DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q3 2023 Earnings Call Transcript November 2, 2023
DENTSPLY SIRONA Inc. beats earnings expectations. Reported EPS is $0.49, expectations were $0.48.
Operator: Good day, and thank you for standing by. Welcome to the Dentsply Sirona Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. 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, Amy, and good morning, everyone. Welcome to the Dentsply Sirona Third 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. Additionally, historical financial data related to our new segments is also available on our website. 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 list some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today's call, our remarks are 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. Comparisons are provided versus 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, and thank you all for joining us this morning for our Q3 2023 earnings call. Today, I'll start by providing an overview of our recent performance, and then Glenn will cover Q3 results and the revised '23 outlook. Before we discuss the recent performance, I wanted to comment on the recent events in the Middle East. I am deeply saddened by the horrific terrorist attacks on Israel and the continued injuries and loss of innocent lives. We have over 300 employees in the country and the safety of our employees and their families is our utmost priority. Currently, our business in Israel remains operational, and Glenn will touch upon this topic again when he covers the outlook assumptions. I would like to remind you all that we are hosting our Investor Day next Thursday, November 9, where we plan to cover our strategy and 3-year plan in more detail, including the path to the adjusted EPS target of $3.
As such, for today's call, our prepared remarks will be brief and focused primarily on a few key messages, Q3 financials and our outlook for the rest of the year. Now starting on Slide 4. In Q3, we continued to execute on our strategic plan to transform the business to deliver sustainable performance over the long term. We are making meaningful progress on our objectives despite the challenging macroeconomic conditions that negatively impacted top line growth in the quarter and led to the revised 2023 outlook. The business experienced headwinds in certain markets, particularly Germany and the U.S. I'm sure you're seeing the data from ADA, and I'll comment momentarily on our own survey data. There were, however, some bright spots in the quarter, including 20% growth in China and double-digit growth in our U.S. CAD/CAM business.
Our Aligners business with Byte and SureSmile also delivered another quarter of double-digit growth. In Q3, our EBITDA margins expanded 70 basis points, with additional contributions generated by our restructuring program. These initiatives remain on track to deliver the full $200 million run rate savings by mid-2021. Additionally, today, we announced our plan to execute $150 million in share repurchases during the fourth quarter. Despite the headwinds we faced in the quarter, we continue to build capability and stay focused on our transformation journey. Now moving to Slide 5, let's start with DSOs. We are seeing positive results from our reinvestment into our relationships with DSOs. We continue to repair, rebuild and refocus on our relationships with this important and growing customer segment.
Our performance in this quarter was flat sequentially. We are building positive momentum with a healthy funnel of DSO opportunities over the next several quarters. We are also fulfilling our renewed commitment to clinical education. Our live education events such as DS World serve as an important component of our overall clinical education infrastructure. These events give us the opportunity to engage with customers and provides unparalleled clinical education. This year, we hosted 4 DS World events, in the U.S., Spain, Italy and Dubai, with 3 held this past quarter. Approximately 7,000 participants attended globally, and we delivered over 250 education courses. At DS World in Las Vegas, we presented the Future of Care. We believe DS Core will play an increasingly important role in delivering the future of care as the digital paradigm shift connects products and technologies in delivering care to patients.
It's a key element of our strategy, and we highlighted expanding features at this year's event. Now of course, we continue to focus on innovation. We recently launched a new SureSmile simulator on DS Core, which has generated positive feedback. Customers have highlighted patient experience and efficiency benefits with the integration of the simulator into DS Core. We have also released updates to DS Core, including the communication canvas and lab ordering and viewer functionalities. We are particularly pleased with the communication canvas as it enables customers to highlight the entirety of a patient's clinical data and proposed treatment plan in one place. Anecdotal commentary from customers indicates that it drives an increase in treatment acceptance rates with customers.
We look forward to discussing and showcasing DS Core's capabilities in greater depth at our Investor Day next week. I'd also like to highlight OSSIX Agile which we recently launched as part of our implants, bone regeneration portfolio. Implants clearly remains an important part of our business. And while we have a robust portfolio, we continue to increase the capabilities of our commercial teams, expand investment in clinical education, and incentivize commercial execution. And finally, in Q3, we continued our cadence of quarterly regional business review meetings with meetings in APAC and LatAm. These meetings provide us the opportunity to dive deeper into each business and to engage with employees and customers. As a result of these reviews, we have identified key opportunities in each region for potential growth investments and have already taken action on some.
