Good morning, everyone. Welcome to Day 2 of the B of A Healthcare Conference. My name is Allen Lutz. I cover healthcare tech and distribution here at B of A. We're excited to have Dentsply Sirona here. We have CFO Glenn Coleman. Glenn, thank you for joining us.
Thank you for having us.
Glenn, you've been with the company now for about a year and a half, and there's been a big focus on revamping the culture and the strategy over that time. How do you feel about where things are today versus where they were when you joined?
Yeah, I think we've done a lot over the last 18 months to build a different culture, a high-performing culture, an inclusive culture. But more importantly, we've done a lot to really shore up the foundation of the organization. There was a lot of things in the organization that needed to be fixed. Just for example, we had 14 ERP systems when I came in. We're now on a journey to consolidate that down to one over the next couple of years. So by 2026, we should have one common platform. The complexity of the organization is very complex. If you look at the number of SKUs we have, as an example, there's tens of thousands of SKUs that can be eliminated, and really simplify the portfolio, but also simplify our manufacturing footprint.
So a lot of what we're going to be doing over the next couple of years is getting to that piece of it in global operations transformation. And so all of that work is starting. It's advancing. Obviously, you won't see the benefits yet, but it should be coming here, you know, as we turn the page to 2025.
So you have a $3 earnings per share target out there for 2026. You talked a lot about the building blocks at Investor Day, 4%-6% organic growth, obviously a lot of costs to be taken out of the model. How do you feel versus where we are today versus what you talked about at Investor Day?
Yeah, I don't think a lot has changed when we look at the $3 bridge. Two-thirds of that bridge are things in our control. So it's $0.30 coming from the restructuring program that's being executed successfully. We're kind of coming to the end stages of that, so we'll have all that pretty much wrapped up over the next couple of months, and we'll start to see the annualized benefit of that as we go forward. The SKU optimization and global operations transformation that we're doing, we're far along. We've already closed five sites. They're smaller sites, but nevertheless, beginning to see some of those benefits, and that will continue as we go forward here. So that's $0.20 of our bridge, if you will. $0.05 coming from Ortho profitability improvements. We expect to see much faster growth coming from Ortho.
But the profitability and the margin in that business should get a lot better as we go forward. It won't be at the corporate averages. Today, it's dilutive, but we do expect to see margin expansion coming from our ortho business. And a big part of that is with our Byte direct to consumer business where, you know, we're expecting to see our conversion rates tick up. We're expecting to see financing costs come down. Those are things that are going to help us to get margin expansion in our ortho business. And then it's $0.15 for things such as our net investment hedges. That's already done, so that's kind of in the bank, if you will. share buybacks.
We just announced a share buyback here with our first quarter earnings, so we're going to continue on our share buyback program, and other initiatives that make up this $0.15. So I think the two-thirds of that bridge that I would say we control, we feel very good about. The one-third is the organic growth that you mentioned. We had modeled 4% compounded annual growth rate over the three-year window. The first year we knew was going to be a challenging year, meaning 2024, and it's proven to be a challenging year. We expected slight revenue growth. That's kind of still our view for this year. But clearly, we're going to need an inflection in the macro environment to get to 4% or 5%, 6% growth in 2025 and 2026. So, you know, it's still early in the year.
We'll have to see how that plays out, but that's probably the biggest variable, I would say, towards us getting to this $3.
Makes sense. Let's talk a little bit about the current state of the dental market in the U.S. In your earnings call, you put out, or you talked about a survey where patient trends in the U.S. seem to be stable. Can you talk about how that has changed or evolved over maybe the past 6-12 months? And then what are you expecting, what's embedded in the guide for traffic over the next, call it, 7 months of the year?
Yeah, so you make a good point. We do a very extensive dental survey quarterly. We survey customers around the globe. We get several thousand responses back, and so I think we probably have the most comprehensive survey and input from customers. In terms of the U.S. data, it was pretty consistent with what we saw the previous quarter, so stable patient traffic. Number one concern is still the cost of the materials and cost of equipment to these practices, and so that's still their number one concern. But I would describe the environment as stable, and, you know, we'll have to see if that improves as we go forward. Implied in our guidance is a similar roadmap to what we just saw. So stable traffic, not worsening, not getting better.
