Q1 2022 DENTSPLY SIRONA Inc Earnings Call
Welcome to the <unk> price run up first quarter 2022 results conference call.
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I'd like to turn the conference over to Andrea Daly, Vice President of Investor Relations. Please go ahead. Thank.
Thank you Anthony and good morning, everyone welcome to our first quarter earnings call. Joining me for today's call is John go to Lars Our Chief Executive Officer, and Barbara about them, our CFO I'd like to remind you that an earnings call press release and slide presentation related to the call are available in the <unk>.
<unk> section of our website at www dot dense by 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 may 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 recently filed Form 10-K, and any updating information and subsequent SEC filings list. Some of the most important risk factors that could cause actual.
Else to differ from our predictions in today's conference call. Our remarks, we may be based on non-GAAP financial results.
We believe that non-GAAP financial measures provide investors with useful supplemental information about financial performance of our business enable the comparison of financial results between periods, where certain items may vary independently of business performance and allow for greater transparency with respect to key match.
Tricks used by management in operating our business.
Please refer to our press release for the reconciliation between GAAP and non-GAAP results and with that I will now turn the call over to John .
Thank you Andrea and thank you all for joining US this morning for the Q1 earnings call.
Today, we will cover four items.
I'll start with an overview of the first quarter.
Barbara cover the quarter's preliminary financial results and our updated 22 outlook.
And then I will finish by providing a strategic operating update.
Before we begin.
Let me start with why I'm excited to be here and why I took the role as interim CEO .
I joined densify surrounds board because of the value I believe the company can create for shareholders over the near medium and long term.
First the company plays in an attractive category with real growth opportunities.
Macro trends are supportive and those who can innovate leverage global scale and execute judiciously will emerge as long term winners.
Second that supply Sirona has a strong foundation the company's plan has allowed it to focus its innovation efforts.
Strengthening demand generation capabilities and simplify the operating structure.
Third we are approaching the interim period with a sense of urgency and a focus on execution and we are not coming from a standing start.
Barbara and I have been working together for many years and we.
We have vast public company experience well, we have grown the business, while focusing on costs and pursuing disciplined capital allocation strategies.
With that opening.
Q1 was a challenging quarter, which led to disappointing results.
Barb will share more with you about how the key drivers of underperformance impacted the quarter's financial results.
Including the weaker sales performance in the U S.
Global supply chain challenges and unfavorable foreign exchange rates.
While we have challenges we also have areas of the business performing quite well.
Our European region delivered organic growth of 7%.
And our strategic growth categories, including the implants and sure Smile business grew high single digits and double digits respectively.
Additionally, this quarter, we were pleased with the double digit sequential growth of our total clear aligner business.
We have updated the 2022 outlook, which further considers the significant macroeconomic headwinds that are unfolding, including impacts from prolonged supply chain challenges COVID-19.
Covid related restrictions in China, Russia.
Russia, Ukraine related disruptions and unfavorable foreign exchange rates.
We are committed to returning cash to shareholders in Q1.
And we announced a double digit dividend increase and completed a $150 million ASR program.
Lastly, an important point to highlight is that innovation is vital to our growth and we continue to invest for future growth. Despite the challenging macroeconomic environment.
Moving now to slide six.
As I mentioned Q1 was a challenging quarter with revenue of $965 million, which represents a decline of 1.4% on an organic basis versus the prior year.
Our operating margin was 15.9%.
The rate was impacted by lower manufacturing volumes.
And inflationary pressures, while SG&A and R&D investments were maintained to support innovation and the expected volume recovery.
Before I turn the call over to Barb to provide more details on our financial performance I would like to address the form 12, B twenty-five we filed with the SEC. This morning.
As a result of an ongoing investigation by the audit and Finance Committee of the board of directors.
<unk> Sirona has not been able to finalize its financial statements or its assessment of the impact of the investigation on its financial statements for the three months ending March 31st 2022.
And we are therefore, unable to file the Form 10-Q on a timely basis.
For additional information please refer to our SEC filings.
Needless to say, we're eager for the audit committee to complete its work and for the company to be able to file the 10-Q as expeditiously as possible.
We will provide updates as there is more information to share.
With that I'll turn the call over to Barb.
Thank you John Good morning, everyone and thank you for joining us.
Today I will cover first quarter preliminary results and then provide an update on our 2022 outlook.
As a reminder, our 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.
Before I begin I would like to note how excited I am to join the company in an interim capacity IP.
I've worked with John over the past three years as a public company CFO and I am now looking forward to working with the rest of the team at didn't supply sirona as we execute against the many opportunities that are ahead of us.
In the first quarter the business delivered revenue of $965 million in line with the preliminary results, we announced on April 19th.
In comparison to prior year organic sales declined by one 4% and reported sales declined by six 1%.
The decline versus last year was driven by foreign exchange U S regional performance.
Increasing challenges in our global supply chain and emerging emerging COVID-19 related softness in China.
