All right, folks, we'll go ahead and get started. Good morning. Welcome to the Jefferies 2023 London Healthcare Conference. I'm Brandon Couillard . I cover the dental space here at the firm, and very happy to have Dentsply Sirona with us back at the conference again this year, fresh out of their recent Investor Day meeting last week. We got CEO Simon Campion, CFO Glenn Coleman, as well as Group VP of Commercial Ops in EMEA, Gerry Campbell. So thanks so much for being here, fellas.
Yeah, thanks for having us.
Thanks.
Maybe just to kick off, you know, now that we've heard from a number of your peers, some of your distribution partners, would you just set the stage and kinda recap the trends that you saw in the business geographically in the third quarter, and how the business is trending into the fourth quarter?
Sure. So I'll start and then Glenn can follow up. So I think everyone's aware that certainly the end of the third quarter had some challenges. You know, we've been trying to drive ourselves to be more customer-centric and more data-centric over the past year, and so we've been doing our own surveys to ascertain, you know, some key trends in the marketplace. And that's why we called out in excess of 1,000 people respond every quarter around the world, and that's why we called out some pressures that we saw in Germany, I think Q2.
And then as we rolled into the end of Q3, we saw continued pressure in Germany, and then the, you know, deterioration in patient volumes in the U.S.. Those trends have continued thus far through the end of October, I would say. And it's, you know, it's a little confusing certainly with respect to the U.S., right? Unemployment is low. People still have dental insurance, but they are making some alternative choices than go to the dentist. And so it's a little befuddling. Elsewhere, particularly with respect to capital, obviously the interest rates are impacting that. You know, anything else to that?
You know, clearly the U.S. patient traffic was down about 4% in September. That was a surprise to us, and October, pretty similar trends overall. Nothing's really changed a lot from September, and Germany is a challenging market for us, one that's very heavily dependent on equipment. So obviously, as higher interest rates continue to be you know out there, it's gonna create challenges for us and our customers relative to moving forward with these larger equipment purchases in the you know $20,000-$100,000 range. But hasn't gotten, I would say, significantly worse there, but certainly a challenging market for us. And if you just look at year-over-year comps, we're down you know double digits year-over-year in Germany the last couple of quarters.
Yeah, to add on to that. These surveys that we do, and we recently did another one with in excess of 2,000 people to look at our product portfolio. The things they call—the customers are calling out for, and this was between the U.S., Germany, and China, is they want more workflow efficiency. They are looking for increased treatment acceptance rates. And, you know, I'm sure it'll come up in a question we later on.
We, we think we're well-positioned to begin to influence those, particularly when we think about, about DS Core and some recent, incremental advances to that around the Communication Canvas, that, you know, anecdotally, are already beginning to resonate with customers, because they're seeing a, they're seeing an increase in acceptance of procedures by their patients.
How's pricing holding up in this environment? Envista's talked about a couple hundred basis points of pressure. Henry Schein, earlier this week, talked about some pricing pressure in intraoral scanners, which isn't necessarily new. How's it look across your business, consumables and equipment right now?
Yeah, I think on the whole, we'd kind of characterize the pricing environment as stable. We're not really gaining any price, but not losing a lot of price either. It depends on the portion of the portfolio in terms of what's going up and down. I think in the scanner market, certainly seeing some price pressure there, so that is one where we are seeing price reductions. In other parts of the portfolio, we're getting a bit of price capture. So I would say on the whole, kind of flat right now, and obviously, you know, look at our inflationary headwinds. You know, we're still dealing with 3%-4% higher costs in our business, and we're not passing that along to our customers.
Got it. A few days removed from the Investor Day last week, what were some of the key messages that you wanted folks to take away from there? Anything you think investors may have overlooked or maybe not fully appreciated, coming out of that comprehensive event?
So I think, you know, a couple of the key messages is, you know, notwithstanding the recent macroeconomic trends, dental is an attractive industry. You know, pretty stable growth. You know, an aging population that are eventually gonna require more oral healthcare. And we think we're poised for profitable growth by executing on what we'd consider as a fairly clear and straightforward strategy. Since we've come in, we've initiated a transformation in our business to make our business more durable and more nimble, and more focused on execution. Our portfolio is pretty robust.
That survey that I mentioned of 2,000 people, that was geared to understand: Do we have any gaps in our portfolio, and how does it stack up against our competitors? And overwhelmingly, it stacks up pretty well across all different categories, whether it's restorative or preventative, or connected technologies. Connected technologies, we're identified as a clear leader in that space. And in implants, we are extremely competitive in that space. So we think we've a really robust portfolio, and the leadership team that's been brought in here in the past 12 months, we have a track record of just getting stuff done and executing.
