Glenn Coleman
Executive Vice President and Chief Financial Officer at DENTSPLY SIRONA
Thank you, Simon. Good morning and thank you all for joining us. Today, I'll cover several topics, including our fourth quarter and full year 2022 results as well as our outlook for 2023. Overall, we exceeded the high end of our revenue, operating margin and adjusted EPS outlook ranges that we provided in November and believe this is an important early milestone as we move forward. So let's begin on slide nine. Our fourth quarter revenue was $983 million, which represented a decline of 10.9% on a reported basis versus the prior year, largely impacted by foreign currency and a stronger US dollar. Organic sales decreased by 2.6%, but if exclude China, sales grew 0.4%. Sequentially, organic revenue grew 5.8% versus Q3.
Operating income was $154 million with operating margin of 15.7%. On a year-over-year basis, operating margin contracted due to continued FX and inflation headwinds, partially offset by price. On a sequential basis versus the third quarter, operating margin improved by 100 basis points, which was much better than expected. Adjusted EPS in the fourth quarter was $0.46 and exceeded the high end of our outlook range by $0.09, largely due to better-than-expected organic revenues and operating margin performance. On a year-over-year basis, adjusted EPS declined by $0.37. We attribute about $0.10 of the EPS decline to foreign currency, with the remainder coming from lower year-over-year organic revenues, inflationary pressures and below-the-line FX expenses.
We also delivered strong operating cash flow in the fourth quarter, which came in at $142 million, translating to adjusted free cash flow conversion of 110%, up from 100% conversion in the prior year. In the quarter, we returned $26 million to shareholders through dividends. Let me now turn to our segment performance in the quarter on slide 10. Organic sales in Technologies & Equipment, or our T&E segment declined 2.2%, while the consumables segment declined 3.4%. The T&E organic sales decline was primarily due to softer implants volume, partially offset by continued strong demand for aligners. Aligners grew over 25% in the fourth quarter, driven by strong growth in both SureSmile and Byte. This quarter was the second quarter in a row with double-digit growth in this part of our business.
SureSmile continues to benefit from regional expansion, particularly in Europe and new product offerings. Our direct-to-consumer aligner brand, Byte also saw a very strong growth despite slowing consumer spending trends as we're seeing improvement in customer conversion rates. Our CAD/CAM business also returned to growth in Q4, driven by strong demand in Japan and Korea. The Equipment & Instruments business declined by low single digits in the quarter, driven by softening demand and ongoing supply chain constraints. Implants were down double digits versus the prior year quarter due to softer demand in China as well as in the US and Europe. We did see some positives in parts of our implants business as value implants showed year-over-year growth.
Moving to the Consumables segment. Organic sales declined primarily due to lower volume in China. These headwinds were partially offset by modest price increases and recent product launches, including ProTaper Ultimate and CEREC blocks and growth in restorative and preventative products. Excluding China, the Consumables segment grew approximately 1% organically over the prior year fourth quarter. Now, let's turn to slide 11 to discuss fourth quarter financial performance by region. US sales were $369 million, representing an organic sales decline of 1.7%, driven by lower volume in CAD/CAM, implants and lab consumables. These headwinds were partially offset by strong growth in aligners. While CAD/CAM volume was down in the quarter, dealer inventory levels were also reduced by $30 million sequentially.
Turning to Europe. Sales of $376 million were down 3.2% on an organic basis due to lower implants and equipment volume. We attribute the softness in equipment to continued supply constraints, as well as a weaker retail demand environment. Rest of World sales were $238 million and down 3% on an organic basis versus the prior year. In China, as expected, we experienced lower sales across product groups due to COVID shutdowns, as well as headwinds in implants due to the impact of VBP. Excluding China, Rest of World organic sales had a very strong quarter and grew double digits. Moving to slide 12, let me now cover our full year 2022 performance. In 2022, sales were $3.9 billion, representing an organic sales decline of 0.5%. Sales in the year were significantly impacted by foreign currency headwinds, supply chain constraints and regional softness in China and the US, with the US decline largely due to reductions in CAD/CAM dealer inventory.
Despite these headwinds, we are pleased by our performance in Europe, which grew 3% on an organic basis and Rest of World, excluding China, which grew 10%. Notably, our global aligners business, which is a key growth area for the company grew nearly 10% over the prior year. Operating margin for the full year was 16.8%, which exceeded our outlook of margin greater than 15%. As compared to full year 2021, operating margin contracted 350 basis points due to lower volume, unfavorable mix, inflation and foreign exchange headwinds, which was partially offset by price. For the full year, foreign exchange headwinds impacted operating margin by 100 basis points. We delivered full year EPS of $2.09 or $2.44 excluding the impact of FX, compared to $2.82 in the prior year. The company continues to maintain a strong balance sheet and finished the year with $365 million of cash and cash equivalents on hand with a net debt-to-EBITDA ratio of approximately 2.1 times.
For the year, we returned approximately 70% of free cash flow to shareholders through the combination of dividends and share repurchases. And today, we announced a 12% increase to our dividend. This represents three consecutive years of double-digit increases to the dividend and signifies our confidence in our long-term plans. With that, let's now move to slide 14 to discuss our expectations for 2023. Overall, we're reviewing 2023 as a transition year. Significant work is underway to improve the company and fix the internal issues, structure and processes that have hindered recent results and this work will position the company to drive significant shareholder value when the external environment improves.
