DENTSPLY SIRONA Inc.

Good day, and thank you for standing by for 2021 Serona 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 that session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Ann Haley. Ann Haley, the floor is yours.

Thank you, Chris, and good morning, everyone. Welcome to our fourth quarter and full year 2021 earnings call. Joining me for today's call is Dawn Casey, our Chief Executive Officer, and Jorge Gomez, our Chief Financial Officer. I'd like to remind you that an earnings call press release and slide presentation related to the call are available in the investor section of our website at www.densebyserona.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 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 turn the call over to Don Casey.

Thank you, Andrea, and thank all of you for joining us this morning for the Dentsply Sirona fourth quarter and full year 2021 earnings call. There's a lot to cover today. Before getting into the discussion, though, I wanted to thank our team at Dentsply Sirona. Looking at the challenges through the last two years, there have been a few constants. The first is that dentists have shown tremendous perseverance and creativity throughout the pandemic, underscoring the resilience of the dental industry. The other is our team at Dentsply Sirona. Every day, they continue to demonstrate unwavering commitment to our customers and our mission of transforming dentistry. Across the entire company, our thoughts are also with the people and our colleagues in Ukraine. We have a great team there, and we will continue to support them however possible. Moving on today, we will cover four items, starting with an overview of 2021. Then Jorge will cover our Q4 financials and provide our 2022 outlook. I will finish by providing a strategic operating update. We are proud of our performance in 2021. Dentsply Sirona delivered robust organic sales and EPS growth, as well as solid cash generation. There was also significant progress against our critical strategic initiatives. An excellent example of that progress were the two announcements we made last week. Those included a strategic collaboration with Google Cloud and the launch of a 3D printer later this year. Both of these represent important milestones and highlight our commitment to transforming digital dentistry. Moving now to slide six. As I mentioned, our financial performance through 2021 was strong with revenues reaching $4.25 billion. This represents a robust 24.6 percent increase on an organic basis versus 2020. That would also represent an organic growth rate of 4.9 percent versus 2019. Our operating margin was 20.5 percent, with SG&A and R&D investments increasing over the year with the pace of the recovery. Adjusted EPS was $2.87, And on a full-year basis, we generated strong operating cash flow of $657 million. To provide more details on our financial performance, I will now turn the call over to Jorge.

