DENTSPLY SIRONA Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Dent Supply 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. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to do so, so this conference call is carried. Dixon, you may begin.

Thank you, Operator, and good morning, everyone. Welcome to our fourth quarter 2020 Earnings Conference Call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsupplyserona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we 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 recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. In today's conference 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'd like to now turn the call over to Don Casey, our Chief Executive Officer. Don?

Thank you, Carrie, and thank all of you for joining us this morning. I hope you're all safe and well. It's hard to imagine that a year ago, on this call, we first started discussing the COVID-19 pandemic. And as we enter 2021, it is still a challenge that creates some level of uncertainty. But over the course of the year, there have been many lessons for Dentsply Sirona and the experience has hopefully prepared us for the coming year and beyond. As we provide a final look at 2020, a few things really stand out. The first is the resilience of the dental market and how committed the dental community is to serving their patients. The second is how strong the underlying Dentsply Sirona business is. This is illustrated by the improvement in our results over the last two quarters. Learning new and different ways to do business has been another key lesson. whether it was a virtual DS world, creating digital KOL forums, or having our global R&D teams collaborate without physically being together. There is vital learning here that we will apply going forward. And finally, we have always talked about how our people are our most important asset. Well, 2020 certainly highlighted that. Every day, our team stayed focused on our customers and their patients, despite dealing with professional and personal challenges that we all face during the year. I want to thank them for their commitment and professionalism. Moving on, today we want to cover four things. The first is our fourth quarter results. After that, we will provide some guidance for 2021, and we will then provide some perspective on our priorities going forward. And we will finish with a discussion around our ESG plans. Moving now to slide six. We were pleased with our performance in the fourth quarter. Revenues were $1.1 billion, down 3.3 percent on an organic basis. This is a sequential improvement versus quarters two and three and reflects a gradual recover in the dental market. In the fourth quarter, we remain disciplined around spending, and these cost containment efforts help deliver a solid margin performance. Operating margin reached 23.2%, up 320 basis points versus a year ago. This results in an adjusted non-gap EPS of 87 cents, up 19.2% versus the prior year. Other actions taken by the team helped generate healthy cash flow from operations of $263 million. To provide the details of our performance for the quarter, I will now turn the call over to Jorge.

