Yahoo Finanza DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q1 2024 Earnings Call Transcript
DENTSPLY SIRONA Inc. (NASDAQ:XRAY) Q1 2024 Earnings Call Transcript May 2, 2024
DENTSPLY SIRONA Inc. reports earnings inline with expectations. Reported EPS is $0.42 EPS, expectations were $0.42. 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, everyone. And thank you for standing by. Welcome to the DENTSPLY SIRONA First Quarter 2024 Earnings Call [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Vice President of Investor Relations, Andrea Daley. Please proceed.
Andrea Daley: Thank you, operator. And good morning, everyone. Welcome to the DENTSPLY SIRONA first quarter 2024 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 Web site 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 prior year quarter, unless otherwise noted.
A webcast replay of today's call will be available on the Investors section of the company's Web site following the call. And with that, I will now turn the call over to Simon.
Simon Campion: Thank you, Andrea. And thank you all for being here with us this morning for our Q1 2024 earnings call. Today, I'll begin, as usual, by providing a summary of our recent performance, Glenn will cover Q1 financial results and the full year outlook. And I will finish by providing an update on our strategic operating plan. Now starting on Slide 3. In Q1, organic sales declined by 1.9%, driven by lower sales in Connected Technology Solutions and Essential Dental Solutions, partly offset by growth in Orthodontic and Implant Solutions and Wellspect HealthCare. Within CTS, imaging equipment experienced larger-than-expected headwinds, driven by continued unfavorable macroeconomic conditions and competitive pressure. Regionally, the macroeconomic environment in Germany remains challenging.
For the quarter, organic sales were roughly flat, excluding Germany. In April, we conducted our quarterly global customer survey covering 12 countries with nearly 1,500 respondents. Survey results indicate that in the US patient volumes are stable and dentist sentiment is relatively unchanged. In Canada, a new government health policy designed to help lower and middle-income families is rolling out in the first half of 2024, which we believe has resulted in patients delaying treatment until this benefit is in effect. In Germany, we are pleased to see procedure utilization and dentists outlook improved slightly. All other European markets included in the survey remained relatively stable. In Asia Pacific, dentists in Australia continued to exhibit more negative sentiment.
We saw mixed feedback in Japan. Although, there was a decline in patient volumes, dentists were positive around the imminent change in reimbursement for intraoral scans. Finally, in China, patient volumes are stable, but remained low compared to other markets. As we execute on our strategic objectives, it remains crucial that we consistently seek input from customers to inform our decisions so that we can validate that we are on the right path. We appreciate so many taking the time quarter-after-quarter to provide us with this substantial and valuable input. Our first quarter adjusted EPS was $0.42, which was an increase of nearly 8% and in line with our expectations despite softer sales. For the full year, we are maintaining our outlook range for organic sales and adjusted EPS, but trending towards the low end of both ranges.
We're taking a cautious stance here with the macro uncertainties that continue to impact parts of our business, most notably imaging. We're also adjusting net sales for an additional FX headwind. Though we believe these headwinds are transient, we are actively taking additional measures, such as tightening cost controls to better position us to deliver on our profitability and EPS targets for the year. We remain confident in our long-term trajectory. We have a comprehensive portfolio and are making progress on our strategic objectives. In fact, today, we announced that we plan to execute up to $150 million in share repurchases in the second quarter. Moving to Slide 4, I would like to share some select business highlights. We are advancing innovation and progressing initiatives across our business.
DS Core remains a key focus of our innovation. We are delivering enhancements and seeing strong uptick in adoption rates from new users and increased utilization rates from existing users. We also piloted DS Core enterprise with a large DSO in the US. Given the shared experience to date, we are jointly exploring increasing the scope and size of this pilot. I've already shared the dynamics impacting our imaging business. To better position our portfolio, we expanded our offerings through the relaunch of Orthophos SL, a 2D and 3D imaging line in Europe. Bringing this product line back to market broadens our imaging portfolio and provides flexibility to our customers with more options at different price points. Therefore, we believe bringing this solution back to our customers will improve performance in imaging.
Additionally, in CTS, we recently launched Axano Pure, a new treatment center with advanced features at an improved price point and Midwest Energo, a portfolio of electric handpieces. These innovations bring new efficiencies and enhanced capabilities to our customers, a continued key demand from customers captured in our quarterly survey. In EDS, we continue to roll out X-Smart Pro+ in additional markets, which included Japan in Q1. X-Smart Pro+ is an endo motor solution that enables dentists to focus more on the procedure rather than the tools. Our data shows that the motor optimizes performance of DENTSPLY SIRONA's endodontic filing systems and has differentiated attributes that sets it apart from its competition, and we are pleased with the uptake of this technology thus far in Europe and in Japan.