If you look at the last couple of quarters, we've seen some blips up and down. Like, back in September, as an example of 2023, we saw a big falloff in the U.S. patient traffic. I'm not sure we have a good understanding of exactly what happened. All of our peers saw the same thing. But clearly, we've seen a rebound from that, and now we're seeing more of a stable patient traffic flow here in the second quarter.
And then you also talked on the call about Germany procedures maybe improving slightly. Can you remind us what % of your revenue comes from Germany and maybe some of the issues that you've observed from the macro environment there? And again, kind of what is expected over the course of this year there?
Yeah, no, Germany for us is about 10% of our consolidated sales. So you can think of it as about a $400 million market. It represents almost 25% of our European sales. So when you look at the Europe numbers, it has a significant impact on the growth rates there. If you look at Germany since Q2 of last year, we've seen pretty consistent double-digit declines. And, you know, it's been even more pronounced when you look at the equipment, which is a bigger part of our Germany business. So, you know, when, when Germany has a challenging environment, obviously, it creates a big headwind for us. We're more reliant on Germany than probably other companies in our space. And so as this recession has happened, as we've seen the consumer confidence fall off a bit, we've seen a challenging environment.
Having said that, the latest survey results we did there were still pessimistic, but less pessimistic than previous surveys. So that's a sign that things are starting to go in the right direction. We're also relaunching a product called Orthophos SL, which is a lower-priced imaging equipment machine. It's got both 2D and 3D capability. It offers this product at a lower price point. It still has comparable margins to our premium-priced product. We just relaunched that, and, you know, imaging has been a big challenge for us globally, but especially in Germany. And we think with this relaunch, you know, we have an opportunity to hopefully slow the amount of decline in the imaging business in Germany, which has been a big headwind for us.
Yeah, since you mentioned the imaging business, let's talk about that. So you mentioned that new launch there. I think it's at a relatively lower price point.
Mm-hmm.
I guess as you think about the commercial strategy on the imaging side, you know, is there, I guess, what's the current pricing environment both in Europe and the U.S.? And, you know, what sort of, what's embedded in the guide in terms of growth from that launch through the remainder of the year?
Yeah, no, good question. From a pricing perspective, there's clearly pricing pressure on the imaging business. We've seen low-cost competitors come in from Asia, and that's impacted some of our share loss in Europe in particular. So that's why we really want to make sure we have a successful relaunch of Orthophos. So the pricing environment is challenging. It is competitive for sure. It's probably similar to what we saw on the scanner side about a year ago, which has now stabilized. But on the whole, it is a competitive environment. We think with the relaunch, we'll see better traction. And just to give you some context, Orthophos was our largest volume imaging machine before it was discontinued several years ago. And there was a belief that we were going to convert customers to our premium-priced product. Well, obviously, that didn't pan out with some of the macro dynamics.
So, this is a pretty big deal for us, we believe. We're including in our guidance a better performance in the second half of the year for imaging versus first half of the year, which means we're still going to be down year-over-year, but not the extent that we saw in the first half. So we are expecting a modest improvement with the relaunch. You know, we're also looking at certain financing programs to make those more attractive for our customers that are dealing with struggles around higher interest rates. We're doing some promotional activities as well, with our premium-priced products. We're retraining our sales force. We're actually highlighting a lot of our CBCT machines at some of our big events coming up. So for example, we've got a World Implant Summit planned for next month in Miami. We have over 500 implantologists coming.
We're going to be also showcasing our CBCT machines there. So there's things like that we think are going to create some better demand. But make no mistake about it, it's going to be a challenging environment through the end of the year.
Let's switch gears a little bit to the 2024 guidance. You maintain both the organic sales growth and the earnings per share ranges, but you pointed to the low end. Can you talk about the biggest drivers to get you to the top and bottom of that updated guide?