Jorge Mancilla- Thank you, Don, and good morning. In the fourth quarter, we delivered strong results and exceeded our internal expectations in many categories. The steps we've taken to improve our business continue to generate positive financial outcomes despite the difficult environment created by the evolving global pandemic. Sequentially, during the fourth quarter, we deliver improvements on almost every key financial metric versus the third quarter. We capitalize on the gradual recovery in customer demand and commitment to cost discipline across the enterprise. While we remain cautious, our fourth quarter performance is giving us good momentum going into fiscal 2021. Let's look at Q4 in more detail. Organic revenue decline of 3.3 percent versus last year was an improvement sequentially as compared to the 8.8 percent decline experienced in the third quarter. Consumables posted organic growth of 1.1 percent in the fourth quarter versus last year. We deliver strong consumables growth in Europe and the U.S., upset by declines in other geographies. As expected, Technologies and equipment organic sales declined 6.2% versus last year, primarily as a result of the difficult comparison for the CAD CAM business relative to Q4 2019. Gross profit was $613 million, or 56.7% of sales, a better-than-expected outcome given this quarter's lower volume levels as compared to last year. the gross margin reduction was primarily due to the lower sales levels and negative absorption. It was partially upset by productivity and cost savings initiatives. SG&A decreased 58 million, or 13.8 percent, versus the prior year. SG&A, as a percent of sales, declined 430 basis points year over year. The reduction in SG&A reflects volume-related decreases and improvements in productivity and operational agility. Examples of volume-related expenses include travel, commissions, advertising, and promotions. Also, we have been very prudent with non-essential and discretionary spending categories. Operating profit grew over 13 percent to $251 million versus last year. It represents a margin expansion of 320 basis points to 23.2 percent. Our margin rate benefited from strong consumable sales and, as just mentioned, the impact from permanent, discretionary, and volume-related spend reductions. Also, keep in mind that the typically strong Q4 sales volume creates significant operating leverage that enhances margin. The results from the actions taken during 2020 give us confidence to expand are investments in R&D and customer experience to deliver sustainable growth. I will refer to these investments later in my presentation. Moving on, net interest and other expense increased $5 million, reflecting higher levels of debt versus last year and the closing out of certain net investment hedges. The non-GAAP tax rate in the fourth quarter was 21%. a decrease compared to 25.1% in the prior year, which was a function of the changes in the U.S. versus non-U.S. pre-tax income mix. This lower rate added approximately 5 cents to fourth quarter 2020 non-GAAP EPS as compared to last year. Non-GAAP EPS was 87 cents, up 19.2% versus the prior year quarter. Moving on to fourth quarter consumables segment results. We are pleased with the consumables business performance in the fourth quarter. Organic sales were $449 million, an increase of 1.1% versus the prior year. Growth was strong in Europe and the U.S., partially upset by a decline in the rest of the world. Sales in restorative and preventive. show a strong organic growth upset by a decrease in lab. Our efforts on retail-focused programs is a driver of improved consumable sales performance in the U.S. We are gaining traction on the execution of initiatives such as the shift in promotional strategies to strengthen relationships with dentists, delivering clinically relevant products with strong incentives. Moving on to technologies and equipment performance. Heading into the fourth quarter, we indicated a tough comparison in this segment versus the prior year due to many factors, including DS world sales, the prime scan upgrade cycle, and the uncertainty from COVID. As expected, technologies and equipment organic sales declined 6.2% versus the prior year, but grew sequentially from Q3 2020 to Q4 2020. Within this segment, our clear aligners and healthcare businesses performed very well during the quarter. Of note, our team was able to transition the DS World event into a fully interactive virtual experience in Q4. Although we are pleased with the results of the virtual DS World event and the strong participation, we have announced our intention of returning to a hybrid live event in 2021. On slide 11, you can see our financial performance by region during the fourth quarter. U.S. sales of $359 million declined 8.7% compared to the prior year. Organic sales declined 7.3%, driven by CAD, CAM, and imaging. European sales were $448 million, up 3% compared to the prior year. Organic sales increased 0.4%. Strong growth in consumables was partially upset by the COVID-19-related impacts on technologies and equipment. Rest of the world's sales were $275 million, down 2.8%. The South American market continues to experience COVID-related declines, especially in Brazil. Moving on to cash flows. In the fourth quarter of 2020, we had a strong operating cash flow of $263 million, bringing the full year 2020 cash flow to $635 million. Full year 2020 delivered $548 million of free cash flow, an increase of 7% versus last year. We returned a total of $228 million to shareholders through dividends and share buybacks and deployed $1.1 billion to fund acquisitions. The company finished 2020 with strongly credit available, comprising $438 million of cash and committed credit facilities of another $1.1 billion. Now let me provide an update on two strategic initiatives we discussed in prior quarters. First, we completed the actions required to exit the traditional ortho and the analog lab businesses as planned. Both businesses accounted for approximately $175 million of sales in 2019. These exits enhance our ability to focus on growth areas. Second, we remain on track to achieve our long-term cost savings objective of $250 million. We deliver another $70 million of savings in fiscal 2020. That brings the total cost savings to $160 million since the announcement of the restructuring in 2018. Consistent with the plan, we expected restructuring to cost a total of $375 million. To date, we have spent approximately $310 million, $120 million of which is non-cash. Before we turn the page into 2021, I want to take a moment to thank every single associate at DEN Supply Sirona for the tremendous commitment to deliver results under very difficult circumstances during 2020. Now, let me turn to our financial expectations for 2021. We are monitoring the markets where we operate very closely. Our research indicates that the gradual rate of recovery in dental appears to continue. Dentist offices remain open. Importantly, patient confidence is improving with the vaccine rollouts. However, COVID-19 continues to represent a lingering uncertainty. which makes median to long-term planning very difficult. After thoughtful consideration and acknowledging the level of difficulty to forecast accurately in the current environment, we have decided to share our key planning assumptions for fiscal year 2021. We're optimistic about the long-term prospects of the dental industry. There are several categories with high growth profiles while others are more moderate but with great cash flow. The intrinsic resilience of the dental category provides some stability in the short term and the possibility of a stronger demand in the second half of 2021 relative to the first half. We are expecting fiscal 2021 reported sales to be in the range of $4 billion to $4.3 billion. range equates to a reported sales growth rate of approximately 20 to 30 percent. From an organic sales perspective, the range provided equates to an organic growth rate of approximately 15 to 25 percent. The difference between reported and organic sales is primarily explained by the acquisitions of byte and datum, the disposition of traditional ortho, analog lab, other smaller portfolio shaping activities, and FX. The recovery of the dental market and the success of the vaccine rollout will influence to a large extent at what end of the range we deliver results. As communicated in January, we expect our clear aligner business to reach an annual run rate of $300 million by the end of 2021. We're excited about the growth contribution of this franchise going forward. We plan to increase our investments related to strategic growth initiatives. Targeted R&D investments are increasing to approximately 160 million in 2021. Other areas of significant investments not reported in R&D include clear aligners acceleration, e-commerce, and other digital platforms. On the SG&A front, Byte and Datum combine contributed approximately $90 million in incremental SG&A in 2021. Operating income margin for 2021 is expected to be 20% or higher, with a stronger performance in the second half of the year. Our margin expansion remains steady, and we continue to aim for 22% operating profit margin by the end of fiscal 22. We expect a non-GAAP effective tax rate to be between 23% and 24%. Our estimate for share count is approximately $221 million. That brings our non-GAAP EPS expectations for 2021 to a range of $2.60 to $2.80. Our capital expenditures estimate for 2021 is $160 million. Despite the near-term challenges presented by COVID-19, we are mindful of the targets we set, and we remain focused on achieving our 2021 objectives and expect to remain on track to reach our longer-term targets. Before I turn the call over to Don, I want to make a comment about the first quarter of 2021. Please remember that the first quarter of the fiscal year has been historically the lowest quarter in sales, and consequently, Operating income margin has been several points lowered sequentially. We expect that trend to continue this year. This seasonality effect is factoring to our planning assumptions for the full fiscal year. With that, I will now turn the call back to Don.

