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

Good afternoon, everyone. Welcome to the session for the Leerink Global Healthcare Conference. I'm Mike Cherny, the health care tech distribution analyst here at Leerink Partners. My pleasure to have with us the DENTSPLY SIRONA team, Simon Campion, CEO; Herman Cueto CFO, Interim CFO, fit the exact title, but will go with CFO for now. Andrea Daley, in the IRC as well.

I got a bunch of questions. I'm going to rip through here, in a very friendly fashion. But I mean, maybe just start on the top and working our way down. You're in a market right now where I think it's widely acknowledged that there's varying degrees of demand differences both in the U.S. and abroad. But let's start with the positive. Where are you seeing the biggest pockets of strength in your business and the level of products, your market leaders so different areas, the level of products that have been most in demand currently given what's been a, call it, more challenging backdrop?

Yes. Thanks, Mike. I think for sure, let me start with our aligner business. While it's rather insignificant, I would say, as compared to our competitors, we have demonstrated growth in Europe of in excess of 20% excluding onetime in North America, we grew mid- to, let's say, high single digits in Q4. We feel we have a differentiated offering there. We've committed to resolve some of the front-end attributes of our software and trying to begin to reengage in the area where most of the volume in ortho is and that's with the orthodontists. So we see that as a bright spot and an opportunity for us moving forward. A big high spot for us in the past 2 quarters, in particular, which I think is a reflection on both a hyperfocus on execution and also eliminating some of the sins of the past was in Germany where we reintroduced a mid-range CBCT in the April time frame last year. And we actually -- we've grown Germany the last 2 quarters in totality. Last quarter was our biggest quarter in 7 or 8 quarters in Germany. And I think we grew every part of our CTS business. So as you know, Germany is extraordinarily important for us for 2 reasons. Number one, that's our second biggest market, it's 10% or 11% of our total company revenue. And number two, we have a very large manufacturing footprint there. So Germany is very, very important to us. And I think, obviously, Wellspect has been a beacon in our business. I know it's not dental, but it's been a beacon in our business, mid-single-digit growth. We knew we'd get there and we've got there, and we think we're going to do the same again in 2025. And the final piece, we have been hyper-focused on. On the ecosystem that our technology affords customers, whether they're a stand-alone dental practices, a small group of dental practices or DSO, that the digital ecosystem can afford us and the entry point for a lot of that is a scanner. And we placed more scanners in '23 than we did in '22. We placed more scanners in '24 than we did in '23. And that's the -- when you all think of -- I see probably many of you have iPhones and iPads and AirPods and MacBook Pros. The starting point is nearly always the iPhone. I think the priority here is the starting point as a scanner. And as we roll forward, we'll have CBCT, we'll have Primemill. Our DS Core is the Apple operating system. And so just think of the interoperability that Apple affords you all with their ecosystem. We view ourselves as being unique providers of that ecosystem in dental as well.

And by the way, just on the Wellspect, don't sell it short, growth is growth, cash flow is cash flow. So obviously important. But maybe just to come back to SureSmile at the start. You've had a differentiated go-to-market approach versus some of your other non-aligned peers in terms of focusing on the GP market. As you think about transitioning into the orthodontic market with that product, what have been the lessons you've learned with GPs and where do you think the best opportunities for success are with a new product and whether it is a competitive market, but not one that is so competitive, there's not a position for another strong product?

Yes, I think we did a lot of research over the past several months on the orthodontic market in general and the orthodontist market in particular. And we know that there are 3, 4 or 5 brands available in an orthodontist's practice. They're not -- you need to align or anyone else that they pick and choose depending on, I guess, price points or the capability that patients pay whatever it may be. Today, for the most part, we are not one of those products. And there's a variety of reasons for that. Number one, I think we have a checkered pass with the orthodontic community when we exited wires and brackets back in the day. And then number two, as I noted, I think certainly, what we hear is that our SureSmile software is well renowned from a does it solve the orthodontic problem the patient has. And I think it's well respected in that regard because it originated in wires and brackets. Where it lets itself down is the front end. So how easy is it to use? And in Q2 of last year, we committed that we would fix that, and we are in the process of fixing that right now. And I think when we fix that and make the playing field a bit more even with respect to the ability to do business with us. When a customer thinks about -- your customer in our mind has got 3 things on their mind. They want to grow their business, they want their business to be as efficient as possible and they want good clinical outcomes. I think partnering at us allows us to get to at least 2, maybe 3 of those things. So they need fewer anchoring points or attachments with our aligner than the competitive aligner. They need fewer refinements with our aligner than with the competitive aligner. And so fewer attachments and fewer refinements means more efficiency and the patient doesn't need to show up for checkups as frequently. So they can put another bump in the seat and get another aligner system sold. So I think the software, the value proposition are going to help us get back in there. But clearly, we will have work to do to regain their trust.

