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

My name is Jeff Johnson. I'm the Senior Medical Technology Analyst at Baird. And our next presentation this morning is from Dentsply Sirona, a leading manufacturer of dental consumables and equipment products across the globe. With us today from Dentsply Sirona, we're happy to have President and Chief Executive Officer, Simon Campion. I think I said that right, right? I don't know why I threw that little accident on there. Simon, I'll turn it over to you. I think you have a couple of slides to go through and then we'll go to some Q&A.

Thank you. Good morning, everyone. Thank you, Jeff. We're now 2 years into our transformation journey at Dentsply Sirona and we're happy to be here today to provide you an update on that journey and an overview and discuss our business. If you could just take a moment to read our forward-looking statements with respect to the presentation. Our most recent SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. Turning now to a snapshot of our business. For those of you not familiar with Dentsply Sirona, this should serve as a helpful introduction. For all of you, it's worthwhile to summarize some recent key numbers so you can assess and measure our performance going forward. From a regional perspective, Europe represents our largest geography, heavily influenced by our presence in Germany, which disproportionately contributes to our revenue profile, especially with equipment. We see the U.S. market as a large source of continued opportunity for our company, while focused and selective expansion in LatAm and Asia Pacific creates an opportunity to accelerate our growth. With more than half of our sales coming from segments with favorable long-term dynamics, we think we're well positioned to provide great solutions for our customers and their patients and generate results for the investment community. A core tenet of this management team's philosophy is to utilize robust data to make data-driven decisions. That's why we continue to survey our customers and conduct assessments to validate and support our strategic initiatives. Through this work, our customers have told us that we do have one of the most recognized brands in dental, that we do offer a comprehensive and competitive portfolio, that our education programs and access to those programs is unparalleled, and our scale and breadth does differentiate us. Our strategy is very clear to us, digitalized dentistry, innovate on products and service for oral health and continence care focused on customer and patient needs, be great partners and do so through a committed and engaged team with compliance and quality always at the core. And we are continuing to operationalize and advance all 5 of our strategic objectives. We cascade these objectives through our organization and have aligned our goals around them from annual operating plans to bonus plans to work plans. We have moved deliberately to execute on these through our operating model that we introduced through our processes, and throughout the investments that we are making to transform the outlook for Dentsply Sirona. Last week, we announced a significant new product with Primescan 2, the first cloud-native intraoral scanning solution powered by our proprietary DS Core. It is truly transformative and arguably breakthrough design with the future in mind and is one example of how we are driving our strategic objective to accelerate enterprise digitalization. Our foundational initiatives also continue to progress and are important drivers of our strategic agenda. We are designing a winning portfolio, driving network efficiency, refining our ERP landscape and executing on our restructuring. And all of these are further shaping and improving the hygiene of our organization. We remain confident in the strategy. We want to capitalize on the opportunity that the dental industry affords an organization like ours. And we believe that as we execute against our stated objectives, we will be well positioned to win in this market space. With that, I'll join you, Jeff, for questions.

Yes. Great. Thanks. So you covered quite a few topics there from the kind of restructuring and cost takeout to the new products, to the just kind of core execution parts. Let's start with Primescan 2 just that it wasn't in my original script only because we didn't know you were launching it until last week. But I'll give you a couple of minutes here, kind of a commercial for Primescan 2, if you will. And the way I want to phrase the question or kind of couch it is you guys have really focused on DS Core and this cloud-based solution in the last year or 2. How do you see that fitting into the future of dentistry between DS Core and then I think Primescan 2 is your first product that directly connects to DS Core, and I think you have to be subscribed to DS Core even to use it. I might be wrong on that, correct me if I'm wrong on that. But how are you trying to transform what can be a slow-moving dental industry as well. But how are you trying to transform that with products like Primescan 2, but more importantly, DS Core?

