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

All right. I think we are back up and running. So yes, I think we are live now. So good morning, everyone. I think we're going to get started. Our next presentation is from Dentsply Sirona, a leading manufacturer. Sorry, I'm having some technical issues. Here we go, a leading manufacturer of dental consumables and equipment products. Hopefully, as many of you know, my name is Jeff Johnson. I'm the senior medical technology analyst at Baird. And with us today from Dentsply, we're pleased to have Executive Vice President and Chief Financial Officer, Jorge Gomez; and Vice President of Investor Relations, John Sweeney. Jorge, I'm going to turn it over to you for a few minutes. I think you have a few slides you want to go through, and we'll move from there into Q&A. But Jorge, the floor is yours.

Thanks, Jeff, and good morning, everybody. Yes, we have just 3 slides that we'd like to share. Just to level up the knowledge of the company with some of you that may not be that familiar with the company. So thank you all for joining us this morning. We're excited to be in front of important investors and analysts after a period that has been really different and difficult in terms of interacting with all of our stakeholders. So happy to be here and cover a few questions and topics today. Turning to the presentation. On the first slide, the key point from here is, we are clearly the largest provider of dental products, software and services. Our products span the needs of the dental practitioner, all the way from technical or high-tech equipment like our CAD/CAM equipment to consumables that are used on routine daily procedures in the dentist's office. No other company has the history, the depth of products -- the product portfolio and the relationships that we have in this industry. The dental products industry, as you know, remains very fragmented. This is a market that represents about $27 billion in addressable opportunity as addressable spend. And our revenues in 2019 were about $4 billion. So we have a mid-teens share of the market. We believe that through innovation, improvements in our sales force effectiveness and by leveraging our global infrastructure, we will be able to continue to improve our position -- competitive position and take more share over time. As you -- many of you remember, in November of 2018, we announced a comprehensive restructuring plan with the goals of growing our revenues, improving our margins and simplifying the business. In 2019, we showed significant progress in achieving our restructuring program goals. While COVID-19 has had a negative impact on our -- on the dental industry overall, we enter this downturn with a very strong market position, with a very strong capital structure. And we were already engaged in a number of cost savings initiatives and efficiency initiatives that actually prove to be very beneficial for us in this -- the last several months that have been really difficult overall. Dentsply Sirona is the innovation leader in dentistry. If you look at just the last couple of years, we have introduced very significant products that are game changers in the industry. We have -- we launched Primescan last year. We launched Primemill at the beginning of this year. We just launched Axeos last week, you probably saw the press release that we issued in connection with that launch. The company is well positioned. We have significant, sustainable competitive advantages, including our track record innovation, our global scale, a very strong financial position and a demonstrated leadership in continuing education, which is going to be crucial in the foreseeable future. Adding all this together, we are confident that we are very well positioned to capitalize on the long-term favorable trends in this industry. If we go to the next page, Slide 5. As I mentioned, we are a global leader in dentistry, and we have a very diversified portfolio. Which is what you see on this page is a reflection of the rich history of innovation that we have. We are organized in 2 segments: the consumables segment, which is roughly 43% of our business and the technology and equipment business, which is about 57% based on 2019 revenues. This chart shows our market position in each of the product groups in the technology and equipment and consumables segments. As you can see, in the dental space, all of our product categories are recognizable to dentists, and most of them are either top 1 or top 2 in their class. So what gives us confidence in our ability to compete and win as we move forward. First, brands matter. Dentists are very sensitive to brands. And they like to use products that they train on, which is why we have such a high emphasis on getting involved in dental schools and our focus on driving continuing education. No other company covers the waterfront better than we do in dentistry, every treatment modality is covered, and we have a unified sales force targeting general practitioners and specialists in each of these technical areas. Importantly, even for those brands and products that flow through distribution, we have sales representatives calling on end users to conduct brand conversations and increase the pull through. We really want to own our own demand. The last page that I want to share is these are major trends that are happening in dentistry. And let me walk you through how we think about these trends and how we are positioned in each of them. From a long-term perspective, the dental market is growing naturally organically as a result of a number of factors. One of them is the aging of the population. Another one is the increasing penetration in many markets where dentistry is not as developed as it is in the U.S. and parts of Europe. And additionally, there is an ongoing desire by patients to keep their natural teeth later in life. We anticipate that all of these trends will continue into the future once the dental market recovers from this temporary -- from the temporary issues driven by the COVID pandemic. And our long-term trend is that general practitioners continue to do procedures that would have been typically considered a specialist procedures. And this includes implants, orthodontics and endodontics, i.e., root canals. We are active in all of these areas, and we are well positioned to offer dental practitioners continuing education to train them and to get them up to speed in those areas. Of course, we also provide dentists best-in-class products that enable them to carry out these procedures. Dental support organizations, DSOs. They continue to increase. They continue to grow. We have very strong relationships with DSOs, and we are always looking to expand those relationships. The biggest single cost for DSOs is there is staffing cost, is the dentists. And there are many things that we can do to improve their efficiency and lower that cost. We have shifted our go-to-market strategy for DSOs in the past 2 years. We now have a dedicated sales force that works with the DSO groups. And we're optimistic that is going to be an area where we can continue to grow and partner with DSOs to deliver better patient outcomes and better productivity for their own dentists. Digitization, digital technologies and digitization of the dental office continues and is only going to accelerate. Historically, we have led this transition. Our company brought to market the first in-office CAD/CAM system, the first x-ray, the first digital x-ray system and many other innovations that drove advancements in digital dentistry. We continue to invest and innovate in this space. Primescan, Primemill, those are good examples of digital dentistry innovations that we are bringing to the market. There is a very important trend. The single visit dentistry approach is emerging and COVID is actually fueling the emergence of single visit dentistry. This has become an area where dentists are looking for ways to be more efficient to reduce extra office visits. Primescan is a good example of a product that fits nicely into this space as it provides superior infection control and reduces the number of visits and the time necessary to complete procedures. And finally, our practitioners are demanding integrated workloads. We continue to ensure that all of our products work seamlessly together from the internal scanner to the mill, including treatment plans and everything in between. That integrated workflow is something that is an important trend in dentistry and one that we're taking up very seriously. So that's all I wanted to share from a prepared remarks perspective. Jeff, I believe now we're going to open it up for questions.