And along those lines, you've had some tough but I think important decisions to make on Byte and the Byte platform and obviously a deal that was done before your tenure and the market clearly changed pretty drastically on you recently with some of the state regulations and other FDA dynamics. As you think about the transition of some of the value of Byte into the broader SureSmile platform, I know it's early days, but what are you seeing as the most interesting piece is, the areas of Byte that you think have the most applicability, the most usage and I don't want to use the term salvage, so to speak, but there's certainly pieces of Byte that were really successful. Where do you think those pieces can be most -- best applied to your future aligner platform?

Mike, when I think of Byte, I think of 2 things. I think of a product and I think of capability. And it's clear that we've moved on from the product for the reasons that have been well discussed. But the capability that the group at the Byte facilities has around demand generation, around e-commerce, around interfacing with patients, we think is very meaningful. And so we don't -- we did a big survey with an orthodontics several months ago. And more recently, we've done yet another survey about perceptions of Byte and perceptions of demand generation and the interface with patients. And we did that with 150 customers and noncustomers of ours. And so demand generation resonates with them. Can we can the capability that the Byte team has helped generate demand for existing customers of ours and customers would be very interested in that. They're also very interested in can the capability that Byte has improved the experience -- improve the interface of the experience between the customer, i.e., a dentist, GP or orthodontists and their patient. And we had a really good patient interface with Byte where we're able to communicate seamlessly with the patient back and forth during the course of their treatment. And so those 2 things, in particular, have resonated with customers and noncustomers alike about how we could redeploy those resources. So that's on the orthodontic side. I also hypothesize based on prior experience that Herman and I both had around educating patients in the surgery world that we came from originally. If you educate a patient and enable the patient to have a discussion about their surgical choices with a surgeon, if it's clinically feasible, 70% of surgeons will do as the patient requests. Unfortunately, when we did this work and we spent quite a bit of money helping educate patients, only 5% of patients felt equipped to have that conversation. So now we want to equip patients that have similar conversations with their dentist around chairside. So could we educate patients on "hey if you go to this dentist here, he has the CEREC system and you can get your crown done that day versus going to the other guy who doesn't have CEREC." I hypothesize that there may be something in that, too. We haven't done any work on it. I think it's -- if you think of -- if you all think those of you who cover Medtech, if you think back 10, 15 years ago, when you drive up and down the freeway, you see all the signs for intuitive surgical, go to such and such a hospital because they got the robot, 0 clinical difference in outcomes at the time, but patients went to that hospital because of the robot. Could we do something the same with you want your crown done on the day, go to Dr. Jones on strip mall A.

If there's a corollary to intuitive, I'll be happy to see in certainly not a bad way to target and emulate. Maybe flipping over a bit to implants. I think it's been well diagnosed. Market challenges, company-specific challenges. I always love a company that is transparent that doesn't hide from the truth and what's going on. And particularly in the U.S., you've talked numerous times about your plan to rebook growth. As you think about where you stand now, what do you think are the biggest near-term opportunities you have to execute on that potential success? And how much of it -- how much of it's product versus marketing?

