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

Okay, guys. Good afternoon, getting to the evening pretty shortly. It's been a great day. And we're going to end the day with one of the biggest players in dental. Our final guest today is Dentsply Sirona, a manufacturer of dental equipment and supplies. And today, I'm joined with Don Casey, CEO of Dentsply Sirona.

Don, where I want to start is -- I mentioned it's been a good day with many of the major players, almost all the major players in dental joining the conference. And quite honestly, the commentary was pretty upbeat and maybe a little bit more upbeat than I would have thought going into the day only 24 hours ago. So if you don't mind, can we start there with what you can say and discuss -- maybe just talk to us what you're seeing with the dental industry and maybe how that might have compared and contrasted to a month or so ago?

Yes, Jon. First, thank you for the invitation to participate in the conference. And I guess we're all learning these things work, huh. I mean, we can bang through a bunch of people and our interaction has been great. So on behalf of Dentsply Sirona, thank you and -- for all the work you're doing here. So look, there's lots of reasons to be upbeat. However, we -- we're just trying to muddle our way through a little bit. And what -- compared to April, I think things are a lot better. I think the ADA survey -- Jon, you've put out a survey and other stuff. Our internal data says the same thing, that there is a clear trend, at least in North America, to see more offices open, that we've moved from just doing emergency procedures to elective procedures in most states and in Canada. We do see that dentists are paying their employees, which is terrific. And obviously, you're starting to see patients return. There's a couple of things that we're working on internally to get a better handle on to see how sustainable this is. The first thing is, as we look at patients returning, we see it uneven. Obviously, in kind of the New York area, Chicago, Detroit, Philly, Los Angeles, San Francisco, you might see the state open with dental practices. However, you're still seeing patients being asked to stay at home. So we haven't -- in big metro areas that are still under some form of restrictions, we're still seeing patient volume lag, how fast dentist's office open. That's the first thing. The second, we believe that there's a bolus of dentistry that wasn't done over the last 8, 10, 12 weeks. And the data we're trying to really tease apart because -- and we talk to dentists every day, are the people coming back, the people who were like, "Hey, Jon, you were scheduled for Wednesday, the 27th at 3:00. Are you coming back for your regularly-scheduled appointment?" Or were they people who were part of that bolus who are looking to get in because they had a functional problem? So we're trying to sift through that data. And we think we need a little bit more to see, hey, are we seeing a really positive trend because there's a bolus of people coming back that haven't had access to dentistry? Because our basic patient data, which is positive, says, hey, 1/3 of people would come back tomorrow morning, if asked. 1/3 of people are going to wait and see. They want to hear from people what the experience was and see what the macro kind of climate is about what the country's thinking about COVID is. And 1/3 of people are really going to be very, very cautious in, probably, in those metro areas. And we're seeing, Jon, just the same -- one last point and then we can kind of dive in and peel that apart. We're seeing really uneven openings around the world. I mean Asia is starting to -- they're -- if you took Hong Kong, Taiwan, Korea, kind of leading the way. Japan has been pretty steady throughout this whole thing. China is coming back, but it's still below where it was year ago level. So absolutely, is it better than it was in April? Yes. Germany, kind of the doc area. They've never really shut down and we're seeing positive things there, but it's offset by the fact that, from our data, we see France, Spain, Italy and U.K., a little bit more of a challenge.

Okay. Okay. That's a great overview. Don, just to go through some of the things that you brought up on the call. You talked about the recovery in stages. And hey, it was emerging only and then you've got the resumption of elective, which certainly seems that's where we're now in some states, most states. And you got the backlog of elective procedures that you alluded to. But maybe please talk to hygiene. And I think there is some trepidation about resuming hygiene, both from the doctors' and even a patient perspective. And our work sort of tells us and our doc discussions, at some point, you need hygiene to come back because it typically acts as a lead generator for future restorative work. So maybe just talk to that. And you mentioned talking to dentists every day. What is some of the current buzz in and around hygiene and when that might come back in a bigger way?