We also remain committed to advancing sustainability. We are a mission driven organization focused on improving health and access to care, and we are proud to partner with organizations, such as the International Association for Disability and Oral Health, who promote equitable access to high quality oral healthcare for patients with disabilities. This partnership builds upon the work we have already done in this area with the University of Pennsylvania to provide equipment for their care center for persons with disabilities, which serves several thousand patients each year. Lastly, our Wellspect HealthCare business achieved a new milestone with the validation of its emission reduction target by the science based targets initiative. We believe Wellspect HealthCare has long-standing leadership and expertise in sustainability that can benefit our entire company.
And with that, I will hand the call over to Glenn for a more detailed financial update.
Glenn Coleman: Thanks, Simon. Good morning, and thank you all for joining us. Today, I'll provide more detail on our first quarter results and an update on our full year 2024 outlook. Let's begin on Slide 5. Our first quarter revenue was $953 million, representing a decline of 2.6% over the prior year quarter. On an organic basis, sales declined 1.9% as foreign currency negatively impacted sales by approximately $7 million or 70 basis points. On a constant currency basis, sales highlights in the quarter included approximately 53% growth in China, 14% growth in our global aligners business, 9% growth in CAD/CAM and 5% growth in Wellspect HealthCare. These improvements were offset by declines in imaging equipment where we continue to experience the effects of market conditions and increased competition.
In addition, our Essential Dental Solutions segment had year-over-year declines, largely due to a tougher comp. Despite lower sales, EBITDA margins expanded 30 basis points due to restructuring savings and net investment hedges. Gross margin was flat year-over-year but improved 140 basis points on a sequential basis. Adjusted EPS in the quarter was $0.42, up 8% from prior year, largely due to higher EBITDA margins, a lower share count and a lower effective tax rate. In the first quarter, we generated $25 million of operating cash flow compared to an outflow of $21 million in the prior year quarter. The year-over-year improvement is attributed to improved cash collections and a lower build of inventory. We continue to maintain a strong balance sheet with cash and cash equivalents of $291 million on March 31st.
Our Q1 leverage ratio was 2.6 times, slightly higher than our long term targeted rate of 2.5 times. We expect leverage to increase marginally in the second quarter with a plan to end the year at approximately 2.5 times. These projected leverage ratios reflect the share repurchases that Simon noted earlier. Let's now turn to first quarter segment performance on Slide 6. Starting with the Essential Dental Solutions segment, which includes endo, resto and preventive products. Organic sales declined 5.5% due to a tough year-over-year comp. As a reminder, EDS organic sales grew 11.5% in the first quarter of 2023, which benefited from a strong rebound in patient traffic and pre-buying ahead of price increases. Shifting to the Orthodontic and Implant Solutions segment, organic sales grew 5.6% with strong growth from aligners, up 14%.
SureSmile, our professional aligner brand, grew 9% and continues to benefit from market share gains, new product offerings and differentiated outcomes. We're expanding further in certain international markets, including Japan and Brazil, which we believe will lead to continued momentum in SureSmile. Byte, our direct-to-consumer aligner brand, grew 18% over the prior year quarter. Byte growth accelerated through the period as the increase in customer interest in impression kit orders that we discussed on our last earnings call began to convert to aligner cases. Implants and Prosthetics grew low single digits in the quarter, highlighted by growth in China due to VBP and partially offset by declines in the US and Europe. Our value implant segment delivered double digit growth.
And on the premium side, the new EV family of implants and prosthetic solutions grew double digits outpacing the declines we have seen in legacy brands. Wrapping up our dental performance, CTS, our Connected Technology Solutions segment. So organic sales declined 5.7% versus the prior year quarter and was below our expectations, largely due to double-digit declines in imaging equipment. Our global CAD/CAM business was a bright spot and grew high single digits driven by increased demand in the US. Moving to Wellspect HealthCare. Organic sales grew about 5% with sales growth across all regions as we continue to benefit from new products launched in the last 12 months. We expect Wellspect to grow faster in the second quarter with high single-digit growth over the prior year.
Now let's turn to Slide 7 to discuss first quarter financial performance by region. US organic sales grew 1.4% due to strong growth in aligners and CAD/CAM, partially offset by lower sales of imaging equipment as well as a tougher comp in EDS. US CAD/CAM had a strong quarter with double-digit growth in intraoral scanners, mills and 3D printers at both the wholesale and retail level. Distributor inventory levels increased sequentially by approximately $9 million, consistent with normal seasonality. We expect US CAD/CAM distributor inventory levels to fluctuate quarter-to-quarter and be roughly flat by the end of the year compared to current levels. Turning to Europe. Organic sales declined 5.8%, primarily due to lower Essential Dental Solutions and Equipment and Instruments’ volume across the region.
This decline was partially offset by SureSmile, which grew over 20% in the region, highlighted by higher demand in Spain, France and Italy. Germany, our largest market in the region, was down double digits versus the prior year quarter. We continue to see prolonged recessionary trends in Germany, largely affecting our equipment business. Excluding Germany, Europe organic sales declined 1.9%. Rest of world organic sales were approximately flat in the quarter, a significant implants growth in China was offset by softer demand for equipment in Japan and Canada. With that, let's move to Slide 8 to discuss our updated outlook for 2024. We're lowering our reported sales range by $50 million to reflect the additional FX headwinds due to the recent strengthening of the dollar versus the euro and other major currencies.