Thank you, Don. Good morning, and thanks to all of you for joining us. Today, I will cover four-quarter results, fiscal year 21 performance, our current outlook for 22, and an update on our capital allocation policy. As a reminder, my remarks today will be based on non-GAAP financial results and less otherwise noted. Please refer to the reconciliation tables at the back of the press release and slides, both of which are posted in the investor section of our website. In the fourth quarter, we delivered a revenue of $1.088 billion with organic sales growth of 1.8% and reported growth of 0.6%. our clear aligners, implants, and CAD-CAM businesses posted a strong growth in the quarter. In line with our expectations, consumables declined versus last year. In the quarter, we also experienced more acute supply chain and COVID-related constraints, which we estimate to have suppressed our total company organic growth by approximately two to three points. We view this as a temporary headwind, but anticipate that our supply chain will remain challenging for at least one or two quarters in 2022. Gross profit was $627 million, or 57.7% of sales. Our margin rate increased 100 basis points year over year, driven by benefits from portfolio optimization and efficiency improvements, upset by inflationary cost pressures. SG&A expenses were $351 million, or 32.3 percent of sales. SG&A, as a percent of sales, increased 290 basis points year over year, primarily due to commercial investments in growth areas, including clear aligners, implants, and digital capabilities. Additionally, SG&A ran at a lower rate in the prior year quarter, as we were still ramping back up to our normal pace of operations. R&D spent was $59 million, an increase of 32.2 percent year-over-year. This increase reflects our focus on innovation and a $10 million one-time reclass of R&D expenses reflected as SG&A in the first three quarters of the year. The reclass was the result of further centralization of R&D processes and has no impact on our operating profit or net income numbers. Operating income was $217 million, down 13.7% versus last year due to increased investments in R&D and selling and marketing. Operating margin of 20% was below our target exit rate of 21%, primarily as a result of weaker volume in the quarter. EPS was $0.76 versus $0.87 in the prior year quarter. Turning to segment performance, in Q4, Technologies and equipment organic sales grew 6.5 percent, while consumables declined 4.6 percent. T&E segment organic sales expansion was led by double-digit growth in clear aligners, CAD, CAM, and implants. The T&E segment posted a strong growth despite difficult supply chain conditions. Up until the third quarter, the majority of our supply chain challenges were cost-related due to inflationary pressures. In the fourth quarter, we started to face significant component shortages, impacting the production of imaging equipment and treatment centers. We estimate this impact to have reduced the T&A segment growth rate by at least four points. We ended the quarter with a higher-than-normal backlog, and imaging on our team will continue to manage the supply chain situation as effectively as possible over the next few quarters. Similar to many other industries, the availability of electronic components in dental is inconsistent at the moment. On the consumable side, organic sales declined primarily due to the strong sales levels seen in Q4 2020, as office capacity and patient traffic were returning to pre-COVID levels. We expect the same difficult year-on-year comparison in Q1 2022. We also estimate that the price increase we implemented on October 1st pulled a portion of sales forward into Q3. Now turning to financial performance by region during the fourth quarter, U.S. sales were 385 million. Organic sales increased slightly over year-on-year. In the U.S., we had growth in implants, aligners, and CAD CAM. Our consumables performance was roughly in line with our expectations. European sales were $437 million with organic growth of 1.8% and product category performance similar to the U.S. Rest of the world sales were $266 million representing organic growth of 4% with growth across consumables and T&E. This region was unfavorably impacted, particularly in APAC, by increased government restrictions associated with COVID variants primarily in China. Now, turning to the full year 2021 performance. In 21, we delivered organic sales growth of 24.6%, near the top of our outlook range. Reported sales were 4.25 billion. Due to a weaker Euro to US dollar exchange rate, reported sales came in at the lower end of our outlook range. Fiscal year 2021 was a year of progress, on our key growth vectors. Digital diagnostic devices such as PrimeScan, Axios, and OrthoFos had a strong year. In three years, we scaled our clear aligners from having no presence in the space to a business that generated $274 million in 2021. In the fourth quarter, SureSmile exceeded our $100 million annual run rate goal. came in short of expectations for the reasons we have indicated before, such as changes in consumer spending patterns and shifts in digital customer engagement tools. However, we believe Byte will contribute to our growth in aligners in the second half of 2022. Despite the challenges in DTC, we achieved sequential growth in total aligner shipments in Q4. Our implants business finished the year strong Our intention is to keep improving our platform to achieve market growth rates consistently. Full year gross profit margin of 58.6% represent an expansion of 120 basis points since 2019. SG&A expenses for the full year were 34% of sales. This ratio remains below pre-COVID 2019 levels, reflecting the benefits from our efficiency improvement initiatives. We finished the year with R&D at 4% of revenue. R&D will continue to be core to our growth strategy. Turning now to profitability, operating margin was 20.5% in line with our expectations to deliver greater than 20% for the full year. Looking back, we have delivered over 200 basis points of operating margin expansion since 2019 and approximately 500 basis points since 2018. The effective tax rate was 23% versus 20.9% in the prior year. The increase was primarily due to geographic mix of pre-tax income and our continued business recovery from COVID. Turning to full-year earnings, we delivered EPS of $2.87 versus $1.79 in the prior year. In 2021, we generated EBITDA of approximately $1 billion. EBITDA is an objective scorecard to measure improvements in operational execution and cash flow generation. Our operating cash flow was $657 million and free cash flow exceeded $500 million. We returned approximately $300 million in cash to shareholders, including dividends and share repurchases. We also completed acquisitions totaling $248 million and finished the year with cash on hand of $339 million. Now let me provide an overview of our financial expectations for fiscal 2022. We expect organic sales to be in the 4 to 5% range. This equates to a net sales range of 4.3 to 4.4 billion. Our assumption for our biggest FX exposure is a Euro to US dollar exchange rate of 114, which is lower than the FY21 average of 119. From a revenue perspective, market demand remains strong despite COVID variant challenges in certain markets. The R&D pipeline is generating new exciting products to meet the most pressing needs of our end customers and channel partners. We expect strong contributions to growth from clear liners, CAD CAM, implants, and imaging. Our expectation is that operating profit margin will be over 21% in the second half of 2022. and exit the year at the 22% target margin rate in the fourth quarter. Our efficiency improvement and portfolio optimization initiatives will continue in 2022 while managing through supply chain challenges. We estimate the effective tax rate to be between 23% and 24%. Our estimate for share counts is approximately $219 million. EPS, is expected to be in the range of $3.05 to $3.25. We anticipate growth to be more heavily weighted to the back half of the year. We're projecting organic growth in the low single digits in the first half and mid-single digits or higher in the second half. Due to the revenue cadence, supply chain constraints, and inflationary pressures, earnings in the first half are expected to be approximately 40% to 45% of the total annual projection. As a reminder, Q1 typically has the lowest quarterly sales of the year, and as a result, operating income margin also tends to be lower. This January, we observed a slower patient traffic in certain markets due to COVID. During the first half of the year, we will continue to be impacted by the ongoing shortage of electronic components, particularly in the imaging and treatment center businesses. These shortages are now impacting the availability of electronic boards for prime mill as well. We are allocating the reduced quantity of boards first to fulfill spare parts needs of mills already owned by end customers and secondarily to units in production. The retail demand for prime mill is solid, and our dealer partners in the U.S. have sufficient inventory to meet that demand. In the short term, this trade-off will reduce our wholesale volume of prime meals, but it's the right thing to do for our customers. Finally, we are projecting our clear-liner franchise to grow sequentially each quarter in 2022. Byte will likely post a year-on-year decline in the first half, but is expected to be a contributor to overall 2021. 22 growth. I want to echo Don's words and express my support and sympathy to my colleagues impacted by the evolving geopolitical events in Eastern Europe. Our teams in the region are doing a terrific job and have grown our commercial presence substantially in the last several years. Our local sales in Russia and Ukraine represented about 3% of total company revenue in 2021. Given the fluidity of the situation, it is hard to measure the potential impact of the ongoing conflict on our financials. We will continue to monitor and assess options available to minimize the impact to our 2022 outlook. Switching gears to our capital allocation framework for 2022. First, reinvesting in the business for profitable growth continues to be our number one priority. We plan to invest at least 4% of revenue on R&D and about 4% in capital expenditures. Our cash flow generation also gives us the ability to provide a consistent and meaningful return of cash to our shareholders. For the next two years, we plan to return at least 50% of our free cash flow through dividends and share repurchases. Similar to last year, today we are announcing a double-digit increase to our dividends. the remaining balance to reach 50% or more of free cash flow returns will be accomplished through the use of opportunistic share buybacks throughout the year. Overall, we are confident that the progress we are making in key growth areas, combined with the resilience of the dental market, will allow us to continue to expand revenue and earnings over time. Additionally, the strength of our EBITDA generation enables the funding of our investment priorities and the funding of a very competitive cash flow yield to our shareholders. To close my remarks, I'd like to highlight two important sustainability initiatives we have underway. First, in collaboration with our strategic partners Smile Train and FDI, we are developing the first global standard for cleft treatment protocols that include digital clinical workflows. We're sponsoring the 2022 World Oral Health Campaign to promote the importance of oral health for every person's overall well-being. This awareness is aligned with our mission to empower millions of customers by creating innovative solutions for healthy smiles. With that, I will now turn the call back to Don.