With that said, we have a credible plan for 2023 that includes cost savings and much needed investments to create and sustain long-term profitable growth in the business. For the full year 2023, we expect organic sales to be in the range of down 1% to up 2%, which represents a net sales range of $3.85 billion to $3.95 billion. Based on current rates, FX will be a 100 basis point headwind to full year net sales. On an FX-neutral basis, we expect the cadence of sales to be fairly balanced over the year with sales slightly larger in the second half of the year as compared to the first half. We anticipate that demand will remain strong in key strategic growth areas. Aligners will continue to benefit from regional expansion and market share gains, and we expect better performance in implants. We also anticipate, an uplift recently launched CAD/CAM products, including Primeprint, DS Core and Primescan Connect, but we remain cautious on overall equipment demand.
Turning to regional dynamics. We expect to see an improvement in the two geographies that were a challenge in 2022, the US and China. In Q4, we made critical investments to our US commercial team, which will continue in the first half of 2023. We also enhanced our commission plans to incentivize growth and address the higher CAD/CAM dealer inventory levels. We expect that, these actions will enable our US business to return to growth in 2023, starting in the first quarter. In China, we expect sales will be flat on an organic basis after a year of significant decline in 2022, but we remain cautious on the demand outlook as significant near-term uncertainty remains. Additionally, VBP will be a top line headwind due to the 40% price impact we will see in our China implants business. While many uncertainties remain, we are seeing positive signs of recovery. For example, this week, our China commercial team participated in an in-person dental trade show with 50,000 dental professionals in attendance.
As we move forward in 2023, we'll be using EBITDA margin as the primary profitability measure to track our operational performance and better align with our peers. For 2023, we expect our EBITDA margin to be greater than 18% which is a decline of 140 basis points from the prior year, but above our fourth quarter run rate of 17.4%. We expect adjusted earnings per share to be in the range of $1.80 to $2 on a full year basis. Let's turn to slide 15 to discuss the puts and takes in our 2023 EPS outlook. Overall, we anticipate that adjusted EPS will decline from $2.09 in 2022 to $1.90 in 2023 at the midpoint of our outlook range. Cost savings from the restructuring plan are expected to accelerate starting in the second quarter, contributing approximately $0.30 of EPS in 2023, with the full run rate achieved by mid-2024.
We anticipate a sequential moderation in raw material inflation throughout 2023, but remain at elevated levels. We will offset a portion of the inflation with price increases, which will net to a $0.20 headwind to earnings. Other items than the FX and interest will net to a $0.04 headwind to EPS. This brings us to EPS of $2.15, up $0.06 versus the prior year, excluding the impact of investments. We will be making commercial investments and undertaking long overdue integration activities in 2023. These investments are expected to impact EPS by $0.25. On slide 16, we'll cover the risks and opportunities we see in our outlook. Our outlook is based on our most recent view of the dental market and economy today. Overall, we see 2023 as having a healthy balance of risks and opportunities that could enable outperformance. The largest variable to our outlook is the overall health of the economy.
Similar to last year, the external environment remains challenging and uncertainty is high. While demand has been largely stable to-date, we believe that recessionary concerns, rising interest rates and high inflation could lead to a change in consumer behavior, which in turn could cause a slowdown in elective procedures and capital equipment purchases. Beyond the external environment, key opportunities that could drive our performance relative to our outlook include earlier or greater impact from commercial investments and faster sustained supply chain recovery. On the risk side, we acknowledge there is some risk to the timing on realizing savings associated with our organizational restructuring plan. It is a large-scale global program with many variables, which we're closely monitoring as we execute.
Turning to slide 17. We've laid out additional details on our expectations for the first quarter, given the visibility that we have at this stage in the quarter. For the first quarter, we expect year-over-year organic sales growth to be approximately 1%, driven by continued strong growth in our aligners business and growth in the US offset by continued headwinds in China, which we expect to gradually improve over the remainder of the year. US organic growth will benefit from easier comps in CAD/CAM and the favorable timing of dealer orders. Entering the year, dealer inventory has returned to much lower levels and will be largely aligned to retail sales going forward. Having said that, we do expect dealer CAD/CAM inventory to increase sequentially in Q1 and then return to lower levels over the course of the year.
We expect the US quarterly performance to be choppy in 2023 with slight growth for the full year. Based on current foreign exchange rates, we anticipate that FX will continue to be a headwind, negatively impacting net sales in the first quarter by approximately $40 million. We expect EBITDA margins will be at least 15% and will sequentially improve each quarter as the realization of the restructuring plan savings accelerate and we begin to see demand recovery in certain regions. Let me now wrap up on slide 18, and quickly touch on capital allocation priorities. We plan to continue returning at least 50% of free cash flow to shareholders through dividends, which we've increased three consecutive years as well as share repurchases. Our capital deployment strategy is predicated on keeping leverage low with flexibility in the balance sheet while maintaining an investment-grade credit rating.
We have a strong balance sheet, a low leverage ratio and healthy cash flow generation and expect full year 2023 free cash flow conversion of approximately 80%, which reflects the expected cash outlays to support our restructuring program. Our goal is to improve conversion to 100% once you move past the one-time cash outlays in 2023 through the organization and portfolio work that we discussed today as well as working capital and supply chain optimization.
And with that, I'll now turn the call back to Simon.
