DENTSPLY SIRONA Inc. Q3 FY2021 Earnings Call

Good day everyone and welcome to the Q3 2021 Dentsply Sirona Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and instructions will be given at that time. An operator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. Now, it is my pleasure to hand the conference over to Andrea Daley, Vice President, Investor Relations. You may proceed.

Thank you, Brian. And good morning, everyone. Welcome to our Third Quarter 2021 Earnings Conference Call. I'd like to remind you that the earnings call, press release, and slide presentation related to the call are available in the Investors section of 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 will make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements on certain assumptions and expectations about 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 expectations. In today's conference call, 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 now like to turn the call over to Don Casey, our Chief Executive Officer.

Thank you, Andrea, and thank all of you for joining us this morning for Dentsply Sirona's third quarter earnings call. Overall, we continue to be pleased with the recovery in the dental market, how we are operating, and our prospects for growth in the future. During this quarter, our top-line showed strong growth versus both 2020 and, importantly, against the pre-pandemic level in 2019. This growth was seen across most business units and regions. Looking at the remainder of the year, we have good momentum but are mindful that the pandemic remains a key variable. Before we get into the details of the quarter, I did want to acknowledge the entire Dentsply Sirona team. Throughout the pandemic and now in the recovery phase, they have remained focused on delivering for the customer, disciplined in how they operate, and committed to making progress against our strategic goals. It is a privilege to be part of this group. Moving now to Slide 6. As I mentioned, our financial performance in the third quarter was quite strong with revenues reaching $1.69 billion. This represents a robust 21% increase on an organic basis. Our operating margin was 20.2% versus 22% in the prior year as SG&A and R&D investments increased to reflect a recovery in the market, as well as our commitment to innovation. Adjusted non-GAAP EPS was $0.68, which is an increase versus $0.67 a year ago. Cash flow was $172 million for the quarter. To provide more details around the quarter, I will now turn the call over to our Chief Financial Officer, Jorge Gomez.

