DENTSPLY SIRONA Inc.

Good day, and welcome to the Dentsply Serena Q3 2022 earnings conference call. All participants will be in list-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded at this time. I would now like to turn the conference over to Mr. Andrea Daly. VP of Investor Relations, please go ahead.

Good morning, everyone. Welcome to our third quarter 2022 earnings call. Joining me for today's call is Simon Campion, Dentsply Serona Chief Executive Officer, and Glenn Coleman, Chief Financial Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the investor section of our website at www.dentsplyserona.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 brace these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. In our most recently filed Form 10-K and any updating information in subsequent SEC filings lists some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about financial performance of our business, enable the comparison of financial results between periods for 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 will now turn the call over to Simon.

Thank you, Andrea, and thank you all for joining us this morning for our Q3 2022 earnings call. I'm very pleased to be here talking to you all today for the first time as CEO of Dentsply Sirona. Today, I'll provide you with an overview of the third quarter. Glenn will cover both the quarter's financial results and provide an update on our 2022 outlook. And then I will finish by providing a strategic operating update. Before we jump into those topics, I'd like to make a couple of introductory comments and also provide you with an important update regarding the completion of our internal investigation. First, I'd like to thank John Groslaers for leading the business as interim CEO and for helping to make my transition to CEO a smooth one. I'd also like to thank the entire Dents by Serona team. Our employees' continued dedication and ability to stay focused throughout this period of change has only reinforced my confidence in the many opportunities ahead, and I'm excited to be leading this team at Dents by Serona. I'm also joined here today by Glenn Coleman, our new Chief Financial Officer. As you all know, Glenn and I both joined Dentsply Sirona at the end of the third quarter, so this is our first earnings call as CEO and CFO. Together, Glenn and I bring a robust set of global leadership experience and medical device industry expertise that we expect will serve us well as we lead Dentsply Sirona into a new disciplined future. Importantly, we also intend to bring fresh perspectives and a critical eye to the business. I want to convey to you all why I am excited to be serving as the new CEO of Dents by Serona and why my early discoveries have reinforced my enthusiasm. Since I joined, I have spent time meeting with employees, customers, and other stakeholders, observing and better understanding what we do well, but also diagnosing the areas where we can improve. Along with my leadership team, we are making urgent progress on the development of our plan to restore the company to the growth and performance that it is capable of delivering. While we knew that the company would face financial pressures in Q3 and throughout the rest of 2022, we are focused on the future and the value we can drive for our shareholders. I believe we have tremendous opportunity to create value for shareholders over the near, medium, and long term predicated on three key factors. One, the company plays in an attractive and healthy category with strong growth opportunities. The long-term macro trends are supportive and those who can innovate, leverage global scale, invest appropriately, and execute judiciously through the current challenging external environment will emerge as long-term winners. Thoughtful disposition towards expenses, along with balanced and prioritized investments, will be a theme of this leadership team. Two, Dents by Sirona has a strong foundation from which we can accelerate growth. I believe we have the right to win in the dental market, as we are already well positioned with a comprehensive portfolio, and especially with our digital assets, where we can help shape and lead digital trends in the industry, from imaging to aligners to unique delivery models like BITES. Our strong and recognizable brand and legacy of innovation affords us the opportunity to gain share and grow above market. But to do so, we need to be disciplined and execute. Three, in order to support our strong foundation, we need to deliver on a sound strategy with best-in-class execution. Glenn and I, as you can see on slide five, are bringing together the best management models from our collective career experiences. coupled with the expertise and company knowledge from our management team. We have seen what operational excellence looks like and the results it can deliver, and that's exactly what we intend to implement at Dents by Serona. As we move forward, we will not shy away from making big, sometimes difficult decisions to put the company on a path to sustainable growth and long-term value creation. I look forward to sharing details of our plan with you over the coming months including metrics by which our progress can be tracked as we work towards our full potential. I'd also like to provide you an important update on the internal investigation. As you know, on November 1st, we announced that the Audit and Finance Committee of the Board of Directors had completed the investigation. Details on the investigation findings and associated remediation plans can be found in our SEC filings, which include an amended 2021 10-K. Remediation actions associated with the investigation and accounting review are underway, and moving forward, we are focused on creating a culture and company that is committed to accountability and transparency as we continue to implement the necessary remedial actions and operate with the utmost levels of integrity. Glenn will discuss the findings as well as remedial actions that we are taking. On behalf of the board and management, I would like to extend our sincerest thanks to all Dents by Sirona team members, especially our finance, accounting, and legal teams, as well as our audit and finance committee and advisors for their support and commitment as the company works to investigate and resolve these matters. Now, before I turn it over to Glenn, let me cover a couple of key observations on the third quarter. During my first week at Dentsply Sirona, I had the opportunity to experience CS World for the first time and was very impressed by the event, our technology, and our team. The level of engagement with our customers and partners was unparalleled. I had the opportunity to see firsthand our launch of several new digital solutions, including the new PrimeScan Connect, and had the privilege of hearing directly from customers on the tremendous value these solutions will deliver for their practices and patience. I will further discuss the importance of innovation after we cover the quarterly results. The business delivered disappointing Q3 financial results, which were impacted by foreign exchange headwinds, softer volumes in the U.S. and China, and continued global supply chain challenges. Despite recessionary and other external pressures, we were encouraged in the third quarter by solid continued growth across the portfolio in Europe, double-digit growth in clear aligners, and growth in imaging despite some supply constraints. Global demand remains strong in these areas, and we are well-positioned to capitalize on the continuation of the industry's adoption of digital dentistry. I'll share further thoughts on what we can do to drive performance going forward after Glenn provides a more complete overview of Q3 and our outlook. Glenn?