The consistent and highly positive feedback from our employees and customers strongly support continuing this in 2024. Now just before I turn it over to Glenn to discuss our third quarter results in more detail, I'd like to take a moment to comment on our revised outlook. As we continue to focus on the transformation of our organization, including driving greater discipline and accountability, customer centricity will continue to stand as a core theme. As such, we believe our quarterly surveys have helped inform us and view of market trends. The weak sentiment in Australia and Germany in Q1, followed by reduced sentiment in Germany in Q2, led us to exhibit caution during our Q2 earnings call in August, especially given our presence in Germany.
With continued negativity among German and Australian customers, in addition to reduced patient volume trends in the U.S., we decided to revise our outlook, which now sits within the guidance range set at the beginning of the year, despite a worsening macroeconomic environment. And with that, I'll hand it over to Glenn. Glenn?
Glenn Coleman: Thanks, Simon. Good morning, and thank you all for joining us. Today, I'll provide more detail on our third quarter results and an update on our full year 2023 outlook. Before doing so, I'd like to comment on the $302 million noncash after-tax charge in Q3 related to goodwill and other intangible asset impairments, primarily impacting our Connected Technology Solutions segment. We recorded this charge as a result of adverse macroeconomic factors, including weakened demand, particularly in Europe, as well as increased discount rates, reflecting the higher interest rate environment. Let me now move to our third quarter financial results. These trends impacted our top line results, which came in below expectations.
Despite this pressure, our transformation and organizational alignment work enabled us to expand EBITDA margin 70 basis points, and with a lower tax rate, resulted in adjusted EPS growth of 20% year-over-year, in line with our projections. Let's now move to Slide 6. Our third quarter revenue was $947 million, with reported and organic sales essentially flat year-over-year. Foreign currency was slightly favorable in the quarter, however, was lower than anticipated due to a stronger U.S. dollar. On a constant currency basis, we saw a strong sales performance in China which grew 20% year-over-year and improved sequentially from Q2. In addition, our Global Aligners business grew 10% and CAD/CAM grew double digits in the U.S. These improvements were offset by softer demand in key markets such as Germany and the U.S., most notably impacting imaging, implants and consumables.
Despite flat revenue performance year-over-year and continued inflationary headwinds, adjusted EPS in the third quarter was $0.49, up 20%. The improvement was primarily driven by adjusted EBITDA margin expansion of 70 basis points to 18.2%, as a result of cost reductions from our restructuring program, effective cost management and the benefit of price increases implemented earlier in the year. We achieved this while continuing to invest in our commercial teams and infrastructure. In addition, our adjusted EPS growth was impacted by a lower tax rate due to a favorable geographic mix. In the third quarter, we generated $134 million of operating cash flow, up 23% year-over-year, driven by improved profitability, a lower build of inventory and the timing of accounts receivable and accounts payable compared to the prior year.
Free cash flow conversion in the quarter was 93% compared to 88% in the prior year. As a reminder, 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. Cash and cash equivalents amounted to $309 million at September 30. And our leverage ratio improved to 2.5x, which is in line with our long-term targeted rate. In the third quarter, we returned $29 million to shareholders through dividends, with a total of $236 million returned year-to-date through a combination of dividends and share repurchases. As Simon noted, we also announced this morning that we intend to repurchase an additional $150 million of shares by year-end. Let's now turn to third quarter segment performance on Slide 7.
Starting with CTS, our Connected Technology Solutions segment. Organic sales declined 4.6%. Within CTS, our global CAD/CAM business grew low single digits, driven by higher wholesale volume in the U.S. as distributors increased inventory ahead of DS World in September. Underlying U.S. CAD/CAM retail demand was also strong, particularly for Primemill and CEREC Primescan. The Equipment & Instruments business declined high single digits in the quarter due to softening demand for imaging equipment in the U.S. and Europe, which we attribute to rising interest rates and recessionary concerns in the market. In the near term, we are working with our distribution partners on financing alternatives to support our customers. Moving to EDS or the Essential Dental Solutions segment, which includes endo/resto and preventive products, organic sales declined about 1%, driven by lower volumes in the U.S. and Europe.
