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

Listen, thanks so much for joining us. Sorry, apologies for the late start. I'm very pleased to have the team from Dentsply with us this afternoon. And I'm going to turn it over to Don for some initial comments, and then we'll go into Q&A.

Great. Thanks, Matt. Look, my comments, I'll keep it brief so we can do as many questions as appropriate. Look, over the last 3.5 years, our story at Dentsply Sirona was coming in and trying to get the organization kind of cleaned up. We had offered a restructuring in -- almost 3 years ago to the day where we said our target would be 3% to 4% growth. We could hit certain headcount targets looking at a 6% to 8% headcount reduction, saving $225 million that was -- we later raised to $250 million, delivering margin improvement to 22%, 2022 and deliver double-digit EPS. We've made progress against all those goals, and we have, in our opinion, demonstrated a fair amount of consistency in reaching those goals. If you look at the growth number coming off '19 versus '18 and how we feel coming out of the pandemic, we said we think we can raise that long-term target to 4% to 5%. And as we sit here today, we're pretty optimistic that our growth prospects are good and that 4% to 5% is definitely attainable. And we put together, I think, a team that's very focused on the next phase of Dentsply Sirona, which is really about how do we grow, how do we build off our very strong digital base and key workflows by becoming the essential player, essential partner of dentists? So we're excited about the future, and I can't wait for questions to talk about how we want to grow the business.

Sounds great. So maybe the way I've started most of the sessions this meeting -- this conference is with sort of just a review of the environment that you experienced in Q3 and your expectations for what that looks like into Q4. Dental as a whole, has done, I think, it's generally better than many of the other markets we cover. But maybe if you could spend a few minutes just characterizing what you're seeing both in terms of COVID or procedural or spending trends as well as, if applicable, any kind of staffing or personnel challenges that you or your customers are facing.

Yes. I mean the general recovery over time has been starts and stops in different parts of the world where I would say we are operating today and most of the world is close to the 2019. There's a few places around the world that we're still seeing lockdowns without huge impacts on dental, but I wouldn't say across the world, we're 100% back versus what I would consider more normal 2019 levels. The challenges our customers, who are dentists, have been facing seem to be ameliorating somewhat, but they're still around basically coming out of COVID particularly when there was question about aerosols, airborne aerosols and which is a lot of the hygiene work and there were disincentives to work. You saw some hiring challenges. That's really -- we hear more and more dentists are able to get people back to work, and we'll be able to operate at full capacity. As we go into the fourth quarter, we're optimistic that things get closer and closer to normal. Obviously, the supply chain is impacting all of us. When you talk about -- in our case, it's -- we look at distribution costs are accelerating. To date, we've been able to manage through a lot of that. And as we look out, we have a few key products that there's obviously going to be constraints around we're a heavily chip-oriented business. To date, we've been able to make everything we need to make. But as we jump out 6, 8, 12 months, we expect to see pressure on that. We have a terrific supply chain. One of the advantages of the structure we put in place over the last 2 years is a centralized supply chain with a pretty sophisticated procurement group, and that's helped us through it. But we're also -- we took price in the -- at the very end of the third quarter, with the idea that we want to get in front of inflation. If inflation moves a little bit faster and harder, we would look to do another price increase probably accelerate that up from -- typically, we do that third and fourth quarter, but we could accelerate that. We've been pretty happy. It's very, very early, but we've been happy that the price increase that we pushed through in October is sticking.

Great. And then just -- I think there's been some questions around consumer spend, consumer priority, shifting of spending from things to experiences or activity-based spending among consumers. What are you seeing there? What are your expectations there for the rest of the year?

