DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q4 2023 Earnings Call Transcript
DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q4 2023 Earnings Call Transcript February 29, 2024
DENTSPLY SIRONA Inc. beats earnings expectations. Reported EPS is $0.44, expectations were $0.43. DENTSPLY SIRONA Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Dentsply Sirona Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Andrea Daley, Vice President of Investor Relations. Please go ahead.
Andrea Daley: Thank you, operator, and good morning, everyone. Welcome to the Dentsply Sirona fourth quarter 2023 earnings call. Joining me for today's call is Simon Campion, Chief Executive Officer; Glenn Coleman, Chief Financial Officer; and Andreas Frank, Chief Business 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.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. 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-K and any updating information in subsequent SEC filings lists some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted.
A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Simon.
Simon Campion: Thank you, Andrea. We appreciate you all joining us this morning for our Q4 2023 earnings call. Today, I'll begin by providing a summary of our recent performance then Glenn will cover Q4 and full year 2023 financial results and share our 2024 outlook. I will finish by providing a strategic operating update. Now starting on slide 3. We achieved over 2% organic sales growth in 2023, above our projection driven by growth in three of our four segments. The Ortho business saw double-digit growth in both Byte and SureSmile. The EDS segments posted growth in all regions and product categories and in total, delivered mid single-digit growth, while Wellspect Healthcare generated high single-digit growth. Through the fourth quarter, the macro environment remains challenging.
The CTS segment declined slightly more than expected, mainly due to equipment and instruments with softness in imaging which we anticipate will continue in 2024. This was partially offset by an increase in demand for CAD/CAM and particularly for intraoral scanners, which was another bright spot for us. In January, we conducted our latest customer survey with over 3,500 respondents from 12 key geographies. Sentiment in the US improved slightly about the future of the industry and their practices. German and Australian customers continue to express a negative outlook, and this is largely unchanged from the last quarter. The survey also suggested that patient demand in China continues at reduced levels but with no sequential deterioration. EBITDA margin for 2023 came in at 17.4% and adjusted EPS was $1.83, both in line with our guidance.
As we stated at the beginning of the year, we consider 2023 a transition year for Dentsply Sirona. We promptly and decisively executed several critical transformation initiatives to achieve the necessary cost savings, enabling strategic reinvestment for hygiene and growth. We made significant progress on these initiatives, which have strengthened the foundation of the business and set us on a path to improved future performance, which we highlighted for you at our Investor Day in November. As we have said, we believe 2024 will be an inflection year for us, delivering double-digit adjusted EPS growth, largely due to the benefits of our transformation initiatives. We remain laser-focused on executing our strategy while simultaneously strengthening our foundation, developing new capabilities and implementing greater discipline and rigor across our business.
Moving to slide 4, I would like to share some selected business highlights. In 2023, we continue to bring innovation to the market. We enhanced our DS Core offering expanding the platform and enabling new clinical functionality. On the last earnings call, I shared that we had already exceeded our DS Core target for 2023. And as an update, we ended the year with over 14,000 unique accounts. We believe that DS Core will play an ever-expanding role in shaping dentistry as the industry undergoes a digital evolution that's connecting technology and clinical workflows. We are also focusing on digital print materials and we recently launched Lucitone for Primeprint and expanded our splint suffering. We believe we are well positioned to advance digital print materials and continue to see opportunities to accelerate the adoption of 3D printing in dental practices, as a stand-alone office capability or as a complement to in-office milling.
As previously communicated, we reinvigorated our focus on clinical education offerings. We know the digital dentistry requires hands-on in-person training to facilitate practice integration and unlock the potential of digital tools, and we are committed to providing this for our customers. In 2023, we were proud to offer over 9,200 training and education courses globally through live, online and hybrid formats, which reflects about a 30% increase compared to prior year. We also expanded our reach with digital learning platforms through a partnership with DTI that started in the fourth quarter. Live events play an important role in enriching our clinical education platform. Earlier this month, I had the opportunity to attend our second DS World event in Dubai.