Thank you, Don. Good morning and thanks to all of you for joining us to discuss another strong quarter in our fiscal year 2021. As a reminder, my remarks today will be based on non-GAAP financial results unless otherwise noted. Please refer to the reconciliation tables at the back of the press release and slides, both of which are posted in the Investors section of our website. In the third quarter, we delivered strong revenue growth across the business in both Consumables and Technologies & Equipment (T&E). The business delivered organic revenue growth of 21.1% and reported growth of 19.4%. Because of the pandemic, it makes it difficult to gauge growth. I want to point out that we also posted robust organic sales growth versus 2019 pre-COVID levels. Compared to the third quarter of 2019, reported sales grew 11.1% and organic sales grew 10.7%, driven by growth in both segments and across all regions. This performance against the 2019 baseline confirms the steady recovery trend we have seen in 2021. Gross profit was $624 million or 58.4% of sales. Our margin rate remains steady, reflecting a balanced contribution from all of our businesses and a more normalized mix. Looking back, we have delivered 50 basis points of gross margin expansion since Q3 2019, the pre-COVID baseline, attributed to portfolio optimization and our efforts to simplify the organization over the last few years. As you all know, the global supply chain environment continues to be a challenge in terms of cost, availability of components, and labor across industries. So far, we have been able to meet demand at a normal pace and continue to work on various operational strategies to minimize the impact to our customers and to our P&L. Now, turning to SG&A. In the third quarter, we had expenses of $373 million or 34.9% of sales. This ratio remains below pre-COVID 2019 levels, reflecting the benefits from our efficiency improvement initiatives. Quarter-over-quarter SG&A increased as we ramped planned SG&A investments, particularly in sales and marketing, to support our growth plans in strategic areas, including clear aligners, implants, and digital capabilities. Q3 spending on R&D was up 31.6% year-over-year to $35 million. We expect this level of increased investment to continue as we are committed to delivering innovation and great solutions to our customers. As a result of the heightened emphasis on our own R&D over the last few years, we are pleased to see a much healthier solutions pipeline, as Don will discuss later. Turning now to profitability. Operating profit grew to $216 million versus $197 million last year. Operating margin was 20.2%. Looking back, we have delivered 230 basis points of operating margin expansion since Q3 2019, the pre-COVID baseline. We have expanded margins and we have also made meaningful investments in our business, which are essential to fund sustainable long-term growth initiatives. Net interest and other expense increased versus last year, mainly due to the impact from foreign exchange fluctuations. Regarding taxes in the quarter, our effective tax rate increased to 23.4% from 20.3% in the prior-year quarter, primarily due to geographic mix of pre-tax income and our continued business recovery from COVID. Turning to earnings, EPS was $0.68 versus $0.67 in the prior year quarter. Moving to segment performance versus the third quarter of 2020, Consumables and Technologies & Equipment grew 15.9% and 25.3%, respectively. Both segments posted strong growth across all product categories. The Consumables segment had sales of $440 million, an organic increase of 15.9% versus the prior year. Overall growth was strong across all regions and in all categories, most notably within the Endo and rest of parts of our portfolio, which represent strategic priorities for our business. This quarter, we launched ProTaper Ultimate, the first major endodontic platform innovation launched in our Endo business in more than five years. Market reactions thus far have been very positive. Additionally, the rebound in the preventive business, particularly in the U.S., continued in Q3. The consumables market has been resilient and our teams are executing well through the recovery. Currency favorably impacted consumable sales by 1.3%, offset by a reduction of 4.8% due to divestitures and discontinued products. Moving onto Technologies & Equipment segment results, T&E organic sales grew 25.3% versus the prior year, with strong overall growth in all regions and product categories. Growth was most notably driven by the digital category and implants. There continues to be strong momentum on increasing digital capabilities within dental offices. Demand is high for digital devices such as Primescan and for imaging equipment such as our new Axeos unit. We're seeing a growing trend in dental offices upgrading from 2D to 3D units and we are observing this trend in all global markets. Our clear aligners franchise drove strong year-over-year growth this quarter. The aligners market continues to grow faster than most categories and the aligners business is a key contributor to our growth strategy. In the