Thank you, Jorge. And we will move to slide 14. To give additional perspective on 2021, it might be helpful to provide some detail around our strategy and operating priorities going forward. Moving to slide 15. Over the past two years, the company has focused on delivering against the restructuring outlined in late 2018. Despite the pandemic, Dentsply Sirona has made solid progress across most areas against the goals outlined in that restructuring. The plan was built around improving growth, driving margin, and simplifying the organization. And while there is still work to do, our leadership team is committed to meeting those goals in the original timeframe. As we get toward the conclusion of the restructuring, though, it now becomes important to lay out a strategy for how we will grow DensPly Cerone in the future. As we have refined our growth strategy over the past few years, it is important to recognize that the dental market continues to evolve. Increasingly, our customers are looking for comprehensive solutions and improved workflows that deliver better patient outcomes and improve the financial health of their practices. DensPly Cerone is uniquely suited to deliver this for our customers. Our company has an unmatched installed base of digital dental products, including both digital impressions and a complete range of x-ray imaging products. We have deep expertise in treatment planning and workflow management. And Densply Sirona has a full portfolio of essential consumer products that are critical components of many procedures. Putting all this together will distinguish us going forward and provide sustainable differentiation. For 2021 and beyond, our operational priorities will remain consistent around delivering growth, improving margin, and building a scaled, efficient company. Specific targets include organic growth of 4% to 5% plus going forward. As Jorge said, we are committed to improving our margin, achieving our 22% goal by the end of 2022. And our efforts around organization simplification will allow us to deliver the cost-saving target of $250 million through the end of the restructuring plan. Doing all this will allow us to target double-digit adjusted EPS growth and create sustainable value for our shareholders. Moving to slide 16, let's look at these priorities in more depth, starting with growing revenues. As I mentioned earlier, Dentsply Sirona is well-positioned going forward to grow our revenues through a combination of organic and inorganic opportunities, all built on a foundation of global commercial excellence. Starting with organic growth, Over the last three years, the company has made significant improvements to our R&D program. Major changes have involved implementing a portfolio management approach to allow us to maximize the impact of our spending by focusing on fewer, bigger products in essential areas. A second major shift is having our innovation efforts focus on procedures rather than products. This aligns us with how our customers think and will allow us to offer more comprehensive solutions. And as those changes have become more ingrained and show promise for the future, in 2021, we are increasing our investment in R&D significantly. This is highlighted by the creation of a new consumables innovation center to be opened this year in Charlotte. As you can see on slide 17, despite the pandemic, Dentsply Sirona was able to continue accelerating our new product activity. We've been pleased with the response in particular to Axios, Prime Mill, and Shorefill One. Looking out to 2021, we are excited about the portfolio we will be bringing to the market, including important new introductions in the endo and implant areas. Moving now to slide 18. In addition to our investment in organic programs, when appropriate, we will look to acquisitions to support critical growth priorities like clear aligners and implants. As we announced in early January, Dentsply Serona acquired Byte, a direct-to-consumer clear aligner company. It has been great to welcome this outstanding team to Dentsply Sirona. The acquisition gives us significant scale in the critical clear aligner market as well as important new capabilities. These capabilities include the ability to communicate directly with patients. We believe it will be important for Dentsply Sirona to help generate patient traffic for dentists across multiple procedures in the future. This business carried good momentum from the fourth quarter into the new year, and the integration of the BITE business is on track. As we mentioned earlier, we believe that we will exit 2021 with $200 million-plus run rates. And as Jorge has mentioned, combined with Sure Smile, our Clear Aligner franchise is expected to achieve a run rate of $300 million by the end of the year. The deal is expected to be accretive to our long-term financial targets and non-GAAP EPS in 2021. Moving to slide 19, in late January, DensPly Siron acquired Datum, an Israeli biomedical company, for a little over $100 million. Datum expands our biomaterial portfolio with the Osix brands with its GlyMetrix technology. The implant category has been shifting to meet the patient need for fewer visits and more rapid results. This has led to an expansion of procedures using immediate load implants. In these procedures, bone growth factors like Osix can provide important benefits. We believe this acquisition gives Dentsply Sirona a terrific brand with an excellent technology that will help improve our performance in the implant category. Moving to slide 20, over the past 15 months, the company has also made major efforts to improve our global commercial capabilities. These have included pursuing a comprehensive sales effectiveness program in multiple countries. We have also shifted our promotional spending to focus more on programs like 1DS that creates demand at the retail level. The team has also enhanced our digital clinical education capabilities, and we reached over a million visitors this year. All of this has improved the effectiveness of our global commercial capabilities. Now on slide 21, along with driving revenue growth, the company is focused on improving our margin in multiple areas. One highlight that has been discussed is spending discipline. Our team has shown steady progress in this area over the last few years. but the pandemic has shown there are new, more efficient ways to manage the business. It's important to apply the lessons learned in 2020 going forward. Our supply chain has made excellent progress across the board, highlighted by reducing our manufacturing footprint from 42 facilities in 2018 to 29 now. There has been strong progress in SKU rationalization and inventory management. Yet even with this success, there are still opportunities in several places as we get better using our scale in areas like procurement and logistics. And finally, we remain committed to portfolio management. The exit of the traditional ortho and analog lab businesses has helped simplify the organization and improve both margin and operating efficiency. This will remain an important part of our discipline around margin improvement going forward. Moving now to slide 22. We believe a key ingredient of a successful business strategy going forward is to establish a comprehensive framework to manage ESG objectives. A strong ESG program can facilitate top-line growth and reduce cost. It can contribute to reducing legal and regulatory risk while improving employee engagement. As a result, getting ESG right has become a business imperative for Dentsply Sirona. As a global leader in the dental health segment, we are striving to become an ESG leader as well. ESG objectives are aligned with our purpose and mission of improving access to quality healthcare globally. Every day, the almost 15,000 employees of Dentsupply Sirona work to improve the lives of people all around the world, including the communities we serve, while continuing to deliver value for our shareholders. We will achieve this by investing in our people as well as leveraging our R&D and innovation capabilities to leave a lasting impact on society. While Dentsply Sirona has always had multiple activities in this area, we felt it was time to create a more comprehensive framework to measure ourselves and communicate our results. Last year, a cross-functional ESG committee was established composed of our most senior leaders. This team is tasked with developing the necessary internal controls, data management, and frameworks for ESG reporting. In addition to the senior leaders, we have added internal subject matter experts, outside resources, and consult regularly with companies' advanced in ESG practices. The committee is in the process of developing an ESG implementation plan with specific objectives, and we look forward to sharing the plan and our progress going forward. Moving to slide 23, in conclusion, there's still uncertainty around how the pandemic will impact 2021, but we feel absent a major setback, the dental market will improve throughout the year. Our solid results in the fourth quarter have shown the resilience of our underlying business and the commitment of our people. While we are cautious around 2021, we expect to see improvement as we go through the year. We believe that Dentsply Sirona has a clear strategy and is well-positioned to drive revenue, improve our margins, and deliver sustainable value for our shareholders. And with that, I will now turn the call back over to Carrie.

Thank you, Don. Operator, we will now open for questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Nathan Rich with Goldman Sachs.

Hi. Good morning. Thanks for the questions. Don, maybe starting on the guidance, you know, the revenue range is kind of back in line with 2019 levels. I know your business has a lot of moving pieces with kind of the M&A and the decisions to exit, you know, the traditional ortho and lab businesses. So I guess just at a high level, you know, could you kind of talk about what your expectations are for the market relative to 2019? And then, you know, when you look at kind of the composition of your portfolio, how would you kind of expect to perform relative to the market?

