DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q4 2022 Earnings Call Transcript

DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q4 2022 Earnings Call Transcript February 28, 2023

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

Andrea Daley: Thank you, Carmen, and good morning, everyone. Welcome to our Fourth Quarter 2022 Earnings Call. Joining me for today’s call is Simon Campion, Dentsply Sirona, Chief Executive Officer; and Glenn Coleman, Chief Financial Officer. I’d like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.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 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.

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

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

We are already seeing the fruits of our efforts with early quick wins such as renewed interest from and with DSOs. While we can’t get into the details, it gives us confidence in the progress that we are already making. You may have heard that, we recently announced our organizational restructuring plan to improve operational performance to increase alignment, to drive process and discipline, and to begin to position Dentsply Sirona for improved future performance. We committed to act with urgency, and I feel we are doing just that. We are moving deliberately from discovery to action, and we are confident that this plan and other initiatives will collectively improve performance to deliver long-term shareholder value. Moving to slide 6. Let me take a few minutes to explain the changes we are making.

We are putting into place a new operating model, which will enable the company to better deliver on our strategic objectives while also focusing on our tone at the top that focuses on inclusivity, transparency and importantly, ethics and compliance. The plan consists of the following elements: number one, reducing the global workforce by approximately 8% to 10% while continuing to invest in the global commercial organizations. Number two, implementation of five global business units reporting into one leader, the global business units are designed to drive enterprise integration align our product portfolio to the Company’s growth strategy and to drive seamless communication with our commercial teams. Number three, commencement of central functions and infrastructure optimization to support the efficiency of the overall organization.

Number four, hiring a new leader of quality and regulatory to sit on the leadership team, thus elevating the visibility and importance of this critical function within the organization. Number five, simplification of management structure to bring the company in line with industry best practices; and number six, delivering cost savings to fund critical investments in 2023 and beyond to position the company for sustainable future growth. As summarized on slide 7, we expect to achieve at least $200 million in annual cost savings over the next 18 months. And as outlined already, reduced the global workforce by up to 10% of the total employee base but we are not targeting our sales teams. We believe that this plan, along with other actions we have underway will set Dentsply Sirona on the right path to deliver better and more consistent results and, in turn, create significant value for all our stakeholders.

The members of the leadership team have undertaken such work in their respective paths. So this experience, coupled with the partnership of external firms who bring an independent view, industry benchmarking and best practice is benefiting this work. This transformational work is particularly difficult when actions impact our team, and therefore, we have not taken these decisions lightly. We have very talented employees and the leadership team is confident that the changes we are making will unite to the organization for better position Dentsply Sirona for long-term sustainable success. Importantly, we are becoming a more inclusive organization focused on creating and fostering a culture of authenticity, compliance and accountability. This starts with having leaders at the top, who will provide the right tone and foster the right culture, and I feel that this change in tone within the organization is beginning to resonate with our employees.

The most recent North American sales force engagement survey, for example, highlights meaningful arguably significant improvement across the board. In addition to the positive employee momentum, we’re also seeing it with our customers globally by leveraging the strength of our clinical education programs. We recently hosted our first-ever DS World, Dubai with more than 800 registered attendees from 47 countries. This was our fourth DS World event in the last six months and enables us to interact with more than 7,000 dental professionals. Before I turn it over to Glenn to discuss the financial performance, let me reiterate that we want to be a company that fulfills our commitments internally and externally, and I feel that the increased engagement we are seeing internally and externally is helping us establish a pathway to be that company.

Glenn?

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Glenn Coleman: Thank you, Simon. Good morning and thank you all for joining us. Today, I’ll cover several topics, including our fourth quarter and full year 2022 results as well as our outlook for 2023. Overall, we exceeded the high end of our revenue, operating margin and adjusted EPS outlook ranges that we provided in November and believe this is an important early milestone as we move forward. So let’s begin on Slide 9. Our fourth quarter revenue was $983 million, which represented a decline of 10.9% on a reported basis versus the prior year, largely impacted by foreign currency and a stronger US dollar. Organic sales decreased by 2.6%, but if exclude China, sales grew 0.4%. Sequentially, organic revenue grew 5.8% versus Q3.

Operating income was $154 million with operating margin of 15.7%. On a year-over-year basis, operating margin contracted due to continued FX and inflation headwinds, partially offset by price. On a sequential basis versus the third quarter, operating margin improved by 100 basis points, which was much better than expected. Adjusted EPS in the fourth quarter was $0.46 and exceeded the high end of our outlook range by $0.09, largely due to better-than-expected organic revenues and operating margin performance. On a year-over-year basis, adjusted EPS declined by $0.37. We attribute about $0.10 of the EPS decline to foreign currency, with the remainder coming from lower year-over-year organic revenues, inflationary pressures and below-the-line FX expenses.

