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

Perfect. Good morning, everyone. This is Rachel Vatnsdal with the Life Science Tools and Diagnostics team here at JPMorgan. Thanks so much for joining us today. I'm joined on stage by the Dentsply Sirona team. So as we typically do with these sessions, it will be 40 minutes, roughly 20 minutes of a presentation followed by 20 minutes of Q&A. So if any of you in the room do have questions, feel free to either submit them via the portal or you can pin me it directly. And with that, I will pass it off to Simon.

Good morning, everyone, and thank you, Rachel. One year into our transformation journey at Dentsply Sirona and following on the heels of our recent Investor Day, and we're pleased to be happy to provide you all an update today. On stage, I'm joined by Glenn Coleman, our Chief Financial Officer; Andreas Frank, our Chief Business Officer; and our Head of Investor Relations, Andrea Daley. So please take a moment to read our forward-looking statements in our presentation. Our most recent SEC filings lists some of the most important risk factors that could cause actual results to differ from our predictions. And additionally, some of our remarks will be based on non-GAAP financial measures as detailed in the appendix. Before we get started today, I wanted to share that yesterday, we issued a press release indicating that our full year 2023 sales are expected to be at or above the high end of our guidance range of $3.90 billion to $3.94 billion. For Q4 and for 2023, we expect to post year-over-year growth in 3 of our 4 segments with growth in Essential Dental Solutions, in Wellspect, and in Orthodontic and Implant Solutions. We do expect Connected Technology Solutions to decline in line with our prior projections. We also reaffirmed our adjusted EPS outlook for 2023 with a range of $1.80 to $1.85 and still expect double-digit adjusted EPS growth in 2024. So let's open with a snapshot of our business. For those of you who are not familiar with Dentsply Sirona, this should serve as a helpful introduction. For all of you, it's worthwhile to recap some numbers to assess and measure our performance moving forward. Europe represents our biggest geography, heavily influenced by our presence in Germany, which disproportionately contributes to our revenue profile. We see the U.S. as a source of continued opportunity for our company, while disciplined and selective geographic and product expansion in LatAm and APAC that creates potential to accelerate our growth. With more than half of our sales coming from segments with long-term favorable dynamics, we think this positions us well to not only provide great solutions for our customers and their patients, but also bolsters our ability to generate results for our investors. While we may have spoken anecdotally in the past about our strengths, we can now do so supported by robust data, and data-driven decision stands as a core tenet of this management team's philosophy. Now here's what our customers have said. We have many of the most recognized brands in dental. We offer a comprehensive and complete product portfolio. We deliver unparalleled access to clinical education and our extensive scale and [ breath differentials ]. The dental market, a $30 billion global market is quite balanced across its core segments. As an established leader in Essential Dental Solutions, we must invest in such areas such as innovation, clinical education, and commercial footprint for this space. Now with that said, we do expect to improve our share and market penetration in areas like Connected Technology, Aligners, Implants, as well as certain geographies such as the U.S. and Asia Pacific. We have invested and we will continue to invest in our Aligners and Implants business, and we believe that we are the best company to partner with on the journey to digitalization in dentistry. We have also demonstrated our commitment to our Wellspect Healthcare business, a business that continues to grow, to innovate, and to drive profitability. As we've said, after carefully evaluating strategic alternatives presented for Wellspect, we decided to retain the business as we believe that this will create the greatest shareholder value. With a new industry experienced general manager now in place and growth investments approved for product innovation and capacity expansion, we are excited to see what's ahead for this part of our business. In a nutshell, as you may have heard me say before, we see areas of our business where growing with the market is acceptable. Some areas where growing with the market is a stepping stone to greater performance and others where we have the potential to achieve above-market growth with the right delivery and execution. We have a comprehensive end-to-end portfolio across our served markets. We aspire to be a customer-centric organization informed by robust customer insights. And that's why we already conduct our own customer surveys, and I know that, that resonates with all of you. We are already much closer to our customers using their insights to drive our investment decisions. And this customer centricity will continue to deepen. Our recently completed product portfolio and customer needs assessment survey informed us that we have no meaningful gaps in our portfolio, but that we need to improve our customer experience. This data will help us define our path forward to improve customer engagement and a better and improved new product development process. It also confirmed the importance of continued but meaningful innovation and digitalization to improve their clinical workflows and create efficiency for our customers. Now we know that we can improve our execution. We see significant runway to grow organically through innovation and through strategic tuck-in acquisitions across our largely fragmented end markets. As I've said before, our go-to-market channels vary considerably by geography and by category. We have both business-to-consumer and business-to-business capabilities, and we will continue to optimize our channel mix and sales force effectiveness to increase customer proximity and engagement. Now you are no doubt aware of the significant changes in the direct-to-consumer Aligner business since our Investor Day in November. We see significant opportunity in the Aligner category overall, and we are moving swiftly to capitalize on this to accelerate profitable growth in the direct-to-consumer business. Some early indicators suggest that increased numbers of potential patients have shown interest in our Aligner offerings. Our strategy is clear to us; digitalized Dentistry, innovate in products and services for our Oral Health and Continence Care businesses, be great partners, and do so through a committed and engaged team with ethics, compliance, and quality at the core. We are actively in continuing to operationalize and advance on all five of these strategies. We cascade these objectives through our organization and we've aligned our goals around them from annual operating plans to annual bonus plans to individual work plans. We have moved deliberately to execute on