Q4 2020 DENTSPLY SIRONA Inc Earnings Call
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Ladies and gentlemen, thank you for standing by bulk of it. The Q4 2020 that supply Sirona earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need of press star one on your telephone if you require any further assistance. Please press Star then zero I would now like to do most of these conference call Me Gary.
Dixon you may begin.
Thank you operator, and good morning, everyone welcome to our fourth quarter 2020 earnings conference call I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www Dot densify Sirona Dot com before we begin please take a moment to read the forward looking statements and are.
Our earnings press release during today's call, we make certain predictive statements that reflect our current views about future performance and financial results.
We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recent form 10-K with them of the most important risk factors that could cause actual results to differ from our predictions in today's conference call. Our remarks will be based on non-GAAP financial results, we believe that non-GAAP financial measures provide invest.
<unk> with useful supplemental information about financial performance of our business enable the comparison of financial results between periods, where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP.
And with that I'd like to now turn the call over to Don Casey, Our Chief Executive Officer, Don. Thank you Gary and thank all of you for joining US. This morning, I hope, you're all safe and well.
It's hard to imagine that a year ago on this call. We first started discussing the COVID-19 pandemic and as we enter 2021. It is still a challenge that creates some level of uncertainty.
But over the course of the year there have been many lessons for dense play Sirona and the experience is hopefully prepared us for the coming year and beyond.
As we provide a final look at 2020, a few things really stand out.
The first is the resilience of the dental market and how committed the dental community is to serving their patients.
The second is how strong the underlying dense play Sirona business is this is illustrated by the improvement in our results over the last two quarters.
Learning, new and different ways to do business has been another key lesson, whether it was of virtual D. S world, creating digital K O L forums, or having our global R&D teams collaborate without physically being together.
There is white of learning here that we will apply going forward.
And finally, we have always talked about how our people are our most important assets well 2020, certainly highlighted that.
Every day, our team stayed focused on our customers and their patients despite dealing with professional and personal challenges that we all face during the year I want to thank them for their commitment and professionalism.
Moving on today, we want to cover four things. The first is our fourth quarter results. After that we will provide some guidance for 2021, and we will then provide some perspective on our priorities going forward and we will finish with a discussion around our ESG plans.
Moving now to slide six we were pleased with our performance in the fourth quarter revenues were $1 $1 billion down three 3% on an organic basis.
This is a sequential improvement versus quarters, two and three and reflects a gradual recover in the dental market.
In the fourth quarter, we remain disciplined around spending and these cost containment efforts helped deliver a solid margin performance.
Operating margin reached 23, 2% up 320 basis points versus year ago.
This results in an adjusted non-GAAP EPS of <unk> 87, up 19, 2% versus the prior year.
Other actions taken by the team helped generate healthy cash flow from operations of $263 million.
To provide the details of our performance for the quarter I will now turn the call over to Jorge.
Thank you Don and good morning.
In the fourth quarter, we delivered strong results and exceeded our internal expectations in many categories.
Steps, we've taken to improve our business continued to generate positive financial outcomes. Despite the difficult environment created by the evolving global pandemic.
Sequentially during the fourth quarter, we deliver improvements on almost every key financial metric versus the third quarter we.
We capitalize on the gradual recovery in customer demand and commitment to cost discipline across the enterprise.
While we remain cautious our fourth quarter performance has given us good momentum going into fiscal 2021.
Let's look at let's look at Q4 in more detail.
Organic revenue decline of three 3% versus last year was an improvement sequentially as compared to the eight 8% decline experienced in the third quarter.
Consumables posted organic growth of one point of 1% in the fourth quarter versus last year.
We delivered strong consumables growth in Europe, and the U S offset by declines in other geographies Asics.
As expected <unk>.
Knowledge than equipment organic sales declined six 2% versus last year, primarily as a result of a difficult comparison for the CAD Cam business relative to Q4 2019.
Gross profit was $613 million or 56, 7% of sales a better than expected outcome, given this quarters lower volume levels as compared to last year.
The gross margin reduction was primarily due to the lower sales levels and negative outsourcing it was partially offset by productivity and cost savings initiatives.
SG&A decreased 58 million or 13, 8% versus the prior year.
SG&A as a percentage of sales declined 430 basis points year over year.
The reduction in SG&A reflects volume related decreases and improvements in productivity and operational agility.
Examples of volume related expenses include travel commissions advertising and promotions.
Also we have been very prudent with non essential and discretionary spending categories.
Operating profit grew over 13% to $251 million versus last year at.
It represents a margin expansion of 320 basis points to 23, 2%.
Our margin rate benefited from strong consumable sales.
And as just mentioned the impact from permanent discretionary and volume related expense reductions.
Also keep in mind that the typically strong Q4 sales volume creates significant operating leverage that enhances margins.
The results from the actions taken during 2020 give us confidence to expand our investments in R&D and customer experience to deliver sustainable growth.
I will refer to these investments later in my presentation.
Moving on net interest and other expense increased $5 million, reflecting higher levels of debt versus last year and the closing out of certain net investment hedges.
The non-GAAP tax rate in the fourth quarter was 21%.
A decrease compared to 25, 1% in the prior year, which was a function of the changes in the U S versus non U S pretax income mix.
This lower rate added approximately five cents to fourth quarter 2020, non-GAAP EPS as compared to last year.
Non-GAAP EPS was <unk> 87.
Up 19, 2% versus the prior year quarter.
Moving onto fourth quarter consumables segment results.
We are pleased with of consumables business performance in the fourth quarter.
Organic sales were $449 million, an increase of one 1% versus the prior year.
Growth was strong in Europe, and the U S. Partially upset by a decline in rest of the world.
Sales in restaurants, if and preventive show a strong organic growth offset by a decrease in lab.
Our efforts on retail focused programs is a driver of improved consumable sales performance in the U S.
Gaining traction on the execution of initiatives such as the shift in promotional strategies to of strengthened relationships with dentists, delivering clinically relevant products with strong incentives.
Moving on to technologies and equipment performance.
Heading into our fourth quarter, we indicated a tough comparison in this segment versus the prior year due to many factors, including DS World sales the primes can upgrade cycle and the uncertainty from Covid.
As expected technologies and equipment organic sales declined six 2% versus the prior year, but grew sequentially from Q3 2020 to Q4 2020.
Within this segment, our clear Aligner and health care businesses performed very well during the quarter.
Of note our team was able to transition the D. S world event into a fully interactive virtual experience in Q4.
Although we were pleased with the results of the virtual V. S World event and the strong participation we have announced our intention of returning to a hybrid live event in 2021.
On Slide 11, you can see our financial performance by region during the fourth quarter.
U S sales of $359 million declined eight 7% compared to the prior year.
Organic sales declined seven 3% driven by CAD Cam and imaging.
European sales were $448 million up 3% compared to the prior year.
Organic sales increased <unk>, 4% store.
Strong growth in consumables was partially upset by the COVID-19 related impacts on technologies and equipment.
Rest of the World sales were $275 million down two 8%.
South American market continues to experience COVID-19 related declines, especially in Brazil.
Moving onto cash flows in the fourth quarter of 2020, we had a strong operating cash flow of $263 million, bringing the full year 'twenty to 2020 cash flow to $635 million.
Full year 2020 deliver $548 million of free cash flow, an increase of 7% versus last year.
We returned a total of $228 million to shareholders through dividends and share buybacks and deployed $1 1 billion to fund acquisitions.
The company finished 2020 with a strong liquidity available comprising $488 million of cash and committed credit facilities of another $1 1 billion.
Now let me provide an update on two of strategic initiatives, we discussed in prior quarters.
First we completed the actions required to exit the traditional ortho and the analog lab businesses as planned.
Both businesses accounted for approximately $175 million of sales in 2019.
These exits enhance our ability to focus on growth areas.
Second.
We remain on track to achieve our long term cost savings objective of $250 million, we deliver an order of $70 million of savings in fiscal 2020.
That brings the total cost savings $260 million since the announcement of the restructuring in 2018.
Consistent with the plan, we expected restructuring to cost a total of $375 million.
To date, we have spent approximately $310 million.
$120 million of which is noncash.
Before we turn the page into 2021 I want to take a moment to thank every single associate at Dan supply Sirona for the tremendous commitment to deliver results and they are very difficult circumstances during 2020.
Now let me, let me turn to our financial expectations for 2021.
We are monitoring the markets, where we operate very closely.
Our research indicates that the gradual rate of recovery in dental appears to continue.
Dentist offices remain open importantly, patient patient confidence is improving with a vaccine rollouts.
However.
COVID-19 continues to represent of lingering uncertainty, which makes which makes medium to long term planning very difficult.
After thoughtful consideration and acknowledging the level of difficulty to forecast accurately in the current environment, we have decided to share our key planning assumptions for fiscal year 2021.
We are optimistic about the long term prospects of the dental industry.
There are several categories with high growth profile high growth profiles, while all of those are more moderate but with great cash flow.
Interest intrinsic resilience of the dental category provides some stability in the short term and the possibility of a stronger demand in the second half of 2021 relative to the first half.
We're expecting fiscal 2021 reported sales to be in the range of 4 billion to $4 3 billion.
This range equates to a reported sales growth rate of approximately 20% to 30%.
From an organic organic sales perspective, the range provided equates to an organic growth rate of approximately 15% to 25%.
The difference between reported and organic sales is primarily explained by the acquisitions of bite and date of them.
The disposition of traditional ortho analog lab, all of a smaller portfolio shaping activities and FX.
The recovery of the dental market and the success of the vaccine rollout will influence to a large extent at one end of what the end of the range we deliver results.
As communicated in January we expect expect our clear aligner business to reach an annual run rate of 300 million by the end of 2021.
We're excited about the growth contribution of this franchise going forward.
We plan to increase our investments related to strategic growth initiatives.
Targeted R&D investments are increasing to approximately had been $60 million in 2021.
All of their areas of significant investments non reported in R&D include clear aligner acceleration e-commerce and all of our digital platforms.
On the SG&A front byte end date of them combine contribute approximately approximately $90 million in incremental SG&A in 2021.
Operating income margin for 2021 is expected to be 20% or higher with a stronger performance in the second half of the year.
Our margin expansion remains steady and we continue to aim for 22% operating profit margin by the end of fiscal 'twenty two.
We expect of non-GAAP effective tax rate to be between 23, and 24% our estimate for share count is approximately $221 million.
That brings our non-GAAP EPS expectations for 2021 to a range of $2 60.
To $2 80.
Our capital is.
<unk> estimate for 2021 as headwind $60 million.
Okay.
Despite the near term challenges presented by COVID-19, we are mindful of the targets, we set and we remain focused on achieving our 2021 objectives and expect to remain on track to reach our longer term targets.
Before I turn the call over to Don I want to make a comment about the first quarter of 2021.
Please remember that the first quarter of the fiscal year has been historically the lowest quarter in sales and consequently operating income margin has been several points lower sequentially.
We expect that trend to continue this year.
This is annuity effect is factor into our planning assumptions for the full fiscal year with that I will I will now turn it back to Don.
Jorge and we will move to slide 14.
To give additional perspective on 2021, it might be helpful to provide some detail around our strategy and operating priorities going forward.
Moving to slide 15 over.
Over the past two years the company is focused on delivering against the restructuring outlined in late 2018.
