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

All right. Welcome to the continuation of day 2 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst here at Barclays. And our next session this morning will feature Dentsply Sirona. Pleased to have from the company Don Casey, CEO; and also John Sweeney from Investor Relations as well. So thanks for your flexibility around the change in our conference venue, and welcome.

And so let's just start off talking about the 2020 outlook. I mean the company just provided 2020 EPS guidance that would have been above The Street consensus at the midpoint if not for the coronavirus impact. And obviously, we'll get to some questions on coronavirus a little bit later, but let's first talk about the drivers of growth for this year. And I'm curious whether you think more of your bottom line growth in 2020 will come from new product sales or more from the cost-cutting initiatives. So let's start there.

Yes. Thanks, Steve, and thanks, people, for joining the call. And Steve, thank you for all the work you guys did on moving the conference on such short notice. While we would certainly rather be at Miami having a piña colada or something like that, hopefully, people get value out of how this process works. But just to answer your question directly, Steve, look, when we put out, November 18, a restructuring plan, we said there's got to be 3 things that we have to focus on, growth and renewing our growth, making sure our margins are moving. And we believe to create sustainability on both of those areas, we needed to simplify the organization. And we feel pretty good right now that in the earnings release we did about 8, 9 days ago, we posted a pretty aggressive quarter. And we finished the year at about a 5.7% internal growth rate -- 5.7% internal growth rate. So we feel that, that growth has been an important step-up for us. Most of that's been driven by innovation. Primescan is probably the best example, but we've got good innovation in our endo space and with our digital dentures in our lab space, Palodent in our restorative space. So we feel that innovation has been pretty important. We're backing that innovation on top of what we think is a much better commercial organization, particularly in the U.S. In the U.S., we spent the last 14 months really working on a sales effectiveness program -- sales force effectiveness program, and we think it's starting to pay dividends. We did note in our call that we had posted consumable growth in the U.S. which, again, driven by innovation, but I also think they've done a good job on getting their sales force in line. In terms of costs, we committed to $200 million to $225 million over a 3-year time period. We feel we made a good down payment on that in 2019, where we were able to record about $88 million in sales -- in savings. And we're on target, we believe, to hit the full $225 million in the time that we gave ourselves. At the end of the day, we feel that, absent coronavirus and other things, that we should be in a position to generate sustainable 3% to 4% growth. And we've been consistent in our aspirations for our margin target of 20% in '20 and 22% in 2022. So look, we're going to -- as you see the margin improvement, some of that is obviously driven by sales, which has a good positive effect. But we also feel that we're getting our cost structure in line. And again, if I was to answer your question succinctly, we would say growth is the critical variance in how we're looking at delivering what we've committed to from a restructuring standpoint. But we've done a pretty good job on costs, and we think we've got a good path in 2020 on delivering more cost improvement.

Okay. Great. So let's move on to some of the new equipment. Obviously, growth in some of these new products is key for 2020. First, I have a few questions on Primescan, and then we'll get into the Primemill. So first, on Primescan digital scanner, I mean as that continues a strong uptake in the market, curious if you can talk about how much of the practitioner demand is coming from scanner-only buyers versus purchases of Primescan that are related to a full chairside crown restoration system.

Yes. Steven -- and I would note a couple of things. First, and a big change for us when we launched Primescan, we believe we're now competing in the DI space. So when we look at the growth trajectory of the Primescan business, we first start with focusing on full chairside. We continue to believe that's underpenetrated, and we put a fair amount of emphasis on that. Our dealer partners are incentivized to sell full chairside and, look, for the first 7 months of 2019, we were basically selling -- there was not an upgrade program, so we feel that while we were getting some upgrade, that was really focused on new users. As we got to DS World, which was a major event for us, in October, we then had an upgrade program. And we're seeing a considerable uptake from an upgrade perspective. And where we are today is -- and by the way, that DS World is a U.S.-only event. Where we are today is that we believe we have an opportunity to continue driving chairside. We haven't announced an upgrade program in any place other than North America so there's still some runway there. When we do announce an upgrade program, we will continue to emphasize the opportunity that full chairside represents and try and get as many new users into the franchise as we can. And just for perspective, in 2018, we sold virtually no DI equipment. I mean it was basically all chairside or maybe you're going to upgrade a camera. But when we launched Prime and -- we felt that we needed to compete in that space, and we're starting to do a better job there. So we look at -- there's 3 vectors of growth for Primescan. First, an untapped chair -- full chairside opportunity; the second, upgrade, and as we move the upgrade program around the world, if we move it around the world and when we move it around the world; and third, we believe that the DI space represents a significant opportunity for us.

Okay. And some of that ties into the next question a little bit as well because I was curious how we should think about Primescan uptake for 2020, just from a geographic perspective as you have ramped up capacity but also received some licenses in some new regions as well.

