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

Good morning, everyone. Thanks for joining this session with Dentsply Sirona. My name is Nathan Rich, and I cover the Dental Space here at Goldman Sachs. Today, we're joined by Jorge Gomez, Dentsply Sirona's CFO; and Andrea Daley from Investor Relations. Before we jump into the Q&A, I just wanted to remind the audience that if anyone would like to ask a question during the course of this presentation, you can either send me an e-mail directly to [email protected], or you can use the ask a question function through the webinar. So Jorge, thanks so much for joining us and for your time today. I think we'll just jump right into questions.

Maybe starting at a high level with the long-term revenue guidance, the company has kind of guided to long-term revenue growth of 4% to 5%. That was following the acquisition of BYTE. That's faster than the dental industry has historically grown. I know you've ramped up your investments in some of the faster-growing areas within the space, specifically clear aligners as well as implants. I guess, how should investors think about building to that 4% to 5% revenue growth target?

Thanks, Nathan, and good morning, everybody. Happy to be here, and thank you for we're starting with that question, which is probably the topic of the theme that we spend the most time with at the company. And it is a function of a number of things. There's no one single lever. There's a -- is an entire commercial strategy and business strategy that will -- is fueling that type of growth rate. And let me start by talking about infrastructure. The company, as you know, has a pretty broad portfolio. The breadth of our services and products is pretty extensive. But for many years, the company didn't use those assets well. And so the first ingredient for -- to deliver this type of top line growth is what I would describe as operational excellence from a commercial standpoint. And we have been talking about this for a number of years and sales force effectiveness is one of the levers. So within commercial excellence, sales force effectiveness using metrics that really drive behaviors, the right behaviors, having the right infrastructure in terms of territories and how we have organized our sales forces. The company used to be very decentralized, very complex, in terms of its go-to-market strategy, Don and the team have simplified that organization a lot. Going from about 11 sales forces to about 4 to 6, depending on the geography. We have injected tools like CRM and other metrics to drive better execution. We have thrown in more sophisticated and strategic incentive plans. We went from doing a lot of incentives with our dealer partners, and we have redirected those dollars mostly to the end customer. And so trying to match end-customer demand with our sales. That is a very important thing. So we're bringing all of these things together. We are also bringing a greater strategic focus. The company has a lot of SKUs, a lot of products, we're trying to simplify the portfolio, making sure that we go after the segments that really grow. And so that's part of the mix change, which is another element that we have been pursuant as we have disposed off of a number of businesses that were either not growing and not very profitable. And we have added assets that have a very different profile, both from a top line perspective as well as from a profitability perspective. And so that brings me to the second point. So first is operation execution and operational excellence. The mix of the portfolio, very important lever for us. And I think we're doing a good job. We have invested in a, probably the fastest-growing area in dentistry right now, clear aligners. And now we're creating a pretty cohesive ecosystem within aligners that starts actually with the scanner, with the intraoral scanner, the launch of Primescan opened a bunch of new possibilities for us, and that is complemented by a strong software powering clinical treatments and treatment applications. Now we have a multi-channel approach. We have the in-office space with SureSmile. We have the direct-to-consumer space with BYTE we are finding now synergies between those 2 channels, direct and traffic from direct-to-consumer to in office, and that brings a lot of benefits for the dentists in terms of more aligners cases that they can deliver in the office. Also the pull-through from other basic treatments that people in the direct-to-consumer channel bring to that space because 1 thing we have found, for example, is that in the BYTE case, 80% of our customers have not visited a dentist in a long time. So whenever we can shift a customer from that channel to the in-office channel, that creates a lot of opportunities for the dentist and for us as well. Also with respect to mix, there are areas where we already had very strong presence, but we have underperformed the market. And we have been very clear about, for example, our performance in the implants business. Implants is a great space within dentistry, grows mid- to high single digits, and we have not been growing at that level. We're doing a lot of work integrating all the assets that we have with an implant from premium brands to value implants, software with ATLANTIS, we have now added data in the bone regeneration space. All of those assets are now being integrated in a cohesive way such that we can go to the customer with a kind of integrated workflow. Lifting the growth rate in implants is also going to be an important lever for our long-term growth. And then performing well with consumables, especially the specialty consumables business, is also -- it provides a great foundation from a growth perspective. I mean those spaces don't grow more than low single digits, but achieving a sustainable low single-digit growth in consumables with the good margins that it has -- it creates a good foundation, and you put on top of that aligners, implants our CAD/CAM business, and all of that brings up the top line to the level that we're projecting it between 4% and 5%. And the last ingredient, the last lever that I would mention is from a geographic expansion perspective, we still have -- despite the fact that we're very global, and we've been around for a long time, there are certain pockets of significance from a value perspective from a critical mass perspective that we are probably under index right now. And I'm talking about places, for example, in Eastern Europe or the new Europe. We are beginning to make interest in inroads in those markets. And those markets are growing substantially faster than Western Europe, for example. And that's an area of emphasis for us. We're going strong into those markets with the old parts of the portfolio, but now we are launching SureSmile aligners outside the U.S., and we're going into those markets. There's China. China is always is a huge market. It's a tricky market. There's a lot of constraints and difficulties performing in China, but that is one area where we should do better and we'll do better. And there's probably a couple of other pockets. One developed market that I think has a lot of upside for us is Japan, and we are also trying to make important changes in those spaces. So geographical expansion, is the last element of this recipe that we're putting together to deliver the 4% to 5% top line growth.