dentist-directed channel, SureSmile continues its expansion domestically and internationally. In addition, the new software we recently launched has been positively received by the market due to its significant user experience enhancements. The upcoming launch of vPro will be another key differentiator for SureSmile offerings. As you may recall, when we acquired Propel earlier in the year, we intended to utilize it for SureSmile as well. SureSmile is on track to meet our run rate goal for the year. After a very strong first half in 2021, the direct-to-consumer (DTC) channel experienced softness in Q3. We believe this is largely attributed to COVID recovery dynamics and seasonality. Given the run rate we're seeing for Byte in the second half of this year, there is a possibility we may not fully achieve the annualized run rate goal for this year. DTC is an exciting new category in the dental industry, and Byte is strategically positioned for growth with its focus on customer experience and key differentiators, such as high product quality and high engagement with customers through the entire aligner journey. Lastly, within T&E, currency favorably impacted sales by 1.2%, as well as a benefit from acquisitions of 7.7%, offset by a reduction of 9.4% due to divestitures and discontinued products. Now I'll turn to financial performance by region during the third quarter. U.S. sales were $399 million, a growth of 25.3% versus last year. Organic sales growth was 20.1%. U.S. dental sales volumes remain at close to normal levels in both segments, despite COVID variance that spiked late in the quarter. European sales were also $399 million, a growth of 13.6% versus last year. Organic growth was 17.8%. Similar to the U.S., the majority of product lines in Consumables and T&E are running at pre-COVID levels or better. Rest of World sales were $271 million, a growth of 20.1% versus last year. Organic sales growth was 27.8%, reflecting recovery in demand across Consumables and T&E. The APEC region has delivered continued growth for our business throughout the entire fiscal year 2021. Next, I'd like to cover cash flow. In the third quarter of 2021, we generated operating cash flow of $172 million and free cash flow of $137 million. During this quarter, we paid our regular dividend and we paid long-term debt of $296 million, which matured in July. We finished the quarter with cash on hand of $281 million. Year-to-date, we have generated $435 million in operating cash flow and $334 million in free cash flow. On a year-to-date basis, we have deployed more than $248 million to fund strategic acquisitions, including Datum and Propel Orthodontics. We have also returned a total of $158 million to shareholders through dividends and share buybacks. Our financial position and balance sheet remain strong. We are well-positioned to continue to deploy capital strategically. Now let me provide an update on our financial expectations for 2021. Based on the solid performance of our business year-to-date and the current market trends, we are increasing our estimates for 2021 as follows. We are tightening our revenue outlook by increasing the bottom of our range. We now expect revenues to be in the $4.25 billion to $4.3 billion range. With respect to EPS, we are increasing and narrowing our estimates for fiscal year 2021; the new EPS outlook range is now $2.87 to $2.92. This range is based on a new assumption for the euro to USD rate of 1.16. This is lower than fiscal year 2021 budget assumption of 1.22 and lower than last quarter's assumption for the second half of the year of 1.18. Given our long euro exposure, a weaker euro represents a net headwind to our P&L. Overall, we're very pleased with the current momentum in our business; our new 2021 outlook for revenue and earnings reflects that confidence. To close my remarks, we're proud to share the progress we're making in our sustainability journey. As you may remember, we indicated a few months ago that we were taking substantive steps to advance sustainability. I am happy to report that just a few weeks ago, we shared our sustainability strategy with a broad range of stakeholders at DS World, and also published our 2020 Sustainability Report and our 2025 goals. It is our commitment to be transparent and accountable with respect to our strategy and goals. Going forward, we will measure our progress within three sustainability verticals: Healthy Planet, Healthy Smiles, and Healthy Business. To support our Healthy Smiles pillar, this quarter we entered into a five-year partnership with Smile Train and committed $5 million to the organization. Smile Train is a nonprofit organization that provides corrective surgery for children with cleft lips and palates across the world. We're excited by the opportunity to help improve oral health for children worldwide. I encourage you to visit the sustainability hub on our website to review our metrics and actions within each of our sustainability verticals. We are convinced that our commitment to sustainability will deliver long-term value to our stakeholders. With that, I will now turn the call back to Don.