So we have a good portfolio, but our performance over the past number of years must boil down to one thing, and that's unapologetic execution in the marketplace. And that's what we're going after and unapologetic execution with respect to the transformation plans, be it SKU, be it network, be it ERP, whatever it may be internally, to get after that.
Yeah, on the financial side, I had four key messages last week. One was, you know, we're targeting to grow 4%-6% on a compounded annual growth rate over the next three years, with a gradual increase and a gradual acceleration of growth. Obviously, we're not expecting that level of growth in 2024. We're confident in that because we have about half or a little over half of our portfolio that's very fast-growing. Think of that as ortho, implants, our digital portfolio growing very nicely, very fast in a normal macroeconomic environment. So that was the first point. Second was, you know, we're confident in our ability to get to $3 of targeted adjusted EPS by 2026, and that's off of our guidance this year of $1.80-$1.85.
So that would be a 60% increase over the next three years. Why are we confident in this uncertain environment? Well, most of it is in our control. So about 2/3 of our EPS improvement are things like, you know, our restructuring program, which is largely complete. Our SKU rationalization, SKU optimization program, which is well underway. Our global operations and supply chain transformation that Tony Johnson laid out last week, where we've already closed four facilities. We've got a plan to close another 15%-25% of our footprint over the next three years, and so that's well underway. The ERP system work that we're undertaking, again, that's underway. We're six months into that. And then we've got a number of other things, like our share buyback, our net investment hedging programs.
2/3 of this bridge is essentially things we can control that are not dependent on the macroeconomic environment. Obviously, there's about $0.40-$0.45 that's dependent on organic growth, and that is somewhat dependent on the macro situation. But we feel confident in our ability to generate meaningful EPS growth over the next three years. And the third message was, we expect 2024 to be that inflection year for us on profitability and on EPS. So we expect to have at least 100 basis points of EBITDA margin expansion in 2024, EPS double digits growth year-over-year, even in this uncertain macroeconomic environment.
Then lastly, was around increasing our cash return to shareholders to at least 75% of our free cash flow through a combination of dividends and share repurchases, and we expect to increase our dividend consistent with our earnings growth over the next three years. And last week, our board authorized an additional $1 billion share buyback to support our plans over the next three years to buy back more shares. Those are the four key messages I had relative to the Investor Day.
Just to clarify your comments on 2024, you didn't necessarily guide top line, but just to be clear, is your base case assumption that revenues are at least flat? And what is the net savings contribution from the cost actions you've already taken on 2024 margins?
Yeah, I think, as we look at the revenues for 2024, we haven't given guidance yet. I wanna be clear on that. We'll give guidance in February. But obviously, when we look at the work we've already done in 2023 around our restructuring program, around some of the net investment hedging programs that we've done, we're confident to say that even if there's not a macro recovery, we should be able to grow EPS double digits in 2024. So we're not counting on revenue growth next year. You could think of it as, minimal revenue contribution to get to double-digit EPS. And again, that's not guidance, it's just how we modeled our EPS assumptions for, for 2024. But we'll give more color around the top line as we get into next year.
And just to reinforce a comment that Glenn made last week. You know, we've been underway all year with respect to the restructuring transformation plan. And part of the timing of that was approval of workers' councils around Europe. And so we concluded the last of those at the start of November as planned. So we're moving ahead with the last phase now of that 2023 restructuring.
Got it. In terms of the 26 targets, like you mentioned, Glenn, 4%-6% organic CAGR next three years. You know, if we look back over the last 10, you know, there's really only been, like, one year that Dentsply has grown, you know, at least 5%. And you talked about growing ahead of the market next few years. Just help us understand how the business can accelerate or what's different about the portfolio or just how you're running it, you know, today, that can enable you to drive that acceleration versus what you've seen in the last decade or so.
Yeah. So listen, I would say that's a fair comment. But there are—as we, as we know, that last week, there are, it's in excess of 50% of our, of our business that we should be, you know, growing very, very well. If you look at aligners, our performance over the past 4 quarters or 5 quarters has been double-digit. We feel we have a differentiated product in that space, both the direct-to-patient or the patient product, and the direct-to-consumer business as well. When we looked at connected technology, I've already mentioned that survey that we have completed, where we are, you know, viewed as clear leaders in the technology space.
And as we roll out more capability on DS Core, which integrates all of this technology under one kind of software hub or software core, as it were, we feel we have a right to win in that space. And as we think about the evolution, certainly of the U.S. dental market, with DSOs becoming more prevalent and shifting from 20%-25% today to, you know, probably around 40% by 2026, 2027, they are looking for what I mentioned before, more workflow efficiency, and more treatment acceptance. And we think DS Core and all our connected technologies can help with that. And then finally, a topic of much discussion at every meeting we have is our performance on implants.
