DENTSPLY SIRONA Inc. (XRAY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the DENTSPLY SIRONA Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Andrea Daley. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the DENTSPLY SIRONA Second Quarter 2024 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. 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 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 updated 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 offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance and enhance the transparency regarding key metrics, utilized by management and 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'd now like to turn the call over to Simon.

Thank you, Andrea, and thank you all for joining us this morning for our Q2 2024 earnings call. I'll start by providing an overview of our Q2 performance, give an update on the previously announced transformation work and share information about new initiatives and investments we've been planning. Then Glenn will cover Q2 financial results and our full year 2024 outlook. I'll finish with a brief strategic operating update. Starting on Slide 3. Our second quarter revenue of $984 million was unfavorably impacted by lower sales in our Connected Technology Solutions segment. As expected, capital equipment continued to experience pressure, largely but not exclusively due to macroeconomic conditions. Other factors included some pricing degradation and weaker-than-expected performance in certain major markets. We delivered organic sales growth in the other 3 segments, Essential Dental Solutions, Orthodontic & Implant solutions and Wellspect HealthCare. We were pleased to see double-digit growth in aligners despite some headwinds, which we'll discuss later. Our continued focus and investments in Wellspect HealthCare enabled us to deliver another quarter of strong growth. For the full year, we're revising our outlook based on first half performance, FX, evolving market dynamics and the continued macroeconomic headwinds. 18 months ago, we announced a restructuring plan to transform DENTSPLY SIRONA. We also communicated that this would be a journey. With our Phase 1 initiatives complete or well underway, we're ready to advance to Phase 2 to build on our progress to date and further advance our transformative agenda to improve efficiencies and drive profitable growth. Although the macro environment has impacted the sales outlook for the global dental market, we remain committed to continued assessment of our business, adapting our organization accordingly, enhancing our efficiency and execution capabilities and investing in high-return categories, all with the goal of driving sustainable EPS growth, as we highlighted during our Investor Day. As we said in our press release, we've identified $80 million to $100 million in annualized structural and operational synergies that are incremental to our recently completed $200 million restructuring program. We've a clear plan to achieve these synergies and expect to realize them in the next 12 to 18 months. Both our Phase 1 and Phase 2 restructuring plans are fundamentally shaping our company. We designed these plans to improve our operational performance and drive much higher customer engagement, increase alignment, drive process and discipline, and strategically position DENTSPLY SIRONA to win. Since announcing Phase 1, we've moved very deliberately in many areas, including reinvestments in key geographies commercially, competencies such as clinical education, simplifying our manufacturing, distribution and product footprint, driving an intentional focus on quality, refining our new product development processes and implementing a single ERP system. These cost-saving initiatives and reinvestments were instrumental in reestablishing positive and constructive relationships with key stakeholders of our company, including customers and investors. We remain confident that these Phase 1 initiatives will have a lasting impact, improving performance to drive long-term shareholder value and contribute meaningfully to our bottom line through 2026 and beyond. As we discussed in Q1, we've been planning incremental measures to better position ourselves to achieve our profitability and EPS target. While we always believe there were additional opportunities to shape and structure our company, we prioritize the Phase 1 operational initiatives. We expect these new initiatives will not only improve our financial performance, but also refine our organizational structure, enhance our business processes and better align roles and responsibilities to support our objectives. Specifically, I'll discuss shortly how we're executing on new investments to reshape our structure, enhance relationships with our customers, and further strengthen our competitive position and accelerate innovation through disciplined R&D pipeline management. Additionally, we're evaluating further strategic investment opportunities, though we'll not disclose these details today for competitive reasons. We're laser-focused on simplifying our global structure by consolidating product categories within each global business segment to better align our portfolio with our customers' needs. In doing so, we're also simplifying our regional structure and reevaluating our marketing efforts across our business. We've assessed and reevaluated lower-performing businesses and geographies, and have decided to selectively exit certain countries, which we expect to complete in 2025. We expect these exits to have a $5 million impact to revenue with minimal impact to the bottom line. We also initiated plans to reduce external spend and G&A costs by consolidating our vendor and supplier base while tightening spend control. In addition, we've developed a plan to consolidate service and support activities that, in turn, will enhance efficiency through streamlined tools and processes, which are enabled by our ERP transformation, though I'll note the time line for this particular project extends beyond 18 months. As we've previously shared, our survey results tell us that we do not have major product gaps in our portfolio and that our company is uniquely positioned to be a partner of choice for customers around the world. These are not our words, but the words of our customers. We'll continue working towards better leveraging our portfolio to drive improved performance where we've lagged the market for years. Unlocking the value inherent in our portfolio requires us to think differently, to invest strategically and to create our own demand. So what does it mean to create our own demand? We must develop closer, more meaningful relationships with all our customers. While we've made progress here, we must continue to assess and take opportunities to advance this crucial strategic objective, when