Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 DENTSPLY SIRONA Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to introduce your host for today's conference call, Mr. John Sweeney. You may begin, sir.

Thank you, Kevin, and good morning, everyone. Welcome to our fourth quarter and full-year 2019 earnings conference call. I'd like to remind you that an earnings press release and slide presentation related to this call are available on our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements on our earnings press release. During today's call, we will make certain predictive statements that reflect our current views about future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of our most important risk factors that could cause actual results to differ from our predictions. And with that, I'll now turn the program over to Don Casey, Chief Executive Officer, DENTSPLY SIRONA.

Thanks, John, and thank all of you for joining our fourth quarter and full-year 2019 earnings call. By almost any measure, DENTSPLY SIRONA delivered a strong performance in 2019, both in the absolute, as well as against the restructuring plan we outlined in late 2018. As we will review today, financial results were strong and the company took important steps to create a foundation that will allow us to deliver consistent and sustainable value to our shareholders in the future. To start reviewing the financial results, let’s turn to Slide 6. Revenues for the full year were $4 billion. This represents an internal growth rate of 5.7%, ahead of our long-term targets outlined in the restructuring. These results were driven by an improved approach to both innovation as well as demand creation. The recent launch of Primescan and our newly launched Primemill are a testament to the efforts to deliver more impactful new products and execute better commercially. Solid sales growth and a sharp focus on operating discipline around expenses and head count contributed to a 310 basis point expansion of our operating margin versus prior year. Non-GAAP EPS for 2019 was $2.45, up 22% versus prior year. This performance included a $0.05 headwind due mainly to the weakening of the euro. Operating cash flow showed a marked improvement versus 2018, up 27% to $633 million for the year. Now turning to results from the fourth quarter 2019 shown on Slide 7. Fourth quarter revenues were $1.1 billion, up 4.8%. On an internal sales growth basis, sales increased 8.4% versus prior year. This strong performance was driven by our new product activity. Adjusted operating income margin came in at 20.2% in the fourth quarter of 2019, up 340 basis points versus 2018. This is an important milestone for the company and speaks to the execution against our restructuring plans. Non-GAAP EPS for the fourth quarter was $0.73, up 26% versus a year ago. Operating cash flow was $299 million, up an impressive 48%, compared to prior year and reflects the focus we have been putting against this area. I will now turn the call over to our CFO, Jorge Gomez.

Thank you, Don and good morning everyone. Don already covered the key highlights of our total fiscal year 2019 financial performance. I will focus today on the results of the fourth quarter and our expectations for 2020. On Slide 9, we show our fourth quarter 2019 P&L. Internal revenue growth reached 8.4%, driven by a strong growth in Digital Dentistry and solid Equipment & Instruments performance. Currency was a revenue headwind of approximately 1.8%, mainly due to a strengthening of the U.S. dollar relative to the Euro. Gross profit was 642 million or 58.2% of sales, up 380 basis points year-over-year. Please note that as a result of our work with standardized policies across the corporation, we reclassified 18.1 million of expenses out of cost of goods sold into SG&A. This shift accounted for 170 basis points of the year-over-year increase in gross margin. The remaining 210 basis point improvement was primarily driven by our ongoing efficiency and portfolio shaping initiatives. SG&A totaled 419 million and was up 5.9%, as compared to prior year. Here are three key components of this increase. First, the largest driver of the variance was the 18.1 million re-class I just discussed. In addition, two smaller drivers of the SG&A increase where sales compensation resulting from strong sales in our Technology & Equipment segment, and the timing of the DS World, which was held in the third quarter of 2018 and in the fourth quarter of 2019. Operating income increased 26% to 222 million. The tax rate in the fourth quarter was higher than we anticipated at 25.5%, due to income mixed variances. Adjusted EPS was $0.73, up 26% versus last year. Moving on to Slide 10, where we review our fourth quarter consumable segment performance, net sales were 433 million, down 4.8% and down…

Thanks Jorge. In addition to the financial results, I wanted to take a few minutes to talk about the progress against our restructuring, planned priorities that included accelerating growth, improving operating margin, and simplifying the organization. The targets for that plan are shown on Slide 20. One year into the restructuring, I’m pleased to say that we are making substantial progress towards achieving our objectives and importantly doing it in a way that creates a solid foundation for delivering those results in a sustainable manner. Core to the entire restructuring was accelerating our growth. That growth will be driven not only by improving our innovation engine, but also by bringing that innovation to market globally through an improved commercial organization. As you can see on Slide 21, the year 2019 marked a step change in the pace of our innovation as demonstrated in the sharply improved pipeline. R&D projects are now managed as a portfolio allowing DENTSPLY SIRONA to focus on the biggest opportunities and bring them to market faster. Nowhere has that acceleration been more evident than in our Digital Dentistry Group. DENTSPLY SIRONA has an aggressive vision for how digital technology can transform the standard of dental care, benefiting both patients and dentists. A critical part of that vision starts with Primescan. This product has been extremely well received because it is so accurate, very fast, and easy to use. Primescan is such a breakthrough that it allows a dental assistant to take a full scan in under a minute. It’s also an open platform that could be used chairside or with major lab-based manufacturing systems. Since launch, we have upgraded the Primescan software with CEREC 5.1, as well is adding OraCheck. In late January, we launched Primemill, which is shown on Slide 22. This represents another major…

Operator, we now like to open it up for questions please.

