DENTSPLY SIRONA Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Dentsply Sirona Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Andrea Daley, Vice President of Investor Relations.

[Andrea Daley, Vice President, Investor Relations at DENTSPLY SIRONA]

Thank you, operator, and good morning, everyone. Welcome to the Dentsply Sirona's Second Quarter 2023 Earnings Call. Joining me for today's call is Simon Campion, Chief Executive Officer; and Glenn Coleman, Chief Financial Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.dentsplysirona.com. Additionally, historical financial data for our new segment is also available on our website.

Yesterday, we announced that the company identified a material weakness in internal control over financial reporting, which did not result in a material misstatement of the company's previously issued financial statements. For more information, refer to Item 801 of the company's current report on Form 8-K filed on August 2, 2023. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain predictive statements that reflect our current views about the future performance and financial results.

We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updating information in subsequent SEC filings lists some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today's call, our remarks will be based on non-GAAP financial results.

We believe that non-GAAP financial measures provide investors with useful supplemental information about financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call.

And with that, I will now turn the call over to Simon.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Thank you, Andrea. And thank you all for joining us this morning for our Q2 2023 earnings call. Today, I'll start by providing an overview of our recent performance, Glenn will cover Q2 results and the updated 2023 outlook. And then I will finish by providing a strategic operating update. Starting on Slide four. We were pleased with the second quarter results, delivering more than 2% organic sales growth. These results rounded out a strong first half of the year in which we exceeded our commitments and delivered over 3% organic growth, well above our expectations.

Fulfilling our commitments, financial and otherwise, both internally and externally, remains a top priority for this leadership team. Q2 performance was highlighted by organic growth in all four new segments. Based on the momentum in the first half of the year and our increasing confidence in the back half of the year, we are raising the full year 2023 outlook for net sales, organic sales and adjusted EPS, which Glenn will cover in a moment. We continue to execute on our transformational and strategic initiatives. The progress we are making is beginning to take shape in our results. We believe we are on the right path, driving improvement and transforming the business to deliver sustainable performance over the long term.

As previously shared, we had received several inquiries about our Wellspect HealthCare business from interested parties. After a thorough review of these and other alternatives, we have decided to keep the Wellspect business in the Dentsply Sirona portfolio as the options explored did not adequately reflect the value of the business. We have now commenced the incorporation of Wellspect into the operating model and will share performance data as part of our investor updates. We have initiated quarterly business reviews with our second one recently held in Europe to discuss performance and strategy for each country and business group.

While there, we review the Connected Technology Solutions R&D pipeline, which we feel is robust. Spending time with our local teams also plays a critical role in building an accountable high-performance culture. These meetings give us the opportunity to dive deeper into the business and engage with employees and customers. Additionally, in Europe, we continue to engage in productive and positive conversations with the workers' councils regarding the restructuring plan.

We are also continuing to deliver on our sustainability commitments. We have developed and launched the first sustainability educational curriculum for dentistry through the Dentsply Sirona Academy. The curriculum was developed in response to an international study Dentsply Sirona conducted in 2022 on sustainability. To complement, of course, the team developed a sustainability in dentistry resource case to assist dentists in their efforts.

And now I'll turn it over to Glenn to discuss our second quarter results in greater detail. Glenn?

[Glenn 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 second quarter results and an update on our 2023 outlook. As Simon mentioned, we delivered top and bottom-line results above expectations. The second quarter performance was highlighted by organic growth in all four segments, which coupled with favorable margins and a lower tax rate drove better-than-expected adjusted EPS. Notably, the second quarter represents another quarter of delivering on our commitments.

Let's begin on Slide five. Our second quarter revenue was $1.028 billion, representing reported sales growth of 0.5%. Foreign currency negatively impacted sales by $18 million and was larger than expected due to the strengthening of the U.S. dollar versus the Japanese yen and Russian ruble. On a constant currency basis, sales grew 2.3%, led by continued double-digit growth in our aligners business and broad-based strength in Asia Pacific, led by China, which grew 25%. EBITDA margins were 17.7% and were better than expected, driven by leverage from higher sales and effective cost management.

Year-over-year, EBITDA margins were lower due to continued inflationary headwinds impacting our cost of goods sold and higher commercial and infrastructure investments, partially offset by price increases and cost reductions from our restructuring program. Adjusted EPS in the second quarter was $0.51 and was well above expectations despite a $0.02 FX headwind. On a year-over-year basis, adjusted EPS declined by $0.18, largely due to lower operating margins.

Operating cash flow was $104 million as compared to $173 million in the prior year quarter. The decline was primarily due to changes in working capital, which was impacted by the timing of AR and AP compared to the prior year and higher operating expenses associated with commercial and infrastructure investments. In the second quarter, we returned $30 million to shareholders through dividends with a total of $207 million returned year-to-date through a combination of dividends and share repurchases.

Let me now turn to our second quarter segment performance on Slide six. Starting with the Connected Technology Solutions segment or CTS. Organic sales grew 2.8%, primarily due to improvements in the supply chain and shorter lead times for a certain high-tech equipment, partially offset by softer demand in Europe. Within CTS, our CAD/CAM business declined by mid-single digits, driven by lower demand in Europe, particularly in Germany, along with broader macroeconomic challenges across the region. That said, underlying retail demand in the U.S. improved sequentially.

