DENTSPLY SIRONA Inc. ($XRAY)

Good morning, everyone. Thanks for joining us for this session of the Leerink Partners Global Healthcare Conference. I'm Mike Cherny, the Health Care Tech Distribution Analyst here. It's my pleasure to have with us Dan Scavilla from Dentsply Sirona, along with Wade Moody, who heads up the IR function. I am pleased that Wade didn't decide to put any slides together because I got questions to keep us about for the next half hour.

All right.

Dan, we were talking a little bit before, and one of the things I said I admired is your bluntness. You came in as CEO, and you're very direct with us about your thought process on the business and the focus on what you've termed the return to growth opportunity. How are you tracking yourself and for the organization, the quarter-by-quarter progress? I mean, I know it's not quarter-quarter for us, week by week for sure for you. And what is the investment community should we be looking for in terms of the most important mileposts on the progress that you want to make sure you're hitting?

Yes, Mike, great question. And it's funny, I see you more day by day, right? As you kind of look at this with an urgency. And the reason for that, too, is just we have to drive urgency with the company, with the mindset. And so your question more on -- from the investor side looking in a little bit tougher because there is a lot of moving parts that you wouldn't necessarily see. I got to think about coming up with some metrics maybe that we call out without repercussion, right? So one of the first things is obviously, when we talked about engaging and expanding dealers, and we announced that we've done that. We'll continue to do that. And I think that's one of the first triggers of theoretically, as you get through that learning curve of the dealer reps, they build a portfolio, they start having a pipeline, you would think that, that would be a return to health in the U.S. for the CTS business, right? Now you got to pivot over into implants, and that's really where the clinical and the rep and the strategy come into play that an investor may not see. What I might try and do is figure out how to metric out the amount of clinical education we're doing maybe year-on-year as a volume lift. But that one, even if you spend heavy Q2, Q3, I think that's a lagging lift that you see maybe in the next quarter or the next year. And so what I'll do is I'll announce where we're spending money and where we're investing. But to me, it's over the long term, the true measure is the lift in sales, the slowdown of loss into a positive. I think that's the ultimate tell.

And I'm glad you started with the dealer dynamic because I think that's an important thing that times gets lost is that you still have a really large portfolio wide swath of products that's available and interesting both for the dealer side as well as your direct side. As you think about your engagement on the dealer front as part of the strategic push, what have been some of the puts and takes? And how have you gone about creating not just renewed contracts, but actually new arrangements so that it's a win-win for both sides?

Right. So the great news with that is just it seemed like all of us happen to be new at the same time. So while you may have had a struggle in the past relationship-wise, if you look at kind of the dealers throughout and me, most people have new leadership in there. And so one of the first things was just a -- we'll shake hands and start fresh. And what are the couple of bugs from the past we have to quickly get behind us, how do you move forward. And I think there's been a general agreement of there's a way for us to actually partner in a strong way that benefits the customers. And so just a general agreement, which I'm not convinced was there in the past is kind of step one. The deal structures that we had in the past, and in particular, with Patterson, that was really the one that was kind of the one that was being renewed, right, were complex, and they just got complex over time. And so the real thing is just to make it simple for everybody. And it really comes down to a benefit to actually have more volume. So the more we sell, the better we both do. I think that's one of the key points. And then drop ship is a lot of questions I get from people. That's just, again, just the simplicity that actually benefits both parties. So you're not asking a dealer to tie up capital in cash in inventory and go. And there's actually a benefit to us as well is that we're not looking and trying to guess at lumpy orders where all of a sudden we have to be ready. So if we know that there's a drop ship and a steady cadence, we can actually manufacture at a steady rate. We don't have as much inventory. We actually have a better cash flow. And then a lot of the complexity that existed in the past was a debate as to when was a thing purchased, what was the deal, what was the price, what are you trying to do? All of that goes away. Our simple focus together is how do you go sell something and place it. And I think that, that in itself will actually create a lot of efficiency and a lot of benefit for both sides.

And the drop ship dynamic is something I know came up on the last earnings call. Maybe just walk us through a little bit more about, a, the most important short-term benefits to you and the dealer and then b, how you think about the financial trade-offs of how big drop ship should be, if that makes sense?