Thank you, Jorge. Moving on, I wanted to provide some additional perspective around our strategy and priorities going forward. Moving to Slide 17 in the presentation. Our priorities have remained consistent over the last few years, which has allowed us to stay very focused on delivering consistent results. These priorities are to grow revenues 4% to 5% long-term through a combination of organic and inorganic activities. The second is to drive our margin to 22% by 2022. Essential to these efforts is the third priority: simplifying the organization to better leverage our scale as one of the largest companies in the dental space. When we meet these goals, we deliver consistent and sustainable double-digit EPS growth. Moving to Slide 18 to detail some of the progress we've made against those priorities. Growth is our overriding priority, with the objective being to deliver 4% to 5% topline increases long-term. We've made important progress against this goal. In addition to the 21% growth for the quarter, year-to-date, we have delivered an increase of 35.9% versus 2020. It's also worth noting that for the entire year 2019, the last period prior to the pandemic, organic growth was 6.1%. This kind of performance gives us confidence in our growth strategy and our priorities. We will keep driving growth by focusing on four areas: building on our leading role in digital dentistry, accelerating our rapidly growing clear aligner franchise, delivering major innovations in critical areas, and building out our capabilities in faster-growing parts of the world. Our portfolio moves over the last few years also reflect these priorities and have resulted in increasing our exposure to faster-growing areas of the dental market. Turning to the next priority around margin expansion. We are confident that we will deliver the 22% margin goal by the end of 2022. We are realizing the benefits of the three-year restructuring plan, as well as portfolio reshaping efforts. Our team also continues working on simplifying the organization both structurally and in how we work. A great example of this is our Comprehensive Enterprise Modernization Program under Jorge's leadership that increases the use of automation and digital tools across the company to improve efficiency and the customer experience. These efforts have helped us deliver significant headcount efficiencies and we are on track to deliver the $250 million in savings that we outlined in 2018. Looking out to the future, our strategy outlined on Page 19 is to develop superior integrated workflows built on diagnostic excellence, easy-to-use treatment planning, and essential products that improve outcomes for patients and dental practices. On Page 20, Dentsply Sirona's impressive digital foundation is outlined. It starts with a large global footprint in imaging with major brands like Schick, Orthopos, Galileo, and our newest addition, Axeos. Our large CEREC franchise that includes both chairside and lab-based (DI) is another critical component in our robust digital foundation. As Jorge noted, coming out of the pandemic, both of these digital businesses have strong momentum as dentists globally are looking to upgrade their practices. By adding these more powerful diagnostic tools like Primescan and 3D imaging, dentists can incorporate more complex procedures into their practice with confidence. Adding these more sophisticated diagnostic tools also creates an opportunity to take advantage of treatment planning for complex cases like implants and clear aligners. Treatment planning helps dentists map out the entire procedure. This increases their efficiency while elevating their confidence, which can lead to better results for patients. Dentsply Sirona is one of the largest providers of treatment planning in all of dentistry with brands like Cares, CEREC, Atlantis, Simplant, and SureSmile. We look at this digital foundation as one of our most important assets and this area is a major investment priority for us. These investments will drive faster innovation, expanded treatment planning capabilities, and accelerated progress in the areas of artificial intelligence. These efforts are now supported by over 500 software engineers within Dentsply Sirona today that are helping us continue leading the digital dental revolution. Moving to Page 21, innovation is our lifeblood and we have delivered several innovations in 2021 in key areas like implants and Endo. At DS World, several of our major innovations were on display. Rather than just launching products, our customers could see our approach is based on simplifying critical workflows from diagnosis to delivering the final treatment in ways that can transform their practices. Our ability to work across the entire procedure is truly unique to Dentsply Sirona. The fact that we address so many of the key procedures gives us a real advantage as we look to become the essential partner to the practice. A great example of this was the comprehensive re-stage of our implant business announced last month. For us, it's not just about launching a new screw and abutment. It is about rethinking the entire implant workflow and bringing all the assets of Dentsply Sirona together to help simplify things for the dentist. It starts with moving to one brand name, Dentsply Sirona Implants. It includes adding tools to Primescan that actually allow for edentulous scanning, a real breakthrough, while also advancing innovative multi- and single-tooth replacement capabilities. It includes a Simplant treatment planning refresh, and a comprehensive continuing education program to support a digital approach to implants. It allows us to deploy Lucitone to enhance performance of digital dentures. We have a best-in-class bone graft product with OSSIX. The team here is also really excited about the launch of PrimeTaper. This is an immediate-load, self-tapping product that is built off a well-known procedure. The system has launched in the U.S. and EMEA to excellent initial reviews. This is the kind of integrated innovation across a critical procedure that we believe transforms dentistry. We're also adding new products to our MIS value implant business to continue building momentum in this rapidly growing franchise. At DS World, we also launched ProTaper Ultimate in the endodontic space, as Jorge mentioned, representing a major innovation in this important therapeutic area. It's more than a file; it includes a great cleaning product as well as a new obturation system that includes a new bioceramic sealant. Early users of the system, which we call the Trifecta, are really excited about ProTaper Ultimate as it simplifies the procedure significantly. We have also launched a major software upgrade in CEREC 5.2, as well as SureSmile 7.6. CEREC 5.2 is so powerful that it makes Primescan feel like a totally new product and it takes its category-leading speed and accuracy to new levels. SureSmile 7.6 makes major progress around our user interface. We also have a full slate of news for our clear aligner franchise. As we have two brands, we're maximizing the investment in both R&D and manufacturing by offering innovations across both the SureSmile and Byte businesses. Innovations in this space include our vibration technology, vPro, and Hyper Byte for improved comfort. We are also launching new whitening products in the near term. To finish the discussion around innovation, there was major progress in 2021 that will pay dividends going forward. I would also note that we have a very robust pipeline going forward that we will bring to the market in the future. Moving now to Slide 22. To summarize, our strong performance year-to-date gives us confidence going forward for the remainder of 2021. We have good momentum leading into the future. Our results reflect the underlying resilience of the dental market and our team's disciplined performance against our operational goals and progress against our key strategic priorities. Based on this, as Jorge said, we are raising our 2021 earnings outlook. Going beyond the quarter-to-quarter discussion, we also believe that Dentsply Sirona is well-positioned to transform dentistry and deliver sustainable growth going forward. And with that, we will now open the call to questions.

