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

We're going to get started. Good morning. Welcome to the Jefferies 2023 London Healthcare Conference. I'm Brandy Couillard. I cover the dental space here at the firm. And very happy to have Dentsply Sirona with us back at the conference again this year. Fresh out of their recent Investor Day meeting last week, we got CEO, Simon Campion; CFO, Glenn Coleman; as well as Group VP of Commercial Ops in EMEA, Gerry Campbell. So thanks so much for being here, fellas.

Thanks for having us.

Yes. Thank you.

Maybe just to kick off. Now that we've heard from a number of your peers, some of your distribution partners, would you just set the stage and kind of recap the trends that you saw in the business geographically in the third quarter and how the business is trending into the fourth quarter?

Sure. So I'll start and then Glenn can follow up. So I think everyone is aware that certainly at the end of the third quarter, had some challenges. We've been trying to drive results to be more customer-centric and more data-centric over the past year. And so we've been doing our own surveys to ascertain some key trends in the marketplace. And that's why we called out in excess of 1,000 people to respond every quarter around the world. And that's why we called out some pressures that we saw in Germany, I think, Q2. And then as we rolled into the end of Q3, we saw continued pressure in Germany, and then the deterioration in patient volumes in the U.S. That -- those trends have continued thus far through the end of October, I would say. And it's a little confusing, certainly in respect to the U.S., right? Unemployment is low. People still have dental insurance. But they are making some alternative choices than go to the dentist, and so it's a little befuddling. Elsewhere, particularly with respect to capital, obviously, the interest rates are impacting that. Anything else to add?

Clearly, the U.S. patient traffic was down about 4% in September. That was a surprise to us. And October, pretty similar trends overall. Nothing has really changed a lot from September. And Germany is a challenging market for us, one that's very heavily dependent on equipment. So obviously, as higher interest rates continue to be out there, it's going to create challenges for us and our customers relative to moving forward with these larger equipment purchases in the $20,000 to $100,000 range. But it hasn't gotten, I would say, significantly worse there, but certainly a challenging market for us. And if you just look at year-over-year comps, we're down double digits year-over-year in Germany the last couple of quarters.

To add on to that, these surveys that we do, when we recently did another one with in excess of 2,000 people to look at our product portfolio, the things they call -- the customers are calling out for, and this was between the U.S., Germany and China, is they want more workflow efficiency. They are looking for increased treatment acceptance rates. And I'm sure it will come up in the question, we -- later on. We think we're well positioned to begin to influence those, particularly when we think about DS Core and some recent incremental advances to that around the communication canvas that, anecdotally, are already beginning to resonate with customers because they're seeing an increase in acceptance of procedures by their patients.

How is pricing holding up in this environment? Envista has talked about a couple of hundred basis points of pressure. Schein earlier this week talked about some pricing pressure in intraoral scanners, which isn't necessarily new. How does it look across your business, Consumables and Equipment, right now?

Yes. I think on the whole, we kind of characterize the pricing environment as stable. We're not really gaining any price. We're not losing a lot of price either. It depends on the portion of the portfolio in terms of what's going up and down. I think in the scanner market, certainly seeing some price pressure there. So that is one where we are seeing price reductions. In other parts of the portfolio, we're getting a bit of price capture. So I would say on the whole, kind of flat right now. And obviously, looking at our inflationary headwinds, we're still dealing with 3% or 4% higher costs in our business. So we're not passing that along to our customers.

Got it. A few days removed from the Investor Day last week, what were some of the key messages that you wanted folks to take away from there? Anything you think investors may have overlooked or maybe not fully appreciated coming out of that comprehensive event?

So I think a couple of the key messages is notwithstanding the recent macroeconomic trends, dental is an attractive industry. Pretty stable growth. An aging population that are eventually going to require more oral health care. And we think we're poised for profitable growth by executing on what we consider as a fairly clear and straightforward strategy. Since we've come in, we've initiated a transformation in our business to make our business more durable and more nimble and more focused on execution. Our portfolio is pretty robust. That survey that I mentioned of 2,000 people, that was geared to understand do we have any gaps in our portfolio and how does it stack up against our competitors. And overwhelmingly, it stacks up pretty well across all different categories, whether it's Restorative or preventative or Connected Technologies. Connected Technologies were identified as a clear leader in that space. And in Implants, we are extremely competitive in that space. So we think we have a really robust portfolio. And the leadership team that's been brought in here in the past 12 months, we have a track record of just getting stuff done and executing. So we have a good portfolio, but our performance over the past number of years, most boil down to one thing, and that's unapologetic execution in the marketplace. And that's what we're going after, an unapologetic execution with respect to the transformation plans, be it SKU, be it network, be it ERP, whatever it may be internally to get after that.