We also delivered strong operating cash flow in the fourth quarter, which came in at $142 million, translating to adjusted free cash flow conversion of 110%, up from 100% conversion in the prior year. In the quarter, we returned $26 million to shareholders through dividends. Let me now turn to our segment performance in the quarter on Slide 10. Organic sales in Technologies & Equipment, or our T&E segment declined 2.2%, while the consumables segment declined 3.4%. The T&E organic sales decline was primarily due to softer implants volume, partially offset by continued strong demand for aligners. Aligners grew over 25% in the fourth quarter, driven by strong growth in both SureSmile and Byte. This quarter was the second quarter in a row with double-digit growth in this part of our business.

SureSmile continues to benefit from regional expansion, particularly in Europe and new product offerings. Our direct-to-consumer aligner brand, Byte also saw a very strong growth despite slowing consumer spending trends as we’re seeing improvement in customer conversion rates. Our CAD/CAM business also returned to growth in Q4, driven by strong demand in Japan and Korea. The Equipment & Instruments business declined by low single digits in the quarter, driven by softening demand and ongoing supply chain constraints. Implants were down double digits versus the prior year quarter due to softer demand in China as well as in the US and Europe. We did see some positives in parts of our implants business as value implants showed year-over-year growth.

Moving to the Consumables segment. Organic sales declined primarily due to lower volume in China. These headwinds were partially offset by modest price increases and recent product launches, including ProTaper Ultimate and CEREC blocks and growth in restorative and preventative products. Excluding China, the Consumables segment grew approximately 1% organically over the prior year fourth quarter. Now, let’s turn to slide 11 to discuss fourth quarter financial performance by region. US sales were $369 million, representing an organic sales decline of 1.7%, driven by lower volume in CAD/CAM, implants and lab consumables. These headwinds were partially offset by strong growth in aligners. While CAD/CAM volume was down in the quarter, dealer inventory levels were also reduced by $30 million sequentially.

Turning to Europe. Sales of $376 million were down 3.2% on an organic basis due to lower implants and equipment volume. We attribute the softness in equipment to continued supply constraints, as well as a weaker retail demand environment. Rest of World sales were $238 million and down 3% on an organic basis versus the prior year. In China, as expected, we experienced lower sales across product groups due to COVID shutdowns, as well as headwinds in implants due to the impact of VBP. Excluding China, Rest of World organic sales had a very strong quarter and grew double digits. Moving to slide 12, let me now cover our full year 2022 performance. In 2022, sales were $3.9 billion, representing an organic sales decline of 0.5%. Sales in the year were significantly impacted by foreign currency headwinds, supply chain constraints and regional softness in China and the US, with the US decline largely due to reductions in CAD/CAM dealer inventory.

Despite these headwinds, we are pleased by our performance in Europe, which grew 3% on an organic basis and Rest of World, excluding China, which grew 10%. Notably, our global aligners business, which is a key growth area for the company grew nearly 10% over the prior year. Operating margin for the full year was 16.8%, which exceeded our outlook of margin greater than 15%. As compared to full year 2021, operating margin contracted 350 basis points due to lower volume, unfavorable mix, inflation and foreign exchange headwinds, which was partially offset by price. For the full year, foreign exchange headwinds impacted operating margin by 100 basis points. We delivered full year EPS of $2.09 or $2.44 excluding the impact of FX, compared to $2.82 in the prior year.

The company continues to maintain a strong balance sheet and finished the year with $365 million of cash and cash equivalents on hand with a net debt-to-EBITDA ratio of approximately 2.1 times. For the year, we returned approximately 70% of free cash flow to shareholders through the combination of dividends and share repurchases. And today, we announced a 12% increase to our dividend. This represents three consecutive years of double-digit increases to the dividend and signifies our confidence in our long-term plans. With that, let’s now move to slide 14 to discuss our expectations for 2023. Overall, we’re reviewing 2023 as a transition year. Significant work is underway to improve the company and fix the internal issues, structure and processes that have hindered recent results and this work will position the company to drive significant shareholder value when the external environment improves.

With that said, we have a credible plan for 2023 that includes cost savings and much needed investments to create and sustain long-term profitable growth in the business. For the full year 2023, we expect organic sales to be in the range of down 1% to up 2%, which represents a net sales range of $3.85 billion to $3.95 billion. Based on current rates, FX will be a 100 basis point headwind to full year net sales. On an FX-neutral basis, we expect the cadence of sales to be fairly balanced over the year with sales slightly larger in the second half of the year as compared to the first half. We anticipate that demand will remain strong in key strategic growth areas. Aligners will continue to benefit from regional expansion and market share gains, and we expect better performance in implants.

We also anticipate, an uplift recently launched CAD/CAM products, including Primeprint, DS Core and Primescan Connect, but we remain cautious on overall equipment demand. Turning to regional dynamics. We expect to see an improvement in the two geographies that were a challenge in 2022, the US and China. In Q4, we made critical investments to our US commercial team, which will continue in the first half of 2023. We also enhanced our commission plans to incentivize growth and address the higher CAD/CAM dealer inventory levels. We expect that, these actions will enable our US business to return to growth in 2023, starting in the first quarter. In China, we expect sales will be flat on an organic basis after a year of significant decline in 2022, but we remain cautious on the demand outlook as significant near-term uncertainty remains.

