DENTSPLY SIRONA Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2023

There are 12 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the 4th Quarter 2022 Dentsply Sirona Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Also be advised that today's conference is being recorded. I would now like to hand the conference over to Andrea Daley, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Carmen, and good morning, everyone. Welcome to our Q4 2022 earnings call. Joining me for today's call is Simon Campion, Dentsply Sirona's Chief Executive Officer and Glenn Coleman, Chief Financial Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.dentsplycerona.com. Before we begin, please take a moment to read the forward looking statements in our earnings press release.

Speaker 1

During today's call, we may make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10 ks and any updating information in subsequent SEC filings lists will be based on non GAAP financial results. We believe that non GAAP financial measures provide investors with useful supplemental information about financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non GAAP results.

Speaker 1

And with that, I would now like to turn the call over to Simon.

Speaker 2

Thank you, Andrea, and thank you all for joining us this morning for our Q4 2022 earnings call. Today, I'll start by providing an overview of our recent performance and the transformation work we have underway. Glenn will cover Q4 and 2022 financial results and also share our 2023 outlook, And then I will finish by providing a strategic operating update. Starting on Slide 5, we were pleased to close out 2022 with results much better than expected, exceeding the high end of our prior outlook across key financial metrics. Having led this organization for 5 months now, I'm energized by the momentum we have and confident that while the macro environment remains challenging, The difficult work we are doing now will aid our ability to navigate it successfully.

Speaker 2

We are already seeing the fruits of our efforts with early quick wins such as renewed interest from and with DSOs. While we can't get into the details, it gives us confidence in the progress that we are already making. You may have heard that we recently announced our organizational restructuring plan to improve operational performance, to increase alignment, to drive process and discipline and to begin to position Dentsply Sirona for improved future performance. We committed to act with urgency and I feel we are doing just that. We are moving deliberately from discovery to action And we are confident that this plan and other initiatives will collectively improve performance to deliver long term shareholder value.

Speaker 2

Moving to Slide 6. Let me take a few minutes to explain the changes we are making. We are putting into place a new operating model, which will enable the company to better deliver on our strategic objectives, while also focusing on our tone at the top that focuses on inclusivity, Transparency and importantly, ethics and compliance. The plan consists of the following elements. Number 1, reducing the global workforce by approximately 8% to 10%, while continuing to invest in the global commercial organizations.

Speaker 2

Number 2, implementation of 5 global business units reporting into 1 leader. The global business units are designed to drive enterprise integration, Align our product portfolio to the company's growth strategy and drive seamless communication with our commercial teams. Number 3, commencement of central functions and infrastructure optimization to support efficiency of the overall organization. Number 4, hiring a new leader of quality and regulatory to sit on the leadership team, thus elevating the visibility and importance of this critical function within the organization number 5, simplification of management structure to bring the company in line with industry best practices and number 6, delivering cost savings to fund critical investments in 2023 and beyond to position the company for sustainable future growth. As summarized on Slide 7, we expect to achieve at least $200,000,000 in annual cost savings over the next 18 months And as outlined already, reduced the global workforce by up to 10% of the total employee base, but we are not targeting our sales teams.

Speaker 2

We believe that this plan along with other actions we have underway will set Dentsply Sirona on the right path to deliver better and more consistent results and in turn creates significant value for all our stakeholders. The members of the leadership team have undertaken such work in their respective pasts. So this experience coupled with the partnership of external firms who bring an independent view, industry benchmarking and best practice is benefiting this work. This transformational work is particularly difficult when actions impact our team and therefore we have not taken these decisions lightly. We are very talented employees and the leadership team is confident that the changes we are making will unite to the organization, We better position Dentsply Sirona for long term sustainable success.

Speaker 2

Importantly, we are becoming a more inclusive organization focused on creating and fostering a culture of authenticity, compliance and accountability. This starts with having leaders at the top We will provide the right tone and foster the right culture and I feel that this change in tone within the organization is beginning to resonate with our employees. The most recent North American sales force engagement survey, for example, highlights meaningful, arguably significant improvement across the board. In addition to the positive employee momentum, we're also seeing it with our customers globally by leveraging the strength of our clinical education programs. We recently hosted our first ever DS World Dubai with more than 800 registered attendees from 47 countries.

Speaker 2

This was our 4th DS World event in the last 6 months and enabled us to interact with more than 7,000 dental professionals. Before I turn it over to Glenn to discuss the financial performance, let me reiterate that we want to be a company that fulfills our commitments internally and externally. And I feel that the increased engagement we are seeing internally and externally is helping us establish a pathway to be that company. Glenn?

Speaker 3

Thank you, Simon. Good morning and thank you all for joining us. Today, I'll cover several topics, including our Q4 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 9.