Yes. On the financial side, I had 4 key messages last week. One was we're targeting to grow 4% to 6% on a compounded annual growth rate over the next 3 years, with a gradual increase and a gradual acceleration of growth. Obviously, we're not expecting that level of growth in 2024. And we're confident in that because we have about half or a little over half of our portfolio that's very fast growing. Think of that as Ortho, Implants, our digital portfolio growing very nicely, very fast in a normal macroeconomic environment. So that was the first point. Second was, we're confident in our ability to get to $3 of targeted adjusted EPS by 2026, and that's off of our guidance this year of $1.80 to $1.85. So that would be a 60% increase over the next 3 years. Why are we confident in this uncertain environment? Well, most of it is in our control. So about 2/3 of our EPS improvement are things like our restructuring program, which is largely complete. Our SKU rationalization, SKU optimization program, which is well underway. Our global operations and supply chain transformation that Tony Johnson laid out last week, well, we've already closed 4 facilities. We've got a plan to close another 15% to 25% of our footprint over the next 3 years. And so that's well underway. The ERP system work that we're undertaking. Again, that's underway. We're 6 months into that. And then we've got a number of other things like our share buyback, our net investment hedging programs. So 2/3 of this bridge is essentially things we can control that are not dependent on the macroeconomic environment. Obviously, there's about $0.40 to $0.45 that's dependent on organic growth, and that is somewhat dependent on the macro situation. But we feel confident in our ability to generate meaningful EPS growth over the next 3 years. And the third message was we expect 2024 to be that inflection year for us on profitability and on EPS. So we expect to have at least 100 basis points of EBITDA margin expansion in 2024, EPS double digits growth year-over-year, even in this uncertain macroeconomic environment. And then lastly was around increasing our cash return to shareholders to at least 75% of our free cash flow through a combination of dividends and share repurchases. And we expect to increase our dividend consistent with our earnings growth over the next 3 years. And last week, our Board authorized an additional $1 billion share buyback to support our plans over the next 3 years to buy back more shares. So those are the 4 key messages I had relative to the Investor Day.

Just to clarify your comments on '24, you didn't necessarily guide top line. But just to be clear, is your base case assumption that revenues are at least flat? And what is the net savings contribution from the cost actions you've already taken on '24 margins?

Yes. I think as we look at the revenues for 2024 -- we haven't given guidance yet, I want to be clear on that. We'll give guidance in February. But obviously, when we look at the work we've already done in 2023 around our restructuring program, around some of the net investment hedging programs that we've done, we're confident to say that even if there's not a macro recovery, we should be able to grow EPS double digits in 2024. So we're not counting on revenue growth next year. You could think of it as minimal revenue contribution to get to double-digit EPS. And again, that's not guidance, it's just how we modeled our EPS assumptions for 2024. But we'll give more color around the top line as we get into next year.

And just to reinforce the comment that Glenn made last week, we've been underway all year with respect to the restructuring and transformation plan. And part of the timing of that was approval of workers' councils around Europe. And so we concluded the last of those at the start of November as planned. So we're moving ahead with the last phase now of that 2023 restructuring.

Got it. In terms of the '26 targets. Like you mentioned, Glenn, 4% to 6% organic CAGR next 3 years. If we look back over the last 10, there's really only been like 1 year that Dentsply has grown at least 5%. And you talked about growing ahead of the market next few years. Just help us understand how the business can, I guess, accelerate. Or what's different about the portfolio or just how you're running it today that can enable you to drive that acceleration versus what you've seen in the last decade or so.

Do you want to take that?

Yes. So listen, I would say that's a fair comment. But there are -- as we noted last week, there are -- it's in excess of 50% of our business that we should be growing very, very well. If you look at aligners, our performance over the past 4 quarters or 5 quarters has been double digit. We feel we have a differentiated product in that space, both the direct to patient or the patient product, and the direct-to-consumer business as well. When we looked at connected technology, I've already mentioned that survey that we have completed, where we are viewed as clear leaders in the technology space. And as we roll out more capability on DS Core, which integrates all of this technology under one kind of software hub or software core, as it were, we feel we have a right to win in that space. And as we think about the evolution certainly of the U.S. dental market with DSOs becoming more prevalent and shifting from 20% or 25% today to probably around 40% by '26, '27, they are looking for, what I mentioned before, more workflow efficiency and more treatment acceptance. And we think DS Core and all our connected technologies can help with that. And then finally, a topic of much discussion at every meeting we have is our performance on Implants. Again, back to the survey, we have a robust implant portfolio. What we have failed to do over the past number of years is, a, invest in commercial teams; b, execute; and c, invest in clinical education. And since we've got here, we have significantly increased our investment in clinical education and our -- and the clinical savviness of our sales forces. And so we do expect to turn Implants around. And one of the comments I made last week is there are areas of our business where we think growing with the market is okay. And I'm thinking about consumables in that respect. Growing there is okay. Growing with the market is okay. There are areas where growing with the market should be a stepping stone to greater performance, and Implants is that. We should be -- we have the portfolio and we have the data and we have the education programs now to perform there. And then there are areas where growing with the market is going to be unacceptable to us, and that's connected technology and aligners. We should be growing ahead of the market in those spaces. And that's how we are bifurcating our focus and bifurcating our investments.

