Q4 2019 Earnings Call
Ladies and gentlemen pick your standing by welcome to the Q4 2019, Dentsply Sirona earnings Conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question answer session.
The question during recession will either press star one on your telephone please be advised to todays conference is being recorded if you require further systems. Please first carbon zero I would now like to resources comps comps drops when do you may begin sir.
Thank you, Kevin and good morning, everyone welcome to our fourth quarter and full year 2019 earnings conference call I'd like to remind you got an earnings coal press release slide presentation related for coal are available on our website at www Dot Dentsply Sirona Dot 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 on certain assumptions and expectations of future events.
Subject to risks and uncertainties. Our most recent form 10-K lists some of the most important risk factors that could cause actual results could differ from our predictions and with that I'll now turn the program over to Don Casey Cheese, Chief Executive Officer, that's what's the right.
Thanks, John and thank all of you for joining our fourth quarter and full year 2019 earnings call.
By almost any measure Dentsply sirona delivered a strong performance in 29 team both in the absolute as well as against the restructuring plan, we outlined in late 2018.
As we will review today financial results were strong and the company took important steps to create a foundation that will allow us to deliver consistent and sustainable value to our shareholders in the future.
Start reviewing the financial results, let's turn to slide six.
Revenues for the full year were $4 billion. This represents an internal growth rate of 5.7% ahead of our long term targets outlined in the restructuring.
These results were driven by an improved approach to both innovation as well as demand creation.
Recent launch a prime scan on or newly launched Prime mill are a testament to the effort to deliver more impactful new products and execute better commercially.
Solid sales growth and a sharp focus on operating discipline around expenses and headcount contributed two or 310 basis points expansion of our operating margin versus prior year.
Non-GAAP bps for 29 team was $2.45 up 22% versus prior year.
This performance included a five cents headwind due mainly to the weakening of the euro.
Operating cash flow showed a marked improvement versus 2018 up 27% to $633 million for the year.
Now turning to results from the fourth quarter 2019 shown on slide seven.
Fourth quarter revenues were $1.1 billion up 4.8%.
On an internal sales growth basis sales increased 8.4% versus prior year.
This strong performance was driven by our new product activity.
Adjusted operating income margin came in at 20.2% in the fourth quarter of 2019 up 340 basis points versus 2018.
This is an important milestone for the company and speaks to the execution against our restructuring plans.
Non-GAAP EPS for the fourth quarter was 73 cents up 26% versus year ago.
Operating cash flow was $299 million up an impressive 48% compared to prior year and reflects the focus we've been putting against this area.
I will now turn the call over to our CFO Jorge Goldman.
I think you Don and good morning, everyone.
Don already covered the key highlights so for total fiscal year 19 financial performance up I will focus today on the results of the fourth quarter and our expectations for Twentytwenty.
On slide nine we show our fourth quarter 2019 BNL.
Internal revenue growth reached 8.4% driven by strong growth in digital dentistry installing equipment on east women's performance.
Currency wasn't revenue headwind of approximately 1.8% mainly to maybe <unk>, mainly due to the strengthening of the U.S. dollar relative to the Europe.
Gross profit was 642 million or 58.2% of sales up 380 basis points year over year.
Please note that as a result of our workforce and their eyes policies across the corporation, we reclassified 18.1 million of expenses out of cost of goods sold into asked DNA.
It's shift accounted for had 170 basis points off the year over year, increasing gross margin.
The remaining 210 basis point improvement was primarily driven by our buyer ongoing efficiency and portfolio shaping initiatives.
That's DNA totaled 419 million and was up 5.9% as compared to prior year.
Here are three key components of fees increase first the largest driver of the variance was the 18.1 million Reclass I just discussed.
In addition to a small drivers of the S. You any increase where sales compensation, resulting from strong sales in our technology and equipment segment and the timing Lps World, which was held in the third quarter of twinning 18, and in the fourth quarter of 29 team.
Operating income increased 26% to 222 million.
The tax rate in the fourth quarter was higher than we anticipated at 25.5% due to income makes variances.
Adjusted EPS was 73 cents up 26% versus last year.
Moving onto slide 10, where we review our fourth quarter consumable segment performance.
Net sales were 483 million down, 4.8% and down 3.1% on an internal sales growth basis.
As you May recall disruptions are available facility in Europe.
Cost a shift of some revenues out of the third quarter of 2018 into the fourth quarter.
Due to the more difficult difficult comparison, we had a decline in consumable sales in Europe into fourth quarter of 29 team.
In contrast, our U.S. consumables business grew in the in the quarter.
Consumables operating income margin was 22.2%.
30 basis points as compared to prior year.
On slide 11, we highlight our technologies and equipment fourth quarter performance.
Net sales were 670 million up 12.2% versus prior year, representing strong internal growth of 17.2%.
This growth was driven primarily by digital dentistry, specifically by a strong prime scans fails.
Equipment on instruments also saw strong growth driven by our Orthopods, new product introduction and robust sales to institutional customers.
Acknowledged and equipment operating income margin was 23.7% up 820 basis points as compared to the prior year.
More than half of this improvement was driven by our efficiency and portfolio shaping initiatives.
The remaining margin expansion was due to primes can't sales growth and the high level of dealer de stocking last year.
On Slide 12, we show our business performance for the fourth quarter on a regional basis U.S. sales of 392 million increased 24.3% compared to prior year and increased 27.5% wondering internal sales growth basis, we experienced solid growth in technology and equipment and positive.
Sales growth in consumables.
Japan sales were 427 million down, 6.5% comfort with probably a year and down 2.9% on an internal sales growth basis.
Technologies and equipment posted growth in the quarter.
Consumable sales were down in Europe in the quarter impacted by the disruption I'd been them.
The rest of the words sales were 283 million up 1.5% and up 5.1% when an internal basis.
He any growth was solid and consumables growth was slightly positive in this region in the fourth quarter.
On Slide 13, we show our non-GAAP results for the full year.
There were very pleased with our operational and financial performance in 2019 overall, our financial metrics experienced a significant improvement.
