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

Good morning, everyone. My name is Erin Wright. I'm the Health care Services Analyst at Morgan Stanley. We're happy to have with us this morning, DENTSPLY SIRONA's CEO, Simon Campion. For disclosure, just for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you do have questions, please reach out to your Morgan Stanley sales representative. And with that, I think we'll kick it off with Q&A, especially [ hot off the ] press. There was a press release out just a few minutes ago while I was presenting. So apologies for not knowing everything about it, but you're here to tell us everything about Primescan 2, your first cloud-native intraoral scanner and the launch of that product, what that means? I guess can you talk a little bit about the product the addition to this broader portfolio from a CAD/CAM perspective and the strategy and rationale behind it.

Sure. So thanks for having us here. So Primescan 2 is getting released today in the U.S. around the world indeed. And it is the first truly cloud-native wireless scanner. And so this enables it to be completely hardware independent. So all the computations, et cetera, et cetera, are done on the cloud. So it adds versatility, portability, and also, I think very importantly, what we know from other areas is the inclusivity of the patient in the workflow and the decision-making. It allows -- it helps the dentist communicate more seamlessly and effectively and at the time of treatment with the patient, all the storage is in the cloud, computation, as I said, we can do sure some simulation on it. It's fully portable. So it's just like picking up your cell phone, you can move it from operatory to operatory in your practice. It interfaces with lab partners. It's powered by DS Core. So it's got a lot of things going for it. It's been in the works for a number of years, and we're really pleased that we've been able to bring it to market today.

And how would you describe the price point and what type of customer this is geared towards in terms of -- it would be an upgrade cycle type of dynamic with the existing customers are expanding kind of the opportunity across your Primescan offering.

Yes. So it's obviously -- there are upgrade cycles, which we feel this will fit nicely into -- but I would say, and hopefully, you've all seen a slight pivot on our part over the past couple of years, getting scanners into the market is really important for us. The CEREC workflow is obviously very important, but the starting point for everything digital is a scanner. And so we've deliberately focused on scanners the past two years. And 2023, we placed more scanners than ever before. I think in '24, we're going to be on track to place more scanners than ever before and Primescan 2 is certainly going to help that. But the starting point is to get more scanners into the market. With respect to the price point, for this device, it's between Primescan ACE, which is the full CEREC system and Primescan Connect. So it's -- we have the top end, the middle section and the lower end of the scanner market covered now with the addition of Primescan 2.

Okay. So this fits in that sort of middle tier segment, I guess, how do you -- how has just the broader landscape or competitive landscape evolved in CAD/CAM, we've obviously seen some more competition at some of the lower end. But what's the appetite for that middle tier, what's the appetite for the higher-end Primescan ACE in sort of the backdrop that we're in. .

So if I start at the higher end, and it's not just scanners, I think it's equipment in general in dental. I think we've communicated before that price points above USD 20,000, USD 22,000 customers tend to finance those purchases. And with interest rates the way they are, there has been hesitancy, and I think everyone has spoken about that. We think there's a good segment in the middle for devices like this, particularly because of the portability of this device. The way it fits into workflows, whether it's a simple digital workflow for aligners or implants, for example, or all the way through to the full CEREC workflow. Primescan 2 can adapt to the needs of the customer and expand as they expand their practices as well. So someone who just wants to begin the digital journey, but wants to migrate eventually to CEREC workflow, Primescan 2 will enable them to do that. It enables them to do the simple stuff at the start and then get it into the more advanced stuff with Primeprint, Primemill, et cetera, et cetera. .

And this is hardware independent, meaning you're agnostic to kind of what you're working with, whether it's a laptop or and it doesn't have to be full chairside offerings in terms of what you're pushing. But how much of the full chairside is still part of the strategy for you? .

Well, full chairside is really important for us. But getting people into digital is most important and then we can pivot customers if they tune to into full chairside. And the hardware independence means that there's no computer tied to this technology. So it's not hardwired in to an operatory, for example, the dentists can show the patient on their cell phone or on any screen in the operatory, what's going on with that patient at that particular point in time.