Regions outside of the U S posted healthy growth in the period, along with the global implants ensure smile businesses.
While we continued to experience supply chain constraints, most notably in imaging the demand for these products remained strong as evidenced by our high order backlog.
Also as a reminder, Q1 2021 was the period, where the dental industry was continuing to replenish in certain categories from COVID-19, particularly in consumables, providing a difficult year over year comparison.
Similarly, our bite business was up against the tough year over year comps.
That said, we are pleased with the sequential growth the bite posted in the quarter.
To highlight underlying momentum bite unique visitor traffic hit a record high in March.
Gross profit was $547 million or 56, 7% of sales.
Gross margin rate declined 280 basis points year over year due to foreign exchange unfavorable mix and volumes and inflationary pressure on materials and distribution costs.
These headwinds were partially offset by benefits from recently launched products and price increases.
SG&A expenses were $349 million or 36, 2% of sales.
On an absolute basis SG&A decreased by 1%.
R&D spend was $45 million, an increase of 11, 1% year over year, which reflects our continued commitment and focus on accelerating our innovation pipeline.
As a reminder, last quarter, we reclassified certain expenses from SG&A to R&D.
Had no impact on operating margin in the prior year period adjustment was $3 million.
Operating income was $153 million down 30% versus last year.
This was due to unfavorable foreign exchange rates U S performance.
Supply chain pressures and increased investments in R&D.
As a result operating margin was 15, 9%.
We attribute approximately 60% of the year over year decline to the transitory macro challenges foreign exchange inflationary pressures and the impact of Covid in China.
As a result adjusted earnings per share was 52 cents versus 72 cents in the prior year quarter.
Operating cash flow was $93 million, a 90% increase year over year, mostly to fluctuations in working capital.
The company has a strong balance sheet and finished the quarter with $374 million in cash on hand.
During the quarter, we returned $174 million to shareholders in the form of increased dividends and $150 million of share repurchases.
Now turning to the segment performance in the quarter.
Technologies and equipment organic sales declined <unk>, 5% and consumables decreased two 7%.
The T&D segment organic sales decline was driven by Cadcam, well implants posted strong growth in the quarter with contributions from all regions.
Our CAD Cam business declined versus last year due to lower sales in the U S. While it grew outside of the U S.
As shared last quarter in Q1, we executed on our plan for Prime now to focus available supply I needed spare parts.
Ortho just slightly decreased year over year, as we anticipated declining by given the tough comps year over year offset growth ensure smile.
As I mentioned previously we are pleased with the momentum we are seeing in the clear aligner sequentially.
The Eni business posted growth despite supply chain constraints, which primarily continue to impact sales of three D imaging equipment.
Our consumables segment organic sales decline was driven by lower sales in the U S. P.
Patient volume softness attributed to Covid in certain markets, most notably in China and supply chain constraints.
And do a strategic growth area posted growth in the quarter across all regions and we are pleased with the progress from recent product launches.
The sales decline was partly offset by benefits from price increases taken in the fourth quarter of 2021.
Now turning to financial performance by region during the first quarter.
U S sales were $299 million organic sales declined by 13, 5% due to the lower sales and CAD Cam and certain consumables supply chain constraints and tough year over year comps, primarily in consumables and bite.
Dealer sales were lower due to higher cadcam inventory levels at the start of the quarter.
Implants in Indo both posted growth in the region.
European sales were $416 million with organic growth of 7% attributed to robust performance in the T&D segment with the strategic growth areas, including Cadcam ortho and implants, all posting double digit growth.
The rest of the world sales were $250 million, representing organic growth of one 4% with growth in both segments.
Resto, CAD Cam and implants experienced healthy growth in the period.
Rest of the World growth was unfavorably impacted by increased government restrictions associated with Covid variance, primarily in China as well as market disruptions in Australia as a result of flooding.
Now let me provide you an update on the financial expectations, we have for the 2022 full year.
Given the significance of the headwinds we experienced in Q1 and what we can reasonably estimate for the remainder of the year, we are updating our 2022 outlook.
We now expect fiscal 2022 organic sales growth to be in the 2% to 3% range.
This equates to a net sales range of $4 1 billion to $4 2 billion.
The dental market remains attractive and resilient despite pandemic variant outbreaks, which continue to challenge certain Margaret markets.
Additionally, our robust R&D platform and pipeline are enhancing our commercial solution to meet the most pressing needs of our end customers and channel partners.
As we navigate a difficult external environment, we continue to focus on opportunities to sustain and drive expansion of margin.
While we expect to see some period to period fluctuations, we estimate that for the full year operating margin rate will be greater than 17%.
Over the last few years. This organization has delivered considerable margin expansion through simplification and portfolio optimization.
We believe those initiatives will serve as a solid foundation, enabling us to better navigate the acute macro challenges.
Our expected 2022 adjusted earnings per share is now in the range of $2 35.
