Q3 2022 DENTSPLY SIRONA Inc Earnings Call
Good day and welcome to the Danfoss around our Q3 2022 earnings conference call.
All participants will be in listen only mode shutting any assistance. Please signal conference specialist by pressing historically you followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note. This event is being recorded at this time I would now like to turn the conference over to Mr. Andrea Daly VP of Investor Relations. Please go ahead.
Good morning, everyone welcome to our third quarter 2022 earnings call.
Joining me for today's call is Simon Campion, Densify, Sirona, Chief Executive Officer, and Glenn Coleman, Chief Financial Officer.
I'd like to remind you that an earnings press release and slide presentation related to the call are available in the investors section of our website at Www Dot densify Sirona Dot com before we begin please take a moment to read the forward looking statements in our earnings press release during today's call, we make certain predictive statements that reflect our current views.
About future performance and financial results, we base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties in our most recently filed Form 10-K, and any updating information and subsequent SEC filings list. Some of the most important risk factors that could cause actual results to differ.
From our predictions. Additionally on today's call our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about financial performance of our business enable the comparison of financial results between periods, where certain items may vary.
Three independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results and with that I will now turn the call over to Simon.
Thank you Andrea and thank you all for joining US this morning for our Q3 2022 earnings call.
I'm very pleased to be here talking to you all today for the first time as CEO of dense play Sirona.
Today I'll provide you with an overview of the third quarter, Glenn will cover both the quarters financial results and provide an update on our 2022 outlook.
And then I will finish by providing a strategic operating update.
Before we jump into those topics I'd like to make a couple of introductory comments and also provide you with an important update regarding the completion of our internal investigation.
First I'd like to thank John grows Lars for leading the business as interim CEO and for helping to make my transition to two C. E O a smooth one.
I'd also like to thank the entire dense play sort of on the team.
Our employees continued dedication and ability to stay focused throughout this period of change has only reinforced my confidence and the many opportunities ahead.
I'm excited to be leading this team met densify sirona.
I'm also joined here today by Glenn Coleman, our new Chief Financial Officer, as you all know Glenn and I, both joined Densify Sirona at the end of the third quarter. So this is our first earnings call as CEO and CFO .
Together, Glen and I bring a robust set of global leadership experience in medical device industry expertise that we expect will serve us well as we lead dense play sirona into a new disciplined future.
Importantly, we also intend to bring fresh perspectives and a critical eye to the business.
I want to convey to you all why am I am excited to be serving as the new CEO of densify Sirona and <unk>.
Why my early discoveries have reinforced my enthusiasm.
Since I joined I've spent time meeting with employees customers and other stakeholders observing and better understanding what we do well, but also diagnosing the areas where we can improve.
Along with my leadership team, we are making urgent progress on the development of our plan to restore the company to the growth and performance that it is capable of delivering.
While we knew that the company would face financial pressures in Q3 and throughout the rest of 2022, we are focused on the future and the value we can drive for our shareholders.
I believe we have tremendous opportunity to create value for shareholders over the near medium and long term predicated on three key factors.
One the.
The company plays in an attractive and healthy category with strong growth opportunities.
The long term macro trends are supportive and those who can innovate leverage global scale invest appropriately and execute judiciously through the current challenging external environment will emerge as long term winners.
What will disposition towards expenses, along with balanced and prioritize investments will be a theme of this leadership team.
To densify Sirona has a strong foundation from which we can accelerate growth.
I believe we have the right to win in the dental market as we are already well positioned with a comprehensive portfolio and especially with our digital assets, where we can help shape and lead the digital trends in the industry from imaging to align there's two unique delivery models like bite.
Our strong and recognizable brands and legacy of innovation affords us the opportunity to gain share and grow above market.
But to do so we need to be disciplined and execute.
Three in order to support our strong foundation, we need to deliver on a sound strategy with best in class execution Glenda.
Glenn and I as you can see on slide five are bringing together the best management models from our collective career experiences coupled with the expertise and company knowledge from our management team.
We have seen what operational excellence looks like and the results. It can deliver and that's exactly what we intend to implement a dense by sirona.
As we move forward, we will not shy away from making big sometimes difficult decisions to put the company on a path to sustainable growth and long term value creation.
I look forward to sharing details of our plan with you over the coming months, including metrics by which our progress can be tracked as we work towards our full potential.
I'd also like to provide you an important update on the internal investigation.
As you know on November 1st we announced that the audit and Finance Committee of the board of Directors had completed the investigation.
Sales on the investigation findings and associated remediation plans can be found in our SEC filings, which include an amended 2021 10-K.
Remediation accident actions associated with the investigation and the accounting review are underway and moving forward. We are focused on creating a culture and company that is committed to accountability and transparency as we continue to implement the necessary remedial actions and operate with the utmost levels of integrity Glenn.
Glenn will discuss the findings as well as remedial actions that we're taking.
On behalf of the board and management I would like to extend our sincerest. Thanks to all densify Sirona team members, especially our finance accounting and legal teams as well as our audit and Finance Committee and advisors for their support and commitment as the company works to investigate and resolve these matters.
Now before I turn it over to Glenn Let me cover a couple of key observations on the third quarter.
During my first week at dense play Sirona I had the opportunity to experience D. S World for the first time and was very impressed by the event.
Our technology and our team.
The level of engagement with our customers and partners was unparalleled.
I had the opportunity to see firsthand our launch of several new digital solutions, including the new primes gun connect and had the privilege of hearing directly from customers on the tremendous value. These solutions will deliver for their practices and patients.
I will further discuss the importance of innovation after we cover the quarterly results.
The business delivered disappointing Q3 financial results, which were impacted by foreign exchange headwinds softer volumes in the U S and China and continued global supply chain challenges.
Despite recessionary and other external pressures we were encouraged in the third quarter by solid continued growth across the portfolio in Europe .
Double digit growth in clear liners and growth in imaging, despite some supply constraints.
