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

All right. Hello. Thanks for joining Piper Sandler's 33rd Annual Healthcare Conference, again, in a virtual setting here this year. Hopefully, we can be back together again in person next year. This is Jason Bednar, Piper's Medtech team. And I'm pleased to have with me today from Dentsply Sirona, Executive Vice President and Chief Financial Officer, Jorge Gomez as well as Vice President of Investor Relations, Andrea Daley. Jorge, Andrea, welcome, and thanks for joining us today. I'll turn it over to you if you have any quick introductory remarks you'd like to make, and then we can dive into Q&A. Again, thanks for joining us today.

Thank you, Jason, and good morning. We appreciate the invite. It's good to be with you today. Yes, let me start by providing a quick, I guess, overview of the market and what is going on with the company. So first, I would tell you, we continue to be very excited about the dental industry. Overall, demand is very high despite the fact that there is still some COVID dynamic going on in certain pockets of the markets. But the trends are very good in general in all of the markets, major markets where we operate. Having that great demand, market demand as a backdrop is great particularly when we look at our internal R&D pipeline and product launches, we feel really good about the health of that pipeline. I think, Jason, you and investors have seen how in the last several quarters and years the level of activity in terms of launches and successful launches that we have brought to market has increased. We just had a great wave of products that we share with the market that when we had our DS World last September. And when we look at the pipeline for the future, we continue to make good investments. We continue to exercise more discipline around the areas of focus from an R&D perspective. We're trying to increase the pace at which we bring products to market. And we're trying to do that by simplifying and putting more money into scalable products. So that is really exciting for us. We continue to make good progress across all of our strategic priorities and operational priorities. Top line, again, aided by this strong R&D pipeline, all the work that we've done from a sales force effectiveness perspective continues to pay off. And then in terms of simplifying the organization, expanding margins, we continue to make progress in that direction of the targets that we set for ourselves, financial targets that we set for ourselves about 3 years ago. We have accomplished those so far. We expanded margins to the 21% level. We believe we have a good shot at getting to 22% level next year, the top line is moving in the right direction. We have also simplified the organization in a very substantial way. So that is good progress there on those key priorities for us. The overall portfolio, we have made progress optimizing the portfolio. We like the exposure we have to key categories like implants, aligners, CAD/CAM, Resto and endo. Those are very healthy categories and in dental, and we have a good exposure and a good set of offerings that positions us well to compete effectively in those markets. So a lot of great positive things. I think from a macro perspective in terms of challenges, in addition to COVID still being there, supply chain is something that we have to watch going forward. I think this is impacting not only dental but all industries, and we are seeing challenges around supply shortages of certain components, labor shortages as well, and we are beginning to experience some inflation. That we are managing through a lot of good work in terms of pursuing efficiencies. There are some pricing activities that we're rolling out that could also help offset some of those challenges. So overall, we feel good about the space.

Thanks so much. That's a great introduction and a lot of different topics there that I want to touch on myself. So maybe why don't we start at the top line here, Jorge. Yes, I want to get to some of the items from the third quarter here a bit later and some recent developments. But just bigger picture. I mean you and Don do have the 4% to 5% revenue growth target out there. How do you think about the buildup of that growth profile when we consider contributions from things like pricing and volumes. And then I mean we can weave in there, it's just a similar question, but a buildup on the growth profile when we think about U.S., Europe, rest of world?