To $2.55.
I would like to now touch upon the five key drivers impacting our revised outlook.
They are listed on slide 13, and the earnings presentation.
First we continue to see governmental restrictions in response to Covid variant outbreaks in China.
The impact from these restrictions started mid Q1 and has persisted through April and we are now estimating a prolonged impact further into the year.
For reference in 2021, China represented approximately 5% of the company's total sales.
And therefore, the continuation of major disruption in the market is a notable headwind.
Additionally, we are closely monitoring this disruptions potential impact on our global supply chain, our commercial and supply chain teams are working diligently to effectively navigate and minimize the impact to our business and customers.
Another regional challenge is the disruption from the conflict between Russia, and Ukraine, which was not considered in our original outlook.
Our revised outlook has been risk adjusted removing all sales to Ukraine for the remainder of the year and reducing sales to Russia and complaints with known sanction.
The risk adjustment represents a modest headwind for the total company.
On the supply chain material shortages and inflationary pressures also represent significant headwind, which we now expect to continue through the rest of the year.
The component shortages are impacting several parts of our business most notably three D imaging had been significant however, we are encouraged by the continuation of strong customer in customer demand globally.
Lastly, we have revised our foreign exchange assumptions based on the weakening euro which represents a larger headwind for us versus the original outlook.
Our updated assumption for the Euro to U S. Dollar exchange rate for the full year is 1.08, which is lower than our previous assumption of 1.14 and the fiscal year 2021 average of 1.19.
We view these five drivers as significant but transitory headwinds and our team is working diligently to navigate and minimize the impact of these challenges.
Now let me provide some color on the quarterly cadence for the rest of the year.
First we're projecting sequential growth over the remaining periods of the year.
In Q2, we anticipate sequential growth will come from normalizing dealer inventory levels as well as benefits from recent product launches and price increases.
These improvements will be partially offset with softer commercial volumes in China and Ukraine.
The back half of the year will further benefit from the momentum we are seeing in strategic parts of the business.
And the opportunities we can capitalize on through strong execution, including new product launches.
Additionally, we continue to project that our clear aligner business will grow sequentially.
And bite will be a contributor to 2022 growth.
As a reminder, in Q2 byte will continue to face tough comps to the strong pandemic driven performance in the first half of 2021.
Nonetheless, it is highly additive to our overall clear aligner strategy and we are seeing the merits of the transaction come through.
In closing we are optimistic that despite a challenging environment. The renewed focus we are now applying will benefit the trajectory of the company.
Over the long term, we believe that improved execution combined with the resilience of the dental market will allow us to continue to expand revenue and earnings.
Additionally, the strength of our EBITDA generation enables a very competitive cash flow yield to our shareholders.
We remain committed to returning at least 50% of our free cash flow to our shareholders through a combination of dividends and share repurchases.
With that I will now turn the call back to John .
Thank you Barbara.
Moving on I wanted to provide some perspective on our strategy and priorities moving forward.
First we have a robust portfolio of leading products and solutions and a strong end market that gives us confidence in our future.
The long term strategy of the company is compelling with a healthy innovation pipeline that is positioned to deliver growth I believe in it and so does our board.
This strategy is one of the key aspects that attracted me to this organization as I was considering joining the board.
The dense fly Sirona team has continued to sharpen our strategy over time, while improving innovation capabilities, which combined with a renewed focus on execution will create powerful momentum going forward.
I would like to highlight that the expectations. We have for the business don't change, we expect to build on our capabilities to deliver over the long term, specifically reliable, 4% to 5% top line growth.
This improvement in margins and ultimately double digit earnings growth once we cycle past the acute challenges we're currently facing.
Our strategy of delivering superior integrated workflows and critical procedures will allow this company to become the vital digital partner to the dentist.
I am not new to digital transformation, we were on a similar journey at Hill ROM and I plan to draw upon those experiences as I worked closely with the team here to accelerate the transformation with relentless focus on driving improved outcomes for our customers.
Rob and I are a proven team with a demonstrated track record of driving long term shareholder value, while executing with rigor across our broad portfolio and a very challenging macro environment that we've all been witnessing in the past few years.
The challenges, we see at densify Sirona I have a high degree of correlation to challenges that we have both successfully navigated in the past importantly.
We are both committed to delivering sequential financial improvement on their preliminary Q1 results as we take the reins of leadership at the company.
While we believe in the company strategy. We also believe there is value in conducting an evaluation of our operational performance to ensure that we are laser focused on our key priorities moving forward.
Turning now to slide 16.
We have a robust 2022 launch schedule already underway as evidenced by the launch event. We held on May 4th to bring D. S Corps to market.
D. S Corps will deliver end to end digital workflow from diagnosis to treatment and it represents an important first step on a long journey of innovation in the dental market.
Reiterating my earlier comments, we are committed to innovation and we will continue to deliver at this company has a rich history of innovating and we intend to be the leader on the forefront of the digital transformation in the dental industry.