And so yes, I mean, that definitely kind of shows the breadth of what you're working on. At the same time, you're also working to kind of expand margins. It seems like based on recent performance, kind of well on track to hitting the 22% margin level that you're targeting by the end of 2022. But I guess, just how do you think about making sure that you are investing enough to kind of go after these opportunities, while also expanding margins at the same time? And can you kind of talk about how you're thinking about that trade-off?

Yes. That's a very good question. And as you said, is it trade-off. But to some extent, those 2 things are not inconsistent. And I think the one word that comes to mind is -- and we talk about this strategically, simplifying the organization. The more we simplify, the more we focus R&D and focus commercial efforts and investments into the areas that really matter. We can do both things, we can actually accelerate the top line growth while improving margins. One of the historical issues with the company was the level of complexity trend to tackle a lot of things at the same time, and we were not effective that way. Now we are reducing the scope. We are increasing critical mass. We are centralizing a lot of our capabilities and operations. By doing so, we can be more effective from a margin perspective. We can eliminate a lot of duplication that we have all of the P&L, starting with COGS, for example, the number of manufacturing sites and distribution centers that we have. It's still a large number, but it's coming down pretty substantially. When Don Casey got here about 3 years ago, the number of sites that we were actively working with were over 40. Now we are just under 30 or 29 day because we have added a couple of businesses lately, but we have reduced that footprint by about 20%, 25% from an SG&A perspective. We talk about the simplification of sales force, going from 11 to 4 to 6, that generates economic benefits from a margin perspective. The support functions. We were totally decentralized. Each business segment had their own infrastructure. Now we have fewer people doing more. And so those 2 things are -- they allow us to reduce costs, and at the same time, free up investment that we can deploy into the areas that matter. And so that's why as you can -- as you have seen in the last several years, we went from mid-teens in the operating profit margin to over 20%, and we are confident we feel good about the trajectory to the 22% next year.

And then the company has talked about potentially being able to accelerate top line growth over time. You've obviously gone through a lot of what you're working on. I guess, what do you need to do that to go after growth above 5%? And do you feel like your current category mix as it stands today would support growth at that level longer term? Or are there further changes that you have to make or pruning that you have to do to kind of position the overall business to hit either the high end of 4 to 5 or something better than that longer term?

Yes. Nathan, first thing I would say is, for now, we want to get into the 4% to 5% sustainable growth. That is primarily 1, 2 and 3. Obviously, in the back of our heads, we're thinking, okay, what could happen beyond that? I think from a conceptual standpoint, all the things that you mentioned will be important. There's never like 1 single thing. And so I think the mix of the portfolio is always a lever that you have, better return on investment in R&D is important. All the other levers that I talk about in terms of geographical expansion, that could give you more. But for now, we have a relatively clear road map for the 4 to 5. Next year, we will be updating -- next year is already '22. So it's going to be about time for us to update on the long-term targets. And at that point, we will probably have a better idea of what the potential is, what the next level is for us. And -- but we'll do that once we have more specifics around those numbers.