Thank you, Jorge. Moving on, I want to provide some perspective on our strategy and priorities going forward. In late 2018, we had outlined a program to accelerate growth, improve margin, and to simplify the organization. Despite challenges, we have largely achieved the targets that we had laid out. Just as important, our team has also sharpened our strategy while improving our innovation capabilities. As Jorge said, going forward, we expect to build on those capabilities to deliver reliable 4% to 5% growth in revenue, continuous improvement in our margins, and double digits earning growth. We believe our strategy of delivering superior integrated workflows in critical procedures will allow Dentsupplies Sirona to become the indispensable digital partner to the dentist. On slide 24, we outline that strategy. Calls for us to build on our large installed digital base, whether it's PrimeScan, Orthophos, or Axios, all of these offer dentists among the best-in-class diagnostic capabilities that are so essential as dentists globally look to enhance their ability to do more dentistry. These diagnostic capabilities feed into our outstanding treatment planning offerings in four of the essential dental workflows. Those areas include implants, clear aligners, restorations, and endodontics. All of this helps make Dent Supply Sirona a real leader in shaping the future. I'd like now to outline progress in each of these areas, starting with digital dentistry. There was strong progress within the CEREC franchise during 2021. In addition to a record number of DI cameras sold, we were able to launch major software innovations with CEREC 5.2 and SureSmile 7.6. There was also good progress on Prime Mill. Our higher-end CBCT imaging systems also saw robust demand. This stems from dentists looking to add more sophisticated diagnostic tools that will allow them to incorporate more complex procedures like implants and clear aligners to their practices. As Jorge mentioned, there are supply chain constraints impacting imaging. These challenges have slowed our ability to meet customer demand starting late last year, and we are seeing those challenges continuing in 2022. Another area that is important to accelerating our digital portfolio is in software development. We have spent significant resources over the last 18 months to overall our entire approach in this area. Instead of developing individual software, For different devices and totally separate initiatives for all the treatment planning offerings, we are building a single platform that will support all of our devices and our extensive treatment planning portfolio. This creates advantages for the customer, as we will have a single user interface and a single easy-to-learn operating system. For Dentsply Sirona, it gives us major cost and speed advantages while also allowing us to create scale around AI and machine learning. A recently announced collaboration with Google Cloud will accelerate these efforts. Dentsply Sirona will bring its decades of experience in digital dentistry to the collaboration. Google will bring scale and expertise in multiple areas. The fruits of this partnership will give the dentist opportunity to digitize their entire practice while improving efficiency, cost, security, and connectivity. We also announced the introduction of PrimePrint last week and look forward to our virtual event this Friday to talk more about this amazing innovation. This medical grade, highly automated 3D printer is a great opportunity for the dentist to improve workflows and practice efficiency. It is very easy to use and lets the dentist delegate many of the tasks around 3D printing to their staff. PrimePrint also offers complete integration with the CEREC system and will allow the dentist to produce things like night guards, surgical guides, and full-scale models quickly and inexpensively. This launch will also come with a complete service package that will let the dentist have Dentsply Sirona or one of our many lab partners do the actual design work, saving the dentist time. Moving now to implants. We're really encouraged by the early results of our implant restage, which centered around the prime taper introductions. We are approaching implants as a single DensePly Serona brand, building off our expertise in digital workflows. The reception of PrimeTaper has been excellent, and we've been happy to see supporting products like the value brand MIS, Osix Biologics, and Atlantis Custom Abutments driving positive growth as well. In the fourth quarter, the implant business grew double digits versus the prior year. As PrimeTaper moves into Europe and the rest of the world in early 2022, We look to see continued improvement performance across our implant franchise. There was also clear progress on clear aligners in 2021, and we are optimistic that progress will continue in 2022 and beyond. As Jorge mentioned, SureSmile hit its run rate objective of 100 million and grew 60% during the year. The bite acquisition also provided important scale to our clear aligner business. While that scale has been important in areas like manufacturing and R&D, there have also been significant changes in the last year around the DTC aligner business. As the pandemic lifted, there have been increased competition for discretionary consumer spending. The iOS privacy change further altered the landscape. As we saw across a range of DTC brands in multiple spaces, this combination negatively impacted sales of many products, including Byte. We continue to believe, though, that BITE is reaching a large underserved population that is not accessing dental care today. We have a clear plan on how we can build off this need and drive growth going forward. Based on these plans, we expect BITE to grow sequentially across the quarters during the year. Clear aligners are an essential part of our digital strategy and increase our exposure to one of the fastest growing areas in dentistry. We are committed to this market and believe we are well positioned to compete long term. Our resto business is also a key pillar to our overall strategy. Virtually every procedure finishes with a restoration, including implants and root canals. Our Class II restoration brands like Paladin have shown good momentum. Our new milling material, Tessera, also lets Dentsply Sirona compete more effectively in that space by offering prime mill customers a more competitive product. While we see good growth in these priority areas, That is offset by corresponding declines in parts of the portfolio, like impression material, as digital impressions take off. And finally, our endo franchise has a strong position in yet another critical workflow, root canal therapy. Our recent launch of ProTaper Ultimate is off to a solid start. The companion products in obturation and sealers that were part of this launch are also making Dentsply Serona a lot more competitive in important adjacencies. In order to provide increased investment in areas like R&D and demand generation, while improving margins, the team is committed to driving costs and efficiencies throughout the organization. We're focused on identifying and executing against additional opportunities for centralization and enterprise modernization. A few closing comments. While we report earnings on a quarter-to-quarter basis, our team is focused on creating value for the long term. Over the past few years, there has been sustained progress against developing a focus strategy that takes advantage of Dentsupply Sirona's position in the market. All this has been done against the complexity and uncertainty of the pandemic. We have delivered progress on accelerating growth, driving margin, and simplifying our organization. The company has a strong balance sheet and has improved our cash generation capabilities. There have been significant portfolio moves that have increased our exposure to segments where digital dentistry is critical, and that grow faster than other parts of the dental market. There have also been portfolio moves that eliminate a business that do not fit our future vision or growth aspirations. We expect that portfolio evolution to continue. We've also improved our innovation pipeline that can be sold across a truly global commercial footprint. All this will serve us well as we look to become the indispensable digital partner to dentists around the world. Looking over the past three years, the progress we've made is visible and steady. All of this makes us confident that despite short-term ups and downs, Dentsupply Sirona is well positioned. Indeed, our team is very excited about our mission and our future. And with that, I will open it up to questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To answer the question, press the pound key. As we compile the Q&A roster, our first question comes from Elizabeth Anderson of Evercore. Your line is open.