Yes, this sounds like an exciting launch head of DS World for you. I guess anything else from a DS World perspective to call out that we should be paying attention to and where the focus will be.

Well, obviously, DS World is our showcase event every year, and we have 5 of them this year around the world. Clearly, Primescan 2 is going to be a cornerstone of this year's event in Vegas at the end of the month. But X-Smart Pro Plus is another great addition to our endodontic portfolio. We've just released that in the U.S. It's been available in Europe for a number of months now and has done extremely well. And the feedback from customers has been extremely positive on that. So we'll be launching that. In fact, so far this year, we've had [ 5 10-Ks ] in the U.S. So our innovation funnel is robust and our ability to deliver predictably is improving all the time with respect to innovation.

Okay. I'll get back to innovation and some of the dynamics around equipment as well. But I'll go back to what I was originally going to ask at the beginning was it's been almost exactly 2 years since you've joined DENTSPLY and it was a somewhat transitional time frame for the company. Can you speak to what surprised you since coming on board? And how have your thoughts evolved in terms of the longer-term trajectory and vision of the company? .

So I think -- so I'll start with the positive surprises. We kind of trust but verify is our philosophy. So we've done a ton of market research about our product portfolio. And we don't have any meaningful gaps, which is a great thing to see. And so we are plugging different areas. But in general, we don't have any meaningful gap. So that was really positive. The positive thing, too, is that the talent that we have is strong. It's just some of our systems and processes don't allow that talent to flourish and we tend to put stuff through the over complicator. So we're trying to simplify our systems and processes to allow people to do good work. And then the third thing I would say positively is our innovation funnel is, is very strong. And with the arrival of Kevin Boyle, our CTO, at the back end of last year, it's becoming more predictable. We've reallocated funds from different areas. I think we announced at the last earnings call, that we've stopped working in certain areas and have reallocated $19 million of R&D funding to key areas such as ortho and such as DS Core and digital in general. So that's all the positive stuff. On the challenges that we face, I don't think it will be a surprise to anyone, but the integration between DENTSPLY and SIRONA never really took room. So we are doing all that work now. Again, we announced for example, one of the most meaningful things that we have embarked on is ERP. We have 14 ERP systems. And we said from the start, we're going to go to one and so we kicked off that project within weeks, I would say, I was arriving. And we just went live on the first of August in the U.K., and we will go live before the end of the year in the U.S. So it's that ongoing integration between DENTSPLY and SIRONA is leading to a lot of effort across the organization.

And part of coming on board, you issued long-term target of $3 in EPS in 2026. That was assuming some sort of faster level of underlying growth of 4% to 6%. I guess, what are you -- how should we think about those assumptions and what can kind of bridge the gap to get you to that $3 if we don't see that sort of 4% to 6% underlying.

So you'll recall from our Investor Day, we had a bridge about from where we were to the $3 and 2/3 of that bridge is internal, I'd call it, stuff that's within our control, such as SKUs, such as network, et cetera, et cetera. And the ERP contributing a little bit too by 2026. So 2/3 of that bridge is within our control. And so far, we are on track for that 2/3. SKU continues to go well. We're eliminating SKUs right now. We migrate revenue SKUs later this year and into next year. We've already spoken, I think, on many occasions about our network optimization plans and that continues to move ahead. We've announced the closure of a number of sites and distribution centers that continues. And then on the -- and I spoke about the ERP. On the macro thing, clearly, we do not anticipate the strength of the downturn in dental. But we have -- we're pulling the levers that we can to try and help us with that bridge. And we spoke at the last call about the Wave 2 of the transformation of DENTSPLY SIRONA, where we're going after $80 million to $100 million in savings. Some of that will help us bridge the gap $2, $3 if the macro doesn't turn. But a lot of that is going to be reinvested in driving growth and driving innovation. So -- we spoke about creating our own demand and creating a virtual or inside sales team. So we are funding that. We've already started that process. And we're really pleased with the candidates we're seeing. We're really pleased also that more than 50% of them are diverse, which is great. We are investing in ortho, enhancing our sales team in that and also enhancing our software to make it more user-friendly. And we will, as I said, invest in DS Core, so we can move R&D in parallel rather than in sequence. That's really important to us. So we have levers we're pulling to help us with that $3 given the macro uncertainty.