An important area to enable accelerating our digital portfolio is in software development.
This organization has invested resources over the last 18 months to overhaul the entire approach in this area shifting from developing individuals' software for a long list of different devices and treatment plans to building a single platform that will support all of our devices and an extensive treatment planning portfolio.
Brian print is now launching in our select markets on a limited basis.
We are excited about prime print as it offers complete integration with the Syrek system and will allow the dentist to produce things like night guards surgical guides and full scale models quickly and inexpensively.
This launch will also come with a complete service package through D. S Corps, including D. S Corps create which is a comprehensive design workflow to help save valuable dentist time.
Our innovation is focused on bringing in leading solutions to our four key procedural areas in dentistry are liners implants, resto and endo.
Over the last year to densify Sirona team has been able to bring innovation to each of these areas and we will continue that momentum with focus on what these solutions mean to our strategy to deliver superior integrated workflows.
Integrated workflows that start with diagnostic excellence easy to use treatment planning and essential consumables.
Through integrated workflows, we can widen our share of wallet, becoming a central partner and provide significant value to our customers.
Let me highlight a few closing comments.
We are encouraged by the good momentum we have in strategic growth areas of the business like implants and clear liners.
We are also very pleased with the performance in our international markets in such a challenging environment as further evidence that our strategy is working.
Our focus going forward will be on driving disciplined and robust execution to capitalize on the momentum.
As we exited this quarter, we remain confident that the portfolio is well positioned in an attractive market to drive sustainable growth over the long term.
And that will continue to be our top priority and.
In my first few weeks I have seen a very engaged mission driven and passionate organization that is ready to embrace a clear set of priorities to address our supply chain challenges U S performance and deliver strong new product growth.
This is a renewed sense of confidence that we will build upon as we move through the remainder of the year.
The revised 2022 outlook now reflects known macro challenges we.
We are confident in the strength of the underlying business and we will move expeditiously to complete our diagnostic analysis. So that we can accelerate progress against a compelling strategy with a focus on execution.
With this we are optimistic about the sequential improvement we expect to see throughout 2022.
The search process is underway for the permanent CEO and CFO .
The board is focused on finding candidates with a track record of world class execution and operational expertise.
Who can best position densify sirona as the innovation leader with the most extensive global footprint in the dental market.
In the meantime, Barbara and I are here to serve the organization.
We will provide leadership stability and bring our diverse experiences to the table in partnership with the high caliber dense supply sirona team.
We will not be shy in taking swift action, where we see improvement opportunities. We intend to use the interim period, just strengthened the base and do the hard work required to drive value creation for our shareholders.
Generally.
We look ahead with optimism.
The densify Sirona team is strong and resilient I am confident that together, we can overcome near term challenges to deliver improvements and drive sustainable results.
With that let me now open up the call for questions.
We will now begin the question answer session.
Ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Our first question will come from Elizabeth Anderson with Evercore you May now go ahead.
Hi, guys. Thanks, so much for your question. My first question is regarding the audit investigation is that only related to one Q results and I noticed a couple of comments on your slides about like Oh.
Inventory management and is that the problem is the primary focus of the investigation.
Yeah, Hey, Elizabeth is John Thanks for the question I think I think the language in the disclosure with the FCC is probably the best reference point.
But it is specifically related to activity that took place in Q3 and Q4 of last year 2021.
And since the investigation is still open we are unable to file our Q1 results.
To your point about the investigations focus it is around the use of incentives with dealers.
The implication of those incentives are as it relates to <unk>.
The accounting of that as well as whether those incentives were directed by executives of the company both former executives as well as potentially a executives are still here.
To hit compensation targets.
Got it okay, that's very helpful.
My second question is regarding the guidance I appreciate that the guidance that you gave and thank you for taking us through the different headwinds Wednesday.
Incorporating them into the guidance my question there in terms of the.
Share repurchases to $150 million that was done in the second quarter, we should think of that as incremental to choose that out to the outlook that you put into the share count was at two.
<unk> I think for the new share count that seems potentially a little bit more conservative than the 150 million might imply and so I just wanted to make sure I wasn't missing something on that front.
Okay.
So when we win them Hey, Elizabeth it's Barb.
As we as we talked about the year you know we did indicate that we are going to be returning about 50% of our free cash flow back in the form of the increased dividends as well as share repurchases. So for the year I think on the 150 years is somewhat.
In line with where we thought the full year was going to be and in fact, if you look at our free cash flow, there's probably room for additional share repurchases in the future quarters as well.
Okay. That's very helpful. Thanks, so much.
Yeah.
Our next question will come from Kevin Caliendo with UBS you May now go ahead.
Hi, Thanks for taking my question.
Sort of following up on Elizabeth's question, but and I do appreciate that the guidance range, it's really it really helpful and very transparent.