At current FX rates, we now expect reported sales to be within the range of $3.91 billion to $3.97 billion. We are maintaining our outlook range for organic sales, which is for flat to 1.5% growth, but trending to the low end of that range based on our first quarter results and the current macro environment largely impacting our imaging business. Our current outlook assumes strong organic sales growth in the second half of the year, primarily driven by double-digit growth in aligners, strong CAD/CAM demand and improvements in EDS and US implants. Moving to profitability. Our outlook for adjusted EBITDA margin of greater than 18% remains unchanged from our prior guidance. Adjusted EPS is trending towards the low end of the outlook range of $2 to $2.10 due to the lower sales expectations.
Consistent with the trends we saw in the first quarter, we expect that second quarter organic sales will decline low single digits versus the prior year period. We also expect about a $20 million headwind from foreign currency. Sequentially, reported sales are expected to increase in the second quarter based on normal seasonality. We anticipate second quarter adjusted EPS will be down slightly year-over-year, primarily due to a higher tax rate, partially offset by a slight improvement in adjusted EBITDA margin. With that, I'll now turn the call back over to Simon.
Simon Campion: Thank you, Glenn. Moving on to our strategic update on Slide 9. On our last earnings call, I shared the progress we plan to make in 2024 on our foundational initiatives, including supply chain transformation and SKU optimization. We expect these programs to contribute meaningfully to enhancing and sustaining profitability over the long term. We are actively executing each initiative with financial benefits expected to begin in the second half of 2024. We expect that accelerating enterprise digitalization will enable both our customers and our organization to benefit from digitalizing and harmonizing workflows. I already shared the uptick in DS Core adoption rates, which includes both dental practices and labs and which we believe reflects the value it can bring.
The new products in our pipeline with expanded connectivity will further enhance the value of embedding DS Core in digital workflows. We've heard firsthand that customers appreciate the workflow efficiencies that we envisioned with this unique, differentiated and unifying platform. We expect our ERP modernization to also play a part in accelerating enterprise digitalization. It is more than a system rollout. It is a true business transformation. Through our phased approach, we plan to transition each country to a single commercial entity, enabling consistent business processes and implementing a range of enhancements to simplify how we conduct business with our customers, improve our operations and accelerate our innovation. We are currently piloting this rollout in several locations with phased deployments expected to start midyear.
Lastly, on enterprise digitalization, we are also advancing our data and AI strategy. We are leveraging the expertise of a leading cloud service provider that supports our digital platforms. We expect this important work will improve our customer experience and increase efficiency as we implement our new ERP and bring more functionality to DS Core. Next, let's cover our progress on our objective to win in high-growth categories such as ortho, implants and continence care. In ortho, we have invested in SureSmile reps in Japan and frontline support for Byte. We are already seeing the growth in Byte with sales increasing nearly 18% in Q1 and we expect more than 20% growth for the full year. Byte Plus, our hybrid solution with in-office scanning and connectivity, also continues to expand and has now moved from pilot phase into commercial launch.
Feedback has been positive and the business is exceeding its KPIs on this initiative as we continue to ramp the model. SureSmile remains on track to launch in Brazil in the second quarter. We believe this is an important market to further drive geographic expansion in this business. In the US, we have invested in our implants business, expanding the team and enabling them with tools, trainings and growth orientated compensation plans. Implants in China has been a bright spot for our business with the first year of VBP exceeding our expectations. While we expect the program to continue to result in increased volume, we anticipate growth rates in China will moderate for the remainder of the year given the tougher comps. We are also investing in capacity expansion for our Wellspect HealthCare business to support the growth in vision from new product launches.
The business delivered mid single-digit growth in Q1. And with its innovation pipeline, we expect the momentum to continue through the remainder of the year and beyond. Lastly, supporting our ability to drive a high-performance culture, we started this year off with well-defined strategic and operational goals. We set clear 2024 KPIs across the company to monitor progress and drive performance. We believe this rigor will enable us to make better decisions as we navigate the dynamic external environment. Moving to our final slide. I would like to reinforce a few key points. First, I want to reiterate that fulfilling our commitments is essential. In Q1, we delivered nearly 8% adjusted EPS growth despite softer sales. While we see this as a positive, we know it is only part of what we need to deliver on.
And as such, we remain focused on achieving all of our commitments. Second, we have and will continue to take proactive steps to improve our competitive position, like our global investments in our aligners business and the reintroduction of the Orthophos SL imaging line. In addition, we're continuing to put additional measures in place to improve cost and efficiency. To that point, our strategic initiatives remain on track. We have a clear strategy, detailed plans and well-defined KPIs that we watch closely and refine as needed. As we execute these initiatives, we believe our business will be better positioned for profitable growth as laid out in the schedule shared at Investor Day in a more normal macro environment. And with that, let's now open it up for questions.
Operator?
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