Doing well 19, the entire organization under took tremendous efforts implement decisive operational I'm portfolio shaping initiatives.
Let me highlight some of the results from this initiatives.
Increase productivity through disciplined head count management.
Higher production efficiencies through consolidation of sites and operational improvements.
Centralization of direct and indirect procurement activities that create economies of scale and greater visibility.
Ingrid discipline on discretionary spending with you progress to ensure we use our scale to drive savings.
Rationalization of marketing and promotional spending while increasing the effectiveness of our programs.
In terms of our portfolio shaping initiatives in the past year, we took steps to optimize our portfolio by shedding underperforming assets and adding capabilities to drive sustainable growth.
Since we announced the restructuring was shut down or on our business.
Terminator our imaging software partnership Sicad sold the surgical line with all right well spec business exited the one 800 dentists business and shut down a small orthodontics lab.
All of this action improve our margin profile and free up management capacity to focus on more profitable activities going forward.
On slide 17, we showed a castle performance.
In 2019, we made great progress in driving cash flow with operating cash flow of 683 million up 27%.
Our capital expenditures were had when 23 million.
In our free cash flow was 510 million up 61% versus last year.
This solid performance what the direct result of thing has internal capital allocation policies and controls with a heightened emphasis on working capital and return on invested capital.
During fiscal 19, we paid dividends of 81 million repurchase shares up 260 million and we paid 201 million up total debt.
Including share repurchases in dividends, we returned to shareholders or 50% off the operating cash flow generating 2019, while sufficiently funding all of our key initiatives.
Let's go now to slide 18, what I will take well I will talk about art twentytwenty expectations.
I will first discuss the simplification to our revenue presentation that will make it easier for investors to understand our financial statements.
Additionally, we publish our financial results, excluding the impact of precious metals.
It made sense to look at our financials. This way a decade ago when precious metals accounted for about 200 million annual sales.
Today. These materials accounted for only 40 million of annual revenues and our consequently significantly less impactful to our overall financial performance.
Also our cost has been to report internal sales growth.
This metric is revenue growth adjusted for precious metals, non-GAAP and acquisition related adjustments currency fluctuations discontinued products and M&A.
On a going forward basis, we will stop reporting the internal revenue growth metric. Instead report is simpler metric that we will call organic revenue growth.
Organic revenue growth adjusts reported revenues for currency translation discontinued products and the impact on M&A.
No other adjustments will be made to reported revenue going forward.
We will begin this practice up using only reported revenue I never Ganic revenue growth in the first quarter of Twentytwenty.
I will now address the current Novartis situation.
As you are aware the impact of the virus has expanded beyond China and he's affecting our countries like Japan, Korea, Taiwan, and even parts of Europe.
As it is the case across all industries, our commercial operations in China and now in all areas are being affected by this fluid public health care situation.
During this difficult period, our priority has been the safety and welfare of our associates.
At the current time, we have not experienced a significant disruption to our global supply chain due to current of ours.
However, in many parts of China, dental clinics and hospitals remain closed for business and in all parts of the world. We are beginning to see any impact.
Given the unique situation today, we're letting you know that China, Japan, Korea, and Taiwan represented approximately 10% of 2019 sales.
While we hope to impact will be viruses control as soon as possible. It is difficult to estimate at this time when commercial activities and more specifically the dental market will return to normal levels.
We estimate that the first quarter of Twentytwenty, we haven't exposure Approx approximately 60 to 70 million in sales stemming from current of ours.
Assuming activities get back to normal in April we estimate a non-GAAP EPS impact of 10 to 12 cents.
We acknowledge it is more difficult to forecast accurately and the current environment and these explains the wider than usual as guided range, we're providing today.
With that said these are the key elements of our guidance for fiscal 20.
We expect 3% to 4% internal revenue growth.
However, accounting for the potential impact of current of ours in the first quarter, we believe growth will likely be toward the bottom end up the range.
We expect roughly 50 million currency headwind for the year.
In addition, there was a stop portion from our portfolio shaping the activities of about 10 million, though we expect to run off in the first quarter.
Get us to a revenue range of 4.1 to 4.15 billion.
Operating income margin for Twentytwenty is expected to be in the range of 19.5% to 20.5%.
We expect our effective tax rate to be between 24.5 and 25.5%.
And our estimate for share count is a range of 21 20 to 224 million.
That brings our non-GAAP EPS guidance for Twentytwenty to a range of $2 I'm 55 cents.
Well there was an 80 cents.
Our capital allocation approach will remain consistent and we will balance reinvestment into business with capital returns to shareholders through dividends and share repurchases.
Twentytwenty, we plan to fun, approximately Henry 50 million in capital expenditures and approximately 50 million in RMB.
To conclude we're very pleased with the execution of our plan and the resulting financial performance delivering 2019th.
As we move forward, we remain optimistic about our industry. The progress, we're making advanced fly sirona and our ability to continue to execute our strategy consistent.
Despite the near term challenges presented by the ongoing public health care issues. We're mindful of the targets, we set and we remain focused on achieving our objectives.
With that I will now turn the call back to dawn.
Thanks, Jorge [noise]. In addition to the financial results I wanted to take a few minutes to talk about the progress against our restructuring plan priorities that included accelerating growth improving operating margin and simplifying the organization.
The targets where that plan are shown on slide 20.
One year into the restructuring I'm pleased to say that we're making substantial progress toward achieving our objectives and importantly doing it the way that creates a solid foundation for delivering those results in a sustainable manner.
Core to the entire restructuring was accelerating our growth that growth will be driven not only by improving our innovation engine, but also by bringing that innovation to market globally through an improved commercial organization.
As you can see on slide 21.
The year 2019 bark, a step change in the pace of or innovation as demonstrated in the sharply improved pipeline.
R&D projects are now managed as a portfolio, allowing dentsply sirona to focus on the biggest opportunities and bringing to market faster.
No, whereas that acceleration been more evident then in or digital dentistry group.
Dentsply Sirona has an aggressive vision for how digital technology can transform the standard of dental care benefiting both patients and Dennis.
A critical part of that vision starts with prime skin.