Okay. And just speaking a little bit more about that restructuring program that you announced in $80 million to $100 million, I guess, how much drops to the bottom line? How much is reinvested in the business as we think about some of these initiatives that you're taking on and the timing of the cost saves?

We've not given any numbers about how much flows through or how much gets reinvested. We'll save that for another day. And the time frame is 12 to 18 months. .

And then in terms of the near-term kind of guidance or 2024 guidance, you're assuming kind of negative 1% to flat kind of organic growth for the year. I guess can you break down some of those headwinds and tailwinds that you're seeing now, for instance, does it incorporate things like Primescan 2 in there? Will that be meaningful this year? Or that will be more of a ramp as we head into next year? .

So I'll start with the back end. So Primescan 2, I think, is quite meaningful this year. It's already factored into the numbers. We're facing additional FX headwinds this year, at the back end of the year. And we've also moderated our expectations on our aligner business, our Byte in particular, given some of the regulatory challenges that DTC business has surfaced over the past number of months. So there are some of the headwinds for the back part of the year that we're overcoming and hence, that guidance at the Q2 call.

Okay. Great. And then I think guidance of over, I guess, 18% adjusted EBITDA margin for 2024. Can you help us understand the cadence there as well as we head into the second half and long-term margin targets across the business.

Yes. So I would say the second half, in general, we expect it to be more robust than the first half. On EBITDA, but also across -- in revenue, in particular, implants. I'm sure you'll ask the question on implants before the next 20 minutes is out. We do expect growth on implants in the back half of the year, too. We put a lot of effort into that business. But listen, our aligner business is robust. It's double-digit growth. Between Byte and SureSmile. And as I said, our scanner business has been very robust. We expect it to continue to demonstrate that robustness. And then the obviously, the imaging businesses across dental and ours, it hasn't been immune to -- has been challenged with macro, and we introduced Orthophos SL or reintroduced it back in the June, July time frame, and we're happy with the uptick of that. So that's helping us offset some of the challenges .

Okay. Great. And then -- so let's talk about implants and move into the specialty segment. So your implant business up low single digits in the second quarter. Can you parse out some of the key underlying drivers in the U.S. market right now as well as international markets where is most of the growth been driven from? And then just kind of the underlying landscape and backdrop and demand trends for implants where we stand today.

So in the U.S., as you know, we invested in enhancing our sales team in the early part of 2023. I think it's fair to say that we have been a little surprised at how long it takes to turn that business around. But there's a unique complexity to that business. That's very different to the business that we came from in med device, for example. So if you're in med device and you're trying to sell something to an interventional radiologist or cardiologist or surgeon, you have to call on that individual and convince them of the merits of transferring their business to you. Whereas in the implant world, not only do you have to convince the implanting clinician, but you also have to convince their network of referrals. And on average, there are 14 referrals. So it's 15x more complex arguably than converting an interventional radiologist or cardiologist, for example. We also had challenges in the past with turnover in our sales team. Between '19 and '22, we last more than 20% of our sales team every year on implants, which is very, very hard to recover. And we stopped investing in clinical education for the implant community. So we reignited our education. We just had a big event in Miami, where we had over 500 implantologists there. We're having another event in Europe this month on our value brand, MIS, where we're expecting the 400 to 500 implantologists there. And we have been reengaging the community and our team and our turnover for that sales team right now is less than 10%, which is a really good number. So we do expect it to turn. We have refocused commission plans, et cetera, et cetera. So we expect -- there are green shoots, we expect to begin to turn in the back part of this year. Outside the U.S., obviously, we have benefited from VBP in China. It was a significant haircut in price. However, the volume that we've picked up have more than offset that. So we've had a very, very strong '23 and '24 to date in China with respect to implants.

