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

All right. Good morning, and thank you for joining us today. We're excited to welcome you to Baird's inaugural Healthcare ESG Symposium. We have over 135 attendees joining us virtually on today's platform, and we hope you find the content informative and useful. Our next presentation today is from Dentsply Sirona, a leading manufacturer of dental consumables and equipment products. And with us today from Dentsply, we're happy to have Chief Financial Officer, Jorge Gomez; and Vice President of Investor Relations, Andrea Daley. So Jorge, I'm going to open the floor to you for a few minutes if you want to start with maybe a few prepared comments, and then I thought we'd move straight into Q&A. So thanks for joining us, Jorge, and the floor is yours.

Thanks, Jeff, and good morning, everybody. Thanks for the invite. We are very happy to be here for multiple reasons. One, Andrea and I, CFO and Head of IR, we actually double hat and have a big responsibility within the company for ESG, so I am the executive sponsor at Dentsply Sirona. And then with Andrea, we -- plus a few other leaders of the company, we have a Steering Committee that is leading the efforts around ESG. And so it's great to have the opportunity to share with you and with investors some of the great things that we have going on. The most interesting thing about ESG for me so far has been the fact that, across the company, across the globe, all of our employees are embracing ESG. And in fact, they are helping us to drive these efforts in a way that is very natural and that, hopefully, is becoming part of how we run the business, how we go about our days. And so that's -- it's great to have that type of environment because it makes the progress faster. And complying with a lot of new regulations and standards and things that will be coming out, I think, is going to be a lot easier because we will have participation from everybody. So, again, very happy to be here. Happy to answer any questions you may have between Andrea and I. We will do our best to share our journey so far.

Great. And just for background for investors who might want to ask a question, please know. I think you can type that question into -- you should have a question box on your screen, I believe, although I have a different screen. So maybe I'm wrong on that. If I am wrong, feel free to e-mail me directly. I have my e-mail up. It is [email protected]. So with that, Jorge, why don't we jump in right into questions. And some recent news from you on ESG last month, you announced that I think it was with GSK's Consumer Healthcare Group and Colgate and TePe, you were partnering with the FDI World Dental Foundation (sic) [ FDI World Dental Federation ] trying to promote FDI's sustainability and dentistry initiative. When I look into that initiative, it's focused on reducing collective carbon dioxide footprint of dentistry, targeting practitioners, patients, supply chain, using a variety of sustainability tools that you expect to introduce. So that's the description anyway that I pull off of press release. But maybe you can give us some color about who FDI is, why you chose to partner with them on this initiative and kind of what should we expect from it over the next couple of years? That would be helpful.

Sure. No, thanks for starting with that question. And just let me start by saying that philosophically, the way we want to tackle ESG is, we believe this is a massive effort that will take participation not only from people inside the company, but I think industrial spaces will have to work together to make meaningful progress. So partnerships is a key element of our strategy. And this is one of a number of examples of partnerships that we are in the process of building, specifically FDI. FDI is a global organization that was, I guess, main industry organization that brings together dentist practices across the globe. And they work on a lot of protocols and ways of conducting the dental business. And so they have great influence in all the continents. And working with other companies like GSK, and if we all our multinational corporations, we believe that we have a great opportunity to do many things within dentistry. Specifically, some of the objectives that we have include, we want to create protocols that dentists, in multiple geographies, can use so they can improve their practice from a sustainability perspective. I think, at a high level, a lot of people understand the environmental, the social and the governance pieces of ESG, but we want to bring this down a level or 2 and specifically, for example, come up with a code of good practice for sustainability in dentistry, allowing dentists -- or empowering dentists with toolkits to help their practices improve from a sustainability perspective. We -- I think, in general, dentistry is a clean industry relative to many other industries, but we still have a lot of waste, and there are things that we need to be mindful of. And it's going to be a lot more powerful if we tackle this across the space of dentistry. We want to do it as a company, we want to do it with our peers. We want to do it with dentists. And if we all work together to figure out what are the key priorities, and then develop plans to tackle those key priorities, we're going to make progress a lot faster. And so that is the intention that we are pursuing with this partnership with our multinational corporations and FDI.