This product has been extremely well received because it is so accurate very fast and easy to use.
Prime scan is such a breakthrough that it allows dental assistance and take a full scan in under a minute.
It's also an open platform that can be used chair side or with major lab based manufacturing systems.
Since launch we've upgraded the prime skin software were certified 0.1, as well as adding or a check.
In late January we launched Prime mill, which is shown on slide 22.
This represents another major new product launch.
This product is designed to save the Dennis time at every step of the entire Chairside procedure and it's an extremely simple to use.
This mill is state of the art and really delivers a meaningful difference in speed for the dental office.
Prime scan combined with Prime mill has really created a whole new standards of performance for CEREC.
And we've seen some of the early users of the integrated system literally change how they schedule patients as a prime scan integrated with Prime mill is that much more efficient and that efficiency translates into healthier practices.
But dentsply Sirona is digital efforts go well beyond Chairside milling.
A great example is sure smile are clear aligner.
We recently launched new software that allows for treatment of class two cases, and new software that integrates seamlessly with prime skin.
Our digital efforts extend into the imaging area and we're seeing a good response to our Orthophos line extensions.
So taking a step back Dentsply Sirona has a large installed base of digital scanners imaging units and treatment centers.
Positioned the company very well to advance digital dentistry.
From Paladin digital dentures to true anatomy to Prime scan 29 team was an important year for new products and we are poised to push the higher levels of innovation going forward.
But growth is not purely about launching new products.
It's also important to have a world class global commercial network and that has been a critical area of focus for our organization.
During the past 14 months in the U.S., we have overhauled our demand creation capabilities in a significant way.
It starts with a single view of the customer moving to a single CRM system, creating a single loyalty program for the entire company for the first time and focusing on a more impactful promotional strategy.
We are encouraged by the results to date in the U.S. and we're in the process of moving that model globally.
The second major pillar of our restructuring was developing a comprehensive plan to improve our margins.
A lot of those efforts and Bob identifying areas were dentsply sirona can create scale and use that scale to improve cost inefficiency.
For the first time the company, which is historically been decentralized has begun to scale critical functions. One example, this is our consolidated supply chain not organization under the leadership of Damn Kate.
Dan joined Dentsply, Sirona about a year ago and brings world class experience in managing scaled global supply chains.
Over the past year, the supply chain organizations begun centralizing procurement logistics demand planning in manufacturing and results. So far have shown improved cost and importantly improved operating efficiency.
Well early in the development of that organization results are encouraging and we are optimistic about its future.
In addition to supply chain areas like finance HR Q, a are a can all be scaled for efficiency and effectiveness.
During 2019 margins also benefited from improved disciplined around expense control as evidenced by the fact that we hit our head count target ahead of schedule.
In addition to head count the organization demonstrated excellent discipline in managing costs as shown by the lower as DNA numbers. Jorge also mentioned the actions taken during the year on portfolio shaping an area that we will continue to pursue as we look to deliver expanded margins.
We're in I would like to knowledge all the work the Dentsply Sirona team did in 2019 and thank them for their consistent commitment to transforming our company.
We also know that this is a multiyear plan in progress in one year, while encouraging is merely the first step in creating sustainable consistent growth and value for our shareholders.
For 2019 shows the organizations committed to sustained improvement and we're optimistic about the future.
With that I will conclude by thanking all of you for joining us today, and then move on to questions John.
Operator, we'd now like to open up for questions. Please.
As a reminder, ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone she likes removed. Your question. Please press the pound <unk>.
Our first question comes from Daniel Brennan colored with Jefferies.
Thanks, Good morning.
Donor Jorge and as far as krona virus is concerned I. Appreciate your quantifying the 60 to 70 million impact is that more on the consumable side or equipment side of the business is there any portion that you would expect to recoup perhaps in the second quarter or later in the year and everything about the impact as far as Twoq goes.
Yeah. Thanks for the question.
Let's start a little broader and then then we'll get into with you'll look as we look at current a virus. We think theres a couple of things we have to look at first is our employees you know how do we make sure that they're safe.
And we obviously spent a lot of time educating I'm thinking about traveling and a few other steps and we feel that again, that's our first priority. The second areas and Jorge mentioned this was supply chain you know today, we haven't seen any supply chain disruption.
And as we look out into the future onto the current scenarios, we feel pretty good that you know, we do not anticipate disruptions to our supply chain and we're spending a lot of time developing contingencies, if there's as kind of a sea change and how countries react.
Last issue in this is what we're trying to quantify is what's going on from a demand perspective.
Obviously.
As we look at the quarter and you know, we <unk>, China, Japan, Taiwan, Korea and to a a smaller extend Italy.
We're obviously seeing a dampening impact on on demand creation there.
And that's what we tried to quantify when we offer the.
$60 million to $70 million sales number.
What we are having a harder time.
Doing is really trying to understand what what happens if there's a significant change and how countries are trying to manage this in terms of if theres a significant shut down in order to border transfers and other things beyond what we're seeing today and look at as if there is a significant sea change obviously, we will work plan.
And develop plans for that.
But we felt right now the responsible thing to do was to give you guys are best thoughts on what the what the quarter would look like and quantify what revenue impact and as you know look we're smarter every single day and.
In a.
A month will be a lot smarter than we are today in terms of what's going on both in the market. So we can see and then how countries around the world are reacting to it and you know obviously is the situation goes on will develop plans accordingly, and where you may want to chime in a little bit here, yeah, Brian and with respect to your question about consumables versus.
<unk> technology is up to be honest the at this point up in those areas that I mentioned, where we are feeling the impact of the the activity has have slowed down for both consumables and t. any so there's no. One segment that has been more impactful than the all there I think Scott I think the impact is.
Similar across the board.
With respect to how much of that can be recovered down. The road you know any of it is hard to predict at this time I'd tell you there our boss constraints relative to.
Sure time and thinks that thought you know, we'll probably have to figure out a over time as to how how much of this can be recover but thought but absolutely. We are working on not contingency plans and we are developing some strategies and ideas to offset some of the top of the stock Q1 impact our bodies.