[Operator Instructions] Our first question comes from Brandon Couillard with Jefferies.

Hi, thanks, good morning. Don or Jorge, as far as coronavirus is concerned, appreciate you kind of eyeing the 60 million to 70 million impact, is that more on the consumables side or equipment side of the business? Is there any portion of that you would expect to recoup perhaps in the second quarter or later in the year, and how do you think about the impact as far as 2Q goes?

Yes, Brandon thanks for the question. Let’s start a little broader and then we’ll get into it. Look, we look at coronavirus; we think there is a couple of things we have to look at. First, it’s our employees, how do we make sure that they are safe, and we’ve obviously spend a lot of time educating and thinking about travel and a few other steps, and we feel that again that’s our first priority. The second area and Jorge mentioned this was supply chain. You know, to date we haven't seen any supply chain disruption, you know as we look out into the future onto the current scenario we feel pretty good that we do not anticipate disruptions to our supply chain and we're spending a lot of time developing contingencies if there is a kind of a sea-change and how countries react. The last issue and this is what we're trying to quantify is, what’s going on from a demand perspective and obviously as we look at the quarter and China, Japan, Taiwan, Korea and to a smaller extent Italy, we’re obviously seeing a dampening impact on demand creation there and that’s what we try to quantify when we offered the $60 million to $70 million sales number. What we are having a harder time doing is really trying to understand what happens if there is a significant change and how countries are trying to manage this in terms of if there is a significant shutdown in border-to-border transfers and other things beyond what we're seeing today and if there is a significant sea-change, obviously we will work plan and develop plans for that, but we felt right now the responsible thing to do was to give you guys our best spots on what the quarter would look like and quantify what’s revenue impact, and as – you know look we’re smarter every single day and in a month we’ll be a lot smarter than we are today in terms of what’s going on both in the markets that we can see and then how countries around the world are reacting to it. Obviously, as the situation goes on, we’ll develop plans accordingly. And Jorge you may want to chime in a little bit here.

Yes. Brandon with respect to your question about consumables versus technology is up, to be honest at this point, in those areas that I mentioned where we are feeling the impact; the activities have slowed down for both consumables and T&E. So, there is no one segment that has been more impacted than the other. I think the impact is similar across the board. With respect to how much of that can be recovered down the road, you know it is hard to predict at this time. I’d tell you there are constraints relative to chairtime and things that you will probably have to figure out over time as to how much of this can be recovered, but absolutely we are working on contingency plans and we are developing some strategies and ideas to upset some of this Q1 impact, but it is early to tell.

Okay, thanks. And if you look at the consumables business, you have been, you know negative comp three over the last four quarters, would you expect to be in that 2% to 3% range in 2020, how do you think you’re performing relative to the market? And how would you characterize sort of your confidence in that portfolio returning to growth in 2020?

Yes, Brandon, first, obviously the quarter Venlo created a really tough comp over in Europe. I think Jorge mentioned in his prepared remarks that we saw growth in the U.S., you know and right now we feel like we’re growing with the market and when we set out our restructuring plan, we offered long-term guidance, which we said we think we can grow the consumable business, you know in the 2% to 3% range and well quarter-to-quarter we are confident that’s going to occur. No, but we do feel that as we look out to 2020 and beyond, we’ve spent a lot of time working on two things, I mean the first is innovation and you know I kind of rattled off some of those in the prepared comments if you look at Digital Dentures, if you look at TruNatomy, which is our Endo business, which shows up as in the consumable segment, you're looking at things like Palodent, SureFil SDR, and other things, you know we feel that we're starting to see a pretty significant platform of innovation and innovation is what we need to do to provide growth. The second thing and the reason we separate out the U.S. a little bit is, we have put programs into place, which we believe revolve around a much more aggressive and efficient promotional strategy, you know with things like One DS where we’re trying to leverage the power of all of DENTSPLY SIRONA, you know it’s been pretty well received and we think is starting to have an impact on the consumables as demonstrated by the U.S. performance in Q4. As we look beyond our sales force effectiveness program, we’re all designed to really bring all of DENTSPLY SIRONA to a dentist in the way that it is easy to consume. So, again, we, the guidance we put out long-term 3 to 4 for DENTSPLY SIRONA in total, you know and that’s coupled to Technology & Equipment segment growing a little bit faster, but when we put out the guidance we’re still pretty comfortable that when we get through some of the lumpiness and things like Venlo that create tuff comps for us that we are going to be able to post growth in the consumable business.

