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

Great. Thanks. Good morning. Jon Block with Stifel. And our next company today is Dentsply Sirona, a leading manufacturer of dental equipment and supplies. And today, I'm joined by Jorge Gomez, Executive Vice President and CFO of Dentsply Sirona; and Andrea Daley, Vice President of Investor Relations.

Somewhat of a short time period. So we're just going to go ahead and jump right into Q&A. Jorge, I'll start on the technology side of things, specific to the CEREC upgrade cycle. And I think a component of our downgrade back in December when I look back, we had some concern on where the company stood with its CEREC product cycle, notably Primescan. And I think, quite honestly, in retrospect, it might have been a little bit early there because it seems like you've got more legs, and I'd really call out the different geographies. So maybe if you could just sort of level set us where you are with the Primescan upgrade in North America and then how that compares to other markets such as Europe and rest of world?

Very good. Jon, thank you, and good morning, everybody. Jon, we are very pleased with the progression of our Primescan, Primemill offers. We -- as you know, we launched Primescan in 2019. And then we began at the end of that year the upgrade cycle in North America. So that began -- that happened in Q4 right after the [ rest of world ]. And then sales, obviously, were somewhat impacted in 2020 as a result of the pandemic. But as we go fast forward into Q1 and we look back at the product, we are extremely pleased with Primescan, the sales, the trajectory. And as we enter this new phase in 2021, we believe we have still a lot of opportunities with that product, similarly with Primemill, and I'll come back to Primescan in a second, but Primemill was launched probably at a -- not an ideal time, if you will. We did it in January of last year, and that, obviously, had some significant impact on the ramp for that product. But now we are kind of doing a new launch of Primemill, and we expect that this is going to be very effective. We are expanding how we look at CEREC and digital technologies in general. With respect to Primescan, we're not only focused on CEREC, user CEREC units, but we are also focusing now on DI, just essentially just the camera. And the market opportunity is still very, very big globally. We -- in the U.S., we're now doing -- we're beginning to do trade-in. So we went from trade ops to now going to trade-ins in the U.S. through our competitive products. Outside the U.S., we have launched the trade-up program in a number of geographies. One thing that is good about markets outside the U.S. is that the tail for the upgrade cycle is much longer. In the U.S., those upgrade cycles tend to be shorter, like steep and shorter. Outside the U.S., they take longer, but the ramp is good. And so we're going through that process right now with Primescan. And we're beginning to do things with Primescan, Primemill in terms of trade-out programs. And when you look at the guidance that we provided for '21 and the implied growth rates, a lot of that has to do with the performance of that business. We are -- we believe very much in our open architecture, open technology. And Primescan is going to be -- is a great driver of our SureSmile business. And as we think about the future, it's going to be the entry point for a lot of integrated workflows, digital integrated workflows. And so we are optimistic about the durability of this product and the possibility that it will continue to grow for some time.

Okay, Jorge. Very helpful. And maybe in my words, it seemed like you may have referenced upgrade cycle, maybe more middle innings in North America and early innings in Europe and rest of world. Again, that's how maybe I framed it. Do we think about that having durability or contribution into growth even into 22? I mean you talked about that longer tail in some of these OUS markets. Do you think that's fair in terms of Primescan and Primemill can still act as, call it, an incremental contributor to growth even when we look out into next year being '22?

Yes, I think so. Perhaps the time frame may be a little bit slightly different than what you're saying. But essentially, yes. I think, as I said before, outside the U.S., that tail is going to be longer in the U.S., we're probably a little bit past the middle innings and going into that second phase, but we are, again, adding the trade-ins. So that helps up for some time.

Okay. Great. And let's stick with technology, and I want to move to the announcement the other day, the agreement with 3Shape. They have a big installed base of scanners and have a very good scanner. And it seems like -- correct me if I'm wrong, but it will be interoperable with the SureSmile aligner. So maybe if you just want to talk to that deal at a high level. It seems like I know what you guys get out of the deal, right? I mean we've done a ton of work, and we can see the utilization of clear aligners goes up when you digitize the entire workflow. So hopefully, there's higher utilization or uptake on the SureSmile clear aligners. Is there something that goes back to 3Shape in the other direction? Maybe if you could elaborate a little bit on it.

So first, I mean, we are very excited about this partnership. I think there is other opportunities beyond SureSmile and their scanner. The initial phase of the partnership, I think, you described it really well. It's about seamless interaction between their camera, the software in their camera and our SureSmile business. Today, both systems are open, open architecture. But doing -- using both is cumbersome, right, because dentist has to -- they have to download files, upload files, manipulate data with the new interpretability of these 2 software is totally seamless. They take the digital picture that information is sent to the SureSmile software, and the dentist has nothing else to do there. So it's great from that standpoint. You're absolutely right. For us, is a great partnership. It opens up a market that we don't have access today for the most part. I mean we could, but it's hard. They have a large installed base globally. And so our SureSmile business from a scientific standpoint, clinical standpoint has proven to be second to none, great product, and they like that product. And so for us, expanded market clearly; for them, today, they believe our product is very good. They have been blocked by other participants in the industry, and they have the opportunity to give their customers, their clients and access to a great product, the SureSmile product. So for them, it also helps from the standpoint of selling their cameras.

