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

We're going to go in here, and I just mentioned earlier, we're making the move from animal health to dental. And next up, we have DENTSPLY SIRONA, one of the leaders in the dental market. And joining us is Glenn Coleman, Chief Financial Officer. A little bit of a different approach. Dental had some, I guess, headwinds more specific to the stocks necessarily. And I speak to a lot of investors, and there's some concerns out there. So I came up with a question that I'm asking most of the dental companies participating in the conference, and I'll run it by it. Glenn, I would love your answer to it. Look, Dental stocks have underperformed since emerging from Covid. I've got investors that say, "Hey, there's value implants. There's private label, there's pricing power". That is more subdued relative to other industries. And they sort of question the structure of the market, just from an investment perspective. And I'd love to get your thoughts on those concerns as high level, and then maybe we'll get into how your portfolio can help address some of those issues.

Yes. No, I think not so much a concern, but just some of the trending of moving from premium to value brand is clearly taking place in the market. I think DENTSPLY SIRONA is well positioned across the portfolio. So if I think about implants as an example, we have a good premium offering called OmniTaper, it has multiple different implant systems. We've got a value offering as well. We'll make it simple. And so we've got premium and value. If you look at other parts of the portfolio, though, even in CAD/CAM, as an example, we have a lower-priced scanner that we rolled out about a year ago called Primescan Connect. So that hits a sweet spot in the overall market. More recently, in Imaging, we rolled out Orthophos, which is a lower-priced imaging alternative, both 2D and 3D as an example. And even in certain other categories like restorative, and Endo, we have value or fighter brands. So as some of the market shifts to focusing on cost, which is a big issue for our customers. Clearly, we have alternatives that we could offer across our portfolio.

Okay. Very helpful. And do you think the customers being more cost conscious. Is that picked up of late? Is that a function of inflationary pressures? Do you think incrementally, there's more focus coming from your customer base relative to years past?

Yes. I would say, certainly the last 3 or 4 quarters, we've seen through our surveys, and we do several thousand responses in each of our quarterly surveys from our customers, telling us that cost is a #1 issue in their businesses and their practices. Obviously, staffing shortages are also an issue. But cost being an issue, clearly, they're looking for alternatives. And it's not just about the cost of the product, but how can you economics better for their practice. So I don't just focus on, here's what it costs for our products, but how can we improve patient flow through their practices, how can we get them better economics. A lot of this is all through digital dentistry and our offering. But clearly, they're focusing on cost. And part of it is the cost of the product. Part of it is, how can I be more efficient in my practice? How can you DENTSPLY SIRONA, help me improve the economics of my practice by improving my patient flow.

And you feel like you've got that diverse portfolio to go ahead and do that.

Absolutely.

Okay. I'm going to go through product lines. I'll hit in some geographies, I'll zoom out and go to margins, and we'll go from there. So I'll start with CTS. And that's been probably the most difficult division for the company, most of the pressure emanating from imaging. You just brought it up. I think on the last call, you talked about company-specific initiatives, right? Orthophos SL being introduced, some promotions. Are you seeing those actions take hold in the marketplace? Or is that something like, hey, John, this is a little bit more longer term that needs to play out over time?

Yes. So when we talk about CTS, it's our connected technology solutions offering. It's obviously heavily equipment based. So think of it as CAD/CAM equipment, everything from interval scanners to mills to 3D printing, along with other equipment, imaging equipment instruments. So that kind of makes up what we call CTS along with our DS Core software platform. We've actually done well in CAD/CAM. So if you think about the intra scanners, mills, printers, that's actually held up pretty well in this tough macro environment. Where we have struggled is on the imaging side. And this is typically equipment that's priced at much higher price points, almost always gets financed. And obviously, with higher interest rates, it puts a lot of pressure on customers moving forward with financing at 7%, 8% versus previously at 3%, 4%. So we've seen a lot of pressure there. It's not just the macro for us, though. We have lost some market share on the imaging side. And to your point, we've now relaunched this lower-priced alternative called Orthophos in a European market. So we think that's going to help. But certainly, we expect kind of the imaging area to be under pressure for the remaining part of this year. And just to put it into perspective, last couple of quarters, we've been declining 30% in imaging, right? So it's been pretty substantial. I think we expect to see declines in the back half of the year, but not to that extent. So we do expect to see some improvement with the relaunch of Orthophos with some of the initiatives that we're rolling out, but clearly, that's been the headwind in our overall CTS business. And with that, in the first quarter, we posted a decline of about 5% organically. And so obviously, it's been a big headwind when you look at our overall performance.