Great, thank you.

Thanks Brandon.

Next question?

Our next question comes from John Kreger from William Blair.

Hi, thanks very much. Jorge just wanted to clarify one thing and in terms of how you handled the guidance of the coronavirus, is it correct that you are not factoring anything yet into the second through the fourth quarters, you are just baking in a Q1 impact, is that right?

That is correct John. At this point, it would be very hard for us to go beyond Q1, so that’s how we have model guidance is that sharing with you the impact that we see in Q1 and as you know the situation is fluid, is changing day-by-day and we will be back together in a few weeks to talk about Q1 results and at that point we will have a much better point of view with respect to our future quarters.

Okay, thank you. And then Don can you maybe just run through how your various specialty product lines are doing, Implants, Ortho and Endo? Thanks.

Yes, thanks John. We don't give a lot of specificity around how each of those businesses are doing, but let’s put it this way, our Implant business is in our opinion a missed opportunity, you know it’s basically flat this year, we have no quarter where it’s up, quarter where it’s down, in my mind what we have to be doing with that business is growing at the pace of the category, and we feel that we’ve started to put the plans in place a couple things of note. I mean, we really felt that our portfolio wasn't where it needed to be, we didn’t have an immediate load product and now that we have Astra EV in there we feel pretty good that we’re competitive. You know, one of the things we’ve also been doing is taking our MIS business and really integrating that into the portfolio, which we think makes us more competitive, particularly in the DSO space. So, Implants to me it’s an okay performance, it’s a disappointment that we’re not growing with the market. Endo for us has been somewhat of a disappointment. Endo for us is obviously a big business and it’s very, very important to us. I think what we’ve been focusing on is restarting that innovation engine that, you know my opinion we really hadn’t after the Protaper, you know gold and other launches we hadn't been as quick with follow-ups. We’re very happy with what’s going on with TruNatomy, you know it’s basically the first new product and kind of a new treatment modality that’s been launched in the space in a while, it’s all about getting preservation and look if you're thinking about Endodontics, the idea is how do you preserve teeth and we believe TruNatomy gives us a really good…

Thanks so much.

Thanks John.

Our next question comes from Nathan Rich with Goldman Sachs.

Hi, good morning. Thanks for the questions. Don, maybe just following up on your last comments there, you know, can you maybe talk about the performance of One DS in the quarter? And, you know, what has the responsible of the program been like so far? You know, how are practices sort of responding with the incremental purchases? And then, you know, as we think forward to 2020, how should we think about the contribution from this program?

Yes, Nate, thanks for the question. You know, One DS, we felt pretty good about, you know, obviously, we launched out a DS world. We had a very strong initial response. As a matter of fact, we liked the response and enough that we basically said, okay, how do we carry that program into 2020? We made a few tweaks to it, so we actually have One DS 2.0, which makes things simpler. There’s less like category requirements. You know, we think it’s one of the drivers of the positive results we saw particularly in the U.S. in the fourth quarter and we look forward to running that program around the world. You know, obviously, you know, there's a lot of work to do in different countries. I mean in the U.S., we’ve spent, you know, over a year getting the salesforce effectiveness program in place, but, you know, look I would tell you the way that we believe that we have to deliver DENTSPLY SIRONA to the dentist is as DENTSPLY SIRONA not as hey, we’re here to sell you an Ortho force. And Nate, if I – you know, we’re not going to quantify specifically this is number of doctors and this is, you know, the amount that they were buying, but, you know we been – remember One DS is a multi-year program. It's – you know there was things available 2019, 2020 and 2021, you know, that gives, you know, the dentist an opportunity to lower the price, their technology and equipment over that time period based on their purchases. The thing that I think was a little misconceived about, you know, what One DS was, was they had to buy incremental product to their practice and we were never saying that. What they have to do was buy incremental DENTSPLY SIRONA products for their practice and that's a key differentiator. So, if a practice is buying $100,000 worth of consumables, we weren't asking them to buy [$105,000 or $110,000]. What we were asking them to do is switch share. So, you know, your chances are you’re already buying things in categories we participate just gives you a great opportunity to participate in great loyalty program if you switch some of that $100,000 from where you may have been spending it to spending it on our products, and you know, given the amount of innovation we put in our consumable business, you know, pretty much in the back half of the last year and the first half of this year, we think that's a win-win for the dentists and us.