This event featured courses on mainly dental disciplines with over 1,000 participants in attendance, and this is the first of several DS World events we have planned this year. In the fourth quarter, we also conducted several implants focused events in the US and Europe. Building on the success of these events, we look forward to hosting our Implant Solutions World Summit in Miami in the second quarter. We continue to progress our sustainability strategy. In 2023, we achieved a new record for our injury and illness prevention rate. The safety of our employees is of the utmost importance, and we are very proud of this accomplishment. Our Wellspect Healthcare business also continues to lead in this area and recently won an award for sustainable MedTech innovation for the use of renewable plastic in LoFric Elle, a female urinary catheter.
We were also named to Sustainalytics 2024 ESG top-rated companies list earlier this month. Wrapping up the highlights, we recently announced an expansion of our collaboration with A-dec, introducing a new integrated product offering that will bring together Primescan Connect and certain A-dec delivery systems. This builds upon our existing collaboration with A-dec that integrated Cavitron into their platform. The new offering creates a fresh solution to meet customer needs, empowering dental professionals to streamline practice workflows and elevate the patient experience. And with that, I will hand the call over to Glenn for the financial update.
Glenn Coleman: Thanks, Simon. Good morning, and thank you all for joining us. Today, I'll cover several topics, including our fourth quarter and full year 2023 results, as well as our outlook for 2024. Let's begin on slide 5. Our fourth quarter revenue was $1.01 billion, representing reported sales growth of 2.9% and organic sales growth of 1.9%. Foreign currency positively impacted sales by approximately $10 million or 100 basis points compared to the prior year quarter. On a constant currency basis, the key highlights in the quarter included strong sales performance in China, which grew over 35%, double-digit growth in both Wellspect and Implants and Prosthetics and high single-digit growth in our global aligners business.
Despite higher sales, EBITDA margins declined 40 basis points in the quarter, mainly due to year-over-year decline in gross margins, which contracted 100 basis points. This was largely driven by unfavorable country mix due to lower-margin implant sales in China and unfavorable product mix within our endo and CAD/CAM portfolios. Adjusted EPS in the quarter was $0.44, down 4% from the prior year, largely due to lower gross margins and a higher tax rate. In the fourth quarter, we generated $160 million of operating cash flow, up 13% year-over-year, driven by improved inventory management and the timing of accounts payable compared to the prior year. Free cash flow conversion was 128% compared to 110% in the prior year. In the fourth quarter, we repurchased $150 million of stock at an average price of $30.73 and paid $30 million in dividends.
For the full year, we returned $416 million to shareholders. Let's now turn to fourth quarter segment performance on slide 6. Starting with the Essential Dental Solutions segment, which includes endo, resto and preventive products, Organic sales grew 3.4%, driven by growth in all three regions and in each product category. EDS benefited from stable patient traffic and price increases implemented earlier in the year. Shifting to the Orthodontic and Implant Solutions segment, organic sales grew 10.6%. Aligners grew high single digits. Specifically, SureSmile grew 13% and continues to benefit from market share gains, new product offerings and differentiated outcomes. Additionally, we believe the recent launch of our SureSmile simulator within DS Core will benefit future sales.
Our direct-to-consumer aligner brand Byte grew 6% despite a constrained financing environment. With the recent uptick in new customer interest, we are ramping our investment in treatment planning, clinical support and sales, which supports our anticipated greater than 20% growth in Byte this year. We also expect SureSmile to grow double digits in 2024. Moving to Implants and Prosthetics. Double-digit growth was a clear bright spot in the quarter driven by VBP and market share gains in China and higher demand in Europe. Globally, premium and value implants saw similar growth rates. Our US implants business was down slightly in the quarter, but showed less of a decline than previous quarters, and we anticipate a return to growth in 2024. Wrapping up our dental performance, CTS, our Connected Technology Solutions segment saw organic sales declined 8.3% versus the prior year quarter.
Our global CAD/CAM business grew low single digits, driven by increased demand in the US, while the Equipment & Instruments business declined double digits in the quarter. Moving to Wellspect Healthcare. Organic sales grew 16.9%, driven by growth in Europe and the US. As a reminder, Wellspect had an easier comp, as the prior year quarter was impacted by a onetime pricing matter in Italy. In addition, new product launches contributed to better-than-expected year-over-year growth. Now, let's turn to slide 7 to discuss fourth quarter financial performance by region. US sales declined 1.2% due to lower sales of equipment instruments and implants, partially offset by strong growth in aligners and CAD/CAM equipment. US CAD/CAM distributor inventory levels decreased sequentially in the quarter by approximately $4 million and ended the year essentially flat compared to the end of 2022.