Thank you, Simon. Good morning, and thank you all for joining us. Before turning to our financial results, I'd like to introduce myself to those of you I have yet to meet. Having overseen financial and operational functions across several geographies and industries, including healthcare, I'm excited to take on this role as the company enters its next chapter. I joined Dentsply Sirona because I believe it's a great company with a legacy of strong brands and innovations. I look forward to working closely with Simon and the rest of the team to bring greater focus and discipline to our execution, advance our financial, operational, and strategic goals, and ultimately deliver long-term growth and value creation. Today, I'll provide more detail on our third quarter financial results and an update on our 2022 outlook. But before I do, let me start with the recently announced completion of the previously disclosed internal investigation and accounting review. The findings resulted in a restatement of our third quarter 2021 10Q and full year 2021 10K. As disclosed in those amended filings, net sales were overstated for the third quarter and full year 2021 by $29 million and $20 million, respectively. The company also revised full year 2020 and 2019 financial statements for immaterial errors. The combination of the investigation and accounting review also resulted in several material weaknesses and internal control over financial reporting. We have developed a comprehensive remediation plan to implement a number of process enhancements and additional controls to strengthen our overall internal controls environment, including personnel changes, updates to the company's code of ethics and business conduct, creation of or enhancements to commercial and accounting policies and procedures, and additional training for our team, including commercial, finance, and accounting employees. I'd refer you to our amended 10-K for more specifics on these efforts. We're already well underway with a number of these initiatives and will continue to provide updates on progress. Now that the investigation and accounting review have concluded, we are even more focused on moving forward and executing on our strategic priorities. Now let's turn to Q3 financial results on slide 8. As previously announced, GAAP results were impacted by the recording of a non-cash charge for the impairment of goodwill and intangible assets of $1.1 billion net of tax associated with two reporting units. This charge primarily reflects changes in macroeconomic factors, such as rising interest rates, foreign exchange headwinds, and broad declines in equity valuations, as well as lower forecasted revenues, which are negatively impacting our financial projections. More information regarding the impairment charge is available in our third quarter 10Q. In the third quarter, the business delivered revenue of $947 million. in line with the preliminary results we announced previously. In comparison to prior year, organic sales declined by 0.7%, while reported sales declined by 8.9% due to the significant strengthening of the U.S. dollar versus foreign currencies. The difference between reported and organic sales was fully attributable to foreign exchange. Gross profit was $539 million, or 56.9% of sales, and declined 100 basis points from the prior year, with half of the reduction coming from FX and the remainder from inflation and volume deleverage. SG&A expenses were $361 million, or 38.1% of sales. On an absolute basis, SG&A was flat sequentially and decreased by 3.6% year-over-year, largely due to FX. R&D spend was $39 million, or 4.2% of sales, up 50 basis points versus the prior year, reflecting Densply Sirona's continued commitment to developing innovative solutions for our customers with the majority of the investments in digital technologies. Operating income was $139 million, down 26.6% versus last year. Operating margin contracted to 14.7% due to lower volumes, particularly in the U.S. and China, and continued macro headwinds, including FX and inflation. As a result, EPS was 41 cents in the third quarter of 2022, as compared to 60 cents in the prior year quarter. We attribute $0.10 of the EPS decline to performance and inflation, $0.07 to foreign currency headwinds, and the remainder to a higher tax rate. Operating cash flow was $109 million in the quarter, and adjusted free cash flow conversion was 88%. The company has maintained a strong balance sheet and finished the quarter with $418 million of cash and cash equivalents on hand, with a net debt to EBITDA ratio of approximately 1.8 times. The strength of our cash generation enables us to maintain our commitment to returning cash to shareholders, while still allowing us to invest in the business. In the third quarter, we paid $27 million in dividends. Going forward, we expect to continue returning at least 50% of our free cash flow to shareholders through a combination of dividends and share repurchases. We will also continue executing on our balanced capital allocation strategy, which includes opportunistic share repurchasing and investing organically to drive faster revenue growth over the long term. As a reminder, we have $740 million of authorization remaining under our share repurchase program. Moving to segment performance in the quarter on slide 10. Organic sales and technologies and equipment or our T&E segment, grew 0.6%, while consumables declined 2.5%. The T&E segment organic sales growth was led by double-digit growth in clear aligners and continued strong global demand for imaging equipment. Ortho grew double digits in the quarter due to strong demand of both SureSmile and Bite offerings. SureSmile continues to benefit from regional expansion and new product offerings. As anticipated, Byte, our direct-to-consumer clear aligner brand, returned to growth in the quarter after facing tough year-over-year comps in the first half of the year. While we are cautious on consumer spending trends entering Q4, we are pleased that Byte continued to show improvement in the third quarter. Given the momentum we have in the aligners business, we expect to see double-digit growth in the fourth quarter. The equipment and instruments business, or E&I, posted growth due to continued strong imaging demand, despite ongoing supply chain constraints, which resulted in higher backlog for our 3D imaging technology in the quarter. Implants were flat in the quarter as growth in the U.S. and Europe was offset by lower volumes in China. We attribute the softness in China to continued COVID-related shutdowns and lower orders in anticipation of volume-based procurement taking effect. Our CAD CAM business declined in the quarter due to tough year-over-year comps and lower wholesale orders through distributors in certain regions, where indicators are showing some softening of retail demand. Moving to the consumable segment, organic sales declined by 2.5% versus prior year, primarily attributable to a weaker performance in the U.S. and lower volumes in China. These headwinds are partially offset by price increases and recent product launches, including ProTaper Ultimate and Steric Blocks. Now turning to third quarter financial performance by region. U.S. sales were $357 million, representing an organic sales decline of 5.2%, driven by lower retail and wholesale volumes in CAD-CAM and certain consumables. These headwinds were partially offset by growth in clear aligners and imaging. Europe delivered another good quarter with sales of $358 million and organic growth of 3% attributed to strong performance across the business, particularly in clear aligners and endo. Demand for imaging and treatment centers also remained high despite supply constraints. Rest of the world sales were $232 million and essentially flat on an organic basis versus the prior year. Lower sales in China were offset by increased adoption of digital dentistry technologies, particularly in countries such as Korea and Japan. Moving to our outlook for 2022. Based upon our third quarter performance and fourth quarter estimates, which includes assumptions for a continued challenging macroeconomic environment. We are lowering our full-year financial projections. Compared to the prior outlook, FX headwinds have become significantly more pronounced, and we now expect net sales in the range of $3.85 billion to $3.88 billion. We anticipate the full-year sales and EPS impact of FX versus the prior year to be approximately $300 million and 30 cents, respectively. FX headwinds represent a 120 basis point operating margin headwind for the year. Full-year organic sales are expected to decline approximately 2%, as we're now anticipating stronger global recessionary headwinds, particularly in the U.S. and certain European markets. In China, we continue to see prolonged impacts from COVID-related shutdowns. which we accounted for in our prior outlook. Additionally, we're beginning to see the effects of volume-based procurement in China on our implants business. Over the long term, we believe VBP presents an opportunity for the business to increase volume, but in the near term, the effect on pricing will be a headwind. We are closely monitoring global dental traffic and leading indicators on consumer behavior. Due to higher consumer inflation in major markets, we're expecting that there will be a slowdown in elective procedures, such as clear aligners and implants, and dental volumes may skew towards more traditional procedures. This dynamic, coupled with higher interest rates, may reduce the demand for certain equipment in the coming months. We estimate that the full-year operating margin will be greater than 15%, down from the prior outlook, due to volume deleverage and supply chain headwinds. With these updates, 2022 adjusted earnings per share is now expected to be in a range of $1.90 to $2, representing a reduction of 50 cents at the midpoint compared to the prior outlook. The key components of the EPS outlook change are shared on slide 14 and include approximately 20 cents for a reduction coming from our U.S. underperformance. $0.05 from China headwinds associated with broader COVID shutdowns and VBP, $0.10 attributed to supply chain headwinds, $0.10 to FX, and $0.05 due to an updated tax rate and share count assumptions. In closing, despite disappointing third quarter results in a challenging macroeconomic environment, we are confident that our strong, business foundation and balance sheet support our priorities to drive successful execution of our strategy. Myself, Simon, and the entire leadership team are executing with urgency to address these headwinds and best position Dentsply Serona for the future. And with that, I'll now turn the call back to Simon.

