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

All right. Good afternoon. Why don't we get started? My name is Jeff Johnson. I'm the senior medical technology analyst at Baird. Our next presentation this afternoon is from Dentsply Sirona, a leading manufacturer of dental consumables and equipment across the globe. With us today from Dentsply, we're happy to have CFO, Matt Garth. Matt, I think you said we can just go straight into Q&A.

We can go straight into Q&A. And you can slow down. It's okay.

I will. Now that we're back on track after our little distraction there from -- I mean how do you send kids to Ohio State, why?

The Ohio State...

Okay. We are going to actually talk dental here, not the best Big 10 school in the nation. So you guys were at -- I saw the eyebrow raise. You guys were at Morgan -- well, at an inferior investor conference yesterday, let's put it that way.

Yes. You've had a lot of caffeine. Just keep going. Love the spirit.

Yes. So you guys were at a conference yesterday. And you've been on board 5 months now.

Oh man, no, 90 days.

90 days. And Dan, 40...

30 days.

30, 40 days. So some things I heard yesterday that aren't in my script, we'll get to my script here in a bit. But I'd love to go through just a few of the comments as we're starting to hear maybe a little bit early versions of a plan rolling out here from what I'd call the new management team at Dentsply. The first one was talking about R&D going to 7%. It's long been 3-ish percent if even that. And now the last couple of years under a prior management team, it was up to 4%, maybe 4.3% or so. Going from 4% to 7%, what -- where does that get focused? How quick does that layer in? And just conceptually, how should I think about Dentsply as a 7% R&D company instead of a 4% R&D company?

Okay. Good. Great quote to pick up. Let me back you into some of the other quotes you have started with. First and foremost, what are the priorities? The priorities for Dan and I in the immediate future are getting our U.S. business back to health. Part and parcel of that is a reallocation of resources within the organization. The way we are structured today, and Dan used the word bloated, which I love, but we have a robust corporate structure that we think we can find efficiencies in and redeploy those monies towards value-accretive activities like our field force and innovation. When it comes to innovation itself, where has the company been really good at the past couple of years? On the equipment side of the house, we've introduced a number of products that are going to lead the market to new utilization. We have been very good across other areas where we have not been putting money has been into the EDS business. And so when you think about our revenue breakdown, EDS somewhere between 40% and maybe higher, there's areas of opportunity for us to invest in there. And then when you scratch the surface a little more deeply, if I were to take out the actual expense that we capitalize because it goes into things like software and stuff like that, today, you're probably running more around 5%. So these incremental adds that are going to step change our opportunities in parts of the portfolio where we have not been spending and then spending more in accelerating the speed in places like software development, building out the rest of DS Core to enable a long-term algorithm of growth. Those are the things that we're focused on. And by the way, a lot of that is centered around the customer experience in the U.S. and helping us get back to health.

Okay. All right. So a couple of things to unpack there on the EDS investments. That's essential dental solutions, primarily consumables. Is that where you'd see those investments in general dental consumables? Is there a part of EDS that would be allocated a bigger part of that than just general consumables?

Moving from, let's call it, 4% on the P&L, 5% in my world to 7%, that's a lot of opportunity, right? So that's -- you're talking several tens of millions of dollars. I think there's opportunity as projects come up across all of EDS.

I guess what else is in EDS that I don't conceptually think about when I hear -- I just think it's general consumables?

Sorry, I'm sorry. You have Resto in there as well. So anyone going through a root canal, those products and processes are in there. There's opportunity for investment there to make improvements and step change technology as well as the consumables. I mean, like you said, between Dentsply Sirona and our competitors, not a lot of investment has been made in that normal state everyday dental solution business, and we can start to develop that with how we're going to reallocate some of these resources.