and where appropriate. Our global sales force, as you know, is a critical part of our commercial infrastructure. Moreover, the geographic distribution of dental practices, particularly in the U.S., can make reaching customers challenging and, in some cases, result in marginal return. To augment our efforts and improve our coverage more cost effectively, we plan to increase investment in our own sales channels. As a first step, we've recruited a sales leader with a strong track record of standing up inside sales organizations around the world. By the end of Q1 2025, we intend to recruit, hire, train and deploy, at least 100 DENTSPLY SIRONA inside sales reps in the U.S. This team will complement our field-based sales teams by connecting with customers who do not see our field-based reps as frequently as we'd like. They'll focus on generating demand and funneling it through the appropriate channel, either our direct sales forces in endodontics and orthodontics for example, or through our dealer partners. More specifically, we see an opportunity to increase our in-office aligner business, particularly with orthodontists where we're underpenetrated. Our studies demonstrate a compelling value and technology proposition, leading us to increase investments in commercial and technology assets. To enhance the effectiveness and performance of our commercial and service teams, we also intend to invest in technology that facilitates a seamless customer service and engagement experience, alongside implementing an advanced CPQ system. Furthermore, many of our direct customers would prefer to do business with our company through a robust e-commerce platform. With that in mind, we've developed a detailed plan to upgrade our offering through increased functionality and capability and are now moving into the execution phase. Our plan incorporates many discrete areas of enhancement, which we expect will improve the performance of this channel and customers' experience with our company. We expect most of these initiatives will go live by the end of Q2 2025. And this leads us to our relationships with distributors. The degree to which we partner with distributors varies around the world. We value these partners in all geographies, and we've worked hard to strengthen those relationships. That said, changing market and competitive dynamics have impacted our relationships with certain distributors, and we're adjusting accordingly. For example, some not only distribute for us and others, but in certain areas, they compete with us directly. Others execute in manners that do not wholly align with our strategic objectives. We've and will continue to invest significantly and strategically across our businesses, introducing new products and software into the marketplace and training our distribution partners to represent our portfolio to our customers. Through these activities, we enable distributor success, which, in some cases, is not adequately reflected in our current terms and conditions with them. With this in mind, we recently issued a nonrenewal notice to Patterson Companies under our equipment distribution agreements in the United States and Canada. We did not make this decision lightly. It reflects our desire for improved delivery and communication of the value proposition we bring to dentistry, including our evolving digitally connected ecosystem. Our current contract remains in effect as we engage in ongoing discussions, which we hope leads to an agreement that aligns more closely with the evolving environment and our strategic objectives. To help us achieve the Phase 2 cost savings and advance our strategic initiatives, we've made several organizational and leadership changes, including merging North America and Latin America into one commercial team now called the Americas region. Given their experience and track record, we're confident that the regional commercial leaders now in place and drive the necessary changes to address our operational realities, improve organizational health, and better position DENTSPLY SIRONA for future growth. Furthermore, we announced today that as part of our leadership changes in connection with Phase 2, Andreas Frank will be leaving the organization. Andreas made many meaningful contributions in helping us establish our path forward and in executing the work we've undertaken. These changes are intended to increase alignment between our global business units and our regions, thereby creating positive momentum in our revenue trajectory, which we anticipate will improve the leverage of our other margin accretive activities. Finally, we've been diligently improving processes in R&D to ensure that we're working on the right programs at the right time, programs that focus on unmet clinical and workflow needs for our customers. Our ongoing assessment has identified $19 million outside of the Phase 2 initiatives that we plan to reallocate into programs tailored to those needs, and with return dynamics that can allow us to alter the return trajectory of our total innovation pipeline. Specifically, we're increasing investments in orthodontic software to improve the dental professionals experience, accelerating DS Core capability and making further investments across our Connected Technology platforms. Now let's circle back and talk about our $3 EPS target. As we stated when we announced this objective, achieving this target assumes an improved macroeconomic environment. Since announcing the target, we've continued to see pressures globally, particularly in markets where we've a significant presence, such as Germany and Australia as well as higher interest rates persisting across many of our major markets, including the U.S. Despite the challenges already noted, the contribution of our Phase 1 activity to our $3 target is meaningful and within our control. This EPS target remains a North Star for us, and we expect Phase 2 to help our path to the $3 EPS target. We also believe, as you heard today, that it's crucial to continue investing in our business to drive profitable growth and remain good stewards of our organization as we laid out at Investor Day. In a nutshell, and while we're still fine-tuning our numbers, some of these initiatives will go towards helping us achieve the $3 EPS target, while the remainder will go towards improving our competitiveness, which we expect will drive even greater value. Before I hand the call over to Glenn to discuss the financial results in more detail, let me add that we had a strong cash flow quarter, resulting in over $100 million in cash becoming available. We plan to return this to our shareholders through additional share buybacks in Q3 of this year. And I'll highlight that in total, we now plan to return about $380 million to shareholders this year through share buybacks and dividends. Now over to you, Glenn.