Thank you, Glenn. Moving on to our strategic update. I want to share with you my thoughts on the strategy and how we will deliver on it going forward. Our strategy of enabling dentists to have superior integrated workflows is compelling. We believe in it, and so does the board. While we will continue to refine it, our strategy remains largely unchanged. What will change is how we deliver on it going forward, which starts with the tone at the top of this organization and the actions we are taking now to move the business forward and enhance, or where appropriate, introduce key capabilities. As we build our capabilities, we are thoughtfully considering the right formula to deliver against the following objectives. One, reliable and sustainable revenue growth. Two, increasing profitability. Three, leverage of investments made. And four, double-digit earnings growth. To achieve these objectives, we are intently focused on our strategy. It requires us to seamlessly bring together the power of our comprehensive portfolio of digital equipment, software capabilities, cloud-based solutions, and essential consumables to provide solutions for our customers. This includes solutions which enable us to take an expanded view of our customers and their interaction points with solutions such as Byte and DS Core. This in turn allows Dentsply Sirona to become the essential partner to dentists regardless of where they are at on the digital journey. With that, I'd like to discuss actions we are taking as shown on slide 18. With our investigation now concluded and remedial actions underway, Dentsply Sirona is at a critical inflection point. As we move forward, we are committed to improving the performance of the organization in all respects. Our organizational transformation starts with the tone at the top and creating a speaking up culture. As leaders, we have the responsibility to set the tone for what is acceptable and what is not. We must and we will operate with the utmost levels of integrity, create a healthy compliance environment, and hold ourselves and each other accountable. We are acting with urgency. and we will be disciplined and accountable whilst providing transparency and disclosure. Next, we must identify what our winning portfolio looks like. We have a strong foundation to build from with a comprehensive portfolio that is available globally. Yet we know that we have opportunities to optimize the portfolio, and we have already kicked off a robust process to execute this work. Optimizing the portfolio will enable simplification and increased profitability, thereby facilitating opportunity to invest in projects and programs to drive growth. To support our winning portfolio, we are also conducting a comprehensive review of the organization. Observations and insights thus far indicate that there is opportunity to reestablish investment in certain regions such as North America and in functions such as operations to improve performance. In fact, we have already commenced some of these investments. Additionally, we must evaluate our organizational structure to ensure it facilitates a collaborative culture that is enterprise and solutions orientated. As we transform, we will look for ways to simplify as well as enhance productivity, collaboration, and accountability across the company, which will drive profitability so that we can bring operating margins back above 20%. Lastly, we will focus on disciplined execution to become a best-in-class organization. With that in mind, we have just appointed an Executive Vice President of Operations. This individual brings a legacy of high performance and transformation in operations and supply chain, and we look forward to having them onboarded. Beyond operations, we have other opportunities to improve our execution and discipline. We've appointed an execution-centric APAC leader who will join our team in the coming weeks. we remain committed to investing in R&D to bring new solutions to market in a disciplined and optimized way. I've experienced the power of an effective new product development process, and we are building this capability at Dentsply Serona. Similarly, Glenn and I have also seen the critical power that effective operating mechanisms and processes can provide, and we are committed to implementing this at Dentsply Serona as well. The management team will continue to build upon refine, and expand our foundation and deliver an operating environment that is disciplined, predictable, insightful, and transparent. We have confidence that with these actions taken and in more normalizing market conditions, Dentsply Sirona can grow revenue at or above our historical long-term targets while also increasing profitability with operating profit margins above 20%. Turning now to slide 19. Going back to my earlier comments on Dents by Sirona's rich legacy of innovation and healthy pipeline, we are focused on creating differentiated and innovative solutions to address customer needs for both patients and their dentists. As we work to identify key areas to accelerate innovation, an important one in our digital portfolio is accelerating software development. We have made a fundamental transformation in our approach to software development, and we are moving from developing individual software for different devices and treatment plans to building a single platform that will support all of our devices, as well as our extensive treatment planning portfolio. That platform is DS Core. DS Core will deliver end-to-end digital workflow from diagnosis to treatment, and it represents an important first step on the long journey of both incremental and transformative digital innovation in the dental market. We are excited about the additional capabilities our new cloud-based platform will provide for our customers and their partners by enabling seamless integration across the entire DS digital portfolio. PrimePrint is our first solution that is fully integrated and enabled by DS Core with additional offerings including DS Core Create for design and DS Core Care for service. PrimeScan Connect is also powered by DS-Core and can be used for digital workflows such as restorations, implants, clear aligners, and sleep appliances. We look forward to continuing to bring more innovations to market in 2023 and beyond. Now let me highlight a few closing comments on slide 20. Despite the challenging quarter, we are optimistic about our future. A winning portfolio, an attractive end market, will enable us to drive sustainable growth and increase profitability over the long term and that will continue to be our top priority. We have the right to win and we will begin to capitalize on that opportunity through partnership, through discipline, through focus on continuous improvement and through execution in everything we do. The 2022 outlook has been updated to reflect our recent performance and changes in the macro environment. With the internal investigation complete, We are moving forward with urgency and renewed focus on and commitment to improving executional discipline. We are at an important turning point for Dents by Serona and are taking the necessary actions to deliver a brighter, more consistent future. Finally, the Dents by Serona team has proven over the past several months that it is strong and resilient. We have a mission-driven organization with a wealth of expertise. We have a leading portfolio of products including in the nascent digital space that we are fully committed to. I am confident that together we can overcome near-term challenges and provide greater shape, structure, and focus to our organization and deliver meaningful and sustainable results. We are looking forward to providing you with the results of our full business diagnostic along with details of our plan and the operating actions that we are taking all of which we feel will set Dense by Sirona up for consistent and sustainable performance. And with that, I will open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press Store, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Store, then 2. At this time, we will pause momentarily to assemble our roster. It looks like our first question comes from Kevin Caliendo of UBS. Please go ahead.