Yes. Good question. I think the buildup of that target, let me start with something I mentioned before, which is the exposure to certain categories and certain markets, right? So we have right now scaled businesses in the areas of CAD/CAM. We continue to be leaders in a lot of areas in imaging as well. Then we have aligners, which is a business that is very important from a growth perspective, is a business that, if you go back 3 years, we didn't have any aligners in our portfolio. Now we have a substantial business with SureSmile and Byte combined. So exposure to that space is extremely important from a growth perspective. Implants is a very large business for us, very profitable. We had not grown that business in any meaningful way in the last several years, but there's a lot of things that we're doing organizationally from a product perspective, from a workflow perspective, to start moving implants to approach the growth of the category. So that's a very important element of being able to get to the 4% to 5% growth rate. And then finally, I mentioned endo and resto, we have strong franchises there. It's a business that -- consumables in general, as you know, they don't grow that fast. It's probably low single digits. But those are 2 businesses where we have competitive advantages, and we can do well. So focusing on those 4 or 5 areas is very important. Geographically, one area that for us has kind of grown under the radar a little bit is rest of world and is a business that is becoming really meaningful now. The growth rates in some markets in rest of world is pretty substantial. And we are counting on that geographic expansion to make some important contributions to our top line growth. The U.S. and EMEA, overall, they have similar growth profiles. And again, what happens in those 2 geographies is going to be a function of how we -- how well we do with our most important growth priorities that I mentioned before. Price volume. I think when you have an inflationary environment like the one we are facing as a global economy, it gives you an opportunity to move price a little bit faster than in a more stable environment. And so we are now implementing or rolling out new pricing strategies more from the standpoint of being more coordinated globally. And so for some of our products, we announced and implemented a price increase effective October 1. The difference with that implementation is simply that we have coordinated this well. In the past, those activities were more localized and certain markets would pick the time, the magnitude of those rollouts. Now we are going for a more global approach. It doesn't mean that we're doing everything at once, but we have a plan for the next several quarters in terms of opportunities that we have to implement price increases. And so in terms of the contribution to our top line, I would say, going into '22, that contribution could be probably a little bit more meaningful than what it has been in the past from a growth perspective. I don't think it's going to be substantially or twice as much as the contribution we had in the past, but we are aiming for something that is a little bit higher than we had done in the past. Depending on how inflation continues to perform throughout the year is something we will be monitoring. We'll be watching. You mentioned competitors, how competitors react to that is an important data point in the categories where we normally implement annual price increases, some places in consumables, for example, typically, we lead the way and competitors follow. And -- but we'll do what we think is the most beneficial for us. And as it is the case with price increases, you have to watch many, many things. The last point is, I think, I would say the biggest contributor to our growth rate is going to be the quality and the acceptance and the success of our pipeline going forward. We have stated several times that we are -- we intend to spend more money on R&D. We're doing that. And that would be the most important engine of growth for us in the foreseeable future.

All right. Very helpful. Very helpful. Maybe staying on the pricing topic here, just quick. I guess 2 follow-ups to what you mentioned there. The first, I mean, do you anticipate that you'll have some pricing power on the equipment side. I mean we're all usually focused on the consumables piece, I think it's naturally a little more doable to pass along the price increases there. But what do you think on the equipment, things like CAD/CAM, Imaging and whatnot. And then again, correct me if I'm wrong here, but I would think that the price increases you're passing along maybe are a little bit less than some of the inflationary pressures we've seen out there. And maybe this is something where we see these -- of these price increases that you're instituting they take the form of multiyear price increases. We phase in these price increases rather than push them on to the customer all in one fell swoop. Is that the right way to characterize it or not?

So on -- let me start with your last point about multiyear price increases. Again this is what we're doing right now is looking at the entire set of markets where we operate, look at what is happening from a competitive standpoint, inflation perspective. And then we're taking a point of view in terms of what is doable throughout the year. In the consumables side, the historical practice has been to look at this annually. So this is not -- we're taking a price increase for the next 2 or 3 years. It's more like this is what we think we can afford, the market can afford in the next 12 months or so, and then we'll revisit again, a year from now, that has been historically what we have done. I think this year, there is going to be possibility of looking at these things more than once a year because of the fluid dynamic of inflation and other costs. So that is that. With respect to pricing power on CAD/CAM and equipment versus consumables. Yes, historically, it has been a little bit different. At the end of the day, price increases are a function mostly of product differentiation. Do you have a product that can command a better price in the marketplace than the alternative products. And so the more we invest in R&D, the better the new products that we launch, the higher the likelihood of having more pricing power in the marketplace. We have a number of great products in CAD/CAM and Imaging that are premium products. And that has been, to some extent -- to a large extent, kind of the history of the -- of our CAD/CAM equipment in general. We have premium products that we believe can deliver a much better service for our customers. And if we -- if the business case for that investment is very clear, our customers are willing to pay premium prices for premium services. And so that's how we approach equipment is, can we deliver the best possible product for our customers so that they can have a more -- a healthier practice, a more profitable practice, expanded practice. And if we do that, I think we have the ability to command a better pricing. So we look at each product individually. And we believe we have the ability to price some of these products at a premium level.

Got it. That makes sense. And maybe one more subtopic on this broader topic. But how do you anticipate offices, your customers responding to price increases from you and from others out there in the market? I mean on one hand, dental consumables aren't a big part of the office budget, but offices are also dealing with rising expenses elsewhere, [ things like wages ]. And they haven't really seen a rise in reimbursement over time. So maybe another 2-parter here. I guess how do you expect offices to respond? And are you hearing anything from a reimbursement perspective that would suggest that they're going to be maybe receiving inflationary adjusted higher payment here over time.

