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

All right. It looks like we're all here and Jorge and Andrea, I see are well centered there. So you're good. So why don't we get started? So good afternoon, everyone. My name is Jeff Johnson. I'm the senior medical technology analyst at Baird and our next presentation this afternoon is from DENTSPLY SIRONA, a leading manufacturer of dental consumables and equipment products across the globe. With us today from XRAY from DENTSPLY SIRONA, we're happy to have CFO, Jorge Gomez, and VP of Investor Relations, Andrea Daley. Jorge, I'll turn it over to you. I think you have a couple of slides to go through, and then we'll go straight into Q&A. So thanks for being here.

Sounds good, Jeff. And on behalf of Andrea and myself, thank you for joining today. We're very happy to be able to share some thoughts and answer questions. So let me go briefly through a couple of pages. And starting with description of the company, a lot of you are familiar with us, but let me just -- let me remind you about the company and the industry. Clearly, the dental industry continues to be a resilient industry has been tested heavily through this COVID transition and has actually recovered well and is doing well right now. So that's a great -- it's great for all of us to know that we are a part of a growing industry. There are a lot of macroeconomic trends that are truly constructive for this industry, including the aging of the population. As you know, there's a growing demand for aesthetics, aesthetic-related product is creating a pretty significant tailwind for all of us. And there is also interesting growth coming from many parts of the world. Dentistry continues to be an underpenetrated space in health care, and we remain pretty bullish about the upside from an industry and market perspective. Clearly, COVID continues to be a wildcard right now, while volumes are back to probably normal levels as measured by what we saw in 2019. There is still some uncertainty that we all have to deal with. But as of now, we feel comfortable with how the industry is trending. Our business, we continue to be the broadest manufacturer -- largest manufacturer of professional grade, high-quality dental products and technologies. We have a comprehensive end-to-end suite of solutions that we are trying to actually integrate even more. And the concept of integrated workflows, end-to-end procedures is something that from a technology perspective and from a go-to-market perspective is that we are emphasizing a lot internally and with our customers. Both are -- as you know, we report in 2 segments. -- technology and equipment as well as consumables. And both segments that represent significant amount of cash flows for the company. So we are well balanced between T&E and consumables. Let me make sure that -- let's stop here for a second and go into the presentation. And so going into the presentation, starting with -- let me help me with -- let me start with the strategy of the company and the things that we're doing today. And on this strategy statement, I think we captured really well what we're trying to do as a business. And let me start by saying that integrated workflows built on diagnostic excellence is the key foundation for our strategy today. We -- as you know, we have a great heritage in tradition of being a great manufacturer about high-tech equipment for diagnostics. And now the integration of that footprint of great equipment, integrating it with our treatment plans with the right delivery mechanisms and products to generate great outcomes for our patients and dentists is what we're trying to do. And when you kind of peel back the onion and you look at the -- what we have within our business, if you start with that diagnostics, we have great imaging brands, Chick, Orthopos, Axeos, Galloway. We have the best digital scanners in the marketplace Primescan, OpniCan. We have great Zurich capabilities for basically one-visit dentistry. And then we have something that we haven't talked about a lot in the last several years is our software capabilities. We have a pretty large table of treatment plans and software capabilities on this page on the right-hand side. You see a lot of the brands that we have Sidexis, CEREC, SIMPLANT, ATLANTIS, Guide, SureSmile. Those are all powerful software capabilities that are enabling a lot of dental professionals to really expand their practices. And by doing so, we are able to actually increase our market presence, share of wallet and just our overall growth. So this digital footprint with the right equipment and software is really going to be the foundation for us as we think about the next 5 years of the company. We are investing heavily in digital technologies. We have, as we see here on this page. we have over 500 software engineers within the company that are developing really powerful tools that our dentists are beginning to be more mindful about. We need to do a better job of simplifying how we go to our customers and how we explain, how we segment the market so that we go with each of those solutions to the right place. So that is very important. And if we do this well, as I said before, we're well balanced between technology and consumables. So we believe that the -- our ability to increase the share of wallet with our customers by having this end-to-end approach is going to generate value over the years for us. If we go to our specific priorities, you have seen this page a few times before, but we want to be boring about this. These are our goals, our targets and we are delivering on those. We want to grow revenues in the 4% to 5% range. Long term, we -- our margin expansion has been documented already. We went from the mid-teens from an operating profit margin perspective in '18. And we are already over 20%. We plan to exit this year by -- with an operating profit margin of about 21%. And we continue to commit to a 22% operating profit target by the end of '22. All of this has been enabled by a great simplification of the organization. Cost savings, we achieved already just under $200 million. We expect to be over that $200 million mark when we go into the first quarter of next year. And this should result in double-digit EPS growth complemented by great cash flow. We've been really efficient with our cash flow generation. If you look at the EBITDA trends for us, if you look at Q2, for example, our EBITDA was over $250 million, which put us on a more than $1 billion annual run rate for EBITDA. So P&L, balance sheet, cash flows are all working on tended. That cash flow generation, obviously, is something that we're proud of and that we are trying to be really mindful of how we use those funds. And so we have a capital deployment strategy that is well balanced. Our primary focus is obviously investment in the business for organic growth, and we are increasing the amounts that we spend in R&D, capital expenditures and just simplification and modernization of the infrastructure of the company to improve the customer experience. Beyond that, we are also making sure that we deploy capital in a disciplined way to M&A. And we have invested just over $1.2 billion in the last 12 months to M&A into assets that are exactly in the sweet spot of our strategic priorities, aligners and implants. So if we do more M&A in the future, you should expect to see investments in those areas or other strategic areas like digital equipment and things like that. There aren't that many targets out there. So I don't think we'll be very active in that regard, but we are open to those possibilities, and we will return cash to shareholders to the extent that we have excess cash. We're not going to sit on cash. We have increased our dividend by 10% last quarter. And we have -- we will tap our share repurchase program as needed or as opportunistic as it can be. Our Board of Directors increased our share repurchase authorization last quarter from just under $300 million to $1 billion. So we have the capacity to do that from a governance perspective, and we have the balance sheet to be able to do that. So let me stop there, Jeff, and that's kind of a quick overview we wanted to provide and then we can jump into what are the questions you want us to address.