The Equipment & Instruments business grew high single digits, driven by improvements in treatment centers and imaging in Europe as well as solid demand across all product categories in Asia Pacific. Organic sales in the Essential Dental Solutions segment, which includes Endo, Resto and Preventive products grew 0.7%, driven by stable patient traffic in the U.S., partially offset by softer demand in Europe. We attribute a portion of the softness in Europe to pre-buying activity in the first quarter. Moving to the Orthodontic and Implant Solutions segment, organic sales grew 3.7%. Aligners grew double digits for the fourth consecutive quarter, driven by growth in both SureSmile and Byte. SureSmile grew over 20% and continues to benefit from market share gains, regional expansion, new product offerings and differentiated outcomes.

Our direct-to-consumer aligner brand, Byte, grew high single digits, driven by improved customer conversion rates and lower customer acquisition costs, which not only drove higher revenues but also better profitability. On a full year basis, we continue to expect our aligners business to grow double digits. Implants returned to growth in the quarter, highlighted by demand for value implants as well as growth in China due to VBP volumes and a recovery from COVID-related shutdowns. Our U.S. implants declined in the quarter, but we expect to see gradual improvement for the remainder of the year. And wrapping up with the Wellspect HealthCare segment, organic sales grew 3.1%, with growth across all three regions.

For Wellspect, we expect to see faster growth in the second half of the year which will include recent and planned new product launches. Now let's turn to Slide seven to discuss second quarter financial performance by region. U.S. organic sales grew 1.1%, driven by stable demand in essential Dental Solutions and double-digit growth in aligners, partially offset by lower sales of imaging equipment and implants. U.S. CAD/CAM distributor inventory levels declined approximately $20 million sequentially in the quarter, driven by solid underlying retail demand. Distributor inventory levels for CAD/CAM products remained low at the end of the second quarter relative to historical averages.

Because of this, for Q3, we expect to see a sequential increase in U.S. distributor inventory levels in advance of DS World in September. Turning to Europe. Organic sales declined 2% due to lower implants and CAD/CAM sales which we attribute to macroeconomic headwinds in the market and unfavorable timing of orders for essential dental solutions. These declines were partially offset by continued SureSmile growth in the region. We also saw a more pronounced demand softness in Germany, which is a key market for our business due to recessionary pressures in the country.

Rest of World organic sales grew 11% in the quarter, driven by growth in all four segments. China and Australia posted solid growth, and we also saw strong equipment demand across the region. With that, let's move to Slide eight to discuss our updated outlook for 2023. We've updated our full year outlook to reflect our performance in the first half of the year as well as our increased confidence for the remainder of 2023. While we recognize macro uncertainties cloud the economic outlook in the second half, we are seeing stable to improving patient traffic in most key markets and our execution is improving.

We are increasing our outlook for the full year net sales to a new range of $3.98 billion to $4.02 billion. This represents a $75 million increase at the midpoint of the range, which is now at $4 billion. We expect organic sales to grow approximately 3%, which is an increase compared to our prior range of flat to 2% growth, and we expect to show growth in all four of our segments. We estimate full year EBITDA margin to be greater than 18%, unchanged from prior outlook. While we continue to face cost headwinds impacting gross margin, we're seeing these headwinds stabilize and expect gross margins in the second half of the year to be consistent with the first half.

Given the better-than-expected top-line performance, we're also raising our full year adjusted EPS outlook by $0.05 at the midpoint to a new range of $1.92 to $2.02. Keep in mind that the improved outlook also includes a $0.03 FX translation headwind. Overall, we're pleased to be raising our adjusted EPS outlook for the second consecutive quarter. Our first half performance gives us even more confidence that we're on the right path towards achieving our target of $3 adjusted EPS in 2026. For the second half of the year, we expect organic sales growth to be approximately 3%, with Q3 growth below 3% and Q4 growth above 3%. For the third quarter, we expect adjusted EPS to grow mid-teens year-over-year, but be lower sequentially due to seasonality. A return to earnings growth in the third quarter would mark an important milestone in our turnaround story.

And with that, I'll turn the call back over to Simon.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Thank you, Glenn. Moving on to the strategic update, starting on Slide nine. Let me start by reaffirming our strategy to transform dentistry by digitalizing dental workflows, driving product and service innovation, and delivering an exceptional customer and patient experience through an engaged and diverse workforce. In order to fulfill our strategy, we must focus on a simple, more secure and connected workflow experience that our clinic and lab customers trust to deliver better treatment journeys and patient outcomes.

We are making meaningful progress executing on the strategy as we remain intently focused on our objectives. Slide 10 shows the 2023 and beyond strategic objectives, which I first shared with you at the start of this year. Our five core tactical and strategic objectives are to: one, deliver on our annual growth and margin commitments; two, enhance and sustained profitability; three, accelerate enterprise digitalization; four, win in aligners and implants; and five, create a high-performance culture. We continue to leverage and expand our operating model to regularly monitor and measure performance and drive progress against these objectives, which we believe has already begun to translate into better business performance.