Hi, guys. Thanks so much for the question this morning. I guess my first question, I just want to make sure I fully understand the Omicron impact on fourth quarter results. And then I think you commented qualitatively that they impacted January results. But as we sit here sort of on the last day of February, it would be helpful if you could just provide any more color around the progression across sort of December, January, and February.

Good morning, Elizabeth. Yeah, the last week or two in December became more complicated for dental practices in many markets, primarily as a result of staffing shortages. And as a result, volume tended to go down a little bit, again, in the last couple of weeks in December in a lot of markets. We had also situations like China, where many provinces still have the zero COVID policy and, as a result, are in major lockdowns, which restricts substantially patient traffic. So those are probably the two main problems. constraints we were facing from a volume, from a demand perspective. Some of that went over into January. And as we look at volumes in the month of January, we observed it's lower than normal volume. And that's based on what you can see with respect to COVID infection curves. Clearly in the U.S., the situation has improved. I would say Europe is probably a couple of weeks behind, meaning they pick up later than we did in the U.S. And the situation in Asia-Pac, particularly China, is still fluid because a lot of cities remain in lockdown. So I think there is an expectation that over the next few weeks, things will become more normalized. But as you all know, the volatility has been high with respect to those type of reactions to the spread of Omicron.

Got it. That's helpful. Thank you. And then you obviously talked about the launch of the new PrimePrint product. I was wondering if you could talk about sort of the commercial launch calendar for the various regions and sort of how you expect sales to contribute to 2022 results there.

Yeah, Liz, let me start, and I'll let Jorge comment specifically on the sales cadence. You know, our expectation is toward the end of the second quarter we'll roll print. It'll be a global launch, but principally focused in kind of our dock and North American regions. You know, right now we're very, very excited, and I'd urge everyone to hit our virtual event on Friday. Without things like Chicago Midwinter, you kind of have to create virtual events. But, you know, we're really excited about PrimePrint. We've had it in alpha and beta testing now for close to a year, and the reaction from the dentist is really positive. The cadence will literally go North America and mostly Central Europe first. It will be global pretty much by the third quarter. You know, there's a couple components to it, Elizabeth, that I draw your attention to in the prepared remarks. I mean, obviously there's a lot of follow-on stuff like the printing ink And we're also committed to offering a service package, which would let a dentist actually kind of outsource the treatment planning and the design work for using the printer, which we're pretty excited about as well. But, Jorge, you may want to comment on the specific revenue.

Yeah, Don, I think you explained the cadence from a geographical standpoint. Just to reemphasize, U.S. first and a few selected markets in Europe. We plan to do that sometime in the third quarter. There are a few things that we still need to finish and to firm up, including I mentioned in my prepared remarks there are supply chain constraints with electronic components. That is a consideration for us. And then we have to fine-tune pricing and the overall economics of the printer. So we have incorporated in our financials for 22 some contribution from PrimePrint, We have a range and it's included in our guidance. We will fine-tune those estimates as we get closer to the summer and as we get closer to the actual launch date for the product.

Okay. Thanks so much, guys.

You're welcome.

Thank you. Our next question comes from the line of Nathan Rich of Goldman Sachs. Your line is open.

Hi, good morning. Thanks for the questions. Maybe I wanted to start with the supply chain disruption that you mentioned and the impact on imaging and some of the other categories within the equipment portfolio. I guess, you know, John and Jorge, I'd be curious just to get your sense of, you know, how much visibility you have on your ability to kind of get the components that you need and how you're assuming that plays out over the course of the year and also, you know, what impact that might have on the cost of production. And have you seen any indications that those supply constraints have started to ease in the first couple months of this year?

Good morning, Nathan. Let me take that. So the amount of visibility into electronic components shortages is complicated, not only for us, but in all industries. We have conferred notes with multiple other companies that actually use the same type of electronic components, and the supply of those products is very inconsistent. Some people believe that the issues will ease sometime in the first half of the year. Other people believe that the situation could last longer. So it's really hard to predict, not only for us, but for many industries. One thing that we had been experiencing before this quarter, and I mentioned this a couple of times, we were able to have access to all the components we needed, albeit at a higher price. So the impact had been huge. only from a cost perspective. That cost impact is reflected in our gross margin and is impacting our gross margin and will continue to impact our gross margin for some time. Our team is doing a terrific job trying to procure these components from multiple sources, and they will continue to do so. In the fourth quarter, we had issues with, as I said before, especially 3D imaging and treatment centers, and the impact was tremendous. roughly between $12, $14, $15 million across all products. And as we go into 2022 and the guidance that we have provided, we are contemplating those challenges to continue for some time. So it is, to a large extent, is captured there. The only one caveat is we have seen situations where certain components totally dry up in the supply chain for periods of a few days or a few weeks. So managing inventory levels, inventory levels in the network, and ensuring that the production lines are balanced is a challenge for the team and will continue to be a challenge for some time. But as I said, a lot of that risk is already captured in our numbers and our projections.