Thanks, that’s helpful. And then, maybe just a follow-up on margins, you know, obviously, coming off of a year where, you know, cost savings kind of ran ahead of your initial plan going into 2019, could you maybe just talk about what you're assuming in terms of the incremental savings that you think you can kind of go after in 2020, and just the pacing, you know, over the next several years of capturing that additional, I think, you know, [$115 million to $140 million] that’s left in terms of that restructuring target that you played out?

Yes. And Nate, I’ll take that question. You know clearly, we had a good performance in 2019. We achieved saving of about $88 million in 2019 and we have a number of initiatives in motion already that make me feel good about the fact that we are on track to deliver the total savings we have projected of $200 million to $225 million by the end of 2021. So, I expect that the balance of this program will be executed, roughly half and half over the next couple of years. Probably, we’ll do a little bit more in 2020 than in 2021, and we have a lot of opportunity, still that we have – that we’re going after. We have programs around procurement both direct and indirect materials. We would [drive our] opportunities for a consolidation of facilities and overall consolidation of our footprint around the globe. There is one area that we are going to tackle, pretty decisively this year, order to cash, so we have opportunities there. And although, we’ve done a lot of work centralizing activities within the company, across the company, I believe we still have opportunities to centralize even further. So good progress, and we’re very much on track to deliver the $200 million to $225 million by the end of 2021.

Thank you.

Our next question comes from Tycho Peterson with JPMorgan.

Hi, thanks. Don, I want to [indiscernible] you know, you highlighted the combination with Primescan, can you talk a little about how you think about this driving a CEREC upgrade cycle? You know any numbers you can provide on, you know how much the installed base you think could turn over an upgrade in the next year?

Hi, Tycho, you broke up right in the first sentence, so why [indiscernible].

Yes, the question was on Primemill, you know, combined with Primescan and the potential to drive a CEREC upgrade cycle and how much of the installed base you think could upgrade, you know, over the next year?

You know, it’s interesting, Tycho. I mean and you’ve followed the SIRONA stock and you’ve followed us for a long time, so, you know – you know traditionally, you’d see an upgrade cycle where we come out with a product and within three months we’d be out, you know, doing the upgrade and in a lot of cases, you know, that worked out really, really well. Where we were on Primescan was, you know, we really felt we were selling full side units and it was appropriate for us to stay focused on that. We launched the upgrade program a little later in the cycle than we would typically, and you know, we had a good response, but you know, so far we haven't seen a dramatic acceleration versus what we would see historically. It’s kind of like we just picked it up and we moved it. I think with Primemill, Tycho, you know, the reaction from, you know, the installed base has been really, really positive. I mean, you know, they – again, it’s a first mill we’ve launched in about 7.5 years and this thing really – it's quick and it has immediate tangible benefits to the office. So, you know, we look at Primemill as a real opportunity to continue seeing a very positive trends from an upgrade perspective. We also think, you know, the story when you put this thing together is, you know, you're talking about dentistry in under an hour and that's a big story for us. So, you know, we would like to see growth come from three things. I mean the first is, you know, how do we sell new full chairside units on the basis of this integrated system is transformative to the dentist practice. The second is, how do we continue the upgrade cycle and for perspective we haven’t run Primescan upgrades around the world yet, and, you know, at some point, we’ll do that, and, you know, with Primemill, you know, we believe that gives us a real jumpstart there. And the third, you know, is an area that we don't necessarily talk about with the mill, but, you know, in DI. I mean that's become a really important area for us. I mean historically, we were only interested in focusing on chairside, and you know, the change that we've made over the last year and a half is, you know, we believe that we need to be competitive in the DI space and we feel that with Primemill we’re doing a good job on that. But, you know, in terms of numbers, Tycho, today, you know, if – and again, you've seen the cycles before, it’s the penetration change – the penetration of upgrades is not different that what we’ve seen, but you probably need to adjust how rapidly we did it in the past versus here. We were, you know, good 6.5, 7 months later.

And then, a follow-up on SureSmile, a couple of things, you know, you’d mention in the past for One DS, you know, that's the easiest product for SureSmile, so have you actually seen, you know, adoption and uptake from, you know, the One DS loyalty program for SureSmile? And then, can you talk to some of the, you know, market development efforts you’re undertaking now as you're rolling that more broadly? And then lastly, you know, any updated thoughts on some of the DTC providers, you know, moving into the Ortho channel, you know, for clear liners?

