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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Q&A Session

Operator: [Operator Instructions] Our first question comes from Nathan Rich with Goldman Sachs. Your line is open.

Nathan Rich: Hi, good morning. Thanks a lot for taking the questions. Maybe I wanted to start, Simon, with the transformation efforts that you talked about and where the company is making investments this year. I think the level of reinvestment of restructuring savings was a bit higher than we expected. So could you maybe just go into a bit more detail of where the most significant investments are this year? And is that something that becomes part of the run rate of the expense base? Or does that step down in future years? And sort of tied to that, if you could help us think about where the 100 basis points of EBITDA margin expansion comes from between gross margin and operating expense, that would be helpful as well.

Simon Campion: Sure. Thanks, Nathan. I’ll start and then we can hand it over to Glenn. I think as we’ve said on many occasions over the past year or so, we had disinvested in a few crucial areas in our business, namely our sales force, our commission plans and clinical education. And over the past year, we have systematically gone after each one of those and invested in them. I think the best benchmark or the two best benchmarks are the fact that we added almost 50 heads in our U.S. commercial team on implants and DSOs and also added significant investment in clinical education. And as I mentioned in the prepared remarks, we delivered over 30% more courses in 2023 than we had before. And in fact, this year, we’ll also extend the reach of DS World events.

So, they are two key areas that we’ve invested in, in addition to work on our network and other, what we would call, hygiene factors within our organization. And to give you some color on the numbers, I’ll pass it over to Glenn.

Glenn Coleman: Hey Nathan, good morning. Thanks for the question. If I look at the investments that are incremental in 2024, I would say they’re going to be part of our base cost going forward. I think first one I would highlight is the Byte investments that we’re making with the opportunity that we now see with the competitive dynamics. We’re going to be investing more in the commercial clinical support area, treatment planners and infrastructure at Byte. We already started in the fourth quarter. and we see a pretty immediate return on those investments. So, I mentioned on my prepared remarks, Byte is expected to grow over 20% in 2024. So, we’re excited about the opportunity there. We are putting more investments in 2 [ph] Byte, and we expect to see a much faster ramp, especially as we get into later in the year.

In addition, I would highlight some of the things that Simon said around our ortho business, we are investing more in SureSmile in Japan and Brazil. These are really nice market opportunities for us, we are putting more commercial resources on the ground there. Clinical education continues to ramp up for us, especially in the implants and endo side of our business. We’re continuing to advance our next-gen ERP platform. So, that will have incremental investment in 2024. And then I would just say DSOs continue to be an area of focus for us. So that’s where we’re putting our money. This is going to be part of our infrastructure going forward, but you should expect a return on these investments, some of which coming later this year and so we’re quite excited about that.

In terms of your question on the EBITDA margin expansion, I would expect about half of it coming from gross margin improvement and half coming from SG&A leverage. Thanks.

Nathan Rich: Great. If I could maybe just ask a quick follow-up, Glenn, on the comments on Byte and the reacceleration of growth there. When we think about growth in Byte and maybe just growth in Clear Aligners in general, how does your current kind of view of the demand environment and the consumer environment kind of factor into your expectations? And do you need to see any kind of improvement in the macro to kind of help fuel that acceleration in — by revenue that you expect?

Glenn Coleman: Yes. No, thanks. We are really excited about our ortho business. So, relative to Byte, we see some very good early indicators right now in terms of the revenue ramp. So that would include unique visitors that are hitting our website. That’s seen a really nice sequential improvement from Q3 into Q4. Probably the most important thing is I’m seeing significant growth in impression kits in the fourth quarter and the early part of Q1. And obviously, the conversion cycle is around 60 days, so I should start to see those conversion kits convert to revenue in the latter part of February, and I’m seeing that. And so that’s why I’m confident that these investments are good investments, they’re going to pay off in terms of faster revenue growth and why I’m talking at least 20% revenue growth on Byte in 2024.

On SureSmile, we continue to see market share gains, continue to see differentiated outcomes with our product with fewer refinements, less revisions of our product. The SureSmile simulator is also expected to drive some better growth in the SureSmile business. And so we don’t expect to see much of an improvement overall from a macro perspective, but we do see good underlying trends, both in office with SureSmile and direct-to-consumer with Byte. And Simon, maybe you want to comment on some of the really good work we’re doing on Byte plus.