Yeah, thanks, Nate. You know, it's interesting that what is the relevant comparison? Is it 19 or is it 20? You know, look, with the pandemic still lingering, you know, through this quarter, and while we're optimistic about vaccines, you know, we think that there's still going to be an impact that we'll see in our business in places like Latin America and others. So, you know, we're kind of really looking at the guidance versus 2020 as kind of the relevant discussion. You know, look, in terms of what we expect, you know, over the course of the year, we see a gradual improvement. You know, if you look at the ADA surveys and a lot of our survey work, you know, you see particularly like in the North American market, we think offices are operating 80%, 85%. You know, there's been some compensation on the part of the dentist by looking at higher value procedures, so revenue has stayed up. We've actually seen, in some cases, dentists beginning to add fees for PPE to compensate for that. But our expectation, based on our tracking studies that talk directly to patients, we see patient optimism starting to increase, and we think that will manifest itself kind of gradually over the course of the year. So, you know, we think the exit rate for the total category in the back half of 2021 will be better than the front half. Just in terms of, you know, how does our portfolio stack up? You know, Nate, look, I think other people are better qualified to answer how, you know, different people's portfolios are going to stack up. I would tell you this as we kind of look at it. You know, we start with our strategy, which we really, you know, think, you know, let's think about workflows and what workflows are important to us. Clear aligners is clearly an area that we've spent a lot of effort on, and we obviously feel very, very good about that. You know, if you look at the implant and endo procedures, you know, we believe that we have a good formula for growth right now, and I mentioned in my prepared remarks that we anticipate some launches in the back half of of 2021 that should accelerate momentum. Stuff like datum, you know, we believe gives us a reason to really go in with new news in the implant market. And in terms of consumables, you know, look, some of that's going to be directly related to how fast, you know, kind of rest of the world comes up. As you know, Nate, our portfolio is not really heavily focused on PPE. You know, we tend to think much more around like the resto, endo, and lab businesses, which are, you know, some of that's a function of what are we able to do competitively to gain share. We feel that we've been very competitive in the fourth quarter. And look, as the market comes back, particularly on a global basis, we're optimistic that we're going to see some improvement there. You know, the last issue, we really have spent a lot of time over the last year shifting our promotional strategy, which is really very much more focused on retail and how do we drive retail consumption at the dentist office level. So, you know, that's one of the last reasons we feel that there's going to be, you know, continuing improvement over the course of the year around our consumable business. So I hope that's helpful.

Yeah, thanks, Don. I appreciate the call. If I could just ask a quick follow-up on the T&E segment. Sure. You said that it got better sequentially. I wonder if you could comment specifically on the digital equipment piece, how that performed relative to your expectations, and just how you feel about kind of the level of demand you're seeing in early 2021 as you think about your expectations for the full year.

Yeah, Nate, and in both mine and Jorge's prepared remarks, we talked about, you know, look, 2019 was a big comp coming off the fourth quarter. I mean, basically you were in full in the critical North American market. You were in the middle of a prime scan upgrade, and you launched Prime Mill, and we had the 1DS program. So we knew that was going to be a pretty steep hill to climb. Relative to our expectations, you know, particularly without having a live DS world, the T&E segment actually performed pretty well. And, you know, as we look out through the first quarter, now let's remember the first quarter for us typically is slow. It's the smallest quarter over the course of the year, and obviously T&E is a big part of that. But I would tell you the thing that has impressed us is that the, you know, if you really go back to the second quarter, I think in the North American European markets in particular, the dentists really were kind of, okay, what are, you know, when the pandemic hit, kind of eases up, what are we going to do? And we've seen a lot of dentists that have really taken a step to say, hey, look, I want to get into implants. I want to do more clear liners, which requires them to kind of up their diagnostic game, whether that's through like more 2D, 3D cone beam, or whether that's, you know, getting what we think is a best-in-class scanner with PrimeScan. And we've seen underlying demand pretty good. I mean, if you actually... One of the reasons we say that is if you look at how North America performed comparative to Europe on some of the CAD CAM and the CEREC businesses, where you didn't have the impact of a DS world, you saw what we think was pretty solid demand for T&E. And we feel as we come into this quarter, we're not getting ahead of ourselves, but we feel that underlying demand interest in our products has been pretty good. And, you know, with Prime Mill now coming, you know, we feel that we've got a pretty winnable portfolio.

Great. Thanks a lot. Our next question comes from Glenn Santangelo with Guggenheim Securities.

Hi, yeah, good morning. Thanks for taking my questions. Hey, Don, I just want to ask the market growth question maybe another way. you put up consumables, organic consumables, just over 1%. And what we're having, we're having a difficult time sort of reconciling that against these ADA surveys. And so when you sort of look at the numbers in the fourth quarter, now you have the luxury of sort of seeing January and February of this quarter before we hit these easier comparisons. You know, is it fair to say that the market is now growing year over year? And I appreciate your comments. You said that there was a shift in promotional strategies. So could you just help us put maybe the market growth in context?