Yes. Let’s unpack a couple things there. Yes, One DS absolutely drove some SureSmile trial and, you know, the idea was to create – again, if we’re going to offer relatively significant opportunity for them to save on their technology and equipment business and we’re actually, by the way, asking them to perform as opposed to just giving them price discount, you know, SureSmile, you by two SureSmile trial kits and you’ve basically fulfilled your obligation and we got really good positive reaction to it. The level of integration, Tycho, and you’ve seen SureSmile, I mean literally it's a button. I mean, it's an app; it’s a button where you’re getting instantaneous treatment planning right there and it works really, really well. The challenge for us and one that we’re pleasantly, I wouldn’t say surprised, we expected it, but we’re happy with is the conversion. I mean, once the docs who’ve had great experience with Primescan understand how to use it, you know, we’re seeing improved penetration. Now, you know, in our mind, first, we have an opportunity to push that around the world, which is important to us. The second is as we enter the space, one of the things we think it's important to do is provide the dentist with kind of the direct-to-consumer tools that they need, and by the way, we're always about supporting the dentist in those activities as opposed to, you know, us going out and trying to create a independent consumer brand around SureSmile, and the reaction we’ve been getting from our doctors, they’re pretty comfortable with that. You know, and just the last issue in terms of some of the DTC oriented brands coming into – you know into the more clinical space, you know, I’m sure that they have data that says that's a good idea. you know we’re pretty comfortable that, you know, the dentist that we talk to in our environment, whether they’re the orthos or whether they’re the general practitioners, are pretty comfortable with the approach we're taking and like having a doctor brand that starts with a dentist and stays with the dentist, so we’ll – we’re were very happy with our chosen channel strategy.

Understood, thank you.

Thanks Tycho.

Our next question comes from Steven Valiquette with Barclays.

Hi, thanks. Good morning, Don and Jorge. So, I know company executives love it when analysts do back of the envelope math during the conference call, so I have just one or two math questions for you. You know first the $0.10 to $0.12 expected EPS reduction in 1Q 2020 around coronavirus, you know, that implies about a 40% net after-tax margin on $60 million to $70 million of reduced sales, so I guess the question around that is, you know, if nothing really improved for the remainder of calendar 2020, you know, whatever the overall sales impact may be from coronavirus in 2020 overall, should we assume the same roughly 40% net margin and whatever loss sale you may have? Or would you be able to pull some levers to reduce some cost to mitigate the EPS impact if this becomes an extended duration situation?

Thanks, Steve. Good morning. Yes, no, your math is – your back of the envelope map is pretty close and we are already thinking about levers that we can pull in order to offset some of the potential impact from the drop through of loss revenue. So, a lot of things going on, and you know, my expectation is that at the next call, we will have a much better view for that, but we are absolutely working on those plans and our expectation is we’re not giving up on this revenue impact that we have in Q1 and we’ll try to recover some of that margin and there is a few things that we are contemplating right now. So, that’s absolutely the intention from the company to offset some of this margin.

Okay. And one other quick math questions, oh! Sorry go ahead.

No, I was just going to say that it's kind of hard for us to, you know, okay, what is the second quarter, third quarter. Obviously, if this becomes an extended duration situation, you know, you – we then change gears pretty significantly in terms of how we look at cost savings and some of the work we did in 2019, you know, really our understanding of what our levers are, are much better today than they were, say 14, 15 months ago. But I cut you off Steve, what else did you want to ask us?

Yes, one other quick math question, the – so if DENTSPLY SIRONA is doing, call it roughly $1 billion in quarterly sales and as you stated 10% of revenues or roughly $100 million of revs are in the four Asian countries you mentioned earlier on this call, I mean, that obviously implies that the $60 million to $70 million sales reduction wiping out maybe 60% to 70% of the sales in those four Asian countries. I just want to confirm that the sales reduction is it primarily in those four Asian countries, and maybe only a little bit in Europe and really nothing in the U.S.? Or do I have the allocations wrong as far as how you guys are thinking about it by the regions?

Now, the $0.10 to $0.12 or the $60 million to $70 million revenue risk that I highlighted is exclusive for those countries. So, it’s China, it’s Japan, it’s Taiwan, it’s Korea. We are not including any impact for European regions at this point or the U.S. for that matter because we haven't seen that impact in those places. So it’s only Asia in the country that I listed.

Okay. That confirms exactly what I thought, perfect. Okay, thanks.

Okay. Thank you.

Strong math skills, Steve.

Our next question comes from Erin Wright from Credit Suisse.

Great, thanks. A follow-up on SureSmile here, I think you recently updated or upgraded the platform for SureSmile, can you speak to the latest SureSmile update, as well as the percentage of Ortho cases that you can address now versus what you could do previously? How does this expand the addressable market for you and will this be meaningful from a financial contribution standpoint? Thanks.