Maybe a question for you, Gerry, I mean, as kind of the Head of Commercial Ops in Europe. And Dentsply has talked a lot about clinical education, which to an outsider doesn't sound that exciting. I mean can you just talk about how Dentsply recommitting to clinical education sets you up for success with your sales team?

Yes. I mean clinical education has always been a fundamental part of how we educate our customers and new technologies and what's changing in the marketplace. There's always a demand for clinical education because dentistry is always evolving. And right now, with Digital Dentistry, it's really moving quite fast compared to previous years. So clinical education is really important at this point in time, both from a clinical point of view and also from a systems point of view. If you think about all the technology within a dental practice today, there's lots of new technology and they're all connected with different PCs. DS Core that we're bringing to the market brings all that technology together to make it simple, easy and effective to do diagnosis and planning of your cases, and access it from anywhere. So clinical education around the traditional clinical parts of dentistry is super important, but also how this connects with digital is a real difference that we're seeing now in this current environment.

You were head of the -- or part of a commercial excellence panel at the Investor Day last week. As you look at your region, what are you most excited about, be it in terms of products or just commercial team as you look out to next year?

I think one of the highlights we're seeing is the SureSmile product. We launched that product 3 years ago from 0 in Europe, and we've rapidly gained a good position in the market. We've got -- as Simon said, we've got a differentiated product with great service levels. We're present in all the Western European markets. And we've got a big reach into the marketplace. We've got lots of salespeople with different disciplines through implants, endodontics, the Sidexis systems. So we've got bigger reach into the market. So we're using that reach to take the message of SureSmile and Digital Dentistry to our customers. And I think that offers us a nice position in terms of being able to take that message to customers who trust us already for -- in different disciplines, to take new disciplines to them and bring all that together.

If I could just build on the previous comment that Gerry made to your question about education. One of the areas that we have not focused on for the past number of years, but now we are absolutely going after it, and it's a lot more than a transactional piece, it's with universities. We have not focused on universities over the past several years. We are rebuilding relationships with many of the key universities around the world right now. And part of it is, obviously, we would like some of their business, but we wanted to be a lot more than a transactional relationship with universities. We know that we have products and technologies that students learn on eventually make it into the practices that they work in. So we are focused intensely on that. We've had a number of the key universities, certainly in the United States, into our facility in Charlotte. We're rebuilding relationships with them. And I think it's important for us as not just a commercial partner, but also as a group that innovates, just some benchmarks. 55% of the dental graduates in the U.S. over the next several years will be female. 70% of graduates from Brazil universities will be female. And so that ties in significantly, we feel, to how we innovate. Because we need to address the needs of females with respect to certain products, certain product design and product features as we move forward, and that bridge into universities is key.

Two-part question on ortho given its importance to kind of accelerate growth algo. With SureSmile, number one, what's the geographic mix and channel mix between GP and ortho for that product? And then number two, why are you committed to the Byte business at all?

Yes. I mean I'll take the first part, and Simon, you can comment on Byte. In terms of the mix, that's predominantly a U.S. business today, meaning SureSmile. Byte is all U.S., so that's the geographic split. We don't break it out further than that. The 2 businesses are roughly 55% Byte, 45% SureSmile in terms of our total ortho revenues.

And with respect to Byte, nearly -- when I joined last year, the first question I got was, why on earth have you done that? And then the second question I got was, what are you going to do with Byte? And the consumer business -- and I ran a consumer business at Bard and BD. Consumer business is a very attractive business if we do it right. The income targets that we have with Byte are vastly different to the income targets that we have with SureSmile and our competitors have. And the median income is about $65,000 per patient with -- per patient who calls up Byte. And as Glenn said, it is about half of our business. It is now profitable. We have a smaller funnel than we've had in the past, but our conversion rates have gone up. And as we have rolled out Byte Plus, which is a kind of a hybrid model between the direct-to-consumer and a dentist-based product, we've had some early success with that in the pilot phase. And we feel that it's complementary right now. We weren't here when the acquisition was done, but we are committed to turning a sow's ear into a silk purse.