Simon Campion: Yeah. So Nathan, as we’ve said, I think the last time, we rolled out a Byte Plus pilot, which is where we refer customers to a dentist. We’re now active. We extended the pilot. It started off with about 10 locations and we’re now in 25 locations. What we’ve heard anecdotally from those customers is that the patients that are filtering through to them are good candidates for orthodontic treatment. But as we hypothesized, this was also going to generate incremental traffic for these dental practices. So several of them have noted that these patients are getting other treatments aside from orthodontic treatment in their practices and they would otherwise not being a dental patient. And then just to back up on to SureSmile, again, what we’ve heard anecdotally is — with the launch of the SureSmile simulator in the September timeframe, our customers have seen an increase in their treatment acceptance rates as well when you can show a patient live, the smile that they should expect to have the dentists are saying that the treatment acceptance rate they’re suggesting is being accepted.

Nathan Rich: Very helpful. Thank you.

Operator: Our next question comes from the line of Michael Cherny with Leerink Partners. Your line is open.

Michael Cherny: Good morning. Thank you so much for taking the question. Relative to the guidance. [Technical Difficulty]

Glenn Coleman: Michael, we’re having a hard time hearing you.

Andrea Daley: Can you repeat your question, please?

Glenn Coleman: Operator, maybe we should go to the next question.

Operator: One moment for our next question. Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Elizabeth Anderson: Hi, guys. Good morning and thank you so much for the question today. I was wondering if you could help us understand a little bit more on the equipment side, what’s going on in that market. Can you talk about sort of how you’re seeing maybe volumes on the equipment side and sort of differentiate that versus price and sort of how that’s been trending recently is just sort of we just understand that trend as you move into 2024? Thank you.

Simon Campion: Sure. So I’ll start with this and then Glenn can give you some additional color. Listen, as we’ve done every quarter, we have — we completed our customer survey with over 3,500 respondents in the last quarter. And I would say, in the US sentiment has remained stable, if not a little more positive than in the past, and that goes across all dental categories. But the areas of continued pressure for us, and I would assume others or Germany and Australia around investments in capital equipment. As we’ve noted before, in the US, anything above $20,000 or $25,000 tends to be funded or financed rather by our customers, while that number is much lower in other geographies. So, continued pressure in Germany and Australia, in particular, but more positive sentiments in general in the U.S.

Glenn Coleman: Yes, I’d just add, when you look at — what I was just going to add in our fourth quarter, obviously, our CTS business was down, but we actually saw growth in CAD/CAM in certain regions such as the U.S. So, seeing some good growth in our scanners, mills, printers. Obviously, the headwind has been really around imaging and instruments, but most notably imaging. So that’s been the dynamic and why we’ve seen declines overall in our CTS portfolio. From a pricing point of view, I would just say the dynamics are customers are buying the lower end, the lower priced scanner. So Primescan Connect has actually seen some really good momentum. And so we’ve seen a bit of a mix shift relative to Primescan AC and CEREC Primescan to Primescan Connect. So it’s some of the dynamics on the pricing side.

Elizabeth Anderson: Got it. That’s really helpful. And maybe one more for you. If we think about sort of cap deployment, I understand what you said about sort of returning — more than 75% of free cash flow to investors. Is the right way to think about the dividend sort of that should grow in line with EPS growth and then sort of the rest is mostly a share repo, but obviously, you’ve talked about maybe tiny M&A? Is that like the right way to think about that sort of mix, particularly between dividends and the share repo going forward?

Glenn Coleman: Yes, it is. So we would expect to grow dividends pretty consistent with our earnings growth, which should be double digits over the next several years. So that’s the right way to think about our dividend. And then on share repurchases, we said about $600 million of share repos over the next three years. And that’s pretty consistent with our current view based upon our cash flow projections. Thank you.

Elizabeth Anderson: Got it. Thank you so much.

Operator: Our next question comes from the line of Jon Block with Stifel. Your line is open.

Jon Block: All right. Thanks guys. Good morning. First one, Glenn, this one might be for you. But the 2024 top line guidance of around 1% organic at the midpoint, give or take. Based on your comments, I’m getting almost 100 bps or maybe even a little bit more than 100 bps of growth from ortho alone, just based on how you frame SureSmile and Byte. So can you just give a few more details on the other key products? I’m guessing CTS is the biggest drag and Wellspect would be up, but maybe if you can frame some of the other key product lines as well just as you think about the various growth rates for 2024?