Okay. Well, that's helpful. And maybe it's a good segue then just into your 2020 sustainability fact sheet. I think that was just recently published. I know you're structuring your disclosures around the sustainability accounting standards. You're trying to align many of your efforts with the UN sustainability -- or Sustainable Development Goals. But maybe as a softball question, but what would you consider to be 1 or 2 of the most important revelations, if you will, from that new report that was just recently released?

There is one that for sure has been really eye-opening for the management team and for everybody within the company and that is, the clear correlation and the significant overlap between ESG priorities and business strategy. That, to me, has been a revelation because when we set out to formalize the journey within the company, this was kind of a side project where a few people were driving it and trying to summarize and to clarify what we wanted to do. And then as we went deeper, as we got smarter about the SASB framework, the TCFD framework, CDP, all of these things -- on the social side, we're talking about gender participation or representation. All of those aspects -- at some point, we stop and we look at all of these things, and we establish a very clear correlation with a lot of business priorities. For example, take the E part of ESG and impact on the environment. That clearly ties to our business strategy of simplifying our footprint. As you know, Jeff, we talked about this multiple times. We are simplifying our footprint. We have consolidated from 42 manufacturing facilities down to 29 or 30 right now. That is important from a cost perspective. It's important from a quality perspective, and it reduces the impact that we have on the environment. So -- very clearly. Switching to the S part of ESG. D&I and gender diversity and just diversity in general, it is extremely important from an engagement perspective. When we do engagement service, those are very important aspects that matter to people. As you know, there are many academic studies that show that greater diversity correlates better with better financial performance. And so working on all of those things, now ESG is part of our mainstream operating model. It's something that we talk about in monthly business reviews, quarterly reviews as part of the ongoing discussions with the Board. So it's -- that has been amazing. It's now part of who we are and how we operate. To me, that was really, really important. The last point I would say is one of the key aspects of ESG is managing risks. And it ties perfectly into our enterprise risk management process, which, from a governance perspective, as you know, is extremely important. So all of these things are coming together really nicely, and that has been really interesting, and I wasn't expecting to get that close -- to get all of these things that closely together.

Yes. No, that's interesting. So maybe even a couple of follow-ups there. You pointed to the E side of ESG. I also noticed you stopped selling amalgam at the end of 2020. I would assume that's an environmentally-driven decision, but maybe you can kind of walk us through how even something like that bubbles up to the surface and you make that decision?

Perfect example of a symbiotic relationship between ESG and business strategy. It's interesting. So from an environmental perspective, there are issues with amalgams, right? And so that was something that the medical -- the clinicians within the company were dealing with and trying to figure out how we solve that issue and made the decision to exit that business. So as a company, we made the decision to exit that business. In parallel, we developed a product, Surefil One, that actually we think is better. And actually from a sales perspective, it has a much better profile, just economically, much better for us. So again, great, great combination of business strategy ESG coming together. And so that's why we made that decision. It makes a lot of sense for the business going forward.

Yes. Okay. And again, if I just kind of tick through some of the points you made on the diversity side, I think 42% gender diversity is the number I saw in your report. What are the efforts maybe to increase that, although that's already kind of at a high level relative to some of the other companies that we've looked into. But -- and I think, for example, a single-digit percentage of the overall workforce is black or African American. I mean just what are some efforts maybe that you're taking there?