Okay. And as you mentioned, CAD/CAM held it better. Let's go to CAD/CAM. There's a lot going on in there. I mean you've got Primescan, you've got CEREC Primemill, you've got Primeprint. Can you deconstruct how those products are faring? And how is the mill holding up in light of 3D printing and any potential cannibalization that you're seeing there?

Yes, it's a great question. I think we've been very focused on intraoral scanning. It's kind of the lead into everything that's digital dentistry. So we've been very focused on both our stand-alone offering, which is Primescan Connect, along with our full chairside offering, which is Primescan AC. We've seen some very good traction there. I think we've rolled out a number of promotions in certain markets outside the U.S. and seeing some good pickup there. So favorable reimbursement that's taking place in certain markets like Japan, as an example, where they're going to get now reimbursement for scans, and we think that that's an opportunity for us as we go forward here. So on the whole, I would say we're doing well in scanners, big focus for us, will continue to be a big focus for us. On the milling side, I think in this tough macro environment, it's a good question to say, well, why is Milling actually doing so well? And I think there's a real good value proposition for customers where if you can design and do your own mill in office through single office dentistry, there's a huge return on investment, right, and a very fast return on investment. And so that's kind of how we really play into this milling space. We're obviously the leader in the category. And then 3D printing, obviously, is still a small part of our business. We're seeing a nice uptake. We've obviously rolled out some new resins, especially around the splint area. But we see clearly a nice runway ahead on 3D printing. But there's a lot of buzz out there around is 3D printing, going to replace milling. We clearly see them as complementary and not in conflict with each other, not a cannibalization situation. If you think about milling, Obviously, the durability of a crown, the strength of the crown is very different when you mill versus when you print. So we view it as permanent versus temporary. When you talk about milling versus printing, the aesthetics are very different, much better when you look at a milled crown versus a printed crown and just time to actually mill versus print is different. And so there are advantages to milling. There's cosmetics that are better today. Down the road, could that possibly change? Of course. And I think we're looking at things within our own R&D area to figure out how we can advance the 3D printing strategy long term. But today, in the short term, intermediate term, we see them as very complementary.

And maybe to that end, Glenn, are you seeing some of those early Primeprints going into mill practices? Are they just sort of tech savvy, leaders. And so sometimes you're actually placing a Primeprint alongside a Primemill?

Yes. I think clearly, where we have a single office dentistry, it's a sweet spot to have a 3D printer included. So we -- obviously, that's kind of a first and foremost area we will go after when we look at 3D printing. But that doesn't mean you have to be a single office dentistry type of practice to actually have a 3D printer. So we see both. I would agree with your point. It's probably the easiest opportunity and where we have the immediate impact is going in to those types of practices.

Okay. And then maybe one more down the CTS road, and we'll pivot off. But you've got DS World, I believe, in September, and then it's an IDS here in 2025. Sometimes I feel like DENTSPLY is trying to use that almost as a launching pad of new products. You see it in the U.S. and then 4, 5, 6 months later, you're almost able to roll it out to the international markets. Should we be more attentive to what that might mean from a product cycle standpoint going into DS World this year, considering IDS is shortly behind it?