Yeah, so I think to understand why we pointed to the low end of the range, it was really driven by further deterioration in the high-end equipment market, the imaging area. So given what we saw in Q1, what we expect to be a challenging environment here in Q2, we felt it was prudent to point to the low end of the range. So what could change that is, obviously, if we get good momentum from the Orthophos launch, better momentum from the equipment side of our business, which has been, you know, the big anchor on us in terms of our ability to grow. If you look at the rest of the portfolio, there were some really big positives across the board. I mean, we grew our ortho business 14%. Both SureSmile and Byte had really good growth.
If you look at implants, we grew over 50% in China, and that helped to grow our overall implants business. CAD/CAM globally grew 9%, and that's the scanners, the mills, the printers. All categories doing well, and it was both wholesale and retail. So, you know, what we recognize as sales are what we sell to our distributors. The more important data is what's happening in terms of the end market sell-through and pull-through, and that was very strong as well. And so there were a number of bright spots, but this equipment area has been a big headwind for us. I mean, we declined 5.5% organically, you know, and that's a big part of our business. So it's hard to overcome that until that starts to turn around.
Can you talk about some of the strength you're seeing in CAD/CAM, and what do you think is driving that? Because that's been relatively resilient.
Mm-hmm.
The growth has been very impressive. So what's driving that growth in an otherwise really more difficult macro?
Yeah, no, it's a good question. We've always been a leader in chairside milling, and so we've always had a really good stronghold on scanners for single-office dentistry visits. We've really concentrated our efforts around standalone scanner sales. And so that's where Primescan Connect comes in. It's a lower-cost scanner. We've seen some really nice volume growth coming out of Primescan Connect on the standalone scanner side. And so that's really, I think, helped drive our overall CAD/CAM category and the growth we're seeing there. On the milling side, you know, there's a lot of economic benefits and return on investment that's pretty quick if you use milling in your office. And so I think some of our customers are realizing that. Again, one of the reasons, their top reason and thing they're struggling with right now is higher costs in their practice.
Well, how can you offset that? Well, be more efficient, do some more of that in-house, and actually get bigger returns. And so they see the benefits of, of the workflow there, and the benefits of using, you know, in-office milling. And then 3D printing continues to be an area of growth. You know, we're still, I would say, in the early stages. Our, our revenues are relatively small, but the growth rates are good. And so all three categories are contributing to, you know, good growth overall in CAD/CAM.
Can you provide a quick update on just budgets in general by customer type? Private practice, national DSOs, regional DSOs? Are you seeing a big delta? You know, obviously, they're growing and have been growing at different rates, but are you seeing any type of deviation today? I think interest rates have been higher for longer, which may be impacting some of the larger customers, but I'm curious if there's anything that you're seeing?
Yeah, and not a lot of change. Interest rates being higher for longer absolutely is causing customers to pause a lot of the higher-end equipment purchases, whether you're a DSO, whether you're an individual practice. So I don't think those dynamics are very different between the two. I think for us, you know, we've got a big focus on the DSO area. We've had it for the last 18 months since Simon and I came in, and, you know, we've really helped to build the relationships at the C-suite level with these DSOs. We're introducing DS Core on a pilot basis called DS Core Enterprise, which we think is going to have some good traction within these DSOs because it's perfect in terms of the connectivity and being able to collaborate across all these offices, as an example. So a lot of efficiencies there.
We expect our business to grow faster in the DSO space, but, you know, in terms of the budgets and the buying dynamics, I don't think there's a large difference between, you know, these individual practices and, say, the DSOs.
So DS Core was a pretty big talking point at your Investor Day, and I think you recently announced a launch of a pilot of the Enterprise version with a large DSO customer. Can you talk about what that rollout looks like for that customer? What problem does it solve for them? And just trying to think about how does a customer benefit from rolling out DS Core in their practices?
Yeah, no, it's a great question. So within a DSO, if you think about sharing information, sharing images, X-rays, that can all be done through the cloud now. You could even do a lot of the assessment and diagnosis from your home. You don't have to even be in the office. And so there's a big benefit relative to that. Just the whole connectivity of DS Core with all of our equipment has a lot of benefits in terms of workflow improvements. If you talk to some of our customers, they'll tell you they've seen a workflow improvement of 40%-50% in many cases by using DS Core as an example. And so it's pretty meaningful. It gets more customers through the door, improves their workflows.