All right. Fair enough. And I think there was something in here where I think you also talked about -- here we go. I think some of the margin achievement that's been done has been done through unilateral cuts throughout the company, and both Matt and I are going back saying we need to invest more in sales force and innovation and less in back office. So my question is, if R&D is going up, but you need to invest more in sales force, then do you feel like there's still enough to reallocate away from, I guess, is the nice way to say it, G&A that is this still a margin improving story potentially over the next couple of years? Or do we have to take a step back? We have seen historically, and I know you did a lot of due diligence, I'm sure, before you took this job, it seems like between you and maybe one of your largest competitors, margins kind of get to about 20% or so operating margin. And then something happens, they fall back to low to mid-teens. And then we go through another kind of 3- to 5-year cycle of getting them back towards 20% and then something happens, they come back. So there's this kind of sinusoidal almost kind of margin trajectory within the dental manufacturers over the last decade of up and down, up and down. And we're kind of there now. You guys, I think, what, 19% or so this quarter.

It's going to be higher than 19%, but yes...

Yes. But I think this past quarter, somewhere ballpark, I'm closer there. So how to think about kind of what higher R&D and needing to reinvest more in sales force means from an operating margin standpoint?

You answered -- sorry, you asked that in reference to the next couple of years. And I would go back to the prioritization, right? So you have new leadership who's acting very quickly to get orderly discipline in the organization that is empowered to drive growth in the field. So what does that mean? That means we're prioritizing heads, education and capability within the sales force. That's meaningful investment. Innovation, we just talked about, you're going to move there over time, right? You're not going to 7% tomorrow. You're going to get there over time. We have a pipeline that, by the way, our innovation leader today is very strong and has a very good disciplined process. So we are moving projects through. We're asking him to open up his aperture across areas that maybe previously we haven't had the monies or the focus to spend in. The organization itself, my organization, the resource side of the house, both Dan and I have a legacy of running extremely lean. So what does lean mean? It means not backfilling in accounting and finance, other resource areas. It means doubling of duties. So if I have people who I think can take on more, they'll have 2 jobs, not 1. So I think that we can collapse costs in the non-value-accretive areas of the company much deeper than was originally envisioned, and we can do it with speed. But to your point on margin development, I wouldn't necessarily expect that to impact us in the near term. Both Dan and I have the same philosophy. And I think the company itself has this philosophy. We're not going to get off track to meet a quarter. What we have to do here, this return of health for the U.S. business requires durable decisions. And those durable decisions are founded in value accretion. And it's tangible, right? We know today because right now, I'm looking at every single headcount in the company, and I am approving every single job opening in the company. Now you would say, hey, that's a level of control that you don't need. Well, we're in the midst of a turnaround, right? But it does 2 things. One, yes, it sends a message of discipline to the organization. But it also allows us to get into the thinking and the philosophy of why these heads are coming through. We're prioritizing customer and value-accretive roles. And so if I tell you, our opportunity implants in North America, we needed 30 heads to go after the regions that we didn't have full scale in. And maybe we had resourced 12. Well, let's go resource the rest of them. I'll pay for it internally, but let's get them. And so that's the shift that's going on. Now does that end up to the greater question, developing margin accretion today? No. I'm going to repurpose those dollars. So do I think over time, as ERP gets fully implemented, as we continue to collapse and get efficiency in our roles on the non-value-added side of the corporation, I think that, that will ultimately yield our ability to get SG&A down back to levels that's commensurate with the rest of our peer group. So instead of the mid- to high 30s, down into the lower 30s, maybe around 30%. And then on the gross margin side of the house, we have an exceptional leadership in our supply chain. And I do believe they have through whether it's SKU rationalization, whether it is taking a look at our footprint, pathways to move our gross margin by hundreds of basis points. And so that evolution has been underway, and I think we can get there in the next couple of years as well.

Okay. Let me ask one question just on what you said there on implants of if you need 30 and you're at 12, you can go to 30, things like that. That has been tried a couple of times at Dentsply over the last several years. And I guess my question is, if you resource up, but you don't yet have the right product. And maybe you think you have the right product. I don't know, and I'm not sure if you do or not. But my experience is right now, Straumann has a fully switchable platform. We can talk about what some of your other competitors have been doing. But do you have the right product right now for the U.S. market and for the global market within implants? And I want to ask a question on ortho similar. But if you resource up, you can drive that turnaround.