Yes. First thing I would say is that, personally, for me and for the CEO of the company, for Don Casey, diversity in general is extremely important, personally. We believe in it. We have been working together on that space for many, many years here and at other companies. And so we are totally committed to tackling diversity in all aspects of it, not only gender, not only race, but all aspects of diversity. So that's number one. And we are talking about this in all management forums, town hall meetings. Having the data been public right now in front of all of our employees and stakeholders is extremely important. Interestingly enough, in one aspect of diversity, Dentsply Sirona is very diverse. We are truly a global company. We are -- we have direct presence in over 100 countries. We just had a couple of days of meetings, virtual meetings with people from all over, all over, all sorts of accents, cultural backgrounds. So diversity is something that is natural to this organization. Now we have to expand that, and there are concepts of diversity that are specific to certain countries, others, they transcend globally. Gender diversity is something that is really, really important across the globe and something that we are committed to. And I'll tell you, we -- in a couple of years, we have made already a lot of progress on that front. It was not something that the company was used to talking about openly. It was not a key priority. Now is absolutely a key priority. Diversity -- ethnicity in the U.S. has a very specific definition, which is different from how you talk about ethnicity in Asia Pacific or in Europe. And so we are defining goals, targets and programs to improve ethnicity representation in the U.S. So this is -- it has a lot of work streams, all of them important. And -- but I think we have a great foundation. One of the great things that ESG does is by having baseline data, it makes you accountable. So it doesn't matter what I tell you today. If we're having this conversation next year, and you look at the numbers and the numbers have not improved, we are not doing a good job. Beyond the absolute numbers, what is really important from an ESG perspective is trending. And so we now have baselines for all areas of ESG, and our commitment now is that we will make progress over time in all of them. Diversity is front and center for us.

Yes. Good. Good. So maybe 1 more on the environment, and this is -- I'm going to show my age and how old I am here. But I can remember literally back in the early 2000s when I first started covering dental, talking with investors about how great it was that we were going from -- the example I used to always use was mixing up dental cement with a mortar and pestle and instead going to single-use vials or kind of the 2 vials with the stopper that you depress and single-use, you throw it away, and that was great for margins. That was great for revenues for companies like Dentsply, things like that. But the flip side is, when we think about environmentally, these single-use consumables in that do generate probably more waste than the buy and bulk kind of things. You kind of talked about it a little bit with FDI, but interesting to hear maybe from you, are there things that can be done from a waste perspective, from a packaging perspective, things like that, from an environmental perspective?

Absolutely. But let me reemphasize the fact that we need to tackle this as an industry. So I think there's 3 layers of this process. One is, how we handle this as an industry, making sure that our customers understand the importance of the need for change, right? Because if one company alone tries to do this, it is not going to make a real dent. We are committed to making changes. And in fact, internally, we have -- within the supply chain team, we have a group that is working on next-generation packaging for a lot of these products. But it's going to take some time. It is expensive, and we need to make sure that there is good customer adoption for those changes. And working on customer adoption is something we need to do as an industry, again, educating the dentists, making sure they understand the opportunities that we have and that we want to move in a direction where we change how things are done today. And the other layer of this is, as we train or as universities train new dentists, right, we -- one of the things that we do from an ESG perspective and from a clinical education perspective is we partner with many schools, dental schools. As part of those partnerships now, we want to start including the topic of ESG, and specifically, things like -- from a packaging perspective, we need to figure out better ways of doing things. So it takes a village. This is, as I said before, is a major initiative. It takes a village, it takes the industry as a whole, individual contributions from companies, education of the dentist and then having organizations like FDI been kind of neutral parties that are going to make sure that everybody tries to follow the same protocols.

Yes. And I obviously talk to one of your manufacturing peers quite frequently, a couple of the others that maybe aren't publicly traded, I talk to sometimes. But do you feel like -- from a top 5 manufacturer, top 7, and I don't want to single anybody out, so keep it as broad as you need to. But are people starting to line up and all pull on that same ore and kind of move in that same direction and taking kind of ESG as an initiative that they would on the product packaging side on some of these other things kind of all move in that direction?

Jeff, I would not be able to tell you with certainty because at least in the efforts that we're conducting with FDI, still very early stages. So I can talk about the efforts that we're doing internally. But I think what you're describing that collaboration across the industry, I believe, is going to start happening relatively soon. But as of now, it's -- I'm not aware of that.

Yes. Understood. Sorry about that on the phone there. But one other question on supply chain. You brought that up, and you build out kind of a broad and complex supply chain. I know there's efforts underway to actually simplify that supply chain. And I think that's probably a good cost opportunity for Dentsply over the next few years. But as you talk about kind of risk assessment that you do and you perform each year on the supply chain, have you ever uncovered a risk that you're uncomfortable with that caused you to change or even end a supplier relationship? Just kind of wondering, does -- do the efforts actually bear fruit or kind of reduce your risk over time because you uncover something maybe at a supplier?