But if you think about 800 offices and the ability to share information very easily, right, through the cloud, has some pretty powerful benefits to it.
You mentioned, I think an event in Miami focused on the implant side.
Mm-hmm.
You're trying to get back to market-level growth, I believe, by 2026 in the U.S.
Mm-hmm.
You know, what are the building blocks that you see, that you need to execute in order to get back to that market-level growth? Is this going to require a new product launch, any type of adjustment to the commercialization strategy? What are the things you're focused on to get back to that growth?
Yeah, no, you are spot on with respect to your comments and what we've said previously around getting to market growth in the US by 2026. Number one, we went out and surveyed our customers around our portfolio and asked them whether or not we had a competitive portfolio, do we have gaps in the portfolio, and came back as resoundingly, "No, you guys have a really solid portfolio. We're a top three player from their perspective." And so there's no real glaring gaps, I would say, in the portfolio. We have launched a new EV family of products called OmniTaper, and we've actually seen a nice pickup in sales relative to that particular product family. Obviously, we're seeing declines, though, in our legacy brand called Xive. But on the whole, we've got a good portfolio. We invested in a number of resources back at the beginning of 2023.
We built out our sales force. We think we've now got the right level of commercial support, relative to that. The other big area that we have ramped up is the clinical education piece. So previously, we had cut back a lot of the clinical education spend. That was not necessarily a great decision, before our time, but we are ramping it up. A good example is this World Summit coming up in Miami. We did one in Greece last year. We've done a number of localized events, and so we're spending a lot more on the clinical education side. So for us, take all of that with the last piece of the equation, which is having a stable workforce. We had a significant amount of turnover in our U.S. implant sales reps, so 20% plus for three consecutive years.
Obviously, the relationship piece of this is critically important because you have to have a relationship with the entire referring network, with the implantologist or the oral surgeon. We lost a lot of that in this transition. We lost customers because of it. And so as a result of that, we've now seen much lower turnover. We got the sales team in place. We got really good products. You know, candidly, it's taken us longer to get to where I want to be. If you asked me a year ago where we'd be today, I would probably tell you we'd be growing. You know, the macro environment hasn't helped, but that can't be an excuse, you know? And so we do expect to see better performance here and return to growth in the second half of this year.
Got it.
When we get back to the market growth, we'll take us a couple of years, though.
Got it. I want to switch gears to the ortho side. You know, Byte's obviously had really strong growth. And I, I think in the guidance, you're assuming an acceleration of growth over the course of the year. Can you talk about, you know, what was what happened in Q1? Obviously, there, there were some share shifts in the market. Can you talk to what's going on there and then, your confidence around growth accelerating into the, the second half of the year?
Yeah, no, I, I think our ortho story is a really good one. If I look at Byte, it's our direct-to-consumer business. You know, we didn't see much of an uptick until one of the big competitors actually exited the market, which was December of last year. And so that created a big opportunity for us. We're not going after all the business they were going after, to be clear. So there's probably about one-third of that that's interesting for us, the profitable part of that business, you know, not going out, chasing customers outside the U.S., as an example, looking at the credit profile of a lot of these customers, making sure that we're not, you know, going after customers that can't pay us, etc. But we started to see the uptick at the beginning part of 2024.
We invested in resources to support a ramp in revenue growth, so, you know, more treatment planners, more clinical people to support that business, more infrastructure to support that business. That was all done in the early part of Q1. We saw the uptick, 18% growth in Q1. That should be the low watermark, though, for us this year. I expect we'll grow over 20% for the rest of the year. That, I'll call it competitor dynamic, coupled with the fact we've launched, we call it Byte+. It's a hybrid model where if you're interested in our product but you want to have a consultation, you go in to see a general practitioner. They'll do the intraoral scan. They'll give you a consultation, but then you do the treatment at home.
