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

Good morning, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team here at JPMorgan. I'm joined on stage by the Dentsply Sirona team. So as a reminder, these are 40-minute sessions. Roughly the first half will be a prepared presentation followed by roughly 20 minutes of Q&A. With that, Simon, I will welcome you to the stage. Thank you.

Good morning, everyone. Thank you, Rachel. We are now 2 years into our transformation journey at Dentsply Sirona, and we're happy to provide you with an update today once I get my slides up. Okay. So I think we're ready. So please take a moment to read our forward-looking statements in our presentation. Our most recent SEC filings list some of the most important risk factors that may cause actual results to differ from our predictions. And additionally, some of our remarks may be based on non-GAAP financial measures as detailed in the appendix. So let's start with an overview of our business. For those of you not familiar with Dentsply Sirona, this will provide a helpful introduction. For everyone else, it's a valuable opportunity to review some key metrics and to evaluate and track our performance moving forward. Our business is comprised of end-to-end dental portfolios, representing over 90% of our revenue, with the remainder coming from the continence care space, Wellspect. With approximately half of our sales coming from categories that are arguably under-penetrated and with the potential for favorable long-term dynamics, we think we are well positioned to provide great solutions for our customers and their patients. From a geographic perspective, Europe represents our biggest geography, heavily influenced by our presence in Germany, which does disproportionately contribute to our revenue profile. We see the U.S. as a large source of continued opportunity in both dental and continence care, while disciplined and selective investments and execution in certain geographies can create the potential to accelerate our long-term growth. Data-driven decision-making remains a core tenet of this management team's philosophy. And as such, we regularly collect feedback from our customers. And here's what we've heard in the recent past from them in relation to our business strength. We have a comprehensive and broad and competitive portfolio that enables efficiencies and outcomes for customers and their patients. We deliver unparalleled access to clinical education, and our extensive scale and reach can help differentiate us from our peers. To take advantage of these strengths, we are laser-focused on delivering innovation that solves key customer needs, winning in high-growth categories like aligners and continence care, improving our execution in implants, and driving our aforementioned organizational transformation. The transformational work that we have and that we're doing here is comprehensive and well underway. We remain committed to unlocking and shaping the organization to unlock efficiencies across the business, to improve our organizational hygiene, to improve the experience for customers who work with us, and to allocate spend in areas with a customer and return focus that enables long-term performance of the business. The dental market is a market of approximately $30 million (sic) [ $30 billion ] globally and is fairly balanced across its core segments. Despite the sustained macroeconomic challenges that we all see, we believe the market is attractive in the medium and long term. For those of you who are unfamiliar with dental, the market shares similarities with other health care industries: an aging population will require more health care, including dental care, especially as more patients and clinicians recognize the link between oral health and psychological and physical health. GPs are adopting digital technologies, enabling them to perform more complex procedures like aligners and implants, meeting the demand for aesthetic dentistry and growing their practice. Importantly, the digitalization of dentistry improves workflows and creates opportunities to improve our customers' profitability. Dental support organizations, or DSOs, in many markets, particularly the North American market, continue to play an increased role as they scale their network of practices. While there are also reimbursement challenges in certain markets, practices of all sizes, from the largest DSOs to single practice owners, are interested in marrying value with efficiency from product and technology offerings. We believe we are well positioned to meet these needs through our end-to-end portfolio, connected technologies and with the increasing functionality of our DS Core platform. As an established leader in the consumables market with our Essential Dental Solutions segment, we are taking initiative by investing in innovation, clinical education and commercial excellence. In other segments, we expect to improve our market share and market penetration, in areas like connected technology and aligners, while we simply must improve our performance in implants. We have demonstrated our commitment to our Wellspect HealthCare, our continence care business, where we continue to grow, where we continue to innovate and we continue to drive profitability. We have made growth investments for product innovation and facility expansion, and we are excited to see what's ahead for this part of our business. As you have heard me say before, there are some areas of our business where we feel that growing with the market is okay. There are other areas where growing with the market is progress towards greater performance. And we have potential for above-market growth with the right delivery and strong execution. Since arriving at Dentsply Sirona, we have very intentionally focused our organization on meeting the needs of our customers from workflow efficiency and clinical outcomes perspectives. Importantly, we have very deliberately integrated quality into our new product development process to avoid some problems of the past. Our customers are not just health care providers, they are also business people. They consistently tell us about their need for efficiency. When it comes to things like revenue per hour of chair time, time spent on clinical workflows, the value for the products that they purchase and how to get their patients to accept the treatment plans or proposals presented to them. Our product portfolio, which I will speak to in a few minutes, position us well to support customers in meeting their needs: to drive dental practice efficiency and enhance patient outcomes. Lastly, it's also worth highlighting that our global clinical education footprint provides unparalleled content and education opportunities for our customers. These programs help accelerate their connectivity journey and, in professional development, drives the integration of new technologies and procedures into their practices. We have a comprehensive end-to-end dental portfolio served across the markets and have leading market positions across several categories with the opportunity for long-term growth and share gain. We have improved our customer centricity as an organization, informed by robust and regularly solicited customer insights. Not only do we conduct our own quarterly survey that many of you are familiar with, but our R&D and marketing teams have improved connectivity and integrated this customer insight into our new product development process. A unique aspect of dentistry is that we cannot only focus on product and outcome-centric NPD, but also on improving the efficiency of dental workflows. The vehicle that enables this is digital and connected dentistry. And we have systematically driven innovation in this space and will continue to do so. Our DS Core platform and our expanding suite of connected products and technology, like Primescan 2, serves as great examples of this agenda. You are no doubt aware of the significant changes in the direct-to-consumer aligner space since our presentation here this time last year. On October 24, 2024, we announced the voluntary suspension of sales and marketing of our direct-to-consumer-only Byte Aligners and Impression Kits while we conducted a review of certain regulatory requirements related to these products. Since that time, we've conducted an intensive and thorough review to understand the regulatory requirements inclusive of the state legislative environment that would facilitate market reentry under the direct-to-consumer teledentistry model. We have also been assessing Byte technologies and capabilities and analyzing the business and