Absolutely. And this process of risk assessment with suppliers and our own risk assessments in our plants, and they always yield a lot of good information and as it relates to third-party suppliers, it helps us filter and reduce the relationships that we have and going with the people that are more progressive with suppliers that are applying best standards. One thing that we have in mind as we do assessment of suppliers is, at some point, we'll have to be reporting a Scope 3 impact on the environment, emissions and other stuff. And in order to do that, there is going to be a significant need for data exchange or a great understanding of who your partners are. And so all of that is underway. So we have our internal process, which is essentially we do an annual risk assessment, and we look at a number of things. It's a pretty long questionnaire and process, includes site visits and interviews and a lot of exchange of information. And every year, there are actions that come out of that. They may not be major in some cases, but certainly as we rank and rate our suppliers, that is an important input into our sourcing decisions, and we make decisions that I have that as a critical input. We also make sure that we share with them that we are always in touch with respect to new regulations. And as you know, there's a lot of banks in some parts of the world that are pretty difficult to comply with, but they make sense over time. And so we -- for example, we make sure that our suppliers comply with the California Transparency in Supply Chains Act of 2010. There is the U.K. Modern Slavery Act on conflict minerals. I mean there are so many regulations that are used as frameworks to assess the performance of these suppliers. We also have -- we always make sure that our code of ethics and business conduct applies to our suppliers. So we have a rigorous code of ethics and business conduct program. And they are -- they need to understand that they need to read it, they need to live by that as if they were employees of the company.

That's interesting. So how many investors ask you about ESG efforts in your conversation? Has that changed in the past year or 2? I can remember back, again, not showing quite as much age, but 4 or 5 years ago, I get a call every now and then from a European investor, especially, hey, we've got a sustainability fund or something, but it happened maybe a few times a year, and it seems, and maybe I'm wrong on that, but it seems like it would be a European investor that was in a sustainability fund or something. But I think call volume on my end has gone up. People at least asking some cursory questions. Are you seeing it on your end? Does it come up more in your meetings at all on the investor side?

Yes, very much so. And I've seen actually a significant change in the last 12 months. I would say, when I first joined the company in August of 2019, like the first few quarters here, there was actually 1 or 2 investors that would ask questions about ESG, and that was it. And then probably as a function of more people are talking about ESG, and we, as a company, are talking more about ESG, that combination results, and we're having a lot more conversations with investors. And -- for example, Andrea and I, in the last 2 weeks, we have had meetings with 3 or 4 investors with the sole purpose of talking about ESG. So they have asked for time, and we have scheduled 0.5 hour, 45 minutes with about 4 investors that want to understand our program, our objectives. And we have also, in addition to that, some of our larger investors, they have well-structured processes within the firms, and they have specialists, and we have had long conversations with them. They look at a lot of details of our program. I'll tell you, and I really -- as part of the management team here, we are proud of the progress we're making. And the feedback that we have gotten from larger investors with respect to where we are in this journey, recognizing that it's early for us, the feedback has been really good. We have been disciplined about choosing the right frameworks, SASB, TCFD, CDP and all that stuff. We are bringing the rigor of data integrity to the data collection from day 1, which is something that, obviously, as CFO, I care a lot about data integrity. And so we are applying the same standards. Essentially, we're going to apply the same standards to ESG data to -- as we apply to financial data. We are going to trade all of this data with the same level of integrity and, to that effect, we're working on implementing technology and systems to be able to track it in a pretty rigorous way.

And I think value, and we can talk about returns on that, I'm sure, from a long-term perspective, are very good. What are the costs involved in this? Is there a demonstrable impact to margin, to earnings? Is it something that's in numbers now? How should we think about it just more from a P&L perspective, even if we're willing -- I think we should be willing to accept a little dilution or a little bit of pressure for the good of society, so to speak. But what are the costs involved?

Jeff, I would say so far, the cost, the actual cost has been really minimal. I mean it's not -- I cannot blame anything on the P&L as a result of initiatives that we are taking from an ESG perspective. I think medium term, as I said before, I think, one thing that is really important is for us to make sure that ESG is part of our operating model. That is not something different or on the side. If we do that, then the cost is going to be really manageable.