Okay. And in terms of innovation across implants, I guess, can you give us an update there, the mix split also between kind of premium and value and where your focus lies now? You mentioned the ads for instance? .

Yes. So we're about 80-20 premium versus value. We have launched several new products. We tend to shut them from the rooftops as much as we're shutting Primescan 2 from the rooftops. But we've launched several new products around the Prime taper family. And we've been converting physicians or dentists either from our older technology to our newer technology. So innovation in implants is really important. But I would say equally important, arguably more important, given our position in the market is the clinical education piece and reigniting our reputation with the implant community.

And then can you talk a little bit about just getting back to mid-single-digit growth across that business and your time line to get there?

Yes. So as I said, we expect to be growing by the end of the year. The plan that we communicated, which we can't see any reason to change it really is to be at market growth by the end of '26, that's part of the -- that's part of the bridge to $3 as well. We have the portfolio to do it. We feel now that we have a sales team that's got some degree of tenure has built some reputation. We're investing on the clinical side. So it comes down to us executing in the field now. That's really -- we've had positive feedback from the events that we've had. [Indiscernible] back in the game. Now we just have to go out and earn the business. And that's where feet on the street helps. And also the virtual sales team that we've created, they will be making phone calls to Butte Montana, for example, where a rep may not cover in their day-to-day business. .

Yes. Okay. And then also within Specialty, the clear aligner efforts, can you give us an update on both the DTC platform with Byte and what's going on from a regulatory standpoint there as well as the strategy at this point behind SureSmile and your goals from a market share perspective?

Yes. So on the SureSmile side, we've had a robust performance in the past couple of years probably double-digit on average over the past few years. We feel we have a differentiated offering. We feel our software is very powerful and the customers that we've visited and spoken to, and we just got back from Australia, where we met a number of them as well. They feel that the software that we have is arguably the best orthodontic software because it started out life as in wires and brackets. The front end is not as easy to use as some of our competitors and hence, the investment that we're making in the front end to make it more seamless. We have a differentiated clinical offering with respect to SureSmile versus our competitors. It's done very well for us domestically and internationally. Europe has been extremely strong over the past number of years, and the revenue is now, I would say, very meaningful on the SureSmile side. On Byte the regulatory challenges, where we need more dental involvement, not that we have -- all our treatment plans are overseen by a dental professional, but some states have taken it to the next level. We've invested a lot in government affairs over the past several months to try and offset some of this and to be fair to our former competitor, small [ Direct Club ], they spend a lot of money in that arena, too. And now there's one man standing or women left as it were -- and so we're shouldering the investment to try and turn some of these things around. We've been successful in some states. In other states, we have been less successful. But that has moderated some of our conversion rates. And hence, back to your question about guidance for the rest of the year. We've moderated our expectations on Byte for the rest of the year as a result of .

And just overall clear aligners and thinking about the doctor-directed market, I guess, how do you think about just overall market growth over the longer term across clear aligners. We always get that kind of question. Because it's still a relatively underpenetrated market.

It's still underpenetrated. We continue to see it as a significant opportunity for us, particularly as we invest more in the commercial team and invest more in our software. Again, referring back to Investor Day from November of last year. It is one of the areas. Aligners is one of the areas where we expect very robust double-digit growth and is a vector for that 4% to 6% growth target that we have. It's a very important part of that.

Your focus right now is more on the GP as opposed to necessarily the ortho. And does that change over time as you kind of delve into the ortho segment?