economic model. As a result of this review, we have concluded that the clinical and regulatory requirements for a market reentry through teledentistry alone are extensive, costly and lengthy. And therefore, we are refocusing the Byte business model away from this direct-to-consumer teledentistry alone model. With this decision, it's important to reiterate that we are committed to continue serving Byte Aligner patients who are not contraindicated and are continuing treatment. What this means moving forward is that we plan to reposition Byte within our aligner portfolio to offer in-person dentist planned and monitored treatment, and we will continue to work with the regulatory authorities and obtain any necessary clearances prior to market launch. It also enables us to continue to leverage direct-to-consumer marketing and demand generation capabilities that Byte developed over many years. Furthermore, we plan to leverage these Byte technologies and capabilities in other parts of our business, and we have already reallocated certain members of the Byte team. Specifically, we are augmenting the SureSmile and e-commerce platforms with the goal of improving our marketing, our demand generation, same-store utilization, patient engagement and compliance, and customer service efforts. Our strategy remains crystal clear to us: digitalized dentistry, innovate in products and services 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 quality and compliance at the core. We have been intently focused on all 5 of our stated priorities over the last 2 years to advance our agenda. We cascade these priorities through our organization and we've aligned our goals from annual operating plans to bonus plans to individual work plans. We have moved deliberately to execute on these through our operating model, our processes and our investments to transform our company. We have made several intentional leadership changes over the past 24 months in order to shift this culture and to transform this organization into a stronger growth engine with the core tenets that we spoke about. We have a legacy of innovation, and this leadership team is proud to continue it, and we invested again about 4% of revenue in R&D in 2024. Some of our key launches included our next-generation intraoral scanner, Primescan 2, which was a significant milestone for the industry. And together with added DS Core capabilities, further advances our digital and connected technology and dentistry agenda. We also continue to innovate in other areas, including endodontics with the U.S. launch of X-Smart Pro+, implants with our recent launch of LYNX and Wellspect HealthCare with the launch of LoFric Origo with sleeve. We have advanced and enhanced our innovation focus, improved the leverage of our core capabilities and refined other aspects of our R&D processes to include -- to increase the return on investment through meaningful innovation. It's worth highlighting for you how we are continuously building out our DS Core ecosystem to create truly integrated and connected digital dentistry. We've introduced DS Core to 39 countries, and we've launched 85 new functions and capabilities to the platform since the initial launch just 2 years ago. We've seen adoption increase with each meaningful advancement to the platform. We ended 2024 with more than 37,000 unique user accounts, more than doubling our base year-over-year. Platform adoption is growing across the board, including increases in connected equipment, increases in lab order placed and paid accounts. By providing a range of tools that enhance efficiency, productivity and growth, DS Core is simplifying dentistry to drive better outcomes for patients and clinicians. In December 2024, we introduced a new DS Core Enterprise solution. We aim to support DSOs in growing the usage of digital workflows by equipping their practices with a growing feature set of the DS Core platform while supporting central DSO functions to administer, to monitor and to analyze their equipment and workflows with full transparency. DS Core Enterprise is the next step in expanding our unique capabilities to DSOs and becoming their preferred partner as they scale, digitalize and connect their network of practices. In September, we launched Primescan 2, bringing the first-ever cloud-native scanner to the market. Primescan 2 was powered by DS Core and takes digital connectivity to a new level, a new era for intraoral scanners. This new scanner provides workflow efficiency through its flexibility, through its portability and connectivity, and is another example of our commitment to solve the unmet needs of our customers. There is more to come in innovation in 2025 and 2026 as we design, create and bring to market new products and technologies to drive workflow efficiencies, to improve patient outcomes and to enhance customer profitability. We also continue to transform our business by focusing on efficiencies and identifying cost savings opportunities. This allows us to reinvest strategically into areas that drive demand and enhance commercial excellence, positioning us for sustainable growth. In Q2, we announced the second phase of our transformation to drive $80 million to $100 million of savings. At that time, we also shared the areas that we identified for strategic reinvestment, including standing up a virtual sales organization, enhancing our SureSmile software and commercial presence, e-commerce and customer service. As we shared earlier, we expect the redeployment of some Byte resources to help us in several areas to improve, but specifically to accelerate the SureSmile opportunity and improve the patient experience for us. We are ahead of schedule with our investment to our virtual sales team, and early performance indicators are positive. For example, the team has made over 16,000 phone calls and reached out to 6,000 unique accounts since November 7. And these accounts would likely not have had a Dentsply Sirona touch point during that time. We also have to acknowledge areas where we have not performed as expected, and one of those areas is the U.S. implants business. We have stepped back to understand what missteps we have made with respect -- given our investments over the past 2 years. Importantly, in 2025, we do expect to more fully digitalize our implant portfolio through DS Core. We know that previously that our SureSmile software had a well-respected back end, but the user interface was suboptimal and hindered adoption of our technology. We have commenced the necessary improvements and expect to release those later this year. We have also started the long overdue improvements on our website and e-commerce portals and expect them to be released this year too. Both of these initiatives are being aided by some of the Byte redeployments that I mentioned earlier. We are focused on executing a wide range of initiatives to unlock the potential of our company, which we all deeply believe in. By focusing our organizational -- our organization on our foundational initiatives, which we've previously spoken about, we have made meaningful progress across our organization, from ERP deployments to increasing customer reach through our newly launched virtual sales team and an improved regulatory and launch process that has yielded 8 FDA clearances out of 8 submissions in 2024 and 21 new product launches globally in 2024 as well. As I just noted, we believe in the potential of our uniquely positioned company, and we plan to continue our efforts to improve and increase the hygiene of our organization, to introduce new customer-focused innovation, particularly in our digital and connected technology platforms, to reduce our cost structure, and to reignite and drive profitable revenue growth. So in closing, I would like to leave you with a few takeaways. First, Dentsply Sirona remains well positioned with an end-to-end dental portfolio and a clear strategy to execute against. Second, innovation is a cornerstone of our growth plans, and we have demonstrated our commitment to this important driver in the dental industry. Thirdly, we are investing for growth, and our investments are enabled by the continued work we are doing to shape our organization and progress all of our foundational initiatives. Fourth, we recognize that 2025 is an important year for us. Beginning to deliver on the promise of this company is essential. We believe we are on the right track with a strong team in place and an executable plan for 2025 and beyond. We look forward to providing you our Q4 and full year 2024 results in February, along with an outdated -- or with an updated outlook. Thank you.

