Q4 2021 DENTSPLY SIRONA Inc Earnings Call
Good day, and thank you for standing by.
For 2021.
The Rona earnings conference call.
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I would now like to hand, the conference over to your speaker today.
Kelly the floor is yours.
Thank you, Chris and good morning, everyone welcome to our fourth quarter and full year 2021 earnings call. Joining me for today's call is Don Casey, Our Chief Executive Officer, and Jorge Gomez, Our Chief Financial Officer.
I'd like to remind you that an earnings call press release and slide presentation related to the call are available in the investors section of our website at Www Dot densify Sirona dotcom.
Before we begin please take a moment to read the forward looking statements in our earnings press release during today's call, we make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties our Form 10-K .
With some of the most important risk factors that could cause actual results to differ from our predictions and 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 final.
Annual results between periods, where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results and with that I'd like to turn the call over to Don Casey.
Thank you Andrea and thank all of you for joining US. This morning for the dense play Sirona fourth quarter and full year 2021 earnings call.
There's a lot to cover today before getting into the discussion, though I want to thank our team at <unk> Sirona.
Looking at the challenges through the last two years there have been a few Constance. The first is the dentists have shown tremendous perseverance and creativity throughout the pandemic underscoring the resilience of the dental industry.
The other is our team at <unk> Sirona.
Every day, they continue to demonstrate unwavering commitment to our customers and our mission of transforming dentistry.
Across the entire company our thoughts are also with the people and our colleagues in Ukraine.
We have a great team there and we will continue to support them however possible.
Moving on today, we will cover four items, starting with an overview of 2021, then Jorge will cover our Q4 financials and provider twenty-two outlook I will finish by providing a strategic operating update.
We are proud of our performance in 2021, <unk> Sirona delivered robust organic sales and EPS growth as well as solid cash generation.
There was also significant progress against our critical strategic initiatives.
An excellent example of that progress where the two announcements we made last week. Those included a strategic collaboration with Google Cloud and the launch of a three D. Printers later this year.
Both of these represent important milestones and highlight our commitment to transforming digital dentistry.
Moving now to slide six as I mentioned, our financial performance through 2021 was strong with revenues, reaching $4 to $5 billion.
This represents a robust 24 per 624, 6% increase on an organic basis versus 2020 that would also represent an organic growth rate of four 9% versus 2019.
Our operating margin was 25% with SG&A and R&D investments increasing over the year with the pace of the recovery.
Adjusted EPS was $2.87.
And on a full year basis, we generated strong operating cash flow of $657 million.
To provide more details on our financial performance I will now turn the call over to Jorge.
Thank you Don good morning, and thanks to all of you for joining us.
Today, I will cover fourth quarter results fiscal year 'twenty, one performance our current outlook for 'twenty, two and an update on our capital allocation policy.
As a reminder, my remarks today will be based on non-GAAP financial results unless otherwise noted please refer to the reconciliation tables at the back of the press release and slides both of which are posted in the investors section of our website.
In the fourth quarter, we delivered revenue of 1.088 billion with organic sales growth of one 8% and reported growth of four 6%.
Our clear aligner is implementing CAD Cam business has posted a strong growth in the quarter.
In line with our expectations consumables declined versus last year.
In the quarter, we also experienced more acute supply chain and COVID-19 related constraints, which we estimate to have suppressed our total company organic growth by approximately two to three points.
We view this as a temporary headwind, but anticipate that our supply chain will be will remain challenged for at least one or two quarters in 2022.
Gross profit was $627 million or 57.7% of sales.
Our margin rate increased 100 basis points year over year, driven by benefits from portfolio optimization and efficiency improvements offset by inflationary cost pressures.
SG&A expenses were 351 million or 32, 3% of sales.
SG&A as a percent of sales increased 290 basis points year over year, primarily due to commercial investments in growth areas, including clear liners implants and digital capabilities.
Additionally, SG&A run at a lower rate in the prior year quarter as we were still ramping back up to our normal pace of operations.
R&D spend was 15 9 million and.
An increase of 32.2% year over year.
This increase reflects our focus on innovation and a 10 million one time re class of R&D expenses reflected as SG&A in the first three quarters of the year.
The re class was the result of further centralization of our R&D processes and has no impact on our operating profit or net income numbers.
Operating income was 217 million down 13.7% versus last year due to increased investments in R&D and selling and marketing.
Operating margin of 20% was below our target exit rate of 21%, primarily as a result of weaker volume in the quarter.
EPS was <unk> 76 cents versus 87 cents in the prior year quarter.
Turning to segment performance.
In Q4 technologies and equipment organic sales grew 6.5%, while consumables declined 4.6%.
T any segment organic sales expansion was led by double digit growth in clear Aligner is cadcam an influence.
A teeny segment posted a strong growth despite difficult supply chain conditions.
Up until the third quarter, the majority of our supply chain challenges were cost related due to inflationary pressures.
In the fourth quarter, we started to face significant component shortages impacting the production of imaging equipment and treatment centers.
We estimate this impact to have reviews, the T&D segment growth rate by at least four points.
We ended the quarter with a higher than normal backlog and imaging on our team will continue to manage the supply chain situation as effectively as possible over the next few quarters.
Similar to many other industries the availability of electronic components in dental is inconsistent at the moment.
On the consumables side organic sales declined primarily due to the strong sales levels seen in Q4, 'twenty 'twenty as office capacity and patient traffic, we're returning to pre COVID-19 levels.
We expect the same difficult year on year comparison in Q1 'twenty two.
We also estimate that the price increase we implemented on October one.
A portion of sales forward into Q3.
Now turning to financial performance by region during the fourth quarter.
U S sales were 385 million organic sales increased slightly over it.
Over a year on year.
In the U S. We had growth in implants are liners and CAD Cam our.
Our consumables performance was roughly in line with our expectations.
European sales were 437 million with organic growth of 1.8%.
