Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Dentsply Sirona Inc (XRAY, Financial) reported strong cash flow in Q2, resulting in over $100 million in cash becoming available.
- The company plans to return approximately $380 million to shareholders this year through share buybacks and dividends.
- Organic sales growth was achieved in three segments: essential dental solutions, orthodontic and implant solutions, and Wellspect HealthCare.
- Double-digit growth was observed in aligners and Wellspect HealthCare.
- The company has identified $80 million to $100 million in annualized structural and operational synergies, incremental to their recently completed $200 million restructuring program.
Negative Points
- Q2 revenue of $984 million was unfavorably impacted by lower sales in the connected technology solutions segment.
- Capital equipment continued to experience pressure due to macroeconomic conditions, pricing degradation, and weaker than expected performance in certain major markets.
- The company revised its full-year outlook based on first-half performance, FX, evolving market dynamics, and continued macroeconomic headwinds.
- EBITDA margins contracted by 30 basis points, mainly due to a decline in gross margins driven by lower volumes, pricing, and unfavorable product mix in the CTS segment.
- The company expects prolonged macroeconomic challenges, particularly in markets like Germany and Australia, as well as higher interest rates persisting across major markets including the US.
Q & A Highlights
Q: Can you discuss the macroeconomic conditions impacting your business segments and the outlook for the second half of the year?
A: The macro environment remains challenging, particularly for our equipment segment, with significant pressure in markets like Germany, Japan, Australia, and the U.S. While patient traffic for consumables has been stable, there has been a decline in specialty and elective procedures such as aligners and implants. We do not see a worsening trend but expect the equipment market to remain challenging through the second half of the year.
Q: What are the key factors needed to achieve the 2026 EPS target of $3, considering the current macro environment?
A: Achieving the $3 EPS target assumes a more normalized macro environment, which we have yet to see. We are balancing our efforts between aiding our path to the target and investing in transformative initiatives such as orthodontics, inside sales teams, e-commerce, and organizational streamlining. We are confident in our ability to deliver on the two-thirds of the EPS bridge that are within our control.
Q: Can you provide more details on the non-renewal of the equipment distribution agreement with Patterson Companies?
A: The non-renewal is specific to Patterson in the U.S. and Canada. We hope to reach a new agreement that reflects the current environment and the value we bring. The current contract remains in effect for the next 12 months, and we will continue to partner with them. This decision does not affect our consumables distribution through Patterson.
Q: How do you plan to achieve the EBITDA margin improvement in the second half of the year?
A: We expect sequential improvement in EBITDA margins, reaching around 18% in Q3 and about 20% or higher in Q4. This will be driven by lower operating expenses from our restructuring efforts and slight improvements in gross margins. The full benefit of our cost reduction actions will be realized in the second half of the year.
Q: What is the outlook for the Connected Technology Solutions (CTS) segment for the rest of the year?
A: We expect CTS to be down low single digits in the second half, an improvement from the first half. Factors contributing to this include retail demand for imaging, the relaunch of OrthoFlo SSL in Europe and Asia, a new product launch, and favorable reimbursement trends in markets like Japan. We also anticipate momentum from our DS World event in September.
Q: Can you elaborate on the pricing dynamics and volume trends in your equipment segment?
A: We have seen pricing pressure in our imaging business, offset by stable pricing in our Essential Dental Solutions (EDS) portfolio. The volume shift towards lower-priced products like Primescan Connect has impacted revenues and gross margins. Overall, pricing has had a neutral effect, but the mix shift has influenced top-line performance.
Q: How are you addressing the legislative changes impacting your direct-to-consumer aligner business?
A: We have invested in government relations to help states understand the direct-to-consumer aligner process and adjusted our internal processes to comply with new regulations. The Bite Plus model continues to gain traction, and we are mitigating the impact of these changes. The growth rate adjustment reflects the additional steps and costs imposed by regulations, not the product quality.
Q: What are the expected savings and charges associated with the new restructuring program?
A: The restructuring program is expected to deliver $80 million to $100 million in savings over 12 to 18 months, with most benefits realized in 2025. We anticipate around $40 million to $50 million in charges. The savings will be used to drive towards our $3 EPS target and reinvest in growth initiatives.
Q: How do you plan to target the orthodontic channel with your clear aligner offering?
A: While we continue to see runway in the GP channel, the majority of volume is in the orthodontic specialty space. We believe we have a compelling technology and software offering for orthodontists. We plan to invest in more feet on the street to target orthodontists and get our aligners on their formulary, providing them with a choice of high-quality, easy-to-use aligners.
Q: What is the impact of potential interest rate cuts on your business?
A: It would likely take multiple rate cuts to see a meaningful improvement in our business. Lower interest rates would boost consumer confidence and patient traffic, leading to increased demand for consumables and capital equipment. Innovation and new product launches could also drive demand in a lower interest rate environment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