Despite the pandemic <unk> Sirona has made solid progress across most areas against the goals outlined in that restructuring.
The plan was built around improving growth driving margin and simplifying the organization and.
And while there is still work to do our leadership team is committed to meeting those goals in the original time frame.
As we get toward the conclusion of the restructuring though.
It now becomes important to lay out of strategy for how we will grow <unk> sirona in the future.
As we have refined our growth strategy over the past few years. It is important to recognize that the dental market continues to evolve.
Increasingly our customers are looking for comprehensive solutions and improve workflows that deliver better patient outcomes and improve the financial health of their practices.
<unk> Sirona is uniquely suited to deliver this for our customers.
Our company has an unmatched installed base of digital dental products, including bolt digital impressions and a complete range of X Ray imaging products, we have deep expertise in treatment planning and workflow management and.
<unk> Sirona has a full portfolio of of central consumer products that are critical components of many procedures.
Putting all of this together, we will distinct putting all of this together will distinguish us going forward and provide sustainable differentiation.
For 2021 and beyond our operational priorities will remain consistent around delivering growth improving margins and building a scaled efficient company spin.
Specific targets include organic growth of 4% to 5% plus going forward.
As Jorge said, we are committed to improving our margin achieving our 22% goal by the end of 2022.
And our efforts around organization simplification will allow us to deliver the cost saving target of $250 million through the end of the restructuring plan.
Doing all of this will allow us to target double digit adjusted EPS growth and create sustainable value for our shareholders.
Moving to slide 16, let's look at these priorities in more depth, starting with growing revenues.
As I mentioned earlier <unk> Sirona is well positioned going forward to grow our revenues through a combination of organic and inorganic opportunities all built on a foundation of global commercial Excellence Star.
Starting with organic growth over.
Over the last three years the company has made significant improvements to our R&D program.
Major changes have involved implementing of portfolio management approach to allow us to maximize the impact of our spending by focusing on fewer bigger products and essential areas.
A second major shift is having our innovation efforts focus on procedures rather than products.
This allows this aligns us with how our customers think and will allow us to offer more comprehensive solutions.
And as those changes have become more ingrained and show promise for the future in 2021, we are increasing our investment in R&D significantly.
This is highlighted by the creation of a new consumables innovation center to be opened this year in Charlotte.
As you can see on slide 17, despite the pandemic <unk> Sirona was able to continue accelerating our new product activity.
We've been pleased with the response in particular to <unk> <unk>.
I'm mill and short fill one.
Looking out to 2021, we are excited about the portfolio, we will be bringing to the market, including important new introductions in the endo and implant areas.
Moving now to slide 18 in.
In addition to our investment in organic programs when appropriate we will look to acquisitions to support critical growth priorities like clear liners and implants.
As we announced in early January dense play Sirona acquired bite of direct to consumer clear Aligner company. It's been great to welcome. This outstanding teams of <unk> Sirona.
The acquisition gives us significant scale in the critical clear aligner market as well as important new capabilities.
These capabilities include the ability to communicate directly with patients. We believe it will be important for <unk> sirona to help generate patient traffic for Dennis across multiple procedures in the future.
This business carried good momentum from the fourth quarter into the new year and the integration of the bike business is on track.
As we mentioned earlier, we believe that we will exit 2021 with $200 million plus run rates.
And as Jorge has mentioned combined with short Smile are clearer line of franchise is expected to achieve a run rate of $300 million by the end of the year.
The deal is expected to be accretive to our long term financial targets and non-GAAP EPS in 2021.
Moving to slide 19.
In late January of dense play Sirona acquired datum, an Israeli biomedical company for a little over $100 million.
Adam expands our biomaterial portfolio with the Asics brands with its glide metrics technology.
The implant category has been shifting to meet the patient need for fewer visits and more rapid results. This has led to an expansion of procedures using immediate load implants and these procedures bone growth factors like Asics can provide important benefits. We believe this acquisition gives <unk> sirona of terrific brand with an excellent technology.
It will help improve our performance in the implant category.
Moving to slide 20.
Over the past 15 months of the company has also made major efforts to improve our global commercial capabilities. These of included pursuing a comprehensive sales effectiveness program in multiple countries.
We have also shifted our promotional spending to focus more on programs like one day, yes that creates demand at the retail level.
The team has also enhanced our digital clinical education capabilities, and we reached over a million visitors this year.
All of this has improved the effectiveness of our global commercial capabilities.
Now on slide 21.
Along with driving revenue growth. The company is focused on improving our margin in multiple areas. One highlight that has been discussed to spending discipline.
Our team has shown steady progress in this area over the last few years, but the pandemic has shown there are new more efficient ways to manage the business. It is important to apply the lessons learned in 2020 going forward.
Our supply chain has made excellent progress across the board highlighted by reducing our manufacturing footprint from 42 facilities in 2018 to 29 now.
There has been strong progress in our SKU rationalization and inventory management.
Yet even with this success there is still opportunities in several places as we get better using our scale in areas like procurement and logistics.
And finally, we remain committed to portfolio management the.
The exit of the traditional ortho and analog lab businesses has helped simplify the organization and improve both margin and operating efficiency.
This will remain an important part of our discipline around margin improvement going forward.
Moving now to slide 22.
We believe a key ingredient of the sixth of a successful business strategy going forward is to establish a comprehensive framework to manage ESG objectives.
Our strong ESG program can facilitate top line growth and reduce cost it can contribute to reducing legal and regulatory risk while improving employee engagement.
As a result, getting ESG right has become a business imperative for <unk> sirona.
As a global leader in the dental health segment, we are striving to become an ESG leader as well.
Is G objectives are aligned with our purpose and mission of improving access to quality health care globally.
Every day, the almost 15000 employees of densify sirona of work to improve the lives of people all around the world, including the communities, we serve while continuing to deliver value for our shareholders.
We will achieve this by investing in our people as well as leveraging our R&D and innovation capabilities to leave a lasting impact on society.
While <unk> Sirona has always had multiple activities in this area. We felt it was time to create a more comprehensive framework to measure ourselves and communicate our results.
Last year of cross functional ESG Committee was established composed of our most senior leaders.
This team is tasked with developing the necessary internal controls data management and frameworks for ESG reporting.
In addition to the senior leaders, we have added internal subject matter experts outside resources and consult regularly with company's advanced in ESG practices.
The committee is in the process of developing an ESG implementation plan with specific objectives, and we look forward to sharing the plan and our progress going forward.
Moving to slide 23 in conclusion, there is still uncertainty around how the pandemic will impact 2021, but we feel absent a major setback the dental market will improve throughout the year.
Our solid results in the fourth quarter have shown the resilience of our underlying business and the commitment of our people.
While we are cautious around 2021, we expect to see improvement as we go through the year.
We believe the dense play Sirona has a clear strategy and is well positioned to drive revenue improve our margins and deliver sustainable value for our shareholders and with that I will now turn the call back over to Kerry.
Thank you Don operator, we will now open for questions.
Ladies and gentlemen, if you of a question of arc from it at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered most of them with yourself from the queue. Please press the balance sheet of.
First question comes from Nathan Rich with Goldman Sachs.
Hi, good morning, Thanks for the questions.
Don maybe starting off on the guidance.
The revenue range is kind of back in line with 2019 levels I know your business has a lot of moving pieces of what's kind of the M&A and the decision to exit the traditional ortho and lab businesses. So I guess just at a high level could you kind of talk about what your expectations are for the market relative to 2019.
Then what you know.
When you look at kind of of the composition of your portfolio. How would you kind of expect to perform relative to the market.
Yeah. Thanks Nate.
Interesting.
Is the relevant comparison is at 19 or as of 20 look with the pandemic still lingering through this quarter and while we're optimistic about vaccines.
We think that theres still going to be an impact that we will see in our business in places like Latin American and others. So we're.
Kind of really looking at the guidance versus 2020 is kind of the relevant discussion.
Look in terms of what we expect.
Over the course of the year, we see a gradual improvement if you look at the Ada of surveys and a lot of our survey work you see particularly like in the North American market.
We think offices are operating 80, 85% there's been some compensation on the part of the dentist by looking at higher value procedures. So sort of revenue stayed up we've actually seen in some cases, Dennis beginning to add fee fees for PPE to compensate for that but our expectation based on <unk>.
Our tracking studies that talk directly to patients, we see patient optimism starting to increase and we think that'll manifest itself kind of gradually over the course of the year.
We think the exit rate for the total category in the back half of 2021 will be better than the front half.
Just in terms of how does our portfolio of stack up.
Look I think other people are better qualified to answer how.
A lot of different People's portfolios are going to stack up I would tell you. This is we kind of look at it.
We start with our strategy, which we really think let's think about workflows and workflows are important to us clear aligner is clearly an area that we've spent a lot of effort on and we obviously feel very very good about that.
If you look at the implant endo procedures.
We believe that we have a good formula for growth right now and I mentioned in my prepared remarks that we anticipate some launches in the back half of.
Of 2021 that should accelerate momentum stuff like that we believe gives US a reason to really go in with new news in the in the implant market and in terms of consumables look some of that is going to be directly related to how fast you know kind of rest of the world comes up as you know of.
Our portfolio is not really heavily focused on PPE.
We tend to think much more around like the rest Oh Endo and lab businesses, which are some of that is a function of what are we able to do to competitively to gain share. We feel that we've been very competitive in the fourth quarter and look as the market comes back, particularly on a global basis, we're optimistic that we're going to see some improvement there.
The last issue, we really have spent a lot of time over over the last year shifting our promotional strategy, which is really very much more focused on retail and how do we drive.
Retail consumption at the at the dentist office level. So that's one of the last reasons, we feel that theres going to be continuing improvement over the course of the year or around our consumable business. So I hope that's helpful.
Thanks, Don appreciate the color if I could just ask a quick follow up on the <unk> segment.
You said that it got better.
<unk> I Wonder if you could comment specifically on the digital equipment piece, how that performed relative to your expectations and just how you feel about kind of the level of demand youre seeing in early 2021 as you think about your expectations for the full year.
Yes, Nick and then both mine and Jorge his prepared remarks, we talked about 2019 was a big comp coming off of the fourth quarter. I mean, basically you were in full.
The critical North American market you were in the middle of a prime scan upgrade of Newmont's Prime mill and we of the one day S program. So we knew that was going to be a pretty steep hill to climb.
Relative to our expectations.
Particularly without having a live D S world.
The <unk> segment actually performed pretty well.
And as we look out to the first quarter now, let's remember the first quarter for US typically is slow.
It's it's as it's the smallest quarter of over the course of the year and obviously <unk> is a big part of that but I would tell you. The thing that has impressed us is that the.
If you really go back to the second quarter I think in the North American European markets in particular, the dentists really we're kind of okay, what or when the pandemic kind of eases up what are we going to do and we've seen a lot of dentists that have really taken a step to say hey look I want to get into implants, I wanted to do more clear liners, which requires them.
To kind of up their diagnostic game, whether that's through like more of <unk> cone beam or whether that's you know getting what we think of as a best in class scanner with prime skim and we've seen underlying demand pretty good.
I mean, if you actually one of the reasons, we say that is if you look at how like North America performed comparative to Europe on some of them like the CAD Cam and the <unk> businesses.