Speaker 3

Our 4th quarter revenue was $983,000,000 which represented a decline of 10.9% on a reported basis versus the prior year, largely impacted by foreign currency and the stronger U. S. Dollar. Organic sales decreased by 2.6%, But if you exclude China, sales grew 0.4%. Sequentially, organic revenue grew 5.8% versus Q3.

Speaker 3

Operating income was $154,000,000 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 3rd quarter, operating margin improved by 100 basis points, which was much better than expected. Adjusted EPS in the 4th 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.

Speaker 3

We also delivered strong operating cash flow in the 4th quarter, which came in at $142,000,000 translating to adjusted free cash flow conversion of 110%, up from 100% conversion in the prior year. In the quarter, we returned $26,000,000 to shareholders through dividends. Let me now Turn to our segment performance in the quarter on Slide 10. Organic sales in Technologies and Equipment or our T and E segment declined 2 22%, while the Consumables segment declined 3.4%. The T and E organic sales decline was primarily due to Softer implants volume, partially offset by continued strong demand for aligners.

Speaker 3

Aligners grew over 25% in the 4th quarter, driven by strong growth in both SureSmile and BITE. This quarter was the 2nd 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, Bite, also saw a very strong growth despite slowing consumer spending trends As we're seeing improvement in customer conversion rates. Our CADCAM business also returned to growth in Q4 driven by prior year quarter due to softer demand in China as well as in the U.

Speaker 3

S. 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.

Speaker 3

These headwinds were partially offset by modest price increases in 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 Q4. Now let's turn to Slide 11 to discuss 4th quarter financial performance by region. U. S.

Speaker 3

Sales were $369,000,000 representing an organic sales decline of 1.7% driven by lower volume in CADCAM, implants and lab consumables. These headwinds were partially offset by strong growth in aligners. While CATKAM volume was down in the quarter, dealer inventory levels were also reduced by $30,000,000 sequentially. Turning to Europe, sales of $376,000,000 were down 3.2% on an organic basis due to lower implants and equipment volume. We attribute the softness of equipment to continued supply constraints as well as a weaker retail demand environment.

Speaker 3

Rest of World sales were $238,000,000 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 VBT. 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 $3,900,000,000 representing an organic sales decline of 0.5%.

Speaker 3

Sales in the year were significantly impacted by foreign currency headwinds, supply chain constraints and regional softness in China and the U. S, with the U. S. Decline largely due to reductions in CADCAM 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%.

Speaker 3

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 3.50 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 for $2.44 excluding the impact of FX compared to $2.82 in the prior year.

Speaker 3

The company continues to maintain a strong balance sheet and finished the year with $365,000,000 of cash and cash equivalents on hand with a net debt to EBITDA ratio of approximately 2.1x. 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 3 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.

Speaker 3

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 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 $3,850,000,000 to $3,950,000,000 Based on current rates, FX will be 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 and key strategic growth areas.

Speaker 3

Aligners will continue to benefit from regional expansion and market share gains and we expect better performance in implants. We also anticipate an uplift from our recently launched CADCAM products, including Prime Print, DS Core and PrimeScan Connect, We remain cautious on overall equipment demand. Turning to regional dynamics, we expect to see an improvement in the 2 geographies that were Challenge in 2022, the U. S. And China.

Speaker 3

In Q4, we made critical investments to our U. S. Commercial team, which will continue in the first half of twenty twenty three. We also enhanced our commission plans to incentivize growth and address the higher CADCAM dealer inventory levels. We expect that these actions will enable our U.

Speaker 3

S. Business to return to growth in 2023 Starting in the Q1. 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 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.

Speaker 3

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 4th quarter run rate of 17.4%. We expect adjusted earnings per share to be in the range of 1 $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 20.22 to $1.90 in 2023 at the midpoint of our outlook range.

Speaker 3

Cost savings from the restructuring plan are expected to accelerate 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, namely FX and interest will net to a $0.04 headwind to EPS. This brings up to EPS of $2.15 of $0.06 versus the prior year, excluding the impact of investments. We will be making commercial And undertaking long overdue integration activities in 2023.

Speaker 3

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 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.

Speaker 3

Beyond the external environment, key opportunities that could drive outperformance 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 are some risks to the timing and 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 Q1 Given the visibility we have at this stage in the quarter. For the Q1, 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 U.

Speaker 3

S, offset by continued headwinds in China, which we expect to gradually improve over the remainder of the year. U. S. Organic growth will benefit from easier comps in CADCAM 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.

Speaker 3

Having said that, we do expect dealer CADCAM inventory to increase sequentially in Q1 and then return to lower levels over the course of the year. We expect the U. S. 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 Q1 by approximately $40,000,000 We expect EBITDA margins will be at least 15% And we will sequentially improve each quarter as the realization of the restructuring plan savings accelerate and we begin to see demand recovery in certain regions.

Speaker 3

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 3 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 Our goal is to improve conversion to 100% once we 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.

Speaker 3

Thank you, Glenn.