And product category performance similar to the U S.
Rest of the World sales were 266 million, representing organic growth of 4% with growth across consumables N T N E.
This region was unfavorably impacted particularly in APAC by increased government restrictions as seated with Covid variance.
Primarily in China.
Now turning to the full year 2021 performance in 'twenty, one we deliver organic sales growth of 24.6% near the top of our outlook range.
Reported sales were 4.25 billion.
Due to a weaker euro to U S. Dollar exchange rate reported sales came in at the lower end of our outlook range.
Fiscal year 2021 was a year of progress on our key growth vectors.
Digital diagnostic devices, such as prime scan axial and Oracle for us had a strong year.
In three years with scalar our clear liners from having no presence in this space to a business that generated $274 million in 2021 .
In the fourth quarter sure Smile exceeded our 100 million annual run rate goal.
Bight came in short of expectations for the reasons, we have indicated before such as changes in consumer spending patterns and shifts and digital customer engagement tools.
However, we believe bite will contribute to our growth and our liners in the second half of 2022 .
Despite the challenges in DTC, we achieved sequential growth in total aligner shipments in Q4.
Our implants business finished the year strong and our intention is to keep improving our platform to achieve market growth rates consistently.
Full year gross profit margin of 58, 6%, representing an expansion of headwind 20 basis points since 2019.
SG&A expenses for the full year were 34% of sales. These ratio remains below pre COVID-19 2019 levels, reflecting the benefits from our efficiency improvement initiatives.
We finished the year with R&D at 4% of revenue R&D.
R&D will continue to be core to our growth strategy.
Turning now to profitability operating margin was 20.5% in line with our expectations to deliver greater than 20% for the full year.
Looking back we have delivered over 200 basis points of operating margin expansion since 2019, and approximately 500 basis points since 2018.
The effective tax rate was 23% versus 20.9% in the prior year.
The increase was primarily due to geographic mix of pretax income or a continued business recovered from COVID-19 .
Turning to full year earnings we delivered EPS of $2.87 versus one dollar and 17 nine cents in the prior year.
In 2021 we generated EBITDA of approximately $1 billion.
EBITDA is an objective scorecard to measure improvements in operational execution and cash flow generation.
Our operating cash flow was 657 million and free cash flow exceeded $500 million.
We returned approximately 300 million in cash to shareholders, including dividends and share repurchases.
We also completed acquisitions totaling $248 million and finished the year with cash on hand of $339 million.
Now, let me provide an overview of our financial expectations for fiscal 2022 .
We expect organic sales to be in the 4% to 5% range.
This equates to a net sales range of 4.3 to $4 4 billion.
Our assumption for our biggest FX exposure is a euro to U S dollar exchange rate of 114.
Which is lower than the FY 'twenty, one average off 119.
From a revenue perspective market demand remains strong despite colleagues varian challenges in certain markets.
The R&D pipeline is generating new exciting products to meet the most pressing needs of our end customers and channel partners.
We expect strong contributions to growth from clear liners cadcam implants in imaging.
Our expectation is that operating profit margin will be over 21% in the second half of 2022 and.
And exited the year at a 22% target margin rate in the fourth quarter.
Our efficiency efficiency improvement and portfolio optimization initiatives will continue in 2022, while managing through supply chain challenges.
We estimate the effective tax rate to be between 23 and 24%.
Our estimate for share count is approximately $219 million.
EPS is expected to be in the range of $3.05 to $3 25.
We anticipate growth to be more heavily weighted to the back half of the year.
We are projecting organic growth in the low single digits in the first half and mid single digits or higher in the second half.
Due to the revenue cadence supply chain constrains and inflationary pressures earnings in the first half are expected to be approximately 40% to 45% of the total annual projection.
As a reminder, Q1 typically has the lowest quarterly saves sales of the year and as a result operating income margin also tends to be lower.
This January we yield served as lower patient traffic in certain markets due to COVID-19 .
During the first half of the year, we will continue to be impacted by the ongoing shortage of lake of electronic components, particularly in the imaging and treatment center businesses.
This shorter gears are now impacting the availability of electronic boards for prime mill as well.
We are allocating the reduced quantity affords first to fulfill spare parts needs of meals already own by end customers and secondarily to units in production.
Yeah.
The retail demand for Prime mill is solid and.
And our dealer partners in the U S have sufficient inventory to meet that demand.
In the short term this tradeoff will reduce our wholesale volume of Prime mills.
But he is the right thing to do for our customers.
Finally, we are projecting our clear aligner franchise to grow sequentially each quarter in 2022.
Beit will likely posed a year on year decline in the first half, but he is expected to be a contributor to overall 2000 2022 growth.
I want to Echo Dons wards and express my support and sympathy to my colleagues impacted by the evolving geopolitical events in eastern Europe .
Our teams in the region are doing a terrific job and have grown our commercial presence substantially in the last several years.
Our local sales in Russia and Ukraine.
Represented about 3% of total company revenue in 2021.
Given the fluidity of the situation it is hard to measure the potential impact of the ongoing conflict on our financials we.
We will continue to monitor and assess options available to minimize the impact to our 2022 outlook.
Switching gears to our capital allocation framework for 2022.
First we're investing in the business where profitable growth continues to be our number one priority.
We plan to invest at least 4% of revenue on R&D and about 4% and capital expenditures.
Our cash flow generation also gives us the ability to provide a consistent and meaningful return of cash to our shareholders.
For the next two years, we plan to return at least 40 at least 50% of our free cash flow through dividends and share repurchases.
Similar to last year today, we are announcing a double digit increase to our dividend.
The remaining balance to reach 50% or more of free cash flow returns will be accomplished through the use of ports monistic share buybacks throughout the year.
Overall, we are confident that the progress we are making in key growth areas combined with the resilience of the dental market will allow us to continue to expand revenue and earnings over time.