But if there is any sort of inventory write down or anything that needs to happen is that been contemplated in any way shape or form in this guidance or are you comfortable that there's nothing that would prompt another sort of re rating down or is there any comfort that you can work through whatever inventory might be in the channel in an efficient manner. So there wouldn't be.
Other sort of write off write down.
Hi, Kevin It's Barb, let me let me do my best to answer your question and thank you for it.
First of all if if you've looked at our 10-K for 2021, we flagged in the 10-K at the time that we estimate we had about $50 million of excess cadcam inventory.
At the end of the end of the year.
And then as we talked about in the prepared remarks and in the presentation that burn of inventory has shown up in our Q1 U S results. So U S was down 13, 5% in the first quarter. The majority of that decline was related to Bernie.
<unk> of inventory, primarily CAD cam, but some consumable as well at the dealers with regards to our own balance sheet and and the inventory we have on our own balance sheet. There's there's no question about you know the accounting of the inventory we have on our balance sheet, it's really about how much inventory did we put into our.
Dealers hands at the end of last year, and how long is that going to take for us to burn it off during the course of 2022.
Does that help.
That's actually really really helpful. Thank you can I ask a quick follow up.
Sure.
Just in terms of cadence of how we should think about the rest of the year and progressing I know originally there was a target of exiting the year with a higher margin than the average for the year do you still.
Well, obviously, the operating margins lower now and understandably. So is there a particular cadence we should think about in terms of margin progression.
Or or earnings progression for the year.
So as we think about operating margin you know it does fluctuate a little bit from quarter to quarter, but but generally the trajectory of ending the year in a stronger place is is what you should be thinking about as we talked about in the prepared remarks, we are expecting sequential improvement over the next few quarters.
But as you think about where we're going to exit for the year I know that we had talked about previously you know exiting 'twenty two out of 22% operating margin. We do not believe that that is a realistic expectation given the macro headwinds that we're looking at we do think that exiting the year probably closer to 20% is is.
Likely and so hopefully that helps you with the magnitude of the change as well as the progression throughout the course of the year.
That's really really helpful. Thank you so much.
Our next question will come from Jason Bednar with Piper Sandler you May now go ahead.
Hey, good morning, Thanks for taking the questions.
Maybe if I could start on the revenue guide and forgive me if I missed all the bridge here, but it's coming down by a couple of points versus where we were previously.
Back on the.
For Q call, Russia, and Ukraine completely coming out of the revenue guidance a couple of point a couple of points on its own.
Updating for the <unk> shortfall and the Lockdowns in China. So I guess, maybe just help US bridge from where we were before to where we are now is it stronger pricing stronger pricing outlook.
Something else Thats, helping limit.
Well come in even lower.
Four.
Jason It it's a great question.
So let me try to frame, what we're seeing from a revenue standpoint.
There are three sort of elements that are bringing down our volume our sales forecast for the full year beyond FX. Okay. So FX is a major headwind, but if we talk about organic sales. The three key drivers are really China. So you know we've seen starting in the late.
They're part of March and we've seen that continued through April that the the shut down in China related to Covid is impacting our sales and what we've included in our outlook for the full year is that that will continue on throughout the course of the year.
So that's the biggest volume change assumption that we've made in our forecast.
The second piece and I just want to make sure that we're clear on the impact of Ukraine, and and Russia.
So for the Ukraine, we've pulled out sales for the remainder of the year, but our Ukraine sales are relatively small.
For Russia, all we've pulled out are those sales that would not be in compliance with the sanctions as we understand them. So we have pulled out those sales, but again, it's a small piece of the overall sales and Russia and Ukraine together last year I think it was about 3%.
So we're talking about modifying those two not taking out the full revenues for those two countries for the full year.
And then the last piece of the volume change really is related to U S performance.
And the piece of the Q1 underperformance that will likely I'll hold on to for the full year, but it's it's the smaller piece. The majority of all our water volume changes are really related to China.
Alright, Thats really helpful Bar, just to clarify and then I've got a follow up on just to clarify is there a stronger pricing outlook now embedded in the revenue guide.
2% to 3% organic out what you're you're coming out with today, and then John and Barbara.
Just wanted to ask I mean, you you both have pretty deep experience here in Med Tech you have the characteristics outlined that the board is looking for in a permanent leadership team.
Can each of you comment on whether your candidates to all the permanent CEO or CFO role or if this is truly a role with an interim label and the board exclusively taken an external approach to search.
So Jason I'll take the first one on price and I'll, let John answer the second one around the search with regards to price. When we started the year with our outlook. We had communicated that we were looking at price given the current environment and the inflationary pressures, we see on supply chain.
That we were going to be looking at price everything in our outlook is consistent with that original guide for the full year. So we are looking at price. We pulled forward price increases into Q2 that typically would have been in Q3, but that was all included in the original guide for the year.
And it's not I was sort of an incremental.