Thanks. Thanks for taking my call, and thanks for all the information this morning. I guess the question that we're all wondering here is how to think about the run rate of the business in the third quarter and implied fourth quarter in terms of the margin, if there's anything there that's one time in nature? Do you think this is the sort of run rate earnings power of the business as we go into 2023? And maybe as a second sort of follow-up to that, you talked about getting margins back over 20%. I'm not going to ask for any 2023 guidance, but maybe talk through how you get from the margin in 2022 to that 20 plus percent rate going forward.

Yeah, Kevin, thanks for the question. This is Glenn. When we look at the run rate of our margins, obviously, sequentially, we were down from the second quarter to be sub-15%. Keep in mind, one of the things really impacting our margins right now is the significant foreign exchange headwinds. And I think I put my prepared remarks on a full-year basis. We're looking at an impact of close to 120 to 130 basis points alone just from FX. And obviously, having lower revenue volumes is also contributing to deleverage in terms of our gross margin performance. So I think we're doing a reasonably good job right now of managing our operating expenses. But for us, as we look forward in the fourth quarter, I would expect to see another step down sequentially in our operating margins, given where we're at and the lower revenues that we're projecting here on a reported basis for Q4 sequentially. I think we'll see a slight reduction overall in our gross margins. But the key for us is really focusing on getting the business back to growth in 2023. That'll get us better performance in terms of leverage. We're looking at a number of things across our organization in terms of optimization initiatives. Simon mentioned some of those relative to his prepared remarks. And I think for us, it's really going through a deep dive on the entire organization structure and figuring out how we could be more efficient. to drive significant margin expansion as we move forward into 2023 and beyond. And we do have a high degree of confidence that over the medium and longer term, we'll get back to 20% plus operating margins across the business.

Thank you. Our next question comes from Elizabeth Anderson of Evercore ISI. Please go ahead.

Hi, guys. Thanks so much for the question. So in terms of, I think you talked about some of the, that you're still getting pricing, particularly in the U.S. when you were talking about your consumables business. Can you help us think about like what you're seeing in terms of like U.S. volumes versus sort of where you're still getting pricing across your portfolio?

Yeah, I think from a pricing perspective, we've done a nice job to offset some of the cost inflation with Price increases in 2022. I think on the whole, we're probably looking at close to a 3% overall increase on pricing. Obviously, it's not fully offsetting some of the volume declines that we're seeing in the U.S. business. As we look at our U.S. performance, I think one of the key things to think about is the sales going through our distributors. And we've seen weakened demand on both the wholesale level and the retail level in terms of our U.S. sales, given the recessionary environment. And we also started the year off with high inventory levels at distributors. And so we've been working that inventory down throughout the year. And so the combination of those items, along with the fact we've had more than usual open territories on a U.S. sales force that we're addressing, has resulted in volumes that are down in the U.S., which is not something that we expect to continue over the long term. Obviously, we're addressing those things, especially the headcount item. and filling those roles. And right now, I think that's the key thing that we're focused on.

And I would supplement that, Elizabeth, with saying that we are investing right now in certain areas of the U.S. sales team. That work was commenced by John Groszler and Barb Odom when they were in their interim roles. And we had an investment plan, and we have begun to action that as well in certain discrete areas of our U.S. commercial team.