Yes. Thanks for the -- that's a good question, Matt. In -- where we have the most exposure to that would be kind of aesthetic dentistry, which would be think about implants and Clear Aligners. The implant business as a whole has -- coming out of COVID has shown excellent strength. A lot of people have looked at the pandemic as an opportunity to improve aesthetics. On the Clear Aligner space, the direct to dentist side remains very positive and strong. We have seen some changes in the DTC side of the house, direct-to-consumer, that in our case, that would be Byte. We -- as we look at the process of getting somebody from a visitor to actually purchasing aligners, we're pretty good at converting. But to your exact words, Matt, people are spending -- right now, there's a couple of things on a macro basis that have narrowed the size of the funnel, not the shape of the funnel. And that is customers are going on vacation. There's a little bit of inflation, government check stopped. So when we look at this economic group that we target with Byte and Bytes-only in North America today and I should note that outside North America, the DTC space continues to be very healthy. And long term, we think it will be very healthy in the U.S. But in the short term, we're competing against experiences and concerns about inflation and some other things.

Yes, I think there's been some sort of segmentation commentary around how the macro environment is affecting different segments, up market, down market, premium priced or sort of middle market offerings. And I guess you'd say by this feeling that pain a little bit, but you'd characterize it as something that recovers. Any feeling for when that starts to sort of normalize?

It's kind of out of our control in terms of what the structural category looks like. What we're focused on is how do we grow Byte and whether it's in the current environment or in an improving environment. And a couple of comments on that. We really bought Byte because it was strategic to us. We felt that our CAD/CAM line, our CEREC line would benefit significantly from having a presence of a Clear Aligner. Dentists often are choosing these kind of scanners on the basis of what can it do? Obviously, Invisalign has been successful with pushing out iTeros associated with Invisalign. We got into the business about 2.5 years ago with the purchase of OraMetrix, which was much more of an orthodontist company, but it came with a Clear Aligner. Subsequent to that, we were able to expand SureSmile. As we looked at that 18 months in, we began to feel that we were subscale. So while we had committed to a manufacturing facility in Mexicali, we had built treatment planning in Costa Rica. We have an R&D unit we felt that if we could get more scale, that would be appropriate. So that's why we went for Byte. It obviously, essentially doubles the size of our Clear Aligner franchise, which is obvious positive impact on the franchise -- cost of managing that franchise. And we're early stages in terms of -- today, Byte is basically in the U.S. and Australia. We think it has a real role to play in other countries around the world. And we look at if we can export Byte to another country or SureSmile, you can bring the other one along because, again, you're creating critical mass. So we feel global expansion is an opportunity. As we run Byte in our mind, okay, if there's less people considering Clear Aligners, then it has to become a share gain and we're very focused on changing how we go about getting share with competitive claims, things like HyperByte, which aid in comfort and other things, we think is a differentiator. And then over time, we've kind of moved away from a pure-play social media demand generation activity, which was all social media, which there's been an impact as Apple changed some privacy settings that's impacted social media, well, that certainly impacted the business. But we have been looking to diversify the demand creation levers by focusing more on insurance, what we call affiliate marketing. How are you in Bride Magazine? For lack of a better term. And then how do you create more content that's going to be valuable from a search engine optimization perspective where people are going to go and get content from you. So our aspiration over time is to diversify Byte across a number of different levels. So that, hey, look, if this -- if the paid social media environment seems to be a lot more rugged, there's still, we think, significant opportunities to expand the funnel whether it's through driving share or looking at alternative means of demand creation.

Fair enough. Fair enough. So maybe if we could talk a little bit about the equipment side. The numbers have been solid. You've talked about the sort of supply chain that you've built out, not feeling the sort of pressure in terms of being able to get the supplies and semiconductors and materials that go into your equipment offerings. I guess what does Q4 look like? What does Q1 look like? Is this a seasonal quarter? Have we seen investment ahead of normal seasonality? Maybe talk a little bit about equipment trends, if you could.