Well, it's really more about a simplistic approach for both sides, right? So right now, we're tracking dealer inventories and how much do they have? Are they going to sell it? Are they going to renew? Do you need to incent them extra to get rid of some of that things? All of that goes away. And so your real focus is how do we actually capture real estate and grow together. And we're not debating about something you may have purchased 6 months ago that's still hanging on and how do we move it and all of that goes away. So I think that's my point is the simplicity is we'll track a pipeline, we'll share it together. We'll know how to build and level load inventory. And then we just simply have the ability to ship and then we go support a customer and not worry about some time in between. And truth is dealers have carried sometimes between 3 to 6 months of inventory, and that can be really a disruptive factor. It's not a benefit to them as well.

Maybe shifting a bit, and I'm sure we'll come back to a lot of this dynamic, but to the offensive side, in particular on start with R&D. You've been fairly straightforward. Do you think the organization could use a heavier R&D lift to drive better product vitality. Where are the immediate excess incremental R&D dollars being portioned across the portfolio?

Yes. So it's a couple of things. I think we have, as a company, spread R&D among all of the verticals, I don't want to say evenly, but not necessarily with a strategic focus. And so everything we're doing right now is to create a sequencing and a focus to go deliver at a certain point. I think everyone would agree DS Core is unique and quite frankly, an opportunity to leverage. And so while we have the base there, now you would normally go through over many years and implement different verticals. How do we do endo, how do we do ortho, how do we do implants. The initial tranche of accelerated spending will now allow us to bring all of that software at a faster pace at the same time. So we no longer have to do one after the other, we can do them all together. AI will be a big part of helping that as well. And so really, the initial thought is how can we realize the potential of DS Core at a faster pace than our current spending had allowed? That's number one. Number two, is there some modernization within the EDS portfolio that we should do that keeps us competitive. Some funds are going into that way. And then really just the third approach here is not necessarily realized in 2026, but how to accelerate the potential of ortho, both with robotically meant wires and also the aligners. All of that was where the first tranche of incremental R&D money went.

AI and robots, I love it. But I mean on the DS Core side, I tend to agree that it's an untapped potential opportunity. Maybe can you talk to us is penetration rate of dentist the right way to think about success on DS Core? Is it the enhancements to the workflow, how much they can access your overall solutions? Like how should we think about where DS Core drives the most value to your customer?

Yes. And listen, in a simple way for me to understand it, I put it this way, it's like we invented the smartphone, and we have it there. Now we're coming back and we're designing all of the apps to get utility out of it. And I think that's the thing is you've got this core to build upon. There's a natural leverage with it. So for example, if you are a dentist using multiple verticals use DS Core, you don't have to be retrained each time as if you had 3 or 4 different companies. You just have one path that all works this way. So there's an ease of use, there's a simplicity for the dentist. So the real thing right now is to create more utility of -- we've got CEREC on Core. We made that move. Now we've got to go get implants and endo and ortho on Core and several others. And really, all that is, is just making it a comprehensive solution all working together for the dentist. I feel like that coming in faster through the spending. And really, right now, while we don't face much competition would be a way to capture more real estate. So to answer your question, I think it's really about the ability to transition into workflow and have more dentists using DS Core as their main workflow model.

And we in the financial community think about -- I constantly think about my model, my inputs to my model. I have an R&D line and SG&A line. If you think about your business and how to make the business better? And obviously, we both do both. But how do you think about the incremental spending on R&D against the targeted spending on the sales and infrastructure side to make sure that you're balancing your potential for new product launches, new workflow rollouts against making sure that you have the right market penetration for those rollouts?

Yes, it's a great question. It's a constant battle, right? And so certainly, as you look at this, you look at it in 2 chunks. Your commercial engine is really going to be immediate going into the long term, whereas the R&D is really about what can I get over the next 3 years. And so really, it's more about a tactical and strategic play and you're saying, how much of my funding do I want to place into both. The immediate need for us, obviously, is to stabilize sales and return U.S. to growth. So that gets the lion's share of it. But at the same time, you need to feed them 2 to 3 years from now, and that's really where this other piece comes in. And so for me, as an old finance guy, I do it as a percent of sales, one of the main things. What do I think regional-wise, how am I doing? Then there's efficiency measures. Am I actually using what I said I would use a good way. But I would tell you, if I had to default anywhere right now, it's stabilizing the business and returning to growth through commercial. Second is the innovation.