Additionally, the strength of our EBITDA generation enabled the funding of our investment priorities and the funding of a very competitive cash flow yield to our shareholders.
To close my remarks, I'd like to highlight two important sustainability initiatives. We have underway first in collaboration with our strategic partners smiled train and FDI. We are developing the first global stand there for cleft treatment protocols that include digital clinical workflows.
Second we're sponsoring the 2022 world oral health campaign to promote the importance of oral health for every person's overall wellbeing.
This awareness is aligned with our mission to empower millions of customers by creating innovative solutions for healthier smiles.
With that I will now turn the call back to dawn.
Thank you Jorge moving on I wanted to provide some perspective on our strategy and priorities going forward.
In late 2018, we had outlined a program to accelerate growth improve margin and to simplify the organization. Despite challenges we have largely achieved the targets that we had laid out.
Just as important our team is also sharpened our strategy, while improving our innovation capabilities as Jorge said going forward, we expect to build on those capabilities to deliver reliable, 4% to 5% growth in revenue continuous improvement in our margins and double digits, earning growth.
We believe our strategy of delivering superior integrated workflows and critical procedures will allow dense plays sirona to become the indispensable digital partner to the dentist.
On slide 24, we outlined that strategy calls for us to build on our large installed digital base, whether it's prime scan orthophosphate axiom.
All of these offer dentist among the best in class diagnostic capabilities that are so essential as Dennis globally look to enhance their ability to do more dentistry.
These diagnostic capabilities feed into our outstanding treatment planning offerings and four of the essential dental workflows. Those areas include implants clear liners restorations and endodontics all of this helps make sense plus or own a real leader in shaping the future.
I would like now to outline progress in each of these areas starting with digital dentistry.
There was strong progress within the Seric franchise. During 2021. In addition to our record number of di cameras sold we were able to launch major software innovations with certified to ensure smile seven six there was also good progress on Prime mill.
Our higher end C. B C. T imaging systems also saw robust demand the stems from Dennis looking to add more sophisticated diagnostic tools that will allow them to incorporate more complex procedures like implants and clear liners to the practices.
As already mentioned there are supply chain constraints impacting imaging. These challenges have slowed our ability to meet customer demand are starting late last year and we're seeing those challenges continuing in 2022.
Another area that is important to accelerating our digital portfolio is in software development. We have spent significant resources over the last 18 months to overall our entire approach in this area instead of developing individuals' software for different devices and totally separate initiatives for all the.
<unk> planning offerings, we are building a single platform that will support all of our devices and our extensive treatment planning portfolio.
This creates advantages for the customer as we will have a single user interface and a single easy to learn operating system.
For <unk> Sirona it gives us major cost and speed advantages, while also allowing us to create scale around AI and machine learning.
Our recently announced collaboration with Google Cloud will accelerate these efforts <unk> sirona will bring its decades of experience in digital dentistry to the collaboration Google will bring scale and expertise in multiple areas.
The fruits of this partnership will give the dentist opportunity to digitize their entire practice, while improving efficiency costs security and connectivity.
We also announced the introduction of Prime print last week and look forward to a virtual event. This Friday to talk more about this amazing innovation.
This medical grade highly automated three D printer is a great opportunity for the dentist to improve workflows and practice efficiency.
It is very easy to use and lets the dennys delegate many of the tasks around three D printing to their staff.
Prime print also offers complete integration with the <unk> system and will allow the dentists to produce things like night guards surgical guides and full scale models quickly and inexpensively.
This launch will also come with a complete service package.
That will let the dentist have dense play sirona or one of our many lab partners do the actual design work savings the dentist time.
Moving now to implants.
We're really encouraged by the early results of our implant restage, which centered around the prime taper introduction.
We are approaching implants as a single dense plus sirona brand building off our expertise in digital workflows.
The reception of Prime taper has been excellent and we've been happy to see supporting products like the value brand mis.
Essex, Biologics and Atlantis custom abutments driving positive growth as well.
In the fourth quarter, the implant business grew double digits versus the prior year.
As prime taper moves into Europe , and the rest of the world in early 2022, we look to see continued improvement performance across our implant franchise.
There was also clear progress on clear liners in 2021, and we are optimistic that progress will continue in 2022 and beyond as.
As Jorge mentioned sure Smile hit its run rate objective of 100 million and grew 60% during the year.
The bite acquisition also provided important scale to our clear aligner business, while that scale has been important in areas like manufacturing and R&D. There have also been significant changes in the last year around the DTC aligner business.
As the pandemic lifted there have been increased competition for discretionary consumer spending.
The I O S privacy change further alter the landscape.
As we saw across a range of DTC brands in multiple spaces. This combination negatively impacted sales of many products including pipe.
We continue to believe though that bite is reaching a large underserved population that is not accessing dental care today.
We have a clear plan on how we can build off this need and drive growth going forward.
Based on these plans, we expect bite to grow sequentially across the quarters during the year.
Clear liners are a central part of our digital strategy and increase our exposure to one of the fastest growing areas in dentistry. We are committed to this market and believe we are well positioned to compete long term.
Our resto business is also a key pillar to our overall strategy virtually.
Virtually every procedure finishes with the restoration, including implants and root canals.
Our class II restoration brands like Palatin have shown good momentum our new milling material to Sara also lets dense ply sirona compete more effectively in that space by offering prime mill customers, a more competitive product.
While we see good growth in these priority areas that is offset by corresponding declines in parts of the portfolio like impression material as digital impressions takeoff.
And finally, our Endo franchise has a strong position in yet another critical workflow root canal therapy.
Our recent launch of protein or ultimate is off to a solid start.
The companion products, an observation and Sealers that were part of this launch are also making <unk> sirona a lot more competitive and important adjacencies.
In order to provide increased investment in areas like R&D and demand generation, while improving margins. The team is committed to driving cost efficiencies throughout the organization.