Okay. Very helpful. Yes. I mean, to your point, it's been thought about as clear liner is sometimes like the killer app for the scanners. So now arguably if they were blocked by another industry player, that 3Shape could have a clear [ route ] with a really good clear aligner with SureSmile. Now you started the conversation or this talk [ track care ], if I said, there could be other opportunities further down the road. Do I think about an opportunity to hook up the mill -- Primemill to these 3Shape accounts, maybe further down the road when you allude to that open architecture?

We're not prepared to give any specifics right now because we -- I mean, this -- documenting these agreements takes some time, and we just finished documenting first agreement. I think in terms of both companies are very much invested into digital technologies and software capabilities. And so I think the future is about integrating workflows, and I think we have opportunities to do further work in that space.

Okay. Fair enough. I'm going to stick with technology, I'm going to move to the Clear Aligner portfolio, which is meaningful between SureSmile. And Byte, Byte, it looks like it was roughly $40 million in the first quarter of '21. The company is expecting to exit the year at around a $200 million run rate, which really isn't a long way from here. Just talk to us about what's gone well so far. What's allowing Byte to seemingly capture share from some of the other DTC players such as SmileDirect?

Yes. We're very excited about the Byte acquisition when we first started looking at them, which was actually about a year ago. We -- our first impression was they had a tremendous capability from a digital marketing perspective. They have very good people, very good in size, software engineers, they have good data. And to us, that was a strategic asset that we wanted to add into our stable of assets. And after now 6 months of owning the company, we are even more excited about those capabilities. And to your point about how are they been able to take share, I think, those digital marketing capabilities are coupled with a good product that is now going to be even better because now we have the aggregated data of SureSmile and Byte. And as you know, in that space, the more cases you have, the better your library and the better the outcomes produced by the product because the artificial intelligence behind this product is able to simulate more cases and so makes the treatment plans faster and more importantly, more accurate. And so the integration is going well at all levels, at the clinical level, at the data level. From a digital marketing perspective, we're actually not integrating anything. We are leaving them along. We are actually learning from them because they are the ones who know about that space. We don't. And we are adopting some of those learnings into our e-commerce platform. As you probably remember, we've been investing in our e-commerce platform for a while now, and that is going to be an important asset for us going forward. So that whole integration is going well. We're working on the next phase -- actually, we -- I think, the core business will continue to grow really fast, but we're also working on Byte Pro, which is kind of the next phase for our multichannel approach to aligner. So we have the in-office offering with SureSmile. We have Byte direct-to-consumer. And then for class -- some Class II and Class III cases that are not able to be handled by Byte, we are -- we're going to direct that volume into a curated network of dentists that we are close to because they are our customers today. And that's going to create a new incremental volume for those practices because the reality is that a lot of the people who come to Byte, they are not even -- they haven't even visited a dentist in months or in years in many cases. And so they are essentially new volume into the industry. And if we're able to send them to other dentists, and that's going to create new revenue sources for the dentist, and we're able to actually sell SureSmile as well. So that is an important aspect of the next phase of the integration.

Got it. And the next is the integration. I just want to follow-up on a couple of things there. So Jorge, does that individual who's not a Class I or Class II, is that a Byte case then once they go into the professional channel? Or is that a SureSmile case or TBD?

So Class I cases that comes straight to Byte, those are Byte Class Is, right?

Yes. What about the Class II that goes to Byte?

Class II -- we are in the process of figuring that out, like -- and that's why we haven't launched program formally because we want to make sure that we have a clear handbook, playbook for this in terms of incentives and how this is going to work. And I think for the most part, I think, what's going to happen is if that patient goes to the dentist, that is going to be dentist revenue, hopefully, SureSmile revenue. Most likely it's going to be SureSmile revenue. That's probably how this is going to play out.

Okay. And then maybe something else with the integration. Just if you can talk to us about the vertical integration of Byte, are all those aligners coming out of Dentsply Sirona or are they on the same sort of SureSmile platform, if you would?

Yes. The aligners, the manufacturing side of the integration is underway. They were using, for the most part, third-party manufacturers, and we have our own facility that we have invested a lot of money in Mexicali for SureSmile. And the integration plan is to integrate all of this volume into the same facility. Now that -- the synergies from that are included in the business case. But honestly, there isn't a lot of money there. The interest aspect of the integration is more -- is the data integration, it's having a common software that utilizes the same data base that is really, really big. That's where the benefits come from in terms of integrating the processes of the 2 companies.

Okay. Okay. Maybe one more on the Byte deal, and then I'm going to pivot because a lot of other topics to get to. Post the Byte deal, we did some work. We talked a potential channel conflict with GPs and how they might view the acquisition. Maybe if you could just talk to any early feedback. Feel free to say, Jon, you're crazy, that was never an issue. It's not the first [indiscernible]. So just talk...