Speaker 2

Moving on to our strategic updates starting on Slide 20. We are putting our plans into motion as we move the organization forward to address the internal challenges we have faced and laid the right foundation that will enable long term sustainable performance. The fundamentals of our industry remain attractive We are well placed to capitalize on growth opportunities supported by a solid organizational foundation. Our path forward starts with confirmation that our strategy to transform dentistry by digitalizing dental workflows by driving product and service innovation And delivering an exceptional customer and patient experience through an engaged and diverse workforce is the right one. We are now intently focused on how we will improve on the delivery of the tactical elements of this strategy in a predictable, Repeatable, reliable manner to customers, shareholders and employees.

Speaker 2

Changing to Slide 21, We have initiated much of this transformational work, but the heavy lifting is ahead of us. As we embark on this New Year, We are focused on 5 core practical and strategic objectives. These objectives are to: number 1, Deliver on our annual growth and margin commitments that Glenn has just shared. Number 2, enhance and sustain our profitability. Number 3, accelerate enterprise digitalization number 4, win in aligners and implants and number 5, create a high performance culture.

Speaker 2

As we make progress on these objectives, we do so with an eye on fulfilling our commitment to return to industry growth and increase profitability. Turning to Slide 22, I would like to reiterate the key actions we are taking to achieve Today, we have provided our 2023 growth and margin outlook, and we are committed to achieving that plan. We will do so by making meaningful progress on the other four objectives that we have laid out. Notably, we have discussed in detail the organizational Changes we have underway to implement a new operating model, which will enable us to connect segments and geographies, Reallocate capital through the company as needed and eliminate silos to improve the customer and employee experience. In parallel, we are defining our winning portfolio.

Speaker 2

The strategic intent of our winning portfolio will focus on a simple, secure and connected workflow experience that our dental clinic and lab customers trust for better treatment journeys and patient outcomes. Related to our portfolio shaping work, a topic of much discussion has been the future of our Wellspect Healthcare business. I can confirm that while no final decisions about the ultimate status of the significant and profitable Parkport portfolio have been made, We have received several inbound inquiries about this asset. We feel compelled to investigate such inquiries and have commenced engagements with several interested parties. We will not make any further comments on this matter until we have a definitive conclusion to these discussions.

Speaker 2

Another key aspect of our winning portfolio involves simplification. We are reviewing the company's product offerings on a SKU level basis to inform the size of actions that can be taken to streamline the portfolio And deliver higher returns. Our early insights indicate that the portfolio is overly complex. For example, We now know that in our consumables business, 12% of the SKUs generate approximately 95% of our revenue in those categories. This complexity adds significant costs to the business and leads to inefficient use of internal resources across functions.

Speaker 2

Specifically, in Endo, we have over 9,000 SKUs of different endodontic files with 8% of the SKUs making up 90% of that platform's revenue. While this work is ongoing, we know there is opportunity to simplify and drive improvement and plans and the network efficiencies to unlock further long term margin expansion. These efforts also yield additional benefits, including reducing operational complexity, optimizing inventory, increasing service levels and sales force effectiveness, Reducing risk and improving quality. Importantly, we see these benefits with a goal of preserving the associated revenue through disciplined execution and effective customer partnerships. The comprehensive review of our business has surfaced important areas that needs strategic investments to drive overdue integration and enable future growth.

Speaker 2

Key areas for investment include our global sales teams, our IT systems and in resources to ensure compliance. Many of these investments have already commenced and we have, for example, Made great progress on the U. S. Sales force expansion. The vast majority are hired and were recently trained at our North America sales meeting.

Speaker 2

Investments in our IT system are necessary to modernize our landscape and further our enterprise integration. While these types of large scale ERP endeavors are typically a multiyear journey requiring large investment, They are critical to the business operating efficiently and most importantly being able to deliver for customers in an optimal way. We have commenced the process to understand this transformation over the past number of weeks. Compliance is another critically important area. Investing in compliance will support the remediation plans developed in 2022.

Speaker 2

Operating with the utmost integrity and in a compliant manner in everything we do is important to us all on the leadership team and on the Board. As such, this investment has the complete support of both groups and is underway. We are confident that with these actions and the more normalized market conditions, Dentsply Sirona can grow revenue atorabove our historical long term targets, while also increasing profitability. The combination of these positive factors In conjunction with the significant structural and process changes within our organization can enable Dentsply Sirona to deliver the meaningful earnings improvement expected by the end of 25 with adjusted earnings per share of $3 targeted in 2026. Now let me close with a few remarks on Slide 23.

Speaker 2

We ended 2022 on a positive note by exceeding our prior outlook commitments in the 4th quarter. Importantly, there is a sense of positivity within the commercial teams about the future driven by the structural changes, our transparency and the commission plan changes. 2023 undoubtedly will be a transition year as the restructuring plan is put into action against a challenging external environment. However, we are confident in our capability to execute it and establish a clear path forward for the organization, its employees and its investors. We committed to taking decisive action at Dentsply Sirona and I believe we are not only taking decisive action, but taking the right action to improve the company, to improve its performance.

