XRAY
#Okay.
<UNK> <UNK>, Morgan Stanley.
First question is, I wonder if you could spend a minute reflecting on the 2017 margin objectives.
Its always nice to hear how the thinking there is evolving and I would say particularly here, given how strong the margins were in the quarter.
Of course, we appreciate that you want to continue investing in the business, but then it begs the question, if we have now more flexibility to invest in the business considering how well we are doing in terms of the efficiency initiatives, maybe that positions you to talk a little bit more about how you think about organic growth evolving over the next couple of years.
How do you think about the interplay between those dynamics given the progress that you are seeing here.
Okay.
<UNK>, this is <UNK>.
I will take a stab at that.
Certainly, we are ahead of where we thought we would be in the margin expansion program and it is beginning to gain traction now, strong traction.
And that creates flexibility for us.
You might remember, this is not, and you alluded to in your question, this is not just a cost-cutting exercise, this is an exercise of taking fixed costs and turning them into variable costs so that we can accelerate investments where we see growth opportunities.
And thus, that is probably the most important part of the program, frankly.
But we are ahead of where our internal targets were on the margin expansion program.
That's going to allow us to bring some of the investments forward and which should generate growth sooner in the program as well.
I will say with respect to the 20% operating margin target in 2017, we are ahead of where we thought we would be now and I think you should view that 20% operating margin target as an interim target.
And we will reassess that target with respect to where we are in the program when we get to that program.
Now we are at 19.9% for the first six months of this year so we are doing pretty well, which is what's giving us the flexibility to invest in the growth initiatives and move forward.
So I don't want to get too far out in front of ourselves here on trying to describe the impact on internal growth, but of course, we would not be making those investments if we did not think it would accelerate internal growth going forward.
<UNK> or <UNK>, do want to add anything.
No.
I think that's accurate.
Obviously, we're headed where we thought we would be.
We are getting some help from FX on that line but we're also getting some good help in terms of the efficiency program.
That's regaining traction and based on the moves on the initiatives in play, it looks like it's going to accelerate which is in line with our expectations.
I would also say there is transition area FX too.
Obviously, as we go through this and we create new territories, we create new positions, we transition businesses, there is a time phase until those things become totally efficient.
And just one followup to a comment that was made in the prepared remarks for you, <UNK>.
Thanks for calling out the cash flow in the business and how that relates to what's going on in net income.
We've been wondering about the balance sheet and the extent to which you might, with working capital efficiency, be able to drive fast or free cash flow growth over time.
Have you guys thought much about how much or how sustainable that is, the ability to drive free cash flow growth ahead of net income given what you see on the balance sheet today.
Are there any parameters around that, that you could share with us.
We certainly believe that there is some sustainable improvements possible here for the next several periods.
Obviously, it is going to vary quarter to quarter.
I don't want to set the expectation on a quarterly basis, but I think over the next couple of years you should expect us to continue to make improvements in terms of working capital.
We are still over 115 days of inventory.
That's not exactly world class.
That's better than where we've been.
But we've got some significant opportunities in a number of initiatives in play to drive that down both in terms of how we operate but also how we structured.
Again, I think you should expect to see that gradual improvement.
Again, not necessarily quarter to quarter but over time.
The fact that historically, I think if you went and looked back, last year we increased the inventories in the second quarter by three days.
If you go back to 2013, and I believe they went up by six days in the quarter.
So to get inventory down by three days in the second quarter which is typically one of our largest build periods, I think is indicative of the traction that we're getting.
Okay.
Thanks again, guys.
Have a good morning.
<UNK> <UNK>, <UNK>eries.
<UNK>, with respect to Europe, I mean if we look back over the last two years we've seen a real sawtooth pattern in the trend there.
Realize there's been several moving parts between CIS and discontinued products.
Do you feel comfortable enough at this stage to say we are perhaps back on a more sustainable consistent growth trajectory in that region.
I think that's an interesting question, because the sawtooth pattern, <UNK>, occurred because of different countries moving in different directions all at the same time.
Whereas today, the pattern is, it's much more consistent meaning many more countries are moving in the right direction than ---+ before there was a balance, more moving down and more moving up, et cetera.
Now there seems to be more momentum in more countries.
And the results today, we still have countries where there were slight declines in sales growth but there were many, many more that had slight increases in sales growth and thus, it appears to be a more sustainable pattern to us.
Time will tell.
We've been surprised before, but I think the region in total seems to be more stable today.
They are still dealing with some issues in Greece, et cetera, but that doesn't seem to create any contagion to the other countries at this point.
Its hard for me to make that call at that point other than to say what we see right now would tell us that it looks to be more sustainable.
Thanks, that's helpful.
Maybe one for <UNK>.
I did not hear you mention the ortho business.
Has their been any change in the ASP environment there.
And any update you could give us on where you are with MTM in terms of the rollout and the traction you are seeing there would be helpful.
Thanks.
Certainly.
From the standpoint of the ortho business, I would say the pattern is pretty similar to what we've seen in the past few quarters.
The market is a still very competitive.
I would say that we are seeing some improvement in our North American business.
Europe and the rest of the world still reads very, very competitive.
From a standpoint of our MTM business, obviously that is a smaller business but we are seeing some excellent growth.