And so it's a little bit more money to do that, but we, we think it's, number one, going to add to conversion rates and increase conversion rates, which not only helps the top line but profitability. It also gives these customers of ours a new patient for their practice. So if they're going to spend money to aesthetically change their smile, they're probably going to come back in and get the preventive treatments, the restorative treatments, etc., that previously they probably wouldn't do because these are people that typically don't go to the dentist very frequently. So we think there's kind of a win-win scenario when we look at this business. The last part of Byte, and this is really interesting, we actually are seeing a really nice uptake in the accessories that are attached to the Byte aligner set. So you can order teeth whitener.
You can order aligner cleaners. There's a number of well-being products that go with the aligner set if you want to order those. And we're seeing about a 35% attach rate, which is another area of growth for Byte. So you kind of take all that together, and we expect this business to be growing over 20% this year. So we're very excited about it. On the SureSmile side, you know, we grew 9% in the first quarter. We feel good about that. We think there's more opportunity to grow faster. And I say that because our business today is concentrated over 80% in the U.S. So there's a big opportunity outside the U.S. We've launched in total over 50 markets. Now we want to go deeper in some of these markets where there's big opportunities.
So one great example would be Japan, where we're investing more commercial resources. We've already seen some good traction where we've put resources in place there and seen a quick return on investment. But the other dynamic in Japan is there's some favorable reimbursement changes that are going to take place in June, where you're going to start to get reimbursement for scanner, each scan that you do. Previously, that wasn't reimbursed. And so we think with scanner sales likely to increase, that could be a direct correlation to also aligners increasing, not just for us, but obviously for anybody that's in the space. And so, we think that's going to be good. We're launching SureSmile in Brazil. We're adding more resources there. We're also launching DS Core and Primeprint.
But I think from an ortho perspective, there's a big opportunity for us, clearly, you know, outside the US. So we're going to spend some more money, more investment. We expect that business to grow very healthy as well, at least high single- to low double-digit as we go forward. The other thing is we've just launched the SureSmile Simulator. So this is another one where you go in, you can see your smile before and after. We think it's going to increase conversion rates. In this conversion rate discussion, obviously, you think of it from a top-line perspective, but there's also a profitability part of this as well, where our profitability goes up as these conversion rates go up because we have a sunk cost in many cases on the ortho side.
So a lot of good momentum, I would say, on both our in-office and our direct-to-consumer brand. And, we do expect to see better performance in the second half of the year, coming off a really good first quarter, so.
Can you talk about Byte+ a little bit more? It just went from pilot to commercialization. How does it work mechanically? Does the patient sign up, and then there's a list of providers in their area that are connected with you, and then they can go to them? I'm just curious mechanically how it works because it seems like that would be a really good way for dentists to gain access to customers in a way that they probably haven't been able to before.
Yeah, so you're right. We've gone from pilot to commercial launch. Commercial launch is still early stages, so not everybody is on this model. But, you know, the way it works is you go online, you'll see a list of participating dentists in your area. That would be, you know, a candidate for the consultation. And then they would go in and obviously get the consultation and then hopefully move forward with the sale. So, that's the way it works today. It's not they can't just pick anybody. They have to have a drop-down menu of, you know, who to select.
Right.
But now we're with over 30 different practices. And so that's, you know, going to expand now. But I think initially, it was hard to get some of these things calendarized, and then patients would cancel. And so we're working through that plan to make sure when patients schedule an appointment, they show up because when we see that, we see the conversion rates actually really good once they actually come to the office.
How do you think about the margin profile of Byte, both just in general in terms of the ramp from here, but then also as it relates to Byte+? You know, is that going to be a margin tailwind for that business? Curious what your expectations are for Byte over time.
Yeah, so the gross margins of our ortho business are quite good. When you look at the EBITDA margins or operating margins, it's dilutive to the corporate average because Byte has a high amount of marketing costs associated with how they go to market. And so that's just something to consider. But we look at Byte+ and our regular Byte offering to be pretty comparable in terms of profitability. It is a higher cost to us, but we obviously pass that along to our customers as well. And that goes ultimately to the patients. So they're not paying the same price. But I would just say it's maybe slightly margin dilutive in terms of the Byte+ model, but nothing significantly different.
Got it. Switching gears, to talk about capital deployment, can you just talk at a high level, how you're thinking about M&A, share repurchases, things like that, over the next year?