Yes, thanks, Erin. You know, with the most recent software update, and I forget the exact whether it’s 7.6 or 7.7, it gives us Class 2 treatment capabilities, which we think is very, very important for us. Do I think it's significant? Yes, I do. I – look, everything we’re focusing on right now is to make sure that SureSmile offers the dentists a very, very complete package and, you know, look, we feel very good right now that are treatment planning is extremely well received by customers, and, you know, the dentists are finding it increasingly easy to use. With the expansion of treatment to Class 2, you know, the expandable universe gets pretty big. I mean it's – you know it’s like 65 to 75 depending on whether you're talking adult or more pediatric indications, you know, and in our mind, again, the biggest space that we're seeing use right now tends to be in the adult static arena, which, you know, the – right now we feel that we’re extremely competitive in terms of being able to offer treatment solutions Class 1, Class 2 with adult aesthetics in mind. So, yes, we think it’s going to be significant. It makes us very competitive and we’re gratified that we got it.

Thank you, Erin. Next question please?

Erin, did you have a follow-up on it. I mean John…

I did have a quick follow-up, if that’s okay?

Sorry, sorry, Erin.

I just wanted to understand a little bit of the quarterly cadence here for the equipment trend. If you exclude kind of the coronavirus, we do have a lot of events that happened like DS World and the Primemill and other product launches. Just on an underlying basis, if you could speak to that quarterly progression of the underlying equipment trend that would be helpful. Thanks – excluding corona.

Yes, let me start. So, first let’s talk about fiscal 2019, right. So, you're correct. There was a lot of moving pieces in 2019 relative to dealer destocking and launches and all the things, but when you peel back the onion and look through the numbers, our growth rate for technology and equipment in the third quarter, the fourth quarter of 2019 was very strong, and as we go into the – fiscal 2020, the moment for the equipment business is very good, the continuation of Primescan sales, the launch of Primemill. So, we feel good about the progression of our sales growth in technology and equipment going into 2020 building on the momentum we started in fiscal 2019.

Yes. And Erin, just to amplify what Jorge said, you know, typically, you would do a one – you would do the DS upgrade, you know, the CEREC upgrade in one shot all around the world because that is not a lever that's been pulled yet, and with Primemill, you know, we think we’ve got, as Jorge said, a lot of momentum there.

Okay, thank you.

Thank you, Erin. Next question please.

Our next question comes from Glen Santangelo with Guggenheim Securities.

Oh! Yes. Thanks for the questions. I just want to follow-up on Primescan a little bit, Don, maybe can you give us a sense for, you know, your sales in terms of how they are trending, you know, in terms of what may be considered an upgrade versus what may be considered a brand-new CAD/CAM sale? and I’m trying to, you know, sort of compare or contrast the experiences you had with the Blue CAM or the Omni CAM upgrade cycles, just to get a better sense for how we should think about the sustainability of this current trend.

Yes. Glen, you could have gone [C2] and Red CAM and Blue CAM. I mean, if we’re going to go total score. You know look, Primemill, the way we’re looking at it is that the percent of current users that are upgrading has not been all that different than what we've seen in the past. What we’re seeing is just later. So, typically, if you go back to Omni and you go back to Blue, you know, the upgrade cycle was usually within three months and this time it was seven, by the way, those were global upgrades, this was a U.S. upgrade. So, you know, as we think about it, we’re not sure the trend line is dramatically different. We’ve been very gratified by it, and you know, we think we’ve got a great product, we charged a premium for it. We think with Primemill and the opportunity to potentially do the upgrade beyond the U.S. now that, you know, we feel very good about our supply chain. You know, we think that should give us a fair amount of momentum as we run into 2020. And then, for us, the things that we’re counting as upgrade is if you’ve purchased a CEREC system in the past, any CEREC system, we consider that an upgrade. DI, if you're just basically buying the acquisition unit and scanner, you know, and haven't bought something from us in the past that's new or if you’ve never bought – you know, whether you’re buying DI or you’re buying full chairside. And we’ve been – we believe we've expanded the CEREC franchise with the introduction of Primescan.

Do, maybe if I can just follow-up with Jorge on the margins really quickly, you know, Jorge, in your restructuring plan you have a target of about 20% EBIT margins by the end of this year and you guidance today, it suggest 20% EBIT margins for the full-year, which may be suggest kind of a flat trend throughout the year. Could you help us think about maybe some of the puts and takes on that – on the profitability and the trajectory as you go through the year?

Yes, Glen. I would not characterize it as flat. I think as you probably remember from prior cycles, each quarter is a little bit different, but as we have modeled our budget and our plans for 2020, there is not a continuation of the ramp that we saw in 2019. We finished at about 18.6% for the year. Our Q4 was very strong, over 20%, but Q4 is typically a very, very strong quarter. So, as I look at the cadence and going into 2020, there will be natural fluctuations given that the typical quarterly cycles, but overall, I see a trend line that is pointing upwards getting to the 20% and trying to set up the year for the future, so that we set the – achieve the target – the long-term targets that we have for operating profit. So, some variability between quarters, but net-net increasing between the first quarter and the fourth quarter of 2020.