We're focused on identifying and executing against additional opportunities for centralization and enterprise modernization.
A few closing comments.
What we report earnings on a quarter to quarter basis. Our team is focused on creating value for the long term over the past few years. There has been sustained progress against developing a focused strategy that takes advantage of dense places <unk> position in the market.
All this has been done against the complexity and uncertainty of the pandemic.
We have delivered progress on accelerating growth driving margin and simplifying our organization.
The company has a strong balance sheet and has improved our cash generation capabilities there've been significant portfolio moves that have increased our exposure to segments, where digital dentistry is critical and that grow faster than other parts of the dental market. There've also been portfolio moves that eliminated business that do not fit our future vision or growth aspiration.
<unk>, we expect that portfolio evolution to continue.
We've also improved our innovation pipeline that can be sold across a truly global commercial footprint.
All of this will serve us well as we look to become the indispensable digital partner to dentist around the world.
Looking over the past three years the progress we've made is visible and steady all of this makes us confident that despite short term ups and downs dense pluses Arun is well positioned indeed, our team is very excited about our mission and our future.
And with that I will open it up to questions.
Thank you.
As a reminder to ask a question you'll need to press star one on your telephone to it.
First the pound key.
As we compile the Q&A roster.
Our first question comes from Duane <unk> of Evercore. Your line is.
Hi, guys. Thanks, so much for the question. This morning, I guess my first question.
We want to make sure I fully understand the AUM upon impact on.
Fourth quarter results and then I think you commented qualitative I'd say impacted January resolved, but.
As we sit here sort of on the last day of February and it would be helpful. If you could just provide any more color around the progression across it I would just add for January and February .
Good morning, Alex So it's yeah.
The the last week or two in December became more and more complicated for dental practices in a in many markets.
Primarily as a result of staffing shortages and not as a result soft volume tended to go.
<unk> down a little bit again in the last couple of weeks in December in a lot of markets. We had also situations like got China, where many provinces still have thought the zero carbon policy and as a result are in major lockdowns, which restrict substantially patient traffic.
So those are probably the two main constraints, we were facing from a from a volume from a demand perspective. Some of that went over into January and as we look at volumes in the month of January we observed.
It's lower than normal volume.
And that's.
Based on what you can see with respect to Covid infection curves.
Clearly in the U S. The situation has improved I would say Europe is probably a couple of weeks behind they meaning they pick out later than we did in the U S and the situation in <unk> in Asia Pac, particularly China.
Still fluid because a lot of cities remain locked out.
So we I think there is an expectation that that over the next few weeks things will become more normalized but it's as you as you all know the volatility has been high with respect to those type of reactions to.
Spread the spread of army crop.
Got it that's helpful. Thank you and then you obviously talked about the launch of the new Prime product and I was wondering if you could talk about sort of the commercial launch calendar for the various regions and sort of how you expect.
Sales to contribute to 2022 results there.
Yes, let me start and I'll, let Jorge comment specifically on the sales cadence.
Our expectation is towards the end of the second quarter, we'll roll print it will be a global launch, but principally focused in kind of our dock and north American regions.
It's.
Right now the we're very very excited and I urge everyone to hit our our virtual event on Friday without things like Chicago Midwinter, you kind of have to create virtual events.
But the you know.
We're really excited about prime print we've had it in alpha and beta testing now for close to a year and the reaction from the dentist is really positive.
The cadence will literally go North America and.
Mostly central Europe , first it'll be global pretty much by the third quarter.
There's a couple of components to it was but that I'd draw your attention to in the prepared remarks, I mean, obviously, there's a there's a lot of follow on stuff like the printing ink and we're also committed to offering a service package, which would let a dentist.
Actually kind of outsource the.
The treatment planning and the design work for using the printer, which we're pretty excited about as well, but Cora you may want to comment on the specifics.
Yeah, Don I think you explained the cadence from a geographical standpoint, just to reemphasize our U S first and a few selected markets in Europe .
We plan to do that sometime in the third quarter. There are a few things that we still need to.
Finished into to firm up including <unk>.
I mentioned in my prepared remarks, there are supply chain constraints with electronic components that is a consideration for us and then we have to fine tune pricing and the overall economics of the printer. So we have incorporated in our financials for twenty-two some contribution from prime print we were.
We have a range and is included in our in our guidance.
We will we'll fine tune those estimates as we get closer to the summer as we get closer to the actual launch date for the product.
Okay. Thanks, so much guys.
Youre welcome.
Thank you.
Our next question comes from the line of Nathan Rich of Goldman Sachs. Your line is open.
Hi, good morning, Thanks for the question.
Maybe wanted to start with the the supply changes disruption that you mentioned and the impact on imaging and in some of the other categories within the equipment portfolio I guess you know.
Jorge I'd be curious just to get your your sense of how much visibility you have on the your ability to get them get the components that you need and how youre assuming that plays out over the course of the year and also you know what impact that might have on the cost of production and have you seen any indications that those have.
Why constraints have started to ease in the first couple months of this year.
Good morning, Nathan let me take that.
So.
The amount of the amount of visibility into electronic components shortages is it's complicated not only for us but in all industries. We have we have compared notes without multiple all are companies that actually use the same fab four clubs of electronic.
Components and the.
The supply of those products is sop is very inconsistent and.
Some people believe that thought the issues will ease sometime in the first half of the year on other people believe that that the situation could last longer. So it's really hard to predict not only for us but for many industries. One thing that we had been experiencing before this quarter and I mentioned, there's a couple of <unk>.
We were able to have access to all the components, we needed, albeit at a higher price. So the impact had been only from a cost perspective that that cost impact is.
As reflected in our gross margin and is impacting our gross margin I will continue to impact our gross margin margin for some time our team is doing a terrific job trying to procure these components from multiple sources and they will continue to do so.