Relative to historical averages, distributor inventory levels remain low. Turning to Europe. The region returned to growth in the quarter with contributions from Wellspect, EDS and OIS. SureSmile grew over 25% with notable growth in Spain, France and Germany. We also saw an increase in implants demand driven by growth in MIS and higher conversions from our legacy product, XiVE, to our new DS OmniTaper implant. Our CTS segment continued to see lower volumes due to recessionary impacts, particularly in Germany, which is the largest market in the region. Excluding Germany, Europe organic sales grew 4.1% compared to the prior year. Rest of World organic sales grew 5.4% in the quarter, led by China, which delivered significant growth in implants.
In 2023, we saw a more than 40% increase in our China implants customer base. The public and private sector both continue to experience significant market growth. Sales in Japan declined during the quarter, as the prior year quarter benefited from government rebate programs on certain equipment. Wrapping up Q4 regional performance. Latin America grew high single digits in the quarter, led by solid demand and sales execution in Brazil and Mexico. We saw an improvement in Interoil scanner volume, driven by the launch of Primescan Connect and sales of refurbished Omnicam units in the region. In the first half 2024, we plan to launch SureSmile, DS Core and Primeprint in Brazil and other countries within the region. Now, let's turn to slide 8 to briefly cover our full year 2023 performance.
Sales for the full year were $3.97 billion, representing reported sales growth of 1.1% and organic sales growth of 2.2%. Foreign currency translation negatively impacted sales by 110 basis points due to a stronger dollar versus most major currencies. Key highlights for the year included double-digit growth in aligners and high single-digit growth in China due primarily to significantly higher volume in implants, which more than offset the pricing declines associated with VBP. The largest challenge we saw in 2023 was lower volumes in equipment and instruments, which we attribute to recessionary concerns and higher interest rates in the US, Germany and other developed markets as well as competitive pressure and we see this trend continuing into 2024.
EBITDA margins contracted 210 basis points to 17.4% due to cost inflation and higher investments in the commercial organization, clinical education and infrastructure, partially offset by restructuring benefits. EBITDA margins were in line with our guidance and adjusted EPS of $1.83 was at the midpoint of our range. Operating cash flow was $377 million, down 27% year-over-year, driven by higher investments, restructuring cash outlays and unfavorable timing of accounts receivable and accounts payable. Free cash flow conversion was 58% compared to 81% in 2022. As we mentioned during our recent Investor Day in November, our long-term goal is to achieve 100% free cash flow conversion on a consistent basis once we move past the cash outlays associated with our transformation initiatives.
The company continues to maintain a strong balance sheet and finished the year with $334 million of cash and cash equivalents on hand, with a net debt-to-EBITDA ratio of approximately 2.6 times, which is slightly above our long-term targeted rate of 2.5 times due to the fourth quarter $150 million share buyback. Today, we also announced a 14% increase to our dividend. This marks our fourth consecutive year of double-digit increases to the dividend and demonstrates our confidence in our long-term plan. With that, let's move to slide 9 to discuss our expectations for 2024. For 2024, we expect organic sales to be flat to up 1.5%, which represents a net sales range of $3.96 billion to $4.02 billion. We expect FX to be a slight headwind to reported sales based on current rates and anticipate stronger organic sales growth in the second half of the year as we remain cautious on the macroeconomic backdrop for the next several quarters, particularly for equipment.
We expect our EBITDA margin to be greater than 18% in 2024, an expansion of approximately 100 basis points year-over-year. We also expect margin improvement as we progress through the year based on the timing of investments and restructuring savings. We project an increase in our full-year tax rate due to geographic income mix and expect the Q1 tax rate to be higher than the full year as we finalize our 2024 tax planning initiatives. We expect adjusted earnings per share to be in the range of $2 to $2.10. For Q1, we expect organic sales to be roughly flat to the prior year, with slightly lower reported sales due to an anticipated FX headwind of approximately $10 million. On a sequential basis, gross margin is projected to improve in Q1. With this, we expect EPS will be up mid-single digits year-over-year.