Thank you. And to everyone who is participating in the Q&A session today, we kindly ask that you please limit yourself to one question and one follow-up. Our first question will come from the line of Elizabeth Anderson with Evercore. Your line is now open.

Hey, guys. Good morning and thank you so much for taking the question. I was wondering if you could go into a little bit of detail perhaps on the T&E segment and what's implied in your guidance for the fourth quarter. I know some people had questions about when revenues were being recognized off of DS World and some delays in shipments and installation of some equipment, so I just wanted to make sure I'm understanding that portion of it. Thanks.

Good morning, Elizabeth. Thanks for the question. Yes, what we're seeing for T&E going into the fourth quarter is along the lines of what we said in our prepared remarks, which is we have great momentum. There is great demand for Primescan, great demand for Axeos and imaging in general. The timing of sales relative to DS World: most of those sales actually happened in the fourth quarter. There was a lot of great excitement. So in our guidance for the fourth quarter, we are including the substantial growth for CAD and for imaging in general. So performance in that part of the business continues to be strong.

Okay. Thank you. That's helpful. Maybe switching over to the clear aligner business — I know you said there was a bit of weakness in the DTC market. Can you go into what you think is driving that, and then contrast it to how you're seeing SureSmile?

Thank you for the question. The DTC segment obviously benefited from the pandemic. As we're entering this recovery phase, we're seeing across not just the DTC clear aligner space but a number of consumer businesses that consumers have choices in terms of where they're spending discretionary income. People are going on vacations and doing other things. So we think we're seeing a little bit of seasonality and some competition for discretionary spending among our core target audience. What we saw in Q3 is a little bit of seasonality and consumers looking at other discretionary spending. I would tell you that when we prepared our projections, we reflected on the fact that in the second quarter of 2018 we had zero sales in clear aligners and today, if it were an independent SBU, it would be one of our more significant franchises and one that we expect to continue providing a lot of growth into the future.

And those comments — you said you focus mostly on the DTC market, but with SureSmile, would you say you're seeing similar trends or do those diverge anywhere?

They're a little bit divergent. SureSmile continued to perform as we expected. It continues to demonstrate very consistent results. We're optimistic as we begin to push that outside the U.S., and we have made progress doing that, that we expect to see continued growth for SureSmile. The plans for Byte are also to pick that up. First, we have new products coming for Byte. Second, we believe there's opportunity to expand this outside the U.S. The DTC channel in parts of Asia and other areas is doing pretty well, and we want to participate in those regions. Another important point is Byte plays a role in our relationships with professionals. Not everyone is eligible for Byte; some people are referred to dentists who use Primescan and other tools and then go into SureSmile. So Byte is a strategic play that gives us opportunities to grow in a number of different areas.

Okay. Cool. That's very helpful. Thank you very much.

Thank you. Next question, please.

Thank you. Our next question will come from the line of Tycho Peterson with JP Morgan. Your line is now open.

Thanks. Don, I hate to nitpick after a beat-and-raise quarter, but just following up on the clear aligners: you had targets out there for the clear aligners about $300 million for the year. Where are you trending on Byte versus that $200 million Byte target you laid out? And how do you know it's not a competitive issue? The channels have gotten pretty competitive.

A couple of things, Tycho. We're not going to give exact numbers on Byte, but it's a little bit soft. We're not talking a major issue. We want to be as transparent as we possibly can, so we're telling you what we're seeing. We don't think it's a competitive issue where we're losing ground to others based on what we observe. We monitor unique visitors, conversion funnels, and our process involves somebody coming into the franchise, buying a diagnostic kit and then hopefully purchasing aligners, so we can see where people leave the funnel. At this point, we don't feel there's been a significant change in momentum from purchasing a diagnostic kit to actually purchasing aligners. We feel it's more of a narrowing of the funnel than losing people to competitors within the funnel.