Well with -- so DS Core is on the market now about 2 years. And at the end of Q2, we had about 27,000 unique users to it. And every time we improve the capability and the functionality of it, we see a stepwise increases in the number of users. So we expect that to continue. Primescan 2 is the first scanner that's wireless and cloud native. And so that's linked directly to DS Core. You're correct, you do need a subscription to DS Core to utilize it. It's at the base level of the subscriber levels. But we feel that the workflow efficiency that the clinical outcomes enabled by DS Core, that the transportability of Primescan around an office, so it's essentially like your cell phone, you can pick it up and move it. There's no trolley involved, but also, we feel that the improved or the ability to include patients in the decision-making at that point in time, will help improve conversion rates or acceptance rates from patients to dentists. We've seen that historically in my experience in the surgery world, where when you educate patients about the options that are available to them, the physician will choose -- will side with the patient on their request for treatment, and we see a parallel with improved acceptance rates with DS Core and Primescan 2. We've robustly tested it over several months. We had 110 dentists from around the world in Germany last week for the launch event and the feedback is extremely positive. Moving forward, we will be utilizing the cloud for all new technology launches. So they will all be based in the cloud. And we want to create an ecosystem built around DS Core with the entry point to that ecosystem being Primescan 2.

All right. Fair enough. And when you move everything to the cloud the way you're doing, is that for convenience for the docs? Is it for lower operating costs over time for the docs? Just what are the key advantages? And have you seen any other companies? Because of your major competitors, we're not seeing anyone else really push on this cloud-based solution in a big way. Is this what you think at the core is going to be Dentsply's differentiating -- differentiation, I guess, over the next 5 to 10 years?

Yes, we think the cloud is going to help differentiate us. It is going to improve efficiencies for dentists and their practices, especially when they have more than 1 practice and patients are moving between practices perhaps. We think it's very relevant to DSOs, which are becoming a larger and more critical part of the -- certainly, the U.S. dental landscape. And the fact that there is reduced amounts of hardware because the computations are done on the cloud, we would expect to see some reduced COGS as well.

Yes. Okay. And you guys are trying to hit a price point, I think, with Primescan 2, and correct me if I'm wrong here, but it's kind of somewhere between Primescan Connect and fully loaded Primescan card-based, all that. And theoretically, to your point, it should be hardware light compared to your other Primescan. So one is this a gross margin play? Is Primescan 2 a gross margin benefit for you guys? I'm assuming it is, but you can answer that question. And then two, in this market where you do see Primescan Connect has had good success, obviously, you've had to kind of get into that $20,000 price point because you've seen some competitors launch down in even lower price points, is middle of the road, the right price point that will appeal to dentists for what they're getting here in Primescan 2?

Well, what they're -- well, we feel it is. What they're getting here with Primescan 2 is an opportunity to build a digital ecosystem for themselves and their practice. And remember, scanners in the United States are maybe 40% to 50% penetrated. We saw data last week that scanners in Germany, for example are 27% penetrated. So there's significant room to grow with respect to scanner -- scanner penetration. With respect to your margins when we get some volume out of Primescan 2, it's definitely accretive to -- compared to Primescan Connect. Historically, over the past several years, before we arrived at the company, the focus was heavily on CEREC and CEREC only, and God forbid, if you sold a stand-alone scanner. We have changed that plan. The scanners are the gateway to the digital workflows in a dental office. And so in 2023, we sold more scanners than ever before. In 2024, we will sell more scanners than ever before as well. So it's been very deliberate to go after the scanner market first, and then enable people the opportunity to build out their digital practice, if they so choose.

And in the years you referenced there and thinking out over the next few years, do you think more of those, and I know most probably, I don't know how to define most, but most will probably be stand-alone scanners that you sell. But do you think more of the minority will be attached to a CEREC mill or attached to a 3D printer?

I think we have to improve our capabilities with respect to the optionality that having chairside milling affords a customer. But the starting point should be getting into -- getting a scanner into your practice and then building it out. We need to convey the value that chairside dentistry has for the dental community. Mills are even less penetrated than scanners. So we need to do a much better job at educating customers on the value to them and the value to their patients. If you think back maybe 10 years and the demand that was generated for surgical robotics, you see the billboards all around the U.S., go to hospital A, they have the robot. There's arguably no reason why we shouldn't be advertising direct to consumers about the benefits of chairside, same-day dentistry.

All right. Fair enough. You mentioned Germany, you mentioned in your -- as you were going over the slides, Europe, 39%, your biggest market. We do a lot of survey work, but obviously, we serve a U.S. dentists. And I think I feel somewhat comfortable saying the dental market in the U.S. has been relatively stable, again, plus or minus in every month. I probably feel a little better or a little worse versus the prior month. But relatively stable, you do as much, if not even more survey work than we do of your own customer base. One, do you agree with that assessment of the U.S. market. And then Europe has had pockets of okay and not okay, but Germany, to your point, is your biggest market, just given the legacy Sirona. And that's where the survey data has really looked soft. Any change in the German outlook in the near term?