I think it's more of the latter and less of the former. I think we have a -- again, data shows that we have a robust portfolio. No one has a complete portfolio, so to speak. We have a portfolio that should enable us to compete. We just launched another new product in that -- in the value part of that portfolio. We will put implants on DS Core later this year. So I think we have a profile that should enable us to compete in the marketplace. Maybe not grow as fast as our competitors, but still compete nonetheless. I think the challenges that we have faced you said have been well diagnosed. I would say they've been well documented. It may be less so diagnosed. But for sure, we have -- we had significant turnover in our sales team between 2019 and 2022, when I think we had in excess of 20% a year turnover. We have remediated that. We invested in the sales team in early '23. We added 40 or 50 new heads. We have trained them. It's clear that we need to train them again. Implant dentistry is the most clinically, should we say, significant or challenging part of the industry. And we need to get -- we need to enable our reps to create more clinical value and the interactions they have with their customers. That's -- we've heard it from our customers, our reps need to be better. And so that's incumbent on us to educate them in a more meaningful way. And so we've actually just completed testing of every single implant rep and a whole lot of them are getting retrained. And they'll be tested again. And if they don't pass, I guess they'll go work for someone else. On the other side, we invested a lot in clinical education. And I think -- I think we took a wrong step here. We did spend more money, but we spent it at big events and we had, I think, almost 1,000 implantologists at events last year. But maybe rather than doing that, we should have taken those events locally and had small rooms of an implantologist than their referral network and 1 or 2 advocates from -- 1 or 2 supporters of our company come and talk to them about here's what you should partner with DENTSPLY SIRONA, et cetera, et cetera. So that's the pivot we're going to make, more rep education, more local education. And I think one of the benefits we spoke at the earnings call about the work we're doing on back office, trying to take cost out. Given our history, there are probably easier companies to do business with than DENTSPLY SIRONA. We're 2 separate companies that -- that grew through acquisition, then they merged and integration has never done. And so we have multiple policies and procedures. And so arguably, we're a challenge to do business with. ERP is already making it a bit easier. I think the work we're doing with the third party is going to streamline some of the back-office stuff that will help us be more efficient, but also will help the customer interface between us and the customer, too. So I think once we pull all those things in better shape, then we'll be in a stronger position. But make no mistake, Straumann are a very strong competitor. They're a great profile. They got 1 focus and 1 focus only. And so disrupting them is not going to be easy, but there's no reason why we shouldn't be able to compete.

And I'm going to come back to more implant question, but you mentioned the third-party consultant you're working with. How are you measuring yourself? What are the checkmarks? What should we expect to hear as an investment community about how that relationship going? When you'll see tangible results that they want you to focus on? Like how should we think about the story of that piece from here?

I mean I think it's starting with industry benchmarks, looking at all of our back office functions and where do we index relative to those benchmarks. And we're in really a diagnosis phase of that, really trying to understand where we are and why we're over-indexed. Because sometimes there's a business reason that requires more finance people, a bad example. But we're trying to do all that work. We've put none of that in our guide. If there is upside, maybe we see a little bit inside of '25, it helps us a little bit. But we're thinking it's more of a '26 and '27 thing and to Simon's point, I think there are technologies and enablements. AI, as an example, in customer service that are game-changing in a lot of ways, that if we were able to get that in the hands of our customer service associates, I think it could be game changing for our customer experience.

And just to build on that comment on AI and investments we've made. We put our neck out there last year, and we invested in a virtual or inside sales team. We've got over 100 people now up to speed or at least making phone calls. The update we gave you on the Q4 call was that they had made about 40,000 calls and contacted about 8,000 separate accounts. That number is now 16,000 separate accounts. So when you think about -- when you think about as you all go home tomorrow, the next day and you drive from the airport to your home, you meet dental practices you pass by. I mean, they're on every street corner. And some of them just are not worth sending a rep into for us. Some of them are worth $5,000 a year, not sending a rep in for $5,000 a year, but I'll call you up. And so we've already seen traction with this not only selling a piece of product to a customer who historically may not have had a call from a DENTSPLY SIRONA for several months in many cases, but we are now gathering market intelligence to go, hey, the guy in the strip mall on South Beach, he's in the market for a new scanner. And so we have an extraordinarily robust -- maybe to be aggressive. We have a robust funnel now of leads that we would not have had if we weren't calling these customers. And then the other angle on AI is now when we call a customer, we should have all this data coming in, they say, "Hey, the last time they ordered was this that they should be in the market for tube of toothpaste or whatever it may be that they would not have had otherwise."

And along those lines on the inside sales force because you spent a lot of time in, I think it's very prudent investment, is your hope that you're going from, you mentioned a $5,000 clients a number. That $5,000 client becomes a $6,000 client or that $5,000 client becomes a $30,000 client because a Primescan 2 opportunity. Clearly, more revenue is always better. But are you happy if it's just some incremental sell-through from someone who just didn't pay enough attention to for a while.

I would be really pleased if all the accounts less than $10,000 doubled, that would be meaningful.

I would say the other thing is it also frees up the time of the sales rep to go after the bigger customers. So instead of maybe going after a customer who's somewhere between $5,000 and $10,000, you have this inside sales group who is handling that. So a lot of the cold calling, the idea generation, trying to understand what they want, that goes away to a lower-cost rep, so to speak, they can go and focus on bigger and better things. So I think that's an opportunity as well.

And it's also huge market intelligence. As I said, they had made 40,000 phone calls, 8,000 accounts. Now they're talking to 16,000 accounts. That's just pure intelligence we can gather from the market about who's doing what in the market, what they think of many competitive launches, et cetera, it's just -- it's a repository of data that we should be able to leverage.