It's interesting. I think we've kind of gone through all this in stages. So there was a question whether dentists are essential. And then we kind of got to the opening and then there was a lot of concern about aerosol and where is that going to go? And hygiene, particularly if you're doing ultrasonic scaling and root planing is an area that would be a potential concern. And as such, you've seen hygiene open slower. However, what we've been looking at is there's 5 states that we kind of think are the harbingers. I mean if you get -- maybe 6. If you go to Utah, Arizona, Louisiana, Florida, Georgia as kind of states that have been open, you do see hygiene lagging the general opening. However, you do see hygiene coming back. I think a lot of this is the office opens. They're getting used to new hygiene protocols, infection protection protocols. And I think once they get comfortable with that and they see the level of comfort that patients have, when you're seeing a lot more visible PPE among the office staff, you're seeing dentists all in shields now potentially in an N95 mask. I think it's a getting used to it period. And in those states, we are seeing if the -- it's almost there's a sequence that we're consistently seeing, not only in the U.S., around the world, which is the offices open, patient traffic is a little slower than that. And then it would seem that like hygiene is a little slower than that. But again, we're cautiously optimistic that, originally, there was a lot of discussion, hey, we need to move all operatories to negative air pressure and things like that. And people have begun to be a little more conscious of the fact that the dentists have been dealing with blood-borne pathogens for 25, 30 years. And infection protocols will be stepped up over time versus where they might have been a year ago, but this is not new to the dentists. It's not a new concept.

Got it, got it. Okay. I'm going to ask some questions on Consumables in a bit, but I actually want to start with Equipment. And you guys have a very broad portfolio of Equipment. So just trying to figure out a couple of things. I think we're all questioning the appetite for capital spending from the dentists. And if there's a desire to spend, where do you think they go ahead with allocating the dollars? Is it around sort of those lower ASP maybe sterility-oriented products? Or do you think it's on the higher ASP initiatives to increase office efficiencies, right? Maybe limit the multiple visits like a DI or even a full-blown CAD/CAM? I guess just what's some of the buzz that you're starting to hear out there amongst the dentists?

It's interesting. First, the thing you hear is not actually about Equipment, it's about PPE and what's that going to do to my practice? And there's not a silver bullet out there that there's a bunch of high-volume evacuation-type products or air filter -- portable air filters that are going to transform things. I would tell you, Jon, the thing that we were most gratified and we were pretty aggressive about keeping our commercial capabilities working during the pandemic. And we got tremendous access to the dentists. And if you look at -- we've put some numbers out, when we did our call, just in terms of the individual number of dentists we saw on a global basis and what were they looking at? The first thing they looked at was infection control, but then the second was workflow management. And we had chatted when we were at Midwinter together, Chicago Midwinter, and we were talking about hey, this idea of single-visit dentistry is a practice changer. Well, during the lull in activity when the dentists were basically not seeing patients and thinking about their practice, we had excellent access and had good lead generation around things like full chairside or DI. And it's on the theory that, hey, these guys are going to recognize that I may lose 5%, 10%, 15% capacity because I'm going to have to do added infection protocols or I may have added expenses. What am I going to do to transform my practice? So we were getting a lot of positive reaction to our story of, "Hey, we're not buying -- you're not buying a piece of equipment, you're buying a practice transformer and economic engine for your practice." Now look, it was great to get access when the dentists were basically not seeing patients and had a lot more time. We're anxious to see how aggressively that transforms itself into -- from leads to Equipment sales. But our -- the buzz we've been getting has been, first, "Hey, talk to me about how you guys think about infection protocols." We have -- obviously, we have a lot of equipment in the office. How do I sterilize this equipment and other things? But then right away, where we're getting the most time and traction has been, "Tell me how I can reengineer the economics of my practice in a post-COVID environment that may be more constrained about the absolute number of patients I see and some patients may be more reluctant to come back."

Okay. And so when we think about Primescan and forgive me here, but obviously, you're running the upgrade in the U.S. and then you were going to go ahead and drive that upgrade out to other parts of the world on a global basis. Is that still intact, Don? I mean are you still going to proceed with a formalized upgrade program on Omni to Prime in OUS markets? Or is that something that maybe you take a step back, wait and see in a COVID-19 environment?

No, we're going to offer it. I mean a lot this -- a lot of what was dictating the timing of that, obviously, we had a really successful DS World and the One DS program really drove an excellent performance on our technology and equipment. I mean in the first quarter, we were still able to post close to 5% growth despite seeing COVID begin to hit the revenue line. We were constrained coming out of DS World and into first quarter, actually, by manufacturing capacity. And we've been able to -- first, we've been able to resolve that. And second, obviously, there was a big change in what the demand curve looked like. So we think we're good to go from a manufacturing standpoint, a capacity standpoint, to begin to bring that program around. We're doing the work underneath it to get the One DS program, which we also thought was really well received in the U.S. There's been some learning on -- and you saw some revisions that we made going into Midwinter that the program will roll out globally, will look a lot more like the Midwinter program. But we're good to go. And right now, it's -- the first thing we don't want to do is, the first day in the office that the dentist is back and says, "Hey, here's our upgrade program." We are going to delay it a little bit to begin to understand how -- what the new normal looks like for the dentist. And -- but we think there is a lot of runway there, both from the upgrade program as well as the One DS program. And Primemill, we're so disappointed because we think Primemill was a great product that barely had been launched when we kind of had to go into pandemic management mode.