And maybe just to pick up on that slightly, so where are you sort of seeing underinvestment in sales? Is that something you would sort of just attribute to the, like, general sort of turmoil left over that you guys obviously inherited? Or is that something that's like a broader macro picture? Like, how long do you sort of think that that takes until you're sort of back up to sort of full capacity in that respect?

Well, we have a very active recruitment program underway right now, Elizabeth. I would suggest over the past number of years we have perhaps underinvested in the U.S. team in particular, and that has driven some of the historical challenges with U.S. commercial performance. We're in the process of, as I said, addressing that right now and focusing on some of the emerging trends as well in the U.S. region, such as DSOs. So we have you know, the work that was undertaken during the summer was comprehensive and complete, and execution of that is now taking place.

Yeah, Elizabeth, I would just add, while we saw obviously reductions overall in the U.S. business and volumes being down, there were some positives I'd call out. The ortho business continues to perform quite well, both bite and sure smile, and our imaging business, even with higher than usual backlog situation, we're actually showing nice growth there as well. So While we did see declines in equipment overall, we did see some bright spots in the U.S. business, which we expect to continue as we move forward here.

Super helpful. Thanks, guys.

Our next question comes from Nathan Rich of Goldman Sachs. Please go ahead.

Hi. Good morning. Thanks for the questions. Two on the top line. First, on the near term, could you maybe just help us think about what you're expecting for the fourth quarter, maybe relative to what you saw in the third? And I guess specifically, you talked about double-digit growth and clear aligners. It sounds like demand for imaging is still strong, but your fourth quarter guidance implies a slight moderation. So, Could you maybe just help us think about what you're seeing in the fourth quarter, and are you expecting some moderation in overall end market demand? And then longer term, could you talk to us about what you see as the key pillars of getting back to that above-market growth? I think you even referenced growth potentially in line with the prior long-term targets, which were 4% to 5%. So could you just talk about maybe the longer-term opportunities there? Thank you.

Yeah, so maybe I'll comment on the first piece, and Simon can comment on the second part on the long-term outlook. Just to remind everybody what we said back on the November 1st pre-announcement, we said reported revenues would be down sequentially from the third quarter to the fourth quarter in a low single-digit range. And on a constant currency basis, organic revenues would be flat to up low single digits sequentially from the third to the fourth quarter, and that's on an absolute dollar basis. So what that translates to when you look at year over year, fourth quarter versus fourth quarter, is organic growth that's going to be down in the mid-single-digit range versus a quarter where we just came in at 0.7% down. So we are expecting to see a further decline in organic growth in the fourth quarter. If I look at the pieces in the fourth quarter, we do expect to see good growth coming out of ortho. Both bite and sure smile should continue to show good growth. in the fourth quarter. I mentioned that in my prepared remarks. Imaging should continue to show growth, but we do expect to see continued declines in the equipment side of our business, similar to what we saw, I would say, in the third quarter. On the consumable side, I think the preventative consumables will continue to hold up pretty well here in the fourth quarter. I don't want to say the recession proof, but certainly less impacted by a recession. But we do expect to see our restorative consumable products show a decline year-over-year in the fourth quarter. So overall, that's how we're looking at Q4. And again, we expect to be down year-over-year, probably in the mid-single-digit range for organic growth.

And then, Nathan, with respect to our long-term outlook, as I answered on the last question from Elizabeth, we are investing in the North America commercial team, the sales team in particular. So we expect to begin to remediate some of their performance When I look across the world, Europe has had a strong year despite the headwinds with growth in each quarter. If we exclude China from the rest of the world, so LATAM and APAC-X China, we've seen high single-digit growth there as well. But as we said in our prepared remarks, what Glenn and I are bringing to Dents by Sirona is absolute discipline and focus on on execution. And that starts with the operating model that we're introducing here and rigor around projections, rigor around R&D, rigor around the delivery of anticipated revenue from R&D launches. So that model, in conjunction with the track record we have with training the dental community, here in Charlotte and also in Bensheim, where we've trained in excess of 7,000 dentists in Charlotte this year. I think we have a track record of technology and a wealth of knowledge in the organization. And if we partner that with rigor and discipline, we strongly feel we can get back to where we should be in the dental market. Thanks very much.

And it looks like our next question comes from Erin Wright of Morgan Stanley. Please go ahead.

Great, thanks. How should we think about the recent trends in CAD-CAM and how should we think about your overall strategy in CAD-CAM now with PrimeScan Connect? And will chair-side still be a meaningful part of your sales effort going forward? Are we moving away from that given the market has evolved? And how would you characterize overall demand for chair-side now? Thanks.

With respect to CAD-CAM and digital, we strongly feel that the strategy we have, Aaron, is an appropriate one. We continue to invest behind digital, whether that's software or pieces of capital equipment that we're delivering both to ChairSide and to Lab. And we will continue to address the needs of the market and also look for key evolutions in the trends of the market, such as within the DSO market. within the DSO community. So while we've experienced some pressure here, we do think that CAD-CAM is going to be a key part of our business moving forward. And the fact that we are a full-line supplier to the dental community, we should continue to drive digital and CAD-CAM and get the commensurate consumable pull-through associated with that as well. So our strategy, for the most part, remains intact. For sure, there will be continued refinement of it as we move forward, but the pivot will be, as I noted in the prepared remarks and to Nathan's question, will be increased rigor and discipline around execution and monitoring performance.

Okay, great. And then a quick one on just what is the timeline of your strategic review or when do you think we'll get more details there and and what is being assessed initially, and is everything on the table, including divestiture? Thanks.

So we've already commenced that work. Part of it started during the summer with respect to North America, and we have ongoing reviews right now with respect to winning portfolio and how we are organized for success moving forward. We would expect that the Q4 call in February to begin to share more details about what that plan is looks like. But we have acted with urgency in the past nine weeks. We're partnering with external partners to do a baselining of our performance, and we expect to be in a position to communicate more around the Q4 earnings goal in February.