Turning to Slide 11 for an update on our objectives. Starting with the goal to achieve our annual growth and margin commitments, we now have consecutive quarters where we have exceeded our commitments and delivered a better-than-expected first half of the year. While there is still much work to do, we are increasingly confident in our ability to deliver consistently on our commitments. In February, we announced the new operating model and restructuring plan. We have acted with urgency and have made meaningful progress on the transformation work with workforce reductions largely complete in regions outside of Europe.

Our SKU rationalization plan continues to advance with pilots well underway in Europe and the U.S. and the project team in place to oversee execution. Additionally, there are other opportunities to enhance and sustain profitability through network and operational simplification initiatives with four locations in the U.S. already in the midst of transferring to other locations in our network. Enterprise digitalization is critical to our success, and we remain focused on accelerating it both internally and externally. We are advancing our multiyear ERP implementation project with the internal team assembled and the blueprinting or design phase already underway. We also continue to add capability to DS Core.

Over the past two quarters, new functionality has been added to enable more efficient communication between dentists, labs and patients, improve efficiency of CAD/CAM practice workflows and broaden the range of services to include SureSmile and Lab. Winning in aligners and implants is another important strategic objective. In the new structure, these businesses are now combined into one segment. In Q2, the aligner business delivered another quarter of double-digit growth, highlighting the momentum and traction we have gained in this category. Byte continues to deliver top-line growth and enhanced operational performance with higher customer conversion rates, effective patient engagement and lower customer acquisition costs.

SureSmile continues to drive market recognition and growth through our differentiated offering, particularly in the GP channel. Our offering is now available in 55 countries, representing most of our key markets across the globe, and we continue to demonstrate the benefits of SureSmile and evaluate investment opportunities to enhance our footprint in certain geographies. In Implants, we have reactivated our investment in clinical education after a prolonged period of underinvestment in this area.

In Q2, we hosted the implant summit in Athens, Greece, which brought together more than 400 clinicians for three days of hands-on peer-to-peer learning and engagement. Customer feedback from the event was very positive. Additionally, we continue to focus on performance in the Implants business and recognize there is more work to do. In the U.S., we are seeing some green shoots with a number of new accounts coming online in the last quarter. Globally, our value implants offering, MIS, has shown consistent growth. In China, the implants business gained strong traction during the VBP program rollout.

The incremental volume since implementation has exceeded our expectations, and we now expect that volume will more than offset the pricing headwinds for the full year. Lastly, and importantly, I would like to touch on the work we are doing to create a high-performance culture here at Dentsply Sirona. This is critical to enable achievement of our other strategic objectives and foundational to driving long-term value creation for all stakeholders. Our new operating model continues to evolve and take shape, providing clarity, efficiency and putting the customer back at the center of everything we do with compliance at the forefront.

It gives meaning to the KPIs implemented to diligently run the business and hold ourselves and each other accountable. You can expect to keep hearing these themes from us because they stand out as core to our operating model and principles. We've also continued to build out the leadership team. Last quarter, I announced that a new SVP of Quality and Regulatory Affairs, join the team, a newly created role elevating quality within the leadership team. Most recently, in mid-July, we brought in a new HR leader, who, along with the rest of the leadership team, will play an instrumental role in driving high-performance culture throughout Dentsply Sirona. We also hosted the top 100 DS leaders in Charlotte during the quarter.

This meeting, the first since 2019, helped us further align on our operational objectives and transformation, drive our winning culture and reinforce our commitment to ethics and compliance. Now let me close with a few remarks on Slide 12. As a reminder, 2023 is a transition year. However, Q2 represented another quarter of improved execution, which provides increased confidence in our outlook. As an organization, we believe we are making significant progress on our transformational and strategic initiatives and will pivot as warranted to pursue our goals. Achievement of the goals, coupled with more normalized market conditions will position

Dentsply Sirona to grow revenue in line with the market while also increasing profitability. The combination of these positive factors can position Dentsply Sirona to deliver meaningful earnings improvement with an adjusted EPS of $3 targeted in 2026. While we have talked a lot about cutting costs, we recognize the criticality of leveraging some of these released funds to invest smartly in our business with a focus on ROI to drive long-term growth.

As I said earlier, it's not just about bringing great products to the market, we must also actively invest in customer engagement, clinical education and sustainability. As previously announced, our Investor Day will be on November nine in Charlotte. We look forward to sharing more details about our strategy and road map at this event.

And with that, I will open it up for questions.

Questions and Answers

[Andrea Daley, Vice President, Investor Relations at DENTSPLY SIRONA]

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Elizabeth Anderson with Evercore ISI. Please proceed with your question.

[Elizabeth Anderson, Analyst at Evercore ISI]

Hi guys. Congrats on the quarter. And thanks so much for the question. I was wondering If you could talk about the -- how you sort of see the progression of the gross margin over the back -- rest of the year. You obviously had a little bit of a step-up in the quarter. I think you previously talked about maybe 100 basis points for the third quarter. So just sort of if you could talk about maybe -- or if you can talk about it quantitatively if you could sort of talk about the puts and takes on that line.

