DENTSPLY SIRONA Inc. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Dentsply Sirona Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Andrea Daley, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Dentsply Sirona fourth quarter 2023 earnings call. Joining me for today's call is Simon Campion, Chief Executive Officer; Glenn Coleman, Chief Financial Officer; and Andreas Frank, Chief Business Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.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 may make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updating information in subsequent SEC filings lists some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance, and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Simon.

Thank you, Andrea. We appreciate you all joining us this morning for our Q4 2023 earnings call. Today, I'll begin by providing a summary of our recent performance then Glenn will cover Q4 and full year 2023 financial results and share our 2024 outlook. I will finish by providing a strategic operating update. Now starting on slide 3. We achieved over 2% organic sales growth in 2023, above our projection driven by growth in three of our four segments. The Ortho business saw double-digit growth in both Byte and SureSmile. The EDS segments posted growth in all regions and product categories and in total, delivered mid single-digit growth, while Wellspect Healthcare generated high single-digit growth. Through the fourth quarter, the macro environment remains challenging. The CTS segment declined slightly more than expected, mainly due to equipment and instruments with softness in imaging which we anticipate will continue in 2024. This was partially offset by an increase in demand for CAD/CAM and particularly for intraoral scanners, which was another bright spot for us. In January, we conducted our latest customer survey with over 3,500 respondents from 12 key geographies. Sentiment in the US improved slightly about the future of the industry and their practices. German and Australian customers continue to express a negative outlook, and this is largely unchanged from the last quarter. The survey also suggested that patient demand in China continues at reduced levels but with no sequential deterioration. EBITDA margin for 2023 came in at 17.4% and adjusted EPS was $1.83, both in line with our guidance. As we stated at the beginning of the year, we consider 2023 a transition year for Dentsply Sirona. We promptly and decisively executed several critical transformation initiatives to achieve the necessary cost savings, enabling strategic reinvestment for hygiene and growth. We made significant progress on these initiatives, which have strengthened the foundation of the business and set us on a path to improved future performance, which we highlighted for you at our Investor Day in November. As we have said, we believe 2024 will be an inflection year for us, delivering double-digit adjusted EPS growth, largely due to the benefits of our transformation initiatives. We remain laser-focused on executing our strategy while simultaneously strengthening our foundation, developing new capabilities, and implementing greater discipline and rigor across our business. Moving to slide 4, I would like to share some selected business highlights. In 2023, we continued to bring innovation to the market. We enhanced our DS Core offering expanding the platform and enabling new clinical functionality. On the last earnings call, I shared that we had already exceeded our DS Core target for 2023. And as an update, we ended the year with over 14,000 unique accounts. We believe that DS Core will play an ever-expanding role in shaping dentistry as the industry undergoes a digital evolution that's connecting technology and clinical workflows. We are also focusing on digital print materials and we recently launched Lucitone for Primeprint and expanded our splint offering. We believe we are well positioned to advance digital print materials and continue to see opportunities to accelerate the adoption of 3D printing in dental practices, as a standalone office capability or as a complement to in-office milling. As previously communicated, we reinvigorated our focus on clinical education offerings. We know digital dentistry requires hands-on in-person training to facilitate practice integration and unlock the potential of digital tools, and we are committed to providing this for our customers. In 2023, we were proud to offer over 9,200 training and education courses globally through live, online, and hybrid formats, which reflects about a 30% increase compared to the prior year. We also expanded our reach with digital learning platforms through a partnership with DTI that started in the fourth quarter. Live events play an important role in enriching our clinical education platform. Earlier this month, I had the opportunity to attend our second DS World event in Dubai. This event featured courses on mainly dental disciplines with over 1,000 participants in attendance, and this is the first of several DS World events we have planned this year. In the fourth quarter, we also conducted several implants-focused events in the US and Europe. Building on the success of these events, we look forward to hosting our Implant Solutions World Summit in Miami in the second quarter. We continue to progress our sustainability strategy. In 2023, we achieved a new record for our injury and illness prevention rate. The safety of our employees is of the utmost importance, and we are very proud of this accomplishment. Our Wellspect Healthcare business also continues to lead in this area and recently won an award for sustainable MedTech innovation for the use of renewable plastic in LoFric Elle, a female urinary catheter. We were also named to Sustainalytics 2024 ESG top-rated companies list earlier this month. Wrapping up the highlights, we recently announced an expansion of our collaboration with A-dec, introducing a new integrated product offering that will bring together Primescan Connect and certain A-dec delivery systems. This builds upon our existing collaboration with A-dec that integrated Cavitron into their platform. The new offering creates a fresh solution to meet customer needs, empowering dental professionals to streamline practice workflows and elevate the patient experience. And with that, I will hand the call over to Glenn for the financial update.