And you gave me a perfect segue. You talked a bit about clinical education before relative to implants. You've also made previous investments -- previous discussions about investments in the sales force in other pieces of the commercial infrastructure. Dentsply has done this in the past. How are you doing it differently?

Yes, it's a good question. I think, first off, it's really about just being transparent to everybody throughout the chain, where are we? How do we get here? What are we going to go to do differently? And I think it's making bolder decisions about these moves and actually clearly articulating where are we going. I think in the past, there were cuts done to make profitability. I'm reengineering a P&L to drive sustained growth, and I'm pointing where it will go to. The capital allocation model, the cancellation of the dividends is another example of that, even the acceleration of R&D. So I think the difference is there's a holistic look at the health of the business, short, long term business itself, the financial markets, all comprehensively that I don't feel was done in the past.

And as you think about it, and again, because you proactively brought up implants, it seems like a fairly direct opportunity. How are -- maybe similar to some of the R&D dynamics, how are you structuring the priority of investments in the commercial infrastructure, knowing well here that for some of your products, the investments are investments alongside your dealers?

It's a great question. I would tell you right now, we're mid-stride in developing our implant strategy. So I think one of the faster things is reestablishing dealers, as you mentioned, and getting capital there. The very next move for us is the creation of a CEO Advisory Board with a lot of dentists where we're going to talk about strategy, evaluate the portfolio, decide how to use clinical data to go drive that. And as you said, an enhancement in clinical education to create awareness peer-on-peer training, which is key, and there's nothing more powerful than having dentists train dentists with that. At the same time, dentists training our reps. I feel like we underinvested in our rep education. We almost have to bring in a Med Dev model about how you do that through several weeks to get these folks stronger. And then there's ultimately a pivot, Mike, from selling a widget into actually the work stream, which comes into DS Core. And so we have to train our reps to think through the dentists side. What is the process flow from imaging through to follow-up? How can they be trained to understand all of that impact? And then how do they have enough proficiency to stratify our portfolio and say, here's the solution for you. The thing that amazes me most is we literally have the strongest implant offerings and have not capitalized on that. That's one of the biggest things we have to turn around this year and next year as we go deeper.

And from a competitive perspective, what does that look like in terms of the capitalization opportunities? How do you -- or how much of it is products versus product awareness versus product education because all 3 of those things take on different measures.

I would tell you we do not have a product gap of note. We have a communication and an execution challenge that I think is there. I mean our Astra product is arguably the best in the industry with the fastest healing, the lowest infection rates over 30-plus years, and we don't flex that muscle. Our MIS portfolio is amazing. And yet we have it out there and it sort of goes on its own. We have to turn it into proactive, honestly, weapons to penetrate the market as opposed to just letting them roll. And I think that's the biggest change is assigning owners, creating education and driving these things meaningfully, I think, can make a difference.

Thinking broadly about the market, the third dental company we've had so far, and the theme has been fairly similar to what we saw in the earnings calls, which is signs of stability. Like how are you thinking about relative to your key product areas, especially on the equipment side, both imaging, et cetera, are you -- where are the biggest sources of stability, where potential source of green shoots, where areas you're still concerned about relative to end market demand?

Yes. So listen, I would agree with everyone that you spoke to that the market appears stable, even slightly improving. I would come back to say that our challenges are not related to a market, whether it's up or down. The fact that we're negative doesn't matter where the market is. We have to change that. And so it's really more -- we currently have to go fix ourselves and reestablish with customers. What we're trying to do is not dependent on the market up or down. Certainly, it helps but I don't think I can lean on it and say we'll recover because the market is up, therefore, we're up. That would be a dangerous spot for me right now. Maybe that's different in 2 years, so we can have that conversation. But right now, it's a great market to build in. There's nothing working against us, some slight noise with the current war that's going on, but nothing that derails you. But it's really about focus and execution internally for us.

And quick sidebar because you mentioned that. Anything we should be thinking about relative to manufacturing locations in the area. Hopefully, what you have, everyone is okay and what's important...