Okay, thank you.

Thanks, Glen.

Our next question comes from John Block with Stifel.

Thanks. Good morning, guys. I’ll keep it to one in the interest of time, but of course, that one will have two parts. So, I guess first one, Jorge, can you just level set for us on Venlo, so we can get the underlying trend? I think there is a lot of questions out there, you know, when we look back to last year, was it $25 million to $30 million impact in 3Q 2018? And if so, did you get back about half of that in the fourth quarter of 2018 so we can think about the comp? And then, part b, would just be done at a higher level, you know, what gives you the confidence in the 2% to 3% long-term consumable number? Is it innovation? Is it market share gain? Is it One DS? Just maybe if you can detail for us what drives call that modest acceleration of the 2019 numbers? Thanks guys.

So, let me start with the first part of your question. So, I think the way we’re sizing the Venlo impact, our number is about, you know, $20 million. That was the impact that we have in our numbers. And I think it's fair to say that we recovered most of that impact. Don?

Yes, and – yes, John, good single question with two completely different parts, but on the consumable side, you know, look, we think basically we should be able to gain share, you know, across our business. If you really break down what is our consumer businesses, four different pieces to it. It’s Preventive, its restorative, obviously, our Endo business and our lab business. You know, we feel that the preventive and rest of the business have been [indiscernible] along nicely. You know we’d like – we think that, you know, TruNatomy and small other innovations that we have should enable us to reignite growth in the Endo business. By the way, the Endo business ex-US has tended to be stronger than in the U.S. just as a point of reference. And last point is, you know, the lab business is not a business we talk a whole heck of a lot about. You know, we think we – with digital ventures and some other steps that we’ve taken, you know, we think that is an opportunity to expand share. So, you know, when we say the [2 to 3] in our mind, its new products. You know, when we launch new products, we – if we can do it, we want to get a premium for it and that’s going to help gain share.

Thank you very much. Next question please?

Our next question comes from Steve Beauchaw with Wolfe Research.

Hi. Thanks for sneaking me in. I know you guys are just about out of time, but it would really help, Jorge, actually if you could help us with something about free cash flow bridge for 2020. Can you put a view out on free cash in dollar terms or conversion? And then, just give us something of a minor walk how are you think about the impacts of particularly working capital of CapEx next year? And then, I’ll drop back out. Thanks so much.

Steve, let me give you a couple of data points and there are some that we have not included in our guidance, but starting with capital expenditures, so we believe that, or we’re targeting a capital expenditure number of about $150 million for fiscal 2020. That is slightly higher than what we did in fiscal 2019, but we believe is a prudent amount of investments to make in the business. I would expect our cash flow generation in general, both operating cash flow as well as free cash flow, to continue to trend in a positive way. We had a very strong free cash flow of over $500 million in 2019 and given the trajectory of our earnings, the work that we’re doing on working capital, for example, in 2019, we brought down inventory by a significant amount, and I believe we have more opportunities there. I would expect that good working capital performance in 2020 as well. And so, the trends for opening cash flow and free cash flow should be consistent with what we experienced in 2019. You know, obviously, all of this is subject to what happens with coronavirus and based on the impact in Q1, I don't see any impact to our cash flows when we closed the quarter and we talk next time and we have a better visibility for the rest of the year, we will update this commentary as necessary.

Okay, great. Thanks, Jorge.

Right, thanks Steve.

Thank you.

Our next question…

You want one more. Sorry, go ahead, operator. Next question?

Our next question comes from Kevin Caliendo with UBS.

Hi, guys. Thanks for getting me in. I guess a question about the cost savings and margin expansion going forward, if you think about where you started and where you are today between you went through and gave us some details on the cost savings, but there has also been, you know, improvement in the overall operations in margin there and there’s also been some portfolio reshaping. As we think about getting from here through the end of say 2021 or 2022, what would be the biggest impact on margins going forward compared to sort of where – what we’ve accomplished or what you’ve accomplished over the last, you know, 12 months to 15 months?

Yes, the way I see it, I think is well-balanced. So, I think the first source of margin improvement will continue to be our top line. So in 2019, we benefited significantly from the increased level of sales driven by technology and equipment. As we look into our guidance for 2019, a 3% to 4% top line growth that is going to have a pretty substantial drop off through the bottom line. Then from a gross profit perspective, we’re doing a lot of work on pricing and we should expect to see some benefit there. The procurement side, as I indicated in my prepared remarks, we have opportunities from a direct materials cost perspective, manufacturing efficiencies. So, there are some – in our plan, we are contemplating improvements to our COGS as well, and then from an SG&A perspective, the initiatives that I mentioned before in terms of order to cash consolidation of certain activities. That will contribute to our benefits. If I look back, historically the last couple of years or 18 months, the [indiscernible] benefits have come from both the gross margin side, as well as the SG&A side has been pretty balanced and I believe that that combination will continue into 2020 and 2021.