And I think Andrea is correcting me that typically we would we also did price increases last Q4, correct correct typically we'd be in the fourth quarter. Okay. So so from a price standpoint, it's not a lot of upside versus the original guide.
Guide, it's very consistent with what we started the year with.
And then Jason on your question about the CEO and CFO search Barbara Ibolt approaching this with a great deal of zest and vigor and enthusiasm to be interims.
We are not the type who are gonna be passive caretakers.
However, we are interims and we do not expect to be.
Be part of the search process or candidates for the permanent CEO and CFO search. So those will those will both be both of those positions will be filled by a new permanent leaders in those roles.
And those searches are underway and we would expect to draw some excellent talent.
Do those searches.
Alright very helpful. Thanks, so much.
Our next question will come from Erin Wright with Morgan Stanley You May now go ahead.
Great. Thanks can you give us a sense of the dynamics in the North American market I guess, how much of the weakness is attributable to the underlying demand trends versus the supply chain constraints.
Maybe Kevin that proactive normalization in dealer inventories and is that already meaningful in the quarter or was that is that just going forward at this point. Thanks.
Yeah, Aaron let me start and I'll pass over to Barb, Yeah, I think the underlying fundamentals of the U S business and for that matter the global business in the end markets. The growth categories of implants are liners digital and endo as well as our innovation pipeline continues to be very strong.
We do need to work through excess inventory that was in the channel in the U S and we would expect to work through that as the year progresses, and I'll pass over to Barb for more specifics here, but the underlying fundamentals are very strong.
And I think you've seen that from our peers in their reporting over the last week.
That is a resilient solid market growth rate that were that were participating with.
And Erinn just to continue on with that when we look at the decline in the U S market in Q1, the majority of that and the largest part a portion of that was related to inventory burn.
CAD Cam and a little bit of consumables.
20% of it 20% of that decline I would say it was associated with a combination of supply chain constraints, and maybe a little bit a lower demand than what we expected, but probably about 80% of that was really related to inventory.
Now with regards to consumables, we think that that was done in the quarter and you know we will have normalized in Q2 with regards to CAD Cam we expect that there's going to be some continuing born a burn in Q2 and that will take us to the second half of the year before we start to normalize there.
Okay, Great that was really helpful. And then just on the comment you were making around ortho and demand trends across clear liners, what's now anticipated for sure smiling in separately bite in 2022.
Yeah, we have a very positive outlook for their our clear aligner business, we have to cycle past some tough comps on the bike side from last year are still in this remaining quarter, but as we look at it we see a large underpenetrated market that's growing at high double digits, and we would expect to start growing in line with that market.
Our growth rate as we get through the second half of the year. So we're quite bullish on our combined offering of sure smile and bite.
Okay, great. Thank you.
Our next question will come from Jeff Johnson with Baird. You May now go ahead.
After you there he might be on mute.
Okay.
Are you there.
I'm here can you hear me.
We can now.
Thank you.
And John I don't like to look backwards.
I think some clarification or some understanding of maybe the change that happened last month would be helpful. Just understand kind of forward look on the company but.
Was that change made because of some of these channel issues that you're talking about the financial investigation into the year and.
Scott.
I mean, when I look back Don did take out about $250 million in costs I think a lot of the pipeline you highlighted is because of some of the initiatives and focus being put on innovation. So I think he did some good things there as well.
Would you expect that the board really kind of continues to focus on those good things with the new leadership and.
And again, just any clarification on what ultimately drove the change would be helpful. I think.
Listen, yes, so I think it's two two questions. There one is the strategy and the direction of the company and our progress towards that strategy, which is intact that is not changing we're committed to it we think it's a very viable and very powerful.
Powerful vision as well as the strategy behind it and the innovation pipeline that is in place.
With respect to Don and Don termination, we have really no further comment beyond what was already said around the circumstances around that.
As as you can appreciate where we are informing you about everything we possibly can at this time and there is an ongoing investigation, that's being led by the audit committee it would be inappropriate for me to comment or speculate or draw any conclusions about.
And ongoing investigation until its completed once we have information from that investigation will share it with you at all investors.
We don't have any further comment about that at this time.
Alright. Thank you and then Barb just as we think about the base business, especially I think some of US were braced for a potential write down at that business today.
I know you did see some sequential improvement in that business, but how are you thinking about I guess that deal and kind of the amount of goodwill on the balance sheet can you would you expect at this point is that trending towards any kind of a write down.
And maybe confidence level on that business getting back to any kind of year over year growth in the next year. Thank you.
Yeah. It's great question. So with regards to bite you know we remain very positive about the transaction as well as the performance. So as you all know in the first half of last year. We had some very strong sort of pandemic related demand that came through and that meant that we're going to have some heads.
Wins in the first half of this year from from a volume growth but.
But for the year, we are expecting bite to be a grower. So and we highlighted that we were expecting to see sequential growth and so far the business is performing very much in line with with what we said.