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 full year 2024 outlook. Let's begin on Slide 4. Our second quarter revenue was $984 million, representing a decline of 4.2% versus the prior year quarter. On an organic basis, sales declined 2.3% as foreign currency negatively impacted sales by approximately $20 million or 190 basis points with the largest impact coming from the weakening of the Japanese yen versus the U.S. dollar. On a constant currency basis, 3 of the 4 segments posted organic growth in the quarter, highlighted by double-digit growth in Aligners and Wellspect HealthCare. These improvements were offset by declines in CTS, where we continued to experience the effects of challenging equipment market conditions and competitive pressure. EBITDA margins contracted 30 basis points mainly due to a decline in gross margins, which was largely driven by the impact of lower volumes, pricing and unfavorable product mix in our CTS segment. In the quarter, a larger proportion of our CAD/CAM sales came from Primescan Connect, which has a lower gross margin profile than our other Primescan offerings. This is not a new trend, but one that has become more pronounced. Adjusted EPS in the quarter was $0.49, down 4% from the prior year due to lower sales and a higher tax rate. Operating cash flow of $208 million doubled over the prior year due to favorable timing of cash collections and receipt of a foreign tax refund. Free cash flow conversion was 155% compared to 65% in the prior year. In the second quarter, we repurchased $150 million of shares at an average price of $27.85 and paid $33 million in dividends. As Simon mentioned previously, we intend to repurchase $100 million of shares in Q3 and plan to do so without increasing our leverage given the strong cash flow performance in the quarter. For the full year, we now plan to return approximately $380 million to shareholders through a combination of dividends and share repurchases. We continue to maintain a strong balance sheet with cash and cash equivalents of $279 million on June 30. Our Q2 leverage ratio remained stable at 2.7x and we plan to end the year with a leverage ratio slightly lower than current levels. Let's now turn to second quarter segment performance on Slide 5. Starting with the Essential Dental Solutions segment, which includes endo, resto and preventive products, organic sales increased 1.5%, driven by steady patient traffic in Europe, partially offset by lower volume in the U.S. Our new endo motor, X-Smart Pro+ drove increased demand in Europe and Japan in Q2 and recently received 510(k) clearance to launch in the U.S., which is now planned in Q3. Shifting to the Orthodontic & Implant Solutions segment. Organic sales grew 4.6% with double-digit growth from aligners, up 11%. SureSmile, our professional aligner brand grew 6%, driven by double-digit growth in Europe. SureSmile also saw accelerated sales growth in Japan, we've recently made investments to expand our footprint and coverage. Byte, our direct-to-consumer aligner brand grew 16% over the prior year quarter. During the quarter, legislative changes required us to adjust our go-to-market model in certain states. Given the evolving legislative and regulatory environment, we now expect Byte to grow approximately 15% for the full year compared to our previous estimate of more than 20% growth. Implants & Prosthetics grew low single digits in the quarter, driven by strong implants growth in China, partially offset by declines in the U.S. and Europe. Our value implant segment was flat in the quarter as growth in most markets was offset by the impact of Turkey suspension of all imports from Israel. On the premium side, growth in our EV family of Implants & Prosthetic Solutions outpaced declines in legacy brands. Supporting our commitment to clinical education, in Q2, we held our Implant Solutions World Summit in Miami, hosting over 600 implant professionals from 25 countries. Wrapping up our dental performance, CTS, our Connected Technology Solutions segment saw organic sales increased 4% sequentially, but declined 16% versus the prior year quarter. We saw double-digit declines in both E&I and CAD/CAM as the demand environment for equipment remains soft due to macro headwinds and higher interest rates in most markets. Declines in imaging equipment and treatment centers were also partially driven by a tougher comp versus the prior year quarter. While we anticipate the equipment market will remain challenging through the second half of the year, we expect our current and planned actions, including an upcoming digital equipment launch to improve our performance in the second half. We look forward to sharing more with you about this launch in the near future. We've all seen very good adoption on DS Core registrations, which continue to grow, and we now have over 27,000 unique users as of quarter end, representing 37% growth compared to Q1. Moving to Wellspect HealthCare. Organic sales grew 11.7% exceeding our expectations. We saw growth across all regions, and we continue to benefit from new product launches, market share gains, and an initial stocking order from a new distributor. In the second half, we expect the Wellspect growth rate to moderate to the mid-single-digit range. Now let's turn to Slide 6 to discuss second quarter financial performance by region. U.S. organic sales declined 0.6% due to lower imaging equipment volume and lower wholesale volumes in EDS. On a retail basis, EDS sales were approximately flat in the quarter. U.S. CAD/CAM grew low single digits. Distributor inventory levels decreased sequentially by approximately $16 million, consistent with normal seasonality compared to a $23 million sequential decrease in the prior year quarter. We expect U.S. CAD/CAM distributor inventory levels to fluctuate quarter-to-quarter and be roughly flat by the end of the year compared to current levels. Turning to Europe. Organic sales declined 2.6% due to lower CTS volume across the region as a result of prolonged recessionary trends, particularly in Germany, most notably affecting the demand for equipment. In Q2, we began to deliver units of Orthophos SL, our relaunched 2D and 3D imaging line. While we're pleased with the uptake of the relaunch, we expect it will only partially offset the macro headwinds and competitive pressures in the second half of the year. The declines in CTS were partially offset by growth in EDS and Wellspect HealthCare both of which benefited from new product launches. Rest of World Organic sales declined 4.3% in the quarter as robust growth in China for endo and implants was offset by soft demand for equipment in Japan, in Australia and New Zealand. With that, let's move to Slide 7 to discuss our updated outlook for 2024. We're revising our full year outlook based upon first half results, anticipated additional FX headwinds, market dynamics and our expectation for prolonged macro challenges. Our July customer survey, which included approximately 2,000 responses, confirmed what external data indicated about the market and demand dynamics. And we believe it's prudent to take a cautious view through the remainder of the year. Several key markets showed a dip in patient traffic, including the U.S., France and Spain. While customers expressed an interest in innovations that can improve their workflows, they also reported that they plan to delay capital investments in the near term, consistent with the ADA data trends. At current FX rates, we now expect full year net sales to range from $3.86 billion to $3.90 billion. We expect organic sales to be down 1% to flat compared to our prior estimate of flat to up 1.5%. Moving to profitability. Our outlook for adjusted EBITDA margin of greater than 18% remains unchanged from our prior outlook. With these updates, we expect 2024 adjusted EPS to be in the range of $1.96 to $2.02, representing growth of 7% to 10% over the prior year. For the third quarter, we expect sales to increase low single digits on an organic basis and decline low single digits on a reported basis compared to the prior year. Sequentially, we project gross margin to improve slightly in Q3 but decline year-over-year. We anticipate third quarter adjusted EPS will be down mid-single digits year-over-year, primarily due to a higher tax rate. And with that, I'll turn the call back over to Simon.