I would say, based on the last survey, Germany is -- Germany is less bad than it was, but it's still poor. The outlook is still poor, particularly with respect to dentist sentiment as opposed to patient sentiment. The outlook is still poor. The U.S., your survey work and the ADA and ours correlates pretty well. I think we saw a little bit of softening in patient outlook in the U.S., but it's a point or 2, so it's marginal. In China and Japan, a poor outlook. But again, it's a couple of points here or there. But typically, for Germany and Australia, since we started doing these surveys, and we normally get maybe 300 respondents in those countries. They are certainly the most negative with respect to capital equipment. And Australia faced, I think, it was 11 interest rate rises in 13 months or something like that. So they are very hesitant to invest in some of the higher end capital equipment. I think we have benefited from the introduction of Primescan Connect, where we did well on that, which was dilutive to the margin profile, but we did very well in getting that scanner into the market because of the price point for it.

Okay. Those are helpful updates. So maybe move on a couple of other topics here. A question I've been getting from investors here just recently, Glenn announced he was stepping down as CFO. We've seen Andreas no longer with the company. What kind of signal, if any, are those sending? How do we think about what that means about the internals at Dentsply at kind of the outlook? Is there anything we should be reading there good, bad, indifferent?

No, there's nothing really you should be reading into any of those changes. Andreas was caught up in the Wave 2 of the restructuring and our desire to do some things a little differently. And then Glenn, as CFO; and Rick as CAO, they left for their own personal reasons. There were no disagreements between either of them and me personally or the leadership team or the Board. They simply made career decisions, for better or for worse you'll have to ask them, but career decisions to move on. The team is very, very aligned. The Board is aligned with our objectives and what we're doing to transform this company. I'm sure you will agree, it does need transformation, and we are making very deliberate investments to grow the top line while improving the hygiene of the company with respect to all the transformation initiatives around ERP, around SKU, around network, around commercial investments that we're making at the same time.

Yes. And I think I asked you this question last year, I asked it as a, you've been there for 1 year. Now I'll ask it as you've been there for 2 years. Have those transformation efforts been more challenging or been about what you expected. And I think, look, if we're being intellectually honest, you guys have done a lot of blocking and tackling on some of those transformation efforts. Obviously, it's not easy to go in and shut down factories in -- or facilities in Germany or what have you. And I think Andrea always tells me, I'm saying that wrong, and I'm not supposed to phrase it that way or something with the German market. So correct me with exactly technically what you're doing in Germany. But you've had some good success there. Are those -- is the cost savings still on track?

Yes. So all of those initiatives are still on track. I would say we have a lot of initiatives that the team is working on, quality, operations, R&D. We brought in a new CTO. We're more disciplined about where we invest and what we do with respect to R&D. So there are a lot of things going on. ERP as well. I would say that maybe ERP is arguably the most challenging -- but there's -- I would say the people that we brought in and their teams have experience in doing these transformations. And so we're confident that we can get there. They are all still on track. We've done -- historically, we have -- for example, on SKU, we have discontinued products without talking to customers, which is a bad thing to do. We've been very deliberate with the rationalizations in endo and resto, by talking to customers in advance and getting their perspective. And as a result of those discussions over several months, we have refined the projections for that SKU rationalization, and we took it down from 60% to around 48%, 50%, but it's still the right thing to do. In other areas, we have found that we can take some price on SKUs that customers want, but there's an opportunity to take some price. So we have been deliberate in talking to customers and engaging with them, affording them an opportunity to do last time buy. So we are not doing -- making any of these decisions in a vacuum without [indiscernible].

Okay. Fair enough. And just on that SKU point, again, it's technical. It's not -- I don't even know that we model it directly, -- although Dane and Tomy would know that better than I do. But you had been talking about taking those endo and resto SKUs down 60%. Now you're saying you're only going to take them down 48% to 50%. Okay. Is that a new number? I don't remember you talking about that?

I thought we spoke about that at earnings.