Thanks, Simon. Good morning, and thank you all for joining us. Today, I'll cover several topics, including our fourth quarter and full year 2023 results, as well as our outlook for 2024. Let's begin on slide 5. Our fourth quarter revenue was $1.01 billion, representing reported sales growth of 2.9% and organic sales growth of 1.9%. Foreign currency positively impacted sales by approximately $10 million or 100 basis points compared to the prior year quarter. On a constant currency basis, the key highlights in the quarter included strong sales performance in China, which grew over 35%, double-digit growth in both Wellspect and Implants and Prosthetics, and high single-digit growth in our global aligners business. Despite higher sales, EBITDA margins declined 40 basis points in the quarter, mainly due to year-over-year decline in gross margins, which contracted 100 basis points. This was largely driven by unfavorable country mix due to lower-margin implant sales in China and unfavorable product mix within our endo and CAD/CAM portfolios. Adjusted EPS in the quarter was $0.44, down 4% from the prior year, largely due to lower gross margins and a higher tax rate. In the fourth quarter, we generated $160 million of operating cash flow, up 13% year-over-year, driven by improved inventory management and the timing of accounts payable compared to the prior year. Free cash flow conversion was 128% compared to 110% in the prior year. In the fourth quarter, we repurchased $150 million of stock at an average price of $30.73 and paid $30 million in dividends. For the full year, we returned $416 million to shareholders. Let's now turn to fourth quarter segment performance on slide 6. Starting with the Essential Dental Solutions segment, which includes endo, resto, and preventive products, organic sales grew 3.4%, driven by growth in all three regions and in each product category. EDS benefited from stable patient traffic and price increases implemented earlier in the year. Shifting to the Orthodontic and Implant Solutions segment, organic sales grew 10.6%. Aligners grew high single digits. Specifically, SureSmile grew 13% and continues to benefit from market share gains, new product offerings and differentiated outcomes. Additionally, we believe the recent launch of our SureSmile simulator within DS Core will benefit future sales. Our direct-to-consumer aligner brand Byte grew 6% despite a constrained financing environment. With the recent uptick in new customer interest, we are ramping our investment in treatment planning, clinical support, and sales, which supports our anticipated greater than 20% growth in Byte this year. We also expect SureSmile to grow double digits in 2024. Moving to Implants and Prosthetics, double-digit growth was a clear bright spot in the quarter driven by VBP and market share gains in China and higher demand in Europe. Globally, premium and value implants saw similar growth rates. Our US implants business was down slightly in the quarter, but showed less of a decline than previous quarters, and we anticipate a return to growth in 2024. Wrapping up our dental performance, CTS, our Connected Technology Solutions segment saw organic sales decline 8.3% versus the prior year quarter. Our global CAD/CAM business grew low single digits, driven by increased demand in the US, while the Equipment & Instruments business declined double digits in the quarter. Moving to Wellspect Healthcare. Organic sales grew 16.9%, driven by growth in Europe and the US. As a reminder, Wellspect had an easier comp, as the prior year quarter was impacted by a one-time pricing matter in Italy. In addition, new product launches contributed to better-than-expected year-over-year growth. Now, let's turn to slide 7 to discuss fourth quarter financial performance by region. US sales declined 1.2% due to lower sales of equipment instruments and implants, partially offset by strong growth in aligners and CAD/CAM equipment. US CAD/CAM distributor inventory levels decreased sequentially in the quarter by approximately $4 million and ended the year essentially flat compared to the end of 2022. Relative to historical averages, distributor inventory levels remain low. Turning to Europe. The region returned to growth in the quarter with contributions from Wellspect, EDS, and OIS. SureSmile grew over 25% with notable growth in Spain, France, and Germany. We also saw an increase in implants demand driven by growth in MIS and higher conversions from our legacy product, XiVE, to our new DS OmniTaper implant. Our CTS segment continued to see lower volumes due to recessionary impacts, particularly in Germany, which is the largest market in the region. Excluding Germany, Europe organic sales grew 4.1% compared to the prior year. Rest of World organic sales grew 5.4% in the quarter, led by China, which delivered significant growth in implants. In 2023, we saw a more than 40% increase in our China implants customer base. The public and private sector both continue to experience significant market growth. Sales in Japan declined during the quarter, as the prior year quarter benefited from government rebate programs on certain equipment. Wrapping up Q4 regional performance, Latin America grew high single digits in the quarter, led by solid demand and sales execution in Brazil and Mexico. We saw an improvement in interoral scanner volume, driven by the launch of Primescan Connect and sales of refurbished Omnicam units in the region. In the first half 2024, we plan to launch SureSmile, DS Core, and Primeprint in Brazil and other countries within the region. Now, let's turn to slide 8 to briefly cover our full year 2023 performance. Sales for the full year were $3.97 billion, representing reported sales growth of 1.1% and organic sales growth of 2.2%. Foreign currency translation negatively impacted sales by 110 basis points due to a stronger dollar versus most major currencies. Key highlights for the year included double-digit growth in aligners and high single-digit growth in China due primarily to significantly higher volume in implants, which more than offset the pricing declines associated with VBP. The largest challenge we saw in 2023 was lower volumes in equipment and instruments, which we attribute to recessionary concerns and higher interest rates in the US, Germany and other developed markets as well as competitive pressure, and we see this trend continuing into 2024. EBITDA margins contracted 210 basis points to 17.4% due to cost inflation and higher investments in the commercial organization, clinical education, and infrastructure, partially offset by restructuring benefits. EBITDA margins were in line with our guidance, and adjusted EPS of $1.83 was at the midpoint of our range. Operating cash flow was $377 million, down 27% year-over-year, driven by higher investments, restructuring cash outlays, and unfavorable timing of accounts receivable and accounts payable. Free cash flow conversion was 58% compared to 81% in 2022. As we mentioned during our recent Investor Day in November, our long-term goal is to achieve 100% free cash flow conversion on a consistent basis once we move past the cash outlays associated with our transformation initiatives. The company continues to maintain a strong balance sheet and finished the year with $334 million of cash and cash equivalents on hand, with a net debt-to-EBITDA ratio of approximately 2.6 times, which is slightly above our long-term targeted rate of 2.5 times due to the fourth quarter $150 million share buyback. Today, we also announced a 14% increase to our dividend. This marks our fourth consecutive year of double-digit increases to the dividend and demonstrates our confidence in our long-term plan. With that, let's move to slide 9 to discuss our expectations for 2024. For 2024, we expect organic sales to be flat to up 1.5%, which represents a net sales range of $3.96 billion to $4.02 billion. We expect FX to be a slight headwind to reported sales based on current rates and anticipate stronger organic sales growth in the second half of the year as we remain cautious on the macroeconomic backdrop for the next several quarters, particularly for equipment. We expect our EBITDA margin to be greater than 18% in 2024, an expansion of approximately 100 basis points year-over-year. We also expect margin improvement as we progress through the year based on the timing of investments and restructuring savings. We project an increase in our full-year tax rate due to geographic income mix and expect the Q1 tax rate to be higher than the full year as we finalize our 2024 tax planning initiatives. We expect adjusted earnings per share to be in the range of $2 to $2.10. For Q1, we expect organic sales to be roughly flat to the prior year, with slightly lower reported sales due to an anticipated FX headwind of approximately $10 million. On a sequential basis, gross margin is projected to improve in Q1. With this, we expect EPS will be up mid-single digits year-over-year. In Q1, we expect to see growth in OIS and Wellspect Healthcare, offset by declines in EDS due to a tougher comp and CTS based on current trends.