Yes. And then I want to be really careful about getting too detailed on Q4. I can comment on macro trends. We feel pretty good that the level of investment that we've seen trending coming out of the pandemic where dentists were investing in more sophisticated diagnostic treatments. If you look at the penetration of 3D or CBCT, cone beam type imaging, and we launched into that with a product called Axeos, it's been positive. If you look at what's going on with the intraoral scanning business as more and more dentists in big markets, U.S. and Germany, it's gone from kind of us pushing to all of a sudden dentists are beginning to realize it's a competitive disadvantage if they're not offering that kind of level of diagnostic. And then coming with the intraoral scanners comes a connectivity to specialists. So the specialists can be looking at the same image at the same time or you tie in with labs. And labs are beginning to push pretty hard that say, hey, look, we would much rather have digital images sent to us than physical models that are a ton more expensive. And as some of those labs have offshore manufacturing, the opportunity to take a really accurate digital scan from something like a Primescan and push that directly to their offshore, it really has an advantage to labs. So they've been very supportive of the digital transition. So you've got 2 really good trends there. In our business, kind of T&E, our T&E section, which may be different than others, implants reports into that and Clear Aligners reports into that. So we feel good that our traditional technology and equipment business has been on a good trend for a while. And then 2 of our big growth initiatives, implants as well as Clear Aligners report out in that section. And again, we feel that, that offers us a significant opportunity to grow the business in the future.

Okay. So yes, you mentioned implants a couple of times, and that's one of the sort of -- it sounded like it was one of the strong bright spots of Q3. Can you talk about how sustainable some of that demand is given what we talked about just a little bit earlier in terms of the shifting cross-currents of consumer spending currently?

Yes. We haven't seen a change in implants. And by the way, just for the record, on the direct-to-dentist side of Clear Aligners, we haven't seen a significant change either. So kind of the dentist-initiated aesthetic treatment categories, Clear Aligners and implants continue to show very, very good progress. In our case, we just restaged our entire implant business, a pretty comprehensive program that started with actually beginning to market everything under the Dentsply Sirona name as opposed to some of the smaller brands we used to do that under. It has a great new product called PrimeTaper, a self-tapping immediate load screw and abutment system, which we think puts us in a very, very competitive place within the category. Unique to us is we think digital workflows are absolutely essential. So we did a lot of work on Primescan 5.2 software that allows all the way up to in dental scanning, which is a real advantage. And not only in the dental scanning, you have multiple tooth replacement, single tooth replacement, bringing the power of our digital diagnostic, whether it's imaging, or whether that's the scanning side of the house, we work long and hard on that, and it's -- we think it's a differentiator. We -- some businesses that people don't have as much familiarity with, we have a custom abutment business where it does design planning and can grind custom abutments that are essential in some -- particularly in the front, aesthetic places. Nice business. We have a value-oriented implant business called MIS, which again, is showing good progress. So in aggregate, we had a very, very strong third quarter. We think that business going forward is sustainable as we bring these new products in. The acquisition of Datum gives us OSX, which is a bone growth factor. Things like MIS and Atlantis give us reason to believe that we -- and I keep saying, I want to get us to grow, then I need to get us to the point we're at the category. And then sure, we'd love to be taking share I think the journey that will go on over the next 18 months as we get into 2022, it goes more from can we consistently grow versus prior year to are we growing at the level of the category, which we tend to peg 5 to 7 on a global basis. Different people have different numbers, but that's how we look at it. And we're optimistic that we can get to the point where we're going to be able to grow at least at the category level.

Okay. That's helpful. So maybe to that point about the next 18 months, you've put some targets out there. You sort of reiterated some targets around growth and margins on the third quarter call, 22% operating income by the end of '22. Can you talk about where maybe -- I'm sure you've talked about this before, but maybe just an update or overview on where that -- where the opportunity is for leverage and expansion across the P&L?