Turning page bit, let's go to Primescan 2. Your latest kind of notable large introduction of a product. I know, obviously, you're constantly introducing products. But that was last year. I know it was a big part of DS World presentation. I remember all the lights in the circles, certainly eye-catching from that perspective. But there's a lot of innovation on Primescan 2 in terms of both usability of the [indiscernible] but also portfolio software, like the whole package behind it, the tie in to DS Core. 6 months, basically 6 months past DS World now, maybe just can we do a check in on how the Primescan 2 evolution has gone, where broad availability is globally right now? And how to think about that in terms of what's embedded in the guidance for this year?

Yes. So Primescan 2, I think, has gone fine, has gone well. It is released in all the markets we wanted to be released in. It's obviously available in Europe and the U.S. and Australia. We continue to innovate. Primescan 2 and DS Core are synonymous really. And later this month, at IDS, we will launch more software for DS Core and Primescan 2, which I think is going to not only increase the functionality of DS Core and Primescan 2, but also aid in the -- in things like upload speed and download speed for the product as well, because obviously, it's contingent on customers' WiFi connectivity and speeds and whatnot. And so we're releasing new compressibility software, I think later this week, in fact, that's going to aid customer who may have been sitting on the fence because my soft -- WiFi isn't good enough. Now the acceptable limit of WiFi is going to be halved for Primescan 2. So I think that's going to aid us a whole lot. But back to the whole ecosystem, a scanner, whether it's -- whether it's Primescan 2 or AC or Primescan, that's the starting point for everything digital. We want to be really relevant in that space. We want to create an ecosystem for our customers. We launched the DS Core Enterprise in Q4, which I think has a bunch of diagnostics about performance of a piece of equipment for DSOs, which I think has resonated with them. And then as we put more of our workflows on DS Core, you should see us begin to really be able to get leverage from the presence. I think we shared at earnings. We've got now 37,000 unique accounts on DS Core and some more data. We tripled the number of connected devices to DS Core in 2024, and we increased the number of orders going through labs by over 400% in 2024. So it's getting traction. I would love it to be faster. I would love to be able to monetize it far more meaningfully than we have, but we want to create an ecosystem and own the ecosystem, and it takes a while, but we're making solid progress.

And how should we think about the further expansion of DS Core in terms of, call it chicken and the egg argument? Are you going out to sell a product and then pitching the wares of DS Core? Or is an opportunity to go out and sell the ecosystem and then use that as the hub and spoke approach where you can then branch out to other connected device. I guess strategically, how is your team thinking about that?

Yes. So I think it's -- I think Primescan 2 has changed name the game when DS Core released 2 years ago. And now Primescan 2, it's synonymous with DS Core. So I think they both go hand-in-hand and that we want to create -- again, back to what I noted earlier, customers are -- I think I mentioned it earlier, I said it a few times today. Customers are interested in practice growth, practice efficiency and clinical outcomes, and DS Core enables all of those 3 things, whether because it's DS Core and the connectivity of it or whether it's, hey, instead of 3 scanners I now need 2 scanners because it's so portable. But the great thing about dentistry, I think 2 great things about dentistry is, number one, it's you have 2 avenues to innovate. Number one is the clinical avenue where you can improve outcomes. But number two is the process avenue where you can improve efficiency, right? So that's really important. So it's a bit like surgery in that regard, you want to improve efficiency. But the second area that's really interesting is digital remains very underpenetrated. And digital 40%, 50% of customers in the U.S. have a scanner, that's not great. And everyone is on an iPhone, why don't ever on a scanner, right? Even in Germany, the most advanced dental nation in the world, 27% of customers have a scanner. So there's still a huge opportunity for digital ecosystems to be created in dentistry. And I think we -- we had the right to win a number of years ago. I think we didn't innovate fast enough and meaningfully enough and we probably lost momentum. I think we are now in the process of regaining momentum in that space. We're placing more scanners than we ever had before. We get DS Core. We are -- I think we are -- I feel we are now leading Connected Dentistry or if you think about a grading system for Dentistry, when we were kids, it was Dentistry 1.0. The beginning of digital dentistry with Dentistry 2.0. I think we're now at Dentistry 3.0, which is connected cloud-based dentistry.