Great. And one quick one on SureSmile, with the software update, are you able to the sort of before and after when somebody comes in and gets a scan showing where the tooth look like now and what they might look like at the end of a treatment protocol, are you able to do that now?

Yes, absolutely. And I will tell you one of the things that we feel long-term will be a competitive advantage for us is the fact that our treatment planning is really quick, really easy to use and what the dentist are telling us, they have a lot of confidence presenting it to the customers. We're just coming off a big SureSmile event this weekend. The amount of change that we’ve made in upgrading the interactivity and the ease of use has been remarkable, people have been with us for a while.

Okay. Thank you very much.

Thank you.

Our next question comes from Jeff Johnson with Baird.

Thank you. Good morning guys. Two quick ones, one I guess Don, just looking at 2020 looking forward and then one question looking back, on 2020 9% growth in the U.S., 27% in the fourth quarter, is 2019 the year of the U.S. growth and we need to think about U.S. tougher to grow against those comps in Europe and Rest of the World really driving 2020 or just how to think about kind of the geographic splits?

No, I actually think the U.S. is going to be pretty damn important to us and we want to see that growth continue you know, obviously you got to look at inventory burn and a few other things there Jeff. I would tell you, I would expect U.S. to be among the front in terms of the growers, we’re very optimistic as we pull couple of levers on Primescan, whether it’s One DS, whether it’s upgrades, you know rolling up Primemill and really pushing the SFE program beyond the U.S., you know we’ve got Germany, China, Japan targeted for that activity this year where that gives you the base to launch One DS. So, we’re expecting a good strong year in the U.S., and we think as we put the programs in place to get the rest of the innovation, you know we would like to see balanced growth. Europe cleans up a little bit, remember once we get out of the Venlo comps, we think we can grow Europe, but I wouldn't read this as the rest of the world picks up, I would like to think balanced with the U.S. still being strong.

Alright, that’s helpful, and then just on the fourth quarter, you know from a revenue perspective, I think you beat the high-end of your guidance by about 300 basis points, you were at the mid-point or slightly below from an EPS perspective, you know what was the lack of flow through in the quarter from a profitability standpoint and may be if you could tie that back One DS, is it just a lot of promotional activity there with some of the rollout of One DS, and do you think the returns on that program even if it’s helping the top line where you need them to be at this point? Thanks.

Yes. You know in the fourth quarter our SG&A number was elevated relative to the trend that we were having, and so that had an impact on the bottom line and as I indicated in my prepared remarks we had a re-class of $18.1 million in SG&A, we had also because of the strong sales we had in the fourth quarter, we had an elevated amount of sales comp and incentive compensation in general. We also had, there was the timing of DS World as you remember in 2018 that event happened in the third quarter and in 2019 we had the event in the fourth quarter, so that also created a little bit of a headwind from an SG&A perspective in Q4 and there were some other investments in some of our key initiatives around digital transformation in a couple of our programs that had a pretty significant amount of spend in the quarter as we had planned. So, all of those things combined resulted in a lower than you would expect operating margin given the beat on the top line.

Alright.

Thanks Jeff. And now we will take our next question please.

Our next question comes from Elizabeth Anderson with Evercore ISI.

Good morning, guys. Thanks for the question. Can I, in terms of the portfolio shaping impact, you know Jorge said there will be a $10 billion impact on the first quarter, can you talk about where you sort of feel like you are with that, obviously you’ve done a lot of the heavy lifting there, but in terms of the impact on how to think about the rest of the year?

So, my comment was mechanical with respect to how the activities that we did in 2019 impact the run rate in 2020 and at that point we will lap that impact in the first couple of quarters of the year. Beyond that, we don't have anything right now that has been executed. We, obviously from our portfolio shaping perspective remain very active in always contemplating new opportunities for us to improve our growth rate and our margin rates, but there is nothing beyond that $10 million that I mentioned when I provided guidance.

Okay, thank you. That’s helpful.

Alright. And the final question please, operator.

Our next question comes from Michael Cherny with Bank of America.

Hi, this is [Alan Luton] for Mike. Regarding coronavirus have U.S. Senate made any change to their purchasing patterns that are worth calling out? For example, on masks or anything like that?

Yes, Alan, we don't sell masks. So, we really can't comment on that and to date we really haven't seen any impact in the U.S.

Okay, thank you.

Thanks, Alan.

Thank you very much. Operator, we would now like to wrap it up please.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Thank you. Goodbye.

Thank you. Have a good day.