Additionally, VBP will be a top line headwind due to the 40% price impact we will see in our China implants business. While many uncertainties remain, we are seeing positive signs of recovery. For example, this week, our China commercial team participated in an in-person dental trade show with 50,000 dental professionals in attendance. As we move forward in 2023, we’ll be using EBITDA margin as the primary profitability measure to track our operational performance and better align with our peers. For 2023, we expect our EBITDA margin to be greater than 18% which is a decline of 140 basis points from the prior year, but above our fourth quarter run rate of 17.4%. We expect adjusted earnings per share to be in the range of $1.80 to $2 on a full year basis.

Let’s turn to slide 15 to discuss the puts and takes in our 2023 EPS outlook. Overall, we anticipate that adjusted EPS will decline from $2.09 in 2022 to $1.90 in 2023 at the midpoint of our outlook range. Cost savings from the restructuring plan are expected to accelerate starting in the second quarter, contributing approximately $0.30 of EPS in 2023, with the full run rate achieved by mid-2024. We anticipate a sequential moderation in raw material inflation throughout 2023, but remain at elevated levels. We will offset a portion of the inflation with price increases, which will net to a $0.20 headwind to earnings. Other items than the FX and interest will net to a $0.04 headwind to EPS. This brings us to EPS of $2.15, up $0.06 versus the prior year, excluding the impact of investments.

We will be making commercial investments and undertaking long overdue integration activities in 2023. These investments are expected to impact EPS by $0.25. On slide 16, we’ll cover the risks and opportunities we see in our outlook. Our outlook is based on our most recent view of the dental market and economy today. Overall, we see 2023 as having a healthy balance of risks and opportunities that could enable outperformance. The largest variable to our outlook is the overall health of the economy. Similar to last year, the external environment remains challenging and uncertainty is high. While demand has been largely stable to-date, we believe that recessionary concerns, rising interest rates and high inflation could lead to a change in consumer behavior, which in turn could cause a slowdown in elective procedures and capital equipment purchases.

Beyond the external environment, key opportunities that could drive our performance relative to our outlook include earlier or greater impact from commercial investments and faster sustained supply chain recovery. On the risk side, we acknowledge there is some risk to the timing on realizing savings associated with our organizational restructuring plan. It is a large-scale global program with many variables, which we’re closely monitoring as we execute. Turning to slide 17. We’ve laid out additional details on our expectations for the first quarter, given the visibility that we have at this stage in the quarter. For the first quarter, we expect year-over-year organic sales growth to be approximately 1%, driven by continued strong growth in our aligners business and growth in the US offset by continued headwinds in China, which we expect to gradually improve over the remainder of the year.

US organic growth will benefit from easier comps in CAD/CAM and the favorable timing of dealer orders. Entering the year, dealer inventory has returned to much lower levels and will be largely aligned to retail sales going forward. Having said that, we do expect dealer CAD/CAM inventory to increase sequentially in Q1 and then return to lower levels over the course of the year. We expect the US quarterly performance to be choppy in 2023 with slight growth for the full year. Based on current foreign exchange rates, we anticipate that FX will continue to be a headwind, negatively impacting net sales in the first quarter by approximately $40 million. We expect EBITDA margins will be at least 15% and will sequentially improve each quarter as the realization of the restructuring plan savings accelerate and we begin to see demand recovery in certain regions.

Let me now wrap up on slide 18, and quickly touch on capital allocation priorities. We plan to continue returning at least 50% of free cash flow to shareholders through dividends, which we’ve increased three consecutive years as well as share repurchases. Our capital deployment strategy is predicated on keeping leverage low with flexibility in the balance sheet while maintaining an investment-grade credit rating. We have a strong balance sheet, a low leverage ratio and healthy cash flow generation and expect full year 2023 free cash flow conversion of approximately 80%, which reflects the expected cash outlays to support our restructuring program. Our goal is to improve conversion to 100% once you move past the one-time cash outlays in 2023 through the organization and portfolio work that we discussed today as well as working capital and supply chain optimization.

And with that, I’ll now turn the call back to Simon.

Simon Campion: Thank you, Glenn. Moving on to our strategic update, starting on Slide 20. We are putting our plans into motion as we move the organization forward to address the internal challenges we have faced and lay the right foundation that will enable long-term sustainable performance. The fundamentals of our industry remain attractive, and we are well placed to capitalize on growth opportunities supported by a solid organizational foundation. Our path forward starts with confirmation that our strategy to transform the industry by digitalizing dental workflows, by driving product and service innovation and delivering an exceptional customer and patient experience through an engaged and diverse workforce is the right one.