Next question, please.

And our next question comes from Brandon Collard of Jefferies. Please go ahead.

Hey, thanks. Good morning. Simon, just on the buy business, it sounds like your intent is to keep those operations. Can you just talk about why and what about the business is attractive to you in terms of the longer-term growth profile? Do you still expect to deliver positive revenue growth in that business for the full year?

So, listen, we think Byte has a key role in our portfolio moving forward. We are end-to-end on the digital or on the consumable and digital scale, and we think we should be end-to-end on the consumer spectrum as well. So we think there's a future for Byte. The Aligner business has delivered double-digit growth for us. We feel we can do better with it for sure. We're investing... behind it to make it easier to do business with and get more conversions out of that business. But for sure, for now, Byte remains a key part of our business and will continue to be so for the foreseeable future.

Yeah, and then on the financial performance of Byte, I would just say Byte has shown sequential growth each and every quarter in 2022, so we're very encouraged by that. In the third quarter, we did see double-digit growth. and we do expect to see growth in the fourth quarter year-over-year as well. On a full-year basis, though, given the tough first half of the year comps, we do expect to be down probably in the mid-single-digit range on a full-year basis.

Got it. That's helpful. And then just touch on where you see the biggest choke points in terms of the supply chain right now. Are you able to quantify any dollar amounts of revenue that supply chain headwinds may have? limited and kind of outlook for maybe when you start to see some improvement?

Yeah, I wouldn't go so far as to quantify it, Brandon, but electronics still continue to be a headwind and a blockage for us, although demand coming in or requests for technology continues to be strong. So we have not seen a dramatic improvement in the outlook for the electronic parts of our technology over the past couple of quarters.

Yeah, I would just say treatment centers is probably the other pain point we have relative to supply. And then on the positive news front, consumables continues to get better overall relative to our backorder situation. So I feel really good about the progress we've made on consumables, but electronics and treatment centers are probably the two pain points right now on the supply side. Thank you.

Our next question comes from Jeff Johnson of Baird. Please go ahead.

Thank you. Good morning, guys. Simon, I wanted to go back to the portfolio question, just kind of composition of portfolio. And I think, you know, soon after you joined, soon after Glenn joined, we all did kind of calls with each of you. And, you know, I think the comment was more around some significant potential portfolio opportunities. reallocation over time. Today on the call, it sounds like you're talking more about optimization. Glenn's talking about a commitment to buybacks and dividends, and the latter makes sense, but not necessarily building a war chest at doing buybacks. So I guess, has something shifted in the last six or eight weeks on kind of how much you think might need to be done on reconstructing the portfolio, reallocating the portfolio? I mean, if I look back over the last 10 or 12 years, earnings basically this year are going to be at about trough where they were in 2008, 2009. So, you know, a lot of stuff that feels like could be reworked here or might need to be reworked, but it seems like you might be backing off a little bit of that portfolio reallocation commentary. Thanks.

No, I wouldn't say backing off at all, Jeff. I would say increasing the scope of the work that we spoke about in in the calls that we had with you and several of your peers in the September timeframe. There are clear areas of our business that we're looking at with respect to moving on. And then there are clear areas of our business where we probably have a proliferation of SKUs. And through taking a long, hard look at our SKU mix, we feel that we can optimize some of our offerings, optimize the allocation of cash, and focus our energies within our network on driving growth in those areas that are delivering growth and have a better longer-term outlook for us. So I don't think we have narrowed our scope at all. I would say we have broadened it to – to look at the skews and a winning dental portfolio in general.

All right, that's helpful. Thank you. And just a quick follow-up, going back, I think it was the first question in Q&A, but Glenn, I just want to understand the margin commentary. You know, fourth quarter going to be down in the low double digits. Third quarter obviously slipped below 15%. Currently, headwinds aren't going to come off right away. Is that at least the starting point we should be thinking about early next year, kind of in that second half range of this year, at least to be starting to build a base off as we think about kind of 23 and 24 estimates? Thanks.

Yeah, I would expect that our Q4 – operating margins are the low watermark and that we will build off of that going into next year. Thank you. We'll get more color on next year's operating margin guidance and how it would shape up by quarter when we get to our February earnings call.

Our next question comes from Mike Charney of Bank of America. Please go ahead.

Yes, hi. This is Dan Clark on for Mike. Thanks for taking our questions. Just on China and the volume-based procurement headwind, can you just help size that for us, understand it's going to go into effect next year, but just how should we think about the magnitude of that and then the timing before that ultimately turns into a potential tailwind for you guys? Thank you.

Thanks, Mike, for the question. Yeah, let me try to size this up. I'll use 2021 as the basis for my comments. I think we previously said China is about 5% of our consolidated revenues, so call it $200 million, and that's based off of full-year 2021 numbers. Obviously, with COVID shutdowns and so forth, the number's a bit lower, but just use $200 million as a starting point for our revenues in China. The portion of our business that's impacted by VBP is our implants business, which is about 25% of our revenues in China. So if you do the math on that, call it $50 million in impacted by VBP. However, um, you know, of our implants business, 90% of it is probably impacted. 10% not, um, just based upon the products that we sell in China. So it's about 40 to $45 million of our implants business that's impacted right now. We think there's probably about a 30% price reduction coming that would impact us. There's probably a bigger reduction, but some of it will be borne by our distributors in China. And so I would take 30% of, call it $45 million as a rough order of magnitude impact on our business right now from a pricing perspective, which call it, you know, somewhere between $10 to $15 million on the top and bottom line. Obviously, as we move past the pricing headwind, we do expect to make some of that back up with volume increases. It's too early to tell when that comes back. And hopefully we can offset most of this pricing headwind now. at some point in the second half of 2023, but it's still too early to tell. We still have to go through the bidding process and see, you know, what our incremental volumes would be as a result of EBP. But hopefully that sizes for you, the impact just from the pricing piece, which I would say is somewhere between 10 to $15 million.