Speaker 2

We want to capitalize on the opportunity that the dental industry affords an organization like ours and believe that this restructuring enables us to drive internal alignment and accountability, simplify and fund critical growth investments. It is essential to achieving our 5 key objectives and delivering the meaningful earnings improvement that you expect that we expect. We are embarking on this road with confidence in our collective experience with the support of the Board and with belief that we can transform this organization. And with that, I will open it up for questions.

Operator

Thank you. And I will begin the Q and A. And in the Please standby while we compile the Q and A roster. And the first question comes from the line of Kevin Caliendo with UBS. Please proceed.

Speaker 4

Thank you very much. This is actually Dylan Finley on for Kevin Caliendo. Congrats on the great quarter guys. Question for you kind of on the revenue side. So you put out that $3 EPS target for 2026.

Speaker 4

Based on some math that we did assuming some moderate amount of buybacks and assuming you hit a 20% operating margin By that timeframe, we landed on an average growth rate around 2.5%. So based on the growth that you're expecting this year, It will definitely take a little bit. I'm wondering if this is consistent with your own internal assumptions and if you have any visibility yet exiting 2023, where you expect to grow? Thanks.

Speaker 3

Yes. No, I think, 1st and foremost, we haven't laid Our revenue expectations long term, we'll do that at an Investor Day coming up in November. But clearly, we would expect to get back to market growth rates over the coming years As part of our plan and I would say our expectations are to do above the 2.5% to 3% when you look at 2 to 3 years from now. So that would be part of our expectations on how we get to the $3 Great. Thank you.

Speaker 3

Thank you.

Speaker 1

Next question please.

Operator

Thank you. One moment please. All right. And it comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed.

Speaker 5

Good morning, Elizabeth. Sorry, I'm on mute talking to myself. I apologize. Thanks so much for the question guys. I guess one longer term question and one shorter term question.

Speaker 5

This is really helpful for the details about some of the And I was wondering how you think about the sort of like cadence and timeline of how some of these new investments translate into sort of maybe new product launches, etcetera. I know you talked, Simon, about reducing the SKU count, but I imagine you also have Continued innovation, as you pointed out with R and D spend, etcetera, maintained. So I guess that would be my first question. And my second question is just sort of on the shorter Cadence, we're sort of 2 thirds of the way through the Q1. And I was just wondering if you could talk through sort of what you're seeing currently in the market across your

Speaker 2

Yes. Good morning, Elizabeth. Thank you for the questions. So let me start with the R and D piece. One of the benefits I think to the reorganization that we're going through has been we're now getting more and more visibility to Where and how we've invested our R and D dollars and the return that we have obtained on those historically.

Speaker 2

The benefit of moving to 1 massive global business unit is we will be able to decide Seamlessly where we want to spend our R and D dollars and bring more discipline to that process as to how we evaluate Value and monitor progress during the R and D cycle and even into the commercial cycle. So You should expect to hear more from us certainly at Analyst Day or Investor Day on that. And then with respect to investments, I'll use the U. S. Commercial team as an example.

Speaker 2

As I noted in the prepared remarks, We are well underway. In fact, we're almost complete with that investment on the implant team and on the DSO team. We've already experienced traction, as I noted, with the DSOs. In relation to the implants, it's a very clinical cell. And so we would expect a tail on their training before they begin to deliver meaningful performance in the implant arena in the U.

Speaker 2

S. But clearly, it's an area where we have control of our own destiny. We were direct sales force. It's profitable and it's growing and we think we have a portfolio that we can win within that space. So we would expect Increasing performance over the year and into next year from the implant team.

Speaker 3

And Elizabeth on your question around Q1, obviously we're 2 months now into the I would say 1st and foremost, we're much more positive around Q1 than where we were just a few months ago. So the fact that we're talking about putting up organic growth in Q1, I think is a We do expect to see really strong growth coming out of the ortho portfolio. January was a record month for SureSmile, which was a pleasant So that momentum is continuing. CADCAM should also have a very strong quarter given where we are at the dealer inventory levels in the U. S.

Speaker 3

Along with the success we're seeing with prime prints. So on the whole, we're looking at Q1 more positively than we were, say, a few months ago with growth coming from Obviously, we're still seeing headwinds in China. So we are modeling a pretty sizable decline in China in Q1, but that should improve After we get past Q1. So that's the Q1 story. FX will be a pretty large headwind still in Q1.