Yeah, I think first and foremost around capital deployment, our focus is around improving cash flows. You know, if you look at how we're going to improve cash flows over the next couple of years and get to 100% free cash flow conversion, number one is our profitability is expected to improve meaningfully. Second, we see opportunities to improve working capital, in particular inventory. During the investor day, I laid out a plan to improve inventory by 15 days. Each day is worth about $5 million of cash. So that's $75 million of cash, in theory, we should be able to free up. There's also a lot of one-time cash outlays that we've seen over the last 18 months for the restructuring programs, the remediation effort we've been, you know, undertaking. CapEx has been elevated, and will stay elevated through the end of 2024.
We're implementing a new ERP system that I mentioned earlier. We've also got significant investments we're making in Wellspect HealthCare, which are going to have a quick return. This is to expand the facility. This is to modernize the equipment in the facility. Our Wellspect HealthCare business is doing really well in terms of growth. You know, it's growing in the mid- to high single-digit range pretty consistently now. So we've got a bit of elevated one-time cash outlays that should come back to a more normalized rate. So with more cash, the question is going to be, what do we do with it? We've been pretty clear. We've got a lot of things to still fix. We got our foundation to make sure we shore up before we go out and do any large M&A.
So I wouldn't expect any large M&A that requires any amount of integration. We may do some tuck-in deals, those types of things. But most of our capital deployment will be towards internal investment and then, you know, such as commercial investments, R&D, etc. And then in terms of return to shareholders, we said, you know, at least 75% of our free cash flow going back through dividends and share repurchases. We did announce earlier this year another double-digit increase to our dividend. We expect to grow our dividends pretty consistent with our earnings growth. So if you look at our plans over the next couple of years, double-digit earnings growth is expected. Obviously, our dividends should grow at least in line with that earnings growth. But we also want to be taking advantage of our share price and we're buying back shares as well.
Great. Going back to the 4% organic growth target for to get to the 2026 EPS target, within that, there's also SKU rationalization, as you've talked about. I guess, can you update us on where we are within the SKU rationalization? And has there been any impact to organic growth as it relates to that rationalization? And then just trying to think about how to think about that in the context of that 4% growth target.
Yeah, no, it's a good question. Keep in mind the SKU work we're doing is really around our Endo and Resto portfolio. We will get to some other SKU rationalization, but it won't be nearly as significant as those two areas. That's where the big opportunity lies. You would expect to have some level of revenue loss when you go through a transition like this. One of the things we were very thoughtful of is making sure we didn't have a significant amount of revenue loss, because the assumption is you're going to convert customers from product A to product B in most cases. Or if there's not an alternative, obviously, you would lose that particular revenue. So we had a bunch of assumptions. We actually went out and piloted it with a number of different markets.
So that's what we've been doing over the last 6 to 8 months. We've gotten the feedback from our customers now. We're going to tweak our plans. In some cases, our assumptions were flawed. We thought we were going to convert them, and for whatever reason, we can't. So we're going to keep those products. In 80% of cases, our assumptions played out as we had thought. In other situations where we're going to keep the product that we otherwise thought we were going to discontinue because our customers really do want it, we're going to raise the prices up on it because these are low-running SKUs. The margins aren't great. And so if customers really want it, it's a sticky product. We'll have to raise the prices on those, you know, to get more of a normalized margin.
But yeah, I would expect we'll have some revenue leakage, but the idea is to obviously keep it to a minimal amount. The benefits, though, are huge. I mean, if you think about lower inventory obsolescence because you're not keeping inventory on all these SKUs, the fact you got to register these products in all these different markets, there's IP costs to keep these products, right? The sustained engineering costs around all of this. So there's just tons of cost benefits, and that's why we're doing it, including our ability to reduce footprint on the manufacturing side. And ultimately, I think having a portfolio that has less SKUs should provide more focus and offset some of that revenue leakage. So we're not anticipating having any major disruption on the top line as a result of the SKU rationalization work.
Got it. Sounds good. Looks like we are out of time. Thank you, everyone, for joining us. And thank you, Glenn.
Yeah, thank you.