Yes. The key for us with our customers is -- it's not we're going to just increase prices. For us, the work with them starts much earlier. And as a company, our purpose, our mission, we really want to help practices become healthier by lowering their operating costs through greater efficiencies given by our products and services. And two, to actually expand their revenue base. So if we are able to do those things, if we -- if our products and solutions help our customers expand their revenue base and it helps them do more with less, for example, in the area of automation. You mentioned labor shortages and wage inflation. A lot of our solutions actually help tremendously and create a lot of efficiencies for practices to improve their cost base. So with those 2 things, if we're able to accomplish those 2 things, a 1% price increase, 1.5% price increase becomes not a discussion point. Now if all we do is increase prices without improving the quality of our offerings without helping them expand the revenue base or lower the cost, then that becomes a problem. But we try to focus on those things that actually are going to move the needle for them, not on the 1% price increase that we can push through their consumables.

Okay. And then anything, sorry, on the reimbursement side that you're hearing at least as we think forward to next year and out years?

No. I mean it's not a topic that is getting a lot of attention right now. I think if and when inflation really materializes, that is going to become probably more -- a topic for more debate. But at this point, it's not -- we're not getting a lot of feedback in that regard at this point.

Okay. All right. Fair enough. Okay. So maybe shifting gears here a little bit. I'd like to talk a little bit about DS World. It was, by all accounts, a pretty successful show, especially considering the environment, pretty good equipment sales leads in -- coming out of the show. And you made the comment, Henry Schein made the comment, I'm sure we'll hear that from the other distribution partner here soon. I guess how did this show stack up maybe relative to your internal expectations? Some of the feedback that you maybe you got at the show, coming out of the show. And I'd love to hear maybe some of the early, again, call it, feedback or color on some of the new product launches that you introduced at the show or use the show as you're coming out platform?

Yes, we felt really, really happy about the outcome and what we were able to accomplish at DS World given the circumstances, it was great for -- to have so many people live. Again, I think our customers were very happy about that. In fact, we held DS World in person to a large extent because our customers wanted that. And it was good to have close to 4,000 people, a much lower number than what we normally have, but certainly a pretty large number given the circumstances. So relative to our expectations, I'd say we met all of our expectations and probably came in a little bit better than that. Really satisfied with what we're able to share and deliver to our customers during the event. I think the reception about our approach regarding integrated workflows was very good. We got feedback from very important customers and KOLs regarding the integrated workflow approach and how that is definitely the future of dentistry and great feedback about the fact that we have all the pieces to make that a reality. And I think what we did with the restaging of inputs is probably the best example of an integrated workflow. It's not just about new products, which we actually launch a new product implants that has been really well received. But it was that plus talking about the workflow from the beginning with that great diagnostic equipment that we have like Axeos and Primescan and other devices like that. And then putting that into an ecosystem with powerful software, which is something that we have -- we made this -- we cited this stat a few weeks ago. We have over 600 engineers, software engineers in the company working on multiple software platforms that now we are harmonizing and with an implants, we have 2 or 3 powerful software solutions that we are now bringing together to our customers to, again, move from diagnostics to treatment planning, to the actual delivery of the appliance or an abutment or what have you from an impact perspective. So that approach has been very, very well received. And I think we have trained our sales forces with that mentality in mind, customers, dentists, they are beginning to speak that language. And we believe that approach is going to produce pretty significant benefits for us. Our dealer partners were also very satisfied with the outcomes of the event for them. The demand for equipment in general was very, very strong, and that sets us well for not only -- it's more than a quarter. It's just the momentum that we have in that business is good and that makes us optimistic about '22. So for -- by all measures, we thought the engagement was very high, the receptivity to the new ideas and products was very good.

Excellent. And you brought Axeos there, and that was actually what I wanted to tease out a bit more. I mean that product has been out there in the market now, I believe, for a little over a year, but it just seems to be killing it. It really does. I think you guys have made the comment in the past that you -- every unit you make is going out the door immediately, which is great to hear. I guess what's the growth tail look like on Axeos going forward? I mean can this still be a growth contributor even against what's been a really strong and a first year out of the box for that system. And then is this going into -- to the extent you have the detail, is this going into new accounts that are brand new to Dentsply, this is a door opener? or is this going mostly into existing accounts where you have already a pretty good relationship?