Where you didn't have the impact of of D. S. World you saw what we think was pretty solid demand for <unk>.
And we feel as we come into this quarter you know, we're not getting ahead of ourselves, but we feel that underlying interest in our products has been pretty good and with Prime mill now come in.
We feel that we've got a pretty winning book portfolio.
Great. Thanks, a lot of please.
Our next question comes from Glenn say intangible with Guggenheim Securities.
Oh, yes. Good morning, Thanks for taking my questions, Hey, Don I just wanted to ask.
The market growth question, maybe another way.
Put of consumables organic consumables, just over 1% and what we're having we're having a difficult time sort of reconciling that against these anda surveys and so when you sort of look at the <unk>.
Numbers in the fourth quarter now you have the luxury of sort of see in January and February of this quarter before we hit these easier comparisons.
Fair to say that the Mark it is now growing year over year.
And I. Appreciate your comments you said that there was a shift in promotional strategy. So can you just help us put maybe the market growth in context.
Yeah, you know Glenn.
First thanks for the question look the consumable market is kind of hard to parse apart because theres not a clean comparison is what is consumables because you've got some people who report big PPE numbers and whatnot when we when.
When we talk about consumables and us it's really about like Resto lab in Endo.
For Us and you know what what we saw was in the fourth quarter. We had a good performance in the U S. In particular, and we think that's been a result of a lot of the work that we had been doing around the promotional strategies.
Not quite as exposed as some of our other competitors may be it is of areas in Asia Pacific that have returned from the pandemic of little bit faster. So in all we were pretty happy with how consumables performed now now go below that of little bit I mean, when and it was really funny. If you go back a year on this call because we report.
<unk> late in the cycle.
We were really the first people that we're talking about an impact on Corona virus in the dental category and one of the things. We said is as Dennis started heading into that kind of March uncertainty in April uncertainty.
The easiest spigot to turn off was consumables.
We're not going to build inventory there and we do think that while the a day is saying 80 80 80, plus we do think that there was some benefits of not only the things we were doing but there was some restocking is as traffic begins to return to somewhat more normal levels.
And then look the promotional programs. We've said this in and you know I wish it was easy to just do that all in one quarter, but as we roll our promotional strategies around <unk> and other things around the world basically what we're saying is hey look anything we want to do is got to be focused on.
Driving innovation directly at the dentist and create promotional strategies like one day, yes that actually allow us to leverage technology and equipment, you know something like a prime scan launch with our consumables and as we roll that out that that represents a shift I mean.
If we were to look at say the U S market 18 months ago, we would be running 910 to 15 promotional programs, which we've now swept into one and some of that was focused on things that may not necessarily be as retail focused you know do we want to do a two for one promotion, which.
Involves different kind of promotional strategy. So you know look.
Bottom line.
We think the consumable market, whether it's growing or not.
Certainly improved sequentially for the third consecutive quarter, we think are.
Strategy that we're pursuing around consumables is the right thing, which is one of the reasons, we're happy with the performance in the U S and.
Europe and then as we go forward, we're optimistic that our innovation as well as our promotional strategy is going to allow us to see consumables trend in the right direction.
I appreciate all that commentary, maybe if I can just ask Jorge of quick follow up question on the margins of Jorge of second quarter in a row of margins coming in I think much better than everyone was expecting and looking at your long term guidance, it's almost hard for us to see how margins could go down so much from this point.
As of fiscal 'twenty, one I know you talked about investing in innovation, new product launches, but on the other side of that you're raising your cost savings targets and things like that and so how should we think about that cadence in the margin because it feels like you have to take a pretty big dip from where you were in the second half of 2020.
To kind of make sense of that guidance for <unk>.
For fiscal 'twenty, one thanks and events.
Thanks, Glenn and good question.
So if you if few things to keep in mind first I would say is you cant compare just the Q4 with the average operating profit margin for the fiscal year because as you. As you know Q4 is typically the strongest from a sales perspective day creates a opera.
And leverage and it really helps.
The margin in that quarter by the same token you cant use for example, Q1 as a good proxy for the average rates of for the year, because Q1 is the lowest quarter. So.
You have to think about how those numbers average out throughout the year.
The mixing of the quarter in Q4 was very good we just talk about consumables and consumables performed really well in the U S and in Europe. It was not only it was not only the U S. But the U S and Europe had a good quarter from a consumables perspective and that is a good margin business.
Then when you go down to our expenses on the expenses side.
There are probably three main buckets right one is the <unk>.
Cost take out that we're doing is structurally and that is that is reflected in the guidance is reflected in the steady progression that we have delivered over the last several quarters and what we're projecting for 'twenty. One so there's going to be a significant amount of cost that is out on a permanent permanent basis.
There is a there are two other buckets one is.
Spend that is volume related and as we as we increase volume.
There is some variable costs that will be added to the equation and we didn't have that in Q4 of Q3, because we are.
Running at a lower than normal levels and volume so that that is important.
There is some discretionary of span in sum all of our spend that.
As our volume growth, we probably.
We'll start spending some in some of those buckets again.
And then.
And then finally the investments in I mentioned investments and we are when when you look at the long term targets that we have for top line and for.
Gross margin.
Margin expansion they require some investments and I can give you a list of things that we're working on there is there is a.
That we're doing from a from an e-commerce platform, we're investing more in R&D, our R&D target for this year's headwind $60 million that ease of substantially higher number than what we sell and 2020 and in 2019.
We are working on investments in all of our.
Digital platforms the day.
The modernization of the enterprise to make our customer experience much better require some investments sales to cash is one area, where we are we definitely need to improve for the benefit of our customers. So when we add all of those things.
That explains some of the of the decline and then and then finally and very important we are adding.
As part of the acquisition of bite and day to them as I indicated in my prepared remarks, there is about $90 million of incremental SG&A that is going into into our numbers in 2021, so with all of that.
You get to the 20th of end.
We were saying we were aiming for at least 20% with the second half of the year being stronger we expect we will exit 'twenty one at day, 21% margin level. So that's how you walk from the Q4 number to the average and the.
Exit rate for 'twenty one.
Super helpful. Thanks, a lot alright.
Alright next question please.
Our net.
From Erin Wright with credit Suisse.
Great. Thanks can you speak a little bit about the stepped up R&D investments.
No change from your previous targeted innovation of <unk> holding back on product launches and Mississippian day, making and should we anticipate a full list of new product launches or should we anticipate that steady stream of innovation.
Yes Aaron.
Objected to deliver pretty steady stream of innovation look in 2020, particularly in the second quarter. What we did was really kind of pull back and make sure. We're focusing on kind of the big really of central products.
But as we've made all of these changes really in kind of late 2018 into 19 talk about portfolio talking about moving to a procedure approach.
We've got new leadership in R&D.
And we're just taking a different approach and the productivity. We've seen we thought we had a pretty good year of 19, where despite the pandemic pretty happy with some pretty major products coming out in 2020, and what we know that we have in coming in 2021, we felt that the R&D organization is really efficient.
You know, we're making further changes I mean, we're super excited about creating a new innovation center that will focus on our consumable and implants business. It's 60000 square foot facility that we're going to be opening this year in Charlotte as kind of emblematic of how we're taking this cross product procedure approach so they're getting.
Up to the $160 million and Jorge mentioned.
To me is just terrific spending because it's going to allow us to deliver innovation.
Net and I look it's not going to be perfect every year, it's going to be on a on a glide path, but we think that kind of step up in spending should enable us to deliver a stepped up productivity from our organic efforts. So.
Again, I'd love to say innovation is going to hey, we're going to launch two in this quarter too in that quarter. Two in the next quarter. Some of it is going to be really timed off.
When the innovation comes and just the last point I'd add.
As we mentioned in my prepared remarks, increasingly where we're really thinking about our digital footprint.
Whether that's a huge installed base of on the X ray side or a very very strong base on the <unk> side how.
How do we combine that in a way that allows dentists to really think about more complex workflows and as a result, you start looking at all of the software in the company.
And as.
As you want that to start working together.
That's an area of that we're extremely excited about our customers some of the stuff we've shown our customers gets them gets their blood.
Flowing and.
That's another area that we're investing in so.
I was telling our board of directors that boy it would be great. If we're able to increase increase our R&D spending because thats. The in my opinion of the most efficient way for us to generate organic growth going down the future.
Okay, great. Thanks, and then can you.
Think about the clear line of strategy now.
You're finally seeing the DTC strategy with the practitioner of directed market. What is some of the initial feedback from your customers there any surprises with the bi transaction close alright, our income.
Co investing aided of course.
The right people.
Uh huh.
Had bite four I've got a couple.
A couple of weeks I guess six or seven weeks the feedback from the dental community is almost exactly what we expected.
On all of the survey work, we had done during the diligence process, which as you know Dennis that are doing clear liners think having another major entry in the clear on one of their space is going to put more marketing emphasis and drive in general more patient traffic. So theyre pretty positive I think some general dentists that arent necessarily doing.
Clear line of work today potentially look at that is as competitive I think of lot of that will dissipate when we bring the bite program out to them I mean, basically when we show them of concept, where we're taking the hundreds of thousands of close to a million unique visitors that come to bite not all of them are going to be available for class one.
Treatment and we believe that gives us an opportunity to direct patient traffic at our network. So we we believe that as we bring that story out and provide details it's going to be pretty positive.
And then the last discussion.
That we've seen as you know people have asked US the question well it said, if the Dennis or negative about it is there going to be any deleterious impact on purchase intent for tens of <unk> sirona products in a couple of things I'd point out. The first is we tend to be a house of brands as opposed to of branded house. So.
Whether or not people know of Cabot drawn as of dense part of Sirona product is actually one of the things I'm working to fix long term, but it's kind of hard to single out <unk> Sirona products and that's it's really funny. It's a blip that comes and then it kind of goes away. So I would tell you that we're pretty happy with the <unk>.
A sponsor of of the general.
The general dental population to bite. That's question. One question two since we've had it doesn't require any new investment or stuff like this we had done a pretty thorough.
The amount of diligence and we kind of knew what it was going to take you know obviously of startup company.
We're looking forward to the integration of like finance of <unk>, some supply chain stuff.
That's really gone according to plan, we haven't seen any areas that require major investment if anything.
Today, we're more excited about bite them, we were in January when we made the announcement.
Okay, great. Thank you.
Our next question comes from Kevin Caliendo with UBS.
Average.
Hi, Thanks for thanks for taking my call.
I guess, it really wanted to talk a little bit about the cadence we.
We understand why <unk> is always a little bit of little bit worse, you talked a little bit about demand in <unk> year over year, but.
I guess I'm asking as people start to expect to get vaccinations sort of what you saw John.
January February what you expect to see in the March I get it on the margin side and spend and everything else, but when we think broadly around dental and dental demand are you still seeing that sort of year over year growth in January and into February.
Kevin.
Here I am.
I don't want to get into January or February of results at this point it is too early.
What I would tell you is that.
All of the information that we have the best information, we have as of <unk>.
Today, we have reflected in the in the outlook that we're providing so as I indicated and Don indicated.
We are seeing some instability and the end of dental industry. We are.
Optimistic cautiously optimistic about patient confidence and all of those data points of growth we've seen in certain areas of the trajectory of all of our parts of the business all of that is factored into our outlook of thought.
'twenty, one where we will see.