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes, Elizabeth, thanks for the question. If you look at the first half of the year's gross margins, we did something around 56.7%, a little bit higher sequentially from Q1 to Q2. We expect it to be pretty consistent in the back half of the year. So I would just say second half of the year, very consistent with what we saw in the first half of the year. And we're still dealing with inflationary pressures. I think the good news is they are starting to subside, but I think we'll see a better improvement in gross margins moving into next year. On EBITDA margins, we do expect to see a meaningful improvement in our EBITDA margins really in the fourth quarter.

So sequentially, I'd expect EBITDA margins to go up slightly from Q2 and then a much more meaningful increase in -- from Q2 to Q3 and then a more meaningful increase in Q4. So -- even margins, we are expecting a much larger dump, and that's because of the restructuring savings kicking in, in the back half of the year.

[Elizabeth Anderson, Analyst at Evercore ISI]

Got it. That was very helpful. And as a follow-up, can you talk about -- I know the macro has been excitingly ever-changing this year. And I appreciate your comments about China, etc., in the quarter. Can you talk about sort of how July progressed and sort of what you're seeing currently in the U.S. and Europe and China? I know China obviously had the lockdown comp, but your comments on the rest of it would also be helpful.

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes. In terms of July trends, I would just say no significant changes from what we saw in the second quarter. We did have some growth in the month of July. But keep in mind, July sequentially coming off of June is a big drop off, especially in Europe. So when you look at our Q3 guidance, while it's up year-over-year in terms of organic growth, we said a little bit less than 3%. Sequentially, we expect Q3 to be down, largely driven by the seasonality factor in Europe. So make sure you consider that in your numbers. But July trended exactly in line with our expectations, down sequentially, but up slightly year-over-year, continue to see stable patient volumes even in spite of a challenging external environment.

I would just say that our ortho business performed really well in July, so that was good to see. But again, it's still just one month in the quarter, and our guidance for Q3 reflects what we saw in the month of July. And again, guidance for Q3 would suggest less than 3% organic growth, down on a sequential basis. And if you do the math on that, I would say somewhere around $975 million would be the revenue number for Q3. And then EPS, we do expect to see mid-teens growth year-over-year, which is good to see. We're finally talking about positive numbers year-over-year. And based upon that color, I would just say the EPS number is probably around $0.47 to $0.48. So that gives you a little bit of color on Q3.

[Operator]

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

[Michael Cherny, Analyst at Bank of America]

Good morning. Thanks for taking the question. Maybe if I can just start on the segments. I'm not sure if this is too early or something we should wait until the Analyst Day for. But is there any color you can give on how we should think about growth across the segments that's embedded in guidance in the remainder of the year? And how we should think about the run rate in I guess, the medium term, long term, whatever time frame you want to use outlook for the four new segments.

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes, Mike, this is Glenn. I would just say we haven't given specific guidance on the segment other than we did make comments that we do expect to see organic growth in each of the four segments. So I would just say from a color perspective, that's what we're willing to say at this point. When you look at the faster-growing segments, obviously, implants and ortho obviously are one of the fastest-growing segments. So that would be one where you'd expect to see faster growth but at this point, we're seeing positive trends across all four segments. We expect growth and look for ortho and implants to probably grow a bit faster than the other three segments.

[Michael Cherny, Analyst at Bank of America]

Got it. That's a helpful start. And then I guess maybe on the ortho side, there's been a lot of variability over the last few quarters now, but especially this quarter in terms of the reported growth rates obviously of very different bases. How do you see -- I'm thinking more on the professional side, but happy to touch on Byte as well, but where the current competitive dynamics lies and I guess, the areas where you're winning the most opportunity versus the areas where you still think you have the most room for further penetration improvement.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Yes. So Ortho again performed extremely well, SureSmile in particular. I would say globally, it performed very well. We're now in over 55 countries. Europe had a tremendous performance in excess of 50% growth in Europe on SureSmile. And we're winning in the GP arena. That's where we've been focused on. We are also in the process of equipping our ortho reps with scanners as we focus on scanner penetration, too. So SureSmile is a critical component of our business has been and will continue to be. We expect to launch some additional simulation tools in the back half of the year.

We also expect on the Byte side, which is another solid quarter of growth to launch Byte Plus as we roll towards the end of the year, which we feel will help drive more patients into the GP channel. So they can actually become patients not just for the Byte aligners, but also for other preventative and restorative care in the GP space. So an area of intense focus, a lot of investment. And as we said in our prepared remarks, we continue to evaluate opportunities to invest in commercial channels for our aligner business on a global basis.

[Michael Cherny, Analyst at Bank of America]

Great. Thanks.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from Jeff Johnson from Baird. Please proceed.

[Jeff Johnson, Analyst at Robert W. Baird]

Thank you. Good morning, guys. Congratulations on the continued progress. Glenn, you touched on it in one of your answers here just recently a little bit on the cost-saving sides. But out of the $200 million that you're planning over the next several years, can you just remind us what so far is run rating into the P&L. And I think more importantly, as you've reactivated some of that implant training doubling down here on some of the clinical education, the ERP progress is starting to happen.

Just remind us, the phasing may be of that $200 million in savings over the next one, two, three years, does the bulk of it come in year one versus year two and 3? And how much initially of those savings should we expect to be offset by some of these added investments here at least in the short to intermediate term?