Speaker 3

We've modeled Right now, dollars 40,000,000 based upon where rates are currently. On a full year basis, we expect organic growth to be down 1% to up 2% organically, again about a full point on the top line relative to the FX headwind and EPS of $1.82 I would just say the way we've modeled our full year outlook is expecting a stable environment, patient volumes to be stable. Regionally, we've made a number of comments in our prepared remarks around improvements we're expecting in both China and the U. S, which have And big challenges for us in 2022. So U.

Speaker 3

S. Should be up on a full year basis slightly, China flat Coming off of a quarter that's going to be down in Q1. And then Europe should be flat to maybe down slightly and then growth coming out of Rest of world when you exclude China and Latin America. So on the whole, that's how we see the regions playing out. And again, if you look at the portfolio, aligner So really good growth year over year, implant should be improving and CADCAM should be growing.

Speaker 3

So on the whole, that's how we've laid out our outlook. I would just say an important point I made and I wanted to ensure that everyone heard it is, when we look at our top line, We expect on a constant currency basis that the second half of the year will be slightly higher than the first half, which means the year is not back end loaded In terms of the top line, however, for EPS, keep in mind our restructuring savings will not kick in until Or the latter half of the second quarter, which means EPS will be back end loaded. And I would just say directionally, I'd model about 40% Of our full year EPS in the first half of the year and 60% in the back half of the year. So hopefully that gives you a little bit of color around Q1 and our full year outlook. Thanks for the question.

Speaker 5

Thanks so much.

Operator

Thank you. One moment for our next question. And it comes from the line of Brandon Couillard with Jefferies. Please proceed.

Speaker 2

Hey, thanks. Good morning. Good morning. Simon, on the $25.26 target of $3 EPS, Just help us understand how you got comfortable putting that target out there today, especially right in front of a pretty major restructuring program? Yes.

Speaker 2

So I would say Brandon, good morning. I would say that, again, we alluded to it in our prepared remarks between The restructuring and a lot of other activities that we have underway, including the SKU rationalization and driving Plans and network efficiency, we got comfortable with that projection pretty quickly. In fact, I think we put that out at JPMorgan meeting in January and we have confidence that we're going to achieve it with all the levers that Quite frankly, we do have our disposal to get to it. Glenn, I don't know if you have any further comments on anything.

Speaker 3

No, I think the cost side of the equation, you've already seen the actions that we're putting in place to drive us towards that $3 EPS number. We'll give more color around the SKU work and the impact of that when we get to November, but we have a good quantification of what we think that looks like, including the Facility optimization piece. I think a key part of this though is getting back to market growth. So we're going to need to see a more normalized macro environment Coupled with new product launches and innovation and again we feel confident over the next 3 to 4 years we'll get back to market growth Coupled with the cost actions that we're taking will drive to a number that's north of $3 by 2026.

Speaker 2

And Glenn, in terms of the full year organic growth guide, can you give any more color between the sub segments T and E versus consumables? What does that indent for net pricing capture for the year? Thank you.

Speaker 3

Yes. So I think in terms of Pricing, the way you laid it out is low single digit increases. I think it's important to note though that we're being very surgical around where we're Increasing pricing. So we're not just doing it across the board. We're doing it in certain regions and in certain parts of the portfolio.

Speaker 3

And that's a net number. So obviously, we're discounting and actually reducing prices in some cases, China being one as an example and also Other parts of the portfolio. So, on the whole, we're counting on low single digit price Tailwinds as we go into 2023. Keep in mind, we rolled out 2 price increases in 2022, so we'll get Full year benefit of that and we have one planned for 2023 at the moment. So that's how we see pricing.

Speaker 3

I'm not going to give you the Specifics between T and E and consumables, but obviously we've been very thoughtful in terms of how we've thought about price increases. Thanks for the question.

Operator

Thank you. One moment for our next question please. And it comes from the line of Nathan Rich with Goldman Sachs. Please proceed.

Speaker 6

Great. Good morning. Thanks for the questions. So I had a few on the CADCAM segment. Can you give a little bit more detail on what drove the growth in CADCAM in Q4?

Speaker 6

Given the kind of relative size of the U. S. And the tough comps there, kind of surprised that it was up, so definitely good performance. Just curious what drove that in the quarter. On the inventory changes, could you maybe talk about what you're hearing from the distributors on why there's The volatility in inventory levels and you said you expect CADCAM to return to growth in 2023.

Speaker 6

Is that growth excluding the Dealer restocking that you expect to benefit Q1? Thank you.

Speaker 3

Yes. So our performance for CAT Camm in Q4 is almost All driven by Asia Pac. We saw really strong performance in Japan and Korea as an example. So regionally, that's where the growth came from. Obviously, we continue to see some progress in other parts of the world, but that's the primary driver of growth here in the Q4.

Speaker 3

On the inventory changes, I think 1st and foremost, we did a really nice job to take down the inventory levels throughout 2022. So I mentioned in my We were down $30,000,000 sequentially from Q3 to Q4. On a full year basis, we were down over $60,000,000 So we're actually below the levels we started the year, which is very good, which means for every retail dollar of sales, we should see a wholesale dollar sale, which we didn't see in 22. So as we move forward now, obviously, we should see better performance in CADCAM in the U. S.