So for the year, it's going to be you know additive to the overall aligner business.
When you think about you know what does it do for US as a company you know not only is it adding to that topline growth, but it is also accretive to our gross margin, which is a positive and you know from a margin standpoint, it may take us a little bit of time before we get accretive there, but that's not unexpected.
For an acquisition of this type.
With regard specifically to goodwill and evaluation in a we go through an annual process, where we will evaluate our goodwill pools and determine whether or not you know there's any impairment that we need to look at so we have that process in front of us at this point in time I have no real.
To believe that we have an impairment coming on this but you know again, we have a normal process that we need to go through later in the year and you know I'm clearly if theres anything that changes in that outlook it'll be reflected in our published filings.
Thank you.
Next question. Please our next question will come from Jon Block with Stifel. You May now go ahead.
Great. Thanks, guys. Good morning, and thanks for all the color.
I'll go back to 2022 revenue outlook and my opinion is only.
Sort of modestly stepping down, especially with 8% of our sales in China, and Russia, but the <unk> is much more impacted than the big decline year over year, maybe Barbara if you can comment on the Decrementals and I get it the bridge on slide I think it's 14, but maybe a little bit more color on the Decrementals and more importantly, how do we think about that greater than 17% going forward.
Sure you know there was a prior leadership there was sort of that cadence of in and around 100 bps plus in Oi expansion per annum do we think about this as sort of a one time step down in a snap back to where we were prior or maybe as best you can extrapolate that number going forward and then I've got a follow up.
Absolutely. So it's a great question. The the key driver you know and we tried to I highlighted in our bridge in the presentation material as you think about the decrement between the topline them step down and the Bottomline step down is really around our gross margin.
And you know in the gross margin area. You know it is driven by the volumes coming down and having a less favorable mix than where we would've been previously.
But it's also being brought down by FX, which is a significant headwind I think we've quantified that as about a 15 cent headwind relative to the prior guidance for the year.
And then supply chain and supply chain to combination of inflationary pressures as well as hum sort of constraints on components.
And so that's another 15 sense as you look at it.
When you look across that entire bridge to get to your question of what do we see as transitory versus what is sort of our underlying performance.
Probably about 70% of that step down in EPS for the year is related to the big trends around FX around China around the pressures that everybody is experiencing on supply chain.
When you think about where do we want to go forward I mean, the company has two great levers about how do we get past these macro headwinds.
In 2022 and get back on the path of performance for 2023.
First of all from a sales standpoint, we have a really well positioned portfolio in a very attractive market and so you know continued excellence in execution. There gives us opportunities to continue to improve our sales growth and improve our profitable sales growth.
And then the second piece is as was highlighted earlier I think by job. The company has done a remarkable job of addressing operating margin.
True cost savings through portfolio optimization and that gives us a really strong a sort of foundation to continue to get on that path for margin expansion. Once we get some of these headwinds behind us.
So we really do see this year as is a bit of a one time, where we've got a lot of things working against us, but we think those things are largely transitory and as we get to 'twenty three will be exiting the year strongly as we sequentially improved and will be you know setting twenty-three up for a strong year.
Yeah, I think we'll I think it's a good way to summarize it we expect to end the year at around 20% op margin as we mentioned earlier.
And when we get to 'twenty three guidance will well articulated then there's obviously a lot of moving pieces in the macro right now that everyone's dealing with <unk>.
And we're no different.
So we'll we'll certainly.
Provide updated guidance for 23, when we get to the end of the year.
Understood and maybe just a quick follow up.
On implants was another strong quarter I think you called out high single digit growth. The company recently restaged the portfolio call. It but now some of these growth rates are all the easier comps your thoughts on the overall market with a consumer that might be weakening for implants, and then densify thrown his ability to continue to put up these solid.
<unk>, maybe as we cycle through and start to get some more difficult comps. Thanks for your time guys yeah.
Yeah, we're very pleased on the implant side with our prime taper launch, that's going very well and in helping to drive robust growth across all the regions. In Q1 was high single digits, and we and we would expect to see continued.
Performance with the market.
Throughout the year I'm very pleased about the performance there you know.
As it relates to the to the economic question, whether its implants or a liners.
We think that the digital dentistry vision and strategy that were pursuing actually makes a dentist's office more efficient.
And more productive.
And that that trend towards digital dentistry, and the workflows that go with it include.
Including a liners and and implants and.
And other restorations I think will help offset some of that inflationary pressure and of course, we're going to adapt and adjust where needed to refined our segmentation and any direct to consumer businesses.
Can help offset any headwinds that we might see from inflation, we haven't seen it trending in our business to date.
But we're certainly being proactive to prepare for that.
Thank you guys.
Our next question will come from Matt mixed sick with credit Suisse. You May now go ahead.
Thanks, So much maybe just some follow ups on some of the topics here you've been you've been talking about.