Early to tell.
Okay. Thanks, if we looked at the consumables business you Didnt.
No negative comp three of the last four quarters of would you expect to be in that 2% to 3% range. In 2020, how do you think you're performing relative to the market and what are.
I would you characterize sort of your confidence in that portfolio returning to growth in 2020.
Yeah, Brian.
I, obviously the quarter.
Venlo created a really tough comp over in Europe, I think Jorge and mentioned in his prepared remarks that we saw growth in the U.S.
And you know right now we feel like we're growing with the market and when we set out our restructuring plan. We offered long term guidance, which we said we think that we can grow the consumable business.
2% to 3% range and.
Well quarter to quarter, we're confident that is going to occur no, but we do feel that as we look out in 2020 and beyond we've spent a lot of time working on two things I mean, the first is innovation and.
End of rattled off some of those in the prepared comments. If you look at digital ventures. If you look at your anatomy, which is endo business, which.
Shows up as in the consumable segment.
You look at things like our then.
Sure fill SDR and other things you know we feel that we're starting to see a pretty significant platform of innovation and innovation is what we need to do to provide growth. The second thing and the reason we separate out the U.S. a little bit is.
We have put programs into place, which we believe revolve around a much more aggressive and efficient promotional strategy you know things like one D.S., where we're trying to leverage the power.
Supply sirona.
Yes, it's been pretty well received and we think is starting to have an impact on consumables as demonstrated by by the U.S. performance. In Q4, you know the as as we look beyond our Salesforce effectiveness program are all designed to really bring all of Dentsply sirona through a Dennis in a way that.
So.
Again, we the guidance, we put out a long term three to four for Dentsply Sirona total that's coupled by a technology equipment segment grown a little bit faster, but now.
When we put out the guidance and we're still pretty comfortable that when we get through some of the lumpiness and things like Venlo.
That's great tough comps for us that we are going to be able to post growth and the consumable business.
Great. Thank you.
Thanks, Brandon next question. Our next question comes from John Kreger with William Blair.
Hi, Thanks, very much Oh, Jorge just wanted to clarify one thing and then in terms of how you handle guidance for the krona virus or is it correct that you're not factoring anything yet into the second through the fourth quarter as you're just they cannot a Q1 impact is that right.
That is correct John Yeah at this point it would be very hard for us to go beyond Q1. So that's how we have modeled guidance is sharing with you the impact that we see in Q1 and <unk>. As you know this situation is fluid is changing day by day, and we will be back to gather and <unk> and a few weeks.
To talk about Q1 results and at that point, we will have a much better point of view with respect to opt future quarters.
Okay. Thank you and then done can you maybe just run through how your your various specialty product lines are doing.
Implants, ortho and endo. Thanks.
Yeah. Thanks, John.
Yes.
Where we don't give a lot of specificity around how each of those businesses are doing but you know <unk>, let's put it. This way are our implant business is in our opinion a missed opportunity you know, it's it's basically flat. This year, we have a quarter, where it's up quarter words down I in my mind, what we have to be doing.
With that business is growing it at the pace of the category a and we feel that we've started to put the plans in place a couple of things of note. I mean, we really felt that our portfolio wasn't where needed to be we didnt have an immediate load product and now that we have asked her E V. In there we feel pretty good that we're competitive one of those things weve.
Also been doing is taken or I might ask business and really integrating that into the portfolio, which we think makes us more competitive.
Particularly the Dsos space. So you know implants to me.
It's an okay performance, it's a disappointment that were not growing with the market you know endo for us it has been somewhat of a disappointment.
You know endo for US is obviously a big.
Business and it's very very important to us I think the what we've been focusing on his restarting that innovation.
Engine that my opinion, we really haven't after the Protaper gold and other launches we really haven't been as as quick with follow ups were very happy with what's going on which are now to me. It's basically the first new product in kind of new treatment modality, that's been launched in the space in a while it's all about debt in prison.
Patient and look if you're thinking about endodontics the ideas how do you how do you preserved piece and we believe true anatomy gives us a really good competitive story and by the way. It's a story that is allows our reps, which we believe are very well trained from a clinical perspective to talk about a clinical story.
And we were pretty optimistic about what we have in our pipeline.
As we look out into the future in the Endo space Ortho.
Mind, it's all about the clear Aligner and you know we we have this kind of funny dialogue, which as you guys don't mentioned assure smile and and that's one of the reasons for that as we're trying to say hey, what's what's material in terms of creating movement for total dentsply sirona, but we're very happy with where we are we source mom just came off a big convention.
Last week, well attended where we're really talking to our power users and you know we feel that we're starting to see good momentum I mean, one of the things we were very happy about particularly in the U.S. was after the one D.S. program launch.
I'm really talking about prime scan ensure smile and ones, yes, we created a pretty good opportunity for a lot of or summer doctors to participate and sure smile and we're starting to see some momentum there. So we're very comfortable with where we are clear aligners and we look forward to that becoming a significant growth engine for the company in the future.
Thanks much.
Thanks, John.
Our next question comes from Nathan Ritchie with Goldman Sachs.
Hi, good morning, Thanks for the questions Don maybe just following up on your last comment there.
Can you maybe talk about the performance of one DS in the quarter and what what has the responses. The program been like so far you know how are practices sort of responding with incremental purchases.
And then you know as we think forward to 2020, how should we think about the contribution from this program.
Yes, thanks for the question.
What do yes, we we felt pretty good about obviously, we launched a DS world We had a a very strong initial response.
In fact, we like the response and.
Enough that we basically said, okay, how do we carry that program into 2020.
We made a few tweaks to it so we actually have one DS 2.0, which makes things simpler there's there's less like category requirements.
Yeah, We think it's one of the drivers of the positive results, we saw a particularly in the U.S.
In the fourth quarter, we look forward to running that program around the World. Obviously, you know there's there's a lot of work to do in different countries I mean, the U.S. we've spent a.