Yes. We have focused on the GP over the past several years. I think it's -- it's important that we reengage with the ortho community as well. The majority of the volume is in the ortho community. We have been historically think recognized in general as a GP orientated business, but we do have fingers in different pies with endodontics and implantology. We should be more meaningful in the ortho space. But the competition there is robust. So we won't just show up and get business, we'll have to earn it.

Yes, yes. Okay. And then shifting gears more so to general consumables, equipment and kind of just general demand trends across dental. So outside of kind of what's going on maybe from a specialty perspective. how would you characterize current dental demand trends across kind of the various geographies and from a basic kind of consumables perspective? And dental office visit trends for instance? .

Yes. So as you know, we do research every quarter, normally in excess of 1,500 respondents around the world. And I'd say the traffic has been muted. -- not getting any worse, but not getting any better, but muted in general. -- domestically, and by the way, our data aligns very well with the data that the ADA publishers. So we feel we have a good reference point. So in general, it's muted in certain pockets of Europe, I would say it's quite muted, particularly around -- particularly in Germany -- and sentiment in parallel with patient flow is challenging. Australia and Japan, it's similar. And in China, the flow in China is, I would say, significantly lower than patients flow elsewhere probably still COVID after shocks, but it is not deteriorating anymore. So the gap between the U.S., for example, in China continues to be 15 to 20 points compared to pre-COVID levels, but it's not getting any worse. .

And Germany is significant for you. I guess what is going on there in terms of the underlying weakness we've seen? Do we start to lap that at some point? Or is it getting incrementally worse from here are starting to stabilize at some point? .

Yes. So it has not gotten incrementally worse. It deteriorated from, let's say, Q2 through Q1 and has been stable since we actually called out Germany first in August of last year as a result of the survey work that we did. So it's not as bad as it was, but it's not improving dramatically. And it is, as you said, arguably, we are overweight in Germany. Given our legacy Sirona presence there, it's about 10% or 11% of our total revenue, which is a significant number for a single country. It's our second largest single country after the U.S. worldwide. So it's -- when -- we don't like Germany getting a cough. Let's go that way.

And can you talk a little bit about kind of the equipment business, I guess, outside of CAD/CAM in terms of demand trends, willingness to spend and invest in practices from the practitioners? .

Yes. Again, pressure in Germany. Unsurprisingly, I mean, their economy is under pressure. Pressure in Australia as well, they had 11 interest rate rises. So imaging -- high-end equipment, for example, has been under a lot of pressure. As I noted, I think at the start of our chat here, dentist tends to finance any purchases over $20,000 or $22,000. So if they're interest rates 7%, 8%, it's hard to think about spending $100,000 to kit out your operatory with some equipment no matter who it's from.

Okay. And then you recently disclosed in your latest filing that you are revisiting your Patterson relationship or rethinking that how should we interpret that sort of disclosure? And how do you characterize the value that distribution brings to you as a manufacturer in this sort of fragmented market? .

Yes. So all our distributors are -- play a very important role for us and other companies within the dental space. They have a large footprint. They do installations, they do service, they create some demand for us. Some of them compete with us. But as the OEM designer and manufacturer we feel we should be doing better out of relationships that we have with distributors globally. The Patterson thing is not a reevaluation, I would say, of our relationship -- it's -- these things are all to renew often. So we said, hey, we need a bit of a reset here. So we issued them a nonrenewal. We do expect to come to an agreement with Patterson in some way, shape or form before the expiration of our deal with them. We're talking to them all the time, but we thought we were obliged to look after ourselves and hence the -- hence, that step that we took. Overall, though, and we've said it frequently since we got to DENTSPLY SIRONA, we need to create our own demand. That's simply an essential thing that we do. I think we've -- arguably, we've become overreliant on our distribution partners to do that for us. So we've changed commission plans with our sales reps. We have restructured ourselves, so we're more focused. We are creating this virtual sales team. We're getting back into universities, just trying to stimulate early demand once these graduates move into the real world. So it's all part of the overall strategy to stand up and be counted ourselves and not rely on others to do the workforce.