Potentially organic growth in the 15% to 25% with a second half stronger than the first half of Q1 typically lower than the other quarters.
And that's.
That's everything we know we have and that's what we have reflected in our guidance that I don't have really any.
Sales to add to that.
That's fine I appreciate that I guess, just one follow up you mentioned prime mill and some of the other products that you launched last year and I'm guessing just given the way everything played out last year.
There maybe are some orders from potential I don't know if theres still pent up demand for any of your bigger ticket equipment items or not or how we should think about that is.
As an impact of 2021, but any color around that would be would be great to understand as well.
It's interesting as we launched access and Prime mill, we were originally constrained from a production standpoint, then we kind of hit the pandemic, we use the pandemic to kind of gear up.
We feel that we are in a really good place right now on ex us and Prime mill.
One of the things that's that's interesting Kevin as you know with the urgency of an on premise DS world like in Las Vegas, There's a certain urgency about purchasing right then and there with kind of the virtual D. S World.
You don't see kind of that everything happens in the course of two weeks.
So we're gonna be interested to see.
Kind of we are really.
Really good response to the virtual World I mean, we had probably as many.
Live prospects real validated prospects as we did at the at the in person event, but we're just we're gonna I'd be interested to see how long that tail is so we don't anticipate there's a whole bunch of pent up demand. We can make you know we're in a better position from a manufacturing standpoint today than we were a while ago.
We'll see but.
Underlying demand for.
Digital dentistry products has been pretty good.
Got it great. Thanks, so much.
Next question next question comes from Elizabeth Anderson with Evercore.
Hi, good morning, guys. Thanks, so much of that question on average.
So maybe if you could talk a little bit about your implant business and sort of any changes.
Yeah in terms of of your plan to sort of accelerate much wise market growth and share our new products are performing or the overall state of.
Brand of branded products in that category.
Yes, it's interesting.
I would say that we remain optimistic about the long term opportunity that we have in the implant business I think fourth quarter was one where I would like to see us improve on our.
Performance.
I would tell you the time that we've spent during the pandemic and looking at how we see the market evolving we've improved our portfolio I think we're optimistic about the things, we're bringing to market over the course of this year, we added datum.
Which we think is an important adjacency product if you look at it Elizabeth we have between Atlantis and data and we think we have two really good.
Adjacencies that will allow us to be in a much better position today than we were even a year ago to go in and really make some noise around implants.
We think our implant business will grow in 2021 so.
We feel good about that and.
Long term, we believe as digital dentistry and workflow management becomes increasingly important we're very very well positioned between the diagnostic expertise of our ex rate portfolio, which is critical around implants, we think our product portfolio.
We'll be rounding that out over the course of this year and we think we've got great Adjacencies that will allow us to be very very competitive and last you know it's interesting.
We mentioned the sales force effectiveness program and it's interesting we don't really get a whole heck of a lot of questions on it even though it represents about a third of the people that work in the tens of <unk> Sirona and the thing that we've been doing in our sales force effectiveness program is really how do we go in and focus on say if it's of high volume of implant.
Doc how do we really make sure that we're bringing all of the resources of <unk> sirona to that dock and we feel pretty good about the work we've done in the U S and we've now rolled that we're in the process rolling that out to 10 more countries. So.
Then getting.
Our commercial sales force effectiveness program rolled out we think is going to be helpful. So long term.
We think there's nothing but upside of our implant business.
That makes a lot of things can you have to talk about sort of more broadly maybe new product rollout as we think about the course of 'twenty 'twenty. One how you think about it in light of the well the reopening and then obviously you said that the investments youre, making this year, which I assume.
Well will translate into some sort of some impact this year, but probably more of that as 2022, maybe trying to shy of three type of that can you talk about sort of that pacing at all and sort of how you view it longer channel. Thanks.
Sure look in the.
We're truly a global company and I'm reminded that every day. So when we say we launched Prime mill, Okay. We launched at North American some selected countries in Europe, and we're now in the process of rolling that out axial sort of same thing actually us was of North American launch.
Are we bringing something new to the market, what we're bringing something new to various markets around the world. So.
We think about it right now is stuff like sure the things I called out short for one.
<unk> palette and $3 60.
We've got a pretty good rhythm of.
Taking products that we may have launched in one place and rolling that out and we think that's going to give us some pretty good momentum through the beginning of the year and then the back half of the year of lot of the stuff that we're working on in late 19.
And through 2020 will come to fruition and then the step up in R&D investment.
You almost have to think of that and of bifurcated way. The first is software is increasingly important to us and that's that comes out of a little bit faster and then products that are 500 10-K or longer term clinical.
Or have longer term clinical requirements.
That's obviously going to come out in a little bit later, but.
I think one of the accomplishments that.
I'm proud of the team that they've made over the course of the last year, plus I mean, I really feel like our R&D.
Engine is where we needed to be and I think its focused on on a broader idea of like how do we win and of procedure was starting from a diagnosis go into a treatment plan and delivering great consumables that are also linked up is the right way to go so.
Long term, we're optimistic that you'll see an acceleration of what we're able to do.
From an organic perspective.
Okay. Thank you that's helpful.
Thank you next question please.
Our next question comes from Steven Valiquette with Barclays.
Alright, great. Thanks, Good morning, Don.
Hey.
Couple of questions here I guess first all of the color on the 2021 guidance has been helpful. So far one area, where there was less color was just around the gross margin expectations for 'twenty, one I'm curious to hear more about the puts and takes that can cause variability there as well.
About the gross margins exiting 2020 of just under 57% is that a good run rates of use for 'twenty. One overall net is.
Quickly on the R&D kind of 160 million of expense of 21 can you just tell us roughly what the R&D expense was for 2020, just to give us a sense for the comparison.
David Good morning, let me start with the second question.
The number for R&D in 2020 was about $115 million.
Total so we're going from $1 15 to $1 60 in 'twenty one.
Going forward, we are going to be very very transparent about our R&D.
And you will see you guys will see that on the face of all of the financials.
With respect to gross margin.
Gross margin fluctuates from quarter to quarter similar too.
Operating profit margin or.
Our expectation is that.
We will.
Steadily increase gross margin a little bit as well.
Some of the cost savings as part of that $250 million target are coming from.
Gross margin improvements, we continue to do a lot of work from a manufacturing facility optimization. There is indirect procurement initiatives that we have and there is a number of other things with them within Cogs that should help.
Our gross margin I don't expect to see a significant change going into 2021, but I wish we have bought some small improvement there.
Okay, Alright, I appreciate the color. Thanks.
Thanks, Steve.
Next question please.
And our next question comes from Tycho Peterson with Jpmorgan.
Hey, good morning I.
I just want to stick with the guidance for a minute I'm. Just wondering if you can break out what you're expecting for FX M&A and divestiture of headwinds and then youre not giving segment level guidance I'm. Just curious how we should think about <unk> versus consumable growth this year.
Yeah. Thanks, Tycho good morning.
FX.
For us FX is mostly <unk>.
Impacted by the Euro.
And so we.
I can give you roughly the assumption we have for <unk>.
For the Euro dollar exchange rate of about 122, that's what essentially what we're using for up for modeling purposes and to budget.
With respect to M&A, we are not modeling anything and are included in the outlook. We have provided a similarly theres no theres no divestitures, either so there's nothing contemplated in those areas and the outlook that we have provided.
Well just can you clarify what the revenue contribution you're expecting from that amiss, then because you've already talked about price, but what do you expect and I know it was only $95 million deal, but what does that add.
It really is really not non material to revenues of the company, we have not disclosed that.
Total number but it is not it's not really it's not really big at the beginning of cycle.
Okay, and then you raised of long term outlook to 4% to 5%, obviously that captures the 200 basis points youre going to get from clear line of this year, but you've also talked about 20% to 25% growth for the clear Aligner segment. So I'm. Just curious you know that's sort of 5% I guess it looks like it could be conservative and then the long line is that is that a fair assessment.
Well.
Two five.
Essentially while we while we day was.
We haven't had to talk about 2% to 3% or 32, 4%.
Long term growth rate from a top line perspective, with the acquisition of bite and the acceleration of our clear line of business. We believe that those two businesses should add about one 5%, maybe a little bit more off top line growth and.
We'll do everything we can to improve that but that that that we believe is doable and that's what we are modeling and the outlook that we have provided.
Okay, and then last one I just wanted to go back to that for a minute I know, it's a small deal not a real revenue contributor, but as we think about after tax and a close and some of these products can you just talk about how you see synergies there Don for the importance.
Yes sure.
Tycho, it's interesting is as patients.
<unk> have looked at implants, I think the biggest trends they've said they want faster results, which is resulting in a lot of kind of more immediate load.
Implant systems, and when you do immediate load.
One of the things that gives Dennis a fair amount of confidence is putting into some kind of of bone growth factor or <unk>.
The immediate load screw to kind of accelerate the healing process. So we look at data as it's a great technology I mean, we believe it is clinically superior to anything else in the marketplace.
Being able to go in with a relevant.
Kind of piece of news about Hey, as you think about immediate load.
Systems, one of the best ways to accelerate healing is to use us ex so that's kind of how we're thinking about it now obviously is as we need to update our portfolio. We've been we've tended over the last eight years to have been much more of a parallel walled implants system company.
We have we think of clear opportunity to begin to expand our portfolio to allow us to compete more aggressively in the faster growing immediate load space.
Okay. Thank you.
Thank you next question please.
Our next question comes from Jeff Johnson with Baird.
Yes.
Thank you good morning, guys I'll try to be brief here just given the time, but going back just the R&D real quickly you know Jorge historically, we've thought of that spike kind of being about a 3% of.
Revenue R&D Spender, obviously with the guidance this year, it's going to be up around four is that about the right number of kind of R&D. After 2021 kind of grow in line with revenue of just thinking longer term kind of holding of closer to that four is their upward bias on that number then going forward.
Thanks, Jeff.
Topic that we have spent a lot of time on and we believe that thought.
Around 4%.
Ratio of percentage of sales is a good number for us at.
At least for the foreseeable future.
Dollar wise is a significant improvement as I indicated earlier.
2020, we spent about $1 15 were going to 160 that that is a substantial amount of incremental dollars. We are working.
Very closely with the R&D team, making sure that we have the right metrics and that we really track the return on those investments and we are comfortable with the 4%, we think that 4% or so is going to be.
Essential critical for the top line growth and we're going to rely significantly on organic growth to deliver that top line.
Yeah understood. Thank you and then Don just a bigger picture for you you guys have been talking about the 3% to 4% organic of double digit EPS, obviously with bite you take that organic up to four to five kind of on the long term guide 2020, and even 2021 there's some funkiness in those years. So so you can't really apply those targets to that is 'twenty two that first.
At year.
Understanding you just put out 'twenty, one guidance, but so not to ignore that but is 'twenty two that first year, where we can think about those long term targets coming into play of four to five in double digits and kind of.
Growing our models beyond that.
In future years. Thanks.
Yeah, Jeff We give you 21 and you asked for 'twenty two.
Look I, that's probably a fair assessment, Jeff it.
As one of the challenges and I give jorge and his team a whole lot of credit how do you look at 'twenty 'twenty, one in context of 2020 and.
Again, it's not clean to go back to 19, but look we think we have a formula of how to grow the business, which is how do you see consumables growing how do you see technology and equipment growing.