Yes, I think the way Simon Campion, our CEO thinks about product launches is we're not going to wait for a DS World event to launch a product, right? We're going to launch the product when we are ready. And I think you will see some new innovation coming out as part of the DS World Las Vegas show that's going to be happening here in September. But -- we are pretty excited about some things that are coming out. It's going to be in the digital dentistry space. I'll just leave it at that at a high level. I don't want to spoil the fun yet, but we do have some innovative products that are going to be launched here, I would say, in the second half of this year. And they will be showcased at our DS World events coming up.

Okay. And maybe just, again, one last one on CTS. It's hard to see a path towards 4% growth next year in 2025 without the resumption of growth in CTS, right? I mean you're doing so well in ortho, you're really getting some momentum in implants. EDS has tight error bands around it for the most part. So when you take it back to CTS to get to that 4%-ish bogey, that's my term, do you feel comfortable in the resumption of growth? You mentioned earlier imaging down 30%, but the decline is slowing. CAD/CAM has done well, it seems like there might be a fit of a new product in the segment, can we think about growth in '25 CTS?

Yes. Listen, I think the biggest wild card and risk we have is CTS returning to growth. So you hit all the points. We're doing well in most parts of our portfolio, growing nicely. Clearly, when you think about CTS, I don't think you should look at it as a broad category. I think we'll continue to do well in CAD/CAM. The area of imaging and getting that back to even neutral would be a huge benefit to us. And obviously, the relaunch of Orthophos should help. Hopefully, we'll see some better macroeconomic conditions in certain markets like Germany. And we call it Germany out because it is our second largest market behind the U.S., it's 10% of our consolidated sales. But Germany is a heavy focused equipment market for us. So you know that CTS, it's probably about 30% of our total sales, when you look at CTS to total DENTSPLY SIRONA. Germany is 2x that, right? So Germany is heavily equipment dependent. And so Germany returning to better performance is going to be a key around this, especially imaging. But our goal is to try to get imaging to kind of at least get to be down low single digits or even flat. I think CAD/CAM will grow. And if we do that, to your point. The rest of the portfolio is actually doing pretty well. That will be the key to us getting to 4% or 5% in the outer years of our long-term plan. But it's clearly the biggest risk in wildcard right now.

And if I could follow up on Germany. It's funny, I was going to go through all your product, but I'll fast forward to Germany and then take it back. As you mentioned, biggest market outside the U.S., you alluded to weakness on the 1Q call, I think you said down 15% year-over-year in 1Q, '24, double-digit declines for the past 4 quarters, and you expect a double-digit decline in 2Q '24. That said, you do all this great survey work. Your proprietary survey, I think, gotten less bad in 1Q '24. We do what we can in Germany, tough. But when we roll up our sleeves and we're looking at consumer confidence, it's not great, but it's actually improved off the lows for the past 4 months and had a decent reading this morning, are you seeing any early signs of like thawing or second derivative that we can attribute to Germany?

Yes. No, listen, I think we rely heavily on our survey results. And even if you just look at Germany stand-alone, we had over 200 responses in the survey that we just did in April, and it was less bad than previous surveys to your point. So it looks like things are hopefully now moving in a better direction. But it is still a challenging market for sure. Customers still have concerns around the cost in their practices, patient traffic is still sluggish. It's the highest concern in terms of staffing shortages versus all the markets that we survey. So -- it's still a challenging situation, but I think on the whole, we're starting to see some silver linings, but we're not going to start calling a turnaround until we actually see the results. And I do think that this Orthophos relaunch should help us as well. This was a product that was very successful in Germany before it was discontinued several years ago. And so I'm pretty encouraged by some of the early signs and what we're seeing there in the first 2 months of launch there. But -- by no means are we expecting growth in Germany this year? I just think having a lower level of decline in the back half of the year would be an improvement from where we're currently at. Cause you mentioned, we are declining 15% plus in Q1, probably the same thing in Q2. And so getting that back to a single-digit decline or would be an improvement from where we are today.

Big weight on the overall top line when you try to tie it back to growing 4%. Okay. And then I'll take you back to the divisions and EDS was down mid-single digits in the first quarter. There was a really difficult comp from a year ago. But you talked about low single-digit growth in the back part of the year, I think to get around flattish for full year 2024. And the 4Q comp is not easy. So I've gotten questions like hey, what drives that acceleration in growth in 2H when we think about EDS?