these through our operating model, our processes and our investments to transformed Dentsply Sirona. We have made several intentional leadership changes over the past 12 months, including a new and tenured Chief Human Resources Officer with a track record of facilitating cultural change and a new Chief Quality Officer, who is partnering closely with operations to heighten our focus on quality across our organization. Most recently, we added a new and seasoned leader as our Chief Technology Officer, which I'll speak about shortly. I highlight these positions specifically because as we think about shifting the culture and transforming this organization into a stronger growth engine with the core tenets that we've spoken about in the past, these roles together with an increased focus on compliance, stand as being central to these efforts. We've consistently spoken about 2023 as a transition year, a transition year for performance, for culture, for systems, and for people. We now have many of the building blocks to execute intentionally on our plans to transform this company across product families, across geographies, and across functions. Our team focuses intensely on execution and transformation. Execution so that we meet the first of our strategic goals, achieving annual growth and margin commitments. The organization realignment commenced earlier this year, together with the ongoing and comprehensive transformational work has helped fuel the critical hygiene work needed across our company. As we shared in November, we have completed all our consultations with all major employee groups and workers' councils and we've since completed this realignment. We've spoken about unlocking efficiency across our company. We have commenced activity on all of these critical projects to refocus our resources, to streamline our organization, and to create value for our stakeholders. And you'll note that we are investing in compliance to ensure that success occurs in the right way. Innovation is and will continue to be a cornerstone of our strategy. To this end, I'm pleased to announce that Kevin Boyle has recently joined our organization as our new Chief Technology Officer. Kevin brings a strong commitment to and track record of driving disciplined, insightful innovation, and to solving unmet clinical and process needs through deep customer intimacy. We plan to continue investing to build out a cohesive digital environment, connecting additional elements of our portfolio and moving clinical applications onto DS Core over the next 24 months. You can see a few examples here with our number of our launches in 2023, focused on digital workflows like orthodontic outcome simulations and additional functionality for DS Core as well as expansion of our printing and milling materials. We also introduced some new products into our Instruments portfolio with improved ergonomics and integrated technology to locate the apex in endodontic procedures. And finally, our Wellspect business has launched new Continence Care products with several other innovative products also in the pipeline. Overall, we spend about 60% of our R&D dollars on product development with much of this directed to Connected Technologies and workflows to drive long-term profitable growth. Moreover, as we have previously noted, a simplified portfolio will enable us to allocate more to new product development over time. We continue to evolve our R&D capabilities. In software engineering, we've augmented our teams with external partners to accelerate our transition to cloud-based computing. Similarly, we're adding further capability to our team focused on AI. For our material science team, we are investing in manufacturing and processing know-how for digital materials. We've spoken before about our recently implemented new product development and prioritization process focused on improving program management and greater ROI discipline. With the addition of our new CTO, we expect to further refine and evolve these processes. Our teams in supply chain, quality, regulatory, as well as R&D are collaborating cross-functionally with a shared set of metrics to ensure predictable launch performance and timing. Now let me now cover our 3-year financial targets. Our long-term financial targets include growth in the 4% to 6% range in normal macroeconomic environments, which is 1% higher than our total addressable market. We expect to deliver over 500 basis points of EBITDA margin improvement, with about 1/3 coming from gross margin and 2/3 coming from SG&A efficiencies. We plan to deliver growth and profitability while still investing in areas such as R&D and our commercial organization. The net result in 2026 is targeted EPS of $3, which represents a 60% increase over the next 3 years. Given our progress on the transformation initiatives, which are within our control, we are confident in our path to this target. Assuming the macroeconomic headwinds remain stable and don't lessen further, we believe 2024 will be an inflection point for our company and will enable us to deliver double-digit adjusted EPS growth. Now wrapping up, I would like to summarize our perspective as to how we can drive meaningful shareholder value over the next several years. Firstly, we are well positioned in attractive industries with the largest end-to-end dental portfolio that is more than 45% digitally connected. This positions us well with dental macro trends such as favorable demographics, practice consolidation, and improved access to care. We have also carved out an attractive and financially accretive position in the Continence Care segment with Wellspect Healthcare. We have leading brands and strategic objectives that focus on high-growth areas like Aligners, Implants, our digitalization strategy enabled by DS Core, and Continence Care. Second, we have a clear and actionable plan to accelerate profitable growth which includes a focused R&D strategy that delivers a regular cadence of new products and solutions for our customers. This, coupled with our new DS operating model will drive better accountability and execution. We have strengthened key elements of this model, win is one team, grow through innovation, drive disciplined execution with the recent additions to our leadership team. We have already made great progress on our transformation journey, which is expected to drive robust margin over the near and long term. And lastly, we will remain disciplined with our capital allocation strategy by maintaining a healthy balance sheet and generating strong cash flows. As we noted at Investor Day, we know Dentsply Sirona is a show-me story. We have worked diligently to restore trust with many of our stakeholders, including with the investment community and with customers. We believe that executing on our plans and transformation objectives will enable us to drive meaningful improvement in our performance and achieve our target of $3 of adjusted EPS in 2026. I thank you for your time and attention this morning. We look forward to sharing our progress with you throughout 2024, a year that we believe will be an inflection point for our company. Thank you.