Combined as we bring stuff like bite on and when you see investments in R&D and things like that we'd like to see our implant business growing as well so yeah.
We think five.
$4 to five pluses, where we want to be and as we think of 'twenty two and beyond absolutely.
Again, if you really kind of look at the last two years I mean, it was okay. In late 18, we got to get the company structured correctly. We think we've done that work. We think we've got a good recipe for growth we've added some organic and inorganic acceleration to it and that's why we say we think we should be four to five plus.
Thank you next question please.
Our next question comes from Jon Block with Stifel.
Hi, This is Trevor on for John Thanks for taking the questions. So just on the 15% to 25% range of you gave for guidance are there any specific variables. It's desk by sort of that you can call out that could take you to the higher low end of this range or is it really driven by the market and macro factors that you called out thanks.
Yeah. Thanks for that question.
There is a number of factors that play into this range. One thing that we indicated in our prepared remarks is the overall trajectory of the market as a function of what happens with thought with all of it with a call of dynamic in vaccine Rollouts that plays an important role.
And then more specifically related to the company there is sort of the performance of of fire.
New launches and Don talk about how.
How we are beginning to roll outs of Prime mill, <unk> and other products more globally that she'd also.
Influence, where we are.
Where we end.
And that part of the range and then and then the growth trajectory of our.
Your line of business is an important factor into into our outlook for 'twenty. One so there's a number of things, but I think those are the major ones.
Great. Thank you next question please.
Our next question comes from Michael Cherny with Bank of America.
This is allen in from Mike. Thanks for taking the questions. Don you mentioned margin opportunity around procurement and logistics can you expand a little net.
It's something that can be done just internally or are you looking at partnerships or potentially M&A for that thanks.
No. That's that's really internal stuff I mean look we used to run a pretty disaggregated supply chain and.
Dan key and his team have done a great job of creating a unified <unk>.
Group, obviously, you know that.
Taking all of the time, we start really started that in earnest in 2019.
As we've gotten the scale.
We're now able to look at total densify sirona from a procurement basis as well as logistic basis and as we think about things we've been able to consolidate distribution points and a few other things that have given us some leverage and we expect to continue giving us leverage in the future.
Okay, great well that concludes today's session. Thank you everybody for joining us today on our fourth quarter 2020 earnings Conference call. We look forward to having follow up discussions with many of you later today.
Okay.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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Ladies and gentlemen, thank you for standing buying boxes of the Q4 2000 2010 Splash Sirona earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session sort of asked the question during the session need of press Star one on your telephone if you require any further assistance. Please press star zero I would now like to do so.
Today's conference call Ms. Gary Dixon you may begin.
Thank you operator, and good morning, everyone welcome to our fourth quarter 2020 earnings conference call I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www Dot densify Sirona Dot com before we begin please take a moment to read the forward looking statements.
Our earnings press release during today's call, we make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recent form 10-K with some of the most important risk factors that could cause actual results to differ from.
Our predictions in today's conference call. Our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about financial performance of our business enable the comparison of financial results between periods, where certain items may vary independently of business performance and allow for greater.
Parents, he with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results and with that I'd like to now turn the call over to Don Casey, Our Chief Executive Officer, Don. Thank you Gary and thank all of you for joining US. This morning, I hope, you're all safe and well.
It's hard to imagine that a year ago on this call. We first started discussing the COVID-19 pandemic and as we enter 2021.
Bill of challenge that creates some level of uncertainty.
But over the course of the year there had been many lessons for <unk> Sirona and the experience is hopefully prepared us for the coming year and beyond.
As we provide a final look at 2020, a few things really stand out.
The first is the resilience of the dental market and how committed the dental community is to serving their patients.
The second is how strong the underlying dense play Sirona business is this is illustrated by the improvement in our results over the last two quarters.
Turning new and different ways to do business has been another key lesson, whether it was of virtual D. S world, creating digital K O L forums, we're having our global R&D teams collaborate without physically being together.
White of learning here that we will apply going forward.
And finally, we have always talked about how our people are our most important asset well 'twenty 'twenty certainly highlighted that Ed.
Every day, our team stayed focused on our customers and their patients despite dealing with professional and personal challenges that we all face during the year I want to thank them for their commitment and professionalism.
Moving on today, we want to cover four things. The first is our fourth quarter results. After that we will provide some guidance for 2021, and we will then provide some perspective on our priorities going forward and we will finish with a discussion around our ESG plants.
Moving now to slide six we were pleased with our performance in the fourth quarter revenues were $1 $1 billion down three 3% on an organic basis.
This is a sequential improvement versus quarters, two and three and reflects a gradual recover in the dental market.
In the fourth quarter, we remain disciplined around spending and.
These cost containment efforts helped deliver a solid margin performance.
Operating margin reached 23, 2% up 320 basis points versus year ago.
This results in of the adjusted non-GAAP EPS of <unk> 87.
Up 19, 2% versus the prior year.
Other actions taken by the team helped generate healthy cash flow from operations of $263 million.
To provide the details of our performance for the quarter I will now turn the call over to Jorge.
Thank you Don and good morning.
In the fourth quarter, we delivered strong results and exceeded our internal expectations in many categories.
The steps we've taken to improve our business continued to generate positive financial outcomes. Despite the difficult environment created by the evolving global pandemic.
Sequentially during the fourth quarter, we deliver improvements on almost every key financial metric versus the third quarter.
We capitalize on the gradual recovery in customer demand and commitment to cost discipline across the enterprise.
While we remain cautious our fourth quarter performance has given us good momentum going into fiscal 2021.
That's sort of get let's look at Q4 in more detail.
Organic revenue decline of three 3% versus last year was an improvement sequentially as compared to the eight 8% decline experienced in the third quarter.
Consumables posted organic growth of one point of 1% in the fourth quarter versus last year.
We delivered strong consumables growth in Europe, and the U S offset by declines in other geographies.
As expected.
All of these and equipment organic sales declined six 2% versus last year, primarily as a result of a difficult comparison for the CAD Cam business relative to Q4 2019.
Gross profit was $613 million or 56, 7% of sales of betters unexpected outcome, given this quarters lower volume levels as compared to last year.
The gross margin reduction was primarily due to the lower sales levels and negative outsourcing. He was partially upset by productivity and cost savings initiatives.
SG&A decreased 58 million or 13, 8% versus the prior year.
SG&A as a percent of sales declined 430 basis points year over year.
The reduction in SG&A reflects volume related decreases and improvements in productivity and operational agility.
Examples of volume related expenses include travel commissions advertising and promotions.
Also we have been very prudent with non essential and discretionary spending categories.
Operating profit grew over 13% to 251 million versus last year. It represents a margin expansion of 320 basis points to 23, 2%.
Our margin rate benefited from strong consumable sales and as just mentioned the impact from permanent discretionary and volume related expense reductions.
Also keep in mind that the typically strong Q4 sales volume creates significant operating leverage that enhances margin.
The results from the actions taken during 2020 gave us confidence to expand our investments in R&D and customer experience to deliver sustainable growth.
I will refer to these investments later in my presentation.
Moving on net interest and other expense increased 5 million, reflecting higher levels of debt versus last year and the closing of out of certain net investment hedges.
The non-GAAP tax rate in the fourth quarter was 21% of decrease compared to 25 point of 1% in the prior year, which was a function of the changes in the U S versus non U S pretax income mix.
This lower rate added approximately five cents to fourth quarter 2020, non-GAAP EPS as compared to last year.
Non-GAAP EPS was <unk> 87 up 19, 2% versus the prior year quarter.
Yeah.
Moving onto the fourth quarter of consumables segment results.
We are pleased with of consumables business performance in the fourth quarter.
Organic sales were 449 million, an increase of one 1% versus the prior year grew.
Growth was strong in Europe, and the U S. Partially upset by a decline in rest of the world.
Sales in retroactive and preventive show a strong organic growth offset by a decrease in lab.
Our efforts on a retail focused programs is a driver of improved consumable sales performance in the U S.
Gaining traction on the execution of initiatives such as the shift in promotional strategies to of strengthened relationships with dentists, delivering clinically relevant products with strong incentives.
Moving on to technologies and equipment performance.
Heading into the fourth quarter, we indicated a tough comparison in this segment versus the prior year due to many factors, including D. S World sales the primes can upgrade cycle and the uncertainty from Covid.
As expected technologies and equipment organic sales declined six 2% versus the prior year, but grew sequentially from Q3 2022 Q4 2020.
Within this segment, our clear Aligner and health care businesses performed very well during the quarter.
Of note our team was able to transition the D. S world event into a fully interactive virtual experience in Q4.
Although we were pleased with the results of the virtual V. S World event and the strong participation we have announced our intention of returning to a hybrid live event in 2021.
On Slide 11, you can see our financial performance by region during the fourth quarter.
U S sales of 359 million declined eight 7% compared to the prior year.
Organic sales declined seven 3% driven by CAD Cam and imaging.
European sales were $448 million up 3% compared to the prior year.
Organic sales increased <unk>, 4%.
Strong growth in consumables was partially upset by the COVID-19 related impacts on technologies and equipment.
Rest of the World sales were $275 million down two 8%.
South American market continues to experience COVID-19 related declines, especially in Brazil.
Moving onto cash flows in the fourth quarter of 2020, we had a strong operating cash flow of $263 million, bringing the full year 'twenty to 2020 cash flow to $635 million.
Full year 2020 deliver $548 million of free cash flow, an increase of 7% versus last year.
We returned a total of $228 million to shareholders through dividends and share buybacks and deployed $1 1 billion to fund acquisitions.
The company finished 2020 with a strong liquidity available comprising $438 million of cash and committed credit facilities of another one point of 1 billion.
Now let me provide an update on two of strategic initiatives, we discussed in prior quarters.
First.
We completed the actions required to exit the traditional ortho and the analog lab businesses as planned.
Both businesses accounted for approximately of headwind of $75 million of sales in 2019.
These exits enhance our ability to focus on growth areas.
Second.
We remain on track to achieve our long term cost savings objective of $250 million.
We deliver an order of $17 million of savings in fiscal 2020 day.
That brings the total cost savings $260 million since the announcement of the restructuring of 2018.
Consistent with the plan, we expected restructuring to cost of total of $375 million.
To date, we have spent approximately $310 million.
$20 million of which is noncash.
Before we turn the page into 2021 I wanted to take a moment to thank every single associate and then supply sirona for the tremendous commitment to their liver results and they're very difficult circumstances during 2020.
Now let me, let me turn to our financial expectations for 2021.
We are monitoring the markets, where we operate very closely.
Our research indicates that the gradual rate of recovery and dental appears to continue.
Dentist offices remain open.
<unk> patient patient confidence is improving with of vaccine Rollouts how's.
However.
COVID-19 continues to represent a lingering uncertainty, which makes which makes medium to long term planning very difficult.
After thoughtful consideration and acknowledging the level of difficulty to forecast accurately in the current environment, we have decided to share our key planning assumptions for fiscal year 2021.
We're optimistic about the long term prospects of the dental industry.
There are several categories with high growth profile high growth profiles, while all of those are more moderate but with great cash flow.
The interest intrinsic resilience of the dental category provides some stability in the short term and the possibility of a stronger demand in the second half of 2021 relative to the first half.