And I guess some of that's part of the investments you're making just in kind of the commercial effort. And I think several years ago before you came on board, I think it was like 80% of sales force comp was basically fixed. I assume that, that's changed since then dramatically and -- and then, I guess, if you could touch on that, but also just what goes through distribution. I think it's like 2/3 of your business goes through distribution today, I guess, where does that mix go over time?

Yes. So 2/3 starting at the back end, probably about 2/3, 70% or so goes through distribution. It does vary around the world. And the U.S. is more distribution-centric than Australia, for example, where we are mainly direct in Australia. Is that going to change meaningfully -- probably not. We just want to get some more recognition for all the investments that we make, such as the investment that saw the other day to day Primescan 2 in the dental market. I think your numbers on how much is fixed versus variable might be a little generous. I think it was maybe more fixed than that even. But it has changed, and it will continue to change. We don't mind paying reps very, very well when they grow and when they grow in the ways that we would like them to grow with no issue paying over robust over quarter dollars. So we've changed those plans globally. We will change them again and enhance the focus on driving revenue growth.

Okay. And then one area that was highlighted, for instance, at the Investor Day was potentially a step back into kind of M&A? And what is the strategy? Are there areas that either you would divest or look to build out in terms of the portfolio offering today? And is there a pipeline of opportunities, I guess, that you see in the market today?

So I would say -- I think we've said this a couple of times and back to the integration of DENTSPLY and SIRONA. I don't think we're in a position to do transformative M&A today -- we have the hygiene work that's well underway and on track to sort out before we do some transformative M&A. However, we are open and ready and have had several discussions with different groups about tuck-in M&A, either a technology that we think is appealing. We're very open to that. I don't think we would divulge the spaces that -- particular spaces that we are interested in. One of the meaningful areas for us, as you know, is our [ Wellspect ] Healthcare business. We spoke when we got we had a lot of inbound inquiries none of them came to fruition. We're really pleased that it didn't come to fruition. We spoke about the investments that we're making in that business. It's revenue accretive or margin accretive for us right now. and we expect that to continue. So we are not just a dental company, but we're also a urology company which is surprising, but it's a macro proof part of our business, which is fantastic.

And I do have to ask with the recent news of Glen Coleman's kind of departure from the company or upcoming departure from the company. I guess, how are we thinking about the CFO starts from here? And any changes to how you're thinking about kind of financial disclosure or any changes kind of in terms of long-term targets as we think about that departure just because.

So no changes. So the back part of your question, no changes to capital allocation or the long-term plans. Glen a really important part of our leadership team, but it wasn't the only part of our leadership team were we're very aligned. We're -- we think we're operators. We don't make decisions in a vacuum. And so while Glen departure is unfortunate, we are very sure of our footing. The search is underway. It was underway about 24 hours after we got the news. So the search is underway. And so far, we've got a robust slate of candidates that we're in the process of starting to meet and have discussions with.

Okay. And as we sit here today, and hopefully, you'll be here next year, I guess, how should we think about the vision of your vision of the mix of this business kind of longer term and you talked a little bit about kind of divestitures and M&A and kind of where you see things from that perspective. But any major changes across as you're thinking about kind of the mix of this business.

I don't think so. I don't think so, not in the medium term. I think you should expect, I would hope that the prevalence of our urology business will become more meaningful as we move forward given the growth rates that we've experienced in the past year and the investments that we're making. We will, for sure, continue to focus on CAD/CAM and scanners in particular. So that would probably become more important to us. And then over time, that will unlock other parts of our portfolio, such as aligners and implants as we digitize customers and enhance their workflow. So -- but we still invest in consumables as well. That's a very important and profitable part of our business. So we are not taking an eye off that for 1 moment. We've had a number of launches in that space already this year. .

Okay. Great. Thanks so much. And we look forward to seeing you at DS World and what's to come and more on Primescan 2 as well. Thank you. .

Thank you..