Perfect. Thank you, and good morning, everyone. You highlighted some of the key takeaways from the Analyst Day, but I wanted to dig a bit deeper off that. So coming up the Analyst Day, you did a deep dive through a lot of information about Dentsply long-term growth algorithm. So what do you think are the most important parts that you would emphasize as the key takeaways from the event?

Well, I think as we noted at Investor Day, Rachel, and just now, we do operate in attractive industries, Dental and Continence Care. And given our portfolio, we believe that we are well positioned to drive profitable growth by executing on a clear plan that we feel we have. Secondly, I think the transformation work that we are doing, have done and continue to do is making us more nimble, more agile, and more responsive. We've noted on a couple of occasions about the research that we've done in our portfolio. We feel that we have a winning portfolio. Our customers say that we have an extremely robust portfolio with no meaningful gaps and with sustainable advantages, particularly in our digital portfolio. So it all comes down to execution. And this new leadership team that we've been bringing in is extraordinarily disciplined and intensely focused on driving disciplined execution.

And then as you noted, you preannounced yesterday with strong 4Q results, revenues coming in at or above the higher end of your guide. So can you just walk us through how did you side set some of the worries this quarter? We have the Henry Schein cyber incident, there's also some macro arrays that you flagged on your 3Q call. So just walk us through some of those puts and takes there.