Thank you, Glenn. Moving on to our strategic update, starting on Slide 11. Our strategy is clear and remains unchanged. Digitalized dentistry delivers customer-centric innovation in products and services for oral health and continence care, serve our partners effectively and accomplish these goals through a dedicated and engaged team with compliance and quality always at the core. We continue to actively implement and advance all five of our strategies with strengthening execution discipline, continued process improvements and the strategic investments we are making in the company. We believe we can advance the performance of this company and create increased value for our stakeholders and employees. Now moving to Slide 12, let me discuss our foundational initiatives. During 2023, we established many of the fundamental elements necessary to purposely carry out our plans for 2024 and beyond to transform this company across product lines, regions, and operational areas. With the restructuring program largely complete and on track to deliver $200 million in savings this year, we are shifting focus to the foundational initiatives we have prioritized for 2024. We spoke about these at our Investor Day in November, and we continue to make progress on each of them. Let's start with supply chain transformation. Our supply chain is overly complex, and we know we have significant opportunities to improve it. In 2023, we announced the closure of three manufacturing sites and consolidated two distribution centers into one. These actions set into motion our efforts to unlock value in our manufacturing and distribution network. To pursue this goal, we kicked off an extensive network analysis to guide our execution roadmap. Spearheaded by a dedicated and cross-functional team of experts, we expect this global initiative will yield significant results, including enhanced operational efficiency, improved footprint, and lower costs. We expect to begin to realize financial benefits in 2025, continuing into 2026 and beyond. Simplifying our supply chain is closely intertwined with our SKU optimization initiative. By streamlining our portfolio and utilizing a robust product life cycle management process, we can improve and simplify our supply chain and reduce sustaining engineering costs. In 2024, we expect to execute on the first wave of the SKU optimization program, addressing 60% of the SKUs in the endo and resto portfolios. We are taking a thoughtful approach to this work to drive our cost and improve working capital, while maintaining revenue and ensuring a positive customer experience. We expect to begin delivering benefits from the first wave towards the end of 2024, and we also plan to evaluate further opportunities. Our ERP modernization initiative will upgrade, improve and standardize our ERP systems. The new system will unlock organizational capacity, enhance efficiencies in our network, and pave the way for future automation opportunities company-wide. We are conducting rigorous systems testing and ensuring organizational readiness as we prepare for the phased deployment approach. We have targeted our initial rollout for mid-2024, and we are confident in our ability to execute this program with minimal disruption. Of course, as we advance these three foundational initiatives, we remain steadfast in upholding compliance and quality as key guiding principles. We plan to deliver on our promises in a manner that aligns with our values with success gauged by our ability to generate value for our stakeholders over the long term. Now moving to our final slide, I would like to reinforce a key few points. First, with focused execution, we delivered on our 2023 guidance. While end markets remain challenging, our strategy is clear and our execution has improved and will continue to do so. Second, we have established our foundational initiatives and strategic objectives. We are significantly better positioned to deliver on our goals for the work that's been completed or is well underway. Third, we are poised to deliver double-digit adjusted EPS growth in 2024, much of which we expect to derive from our transformational actions. Fourth, we remain confident in the path to our targeted $3 of adjusted EPS in 2026. We've established the roadmap to reach our goals and are fully focused on execution, which we believe positions us well for improved performance in 2024 and beyond. And with that, let's now open it up for questions.