We are now intensely focused on how we will improve on the delivery of the tactical elements of this strategy in a predictable, repeatable, reliable manner to customers, shareholders and employees. Changing to Slide 21, we have initiated much of this transformational work with heavy lifting is ahead of us. As we embark on this New Year, we are focused on five core tactical and strategic objectives. These objectives are to: number one, deliver on our annual growth and margin commitments that Glenn has just shared. Number two, enhance and sustain our profitability. Number three, accelerate enterprise digitalization. Number four, wind in aligners and implants. And number five, create a high-performance culture. As we make progress on these objectives, we do so with an eye on fulfilling our commitment to return to industry growth and increase profitability.

Turning to Slide 22. I would like to reiterate the key actions we are taking to achieve these objectives. Today, we have provided our 2023 growth and margin outlook, and we are committed to achieving that plan. We will do so by making meaningful progress on the other four objectives that we have laid out. Notably, we have discussed in detail the organizational changes we have underway to implement a new operating model, which will enable us to connect segments and geographies, reallocate capital through the company as needed and eliminate silos to improve the customer and employee experience. In parallel, we are defining our winning portfolio. The strategic intent of our winning portfolio will focus on a simple, secure and connected workflow experience that our dental clinic and lab customers trust for better treatment journeys and patient outcomes.

Related to our portfolio shaping work, a topic of much discussion has been the future of our Wellspect Healthcare business. I can confirm thus far no final decisions about the ultimate status of the significant and profitable part portfolio have been made, we have received several inbound inquiries about this asset. We feel compelled to investigate such inquiries and have commenced engagements with several interested parties. We will not make any further comments on this matter until we have a definitive conclusion to these discussions. Another key aspect of our winning portfolio involves simplification. We are reviewing the company’s product offerings on a SKU level basis to inform the size of actions that can be taken to streamline the portfolio and deliver higher returns.

Our early insights indicate that the portfolio is overly complex. For example, we now know that in our consumables business, 12% of the SKUs generate approximately 95% of our revenue in those categories. This complexity adds significant costs to the business and leads to inefficient use of internal resources across functions. Specifically, in Endo, we have over 9, 000 SKUs of different endodontic files with 8% of the SKUs making up 90% of that platforms revenue. While this work is ongoing, we know there is opportunity to simplify and drive improvement in plants and the network efficiencies to unlock further long-term margin expansion. These efforts also yield additional benefits, including reducing operational complexity, optimizing inventory, increasing service levels and sales force effectiveness, reducing risk and improving quality.

Importantly, we see these benefits with the goal of preserving the associated revenue through disciplined execution and effective customer partnerships. The comprehensive review of our business has suffered important areas that need strategic investments to drive overdue integration and enable future growth. Key areas for investment include our global sales teams, our IT systems and in resources to ensure compliance. Many of these investments have already commenced, and we have, for example, made great progress on the US sales force expansion. The vast majority are hired and were recently trained in our North America sales meeting. Investments in our IT systems are necessary to modernize our landscape and further our enterprise integration.

While these types of large-scale ERP endeavors are typically a multiyear journey requiring land investment, they are critical to the business, operating efficiently and most importantly, being able to deliver for customers in an optimal way. We have commenced the process to understand this transformation over the past number of weeks. Compliance is another critically important area. Investing and compliance will support the remediation plan developed in 2022. Operating with the utmost integrity and in a compliant manner in everything we do, is important to us all on the leadership team and on the Board. As such, this investment has the complete support of both groups and is underway. We are confident that with these actions and in more normalized market conditions, Dentsply Sirona can grow revenue at or above our historical long-term targets, while also increasing profitability.

The combination of these positive factors in conjunction with the significant structure of our process changes within our organization can enable Dentsply Sirona to deliver the meaningful earnings improvement expected by the end of 2025, with adjusted earnings per share of $3 targeted in 2026. So let me close with a few remarks on slide 23. We ended 2022 on a positive note by exceeding our prior outlook commitments in the fourth quarter. Importantly, there is a sense of positivity within the commercial teams about the future, driven by the structural changes, our transparency and the commission plan changes. 2023 undoubtedly, will be a transition year as the restructuring plan is put into action against a challenging external environment. However, we are confident in our capability to execute it and establish a clear path forward for the organization, its employees and its investors.

We’re committed to taking decisive action at Dentsply Sirona, and I believe we are not only taking decisive action, but taking the right action to improve the company, to improve its performance. We want to capitalize on the opportunity that the dental industry affords an organization like ours and believe that this restructuring enables us to drive internal alignment and accountability, simplified and fund critical growth investments. It is essential to achieving our five key objectives and delivering the meaningful earnings improvement that you expect that we expect. We are embarking on this road confidence in our collective experience, with the support of the Board and with belief that we can transform this organization. And with that, I will open it up for questions.

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Q&A Session

Operator: Thank you. And I will now begin the Q&A. And the first question comes from the line of Kevin Caliendo with UBS. Please proceed.