Okay, great. That's helpful. And maybe just to clarify, so the $12 to $15 million of impact, that might be the rough ballpark to use for the first couple quarters of the year, and then hopefully the supply eases beyond that. And, Jorge, just if I could kind of tie in my follow-up to that, just how are you thinking about kind of the cadence of margins over the balance of the year? I understand you're kind of working to get to 22%. by the fourth quarter. Can you maybe kind of talk about how that plays out over the balance of the year? And also, if you have any, you know, kind of updated thoughts on beyond 2022, what we should expect in terms of, you know, annual margin expansion from the business? Thank you.

Yeah, Nate, one thing on the 12 to 15 million in Q4, I would ask you not to extrapolate because those numbers fluctuate all the time. So that was the impact specifically in Q4. The impact in Q1 could be similar. It could be less. It could be more. So it is always a range. So I would not extrapolate. Our projections show our expectations from supply chain is that we should be able to recover in the next couple of quarters, but that situation could change. So that's a fluid situation. Your second question about cadence of margins, I indicated in my preferred remarks, we expect the first half to be lower. And a number of factors come into consideration here. One, as you know, Q1 is always a low quarter from a volume perspective, and that results in lower margins. You also have the mathematical effect of BITE. So BITE we expect to decline in the first half versus last year. And so that is a headwind. And then we have some of the supply chain issues that I talk about that. So that's going to depress margins in the first half. As we go into the second half, then there are tailwinds. For example, bike, we expect to be a contributor to growth in the second half. We expect the acceleration of product launches to gain traction. We are pretty excited about the progression we are seeing with ProTaper Ultimate, PrimeTaper, and Tesera. Those products are gaining traction. They began in Q4, and they progress throughout the year. Those are going to be important contributors to growth in the second half. PrimePrint, although not very significant, is also another improvement in the second half. And the last point I would indicate is pricing. So in Q4, actually in October 1st of 2021, as you know, we implemented a price increase that is going to start annualizing now. So that helps the first three quarters. And then we have the opportunity, and we will monitor the market, and we'll potentially do more price increases throughout 2022. The inflationary environment is real. It's happening. Costs are going up, and pricing is also something that we can use to offset some of those incremental costs and hopefully have a net positive impact from it. pricing. So hopefully that helps with respect to the cadence for 22. Beyond 22, good question. We talked about this before. I think we always, once we are at the level of 22% operating profit margin rate, for us it's going to be really important to balance growth, top line growth, with further margin expansion. I think a 22% margin rate is reasonable. Can we do more? I think we can do more. But at that point, our biggest priority, our higher priority, is going to be making sure that the top line starts to grow faster than we have seen so far.

Great. Thanks so much for all the comments. Appreciate it.

All right. You're welcome. Next question, please.

Thank you. And next we have Michael Cherney of Bank of America. Your line is open.

Hi, good morning, and thanks for all the detail so far. So I want to get back a little bit to that cadence dynamic over the course of the year, and particularly into the second half. As you think about bite in particular, think about the supply chain shortages. As you target second-half growth amid single-digit organic or better, what are the areas that are potentially the most concerned that won't let you get there? And that or better side, what's going better to get you to that or better part?

Yeah, I think the things that concern me the most are things that are beyond our control. And so... What happens with supply chain throughout the year is an important consideration. And I think we are trying to be conservative in factoring the situation the best we can see it today. So that's a challenge. In terms of things that can actually provide upside, I think new products is a possibility for upside. I think the traction, the potential acceleration of the traction we have in important businesses like clear liners and implants is another source of upside. But I think overall what we are providing in our guidance reflects a balanced view of both downsides and upsides. So we think, and that's why we're sharing those numbers, we think those are the likely outcomes. And we are confident about that range at this point.

Thanks, Jorge. And then I guess one other question on the mix and the portfolio. You did mention that portfolio evolution is likely expected to continue. Obviously, you've made a lot of changes the last couple of years. How do you think about identifying specific areas that might make sense within the portfolio, not in the portfolio? And as we go forward, especially given some moving pieces you've had, should we be thinking about anything of scale that potentially doesn't make sense within the go-forward densify?

Yeah, thanks for the question, Michael. You know, over the last three years, if you think about it, we got out of, you know, analog lab and we got out of, you know, traditional ortho, and there's been some dribs and drabs there. You know, we've also added, you know, exposure to clear aligners, which we're excited about. At this point, we don't see any, you know, massive needs or any, you know, tomorrow morning we're going to get out of preventive equipment. So we continue to look at stuff, and our criteria is, is it a growth accretive? Is it margin accretive? Is there a place that we can add real value through R&D? And is it essential to our digital workflows? And if it meets those criteria, we'll keep and invest them. And if it doesn't, we'll look to harvest them, whether harvest them means look to maximize profits, on those businesses or, you know, potentially divest them, you know, we'll make those decisions. But I think the scale of the activity you've seen is kind of what we look at going forward. Got it. Thanks, Don. No problem, Michael. Next question, please.

Thank you. And next we have Kevin Caliendo of UBS. Your line is open.

Great. Thanks for taking my call. First one's just on Ukraine and Russia, and obviously knowing how sensitive it is. But what have you sort of contemplated for it? Where are you in terms of trying to understand the impact to your business at this point or what it might be, and how did you contemplate it? I know it's low single-digit part of your total revenues, but it's still meaningful enough to impact things.