I'm going to characterize something, and I'm -- maybe this was a quotable from yesterday. 85% of what the prior team had seen and was acting on was right. The challenge here is depth of change and speed of change, maybe some moderate realignment, right? But empowering the organization, putting the right resources in place, whether it's product, whether it's people, it is the total customer experience. And that's what we are driving to. And I know those words have been said before, but there's a durability in this. You went back to margins being volatile over time, for sure, right? And so then you have to make variable change decisions and you have to pull back here. We retrenched in a way that our competitiveness was not where it needed to be. More particular, going after cost reductions to solve lack of growth issues required cost cuts across the board as opposed to disciplined, well-thought-out cost cuts that were focused primarily on non-value-add areas. That's how you get corporate dollars staying relatively flat while selling dollars and innovation dollars go down. That's not the recipe for competitiveness that the organization needs. And so when you go back to and say, well, everyone's talked about this before, sure, sure. But there's a durability to it that matters. Because I will tell you, if I am to diagnose, and Dan and I talk about this a lot, the value of our brand has been impugned. What Dentsply Sirona brings to the table in terms of premium positions, premium solutions and innovation needs to be deeper and it needs to be accelerated. And so if I need to resource as CFO, those elements, I'm going to do it. And it's going to come out of my organization and/or we're going to find creative ways to do it. But when you say competitors have been taking share from us, absolutely. We have not been competitive. And I will tell you the diagnosis and previous management was there as well is the customer experience. Our customers were not receiving the type of premium treatment that they deserve. And Dan and I are at the forefront of pushing that through and changing that right now. And then when you go back, and I know you're going to get there, Jeff, but you were talking a lot and now I'm going to talk a lot. When you look at it from a perspective of making decisions on who we are going to partner with as we move forward, those are kind of easy decisions for Dan and I now because it's with everyone. We can be a functional good partner with many parties, and we should be. We have a premium solution that fits into a whole slew of potential partners categories, and we should be able to work with them and have very productive relationships together. And so that tonal change will hopefully manifest itself in the ability to grow again. And one more piece on this. I'm sorry. I know. No, I don't want you to talk.

No, I'm trying to remember the 3 things so far out of what you said that I want to come back to...

It's all recorded...

No, no, no. I want to ask you follow-up questions.

They're all taken notes. You can just ask out to the crowd. Well, actually, let's just go there then. What's your next?

No, no, no. So okay. Well, so now you put me on the spot and I forget what they are. Why don't you give your point now, I'll come back to mine in a second and hold on.

No, I want you -- now I forgot my point. Now you got to get on your point.

All right. So on the -- well, let me just go to the -- you talk about partners. I want to make sure we're being kind of clear headed and clear voice here and what you're saying, you can be good partners. Do you mean relative to your dealer and distributor partners where there has been some questions over the past year or so? Is that your comment? Because yesterday, again, I'm my little handy dandy that I just hit don't save and closed out on. So there goes that.

Go to the spirit of it. You don't need to give me the quote.

I do need the quote because I'm not smart enough to remember, but it was something about, hey, we're going to continue to reevaluate our partnerships. I thought it was a strange comment if part of a new management team is to -- maybe not mend fences, but to mend fences with some of your largest dealer partners. The comments yesterday didn't strike me.

As conciliatory?

As conciliatory.

Oh, no, not at all. I believe they're totally conciliatory. Think of it this way. And Dan, we're both very purposeful people. Like our stage presence, I hope, is really good for people because it's natural. That's where Dan and I work too, right? The opportunity for management change on our side, and by the way, on our 2 largest distributors in the U.S., their management teams are changing, too. It opens the door for constructive relationships. That is the tone. It's coming off the back of a very vocal public statement that we are going to change the way that we work with one of our largest partners. It's hard to say -- like that's not -- I've never negotiated with partners that way so...