Yes. No, that's perfect. I think we've got about 20 minutes left. So let me -- I've got a couple of short-term questions that I apologize in advance for, but it's kind of what I have to do because I've got investors who are asking me to ask the short-term stuff, then we'll ask some more interesting longer-term strategy questions in that. But I want to go back actually that one of the last things you said there, Jorge on not a whole lot of targets out there, increasing the dividend, increasing the commitment to share buybacks or taking up at least the allocation or the share buyback authorization. I find that a little interesting, is that a little bit of a change in positioning there. From an M&A standpoint, you're going to rely more on organic. We've thought in the past, there's some maybe value dental implants in specific geographies, maybe a little more you could do on orthodontics technologically. But it sounds to me like maybe you're looking a little more internally focused here in the near term than maybe I thought you were.

Yes. I would not say that our approach is changing. I think we have a number of organic opportunities that we haven't maximized. So we feel good about our exposure to growing areas in dentistry, including CAD/CAM, digital dentistry, implants clear aligners. Those are very important categories that are growing really fast. And in consumables, things like Resto. What -- the obituary for us is mostly related to how we actually maximize the assets that we have already in those franchises. So let's start, for example, with aligners. Aligners 3 years ago, we didn't have any revenues from aligners as a company. If you fast forward to this, say, Q4, we have indicated our commitment is to be at the $300 million annual run rate. So that's a pretty significant improvement. And we still have a lot of opportunity because, as you know, that space is growing 20% plus. There are regions of the world where we don't have any exposure. And so right now, we're in the process of investing in places in Europe and some places in Asia Pacific to expand our clear aligners business. The same concept applies to some of the other businesses. For example, implant is a big business in China. For us, there's still a small piece of our portfolio, although implants as a whole for us is a big business. But in China, our presence is pretty limited. So there are some geographical opportunities for expansion that we still -- that we can still maximize. And in the case of digital dentistry, our pipeline is good. We have great products already in the marketplace. We will do more. So we want to fund that organic pipeline. And if we do that well, I think that keeps us a great foundation to grow at a healthy pace. Now if along the way, we find accretive opportunities to do inorganic investments, we will do that, but we want to have a balanced portfolio between -- of investments between organic, inorganic and cash flow return to shareholders. But the packing order is that it's invested in the business first, organically and inorganically and then returning cash to shareholders.

Okay. That's helpful. And then just to focus on the short term here for a second. So we've talked to a lot of different companies over the last 2 days of our conference. Those that function in hospital settings, they're definitely seeing impacts from COVID and Delta variant. Aesthetic companies and it sounds like clear aligners in that still powering through nicely. But as I think about not just your clear aligner business, but your overall business. Have you seen over the last month or 2, any kind of incremental headwinds from COVID? Or kind of like dentistry last year recovered so much faster than we thought it was going to? Has it been able to just kind of power through given these visits take place and kind of stand-alone dental offices that don't seem as impacted?

No. We have not seen any material impact, any significant changes in trends relative to the last stock 2 quarters, which I think are more representative. And you hear some noise in certain buckets. There's some places in Asia PAC, for example, where you hear a lot of noise. But those are really small markets. So for the most part, I think we are not seeing any significant changes with respect to trends. I think the market is operating back to 2019 levels. Speaking of short term, I want to remind everybody that the third quarter, there is some seasonality in the third quarter. If you go back and look at third quarter, always lower than the second quarter. And I don't think this year is going to be different than what it has been in the past. But relative to Delta, we have not seen any significant impact yet.