Yeah, you know, Glenn, first, thanks for the question. Look, the consumable market is kind of hard to parse apart because, you know, there's not a clean comparison as what is consumables because you've got some people who report, you know, big PPE numbers and whatnot. You know, when we talk about consumables in us, it's really about like resto, lab, and endo. for us. And, you know, what we saw was in the fourth quarter, we had a good performance in the U.S. in particular, and we think that's been a result of a lot of the work that we had been doing around the promotional strategies. You know, we're not quite as exposed as some of our other competitors may be to areas in Asia Pacific that have returned from the pandemic a little bit faster. So in all, we were pretty happy with how consumables performed. Now go below that a little bit. And it was really funny, if you go back a year on this call, because we report relatively late in the cycle, we were really the first people that were talking about an impact on coronavirus in the dental category. And one of the things we said is, as dentists started heading into that kind of March uncertainty and April uncertainty, the easiest spigot to turn off was consumables. Hey, we're not going to build inventory there. And we do think that while the ADA is saying 80-80, you know, 80-plus, we do think that there was some benefit to not only the things we were doing, but there was some restocking as traffic begins to return to somewhat more normal levels. And then, look, the promotional programs, you know, we've said this, and, you know, I wish it was easy to just do that all in one quarter, but as we roll our promotional strategies around 1DS and other things around the world, basically what we're saying is, hey, look, Anything we want to do has got to be focused on, you know, driving innovation directly at the dentist and, you know, create promotional strategies like 1DS that actually allow us to leverage technology and equipment, you know, something like a prime scan launch with our consumables. And as we roll that out, that represents a shift. I mean, you know, if we were to look at, say, the U.S. market 18 months ago, we would be running 9, 10 to 15 promotional programs, which we've now swept into one. And some of that was focused on things that may not necessarily be as retail-focused. You know, do we want to do a two-for-one promotion, which, you know, involves different kind of promotional strategies? So, you know, look, bottom line, we think the consumable market, you know, whether it's growing or not, it certainly improves sequentially for the third consecutive quarter. We think the strategy that we're pursuing around consumables is the right thing, which is one of the reasons we're happy with the performance in the U.S. and Europe. And then, you know, as we go forward, we're optimistic that our innovation as well as our promotional strategy is going to allow us to see consumables trend in the right direction.

I appreciate all that commentary. Maybe if I could just ask Jorge a quick follow-up question on the margins. You know, Jorge, this is the second quarter in a row of margins coming in, I think, much better than everyone was expecting. And, you know, looking at your long-term guidance, it's almost hard for us to see how margins could go down so much from this point. you know, as fiscal 21. I know you talked about investing in innovation, new product launches, but, you know, on the other side of that, you're raising your cost savings targets and things like that. And so how should we think about that cadence in the margin? Because it feels like you have to take a pretty big dip, you know, from where you were in the second half of 2020 to kind of make sense of that guidance for fiscal 21. Thanks in advance.

Thanks, Glenn. Good question. So a few things to keep in mind. The first I would say is you can't compare just Q4 with the average operating profit margin for the fiscal year because, as you know, Q4 is typically the strongest from a sales perspective. That creates operating leverage, and it really helps the margin in that quarter. By the same token, you can't use, for example, Q1 as a good proxy for the average rate for the year because Q1 is the lowest quarter. So you have to think about how those numbers average out throughout the year. The mix in the quarter in Q4 was very good. We just talked about consumables, and consumables performed really well in the U.S. and in Europe. It was not only the U.S., but the U.S. and Europe had a good quarter from a consumables perspective, and that is a good margin business. Then when you go down to expenses, on the expenses side, there are probably three main buckets, right? One is the cost takeout that we're doing structurally, and that is reflected in the guidance. It's reflected in the a steady progression that we have delivered over the last several quarters and what we're projecting for 21. So there's going to be a significant amount of cost that is out on a permanent basis. There are two other buckets. One is a spend that is volume-related. And as we increase volume, there is some variable cost that will be added to the equation. And we didn't have that in Q4 or Q3 because we are running at a lower than normal levels in volume. So that is important. There is discretionary spend and some other spend that as our volume grows we probably will start spending some in some of those buckets again. And then And then finally, the investments. And I mentioned investments. And when you look at the long-term target that we have for top line and for margin expansion, they require some investments. And I can give you a list of things that we are working on. There is stuff that we're doing from an e-commerce platform. We're investing more in R&D. Our R&D target for this year is $160 million. That is a substantially higher number than what we saw in 2020 and in 2019. We're working on investments in other digital platforms. The modernization of the enterprise to make our customer experience much better requires some investments. Sales to cash is one area where we definitely need to improve for the benefit of our customers. So when we add all of those things, That explains some of the decline. And then finally, very important, we are adding as part of the acquisitions of byte and datum, as I indicated in my prepared remarks, there is about $90 million of incremental SG&A that is going into our numbers in 2021. So with all of that, you know, you get to the 20 and, you know, we're saying we're aiming for at least 20% with the second half of the year being stronger. We expect we will exit 21 at the 21% margin level. So that's how you walk from the Q4 number to the average and the exit rate for 21.

Super helpful.

Thanks a lot. All right. Next question, please.

Our next question is from Erin Wright with Credit Suisse.

Great. Thanks. Can you speak a little bit about the stepped-up R&D investments? Is this now a change from your previous targeted innovation approach, and were you holding back on product launches amidst the pandemic? And should we anticipate a bull with the new product launches, or should we anticipate that steady stream of innovations?

Yeah, Aaron, you know, it's our objective to deliver a pretty steady stream of innovation. Look, in 2020, you know, particularly in the second quarter, what we did was really kind of pull back and make sure we were focusing on, you know, kind of the big, really essential products. But as we've made all these changes really in kind of late 18 into 19, talk about portfolio, talking about moving to a procedure approach, we've got new leadership in R&D. And we're just taking a different approach. And the productivity we've seen, you know, we thought we had a pretty good year in 19. We're, despite the pandemic, pretty happy with some pretty major products coming out in 2020. And what we know that we have in coming in 2021, we felt that the R&D organization is really efficient. And, you know, we're making further changes. I mean, we're super excited about creating a new innovation center that will focus on our consumable and implants products. business. It's, you know, 60,000 square foot facility that we're going to be opening this year in Charlotte as kind of emblematic of how we're taking this cross-product procedure approach. So, you know, getting up to the $160 million that Jorge mentioned to me is just terrific spending because it's going to allow us to deliver innovation. You know, look, it's not going to be perfect every year. It's going to be on a glide path. But, You know, we think that kind of step-up in spending should enable us to deliver a stepped-up productivity from our organic efforts. So, again, I'd love to say innovation is going to, hey, we're going to launch two in this quarter, two in that quarter, two in the next quarter. Some of that's going to be really timed off, you know, when the innovation comes. And just the last point, Erin, I'd add, you know, as we – I was mentioning in my prepared remarks, increasingly we're really thinking about our digital footprint, whether that's a huge installed base on the x-ray side or a very, very strong base on the CEREC side. How do we combine that in a way that allows dentists to really think about more complex workflows? And as a result, you start looking at all the software in the company. And as you want that to start working together, you know, that's an area that we're extremely excited about. Our customers, some of the stuff we've shown our customers gets their blood flowing. And, you know, that's another area that we're investing in. So I was telling our board of directors that, boy, it would be great if we're able to increase our R&D spending because that's the, in my opinion, the most efficient way for us to generate organic growth going down in the future.