Over a year getting the Salesforce affections program in place, but well look I I would tell you the way that we believe that we have to deliver dentsply sirona to the dentist is as Dentsply sirona not as a we're here to sell you an orthophos and then if I. If you know we're not going to quantify specifically this is number doctors and this is <unk>.
The amount that they were buying but we've been remember one D. S is a multiyear program. It's you know it's about there was things available 2019, 2020, and 2021, you know that gives.
The the Dennis an opportunity to.
Lower the price of their technology and equipment over that time period based on their purchases. The thing that I think was a little misconceived about.
What one D.S. was was they had to buy incremental product to their practice and we were never saying that what they have to do is by incremental dentsply sirona products for their practice and that's a key differentiators. So for practice is buying $100000 worth the consumables, we weren't asking the by 100 fiber 110, what we were.
Ask him to do is.
Switch share. So you know you chances are you're already buying things in categories. We participate well just gives you a great opportunity to participate in great loyalty program. If you switch some of that 100000 from where you may have been spending it to spending it on our products and you know given the amount of innovation, we put in our.
Consumable business pretty much in the back half of last year on the first half of this year, we think thats a win win for the Dennis than us.
Thanks, that's helpful. And then maybe just a follow up on margins.
Obviously coming off of a year, where you know cost savings kind of ran ahead of your initial plan I'm going into 2019 can you maybe just talk about what you're assuming in terms of incremental savings that you think you can kind of go after and 2020 and just the pacing you know over the next several years of capturing that additional I think 115 to 140 that for left and turn.
So that restructuring target you played out.
Yeah, and they'd I'll take that question.
We had a good performance in 19, we achieved savings of about $88 million in 19, and we have a number of initiatives in motion already that make me feel good about the fact that we're on track to deliver the total savings we have.
Rejected off Bob 202, $225 million by the end of 2021, so I expect that the balance of this program will be executed roughly half and half over the next couple of years, probably we'll do a little bit more and 20 dining 21, and we have a lot of opportunities still.
Although we have thought that we're going after.
We have Bob programs.
On procurement, both direct and indirect materials.
We with gobble opportunities for reconciliation of file facilities and overall consolidation of our footprint.
Around the globe.
There is one area that we are all going to tackle pretty.
Decisively at this year order to cash Oh, we have we have opportunities there and and that although we've done a lot of work centralizing activities within the company across the company I believe we feel have opportunities to centralize even further so good progress and now we're very much on track to deliver to 202 225.
Million dollars by the end up 21.
Thank you.
Our next question comes from truck or presuming JP Morgan.
Hey, Thanks, Don I want it.
No you highlighted the combination with prime scan can you talk a little bit about how you think about this driving a chirac upgrade cycle any numbers you can provide on how much of the installed base you think could turn over an upgrade and the next year.
Hey, Tyco you broke up right right in the in the first sentence. So.
One question was on on Prime milk, combined with prime scan and the potential to drive Chirac upgrade cycle.
How much of the installed base you think could upgrade you know over the next year.
Yes, it's interesting Tyco I mean, and you followed the Sirona stock and you've followed us for a long time. So you know traditionally you'd see an upgrade cycle, where we'd come out with a product and within three months, we'd be out doing the upgrade and a lot of cases.
That worked out really really well, where we were on prime scan was we really felt we were selling full side units and and it was appropriate for us to stay focused on that we launched the upgrade program a little later in the cycle than we would typically and we had we had good response, but.
So far we haven't seen a dramatic acceleration versus what we would see historically, it's kinda like we just picked it up and we moved it I think with Prime mill Tyco or you know the reaction.
From the installed base has been really really positive I mean, they again, it's the first mill, we've launched and about seven and a half years and then this thing really it's quick and it as immediate tangible benefits to the office. So we look at.
Prime mill is a real opportunity to continue seeing a very positive trends from an upgrade perspective, we also think.
The story when you put this thing together is you know you're talking about dentistry and under an hour.
And that's that's a big story for US. So you know we would like to see growth come from three things I mean, the first is how do we sell new full chairside units on the basis of this integrated system is transformative Dennis practice, a second is how do we continue the upgrade cycle and for perspective, we haven't run prime scan upgrades around the world yet.
You know at some point, we'll do that and with Prime mill, We believe that gives us a real jumpstart there and the third you know as an area that we don't necessarily talk about the mill, but you know in D. I mean, that's become a really important area area for us I mean, historically, we were only interested and focusing on chair side and you know change that we.
Made over the last year and a half is we believe that we need to be competitive into d. I space and we feel that with prime we're doing a good job on that but.
In terms of numbers Tyco today, you know if and again you've seen the cycles before it's the the penetration change the penetration of upgrades is not different than what you see but you probably need to adjust how rapidly we did it in the past versus here we were.
Good six and have seven months later.
And then a follow up on sure Smile couple of things you'd mentioned in the past for one DS, but that's the easiest product for sure Smile. So have you actually seen.
Adoption it uptake from the one DS loyalty program for sure Smile and they can you talk to some of the market development efforts, you're undertaking now as you're rolling that out more broadly and then lastly, any updated thoughts on some of the DTC you know providers moving into your ortho channel.
Are clear Aligners.
Yeah.
Lets on pack a couple of things there yeah, one do yes, absolutely drove some sure smile trial.
And.
The idea was to create again, if we're going to offer a relatively significant opportunity for them to.
Save on on their technology and equipment business, and we're actually by the way asking them to perform as opposed to just giving them a price discount.
Yeah sure Smile, you buy to shore Smile trial kits and Youve basically fulfilled your obligation and we got really good positive reaction to it the level of integration Tyco and you've seen sure smile I mean literally it's a button I mean, it's an app that it's a button, where you're getting instantaneous treatment planning right.
Right, there and it works really really well.
The challenge for Us and one that we're we're pleasantly I wouldn't say surprise, we expected it but we're we're happy with is the conversion I mean once this the docs, who have had great experience with prime scan understand how to use it we're seeing improved penetration now you know in our mind first we have an opportunity to push that around.
Now the world, which is important to us the second is as we enter this phase one of the things. We think it's important to do is provide the Dennis with kind of the direct to consumer tools that they need and by the way, we're always about supporting the dentist and those activities as opposed to.