Did you? Sorry. Maybe it was a busy day, I'll blame that as opposed to anything else. So maybe I missed it. One other topic that came up on last quarter's call was obviously a letter you sent or at least a discussion you had with one of your biggest channel partners out there about whether or not you're going to renew in the '25, '26 time period, the distribution agreement. As I go out there and diligence that and talk to some of the private dealers and manufacturers in that, I don't think those letters are too abnormal. It's just calls the time out, gives you a chance to go back to the table and say, "Hey, we want to renegotiate some things." One, is my assessment of that correct? And two, what are you really looking for different, better change from maybe your distribution partners?

Yes. So I think your assessment is broadly correct. We feel that we create immense value for our distribution partners. They create value for us too, make no mistake about that, but we create immense value. We invest $170-or-so million in R&D. We engage with the customers. We provide clinical education, et cetera, et cetera. And so we feel we need to get more value from the relationship in some respects. The Patterson thing was -- that's equipment only in North America and Canada. It's separate to agreements with anyone else. It's separate to the consumables agreement we have with Patterson, we had been speaking to them, and we needed more attention.

Okay. And is there any reason to think there was just something with the fiscal calendar, the calendar-calendar, anything that Patterson was just the first, but we might see this same kind of discussion or notice to other distribution partners? Or was it mainly a Patterson focus?

It's a Patterson focus.

I can check that off the box. Thank you. A couple of other questions. Maybe we'll start on the orthodontic side. It's not quite 10% of your global revenue, but it's probably been the best -- outside of maybe the health care part of the business, the best performing. So talk to me about maybe the sustainability of that SureSmile product. You are talking about now starting to take that into the ortho channel. You don't have an ortho sales force. Is this incremental investments? And how do you go in and build relationships since you've been out of the ortho channel now for, what, 4 years, 5 years, but really been out of the ortho market since the Tsunami, so for 10 years or something. So just how do you overcome those challenges?

Yes. So we have -- we -- again, that was an example of where we have historically irritated some key customers. We're in the process of repairing those relationships. So we've been going to orthodontic shows, for example, in the past year or so. We know, given the legacy of Dentsply Sirona and wires and brackets, that the software that we have is actually really very good, and people who know how to use it, use it very, very well and the outcomes are very predictable with it because it originated in the wires and brackets. Our front end is not great. It's not particularly user-friendly. It's a bit kludge. And so getting new customers to engage because of the front end is a bit of a challenge.

Here, you're talking the treatment planning?

The treatment planning, yes. So what we announced in respect to how we're going to spend some of the wave 2 savings is we're going to improve the front end and make it more user-friendly and accessible for customers. So that's the first part. And the second part then, we will -- when we get -- when we're closer to having that software piece fixed, we will create an orthodontist sales channel. We feel we have a great product offering. We're very competitively priced. The customers we speak to say that our software, apart the front end, is really robust and very, very good. When we look at data, again, we're data-driven, so we've recently completed a survey of in excess of 250 orthodontists. And so we know the product choices that they make. We know why they make product choices. We know that in excess of 80% of them have between 2 and 4 different aligners on their shelf. Today, we are not 1 of those aligners. We know that most of the volume in orthodontics is with the orthodontist. And so we are missing out on a major slice of the action by not focusing on that channel. And so we're going to fix the front end. We're going to invest in the commercial team. It's going to take -- it's going to be hard work. I mean, I'm sure you're going to ask me a question about implants momentarily. It's going to be hard work. We're not taking it for granted, but there's opportunity there. Our friends who were in here before us, sell $3 billion.

Yes. No, fair enough. All right. So yes, I was going to go to implants on that just in -- I think when you came in 2 years ago, we're going to put 30 new sales reps in the U.S. market. We're going to go out there and hold more education events. We'll get back to market within a year or so. And I think the realization has hit that it's going to take more than just probably education, events and what have you. So yes, on the implant side, I have one question on Byte. I want to come back to as well in ortho, but since we're segueing to implants here for a second, how do you overcome those challenges in implants? And what does it take? Does it take new product, a new focus on price point? What does it take to kind of get back to at least market, which from here would probably be a home run, just getting back to market for your implant business, I mean it would do a lot for your overall growth?