Speaker 3

And We're still cautious around the U. S. Equipment market and speaking with our dealers and seeing what's happening in the marketplace, we're still cautious. So I think the fact we've got our dealer inventory levels where they are being a bit cautious is how we've laid out our guidance for 2023. But keep in mind, We do have some new products that we've launched in this space.

Speaker 3

We are expecting to see growth overall. And so that's how we've laid out 2023. Simon, did you want to add anything? I think

Speaker 2

you covered that. We had a strong quarter with the global execution and with our renewed focus on the U. S, We're comfortable where we're at.

Speaker 6

Great. Thank you.

Operator

Thank you. One moment for our next question please. And it comes from the line of Geoff Johnson with R. W.

Speaker 3

3rd? Good morning.

Operator

All right. We have technical issues with his line. Can I move to the next question please?

Speaker 1

Do we have the next question?

Operator

Yes, ma'am. It comes from Erin Wright with Morgan Stanley. Please proceed.

Speaker 7

Great. Thanks for taking the question. So on the restructuring I think you alluded to SKU count rationalization. Does that have a meaningful impact on sales? And is this something that is embedded in your guidance, both in the near term and longer term perspective.

Speaker 7

And will this be something you're breaking out for us? How should we be thinking about the timing and magnitude of that? And then just on divestitures, other areas of potential divestitures outside of Medical, I understand that you're kind of limited on what you can say on that front, but Also any details you can give us on the margin profile of the Wellspect business that would be great. Thanks.

Speaker 2

Hey, thank you for the question. So on the SKUs, we don't expect to Execute any meaningful work on the SKU rationalization in 2023. The organization Ran a SKU program a few years ago, and I think we offset some customers and we offset some of our distribution partners. So going through this in a very thoughtful manner. So we don't expect any changes this year, but the plans will be laid out this year and you should Expect to hear some more granularity at the Investor Day in November about that.

Speaker 2

We provided some color in the prepared remarks about The scale of some of the SKU offerings we have and their contribution to revenue. So hopefully that provided you some additional Color around there. With regard to the divestitures, We obviously considered other parts of our business too, but they are more consistent with our thoughts around being a dental Developer and manufacturer and commercial team. So while we looked at a number of different opportunities to Our portfolio, the one that we have received several inbounds about and that we're taking a long Close look at right now is the Wellspect Healthcare portfolio and there are no plans to do any further ones at this time. And then, Glenn?

Speaker 8

Okay.

Speaker 3

Yes, I would just add just to answer your question on the profitability of the Wellspect business. It is accretive to our overall corporate average. Thanks.

Speaker 7

Okay. Thanks.

Operator

All right. We'll move along to the next question, please. One moment. And it comes from the line of Jeff Johnson with R. W.

Operator

Baird. Please proceed.

Speaker 9

Thank you. Good morning, guys. Glenn, maybe I can follow-up just on that margin accretive comment on Wealth Spec. We get the EPS contribution annually maybe around $0.20 or so, are we at least in the ballpark there? And I just want to confirm that Wellspect is In guidance, keeping that for the full year as part of the current guidance.

Speaker 9

And I guess one other question tied to that is, If you were to get a big cash infusion, whether it was for this reason or any other reason, does that go to pay down debt? Does it go as a share buyback? Or do you pump that right back into maybe potentially other acquisitions to drive that top line and kind of the dental portfolio going forward? Thank you.

Speaker 3

Jeff, thanks for the questions. 1st and foremost, I would say, yes, Wellspect is included full year in our numbers. And again, we're just at this point evaluating our options around that business. So that business is included in our full year expectations. Obviously, if the business were to be divested, we'd have to think about what to do with those cash proceeds.

Speaker 3

We're already very low levered, So that's good news relative to what we could potentially do. But at this point in time, we're not going to lay out any specific plans other than we would make the most appropriate Decisions around how to offset any EPS dilution relative to the transaction. Thank you.

Speaker 9

Thank you. And then maybe one follow-up question, if I can. Just you talked about adding to the sales force here in a few different areas and trying to increase the commercial heft I could pick on, I guess, or pick out a couple of different areas, whether it's within equipment or orthodontics or implants, I'll try to narrow it down just to implants here. You're a number 5 player in implants, probably under indexed, although You can push back on that comment under indexed in value implants or under indexed in fully tapered implants, which those are the 2 kind of bigger growth areas recently. So if you add sales reps, I get it, but what are you doing on the product side to really if implants is one of the keys to the turnaround here, How do you end up winning in implants, Simon, as you kind of talked about here recently?

Speaker 9

Thanks.