Again, back to the survey, we have a robust implant portfolio. What we have failed to do over the past number of years is, A, invest in commercial teams, B, execute, and C, invest in clinical education. And since we've got here, we have significantly increased our investment in clinical education, and the clinical savviness of our sales forces. And so we do expect to turn implants around. And one of the comments I made last week is there are areas of our business where we think growing with the market's okay. And I'm thinking about, you know, consumables, in that respect. Growing there is okay. Growing with the market is okay.
There are areas where growing with the market should be a stepping stone to greater performance, and implants is that. We should be. We have the portfolio, and we have the data, and we have the education programs now to perform there. There are areas where growing with the market is going to be unacceptable to us, and that's connected technology, and aligners. We should be growing ahead of the market in those spaces, and they are the. That's how we are bifurcating our focus and bifurcating our investments.
Maybe a question for you, Gerry. I mean, as kind of head of Commercial Ops in Europe, and Dentsply's talked a lot about clinical education, which to an outsider, doesn't sound that exciting. I mean, can you just talk about how Dentsply recommitting to clinical education sets you up for success?
Yeah.
with your sales team?
Yeah, I mean, clinical education's always been a fundamental part of how we educate our customers in new technologies and what's changing in the marketplace. There's always a demand for clinical education because dentistry is always evolving, and right now, with digital dentistry, it's really moving quite fast compared to previous years. So clinical education is really important at this point in time, both from a clinical point of view and also from a systems point of view. If you think about all the technology within a dental practice today, there's lots of new technology, and they're all connected with different PCs. DS Core that we're bringing to the market brings all that technology together to make it simple, easy, and effective to do diagnosis and planning of your cases and access it from anywhere.
So clinical education around the traditional clinical parts of dentistry is super important, but also how this connects with digital is a real difference that we're seeing now in this current environment.
You were head of a or part of a commercial excellence panel at the Investor Day last week. As you look at your region, what are you most excited about, be it in terms of products or just commercial team, as you look to next year?
I think one of the highlights that we are seeing is the SureSmile product. We launched that product three years ago from zero in Europe, and we've rapidly gained, you know, a good position in the market. We've got, as Simon said, we've got a differentiated product. We've got great service levels. We're present in all the Western European markets, and we've got a big reach into the marketplace. We've got lots of salespeople with different disciplines through implants, endodontics, the CEREC systems, so we've got a big reach into the market. So we're using that reach to take the message of SureSmile and digital dentistry to our customers. And I think that offers us a nice position in terms of being able to take that message to customers who trust us already for different disciplines, to take new disciplines to them and bring all that together.
If I could just build on a previous comment that Gerry made, to your question about education. One of the areas that we have not focused on for the past number of years, but now we are absolutely going after it, and it's a lot more than a transactional piece, it's with universities. You know, we have not focused on universities over the past several years, and we are rebuilding relationships with many of the key universities around the world right now. And part of it is obviously we would like some of their business, but we want it to be a lot more than a transactional relationship with universities.
We know that the products and technologies that students learn on, eventually make it into the practices that they, that they work in. So we are, we are focused intensely in that. We've had a number of, the key universities, and certainly in the United States, into our facility in Charlotte. We're rebuilding, relationships, with them. And, you know, I think it's, it's important, for us as, as not just a, a commercial, partner, but also as a, as a group that, that innovates. You know, just some, some, some benchmarks. 55% of the dental graduates in the U.S. over the next several years will be female.
70% of graduates from Brazil universities will be female, and so that ties in significantly, we feel, to how we innovate, because we need to address the needs of females with respect to certain products, certain product design and product features as we move forward, and that bridge into universities is key.
Two-part question on ortho, you know, given its importance to kind of the accelerated growth algo. With SureSmile, number one, what's the geographic mix and channel mix between GP and ortho for that product? And then number two, why are you committed to the Byte business at all?
Yeah, I mean, I'll take the first part, and Simon, you can comment on Byte. You know, in terms of the mix, it's predominantly a U.S. business today, meaning, SureSmile. Byte is all U.S. So that's the geographic split. We don't, we don't break it out further than that. The two businesses are roughly 55% Byte, 45% SureSmile in terms of our total ortho revenues.
W ith respect to Byte, you know, when I joined last year, the first question I got was, "Why on earth have you done that?" And then the second question I got was, "What are you going to do with Byte?" And, you know, the consumer business and, you know, I ran a consumer business at Bard and BD. Consumer business is a very attractive business if you do it right. The income targets that we have with Byte are vastly different to the income targets that we have with SureSmile and our competitors have. You know, the median income is about $65,000 per patient for a patient who calls up Byte.