It's going out and trying to create a independent consumer brand are around sure smile and the reaction we've been getting from our doctors there pretty comfortable with that.
And just the last issue in terms of some of the DTC oriented brands coming into the you know into the more clinical space.
<unk> I'm sure that they have data that says that's it that's a good idea.
We're we're pretty comfortable that you know the Dennis that we talked to in our environment, whether they're the worth those or whether they are the general practitioners are.
Pretty comfortable with the approach, we're taking and like having a doctor brands that starts with a dentist and stays where the dentist. So we'll we're we're very happy with our chosen channel strategy.
Understood. Thank you.
Thanks Tyco.
Our next question comes from Stephen for Q2 Barclays.
Hey, Thanks, good morning down in Jorge So I.
No company executives love it when analysts do back of the envelope math during the conference call. So I have just just one or two map questions for you.
First the.
The 10 to 12 cents expected EPS reduction in one Q 20.
Around front of Irish him that implies about a 40% net after tax margin on 60 to 70 million to reduce sales.
I guess a question around that is if nothing really improved for the remainder of calendar 20, whatever the overall sales impact maybe from Corona virus in 2020 overall should we assume this same roughly 40% net margin on whatever loss sales you may have or would you be able to pull some levers to redo some cost it to mitigate EPS impact at this week.
Comes an extended duration situation.
Thanks, Steve Good morning, Yeah, No. Your math is thought your backup you have a math is is it's pretty close and Oh.
We are already thinking about levers that we can pull in order to.
Offset some of Bob off the potential impact from the drop through off an awful lot lost revenue. So a lot of things going on and I'm. You know my expectation is that at the next call. We will have a much better view for that but we are absolutely working on those on those sop plans and our expectation.
Yes units out we're not giving up on on these revenue impact that we having in Q1, and we will try to recover some of that margin and and there is if you things that we are contemplating right now so it's absolutely the intention Bob from the company to by the two to offset some of this margin.
Okay and one other quick math question, sorry, right Yep No I was just say, it's kind of hard for us to okay. What what is the second quarter third quarter. Obviously, if this becomes an extended duration situation you.
We then change gears pretty significantly in terms of how we look at cost savings and some of the work we did in 2019.
You know really our understanding of what our levers are much better today than they were say 14 15 months ago, but I cut you off see what what else did you want to ask US yes. One other quick math question. The so if that's faster on is doing call. It roughly 1 billion in quarterly sales and as you stated 10% of revenues are roughly 100 million.
In of Revs are in the for Asian countries, you mentioned earlier.
Earlier on this call.
I mean, obviously implies that the 60 to 70 million sales reduction or weapon about wiping out about maybe 60% to 70% of the sales and those for Asian countries. That's want to confirm that the sales reduction is it primarily in those for Asian countries, and maybe only a little bit in Europe, and really nothing in the U.S. or do I have the.
The allocations wrong as far as how you're thinking about it.
By the regions.
No the 10 to 12 cents or the $60 million to $70 million grabbing a risk that I highlighted is not exclusive for those two those countries. So as soon as China is Japan as Taiwan is Korea, we are not.
Including any impact for European regions at this point for the U.S. for that matter, because we haven't seen that impact up and in those places. So there is only Asia in the countries that I listed.
Okay confirms exactly what I thought perfect. Okay. Thanks.
Okay.
Strong math skills.
Our next question comes from Aaron right with Credit Suisse.
Great. Thanks, a follow up on shore Smile here I think you recently updated our upgraded the platform for sure Smile can you speak to the latest sure smile update as well the percentage of ortho cases that you can address now versus what you could you previously how does this expands the addressable market for you and will this be.
Meaningful from a financial contribution standpoint thanks.
Yes, Thanks Aaron.
With the most recent software update and I forget the exact whether it's a seven 7.6 or seven seven.
It gives us class to treatment capabilities, which we think is very very important for us.
Do I think it's significant yeah, I do I look everything we're focusing on right now is to make sure that sure Smile offers the Dennis a very very complete package and.
Look we feel very good right now that our treatment planning.
He is extremely well received by customers and you have the dentists are finding it increasingly easy to use with the expansion to treatment.
Two class to the expandable universe gets pretty big I mean, it's you know, it's like 65 to 75, depending on whether you're talking adult or more pediatric indications.
And in our mind again, the biggest space that we're seeing a use right now is tends to be in the adult static arena, which.
Right now we feel that were extremely competitive in terms of being able to offer treatments solutions class one quest to with adult statics in mind. So yeah. We think it's going to be significant it makes us very competitive and and we're gratified that we got it.
Thanks next question please.
Did you or did you follow up I mean, John I did have a quick follow up if that's okay. I just wanted to.
Well.
But at the quarterly cadence here for the for the equipment try and if you exclude Canada chronic virus, we do have a lot of events that happened like yes world and the prime the launch and.
Another product launches.
On an underlying basis, if you could speak to that quarterly progression of the underlying equipment trend that would be helpful. Thanks, excluding correct.
Well, let me start so first lets stop let's talk about fiscal 19, right. So I.
You're correct. There there was a lot of moving pieces in 19 relative to dealer stocking and launches in order. Thanks, but when you when you build back the ongoing and outlook through the numbers our growth rate for technology and equipment in and not the third quarter the fourth quarter off about 2090.
I mean, I was very strong and now as we go into.
The <unk> fiscal Twentytwenty the momentum for the for the equipment business is very good are the continuation of primes can sales the launch of Prime mill. So we feel good about the the progression of our sales growth in technology and equipment going into into 20 building on the men.
We started out and not in fiscal 19, yeah and they're in the.
Just to amplify what Jorge sand.
Typically you would do a one you would do the D.S. upgrade the CEREC upgrade in one shot all around the world because that is not a lever that's been pulled yet and with Prime mill. We think we've got as Jorge said a lot of momentum there.
Okay. Thank you.
Thank you. Our next question. Please next question comes from blends in terms of Guggenheim Securities.
Oh, yes, thanks for the questions I just wanted to follow up on prime scan a little bit.