Yes. So just to put into context, we were down in the first quarter, but last year's first quarter in 2023, we had close to 12% growth. So the comp was extremely difficult. That's the reason why we were down -- down kind of mid-single digits in Q1. We would expect kind of our EDS business, which is Essential Dental Solutions that consists of preventive, restorative and endodontics as part of that part of our business to grow pretty consistent with patient traffic, right? And so low single-digit growth is our expectation. We also have a product that we've just launched in Europe and certain parts of Asia in the endo space called X-Smart Pro, it's a new Endo Motor. Seeing some really good results early on. We're expecting to get the U.S. approvals and launch here later this year. And so that should help our overall EDS growth in the back half of the year versus the front half of the year. But a lot of it is comps. The Q4 comp, I think last year, we grew 3% or 4%.

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Right. So it's not the 11%, 12% we saw in Q1, but Clearly, we expect better performance in EDS. Comps were the big issue, but the new product launch would help as well?

And just how about pricing power and consumables? I said prior to you taking the stage we're doing animal health, right? Animal Health, is really at a lack of volume growth, but you see consistent price of 3%, 4%, maybe even in some cases, 5%. Obviously, that's not the case in dental, but -- is there this ongoing shift on a private label on a trade down where really that EDS long-term growth algo is just part [ of the term ] but more hostage to volumes and unlikely to get any price realization. Can you talk to those dynamics?

Yes. I totally agree with you. I think all of the growth in EDS going forward is going to come from volume. I think raising prices right now is the wrong thing to do. Customers will shift and continue to move towards lower cost brand if you're going to raise your prices. And so we were able to do that, I would say, last couple of years with inflation being what it was, but our view going forward is pricing is kind of flat to even down slightly. And so any growth coming out of ED is going to have to come from volume basis. That's the way to think about it, at least as we look at the next 3 years.

Okay. And then your ortho segment, your fastest growing to vision and really across 2 different areas. So let's go with Byte. We'll start there. You started to see increasing traction post the SmileDirectClub bankruptcy, you're now pointing to north of 20% growth this year. The big question I get is sort of your level of confidence that success continues into 2025. I think the pushback I get is, it a onetime step-up due to SDC exiting, and then you still grow. But it's a higher base, so the level of growth that we're able to subscribe to the that step-up?

Yes. No, listen, I think we're really happy with the performance of our Byte business is a direct-to-consumer business. We are taking advantage of some of the competitive dynamics. So one of the big competitors exited the space in end of 2023, and we saw an immediate uptick in our business when that happened. We are seeing some really good positive leading indicators for this business. So impression kit growth up significantly. And I mentioned on the earnings call, I think, plus 50% growth in impression kits, just as an example, that's a lead indicator, seeing really good unique patient traffic going through our website, really good lead indicator. We saw this coming and we forward invested in this business. So add a number of treatment planners, clinical operations, support people, salespeople, et cetera, knowing that we're expecting to see a faster growing business as we move forward. And I don't think it's a onetime bump and then it kind of comes way down in 2025. I think we'll have to talk about what '25 looks like when we get closer to the end of this year. But clearly, this is a business that should be growing double digits consistently. We're probably seeing some additional benefit here in 2024. But in addition to the competitive dynamics, we rolled out this Byte Pus model, we call it. It's a hybrid model where you do an initial consult with a general practitioner. Get the scan done. They say you have a good treatment person for the direct-to-consumer treatment plan being from home. And -- so that hybrid model is now fully commercially launched. And we feel like there's going to be some good traction around that should help our conversion rates. And then on top of that, we're seeing a really good uptick in accessories. So with every aligner going out now, we offer things like teeth whitener, retainers...

The add-ons.

The add-ons, all these accessories, and we're seeing about a 40% attach rate right now, and that's increasing. Which is a really good additional revenue source for the Byte business. So we're excited about that as well.