Okay, great. Thanks. And then can you speak about the clear aligner strategy now and and how you're balancing the DTC strategy with the practitioner-directed market. What is some of the initial feedback from your customers? Are there any surprises with the BITE transaction since the close? Are incremental investments needed across the BITE entity?

You know, we've had BITE for, you know, like a couple weeks, I guess six or seven weeks. The feedback from the dental community is almost exactly what we expected. you know, based on all the survey work we had done during the diligence process, which is, you know, dentists that are doing clear aligners think, you know, having another major entry in the clear aligner space is going to put more marketing emphasis and drive in general more patient traffic. So they're pretty positive. I think some general dentists that aren't necessarily doing clear aligner work today potentially look at that as competitive and I think a lot of that will dissipate when we bring the BITE program out to them. I mean, basically when we show them a concept where, you know, we're taking the hundreds of thousands, close to a million unique visitors that come to BITE, not all of them are going to be available for class one treatment. And, you know, we believe that gives us an opportunity to direct patient traffic at our network. So, you know, we believe that as we bring that story out and provide details, it's going to be pretty positive. And, you know, and then the last discussion, you know, that we've seen is, you know, people ask us the question, well, if the dentists are negative about it, you know, is there going to be any deleterious impact on purchase intent for dental supplies surrounding products? And, you know, a couple of things I'd point out. The first is, you know, we tend to be a housewife. of brands as opposed to a branded house. So, you know, whether or not people know a Cavitron is a Densply Serona product is actually one of the things I'm working to fix long-term, but it's kind of hard to single out Densply Serona products. And that's, you know, it's really funny. It's a blip that comes and then it kind of goes away. So I would tell you that we're pretty happy with the response of the general dental population to bite. That's question one. Question two, since we've had it, you know, does it require any new investment or stuff like this? You know, we had done a pretty thorough amount of diligence, and we kind of knew what it was going to take. You know, obviously a startup company, you know, we're looking forward to the integration of, like, finance, QARA, you know, some supply chain stuff. And that's really gone according to plan. We haven't seen any areas that require major investment. If anything, you know, today we're more excited about BITE than we were in January when we made the announcement.

Okay, great. Thank you.

Our next question comes from Kevin Caliendo with UBS.

Hi. Thanks for taking my call. I guess it we want to talk a little bit about the cadence. You know, we understand 1Q is always a little bit worse. You talked a little bit about demand in 4Q year over year, but I guess I'm asking, as people start to expect to get vaccinations, sort of what you saw January, February, what you expect to see in the March. I get it on the margin side and spend and everything else, but when we think broadly around dental and dental demand, are you still seeing that sort of year-over-year growth in January and into February?

Kevin, Jorge here. I don't want to get into January or February results at this point. It's too early. What I would tell you is that all the information that we have, the best information we have as of today, we have reflected in the outlook that we are providing. So as I indicated and Don indicated, we are seeing some instability in the dental industry. We are optimistic, cautiously optimistic about patient confidence. And all of those data points, the growth we've seen in certain areas, the trajectory of other parts of the business, 21, where we will see potentially organic growth in the 15% to 25% with a second half stronger than the first half, Q1 typically lower than the other quarters. And that's everything we know we have, and that's what we have reflected in our guidance. I don't have really anything else to add to that.

No, that's fine. I appreciate that. I guess just one follow-up. You mentioned Prime Mill and some of the other products that you launched last year, and I'm guessing just given the way everything played out last year, there maybe are some orders or some potential. I don't know if there's still pent-up demand for any of the bigger ticket equipment items or not or how we should think about that as an impact of 2021, but any color around that would be great to understand as well.

You know, it's interesting as we launched Axios and Prime Mill, you know, we were originally constrained from a production standpoint. Then we kind of hit the pandemic. We used the pandemic to kind of gear up. You know, we feel that we are in a really good place right now on Axios and Prime Mill. One of the things that's interesting, Kevin, is with the urgency of an on-premise DS world, like in Las Vegas, there's a certain urgency about purchasing right then and there. With kind of the virtual DS world, you don't see kind of that everything happens in the course of two weeks. So we're going to be interested to see kind of really good response to the virtual DS world. I mean, we had probably as many live prospects, real validated prospects as we did at the in-person event. But we're going to be interested to see how long that tail is. So, you know, we don't anticipate there's a whole bunch of pent-up demand. We can make, you know, we're in a better position from a manufacturing standpoint today than we were a while ago. And, you know, we'll see. But, again, underlying demand for, you know, digital dentistry products has been pretty good.

Guys, great. Thanks so much.

Next question, please.

Our next question comes from Elizabeth Anderson with Evercore.

Hi. Good morning, guys. Thanks so much for the question. I was wondering if you could talk a little bit about your in-plant business and sort of any changes in terms of your plan to sort of accelerate more towards market growth and sort of how new products are performing or the overall state of your brand of products in that category. Thanks.