Glenn Coleman: Sure, Jon. Thanks for the question. I’ll keep it to the segment level. I think that’s probably appropriate. So, obviously, the fastest-growing area we would expect in 2024 is ortho and implants. I mentioned double-digit growth for SureSmile, over 20% growth in Byte. On the implant side, we expect to see really strong growth continuing in China. So I would put strong growth at above 25% in 2024. And we expect a return to growth in our U.S. implants business in the back half of the year. So ortho and implants as a segment, I would say, is going to be the fastest-growing area for us in 2024. EDS, our Essential Dental Solutions segment, I would say, nominal growth. It’s going to be really largely dependent on patient traffic.

So right now, we’re kind of modeling it to be flattish, I would say, overall in 2024. And then CTS is expected to be down year-over-year. Again, similar dynamics to what we saw in the fourth quarter and full year of 2023 where CAD/CAM should continue to grow. So scanner growth, growth in our 3D printer and Primeprint and growth in our mills, but that’s going to be likely offset by declines in imaging. And so right now, we’re not projecting any real improvement in imaging going into 2024. But overall, CTS, we’re modeling to be down year-over-year. And then lastly, outside of dental, Wellspect Healthcare should continue to put up some decent growth, I would say, mid-single digit as a low bar for our Wellspect business.

Jon Block: Okay. Great. That was a very helpful detail. And then Simon, you mentioned the SKU optimization or rationalization to start this year. I know you have past experience with big projects like that. Starting this year, how long will that go on for your thoughts around risks of implementation in terms of potential revenue leakage? And then when we tie it back to the 2024 gross margin expansion, Glenn, that you alluded to earlier to Nathan’s question, is the SKU optimization in 2024? Is that more of we’re starting this thing in 2024 and it’s more of a tailwind for 2025? Thanks, guys.

Simon Campion: Yes. So thanks, Jon. So SKU optimization, as we’ve noted before, we’re focusing on Endo and Resto. We’re targeting about 60% of our SKUs in that space. We’ve been thoughtful about this process. We’ve run a number of pilots in different geographies, and that gives us a high degree of confidence that we can execute on that. We expect benefits from it to begin to materialize at the back end of 2024 and then into 2025 and beyond. And we also intend, as we noted in the prepared remarks, to begin to look at other aspects of our portfolio outside of Endo and Resto. I think we noted at the last earnings call that we’ve stood up a team to do this work, we are working in conjunction with our countries and our regional leadership teams.

I think we — the company had done this historically in the past, but created a little visibility for the commercial teams on the ground and for customers. And we are not going to make that error again. So we’re being very thoughtful about it. Andreas, do you have any comments to add to that?

Andreas Frank: Only thing I would add is that 2024 is very much — you commented on the very broad network that we have. So we’re working across our plans to stand up some standardized processes that allow us to have visibility not just in 2024, but as we execute it into 2025 and 2026 to make sure we have some clear KPIs and forward-looking metrics. And I think the initial steps will be less visible on the commercial side, but there were also already yield benefits in terms of our inventory management as we take out none — we just simplified the portfolio by taking out non-revenue-generating SKUs and work on the back end as we get ready for 2025 and 2026

Simon Campion: Thanks for your question, Jon.

Operator: Our next question comes from the line of Michael Cherny with Leerink Partners. Your line is open.

Michael Cherny: Okay. Let’s try this again. Can you hear me?

Simon Campion: Now much better.

Michael Cherny: Okay. I’m learning the new technology here. So, thanks. You just — we’re talking about, call it, the lower end with the SKU rationalization of products. I want to touch a little bit more on the higher end. As you think about what’s baked into the 2024 guidance, how much of it is from a quasi vitality index, either some of the new, more high-end products and/or how much conversion you can have on near-term pipeline, in particular on new instrumentation?

Andreas Frank: Yeah. I think relative to the SKU rationalization optimization, there’s really no benefit baked into our cost reduction efforts in 2024. That would be more of 2025. If you’re talking about new product launches and the impact in our guidance for 2024, we have a couple of product launches in the back half of the year that we are obviously counting on to drive some of the revenue growth and obviously some of the margin improvement. Simon, you want to comment on those?

Simon Campion: And then the additional piece here around DS core, Michael, we launched that DS World 2 years ago now, almost. We added to it with the communication canvas in May of last year and the SureSmile simulator in September. We just launched some more capability around the user experience and user interface. And each time we have incrementally added or improve the user experience and added clinical functionality, we have seen an uptick in the number of accounts using DS Core. So that will continue to be central to any new product introductions or new software introductions in 2024 and beyond. And at the back end of last year, we also launched the new X-smart Pro endodontic system. We’ve had very positive feedback from customers in Europe about it, and we do expect to bring that to the US market later this year as well.