Great. Thank you. And then just a follow-up, um, your 4Q guide for clear aligner growth in the double digits, is that sort of an appropriate jump off point when we're thinking about 2023?

Yeah, I don't want to comment yet on 2023. Obviously, we have to see how we end up the year. We have to see what the macro headwinds look like around the aligners business. I would just say we're encouraged by the momentum we have in our aligners business, given that we've grown sequentially for three consecutive quarters in both of our direct-to-consumer and in-office align our businesses, which is encouraging. We're seeing double-digit growth here in the third quarter, expecting good growth year-over-year in the fourth quarter. But until we get to next year and we see the impact on consumer confidence, consumer spending, I'm going to be cautious on what I say around next year until we get there. Thanks.

And our next question comes from John Block of Stiefel. Please go ahead.

Great. Thanks, guys. Good morning. just maybe a follow-up on CAD CAM. I think in the U.S. it was down high single digits or more, maybe even low double digits. Can you guys just talk to the end market demand for CAD CAM versus, you know, what still might be some inventory headwinds or maybe just sort of framed differently? Are we now fully normalized for the inventory and the channel, you know, specific to the U.S.? And then I'll ask a follow-up.

Yeah, I think... The reduction in terms of year-over-year volumes in CAD-CAM is a combination of burning through the inventory that we had on hand at the end of the year, along with softening retail demand. So, you know, I don't have a good estimate of what that looks like, but clearly it's a combination of the two factors. And I think as we lap into 2023, obviously our deal with inventory levels are going to be at very reasonable levels, lower levels than probably historical norms even, and Then it comes down to what's the retail demand look like, and it's too early to tell what that's going to look like right now. But obviously, with rising rates, it could put pressure on our equipment business overall, and this would be part of it. But clearly, when you look at the performance this year, it's a combination of burning down the inventory levels at dealers and, I would say, softening demand at the retail level for the overall CAD CAM business. Okay.

And then maybe just to shift gears, and, you know, you've had some some really good new products recently, Prime Scan Connect and Prime Print. And maybe just talk to us about uptake at the DS world. And, you know, we always think about Densply, Sirona as an innovator, and you've got IDS, you know, in the not-too-distant future. Are we looking at what you're going to have out there? Are there still some incrementals maybe in your back pocket that might come to light over the next, I don't know, four or five months? Maybe just talk to us about the pipeline and new products and how you see that unfolding in coming quarters. Thanks, guys.

Sure. Thanks, John. Listen, I was at DS World, as I mentioned, and I was extremely impressed that we have 3,500 dental professionals at a trade show and training event for Dents by Serona products and technologies. I think the technologies that we have are really very robust and serving the emerging trends in the dental industry, making dentists and their practices more efficient. and enabling better outcomes for their patients. So I was very comforted with what I saw at DS World and the new technologies that we're bringing to bear on the market, including PrimeScan Connect and PrimePrint and indeed the new software solution DS Core. So uptake of those, it's early, six weeks ago or so. Uptake has been reasonably strong. Obviously, as we move forward, as we said in our prepared remarks, the discipline that we have around new product development, around identifying the markets that we want to play in, and rigor and discipline around how we track and monitor performance is going to increase in a very meaningful way here at Dents by Sorona moving forward. But the base of technology that we have, And the knowledge and interaction that I saw between our reps and their customers was really exceptional. And as we move forward into 2023, you should expect more product launches. Primarily, I think I would classify them as incremental product launches in 2023, but that's quite fine too. Singles and doubles also add up to meaningful revenue. But as I said, you should expect more. to see more rigor and discipline around our commercial and new product development efforts moving forward.

Great. That's a great call. Thanks, guys.

Our next question comes from Michael Patusky of Barrington Research. Please go ahead.

Hey, good morning. So, Simon, I'm focused on slide 18 where you talk about tone at the top and you say creating and fostering a culture of speaking of compliance and accountability. And I'm just curious, certainly that bullet implies that those things weren't being done at an appropriate level. And, you know, concretely, I mean, what do you do other than sort of removing – maybe folks that weren't, you know, employees, leaders that weren't aligned with that. Other than doing that, I mean, what do you do to create a culture of speaking up and compliance and accountability?

Well, for sure, Mike, what we've already begun to drive here is a culture of inclusivity so that people have an opportunity to share their voice and that there is no... that there were zero consequences for speaking up here at Dentsply Sirona. Both Glenn and I and the remainder of the management team are committed to that and providing fora and opportunities for employees to share their opinion. Now, we won't seek consensus. We will seek opinion, and then we will make decisions and move forward on any topics that come up. But our organization has proven to be resilient. As I said to the previous question, the technology that we have is robust. And when we create a place where people want to come in and do their best, where their voice is appreciated and welcomed, and where we operate with rigor and discipline, we feel we can get the performance of our organization there. back to where we expect it to be and where all of you expect it to be as well.

Can I just ask one more question? Just on the strategic review, as you guys think about capital allocation going forward, I know dividend has been a part of the history of Dentsply, but given the internal investment you guys want to make in U.S. sales and other places, I mean, is Dentsply Dividend, quarterly dividend, I mean, is that absolute part of capital allocation going forward or is even something like that on the table as far as assessing things?