Yeah, it's interesting. I would say that we remain optimistic about the long-term opportunity that we have in the implant business. I think fourth quarter was one where I'd like to see us improve on our performance. I would tell you the time that we've spent during the pandemic and looking at how we see the market evolving, we've improved our portfolio. I think we're optimistic about the things we're bringing to market over the course of this year. We added datum you know, which we think is an important adjacency product. If you look at it, Elizabeth, we have, you know, between Atlantis and Datum, we think we have two really good adjacencies that allow us to be in a much better position today than we were even a year ago to go in and really make some noise around implants. You know, we think our implant business will grow in 2021. So, you know, we feel good about that. And again, Long term, we believe as digital dentistry and workflow management becomes increasingly important, we're very, very well positioned between the diagnostic expertise of our x-ray portfolio, which is critical around implants. We think our product portfolio will be rounding that out over the course of this year, and we think we've got great adjacencies that will allow us to be very, very competitive in And last, you know, it's interesting. We mentioned the Salesforce Effectiveness Program, and it's interesting. We don't really get a whole heck of a lot of questions on it, even though it represents about a third of the people that work in Dentsply Sirona. And the thing that we've been doing in our Salesforce Effectiveness Program is really how do we go in and focus on, say, if it's a high-volume implant implant, doc, how do we really make sure that we're bringing all of the resources at Densply Serona to that doc? And, you know, we feel pretty good about the work we've done in the U.S., and we've now rolled that. We're in the process of rolling that out to 10 more countries. So, you know, again, getting our commercial Salesforce effectiveness program rolled out we think is going to be helpful. So long-term, we think there's nothing but upside on our implant business.

That makes a lot of sense. And can you also talk about sort of more broadly maybe your new product rollout as we think about the course of 2021, how you think about it in light of both the reopening and then obviously some of the investments you're making this year, which I assume will translate into some impact this year, but probably more down as 2022, maybe 2023 type of event. Can you talk about sort of that pacing at all and sort of how you view it longer term?

Thanks. Sure. You know, look, we're truly a global company, and I'm reminded that every day. So when we say, you know, we launched Prime Mill, you know, okay, we launched it in North America and some selected countries in Europe, and we're now in the process of rolling that out. Axios is the same thing. Axios was a North American launch. So, you know, are we bringing something new to the market? Well, we're bringing something new to various markets around the world. So, you know, as we think about it right now, stuff like, you know, the things I called out, Shorefield One, Axios, Paladin 360. We've got a pretty good rhythm of taking products that we may have launched in one place and rolling that out. And we think that's going to give us some pretty good momentum through the beginning of the year. And then the back half of the year, a lot of the stuff that we were working on in late 19 and through 2020 will come to fruition. And then the step up in R&D investment You almost have to think of that in a bifurcated way. The first is software is increasingly important to us, and that comes out a little bit faster. And then products that are 510K or have longer-term clinical requirements, that's obviously going to come out a little bit later. But I think one of the accomplishments of that I'm proudest of the team that they made over the course of the last year and plus. I mean, I really feel like our R&D engine is where we need it to be, and I think it's focused on a broader idea of, like, how do we win in a procedure, you know, starting from a diagnosis, going to a treatment plan, and delivering great consumables that are all synced up is the right way to go. So long-term, we're optimistic that you'll see an acceleration of what we're able to do from an organic perspective.

Great. Thank you. That's very helpful. Thank you. Next question, please.

Our next question comes from Steven Velik, with Barclays.

Hi. Great. Thanks. Good morning, Don and Jorge. A couple questions here. You know, I guess first, all the color on the 2021 guidance has been helpful so far. One area where there was less color was just around the gross margin expectations for 21. I'm curious to hear more about the puts and takes that can cause variability there. As we think about the gross margins exiting in 2020 at just under 57%, is that a good run rate to use for 21 overall? And then just quickly on the R&D, you know, the $160 million expense in 21, can you just tell us roughly what the R&D expense was for 2020, just to give us a sense for the comparison? Thanks.

Dave, good morning. Let me start with the second question. The number for R&D in 2020 was about $115 million So we're going from 115 to 160 in 21. And going forward, we are going to be very, very transparent about our R&D spend, and you guys will see that on the face of all the financials. With respect to gross margin, gross margin fluctuates from quarter to quarter, similar to operating profit margin. Our expectation is that we will steadily increase gross margin a little bit as well. Some of the cost savings as part of the $250 million target are coming from gross margin improvements. We continue to do a lot of work from a manufacturing facility optimization. There is indirect procurement initiatives that we have, and there is a number of other things within COGS. that should help our gross margin. I don't expect to see a significant change going into 2021, but we should have some small improvement there.

Okay. All right. Appreciate the color. Thanks.

Thanks, Steve.

Next question, please.

Our next question comes from Tyson Peterson with JP Morgan.

Hey, good morning. Jorge, I just want to stick with the guidance for a minute. I'm just wondering if you can break out, you know, what you're expecting for FX, M&A, and divestiture headwinds. And then, you know, you're not giving segment-level guidance. I'm just curious, you know, how we should think about T&E versus consumable growth this year.

Yeah, thanks, Taiko. Good morning. FX, for us, FX is mostly impacted by the euro. And so we're I can give you roughly the assumption we have for the Euro-dollar exchange rate is about 122. That's essentially what we're using for modeling purposes in the budget. With respect to M&A, we are not modeling anything included in the outlook we have provided. Similarly, there's no divestitures either, so there's nothing contemplated in those areas. in the outlook that we have provided.

Well, could you clarify what the revenue contribution you're expecting from Datum is then? Because you've already talked about Byte, but what are you expecting? And I know it was only a $95 million deal, but what does that add?

It's really not material to the revenues of the company. We have not disclosed the total number, but it's not really big at the beginning cycle.

Okay. And then, you know, you raised the long-term outlook to 4% to 5%. Obviously, that, you know, captures the, you know, the 300 basis points, you know, you're going to get from clear aligners this year. But you've also talked about 20% to 25% growth for the clear aligner segment. So, I'm just curious, you know, that 4% to 5%, I guess, looks like it could be conservative in the long run. Is that a fair assessment?