In Q1, we expect to see growth in OIS and Wellspect Healthcare, offset by declines in EDS due to a tougher comp and CTS based on current trends. Let's turn to Slide 10 to discuss the puts and takes in our 2024 adjusted EPS outlook. Organic growth at the midpoint is expected to contribute $0.04 to earnings. Our projected cost savings from the restructuring plan should reach the run rate of $200 million in 2024. Net of investments, we expect this will contribute approximately $0.13 of EPS. The investments for 2024 include ERP expenses, Byte and SureSmile expansion. We expect net investment hedges will be a $0.07 tailwind to EPS, consistent with our previous comments at our November Investor Day. We are forecasting that other items, namely cost inflation, tax and share count will net to a $0.02 headwind to EPS.
These drivers combined to adjusted EPS outlook of $2.05 at the midpoint of the range, up double-digits versus the prior year. With that, I will now turn the call back over to Simon.
Simon Campion: Thank you, Glenn. Moving on to our strategic update, starting on Slide 11. Our strategy is clear and remains unchanged. Digitalized dentistry deliver customer-centric innovation in products and services for oral health and continence care, serve our partners effectively and accomplish these goals through a dedicated and engaged team with compliance and quality always at the core. We continue to actively implement and advance all five of our strategies with strengthening execution discipline, continued process improvements and the strategic investments we are making in the company, we believe we can advance the performance of this company and create increased value for our stakeholders and employees. Now moving to Slide 12, let me discuss our foundational initiatives.
During 2023, we established many of the fundamental elements necessary to purposely carry out our plans for 2024 and beyond to transform this company across product lines, regions and operational areas. With the restructuring program largely complete and on track to deliver $200 million in savings this year, we are shifting focus to the foundational initiatives we have prioritized for 2024. We spoke about these at our Investor Day in November, and we continue to make progress on each of them. Let's start with supply chain transformation. Our supply chain is overly complex, and we know we have significant opportunities to improve it. In 2023, we announced the closure of three manufacturing sites and consolidated two distribution centers into one.
These actions set into motion our efforts to unlock value in our manufacturing and distribution network. To pursue this goal, we kicked off an extensive network analysis to guide our execution road map. Spearheaded by a dedicated and cross-functional team of experts, we expect this global initiative will yield significant results, including enhanced operational efficiency, improved footprint and lower costs. We expect to begin to realize financial benefits in 2025, continuing into 2026 and beyond. Simplifying our supply chain is closely intertwined with our SKU optimization initiative. By streamlining our portfolio and utilizing a robust product life cycle management process, we can improve and simplify our supply chain and reduce sustaining engineering costs.
In 2024, we expect to execute on the first wave of the SKU optimization program, addressing 60% of the SKUs in the endo and resto portfolios. We are taking a thoughtful approach to this work to drive our cost and improve working capital, while maintaining revenue and ensuring a positive customer experience. We expect to begin delivering benefits from the first wave towards the end of 2024, and we also plan to evaluate further opportunities. Our ERP modernization initiative will upgrade, improve and standardize our ERP systems. The new system will unlock organizational capacity, enhance efficiencies in our network and pave the way for future automation opportunities company-wide. We are conducting rigorous systems, testing and ensuring organizational readiness as we prepare for the phased deployment approach.
We have targeted our initial rollout for mid-2024, and we are confident in our ability to execute this program with minimal disruption. Of course, as we advance these three foundational initiatives, we remain steadfast in upholding compliance and quality as key guiding principles. We plan to deliver on our promises in a manner that aligns with our values with success gauged by our ability to generate value for our stakeholders over the long-term. Now moving to our final slide, I would like to reinforce a key few points. First, with focused execution, we delivered on our 2023 guidance. While end markets remain challenging, our strategy is clear and our execution has improved and will continue to do so. Second, we have established our foundational initiatives and strategic objectives.
We are significantly better positioned to deliver on our goals for the work that's been completed or is well underway. Third, we are poised to deliver double-digit adjusted EPS growth in 2024, much of which we expect to derive from our transformational actions. Fourth, we remain confident in the path to our targeted $3 of adjusted EPS in 2026. We've established the roadmap to reach our goals and are fully focused on execution, which we believe positions us well for improved performance in 2024 and beyond. And with that, let's now open it up for questions. Operator?
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