Dylan Finley: Thank you very much. This is actually Dylan Finley on for Kevin Caliendo. Congrats on a great quarter, guys. Question for you kind of on the revenue side, so, you put out that $3 EPS target for 2026. Based on some math that we did assuming some moderate amount of buybacks and assuming you hit a 20% operating margin, by that time frame, we landed on an average growth rate of around 2.5%. So based on the growth that you’re expecting this year, it will definitely accelerate a little bit. I’m wondering if this is consistent with your own internal assumptions and if you have any visibility yet exiting 2023, where you expect to grow? Thanks.

Glenn Coleman: Yeah. No, I think first and foremost, we haven’t laid out our revenue expectations long term. We’ll do that at an Investor Day coming up in November. But clearly, we would expect to get back to market growth rates over the coming years as part of our plan. And I would say, our expectations are to do above the 2.5% to 3%, when you look out two to three years from now. So that would be part of our expectations on how we get to the $3.

Dylan Finley: Great. Thank you.

Glenn Coleman: Thank you.

Andrea Daley: Next question, please.

Operator: Thank you. One moment please. All right. And it comes from line of Elizabeth Anderson with Evercore ISI. Please proceed. Elizabeth, check if you’re muted.

Simon Campion: Good morning, Elizabeth.

Elizabeth Anderson: Sorry. I’m on mute, talking to myself, apologize. Thanks so much for the question, guys. I guess, one longer-term question and one shorter-term question. As this is really helpful for the details about some of the strategic investments and initiatives and I was wondering, how you think about the sort of like cadence and time line of how some of these new investments translate into sort of maybe new product launches, et cetera? I know you talked, Simon, about reducing the SKU count, but I imagine you also have sort of continued innovation, as you pointed out with the R&D spend, et cetera, maintain. So I guess that would be my first question. And my second question is just sort of on the shorter-term cadence. We’re sort of two-thirds of the way through the first quarter. And I was just wondering, if you could talk through sort of what you’re seeing currently in the market across your major geographies? Thank you.

Simon Campion: Yes, good morning, Elizabeth, thank you for the questions. So let me start with the R&D piece. One of the benefits, I think, to the reorganization that we’re going through has been we’re now getting more and more visibility to where and how we’ve invested our R&D dollars and the returns that we have obtained on those historically. The benefit of moving to one massive global business unit as we will be able to decide seamlessly where we want to spend our R&D dollars and bring more discipline to that process as to how we evaluate the value and monitor progress during the R&D cycle and even into the commercial cycle. So, you should expect to hear more from us certainly at Analyst Day or Investor Day on that. And then with respect to investments and I’ll use the US commercial team as an example.

As I noted in the prepared remarks, we are well underway. In fact, we’re almost complete with that investment on the Implant team and on the DSO team. We’ve already experienced traction, as I noted, with the DSOs. In relation to the Implants, it’s a very clinical sell. And so we would expect a tail on their training before they begin to deliver meaningful performance in the implant arena in the US. But clearly, it’s an area where we have control of our own destiny, we were direct sales force. It’s profitable and it’s growing. And we think we have a portfolio that we can win with in that space. So we would expect increasing performance over the year and into next year from the Implant team.

Glenn Coleman: And Elizabeth, on your question around Q1. Obviously, we’re two months now into the quarter. I would say, first and foremost, we’re much more positive around Q1 than where we were just a few months ago. So the fact that we’re talking about putting up organic growth in Q1, I think, is a positive. We do expect to see really strong growth coming out of the Ortho portfolio. January was a record month for SureSmile, which was a pleasant surprise for us. So that momentum is continuing. CAD/CAM should also have a very strong quarter given where we are with the dealer inventory levels in the US, along with the success we’re seeing with Primeprint. So on the whole, we’re looking at Q1 more positively than we were, say, a few months ago with growth coming from Ortho and CAD/CAM.

Obviously, we’re still seeing headwinds in China. So we are modeling a pretty sizable decline in China in Q1, but that should improve after we get past Q1. So that’s the Q1 story. FX will be a pretty large headwind still in Q1. We modeled out right now $40 million based upon where rates are currently. On a full year basis, we expect organic growth to be down 1% to up 2% organically, again, about a full point on the top line relative to the FX headwind and EPS of $1.82. I would just say, the way we’ve modeled our full year outlook is expecting a stable environment, patient volumes to be stable. Regionally, we’ve made a number of comments in our prepared remarks around improvements we’re expecting in both China and the US, which have been big challenges for us in 2022.

So US should be up on a full year basis, slightly China flat, coming off of a quarter that’s going to be down in Q1. And then Europe should be flat to maybe down slightly and then growth coming out of rest of world when you exclude China and Latin America. So, on a whole, that’s how we see the regions playing out. And again, if you look at the portfolio, aligner should show really good growth year-over-year. Implants should be improving and CAD/CAM should be growing. So, on the whole, that’s how we’ve laid out our outlook. I would just say an important point I made, and I wanted to ensure that everyone heard it is when we look at our top line, we expect on a constant currency basis that the second half of the year will be slightly higher than the first half, which means the year is not back-end loaded in terms of the top line.