Yes. Yes. Okay. And I'm going to stick with Equipment for a moment. It's hard to imagine, but we're actually -- it doesn't feel like and we're heading into an IDS year, right, which will be next March. And hopefully, it will be next March and take place. And we always think about a heightened level of innovation coming out of Dentsply Sirona into an IDS year. Yet to your -- just your prior point, it feels like we're still so early with some of your recent offerings, right? Primescan and Primemill. So maybe, Don, can you talk to the product pipeline at a high level about 2021? And can this be an impactful IDS for you guys? Or is it, "Hey, Jon, we still have so much more runway even where we are today with Primescan and Primemill in front of us."

Well, first, I think the IDS question is a great one. I mean what is the future of gigantic dental shows? Because Jon, you've been there multiple times. It's close quarters with 160,000 of your friends from all over the world for 3 days. We'll see. I agree with you. I hope we have it. We're thinking about our own show, DS World, and at this point, if we're allowed to have it, we look forward to doing it as combination on-site and online show. But I'd love to see IDS. And obviously, we think a lot about IDS and what our innovation pattern looks like. We have a pretty full portfolio ready to rock and roll. We're just going to have to see. I mean look, if the world's still in shutdown or there's another wave that really slows things in the back half of this year, we might push some things out. I mean you don't want to shortchange some of the innovation. But I would tell you, we talk about Technology & Equipment. One of the businesses in our Technology & Equipment sector is our implant business. And we feel very good that our innovation pipeline is starting to work after EV. Our real first entry into the immediate load space is important to us. We were looking at IDS and worked immediately beyond to kind of really reposition our implant lines. So we're excited about that. We've got some cool stuff coming in Endo. So on the Technology & Equipment side, we're going to have to see where we are in mill. We've got some other stuff coming around treatment centers and other things in Imaging. So we have the ability -- again, I think we're doing what everybody else is doing, kind of taking a -- we're preparing for how to take full advantage of it. But if it doesn't come to fruition, we have backup plans.

All right. And Don, you mentioned implants. I want to explore that a little bit more. I mean Primescan and Primemill get so much attention in the Tech division. But implants, I think, in and around a $600 million-plus business, it's been lagging market growth. And it's ebbed and flowed a little bit, but if market growth is [ 4 to 5 ] I think you've been a little bit south there. You alluded to some recent innovation. Is that what you need to claw back and get closer to market growth? Do you still have more in your back pocket from an innovation standpoint? One of the biggest players is coming out with an entirely new platform that they're pretty excited about. So what gives you the confidence that you can get a little bit closer to market growth when one of the top 2 players is coming out with what they believe is a pretty big step function innovation?

Yes. A couple of things, Jon. So first, I -- hats off to Straumann. I think they've done a nice job. After that, I think it's a discussion about where innovation is going to come and what is the best profile. But we look at our implant businesses as requiring a kind of a 3-legged stool, if you will, innovation being a big one of them. And innovation is the longest pole in the tent. I think our innovation profile has been kind of dismal, if you look over the last couple of years. And one of the things I give the team full credit for because they did a good job on the equipment, we can move equipment innovation faster than we can move implant innovation. But first, we like what -- if you were to look at the next 2 years in terms of platforms, in terms of participation in segments that we've been weak at, we feel pretty good about what our innovation profile looks like. To be honest, I don't think it's going to be -- whether it's us or Envista or Straumann, I think it's going to be less about huge platforms in the future. I don't think people are saying, "Gee, I wonder exactly when these 3 guys are going to come up with a new platform." I do think it's going to be, "Hey, what segments of the market are important?" We think it's immediate load. We think it's multiple teeth, and we hadn't participated in that. I mean if you really look at what we had done kind of spreading innovation over 4 brands, not getting behind one thing. And by the way, just missing segments, we think we've fixed that. The second issue is -- and this is what Dentsply Sirona should be really good at, that we have not, historically, and something we're still trying to fix, is we have to sell a procedure. And in our mind, whether it's Primescan or if you look at -- we think our 3D combing stuff is really, really good. How do we use the image capture right through treatment planning and do that in a seamless way that is going to enable a doctor to deliver better patient outcomes? We think that's really important. But up until a couple of months ago, Astra wasn't even -- wasn't registered on Primescan in terms of how you can put a crown on top with your button. It's stuff like that, that we've got to clean up, and we think we've done a good job. So we say it's innovation. We've got to get the -- a procedure workflow thought process and do that well commercially. And then, last issue is our KOLs. I think we've done a weak job on maintaining a relationship with KOLs and the new leadership we've put there over the last 12 months, I think, has been light years in front of where we were 13 months ago. So are we going to grow at market growth rates tomorrow morning? No. Are we going to continue having a discussion about did we grow versus our prior year, which is we've been kind of holding serve there? Our anticipation is, we will start returning to regular growth. And then we got to get to the category. Whether that happens -- let's get to the post-COVID world, but whether that happens in a quarter or 6 months, our clear aspiration is to grow that at least at category, if not better.