Okay. And then when I think back, historically, on Dentsply, there was a period when the company was being run by a CEO and a Chairman of the Board. And maybe morale wasn't as high as I'd seen in prior years at Dentsply. How does ESG maybe help morale? I would assume now there's kind of this unifying, and you kind of discussed this earlier, but almost this unifying effort underway that probably gives everybody a good collegial feeling of pulling on that same work, so to speak, and things like that. So anything you can say from internally on morale with these efforts?

It's hard to measure at this point because it's early. Anecdotically, I would say that people seem to be really, really embracing ESG. We had -- in the last couple of days yesterday and the day before, we had a global meeting with the top leaders of the company, several layers of management, and the topic of sustainability came up often. We were talking about culture and defining our operating principles and values or refreshing them for the future. And in all the conversations, sustainability came up. And -- as something that people want, as something that people want to be part of. The fact that now we are providing them with a framework, and we are demonstrating progress in that we care as a management team, I think, is creating a level of engagement that will be very, very positive for the morale of people across the globe. As you know, ESG is a big, big deal in Europe, for example. So we have our -- and as you know, 40% of our business is European. The excitement that we have created with our people in Europe is great. In the U.S., it's happening, too, in Asia Pacific, everywhere. So I think this is going to have a tremendous positive impact, and we should be able to measure that more tangibly in the next 1 or 2 years.

Great. And I'm down to my last question, we have 6 minutes left. So again, if there's anyone else who would like to ask a question, none have come in so far, but please either e-mail me directly as we discussed previously or, hopefully, there's a question box on your screen. So Jorge, not necessarily an ESG-related question, but I did see in that 2020 report, you've trained over 1 million -- you trained over 1 million dental professionals in 2020. Without context, like you said, maybe it's hard to have a real feel for what that might be. But when I look at that trending data, a couple of years prior in 2018 and 2019, the number of dentists trained into those prior years was half of that and even less than half of that, $400,000 to $500,000. So how much of that sizable increase in docs that you trained last year? How much of that was tied to COVID? These guys were just sitting around more -- guys and women were just sitting around more and had more time to train during some downtime? Or how much of that is -- obviously, you've grown your efforts. You've developed those 60 dental training facilities and showrooms across the globe. So how much is tied to each of those? And how sustainable is that big number going forward?

Yes. No, very important topic for us. And I would tell you, clinical education, in general, is a strategic area for us. When you believe in integrated workflows and a lot of the new technologies that we're using, software, training is incredibly important, empowering dentists to perform at the top of their license. It's something that strategically is very important for us. And clinical education is clearly enabling that. So as you indicated, I think, as a company, we have a good tradition of having implemented tools and resources to provide clinical education to our customers. And COVID actually accelerated that journey. And to your point, we doubled -- more than doubled the participants in 2020. Obviously, COVID had a lot to do with that for a number of months. Clinicians, dentists in general, had more time at their disposal because they were not seeing patients or were seeing fewer patients. And they -- for the most part, they used that time well. We were ready. When that demand showed up very quickly during COVID, we had the right content and the right technological tools to meet that demand. I think some of that probably is not going to continue as people go back closer to their normal routines and volumes. So there's going to be less opportunities for them to spend time on clinical education. However, I think it's not going to go back down to the levels pre-COVID. I think it's going to be higher than that because people are now more comfortable with virtual training. In the past, as you know, there was -- a lot of this training was in person. Now there's great technology. People are more comfortable with the technology. And specifically, at Dentsply Sirona, we keep working harder and harder on having a good clinical education offering because we believe it is a strategic part of our business.

All right. Well, that's a great way to end the conversation, I think. So thank you, Jorge, and Andrea, for the interesting discussion kind of insight into your growing ESG efforts. So Andrea, Jorge, thank you for joining us today. I've enjoyed the conversation. And for everybody on the web stream here, have a great rest of your day. Thanks.

Thanks, Jeff. Appreciate the invite. I really thank you for that. Bye.

You, too. Bye.