I wanted to get to some of the specific product opportunities that you mentioned, but maybe a couple of questions on just the dental market first. I think that what surprised a lot of investors has just been the resiliency of the industry. It's something that you and many of your peers have been talking about really since the middle of last year. I guess as we look forward and beyond the pandemic, do you think anything has changed structurally with the industry either from the side of the consumer and then their just overall demand for dental services or maybe it's a dentist driving more procedures. Anything that could be more durable from a market standpoint coming out of this pandemic relative to where we were before?

Yes. We believe there are some fundamental changes happening in the industry structurally. And to some extent, I think dentistry has been lagging and a number of years, the overall health care space, right? Dentistry was kind of a dormant industry for a while. And I think we're seeing pretty dramatic changes, both from a supply perspective and from a demand perspective. And so let me start with the supply side. I think the developments that we've seen from a technology perspective, including imaging technologies, software, clinical treatments, artificial intelligence. Those type of advancements are creating our created offerings there are a lot more conducive for the dentists to do more things. They are changing price points. They are changing the pace of treatments. With outcomes seeing a lot faster. They are improving the accuracy of the procedures. So on the supply side, I think we've seen an acceleration of that. And I think software, primarily in digital technologies are actually really, really feeling a new wave of offerings that are really attractive for the customer and is changing price points. And then on the demand side, I think the acceleration in aesthetics and aesthetics applications, I think there's a lot more demand or implants, for clear aligners, for those type of things that historically where somewhat of niche products is still significant, but they were probably within a limited space, mostly performed -- procedures performed by specialists. Now because of the supply side of the new technologies and software, general practitioner, GPs, are able to expand their practices and offer a lot of things that were not available to patients before. So I think that combination is creating a sustainable new trajectory for dentistry that is going to be around for a long time. And then you put as a foundation the general trends that we have seen for a long time, which is aging of the population, improving income levels, penetration of dentistry in certain markets where is still really underpenetrated. And even in developing markets -- in developed markets, implants, for example, in the U.S. alone, there's hundreds of millions of missing teeth and people have not have the access to solutions for that at a large scale, and that is changing. So we are very bullish on the overall industry and that's why we are excited about increasing investments because I think the demand is going to be there.

Great. And maybe if I could ask one on the revenue guidance for this year. I think you said that first half revenue is usually 47% of the full year. This year would be a little bit higher than that. I think historically looking back, you've actually seen a nice step-up from 1Q to 2Q in revenue. The guidance doesn't seem to imply if we're using that kind of 47%, 48%, 49% first half revenue versus second half guidance. For the second quarter, it seems like you're not going to see that same type of sequential step up. And so I guess what I'm asking, you kind of talked in on the first quarter call about there, maybe being some replenishment benefit of -- in 1Q, maybe that could shift some sales. But could you maybe just talk us through how you're thinking about revenue cadence between the first quarter and the second quarter and then into the back half of the year as well?

Yes. Nathan, we talked about this. I think in Q1, Q2, I mean, we're in the middle of Q2. We're not going to talk about Q2, and we don't provide quarterly guidance, more at a higher level first half versus second half, you're correct. I mean, historically, you go back, lease -- I've gone back at least 5 years. And you see that type of a 47% first half, 53% second half cadence within certain margin, but very consistent. This year, first of all, we still have COVID around, right? And there's still a lot of conflicting data points in terms of volume, revenue per visit, the rate of recovery, setbacks with respect to COVID. So this is not a good time to be -- to try to be too precise about quarterly trends because there's still a lot of noise in this system. We -- when we model fiscal '21, we thought that the ramp from Q4 to Q1 was going to be more gradual, kind of lower, slow than what it turned out to be. The endpoint, actually, we're still modeling kind of the same end point at the end of '21 but how we get there, the shape of that curve has changed from our perspective as we have modeled the numbers. And so what we experienced in Q1 was a faster recovery. And that drove a significant amount of volume, not because people talk about pent-up demand, and it's really hard to understand or to measure pent-up demand. But in a more simplistic way, what we saw was with the reopening of the economies with the greater level of optimism driven by higher rates of vaccination, people started to plan, volumes started to go up and people, in general, across the supply chain, manufacturers, distributors, providers, started to gear up for higher volumes going forward or getting back to that kind of normal level faster. And that drove a significant amount of demand in the first quarter. And the term that we would like to use is we experienced a replenishment across the entire supply chain, which is not to confuse with higher inventory levels in the biller network. A lot of people jump into that is not about higher levels of inventory in the dealers, is all the participants across the value chain, we're adding production because demand was a lot higher. And so that step-up explains why we think Q1 -- first half to second half ramp is going to be a little bit less than what we thought initially when we model '21.