Global demand remained strong in these areas and we are well positioned to capitalize on the continuation of the industry's adoption of digital dentistry.
I'll share further thoughts on what we can do to drive performance going forward. After Glenn provides a more complete overview of Q3 and our outlook.
Dan.
Thank you Simon good morning, and thank you all for joining us.
Before turning to our financial results I'd like to introduce myself to those of you I've yet to meet.
Having overseen financial and operational functions across several geographies and industries, including health care I'm excited to take on this role as the company enters its next chapter.
I joined <unk> Sirona, because I believe it's a great company with a legacy of strong brands and innovation.
I look forward to working closely with Simon and the rest of the team to bring greater focus and discipline to our execution advance our financial operational and strategic goals and ultimately deliver long term growth and value creation.
Today I'll provide more detail on our third quarter financial results and an update on our 2022 outlook.
But before I do let me start with the recently announced completion of the previously disclosed internal investigation and accounting of review.
The findings result in a restatement of our third quarter 2021 10-Q, and full year 2021 and 10-K.
As disclosed in those amended filings net sales were overstated for the third quarter and full year, 2021 by $29 million and $20 million respectively.
The company also revised full year, 'twenty, 'twenty, and 'twenty and 19 financial statements for immaterial errors.
The combination of the investigation and accounting review also resulted in several material weaknesses in internal control over financial reporting.
We have developed a comprehensive remediation plan to implement a number of process enhancements and additional controls to strengthen our overall internal controls environment, Inc.
Including personnel changes.
Updates to the company's code of ethics and business conduct.
Creation of or enhancements to commercial and accounting policies and procedures.
And additional training for our team, including commercial finance and accounting employees.
I'd refer you to our amended 10-K for more specifics on these efforts.
We are already well underway with a number of these initiatives will continue to provide updates on progress.
Now that the investigation and accounting review have concluded.
We are even more focused on moving forward in executing on our strategic priorities.
Now, let's turn to Q3 financial results on slide eight.
As previously announced GAAP results were impacted by the recording of a noncash charge for the impairment of goodwill and intangible assets of $1.1 billion net of tax associated with two reporting units.
This charge primarily reflects changes in macroeconomic factors such as rising interest rates foreign exchange headwinds and broad declines in equity evaluations.
As well as lower forecasted revenues, which are negatively impacting our financial projections.
More information regarding the impairment charge is available in our third quarter 10-Q.
In the third quarter, the business delivered revenue of $947 million.
In line with the preliminary results, we announced previously.
In comparison to prior year organic sales declined by 0.7% while reported sales declined by eight 9% due to the significant strengthening of the U S dollar versus foreign currencies.
The difference between reported and organic sales was fully attributable to foreign exchange.
Gross profit was $539 million or 56, 9% of sales and.
And declined 100 basis points from the prior year with half of the reduction coming from FX and the remainder from inflation and volume deleverage.
SG&A expenses were $361 million or 38, 1% of sales.
On an absolute basis, SG&A was flat sequentially and decreased by 3.6% year over year.
Largely due to FX.
R&D spend was $39 million or four 2% of sales.
Up 50 basis points versus the prior year, reflecting dense place their own his continued commitment to developing innovative solutions for our customers.
With the majority of the investments in digital technologies.
Operating income was $139 million down 26.6% versus last year.
Operating margin contracted to 14.7% due to lower volumes, particularly in the U S and China.
And continued macro headwinds, including FX and inflation.
As a result, EPS was 41 cents in the third quarter of 2022.
As compared to 60 cents in the prior year quarter.
We attribute 10 cents of the EPS declined to performance and inflation.
Seven cents to foreign currency headwinds and the remainder to a higher tax rate.
Yeah.
Operating cash flow was $109 million in the quarter and adjusted free cash flow conversion was 88%.
The company has maintained a strong balance sheet and finished the quarter with $418 million of cash and cash equivalents on hand, with a net debt to EBITDA ratio of approximately 1.8 times.
The strength of our cash generation enables us to maintain our commitment to returning cash to shareholders, while still allowing us to invest in the business.
In the third quarter, we paid $27 million in dividends.
Going forward, we expect to continue returning at least 50% of our free cash flow to shareholders through a combination of dividends and share repurchases.
We will also continue executing on our balanced capital allocation strategy, which includes opportunistic share repurchasing and investing organically to drive faster revenue growth over the long term.
As a reminder, we have $740 million of authorization remaining under our share repurchase program.
Moving to segment performance in the quarter on slide 10.
Organic sales in technologies and equipment or our Teeny segment grew 0.6%, while consumables declined 2.5%.
The Teeny segment organic sales growth was led by double digit growth in clear Aligner and continued strong global demand for imaging equipment.
Ortho grew double digits in the quarter due to strong demand in both sure smile and bite offerings.
Gross mile continues to benefit from regional expansion and new product offerings.
As anticipated bite or direct to consumer clear Aligner brand returned to growth in the quarter after facing tough year over year comps in the first half of the year.
While we are cautious on consumer spending trends entering Q4, we were pleased that by continued to show improvement in the third quarter.
Given the momentum we have in the liners business, we expect to see double digit growth in the fourth quarter.
The equipment and instruments business or Eni posted growth due to continued strong imaging demand despite ongoing supply chain constraints, which resulted in higher backlog for a three D imaging technology in the quarter.
Implants were flat in the quarter as growth in the U S and Europe was offset by lower volumes in China.
We attribute the softness in China to continued COVID-19 related shutdowns and lower orders in anticipation of volume based procurement taking effect.
Our CAD Cam business declined in the quarter due to tough year over year comps and lower wholesale orders through distributors in certain regions.
We're indicators are showing some softening of retail demand.
Moving to the consumables segment organic sales declined by 2.5% versus prior year.
Primarily attributable to a weaker performance in the U S and lower volumes in China.
These headwinds were partially offset by price increases and recent product launches, including protein per ultimate and Zurich blocks.
Now turning to third quarter financial performance by region.