We are pleased at the case uptake that we see in that business.
A lot of it is going to be our continued investment in the clinical education program and our sales efforts to ensure we get continued adoption and increased case volume.
We are pleased with the performance of the MTM business.
Jon Block, Stifel.
This is <UNK> <UNK> on for Jon Block.
Maybe first, on the margin expansion.
It's been critical to the story and you can see to the 2017 goal of 20% in the quarter which is allowing you to reinvest a portion of the savings, fund growth initiatives.
I know that you mentioned that you were ahead of plan, but looking beyond 2017, what do you consider to be the peak operating margin for the overall business.
Clearly this business can and has produced operating margins about 20% and that's why we continue to describe the 20% target as an interim target and a net target.
Meaning it's net of the reinvestment.
And it is an interim target which we would expect to meet on the time frames we've established.
As we get closer to that timeframe, we will be able to update that target and the guidance based on the maturity of our efficiency program and what we see the reinvestments generating in returns.
So I don't want to put a stake in the ground at what the maximum operating margins are for this business but it's above that 20% target that we have today.
Okay, great.
I know you mentioned that momentum has picked up in the business and the Q2 internal stack growth stepped up a bit sequentially.
But your comps get more difficult in the back half of the year.
Do you think it's realistic to think you can maintain this 3% plus internal growth just given the momentum of the business.
We don't publish an internal growth target for the year, although the reason I went through what we see in the regional markets was to give you some indication of what we see the underlying conditions to be.
So at this point, we see stable to improving results in both the US and Europe and that is 80% of our sales base so that is a big factor.
The wild card has always been the rest of the world countries and there is 120 countries in that category so it's a little bit more difficult to make a firm call on that.
Based on the underlying trends that we see in the markets today, we feel pretty good about growth prospects for the back half of the year and I don't think ---+ we're not too concerned about what the baseline is in making those kinds of calls at this point.
Okay, <UNK>.
That's difficult for us to know what those underlying trends are at the dentist office themselves.
We buy surveys and so forth and some of those show that patient traffic is improving.
From our perspective, the General Consumables, the products we sell through distributors, are really the strongest category we have right now and those products really don't move other than through patient traffic.
So that tells us, if we had to guess, we would say there has been an acceleration of patient visits and these patients are getting back into the office.
And generally when that happens, then you see the specialty business pick up on a little bit of a trailing basis.
So if we had to guess, patient traffic trends have improved for where they were, for instance, a year ago.
And with the job growth coming, we would think that that would continue.
Do you guys have anything to add on that.
No, I think that's correct.
Yes, if you look at the 180 basis points in the quarter, a bit over half is currency.
Again, recognizing that with the cash flow hedges, the impact on our bottom line is less than the translation impact headwind on the top line.
About one-third of it, a little over a third on a gross basis, is the efficiency program.
And price and mix are helpful, but then we add headwinds from reinvestments and then also, headwinds from absorption, as I mentioned earlier; where again, last year we built inventories by three days and this year we brought it down.
Thank you
<UNK>, we did not intend to do that.
As those products come out, it does create a slight drag on internal growth.
Our plan was to report internal growth to you each quarter and then let you know what the drag was.
But we were not going to attempt to normalize it for a product dropping out here or there.
And we've kind of quantified the range of that drag going forward here.
And of course, that is a temporary drag.
Once we anniversary those discontinuances then that's going to drop out.
But also, new products being launched in that business as well.
<UNK>, that's a very picky question.
(Laughter).
I think it fluctuates around.
A lot of things can affect that.
Dealer inventories can affect that and so forth, by 50 basis points here to 100 basis points.
We are not troubled by the ---+ it's slightly stronger in the first quarter.
It's a little bit, just a little bit weaker here, but overall this year, we are up around 4% organically in the US and probably a little bit above the market.
If we had to guess on the market, we would say between somewhere between 3% and 3.5% is what the market is growing.
We will know a lot more than that as we see more distributors report, et cetera.
But we feel pretty good about the number.
We feel good about the momentum, the execution is good and the seed investments we have put in are bearing results here.
So I don't think we are overly troubled by that US number.
I will take implants and then you can comment on medical.
Implant unit growth was pretty nice for us in US in the second quarter.
If I had to characterize it regionally, I would say the rest of the world was our strongest region and that was followed by Europe and the US.
The trends seem to be favorable there.
It varies by technology at this point but we think we are picking up momentum on implant unit placements.
And that is being driven by the new product that we've been talking about for the last year or so on these calls, ASTRA TECH EV.
You want to comment.
<UNK>, as it relates to the medical business, we're seeing really good mid-single digit growth in that business.
We are pleased with the performance.
We are seeing some nice growth in our US market and in addition, we have some fairly significant new products coming in the coming quarters.
We look for continued improvement in that business.
Well yes, the unit growth does differ a little bit, meaning the point that you raise is important and that is that the price is higher on EV than some of the legacy products.
So as the mix shifts to EV, the effect on revenue is a little bit higher than the effect on unit growth.
I am using unit growth here to give you a perspective on what is happening to the number of our own dental implant screws that are being placed irrespective of which brand it is.
Thank you very much, everyone.
That concludes our conference call today.
I will be around for follow-ups this afternoon.
Have a nice day.