Speaker 2

Yes. Thanks, Jeff. So just a couple of points on that. I think historically, our focus on paying for growth hasn't been what we would have liked. So our commission plan changes.

Speaker 2

Our commission plans have changed to more reflect that we want to drive growth from our commercial teams. So we're certainly getting a lot more visibility From them to different parts of our portfolio and the feedback we've received thus far on those commission plan changes have been very positive. People want to get paid when they perform. So we do expect that. In relation to our portfolio, as I noted, I think in my response to Elizabeth's question, we are now Getting visibility, we now have visibility to where we spend our dollars and what returns we get from them.

Speaker 2

So to your point About implants, it's a fast growing segment and opportunity to differentiate ourselves where we have a sales force that is direct, Then we would more likely invest in spaces like that than elsewhere. What you need to make sure Is that we get developed products that are meaningful for our customers. I think we've just launched the some of our tapered products as well, Which have resonated with customers thus far. So I think we're already doing some of the work that you've alluded to. And we will Absolutely be reinforcing our commitment to appropriate R and D in the appropriate spaces moving forward.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question please. And it comes from the line of Jon Block with Stifel. Please proceed.

Speaker 10

Hi, guys. This is Tom Steffen on for John. Thanks for the questions. I'll start with 2023 guidance. Glenn, maybe this is for you, but How should we be thinking about T and E and consumables organic growth?

Speaker 10

I guess relative to the total company guidance of down 1 to up Between implants, ortho, it sounds like T and E will be the growth engine. But I think it'd be helpful if we could put A final point on where that may shake out in rough terms, I guess, is each segment within the total company range or how should we Maybe think about them maybe breaching the high end and low end of it potentially?

Speaker 3

Tom, thanks for the question. We're not going to give too much specifics on our segment guidance. I would just say we are expecting T and E to grow faster than consumables as part of our guidance range. But that's all we're going to comment on at this point in time.

Speaker 10

Got it. And then my follow-up is just on The restructuring, Simon, you gave some very helpful color throughout the call. But can you maybe talk a bit more about the current restructuring and how it may be different from the prior ones for the company. I guess, what were the learnings from those that you're trying to apply this time around? And maybe what gives you confidence This may potentially be more disruptive than expected, and maybe ultimately have some sort of impact on growth.

Speaker 10

Thanks.

Speaker 2

Yes. Thanks for the question. So we've been very thoughtful about this restructuring. You will have hopefully noted that we are not impacting our sales teams at all. In fact, we're net positive on investments in our sales team globally, including Europe and the U.

Speaker 2

S. I think the difference is we're here, We're being extremely thoughtful about it. We are driving alignment between our RCOs, between the regions and the global business units. And we're giving the global business units a single voice. So communications is going to be better between the business units and the regions and decision making and agility is going to be improved because we have we now have more visibility to all of the financial aspects of it.

Speaker 2

And we can move money around as appropriate to fund different investments either commercially or R and D or in other spaces like plant quality and so on and so forth. So I think it's meaningfully different to what was done before. As we noted in the prepared remarks as well, I think the tone at the top is a very material change Here as well. And again, in the prepared remarks, we commented on some of the feedback that we've received from the U. S.

Speaker 2

Commercial team in particular where some of those Metrics have doubled in the past 6 months. So we are changing the tone here at the company. We're being transparent. We're being inclusive. We're driving discipline and improving process and making investments to make this company a better place to work And a better place to deliver results that you expect and that we expect.

Speaker 10

Very helpful. Thanks.

Operator

Thank you. One moment for our next question please. And it comes from the line of Michael Cherny with Bank of America. Please go ahead.

Speaker 2

Thank you for taking

Speaker 11

the question. I'm going to wrap a bunch of topics, I think, into one here. But as you think about the Trajectory and particularly the build into that $3.26 number, I'm not looking for how you think about the revenue dynamics, but how you think about the mix in terms of You're focused on going direct versus not going direct. We heard from one of your key distribution partners yesterday about their desire to build out their own specialty business. And so How does that impact your view of X-ray's go to market strategy and what you can do to take control of more of your own destiny versus relying on your distribution partners as you think about this multiyear

Speaker 2

Yes. Thanks for the question, Michael. We value the partnership that we have with our distributors. They have different degrees of meaningfulness to our organization in different regions. Certainly in the They're very meaningful and we have begun to build, I think, constructive relationships with them.

Speaker 2

But there are certain areas, of course, where we have a direct presence such as implants and aligners, and we do tend to see Great growth from those areas. So while we have constructive and developing relationships with our distributors, It is a unique environment within dental where your partners and competitors at the same time. So We are driving transparency with respect to our thought process with those distributors in the U. S. In particular.

Speaker 11

Got it. That's good for me. Thank you.

Operator

Thank you. One moment for our next question. And it comes from the line of Justin Lin with William Blair. Please proceed.