Okay. Then a follow-up on supply chain: what are you seeing in the channel in terms of inventory levels? Are dealers starting to stockpile? Are you running into shortages? Are you able to pass on higher shipping costs? Can you walk through what you're seeing on the supply chain side right now?

I'll take that question. As I indicated in my remarks, there are challenges. So far, we have not been materially impacted in our ability to manufacture products or to supply our distributors. The supply chain team is doing a great job because it is harder now to find certain components and it is more expensive in some cases to procure certain materials. We have managed all of that so far. With respect to inventory in the pipeline or channel, we haven't seen any major disruption or material changes at this point. This is a global situation and it's hard to predict, but so far our financials have not been materially impacted by supply chain issues beyond some elevated costs that we have been able to offset. For example, we announced a price increase effective October 1st, and some of that helps offset incremental costs that we are all facing.

Okay. And on the cost side, has wage inflation and hiring challenges changed customer views on automation and digitization? Are staffing shortages driving more interest in digital solutions?

Yes, I think so. There are shortages of labor in many spaces and the dental industry is one of them. Staffing issues at dental offices are becoming a bit challenging and that motivates our customers to think about ways to improve automation and efficiency. I think that is reflected in the strong momentum we've seen in our digital equipment, including digital scanners and 3D units. That trend is accelerating and will help expedite the digital transformation we've been discussing.

Okay. Thank you.

Thank you. Our next question will come from the line of Jon Block with Stifel. Your line is now open.

Hey, guys. This is Tom Stephan on for Jon. Thanks for taking the questions. Sorry to belabor this, but want to go back to Byte. Can you elaborate on the macro headwinds you called out — specifically how they looked in the third quarter versus prior periods? Also, did the Apple iOS changes have any impact on Byte results, and if so, do you believe you're navigating those challenges?

I'll answer the iOS part first. The Apple changes affect how platforms like Facebook handle ad targeting and how we interact with that. One reason we acquired Byte was because they have a strong team that's sophisticated in demand generation and in the digital mix — search engine optimization, social media, affiliates, and insurance partnerships. We've worked our way through those platform changes. Regarding the headwinds in Q3 versus Q2: we saw seasonality. People were taking vacations and spending discretionary income on other things. Customers who initially engaged with the diagnostic kit sometimes delayed taking the next step because they were traveling or spending on other post-pandemic activities. There was also some change related to government pandemic-related payments earlier in the year that affected consumer behavior. We're continuing to monitor and work through these dynamics. Overall, we posted significant growth this quarter and we raised guidance, and we remain optimistic about Byte's future growth.

Great. That's helpful. On the 2021 top-line guidance, the implied Q4 suggests modest sequential growth. T&E sounds like it will be very strong due to DS World. On the other side, how should we think about Consumables? Any timing or other puts and takes there?

Tom, there is a good increase from Q3 to Q4 sequentially. When you do the math, the sequential growth implied is several percentage points — probably in the 4% to 5% range — so that is a good jump. Specifically for Consumables, there's always the possibility of timing effects between quarters. We announced a price increase effective October 1st, which can create some movement of revenue from one month or quarter to another. There may have been some acceleration of consumable purchases from Q4 into Q3 in anticipation of that increase, though probably not material. But the macro point is there is sequential growth, and the organic growth rate for total 2021 is strong — when you look at the range of 22% to 25% organic growth, it's closer to the higher end, and those are robust numbers.

Got it. Thanks, guys.

Thank you. Our next question will come from the line of Jeff Johnson with Robert W. Baird. Your line is now open.

Thank you. Good morning. Don, you sounded optimistic about the implant business in the third quarter, even though that business has been lagging the market. How do you feel you're performing relative to the market in the third quarter? This was ahead of the PrimeTaper launch; any expectations for the next several quarters for that business?