And, you know, it, as Glenn said, it is about half of our business. It is now profitable. We have a smaller funnel than we've had in the past, but our conversion rates have gone up. And as we have rolled out Byte Plus, which is a kind of a hybrid model between the direct-to-consumer and a dentist-based product, we've had some, you know, early success with that in the pilot phase. And we feel that it's complementary right now. We weren't here when the acquisition was done, but we are committed to turning a sow's ear into a silk purse.
Brandon, just to answer the last part of your question. Almost all of our SureSmile business is with the GP space versus ortho.
Okay, that's helpful. Thank you.
Yeah, thanks.
Obviously, Henry Schein is an important distribution partner of yours, and though things may still be in flux, but, you know, given they are coming back online, just curious if your visibility around their order patterns in the fourth quarter has gotten any better, stayed the same over the last two weeks since you reported?
Yeah, so just to frame up the Henry Schein relationship, great partners, long-term partners with Dentsply Sirona. We do about 12% of our consolidated revenues through Schein, so it's over $0.5 billion. So it is a significant part of our business. Half of that's in the U.S., 20% in Germany, so three-quarters, those two markets alone, and mostly consumable, so preventive and restorative. So they also sell some equipment for us, but that's kind of framing up the overall relationship. You know, during the last call it month, as Schein has been dealing with their cyber issues, you know, the most important thing for us was getting product to customers when they needed it, where they needed it, and so that's what we were working on.
There was orders that were coming in, from customers through the telephone, through Schein, and obviously, we were fulfilling what we could to help them during the situation. So that was the priority. It sounds like earlier this week on their call, they said they were making really good progress. I think they said 85%-90% of their distribution was back to normal, which was good to hear. I think starting today, they're actually taking e-commerce orders, which is also a positive step in the right direction. So, you know, we'll see how the rest of the quarter plays out. We did build in some level of conservatism in our guidance for Q4, knowing that there was gonna be some disruption here on the orders that would likely come from Schein.
I don't have much more to comment than that, but sounds like things are heading in the right direction.
I would like to touch on the SKU rationalization program, which seems pretty comprehensive, would touch a number of areas in terms of the P&L and cash flow. You're starting in restorative and consumables, it sounds like. Are there other opportunities in other parts of the portfolio? And, I guess, what's the timeline, you know, for this program to roll out, and how do you think you can execute it without really affecting revenue?
So, you know, endo and resto are, as you said, the areas we're focusing on first, clearly the highest volume or number of SKUs. In those areas, we have historically not had a robust product lifecycle management process at Dentsply Sirona, at Dentsply. We are building that in now. Where we are on the plan is we have stood up a PMO led by a gentleman who did the exact same work for me before at Urology, where we rationalized the Foley offering at Becton Dickinson. So he's in. He set up a PMO. We are doing this thoughtfully.
You know, we did this before, and we irritated a lot of people with the way it was done, not giving them an opportunity to last buy. They ring up, and they look for a code, and, you know, "Sorry, sir, that's no longer available." So we're running pilots right now to make sure that we have got the right approach. We're going to be very thoughtful and diligent with how we roll this out, and we do not expect to see any benefit from this until the back end of next year. You know, we did some pilots in Europe, so I don't know, Gerry, if you wanna comment on Europe and how we're approaching this in a thoughtful way.
Yeah, as Simon said, our approach is a very thoughtful way in terms of trying different trials with customers in Europe to test out some of the concepts we're looking at. In the end, we're looking for customers to upgrade to a more modern product. We've got a wide portfolio, and what we've done in the past is we've brought new products out but not obsoleted old products. So there's opportunity here to bring customers up to date with the new product, which is a better product, and take them through that process. And we're running these trials to work out what sort of the best way is to run these trials and scenarios to get the best outcomes, and we're learning from that.
Yeah, and I would just say, you know, how do you get benefits from a SKU optimization program? You know, you don't have to carry inventory. You have lower excess and obsolete inventory reserves. Don't have to maintain this product from a sustaining engineering point of view. Stopping and restarting the production lines is a significant cost, so you don't have to do that. Obviously, if you go deep enough on the SKUs, you can actually reduce your manufacturing footprint, which is, you know, where we're going with this. So there are significant benefits that come with the SKU optimization work that we're doing.
In the last few seconds we have here, I mean, the stock's trading at a ten-year trough multiple on basically trough earnings. I mean, you did almost $1.80 in the COVID year of 2021. And notwithstanding kind of Dentsply's choppy history over the last decade, what do you think investors are missing about the story right now and maybe how you're just fundamentally running the company different today?
I don't think they're missing anything. We just have to go out and execute, and I think if we deliver on the plans that we outlined last week and get to $3 of adjusted EPS by 2026, the stock will take care of itself. And so for us, it's about an execution story.
Very good. Well, we're out of time, so I have to leave it there. Thank you guys for being here.
Thank you.
Great to see you.