We were expecting fiscal 2021 reported sales to be in the range of 4 billion to $4 3 billion.
This range equates to a reported sales growth rate of approximately 20% to 30%.
From an organic organic sales perspective, the range provided equates to an organic growth rate of approximately 15% to 25%.
The difference between reported and organic sales is primarily explained by the acquisitions of bite and date of them.
The disposition of traditional ortho analog lap all of our smaller portfolio shaping activities and FX.
The recovery of the dental market and the success of the vaccine rollout will influence to a large extent at one end of what end of the range we deliver results.
As communicated in January we expect expect our clear aligner business to reach an annual run rate of 300 million by the end of 2021.
We're excited about the growth contribution of this franchise going forward.
We plan to increase our investments related to strategic growth initiatives.
Targeted R&D investments are increasing to approximately had been $60 million in 2021.
All of their areas of significant investments not reported in R&D include clear Aligner acceleration e-commerce and all of our digital platforms.
On the SG&A front byte end date of them combined contributed approximately of approximately $90 million in Incrementals S. DNA in 2021.
Operating income margin for 2021 is expected to be 20% or higher with a stronger performance in the second half of the year.
Our margin expansion remains steady and we continue to aim for 22% operating profit margin by the end of fiscal 'twenty two.
We expect of non-GAAP effective tax rate to be between 23 of 24% our estimate for share count is approximately $221 million.
That brings our non-GAAP EPS expectations for 2021 to a range of $2 60.
To $2.80.
Our capital is.
<unk> estimate for 2021 headwind and $60 million.
Yeah.
Despite the near term challenges presented by COVID-19, we are mindful of the targets, we set and where do we remain focused on achieving our 2021 objectives and expect to remain on track to reach our longer term targets.
Before I turn the call over to Don I want to make a comment about the first quarter of 2021.
Please remember that the first quarter of the fiscal year has been historically the lowest quarter in sales and consequently operating income margin had been several points lower sequentially.
We expect that trend to continue this year.
This analogy effect its factor into our planning assumptions for the full fiscal year with that I will I will now turn it back to Don.
Thank you Jorge and we will move to slide 14.
Give additional perspective on 2021, it might be helpful to provide some detail around our strategy and operating priorities going forward.
Moving to slide 15.
Over the past two years the company is focused on delivering against the restructuring outlined in late 2018.
Despite the pandemic <unk> Sirona has made solid progress across most areas against the goals outlined in that restructuring.
The plan was built around improving growth driving margin and simplifying the organization.
While there is still work to do our leadership team is committed to meeting those goals in the original time frame.
As we get toward the conclusion of the restructuring though.
It now becomes important to lay out a strategy for how we will grow down supply sirona in the future.
As we have refined our growth strategy over the past few years. It is important to recognize that the dental market continues to evolve Inc.
<unk> our customers are looking for comprehensive solutions and improve workflows that deliver better patient outcomes and improve the financial health of their practices.
<unk> Sirona is uniquely suited to deliver this for our customers.
Our company has an unmatched installed base of digital dental products, including both digital impressions and a complete range of X Ray imaging products, we have deep expertise in treatment planning and workflow management and dense play Sirona has a full portfolio of of central consumer products that are critical components of many procedures.
Putting all of this together, we will distinct putting all of this together will distinguish us going forward and provide sustainable differentiation.
For 2021 of them beyond our operational priorities will remain consistent around delivering growth improving margins and building a scaled efficient company spin.
Specific targets include organic growth of 4% to 5% plus going forward.
As Jorge said, we are committed to improving our margin achieving our 22% goal by the end of 2022.
And our efforts around organization simplification will allow us to deliver the cost saving target of $250 million through the end of the restructuring plan.
Doing all of this will allow us to target double digit adjusted EPS growth and create sustainable value for our shareholders.
Moving to slide 16, let's look at these priorities in more depth, starting with growing revenues.
As I mentioned earlier dense part Sirona is well positioned going forward to grow our revenues through a combination of organic and inorganic opportunities all built on a foundation of global commercial Excellence Star.
Starting with organic growth.
Over the last three years the company has made significant improvements to our R&D program made.
Major changes have involved implementing of portfolio management approach to allow us to maximize the impact of our spending by focusing on fewer bigger products in a central areas.
A second major shift is having our innovation efforts focus on procedures rather than products.
This allows this aligns us with how our customers think and will allow us to offer more comprehensive solutions.
And as those changes have become more ingrained and show promise for the future in 'twenty and 'twenty. One we are increasing our investment in R&D significantly.
This is highlighted by the creation of a new consumables innovation center to be opened this year in Charlotte.
As you can see on slide 17, despite the pandemic <unk> Sirona was able to continue accelerating our new product activity.
We've been pleased with the response in particular to access Prime mill and short fill one.
Looking out to 'twenty 'twenty. One we are excited about the portfolio, we will be bringing to the market, including important new introductions in the endo and implant areas.
Moving now to slide 18.
In addition to our investment in organic programs when appropriate we will look to acquisitions to support critical growth priorities like clear liners and implants.
As we announced in early January dense play Sirona acquired bite of direct to consumer clear Aligner company. It's been great to welcome. This outstanding teams of <unk> Sirona.
The acquisition gives us significant scale in the critical clear aligner market as well as important new capabilities.
These capabilities include the ability to communicate directly with patients. We believe it will be important for dense applied to sirona to help generate patient traffic for Dennis across multiple procedures in the future.
This business carried good momentum from the fourth quarter into the new year and the integration of the bite business is on track as.
As we mentioned earlier, we believe that we will exit 2021 with $200 million plus run rates.
And as Jorge has mentioned combined with short Smile are clearer line of franchise is expected to achieve a run rate of $300 million by the end of the year.
The deal is expected to be accretive to our long term financial targets and non-GAAP EPS in 2021.
Moving to slide 19.
In late January of <unk>, Sirona acquired datum, an Israeli biomedical company for a little over $100 million.
Adam expands our biomaterial portfolio with the Asics brands with its glide metrics technology.
The implant category has been shifting to meet the patient need for fewer visits and more rapid results. This has led to an expansion of procedures using immediate load implants and these procedures bone growth factors like Asics can provide important benefits. We believe this acquisition gives <unk> sirona of terrific brand with an excellent technology that.
Will help improve our performance in the implant category.
Moving to slide 'twenty.
Over the past 15 months of the company has also made major efforts to improve our global commercial capabilities ease of included pursuing a comprehensive sales effectiveness program in multiple countries.
We have also shifted our promotional spending to focus more on programs like one day, yes that creates demand at the retail level.
The team has also enhanced our digital clinical education capabilities, and we reached over a million visitors this year.
All of this has improved the effectiveness of our global commercial capabilities.
Now on slide 21.
Along with driving revenue growth. The company is focused on improving our margin in multiple areas. One highlight that has been discussed of spending discipline.
Our team has shown steady progress in this area over the last few years, but the pandemic has shown there are new more efficient ways to manage the business. It is important to apply the lessons learned in 2020 going forward.
Our supply chain has made excellent progress across the board highlighted by reducing our manufacturing footprint from 42 facilities in 2018 to 29 now.
There has been strong progress in our SKU rationalization and inventory management.
Yet even with this success there is still opportunities in several places as we get better using our scale in areas like procurement and logistics.
And finally, we remain committed to portfolio management the.
The exit of the traditional ortho and analog lab businesses has helped simplify the organization and.
An improved both margin and operating efficiency.
This will remain an important part of our discipline around margin improvement going forward.
Moving now to slide 22.
We believe a key ingredient of the sixth of a successful business strategy going forward is to establish a comprehensive framework to manage ESG objectives of strong ESG program can facilitate topline growth and reduce cost it can contribute to reducing legal and regulatory risk while improving employee engagement.
As a result, getting ESG right has become a business imperative for <unk> sirona.
As a global leader in the dental health segment, we are striving to become an ESG leader as well.
<unk> objectives are aligned with our purpose and mission of improving access to quality health care globally.
Every day, the almost 15000 employees of densify sirona of work to improve the lives of people all around the world, including the communities, we serve while continuing to deliver value for our shareholders.
We will achieve this by investing in our people as well as leveraging our R&D and innovation capabilities to leave a lasting impact on society.
While <unk> Sirona has always had multiple activities in this area. We felt it was time to create a more comprehensive framework to measure ourselves and communicate our results.
Last year of cross functional ESG Committee was established composed of our most senior leaders.
This team is tasked with developing the necessary internal controls data management and frameworks for ESG reporting.
In addition to the senior leaders, we have added internal subject matter experts outside resources and consult regularly with company's advanced in ESG practices. The committee is in the process of developing an ESG implementation plan with specific objectives, and we look forward to sharing the plan and our progress going forward.
Moving to slide 23 in conclusion, there is still uncertainty around how the pandemic will impact 2021, but we feel absent a major setback the dental market will improve throughout the year.
Our solid results in the fourth quarter have shown the resilience of our underlying business and the commitment of our people while.
While we are cautious around 2021, we expect to see improvement as we go through the year.
We believe the dense play Sirona has a clear strategy and is well positioned to drive revenue improve our margins and deliver sustainable value for our shareholders and with that I'll now turn the call back over to Kerry.
Thank you Don operator, we will now open for questions.
Ladies and gentlemen feel of a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.
It's been answered most of them with yourself from the queue. Please press the balance sheet.
Our first question comes from Nathan Rich with Goldman Sachs.
Hi, good morning, Thanks for the questions.
Don maybe starting on the guidance the revenue range is kind of back in line with 2019 levels. I know your business has a lot of moving pieces of what's kind of of the M&A and the decision to exit the <unk>.
Traditional ortho and lab businesses. So I guess just at a high level could you kind of talk about what your expectations are for the market relative to 2019.
And then what.
When you look at kind of of the composition of your portfolio. How would you kind of expect to perform relative to the market.
Yeah. Thanks Nate.
It's interesting that what what is the relevant comparison is at 19 or is it 'twenty look with the pandemic still lingering through this quarter and while we are optimistic about vaccines, we think that theres still going to be an impact that we will see in our business in places like Latin American and others. So you know we're kind of really looking at the guidance versus.
2020 is kind of the relevant discussion.
Look in terms of what we expect.
Over the course of the year, we see a gradual improvement you know if you look at the a day surveys and a lot of our survey work.
See particularly like in the North American market.
We think offices are operating 80% to 85% you know theres been some compensation on the on the part of the dentist by looking at higher value procedures. So sort of revenue has stayed up we've actually seen in some cases, Dennis beginning to add fee fees for PPE to compensate for that but our expectation based on <unk>.
Our tracking studies that talk directly to patients, we see patient optimism starting to increase and we think that'll manifest itself kind of gradually over the course of the year.
We think the exit rate for the total category in the back half of 2021 will be better than the than the front half.
Just in terms of how does our portfolio of stack up.
Look I think other people are better qualified to answer of how.
A lot of different People's portfolios are going to stack up I would tell you. This is we kind of look at it.
We start with our strategy, which we really think let's let's think about workflows and workflows are important to us clear liners is clearly an area that we've spent a lot of effort on and we obviously feel very very good about that if you look at the implant and endo procedures.
We believe that we have a good formula for growth right now and I mentioned in my prepared remarks that we anticipate some launches in the back half of.