However, for EPS, keep in mind, our restructuring savings will not kick in until probably the latter half of the second quarter, which means EPS will be back-end loaded. And I would just say directionally I’d bottle about 40% of our full year EPS in the first half of the year and 60% in the back half of the year. So hopefully, that gives you a little bit of color around Q1 and our full year. Thanks for the question.

Elizabeth Anderson: Thanks so much.

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

Brandon Couillard: Hey, thanks. Good morning. Simon, on the 2025, 2026 target of $3 EPS. Just help us understand how you got comfortable putting that target out there today, especially right in front of a pretty major restructuring program.

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

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

Brandon Couillard: Excellent. And Glenn, in terms of the full year organic growth guide, can you give us any more color between the sub-segments, T&E versus consumables and what does that intend for net pricing capture for the year? Thank you.

Glenn Coleman: Yes. So I think in terms of pricing, the way we laid it out is low single-digit increases. I think it’s important to note, though, that we’re being very surgical around where we’re increasing pricing. So we’re not just doing it across the board. We’re doing it in certain regions and certain parts of the portfolio. And that’s a net number. So obviously, we’re discounting and actually reducing prices in some cases, China being one as an example and also other parts of the portfolio. So on the whole, we’re counting on low single-digit price tailwinds as we go into 2023. Keep in mind, we rolled out two price increases in 2022, so we’ll get the full year benefit of that. And we have one plan for 2023 at the moment. So that’s how we see pricing. I’m not going to give you the specifics between T&E and consumables, but obviously, we’ve been very thoughtful in terms of how we thought about price increases. Thanks for the question.

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

Nathan Rich: Great. Good morning. Thanks for the questions. I had a few on the CAD/CAM segment. Can you give a little bit more detail on what drove the growth in CAD/CAM in Q4, given the kind of relative size of the US and the tough comps there, kind of surprised that it was up, so definitely good performance. Just be curious what drove that in the quarter. On the inventory changes, could you maybe talk about what you’re hearing from the distributors on why there’s the volatility in inventory levels? And you said you expect CAD/CAM to return to growth in 2023. Is that growth excluding the dealer restocking that you expect to benefit Q1. Thank you.

Glenn Coleman: Yes. So, our performance for CAD/CAM in Q4 is almost all driven by Asia Pac. We saw really strong performance in Japan and Korea as an example. So, regionally, that’s where the growth came from. Obviously, we continue to see some progress in other parts of the world, but that’s the primary driver of growth here in the fourth quarter. On the inventory changes, I think, first and foremost, we did a really nice job to take down the inventory levels throughout 2022. So I mentioned in my prepared remarks, we were down $30 million sequentially from Q3 to Q4. On a full year basis, we were down over $60 million. So we’re actually below the levels we started the year, which is very good, which means for every retail dollar of sales, we should see a wholesale dollar sale, which we didn’t see in 2022.

So, as we move forward now, obviously, we should see better performance in CAD/CAM in the US. And we’re still cautious around the US equipment market and speaking with our dealers and seeing what’s happening in the marketplace, we’re still cautious. So I think the fact we’ve got our dealer inventory levels where they are, being a bit cautious is how we’ve laid out our guidance for 2023. But keep in mind, we do have some new products that we’ve launched in the space. We are expecting to see growth overall. And so that’s how we’ve laid out 2023. Simon, did you want to add anything?

Simon Campion: I think you covered that well. We had a strong quarter. We’ve got global execution and with our renewed focus on the US, we’re comfortable where we’re at.

Nathan Rich: Great. Thank you.

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

Simon Campion: Good morning.

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

Andrea Daley: Do we have the next question?

Operator: Yes, ma’am. It comes from Erin Wright with Morgan Stanley. Please proceed.

Erin Wright: Great. Thanks for taking the question. So on the restructuring initiative, I think you alluded to SKU count rationalization. Does that have a meaningful impact on sales? And is this something that is embedded in your guidance, both in the near-term and longer-term perspective? And will this be something you’re breaking out for us, how should we be thinking about the timing and magnitude of that. And then just on divestitures, other areas of potential divestitures outside of medical, I understand that you’re kind of limited on what you can say on that front. But also any details you can give us on the margin profile of the Wellspect business, that would be great. Thanks.

Simon Campion: Thank you for the question. So, on the SKUs, we don’t expect to execute any meaningful work on the SKU rationalization in 2023. The organization ran a SKU program a few years ago. And I think, we offset some customers and we offset some of our distribution partners. So we’re going through this in a very thoughtful manner. And so we don’t expect any changes this year, but the plans will be laid out this year, and you should expect to hear some more granularity at the Investor Day in November about that. We provided some color in the prepared remarks about the scale of some of the SKU offerings we have and their contribution to revenue. So hopefully, that provided you some additional color around there. With regard to the divestitures, we obviously considered other parts of our business, too.