Yes. I would tell you, Steve, we're pretty optimistic about what Primescan can do in the environment. Again, we haven't launched an upgrade program outside the U.S. We now have approval in every country other than China, and so that gives us an opportunity to begin to pursue Primescan. And we're now not constrained from a manufacturing standpoint. We expect to basically have cleared most of the back orders up by the end of Q1, which then gives us -- and we feel good about. We brought additional capacity on in some of our key suppliers so that we feel that we will be in a position to aggressively support promotional and upgrade programs outside the U.S. as the year goes on. The other thing that we have to think about, which is a little bit different now is that we have Primemill. We're really excited. And I know, Steve, you and I had an opportunity to spend some time at the Chicago Midwinter event, and we feel that we've now upgraded all the components of the CEREC system. We think we've got a great camera, great acquisition unit with better software, and now we have Primemill. So we feel that we've got a pretty good opportunity to see Primescan continue to turn in strong performances, particularly as we begin to move some of the successful promotional programs we saw in the U.S., outside the U.S.

Okay. Okay. 1 or 2 final questions here on Primescan before we get into Primemill that you just mentioned, is that just from covering the dental distributors as well, we hear that pricing on digital scanners seems to have come down really across the entire marketplace over the past, let's call it, 6 to 12 months. So I'm curious whether you're happy with where the price point is on Primescan currently. Seems to be at the higher end of the spectrum, at least from a list price standpoint, but also from our view, does not appear to be a hindrance to the sales uptake even if it is at the higher end. So I guess I'm just curious to get your current thoughts around your price point on Primescan.

It's interesting. When we were developing Primescan and we had an opportunity to take it out to some of the early adopters and people who have known the system for a long period of time, they were really blown away by how good this thing was. And we did a lot of work, and we felt that we could get and support a price premium on the scanner. And there was some skepticism in the market, "Another scanner, can you really make a scanner that would be worth a premium?" And we -- starting at Midwinter last year and at IDS, people who have used this product really feel that it's a pretty dramatic step-up in both the capabilities of the camera, the acquisition unit and some of the software we've been putting into it. So we feel pretty good about the price. Right now, we feel that we can and will support a price premium. And that's core to a lot of stuff we're trying to do at Dentsply Sirona is we want to dramatically upgrade performance in key categories. And when we do that, we expect to get a price premium for it. So -- and as you noted, Steve, we were actually constrained by supply through significant parts of 2019. So again, we feel pretty good about the price. The other issue is, one thing you see is a list. The second is what are the dealers actually charging? And then if we do stuff like One DS, is it an opportunity to use promotional programs to pull the rest of the line on top of the strength of Primescan? And we believe we've done that.

Okay. Great. Okay. Let's shift over to talking about the new Primemill chairside crown-milling machine just launched earlier this year. Some investors are still probably not totally familiar with the product. Why don't you just take a minute just to talk about the design features that make it better than your prior MC XL offering?

Yes. Sure. Primemill, for those who don't know, that's our first new offering in 8 years in the milling space. It's state-of-the-art in so many different ways. But I'll come back to the primary benefit of speed in a second. But it's now a really, really simple program to use. It's got an RFID reader, which makes loading a block kind of automatic. If you don't know what -- Primemill, you put a little block in it and it basically mills out a crown, and you can pick what kind of blocks you use. And the system is now a very easy-to-use touchscreen. As a matter of fact, we were doing a fun demo in the Chicago Midwinter, where we had a 7-year-old actually launch and do the whole milling sequence. And then at Midwinter, we also had some investor meetings where we were able to show people that we could mill a crown and deliver a fully personalized crown in under 30 minutes. And that gets to the primary benefit of Primemill. My running joke with the brand group was they named it Primemill. I wanted to name it Speedmill because this thing is just fast. It basically -- you can carve out a zirconia crown in 5 minutes. And once you get a crown in 5 minutes, you basically put it in into a sintering oven, and you've got a fabulous product in about 20 minutes. So we're basically -- we say it takes 5 minutes to do a scan. It probably takes a minute. And we say it's going to take 5 minutes to do a crown except every time, at Midwinter, we actually did the crown, it took 3 minutes. And we really feel that this is a super-accurate, easy-to-use mill that's a game changer. As a matter of fact, our early adopters have told us that the jump in performance of Primemill is actually bigger from -- the MC XL to Primemill is actually a bigger jump than what we saw from Omnicam into Primescan. So we're pretty -- as you can tell, we're pretty excited about the product.