We'll put that in the 15% bucket that was probably not the right strategy. I'll say that, not you. But in the 85% bucket that you said prior management was on the right track. I think the other thing I would say they were on the right track, and I think you're saying the same thing. If -- and this is almost going to be not a complement, but it is to Dentsply holistically is if there's one thing they really messed up over the last 20, 25 years, it was being an acquirer of technology for years and years and years and not integrating a single thing. And this prior management team finally got that and got that it was hard to integrate and do the heavy lifting, especially in Germany and other kind of large markets where it's not easy to reduce headcount, close things down. Is there still a decent amount of that, that can also fund some of this product development and higher R&D and sales force investment? Or is that low-hanging fruit, which I don't think after 20 years of not going after those costs that it's probably been harvested at this point. Is there still a decent amount of that to harvest?

There were a lot of double negatives in there. Here's where I'm going to go. I think the opportunity at the customer level, which was proven out by the steps that the team took in Germany -- sorry, in Europe, all of EMEA is now bearing fruit. And that's why we are seeing good growth through EMEA. The change in partnerships, our leader in EMEA is outstanding. And the approach to getting the customer experience right, pursuing the relationships across the board, whether distributor, nondistributor, direct, nondirect, just a multichannel approach works really well for us. The partnerships in the U.S. can follow. And so it is very conciliatory. There is room for Dentsply Sirona. We should be the supplier of choice because of decisions we've been deselected. That can't be the case. Now to your greater point over -- once you have the consumer experience fixed and that helps drive the U.S. turnaround, I said before, there are still a lot of activities that were underway and pointed to and whether that is on SKU rationalization, which there's been a lot of work done on footprint rationalization, which we're executing a lot of that, on ERP deployment. Remember, we have 14 ERPs today.

Because you're an acquirer of technology.

Correct, right. And so we're swallowing some very large pills right now, getting the organization footprint the right way, right? That's not operating footprint. That's like how we stand, how we identify ourselves. I think there's still a lot of fruit to be borne out of that. ERP in and of itself, you're -- I would say today, you don't get synergies from an ERP implementation until later. We're in year 1. Synergies are going to come. And so we will have that opportunity to extract further integration savings as we move forward. But I will tell you, this organization, this team, what they needed most, they needed direction, durability that decisions would stick back to your volatility of margin, Dan and I are not going to pursue this variable slam whenever something happens in a quarter. We have a long-term destination that we will share with you guys at some point on where we see this company going. And we're going to make sure that it is well thought out, prudent and that it matches what the market will provide. And along that way, we're both going to be driving lean processes throughout the organization.

So I'm hearing you a lot on the lean processes, the cost side. Is Dentsply a revenue grower over the next year or 2? Or do you need to take a step back before you get back to a growth?

The way that I'm entering the planning cycle is to first say, what is the market going to provide? And by the way, I don't even know if I'm looking at it on a 1-year basis right now. I'm looking at it on a 3-year basis. So I'm giving the teams a CAGR outlook that just says your market is going to grow this manner, yes, year-by-year. But over these years, it is going to grow for EDS, GDP minus, so 2% to 3%. For CTS, probably the same, right? Just market -- what the market is giving you. We can talk about aligners, but let's just say that they're going to be mid-single digits, right? I don't know what you learned over the weekend that would change that fact point from how I'm talking to the teams. And then as you look at the implant side of the house, same, mid-single digits. That's what the market is doing. We have not been able to hit market growth rates. What do we need to be able to do that? So can Dentsply Sirona be a grower over the next couple of years? Yes, because we should be able to grow with the market. It takes investment to be able to grow with the market. You can't have resource gaps. You can't have geographical gaps. You can't be out of markets that are growing faster than other parts of the market to get the average temperature of the hospital, and that's where Dan and I are pushing. Let's get back to market growth. And from there, how do we get super competitive and pull out what positions we want. Fact of the matter is getting back some of the share losses to an exceptional competitor in implants, that's going to be hard, right? Your earlier question, it's going to take innovation. It's going to take resourcing.

Yes. So you just announced that you're going to keep the Wellspect business, which I think makes sense.

Yes. Do you need to look at your quotes?