In the fourth quarter, we had issues with as I said before especially three the imaging and treatment centers and the impact was roughly between 12 14 $15 million across all products and as we go into 2022 and the guidance.
We have provided we are contemplating those challenges to continue for some time. So it is to a large extent is that is captured there.
The only one caveat is we have seen situations where certain components.
Totally dry up and not in the supply chain for periods of a few days or a few weeks, so managing inventory levels inventory levels in the network and ensuring that the production lines are balanced as that is a challenge for the team and and will continue to be a challenge for some time, but as I said a lot of that risk is over.
Recapture in our in our numbers and our projections.
Okay, Great. That's helpful and maybe just to clarify so the $12 million to $15 million of impact that might be the rough ballpark to use for the first couple of quarters of the year and then hopefully the supply is beyond that and Jorge just if I could kind of tie in my follow up to that.
How are you thinking about kind of the cadence of margins over the balance of the year I understand you're kind of working to get to 22% by the fourth quarter.
Can you maybe kind of talk about how that plays out over the balance of the year and.
Also if you have any kind of updated thoughts on beyond 2022, what we should expect in terms of you know annual margin expansion from the business. Thank you.
Yeah.
One thing on the on the tented to that $12 million to $15 million in Q4.
I would ask you not to extrapolate because because those numbers fluctuate all the time, so that was the impact specifically in Q4.
Impacting Q1 could be similar it could be less could be more so it is a it's always a range. So I would I would not extrapolate we.
Our projections show, where our expectations from supply chain is that we should be able to recover in the next couple of quarters, but that situation could could change so that's something that the fluid situation.
Your second question about cadence of margins I indicated in my prepared remarks, we expect the first half to be lower.
And a number of factors common to into consideration here. One as you know Q1 is always a low quarter from a volume perspective and that results in lower margins you also have Bob.
The.
Mathematical effect of the of both bite so bite we expect to be.
To decline in the first half versus last year, and so that that is a that is a headwind and then and then we have some of these supply chain issues that I that I talk about that so that's kind of a dip.
Depressed.
Margins in the first half as we go into the second half than.
There are they are a tailwind for example, bite we expect to be a contributor to growth in the second half.
We expect the acceleration of product launches to to gain traction.
We have we are pretty excited about the progression we are seeing with our prototype our ultimate Prime Prime paper and other and Zurich. This era those products are gaining traction they began in Q4 and they progress throughout the year that is those are going to be important contributors to growth in the second half.
Our prime print, although not very significant is also.
The improvement in the second half and the last point I would indicate is pricing so.
And in Q4 actually in October October one of 2021 as you know.
We implemented.
Today, a price increase that is going to start annualize in Dallas.
Helps.
92, the first three quarters and then we.
We have the opportunity and we will monitor the market and we will.
We will potentially do more price increases throughout 2022, the inflation inflationary environment. It's real it's happening our costs are going up and in price and this is also something that we can use to offset some of those shop incremental cost and.
Hopefully have a net positive impact from from pricing. So hopefully that helps with respect to the cadence for 'twenty two beyond 'twenty two.
Good question, we talk about this before I think we always.
Once we are at the level of 22% operating profit margin rate, whereas it's going to be really important to balance.
Growth topline growth with up further.
Margin expansion I think at 22% margin rate is reasonable and we do more I think we can do more but at that point, our biggest priority. Our higher priority was is going to be making sure that the top line.
Starts to grow and faster than we have seen.
Seen so far.
Great. Thanks, so much for all the comments I appreciate it alright.
Alright, you're welcome next question please.
Thank you.
And next we have Michael Cherny of Bank of America. Your line is open.
Hi, good morning, and thanks for all the detail so far so I wanted to get back a little bit to that.
<unk> dynamic over the course of the year and particularly into the second half as you think about.
But in particular I'm thinking about the supply chain shortages as you target second half growth of mid single digit organic or better what are the areas that are potentially the most concern that won't let you get there and as that or better side, what's going better that gets you to that for better part.
Yes, I think I think the things that concern me. The most are things that are beyond our control and so.
What happens with supply chain throughout the year is as an important consideration and.
I think we are trying to be conservative and in factoring.
The the situation the best we can see it today. So that's that's a that's a challenge.
In terms of things that can actually provide upside.
I think got new products is a possibility for upside I think got the the traction.
Potential acceleration of the traction we have and not an important businesses like clear liners and and aimed plants is up.
Sort of a thought upside, but I think overall.
While we are providing our guidance reflects a balanced view of both downsides and upsides. So we think and that's why we're sharing those numbers. We think those are the likely outcomes and and and weird.
We are confident about that that range at this point.
Thanks, Jorge and then I guess one other question on on the mix in the portfolio you did mention that portfolio portfolio evolution is likely expected to continue obviously you've made a lot of changes last couple of years. How do you think about identifying specific areas that might make sense within the portfolio not in the portfolio and as we can.
Go forward, especially given some moving pieces you've had should we be thinking about anything of scale that is potentially it doesn't make sense within the go forward that's fine.
Yeah. Thanks for the question Michael.
You know over the last three years, if you think about it we got out of you know analog lab and we got out of you know traditional ortho and there there's been some dribs and drabs. There. We've also added exposure to clear liners, which we're excited about at this point, we don't we don't see any.
No massive needs.
Or any.
Tomorrow morning, we're going to get out of preventive.
So we continue to look at stuff and our criteria is is it a growth accretive is it margin accretive is there a place that we can add.
Real value through R&D and is essential to our digital dental.
Our digital workflows.
And if you know if if it meets those criteria, we'll keep and invest them and if it doesn't we'll look to harvest them, whether harvested means look to maximize profit on those businesses or potentially divest them, we'll make those decisions, but I think the scale of the activity you've seen is kind of.
What we look at going forward.
Got it thanks Tom.
No problem Michael next question. Please.
Next we have Kevin Caliendo of UBS. Your line is open.