Yes. I think we were surprised by some of the patient declines in September. And obviously, we had a disappointing third quarter, but we were pleased to see a pickup in patient volumes, especially in the latter part of the fourth quarter. As Simon mentioned, we did post growth in 3 of our 4 segments and essential Dental Solutions, one of those segments of growth. Around the Schein situation, we did factor in some level of disruption we were expecting. And keep in mind, they're an important partner for us. We do about $0.5 billion a year in annualized sales. Most of that in consumables. I think the fact that we actually posted growth showed that we got through that situation without any significant unexpected deviation. So on the whole, I think things are improving, but it's still a very challenging environment. We're still seeing our equipment business down year-over-year, challenging markets in places like Germany, in Australia. These are heavily equipment markets. And so that's probably going to take us some time to still recover. But on the whole, we were pleased with how we ended the year.

Helpful. Maybe just as we dig into next year or this year, I guess, on 2024. You clarified at your Analyst Day that you do not expect to grow revenues up 4% organic or higher. So regardless of this macro backdrop that we're seeing as we start off on 2024, what portions of the business do you currently view as best positioned to drive the greatest growth upside?

Well, I think we've spoken quite a bit in the past year about the investments that we've made in our Implant business. We certainly expect to begin to turn the corner on that business in 2024. I noted and Glenn has noted the performance in our Wellspect business and some of the product launches that we've had in '23 and we'll continue in '24, we expect to help drive growth there. And then I would say, finally, both of our Aligner brands are well positioned to continue the growth trajectory that they've had since we arrived in September of '22. So they are, I think the key areas that we'll be focusing on '24.

Helpful. And then maybe just moving down the P&L for 2024. You're assuming 100 basis points of adjusted EBITDA margin growth in 2024 and double-digit EPS growth, which also assumes that similar stable macro environment. So that said, can you shed some light for investors on how should we think about the range of margin outcomes given the range of revenue growth outcomes for '24?

Yes. I don't think we're going to comment much further on 2024 relative to anything above and beyond what we announced yesterday in the press release. So I think in a stable macro environment, even with little revenue growth, given all the things we've done in 2023 around restructuring the business or moving forward with a number of transformative initiatives like our SKU optimization work, closing 4 facilities. Taking our cost structure down, we're confident to say at this point, even with minimal revenue growth, we can deliver 100 basis points of EBITDA margin expansion and double-digit EPS growth. I think that's kind of where we going to limit ourselves to at the moment. Obviously, I think if we see a better top line recovery and organic growth is faster, it's going to help us get leverage across the P&L. And we'll talk more about what that means when we get to our February earnings call.

Perfect. And maybe just digging into the long-term targets laid out at the Analyst Day. So you noted that you expect long-term revenue to grow 4% to 6% from 2023 through 2026. Can you kind of walk us through, what are the biggest drivers that get you to that growth algorithm in the solid mid-single level?

Yes. I think a lot of the points that Simon made earlier, if you look at the orthodontic market, clear Aligners, we're very confident we can grow double digits and approach that 20% range in a normal macro environment. We've got some tailwinds and favorable dynamics in our direct-to-consumer business with Byte given we've had a large competitor exit that space on the in-office side, we're seeing very positive trends with SureSmile. So in the ortho area, we feel very confident over the long term, we can grow double digits and approach that 20% range. Implants. Again, China, an area of growth for us this year. That was somewhat surprising in that we had to take a haircut on pricing with VBP, but the volumes we've seen on Implants have been meaningful. And so we're very excited about the opportunity there for Implants in China. And we do expect to see a recovery in our U.S. Implants business with the investments we've made during 2023. Outside of that, obviously, the digital area with CTS, all connected by DS Core and then well spec with Continence Care. We just put up 7% growth in the third quarter, driven by new product launches. That ramp is continuing. And I mentioned on the earnings call in Q3 that we expect double-digit growth in Q4. So that should be a nice growth driver for us as we move forward.

Great. That's helpful. And then just digging into this $3 EPS number that you had laid out. Can you kind of walk us through how should we think about your confidence? And what are each of the moving parts that really get you to that $3 EPS number?

