Q1 2023 Dentsply Sirona Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the dense supply Sirona first quarter 2023 earnings conference call.
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After the speaker's presentation, there will be a question and answer session.
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As a reminder, today's conference is being recorded.
And I would now like to turn the conference over to your host Andrea Daly, Vice President for Investor Relations.
Andrea.
Please go ahead.
Thank you operator, and good morning, everyone. Welcome to our first quarter 2020 earnings call. Joining me for today's call is Simon Campion dense Pfizer and as 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 dense by 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 may make certain predictive statements that reflect our current views about future performance and financial results.
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 results to differ from our predictions.
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 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 a 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 Q1 2023 earnings call.
Today I'll start by providing an overview of our recent performance Glen will cover Q1 results and our updated 2023 outlook and then I will finish by providing a strategic operating update.
Starting on slide five we were pleased to begin 2023, with a strong quarter delivering more than 5% organic sales growth.
Our top line returned to growth with consumables and our aligner business is sure smile and bite delivering double digit growth.
S region grew nearly 15% in the quarter driven by the strength in consumables and the liners. In addition to some favorable timing of CAD Cam dealer orders.
Outside of the U S. We saw some growth in Europe , while performance in the rest of world was flat due to the headwinds in China.
In addition to revenue performance, we also over delivered on adjusted EPS.
As we have repeatedly noted.
Filling our commitments internally and externally is a top priority for this leadership team.
Combination of the progress we are making on our strategic objectives, our organizational transformation and our Q1 performance is increasing our confidence in our trajectory through this transition year.
As a result, we are now raising the low end of our 2023 outlook for net sales organic sales growth and adjusted EPS, which Glenn will cover in a moment.
In Q1, we participated in Ids in Cologne, Germany for the first time since 2019.
The trade show was well attended with more than 120000 dental professionals from 162 countries.
I was impressed by the power of our presence at the event I am proud of the way our commercial team engage with customers.
Was very clear that there is cachet associated with Dennis play Sirona in this industry. We think it's vital to our success to leverage this reputation into a greater customer and patient centric approach as we execute on our transformation plans.
Additionally, two weeks ago, we brought together our top leaders across the company for a leadership summit to reinforce and engage on a short and long term expectations.
Hearing from our customers investors board members and other Ceos delivered a palpable impact and I believe further motivated this team to believe in our future to get some swagger back to think boldly and courageously and to bring their best to our company every day.
Our purpose will change as clear to make <unk> sirona, a better place for employees to working for customers to work with and for shareholders to invest in.
I am very pleased with the engagement and traction that we are beginning to achieve with our customers employees and partners we.
We have built positive momentum inside and outside of our company, which is critically important for all our stakeholders.
We are also delivering on our ESG commitments and are proud to announce that the first ever global standard protocols for Digitalized Cliff treatments have been developed through our partnership with FDI and smiled train the world's largest cleft focused organization.
These protocols are expected to significantly improve the accuracy and efficacy of the current treatments by providing dental professionals with a comprehensive digital clinical approach across all stages of care for these patients.
This initiative builds upon an ongoing global partnership we have with small train which is funded over 1000 cleft surgeries to date and is an excellent example of how we can contribute to our vision of transforming dentistry to improve oral health globally, while I was giving back to our communities.
And with that I'll turn it over to Glenn for greater financial detail Glen.
Thank you Simon good morning, and thank you all for joining us.
Today I'll provide more detail on our first quarter results and an update on our 2023 outlook.
<unk> Sirona had a very strong start to 2023 with.
With first quarter organic sales growth of five 1% exceeding our outlook of approximately 1%.
The first quarter outperformance on the top line of about $40 million.
It was driven by stronger than expected growth in consumables and our liners.
Our topline results also drove better than expected adjusted EPS.
Though we're still in the early innings of our transformation work and have more work to do.
We believe that delivering consistently on our commitments is critical to rebuilding investor confidence.
So let's begin on slide seven.
Our first quarter revenue was $978 million, which represents reported sales growth of 0.9%.
Foreign currency negatively impacted sales by approximately $40 million as compared to the first quarter of 2022.
Excluding the impact from foreign currency organic sales grew five 1% with strong regional performance in the U S Europe and Latin America.
Excluding China organic sales grew six 6% overall.
EBIT margin of 16, 4% was consistent with our outlook of at least 15%.
On a year over year basis, EBIT margin contracted 320 basis points due to continued foreign exchange and inflation headwinds.
Partially offset by favorable mix from consumables.
And profitability improvements in our liners.
SG&A as a percentage of sales increased 220 basis points in the quarter, primarily due to commercial head count investments in trade events with customers both of which we believe will drive better sales performance later this year.
Adjusted EPS in the first quarter was 39 cents as compared to 54 in the prior year quarter.
We attribute 10 cents of EPS declines of commercial investments.
<unk> to higher inflation and below the line expenses and <unk> to foreign currency headwinds.
This was partially offset by a <unk> <unk> tailwind from strong organic sales.
Operating cash flow in the quarter was an outflow of $21 million due to unfavorable changes in working capital, primarily driven by accounts receivable and accounts payable timing.
Operating cash flow was also impacted by increased operating expenses associated with commercial investments.
And nonrecurring charges, such as restructuring and remediation costs.
As a reminder, we still expect to have significant cash outflows for severance and restructuring costs for the remainder of the year.
In the first quarter, we returned $27 million of cash to our shareholders through dividends.