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Jeff, thanks for your comments. First, I would say we're on track to our restructuring plans with annualized savings of $200 million to $225 million. That will be realized by mid-2024. So most of the savings would come next year. For 2023, what we said was we'd achieved about $0.30 of savings from the restructuring program. That's about $85 million. But to your point, we are investing a lot of that back into the business, commercial, infrastructure, whether it be North America implants, DSOs, a lot of investment in clinical education, the ERP system, compliance and quality, to name a few. We basically said that those investments would consume about $0.25 of the $0.30, in terms of the restructuring programs, only $0.05 would flow through this year in terms of the restructuring program.

In terms of where we are, the head count actions have essentially been taken across all countries outside of a few in Europe and those are obviously complex in terms of the multiple workers' council approvals that we have to get through. And we've also got to get some additional non-headcount savings in the back half of the year. But on the whole, everything is progressing as we would expect. If you look at the first half of the year versus second half of the year for 2023 and the meaningful improvement in the back half of the year, both in terms of EBITDA margins and EPS, so we did $0.90 of EPS in the first half, midpoint of our guidance would suggest $1.07 in the back half.

Over 2/3 of that improvement in EPS is expected to come from the restructuring savings kicking in, in the back half of the year. So hopefully, that gives you a lot of color on what we're expecting this year. And then obviously, as we move forward to next year, we should see another meaningful increase in the restructuring savings. We haven't yet laid out how much of that is going to be offset by investments next year. But clearly, it will be a nice pull-through when we look at 2024.

[Jeff Johnson, Analyst at Robert W. Baird]

All right. And hopefully, this doesn't come with my follow-up, but would you expect those investments to be less as a percentage of the cost savings next year, so more of the cost savings can flow through. But then the follow-up question I do want to ask is just on Europe, what's your just maybe sign in your update on state of the economy there? I think your comments this quarter were maybe a little more guarded obviously, leading economic indicators have not looked great.

Obviously, you have the pretty sizable exposure to Germany with the Sirona legacy business, so maybe it's all equipment. But what is patient demand looking like there? How concerned are you about maybe the next six to 12 months? Is that something that you think Europe could really see a consumption issue from a dental standpoint? Is this just an equipment sluggishness right now because of Germany macro? Just how to think about the lay of the land in Europe right now?

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Sure. So Jeff, just like we did for the last two quarters we ran our survey, and we got about 450 responses from Europe, about half of those came from Germany. And I would say sentiment in Germany with customers is muted and has deteriorated versus the prior survey, especially around capital equipment and indeed around patient volumes. Let's say, the other geography that is a watch out for us and others, I'm sure, is Australia and New Zealand. They've also -- their sentiment has also declined. But in the other countries in Europe, U.K. is stable, France is stable, Italy is stable. So it's really centered around the negative sentiment that we found in our survey is primarily centered around Germany and Australia and New Zealand with everywhere else stable to modest improvement, very modest improvement.

[Jeff Johnson, Analyst at Robert W. Baird]

That's helpful. Thank you.

[Operator]

Thank you. Our next question comes from Kevin Caliendo with UBS. Please proceed.

[Kevin Caliendo, Analyst at UBS Group]

Thanks for taking my questions. You talked earlier about winning some new accounts in implants. I know you had made some investments in implant sales force. Can you maybe talk a little bit about what kind of clients you're winning on the implant side and the implant dynamics that you're seeing in the U.S. and in Europe and in China, the differences between the markets right now?

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Yes. So let me start with the shining light, Kevin, which is China. We had a tremendous quarter in China on implants. We now strongly believe that we will offset the price degradation with volume as we head into the back part of the year. Clearly, we're winning in MIS there and the mix. The mix is also favorable for us in China. So all very positive in China. I would say in the U.S., we've made those investments as we went into the early part of this year in the sales team. And now in Q2, not only have we got the sales team together for training, we also invested in that 400-person session in Greece and other sessions like it.

We have -- we had stepped away -- the company had stepped away from investments in the implants business and clinical education, in particular, over the past number of years. And I think as I shared on the last call, the implantologists view themselves as a family, and we had moved away from that family, but we're now re-engaging. And sentiment is positive from these customers as a result of this. I would say with the type of customers that we are winning, it's -- I would say it's too early to get any trends from that.

Obviously, we monitor this on a religious basis each and every month. And I mentioned in the prepared remarks that there are green shoots in terms of the engagement of our reps, the number of customer visits they are making the -- some of the positivity from customers and also from their referral dentists because that's part of the challenge that we have here. It's not just calling on the implantologist. We also need to get to their referring dentists as well, which is the heavy climb that we have faced. But as Glenn said in his remarks, we do expect progress in Q3 and Q4 and expect to see growth for the year in implants. So we're heading in the right direction, we feel, but it's -- we're a long way from thinking we have the job done.

[Kevin Caliendo, Analyst at UBS Group]

If I can ask you a quick follow-up. DS World is coming up, we're all anxious to see your -- you guys running your first DS world. And I know that when you took over, you looked at some of the R&D projects that were in the pipeline and I think maybe got rid of some of them or changed up sort of the R&D model. How much of this DS World, would you say is stuff that you're -- that you put in place and how do you think, from an R&D perspective, where does investment need to come going forward? Like where would you want to be focused going forward?