Yes. So if you look at where we are today, at $1.80 to $1.85 going to $3 over the next 3 years. It's a 60% increase. And we're very confident we can get there because 2/3 of that improvement is really things in our control. So the restructuring program would generate about $0.30 of that improvement. That's well underway, mostly complete in terms of the head count actions. We have some non-headcount work to still do. But by mid-2024, that plan will be completed and we feel very confident we'll generate $200 million of annualized savings once that plan is done. We've also got plans to reduce the amount of SKUs across the organization. We laid out during the Investor Day that in our Endo and Resto portfolios, 15% of our SKUs drive 90% of our revenues. So there's a huge opportunity for us to reduce SKUs, reduce cost. That's part of our 3-year plan, coupled with a reduction to our manufacturing sites, streamlining our distribution centers. And I'll just classify kind of the overall SKU optimization and global operations transformation as $0.20 improvement over the 3-year window. And we've got a couple of other areas like our ERP benefits we're expecting towards the tail end of the 3-year window. Improvements in our ortho profitability, especially our direct-to-consumer business with Byte, which we've already seen an improvement, but we expect a further improvement. And then a number of things just around our capital structure with share buybacks, net investment hedging, which is already in place. And so 2/3 of that are in our control. The other 1/3 is really subject to our ability to grow organically at least 4%. And we're not counting on 4% growth in 2024, but we are expecting to see an acceleration of growth as we go into 2025 and 2026. And so that's a bit of a wildcard in terms of the macro environment. But if the macro environment gets back to a normalized state, we're very confident we can grow in that range, and then you could see a path to the $3 of EPS.

Great. That's helpful. Then maybe digging into some of the segments and what's embedded into that long-term guidance. First up on Essential Dental Solutions, you're projecting low single-digit growth there. Can you walk us through what are some of the key products that have potential to drive upside to that number? And kind of what's the range of outcomes on how you get there?

Sure. So Essential Dental Solutions is a really important foundation and anchor point of our portfolio. We serve more than 0.5 million dental practices around the world. We have many of the leading brands. We're category leaders across a number of areas in endodontics, in preventive solutions, in a number of the restorative businesses. So this will continue to be an important part of the portfolio. We're expecting to grow with the market. We know we have a comprehensive set of offerings and we are leveraging an unparalleled clinical education footprint that we have around the world with our academies, with our university relationships that we're continuing to invest behind as well as a number of engagements with clinicians, with our KOLs around the world, together with a really broad commercial footprint, right, both through distribution and through our direct sales forces.

Maybe shifting over to Connected Technology Solutions. You're projecting that, that will grow at or above mid-single digits. You hold some key products there, including CAD/CAM, iOS, Mill, Print, some of the imaging pieces as well. So what do these applications do you really think could also drive the greatest upside to that segment?

So on Connected Technology Solutions, I think of that segment as the infrastructure backbone of the dental office. And the market is really going through a rapid digital transformation right now. And that's what we're looking to capitalize on to accelerate growth. And the key element for us is our cloud-based DS Core solution, it really had 3 elements to it. It's a collaboration platform. It will power our next generation of devices, and we'll also link all the technology with digital workflows, whether that's an Aligners, whether that's an Implant or also in the restorative side. And it sort of crosses not just in the dental practice, but it's also a very important connectivity point into the lab and to the patient. And so with DS Core at the center, at the hub, it becomes a force multiplier really between our digital workflows and the equipment infrastructure that we have. So obviously, intraoral scanning is a key area of growth. Penetration is still around the 30% mark in many markets. So there's a lot of runway there. We have a leading position in 3D imaging that is an important base for us that we're looking to continue to grow. And ultimately, the digital solutions in both milling and printing that we believe are highly complementary, we are the largest manufacturer actually that has the ability to leverage both of those technologies across the portfolio. So that will be an important part of the growth story as well.

That's helpful. Then shifting over to Orthodontic and Implant Solutions. I wanted to dig in more deeply just on this Implant piece. That combined segment is expected to grow mid-single digits long term. But given how much of an Implant or given how much of the focus has been on Implants recently, can you talk about your portfolio there? How should we think about this value Implant segment that's been coming into focus in recent quarters?