Yes. Makes sense. All right. That's helpful. No, it makes sense. One other question on that is you guys are in a little bit of a tough from the standpoint of we all are judging people right now by 2-year growth rates. And obviously, in 2019, you guys had a fantastic second half of that year with some of the -- especially on the U.S. growth and what have you. So we're getting -- well, I would assume is it fair to think that your 2-year growth rates could still come down a little bit because of those tough comps in the second half of '19. But the end markets, it sounds like you're saying are still pretty stable from where they've been, it just might be a comp-related issue, is that a fair kind of assessment?

I think so. And I mean, our guidance for the rest of the year is very clear from an EPS perspective, I mean from an operating profit margin perspective. So you can do up the math in a relatively transparent way. But your macro point about how we feel about the end market is we agree. We feel good about how the markets are performing.

Yes. And when I do look at your margin guidance for the rest of the year, to your point, the 21%, I think you were up closer to 22% in the first half. It kind of implies closer to 20% in the second half. How much of that is conservatism versus how much is T&E and other kind of travel? And I know we've got DS World coming up here in a couple -- or next week, things like that. So what are the drivers of that second half margin coming down maybe 1 point or 2 below where the first half margin was?

Yes. I think I would not call it conservative. I think we are trying to be very transparent and a few times where we -- numbers have come in, probably much better than what people were expecting. We have been very clear as to what the reasons for that. And so if you take Q1, when the operating profit margin was very high, we talk about 2 specific things. One, from a revenue or end market perspective, the market came back really strong in the first quarter. The mix was really good. The replenishment of the consumables kind of pipeline between distributors and dentists, it came back really fast, mix was really good, that really drove a very healthy gross margin level. We also said that from a spend rate perspective, 2 things happen. One, the -- some normal expenses relative to commercial operations and other parts of the company, they were still very constrained because of the uncertainty that we were having in Q4 and when we did the budget. So we really constrained that remain at very low levels in Q1. And then there were a couple of important infrastructure projects that got delayed and push back to second, third quarter, fourth quarter. So we -- I remember we mentioned, I think, about an impact of about $0.05 of expenses moving from the first quarter to the back half of the year. So the combination of all of those things created a pretty strong operating profit margin in the second half. We still believe in the trend, and we like the trend of our operating profit margin, but we need to be mindful of the timing of those things. We expect to exit the year at 21% or better and trending into the 22% for next year.

Yes. Okay. That's helpful. And then with DS World coming up next week, how is response to that? We've seen some of the promotions now that you put out there on the trade-ins for both Primescan and Primemill that the dealers are running. Those look very similar to what we saw maybe 6 or 12 months ago when Primescan was out there in that. So is there anything new from a promotional standpoint or that $15,000 each on the trade-in for Primescan and Primemill? Are those relatively consistent with past promotions? How to think about that? And again, what's the tenant shaping up to be like for DS World.

Yes. No, we're very excited about the possibility of being in person meeting with tons of customers, distributors, clients. The people really want to attend the event. We are surprised actually with the number of people that have sign-up that already paid to attend the event. So the number is not as high as it was in 2019. But we're talking about over 4,000 people that have already signed up for the show. So I think what is important about that number is, I think it gives you a good proxy for the confidence level of dentists and their ability to practice and to have their offices open. So that is really encouraging, not only for us, but for the overall industry. So that's point number one. For us, as point number two, the -- we have a few key objectives with this year. One of them is continued momentum with our digital dentistry and the promotions that you talk about. Primescan continues to do well. Selling cameras alone is doing really well. CEREC is also doing well. So that -- the momentum in that business has continued. And I remember when COVID began, how concerned we were all about. Well, equipment in general in this type of situation tends to go down faster, and it stays low for a long time. I don't think we saw that. And so I think our digital business -- digital dentistry business continues to be strong and we have more things coming down the pike. The second point that we want to emphasize is the revamping of our implants business. Implants, we have been very transparent about this, we have been really disappointed about our performance in the implants business. We have not been growing with the market rates, which have been really healthy. And there's a number of steps that we're taking across the enterprise to revamp our implants business. not only by launching new products, which we will. And we have a great product coming up to market that is already being used by over 150 dentists, KOLs and others and the feedback that we're getting in terms of the technical quality of that product is fantastic. From a commercial standpoint, we're investing more. We're integrating better our clinical education, our customer segmentation. We are trying to -- as we know, we're targeting GPs big time in that space. And there's a number of tools that we are creating. And we believe these changes are going to help us move in the direction of the market. I'm not saying we'll get to market rates market growth rates next month, but we are going to change the trend in our implant business. Software. I mentioned at the beginning, during my opening remarks, software, we have great software capabilities with an implant, and we haven't maximized the potential for that. So that is going to be the focus for us in Las Vegas next week.