But they are more consistent with our thoughts around being a dental developer and manufacturer and commercial team. So while we looked at a number of different opportunities to rationalize our portfolio, the one that we have received several inbounds about and that we’re taking along close look at right now is the Wellspect HealthCare portfolio, and there are no plans to do any further ones at. And then, Glenn?

Erin Wright: Okay.

Glenn Coleman: Yeah, yeah, I would just add just to answer your question on the profitability of the Wellspect business, it is accretive to our overall corporate average. Thanks.

Erin Wright: Okay. Thanks.

Operator: All right. We move along for the next question. Please one moment. And it comes from the line of Jeff Johnson with RW Baird. Please proceed.

Jeff Johnson: Thank you. Good morning, guys. Glenn, maybe I can follow up just on that margin accretive comment on Wellspect. We get the EPS contribution annually maybe around $0.20 or so or at least in the ballpark there. And I just want to confirm that Wellspect is in guidance in keeping that for the full year as part of the current guidance. And I guess one other question tied to that is, if you were to get a big cash infusion, whether it was for this reason or any other reason, does that go to pay down debt? Does it go as a share buyback, or do you pump that right back into maybe potentially other acquisitions to drive that top line and kind of the dental portfolio going forward? Thank you.

Glenn Coleman: Jeff, thanks for the questions. First and foremost, I would say yes, Wellspect is included full year in our numbers. And again, we’re just at this point, evaluating our options around that business. So that business is included in our full year expectations. Obviously, if the business were to be divested, we’d have to think about what to do with those cash proceeds. We’re already very low levered. So that’s good news relative to what we could potentially do. But at this point in time, we’re not going to lay out any specific plans other than we would make the most appropriate decisions around how to offset any EPS dilution relative to the transaction. Thank you.

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

Simon Campion: Yes. Thanks, Jeff. So, just a couple of points on that. I think historically, our focus on paying for growth hasn’t been what we would have liked, so our commission plan changes — our commission plans have changed to more reflect that we want to drive growth from our commercial teams. So, we’re certainly getting a lot more visibility from them to different parts of our portfolio. And the feedback we’ve received thus far on those commission plan changes have been very positive. People want to get paid when they perform. So we do expect that. In relation to our portfolio, as I noted, I think in my response to Elizabeth’s question, we are now getting visibility. We now have visibility to where we spend our dollars and what returns we get from them.

So to your point about Implants, it’s a fast-growing segment, an opportunity to differentiate ourselves where we have a sales force that is direct, then we would more likely invest in spaces like that than elsewhere. What we need to make sure is that we get the — develop products that are meaningful for our customers. I think we’ve just launched some of our taper products as well, which have resonated with customers up there. So I think we’re already doing some of the work that you’ve alluded to. And we will absolutely be reinforcing our commitment to appropriate R&D in the appropriate spaces moving forward.

Jeff Johnson: Thank you.

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

Unidentified Analyst: Hi guys. This is Tom stepping on for Jon. Thanks for the questions. I’ll start with 2023 guidance. Glenn, maybe this is for you. But how should we be thinking about T&E and consumables organic growth, I guess, relative to the total company guidance of down 1% to up 2% between Implants Ortho, it sounds like T&E will be the growth engine. But, I think it would be helpful if we could put a finer point on where that may shake out in rough terms, I guess, is each segment within the total company range, or how should we maybe think about them maybe reaching the high end and low end of it potentially?

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

Unidentified Analyst: Got it. And then my follow-up is just on the restructuring. Simon, you gave some very helpful color throughout the call. But can you maybe talk a bit more about the current restructuring and how it may be different from the prior ones for the company. I guess, what were the learnings from those that you’re trying to apply this time around? And maybe what gives you confidence this won’t potentially be more disruptive than expected, and maybe ultimately have some sort of impact on growth. Thanks.

Simon Campion: Yeah. Thanks for the question. So, we’ve been very thoughtful about this restructuring. You will have hopefully noted that we are not impacting our sales teams at all. In fact, we’re net positive on investments in our sales team globally including Europe and the US. I think the difference is, we’re here, we’re being extremely thoughtful about it. We are driving alignment between our RCOs, between the regions and the global business units. And we are giving the global business units a single voice. So communications is going to be better between the business units and the regions and decision-making and agility is going to be improved because we have — we now have more visibility to all of the financial aspects of it and we can move money around as appropriate to fund different investments either commercially or R&D or in other spaces like plan, quality and so on and so forth.

So I think it’s meaningfully different to what was done before. We — as we noted in the prepared remarks as well, I think the tone at the top is a very material change here as well. And again, in the prepared remarks, we commented on some of the feedback that we’ve received from the US commercial team, in particular, where some of those metrics have doubled in the past six months. So we are changing the tone here at the company, and we’re being transparent. We’re being inclusive. We’re driving discipline and improving process and making investments to make this company a better place to work and a better place to deliver results that you expect and that we expect.

Unidentified Analyst: Very helpful. Thanks.