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

So I would say a year into our tenure here. You don't make changes in terms of products sitting in the street within a year. The life cycle is longer than that. But what we have done is install the processes around R&D so that we can accurately assess the potential return on it. and accurately assess the timing of commercial launches. And so that -- they are the processes that we have built around it. We have consolidated our R&D efforts around fewer programs that we focus on ROI.

We have a robust process now for valuation. We will be, as I mentioned in an early response, we will be launching new products over the next number of months. You'll get sight on some of them at DS World and then further into Q4 and Q1. So -- it's very much a work in progress on the R&D side. And it's -- I would say, no projects that we have kicked off will have -- we'll see the light of day here for the next several months, but the process is more robust.

[Kevin Caliendo, Analyst at UBS Group]

Thank you.

[Operator]

Thank you. Please standby for our next question. Our next question comes from Jonathan Block with Stifel. Please proceed.

[Jonathan Block, Analyst at Stifel Nicolaus]

Thanks guys. Good morning. The outperformance for the first half of '23 and Glenn, I think as you mentioned, you're obviously taking up the implied 2H as well by really a decent clip. What are the areas of the overall business that deviated the most to the upside, call it, versus your expectations when you guided whatever that was six, seven months ago? I'm guessing aligners might be one of them, but maybe you can elaborate and give a little bit more detail. And then I'll pause to ask my follow-up.

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes. I would say, regionally, it's been in the U.S. and Asia Pacific. So in the U.S., consumables have done better than our initial expectations. I think the retail demand has also been stronger for certain CAD/CAM equipment, which we haven't yet seen in our numbers. So that's encouraging as well. In Asia Pacific, obviously, we mentioned China. China has now been outperforming even some pretty robust expectations for the back half of the year. So I think China will continue to do well and actually outperform our initial budget if you will. We're seeing better recovery in imaging and treatment centers as well.

And a lot of that is improvements in the supply chain. We've significantly reduced lead times. And so really good work by our global ops team on doing that, and that's helping us to overperform there. And so those would be the areas coupled with what you mentioned earlier, which is aligners. Aligners continue to do really well, really strong double-digit growth for us, both SureSmile and Byte and so those are the areas of outperformance.

On the EPS front, the volume benefit from these higher sales is obviously helping us overachieve. We got slightly higher restructuring savings in the first half of the year as well. The ortho profitability doing better than we had expected because of the outperformance there and then a lower tax rate. So I think on the whole, that's how we look at the first half of the year. And we're very pleased with how we started the year and looking forward to continuing it in the back half.

[Jonathan Block, Analyst at Stifel Nicolaus]

Okay. Great color. And maybe I'll try to ask sort of two quick ones. Simon, strategically on the scanner, you talked about some good results there and maybe you're bundling with the aligners. Are you -- where you want to be strategically? In other words, do you think you need, call it, a lower-end scanner when you've seen what's going on with some of the prices out there? And then if I can try to jam in another question. You started the year organic sort of flattish. You're now at 3%, but the EBITDA margins remain, call it, greater than 18%. So where are those additional dollars, where are they being earmarked and going in terms of investments? And maybe just talk to us about the return timeline on those dollars.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Yes. So on the scanner side, with Primescan, we're obviously a premium scanner with great technology available. And we did launch Primescan Connect in the September time frame last year. We had a really strong quarter in Q2 on Primescan Connect. In fact, scanners, I think we had the second biggest quarter in six on unit sales in scanners and on mills. So we adapted some price on the Primescan Connect. So that's not, I would say, an upper mid-value scanner that has resonated. We had traction in Europe, traction in Japan. So scanners, we are pleased with the quarter, but we're not pleased with where we are in the market.

And we are intently focused on bringing next-gen scanners to the marketplace. And as I mentioned, DS Core continues to be a really important aspect of our business moving forward. We brought new incremental capability to that in Q2 that will continue throughout this year and next year and any new technology that we bring out will obviously be integrated into DS Core and leverage the cloud. So that's where we're having scanners and equipment, and I'll let Glenn handle the other part.

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Jonathan, on the EBITDA margins, we have not updated our guidance since the beginning of the year. We're on track to be greater than 18% EBITDA margins. And if you look at where we are investing, I would say, on the commercial side, North America implants, the return on that will come, I believe, probably later this year, Q4, most likely. but that return should start to be felt here in 2023. The investments in DSOs we're already seeing as the top-line improvements there. We do expect DSOs to have faster growth in the overall corporate average for the full year 2023. So that's looking promising.

The clinical education investments that we're making on the implant side, on the endo side, again, you don't see an immediate payback for that, but we would expect to see that probably in 2024. The ERP investments take longer. The returns on those will take us multiple years to get to. But an investment we have to make now if we're going to have a sustainable, profitable long-term business. And I would just say, given the strong start to the year, we've made some additional investments in certain R&D programs and certain commercial areas outside the U.S. So for example, because we're overachieving, I've just given the green light to go forward and add some additional reps and commercial footprint in Japan for our Ortho team, where we see a nice opportunity.