We did see strength in the rest of the world, which mitigated some of this negative impact. Shifting to the Orthodontic & Implant Solutions segment, organic sales grew 3.7%. Aligners grew double digits for the fifth consecutive quarter. This strong performance was driven by growth in both SureSmile and Byte. SureSmile grew 13% and continues to benefit from market share gains, new product offerings and differentiated outcomes. Our direct-to-consumer aligner brand Byte grew 7% as we saw higher customer conversion rates. On a full year basis, we expect our Aligners business to grow double digits but anticipate single-digit growth in the fourth quarter given macro pressures in our largest markets. Implants & Prosthetics grew low single digits in the quarter, highlighted by increased demand for value implants as well as growth in China due to and market share gains.
On a sequential basis, China implants grew 30% in the third quarter. And wrapping up with the Wellspect Healthcare segment, organic sales grew 6.8%, with growth across all 3 regions. Wellspect also benefited from new product launches with Navina Mini, a minimally invasive irrigation product for bowel care and the LoFric Origo flexible, an intermittent male catheter, both of which have been well received by customers. For Q4, we expect a further acceleration of growth in Wellspect to about 10% year-over-year. Now let's turn to Slide 8 to discuss third quarter financial performance by region. U.S. sales declined about 1% due to lower sales of imaging equipment, implants and restorative products, partially offset by strong growth in aligners and CAD/CAM equipment.
U.S. CAD/CAM distributor inventory levels increased sequentially in the quarter by approximately $20 million, driven by a normal build in advance of DS World Las Vegas in September. We expect that most of this will support installs in Q4. And because of this, inventory levels will likely be lower by the end of the year. Turning to Europe. Organic sales declined 2.8% due primarily to lower EDS and CTS demand as we continue to see prolonged recessionary impacts in Germany, our second largest market globally. Excluding Germany, organic sales in Europe were flat compared to the prior year. That said, we posted strong performance in the Wellspect segment and with our SureSmile aligners. Rest of world organic sales grew 4.5% in the quarter, led by China, which delivered significant growth in implants and EDS.
With the strong third quarter performance, our year-to-date sales growth in China has now turned positive with volume increases more than offsetting the pricing impact sooner than expected. Latin America, a smaller but fast-growing region for us, was another bright spot and grew double digits with improved performance in Brazil and Mexico. With that, let's move to Slide 9 to discuss our updated outlook for 2023. We expect to see current conditions continue to impact Q4. Our recent survey of over 1,000 dental customers, together with other industry research data, suggests that we're seeing negative trends, with decreased patient visits and increased cancellations. In addition, higher interest rates will likely result in deferral of some higher-end equipment purchases.
These macroeconomic factors, coupled with a more unfavorable FX impact expected for the remainder of the year, have led us to lower our full year outlook. We now expect full year net sales to range from $3.90 billion to $3.94 billion. This includes an additional FX headwind of $25 million compared to our prior outlook. We expect organic sales to grow about 1% compared to our prior estimate of about 3% growth. Regarding Israel, I'd like to echo Simon's comments. Our thoughts are with all the families impacted, including our colleagues that call Israel home, and their safety is the top priority. Israel is an important country where we have operations, including 2 implant manufacturing sites that generate roughly 3% of our total sales. Initiatives are underway to move inventory, identify alternative resources, and limit potential supply disruptions.
We continue to monitor the events closely. And while we have not seen a significant impact on our business to date, the situation remains fluid. Our Q4 outlook assumes minimal impact from the conflict in Israel. Moving to profitability. We estimate full year EBITDA margin to be greater than 17%, down from the prior outlook, due to lower expected sales and the impact of lower volumes and unfavorable absorption in our CTS business. Our updated outlook includes a lower tax rate due to geographic mix, largely driven by a reduction in pretax income projections in Germany as well as a lower share count due to the $150 million of additional share repurchases that are planned in the fourth quarter. With these updates, full year adjusted earnings per share is now expected to be in a range of $1.80 to $1.85, representing a $0.14 decrease compared to the midpoint of our prior outlook range.
Of this amount, $0.11 is due to lower organic sales, $0.04 is due to lower CTS gross margins given lower volume projections, and $0.03 is from additional FX headwinds. This is partially offset by a lower tax rate, which is a $0.04 tailwind. With that, I'll now open the call for questions.
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