Our first question comes from Nathan Rich with Goldman Sachs. Your line is open.

Hi, good morning. Thanks a lot for taking the questions. Maybe I wanted to start, Simon, with the transformation efforts that you talked about and where the company is making investments this year. I think the level of reinvestment of restructuring savings was a bit higher than we expected. So could you maybe just go into a bit more detail of where the most significant investments are this year? And is that something that becomes part of the run rate of the expense base? Or does that step down in future years? And sort of tied to that, if you could help us think about where the 100 basis points of EBITDA margin expansion comes from between gross margin and operating expense, that would be helpful as well.

Sure. Thanks, Nathan. I'll start and then we can hand it over to Glenn. I think as we've said on many occasions over the past year or so, we had disinvested in a few crucial areas in our business, namely our sales force, our commission plans and clinical education. And over the past year, we have systematically gone after each one of those and invested in them. I think the best benchmark or the two best benchmarks are the fact that we added almost 50 heads in our U.S. commercial team on implants and DSOs and also added significant investment in clinical education. And as I mentioned in the prepared remarks, we delivered over 30% more courses in 2023 than we had before. And in fact, this year, we'll also extend the reach of DS World events. So, they are two key areas that we've invested in, in addition to work on our network and other, what we would call, hygiene factors within our organization. And to give you some color on the numbers, I'll pass it over to Glenn.