Yes. Sure, Matt. I mean, obviously, it all starts with sales. So good revenue in higher-margin areas is important to us. And if you look at some of the portfolio work we've done over the last 2 years getting out of traditional ortho, getting out of analog lab, there's been -- we've been trimming in certain areas that don't necessarily bubble up. But we've been very committed to, okay, let's exit businesses where we don't have a long-term competitive advantage, that are deleterious to both our margin as well as our aggregate growth level. So we feel that, that's been a benefit. The second, we want to add categories or invest in categories that are going to give us higher margin, higher growth rates. So in our mind, that's kind of the CAD/CAM imaging implants, Clear Aligners. Our Endo business is really important. We just had a major launch there first time in 5 years that we've had a new endodontic platform called ProTaper Ultimate. So that gives us momentum in a very important category for us. And over the last 18 months, we've kind of redone our restorative business with Surefil one, updates in some of our blocks. We launched a product called the Tessera Blocks which is a good product for crowns. And if you look at Palodent, Palodent 360, so we feel that, again, it starts with growth. The second thing is we spent a lot of time, talent and treasure working through the restructuring which is -- we targeted $250 million, well, just because that ends doesn't mean the efficiencies of a leaner headcount organization, more efficient workflows stops. So we'll benefit from work that we were doing in '21 and into '22 as we go forward. Third area is supply chain. Now supply chain is going to be a little bit more challenging as there's potential pressure on distribution costs in other areas. But if you look at where we were, say, 2.5, 3 years ago, we were 40-plus facilities, and we bought some facilities with the acquisitions along the way. Yet today, we're operating in under 30 facilities. So we think we've got opportunities to continue doing that. And then in the call, I mentioned what we call our EMP program, enterprise modernization, which is how do we bring tools and workflows, whether it's things like digital tools or whether it's automation in certain areas that will allow us to not only improve the customer experience but drive significant efficiencies in the organization or at least move some of that activity from kind of a high-cost labor location to a low-cost labor location. So that's how we look at it, 2 sides. It's how do you get your revenue in higher margin, higher growth areas? How do you drive costs through efficiencies throughout the organization?

Okay. And sort of maybe to what degree is mix, part of that equation as well? New products, I don't know, new segments. If you could talk a little bit about where the mix opportunities are for next year.

Without commenting too deeply on what our pipeline looks like in '22, I'd make a comment when we launched something brand new Endo platform, a new implant platform on September 27, I mean the real benefit to that start showing up in '22. And both Endo and implant are significantly higher-margin businesses. So that's important to us. And as we go through 2022, I'm pretty comfortable that we will have a very strong set of new products. Again, Matt, it's a little bit challenging for us because the minute we say something in technology and equipment, the following day, you stopped selling something, oh, okay, you're coming out with a new treatment center. Well, I'm going to wait. So obviously, we play it a little bit versus back in the J&J days when I was there, we'd tell you everything on the pipeline here. The minute you tell it the dentist see it and say, whoa, hang on a second, I'm not going to -- so if you're not launching it the following day, you don't give as much advanced notice. But we've got -- in my mind, we have a pretty good pipeline. And Matt, just to kind of cobble things together. If you sit there and you say, okay, again, we're going to benefit from growth in higher growth segments that happen to be higher margin. We're launching new products into those higher-margin areas like implants, resto, CAD/CAM and others. We did take a price increase. For the first time we put all of Dentsply Sirona together and we did a global price increase. The bulk of that is sitting on the Consumables side. But we were able to do that, which I realize we have inflation, but that's certainly a tailwind that we were able to push into the business and then keep driving costs. Keep driving costs but you have to be very, very disciplined in how you operate. And particularly coming out of COVID, with the words we use internally are COVID keeper. That's a COVID keeper, like what is the role of future participation in dental shows? We're cutting that way back. I mean if we're going to maintain a commercial selling organization, sales and marketing of 5,000 people, and if we're going to really go hard on clinical education and build like the Dentsply Sirona Academy, which we happen to be sitting a few floors above that have over 75 dentists today sitting down on our fourth floor. Yes, okay, we're not going to invest in other things. So COVID taught us things. We got to make sure we keep that discipline and really look at where we can spend to get the maximum value of demand creation.