That's helpful. Maybe shifting to your strategy and clear aligners. Could you just talk at a high level just kind of about the strategy of SureSmile kind of which has been targeted at the GP so far. Earlier this year, you bought BYTE, which is a direct-to-consumer aligner business. Why is this the right approach for Dentsply? And kind of how are you thinking about the growth of these 2 channels that you're in within the overall aligner space?

Yes. Obviously, it's a category. Aligners is a category that is growing extremely fast, 20%, 25% plus and with still a low level of penetration. So there's a lot of space where to go and tap markets. And we want to be in spaces where we think we are strong and we have good access to. We have the right capabilities. And we have come up with this strategy that has 2 or 3 prongs, and we are executing on that. And at the core of that strategy is the focus on GPs and consumers that is important to us. I think that is material to us. It doesn't mean that other spaces are not important. But we think we have now critical mass and the right capabilities to take advantage of those markets. And I think we talked about this before with the in-office strategy, the direct-to-consumer, we can cover a lot of ground and actually cross-pollinate those 2 spaces. I think have been growing our brands, directing traffic from the direct-to-consumer market into the in-office market, we talked about that before. That is very important. We have added capabilities like Propel that is a pretty distinct product that is going to help us. It is helping us today with BYTE. So every time we ship a BYTE product, Propel is part of that. Now we have the opportunity to deploy that technology into the in-office SureSmile business. And so that is going to be really important for us in the future. And then now we're taking deployment of capabilities that was mostly in the U.S. Now we want to go outside the U.S., and we are launching SureSmile and BYTE in Europe and in other geographies. And then as part of this strategy, we want to take advantage of a large install of digital scanners in the marketplace, either scanners that were manufactured by us or by somebody else. And so grabbing that market share early on is very important. The partnership with 3Shape is a lot about that. And it's a great partnership because it's a win-win, clear win-win for both companies. For us, it gives us access to, again, this large installed base and number of dentists that is not natural for them to choose SureSmile. Now with the seamless integration of the softwares of 3Shape and Dentsply Sirona for those dentists that use their scanners, SureSmile is going to be their aligner of choice. And then for them, it gives their customers, the customers that buy their scanners, access to a great product, a great aligner product that is second to none in terms of clinical efficacy and just the overall power of the software and the quality of the outcomes with that business. So it's a great space. There's a lot of opportunities for a number of players. We have great assets. We're integrating them well. We are partnering with others. And so as a result of that, I mean, we're going from almost 0 revenue in aligners 2.5 years ago, 3 years ago, to $300 million, at least $300 million annual run rate by the end of this year. So that's a pretty significant ramp, and we are excited about what could happen after that.

And I think 1 of the other interesting things is that, at least based on your comments on BYTE, the company was also profitable. I don't think you've commented on SureSmile. But as you grow to that $300 million of aligner revenue, can you do that profitably? And do you feel like you've kind of built-in the sales and marketing dollars and the capacity investments that you might need to make as you kind of ramp up and scale that business?