Great. Thanks for taking my call first one just on Ukraine, and Russia, and I, obviously, knowing how sensitive it is.
What is what are you sort of contemplated for it.
How where are you in terms of like trying to understand the impact to your business at this point or what it might be and how did you contemplated I know, it's low single digit part of your total revenues, but it's still meaningful enough to impact things.
Okay.
Good morning, Kevin Yeah. It is a it is a small but meaningful as you said at this point in our guidance for 2022 .
We are not.
Contemplating any major disruptions with respect to our commercial cadence in those in those geographies and so on.
The reason for that is it's still early on.
And it is not very clear what is going to happen with that the actual markets.
And in the local.
Local geographies.
We have no indication yet that for example, patient traffic has slowed down as a result of some of this conflict, particularly in Russia, and Ukraine is a lot smaller for us and from a <unk>.
A regulatory standpoint potential sanctions and capital flows.
It is what you don't know yet and now we're trying to assess that we will all learn more in the next few weeks, but at this point, we have decided not to capture any any downside because it is really hard to quantify at this time.
Got it Okay. That's helpful and just maybe a broader question strategy question.
A lot of your long term targets and guidance that you've provided.
Sort of culminated in 2022 is there is there a plan at some point this year to update.
Long term.
Margin targets, and our cost saving programs or even the revenue guidance, which I think has been in place for a bit.
Okay.
Yeah Kevin.
The intent right now is to you know we wanted to get through Q4 and talk about the year and then get through.
Our initial discussion about 2022, but we owe you guys at Investor Day, which we're planning on doing.
And at that point, we'll update where we see long term revenue and how we how we're thinking about margin how we're thinking about earnings per share as well as our capital allocation strategy. So you know the.
I would tell you one of the interesting things from my perspective, as we outlined the four year plan, we've been operating against the four year plan and.
Theres, obviously ups and downs and Pandemics and all that kind of fun stuff, but we're we're pretty happy that we're on path to complete what we said we're going to complete on a timely basis and we're optimistic that when we do an investor day.
<unk> in the middle of the year, we're looking forward to identifying what we think our future targets are.
Great. Thank you so much.
Thank you <unk> question. Please.
Our next question comes from Jeff Johnson of Baird. Your line is open.
Thank you good morning, guys.
Maybe I'll start with a two parter on the clear Aligner business site, one youre talking about kind of sequential growth for bite throughout the year and year over year growth in the back half of the year looks.
It looked like the US fight revenue may be down a couple million in the fourth quarter versus third quarter. So what are you seeing kind of a that gives you confidence we might be at that bottom end and be able to grow off that and number two you're sure Smile business, you said to hit that $100 million run rate looks like to us at least by our numbers that you were over $100 million for the full year.
Well, so not just a run rate number insurer smile so.
How are you thinking about the growth outlook for that business in 'twenty two it seems like that that 60% growth number maybe not sustainable obviously, but very solid outlook in 'twenty two.
Yeah.
Yes, Jeff on sure Smile, you got it exactly right and then on bite.
It did in fact decline in Q4, our senses and literally we get stuff that we look at on a daily and weekly monthly basis, we're seeing.
You know improvements there are a couple of things going on there obviously within the DTC category there were changes.
On the competitive landscape around you.
Some of the other brands.
And where we've been kind of sticking to our knitting focused on how do we.
Build more capabilities around things like search engine optimization, you know affiliate marketing insurance things that we think put bite on a much more stable.
Our growth platform and then we're all anxious to.
Implement what we refer to as by Pro which is again, we think we've got this large underserved population, that's really not accessing Dennis today, and how do we use bite as a potential traffic generator.
That go into the dental office and whether they.
Exactly how we look forward to using prime scan ensure smile is stuff that we'll talk about in the middle of the year.
Alright Thats helpful. Thanks, Jorge I, just want to understand that the operating margin you made a comment about 22% and then youll see from there where it goes what are you, saying you still expect or you would expect to get to that 22% operating margin in 'twenty three or were you just saying as you get there then it'll be a topline versus trade off the margin expansion.
Discussion from there.
Yes, Jeff No. We we expect to exit 2022 at the 22% top margin rate and it was.
Structurally when when we look at the progression over the last several years. Despite some quarterly fluctuations we are operating.
Substantially above the margin rates the company had in the past so in 'twenty. One for example, we indicated at the beginning of the year that we would be over 20% throughout the year and we did that.
And as we go into 'twenty, two we should should be above the 21% level structurally and exited at 22%. So.
Through all the changes, we're making to our infrastructure the changes in the mix new products. We think in 'twenty three we should be operating structurally at a 22% operating profit level and then beyond that that was my comment was what happens then at that point the tradeoff between.
Investments were higher topline growth versus continuing to expand.
Margins will be a topic of continued debate internally to make sure that we are.
Move levers and the most effective way to create shareholder value.
Understood. Thank you.
Youre welcome.
Thank you.
And next we have John Kreger of Blair. Your line is open.
Hey, Thanks, guys I appreciate it I wanted to follow up on the supply chain issue.
You've mentioned a couple of brands that sounds like are being most impacted can you just review that again as you think about the 22 guide what are the product categories that you think will be most constrained by the supply chain shortages.
Yeah, John Thank you for the question it is primarily <unk>.
Imaging equipment, so one of our.
Best selling products today is ortho flaws action has been has been doing really well in the market does those products are impacted by the shortage.
Of electronic components in addition to that.
<unk> centers, which are not that relevant in the U S. But there's a big market for treatment centers in Europe , and Asia Pac and we are having challenges with that those are the two main lines and then there is a number of random.
Components that impact that some other or categories, but those are the two the two main ones electronic components kind of around the high voltage type of electronic components.
Great. Thanks, and then my follow up kind of same topic.
What drives the confidence that hopefully the situation is better in the second half is that just sort of feedback youre getting from suppliers or are you pursuing perhaps other changes and sourcing. Thanks.