That's helpful. Maybe with some of the time we have left here, you've talked a lot about sort of digital dentistry and use of AI. It's certainly something that has just -- and it seems like it's been on the verge of being more pervasive for a decade, but in the last 2 years across a whole bunch of different markets, different companies are putting these technologies to use and to drive all sorts of benefits. And I'd just love to hear what's at the center of that strategy? And what benefits are you talking about bringing to customers?

Yes. It was funny, we were at DS World in Las Vegas and somebody used that exact phraseology, Matt. They were sitting there saying, digital dentistry is like Dippin' Dots, the ice cream of the future. It's been the ice cream of the future for 60 years, but I really think a couple of things changed. With this current generation of intraoral scanners, if you look at iTero, if you look at what's come out of 3Shape, you look at what we've come out, it's really fast, really accurate. We think we're kind of a cut above everything. And the digital workflow efficiencies, cost efficiencies, consumer preference and now the treatment planning that's starting to come off these things, has changed. And it's different market to market, like in the U.S., it's now prevalent enough, penetration is high enough, where if you don't have one, the dentist -- if the dentist down the street doesn't have one, she's going to feel she needs one because she's got to be competitive for patient acquisition. And then if you look at things that have been built off it, Clear Aligners really, really benefit from an intraoral scan versus a physical model because -- due to the whole cost structure changes dramatically. And then with the pandemic, you saw so many dentists basically saying, "Hey, look, if I'm going to see a reduction in patient volume, I have to increase the revenue per patient and a more sophisticated diagnostic thing." I mentioned 2D, 3D giving way to really 3D CBCT, and you see the penetration of that actually begin to move because you can diagnose and do a much better job if you want to add implants to your practice. So in my mind, the ease of use of the products, the sophistication and now the treatment planning that's really beginning to incorporate a lot of AI has made it different. It's now gone from nice to have to you have to have it. And in our prepared remarks, Matt, we talked about the fact that we're one of the few -- easily the biggest company that's both -- that has both x-ray imaging and intraoral scanning and the opportunities for us to begin to harmonize how that works together. It's one of the reasons in our prepared remarks, 2 quarters in a row, we've talked about the fact that we have 500 software engineers, which is double where we were 3 years ago, and I would expect that number to continue increasing. And when we talk about we want to spend 4% to net in R&D or if it has to go higher, so much of that is going to go into AI machine learning that's going to really make it almost impossible for the dentist to do without. We would really like to be that essential diagnostic and treatment planning partner for the dentist.

Fair enough. Okay. Well, we're just about at time here. I, again, apologize for the late start, but is there anything that you'd like to close with in terms of forward-looking comments or things that we didn't quite touch on enough here in the discussion?

Yes. I mean, of course, Matt, we're not going to issue forward-looking comments. I should have had somebody read the safe harbor. But we're -- I've been here 3.5 years, and I think our team has done a very good job on positioning the company really well for the kind of the next generation of Dentsply Sirona, which, again, as I mentioned upfront, I think our -- we have an incredibly valuable, large digital installed base between imaging, treatment centers and intraoral scanning, one of the best names in dentistry with CEREC. And as we look out of the future, the opportunity to integrate workflows in the faster-growing, higher-margin categories like Clear Aligners, implants, Resto and Endo gives us confidence that we think we can grow this business and continue improving the fundamentals underneath when we talk about margin and other things. So we're probably more optimistic about the business today than we were 2 weeks ago. And if you look at where we were 2 weeks ago, we were certainly more optimistic as time goes on. So there's a pretty fired up team here at Dentsply Sirona.

Great to hear. Listen, thank you very much for spending the time with us. Thanks, everyone, for joining us, and I hope you have a good rest of your day.

Great. Thanks, Matt.