Don maybe can you give a sense for you know your sales in terms of how they're trending in terms of what what may be considered an upgrade versus what may be considered a brand new CAD cam sale and I'm trying to sort of compare or contrast fee experiences you had with the bluecam, where the omni cam upgrade.
Cycles, just to get a better sense for how we should think about the sustainability of this current trend.
Yeah.
Well you could have gone C and Red Chemed Bluecam I mean, if we're going to go.
You know look primal.
The way we're looking at it is that the percent of current users that are upgrading is it's not been all that different than what we've seen in the past what we're seeing its just later.
So typically if you go back to omni and you go back to Blue the upgrade cycle was usually within three months and this time it was seven.
By the way those were global upgrades. This was a U.S. upgrades. So you know as we think about it we're not sure the trend wine is dramatically different we've been very gratified by it and you know we think we've got a great product we charge a premium for it.
We think with prime mill and the opportunity to potentially do the upgrade beyond the U.S. now that we feel very good about our supply chain.
We think that that should give us a fair amount of momentum as we run into 2020 or and then for US the things that were counting as as upgrade as if youve purchased a CEREC system in the past any CEREC system, we consider that an upgrade.
D. I, if you're just basically buying the acquisition unit and scanner, you know and Havent bought something from us in the past, that's that's new or if you've never bought you know, whether you're buying d. I or whether you're buying full chair side and we've been we believe we've expanded the Sarah franchise with the introduction of projects.
Yeah.
Sure.
Maybe if I could just fall with home Jorge on the margins really quickly Jorge and restructuring plan you have a target of about 20% EBIT margins by the end up this year in your guidance today. It suggests 20% EBIT margins for the full year, which may be some just kind of a flat trend throughout the year could you help us think about maybe some of the puts and takes.
On that prop.
Profitability and the trajectory as as you go through the year.
Yeah.
Correct.
As flat I think as you probably remember.
Prior cycles.
Each quarter is a little bit different but as we have model our budget and our plans for Twentytwenty. There is a continuation of off the ramp that we so and not in 2019, we finished at about 18.6% off for the year.
Our Q4 was shot was very strong over 20%, but.
I thought Q4 is typically a very very strong quarter. So I look at the cadence and you're going to Twentytwenty. There were there will be natural fluctuations.
Even though the typical quarterly cycles, but overall I see it trend line that is stop pointing upwards job getting too.
The 20% and and trying to set up the year for port for the future. So that we I set they achieved the target long term targets that we have four four operating profit. So some some variability between quarters, but net net increase in between.
The first quarter and the fourth quarter of Twentytwenty.
Okay. Thank you.
Thanks.
Our next question comes from Jon Block with Stifel.
Thanks, Good morning, guys I'll keep it don't want any interest of time, but of course out one we'll have two parts. So I guess first one or it can you just level set for us on venmo. So we can get the underlying trend I think there's a lot of questions out there and when we look back to last year was a 25 to 30 million impact in Threeq, you 18, and if so did you get back about half of that.
In the fourth quarter of 18, so we can think about the comp and then.
Part B would just be done at a higher level. What gives you the confidence in the 2% to 3% long term consumable number is it innovation is a market share gains is it one DS just maybe if you can detail for us what drives called that modest acceleration off the 19 numbers. Thanks guys.
So let me start with <unk>. The first part of your first part of your question. So I think the way, we we're sizing they've been low impact our numbers about $20 million that was the impact that thought that we have five in our in our numbers and I think it's fair to say that we recovered up most of that impact.
Don Yeah, and yes, John good good single question with two completely different parts.
But on on a on the consumable side you know look we we think basically we should be able to gain share in our cross our business. If you. If you really break down what is our consumable business. There's four different pieces to it its preventative it's restorative, obviously, our endo business and our lab business you know we feel that the.
Preventive and rest of business have been chugging along nicely, we'd like we think that turned out to me and some other innovations that we have should enable us to to reignite growth.
In in the Endo business by the way the Endo business ex us as tended to be a a stronger than in the U.S. just as a point of reference and West point as you know the lab businesses not not a business we talk a whole heck of a lot about we think we we with digital ventures and some other steps that we've taken we think that as an opportunistic.
And share. So you know when we say the two to three and <unk> in our mind, it's new products when we launched a new products we.
If we can do it were Wanna get a premium for it and that's going to help us gain share.
Thank you very much next question please.
Next question comes from Steve We start with Wolfe Research.
Hi, Thanks for sneaking me and I know you guys are just about out of time, but it was really help Jorge actually if you could help us with something of a free cash flow bridge for 2020.
Can you put a view out on free cash in dollar terms or conversion and then just give us something of a minor walk how are you thinking about the impacts of particularly working capital and Capex next year, and then I'll I'll drop back out thanks, a bunch.
Let me give you a couple of data points and there are some that we have not included in our guidance but.
Starting with <unk> capital expenditures. So we believe that or we are tied targeting a capital expenditure number off Bob about headroom $50 million off for fiscal 20.
That is slightly higher than what we did and fiscal 19, but we we believe as some is it probably amount of <unk> of investments out to make into business.
I would expect.
Our cash flow generation in general both the operating cash flow as well as free cash flow to.
To continue to trend in a positive way, we had a very strong free cash flow of Bob over $500 million in 19 and not given the.
Trajectory of our earnings stop the work that we're doing on working capital for example in 19, we brought down inventory by a significant amount and I believe we have five more opportunities. There I would expect that good working capital performance in 20, as well and so they transport.
Operating cash flow and free cash flow opt should be consistent with what we experienced in 19.
You know obviously all of this is subject to what happens with thought with current of ours and based on the impact in Q1, I don't see any any impact to our cash flows.
When we closed the quarter and we talk next time, and we haven't better visibility for the rest of the year we will.
We will update.
This commentary as necessary.
Okay, great. Thanks.
Right I see.
Our next question comes from woman.
Sorry go ahead operator next question. Our next question comes from covering Caliendo, if you'd be yes.
Hi, guys. Thanks, again getting man.
[music].