Thank you, Glenn. Moving on to our strategic update, starting on Slide 8. We remain confident in the strategy that we've laid out, digitalize our company, win in high-growth categories, create a high-performance culture, enhance and sustain profitability and meet our stated financial objectives. As we noted this time last year, we had several areas that we wanted to focus on in 2023, 2024 and beyond to drive this agenda. These included work on our foundational initiatives, designing a winning portfolio, driving network efficiency, redefining our ERP landscape and executing our restructuring. Let me now provide you with a brief update on our progress. We're advancing our SKU optimization work and expect to eliminate almost 50% of our endo and restorative SKUs by the end of 2025. We anticipate having the majority of this completed by the end of this year, starting with the nonrevenue-generating SKUs, while we work towards migrating revenue-generating SKUs in 2025. Our supply chain team continues to seek opportunities to improve our network performance. We've recently closed another U.S. distribution site and announced plans to close another U.S.-based manufacturing site. We've been driving towards a Q3 commencement of an initial ERP rollout in Europe for several months. I'm pleased to inform you that tomorrow, August 1, we'll go live with SAP 4HANA in the U.K. We've completed an extraordinarily robust set of tests and simulations and will now shift our focus to a go live in North America in the latter part of 2024 with other implementations to follow. Today, we've clearly articulated Phase 2 of our plans to transform DENTSPLY SIRONA. We've demonstrated our ability to deliver on such objectives with our success to date in Phase 1, and we're confident we can deliver on these new initiatives and investments as we strive towards making DENTSPLY SIRONA the preeminent partner for dentists, hygienists, and practice owners around the world. Now let me close with a few remarks on Slide 9. Last year, we committed to taking decisive action and this was not a singular statement in time. We want to capitalize on the opportunity that the dental industry affords an organization like ours, and we believe that the actions we've announced today as well as those we took in Phase 1 will continue to drive efficiency and position us well in this evolving market. We'll continue to regularly assess our business, take decisive action and pivot as needed to improve our company and its performance particularly with respect to revenue growth, margin expansion and EPS. Today, you've heard us expand on further decisive action that we're taking to not only aid our path to our $3 target, but to also improve and increase our proximity to our customers. To recap, we ended Q2 experiencing continued pressure on our capital equipment business. Our implants business in China has progressed well, while we continue to invest in the U.S. business and do expect growth in the back half of 2024. Our ortho business continues to be our fastest-growing portfolio globally notwithstanding the previously mentioned regulatory environment for Byte in the U.S. Our new product launches, particularly in endodontics and Wellspect have done well for us and we look forward to sharing more information with you as 2024 progresses. And with that, I'll open it up for questions.