Good morning, Kevin. Good morning. Yeah, it is small but meaningful, as you said. At this point in our guidance for 2022, we are not contemplating any major disruptions with respect to our commercial cadence in those geographies. And so the reason for that is it's still early on and it is not very clear what is going to happen with the actual markets in the local geographies. We have no indication yet that, for example, patient traffic has slowed down as a result of this conflict, particularly in Russia. Ukraine is a lot smaller for us. And from a regulatory standpoint, potential sanctions, and capital flows, you don't know yet. And we're trying to assess that. We will all learn more in the next few weeks. But at this point, we have decided not to capture any downside because it is really hard to quantify at this time.

Got it. Okay, that's helpful. And just maybe a broader question, strategy question. A lot of your long-term targets and guidance that you've provided sort of culminated in 2022. Is there a plan at some point this year to update sort of long-term margin targets and or cost-saving programs or even the revenue guidance, which I think has been in place for a bit?

Yeah, Kevin, you know, the intent right now is to, you know, we want to get through Q4 and talk about the year and then get through, you know, our initial discussion about 2022. But we owe you guys an investor day, you know, which we're planning on doing. And at that point, we'll update where we see, you know, long-term revenue and how we're thinking about margin, how we're thinking about earnings per share, as well as our capital allocation strategy. So, you know, the... I would tell you one of the interesting things from my perspective is we outlined a four-year plan. We've been operating against the four-year plan. And there's obviously ups and downs and pandemics and all that kind of fun stuff. But we're pretty happy that we're on path to complete what we said we're going to complete on a timely basis. And we're optimistic that when we do an investor day, probably in the middle of the year, we're looking forward to identifying what we think our future targets are.

Great. Thank you so much.

Thank you. Next question, please. Our next question comes from Jeff Johnson of Beard. Your line is open.

Thank you. Good morning, guys. Hey, Don, maybe I'll start with a two-parter on the clear aligner business. You know, one, you're talking about kind of sequential growth for Byte throughout the year and year-over-year growth in the back half of the year. Looks like to us, Byte revenue may be down a couple million in fourth quarter versus third quarter. So what are you seeing kind of that gives you confidence we might be at that bottom and be able to grow off that. And number two, your SureSmile business, you said, hit that $100 million run rate. It looks like to us, at least by our numbers, that you were over $100 million for the full year as well, so not just a run rate number in SureSmile. So, you know, how are you thinking about the growth outlook for that business in 22? It seems like that 60% growth number may be not sustainable, obviously, but very solid outlook in 22. Thanks.

Yeah, Jeff, on SureSmile, you got it exactly right. And then on Byte, you know, it did, in fact, decline in Q4. Our senses and literally we get stuff that we look at on a daily and weekly, monthly basis. You know, we're seeing, you know, improvements. There are a couple things going on there. Obviously, within the DTC category, there were changes on the competitive landscape around, you know, some of the other brands. And we've been kind of sticking to our knitting, focused on how do we build more capabilities around things like search engine optimization, affiliate marketing, insurance things that we think put Byte on a much more stable growth platform. And then we're anxious to implement what we refer to as Byte Pro, which is, again, we think we've got this large underserved population that's really not accessing dentists today and How do we use Byte as a potential traffic generator that go into the dental office and, you know, whether they – exactly how we look forward to using PrimeScan and SureSmile is stuff that we'll talk about in the middle of the year.

All right. That's helpful. Thanks. And, Jorge, I just want to understand on the operating margin. You made a comment about, you know, 22%, and then you'll see from there where it goes. Were you saying you still expect or you would expect to get to that 22% operating margin in 23? Or were you just saying as you get there, then it'll be a top line versus tradeoff to margin expansion discussion from there?

Yeah, Jeff. No, we expect to exit 2022 at the 22% margin rate. And listen, structurally, when we look at the progression over the last several years, despite some quarterly fluctuations, we are operating substantially above the margin rates the company had in the past. So in 21, for example, we indicated at the beginning of the year that we would be over 20% throughout the year, and we did that. And as we go into 22, we should be above the 21% level structurally. and exit at 22%. So through all the changes we are making to our infrastructure, the changes in the mix, new products, we think in 23, we should be operating structurally at a 22% operating profit level. And then beyond that, that was my comment was, what happens then? At that point, the trade-off between investments for higher top-line growth versus continuing to expand will be a topic of continuous debate internally to make sure that we move levers in the most effective way to create shareholder value.

Understood. Thank you.

You're welcome.

Thank you. And next we have John Krieger of Blair. Your line is open. Thank you.

Hey, thanks, guys. Appreciate it. Wanted to follow up on the supply chain issue. Jorge, you've mentioned a couple of brands that it sounds like are being most impacted. Can you just review that again as you think about the 22 Guide? What are the product categories that you think will be most constrained by the supply chain shortages?

Yeah, John, thank you for the question. It is primarily imaging equipment. So one of our best-selling products today is is orthophos, Axios has been doing really well in the market. Those products are impacted by the shortages of electronic components. In addition to that, treatment centers, which are not that relevant in the U.S., but there's a big market for treatment centers in Europe and Asia Pac, and we are having challenges with that. Those are the two main lines. And then there is a number of random products components that impact some other categories. But those are the two main ones, electronic components, kind of around the high voltage type of electronic components.

Great, thanks. And then my follow-up, kind of same topic. What drives the confidence that hopefully this situation is better in the second half, such as sort of feedback you're getting from suppliers, or are you pursuing perhaps other changes in sourcing? Thanks.