And we announced a $150 million accelerated share repurchase program.
A reduced share count in the quarter was primarily driven by the initial receipt of shares in March under the terms of the ASR.
The ASR was completed at the end of April .
Let me now turn to our segment performance in the quarter on slide eight.
Organic sales in technologies and equipment or <unk> segment grew one 7%.
While organic sales in the consumables segment grew nine 8%.
The tenet organic sales growth was led by strong growth in our liners up over 25% in the quarter versus prior year.
As well as strong growth in our CAD Cam business, particularly in the U S.
These improvements were partially offset by lower volumes in implants imaging and instruments.
Aligner grew double digits for the third consecutive quarter driven by strong growth in both sure smiling bite.
<unk> continues to benefit from regional expansion, particularly in Europe , and new product offerings and clinical differentiation.
Our direct to consumer Aligner brand fight also saw strong growth despite slowing consumer spending trends.
Driven by higher customer conversion rates and lower customer acquisition costs, which not only drove higher topline revenues, but also better profitability.
Our CAD Cam business grew mid single digits in the quarter, primarily due to wholesale demand in the U S, which was expected as dealers had exited 2022 at lower inventory levels.
The equipment and instruments business declined by mid single digits in the quarter driven by lower demand in the U S and Europe .
Partially offset by strong imaging growth in Canada.
Implants was down high single digits in the quarter and performed in line with our projections.
Can use to be stable.
We did see lower demand for imaging equipment, which we attribute to higher interest rates and recessionary concerns in the market.
R U S cadcam dealer inventory levels grew $10 million sequentially in the first quarter.
Consistent with the expectations, we laid out on our February earnings call.
We expect cadcam dealer inventory levels to fluctuate quarter to quarter and be slightly lower by the end of the year compared to current levels.
Turning to Europe organic sales grew 1.1% due primarily to strong growth in both consumables and aligners.
This growth was partially offset by softer demand for imaging equipment.
Rest of world organic sales, where approximately flat versus the prior year.
Excluding China rest of the world organic sales had a strong quarter and grew five 7%.
Led by strong demand for imaging equipment and consumables.
And China is expected, we experienced lower sales across the portfolio.
As well as headwinds and implants do the continued impact a V b pay.
With that let's move to slide 11 to discuss our updated outlook for 2023.
We've updated our full year outlook to reflect are better than expected performance in the first quarter.
As well as our increased confidence for the remainder of 2023.
We're increasing the low end of our full year net sales range by $50 million to a new range of $3.9 billion to $3.95 billion.
With organic sales now projected to be flat to up 2%.
This represents a 100 basis point increase to the low end of our previous outlook range.
Oh, we're still operating in a challenging macro environment, we are seeing stable to improving patient traffic in key markets.
In addition, foreign currency exchange rates are largely unchanged compared to our prior outlook.
And as such were still expecting FX will be 100 basis point headwind to full year net sales mode.
Most of which was realized in the first quarter.
Based on current FX rates, we expect a minimal impact for the remainder of the year.
We estimate full year EBIT margin to be greater than 18% unchanged from a prior outlook.
Given the better than expected organic sales performance to start the year.
We're also raising our full year adjusted EPS outlook by five on the low end.
Which brings are adjusted EPS range to $1.85 to $2.
The updated EPS outlook includes a weighted average share count of approximately $214 million.
Which includes the previous mentioned ASR.
For the second quarter, we expect a slight sequential increase in sales and adjusted EPS over the first quarter.
On a year over year basis, Q2 organic sales is expected to decline as the prior year included the benefit of some backwater recovery and a better capital equipment demand environment.
While we anticipate fluctuations in our quarterly sales performance, we expect the first half of the year to show organic sales growth over the prior year period.
We are confident in the progress we're making.
Will remain cautious on the external environment, particularly with capital equipment.
As well as the overall macro challenges in certain markets, such as China, Brazil and Australia.
Wrapping up my second quarter comments, we expect EBIT margins will be at least 16%.
Let's move to slide 12 to quickly touch on upcoming changes to our segment structure.
Starting in our second quarter will begin reporting using a new segment structure.
The new structure will include three dental segments, which are connected technology solutions.
Implant, an orthodontic solutions and essential dental solutions.
Well expect healthcare, which operates in the confidence care market for urinary and bowel dysfunction will be the fourth segment.
The revised structure aligns with the new operating model that we detailed on our last earnings call.
And we believe will provide greater transparency in our financial reporting.
And with that I'll now turn the call back to Simon.
Thank you Glenn.
Moving onto our strategic update starting on slide 14.
First I want to reiterate our strategy to.
To transform dentistry by Digitalizing dental work clothes, driving product and service innovation and delivering an exceptional customer and patient experience through and engaged in diverse workforce.
Simply to fulfill our strategy, we must focus on a simple more secure and connected workflow experience that our clinic and lab customers trust to deliver better treatment journeys and patient outcomes.
As we execute on a strategy, we continued to be intensely focused on improving the delivery of our products and services and a predictable repeatable and reliable manner and we are making good progress.
On Slide 15, you will see the 2023 and beyond strategic objectives.
That I shared with you at the start of this year.
We are focused on five core tactical and strategic objectives, which are two one deliver on our annual growth in margin commitments to enhance and sustained profitability three accelerate enterprises digitalization for when in our lineup and implants and five create a high performance.
Culture.
This is our true north and as we make progress on these objectives, we have our eye on fulfilling our commitment to return to industry growth and increased profitability.
Turning to slide 16 for a progress update on our objectives.
Starting with our overarching goal to achieve our annual growth in margin commitments Q1 provided us with a good stock showcasing our focus on fulfilling commitments.
In February we announced our new operating model and restructuring plan in.
Q1, we made meaningful progress on the transformation work with.
With workforce reductions largely complete and regions outside of Europe .
We are in active discussions with applicable workers councils to align on our plans.
As we look for other opportunities to enhance on sustained profitability. We have already identified and are executing on some network and operational simplification opportunities.
Enterprise Digitalization is critical to our success and we have made significant progress in this regard.
We received board approval for a multiyear ERP implementation project and have selected the next generation platform.
On our strategic objective to win and the line is an implant we're seeing great traction with another quarter of double digit performance in both sure smile and bite.
<unk> not only deliver top line growth, but also made significant strides on improving operational performance.
With Joe Smile, we have a clinically differentiated solution compared to the other offerings on the market.
Clinical benefits, which include fewer refinements and shorter treatment time are resonating with customers and contributed to the strong continued growth in this business in Q1.
We launched D S omni taper in the U S. This past quarter.
With this product we now have a full range of premium implants, all of which are harmonized with one easy digitally enabled connection.
<unk> in China has been a headwind for us since September securing a winning position in the DVD process will allow us an opportunity to acquire incremental volume that will support longterm growth in our business.
We are also working to create a high performance culture.
This is critical to enable achievement of our other strategic objectives and foundational to driving longterm value creation for our stakeholders.
Our new operating model is taking shape, providing clarity efficiency and putting the customer back at the centre of everything we do with compliance at the forefront.
This operating model gives meaning to the kpis that we have identified and rolled out across the organization.
It enables us to set the right expectations and gargoyles with clear lines of measurement and accountability.
I am also excited to announce that is part of our new operating model. We are elevating the role of quality within our organization and we have hired a new SVP of quality and regulatory affairs.
This individual will be pirates of my leadership team and we will be key to ensuring that customers and quality are at the centre of everything we do.
As a team we have made solid progress on our strategic objectives. We.
We remain confident that our transformation plans combined with more normalised market conditions will position dense by sirona to grow revenue in line with the market, while also increasing profitability.
The combination of these positive factors can enable dense by sirona to deliver meaningful earnings improvement with adjusted earnings per share of $3 targeted in 2026.
Now, let me close with a few remarks on slide 17.
A year is off to a strong start.
While 2023 remains a transition year with a challenging macro environment. We are increasingly optimistic about what we can deliver.
For that reason, we are raising the low end of our full year outlook.
We are making significant progress on our transformation and strategic objectives.
We committed to taking decisive action that dense by Sirona and we are boldly, putting our plans into motion to improve the company and its performance.
This is just the beginning there.
There was more hard work ahead of us to transform our company, but we are confident that our plans placed the company on the right path.
Progress will be aided by our collective experience the support of the board and the belief that has been instilled in our leadership.
Later this year, we look forward to sharing more details with you all at our upcoming Investor Day on November 9th and Charlotte.
And with that I will open it up for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question simply press Star one one again.
Please stand by while we compile the Q&A roster.
And our first question comes from the line of Elizabeth Anderson with Evercore Elizabeth Your line is open. Please go ahead.
Hi, guys. Thanks, so much for that question I have one I mean I can say this is a nice outperformance in that first quarter, especially given everyone's furious about that.
Dental market and you know we're seeing you know you guys. The low end of your guidance can you talk about should have trends that you saw it I should've towards the end of the quarter or into April Justice people kind of continue to wonder about the the short term volatility and then secondly can you also talk about the airliner profit.
Ability, whereas the wheel drivers of that kind of if you can talk about sort of when you expect that to be.
<unk> like March carpet margin.
Tributary that would be helpful. Thank you.
Good morning, Elizabeth it's Glenn relative to trends in the quarter I think we saw a really strong trends in January and February .
March not so much so of March was a little bit weaker than the first two months, but as.
As we look forward to April we're actually seeing very stable environment. So April looks good as well here. So I'm training wise, obviously, we outperformed the quarter.
A law that came in I would say January and February what we're seeing in positive trends even in April here. So that's a good sign overall and.
When you think about the outperformance in the first quarter clearly the trends were very favorable and consumables improve patient traffic procedure recovery was very strong.
And it was pretty much across the board across all consumable categories or and Owen Resto business was actually up double digits.
Really good performance in both the U S and Europe preventative was up double digits as well.
We did have some easier comps when you look at our consumables business. So obviously I mentioned.
Army crime impacted the first quarter of last year in a negative way so that helped the year over year growth rates.
And we have put forward some price increases last year and this year.
That will take effect in may so.
So he probably saw a bit of a pre by in certain cases with yours on some consumables bond. The hall, we were delighted to put up almost 10 per cent growth inconsumable. So the trends there were quite positive.
Relative to the aligner profitability.
I think the key around this is our bite business and.
The most important thing is really looking at the quality of the final and how we're targeting customers.
And we're seeing an increase in our overall customer conversion rates, which really help to reduce customer acquisition costs.
And drive increased profitability. So when you look at our outperformance on ETS.
Clearly a lot of it was due to the stronger than expected organic performance.
But also we did see a nice improvement in our Aligners business in particular by and we expect that to continue as we go forward here.
Okay. Thank you for your questions.
Okay standby for our next caller.
And our next question comes from the line of Jeff Johnson with bear.
The line is open. Please go ahead.
Thank you good morning, guys Glen maybe just following up on the <unk> question. There from Elizabeth just your guidance and negative organic growth in the quarter. You just put up to 5.1 per cent I I understand what you're saying it and maybe the price increase pulling some business forward, but you know you also talk about a solid April I guess.
When I look at your three year staff calm stay actually are fairly stable in first second and third quarter. So not a whole lot of volatility going from one quarter to the other on kind of cops, you're gonna come up against so what would change that business by a fall call at 567 points wherever you're guiding you end up in that second quarter.
Yeah. So just jen thanks for the question you know on a sequential basis, we did mention that we expect to see a slight sequential increase in both revenue in EPS some of it because there's a really strong performance in the first quarter.
That being somewhat timing related for consumables, but keep in mind last year's second quarter is our toughest comp quarter, we did see some backwater recovery in the prior year quarter and overall when we look at the equipment market Lamb.
Last year is more favorable versus this year on being very cautious on.
Larger equipment spending, especially imaging as an example, so.
We feel quite good about our overall first half of the year performance in our guidance, we do expect to see a bit of a decline on organic sales growth based upon our guidance and we're going to continue to be cautious on the equipment environment, but just keep in mind for the first half of the year. When we look at what we said back in February we do expect to see organic growth.
We do expect to outperformer initial comments on the first half of the year.
And we're being cautious because it's still very early in the air you are having said that we do expect to see in the second quarter, an improvement in our China business.
Both on a sequential in a year over year basis.
And we do expect to post growth in our ortho business given a strong momentum that we have.
But again, we're going to continue to be very cautious on the equipment environment given.
Given what we're seeing from a recessionary perspective, and also a macro slowdown somehow no. If you want to add anything yeah. Good morning, Jeff.
You all do your your your surveys. We we've also started doing our own surveys and we have a 1600 dentists survey that we completed.
Just in April in relation to technology and equipment and capital spend there is still some bearishness from from customers around the world in the U S. A and Australia in particular about their willingness to invest in some high end capital equipment. So that's a that's a factor in our consideration as we move into Q2.
And beyond.
Alright, that's helpful. And then maybe just one follow up question, but first sign and maybe you and I can just share each other surveys that if I if I share mind, maybe you'll give me ears back to you and that would be helpful. But just on the implant business. What was the implant number X China I don't think I heard that and you know I'm sure you saw the night, Australia and put up three three and a half.
<unk> and plant growth might've been a little below that I guess, depending on their or their business. So.
So what is the path back from your high single digit decline <unk> kind of low single digit organic growth this quarter, what's the path back to getting <unk>.
Closer to what I, what I'm sure is kind of a market rate. That's traveling is almost setting there with the other one quarter report. Thanks.
Jeff. Thanks for the question you know our implants business, excluding China is down low single digits.
Largely due to the U S being down and that's not surprising to us a as in line with our expectations.
The road for us to get back to growth really comes from two market. So China being the first and obviously I think we all know the challenges of V. B P.
For us in total in China, we were down 30% in the first quarter. The good news is we're seeing a really nice recovery as we exit Q1, and even stronger recovery in the month of April relative to our implants business in China. So we are much more optimistic, but I'm not yet reflecting that in the full year numbers, because I wanted to see some more data points before I.
Get too bullish on China, but the signs of recovery are there, especially.
Especially volume and implants in China, So we feel good about that.
The other part is the U S business and we've lost share over the last couple of years in.
In implants, we've underinvest it and.
And as we spoke about previously we've made significant investments in our commercial organization to add more resources add more reps we.
We have a significant training program that we're rolling out we've got all of her implant wraps in fact coming in to Charlotte in the month of May which is gonna be another step forward here are territory's are now filled and I am expecting to see better implants performance starting here in the second quarter in both the U S in China. So.
Yes, we were down in the implants down-low single digits, if you pull out of China.
I think as we move forward, we should be talking about growth on her implants business and showing sequential improvement from this point forward sign you want to add anything yeah. Just just one more comment on implants in China. You know we have not been selective in terms of the implants that we offer in China.
As a result of EVP all all the products that were offered by dense by Sirona in China pre V. V. P continued to be offered by dance place orona enjoying the posts GBP so customers can can choose.
Whatever policy, they use and hasn't been forced on any particular, Colorado.
Understood. Thank you very helpful.
Thank you.
Standby for our next caller.
Next up we have Aaron right from Morgan Stanley error in your line is open. Please go ahead.
Great. Thanks can you quantify the distributor tiny dynamic and across the cat can <unk> with that primarily you asked and has to repeat your thinking about the chord progression and just broadly speaking on it quite named <unk> and how the order buffet shaping up and howling attraction at Ivy at.
If you take care of that <unk>.
10th of how you're seen thanks, Daren, how we should think about accordingly progression your <unk>.
Yeah, a lot of the.
Distributor timing is related to the U S business. So that is specific to the U S and as we talked about throughout 20, twenty-two we were reducing our dealer inventory levels for Cadcam and.
And so we exited 2022 and a very good position and so now we're seeing essentially retail demand translate to wholesale demand.
At our dealers, but we did see.
A good pickup so when you talk about timing, it's really last year was a low quarter versus this year and seem more normalized inventory levels.
Overall, when we look at the volume gains we did see a good volume gains in our D I business.
R Sarak mills performed quite well in the quarter.
Maybe we could circle back to that with Simon and just a few minutes.
Obviously, the concerns and our business are really around the recessionary environment higher interest rates and the effect, it's having on.
You know the higher priced equipment, such as imaging and so are being very cautious we we were down in the quarter on our imaging equipment.
So we're being cautious as we go forward, but I think ultimately, there's probably more upside and downside in our forecasts relative to equipment.
But we're going to continue to be cautious until we see more positive data points.
So at that time, you want to make any additional comments yeah. So just just two two comments.
We are getting traction now on times can connect particularly in Europe , where we saw you'll sequential improvement month over months in the in the quarter and then there's a there's a lot of noise and discussion in the marketplace about million versus versus printing and we continued to be of the opinion here that milling for cry.
Mounds offers offers more more durability.
Three D printing as much much lower strength.
Then then the middle ground the speed is quicker, which as we know it was important for for customers, particularly when when you think of the impact on staffing levels in the.
And the dentist market today, and then you know the.
The aesthetics and the accuracy of million versus printing is is is very much in meetings and meetings favorite where we were broader range of colors. For example, so we we will be on the front foot here respect 2 million versus three D. Printing on a go forward basis. We continue to believe that <unk> is the best option for.
For patients. We're we're pleased to we're pleased to have the market leading a mill in our in our portfolio.
Aaron on your question an idea. So I was I had the pleasure of joining my first idea as in Germany. This past go around and you know we did see a lot of good momentum and customer interest in our D. S core software how.
How it's digitalizing the entire work flow for our customers. So really good interest in progress on getting orders for prime scan connect coming out of ideas and so we were really enthusiastic about a lot of the progress in customer feedback we received.
At that convention.
Great and if I could I just ask one more I just have your portfolio optimization, where are we at now with ski rationalization and to the extent there are divestiture and can you speak can't use the proceeds sir thanks.
Yeah, So I'll I'll take the skewed rationalization piece.
We made we made very good progress on on on Resto, and and and we haven't we haven't eliminated any excuse that that's a that's a work in progress as we have noted before we're going to be very diligent and thoughtful about where and when we reduce skews, but we have as we've noted all the data.
To us now and we are beginning to to test in different in different markets. If we can eliminate eliminate specific excuse as we did note in our prepared remarks, you know we have we have seen some opportunities for for network optimization and we have we have begun to to take those opportunities.
And a couple of sites. This this past quarter.
Those sites have been have been notified and then Glen take take the other part of that question.
Obviously in our last earnings call, we talked about a significant amount of interest in our wall spec asset. So we're still evaluating.
Different alternatives relative to what to do with that asset Ah one of which could be devasting. Another can be keeping the asset because it is very attractive it's performing very well both in terms of the top line and bottom line.
So no decisions have been made around that to the extent we were to divest that asset obviously use of proceeds with like we go towards paying down debt and possibly buying back shares but again no decision made.
Unwell Spect I would also say that we've concluded the rest of our evaluation on the portfolio at this point in time.
We do not expect any more significant divestitures coming out of that review.
Having said that just keep in mind a portfolio review as part of an ongoing assessment that we do it's not a one and done process. So as part of a regular cadence and operating model, we do a continuous evaluation of portfolio, but for the initial go round we've.
Included and at this point in time, there's no further significant divestitures expected.
Thank you for your questions.
Thank you.
Okay standby on the line for our next caller.
And our next question comes from Brandon Vasquez with William Blair.
Brandon Your line is open and please go ahead.
Good morning, Thanks for taking the question first I just wanted to ask about.
Sorry, clear liners, and where are you guys seeing the most success, maybe what channels, specifically and curious if you could talk a little bit about what is it about your technology that is able to allow you to deliver these fewer refinements and shorter treatment times compared to the competition.
Sure I'll start and then maybe ask some others to comments I think first off airliners business at a record quarter Bowsher smile and bite.
Not only do we see a double digit sequential improvement, but obviously up 25% year over year.
If I look at the two businesses starting with sure Smile I think a big part of the growth is driven driven by a regional expansion, particularly in Europe . We also do have clinical differentiation of our product and to give you. Some context three out of four cases require no revision, which is a big deal in the liner space.
So we're.
Really showing clinical differentiation that is driving increased market share, especially with the G. P. S and so that's a big part of our growth story. We're also winning more with Dsos. So we've got a couple of DSO wins in your liner space as well all of that is enabling us to have really strong growth coming out of sure smile.
On the bright side.
I think we're doing a much better job of targeting customers.
And driving better customer conversion rates that I mentioned earlier.
In addition, we roll that are my bite App, which is.
Giving a full customer treatment plan to our customers engages them throughout the entire process.
And we've also all that hyper bite and which is helping speed of treatment for customers on the direct to consumer side. So on the hall, we are capturing more market share in both direct to consumer in the G. P space.
And obviously this is still an underpenetrated market and one of the fastest growing areas.
Because aesthetics are still a very fast growing area in the dental space I mean, you Wanna make some further comments yeah. So just you know we've we've spoken before about the investment that we've made in in Dsos, adding some head count there and we had we had a nice growth in that business in the in the first quarter, but one of the one of the ways that we are we are.
[noise], winning with with some of our DSO partners is through digital digital scanning.
And and the liners. So we've had.
Pretty robust traction, where we place our our prime Prime scam product and then enable some of the dsos to begin to drive their line of business.
In a more meaningful way. So we had we had good traction from that from that regard in our in our sure small business in particular in the first quarter.
Got it thanks, and then can I go back to China for a second if you. If you look at it I know that you had a big exposure more to the private side of that market our price cuts spilling into the private side at all I think we've heard a little bit of mixture views on that.
And then you guys can a happy with volume increases to help offset these price declines like how how're volume growth.
Trends looking relative to your expectations, especially as you move through the pet into the back half of the year. Thank you.
Yeah. So keep in my most of our business in China is in the private sector and yes, we are seeing the price spill over into the private sector. As we previously talked about we're seeing price reductions anywhere from 35 to 40 per cent and that's in fact, what's happened. The good news is we are a winter in the V. B P space and we are so.
They pick up and volumes and it sequentially getting significantly better here in the month of April , but again, I don't Wanna get too excited yet because.
I need to see more proof points and more data points before I become more bullish but definitely the volumes are picking up in the short term here.
We're very encouraged by what we're seeing in the month of April I don't expect the volume to offset the price reduction in the second quarter for implant. So I do expect implants over on China will be down even though the total business in China she'd be flat or up.
But I think once we get to the end of this year the volume should offset the price reduction.
And I previously made a comment last call that I expect China to be flat on a full year basis, despite being down.
30% in the first quarter I think my view right now is Chinese should be growing this year, given what I'm seeing right now and the last couple of months. So we're more bullish on China is still cautious thanks for your question.
Thank you.
Operator, we had another question.
Yes. Our next question comes from the line of John Block with Stifel. John Your line is open. Please go ahead.
Oh, great. Thanks, guys.
Cyber Glenn just two more high level you know when you guys seem return a gentleman a shrink rose for the call.
Company.
How do you view that industry grow and I asked because.
Industry grows really deviate show much depending on your weightings for Ah liners implants equipment et cetera, so when.
When we think about your portfolio you know what do you think the industry growth looks like and then over what period of time do you expect to get there.
Yeah. So John good morning assignment I would say on average we think it's growing into three to five per cent range. Clearly there are hotspots within that Aligners in particular, maybe some some of the meals and the three D. Three D printing has also grown.
At a faster clip.
But then we have we have areas that are in the in the one to two per cent range in the in the Inconsumable business. We've spoken before about getting back to you know the three Donald's V. P. S. Ah by 2026.
We noted we believe we're on track with to that and you know we've previously commented that getting back to market growth in that timeframe is a key driver to getting to that $3. A V. P. S. In 2006. So that's the kind of time frame that that we are we are thinking about it as as we've noted before we have transformation work to get through we have.
Now with your P I had to get through as well. So there's there's much hard work to do for us here to get there, but we are Ah Ah confidence is increasing in our ability to to get this done and to move dentsply sirona back to that market growth rate.
It was great a great color. Thank Simon and then I think the second one I'm glad might be a little bit more for you but.
Any investments for the quarter were 10 cent drag your year I don't believe the twenty-five said that you called out last quarter changed show you know the twenty-five cents is unchanged for the year, how do we think about the cadence in other words as a sort of another dimer show for two Q, you know turn sort of flattish in a three Q and exits a year.
Call it accretive.
Sort of a follow on to that would be Glen.
As a function of that cadence that I'd just laid out is there any more specific color on two Q E. P. S. As a result of those investments thanks guys.
Yeah, I don't want to give too much specifics on a P. S guide for commercial investments only as say that obviously, we expect it to continue.
Throughout the remainder of the year, but keep in mind, we should have offsets now starting in the second quarter with our restructuring program right. So.
Part of the investments and and the reason why we had to do the restructuring was to fund those investments whether it be north American commercial sales dsos.
Our ERP systems compliance et cetera.
Yes, the commercial investments are going to be with us.
From a headwind perspective for the rest of this year, but we should start to see the restructuring savings kicking.
It'd be much more meaningful in the back half of the year. So when we look at the E. P S cadence.
We do expect to see a slight sequential increase in EPS in queue too and.
And then we should see a much better performance windows restructuring savings kicking in Q3 and Q4 <unk>.
Keep in mind the reason why the restructuring savings happened later this year is a lot of what Simon had in his prepared remarks around still having to get through the workers Council approvals in Europe , which is where a large part of the savings come from so.
That work is still ongoing.
It's one of the reasons why we're still being conservative in our EPS guide until we get through that work in those discussions.
We want to make sure that we don't have any delays or our timing issues pushing out. So once that's finished I think it will be much more confident that our EPS can be achieved or exceeded but that's still work in front of us.
Thanks, guys I appreciate it.
Okay hold the line, while I bring the next caller on.
Our next question comes from <unk> Bedner with Piper Sandler Jason. Your line is your line is open.
Thanks, Good morning, Senator go out and thanks for taking the questions in a nice dark twenty-three here you wanted to you know come back negative restarted on the consumables grow tip. It was impressed.
Yeah, I'm trying to really get a sense of maybe white underlying growth might've been if we exclude some of those one time elements like easier around the crown comps and why they were late closers that might've happened opposite last year, you mentioned good retail demand, but then also trying to reconcile that against commentary around patient traffic stability.
You can just maybe considering all those points and then to buy and you mentioned the head of the Nate price increase if you could just wrap into your answer maybe how sell out performed versus cell in for consumables.
Yeah, I would say overall, probably mid single digits. If you exclude some of the year over year easier comps and.
Price increases in some of the buy ins is probably about half of it.
True real underlying improve demand and the other half to some easier comps and.
Timing relative to Q2 versus Q1, so very strong but it is across the board. It wasn't just in one geography. It wasn't just in one part of our consumers businesses I mentioned earlier.
We were really pleased to see the growth across and a restorative preventive.
Across the globe so.
I think it's a good sign relative to patient traffic coming back cause some of the comments just around these comps is really a U S comment.
Sure Yeah, no I understand that's helpful. Thanks, Glenn.
Maybe then looking at one of their deviation at least relative to how we were thinking about things for the quarter.
Maybe on the other side T any operating margin in the quarter. It does look like a step down it was a little bit lower than what we were thinking I'm sure. Some of this is tied to V. B P. A also probably somebody investments you make your new plan so clear aligners.
When we look at I think it was 12.2.
Per cent operating adjusted operating merger for the segment is this a low water mark for a segment profitability and.
If so how are you thinking about the pace of improvement for tiny margins from ear again understanding you're you're changing your reporting methodology. So I guess, however, you want to ask that question with the segments of the products and that that are currently in that category.
Yeah, No I think certainly the profitability was impacted by VB pay so that did have an impact there were also some other.
I'll call them non recurring charges that are reflected in our in our numbers in the teeny segment. So we were able to absorb those and still deliver a really good performance I do expect we'll see better performance in the Teeny segment of we're gonna be changing our segments to your point, but that's part of our business should show improvements, but again I don't want to underestimate the strong.
<unk> profitability improvements in art, though ortho did show really good progress.
Sequentially year over year, and we're expecting to see better performance and are worth of business going forward. So to your point.
I would expect there's probably a low watermark.
For a teeny segment.
Mmm can only get better as real estate.
Alright, and just real quick follow up any quantification around around where you're currently set with ortho profitability.
No I I would just say, we're making really good strides you know we have questions on you know as bite profitable I just tell you bite was profitable mcwhorter just.
Just to alleviate that question that we could typically get but now I think on the whole we feel good about it.
It's still dilutive to the overall corporate margins. So we have more work to do but we intend on making progress each and every quarter and a teamster.
Teams that are real nice job to not just get this top line performance going in a meaningful way, which is gonna help on the leverage side, but also working on profitability improvements.
Alright very helpful. Thanks, so much.
Thank you.
Standby for our next caller.
And our next question comes from the light of Michael Czerny with Bank of America. Michael Your line is open and please go ahead.
Hi, This is Dan Clark on for Mike are you seeing or hearing of any recent impacts to equipment demand I'm, just thinking through potentially tighter lending standards that that might be hitting the market as a result of recent banking headlines. Thanks.
Yeah. So good morning assignment.
Obviously, you that the survey that I quoted earlier on with those 600 customers around the world.
The wild wild sentiment about capital purchases has not gotten worse since the last time, we did a survey in February there is the rules, there's still some heightened concern from customers about making making those investments. So you know Glen common does it earlier on about about some some thoughtfulness that.
We've we've put into Q2 and beyond with respect to that part of our portfolio ones until until our survey or or all your surveys point to a more favourable environment. Then we'll we'll continue to exhibit some caution in that space.
Thanks, and I should a quick clarification are you still seeing supply caches and equipment and instruments.
So I would say that the supply chain status has not has not gotten any worse at all.
In fact, we we we we would say probably a slight improvement we your last year. We had these middleman, who who are supplying you know you know electronic components. They they are still playing a role although their role is is being reduced each and every month.
We are making a lot of internal progress with respect to our turnaround times as well. So I would say, it's it's less of a concern than it has been in the past, but we still that we are still very watchful about it.
Thanks.
The standby for our next question.
And our next question comes from the line of Nathan Rich with Goldman Sachs. Nathan. Your line is open go right ahead.
Thanks. Good morning, Thanks for the questions, maybe a numbers one to start I'm just trying to reconcile the the first quarter topline outperformance relative to your guidance and then you are commentary on where to Q organic growth would be I guess it seems like you outperformed by about 40 million relative to your initial X.
Vacations, I think you called out the Cadcam inventory.
Stocking was about 10 million the consumables buying ahead of the price increase it seems to be about 20 million. Just is that are those in the right ballpark and I guess, you know does that 30 million total kind of turn into a headwind into Q and I guess in either case. It seems like you're kind of tracking at the high end of your guidance for the year. So is there anything.
Alison the back half of the year that we should have on the radar [laughter] cause. It seems like you know you've kind of pointed to sales improving throughout throughout the year. This year.
Yeah. Thanks for your question. So yeah. The Overperformance in Q1 was consumables I would also highlight worth though outperformed.
Cadcam I don't know the exact amount is for each of the bucket, but clearly those are the three big drivers for us within Cadcam I would say that the mills also outperformed so.
Some of the timing, but yeah. There was good strong underlying demand, though outside of some of the time. He items that we have called out relative to consumables is an example in the pre buys.
So patient traffic is much stronger that helped to drive the consumables outperformance artwork, though takes share has absolutely you know created more upside versus our forecast.
We're being cautious for the rest of the year.
If you look at our guidance right now obviously, we're not projecting to show sequential improvement in the back half of the year versus the front half of the year.
We're being cautious around the equipment environment and you know I think it leaves us opportunity to overachieve, if things continue to go well, but we're obviously.
Expecting to see improvements in China expecting to see improvements in our implants business.
Continuing to see momentum with worth though and.
If the macro environment does not erode then I think there's opportunity to.
Do better and probably get to the upper end of our guidance range or even better than that so we'll see how the rest of the year plays out but.
To your point, we've got good momentum here in the first quarter, but being cautious, especially around the equipment environment.
Great and then Simon maybe a follow up just on R&D. How are you thinking about you know the allocation of R&D dollars between consumables and equipment and and some of the growth categories that you talked about and and you know can you talk maybe about the timeline for making those chain.
<unk> and you know, where you're kind of focus on bringing innovation to market and when we could potentially see you know you know some of those fruits come to their as we think about the forward.
You're at Nathan we we we brought in the Android is Frank who is our chief business officer with US today, who leads R. G. B you. So I'll give give them an opportunity to take that question.
So I think I'd point to our new operating model that we're putting in place and and Ah first and foremost that enables us on the investment side and on innovation side to have a more dynamic resource allocations one of our biggest investment areas is.
Is clearly software.
So we're continuing.
To invest behind D. S Corps and to enable that platform with next generation clinical applications as we upgrade our software Shaq and then secondly, as we continue to execute on our portfolio optimization and simplification strategy.
Few R&D dollars will be spent towards maintenance, which will free up resources to also invest behind a more meaningful innovation products that solve significant challenges for our patients and for our customers.
Okay hold the line for the next question.
And our next question comes from the line of Rachel <unk> from J P. Morgan Rachel. Please go ahead. Your line is open.
Great. Thank you for taking my question.
I hear from the visibility that you're having to customers capex budget. He's spoken a fair amount today about the caution you have around your pet name can you instrumentation Oh can you just walk I see the conversations are having customers and at this point you expect capex budgets to be pressured into 2024, and then as a follow up new flag to strengthen equipment and instrumentation within Canada.
Can you just talk about what you have the strength that relative to the U as in Europe .
So I would say that we've we've we've obviously red all all the services that you would put out we've done we've done our own work as well I don't know if if I don't know if the details I say if their capital budgets are being constrained in any way with respect to the.
Dollars other than those budgets, but their willingness to spend it is certainly certainly being constrained.
We we discover that one and for our customers in that in that survey mm across across the globe across the entire globe were exhibiting caution around capital equipment capital equipment spending so that that's the that's the data that we have we have to go on and then <unk>.
Back to your question on Canada Ah some of that demand, but also some of that some of that is timing as well. So that's a great color. We can we can give you on that.
Thanks, and then maybe a quick one.
Carolina noted that sure <unk>. So can you just mark as to how much that refunding airliners has been driven by Greenfield land purchase brownfield. Thank you.
Well, it's not a as a as Glenn noted earlier on we've seen you know really robust growth through I think the third quarter in a row now and ensure smile and bite.
I also noted that we are we are gaining traction with some dsos as we bring our imaging equipment in there as well and they're expanding their their offerings to include offshore smile after.
A smile offering we've also expanded globally, so where we we have we're going to where we are present in in excess of 50 countries now and then as a blend of the two you know we have we have been.
Passing or or or rolling through a and improved process at byte in relation to customer acquisition, ensuring that the customers that we are bringing into the funnel.
More likely than in the past two ended up ordering ordering aligners. We have we have worked on our sales incentive program and the sales training programs with our with our sales force an onboard sure smile and and bite. So there are a lot of a lot of legs to the aligner stool that we.
That we are that we're using to drive increased growth and increased profitability.
Okay standby for our last question.
And our last question comes from Michael Partis Ski with Barrington Research.
The line is open. Please go ahead right. Good morning. Good morning got <unk> I may have missed this but have you guys talked about sort of cadence of free cash flow for the rest of your I mean, Q1s always seasonally week, but usually cute to bounce back, but I know, you're only expecting sort of modest EPS squirrel could you just talk about to an extent you can sort of what you expect in terms of K.
For free cash for the rest of your things.
And thanks for the question I think first and foremost on Q1, obviously, we had a cash outflow from operations that was not unexpected we had nonrecurring expenses associated with the restructuring a lot of one time items from last year that we paid in the first quarter of this year and timing of receivables and payables I just think as we go.
Four keep in mind, we have more restructuring and whatnot non-recurring payments that are going to be made.
So this year overall will be Ah Ah lower the lower here than what you typically would see young free cash flow and free cash flow conversion you know, having said that we do expect to see improvements.
Throughout this year on both are free cash flow performance and free cash flow conversion. So it will certainly get better as we go forward, but this will be a year that's.
Lower than most normal years, given the restructuring efforts and the payments after he made associated with getting the annualized savings that we've quoted for 2024.
Is it fair to say it should be sequential growth sort of Ah going forward to 234, yes.
Yes.
Alright awesome. Thanks, guys.
Thank you.
[noise] and that concludes our Q&A for today I would like to now turn it back to Simon Campion, Chief Executive Officer for closing remarks Simon.
Thank you and thank you all for your thoughtful questions. This morning, I would also like to thank the entire dense place around the team, including those employees, who have left the organization recently for their valuable contributions to our company and their unwavering commitments to our customers.
We have much more hard work ahead of us.
I'm energized by our progress and the passion and belief that our team has that we can deliver a brighter future for this organization together. Thank you.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
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