Yes. Good question. And the answer is yes. We -- that's what we have factored in the guidance. That's what we have factored in our long-term guidance for operating profit margin. Let me talk about BYTE first. One of the things that we like about BYTE from the beginning. And we started talking to the BYTE people more than a year ago, like early in 2020. And then because of COVID, things got delayed. But we have followed that company for a while. And it was really interesting from the beginning, the mentality of the founders and the owners in terms of for them, not every -- not all type of profit was good. They were interested in profitable growth from the beginning. And that company became profitable very early on relative to other start-up companies, it's pretty amazing how they got to breakeven and to profitable levels early in the stage of development. And that mentality has continued, and it will, for sure, continue under our ownership. And we said when we did the acquisition, that BYTE was going to be accretive to us from a top line perspective, from a gross margin perspective and from a bottom line perspective. It's not accretive to us in the short-term from an operating profit margin perspective. But bottom line, for sure, is accretive. And in our guidance for this year, or margin profile for next year, we're capturing lots of investments. We are -- as we deploy, for example, BYTE outside the U.S., there will be some marketing spend that has to be added as we grow in the U.S., the key ingredient for BYTE from a cost perspective is digital marketing cost. And we are contemplating substantial increases there from a manufacturing capacity both businesses are growing really fast, and we have invested a lot of money in manufacturing for clear aligners, BYTE has sourced aligners from third parties, and we're going to bring that manufacturing in house. We are in the process of doing that, that investment is included in our projections. And we believe we should be able to sustain a very interesting margin profile for both SureSmile and BYTE. It is a competitive market cost for, for example, for digital marketing, fluctuates, goes up and down, but there are choices and levers and channels. And part of the great thing about BYTE is, we are very pleased, and we -- this was a -- was heavy emphasis during due diligence, understanding their knowledge of digital marketing space. We don't have that knowhow here. We are actually learning a lot from their capabilities. They are very good at that. We're beginning to apply that to our e-commerce platform as we keep investing in e-commerce for the rest of the company, digital marketing capabilities, managing customer acquisition cost is something that is complicated. They have the know-how. Now we have it as a company.

Great. And then the last one on this topic is, what does the integration of this -- the D2C channel and the doctor-directed channel look like? You kind of talked about the BYTE pro model, kind of how do you see that evolving as you kind of integrate both of the businesses?

Yes. It's -- think about it as a playbook in terms of the -- our commercial organizations, making sure that we have complete visibility over this large pool of potential patients and then having clear protocols and actions and hands-off in terms of -- if I have a customer here approaching BYTE and BYTE is not the right solution for that patient. Making sure that we have the right mechanism to in a compliant way, direct that patient to the right place. And so that involves, for example, having a pretty clear curated network of dentists in multiple areas around the country that will be available for that patient to go and choose from that pool of dentists and have -- and for that dentist to actually be able to attract that patient. And then do whatever that patient requires, both in terms of aligner solutions and hopefully -- or in many cases, potentially other potential procedures that, that patient may need to need. So it's a combination of commercial strategy, data, ability to create visibility for this network and that has all been worked out under the umbrella BytePro, which will be launched in the next several months, but we want to make -- we want to get it right and make sure that is high -- the output and the efficiency is really high with that program. And we're talking to a lot of doctors right now in that space and there is a lot of appetite for that model to be launched.

Great. I wanted to move over to the -- to Primescan and the CAD/CAM business. I guess a couple of questions to start. Do you feel like there's pent-up demand for practices to invest in digital equipment generally? It seems like the equipment business lagged last year, you're also cycling the Primescan launch, so the comparisons made is difficult to really tease out. But do you feel like practices are kind of back on their front foot, want to invest in digital equipment. You also talked about, they see this as a tool to kind of increase the scope of procedures that they can do. And then on Primescan specifically, kind of where are we with the kind of maybe launch or upgrade cycle obviously got interrupted by COVID, but just kind of where do things stand now? And what's the incremental opportunity from here?