Yes. You're right, Jorge. Thank you for that overview. That was very helpful. We have about 20 minutes left, a little less than that. So why don't we just jump right in. I did want to ask one question. Just you filed an 8-K yesterday. It looks like the Board has changed some of the EBITDA targets for bonuses in the second half of this year. Can you ballpark us at all kind of -- maybe you don't want to talk about what those internal targets are, but what drove that change? Obviously, we know COVID did, but are you expecting EBITDA in a certain ballpark that you can talk about in the back half of this year at all?

Yes. On that -- on the second part of your question, Jeff, unfortunately, we are not providing any type of guidance with respect to any metrics of the P&L. With respect to the 8-K and what we have done, obviously, this year has been very different, very difficult at many levels. And the first half of the year was, to some extent, lost financially, Q2 was extremely difficult, as you all know. We have a lot of good things going on in the company. We are continuing with a major restructuring. We are excited about the product portfolio, the new launches that we have. And so our intention is to keep our people motivated. This is a time where we need everybody moving in the right direction, moving -- executing on the strategy and all the plans that we have. We remain committed to ambitious goals, like our financial metrics of getting to a 22% operating profit margin. We can't slow down. We are gaining momentum with our products, with our customer relationships, and we thought it was important for us to, at least for the second half of the year to create an incentive for our people that would keep them motivated in this very difficult environment for many of them. The goals that we set, if we get them -- if employees get the benefit from those goals is because the company will perform well in the second half, and we'll generate profits and cash for our shareholders. And if that happens, we want to have a little bit of a motivation for our people to keep working really hard. So that is the context of what you saw in the 8-K.

All right. Well, that's helpful. And I don't want to focus too much on the short term. I do want to talk about a couple of those long-term drivers that you mentioned in your slide presentation. But if I think about kind of what we've been hearing at this conference broadly across med tech, if I think about what Shine has said recently about the dental end markets, Patterson even last week talking about dental end market. It sounds as if you guys pointed to relatively flattish July trends, maybe down a little bit, flat, somewhere in there. Shine and Patterson have been pretty clear, and I think most med tech companies that July has held in well. August, probably similar, if not even a little bit better than July. So would love just kind of your latest thoughts on kind of where the dental market is trending and if you're seeing anything in your business that would tell you the trend line, not the numbers, but the trend line has been different than what a lot of these other med tech companies and even Shine and Patterson, maybe are talking about their businesses in July and August?

Yes. No, I think, as we said back in early August when we did our Q2 earnings, July was, from our perspective, was strong relative to what we had seen in the second quarter. We saw a significant improvement in July versus the second quarter. And I said during that call that we were very close within striking distance of being at the 2019 levels up toward the month of July, almost flat within 5 points up -- that clearly is in line with what other people are saying with the service that we have seen ballpark. I mean, it's not exactly the same type of numbers, but I think what is really important is that the direction is positive. And so that was an absolute step in the right direction from a market perspective, and we experienced that as well. So we are very optimistic because when we see that all -- that most of the dentists' offices are open, the demand comes back and comes back very quickly. At the same time, Jeff, there's still a lot of uncertainty. And there are many things that could change quickly, given the -- what's going on with COVID and just the overall economy and the effects from COVID, and so we want to be cautious as well. So when we think about the next several months, we are trying to plan for a number of scenarios. We are optimistic. We're ready to take advantage of demand if it continues to improve. But we're also prepared for other scenarios that not -- may not be as positive. When I look at all of the data points, I think the range of like if you talk -- if you look at the ADA surveys that show probably market down 10%, 15% and you have some distributors talking about up mid-single digits, things like that. There's a lot of elements that go into those numbers. We are probably somewhere in between. You have some companies that have a lot of PPE in their portfolio. We don't have that. There is some mix things going on. But overall, I think we remain optimistic and cautious. I think we are just digesting the August numbers and trying to figure out what that means for the quarter. I think we're encouraged by all the signs we're seeing in the marketplace.