Brandon, just to answer the last part of your question. So almost all of our SureSmile business is with the GP space versus ortho.

Great. That's helpful. Obviously, Henry Schein is an important distribution partner of yours and that things may still be in flux. But given they are coming back online, just curious if your visibility around their order patterns in the fourth quarter has gotten any better, stayed the same, over the last 2 weeks that you reported?

Yes. So just to frame up the Henry Schein relationship. Great partners, long-term partners with Dentsply Sirona. We do about 12% of our consolidated revenues through Schein, so it's over $0.5 billion. So it is a significant part of our business. Half of that's in the U.S., 20% in Germany. So 3/4 of those 2 markets alone and mostly Consumables, so Preventive and Restorative. So they also sell some equipment for us, but that's kind of framing up the overall relationship. During the last, call it, month, as Schein has been dealing with their cyber issues, the most important thing for us was getting product to customers when they needed it, where they needed it, and so that's what we are working on. There is orders that were coming in from customers through the telephone, through Schein. Obviously, we were fulfilling what we could to help them during the situation. So that was the priority. It sounds like earlier this week on their call, they said they were making really good progress. I think they said 85% to 90% of their distribution was back to normal, which was good to hear. I think starting today, they're actually taking e-commerce orders, which is also a positive step in the right direction. So we'll see how the rest of the quarter plays out. We did build in some level of conservatism in our guidance for Q4, knowing that there was going to be some disruption here on the orders that would likely come from Schein. So I don't have much more to comment than that, but it sounds like things are heading in the right direction.

I would like to touch on this SKU rationalization program, which seems pretty comprehensive. We touched a number of areas in terms of the P&L and cash flow. You're starting in Restorative and Consumables, it sounds like. Are there other opportunities in other parts of the portfolio? And I guess -- what's, I guess, the time line for this program to roll out? And how do you think you can execute it without really affecting revenue?

So Endo and Resto are, as you said, the areas we're focusing on first. Clearly, the highest volume of number of SKUs in those areas. We have historically not had a robust product life cycle management process at Dentsply. We are building that in now. Where we are on the plan is we have set up a PMO, led by a gentleman who did the exact same work for me before at neurology, where we rationalized the folio offering at Becton Dickinson. So he's set up a PMO. We are doing this thoughtfully. We did this before and we irritated a lot of people with the way it was done. Not giving them an opportunity to last buy. They ring up and they look for a code and, sorry, sir, that's no longer available. So we're running pilots right now to make sure that we have got the right approach. We're going to be very thoughtful and diligent with how we roll this out. And we do not expect to see any benefit from this until the back end of next year. We did supply that in Europe. So I don't know, Gerry, if you want to comment on Europe and how we're approaching this in a thoughtful way.

Yes. As Simon said, our approach is in a very thoughtful way in terms of trying different trials with customers in Europe to test out some of the concepts we're looking at. In the end, we're looking for customers to upgrade to a more modern product. We've got a wide portfolio. And what we've done in the past is we brought new products up, and obviously did old products. So there's an opportunity here to bring customers up to date with the new product, which is a better product, and take them through that process. And we run these trials to work out what's sort of the best way is to run these trials and scenarios to get the best outcomes, and we're learning from that.

Yes. I would just say, how you get benefits from a SKU optimization program, you don't have to carry inventory, you have lower excess and obsolete inventory reserves, don't have to maintain this product from the sustaining engineering point of view. Stopping and restarting the production lines is a significant cost, so you don't have to do that. Obviously, if you go deep enough on the SKUs, you can actually reduce your manufacturing footprint, which is where we're going with this. So there are significant benefits that come with the SKU optimization work that we're doing.

In the last few seconds we have here, I mean, the stock's trading at a 10-year trough multiple on basically trough earnings. I mean, you did almost $1.80 in the COVID year of '21. And notwithstanding kind of Dentsply's choppy history over the last decade, what do you think investors are missing about the story right now and maybe how you're just fundamentally running the company different today?

I don't think they're missing anything. We just have to go out and execute. I think if we deliver on the plans that we outlined last week and get to $3 of adjusted EPS by 2026, the stock will take care of itself. And so for us, it's about an execution story.

Very good. Well, we're out of time so we'll have to leave it there. Thank you guys for being here.

Thank you.

Thank you.

Thank you.