Perfect. Thank you, Simon. So first up, I just want to kind of walk through some of the dynamics on aligners given the updates that you gave us this week. At your most recent Analyst Day, you noted that you expected over 20% growth in the aligner market just given SureSmile and Byte. Today, you noted that aligners are targeting kind of that double-digit growth range. So given some of the refocus on the Byte model here, are you still expecting double digits to be into that 20% range? Or could double digits mean more something like 10% just given some of that reprioritization there?

Yes. Thanks, Rachel. So if I look globally at our SureSmile business, for example, we have grown in excess of 20% in Europe fairly systematically over the past several quarters. And the European growth is now becoming very meaningful -- or the European numbers becoming very meaningful for us. If we take out some of the one-timers from 2024, we're actually growing in the -- on the aligner piece, we're actually growing in the mid- to high single digits in that space. We believe we have a differentiated platform with SureSmile. We believe that there is an opportunity to create further demand with some of the resources that we are reallocating. And so I would say that our double-digit growth there is still very achievable for our SureSmile platform, and we are -- it is one of the highest growth categories in dental. We have an opportunity, we feel, to take share and to drive penetration. And so that's what we're heavily focused on.

Perfect. Then just kind of sticking on that same topic of aligners. So in the press release, you noted that you're planning on repositioning Byte within that aligner portfolio to include more in-person dentist oversight. So can you provide more details on what the future operations of how that repositioning will work out? And then specifically, will that DTC model still play a role at all in the positioning? Or will you entirely shift that focus into the in-person dentist visits?