But Don, just so I'm clear and I might have missed this, my apologies. But to your point, let's first grow in a post-COVID environment then let's get closer to category growth. Let's first grow, is that contingent on new products where you previously felt you had some gaps? Or is it, no, we've now got those products and we think it's more a function of execution, integration into our equipment, et cetera?

We think that we're in a better -- if we needed 10 things to be better from a product standpoint, we're about 1/3 of the way there. And I know what the next 7 look like and what the timing is. So we feel we've got -- we understand what the offering is. It's not all out there. But Jon, you know our company really well. I mean have you ever heard of MIS?

I have heard of MIS. Because I remember when you bought them, from a value implant standpoint, but look, I don't think it's been -- the entire implant portfolio has been highlighted very well to the GPs and specialists. I guess that's a good way of putting it.

And you're being -- and to be honest, I was being nuts. I mean I -- we bought MIS up until a-year-and-plus ago when we finally said, "You know what, hey, we have an implant portfolio and we've got to run it as a single portfolio, and we've got to look at innovation that can go across the value as well as the premium brands, and we've got to be thoughtful about a single approach to the marketplace." Yes. So look, we -- I think we have not done the job we need to do in implants. I think the path to fix it because if you're going to lead with innovation, it takes a little bit longer than other parts of the business because if I could just be a short-order cook and order a new implant platform that was innovative, I would have done it. I mean it takes time, and you got to work through it. But I think that we have the ingredients from a new product perspective. We have the commercial -- I think we've now put the commercial program in place. And I think you're going to -- I agree with what your statement is. Right now, it's we've got to grow, and we've got to do that reliably, and then we'll get to -- if I could -- let's put this way, if I can deliver consistent growth over 12 months, then let's have the conversation about how I'm taking share. But right now, I'm working on being consistent on just getting the thing moving in a positive direction. I think we've -- the commercial integration is, I think, is getting there, or the KOL is getting in there. And I think that the first of a multiphase new product introductions are coming out. And I'll also just -- we don't believe that there should be a massive platform. We just don't think that dentists are sitting there waiting with bated breath to, "Hey, when could I -- what I really need is a complete new approach and platform development to implants."

Understood. Understood. Okay. Great. Very helpful. I've got maybe 2 or 3 other topics that hopefully we can get to. I want to shift gears to clear aligner SureSmile. Seems like you've had some good traction with SureSmile. It's a little bit of a different approach that you guys have taken, right? Unlike 3M and Envista, you're selling to both the GPs and the orthodontist. So Don, maybe just start off there. Which channel are you having more success with in your opinion? Is it the GPs? Is it the ortho? Is it somewhat equally weighted? And then I've got a couple of follow-ups there.

Well, we've always had a good base with some super users among orthos and we continue to maintain that. We've had good success with the GPs, but it's less, Jon, that we're thinking about the specialty market versus the GP market. In us, this all goes back to kind of what Dentsply Sirona should be, which is we went out and introduced One DS. The easiest way to hit your One DS obligation, which is aligned to SureSmile trials. We had a lot of success coming off Primescan and now Primemill where we're getting dentists to take a hard look at all the features of that. And then they got One DS, where, "Hey, take a look at SureSmile. It's a relatively straightforward way for you to boost your practice, expand your practice." And with 7.6, the software that we introduced at Midwinter, really expands the class -- we can go Class 2, Class 3. And in our mind, that really lets us go to the CEREC doctor community and the Primescan potential doctors. Less about, is it ortho or is it GP? But there's a group of people that are really skilled at using our platform and how do we expand the capabilities of that platform by offering additional procedures? So that's where we really have the success.

