Glenn G. Coleman
Executive Vice President & Chief Financial Officer at DENTSPLY SIRONA
Thanks, Simon. Good morning, and thank you all for joining us. Today, I'll provide more detail on our third quarter results and an update on our full year 2023 outlook. Before doing so, I'd like to comment on the $302 million noncash after-tax charge in Q3 related to goodwill and other intangible asset impairments, primarily impacting our Connected Technology Solutions segment. We recorded this charge as a result of adverse macroeconomic factors, including weakened demand, particularly in Europe, as well as increased discount rates, reflecting the higher interest rate environment. Let me now move to our third quarter financial results. These trends impacted our top line results, which came in below expectations. Despite this pressure, our transformation and organizational alignment work enabled us to expand EBITDA margin 70 basis points, and with a lower tax rate, resulted in adjusted EPS growth of 20% year-over-year, in line with our projections.
Let's now move to slide six. Our third quarter revenue was $947 million, with reported and organic sales essentially flat year-over-year. Foreign currency was slightly favorable in the quarter, however, was lower than anticipated due to a stronger U.S. dollar. On a constant currency basis, we saw a strong sales performance in China which grew 20% year-over-year and improved sequentially from Q2. In addition, our Global Aligners business grew 10% and CAD/CAM grew double digits in the U.S. These improvements were offset by softer demand in key markets such as Germany and the U.S., most notably impacting imaging, implants and consumables. Despite flat revenue performance year-over-year and continued inflationary headwinds, adjusted EPS in the third quarter was $0.49, up 20%. The improvement was primarily driven by adjusted EBITDA margin expansion of 70 basis points to 18.2%, as a result of cost reductions from our restructuring program, effective cost management and the benefit of price increases implemented earlier in the year.
We achieved this while continuing to invest in our commercial teams and infrastructure. In addition, our adjusted EPS growth was impacted by a lower tax rate due to a favorable geographic mix. In the third quarter, we generated $134 million of operating cash flow, up 23% year-over-year, driven by improved profitability, a lower build of inventory and the timing of accounts receivable and accounts payable compared to the prior year. Free cash flow conversion in the quarter was 93% compared to 88% in the prior year. As a reminder, our long-term goal is to achieve 100% free cash flow conversion on a consistent basis once we move past the cash outlays associated with our transformation initiatives. Cash and cash equivalents amounted to $309 million at September 30. And our leverage ratio improved to 2.5 times, which is in line with our long-term targeted rate. In the third quarter, we returned $29 million to shareholders through dividends, with a total of $236 million returned year-to-date through a combination of dividends and share repurchases.
As Simon noted, we also announced this morning that we intend to repurchase an additional $150 million of shares by year-end. Let's now turn to third quarter segment performance on slide seven. Starting with CTS, our Connected Technology Solutions segment. Organic sales declined 4.6%. Within CTS, our global CAD/CAM business grew low single digits, driven by higher wholesale volume in the U.S. as distributors increased inventory ahead of DS World in September. Underlying U.S. CAD/CAM retail demand was also strong, particularly for Primemill and CEREC Primescan. The Equipment & Instruments business declined high single digits in the quarter due to softening demand for imaging equipment in the U.S. and Europe, which we attribute to rising interest rates and recessionary concerns in the market. In the near term, we are working with our distribution partners on financing alternatives to support our customers. Moving to EDS or the Essential Dental Solutions segment, which includes endo/resto and preventive products, organic sales declined about 1%, driven by lower volumes in the U.S. and Europe.