I guess a question about the cost savings and margin expansion going forward. If you think about where you started.
Where you are today between you went through and gave US some details on the cost savings, but there was also ban.
The improvement in the overall operations and margins there and there's also been some portfolio reshaping that as we think about getting from here through the end of say 21 or 22.
What will be the biggest impact on margins going forward compared to sort of where what we've accomplished or what you've accomplished over the last 12 to 15 months.
Yes.
I think is well balanced so I think the first source.
Margin improvement.
We'll continue to be <unk>, our topline so in and 19, we benefited significantly from the increased level of sales driven by technology and equipment as we look in our guidance for 2019, a 3% to 4% thought topline growth that.
He's going to have a pretty substantial drop through to the bottom line.
Then out from a gross profit perspective, Bob we were doing a lot of work on pricing and now we should expect to see some benefits there the procurement side as I indicated in my prepared remarks, we have opportunities from a direct materials cost perspective thought manifest.
Got you inefficiencies. So there are some in our pipeline, we're contemplating improvements to our Cogs as well and then and it from an as DNA perspective.
The initiative that I mentioned before in terms of order to cash consolidation of five of certain activities that will will contribute to our benefits. If I look back historically, the last couple of years or 18 months.
Backstop benefits have come from up both the gross margin side as well as the S. DNA side has been pretty balanced and I believe that thought that that combination will continue into 20 and 21.
Great and one quick one I'm sure Smile, what the software update are you able to do the sirna before and after after when somebody comes in and gets a scan.
Dealing with where the teams look like now and what they might look like at the end of a treatment protocol are you able to do that now.
Absolutely.
And I'll tell you one of the things that we feel long term will be a competitive advantage for US is the fact that our treatment planning is really quick really easy to use and what the dentists are telling us they have a lot of confidence presenting it to the customers, meaning we were just coming off a big shore Smile event this weekend and yes.
The the amount of a change that we've made in upgrading the inner activity in the ease of use has been a remarkable on people been with us for a while.
Okay. Thank you very much.
Thank you.
Our next question comes from Jeff Johnson with Baird.
Thank you. Good morning, guys two quick ones, one I guess, Don just looking at 2020 I look forward and then one question looking back on 20, 29% growth in the U.S., 27% in in the fourth quarter is 2019, the year of the U.S. growth and we need to think about a U.S. tougher to grow against those comps in Europe.
In rest of World really driving 2020, or just how to think about kind of the geographic split.
No actually I actually think the U.S. is going to be pretty darn important to us and we want to see that growth continue obviously, you got to look at inventory burn in and a few other things there Jeff I would tell you I would expect us to be among the front in terms of the grow.
Hours were very optimistic as we pole.
Couple of levers on Prime scan, whether it's one do you asked whether its upgrades.
Rolling up Prime mill.
And really pushing the SFP program beyond the U.S., you know, we've got Germany, China, Japan.
Targeted for that activity. This year were that gives you the based one D.S. So you know we we were expecting a good strong year in the U.S. and.
We think as we put the programs in the place get the rest of the innovation, yeah, we'd like to see balanced growth.
Europe cleans up a little bit remember once we get out of the Venlo comps, we think we can grow Europe, but.
I I wouldn't I wouldn't read this is the rest of world picks up I would like to think balanced with the U.S. still being strong.
All right. That's helpful. And then just in the fourth quarter or you don't from a revenue perspective, I think you beat the high end of your guidance by about 300 basis points, you were at the midpoint or slightly below from an EPS perspective, what was the lack of flow through in the quarter from a profitability standpoint, maybe if you could tie that back to one D. S. A is it just a lot of promotional activity there with some of the.
Rollout of one DS.
And do you think the returns on that program, even if it's helping the top line or where you need them to be at this point. Thanks.
Yep.
In the fourth quarter, we are asked DNA number was.
Elevated relative to that trend that we were having and so that had an impact on the.
The bottom line and as I indicated in my prepared remarks out we had a reclass off up $18.1 million.
And ask DNA, we had.
Also because of the.
Strong sales, we had into fourth quarter, we had.
A elevated amount of sales comp and incentive compensation in general. We also had there what the timing of thought DS World as as you remember in 2018 that event happened in the third quarter.
And in 2019, we had the event in in the fourth quarter. So that also up created a little bit of a headwind from a from an assay in a perspective.
And now in Q4, and there were a similar.
Investments and in some of our key initiatives around digital transformation and a couple of our programs that had a pretty significant amount of spend in the quarter as we had planet. So all of those things combined.
Resulted in a in a lower than you would've expected operating margin given the beat on the on the topline.
Alright, Thanks, Jeff.
Now we'll take a.
Our next question. Please next question comes from Elizabeth Anderson with Evercore ISI.
Good morning, guys and thanks to the question I'm Kinda in terms of <unk> portfolio shaping impact I know you said about 10 million dollar impact on the first quarter can you talk about where you sort of feel like you are without I mean, obviously, if that a lot of that heavy lifting there, but in terms of the impact and how to think about the rest of the year.
So the my comment was a mechanical with respect to how the activities that we did in 19 in fact that the run rate in 20 and out at that point, we will lap.
That in fact stop in the first a couple of quarters of the year beyond that we don't have anything right now that it's been executed we are obviously from a portfolio shaping perspective remain very.
Active and always contemplating a new opportunities for us to improve our growth rate and our margin rates, but there is nothing beyond that $10 million that I mentioned when I provided guidance.
Okay. Thank you that's helpful.
All right.
The final question. Please operator next question comes from Michael Cherny with Bank of America.
Hey, this is Alan lots in for Mike regarding current a virus have U.S. Dennis made any change to their purchasing patterns that are worth calling out.
For example on masks or anything like that.
Yeah.
Don't sell masks. So you know, we really can't comment on that and today, we really haven't seen any impact in the U.S.
Okay. Thank you.
Thanks, Tom Thank you very much.
Operator, we'd now like to wrap it up please.
Ladies and gentlemen, just conclude todays presentation. You may now disconnect from have a wonderful day.
Thank you goodbye. Thank you I because then.