Yes. Good question. And we're still trying to tease out the actual numbers, but I think there is a -- first, there is an important shift in the market with going from 2D equipment to 3D equipment. So that is something that is happening. And so that is driving a lot of our existing customers to upgrade. So as you know, we have a very large installed base of equipment across all geographies. And so when we go to our customers, that is essentially our first target market for us is our installed base. But because in general, practices want to have more sophisticated diagnostic equipment to be able to expand the range of their practices, new customers are also getting interested in Axeos. But the majority of the volume so far has come or is coming from upgrades in our installed base. The product has been really, really well received. And I can't tell you exactly like what is the tail going into '22. But it's -- I think those macro trends, again, moving from 2D to 3D, they're going to go on for a little while because that -- the penetration with 3D equipment is still low. So that still has some legs.

Sure. Okay. That makes sense. Maybe pivot over to one of the more topical items from the most recent call here with Byte. I know this is a newer business for Dentsply. Maybe review quick. What didn't go right with that business? Or maybe it's just investors' expectations, sell-side expectations that are misplaced. But I guess from your perspective, is there anything that didn't go right in the quarter relative to a business that was really seemed to be cooking earlier this year? I hear you and Don say about vacationing with your core customer base and maybe some more pronounced seasonality there than may have come out. But that -- because that's consistent with what some other orthodontic companies have talked about that seasonality point or more traditional seasonality point. But I also hear SmileDirectClub out there saying that they're talking about challenges with consumer sensitivity of their core customer base with respect to inflation. So I guess the question, it's a long kind of on preamble, but the question is, can you help investors get comfortable with the visibility and confidence level you have in the business as we think forward to 2022 and 2023 and beyond? Can this be adding 50 to 100 basis points to revenue growth when we think about some of those years?

Yes. I think let me start first at a very high level, which is with respect to the aligners category. Obviously, it's a great category. Within aligners, there is -- there are 2 channels, dentists directed and direct-to-consumer. Byte clearly in the direct-to-consumer, new category, but one that has a lot of potential for many reasons. One, aligners as a category continues to be underpenetrated. There is a price point dynamic as well between dentists directed and direct-to-consumer with a direct-to-consumer price point being much lower with -- which is attractive to a large part of the population that cannot afford going to a dentist and pay $5,000 to $8,000 for a clear aligner treatment. So it's a segment of the population that is more price sensitive and that has pros and cons. But overall, is a segment of the population that is growing and is a segment of the population that probably has been more affected by the macro shifts that we've seen in the last probably 2 years since the beginning of COVID. So we have a segment of the population -- well, actually, most people went into their homes and being come out for 12 months, right? Some people we're able to redirect income or spending patterns from travel and going out to the restaurants and things like that into some other spend, aligners and other aesthetic categories or fitness categories, for example, were substantially benefited by that shift. Well, as we come out of the pandemic and people start going back to their normal levels of spend and just normal levels of lifestyles, we believe that a direct-to-consumer aligners, that category was affected by that. And so when we look at what happened in Q3, I don't think for us, seasonality is the #1 item. For us, based on the analysis we've done, we believe these changes in spending patterns and discretionary spend is probably what really affected that space more than anything else. So that's number one. Number two, there's another element that happened in the third quarter, which was the Apple iOS shift that also impacted direct-to-consumer categories across the board. The ability to engage with the consumer was dislocated to some extent. And so from a digital marketing perspective, companies have been forced to go from certain type of engagements to alternative forms of engagement like working with affiliate publications, working with -- investing more money in SEO. In the case of Byte, for example, we are doing a lot more work trying to penetrate the market with insurance companies. So that has been another issue that impacted the business in the third quarter. And then third, I would put seasonality. But to me, that was a really minor one. And more importantly, honestly, we don't have enough data because the business is very new for us. Aligners is very new. I don't have -- we don't have enough data to go back 5 years and say, yes, in the third quarter, there is seasonality, more pronounced than other quarters. I think a number of companies have mentioned that there is a possibility that, that happened, people trying to go take vacations a lot more because they were at home for 18 months. Maybe there is some element of that, but I would not overemphasize that point.

All right. Got it. Got it. Very helpful. I'm sure a lot of other questions that I do have that I can't -- don't have time to get to because we are actually at time here. So great. We covered a lot of ground here just over the past half hour. Very informative and helpful discussion as always Jorge. I really look forward to seeing how the next year plays out. And of course, looking forward to when we can get back and see each other and all in person. So thanks, everybody, for tuning in, and have a great day.

Thank you, Jason. Appreciate the invite. Have a good day.