Well, the 4% to 5%, essentially what we did was, you know, we had talked about 2% to 3% or 3% to 4%. long-term growth rate from a top-line perspective with the acquisition of Byte and the acceleration of our ClearLiner business, we believe that those two businesses should add about 1.5%, maybe a little bit more of top-line growth. And, you know, we'll do everything we can to improve that, but that we believe is doable, and that's what we are modeling in the outlook that we have provided.

Okay, and then last one, I just want to go back to Datum for a minute. I know it's a small deal, not a real revenue contributor, but as we think about, you know, AstroTac and Ankylos and some of these, you know, products, can you just talk about how you see synergies there, Don, for the implant business?

Yeah, sure. You know, Taika, it's interesting. As patients have looked at implants, I think the biggest trends they've said, you know, they want faster results, which is resulting in a lot of kind of more immediate, you know, implant systems. And when you do immediate load, you know, one of the things that gives dentists a fair amount of confidence is putting in some kind of a bone growth factor around the immediate load screw to kind of accelerate the healing process. So, you know, we look at Datum as, you know, it's a great technology. I mean, you know, we believe it's clinically superior to anything else in the marketplace. You know, being able to go in with a relevant kind of piece of news about, hey, as you think about immediate load, systems, one of the best ways to accelerate healing is to use Osix. So, you know, that's kind of how we're thinking about it. Now, obviously, as we need to update our portfolio, you know, we've been, we've tended over the, you know, the last eight years to have been much more of a parallel wall implant system company, you know, and we have, we think a clear opportunity to begin to expand our portfolio to allow us to compete more aggressively in the faster growing immediate load space.

Okay, thank you. Thank you. Next question, please.

Our next question comes from Jeff Johnson with Baird.

Thank you. Good morning, guys. I'll try to be brief here, just given the time. But going back just to R&D real quickly, you know, Jorge, historically we've thought of dense fly kind of being about a 3%. of revenue R&D spender. Obviously, with the guidance this year, it's going to be up around four. Is that about the right number, kind of R&D after 2021, kind of grow in line with revenue, just thinking longer term, kind of holding it closer to that four, or is there upward bias even on that number than going forward?

Thanks, Jeff. This is a topic that we have spent a lot of time on, and we believe that around 4% of ratio of percent of sales is a good number for us, at least for the foreseeable future. Dollars-wise is a significant improvement. As I indicated earlier, in 2020, we spent about 115. We're going to 160. That is a substantial amount of incremental dollars. We are working very closely with the R&D team, making sure that we have the right metrics and that we really track the return on those investments, and we are comfortable with the 4%. We think that 4% or so is going to be essential, critical for the top-line growth, and we're going to rely significantly on organic growth to deliver that top line.

Yeah, understood. Thank you. And then, Don, just the bigger picture for you, you know, you guys have been talking about this 3% to 4% organic and double-digit EPS. Obviously, with Byte, you take that organic up to 4% to 5% kind of on the long-term guidance. You know, 2020 and even 2021, there's some funkiness in those years, so you can't really apply those targets to that. Is 22 that first year, you know, understanding you just put out 21 guidance, so not to ignore that, but is 22 that first year where we can think about those long-term targets coming into play of four to five and double digits and kind of growing our models beyond that in future years then? Thanks. Yeah.

Yeah, Jeff, we give you 21 and you ask for 22. You know, look, that's probably a fair assessment, Jeff. Look, as one of the challenges, and I give Jorge and his team, you know, a whole lot of credit is, you know, how do you look at 2021 in context of 2020? And, you know, again, it's not clean to go back to 19. But, look, you know, we think, you know, we have a formula of how to grow the business, which is, you know, how do you see consumables growing? How do you see technology and equipment growing? you know, combined is, you know, we bring stuff like Byte on and, you know, when you see investments in R&D and things like that, you know, we'd like to see our implant business growing as well. So, yeah, we think five, you know, four to five plus is where we want to be. And as we think of 22 and beyond, absolutely. You know, again, if you really kind of look at the last two years. I mean, it was, okay, in late 18, we've got to get the company structured correctly. We think we've done that work. We think we've got a good recipe for growth. We've added some organic and inorganic acceleration to it, and that's why, you know, we say, you know, we think we should be four to five plus.

Thank you. Next question, please.

Our next question comes from John Black with Stifos.

Hi, this is Trevor on for John. Thanks for taking the question. So just on the 15% to 25% range that you gave for guidance, are there any specific variables to Dents by Serona that you can call out that could take you to the higher, low end of this range, or is it really driven by the market and macro factors that you called out? Thanks.

Yeah, thanks for the question. Obviously, there is a number of factors that play into this range. One thing that we indicated in our prepared remarks is the overall trajectory of the market as a function of what happens with the COVID dynamic and vaccine rollouts, that plays an important role. Then, more specifically related to the company, there is the performance of our new launches, and Don talked about how we are beginning to roll out Prime Meal, Axios, and other products more globally. That should also influence where we end in that part of the range. And then the growth trajectory of our clear-liner business is an important factor into our outlook for 21. So there's a number of things, but I think those are the major ones.

Great. Thank you. Next question, please.

Our next question comes from Michael Cherney with Bank of America.

This is Alan, and for Mike, thanks for taking the questions. Don, you mentioned margin opportunity around procurement and logistics. Can you expand a little on that? Is that something that can be done just internally, or are you looking at partnerships or potentially M&A for that? Thanks.

No, that's really internal stuff. I mean, look, we used to run a pretty disaggregated supply chain, and Dan Key and his team have done a great job of creating a unified supply Group, obviously, you know, that's taken a little bit of time. We really started that in earnest in 2019. And as we've gotten scale, you know, we're now able to look at total dense supply surrender from a procurement basis as well as a logistic basis. And, you know, as we think about things, we've been able to consolidate distribution points and a few other things that have given us some leverage. And we expect to continue giving us leverage in the future. Thank you.

Okay, great. Well, that concludes today's session. Thank you, everybody, for joining us today on our fourth quarter 2020 earnings conference call. We look forward to having follow-up discussions with many of you later today.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.