Okay. And the question I want to ask you, Don, and you're really well situated, I think, to answer this. You've got a diversified orthodontic business. It's not quite the size of like an Ormco, so I think maybe you can be a little bit more objective here. I'd be curious to see how you see that market playing out over time, right? If I get Invisalign -- if I got a line on my phone at any time, it's going to tip to clear aligners. If I get in business, they might say it's going to be really hard, it's wires and brackets. You're a little bit more objective, in my opinion, just based on where you're situated. How do you think that market plays out? Over time, does that market tip? And does clear aligners become the standard of care? Is that going to be a lot more hard -- difficult to do? Just maybe talk to us looking out 5 or 10 years, how you see the evolution of the orthodontic business?

I would say, Jon, that, first, divide the market up a little bit. I think we tend to think of the market in terms of functional pediatric dentistry, which still tends to be brackets and bands. That's a nice category, it's $1 billion. It hasn't really shown a lot of growth. The growth has really come from moving adults into clear aligners. A lot of it for aesthetic reasons or other things, and that's really been where the explosive growth has come. I think as the products have gotten better, again credit to Invisalign and others, as Class 2 and Class 3 has become available and doctors get a lot more experience with it. I think you've seen more and more people begin to turn to clear aligners as first-line therapy. If you were to ask me where we'll be in 5 to 10 years, I think that the -- if you look at the total orthodontic category, I think clear aligners will, by far and away, be the biggest share. But I always think there's going to be kind of a pediatric really fundamental work that you're probably still going to have to do even if it's a starter set with brackets and bands, like maybe in 5 to 10 years, things will be a little bit different. But if you have to level teeth and like really spin teeth around completely root to crown, that's still a little bit harder for aligners. But to be honest, the clear aligner more adult aesthetically-driven category, I think, has got a huge amount of runway in front of it. So I don't think it's going to be the source of growth that we're all going to be driving to is how do we disrupt the ortho market as much as how do we continue the momentum on the adult aesthetic market?

Yes. Yes. Okay. Makes sense. And maybe one last -- 1 or 2 questions, Don. You mentioned the leads at Chicago Midwinter, and I was there and we caught up, and your booth was buzzing. It really was. You had a ton of traffic. Primescan still very new, you augmented that with Primemill. You add a ton of leads. Just taking a step back, how do you feel about those leads converting today? I mean obviously, it's been -- a lot's gone on since Chicago Midwinter, right? You get hit over the head with COVID. And now we're in the early stages of the industry clawing its way back. Do high ASP ticket items need to take a backseat in 2020 as dentists think about other smaller purchases from an equipment standpoint? I don't know, certain air vacs, et cetera, to purify their offices? Or do you think they're in a good enough position, the markets come back strong enough, where you could still see them move ahead with some of those high ticket ASP items?

Look, I think you asked the multibillion-dollar question. First, we went back to 2008, 2009 and counterintuitively, we saw Technology & Equipment continue to perform well. We did not see Technology & Equipment take a step back. I think the time away, I don't think all dentists, but I think a lot of the dentists have been thoughtful about how do I want to think about my practice over the next 18 to 24 months, where I may be more challenged? What does that mean? I may have to look to add procedures, and the best way to do that is with Technology & Equipment. And look, with the financing that we're supporting our dealers with and the dealers are out pursuing, it's not as if the big-ticket items, Jon, I'm asking somebody to write a $120,000 check. Realistically, it may be 6 months, no payments, no financing, which was kind of a deal that we had seen that some of our dealers did on their own. Try it. And I don't think it's going to be sticker shock around ASP. I think it's about how can we sell the economic benefits of technology that could be truly transformative to the procedure base of their practice.

Okay. Great. Well, that's a good way to end it. I do want to take just 10 seconds to thank Don and Dentsply Sirona and just take a step back and thank all of the companies that I cover that have gone out of their way to participate in the specialty conference. They've heard me say it 1,000 times, but it's a specialty conference. Their participation is so important. And many of these companies have done whatever they could to participate, Dentsply Sirona being one of them. So Don, thanks very much for being here virtually today. Good to catch up. Best of luck in the back part of the year. And we'll catch up soon in coming weeks, I'm sure. All right. Have a great evening.

Thanks, Jon. Be safe and healthy, everyone. Thanks so much for the time.

Take care, everyone.