Yes. Thanks for asking it. And they are okay. And of course, we have 2 plants that are -- have missiles literally flying over them in Israel, right? So we're watching. We have all of our employees safe. We're keeping them out of harm's way with that. While there could be some disruption, which we'll say over time, we currently have enough inventory in the market that I don't think there's anything to signal right now. A prolonged work could always change that course.

Hopefully, we don't have that for many reasons, but I appreciate that. Just check the box on the financial side. Turning to DSOs. You come from outside the dental world. But you come from a world where there's plenty of other broader groups. How -- looking still within your first year in the tenure, how are you viewing the strategic nature of your Dentsply's push into DSOs, DSO expansion and where you think your strongest versus opportunities for improvement?

Yes. It's one of those ones. Again, I'm going to go back to say sequencing, it's very important for us. I was kind of going into capital into implants and ortho, restructuring the U.S. sales force. We have all of that underway. Now as you know, when we mentioned, we're moving into ClinEd, rep type of approaches. With that, now you start pulling into some DSOs. How do we actually work on programs, not only to train our reps, but actually use a focused ClinEd through the DSOs. So that entry way in is going to allow us to actually recruit a new structure, a team who will focus on DSOs to penetrate. I believe our strength is the holistic portfolio we have. We can sit down with them and offer every single thing as one company. No one else can really do it to that extent. Even the dealers are piecemealed among what they offer. And so our ability to leverage with the DSOs can be very beneficial. I'm a fan of a de novo approach within the suites themselves filling it out. And so I would tell you, it's coming. It's not where it is right now, but within the next 6 months, us building a DSO team and strategy and penetrating that is something that's on my list.

So is that the sequence that we should be focused on and not the strong obviously, DSO representation now, but from a strategic perspective, put the team on the field and then give the team the playbook to go out and win new business?

It is. And Mike, it just comes down to this, right? We're in a turnaround. And so I evaluate some people. And if they're capable of moving along, we fuel them and go. If they're not, we remove them and hire. And currently, with that role, I'm in a remove and hire situation. So I think it would be more towards the second half of the year.

Okay. Turning a bit a different way back to innovation, but you touched on AI briefly. AI, obviously, I think I'm asking an AI question every fireside here, so clearly time for it. But how do you strategically view AI as an outward-facing tool versus AI as an internal efficiency tool?

Yes. It's interesting, too. I always say the truth is none of us really know, right? Let's be honest. It's moving so fast and our understanding isn't quite there. But there's something there to not only embrace and push, but also be wary of. And I would tell you, just by human nature, I don't want to be the first one out and the most leading with this in something that changes so rapidly. I don't want to be a follower, maybe a fast follower, but eyes on it. So you broke it down into 2 important areas. On the external facing, we've already started using AI and of course, it enhances every day. With the ability to take an image, diagnose it, recommend treatments and to be active part of the planning of that with the dentist. And so we'll keep going down that path. Customer service and customer experience is something we need to improve and improve rapidly. We've begun playing with bots online to significantly reduce call times and therefore, response times to our customers. So there's little dabbles like that, that we're getting into, not little, but actually moves that we're doing that way. Internally, the R&D team is actually looking at AI written software, and they're not there yet, but that capability in the next 12 months is highly likely, which can accelerate type software development and even product designs. And so part of the funding that I failed to mention before is also down that path. I think in-house, when we continue to rebuild the support departments and the P&L and the structures, I think AI tools for some of the basic finance, I mean, AR, AP type of things like that can be big. The analytics and the approach, whether it be in legal or other areas, I think there's applications that will allow us to move fast consistently with less bodies that can free up more money for us to actually place into commercial of market penetration.

Got it. Yes, I agree with you, things are moving fast. We've honed in a lot on stuff around the North American market, and I mean we touched implants a bit. But how do you feel about the global presence, in particular on implants, which I know obviously, you have a great global reach. And if you think about ex U.S., where do you -- as you sell into the -- still within your first year of the role, view you have the best product penetration opportunities based on branding in local markets?

Yes. I would say EMEA is one of our strongest markets. And when you remove some of the delisting of SKUs or products and you tease through that noise, you would actually see that several of the products are growing significantly above market with penetration. And so I would say that EMEA as a region is one of our strongest for implants. Asia Pac has the most potential. And again, we're evaluating China and all of the changes in China to understand what our response is there. But outside of that, in the other areas, the potential for implants is amazing. But I would say EMEA is strongest with U.S. having high potential longer-term growth out of Asia Pac through the implant business.