Okay. Great. Well, with that faster speed -- it's going to be hard to answer this right now but I guess I'm curious. How much of this do you think will open up the market to a wider set of practitioners that may be around the fence, thinking, "Hey, there are some benefits to having chairside crown milling, but I need a lot of patient volume." Now with even faster times, I don't know if there's any sense you have right now for what percent of the sales of Primemill you think will come from brand-new users, brand-new practitioners versus practitioners that are just replacing older chairside milling machines.

I'll tell you what, Steve, I would be disappointed and surprised if mill -- Primemill doesn't help us generate new users. The core issue for me right now -- and if we could take 30 seconds. If you actually moved to chairside dentistry and if you actually do Primescan and Primemill -- and by the way, one of the benefits of both of those products is so simple: you actually -- the dentist doesn't have to do all of it. So you can delegate things. You're basically changing how you practice dentistry, and the economics are pretty positive. If you think about it, conventional, if you're going to go through a lab to generate a crown, you're going to basically scan. You're going to put a temporary crown in. The -- you're going to send something out to lab. The lab is going to send it back and you're basically in line for a second visit to replace a permanent crown. The chances are that the lab is going to charge you $200 -- $150, $200 for that crown. Well, if you're doing it chairside, you actually have the patient leave in under an hour with a crown. No second visit. And if you think about it, dentist spend -- bills himself out or herself out at about $400 an hour. So you've just saved an hour. You're not prepping a second operatory. And basically, your variable cost of a crown is going to be $15, which is basically what the blocks cost. So the economics of this thing are extremely compelling. And now that it's -- now that we're talking about Primemill that actually -- we used to think the procedure in total would take an hour and 15, an hour and 20. We're now doing the whole thing in under an hour. And what our early adopters are telling us is they've begun to reallocate time in such a way that they've gone from 90 minutes to an hour for an appointment. And if you were doing 20 crowns a week, that's a pretty big difference. And again, you're leaving -- the patient is leaving with a crown customized exactly to them and as close as we can possibly come to replicating the shape of their old tooth and the esthetics of their old teeth. And they're leaving in an hour completely satisfied versus multiple visits. And the dentist has gotten much better economics. So we feel it's a good step for the dentist to make.

Okay. Great. All right. One final question here before we get into everybody's favorite topic of coronavirus, and that is just a question around dental consumables and the dental consumables market. So you mentioned that your year-over-year sales trends in the U.S. consumables market on the last quarterly call that it improved on a quarterly basis throughout 2019. Maybe just remind us for the U.S. market, again, what the key drivers were of that trend. And should that continue into 2020 as well?

And, Steve, thanks for bringing it up because I thought somehow in the call, the fact that the U.S. consumable business grow and had shown consistent progress was kind of missed a little bit. Look, we feel the U.S. is a microcosm now for what we're trying to do around the world, which is, first, we have a good pattern of innovation in our key businesses, whether it's TruNatomy in our endo space; whether it's stuff like Palodent, SureFil SDR in our restorative space. We think we've got some entries and -- in our lab space that will be helpful. And prevention's actually been an area that's been growing. You back that innovation on top of what we believe is a much more effective commercial organization. We've spent a lot of time on this but just one more time. We really moved to the idea that there's one customer. We've moved all our sales force onto a common CRM platform. We're much more sophisticated about targeting and targeting our message to different people. So when you combine innovation with a really good sales force and then the last thing we did, which we announced in October, is a much more effective promotional program, which is our One DS. We believe that's a recipe to generate growth in the Consumable business. And we are gratified that we saw progress consistently in the U.S. If you look at sequentially and if you look at what we saw in the fourth quarter, we feel pretty good about that. I would make a point that the Rest of the World on the Consumable business was slightly positive in the fourth quarter. And I would also point out that Europe, which was kind of the big challenge for us, it was really being compared to a comp in fourth quarter of '18, where we had seen our Venlo distribution center create a pretty significant disruption in Q3 2018, where we basically didn't ship anything. All that stuff was shipped out in Q4 to create a tough comp. So on the net, we feel Consumables is growing, and we think we've got a recipe to do that.

Okay. All right. Excellent. So around coronavirus now, so you guys reported earnings and gave your 2020 guidance about 10 days ago. But in coronavirus time, that's a couple of light-years ago from what it feels like. Maybe you can just give -- well, look, I guess a bunch of ways to tackle this. First, let's just say that on the last quarterly conference call, you talked about that there could be a fairly balanced impact on your consumable sales versus your equipment sales within the 4 key countries in Asia that you cited, where you took a more conservative stance as far as your revenue outlook. So is that still the case as far as that balanced impact between consumables and equipment? Or have your thoughts evolved on that just since you gave that guidance?

No. Obviously, when we gave the guidance, we had done a fair amount of research on what we think was going to go on, on the ground. And we see no reason to change the estimate at this point on the ratio of consumer -- excuse me, Consumables to Technology & Equipment.