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

Michael Cherny: Thank you for taking the question. I’m going to wrap a bunch of topics, I think, into one here. But as you think about the trajectory and particularly the build into that $3.26 number, I’m not looking for how you think about the revenue dynamics, but how do you think about the mix in terms of your focus on going direct versus not going direct. We heard from one of your key distribution partners yesterday about their desire to build out their own specialty business. And so how does that impact view of X-rays go-to-market strategy and what you can do to take control of more of your own destiny versus rely on your distribution partners as you think about this multi-year build?

Simon Campion: Yes. Thanks for the question, Michael. We value the partnership that we have with our distributors. They have different degrees of meaningfulness to our organization in different regions, certainly in the US they’re very meaningful, and we have begun to build, I think, constructive relationships with them. But there are certain areas, of course, where we have a direct presence, such as implants and aligners. And we do tend to see great growth from those areas. So while we have constructive and developing relationships with our distributors, it is a unique environment within that — within dental, where your partners and competitors at the same time. So we are driving transparency with respect to our thought process with our — with those distributors in the US in particular.

Michael Cherny: Got it. That’s good for me. Thank you.

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

Justin Lin: Hi. Good morning. You mentioned you had a record quarter for SureSmile. I guess, in your view, what’s driving the success beyond improving macro? And are you more so taking share or expanding the market?

Glenn Coleman: Yes. So it was a record month in January, not quarter. So I just want to be clear, January was a really strong month. But obviously, the momentum around SureSmile continues. We still think it’s a very much underpenetrated market. Aesthetics are here to stay. So those are positive dynamics. But for us, SureSmile has fewer revisions from a clinical perspective, we’re seeing high customer engagement and geographic expansion, and all of that is leading to market share gains for us. So, we had a really robust 2022 year, and we expect that will continue to see good growth, both in SureSmile and Byte in 2023.

Justin Lin: Got you. And I guess that kind of leads me to my next follow-up question, if you may. I guess more longer-term question around your Clear Aligner strategy. How do you make a more meaningful push into the Ortho channel, if that’s part of your plan at all with sort of the other portion of the business being sort of direct-to-consumer.

Simon Campion: Yes. So Byte has performed very well for us over the past two quarters. We’ve had a lot of questions on Byte and the acquisition since we joined here last September. I think, it is synergistic with our SureSmile business. It has performed very well since we’ve arrived here. We have had great customer satisfaction scores through the My Byte app, which is really resonating with them, and it’s performing well. So, we see it as a as a meaningful part of our portfolio, one that we’re being diligent around expenses on and investing appropriately and driving customer acquisition, customer conversion and trying to increase customer satisfaction scores and drive the web traffic in that manner.

Glenn Coleman: Yes, I would just add, I mentioned this in some previous discussions. Obviously, with Ortho doing much better on a top line, a big part of our margin expansion and improvement story is around the bottom line as well. And our Ortho businesses are becoming more profitable, both in SureSmile and in Byte. So that’s also very encouraging relative to how we think about 2024, 2025, getting to higher operating margins, the EBITDA margins, our Ortho business should be a contributor to that and should be a nice tailwind when we go into 2024 for sure. Thanks for the question.

Justin Lin: Thank you.

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

Rachel Vatnsdal: Hi guys. Thanks for fitting me in. So I wanted to follow up on some of the earlier questions around margin and the P&L guidance for the year. So there’s a fair amount of moving pieces throughout that P&L given the restructuring. So, I appreciate your comments on EPS being 40:60 between first half and second half. Can you give us some color on margin cadence throughout the year? Going from that greater than 15% EBITDA margins in 1Q to 18 for the year, what should we really expect from a 4Q exit rate and then I have a follow-up as well. Thanks.

Glenn Coleman: Yes, I don’t think we want to provide too much more color on margin performance. I would just say, Q1 is expected to be the lowest quarter of the year. We said greater than 15% EBITDA margins. Obviously, that would imply the back half of the year doing north of 20% EBITDA margins with Q4 exiting at the highest rate. So, I think that’s how we’ve laid it out overall. And again, for our full year, we expect to be greater than 18% for EBITDA margins. So I think that’s all the color we’re going to provide at this point. Thanks, Rachel.

Rachel Vatnsdal: Got it. And then just a quick follow-up just on supply chain and you’re off you guys play that those constraints continue. So can you just talk about what is assumed from supply chain constraints heading forward throughout 2023?

Glenn Coleman: Yeah. I think first and foremost, the supply chain constraints really surround electronics and electronic components. It hasn’t gotten any worse. It is moving in the right direction, but we still have challenges. What we assumed is things get a little bit better throughout 2023. I did mention in my prepared remarks, one of the upside possibilities we have in 2023 is seeing a better improvement than what we’re modeling. So I think I have modeled a pretty conservative view on supply chain and some of the constraints we’re dealing with. If it actually is better than our assumptions, it would lead us to a chance to overachieve. So, I think we’ve been pretty conservative in how we’ve laid that out. Thank you.

Rachel Vatnsdal: Great. Thank you.

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

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

Glenn Coleman: Thank you all.

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