U S sales were $357 million, representing an organic sales decline of five 2%.
Driven by lower retail and wholesale volumes and CAD Cam and certain consumables.
These headwinds were partially offset by growth in clear liners and imaging.
Europe delivered another good quarter with sales of $358 million and organic growth of 3% attributed to strong performance across the business.
Particularly in clear liners and endo.
Demand for imaging and treatment centers also remains high despite supply constraints.
Rest of the world sales were $232 million and essentially flat on an organic basis versus the prior year.
Lower sales in China were offset by increased adoption of digital dentistry technologies.
Particularly in countries, such as Korea and Japan.
Moving to our outlook for 2022.
Based upon our third quarter performance and fourth quarter estimates, which includes assumptions for a continued challenging macroeconomic environment, we are lowering our full year financial projections.
Compared to the prior outlook FX headwinds have become significantly more pronounced and we now expect net sales in the range of 3.85 billion.
To $3.88 billion.
We anticipate the full year sales and EPS impact of FX versus the prior year to.
To be approximately $300 million.30, respectively.
FX headwinds represent a 120 basis point operating margin headwind for the year.
Full year organic sales are expected to decline approximately 2%.
As we're now anticipating stronger global recessionary headwinds, particularly in the U S and certain European markets.
In China, we continue to see prolonged impacts from Covid related shutdowns.
Which we accounted for in our prior outlook.
Additionally, we're beginning to see the effects of volume based procurement in China on our implant business.
Over the long term, we believe V. P presents an opportunity for the business through increased volume but.
But in the near term the effect on pricing will be a headwind.
We are closely monitoring global dental traffic and leading indicators on consumer behavior.
Due to higher consumer inflation in major markets, we're expecting that there will be a slowdown in elective procedures, such as clear liners in implants.
And dental volumes may skewed towards more traditional procedures.
This dynamic coupled with higher interest rates may reduce the demand for certain equipment in the coming months.
We estimate that the full year operating margin will be greater than 15% down from the prior outlook due to volume deleverage in supply chain headwinds.
With these updates 2022 adjusted earnings per share is now expected to be in a range of $1 90 to $2 <unk>.
Representing a reduction of 50 cents at the midpoint compared to the prior outlook.
The key components of the EPS outlook change are shared on slide 14.
And include approximately 20 cents for a reduction coming from our U S underperformance.
Five cents from China headwinds associated with broader Covid shutdowns and V P.
Tencent attributed to supply chain headwinds.
10 cents to FX and five cents due to an updated tax rate and share count assumptions.
In closing despite disappointing third quarter results in a challenging macroeconomic environment. We are confident that our strong business foundation and balance sheet support our priorities to drive successful execution of our strategy.
Myself, Simon and the entire leadership team are executing.
Moving with urgency to address these headwinds and best position densify sirona for the future.
And with that I'll now turn the call back to Simon.
Thank you Glenn.
Moving onto a strategic update.
I want to share with you my thoughts on the strategy and how we will deliver on it going forward.
Our strategy of enabling dentists to have superior integrated workflows is compelling.
We believe in it and so does the board.
While we will continue to refine it our strategy remains largely unchanged.
We'll change is how we deliver on that going forward, which starts with the tone at the top of this organization and the actions. We are taking now to move the business forward and enhance or where appropriate introduce key capabilities.
As we build our capabilities, we are thoughtfully, considering the right formula to do to deliver against the following objectives.
One reliable and sustainable revenue growth to increasing profitability three leverage of investments made and for double digit earnings growth.
To achieve these objectives, we are intensely focused on our strategy.
It requires us to seamlessly bring together the power of our comprehensive portfolio of digital equipment software capabilities.
<unk> based solutions and essential consumables to provide solutions for our customers.
This include solutions, which enable us to take an expanded view of our customers and their interaction points with solutions, such as bite and D. S Corps.
This in turn allows densify sirona to become the essential partner to dentists, regardless of where they are at on the digital journey.
With that I'd like to discuss actions, we're taking as shown on slide 18.
With our investigation now concluded and remedial actions underway dense play Sirona is at a critical inflection point.
As we move forward, we are committed to improving the performance of the organization in all respects.
Our organizational transformation starts with the tone at the top and creating a speaking up culture.
As leaders, we have the responsibility to set the tone for what is acceptable and what is not.
We must and we will operate with the utmost levels of integrity creates a healthy compliance environment and hold ourselves and each other accountable.
We are acting with urgency.
And we will be disciplined and accountable, while providing transparency and disclosure.
Next we must identify what our winning portfolio looks like.
We have a strong foundation to build from with a comprehensive portfolio that is available globally.
Yet we know that we have opportunities to optimize the portfolio and we have already kicked off a robust process to execute this work.
Optimizing the portfolio will enable simplification and increased profitability, thereby facilitating opportunity to invest in projects and programs to drive growth.
To support our winning portfolio. We are also conducting a comprehensive review of the organization.
Observations and insights thus far indicate that there is opportunity to reestablish investments in certain regions, such as North America and in functions such as operations to improve performance and.
In fact, we have already commenced some of these investments.
Additionally, we must evaluate our organizational structure to ensure it facilitates a collaborative culture that is enterprise and solutions oriented.
As we transform we will look for ways to simplify as well as enhance productivity collaboration and accountability across the company, which will drive profitability. So that we can bring operating margins back above 20%.
Lastly, we will focus on disciplined execution to become a best in class organization.
With that in mind, we have just appointed an executive Vice president of operations.
This individual brings the legacy of high performance and transformation in operations and supply chain and we look forward to having them on boarded.
Beyond operations, we have other opportunities to improve our execution and discipline.
We've appointed an execution centric APAC leader, who will join our team in the coming weeks.
We remain committed to investing in R&D to bring new solutions to market in a disciplined and optimized way.
I've experienced the power of a of an effective new product development process and we are building this capability at densify Sirona.
Similarly, Glenn and I have also seen the critical power that effective operating mechanisms and processes can provide.
And we are committed to implementing this at dense play sirona as well.
The management team will continue to build upon refine and expand our foundation and deliver an operating environment that is disciplined predictable insightful and transparent.
We have confidence that with these actions taken and then more normalizing market conditions densify sirona can grow revenue at or above our historical long term targets.
While also increasing profitability with operating profit margins above 20%.
Turning now to slide 19.
Going back to my earlier comments on dense flights or owners rich legacy of innovation and healthy pipeline. We are focused on creating differentiated and innovative solutions to address customer needs for both patients and their dentists.
As we work to identify key areas to accelerate innovation and an important one in our digital portfolio is accelerating software development.
We have made a fundamental transformation in our approach to software development and we're moving from developing individual software for different devices and treatment plans to building a single platform that will support all of our devices as well as our extensive treatment planning portfolio.
That platform is D S Corps.
D. S Corps will deliver end to end digital workflow from diagnosis to treatment and it represents an important first step on the long journey of both incremental and transformative digital innovation in the dental market.
We are excited about the additional capabilities of our new cloud based platform will provide for our customers and their partners by enabling seamless integration across the entire D. S digital portfolio.
Brian printers, our first solution that is fully integrated and enabled by D. S Corps with additional offerings, including D. S core create for design and D. S core care for service.
Primes can connect is also powered by D. S Corps and can be used for digital workflows, such as restoration implants clear liners and sleep appliances.
We look forward to continuing to bring more innovation to market in 2023 and beyond.
Now let me highlight a few closing comments on slide 20.
Despite the challenging quarter, we are optimistic about our future.
A winning portfolio and attractive end markets will enable us to drive sustainable growth and increased profitability over the long term.
And that will continue to be our top priority.
We have the right to win and we will begin to capitalize on that opportunity through partnership through discipline through focus on continuous improvement and through execution in everything we do.
The 2022 outlook has been updated to reflect our recent performance and changes in the macro environment.
With the internal investigation complete we're moving forward with urgency and renewed focus on and commitment to improving execution discipline.
We are at an important turning point for dense play Sirona and are taking the necessary actions to deliver a brighter more consistent future.
Finally, the dense places where own the team has proven over the past several months that it is strong and resilient.
We have a mission driven organization with a wealth of expertise.
We have a leading portfolio of products, including in the nascent digital space that we are fully committed to.
I'm confident that together, we can overcome near term challenges and provide greater shape structure and focus to our organization and deliver meaningful and sustainable results.
We are looking forward to providing you with the results of our full business diagnostic along with details of our plan and the operating actions that we're taking all of which we feel will set densify sirona op for consistent and sustainable performance.
And with that I will open it up for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And it looks like our first question comes from Kevin Caliendo of UBS. Please go ahead.
Thanks, Thanks for taking my call and thanks for all the information this morning.
I guess the big question that we're all wondering here is how to think about the run rate of the business in the third quarter and implied fourth quarter in terms of the margin.
If there is anything there.
At one time in nature or do you think this is the.
Run rate earnings power of the business as we go into 2023.
And maybe as a second sort of follow up to that you talked about getting margins back over 20% I'm not going to ask for any 2023 guidance, but maybe talk through how you get from the.
The margin in 2022 to 20 to that 20 plus percent rate going forward.
Yeah, Kevin Thanks for the question. This is Glenn when we look at the run rate of our margins, obviously sequentially we were down.
From the second quarter to be sub 15% keep in mind, one of the things really impacting our margins right now is the significant foreign exchange headwinds.
And I think I put in my prepared remarks on a full year basis, we're looking at an impact of close to 120 to 130 basis points alone just from FX.
And obviously, having lower revenue volumes is also contributing to deleverage in terms of our gross margin performance. So I.
I think we're doing a reasonably good job right now of managing our operating expenses, but for us.
As we look forward in the fourth quarter I would expect to see another step down sequentially in our operating margins given where we're at in the lower <unk>.
Revenues that we're projecting here on a reported basis for Q4 sequentially.
I think we'll see a slight reduction overall in our gross margins but.
The key for US is really focusing on getting the business back to growth in 'twenty twenty-three that'll get us better performance in terms of leverage.
We're looking at a number of things across our organization in terms of optimization initiatives. Simon mentioned some of those relative to his prepared remarks, and I think for us, it's really going through a deep dive on the entire organization structure and figure out how we can be more efficient to drive significant margin expansion as we move forward into 'twenty 'twenty three M b.
And then we do.
Have a high degree of confidence that over the medium and longer term, we'll get back to 20% plus operating margins across the business.
Thank you.
Our next question comes from Elizabeth Anderson Evercore ISI. Please go ahead.
Hi, guys. Thanks, so much for the question. So in terms of I think you talked about some of the that you're still getting pricing.
In the U S. When you were talking about your consumables business can you help us think about like what youre seeing in terms of like U S volumes versus sort of where you're still getting pricing across your portfolio.
Yeah, I think from a pricing perspective, we've done a nice job to offset some of the cost inflation with <unk>.
Price increases in 2022, I think on the whole, we're probably looking at close to a 3% overall increase on pricing.
Obviously, it's not fully offsetting some of the volume declines that we're seeing in the U S business.
As we look at our U S performance.
I think one of the key things to think about is the sales going through our distributors and we've seen weakened demand on both the wholesale level and the retail level in terms of our U S sales given the recessionary environment.
And we also started the year off with high inventory levels at distributors and so we've been working that inventory down throughout the year and so the combination of those items along with the fact, we've had more than you.
Usual open territories in the U S sales force that we're addressing.
As a result of it and you know volumes that are are down in the U S which is not.
Uh huh.
Something that we expect to continue over the long term, obviously, we're addressing those things, especially the head count item.
And filling those roles and right now I think that's the key thing that we're focused on.
And I would supplement that Elizabeth with saying that we are.
We are investing right now in certain areas of the of the U S. A U S sales team.
Work was was commenced by John gross routers and Barbuda them is when they were in their interim roles. Oh, we have an investment plan and we have a we have begun to action that as well in certain discrete areas of our of our U S commercial team.
Got it and maybe just to.
Pick up on that so where are you sort of seeing underinvestment in sales is that something you would sort of just because theres a general sort of turmoil.
Leftover you guys, obviously inherited or is that something that's like a broader macro picture like how do you.
I think that that takes until you actually go back up to full capacity in that respect.
Well, we have a we have a very active recruitment program underway right now Elizabeth I would I would suggest over the past number of years, we have perhaps underinvested in the U S team in particular and that has driven some of the historical challenges with with U S commercial performance.
There were in the process of as I said addressing that right now and focusing on some of the emerging trends as well in the <unk> in the U S region, such as our Dsos.
So we have the work that was undertaken during the summer was comprehensive and incomplete.
And execution of that is now taking place.
Elizabeth I would just add while we saw obviously reductions overall in the U S business and volumes being down the worst some positives I'd I'd call out the ortho business continues to perform quite well.
Both our bite and sure smile, and our imaging business, even with higher than usual back log situation, we're actually showing nice growth there as well so while we did see declines in equipment. Overall, we did see some bright spots in the U S business, which we expect to continue as we move forward here.
Super helpful. Thanks, guys.
Yeah.
Our next question comes from Nathan Rich with Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for the questions two on the top line first on the near term could you maybe just help US think about you know what your exciting for the fourth quarter, maybe relative to what you saw in the third and I guess, specifically you talked about double digit growth in clear liners. It sounds like demand for imaging still is still strong.
But your fourth quarter guidance implies a slight moderation. So could you maybe just help us think about what you are seeing in the fourth quarter and are you expecting some moderation in overall end market demand and then longer term could you talk to us about what you see as the key pillars of getting back to that Oh above market growth I think even rough.
Friends growth potentially in line with the prior long term targets, which were 4% to 5%.
So could you just talk about maybe the longer term opportunities there. Thank you.
Yeah, So maybe I'll comment on the first piece and Simon can comment on the second part on the long term outlook is just to remind everybody.
What we said back on the November 1st pre announcement, we said reported revenues would be down sequentially from the third quarter to the fourth quarter and a low single digit range.
And on a constant currency basis organic revenues will be flat to up low single digits sequentially from.
From the third to the fourth quarter and that's on an absolute dollar basis.
So what that translates to when you look at year over year fourth quarter versus fourth quarter.
Organic growth, that's going to be down in the mid single digit range versus a quarter, where we just came in at 0.7% down. So you are expecting to see.
A further decline in organic growth in the fourth quarter, if I look at the pieces in the fourth quarter, we do expect to see good growth coming out of ortho both by insurer Smile should continue to show good growth.
In the fourth quarter I mentioned that in my prepared remarks imaging should continue to show growth, but we do expect to see continued declines in the equipment side of our business.
Similar to what we saw I would say in the third quarter on the consumable side.
I think the preventative consumables will continue to hold up pretty well here in the fourth quarter I don't want to say the recession proof, but certainly less impacted by a recession, but we do expect to see our restorative consumable products show a decline year over year in the fourth quarter. So overall, that's how we're looking at a.
Q4 and you.
Again, we expect to be down year over year, probably in the mid single digit range for organic growth.
And then Nathan with respect to our our long term outlook.
As I answered on the last question from Elizabeth We are we are investing in the North America commercial team the sales team in particular.
So we expect to begin to remediate some of some of their performance and when I look across across the World Europe has had a strong year. Despite the despite the headwinds with with both in the in each quarter. If we exclude China from from the rest of the world. So a lot of time and APAC ex China. We've seen you know high single.
Growth, there as well, but as we said in our prepared remarks.
Dan and I are bringing to the bringing to densify sirona is absolute discipline and focus on execution.
And that that starts with the operating model that are that where were introducing here.
And rigor around projections rigor around R&D, a rigor around the delivery of anticipated revenue from R&D launches.
So that model in conjunction with our you know the track record we have with training the dental community here in in Charlotte and then also one been signed where we've trained in excess of 7000 dentists in Charlotte. This year I think we have a we have a track record of.
<unk>.
And and a wealth of knowledge in the organization and if we if we partner that with rigor and discipline. We strongly feel we can get back to where we should be in the dental market.
Yeah.
Thanks very much.
It looks like our next question comes from Erin Wright of Morgan Stanley . Please go ahead.
Great. Thanks, how should we think about the recent trends in CAD Cam and how should we think about your overall strategy and CAD CAD can now with primes can connect in and will chair side <unk> a meaningful part of your sales effort going forward are we moving away from that given the market has evolved and how would you characterize.
Overall demand for chair side now.
So with respect to CAD Cam and in digital we are we strongly feel that the that the strategy. We have Aaron is isn't appropriate one we continue to invest behind the digital world that software or pieces of capital equipment that we're delivering both to chair side onto and to lab and.
And we will continue to address the needs of the market.
And also you'll look for key evolutions in and the trends of the market such as within our within the DSO within the DSO community. So while we've experienced some pressure here. We do think that you'll cadcam is is going to be a key part of our business moving forward and the fact that we are a full line supplier to <unk>.
The dental community are we should be we should continue to drive digital and and CAD Cam and get the commensurate consumable pull through associated with that as well so our strategy for the most part remains intact.
For sure there will be continued refinement of it as we move forward, but are the the the pivot will be as I noted in the prepared remarks and to Nathan's question will be increased rigor and discipline around our execution and more and more.
Monitoring performance.
Okay, Great and then a quick one on just what is the timeline of your strategic review or when do you think we'll get more details therein.
And what is being assessed initially and and is everything on the table, including divestitures. Thanks.
So we've already commenced Ah that work are part of it started during the summer with respect to North America, and we have you know ongoing reviews right now with respect to winning portfolio and how we are organized for success moving forward. We would expect that the at the Q4 call in February to begin to.
To share more details about what that what that plan looks like but we are we have acted with urgency and the past nine weeks, where we're partnering with with external partners to do a base lining of our all of our performance and we expect to be in a position to communicate more around the Q4 earnings call in February .
Murray.
Next question. Please and our next question comes from Brandon Couillard of Jefferies. Please go ahead.
Hey, Thanks, good morning.
And then just on the buy business it sounds like your intent.
Keep that does operations can you just talk about why and what about the business is attractive to you.
Longer term growth profile and you still expect to deliver positive revenue growth in that business for the full year.
So listen we we think bite as a as a key role in our in our portfolio moving forward.
Where we are and wind on the on the digital or on the consumable in digital skill and we think we should be end to end on the on the consumer spectrum as well. So we think we think there's a future for bike Oh. The line of businesses has delivered double digit growth.
For us we feel we can we can do better with it for sure we're investing behind it to make it easier to do business with and get more more conversions out of that out of that business, but for sure for now bite remains a key part of our a key part of our business Oh.
We will continue to be so for the foreseeable future Yeah, and then on the financial performance of buy it I would just say bite has shown sequential growth each and every quarter in 2022. So we're very encouraged by that.
In the third quarter, we did see double digit growth and we do expect to see growth in the in the fourth quarter year over year as well on a full year basis, though given the tough first half of the year comps, we do expect to be down.
Probably in the mid single digit range on a full year basis.
Got it that's helpful. And then could you just touch on where you see the biggest choke points in terms of the supply chain right now.
Quantifying the dollar amounts of fee revenue.
<unk> headwinds.
Limited and kind of outlook for.
Maybe when you start to see some improvement.
I wouldn't I wouldn't go so far as to quantify it Brandon but electronics.
So it continues to be a headwind.
Blockage force, although you'll demand coming in or requests for for technology continues to be strong. So it's a we have not seen a dramatic improvement and in the outlook for the electronic parts of our technology.
Over the past couple of quarters.
Yeah, Let me just say treatment centers is probably the other pain.
Pain point, we have relative to supply and then on the positive news front, our consumables continues to get better overall relative to our back order situations. So I feel really good about the progress you've made on consumables, but.
Electronics and treatment centers are probably the two pain points right now on the supply side.
Thanks.
Our next question comes from Jeff Johnson of Baird. Please go ahead.
Thank you good morning, guys.
Simon I wanted to go back to the portfolio question, just kind of composition of portfolio and I think you know soon after you joined soon after Glenn Julian We all did a kind of.
Calls with each of you and I think the comment was more around are you.
Some significant potential portfolio reallocation over time today on the call. It sounds like Youre talking more about optimization Glen talking about our commitment to buybacks and dividends and the ladder makes sense, but not necessarily building a war chest at doing buybacks. So I guess, you don't have something shifted in the last six or eight weeks.
And kind of how much you think might need to be done on reconstructing the portfolio reallocating the portfolio I mean, if I look back over the last 10 or 12 years earnings basically.
This year, we're going to be at about trough to where they were in 2008 2009. So.
Lot of stuff that feels like could be reworked here it might need to be reworked, but it seems like you might be backing off a little bit of that portfolio reallocation commentary. Thanks.
No no I wouldn't say backing off.
At at all Jeff I would say increasing the scope of the of the work that our the way that we spoke about and in the cold that we had with you and several of your peers in the September timeframe are there are there are clear.
Areas of our business that we're looking at them with respect to you know.
Moving on and then there are there are clear areas of our business, where we probably have a proliferation of skus and through through taking a long hard look at our our SKU mix, we feel that we can that we can optimize some of our some of our some of our offerings are optimized.
As you know the allocation of cash and focus our energies within our network on driving growth in those areas that are that are delivering growth and have a better longer term outlook for us. So I don't think we have narrowed our our our scope at all I would say we are we have broadened its too.
To look at the Skus and a winning dental portfolio in general.
Alright, that's helpful. Thank you and just a quick follow up but going back I think it was the first question in Q&A, but Glenn I, just want to understand the margin commentary fourth quarter going to be down into low double digits for us for the third.
Third quarter, obviously slipped below 15%.
Currency headwinds aren't going to come off right away or is that at least the starting point, we should be thinking about early next year kind of in that second half range of this year at least to be starting to build a base off as we think about kind of 'twenty three and 'twenty four estimates. Thanks.
Yeah, I would expect that our Q4 operating margins at a low watermark in that we will build off of that going into next year.
Thank you Tamara will give more color on next year's operating margin guidance and how it would shape up by quarter, when we get to our February earnings call.
Our next question comes from Mike Cherny of Bank of America. Please go ahead.
Hi, Yes, Hi, this is Dan Clark on for Mike. Thanks for taking our question.
On China in the volume based procurement.
Can you just help size that for us understand that's going to go and get it back next year.
Just how should we think about the magnitude of that and then the timing before that ultimately turns into a potential tailwind.
Thank you.
Thanks, Mike for the question Yeah, Let me try to size this up and I'll use <unk> 2021 as the basis for my comments.
I think we've previously said China is about 5% of our consolidated revenue so call it $200 million and that's based off of our full year 2021 numbers, obviously with Covid shutdowns and so forth the numbers a bit lower but just.
Just use $200 million as a starting point for our revenues in China.
The portion of our business that's impacted by V. P is our implants business, which is about 25% of our revenues in China. So if you do the math on that call it $50 million impacted by V. B P. However.
Yep.
All of our implants business, 90% of it is probably impacted 10% not just based upon the products that we sell in China. So.
It's about $40 million to $45 million of our implants business that's impacted right now.
We think theres, probably about a 30% price reduction coming that would impact us theres, probably a bigger reduction, but some of it will be borne by our distributors in China, and so I would take 30% of call it $45 million as a rough order of magnitude impact on.
On our business right now from a pricing perspective, which call. It you know somewhere between $10 million to $15 million on the top and bottom line.
Obviously as we move past the pricing headwind, we do expect to make some of that back up with volume increases it's too early to tell when that comes back in.
Hopefully, we can offset most of this pricing headwind at some point in the second half of 2023, but it's still too early to tell we still have to go through the bidding process and see.
What our incremental volumes would be as a result of V P. But hopefully that sizes for you the impact just from the pricing piece, which I would say, it's somewhere between $10 million to $15 million.
Great. Thank you and then just.
The four key guide for clear aligner growth in the double double digits is that sort of an appropriate jump off point in our thinking about 23.
Yeah, I don't want to comment yet on 'twenty twenty-three, obviously, we have to see how we ended up the year, we have to see what the macro headwinds look like around the aligner business I.
I'd just say were encouraged by the momentum we have in our aligner business given that we've grown sequentially for three consecutive quarters in both of our direct to consumer and an all in office.
Aligner businesses, which is encouraging we're seeing double digit growth during the third quarter expecting good growth year over year in the fourth quarter, but until we get to next year and we see the impact on consumer confidence consumer spending yeah, I'm going to be cautious on what I say around next year until we get there.
Thanks.
And our next question comes from Jon Block of Stifel. Please go ahead.
Great. Thanks, guys good morning.
Just maybe a follow up on Cadcam I think in the U S. It was down high single digits or more maybe even low double digits can you guys. Just talk to the end market demand for cadcam versus what's still might be some inventory headwinds or maybe just sort of frame differently or are we now fully normalized for the inventory in that.
Channel specific to the U S and then I'll ask Paul.
Yeah, I think the reduction in terms of year over year volumes and Cadcam is combination of burning through the inventory that we had on hand at the end of the year along with softening retail demand. So you know I don't have a good estimate of what that split looks like but clearly it's a combination of the two factors and I think as.
We lap.
Into 'twenty 'twenty, three obviously, our dealer inventory levels are going to be at.
A very reasonable levels lower levels than.
Probably historical norms, even and then it comes down to what's the retail demand look like and it's too early to tell what that's going to look like right now, but obviously with rising rates it could put pressure on our equipment business overall and this would be part of it.
But clearly when you look at the performance. This year, it's a combination of burning down the inventory levels at dealers and I would say softening demand at the retail level four.
The overall cadcam business.
Okay, and then maybe just to shift gears and look at.
You've had some really good new products recently, Nick and client Brendan maybe just talk to us about uptake at DS World and we always think about densify sirona as an innovator and you've got it.
In the not too distant future are we looking at what Youre going to have out there are there is still some incrementals maybe in your back pocket that might come to light over the next I don't know four or five months, maybe just talk to us about the pipeline of new products and how you see that unfolding in coming quarters. Thanks, guys.
Sure. Thanks, John .
I was at D. S World is as I mentioned, though that was.
Extremely impressed that we have three and a half thousand dental professionals at a trade show and training event for for dense play Sirona products and technologies I think the technologies that we have are are really very robust and and serving the emerge.
<unk> trends in the dental industry, making dentists and their practices more efficient and enabling better outcomes for their for their patients. So I'm I was I was very comforted with what I saw with a D S World and the new technologies that we're bringing to bear on the market, including your primes can connect and.
And prime print and indeed, the the new software solution D. S Corps. So uptake of those it's early it's six weeks ago or or so uptake has been a reasonably strong you know obviously as we move forward is as we said in our prepared remarks I'm the discipline that we have.
<unk>, a new product developments are around identifying the markets that we want to play and and rigor and discipline around how we how are we tracking and monitor performance is going to increase in a very meaningful way here at densify Sirona moving forward, but the base of technology that we have and.
And the knowledge and interaction that I sold between our our reps and their customers was was really exceptional and as we move forward into 'twenty three you should expect more product launches.
Primarily I think I would classify them as incremental product launches in our in 'twenty three but that's that's quite fine too.
Singles and doubles and also add up to a meaningful a meaningful revenue, but as I said, you should expect to see more rigor and discipline around our commercial and new product development efforts moving forward.
Great that's great color thanks, guys.
Our next question comes from Michael to Ski Barrington Research. Please go ahead.
Hey, good morning.
So Simon.
I'm focused on slide 18, where you talked about tone at the top and you say, creating up creating and fostering a culture of speaking up compliance and accountability and I'm. Just curious certainly that bullet implies that those things weren't being done it at an appropriate level and concretely I mean, what do you do other than sort of reach.
Moving.
Maybe folks that want folks employees leaders that weren't aligned with that other than doing that I mean, what do you do to create to create a culture of speaking up and compliance and accountability.
Well for for sure Mike what we've what we've already begun to drive here is a culture of inclusivity.
So that people have a an opportunity to share their voice and that there's a that there's no there were zero consequences for four speaking up.
Here at <unk>, Sirona, both Glenn and I and the remainder of the of the management team are committed to that and providing for and opportunities for for employees to to share their share their opinion.
Now we will be we won't see consensus we will seek opinion and then we will make decisions and and move forward on those on any topics that come up but our organization has proven to be resilient as I said to the previous question the technology that we have.
Robust and when we when we create a place where where people want to come in and do their best where their voices is appreciated and welcomed and where we operate with rigor and discipline. We feel we can get the performance of our organization back to where we expect it to be and where all of you expect it to be as well.
Okay can I just ask one more question just on the strategic review as you guys think about capital allocation going forward I know dividend has been a part of the history of dense applied but given the internal investment you guys want to make in U S sales and other places I mean is is dividend.
Dividends I mean is that absolute a part of capital allocation going forward or is even something like that on the table as far as assessing things.
You know I would say, our we're still intending on paying a dividend moving forward. So no change to that I think the big focus for me.
And the leadership team is how we're going to improve cash flows across the business to get more capital to be deployed.
Including dividends share repurchases and investing organically in the business, which is obviously important when we think about the investments we need to make.
And so my Big focus is really on improving cash flows. So we can continue our dividend program.
Do more share buybacks and being able to reinvest in the business and then down the road.
Do some accretive tuck in acquisitions that fit our strategy and so that's really the key focus for us and I would tell you that I'm setting a goal for the organization to have a free cash flow conversion rate of at least 100% moving forward I mean, that's an expectation that I expect to hit and achieve and big part of it is improving profitability is looking at inventory and how he can.
To get more cash out of our inventory and reducing these onetime costs that we're currently incurring and so theres big opportunity.
Opportunity from my perspective to do that and again I don't see any change to our dividend strategy that's been implemented to date.
Thank you I appreciate it.
Our next question comes from Jason Bednar with Piper Sandler. Please go ahead.
Hey, good morning, Thanks for taking the questions here.
Yeah.
Glen.
You referenced more pronounced recessionary impacts in the U S.
So some certain European markets, some risks around higher out of pocket procedures potential for slowdown in equipment. I mean, all of this sounds like you have some early framework for 2023.
I know, we're not going to get formal guidance here I know some others have taken a stab at it but.
I'll I'll do you mind here as well is is that the down mid single digits growth here in <unk> in place for I guess you'd feel comfortable with street estimates for at least the first half of next year.
Just given some of those comments you made that we're forward looking.
Or are you willing to commit here today too on a full year basis for next year, expanding margins and growing EPS next year.
Hey, Jason it's Glenn we're not going to comment on 'twenty 'twenty three at this point I think we've got to see where you finish up the year have to see what the environment looks like as we enter 2023, and so you know I'm going to refrain from making any comments on 'twenty twenty-three only to say that we're going to act with urgency to really get the organization on a better path to.
<unk> growth and profitability as we move forward so more to come when we get to the February call, but for now I think we're gonna.
Paas or any further comments on 2023.
Okay understood and I thought I'd try.
And then maybe just a follow up here on pricing I think you mentioned, a three point tailwind from pricing.
Most recently it looks like you did another round of price increases in at least some parts of the world on October 1st.
Maybe could you confirm that.
Was it just regional.
And then did that drive any that that price increase.
And that was in place assuming it was did that drive any above normal pre buying in <unk> and out of <unk>.
Influencing the organic growth guide that you have here for the fourth quarter.
Yeah. So we can confirm we did a price increase a middle of October . So yes, we did another price increase and then no. There was no pre buys relative to that price increase coming so.
It was select in terms of where we did the price increase I don't really think we did an across the board increase we had to be very selective in where we did it but.
We did implement one middle of October and.
Hopefully that can offset some of the cost headwinds, we're seeing as we move forward.
And in fact, I would I would add a comment on China to that are you know when the when the V. P was announced we actually saw some pullback from our distributors in China as they as they manage their inventory levels as well with the anticipated changes in China.
Okay. That's helpful and just Glenn any quantification around that price increase or would you call it normal or standard for Ya.
Yeah, I don't have a good quantification of it I would just say, it's pretty much normal to what we've done in the past.
Okay. Thanks, so much.
Our next question comes from Brendan <unk> with William Blair. Please go ahead.
Hi, everyone. Thanks for taking the question.
Wanted to clarify an earlier comment because we weren't getting pretty much on 23 at this point, which I can appreciate but I.
I think I heard a comment earlier that you did want to return to growth next year. So first is that fair or is that what we're thinking about it even if it's maybe just on a full year basis, a little bit of growth and then the follow up would be you obviously have a lot of.
Great strategic outlines here Theres still more work that needs to be done in flushing them out.
But if you are feeling confident that you could see some growth in 'twenty three maybe what are some of those I guess I'd call them low hanging fruit that you guys are identifying strategically that could help you return to that next year.
Yeah, Brandon I'll start and then maybe Simon you could add some comments as well on 23 again, we're going to do what we can to show better performance in 2023 versus 2022 but we're not going to give any further comments on what the top line growth or declines look like or what the margin expansion looks like so.
Then we will give more color on that when we get to February of 2023. So I don't know what else you want to add yeah, I would add to that about the investments and I'm trying to get get after the growth profile of the organization and we mentioned the work that we're doing on on the on the portfolio.
On on structuring our organization for success moving forward. So when I when I look at that and we already spoke a in our prepared remarks about getting ourselves above.
Above the 20% operating margin I'm confident that we have we have the resources in this organization to invest for growth.
Without increasing the company's operating expenses and so that is a that is a key focus for us moving forward, we've already demonstrated that we're willing to invest.
To drive growth in the North America investment and we will continue to have that mindset about thoughtful and disciplined investment for growth.
And then equally thoughtful disposition to to expenses moving forward.
Got it. Thank you and then within maybe just to close up we can clear liners can you talk about where youre seeing some growth. It sounds like you guys are happy with some of the initial traction you're seeing on the clear aligner side. So maybe talk a little bit about like are these new accounts is growth coming from new accounts or are you going deeper into existing accounts.
And where you would expect kind of momentum going forward. Thank you.
Yeah, I think the growth, we're seeing is pretty broad part.
Part of it is geographic expansion part of it is better conversion rates with customers, but it's pretty broad U S. Europe .
Rest of World. So I think the good news is it's pretty broad in terms of the growth and I think geographic expansion is obviously an important part of it.
Yeah, I would just highlight sure smile has been really a stellar performer in this I mean, if I look at the growth rates for the first nine months of this year.
Each quarter, we're putting up sequential and impressive growth year over year. So we do think we're taking some share here and with our with our plans moving forward. This should be a bright spot in the portfolio.
Yeah.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Simon Campion CEO . Please go ahead.
Thank you everyone for participating today and and for your thoughtful questions on the call.
In closing I would like to reiterate my thanks to all dense play Sirona employees.
Around the world for their patience and fortitude.
The organization navigated this a tumultuous period.
We can all now focus on running this organization to the very best of our abilities. So once again. Thank you for your time today.
Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].