Of 2021 that should accelerate momentum stuff like that we believe gives US a reason to really go in with new news in the in the implant market and in terms of consumables look some of that is going to be directly related to how fast you know kind of rest of the world comes up as you know our portfolio is not.
Really heavily focused on PPE.
We tend to think much more around like the rest Oh Endo and lab businesses, which are you know some of Thats a function of what are we able to do to competitively to gain share we feel that we've been very competitive in the fourth quarter and look as the market comes back, particularly on a global basis, we're optimistic that we're going to see some improvement there.
The last issue, we really have spent a lot of time over over the last year shifting our promotional strategy, which is really very much more focused on retail and how do we drive a.
Retail consumption at the at the dentist office level. So that's one of the last reasons, we feel that there's going to be continuing improvement over the course of the year.
Round.
Our consumable business. So I hope that's helpful. Nick Yeah. Thanks, Don appreciate the color if I could just ask a quick follow up on the T&D segment.
You said that it got better sequentially I would I wonder if you could comment specifically on the digital equipment piece, how that performed relative to your expectations and just how you feel about kind of the level of demand youre seeing in early 2021 as you think about your expectations for the full year.
Yeah, Nick and then both mining and Jorge his prepared remarks, we talked about all of 2019 was a big comp coming off of the fourth quarter. I mean, basically you were in full in the in the critical North American market you were in the middle of a prime scan upgrade and you launched Prime mill and we of the one day S program. So we knew that was going to be a pretty steep hill to climb.
Relative to our expectations.
Particularly without having a live D S world.
The T&D segment actually performed pretty well.
And as we look out through the first quarter now, let's remember the first quarter for US typically is slow.
It's it's as it's the smallest quarter of over the course of the year and obviously <unk> is a big part of that but I would tell you. The thing that has impressed us is that the.
If you really go back to the second quarter I think of in the North American European markets in particular, the dentists really we're kind of okay, what or when the pandemic kind of eases up what are we going to do and we've seen a lot of dentists that have really taken a step to say hey look I want to get into implants, I wanted to do more clear liners, which requires them.
To kind of up their diagnostic game, whether that's through like more of <unk> cone beam or whether that's getting what we think is of best in class scanner with prime skin.
And we've seen underlying demand pretty good I mean, if you actually one of the reasons. We say that is if you look at how like North America performed comparative to Europe on some of the like the CAD Cam and the <unk> businesses.
Where you didn't have the impact of of D. S. World you saw what we think was pretty solid demand for tea.
And we feel as we come into this quarter you know, we're not getting ahead of ourselves, but we feel that underlying interest in our products has been pretty good and with Prime mill now come in.
We feel that we've got a pretty winnable portfolio.
Great. Thanks, a lot of course.
Our next question comes from Glenn Santana with Guggenheim Securities.
Oh, yeah. Good morning, Thanks for taking my questions.
John I just wanted to ask.
I can quote question, maybe another way you can put up consumables of organic consumables, just over 1% and what we're having we're out of it.
Tom sort of reconciling that against these anda surveys and so when you sort of look at the.
The numbers in the fourth quarter and now you have the luxury of sort of see in January and February.
Of this quarter before we hit these easier comparisons there.
Fair to say that the Mark it is now growing year over year.
And I. Appreciate your comments you said that there was a shift in promotional strategy. So can you just help us put maybe the market growth in context.
Yeah, you know Glenn.
First thanks for the question look the consumable market is kind of hard to parse apart because theres not a clean comparison is what is consumables because you've got some people who report big PPE numbers and whatnot you know when we.
When we talk about consumables and in US, it's really about like Resto lab in Endo.
For Us and you know what what we saw was in the fourth quarter. We had a good performance in the U S. In particular, and we think that's been a result of a lot of the work that we had been doing around the promotional strategies.
Not quite as exposed as some of our other competitors may be it is it's of areas in Asia Pacific that have returned from the pandemic of little bit faster.
In all we were pretty happy with how consumables performed now now go below that of little bit I mean, when and it was really funny. If you go back a year on this call because we report relatively late in the cycle.
We were really the first people that we're talking about an impact on Corona virus in the dental category and one of the things. We said is as Dennis started heading into that kind of March uncertainty in April uncertainty, it's the easiest spigot to turn off was consumables sales.
We're not going to build inventory there and we do think that while the a day is saying 80 80 80, plus we do think that there was some benefits of not only the things we were doing but there was some restocking is as traffic begins to return to somewhat more normal levels.
So and then look the promotional programs you know we've said this and you know I I wish it was easy to just do that all in one quarter, but as we roll our promotional strategies around one day and other things around the world basically what we're saying is hey look anything we want to do is got to be focused on driving innovation directly at the <unk>.
Dentist and create promotional strategies like one day, yes that actually allow us to leverage technology and equipment, you know something like a prime scan launch with our consumables and as we roll that out that that represents a shift I mean.
If we were to look at say the U S. Mark at 18 months ago, we would be running 910 to 15 promotional programs, which we've now swept into one and some of that was focused on things that may not necessarily be as retail focused you know do we want to do a two for one promotion, which.
Involves different kind of promotional strategy. So you know look.
Bottom line, we think the consumable market, whether it's growing or not it's certainly improved sequentially for the third consecutive quarter. We think are.
The strategy that we're pursuing around consumables is the right thing, which is one of the reasons, we're happy with the performance in the U S and.
Europe and then you know as we go forward, we're optimistic that our innovation as well as our promotional strategy is going to allow us to see consumables trend in the right direction.
I appreciate all that commentary maybe thinking of just ask Jorge of quick follow up question on the margin of Jorge.
<unk> quarter in a row of margins coming in I think much better than everyone was expecting and looking at your long term guidance, it's almost hard for us to see how margins could go down so much from this point.
As of fiscal 'twenty, one I know you talked about.
<unk> innovation, new product launches, but on the other side of that you're raising your cost savings targets and things like that and so how should we think about that cadence in the margin because it feels like you have to take a pretty big dip from where you were in the second half of 2020 to kind of make sense of that guidance for for FIS.
21, thanks and events.
Thanks, Glenn and good question.
So if you if few things to keep in mind. The first I would say is you cant compare just the Q4 with the average operating profit margin for the fiscal year because as you. As you know Q4 is typically the strongest from a sales perspective that creates oh.
And leverage and it really helps.
The margin in that quarter by the same token you cant use for example, Q1.
As a good proxy for the average rate of four.
Yeah, because Q1 is the lowest quarter so.
Do you have to think about how those numbers average out throughout the year.
They they the mixing of the quarter in Q4 was very good we just talk about consumables and consumables performed really well in the U S and in Europe. It was not only it was not only the U S. But the U S and Europe had a good quarter from a consumables perspective and that is a good margin business.
Then when you go down to our expenses on the expenses side.
There are probably three main buckets right one is the.
Cost take out that we're doing structurally and that is that is reflected in the guidance is reflected in the steady progression that we have delivered over the last several quarters and what we're projecting for 'twenty. One so there's going to be a significant amount of cost that is out on the permanent permanent basis.
There is a there are two other buckets one is it's ex.
Spend that is volume related and as we as we increase volume.
There is some variable costs that will be added to the equation and we didn't have that in Q4 of Q3, because we are.
Running at a lower than normal levels and volume so that that is important and there is a discretionary of span and some all of their spend as well.
As our volume growth, we probably.
We'll start spending some some and in some of those buckets again.
And then.
And then finally, the investments and I I mention our investments and we are when when when you look at the long term targets that we have for top line and for a gross and four.
Margin expansion they require some investments and I didn't give you a list of things that we're working on there is there is a.
Stuff that we're doing from a from an e-commerce platform, we're investing more in R&D, our R&D target for this year's headwind $60 million that is of a substantially higher number than what we sell and 2020 and in 2019.
We're working on investments in all of our data platforms the day.
The modernization of the enterprise to make our customer experience much better.
Wires some investments sales to cash is one area, where we are are we definitely need to improve for the benefit of our customers. So when we add all of those things.
That explains some of the of the decline and then and then finally.
Very important we are adding.
As part of the acquisitions of bite and day to them as I indicated in my prepared remarks, there is about $90 million of incremental SG&A that is going into into our numbers in 2021, so with all of that.
You get to the 20th and.
We were saying we were aiming for at least 20% with the second half of the year being stronger.
We expect we will exit 'twenty, one at day, 21% op margin level. So that's how you walk from the Q4 number two the average and the exit rate for 'twenty one.
Super helpful. Thanks, a lot.
Alright next question.
Our net from Erin Wright with credit Suisse.
Great. Thanks can you speak a little bit about the stepped up R&D investments.
No change from your previous targeted innovation approach and really holding back on product launches at Mississippi, and then they can and should we anticipate a bolus of new product launches or should we anticipate that steady stream of innovation.
Yeah Erin.
It's our objective of deliver pretty steady stream of innovation.
In 2020, particularly in the second quarter, what we did was really kind of pull back and make sure we're focusing on kind of the big really essential products.
But as we've made all of these changes really in kind of late 18 into 19 talk about portfolio talking about moving to a procedure approach.
We've got new leadership in R&D.
And we're just taking a different approach and the productivity. We've seen you know we thought we had a pretty good year of 19, where despite the pandemic pretty happy with some pretty major products coming out in 2020, and what we know that we have in coming in 'twenty and 'twenty. One we felt that the R&D organization is really efficient and.
We're making further changes I mean, we're super excited about creating a new innovation center that will focus on our consumable and implants business. It's 60000 square foot facility that we're gonna be opening this year in Charlotte as kind of emblematic of how we're taking this cross product procedure approach so getting good.
Up to the $160 million that Jorge mentioned.
To me is just terrific spending because it's going to allow us to deliver innovation.
Net and they'll look it's not going to be perfect every year, it's going to be on a on a glide path, but we think that kind of step up in spending should enable us to deliver a stepped up productivity from our organic efforts. So.
Again, I'd love to say innovation is going to hey, we're going to launch two in this quarter too in that quarter. Two in the next quarter. Some of it is going to be really timed off.
You know when the innovation comes in just the last point I'd add.
As we mentioned in my prepared remarks, increasingly where we're really thinking about our digital footprint.
Whether that's a huge installed base of on the X ray side or a very very strong base on the search side how.
How do we combine that in a way that allows dentists to really think about more complex workflows and as a result, you start looking at all of the software in the company.
And you know as.
As you want that to start working together.
That's an area that we're extremely excited about our customers some of the stuff we've shown our customers gets them gets their blood.
Flowing and.
That's another area that we're investing in so.
I was telling our board of directors that boy it would be great. If we're able to increase increase our R&D spending because that's the in my opinion of the most efficient way for us to generate organic growth going down the future.
Okay, great. Thanks, and then can you speak about the clear line of strategy.
How you're balancing of DTC strategy with the practitioner of directed market. What is some of the initial feedback from your customer or are there any surprises with the bi transaction.
Alright.
From an co investing needed across the base of people.
Oh, Yeah, we've had a bite for you know I've got a couple of weeks I guess six or seven weeks the feedback from the dental community is almost exactly what we expected.
Based on all of the survey work, we had done during the diligence process, which as you know Dennis that are doing clear liners think having another major entry in the clear on wider space is going to put more marketing emphasis and drive in general more patient traffic. So theyre pretty positive I think some general dentists that aren't necessarily doing.