So if I start at the back end of your question. I think there's an opportunity in the aligner space and, arguably, in some aspects of dentistry in general for a direct-to-consumer model focused on educating consumers about the choices they have with respect to their dental care. And Byte, over their time, have really generated some robust systems and practices to create awareness and to drive demand and also to develop tools and capabilities that enhance the experience for patients who were dealing with the Byte model. So we plan on deploying them across our portfolios where we think it's applicable. Everything will be dentist-centric. The regulatory requirements are there. And so all patients will be assessed by a dentist at the start, and we'll continue to have ongoing monitoring by the dentists during their treatment plan.

Perfect. And then you also mentioned in that press release leveraging some of Byte's core competencies and expanding that digital customer journey for patients. So can you talk about how you plan on integrating some of those core competencies in the digital customer journey into the broader aligner portfolio?

Yes. So we had a pretty powerful app on the Byte side to ensure their continued connectivity with that team. And so we're going to recast that into other parts of our business, so the patients and the aligner patients in particular are continuously connected back to our company and back to their treating dentists.

That's helpful. Maybe shifting over more to just your view on the market expectations across dental. Obviously, 2024 was a challenging year for the dental end market. So can you walk us through how that environment has really progressed throughout 4Q and if customer demand is trending better entering 2025? And overall, do you expect that end market to materially improve in 2025?

So as you know, Rachel, we do a quarterly customer survey where we get 1,500 to 2,000 respondents. We've just done a small one here in the U.S. with 85 respondents, and we'll share when we get a complete -- the more globalized version of that on our Q4 call. I would say footfall or patient traffic in the U.S. has not changed significantly in the past quarter. It's plus or minus 1% as it has been throughout 2024. I think there's some elements of positivity around capital equipment purchases. And if you take a close look at the ADA survey, I think their data suggests that there's, I would say, a marked improved sentiment with respect to intent to purchase capital equipment in 2025. So the environment is not getting any worse from what we see, and there may be some signs of some light at the end of the tunnel with respect to capital purchases. And then as I noted, we'll provide some insight into Germany in particular, which as you all know is critically important for us, particularly around the capital piece, and Japan and Australia on our Q4 call.

Perfect. Maybe just digging into that equipment versus consumable trends a little bit more. Can you walk us through your customer conversations toward the end of the year across equipment versus the consumables part of the portfolio? You've mentioned that consumables have remained more stable. So how should we expect that to trend into 2025? Are you seeing heightened pressures anywhere, just given macro challenges, some of the elective procedures and things like that?

So on the consumables, as you know, that's driven by patient footfall into a clinic. But we have launched some new products in that space that have performed pretty well for us: the X-Smart Pro+, a new endodontic motor and the Reciproc Blue files have done very well for us. We're seeing good adoption, we're seeing competitive account wins, and we're seeing stickiness with respect to the files themselves. So we're pretty confident, we're pretty comfortable with our endodontic business. And the footfall for the consumables business in general is not suggesting any deterioration. On the capital side, I think it's a -- it continues to be a wait-and-see, notwithstanding some of the positivity that, one could argue, the ADA survey put out there.

Perfect. That's helpful. Then just sticking on this idea of end market backdrop and market growth, are there anywhere where you believe that Dentsply can outgrow the market in 2025? And which products do you view is taking a little bit longer to recover on the flip side as well?

So we've commented on aligners already. I think it's fair to say we're -- we've been taking some share in aligners on a global basis with SureSmile. Of course, we're not a large player in that market compared to the competition, but we do expect our double-digit growth profile to continue in that space and so exceed the market expectations. In our connected technologies business, we were under pressure, the market was under pressure in 2024, particularly in Germany. And imaging was a large source of that pressure for us, the high-end imaging. So we introduced -- reintroduced Orthophos SL back in the April or May time frame, and that really helped stem the bleeding for us on our imaging platform. With our scanners being connected to DS Core, and I mentioned in the prepared remarks, 85 incremental additions to DS Core capability in the past 2 years, we feel we can outgrow the market in the scanner space and create a digital ecosystem for our customers that's going to improve workflow efficiency, reduce chair time, reduce customers coming back, and increase the profitability of our customers. And then finally, the high-growth category that we have not, to acknowledge it, where we have not performed nearly as well as we and many of you expected, is implants. So we're taking a long, hard look at what missteps we made there. As you know, we invested in the U.S. sales team. We doubled down on clinical education in that space, and we have yet to see traction. And it continues to be a source of disappointment for us. So when I look at our scorecard about what we've done in the past 2 years, that is a glaring red dot on our scorecard, and we need to address that because it's an integral part of our plans moving forward.