So maybe if I can ask the dumb question because it comes up all the time, but I don't think we ever address it. Why are penetration rates so low? We just went through a cycle where the price point on intraoral scanners came down meaningfully across the board, not because people are discounting just introduce products at a completely different price point across the market. So what's the hindrance that you think whether it's the U.S., whether it's Germany, emerging markets, obviously a different animal, but for 2 very developed dental markets with plenty of product available, what's the holdup?

I think part of it -- I think there are 2 dynamics there. Part of it is the university education that students get. And if you talk to some DSOs, the number that they provided me was it costs them about $100,000 to prepare a dental graduate to actually practice dentistry. That's -- so they're not ready when they graduate. And we do know that many of the universities are not digitally orientated. So the systems are -- the systems are not providing graduates who are digitally savvy. So that's point number one. I think point number two is the changing demographic, let's say, of graduate students who are less interested today in owning a practice than they were 20 years ago, and they're prepared to go work for someone and take a salary and have a nice quiet life. And if the guy or gal they go and work for is a 60-year-old and takes impression, use impression kits, then I guess they're going to take an impression kit until they take it over. I think they are the 2 dynamics. We've been working more closely with universities this past 18 months. We've had some good traction. I think the starting point is having graduates who are savvy with digital dentistry.

A couple of more quick ones before we run out of time.

Sorry, can I just -- one more thing to state there. We -- and I think we are arguably better equipped than others to have this discussion. You mentioned the dirty word price a moment ago. We need to stop talking about price and start talking about value and think about it in terms of the efficiency and outcomes that we can provide that leads to growth.

No, of course, it's a great point. It's not it's not discounting. It's just different approaches to how to build the products. Obviously, IDS in 2 weeks, you mentioned Orthophos which was into Germany. Is there a desire and expectation to build that beyond Germany? Or is that just the German market demand is so unique and that product has been so successful there historically that made sense to have a product for what's obviously a big market?

So Orthophos is released -- SL is released in Europe again, and it's released in some areas of Asia pac. It was never released in the U.S. So that would be arguably a bridge too far. We have to go through FDA and whatnot. But IDS is in 2 weeks, the biggest dental show in the world. We've got some more innovation coming through mainly on the software side, on the AI side at IDS based around DS Core. So we're looking forward to it. Someone asked me a couple of weeks ago do you have any big releases coming out at DS World, rather IDS. And my product launch philosophy is it will launch when it's ready to launch. And we're not -- we're ready on Tuesday and not wait till Thursday. So that's my way of looking at things.

And then last question. On the last earnings call, you completely understandably walked away from your multiyear targets to $3 of earnings. You've been extremely transparent the whole time up about. Here is our target, but here is what gets us there. That bridge slide has been in every deck that you've done. And obviously, the market has nowhere close to cooperate amongst other items. What are you looking for within the organization to feel comfortable though, of putting out whatever a new long-term guidance maybe. What needs to happen operationally? How are you thinking about the positioning of the business to give you the comfort in that level of visibility that you had previously with the targets?

Well, I think if I think of -- if I break it up internally and externally, I think we are comfortable internally with what we put out 2 years ago and where we are today with respect to that. I think we noted that we feel we are on track with all of the internal pieces. Some of the internal stuff affects the external stuff, too. Clearly, we thought we will be growing at market in implants by '26 and we won't be. We thought we'd be -- we felt we'd be growing, I forgot exactly what we said about the aligners, but double digits for sure on aligners and increased profitability because of more efficiency within Byte in particular. And obviously, I think we can still grow double digit on a smaller base, but the profitability of Byte won't contribute. I think the big -- and I think there is a discussion in the marketplace. If you look at the guide that the guides that our friendly competitors have put out there, there are mixed signals there. Some of them are going macro is the same. Others have gone modest rebound in macro. Our guide for the year has said macro is the same. And I think until we kind of know who's right and who's wrong, if that's the case until we have a full-time CFO in place, I can get his or her eyes on that. I think it's unwise to put a number out. But internally, we are still committed to, as Herman was saying to, getting ourselves beginning to get on the road to benchmark with respect to some of the back office stuff. We've already taken out almost $300 million of costs that are on track to take out $300 million of cost. We have reduced our operational footprint meaningfully, and I think we need to continue to do that. We've innovated and we've got better and more predictable at innovation. And we are relentlessly focused on getting the growth line moving. We know we can't cut our way to growth, it's not sustainable for us. We have to grow. We see pockets of light at the end of tunnel. We need to see more pockets of light and we're committed to committing ourselves to help the commercial teams do that.

Perfect. Well, Simon, Herman, thank you so much for being here. [indiscernible] Appreciate that.

Thanks.

Thank you so much.