Okay. That's helpful. I want to make sure we carve out a little time here for SureSmile and for BYTE, obviously, some really strong growth we've seen on those combined product lines. Any surprises you've seen in the 9 months or so now that you've owned BYTE? Are the cost synergies of owning those 2 assets developing the way you thought? Anything surprising you on the customer acquisition cost side for BYTE, response from your GP dentists, things like that? Just any update there would be helpful.

Yes. No, I would say the acquisition is tracking with the business case. We have, from a cost synergies perspective, if you remember, the synergies we're talking about are more back-office related, manufacturing related. So we're consolidating the production and manufacturing of the aligners and that is very much on track. Other than that, the synergies are not that big because is a different channel and is a business that is well run. They have great capabilities from a digital marketing perspective. So to your point about CAC, CAC is -- it moves all the time. And it changes every day. We track it very closely. Even Don and I are looking at data reports on CAC is this, and it moves quite a bit, but one thing that we always like about BYTE was their digital marketing capabilities and how able they are to navigate supply and demand dynamics related to access to social media and other channels for digital marketing. So they do a good job of redeploying resources in the most effective way possible. And the outcome of that is demonstrated by the fact that year-to-date, when we look at on average, our CAC is trending within a pretty narrow band around our business case assumptions. So there are months or days when the number is really outside of that band, but then they don't spend too much money there. They go spend money somewhere else. So they're managing that. And as a result, I think our revenue and profitability is, again, within the framework of the business case. The response from dentist, it has been, as we were expecting, it has been very minor. For sure, there are a few dentists potentially or probably more like orthos that complain a little bit about direct-to-consumer channels in general, not just about us, but in general about that channel. But that has not been a major headwind for us. And on the flip side, actually, one of the synergies for the future is how we integrate BYTE and SureSmile in terms of our BYTE-pro capabilities in terms of directing traffic of the complicated cases that cannot be handled by BYTE and trying to move those into SureSmile. So that is work in progress.

Okay. That's helpful. And then the Aspen deal, what's early feedback, anything there? And this tray 1 on day 1 seems like an interesting proposition from them. Is that technology that you sell? Is that stuff that they're using to make that first SureSmile tray in the office here, is that coming from you? Or just how to think about that offering?

Well, with respect to a specific program, Jeff, I would recommend that you ask them directly. But as we have indicated in the past, we are the source of the clear aligners that they're using. So it is our technology. The commercial go-to-market program you're talking about, they're probably in a better position to give you more details.

Okay. And then we did see recently trademarked name MyTime, and it had a description of clear aligners. Any clarification there on what that is? Is there going to be a new kind of heading of your clear aligner business, anything there?

Nothing at this time. I mean we trademark names regularly, and we have a pretty active pipeline and clear aligners is a key priority for us. So we're working on a number of ideas to expand that offering into trying to fuel growth. And so there's a number of things in the works, but nothing -- at the right time, we will spell out what's going on with some of those offerings.

Okay. Fair enough. We're down to just 1 minute. So I guess I'll skip over a couple of things here. You talked about digitization and your kind of commitment there and some other parts of the business. But you feel good, it sounds like on getting to that kind of sustainable 4% to 5% organic growth. I don't want to put words in your mouth, but you feel good on getting to that level here in the next year or 2, I would assume.

Yes. We think we have the levers. I think the market is healthy in many areas where we have exposure. We are making investments in areas where we are underindexed. And so we think we have a very good shot at being able to deliver that type of growth rate sustainably, which is something that the company has not done in many, many years.

Yes. And last one I have just on DSOs. How have the relationship's been there? Is there an opportunity to increase your positioning within some of those DSOs going forward? And we hear more and more about DSOs outside the U.S. as well, is that a good opportunity as well?

It is. And we have good relationships with a few of them. All our manufacturers have also their own relationships. I think DSOs, in general, for us are a positive part of the industry, to your point, in some other markets are probably, they're growing as well. But nothing has really changed in a dramatic way in the last 6, 12 months. We continue to be good partners with a number of them and work well. They give us an opportunity to do a lot of things with one customer, and that's efficient for all of us. So no, nothing really negative happening on that front.

Yes. No, good. Well, I think our time is up. So thank you both. Very helpful overview here. I'll see you, hopefully, next week in Vegas, I look forward to that.

Very good. Look forward to seeing you.

Yes. Great. As a reminder, the next presentation is set to begin at 3:10 Eastern Time include Harpoon Therapeutics, Leap Therapeutics, T-Cure Biosciences and Hanger. Thanks, guys.

Thank you, Jeff.

Take care. Bye