[Operator Instructions] The first question comes from Brandon Vazquez from William Blair.

Maybe first, I'll focus a little bit on macro. I mean, it's something that's on everyone's minds these days, and it seems like in certain areas, it's deteriorating a little bit. So maybe can you just spend a couple more minutes talking about the specific segments. Is this broad-based or is this kind of equipment specific where you're seeing macro worsening? And what's kind of the exit trajectory of macro conditions, as we're going into the back half of the year now for these segments?

Yes, Brandon, this is Glenn. I'll start. I think, first and foremost, we're not seeing a worsening trend in terms of the macro environment. I think on the equipment side, certainly a challenging environment. It's been challenging for the last several quarters. The biggest challenges for us continue to be Germany, parts of Asia, including Japan and Australia, and the U.S. market. So I wouldn't say it's gotten any worse. But certainly, when we look at the equipment market, it's a challenging market. On the consumables side, I'd say the patient traffic has been pretty stable. We've seen a bit of a decline in some of the specialty procedures and elective procedures. So aligners and implants as an example, in the U.S. market that was confirmed also with our external survey that we do. And so those are overall some of the trends that we're seeing. But Simon, maybe you want to comment as well.

Yes, Brandon, and I think we noted previously that for some of those specialty procedures, patients actually finance their treatment. So when you've a continued inflationary environment, they're less likely to finance those procedures and some of the details from the survey reaffirm that this past quarter.

Okay. And a lot of other updates to hit on, I'm sure other analysts will get to, but I'll maybe focus on the other top inbound and discussion I usually have with investors, which is if macro is performing a little bit worse today, guidance has to come down a little bit. I know Simon, you were touching on this 2026 EPS target. Help us frame out what macro needs to happen in order to get there still? We're tracking a little bit behind that now. What needs to happen in the next 2 years to still hit that 2026 EPS target in terms of macro? And should we maybe be thinking of that 1/3 macro in the EPS bridge as something that has come in a little bit lower at this point?

Yes. Thank you, Brandon. As we noted at Investor Day and each quarter since, our assumptions around that target were predicated on a more normalized macro environment, and we've still yet to see that, albeit the reports about reduced interest rates continue to -- continue to swirl, but it's going to take more than one of those. What you heard us describe today was a balance between aiding our path to the target, but also taking decisive steps to invest in the areas, to continue the transformative journey that we're on, to invest in orthodontics, to invest in our -- in a new inside sales team, which will drive and create demand to invest in e-commerce and to streamline our organization. So while satisfying some of our investor needs and desires internally as well, we're also extraordinarily focused on transforming this company into a company that provides long-term shareholder value by investing in the high-growth categories that we laid out at Investor Day.

And Brandon, I'd just add that the 2/3 of that bridge that is in our control, we're on track to delivering. We're executing against those plans. So obviously, the macro piece and getting back to our normalized macro environment, looks to be more challenging, but that's why we've announced some of the additional actions that we're taking today and as we move forward to continue to drive towards that $3 EPS number.

Our next question comes from Kevin Caliendo from UBS.

This is Dylan Finley on for Kevin. Just honing in on some of those comments about your nonrenewal of the agreement with Patterson for equipment. I guess from here, does it make sense to work with another distributor? Or is this a pivot in the model entirely in your go-to-market strategy there? And then secondarily, any context on the timing of when this current contract expires?

Dylan, it's Simon. The distributors we partner with globally are extraordinarily valuable to us. And we feel we're extraordinarily valuable to them as well. We've been discussing with Patterson for some time about our relationship. And we felt that this was an appropriate time to begin negotiations about renewing contracts, et cetera, et cetera. And given the value that we bring to them, given the new products that we introduced, et cetera, et cetera. So we very much hope that we get to an agreement, a new agreement with Patterson that is more reflective of the environment we're in and of the value that we create. And -- but for now and for the next 12 months, the current contract remains in place, and we'll continue to partner with them.

And then just as a follow-up. No change expected to have you deal with them in terms of your consumables. This is exclusively focused on the equipment that you distribute?

That is correct.

And just as a reminder, Patterson does the distribution of equipment in both the U.S. and Canada.

Our next question comes from David Saxon from Needham & Company.

Great. Maybe I'll start with Glenn on margins. So it looks like first half EBITDA margin is about 17.2%. Obviously, you're reiterating the above 18% guidance for the year. So can you just walk through the bridge to getting second half closer to 19%, I think what's implied? How much of this new restructuring program kind of helps out in the back half, and what other factors kind of can help drive that margin improvement?

Thanks for the question. If you look at our EBITDA margin progression here, we grew sequentially about 70 basis points from Q1 to Q2 to 17.5%. I'd expect we'll see another sequential improvement in Q3 to around 18% based upon some of my color that I gave as part of my prepared remarks, and then about 20% or even a little bit north of that in Q4. So clearly, the hockey stick is going to be in Q4, and a lot of that is going to come from lower OpEx expenses and all the cost reduction efforts that we're doing from both our previous restructuring plan. Now we're seeing the full benefit of those actions, coupled with some of the newer actions that we've outlined this morning. So our OpEx is expected to come down, did come down in Q2 on an absolute basis, that will continue to happen in the back half of the year. And then we do expect a slight improvement in gross margins in Q3 and then another improvement in Q4. And so that's the progression of margins for the rest of the year.

Okay. Great. That's super helpful. And then maybe this is for Simon, just on CTS. So it sounds like E&I is still facing some challenges. You've some unfavorable mix in CAD/CAM going to Primescan Connect. You talked about some improved execution expected in the second half. I guess, how should we think about full year 2024 growth at this point? Is it closer to down double digits? And then with interest rates obviously impact demand. So with a potential rate cut in September, how does that impact, how you think about the level of demand? Will that be enough? Or do we need to see 2, 3, 4 rate cuts before demand really recovers?

This is Glenn. I'll take the question. If we look at our CTS business in the second half of the year, we're modeling to be down low single digits, which would be an improvement from what we saw in the first half of the year. We clearly recognize it's a challenging environment. Having said that, there's a lot of reasons to believe that we'll see better performance in the second half of the year versus first half of the year. So first, I'd highlight what we're seeing in terms of retail demand in the U.S. with our imaging business, we were actually flat in our imaging business on a retail level. So we were down double digits wholesale, which is what we report revenues out on. But from a retail perspective, it was encouraging to see a pickup in demand on imaging on a retail level. And that should lead to dealer orders coming forward in the second half of the year. We talked about the Orthophos, relaunch of our 2D and 3D imaging machine in Germany, seeing good momentum there, starting to convert those orders now to sales. We're going to be also relaunching that product in the rest of Europe and Asia in the second half of the year. So that should be a bit of a help. I mentioned earlier as well, our new product launch, we're very excited about. We'll be more specific on what that is in the very near future, but that should drive incremental momentum in sales in the back half of the year. We've got our DS World event coming up in Las Vegas in September that typically leads to a lot of momentum going into and coming out of that conference. Q4 seasonality should help us. Typically, it's a stronger quarter. We've got easier comps in the second half of the year versus first half of the year. Germany actually has shown signs of improvement in our survey, albeit slight improvement, but it's moving in the right direction for the first time in over a year. And obviously, we call out Germany because of the significance of the equipment business in that market. And then just lastly, there's some favorable reimbursement trends that we're seeing in places like Japan with intraoral scanning. And so there's a lot of things that are going to help us, I think, in the second half of the year. With all the things that I just mentioned, we're still modeling to be down, but not down as much as we saw in the first half of the year. Simon, I don't know if you want to comment.

Yes. Just a quick comment, David, on scanners. I think we've spoken before about the importance of scanners for our business and to unlock value in other parts of our portfolio. In Q2, we had another pretty strong scanner quarter. The mix had shifted, but we had a really strong quarter in stand-alone Primescan and PrimeScan Connect and a more challenging quarter in the full-line CEREC scanner. So as you roll forward into a more normalized or even an improved macro environment, having scanners in the marketplace is crucial for us to be able to unlock value quickly in the rest of our portfolio, chairside, aligners, implants and so on and so forth. So we're pleased with our scanner performance in Q2 and expect that to continue for the rest of the year.

Our next question comes from Elizabeth Anderson from Evercore ISI.

I had to 2 main questions. One, can you kind of help us parse out the pricing degradation impact either from competition or from trade downs on equipment versus maybe what's more on the macro side? And then I was intrigued to hear your -- the comments about the improving business in China. Obviously, we're sort of comping against some VBP type quarters, but it's obviously at odds to most of the commentary we're hearing about China these days. So just a little bit more detail on sort of what's driving that would be very helpful.

Yes. Elizabeth, thanks for the question. On pricing, we've seen some pricing pressure on the imaging side of our business. I'd say that's pretty much been offset in total with our EDS portfolio. So when we look at our pricing across our entire business, it's kind of flat with some pressure on equipment, but it's being offset with EDS. So it's overall, I'd say, having a neutral effect. What we've seen though is more volume coming from lower-priced products. So Primescan Connect had a really strong quarter. It comes at a lower price point. And so obviously, that results in lower revenues on equal volumes, if you'll. And so that's been part of the dynamics that we're seeing in terms of the top line and also some of the impact on gross margins because Primescan Connect has lower gross margins than our other Primescan offerings. So on the pricing side, those are the dynamics that I'd call out. In terms of China, we had another really strong quarter in China. Overall, we grew high single digits. On the implant side, we actually grew over 30%. For the rest of the year, though, we do expect it to moderate. And so if we look at our implants business, as an example, I'd tell you that China is likely going to show slower growth on the implant side because we lapped tougher comps, but we do expect to see better performance in the U.S. And we've talked about that previously. We've got a lot of things that are showing progress there, and that should offset some of the moderation that we're seeing in China in the back half of the year.

And Elizabeth, we did have a strong quarter in China in EDS, but it is no different from any other region with respect to CTS.

Our next question comes from Michael Cherny from Leerink.