Speaker 10

Hi, good morning. You mentioned you had a record quarter for SureSmile. I guess in your view, what's driving the That's beyond improving macro. And are you more so taking share or expanding the market?

Speaker 3

Yes. So it was a record month in January, not quarter. So I just want to be clear, January was a really strong month. But obviously, the momentum around SureSmile continues. We still think it's a very much underpenetrated market.

Speaker 3

Aesthetics are here to stay. So those are positive dynamics. But for us, Yes, ShiftSmile has fewer revisions from a clinical perspective. We're seeing high customer engagement And geographic expansion and all that is leading to market share gains for us. So, we had a really robust 2022 year and we expect that We'll continue to see good growth both in SureSmile and BITE in 2023.

Speaker 3

Thank you. Got you. And I guess that kind

Speaker 10

of leads me to my next follow-up question, if you may. I guess more longer term question around your Clear aligner strategy How do you make a more meaningful push into the ortho channel, if that's part of your plan at all, with sort of the other portion of the business Being sort of direct to consumer.

Speaker 2

Yes. So Yes, BYT has performed very well for us over the past two quarters. We've had a lot of questions On BITE and the acquisition since we joined here last September, I think it is synergistic with our SureSmile business. It has performed very well since we've arrived here. We have had great customer satisfaction scores through the My Bite app, which is really resonating with them.

Speaker 2

And it's performing well. So we see it As a meaningful part of our portfolio, one that we're being diligent around expenses on and investing appropriately in driving Customer acquisition, customer conversion and trying to increase customer satisfaction scores and drive that drive the web traffic in that manner.

Speaker 3

Yes. I would just add, I mentioned this in some previous discussions. Obviously, with Ortho doing much better on the top line, a big part of our Margin expansion and improvement story is around the bottom line as well. And our ortho businesses are becoming more profitable, both in SureSmile and in BYTE. So That's also very encouraging relative to how we think about 2024, 2025 getting to higher Operating margins, the EBITDA margins, our ortho business should be a contributor to that and should be

Speaker 2

a nice tailwind when we

Speaker 3

go into 2024 for sure. Thanks for the question. Thank you. And

Operator

our last question, one moment please. And it comes from the line of Rachel Van Sindel with JPMorgan Chase. Please go ahead.

Speaker 8

Great. Hi, guys. Thanks for fitting me in. So I wanted to follow-up on some of the earlier questions around margin and the P and L guidance for the year. So there's a fair amount of moving pieces So appreciate your comments on EPS being weighted 40.60 between first half and second half.

Speaker 8

Can you give us some color on margin cadence throughout the year? Going from that greater than 15% EBITDA margins in 1Q $8,000,000 over $18,000,000 for the year. What should we really expect from the 4Q exit rate? And then I have a follow-up as well. Thanks.

Speaker 2

Yes, I

Speaker 3

don't think we want to provide too much more color on margin performance. I would just say Q1 is expected to be the lowest Quarter of the year, we said greater than 15% EBITDA margins. Obviously, that would imply the back half of the year doing north of 20% EBITDA margins, The Q4 exiting at the highest rate. So I think that's how we've laid it out overall. And again, for a full year, we expect to be greater than 18% For EBITDA margin, so I think that's all the color we're going to provide at this point.

Speaker 3

Thanks, Rachel.

Speaker 7

And then

Speaker 8

Just a quick follow-up just on supply chain in Europe. You guys flagged that those constraints continue. So can you just talk about what is assumed from supply chain constraints heading forward throughout 2023?

Speaker 3

Yes. I think 1st and foremost, the supply chain constraints really surround electronics and electronic components. It hasn't gotten any worse. It is moving in the right direction, but we still have challenges. What we assumed is things get a little bit better throughout 2023, I did mention in my prepared remarks, one of the upside possibilities we have in 2023 is Seeing a better improvement than what we're modeling.

Speaker 3

So I think I have modeled a pretty conservative view on supply chain and some of the constraints we're dealing with. If it actually is Better than our assumptions, it will lead us to a chance to overachieve. So I think we've been pretty conservative in how we've laid that out. Thank you.

Operator

Great. Thank you. Thank you. And with that, I will conclude the Q and A session and turn the call back to Simon Campion for final remarks.

Speaker 2

Thank you, Carmen. So in closing today, I would like to reiterate my Thanks to the entire Dentsply Sirona team, including those employees who have left recently for their valuable contributions to the organization and their unwavering commitments to our customers. The past year was challenging and the transformational work we have ahead of us will not be easy. However, I am confident that Dentsply Sirona has a bright future ahead. We're already making significant progress, which will benefit all stakeholders over the long term from customers to employees to investors.

Speaker 2

Thank you for your time today.

Speaker 3

Thank you all.

Operator

Thank you. And with that, we thank you for your participation and you may now disconnect.

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Earnings Conference Call
DENTSPLY SIRONA Q4 2022
00:00 / 00:00