Yes. It is all of the above so we actually in 'twenty, one as we started to face challenges the the procurement team.
Went out and up.
Source products from <unk>.
Places that we had not blood components from in the past that activity will continue.
We are obviously having tons of conversations with our suppliers, we're talking to many other companies.
And some people believe that this situation will begin to ease sometime in the towards the end of the first house in some areas I have I've heard directly from out from other companies, where they they actually have experience in certain components already some sort of improvement, but it's but it is really.
Fluid. So all overall, we are not banking on a substantial improvement in the second half.
We are what we're modeling is a slight improvement, but we're not banking on a tremendous or on a complete solution of the supply challenges related to our imaging products.
Great. Thank you.
Youre welcome. Thank you.
And next we have Jon block of Stifel. Your line is open.
Thanks, guys. Good morning, maybe just a couple of follow ups on some topics already discussed, but just to go back to buy for a moment guys. I believe you said growth.
For full year 'twenty, two I think that was specific to buy you know maybe what level of growth modest growth any color commentary there and then maybe more importantly done now do you see the.
Long term outlook for the DTC market and you've had this asset for 12 months what about also the level of accretion I think at the time you guys acquire the asset you talked about ramping accretion into the out years, maybe if you could just provide some color there and then I'll just a quicker follow up.
Yeah, So John specifically, yeah, we do expect buy to post growth.
<unk> 22 versus 'twenty, one, it's driven off the back half.
If you look at the revenue cycle of bite.
The first two quarters, when we were kind of in the pandemic pre iOS change there there are bigger quarters.
But we expect bite to grow that's part one part two is what do we expect for the DTC market.
I can't answer completely for other competitors in the market, we've always looked at it as an opportunity to reach this underserved population.
And our strategy was to sit there and say hey look the total clear aligner business is absolutely critical to us from a digital dentistry perspective, because you know Dennis are making choices about scanners and other things based on their ability to access.
<unk>.
Things like clear liners or implants or other things. So we felt that being in the clear aligner business as offensive as well as defensive.
We thought bite was going on and we have seen it but it's going to give us critical mass in terms of manufacturing R&D stuff like treatment planning and whatnot.
The other thing that we really felt that we needed to do was have the ability to create traffic for the dentists and again, we're tapping into a population that just does not access dental care at the same rate as you know a traditional population. So the challenge for us and one that we're optimistic hence why we talk about by growing is that.
We can in fact begin to bill.
Build bite.
<unk> reputation and capabilities so that it does in fact increased patient traffic.
At the dentist and obviously those would be dentists that.
We believe our offering.
<unk> scan ensure smile type solutions, so and then in the out years around accretion yet look we believe our total clear aligner business it will be accretive from a growth perspective.
We're not going to talk specifically about the individual brands, but we like where we are clear liners, we like the profit profile of that business. We think we're scaled today in a place that will give us an opportunity to be very very competitive over the long term and it's important.
So as we build a digital dentistry ecosystem that having access to important procedures, where our we believe our treatment planning stuff like short smiles stuff.
You know, Mike simpler and other things you know really is going to mesh well with what we believe were creating.
Got it.
That was very helpful. Thanks, and also a lot of great color on the call and a great slide deck as well, so a shout out to Andrea and the team, but maybe just a quick second question supply chain challenges I look I know, it's difficult to figure out how long it lasts but maybe just for more and most importantly.
Are you worried there sort of a breaking point, where if youre not able to fill that backlog. That's building you're starting to see any leakage is that possible is that a late one each in early two weeks I'm just curious your conviction that it's more hanging in the backlog and it's just one we're able to service it versus if this drags on where people might think.
An alternative solution. Thanks for your time.
Thanks, John .
And Andrea totally is beaming over here. So we're gonna have to just try and keep her down for the rest of the day, but.
Look on.
Back orders are rolling back orders, it's not as if there is no availability full stop.
Jorge and we'd been.
Trying to describe is sometimes or components, sometimes are not in their complex you might wind up getting.
The chips, you need but the high voltage capacitors aren't there. So our thought I would just tell you. What we're modeling is that there is movement on the backlog of orders, it's not happening as fast as we would like if you know we have.
A backlog of of X number of weeks.
It doesn't mean that there's not any imaging, but obviously look if if something if somebody places an order for something and we're gonna deliberate 18 months later, that's a problem.
What we have been doing as you know we go out and if we have an order.
From Doctor Gomez, we're out maintaining that relationship and look a lot of our imaging business is replacement of our old imaging business, who tend to be a very loyal customer base, they've gotten very used to using the treatment planning of stuff like <unk>, Texas, which comes kind.
Kind of only with our equipment. So look what would I like to see this situation resolved in the first quarter, absolutely. What we're telling you to try and be realistic as we think it is going to flow through the year. It does move there is movement you know it's not as if we have stopped shipping imaging products and it's really incumbent on us.
To maintain contact with that customer to reduce the.
You know some of the friction that might result in them, saying, Hey look I can't wait X number of weeks, so I'm going to go to a competitor Rember go into that competitor involves learning a whole new software set of things building a whole new software set of contacts with labs and other things. So we think there's an inherent advantage of our software and other things.
Don the only thing that I would add is are the components that we are having challenges with or not.
Unique components or components that we own that are very specific to our devices. I mean these are to a large extent generic electronic components and so they shorted yours are.
General this is not just the.
For us.
Understood. Thanks, guys.
Thank you.
Thank you.
And next we have Matt makes it Chris your line open.
Great. Thanks, Thanks, so much for the question so.
Covered a lot here I won't go back into supply chain.
Though I do understand it sounds like from your comments that if there is an unknown risks to the back half or late in the year. It sounds like that that is sort of like a.
Hard to predict.
That's sort of out there.
But on.
On pricing look to understand if you could.