Yeah, it's all of the above. So we actually, in 21, as we started to face challenges, the procurement team went out and sourced products from places that we had not bought components from in the past. That activity will continue. We are obviously having tons of conversations with our suppliers. We're talking to many other companies. And Some people believe that the situation will begin to ease sometime towards the end of the first half. In some areas, I've heard directly from other companies where they actually have experience in certain components, already some sort of improvement, but it's really fluid. So overall, we are not banking on a substantial improvement in the second half. What we're modeling is a slight improvement, but we're not banking on a complete solution of the supply challenges related to imaging products.

Great. Thank you.

You're welcome.

Thank you. And next we have John Block of Stifel. Your line is open.

Thanks, guys. Good morning. Maybe just a couple follow-ups on some topics already discussed, but Just to go back to Byte for a moment, guys, I believe you said growth for full year 22. I think that was specific to Byte. Maybe what level of growth, modest growth, any color commentary there? And then maybe more importantly, Don, how do you see the long-term outlook for the DTC market? You've had this asset for 12 months. What about also the level of accretion? I think at the time you guys acquired the asset, you talked about ramping accretion into the out years. Maybe if you could just provide some color there, and then I'll just ask a quicker follow-up.

Yeah, so, John, specifically, yeah, we do expect Byte to post-growth, you know, 22 versus 21. It's driven off the back half. You know, if you look at the revenue cycle of Byte, you know, the first two quarters when we were kind of in the pandemic, pre-iOS change, you know, there were bigger quarters. But, you know, we expect Byte to grow. That's part one. Part two is, you know, what do we expect for the DTC market? You know... I can't answer completely for other competitors in the market. We've always looked at it as an opportunity to reach kind of this underserved population. And, you know, our strategy was to sit there and say, look, the total clear aligner business is absolutely critical to us from a digital dentistry perspective because, you know, dentists are making choices about scanners and other things based on their ability to access You know, things like clear aligners or implants or other things. So we felt that being in the clear aligner business is offensive as well as defensive. We thought BITE was going to, and we have seen it, BITE's going to give us critical mass in terms of manufacturing R&D, stuff like treatment planning and whatnot. The other thing that we really felt that we needed to do was have the ability to create traffic for the dentists. And, again, we're tapping into a population that just does not access dental care at the same rate as, you know, a traditional population. So the challenge for us, and one that we're optimistic, hence, you know, why we talk about bite growing, is that we can, in fact, begin to build bite reputation and capabilities so that it does, in fact, increase patient traffic at the dentist. And obviously, those would be dentists that, you know, we believe are going to offer a, you And then in the out years around accretion, look, we believe our total clear aligner business will be accretive from a growth perspective. We're not going to talk specifically about the individual brands, but we like where we are clear aligners. We like the profit profile of that business. We think we're scaled today in a place that will give us an opportunity to be very, very competitive over the long term. And it's important, you know, as we build a digital dentistry ecosystem that having access to important procedures where we believe our treatment planning, stuff like SureSmiles, you know, stuff, you know, like Simplant and other things, you know, really is going to mesh well with what we believe we're creating.

Got it. That was very helpful. Thanks. And also a lot of great color on the call and a great slide deck as well. So shout out to Andrew and the team. But maybe just a quick second question. Supply chain challenges, look, I know it's difficult to figure out how long it lasts, but maybe just from our end, most importantly, are you worried there's sort of a breaking point where if you're not able to fill that backlog that's building, you start to see any leakage? Is that possible? Is that a a late 1H, an early 2H. I'm just curious, like, your conviction that it's more, hey, it's in the backlog and it's just when we're able to service it versus if this drags on where people might seek an alternative solution. Thanks for your time.

Yeah, thanks, John. And Andrea totally is beaming over here. So, you know, we're going to have to just try and keep her down for the rest of the day. But look, back orders are rolling back orders. It's not as if there is no availability, full stop. You know, what Jorge and we've been, you know, trying to describe is sometimes they're components, sometimes they're not, and they're complex. You might wind up getting, you know, the chips you need, but the high-voltage capacitors aren't there. So our thought, I would just tell you what we're modeling is that there is movement on the backlog of orders. It's not happening as fast as we would like. You know, if we have, you know, a backlog of X number of weeks, you know, it doesn't mean that there's not any imaging. But obviously, look, if somebody places an order for something and we're going to deliver it 18 months later, that's a problem. What we have been doing is we go out, and if we have an order from Dr. Gomez, we're out maintaining that relationship. Look, a lot of our imaging business is replacement of our old imaging business, who tend to be a very loyal customer base. They've gotten very used to using the treatment planning of stuff like Sodexus, which comes, you know, kind of only with our equipment. So, you know, look, would I like to see this situation resolved in the first quarter? Absolutely. What we're telling you to try and be realistic is we think it's going to flow through the year. It does move. There is movement. You know, it's not as if we have stopped shipping imaging products. And it's really incumbent on us to maintain consistency. contact with that customer to reduce some of the friction that might result in them saying, hey, look, I can't wait X number of weeks. I'm going to go to a competitor. Remember, going to that competitor involves learning a whole new software set of things, building a whole new software set of contacts with labs and other things. So we think there's an inherent advantage of our software and other things.

Don, the other thing that I would add is the components that we are having challenges with are not – unique components or components that we own that are very specific to our devices. I mean, these are, to a large extent, generic electronic components. And so the shortages are, you know, general. This is not just for us.

Understood. Thanks, guys.

Thank you.

Thank you. And next we have Matt Mixit of Chris Yolanda.

Thanks so much for the question. So we covered a lot here. I won't go back into supply chain, although I do understand it sounds like, Jorge, from your comments, that if there's an unknown risk to the back half or late in the year, it sounds like that is sort of like a, you know, it's hard to predict. And so that's sort of out there. But on pricing, I'd love to understand if you could maybe give an update as to some of the price increases you talked about and began late last year and how we should think about maybe the contribution to this year and then just one follow-up.