No, I got the quote there. I know you're keeping that. So -- and that's been a decision that has been toyed with off and on over the last, call it, 5 to 7 years, a couple of different times. And that's the answer that tends to be each time. But I guess my question is, in all parts of your dental business, in today's world, can you be a diversified multi-segment, multi-category player? Does it make sense to be when you are competing against 1 or 2 stand-alone pure-play focused implant companies, 1 or 2 stand-alone pure-play clear aligner companies, 1 or 2 or several 3D printing companies, things like that. Those companies like right now seem to really love competing against the diversified. And I'm not putting Dentsply only in that [indiscernible] well -- but there are several others as well. But my point is, can you be a broad multi-platform dental company and succeed in today's world? Or do you need to have a narrower dental business?

No. You do not need to have a narrower dental business, but you also layered into that Wellspect. The Wellspect decision, the Board, we presented the findings of the strategic review. And the fact of the matter, and this was in one of your quotes, but let's say it again, not yielding the valuations or the cash that would drive value for Dentsply Sirona and Dentsply Sirona shareholders.

No, look, it's 40% of your cash flow. It's tough to get rid of that if you're trying to fund a turnaround. I get it.

Thank you. Okay. So that one was a relatively easy decision for the Board. And I think we feel really good about the fact that Dan and I spend very little time focused on that business. We help leadership, we convey a purpose, help set targets, but they are very strong in that area. And by the way, it's been growing. It's been raising its financial profile and delivering back for the parent. On the total portfolio on the dental side, I think it really comes down to your vision of the future, which you're going to try and educate me on after this. But I have this -- it's not idealistic and it stems from where prior management was as well, which is there is an evolving ecosystem in which the dental office is going to operate. And it is centered on technology, and it's centered on the evolution of a client's dental position over time and the associated revenue stream that a dentist or a specialist or a DSO can get from that client over time. And having a whole suite of technologies from consumables all the way through to implants for the various stages -- aligners and implants for the various stages of mouth development in a client over time with the projection and analytics that allow you to associate that revenue stream over time offers huge value creation opportunities for the dentist, more so for DSOs. And if you can do it at the enterprise levels with DSOs, think about this. If your technology is so connected that you can get down to the client level and you know the potential revenue stream for that client. And then you can start to benchmark by chair, by dentist, by office, how each of those are performing against each other. If you're running a DSO, you have a phenomenal ability to create significant value. That is the ecosystem. And so selling into that ecosystem with a unified capability across product platforms, across technologies that are all speaking to each other, all for the benefit of driving more value for the dentist. That is the power, okay? So look, those are words, but I think that's been the premise of this for years. So go execute it. And the difference here -- and I just -- when you get to a point where Dan, who's an exceptional CEO and operator, I'm personally, I'm very happy Dan is here. I think the organization as well. For me, Dan always says, "Hey, I'm not going to win any popularity contest. He's going to win all the popularity contest. I will not.

I haven't seen any sign of that today.

I'm just saying, no, this is all funny games, but like let's go operate. Let's go deliver. Talk is cheap. So we are going to execute. We are going to deliver. The rest of the P&L, just so you know, because I need to outline this for you. We're free cash flow-focused managers. This company has a huge opportunity in driving higher levels of free cash flow, getting more financial flexibility by getting debt down a little bit and then just buying back shares. We can be a top quintile TSR performer if we can get our share repurchase program to consistently deliver 8% to 10% EPS growth. Let's go.

I don't disagree with any of that. I think that's right. I think in this market, it's hard to get paid that way in mid-cap med tech. But I think strategically, dental, no matter your problems or some of your competitors' problems over the last couple of years, cash flow has still been...

King.

King.

Cash is king.

It is. It is. All right. With that, I think we're going to wrap. So please join me in thanking Dan -- Matt, sorry. Yes, exactly. You're no longer -- you're not CEO. Thanking Matt for a wonderful overview here of the early stages of the Dentsply turnaround. And our next presentations set to begin at 2:00 p.m. Eastern Time include HealthEquity in this room, Soleno Therapeutics in Empire Ballroom A, Contineum Therapeutics in Ballroom B and [ EleFast ] in the Morgan Suites. Thank you.

Thank you.