Maybe give an update as to some of the price increases you talked about and began late last year and what the how we should think about maybe the contribution to this year and then just one follow up.
Yeah.
For the question, Matt So on price I think that we are seeing good price realization.
Relative to the October 1st stock price increase.
And it is.
It is the first phase of price increases I think at this point I can tell you, we probably had a benefit.
That if you annualize it into 'twenty two.
Based on these price increases we are probably we were going to have probably a contribution of fob $40 million to $50 million in price increases and then we probably will do something beyond that so it is it is it has happened the price realization is good and there should be.
Other opportunities in in the next few quarters few months ought to do more price increases in certain geographies, where we haven't rolled those out.
Or on certain products, where we haven't increased prices yet.
Okay, just to be clear you havent doesn't sound like you've taken any so far this year.
Correct.
Okay, and then if I could that's just super helpful. And then just on implants I understand.
One of the bright spots in the quarter it sounded like.
Can you talk a little bit about share or opportunity to to to sort of carve out chair or.
Or growth or mix maybe around.
And if some of the new product launches that you've that you've talked about.
Prime paper et cetera.
Sure it's hard to measure in this environment with all the ups and downs regionally, but will.
It will be super helpful to get some color if you could provide it.
Yes, Thanks, Matt.
Look our strategy that we've articulated has been okay, let's let's get the business in a position to compete we feel that we've got a pretty good portfolio of premium brands.
As as well as a value brand and then we think we have important supported businesses, where if you look at our biologic in things like customer butman.
Our strategy was like Okay, let's get competitive so that we can grow with the category rate, which we think is kind of.
You know mid to high single digit.
Which we you know we.
We think we actually gained share a little bit in the fourth quarter.
As Jorge said in his prepared remarks, our expectation around implants over the course of 2022 is that we will grow at market rate.
Over time.
Our aspiration is to take share and again, we really we kind of do implants, a little bit differently, where for us it's about the digital workflows. So.
Given that we just talked about like Orthopedists, and axiom and all that stuff.
A lot of the treatment planning and software that goes into that imaging equipment and things like we did with <unk> five two which gives us enhanced capabilities of looking at intermodal scanning as well as another kind of diagnostic viewpoint for the dentist, we feel if we start with our digital base and we create really easy to use.
Solutions and then our products built right in you know, we'd like to be able to take share.
Specific bright spots I would tell you prime paper, we're very excited about obviously, but M. I S.
Value business that doesn't get as much recognition because it tends to be a little bit more of an ex U S oriented brand and when we bought a company that which is Essex. We we really felt that we got a best in class bone growth factor that we're.
We're getting good traction with so our aspiration is to gain share in our implant business and.
The launch of Prime paper as well as kind of an aggregate restage of our implant business has a kind of a pull through effect on the entire business. So you know the.
The specific contribution of prime taper is not going to be you know in 2022 in the tens of millions, but the idea that there is a comprehensive restage that we're actually offering a complete solution is very important because implant dentists tend to pick systems and they want to know that you are committed and they want to know you offer the full breadth of solutions.
Great. Thank you.
Thanks, Matt we have time to take one last question. Please thank.
Thank you.
Our last question comes from Erin Wright of Morgan Stanley . Your line is open.
Great. Thanks, so much for squeezing me in I had a quick question on <unk> in three D printing, how would you characterize the level of demand that you anticipate across crossed the three D printing solutions that are out there and and and and how does it fit into the broader high tech equipment offering that you have and what sort of investments maybe that you would.
Need to make in and around that issue, but that there is plenty of products.
Yeah.
You know as Jorge said, we kind of built it in the back half of our projections, but.
Three D printer three D printers are starting to gain traction in the marketplace.
Our sense of it is there were some solutions there are some good competitors out there none of them offer the level of automation the level ease of use some safety and some other things we really feel that we started from a what is the dentist need and go there a lot of this aaron's also gonna be about getting real estate you know right now there's some great apps.
That you can do on the three D printer night guards surgical guides you know a lot of people do three D modeling, which is important but ultimately where this is going to go as you know, we think theres going to be an opportunity.
As the inks get.
More sophisticated that youre going to be able to do permanent implants.
Think the races on for the ability to print that first aligner.
And digital dentures is clearly something that we believe ultimately will be a three D printed whether that's done the office or in the lab. So you know in our mind.
We think we've got a really good product that gives us a technology base that will allow us to continue to expand applications.
Where again the reaction of and we've kind of had a beta cohort for for a while and they they really talk about how transformative. This is in terms of investments Aaron you know what we need to do a lot of this is going to be about developing inc's, either internally or with partners that give you capabilities and some of it.
That kind of the future applications around you know a liners and permanent implants and dentures as well. So you know whether those are investments or partnerships.
It's not clear right now.
Okay, Great and then I mean, you mentioned the headline term preventative products I guess can you break out what you're embedding in your guidance for preventative product in 2022, and how we should be thinking about that impacting product consumables Greg.
Yeah.
I don't think we'd called out preventative specifically I mean, you know the.
Think the consumable discussion as it was you know youre up against a tough comp.
You know as dentistry reopens.
And I think I mentioned in my prepared remarks stuff like.
Our Paladin <unk> and other things tend to grow but there's parts of the portfolio is digital.
Imaging goes up and up and up stuff like Aqua solar is going to go down, but I don't think we'd called out specific prevention.
Okay alright, thank you.
Alright, well thank you.
Thanks, Chris Let me just close out by saying again, we appreciate the time you spent with US I know we covered a lot of things you know one of the discussions that we've had with a lot of you guys. As you know when when are we going to do an investor day, you know right now we're targeting June because there's there's lots of stuff and you know to be honest, we're all optimistic.
Talk about after the restructure where are we going into the future and describe why we're so excited about <unk> plus around them. So with that hope everyone has a great day. Thank you.
This concludes today's conference call. Thank you all for participating you may now.
This day.
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