The first on the inventory that you went through Barb and I think then went through some color on the fact that on.
On the capital side, the CAD Cam side that that it will take another couple of quarters or few quarters to work through that if it was $150 million.
Is that.
20 $30 million of the way through that is that can you give us some color as to how far along that CAD Cam inventory, we are with Q1.
And then I have one follow up.
So Matt Thanks for the question of in the 10-K, we highlighted that there was approximately $50 million of excess inventory at the end of 2021, we've seen a portion of that burn off in Q1 of this year, we expect the balance to largely work its way through <unk>.
Quarter and by the time, we get to Q3, we we should be getting normalized so so that's sort of the trajectory of what we expect around the U S inventory burn.
Great. Thanks for that clarification.
On the margin.
The delta to EPS and the Delta to margins I guess, if we look at 70 reduction roughly from your prior range for your current range that would imply a slightly heavier impact on margins than say the.
The three to 400 basis point Delta.
Delta that you gave in your full year guide.
Can you talk about what some of the offsets to that are that give you the.
Or what the additional with the additional Delta is there that maybe you know.
I guess, if I do the math on EPS it looks like it would be more like a you know.
Another 100 basis points, lower and I'm, just trying to get some color as to what youre doing to offset that if anything.
So some of that I may not be following your math as we go through in the presentation. We tried to highlight it pretty clearly as to where the pieces would be so so as we walk through you know there is about 25 cents that is really driven by the change in sales and the change in <unk>.
Volumes that we would see because of the headwinds and again, that's primarily around China, but also it has Ukraine and Russia in there and then a little bit with regards to U S performance.
As we think about the balance of the changes you know FX is a big piece. We also have an equal amount. Another 15 since that we think would be related to supply chain constraints.
And then the balance of that you know that we highlighted I think it's the last bar on that chart, we talked about investments that we're going to continue to make in our primarily our R&D and our commercial organization. So if you if you walk through those pieces that pretty much gets you to where our guide is for the full year.
From an EPS perspective.
In terms of you know other levers that we're looking at we've talked a little bit about price, we really haven't changed our outlook on price, that's pretty consistent with where we started.
We will you know continue to be working hard on Oh on supply chain and making sure that we can contain that.
I'm just trying to think through the rest of the P&L I think the other place where you may see some favorability that that May help you from an overall equation is you know we are seeing a slightly better tax rate for the full year.
So maybe that's a little bit of that offset that you're looking for you know, but again, we have a little bit of a headwind when it comes to interest him just like many other people as well so.
As you as you get later in the day and Youre going through further questions. If we can provide any more color there Andrea well, we will certainly do so.
That's helpful.
I guess I get about 500 basis points of a tax effect those EPS numbers and your guide came down by about 400. So.
Some of the other things you mentioned should should help explain explain that delta, but thanks, so much Bob.
No worries.
Oh, we'll take one more question please Anthony.
Okay. Our next question will be from Rachel vans at all with J P. Morgan.
No go ahead.
Great. Thanks for taking the question. So I appreciate the color that you've given on China and that the region is going to be pressured for the year due to the lockdowns.
But can you just dig into that a bit more so how significant do you expect those headwinds to be into Q and then what's assumed for the cadence in the back half of the year for China. And then also do you think that you'll be able to recoup any of those volumes once the region reopen.
Yeah, let me start on that one Rachel that China represents more than half of the regional headwinds that we're now putting in the outlook.
Somewhere around 60% actually.
So it's by far the biggest and.
And we do expect that Theyre going to go out throughout the year.
And and.
Once that once we get past the.
The end of the year, there's no reason to think once once the COVID-19 situation in China resumes and Lockdowns are a lot less frequent or nonexistent theres no reason to believe that the business wouldn't come back too.
To the to prior levels.
Our levels in 2021.
Got it that's helpful. And then on the EPS Bridge, you guys had flagged that 15% or 15 cent decline stemming from investments could you just walk us through what those are going to go towards for the air. Thanks.
So I'll start and then John if you want to add in please do.
I think the most significant is if you look at R&D and you can see that a little bit in Q1, I'm you know last year, we talked about how as the.
The world reopened and we got back to more normal a performance that we were going to accelerate our investment in our pipeline and so R&D investment is is a big piece of that as we go forward and beyond that you know it really gets to two more support.
And an ongoing focus in our commercial organizations and making sure that you know we have teams in place that are well positioned to be working with our customers and helping them going forward.
No I wouldn't add to that okay. Okay. So let me just close with a comment and thank you all for joining the call. This morning.
As you can appreciate I think what you can see that we're trying to do our best to inform you about everything we possibly can this morning at this time.
Barbara and I are confident that with the help of the management team here, we're going to successfully address any findings, while leading us forward to make a stronger team identify sirona.
And we have a you know we really believe in the vision and the strategy that we're pursuing and we will pursue it with all of our all of our might and effort. Thank you very much for your time.
But just.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.