All right. That's helpful. And you mentioned the ADA surveys. I think their volumes have shown down 20%, something like that, maybe even a little worse than that. I think we're on our 24th survey since the start of COVID. And in those surveys, we've seen volumes consistently settling in down 15% or so. Does there have to be a convergence between that patient volume down 15% and company revenue? And is it volumes get better from here? Or is it that company revenues have to come off because there is some expectation or I think it makes some common sense that there's probably a little pent-up demand. There's probably some mix benefits right now that you're benefiting from, maybe a little inventory stocking. So do you think the next move is that we fall back towards those volumes or that volumes come up to revenue? And I know it's hard to predict. But what are you seeing out in the field that would maybe sway you one way or the other?

Yes. I think it depends what time frame you're defining in this case. I think if you're talking about months and potentially quarters, I think those will converge. I think if you're talking about months like this quarter and potentially next quarter, that is hard to predict and to reconcile for the factors that you talk about. So clearly, we are seeing pent-up demand. Not only pent-up demand, but also you mentioned mix. One thing that is clear based on all of our conversations with our customers is the value, if you will, the revenue per procedure has actually increased in many cases because as people deem go to the dentist for several months, that created some oral health issues that now they have to deal with that are more complicated than what they would have been if -- had they gone to the dentist 2 months ago. So from a -- some cases have gone from very simple cleaning procedures to crowns and other things. So we are seeing a revenue per procedure increase and pent-up demand. So that's one element. To balance that -- to counterbalance that, it is real that dentists are being able to have fewer people flowing through their practices because of all the new protocols and challenges they have from a logistics standpoint. So that is a point. And other point that counterbalances the optimism is there is still some percentage of the population that still have some fears about going back to the dentists. And then two, from a more macro perspective to reconcile the numbers that you see coming from multiple companies, there's also fluctuations in retail sales, wholesale sales. From our perspective, we are very much focused on retail sales. We track those very closely and we're making sure that we are tracking with that or better than that. That ultimately defines our market position is retail sales. Other things related to inventory in the dealer network. Those are temporary fluctuations that I don't think should impact our numbers in a meaningful way in the next several quarters.

All right. That's helpful. And I think one of the things that surprised us a little bit is that equipment has held in almost as well as consumables. The consumables recovery has been faster than we thought it might. But equipment seems like it's held in well. Shine yesterday was again talking about single day dentistry and CAD/CAM and what have you. You mentioned it in your prepared remarks. I think, John, you remind me, but I think we've been stuck at kind of this 18% penetration, 19% penetration for CEREC in the U.S. for several years now at least. Is this really potentially something that drives that penetration higher now? Did it take something like COVID or dentists, do you think, sustainably going to be looking towards in-office CAD/CAM as an alternative to crown and bridge work nowadays or as an option for?

Yes. Jeff, it is very clear, again, from our conversations with our customers that there is a significant desire to improve the 1 visit dentistry practice because it is beneficial at many levels. It is beneficial economically for the practice, which is something that we've known for a long time and is one of the most important selling points for that equipment. The second thing is now from a health care perspective, the desire by people to be exposed in certain settings, less than what they were comfortable with in the past. So these things are converging. In addition to that, the technology is improving. The software capabilities are getting better and better. We are investing a lot of money in software and getting it more powerful. And so you have great hard work power by very sophisticated software, better economics for the practice and more convenience for the patient. All of those things point in the direction of the demand for technology-based practice products is only going to increase. Whether that happens in August, September, October, hard to tell. So I'm not predicting what's going to happen this quarter or next quarter. But from a macro perspective, that trend is happening. And as a result, the penetration that you were talking about should increase over time. And at some point, it's going to start moving very quickly.

Yes. All right. Well, I want to talk about a couple of changes you announced last quarter, especially on the orthodontic side stepping away from the core brackets and wire business. I got a question today. I've gotten this question now and number of times in the last couple of weeks. But just remind us how there's not a cognitive dissonance going on here. You can get out of the brackets and wire business but still do well with SureSmile. It's 2 different end markets, 2 different end market customers. You're focusing mainly with the GPs, with SureSmile, that orthodontics business was obviously weighed down heavily since the Fukushima tsunami back a number of years ago. So just how confident are you that the SureSmile business can succeed from here as you step away from the brackets and wire side of the core ortho business?