Clear line of work today potentially look at that is as competitive I think of lot of that will dissipate when we bring the bite program out to them I mean, basically when we show them of concept, where we're taking the hundreds of thousands of close to a million unique visitors that come to bite not all of them are going to be available for class one treatment.
And we believe that gives us an opportunity to direct patient traffic at our network. So we are we believe that as we bring that story out and provide details it's going to be pretty positive and you know and then the last discussion.
That we've seen as you know people have asked US the question well. It says if the dentists are negative about it is there going to be any deleterious impact on purchase intent for tens of placement of products in a couple of things I'd point out. The first as you know we tend to be a house of brands as opposed to of branded house. So.
Whether or not people know of Cabot drawn as of dense part of Sirona product is actually one of the things I'm working to fix long term, but it's kind of hard to single out <unk> Sirona products and that's it's really funny. It's a blip that comes and then it kind of goes away. So I would tell you that we're pretty happy with the rest.
Sponsor of of the general.
The general dental population to bite. That's question. One question two since we've had it doesn't require any new investment or stuff. Like this you know we have done a pretty thorough a amount of diligence and we kind of knew what it was going to take you know obviously of startup company.
We're looking forward to the integration of like finance, QA or a some supply chain stuff.
And that's really gone. According to plan, we haven't seen any areas that require major investment if anything.
Today, we're more excited about bite them, we were in January when we made the announcement.
Okay, great. Thank you.
Our next question comes from Kevin Caliendo with UBS.
Hi, Thanks for thanks for taking my call.
I guess, if we wanted to talk a little bit about the cadence you know we understand <unk> is always a little bit of little bit worse, you talked a little bit about demand in <unk> year over year, but I.
I guess I'm asking as people start to expect to get vaccinations sort of what you saw.
January February what you expect to see end of March I get it on the margin side and spend and everything else, but when we think broadly around dental and dental demand are you still seeing that sort of year over year growth in January and into February.
Kevin.
Roy here.
I don't want to get into January or February of results at this point it is too early.
What I would tell you is that all.
All of the information that we have the best information we have as of.
Today, we have reflected in the in the outlook that we are providing so as I indicated and Don indicated.
We are seeing some stability.
And the end of dental industry, we are.
Optimistic cautiously optimistic about patient confidence.
And all of those data points of growth, we've seen in certain areas of the trajectory of <unk>.
All of our parts of the business all of that is factored into our outlook of thought a 'twenty, one where we will see potentially.
Potentially organic growth in the 15% to 25% with a second half stronger than the first half of the Q1 typically lower than the other quarters.
And I mean that that's that's everything we know we have and that's what we have reflected in our in our guidance that I don't have really anything else to add to that.
That's fine I appreciate that I guess, just one follow up you mentioned prime mill and some of the other products that you launched last year and I'm guessing just given the way everything played out last year.
There may be some orders here of some potential.
If theres still pent up demand for any of your bigger ticket equipment items or not or how we should think about that is.
As an impact of 2021, but any color around that would be would be great to understand as well.
It's interesting as we launched access and Prime mill, we were originally constrained from a production standpoint, then we kind of hit the pandemic, we use the pandemic to kind of gear up.
We feel that we are in a really good place right now on ex us and Prime mill.
One of the things that's interesting Kevin is it with the urgency of an on premise DS world like in Las Vegas, There's a certain urgency about purchasing right then and there with kind of the virtual D. S World.
You don't see kind of that everything happens in the course of two weeks. So we're gonna be interested to see.
Kind of.
You had really good response to the virtual <unk> World I mean, we had probably as many.
Live prospects real validated prospects as we did at the at the in person event, but we're just we're gonna I'd be interested to see how long that tail is so we don't anticipate there's a whole bunch of pent up demand we can make.
Out of position from a manufacturing standpoint today than we were a while ago.
We'll see but again underlying demand for.
Digital dentistry products has been pretty good.
Okay, great. Thanks, so much.
Next question next question comes from Elizabeth Anderson with Evercore.
Hi, good morning, guys. Thanks, so much of that question on average.
Wondering if you could talk a little bit about on your implant business and sort of any changes.
Yeah in terms of your plan to sort of accelerate much wise market growth and share of new products are performing or the overall state.
Brand of branded products in that category. Thanks.
Yes, it's interesting.
I would say that we remain optimistic about the long term opportunity that we have in the implant business I think fourth quarter was one where I'd like to see us improve on our.
Performance.
I would tell you the time that we've spent during the pandemic and looking at how we see the market evolving we've improved our portfolio I think we're optimistic about the things, we're bringing to market over the course of this year, we added datum.
Of which we think is an important adjacency product. If you look at it Elizabeth we have between Atlantis and data. We think we have two really good.
Adjacencies that will allow us to be in a much better position today than we were even a year ago to go in and really make some noise around implants.
We think our implant business will grow in 2021, so we feel good about that and.
Long term, we believe as digital dentistry and workflow management becomes increasingly important we're very very well positioned between the diagnostic expertise of our ex rate portfolio, which is critical around implants, we think our product portfolio will.
We'll be rounding that out over the course of this year and we think we've got great adjacencies that will allow us to.
It would be very very competitive and last you know its interesting we mentioned the sales force effectiveness program and it's interesting we don't really get a whole heck of a lot of questions on it even though it represents about a third of the people that work in <unk> Sirona.
And the thing that we've been doing in our sales force effectiveness program is really how do we go in and focus on say if that's of high volume of implant.
Doc how do we really make sure that we're bringing all of the resources of <unk> sirona to that dock and we feel pretty good about the work we've done in the U S and we've now rolled that we're in the process of rolling that out to 10 more countries. So.
Again getting.
R.
Our commercial sales force effectiveness program rolled out we think is going to be helpful. So long term we.
We think there's nothing but upside of our implant business.
That makes a lot of things can you have to talk about sort of Mark Bradley, maybe new product rollout of as we think about the course of 'twenty and 'twenty. One of how you think about it in light of the well the reopening of and obviously you said that the investments youre, making this year, which I assume you know what.
Well will translate into some sort of some impact this year, but probably more of that as of 2022, maybe trying to trying to three type of that can you talk about sort of that pacing at all of them sort of how you view it.
Longer term thanks.
Sure Yeah look in the.
We're truly a global company and I'm reminded that every day. So when we say you know we launched Prime mill Yeah. Okay. We launched it in North America in some selected countries in Europe, and we're now in the process of rolling that out access of the same thing actually is because of North American launch. So are we bringing something new to the market, what we're bringing something new to various markets around the world. So.
You know as we think about it right now is stuff like short of the things I called out short for one <unk>.
Paladin $3 60.
We've got a pretty good rhythm of.
Taking products that we may have launched in one place and rolling that out and we think that's going to give us some pretty good momentum through the beginning of the year in the back half of the year of lot of the stuff that we're working on in late 19.
And through 2020 will come to fruition and then the step up in R&D investment.
You almost have to think of that and of bifurcated way. The first is software is increasingly important to us and that's that comes out of a little bit faster and then products that are 500 10-K or longer term clinical.
Or have longer term clinical requirements.
It's obviously going to come out in a little bit later, but.
I think one of the accomplishments that I'm proudest of the team that they've made over the course of the last year, plus I mean, I really feel like our R&D.
Engine is where we needed to be and I think its focused on a broader idea of like how do we win and of procedure was starting from a diagnosis go into a treatment plan and delivering great consumables that are all synced up is the right way to go so.
Long term, we are optimistic that you'll see an acceleration of what we're able to do.
From an organic perspective.
Okay. Thank you that's very helpful.
Thank you next question please.
Our next question comes from Steven Valiquette with.
Barclays.
Alright, great. Thanks, Good morning, Don and Jorge.
Couple of questions here I guess first of all the color on the 2021 guidance and help us so far one area of where there was less color was just around the gross margin expectations for 'twenty, one I'm curious to hear more about the puts and takes that can cause variability there as we think about the gross margins exiting 2020 of just under 57% is that a good run rate of use for <unk>.
One overall.
And then just quickly on the R&D out of 160 million expense of 21 of if you just tell us roughly what the R&D expense was for 2020, just to give us a sense for the comparison.
David Good morning, let me start with the second question the number for R&D in 2020 was about $115 million.
Total so we're going from 115 to $1 60 in 'twenty, one and going forward, we are going to be very very transparent about our R&D.
And you'll see you guys will see that on the face of.
All of the financials.
With respect to gross margin.
Gross margin fluctuates from quarter to quarter similar to our operating profit margin.
Our expectation is that.
We will.
Steadily increase gross margin a little bit as well.
Some of the cost savings as part of that $250 million target are coming from gross margin improvements. We continue to do a lot of work from a manufacturing facility optimization. There is indirect procurement initiatives that we have and there's a number of other things with them within Cogs.
That should help.
Our gross margin I don't expect to see a significant change going into 2021.
But we should have bought some of it's a small improvement there.
Okay, Alright appreciate the color. Thanks.
Thanks, Steve.
Next question please.
And our next question comes from Tycho Peterson with Jpmorgan.
Hey, good morning.
I just want to stick with the guidance for a minute I'm. Just wondering if you can break out what you're expecting for FX M&A and divestiture of headwinds and then youre not giving segment level guidance I'm. Just curious how we should think about <unk> versus consumable growth this year.
Yeah. Thanks, Tycho good morning.
FX.
For us FX is mostly.
Impacted by the Euro.
And so we I can give you roughly the assumption we have for <unk> for the Euro dollar exchange rate of about 122, that's what essentially what we're using for up for modeling purposes in the budget.
With respect to M&A, we are not modeling anything and are included in the outlook. We have provided a similarly theres no theres no divestitures, either so there's not nothing contemplated in those areas and the outlook that we have provided.
Well just can you clarify what the revenue contribution you're expecting from that amiss, then because you've already talked about price, but what do you expect and I know it was only $95 million deal, but what does that add.
It really is really not non material to revenues of the company, we have not disclosed the total number but it is not it's not really it's not really big at the beginning of Tyco.
Okay and then your you raised of long term outlook to 4% to 5%, obviously that captures the 300 basis points youre going to get from clear line or is this year, but you've also talked about 20% to 25% growth for from a clear aligner segments. John just curious you know that 45% I guess it looks like it could be conservative.
Your line is that is that a fair assessment.
Well the four to five.
Essentially what we what we did was we haven't had to talk about 2% to 3% or 32, 4%.
Long term growth rate from a top line perspective, with the acquisition of bite and the acceleration of a clear line of business. We believe that those two businesses should add about one 5%, maybe a little bit more off top line growth and.
We will do everything we can to improve that but that that that we believe is doable and that's what we are.
Model and the outlook that we have provided.
Okay, and then last one I just want to go back to data for a minute I know, it's a small deal not a real revenue contributor, but as we think about after tax and a close in some of these products can you just talk about how are you.
These synergies there Don for example happens.
Yes sure.
Tycho, it's interesting is as patients.
<unk> have looked at implants, I think the biggest trends they've said that they want faster results, which is resulting in a lot of kind of more immediate load.
Implant systems, and when you do immediate load.
One of the things that gives Dennis a fair amount of confidence is putting into some kind of of bone growth factor or <unk>.
The immediate load screw to kind of accelerate the healing process. So we look at that.