Yeah, thank you for the question, Matt. So on price, I think we're seeing good price realization relative to the October 1st price increase. And It is the first phase of price increases. I think at this point I can tell you we probably had a benefit that if you annualize it into 22 based on this price increase, we're going to have probably a contribution of $40 to $50 million in price increases. And then we probably will do something beyond that. So it is happening. The price realization is good, and there should be other opportunities in the next few quarters, few months, to do more price increases in certain geographies where we haven't rolled those out or on certain products where we haven't increased prices yet.

Okay. And just to be clear, it doesn't sound like you've taken any so far this year?

Correct.

Okay. And then if I could, that's just super helpful. And then just on implants, I understand, you know, one of the bright spots in the quarter sounded like Can you talk a little bit about share or opportunity to sort of carve out share or growth or mix maybe around some of the new product launches that you've talked about, PrimeTaper, et cetera? I know share is hard to measure in this environment with all the ups and downs regionally, but it would be super helpful to get some color if you could provide it.

Yeah, thanks, Matt. You know, look, our strategy that we've articulated has been, okay, let's get the business in a position to compete. You know, we feel that we've got a pretty good portfolio, premium brands, as well as a value brand. And then we think we have important supportive businesses, you know, if you look at our biologic and things like custom abutment. Our strategy was like, okay, let's get competitive so that we can grow at the category rate, you know, which we think is kind of, you know, mid to high single digits. which we, you know, we think we actually gained share a little bit in the fourth quarter. As Jorge said in his prepared remarks, you know, our expectation around implants over the course of, you know, 2022 is that we will grow at market rate. Over time, you know, our aspiration is to take share. And, you know, again, we really, we kind of do implants a little bit differently where, For us, it's about the digital workflows. So given that we just talked about like Orthopos and Axios and all that stuff, a lot of the treatment planning and software that goes into that imaging equipment and things like we did with PrimeScan 5.2, which gives us enhanced capabilities of looking at interoral scanning as another kind of diagnostic viewpoint for the dentist. You know, we feel if we start with our digital base and we create really easy-to-use solutions and then our products built right in, you know, we'd like to be able to take share. Specific bright spots, I would tell you, you know, Prime Taper, we're very excited about, obviously. But MIS, you know, it's a value business that you know, doesn't get as much recognition because it tends to be a little bit more of an ex-US oriented brand. And, you know, when we bought the company Datum, which is Osix, we really felt that we got a best in class bone growth factor that, you know, we're getting good traction with. So, you know, our aspirations to gain share in our implant business and The launch of Prime Taper as well as kind of an aggregate restage of our implant business has a kind of a pull-through effect on the entire business. So the specific contribution of Prime Taper is not going to be in 2022 in the tens of millions, but the idea that there is a comprehensive restage. that we're actually offering a complete solution is very important because implant dentists tend to pick systems, and they want to know that you're committed, and they want to know you offer the full breadth of solutions.

Great. Thank you.

Thanks, Matt.

We have time to take one last question, please.

Thank you. Our last question then comes from Erin Wright of Morgan Stanley. Your line is open.

Great. Thanks so much for squeezing me in. I had a quick question on prime print and 3D printing, and how would you characterize the level of demand that you anticipate across the 3D printing solutions that are out there, and how does it fit into the broader high-tech equipment offering that you have, and what sort of investments maybe that you need to make in and around that initiative with other ancillary products?

Yeah, Erin. You know, as Jorge said, we kind of built it in the back half of our projections. But, you know, 3D printers are starting to gain traction in the marketplace. You know, our sense of it is there were some solutions. There's some good competitors out there. None of them offer the level of automation, the level easy view, some safety, and some other things. We really feel that we started from a what does the dentist need and go there. A lot of this, Aaron, is also going to be about getting real estate. You know, right now there's some great apps that you can do on the 3D printer, night guard, surgical guides. You know, a lot of people do 3D modeling, which is important. But ultimately where this is going to go is, you know, we think there's going to be an opportunity as the inks get, you know, more sophisticated that you're going to be able to do permanent implants. You know, I think the race is on for the ability to, you know, print that first aligner. And digital dentures is clearly something that, you know, we believe ultimately will be a 3D printer, whether it's done in the office or in the lab. So, you know, in our mind, we think we've got a really good product that gives us a technology base that will allow us to continue to expand applications. We're, again, the reaction of, we've kind of had a beta cohort for a while, and they really talk about how transformative this is. In terms of investments, Erin, you know, what we need to do, a lot of this is going to be about, you know, developing inks either internally or with partners that give you capabilities in some of the, you know, kind of the future applications around, you know, aligners and permanent implants and dentures as well. So, you know, whether those are investments or partnerships, you know, it's not clear right now.

Okay, great. And then you mentioned the headline from preventative products. I guess, can you break out what you're embedding in your guidance for preventative products in 2022 and how we should be thinking about that impacting broader consumables growth?

Yeah, Erin, I don't think we called out preventive specifically. I mean, you know, I think the consumable discussion is it was, you know, you're up against a tough comp, you know, as dentistry reopened, you know, and I think I mentioned in my prepared remarks stuff like our paladin and other things tend to grow, but there's parts of the portfolio, you know, as digital imaging goes up and up and up, stuff like AquaCell is going to go down. But I don't think we called out specific prevention.

Okay. All right. Thank you.

All right. Well, thank you. Thanks, Chris. Let me just close out by saying, again, we appreciate the time you spent with us. I know that we covered a lot of things You know, one of the discussions that we've had with a lot of you guys is, you know, when are we going to do an investor day? You know, right now we're targeting June because there's lots of stuff. And, you know, to be honest, we're optimistic to talk about after the restructure where are we going into the future and describe why we're so excited about Densply Serona. So with that, I hope everyone has a great day. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect.