Ladies and gentlemen, thank you for being here, and welcome to the Q4 2020 Dentsply Sirona Earnings Conference Call. All participants are currently in a listen-only mode. After the presentation, there will be a question and answer session. I would now like to introduce your host for today's conference call, Ms. Kari Dixon, you may begin.

Thank you, operator, and good morning, everyone. Welcome to our fourth quarter 2020 earnings conference call. I'd like to remind you that an earnings call press release and slide presentation related to the call are available on our website at www.dentsplysirona.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. Our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. In today's conference call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. And with that, I'd like to now turn the call over to Don Casey, our Chief Executive Officer. Don?

Thank you, Kari, and thank all of you for joining us this morning. I hope you're all safe and well. It's hard to imagine that a year ago, on this call, we first started discussing the COVID-19 pandemic. And as we enter 2021, it is still a challenge that creates some level of uncertainty. But over the course of the year, there have been many lessons for Dentsply Sirona, and the experience has hopefully prepared us for the coming year and beyond. As we provide a final look at 2020, a few things really stand out. The first is the resilience of the dental market and how committed the dental community is to serving their patients. The second is how strong the underlying Dentsply Sirona business is. This is illustrated by the improvement in our results over the last two quarters. Learning new and different ways to do business has been another key lesson. Whether it was a virtual DS World, creating digital KOL forums, or having our global R&D teams collaborate without physically being together, there is vital learning here that we will apply going forward. And finally, we have always talked about how our people are our most important asset. Well, 2020 certainly highlighted that. Every day, our team stayed focused on our customers and their patients despite dealing with professional and personal challenges that we all faced during the year. I want to thank them for their commitment and professionalism. Moving on. Today, we want to cover four things. The first is our fourth quarter results. After that, we will provide some guidance for 2021, and we will then provide some perspective on our priorities going forward, and we will finish with a discussion around our ESG plans. Moving now to Slide 6. We are pleased with our performance in the fourth quarter. Revenues were $1.1 billion, down 3.3% on an organic basis. This is a sequential improvement versus quarters two and three and reflects a gradual recovery in the dental market. In the fourth quarter, we remained disciplined around spending, and these cost-containment efforts helped deliver a solid margin performance. Operating margin reached 23.2%, up 320 basis points versus a year ago, this results in an adjusted non-GAAP EPS of $0.87, up 19.2% versus the prior year. Other actions taken by the team helped generate healthy cash flow from operations of $263 million. To provide the details of our performance for the quarter, I will now turn the call over to Jorge.

Thank you, Don, and good morning. In the fourth quarter, we achieved strong results and surpassed our expectations in several areas. The measures we've implemented to enhance our business have continued to yield positive financial results, even in the challenging environment of the ongoing global pandemic. Comparatively, in the fourth quarter, we showed improvements across nearly all key financial metrics against the third quarter. We took advantage of the gradual rebound in customer demand and maintained strict cost management across the company. Although we remain cautious, our performance in the fourth quarter has provided us with good momentum as we head into fiscal 2021. Looking at Q4 more closely, organic revenue declined by 3.3% from last year, improving sequentially from the 8.8% decline in the third quarter. Consumables achieved organic growth of 1.1% in the fourth quarter compared to the previous year. We saw robust growth in Consumables in Europe and the U.S., which was partially countered by declines in other regions. As anticipated, organic sales in Technologies & Equipment fell by 6.2% year-over-year, mainly due to a challenging comparison for the CAD/CAM division compared to Q4 2019. Gross profit was $613 million or 56.7% of sales, which was better than expected given this quarter's lower volume compared to last year. The reduction in gross margin was mainly due to lower sales and negative absorption but was partially mitigated by productivity and cost-saving initiatives. SG&A expenses decreased by $58 million or 13.8% compared to the previous year, with SG&A as a percentage of sales dropping by 430 basis points year-over-year. This decline reflects cost reductions related to volume and improvements in productivity and operational efficiency. Examples of these volume-related expenses include travel, commissions, advertising, and promotions. We have also been very careful with non-essential and discretionary spending. Operating profit grew over 13% to $251 million compared to last year, leading to a margin expansion of 320 basis points to 23.2%. Our margin benefited from strong sales in Consumables and the impact of reduced discretionary and volume-related spending. Additionally, the typically high sales volume in Q4 creates significant operating leverage that enhances margins. The results from our actions in 2020 support our commitment to ramping up investments in R&D and customer experience to ensure sustainable growth, which I will discuss further later in my presentation. Moving on, net interest and other expenses rose by $5 million due to higher debt levels compared to last year and finalizing certain net investment hedges. The non-GAAP tax rate for the fourth quarter was 21%, down from 25.1% in the prior year due to shifts in the mix of U.S. versus non-U.S. pretax income. This lower rate contributed roughly $0.05 to the non-GAAP EPS for the fourth quarter of 2020 versus the previous year, bringing the non-GAAP EPS to $0.87, a 19.2% increase year-over-year. Now, regarding the results from the fourth quarter of the Consumables segment, we are satisfied with the performance of the Consumables business. Organic sales were $449 million, marking a 1.1% rise compared to the previous year. Growth was strong in Europe and the U.S., with declines in the rest of the world. Sales in Restorative and Preventive showed solid organic growth, while Lab experienced a decrease. Our focus on retail-oriented programs has been a catalyst for improved sales performance in Consumables in the U.S., as we are making progress in executing initiatives such as adjusting promotional strategies to strengthen relationships with dentists and providing clinically relevant products with strong incentives. Next, let's discuss Technologies & Equipment performance. As we noted going into the fourth quarter, we anticipated a tough comparison in this segment compared to the previous year, influenced by various factors, including DS World sales, the Primescan upgrade cycle, and uncertainties surrounding COVID. As expected, organic sales in Technologies & Equipment experienced a 6.2% decline year-over-year but grew sequentially from Q3 2020 to Q4 2020. Within this segment, our clear aligners and healthcare businesses saw excellent performance during the quarter. Notably, our team successfully transitioned the DS World event to a fully interactive virtual format in Q4. Although we were pleased with the results of the virtual event and high participation, we have expressed our intention to return to a hybrid live event format in 2021. On Slide 11, you can view our financial performance by region for the fourth quarter. U.S. sales totaled $359 million, reflecting an 8.7% decline year-over-year. Organic sales fell by 7.3%, primarily driven by CAD/CAM and imaging performance. European sales reached $448 million, an increase of 3% compared to the previous year, with organic sales rising by 0.4%. Strong growth in Consumables was somewhat offset by COVID-19's effects on Technologies & Equipment. Sales in the Rest of the World amounted to $275 million, down 2.8%. The South American market continues to face declines related to COVID, particularly in Brazil. In terms of cash flows, we generated $263 million in operating cash flow during the fourth quarter of 2020, bringing the full-year cash flow to $635 million. For the entire year, we achieved free cash flow of $548 million, a 7% increase from last year. We returned a total of $228 million to shareholders via dividends and share buybacks while investing $1.1 billion in acquisitions. The Company concluded 2020 with strong liquidity, featuring $438 million in cash and committed credit facilities totaling $1.1 billion. Now, I would like to update you on two strategic initiatives discussed in previous quarters. First, we have completed exiting the traditional ortho and analog lab businesses as planned, which accounted for about $175 million in sales in 2019. These exits will enable us to concentrate more on growth areas. Second, we remain on track to achieve our long-term cost savings goal of $250 million, having realized an additional $70 million in fiscal 2020. This brings our total cost savings to $160 million since announcing the restructuring in 2018. According to plan, the restructuring is expected to cost a total of $375 million, with approximately $310 million spent to date, of which $120 million is non-cash. Before we move into 2021, I want to express gratitude to every associate at Dentsply Sirona for their extraordinary commitment to achieving results in the challenging circumstances of 2020. Now, let’s discuss our financial outlook for 2021. We are closely monitoring the markets we operate in. Our research suggests that the gradual recovery in the dental sector is ongoing, with dentist offices remaining operational and patient confidence improving alongside vaccine rollouts. However, COVID-19 still presents lingering uncertainties, complicating medium- to long-term planning. After careful consideration and recognizing the challenges of accurate forecasting in the current environment, we will share our key planning assumptions for fiscal year 2021. We are optimistic about the dental industry's long-term prospects, with numerous categories showing high growth potential and others displaying moderate but substantial cash flow. The inherent resilience of the dental sector provides some short-term stability and the potential for stronger demand in the latter half of 2021 compared to the first half. We anticipate reported sales for fiscal 2021 will fall between $4 billion to $4.3 billion, translating to a growth rate of approximately 20% to 30%. From an organic sales perspective, this range suggests a growth rate of approximately 15% to 25%. The gap between reported and organic sales is mainly attributed to the acquisitions of Byte and Datum, the exit from traditional ortho, analog lab, other portfolio adjustments, and foreign exchange impacts. The recovery of the dental market and the success of the vaccine rollout will significantly influence where we land within this range. As mentioned in January, we expect our clear aligner business to achieve an annual run rate of $300 million by the end of 2021, and we are enthusiastic about the growth this franchise will contribute moving forward. We plan to increase our investments in strategic growth initiatives, with targeted R&D investments rising to approximately $160 million in 2021. Significant investments not included in R&D will focus on accelerating clear aligners, e-commerce, and other digital platforms. In terms of SG&A, combined, Byte and Datum will account for about $90 million in additional SG&A costs in 2021. We expect our operating income margin to be 20% or higher, with stronger performance anticipated in the second half of the year. Our margin expansion is stable, and we continue to target a 22% operating profit margin by the end of fiscal '22. We project the non-GAAP effective tax rate to be between 23% and 24%, with an estimated share count of approximately 221 million, resulting in non-GAAP EPS expectations for 2021 ranging from $2.60 to $2.80. Our planned capital expenditures for 2021 are estimated at $160 million. Despite the immediate challenges posed by COVID-19, we are committed to our targets and remain focused on achieving our 2021 objectives, while staying on track to meet our long-term goals. Before I hand the call back to Don, I want to highlight the situation for the first quarter of 2021. Please remember that historically, the first quarter of the fiscal year is typically the lowest period for sales, often leading to a significant sequential drop in operating income margin. We expect this trend to continue this year, and this seasonality is integrated into our planning assumptions for the full fiscal year. Now, I will turn the call back over to Don.

Thank you, Jorge, and we will move to Slide 14. To give additional perspective on 2021, it might be helpful to provide some detail around our strategy and operating priorities going forward. Moving to Slide 15. Over the past two years, the Company has focused on delivering against the restructuring outlined in late 2018. Despite the pandemic, Dentsply Sirona has made solid progress across most areas against the goals outlined in that restructuring. The plan was built around improving growth, driving margin, and simplifying the organization. And while there is still work to do, our leadership team is committed to meeting those goals in the original time frame. As we get toward the conclusion of the restructuring, though, it now becomes important to lay out a strategy for how we will grow Dentsply Sirona in the future. As we have refined our growth strategy over the past few years, it is important to recognize that the dental market continues to evolve. Increasingly, our customers are looking for comprehensive solutions and improved workflows that deliver better patient outcomes and improve the financial health of their practices. Dentsply Sirona is uniquely suited to deliver this for our customers. Our company has an unmatched installed base of digital dental products, including both digital impressions and a complete range of x-ray imaging products. We have deep expertise in treatment planning and workflow management, and Dentsply Sirona has a full portfolio of essential consumer products that are critical components of many procedures. Putting all of this together will distinguish us going forward and provide sustainable differentiation. For 2021 and beyond, our operational priorities will remain consistent around delivering growth, improving margin, and building a scaled, efficient company. Specific targets include organic growth of 4% to 5% plus going forward. As Jorge said, we are committed to improving our margin, achieving our 22% goal by the end of 2022. And our efforts around organization simplification will allow us to deliver the cost-saving target of $250 million through the end of the restructuring plan. Doing all this will allow us to target double-digit adjusted EPS growth and create sustainable value for our shareholders. Moving to Slide 16. Let's look at these priorities in more depth, starting with growing revenues. As I mentioned earlier, Dentsply Sirona is well-positioned going forward to grow our revenues through a combination of organic and inorganic opportunities, all built on a foundation of global commercial excellence. Starting with organic growth. Over the last two years, the Company has made significant improvements to our R&D program. Major changes have involved implementing a portfolio management approach to allow us to maximize the impact of our spending by focusing on fewer, bigger products in essential areas. A second major shift is having our innovation efforts focused on procedures rather than products. This aligns us with how our customers think and will allow us to offer more comprehensive solutions. And as those changes have become more ingrained and show promise for the future, in 2021, we are increasing our investment in R&D significantly. This is highlighted by the creation of a new Consumables Innovation Center to be opened this year in Charlotte. As you can see on Slide 17, despite the pandemic, Dentsply Sirona was able to continue accelerating our new product activity. We've been pleased with the response, in particular to Axeos, Primemill, and Surefil one. Looking out to 2021, we are excited about the portfolio we will be bringing to the market, including important new introductions in the endo and implant areas. Moving now to Slide 18. In addition to our investment in organic programs, when appropriate, we will look to acquisitions to support critical growth priorities like clear aligners and implants. As we announced in early January, Dentsply Sirona acquired Byte, a direct-to-consumer clear aligner company. It's been great to welcome this outstanding team to Dentsply Sirona. The acquisition gives us significant scale in the critical clear aligner market as well as important new capabilities. These capabilities include the ability to communicate directly with patients. We believe it will be important for Dentsply Sirona to help generate patient traffic for dentists across multiple procedures in the future. This business carried good momentum from the fourth quarter into the new year, and the integration of the Byte business is on track. As we mentioned earlier, we believe that we will exit 2021 with $200 million-plus run rates. And as Jorge has mentioned, combined with SureSmile, our clear aligner franchise is expected to achieve a run rate of $300 million by the end of the year. The deal is expected to be accretive to our long-term financial targets and non-GAAP EPS in 2021. Moving to Slide 19. In late January, Dentsply Sirona acquired Datum, an Israeli biomedical company for a little over $100 million. Datum expands our biomaterial portfolio with the OSSIX brands with its GLYMATRIX technology. The implant category has been shifting to meet the patient need for fewer visits and more rapid results. This has led to an expansion of procedures using immediate load implants. In these procedures, bone growth factors like OSSIX can provide important benefits. We believe this acquisition gives Dentsply Sirona a terrific brand with an excellent technology that will help improve our performance in the implant category. Moving to Slide 20. Over the past 15 months, the Company has also made major efforts to improve our global commercial capabilities. These have included pursuing a comprehensive sales effectiveness program in multiple countries. We have also shifted our promotional spending to focus more on programs like One DS that creates demand at the retail level. The team has also enhanced our digital clinical education capabilities, and we reached over 1 million visitors this year. All of this has improved the effectiveness of our global commercial capabilities. Now on Slide 21. Along with driving revenue growth, the Company is focused on improving our margin in multiple areas. One highlight that has been discussed is spending discipline. Our team has shown steady progress in this area over the last few years, but the pandemic has shown there are new, more efficient ways to manage the business. It's important to apply the lessons learned in 2020 going forward. Our supply chain has made excellent progress across the board, highlighted by reducing our manufacturing footprint from 42 facilities in 2018 to 29 now. There has been strong progress in SKU rationalization and inventory management. Yet, even with this success, there are still opportunities in several places as we get better using our scale in areas like procurement and logistics. And finally, we remain committed to portfolio management. The exit of the traditional ortho and analog lab businesses has helped simplify the organization and improve both margin and operating efficiency. This will remain an important part of our discipline around margin improvement going forward. Moving now to Slide 22. We believe a key ingredient of a successful business strategy going forward is to establish a comprehensive framework to manage ESG objectives. A strong ESG program can facilitate top-line growth and reduce costs. It can contribute to reducing legal and regulatory risk while improving employee engagement. As a result, getting ESG right has become a business imperative for Dentsply Sirona. As a global leader in the dental health segment, we are striving to become an ESG leader as well. ESG objectives are aligned with our purpose and mission of improving access to quality healthcare globally. Every day, the almost 15,000 employees of Dentsply Sirona work to improve the lives of people all around the world, including the communities we serve while continuing to deliver value for our shareholders. We will achieve this by investing in our people as well as leveraging our R&D and innovation capabilities to leave a lasting impact on society. While Dentsply Sirona has always had multiple activities in this area, we felt it was time to create a more comprehensive framework to measure ourselves and communicate our results. Last year, our cross-functional ESG Committee was established, composed of our most senior leaders. This team is tasked with developing the necessary internal controls, data management, and frameworks for ESG reporting. In addition to the senior leaders, we have added internal subject matter experts, outside resources, and consult regularly with companies advanced in ESG practices. The committee is in the process of developing an ESG implementation plan with specific objectives, and we look forward to sharing the plan and our progress going forward. Moving to Slide 23. In conclusion, there's still uncertainty around how the pandemic will impact 2021, but we feel, absent a major setback, the dental market will improve throughout the year. Our solid results in the fourth quarter have shown the resilience of our underlying business and the commitment of our people. While we are cautious around 2021, we expect to see improvement as we go through the year. We believe that Dentsply Sirona has a clear strategy and is well positioned to drive revenue, improve our margins, and deliver sustainable value for our shareholders. And with that, I will now turn the call back over to Kari.

Thank you, Don. Operator, we will now open for questions.

Our first question comes from Nathan Rich with Goldman Sachs.

Hi, good morning. Thanks for the question. Don, maybe starting on the guidance, the revenue range is kind of back in line with 2019 levels. I know your business has a lot of moving pieces with kind of the M&A and the decisions to exit the traditional ortho and lab businesses. So I guess just at a high level, could you kind of talk about what your expectations are for the market relative to 2019? And then when you look at kind of the composition of your portfolio, how would you kind of expect to perform relative to the market?

Thank you, Nate. It's an interesting comparison between 2019 and 2020. With the ongoing pandemic, we anticipate it will still affect our business, particularly in regions like Latin America. Thus, we are focusing on guidance as it pertains to 2020. Over the year, we foresee gradual improvement. Data from ADA surveys and our own research show that the North American market is operating at about 80% to 85%. Dentists have begun to focus on higher-value procedures, helping to sustain revenue, and some have started charging fees for PPE. Our tracking studies indicate a rise in patient optimism, which we believe will gradually increase throughout the year. We expect that the market in the latter half of 2021 will outperform the first half. Regarding our portfolio, while others can better assess how different portfolios compare, we’re concentrating on our strategy, especially regarding workflows. We have invested significantly in clear aligners and feel positive about that area. We also believe we have strong growth potential with implant and endo procedures. I mentioned earlier that we anticipate some product launches in the latter half of 2021 that will boost momentum, specifically innovations in the implant market. For our consumables, growth will depend on the global recovery pace. Our portfolio doesn’t heavily rely on PPE, and we focus more on restoration, endo, and lab businesses, which depend on our competitive positioning to gain market share. We’ve been quite competitive in the fourth quarter, and as the market rebounds globally, we’re hopeful for improvement. Additionally, we've invested considerable time in reshaping our promotional strategy to emphasize retail consumption in dental offices, which we believe will continue driving growth in our consumables business throughout the year. I hope this information is helpful, Nate.

Yes. I appreciate the color. If I could just ask a quick follow-up on the T&E segment, you said that it got better sequentially. I wonder if you could comment specifically on the digital equipment piece, how that performed relative to your expectations? And just how you feel about kind of the level of demand you're seeing in early 2021 as you think about your expectations for the full year?

Yes, Nate. In both Jorge's and my prepared remarks, we mentioned that 2019 posed a significant comparison, particularly in the fourth quarter. During that time, the critical North American market was in the midst of a Primescan upgrade, and we also launched Primemill alongside the One DS program. We anticipated a noticeable decline. Despite lacking a live DS World, the T&E segment performed relatively well compared to our expectations. Looking ahead to the first quarter, it's worth noting that this quarter is generally slow for us being the smallest of the year, with T&E being a significant contributor. However, we were encouraged to see that in the second quarter, particularly in North America and Europe, dentists were starting to consider their next steps as the pandemic eased. Many dentists expressed interest in implants and clearer aligners, which require enhanced diagnostic capabilities, whether through improved 2D or 3D cone beam technology or by acquiring a top-tier scanner like Primescan. The underlying demand has been quite positive. For instance, when comparing North America's performance to Europe in the CAD/CAM and CEREC sectors—where the effects of DS World weren’t felt—we observed solid demand for T&E. As we enter this quarter, while we remain cautious, we believe there has been strong underlying interest in our products. With the introduction of Primemill, we feel confident about our robust portfolio.

Next question comes from Glen Santangelo with Guggenheim Securities.

Good morning. Thank you for taking my question. Don, I'd like to approach the market growth question from a different angle. You reported organic Consumables growth of just over 1%. We're struggling to reconcile that with the ADA surveys. Given that you can now review the numbers from the fourth quarter, along with January and February of this quarter before we encounter easier comparisons, can we say that the market is growing year-over-year? Also, I appreciate your comments regarding the shift in promotional strategy. Could you help us understand the market growth better in that context?

Yes, thanks for the question. The Consumable market is challenging to analyze since there's no clear definition of what constitutes Consumables, as some companies report large PPE figures. For us, Consumables primarily includes products like resto, lab, and endo. In the fourth quarter, we performed well in the U.S., largely due to our promotional strategies. We are not as affected as some competitors in the Asia Pacific region, which has recovered from the pandemic more quickly. Overall, we were pleased with our Consumables performance. Looking back a year, we were among the first to acknowledge the impact of coronavirus on the dental category. We noted that as dentists faced uncertainty in March and April, they could easily reduce Consumables inventory. While the ADA mentions growth indicators, we believe there were benefits from our initiatives and restocking as traffic started to normalize. Our promotional programs are evolving; we wish we could implement them more quickly, but as we refine our strategies globally, we are focused on innovations that directly benefit dentists, like the Primescan launch with our Consumables. We have streamlined our promotional efforts into one program rather than the multiple we were running 18 months ago, which were not always retail-focused. Ultimately, we see improvement in the Consumable market over the past three quarters, and we believe our strategy is effective. We are optimistic that our innovation and promotional strategy will lead to positive trends in the Consumables sector moving forward.

I appreciate all that commentary. Maybe if I can just ask Jorge a quick follow-up question on the margins. Jorge, it's the second quarter in a row of margins coming in, I think, much better than everyone was expecting. And looking at your long-term guidance, it's almost hard for us to see how margins could go down so much from this point as fiscal '21. I know you talked about investing in innovation, new product launches. But on the other side of that, you're raising your cost savings targets and things like that. And so how should we think about that cadence in the margin? Because it feels like you have to take a pretty big dip from where you were in the second half of 2020 to kind of make sense of that guidance for fiscal '21?

Thanks, Glen. That's a great question. First, it's important to note that comparing just Q4 with the average operating profit margin for the entire fiscal year isn't accurate, as Q4 typically sees the highest sales. This increased sales create operating leverage, which significantly boosts the margin in that quarter. Similarly, you can't take Q1 as a representative sample for the average rate during the year since Q1 usually experiences the lowest performance. It's essential to consider how these figures balance out over the year. In Q4, the mix was favorable, particularly in Consumables, which performed well both in the U.S. and Europe. This category is a good margin business. Regarding expenses, there are mainly three categories to consider. First, we are making structural cost reductions, which are reflected in our guidance and the consistent progress we've made over the last several quarters, projected into '21. A substantial amount of costs will be reduced permanently. The second category is volume-related spending. As our volume increases, certain variable costs will rise as well, which we did not experience in Q4 or Q3 due to lower-than-normal volume levels. The last bucket includes discretionary expenditures and other spending that we might resume as our volume grows. Finally, we are also making investments. Our long-term targets for revenue, gross margin, and margin expansion necessitate significant investments. For instance, we are enhancing our e-commerce platform, investing more in research and development, with a target of $160 million this year, a considerable increase from 2019 and 2020. We're also modernizing our enterprise systems to improve customer experience and enhancing our sales-to-cash processes. All these factors contribute to some of the decline we're seeing. Additionally, with our acquisitions of Byte and Datum, there will be approximately $90 million in incremental SG&A added to our figures in 2021. Taking all this into account, we aim for at least a 20% margin, targeting a stronger second half of the year, and we expect to end '21 with a 21% margin level. This explains the transition from the Q4 number to the average and the exit rate for '21.

Our next from Erin Wright with Crédit Suisse.

Can you discuss the increased R&D investments? Is this a shift from your previous innovation strategy? Were there delays in product launches during the pandemic? Should we expect new product launches, or will there be a consistent stream of innovation?

Yes, our goal is to consistently deliver innovation. In 2020, especially in the second quarter, we decided to focus on our most essential products. After making changes in late 2018 and throughout 2019, we have a new leadership team in R&D and are taking a different approach. We had a solid year in 2019, and despite the pandemic, we are pleased with the major products we launched in 2020. Looking ahead to 2021, we believe the R&D organization is efficient, and we are implementing further changes. We are excited about opening a new innovation center this year in Charlotte, which will focus on our consumables and implants business. This 60,000 square foot facility represents our shift to a cross-product procedure approach. The increase in spending to $160 million, as mentioned by Jorge, is significant as it will support our innovation efforts. While we don't expect to hit perfection every year and recognize that our progress will be gradual, we believe this increased spending will enhance our organic productivity. I wish I could specify exact product launch timelines for each quarter, but some of that depends on the timing of the innovations. Additionally, we are increasingly focused on our digital offerings, utilizing our extensive installed base in x-ray and our strong presence in CEREC. We want to integrate these systems to help dentists manage more complex workflows. This is an area of great excitement for us, and feedback from our customers has been very positive. I’ve expressed to our Board of Directors that boosting our R&D spending would be an efficient way to drive future organic growth.

Okay. Great. And then can you speak about the clear aligner strategy now? And how you're balancing the DTC strategy with the practitioner-directed market? What is some of the initial feedback from your customers? Or any surprises with the Byte transaction since the close or incremental investments needed across the Byte?

We have been working with Byte for about six or seven weeks now, and the feedback from the dental community aligns closely with our expectations based on our survey work during the diligence phase. Dentists involved in clear aligners believe that the introduction of another key player in the clear aligner market will enhance marketing efforts and generally increase patient traffic, which they view positively. Some general dentists who aren't currently engaged in clear aligner work might see this as competition, but we anticipate that perception will fade once we introduce the Byte program to them. Essentially, we plan to leverage the hundreds of thousands, nearly a million unique visitors to Byte, even though not all of these will qualify for class one treatment. We see a chance to channel patient interest towards our network. As we share this narrative and provide further details, we expect a favorable reception. Regarding concerns about whether dentist negativity might affect the purchase intent of Dentsply Sirona products, it's important to remember that we operate as a house of brands rather than a single branded house. While it can be tough to associate specific products like Cavitron directly with Dentsply Sirona, these concerns tend to be temporary blips that often dissipate. Overall, we're pleased with the response from the general dental community regarding Byte. Additionally, regarding the need for new investments since acquiring Byte, we've conducted substantial due diligence and had an idea of what it would entail. We're excited about integrating aspects like finance, quality assurance, and some supply chain elements, and this process has proceeded as planned. We haven't encountered any significant areas requiring major investment. In fact, we feel more optimistic about Byte now than we did in January when we first announced it.

Our next question comes from Kevin Caliendo with UBS.

I guess we want to talk a little bit about the cadence. We understand 1Q is always a little bit worse. You talked a little bit about demand in 4Q year-over-year. But I guess I'm asking as people start to expect to get vaccinations, sort of what you saw January, February, what you expect to see into March? I get it on the margin side and spend and everything else, but when we think broadly around dental and dental demand, are you still seeing that sort of year-over-year growth in January and into February?

Kevin, Jorge here. I don't want to get into January or February results at this point. It's too early. What I would tell you is that all the information that we have, the best information we have as of today, we have reflected in the outlook that we are providing. So as I indicated and Don indicated, we are seeing some stability in the dental industry. We are optimistic, cautiously optimistic about patient confidence. And all of those data points, the growth we've seen in certain areas, the trajectory of other parts of the business, all of that is factored into our outlook of '21 where we will see potentially organic growth in the 15% to 25%, with the second half stronger than the first half, Q1 typically lower than the other quarters. And I mean, that's everything we know we have, and that's what we have reflected in our guidance. I don't have really anything else to add to that.

No. That's fine. I appreciate that. I guess just one follow-up. You mentioned Primemill and some of the other products that you launched last year. And I'm guessing just given the way everything played out last year, there maybe are some orders or some potential. I don't know if there's still pent-up demand for any of your bigger ticket equipment items or not or how we should think about that as an impact to 2021. But any color around that would be great to understand as well.

It's noteworthy that when we launched Axeos and Primemill, we faced some production constraints, and then the pandemic hit. We took that opportunity to ramp up our efforts. Currently, we believe we are in an excellent position regarding Axeos and Primemill. One point of interest is the urgency felt in an on-premise DS World event, like the one in Las Vegas, where purchases are made immediately. In contrast, during the virtual DS World, that urgency isn't as pronounced, and everything unfolds over a two-week period. We're eager to observe the long-term results from this virtual event. We've received a strong response, with a comparable number of validated live prospects to the in-person event. However, we don't expect significant pent-up demand. Our manufacturing capabilities have improved compared to a while back, and we'll monitor the situation. Overall, the underlying demand for digital dentistry products has remained solid.

Our next question comes from Elizabeth Anderson with Evercore.

I was wondering if you could talk a little bit about your implant business and sort of any changes in terms of your plan to sort of accelerate more towards market growth and how new products are performing or the overall state of your branded products in that category?

Yes, we remain optimistic about the long-term potential in the implant business. While we aim to improve our performance from the fourth quarter, we've spent time during the pandemic assessing the market and enhancing our portfolio. We believe the products we are launching this year will be beneficial. With the addition of Datum, we now have two strong adjacency products, Atlantis and Datum, which position us significantly better than we were last year to make an impact in the implant sector. We anticipate growth in our implant business for 2021, and as digital dentistry and workflow management become more vital, we feel very well-equipped. Our X-ray portfolio provides crucial diagnostic expertise for implants, and we expect to round out our product portfolio this year, enhancing our competitiveness. Additionally, we've been focused on our sales force effectiveness program, which has not received much attention despite comprising about a third of our workforce at Dentsply Sirona. This program aims to ensure we are supporting high-volume implant doctors with all our resources. We are pleased with our progress in the U.S. and are rolling this out to ten more countries. Overall, we are optimistic about the future of our implant business.

That makes a lot of sense. And can you also talk about sort of more broadly maybe your new product rollout as we think about the course of 2021, how you think about it in light of the reopening and then obviously, some of the investments you're making this year, which I assume will translate into some impact this year, but probably more down as 2022, maybe 2023 type of event. Can you talk about sort of that piece at all and sort of how you view it longer term?

Sure. We are truly a global company, and I am reminded of that every day. When we say we launched Primemill, we initiated it in North America and selected countries in Europe, and we are currently in the process of expanding that rollout. Axeos was also launched in North America. Are we introducing something new to the market? Yes, we are bringing new offerings to various markets worldwide. As we consider our current products like Surefil one, Axeos, and Palodent 360, we have established a solid rhythm of taking products that we may have launched in one region and expanding them further. We believe this will create good momentum at the beginning of the year. In the latter half of the year, many of the initiatives we worked on in late 2019 and throughout 2020 will come to fruition. Regarding our increased R&D investment, it's essential to view it in two parts: first, software is becoming increasingly important to us and the returns from that tend to arrive quicker; second, products requiring 510(k) approval or longer-term clinical trials will naturally take more time. One of my proudest accomplishments from the past year is that our R&D engine is now operating effectively. We are focusing on how to succeed in a procedure lifecycle, starting from diagnosis to treatment planning and delivering excellent consumables that are all aligned. Long-term, we are optimistic that you will see an acceleration in our organic growth capabilities.

Our next question comes from Steven Valiquette with Barclays.

Great. A couple of questions here. I guess, first, all the color on the 2021 guidance has been helpful so far. One area where there was less color was just around the gross margin expectations for '21. Curious to hear more about the puts and takes that can cause variability there, as we think about the gross margins exiting 2020 at just under 57%, is that a good run rate to use for '21 overall? And then just quickly on the R&D, the $160 million expense in '21, can you just tell us roughly what the R&D expense was for 2020, just to give us a sense for the comparison?

Let me address the second question first. The R&D expenditure in 2020 was approximately $115 million. For 2021, we're increasing that to $160 million. Moving forward, we will be very transparent about our R&D expenditures, and you will see this clearly in our financial statements. Regarding gross margin, it tends to vary from quarter to quarter, much like operating profit margin. We expect to see a gradual increase in gross margin as well. Part of the $250 million cost savings target will come from enhancements in gross margin. We are actively working on optimizing our manufacturing facilities and implementing indirect procurement initiatives, along with other strategies within cost of goods sold that should contribute to improving our gross margin. While I don't anticipate a major shift as we enter 2021, we do expect some slight improvement.

Our next question comes from Tycho Peterson with JPMorgan.

Jorge, I just want to stick with the guidance for a minute. I'm just wondering if you can break out what you're expecting for FX, M&A, and divestiture headwinds. And then you're not giving segment-level guidance. I'm just curious how we should think about T&E versus Consumable growth this year?

Yes, thanks, Tycho. Foreign exchange for us is primarily influenced by the euro. We are using an estimated euro-dollar exchange rate of about 1.22 for our budget modeling. Regarding mergers and acquisitions, we are not including any projections in the outlook we have provided, and there are also no divestitures planned. Therefore, these areas are not part of our outlook.

So just could you clarify what the revenue contribution you're expecting from Datum is then because you've already talked about Byte, but what are you expecting? And I know it's only a $95 million deal, but what does that add?

It's really not material to the revenues of the Company. We have not disclosed the total number, but it's not really big at the beginning, Tycho.

Okay. And then you raised the long-term outlook to 4% to 5%. Obviously, that captures the 300 basis points you're going to get from clear aligners this year. But you've also talked about 20% to 25% growth for the clear aligner segment. So I'm just curious, that 4% to 5%, I guess, looks like it could be conservative in the long run. Is that a fair assessment?

Well, the 4% to 5%, essentially, what we did was we had talked about 2% to 3% or 3% to 4% long-term growth rate from a top-line perspective. With the acquisition of Byte and the acceleration of our clear aligner business, we believe that those two businesses should add about 1.5%, maybe a little bit more of top-line growth. And we'll do everything we can to improve that, but that, we believe, is doable, and that's what we are modeling in the outlook that we have provided.

Okay. And then last one, I just want to go back to Datum for a minute. I know it's a small deal, not a real revenue contributor. But as we think about Astra Tech and Ankylos and some of these products, can you just talk about how you see synergies there, Don, for the implant business?

Yes, it's interesting that patients are looking for implants that provide faster results, leading to an increase in immediate load implant systems. When using immediate load, one factor that helps dentists feel more confident is the application of a bone growth factor around the immediate load screw to speed up the healing process. We view Datum as an excellent technology, and we believe it is clinically superior to anything else available. When discussing immediate load systems, a significant way to enhance healing is by using OSSIX. This is how we are approaching it. Over the past eight years, we have primarily focused on parallel wall implant systems, but we see a clear opportunity to expand our portfolio so we can compete more effectively in the rapidly growing immediate load market.

Our next question comes from Jeff Johnson with Baird.

I'll try to be brief here just given the time, but going back just to R&D real quickly. Jorge, historically, we thought of Dentsply kind of being about a 3% of revenue R&D spender. Obviously, with the guidance this year, it's going to be up around 4%. Is that about the right number kind of R&D after 2021 kind of grow in line with revenue? Just thinking longer term, kind of holding it closer to that 4% or is there upward bias even on that number then going forward?

Thanks, Jeff. Now this is a topic that we have spent a lot of time on, and we believe that around 4% ratio as a percent of sales is a good number for us at least for the foreseeable future. Dollars-wise is a significant improvement. As I indicated earlier, in 2020, we spent about $115 million. We're going to $160 million. That is a substantial amount of incremental dollars. We are working very closely with the R&D team, making sure that we have the right metrics and that we really track the return on those investments. And we are comfortable with the 4%. We think that 4% or so is going to be essential, critical for the top-line growth, and we're going to rely significantly on organic growth to deliver that top line.

Understood. Don, I want to discuss the broader perspective with you. You've mentioned a 3% to 4% organic growth and double-digit EPS. With Byte, you can elevate that organic growth to around 4% to 5% in your long-term guidance. The years 2020 and 2021 had some irregularities, so those targets may not apply directly. Is 2022 the first year we can start considering those long-term targets of 4% to 5% and double-digit growth, which would allow us to expand our models for future years? Yes, Jeff, we provided information for 2021, and you're asking about 2022. That seems like a reasonable observation. One of the challenges we face, and I give Jorge and his team a lot of credit for this, is understanding 2021 in the context of 2020. Looking back to 2019 isn't straightforward either. However, we believe we have a strategy for business growth, focusing on the expansion of Consumables and the growth of technology and equipment. We aim to introduce products like Byte, and with our investments in R&D, we hope to see growth in our implant business as well. Our target is to achieve a growth rate of 4% to 5% or more. As we consider 2022 and beyond, that is absolutely our goal. If you reflect on the past two years, late 2018 was about restructuring the company correctly, which we believe we have accomplished. We have a solid plan for growth, enhanced by both organic and inorganic initiatives, which is why we maintain that we expect growth in the range of four to five percent plus.

Our next question comes from Jon Block with Stifel.

This is Trevor on for John. So just on the 15% to 25% range that you gave for guidance, are there any specific variables to Dentsply Sirona that you can call out that could take you to the higher low end of this range? Or is it really driven by the market and macro factors that you called out?

Yes. Thanks for the question. Obviously, there's a number of factors that play into this range. One thing that we indicated in our prepared remarks is the overall trajectory of the market as a function of what happens with the COVID dynamic and vaccine rollouts. That plays an important role. Then more specifically related to the Company, there is the performance of our new launches, and Don talked about how we are beginning to roll out Primemill, Axeos, and other products more globally. That should also influence where we end in that part of the range. And then the growth trajectory of our clear aligner business is an important factor in our outlook for '21. So there's a number of things, but I think those are the major ones.

Our next question comes from Michael Cherny with Bank of America.

This is Allen in for Mike. Don, you mentioned margin opportunity around procurement and logistics. Can you expand a little on that? And is that something that can be done just internally? Or are you looking at partnerships or potentially M&A for that?

No, that's really internal stuff. I mean, look, we used to run a pretty disaggregated supply chain. And Dan Key and his team have done a great job of creating a unified group. Obviously, that's taken a little bit of time. We really started that in earnest in 2019. And as we've gotten scale, we're now able to look at total Dentsply Sirona from a procurement basis as well as a logistic basis. And as we think about things, we've been able to consolidate distribution points and a few other things that have given us some leverage and we expect to continue giving us leverage in the future.

Okay, great. Well, that concludes today's session. Thank you, everybody, for joining us today on our fourth quarter 2020 earnings conference call. We look forward to having follow-up discussions with many of you later today.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.