Okay. And also when you talked about that $60 million to $70 million revenue impact in 1Q in those 4 Asian countries, I mean I'm assuming most of that was in China and then the other 3 Asian countries were a smaller part of that. But I just want to confirm that, too.

Yes, from an impact perspective. And just a little bit of detail, Steve. Japan and China are roughly the same size in our world. Korea and Taiwan are significant, but they're obviously a lot smaller than the 2 of those countries.

Okay. That's helpful. Okay. Here's where it gets a little bit tougher. I mean now that we're in mid-March, I mean it seems pretty unlikely to most investors that the coronavirus situation is just going to magically go away in just a few weeks by the end of the first quarter. So my only question around that is, do you expect to give an updated outlook for 2Q '20 impact on the next quarterly earnings call and just sort of progress on this sort of quarter-by-quarter. Or are you able to give any outlook beyond just a quarterly basis? I mean how are you thinking about that right now in terms of how you're going to guide around this whole thing?

Yes. Steve, I would tell you, the situation is fluid. And I'm not sure anybody on the call or anybody that you've been exposed to at the conference has a real crystal ball on what the best way to manage through this is. Look, we reported relatively late in the quarter. We gave a pretty good estimate. We don't see a reason to change that. We think if things change and the impact is longer, we'll update that as the quarters go by. Obviously, as we sit and do our work as leaders of our organization, our priorities have been pretty straightforward, which is let's make sure that our employees are safe. Let's stay close to our customers. Let's make sure our supply chain is intact. And I'll tell you, we don't anticipate a whole lot of impact right now on our supply chain. Haven't seen any to date. And then the contingency planning we're doing is going to be based on, "Okay. Is this a short-term and medium-term or a long-term event?" And we've developed that. And as things become a little bit clearer and the change, we'll update the impact as we have it.

Okay. Are you able to talk about even at this stage, though, whether you expect any impact in the U.S. or not?

We haven't heard from our sales teams or seen anything in the U.S. that would indicate there's been a change in what our outlook was for the U.S. business. Now look, obviously, it's a fluid situation. And if we see something, we'll adjust it. But to date, our sales teams are telling us that the dentists are saying it's kind of business as usual. And it is interesting. It's not as if the dentist community is a monolith. I mean it's 160,000 independent contractors that are doing, making individual decisions about what's best for them. But again, we haven't seen anything in the U.S.

Okay. Last question around this topic. So you just mentioned this a minute ago but also on the last earnings call. I mean you really made a point to say that coronavirus is not expected to impact your supply channel at all. Maybe just provide a little more color around the company's manufacturing and distribution dynamics that allow you to make that statement and just have confidence around that.

Well, obviously, the first concern was that what were we getting out of China, and it turns out that we had a de minimis amount of critical manufacturing components that came in and out of China. I would also tell you that some of the components that were not critical, we haven't seen any interruption and we're not seeing any interruption. The second thing is, as we have a pretty diversified manufacturing base. So as we think about components and components getting shut down, we feel pretty good at this point that we're not seeing a disproportionate risk of anything coming out of Asia. And then the critical manufacturing hub for us is Bensheim and a couple of critical U.S. manufacturing facilities. And as we've taken a lot of precautions to make sure that we're in a position to keep those plants up and moving.

Okay. Excellent. All right. Final question, just coming back to the cost-cutting program announced for the overall company, roughly now about 18 months ago. It does seem like the company has outperformed its own expectations so far in this program. Maybe you can just spend a minute talking about the primary sources of what's been better than expected thus far. But also more importantly, what are the areas going forward that are still ahead of us where you expect to capitalize on a lot of the incremental cost savings?

Sure. I would say, to date, that the 2 big areas -- we've been very disciplined about spending. That's manifested in head count numbers that we talked to you guys about. But also if you look at the progress we made on SG&A over the course of the year, we're showing that we're spending in a more disciplined way. I would tell you what's going to go on in the future, Steve, and why we're optimistic we can hit the target. Our supply chain, which is a recently centralized organization, it's less than 12 months old. We think we've got a lot of room around areas like procurement and getting much more sophisticated about planning. The second big area for us is while we simplified the organization and moved it into a more rational structure, we're still relatively immature about centralizing processes and creating Centers of Excellence. And we -- again, based on the progress we made in '19 in setting some of those institutions up and then how we're actually going to activate those within the organization, we're pretty comfortable that, again, between supply chain and this process standardization activity, it's going to give us a clear line of sight into hitting the target we had outlined.

Okay. Excellent. All right. Well, with that, I think we're out of time. So I definitely want to thank you, Don, and also, John, for your time today and enjoy the rest of the virtual conference.

All right. Thanks so much, Steve. And again, we really appreciate you guys hanging tough and doing the best you can under trying circumstances.

All right. Thanks again. Bye.