Thanks, Jeff. We feel we had a good quarter in implants and in imaging, and we have momentum for a number of reasons. In our value segment, we're seeing good progress. The restage we announced followed extensive work with key opinion leaders and we feel those efforts are starting to have a positive effect. We may still be slightly lighter than the category overall, but with the restage and restructuring we expect to close that gap. It won't happen overnight, but in the foreseeable future we expect to be growing at the category level. We want to grow, then grow with the category, and the quarter's results show progress toward that objective.

Fair enough. Following up on Byte: when thinking about that business, you probably have at least a few months of visibility from initial tests through conversion and revenue. Any update on Q4 — are you seeing sequential step-down from Q3, sequential stability, or improvement? Any color relative to the third quarter number would be helpful.

Jeff, I'm not going to provide Q4 numbers for Byte specifically, but we've been transparent about the softness we saw in Q3 and the fact that because of that softness we think there's a chance we won't hit the $200 million run-rate goal for Byte this year. That explains what we're seeing at the moment.

Thank you. Our next question will come from the line of Yi Chen with H.C. Wainwright. Your line is now open.

Thank you for taking my question. Could you comment on how long you think the supply chain issue can persist and whether you expect the issue to fall both on the manufacturing side and on the logistics side? Thank you.

Good morning. It's hard to predict how long the supply chain issues will last because this is impacting pretty much all manufacturing industries globally. We are a relatively small piece of a much larger equation. We're taking many actions to minimize the impact: procurement is identifying new sources for certain components, renegotiating contracts to secure access to key components, and harmonizing certain products or components to improve reliability of supply. We're balancing our manufacturing operations to keep lines running efficiently rather than stopping and starting. The supply chain team is doing a great job, and so far we have not been materially impacted in our ability to manufacture products.

Got it. Do you expect your inventory level to increase in the coming quarters?

I don't think so. We watch inventory very closely — both internal inventory and inventory in the channel. Our objective is to ensure our manufacturing process is smooth and predictable. The worst thing for manufacturing is large movements in inventories period-to-period. Our long-term goal is to decrease days of inventory and keep levels stable, and that's the key internal metric we track closely.

Thank you. Next question.

Thank you. Our next question will come from the line of Jason Bednar with Piper Sandler. Your line is now open.

Hi, this is Korinne Wolfmeyer on for Jason. Thanks for taking the questions. First on SureSmile and the Clear Aligner business more broadly: can you provide more color on your marketing and DTC plans for the remainder of the year and into next year? What level of investments should we expect?

On SureSmile, our program is about how we see the product in the market. We will pull slightly different levers that may include some DTC activity, but there is no radical change in the overall P&L construct. For Byte, there are many levers: paid social is important, but since acquiring Byte we've helped them focus more on search engine optimization, stronger content, a robust affiliate marketing program, and insurance partnerships. We don't expect a large change in overall marketing spend; we're disciplined and won't chase unprofitable volume. Our goal is to broaden the customer acquisition mix beyond reliance on a single paid channel and to make Byte less dependent on paid social. We see a long runway for growth and plan to be deliberate and efficient in marketing investments.

Helpful. One last question: can you speak to early impact from DS Activate? I know it's early, but how many doctors have taken advantage of this program and have you seen any pull-through yet?

We're very happy with DS Activate. The program is principally in North America and it's going well. We see strong interest — for example, finding parking is hard during DS Activate sessions because so many doctors are attending the Academy events. Without giving specific numbers, we believe the program is doing well and generating strong engagement.

Next question, please.

Thank you.

Thank you. Our next question will come from the line of Justin Lane with William Blair. Your line is now open.

Good morning. Quick question: the high end of the organic growth target you gave for the full year, 22% to 25%, I think implies essentially flat year-over-year growth in Q4 if my math is correct. Just trying to understand the puts and takes here. I initially thought there might be softer T&E in the quarter or early orders pulled into Q3, but that doesn't sound like the case. Any color would be helpful.