And the returns on that will be in 2024. I'll actually have a hit in 2023, but we'll definitely see returns in 2024. And so I'm going to do some things in the back half of the year here. while still hitting our commitments but really setting us up better for next year. We want 2024 to really be an inflection year for us both in terms of top-line performance and in terms of EBITDA margins and EPS. And so given the good start we've had to this year and what we're seeing for this full year, I think we could do more while still hitting our commitments and setting ourselves up for better performance next year. Thanks for your question.

[Jonathan Block, Analyst at Stifel Nicolaus]

Thank you.

[Operator]

Thank you. Please stand-by for our next question. Our next question comes from Nathan Rich with Goldman Sachs. Please proceed.

[Sarah, Analyst at The Goldman Sachs Group]

Good morning. Hi. This Is Sarah [Phonetic] on for Nate. I just wanted to dig into the 25% growth we saw in China. So how much of that was VBP volume uplift versus underlying traffic improvement and the compares? And then how was traffic trending throughout the quarter? I'd just be curious to get a sense of your expectations for China over the back half of the year.

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes. So in terms of our performance in China, let me just try to summarize the overall situation. I'm not sure we're going to have the level of detail that you're asking for. But I think, first and foremost, our China business represents about 3% of our consolidated sales to put that into perspective. We did have year-over-year growth of 25%. Sequentially, we actually even grew faster from Q1 to Q2. And a lot of that was driven by these VBP volume increases in implants. Implants had really strong growth above the 25%. And Simon made some comments earlier. We expect that the volumes now will actually offset the price erosion on a full year basis, which is very positive for us overall.

As we move forward, I would expect to see really healthy growth in Q3 and Q4 coming out of China, at least double-digit growth in both of those quarters. And just to give you some perspective on the second quarter here, well, implants had a really strong quarter. We saw growth across all product categories, except for imaging. So the one area that we're still being cautious on is the equipment side in China, both imaging and CAD/CAM. But on the whole, between the COVID recoveries, between what we're seeing in terms of our share gains in VBP. And it's both on the public and private side, we feel really good about the momentum we have there.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

I would just add on the -- on our server data from China, where we had over 250 respondents. They are reasonably bullish about the next three to six months. Though their patient levels are -- their offices are not yet full, but they are improving quarter-over-quarter or survey over quarter -- survey over survey.

[Sarah, Analyst at The Goldman Sachs Group]

Really helpful. Thank you. And then just on imaging, we saw strength from the supply recovery in the quarter. But if we exclude this impact, can you discuss like the underlying business performance? And then how are you thinking about imaging throughout the back half of the year?

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes. We were pleased with the imaging performance as well as treatment centers. Both Europe and Rest of the World had really strong, robust double-digit growth in both of those categories. A lot of it was the improvements I mentioned earlier on supply chain and shortening lead times. If we look at the rest of the year, we're still cautious on imaging. So I would say right now, I'm still expecting to see some pressure on imaging in the third quarter and in the fourth quarter, and that's what's built into our guidance. So we're not expecting to see a rebound.

The high cost of financing, we think will likely impact some of this in the back half of the year in certain markets, including Germany. So we're going to be cautious on the equipment forecast going forward. It's one of the reasons why our second half of the year guidance relative to first half of the year is flat to down when you look at half-to-half performance. And so if that turns out to be better, that's going to be upside for us. But right now, we're being very cautious on the equipment environment until we see better signs overall. Thanks for your question.

[Operator]

Thank you. Our next question comes from Justin Lin with William Blair. Please proceed.

[Justin Lin, Analyst at William Blair]

Hi. Good morning, guys. Thanks for taking my questions. I want to touch on guidance a little bit. The EPS guidance raise factoring the three points of FX headwind, I think, essentially just passes through the beat in the quarter. That obviously, you've raised yourselves much greater than the beat. Can you maybe just talk about kind of your thought process behind the guidance here?

[Glenn Coleman, Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA]

Yes. Listen, I think this is our second guidance raise. We're only halfway through the year. We did pass through the outperformance here in the second quarter. To your point, we are seeing higher FX headwinds right now. So we're absorbing those in this increased guidance range that we're providing. And again, if you look at the back half of the year, there are certain areas where we need to be careful about relative to getting ahead of ourselves. So if you look at the Germany market, Australia, we're being cautious there. I want to see the momentum we have coming out of DS World. We're expecting to have a great event, and I'm hoping that we actually get some upside from the U.S. team coming out of the September event.

So -- still some things to see before we get too bullish on the year. But in terms of EPS, we still have a lot of investments to make in this business. We still got to get the infrastructure to where it needs to be having a solid foundation across the company. And like I mentioned earlier, I'm going to take some of this overperformance and try to do some things that I think will position us even better for next year. And so I'm looking at areas and opportunities. Simon mentioned these reviews that we're doing regionally. Coming out of the last region review, we gave some additional dollars to certain sales leaders to go and get better top-line performance for next year.

And we have more planned coming up here later this month in Asia Pacific, as an example, and I'm planning on probably having a similar conversation. So one of the benefits of us actually overperforming on the top line is we can probably do some more investments to position us better for next year. But on the whole, we're very happy with the first half of the year's performance, both top line, EPS, EBITDA margins, and we're moving forward.