We did see strength in the rest of the world, which mitigated some of this negative impact. Shifting to the Orthodontic & Implant Solutions segment, organic sales grew 3.7%. Aligners grew double digits for the fifth consecutive quarter. This strong performance was driven by growth in both SureSmile and Byte. SureSmile grew 13% and continues to benefit from market share gains, new product offerings and differentiated outcomes. Our direct-to-consumer aligner brand Byte grew 7% as we saw higher customer conversion rates. On a full year basis, we expect our Aligners business to grow double digits but anticipate single-digit growth in the fourth quarter given macro pressures in our largest markets. Implants & Prosthetics grew low single digits in the quarter, highlighted by increased demand for value implants as well as growth in China due to VBP and market share gains. On a sequential basis, China implants grew 30% in the third quarter. And wrapping up with the Wellspect Healthcare segment, organic sales grew 6.8%, with growth across all three regions.
Wellspect also benefited from new product launches with Navina Mini, a minimally invasive irrigation product for bowel care and the LoFric Origo flexible, an intermittent male catheter, both of which have been well received by customers. For Q4, we expect a further acceleration of growth in Wellspect to about 10% year-over-year. Now let's turn to slide eight to discuss third quarter financial performance by region. U.S. sales declined about 1% due to lower sales of imaging equipment, implants and restorative products, partially offset by strong growth in aligners and CAD/CAM equipment. U.S. CAD/CAM distributor inventory levels increased sequentially in the quarter by approximately $20 million, driven by a normal build in advance of DS World Las Vegas in September. We expect that most of this will support installs in Q4. And because of this, inventory levels will likely be lower by the end of the year. Turning to Europe. Organic sales declined 2.8% due primarily to lower EDS and CTS demand as we continue to see prolonged recessionary impacts in Germany, our second largest market globally.
Excluding Germany, organic sales in Europe were flat compared to the prior year. That said, we posted strong performance in the Wellspect segment and with our SureSmile aligners. Rest of world organic sales grew 4.5% in the quarter, led by China, which delivered significant growth in implants and EDS. With the strong third quarter performance, our year-to-date sales growth in China has now turned positive with volume increases more than offsetting the pricing impact sooner than expected. Latin America, a smaller but fast-growing region for us, was another bright spot and grew double digits with improved performance in Brazil and Mexico. With that, let's move to slide nine to discuss our updated outlook for 2023. We expect to see current conditions continue to impact Q4. Our recent survey of over 1,000 dental customers, together with other industry research data, suggests that we're seeing negative trends, with decreased patient visits and increased cancellations.
In addition, higher interest rates will likely result in deferral of some higher-end equipment purchases. These macroeconomic factors, coupled with a more unfavorable FX impact expected for the remainder of the year, have led us to lower our full year outlook. We now expect full year net sales to range from $3.90 billion to $3.94 billion. This includes an additional FX headwind of $25 million compared to our prior outlook. We expect organic sales to grow about 1% compared to our prior estimate of about 3% growth. Regarding Israel, I'd like to echo Simon's comments. Our thoughts are with all the families impacted, including our colleagues that call Israel home, and their safety is the top priority. Israel is an important country where we have operations, including two implant manufacturing sites that generate roughly 3% of our total sales. Initiatives are underway to move inventory, identify alternative resources, and limit potential supply disruptions. We continue to monitor the events closely.
And while we have not seen a significant impact on our business to date, the situation remains fluid. Our Q4 outlook assumes minimal impact from the conflict in Israel. Moving to profitability. We estimate full year EBITDA margin to be greater than 17%, down from the prior outlook, due to lower expected sales and the impact of lower volumes and unfavorable absorption in our CTS business. Our updated outlook includes a lower tax rate due to geographic mix, largely driven by a reduction in pretax income projections in Germany as well as a lower share count due to the $150 million of additional share repurchases that are planned in the fourth quarter. With these updates, full year adjusted earnings per share is now expected to be in a range of $1.80 to $1.85, representing a $0.14 decrease compared to the midpoint of our prior outlook range. Of this amount, $0.11 is due to lower organic sales, $0.04 is due to lower CTS gross margins given lower volume projections, and $0.03 is from additional FX headwinds. This is partially offset by a lower tax rate, which is a $0.04 tailwind.
With that, I'll now open the call for questions.