And obviously, the Dentsply Sirona organization has a strong roots in Germany and whatnot. And so as you think about across EMEA, is it how do you view the opportunity on developed versus more developing countries in terms of penetration potential?

Yes. Certainly, the developing will be the higher rate of penetration over time, just given the small scale and where they can get up to. But at the same time and kind of where you're going, but you also need to preserve and protect the business you have. You can't lose it in the developed areas. You've got to let that grow even if it's at a slower rate to be the foundation as you dig deeper in other market penetrations.

Talked about implants. We talked about -- you touched on some of the imaging CEREC, equipment and consumables, the knots and bolts of the dental market, I feel like it doesn't get talked about a ton. How do you view the health of your basic equipment and consumables portfolio right now?

Yes, very healthy, actually. I think the foundation we build from is our EDS business, which is where we have most share and it's a very strong business for us and it kind of goes. So I think that, that platform is doing well, can do better again through just the basics of ClinEd, RepEd type things for sure. But I'm pretty happy with it. Again, if I look at our products, I'm going to go back and say, I really feel that we don't have major gaps. I kind of point the finger and say it's how we're executing. It has to improve. That does include EDS. And so again, I see opportunities to get even stronger there.

And what are your thought process feelings about using promotional opportunities to try and reestablish business? It's obviously a trade-off of value and volume versus price. So how do you philosophically view the ability to partner promotionally with dealers and vendors?

Yes. Listen, I'm very favorable towards that. So we go back past life, even in spine with Globus. The ability to actually place capital and earn it out through volume is there. The potential is here more than anything else, I think, in dental as well. And so I'm game to come up with plans that allow us to actually consider is there a capital and a pull-through bundle that makes sense for both parties. Again, with that, there has to be volume commitments in order to be price relief. It can't just be one. We're in it to grow as a total. And listen, the ultimate focus for me is sustained profitable growth. But ultimately, that throws off ever strengthening cash flow. And I want to become more of a cash flow-based company over time. And again, I don't think we're there in the next 12 to 24. But I think going forward, having a strong cash flow and investing that wise, it could be really a lift for the company.

And thinking across the rest of the product portfolio, intraoral scanners have been through a multiyear cycle of kind of market establishment, pricing differentiation, stratification. You got Primescan 2, you got Primescan Direct. Like where do you see the best strategic pushes on the Primescan family right now against what's been a varying level of price point. Probably?

Yes, probably this soon -- I shouldn't say soon, but I would think in the future, Primescan 3, which is going to be a different design and coming out will probably be one of the things we'll want to use and leverage as a way to create penetration. I think right now, we'll stay the course with what we have. And it's not lack of creativity. It's just there are different items that we need to do and focus on right now. And I think coming out with a new strategy with the imaging isn't quite there. But again, I would say '27 can be a very different story depending on how we progress.

And Primescan 2, I think a lot of the dynamics was ease of use, the handheld perspective, the portability. Is Primescan 3, I don't want to get too far ahead itself, but maybe the advancement of the family more about the hardware or the software or both?

Both. Yes. And it's easy to say because it doesn't exist, Mike. So ideas right now. But one would think that smaller, faster, cheaper would be really where you want to get to. And to me, it's about iterative learning and making this move into a simpler package that can help us expand further.

I'll get a Sketchpad after we can start to...

Yes, we'll figure out.

Let's talk about the orthodontic portfolio. I mean you highlighted the roll-off of Byte into next year. Like how do you feel that SureSmile now that you're now a professional-only orthodontic platform is positioned in the market right now, especially against the potential long term of transitioning from traditionally GP into the orthodontic market.