[Justin Lin, Analyst at William Blair]

Got it. That's very helpful. I guess we haven't really talked about Primeprint for a while, I feel like. Can you talk about how the product is gaining traction relative to your expectation whether you've seen any sort of short-term hit to Primemill, some doctors may see 3D printing as a replacement for mills in your practices.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Yes. So I'll start with this -- with the second part of your question, Justin. We see printing and milling as extremely complementary. Printing does not, in our opinion, have the capability for permanent crowns, but more facilitates implants, temporary crowns, etc., etc. That's our opinion. And we've been sharing it with customers and potential customers. And we think it does resonate, and we have a strong printer offering, a strong resin offering and a great mill offering.

Now with respect to our performance, I would say we are doing okay in the marketplace today. Our devices is very efficient. We believe it's got a great safety profile in the sense that it doesn't expose the clinicians or technicians or the office to resins or fumes and the fact that it's linked up to DS Core and other technologies as well. We think it's a competitive advantage for. We continue to invest in new materials -- new material capability.

And we expect as we roll through the next six to nine months that our ability to compete with other vendors in this space that we will begin to level out the playing field as we bring some of the new materials to bear in that marketplace. So we are bullish about the future of printing. We think it's complementary to milling and that our complete technology offering coupled with DS Core will continue to be meaningful for customers, and we will certainly be driving it in that manner.

[Justin Lin, Analyst at William Blair]

Very helpful. Thank you.

[Operator]

Thank you. Please stand by for our final question. Our final question comes from Michael Petusky with Barrington Research. Please go ahead.

[Michael Petusky, Analyst at Barrington Research]

Hi. Good morning. Thanks for the questions. And I'm going to sort of throw a bigger, I think philosophical question. So Simon, you've almost been in the chair for a year at this point. Obviously, a number of people have been in that chair over the past decade have not been able to create sort of sustainable momentum and sustainable value -- a sustainable value-creating business.

Just curious, what are two or three things that -- now that you've been in the chair almost a year that you've sort of looked at and you said, you know what, okay, I see where my predecessors maybe ran into some problems or these are some things that, obviously, we've as a business, historically, have not been able to get done. I mean are there things that you've learned at this point where you can sort of see, hey, this is why predecessors have not quite executed and here's why I think we can. Thanks.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Well, I don't know if I want to comment on what they -- what predecessors did and did not do. I'd rather focus on what we are doing. So I'll pick some of the themes that we've spoken about at this meeting or at this call this morning. So one, investment in commercial infrastructure and clinical education. We have reinvested, I think, significantly in that space.

Number two, building capability around R&D, particularly around uncovering innovation, monetizing it and discipline around the R&D process. The big gap for us, and we're prepared to grab that thorny bush is ERP. We have 13 or 14 ERP systems in this company that drives massive inefficiency. So we -- as we noted in the prepared remarks, we have kicked off that project. We have selected the vendor. And we've selected the integration partner. We've built a team around it, and we're in the blueprinting phase. We are reducing our network -- our manufacturing and distribution network.

So there are a lot of levers that we are pulling why others data did not pull the same levers, I don't know, but we have -- we have a full plate and we're making progress in all regards. In addition to the cultural transformation, we're building out the team, we've elevated quality. We brought in a new CHRO leader. We've changed out the leadership in Australia and New Zealand. We've put the customer at the center of everything we do. In addition to driving a culture of ethical and compliant behavior, which we think is -- which we know is extremely important. And we drive that at every single meeting. In fact, at the top 100 leader meeting that we had in Charlotte, the first presentation on the agenda was ethics and compliance. So we are not screwing around. It's really important.

[Michael Petusky, Analyst at Barrington Research]

All right. Very good. Thank you so much.

[Operator]

Thank you. At this time, I am showing no further questions. I would now like to turn the conference back over to Simon Campion, CEO, for closing remarks.

[Simon Campion, President and Chief Executive Officer at DENTSPLY SIRONA]

Thank you, and thank you all for your attendance on today's call. I would just like to take a moment to reiterate some key points before we close. Firstly, delivering on our commitments is of the utmost importance to this team. We feel that operational execution is improving at Dentsply Sirona. We continue to make advances on the transformational and strategic objectives that we've laid out. We are, as we've spoken about, investing back into our business, which has been funded in part by our cost savings initiatives.

And then finally, on behalf of the management team, I want to thank all Dentsply Sirona employees for their dedication to the business and the necessary transformation that is underway and in particular, we want to express our thanks to employees who have the part of the organization in the last quarter and wish them all well in the next phase of their careers. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Andrea Daley, Vice President, Investor Relations
• Simon Campion, President and Chief Executive Officer
• Glenn Coleman, Executive Vice President, Chief Financial Officer

Analysts

• Elizabeth Anderson, Evercore ISI
• Michael Cherny, Bank of America Co.
• Jeff Johnson, Robert W. Baird
• Kevin Caliendo, UBS Group AG
• Jonathan Block, Stifel Nicolaus
• Sarah, The Goldman Sachs Group, Inc.
• Justin Lin, William Blair
• Michael Petusky, Barrington Research