Yes. So let me try and answer your question on ortho and implants at the same time here, if it's possible. I think one of the challenges that we face that we kind of -- to be fair, I didn't appreciate to the extent of the challenge was the referral network in implants. So you have an implantologist on the data that we have says on average they have 14 different referring dentists. And so not only do we have to build a relationship with the implanter, we have to build a relationship, build credibility and convince them then to use our product with their network of 14 referrers. So that was not really visible to us at the time nor contemplated. Compared to our history in different companies, many of us, when we were going in to convert an interventional radiologist or an interventional cardiologist or colorectal surgeon to some of our technology, we have to convince that physician only to utilize our product. And I hypothesize, again, we're going to go and check it, I hypothesize that the orthodontist angle is more akin to our previous experience in medical devices rather than implants because the referral network is not as prevalent.

All right. Fair enough. I'm going to -- it will be interesting to see how that hypothesis plays out because I do think a lot of GPs still turf the tough cases. So if you're going to go after the tough cases on the ortho channel, the high acuity teen cases, especially, I think a lot of those do get turfed out as I said or referred out...

We'll survey you as well.

Yes. Okay. We'll see what happens. On Byte. So Byte, your biggest competitor in the DTC market went out of business at the end of the year. That provided some tailwinds. How do you see kind of demand at this point on just an ex SmileDirect tailwinds kind of basis? Is there still decent demand out there for the DTC product? How do you keep that demand growing over the next couple of years on the DTC side?

Yes, I think there's decent demand in that business for sure. We've got the regulatory challenges that we spoke about at the last earnings call that have slowed down some of the conversion rates. To be fair to SmileDirectClub, their government affairs was helping out with respect to trying to mitigate some of those risks. And now it's up to us to invest more in government affairs to do the work ourselves. I think the growth profile is still pretty robust in the direct-to-consumer business. Remember, the median income for those families that go down that route is about $65,000. So it's a different segment of the market. Of course, there is continued pressure on that group. A lot of them finance their aligners with interest rates the way they are and greater sensitivity around credit scores in that group. We are seeing some pressure on the financing side, but the revenue growth is still -- it's certainly still double-digit revenue growth in that space.

Yes. All right. Fair enough. You've mentioned a couple of times, here you talked about it, increased burden maybe on the government affairs. Obviously, ERP, I think the joke is something like any ERP system that any company puts in ends up costing twice as much and taken 3x as long or something. But there's definitely some costs here building that orthodontic sales force, things like that. So I think you've done a good job of executing and holding the cost savings, delivering to the cost savings you promised. Was it last quarter, and I can't find it here in my notes that I'm looking at, an incremental $100 million now you've uncovered that you can take out costs. Whatever that number is, one, help me out on what that number is. But two, how much of that now can you let flow through? Or should we think about the vast majority of that now helping fund these additional investments you're thinking about and contemplating?

Yes. So it's $80 million to $100 million is the number. We said we'd realize those savings over the next 18 months. So think about maybe by the end of next year. And we have not communicated the mix of drop-through versus investment, but we want to be -- we think we've been and we want to continue to be good stewards of the medium and long-term health of the organization. And so a good part of that will go into trying to drive top line revenue growth, fix the front end of the orthodontic software, create this virtual or apparently that's the modern word for inside sales, virtual sales force. We've got the leader in place. Already he started the Monday after earnings. We've got, I think, it's 49 candidates lined up to interview. So we are not letting the grass grow under our feet here. We think it's a very cost-effective way to increase our reach to customers, to GPs, which circles back to the participation in our orthodontic survey.

Yes. Fair enough. 30 seconds, two just very quick questions. One, back to implants and I'm jumping around here, but thoughts on build versus buy. Do you have the product you need? Do you have the capabilities to develop the products you need to improve your performance in that business?

So the survey we did last summer said that we're #3 or so in implants with respect to the portfolio, but the gap between #1 and #3 is marginal compared to the gap in our digital technology, where we're #1, and the gap is 10s of percentage points. So we think we have the portfolio. But we do continue to launch new products in that space. Our PrimeTaper family has done very well for us. Remember, we had significant turnover in that sales team between '19 and '22. So effectively, we have a sales team with 18 months of tenure, and they are getting after those 15 clinicians, implanter and referral network, and that's -- it's taking longer than we expected.

Understood. All right. Well, we are out of time. Thank you, Simon, for a wonderful overview of the company here. Our next presentation is set to begin at 10:15 a.m. Eastern Time, include Charles River Laboratories, Henry Schein, LivaNova and Solaris. Thank you.