Yes. And I think you kind of answered it right there. So we have to reestablish a stronger presence in ortho. Having exited that out for GPs is something that I want to change. The biggest thing is with SureSmile, again, it's one of those assets that we haven't flexed the muscle on with clinical data, with outcomes with materials that are really strong and very capable of having its fair share of market. The fact that it's a comprehensive package that is beyond aligners into robotically bent wires and creates a solution for orthodontists that can either be combined brackets and wires along with aligners or just aligners or one or the other. The biggest thing for us is modernizing our platform. We have an out-of-date software that wasn't invested in. We need to roll that into Core. So part of the acceleration of R&D this year is to bring that further along to make that simpler to use, modernize it out to today's standards and allow us to go out and compete against the Invisalign or the angels and look at it that way. I really feel that once we have that done and we go through the trainings that we've mentioned, we have the ability to capture share there. And again, I'm not declaring that suddenly we're #1 in the market. That's not it. But there's enough space to get a decent amount of, obviously, free cash flow to use to generate for the rest of the business.

And when you win share on SureSmile, what is the typical profile of a dentist that you bring on board? Is it somebody who historically been only brackets and wires? Is it somebody looking for a replacement product? Is it somebody who is a hardcore DS Core customer already? Like how should we think about where you've been successful?

Yes. I think where we've been successful is, first off, people who are willing to tolerate our software because it just really does need to be modernized. But they also understand that it gives you more planning options and therefore, less special one-off items where some of the market leaders have to go to. And so it's a comprehensive solution that can just become a natural part of the planning for them that works well. The outcomes, which we haven't discussed yet are higher or better than others, and we have to get that solidified and go share that out. So it's usually someone willing to tolerate. It's a little bit tougher to use the software, but it's better for my patients. And I think that's really where we see mostly conversion versus a hardcore Dentsply person.

And how do you get that data out? Is it clinical papers?

Clinical papers, it's clinical education, right? Hence, the move for that. So when I talk about ClinEd, while certainly we'll be focused on implants, ortho is right up there. And I think that's one of the needs is we just have to share what we have. We haven't done the best job doing that.

And you've been fairly transparent about the Byte financial impact. Is there any qualitative impact that you see in the market? Obviously, you're a new leader, like this was not a deal that you did. And so now it's kind of cleaning up the challenge in the past. But has there been anything in the market customer-wise or patient-wise that is worrisome to you? Or is it?

No. No, not really. Listen, I just think there was something that wasn't the right move that overall, pulling it was the right thing to do. And getting all of that underway and done is there. I think by the end of this quarter, all of the treatments that were in progress are planned to stop and then that gets into the history books. But I don't know if it did anything to damage us with it. I think it created the rift between Ortho and Dentsply Sirona, and that's really what we're trying to rebuild. And that one will take a couple of years. It's not just going to be a phone call a new guy and suddenly they're all alright, right? So we have to rebuild that trust and go. So I think it created a situation that's impacted us, but it's something that we can overcome.

And as we wrap this up, and we've talked a lot about the investments you're making, a lot of the blocking and tackling, the band-aid being pulled on the dividend. I think everyone understands it. How are you thinking about the final leg of organizational priorities on making sure I hear you as a cash flow guy. Like how do you make sure that you get that cash flow level where you want it, knowing that you're spending to grow right now?

Yeah. Listen, I'm going to build on that because there's really 2 things. One is a message I do want to throw out there. We are implementing our investment plan, whether it be the 50% increase in clinical education or investing in reps, as we talked about or even double-digit growth in R&D, and that's occurring right now. We've begun the restructuring really in March. And over the next 4 months, that's also going to occur. So one thing I do want to throw out, Mike, to you and to counterparts in the investment community is, as I look at that and I look at the timing of that, while we don't give quarterly guidance, we will have EPS pressures in Q1, Q2 as you do the investments and not yielding the results of that. And I think you have the second half lift where that restructuring comes through. So just something for everyone to keep in mind is we're going to spend for the long-term growth, not a quarterly flash. We have pressure upfront, relief coming, which has started in March, probably finish up and then see it in the second half of the year. And I do think there's a balance of that, that has to be factored into the way we're looking through this year because I'm going to invest in the right things and take the right bumps upfront for long-term gain, and that's where we are now. But I think that that's probably the biggest thing I want to throw out there is that at the same time as we grow and we deleverage, we'll get ourselves healthier on the balance sheet. And then I want to remove shares so that we have a stronger EPS growth versus top line. And then that in itself, as we use cash flow can be used to create what I think is a value generation for shareholders.

All seems logical to me. Dan, thank you so much for the time. Really appreciate it.

Good seeing you again, Mark. Thank you.