Justin, thank you. If you go to the 25% end of the range on an organic basis, the implied growth would be closer to 5% sequentially in Q4. So your math may be off depending on the scenario, but the guidance implies a positive sequential move for the quarter.

And second question: any update on what you're seeing in other regions outside the U.S. in terms of patient volume and spend? Trying to understand what you're including in your guidance from a geographic perspective.

There's nothing major to highlight beyond what I said earlier: in Q3 all regions performed well and we're not seeing any meaningful deviation from that into Q4. COVID remains a shadow with some small markets experiencing lockdowns, for example Australia, New Zealand, and parts of China, but those markets are relatively small for us and haven't affected our sales materially. Our expectation for the fourth quarter from a regional standpoint is a continuation of Q3 performance.

Got it. Thank you.

Thank you. Our next question will come from the line of Michael Cherny with Bank of America. Your line is now open.

Hi, good morning. This is Allen in for Mike. Thanks for taking the questions. On the operating margin and the 22% target for 2022, can you talk about the swing factors and rank order? You mentioned investments in SG&A, the implant rebranding, and labor costs. How should we think about the rank order of those themes?

Thank you. There needs to be a good contribution from all areas of the P&L to get to the 22% target, and we feel good about all of them. Starting with the top-line, we have the 4% to 5% revenue growth target which is important. Gross margin stability is another factor — we've trended steadily there. We also see opportunities for cost savings in both COGS and SG&A that we are pursuing, many tied to our Enterprise Modernization Program: process harmonization, centralization, and automation. There are further possibilities to optimize our footprint, both manufacturing and facilities, and to rationalize software and other overheads as we adapt to new ways of working post-pandemic. From a product design perspective, we're working to improve materials costs and manufacturing efficiency. When you add all of these levers together, that's where we feel confident about the 22% target.

Great. Thank you very much.

Thank you. Our next question will come from the line of Nathan Rich with Goldman Sachs. Your line is now open.

Hi. Good morning. Jorge, you highlighted a lot of product opportunities. As you think about going forward, how do you balance investing more aggressively to pursue those opportunities against inflationary cost pressures and the path to 22% margins? Has that dynamic changed your historical approach?

Thanks, Nathan. Our thinking hasn't changed substantially. The current environment reinforces beliefs we had going into the pandemic and encourages us to invest more and faster in promising opportunities. We are proud of the increased R&D activity and what's coming out of that work. We have many ideas in the pipeline aligned with macro trends like digitization and changing consumer behavior, and we're moving to bring those to market faster. So while we remain focused on margins, we're also accelerating investments where we see strong potential returns.

Quick follow-up: have you seen distributors stock up? Is there any change in distributor inventory levels with the current inflationary environment and price increases?

We don't think so. We track that closely and manage inventory levels in a disciplined way. We're not seeing significant changes in distributor inventory at this point.

Thank you. This concludes our question-and-answer session for today. I will now hand the conference over to Don Casey, Chief Executive Officer, for closing comments.

Yes. Thanks so much and thanks for all the time and great questions. I'd summarize by saying we feel really good about the quarter. It's rare that you get to talk about a 20% plus organic quarter with breadth across the portfolio. We saw strong momentum in our T&E and consumables businesses, and we're excited about innovation across the platform. For example, we're seeing double-digit implant growth — something we haven't seen in a long time — and there's tremendous momentum in our digital businesses. We've innovated across a broad platform and we feel good about the runway ahead. I'd also pull back beyond quarter-to-quarter results: it was almost three years ago to the day when we announced the restructuring and since then we feel we're really on track in terms of growth. If you look at 2019 and then the recovery phase, we were meeting margin targets and we delivered headcount reductions. We've created a simpler, more functional organization and the team is energized about the future. For those who attended DS World, you could see how we're laying things out from a procedure perspective and why we think Dentsply Sirona is well-positioned to become the essential partner to practices all over the world. I'll close and say thank you all and I look forward to catching up in one-on-one sessions.

Thank you. Everyone, this concludes our webcast and conference call for today. You may now disconnect. Have a good day.