Michael Cherny: Understood and helpful. And then you talked a bit about the improvement you’re expecting to see on the US implant side of the business. As you think about what’s baked into next — the multiyear guidance into 2026, how much is that US recovery factor and a driver of the organic growth component of that multiyear contribution?

Andreas Frank: I think what we noted at Investor Day and all our hypothesis and assumptions from Investor Day across all of our businesses and margins, et cetera, remain intact. What we said was we expect to grow above the market in Aligners. We expect to grow above the market in our connected technologies in a normal macro environment. And our intention is to get back to market growth in the implants business by 2026. So that’s what’s baked into our assumptions around revenue growth and our $3 of EPS target in 2026. Glenn, do you have anything to add to that?

Glenn Coleman: No.

Michael Cherny: Thanks.

Operator: Our next question comes from the line of Jeff Johnson with Baird. Your line is open.

Jeff Johnson: Thank you. Good morning, guys and congrats on at least delivering to your targets here in a tough environment. The ability to do that is not lost on some of us who have been around for a long time with this company. I wanted to maybe stick Simon, on that 2026 topic that you were just talking about the $3 target. You reiterated in your slide deck this morning that you feel comfortable with that. Glenn, I guess when I think about the $0.13 in cost savings as you run rate — or sorry, the $0.13 in incremental EPS this year from run rating those cost savings in. Even if we assume next year, maybe that doubles or something because those are back-end loaded on the cost savings this year or something, and that’s maybe being generous.

But if we assume that, we would still need kind of your core ex cost savings, EPS growth well north of 10% and probably pushing low teens even then outside of just the cost savings over the next two years to get them to $3. So I guess help us get comfortable there, especially given where it seems as if there’s going to be a little organic growth this year and hard to know when that organic growth can pick up? Thank you.

Glenn Coleman: Yeah. Thanks for the comment. I think first and foremost, nothing has changed relative to what we communicated back in November. And where we expected to land for 2023 and our view of where we expect to land by 2026. We had indicated back in November that we expected lower growth in 2024 with a tough challenging macro environment. But we do expect to see organic growth get back to a normalized rate and growing in that 4% to 6% range starting in 2025. So that’s a key component to us getting to the $3. On the restructuring savings, obviously, we’re making a number of investments this year that’s offsetting the gross savings from the restructuring program. But obviously, a lot of these investments we’re making, we’re expecting to get returns on.

So, overall, that should help us get towards that $3 EPS target. The benefits that Tony Johnson walked through around global operations and $0.20 of EPS improvement, none of that is reflected in our numbers essentially today. So while a small amount in 2024, but most of that will come in 2025 and 2026 as we go through the plant optimization, the SKU rationalization and our distribution footprint simplification. So that’s all really in the 2025 and 2026 time frame. We’ve talked a lot about the work we’re doing with ERP. And right now, that’s an actual headwind to our costs. That will eventually become a benefit to us as we get to 2026 and can do some things around our cost structure and being more efficient once we have a common ERP platform.

And then aligners profitability was also a part of our bridge, and I feel even more confident now with our aligners profitability. Yes, we’re making some investments early in 2024 for Byte, but we really like what we see with our aligners business right now. And so overall, nothing has changed from those aspects. Below the line, we’ve got the net investment hedges that we communicated $0.07 back in November. That’s consistent with our guidance that we just laid out here, and that will continue in 2025 and 2026 to be a similar benefit for us. And then the share buyback program with the incremental cash we expect to generate will also help us get to the $3. So nothing new, Jeff. We’re consistent with our messaging from November. And obviously, getting the organic growth back to a normalized rate in 4% to 6% is going to be key for us.

Jeff Johnson: Yes. That’s helpful. Thanks to all that. And then, Simon, maybe a bigger picture question. You’re talking about EDS being flattish this year. That’s probably, I would assume, within plus or minus a few points — a couple of points of market. What was pricing in EDS for 2023? What do you think it’s going to be in 2024? And I think, even more importantly, you’re spending 4%, a little more than 4% on R&D. I would assume that a lot of that R&D is going to general consumables, but we’ve been hearing more and more from public private dealers, from even some of your core manufacturing peers that there’s been a lack of innovation on the consumables side for five, six, seven years now, and that’s allowing some of these private label products or maybe lower price branded alternatives to come in and really put pressure on the higher-end branded consumable products out there.

So how important is innovation in consumables? Do you have enough in that 4% R&D number to fund any kind of spending in that area? And how should we think about EDS maybe over the multiyear period then with those trends start to flare up maybe a little bit? Thanks.