You know, I would say we're still intending on paying a dividend moving forward, so no change to that. I think the big focus for me and the leadership team is how we're going to improve cash flows across the business to get more capital to be deployed and including dividends, share repurchases, and investing organically in the business, which is obviously important when we think about the investments we need to make. And so my big focus is really on improving cash flows so we can continue our dividend program, do more share buybacks, and being able to reinvest in the business. And then down the road, do some accretive tuck-in acquisitions that fit our strategy. And so that's really the key focus for us. And I would tell you that I'm setting a goal for the organization to have a free cash flow conversion rate of at least 100% moving forward. I mean, that's an expectation that I expect to hit and achieve. And a big part of it is improving profitability, is looking at inventory and how we can get more cash out of our inventory and reducing these one-time costs that we're currently incurring. And so there's a big opportunity from my perspective to do that. And, again, I don't see any change to our dividend strategy that's been implemented to date. Thank you. Appreciate it.

Our next question comes from Jason Bednar, Piper Sandler. Please go ahead.

Hey, good morning. I appreciate the questions here. Simon or Glenn, you referenced more pronounced recessionary impacts in the U.S., also some certain European markets, some risks around higher out-of-pocket procedures, potential for slowdown in equipment. I mean, all this sounds like, you know, some early framework for 2023, but I know we're not going to get formal guidance here. I know some others have taken a stab at it, but I'll do mine here as well, is that the down mid-single-digit growth here in 4Q, a place where I guess you'd feel comfortable with street estimates for at least the first half of next year, just given some of those comments you made that were forward-looking, or are you willing to commit here today on a full-year basis for next year, expanding margins and or growing EPS next year?

Jason, it's Glenn. We're not going to comment on 2023 at this point. I think we've got to see where we finish up the year, have to see what the environment looks like as we enter 2023. And so I'm going to refrain from making any comments on 2023, only to say that we're going to act with urgency to really get the organization on a better path to growth and profitability as we move forward. So more to come when we get to the February call. But for now, I think we're going to Pass. Any further comments in 2023?

Okay. Understood. I thought I'd try. And then maybe just a follow-up here on pricing. I think you mentioned a three-point tailwind from pricing here most recently. It looks like you did another round of price increases in at least some parts of the world on October 1st. Maybe could you confirm that? Was it global? Was it just regional? And then did that drive any – that price increase – that was in place, assuming it was, did that drive any above normal pre-buying in 3Q and out of 4Q that's influencing the organic growth guide that you have here for the fourth quarter?

Yeah, so we can confirm we did a price increase middle of October. So, yes, we did another price increase. And no, there was no pre-buy relative to that price increase coming. So, yeah. It was select in terms of where we did the price increase. I don't think we did an across-the-board increase. We had to be very selective in where we did it, but we did implement one middle of October, and hopefully that can offset some of the cost headwinds we're seeing as we move forward.

In fact, I would add a comment on China to that. When the VBP was announced, we actually saw some pullback from our distributors in China as they managed their inventory levels as well with the anticipated changes in China.

Okay. Glenn, any quantification around that price increase, or would you call it normal or standard for you?

Yeah, I don't have a good quantification of it. I would just say it's pretty much normal to what we've done in the past. Okay. Thanks so much.

Our next question comes from Brennan Vasquez of William Blair. Please go ahead.

Hi, everyone. Thanks for taking the question. I just wanted to clarify an earlier comment because I know we weren't getting too much on 23 at this point, which I can appreciate. But I think I heard a comment earlier that you did want to return to growth next year. So first, is that fair? Is that what we're thinking about, even if it's maybe just on a full-year basis, a little bit of growth? And then the follow-up would be, you know, you obviously have a lot of great strategic outlines here. There's still more work that needs to be done in flushing them out. But if you are feeling confident that you could see some growth in 23, maybe what are some of those, I guess I'd call them low-hanging fruits that you guys are identifying strategically that could help you return to that next year?

Yeah, Brandon, I'll start, and then maybe Simon, you could add some comments as well. On 2023, again, we're going to do what we can to show better performance in 2023 versus 2022, but we're not going to give any further comments on what the top line is. growth or declines look like or what the margin expansion looks like. So, again, we'll give more color on that when we get to February of 2023. Simon, I don't know what else you want to add.

Yeah, I would add to that about the investments and trying to get after the growth profile of the organization. We mentioned the work that we're doing on the portfolio and on structuring our organization for success moving forward. So when I look at that, and we already spoke in our prepared remarks about getting ourselves above the 20% operating margin, I'm confident that we have the resources in this organization to invest for growth without increasing the company's operating expenses. And so that is a key focus for us moving forward. We've already demonstrated that we're willing to invest to drive growth in the North America investment, and we will continue to have that mindset. about thoughtful and disciplined investment for growth and an equally thoughtful disposition to expenses moving forward.

Got it. Thank you. And then maybe just to close up within clear aligners, can you talk about where you're seeing some growth? It sounds like you guys are happy with some of the initial traction you're seeing on the clear aligner side. So maybe talk a little bit about, like, Are these new accounts, is growth coming from new accounts? Are you going deeper into existing accounts and where you would expect kind of momentum going forward? Thank you.

Yeah, I think the growth we're seeing is pretty broad. Part of it is geographic expansion. Part of it is better conversion rates with customers. But it's pretty broad, U.S., Europe, rest of the world. So I think the good news is it's pretty broad in terms of the growth. And I think geographic expansion is obviously an important part of it. And I would just highlight SureSmile has been really a stellar performer in this. I mean, I look at the growth rates for the first nine months of this year. Each quarter, we're putting up sequential and impressive growth year over year. So we do think we're taking some share here. And with our plans moving forward, this should be a bright spot in the portfolio.

At this time, this concludes our question and answer session. I'd like to turn the call back over to Mr. Simon Campion, CEO. Please go ahead.

Thank you, everyone, for participating today and for your thoughtful questions on the call. In closing, I would like to reiterate my thanks to all Dents by Sirona employees around the world for their patience and fortitude as the organization navigated this tumultuous period. We can all now focus on running this organization to the very best of our abilities. So once again, thank you for your time today. Thank you. The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.