Yes. So Nathan, let me tackle that in 2 parts. One, just kind of industry trends and market demand, in general for digital technologies. Going back to one of your prior questions and my description of general trends. Forget about COVID, in respect of COVID, I think there is the uptake for digital technology, digital scanners, powerful software connecting end-to-end procedures is gaining traction, right? And yes, it was disrupted by COVID. But one interesting thing that happened during COVID was at the front end of the crisis, a lot of people were arguing in this type of situations, equipment demand drops dramatically, and it takes a while to come back. We actually didn't see that. And yes, equipment went down with everything else, but it went down together and is rebounding together with everything else, which confirms the point of there is a macro trend for higher demand for those technologies that is really -- is different. And the installed base of digital technology is still relatively low. And digital scanners, intraoral scanners, there's still a lot of room for penetration. So that's number one. Specifically for us, we have seen a good rebound of our sales in CAD/CAM in general and is happening pretty much across all of the categories within equipment. I think we're seeing great recovery and imaging across the board, CAD/CAM. And we feel frankly, in some places, we are probably gaining share. At a minimum, we are tracking with a fast market growth rate. And dentists, I don't think they have changed their approach to invest in. They are -- they continue to invest based on the numbers that we are seeing. The launch of Axeos for us, for example, in a difficult market environment, that business -- that product is doing really well. It's a great advanced product and is going well. So across that entire ecosystem, we've seen good recovery, good progress. And so both short-term rebound is good. And then long-term trend, this is part of a good trend, and we're excited about that business. And I think the potential is there for us and for all.

Makes sense. And I guess, how do you feel like the open platform has been received by customers? I know that, that was always one of the things that we felt like was maybe holding Omnicam in the previous versions back. I mean, do you feel like with Primescan now, that's kind of allowed you to appeal to a wider base of practices just because like the utility of the product, I think, is greater than maybe what past versions of it was?

Yes. I mean, philosophically, we subscribe to the principle of open architecture for digital equipment. We believe that the interoperability of this product is extremely beneficial for the customer. And so we are very committed to that type of approach from an IT architectural perspective. The partnership with 3Shape is a confirmation of that approach. 3Shape believes in the same approach. And now we're going to create a lot of opportunities for a number of customers, dentists that could choose this equipment and that aligner. And that's -- if that's good for them, that is good for us, we still believe we can compete effectively with our DI and imaging equipment in general, even in an open architecture environment. And so that's now we are even more convinced than that. I think a lot of the feedback that we get from dentists in that regard is positive. And frankly, we kind of took that approach because that's what we peer customers want. And so at this point, we are very much committed to that approach.

Okay. Just a couple of questions in the time we have left. I did want to hit on implants. It's an area where, Jorge, as you said earlier, you kind of struggled to grow with the market. I guess, what's the strategy to improve that business? And how do you feel like you're going to position the portfolio? Is it more of a premium strategy? Do you want to have offerings in both the premium and more value segment? Could you just maybe talk about what changes you're making there to improve the growth for that business?

Yes. Thank you for that question, Nathan. We have underperformed the influence market, which is actually extremely disappointing because from a product offering perspective, we have great assets. We have, to your point, we have premium implant. We have value inputs, which is a category that is growing really fast. But premium implants is still a pretty big business, and it grows. We have a great software capability with ATLANTIS, which is used by labs to for us to manufacture custom abutment. Now we have added data in the bone regeneration space, which is critical for faster healing and better outcomes in implants. So our issue and our focus right now is about the improvement, the commercial execution of kind of an end-to-end workflow for implants. Bringing together all of those capabilities into one cohesive offering with the right commercial approach from an incentives perspective, from a go-to-market perspective, and making it really easy for the customer to take whatever they need for their procedures. Your question about premium versus value. I think both markets are very relevant. We have a great asset with MIS on the value space. There's a lot of growth there, both in the specialist area as well as for very small -- for very simple cases in the GP area. And with great software and clinical education, that is a pretty important market that we are tapping. So this is -- this issue for us is not about having the right portfolio. We have the right portfolio. We have the right assets. It's about integrating it well and executing well from a commercial standpoint, and we are really excited about some of the changes. We have an internal project, which is not a secret name, but we call it Phoenix. And there's a lot of resources and people working on these projects right now. And in the last few quarters, we've seen important progress in some of these areas. And our ambition is to be able to approach over time, the growth of the implant market, and that's an important lever for us to achieve our 4% to 5% top line target.

Great. I think we're at time, so let's stop there. Jorge and Andrea, thanks so much for your time. I really appreciate the detailed discussion, and everyone, have a great time at the rest of the conference. Take care.

Thank you, Nate. Bye.