Hey Nathan, good morning. Thanks for the question. If I look at the investments that are incremental in 2024, I would say they're going to be part of our base cost going forward. The first one I would highlight is the Byte investments that we're making with the opportunity that we now see with the competitive dynamics. We're going to be investing more in the commercial clinical support area, treatment planners and infrastructure at Byte. We already started in the fourth quarter. We see a pretty immediate return on those investments. So, I mentioned in my prepared remarks, Byte is expected to grow over 20% in 2024. So, we're excited about the opportunity there. We are putting more investments in Byte, and we expect to see a much faster ramp, especially as we get into later in the year. In addition, I would highlight some of the things that Simon said around our ortho business; we are investing more in SureSmile in Japan and Brazil. These are really nice market opportunities for us, and we are putting more commercial resources on the ground there. Clinical education continues to ramp up for us, especially in the implants and endo side of our business. We're continuing to advance our next-gen ERP platform, so that will have incremental investment in 2024. And then I would just say DSOs continue to be an area of focus for us. So that's where we're putting our money. This is going to be part of our infrastructure going forward, but you should expect a return on these investments, some of which coming later this year, and we're quite excited about that. In terms of your question on the EBITDA margin expansion, I would expect about half of it coming from gross margin improvement and half coming from SG&A leverage.

Great. If I could maybe just ask a quick follow-up, Glenn, on the comments on Byte and the reacceleration of growth there. When we think about growth in Byte and maybe just growth in Clear Aligners in general, how does your current kind of view of the demand environment and the consumer environment factor into your expectations? And do you need to see any kind of improvement in the macro to kind of help fuel that acceleration in Byte revenue that you expect?

Yes. No, thanks. We are really excited about our ortho business. So, relative to Byte, we see some very good early indicators right now in terms of the revenue ramp. So that would include unique visitors that are hitting our Byte website. That's seen a really nice sequential improvement from Q3 into Q4. Probably the most important thing is I'm seeing significant growth in impression kits in the fourth quarter and the early part of Q1. And obviously, the conversion cycle is around 60 days, so I should start to see those conversion kits convert to revenue in the latter part of February, and I'm seeing that. And so that's why I'm confident that these investments are good investments, they're going to pay off in terms of faster revenue growth and why I'm talking at least 20% revenue growth on Byte in 2024. On SureSmile, we continue to see market share gains, continue to see differentiated outcomes with our product with fewer refinements, fewer revisions of our product. The SureSmile simulator is also expected to drive some better growth in the SureSmile business. And so we don't expect to see much of an improvement overall from a macro perspective, but we do see good underlying trends, both in office with SureSmile and direct-to-consumer with Byte. And Simon, maybe you want to comment on some of the really good work we're doing on Byte Plus.

We recently expanded our Byte Plus pilot program, which connects customers with dentists, from 10 to 25 locations. Feedback from customers indicates that the patients referred are good candidates for orthodontic treatment, and as we anticipated, this has increased traffic for these dental practices. Many dentists have noted that these patients are also receiving other treatments they wouldn't have sought otherwise. Additionally, with the launch of the SureSmile simulator in September, we've heard that treatment acceptance rates have improved, as dentists can now show patients the smile they can expect, leading to higher acceptance of recommended treatments.

Good morning. Thank you for taking the question. Regarding the guidance.

Michael, we're having a hard time hearing you.

Can you repeat your question, please?

One moment for our next question. Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys. Good morning and thank you so much for the question today. I was wondering if you could help us understand a little bit more on the equipment side, what's going on in that market. Can you talk about sort of how you're seeing maybe volumes on the equipment side and sort of differentiate that versus price and sort of how that's been trending recently is just sort of we just understand that trend as you move into 2024? Thank you.

Sure. I'll start with this and then Glenn can provide more details. As we've done every quarter, we completed our customer survey with over 3,500 respondents in the last quarter. I would say that sentiment in the US has remained stable, if not slightly more positive than before, across all dental categories. However, we continue to face challenges, particularly in Germany and Australia regarding investments in capital equipment. As we have mentioned previously, in the US, purchases over $20,000 or $25,000 are typically funded or financed by our customers, whereas this threshold is considerably lower in other regions. Therefore, we are experiencing ongoing pressure in Germany and Australia, but generally more positive sentiments in the US.

I would like to add that in our fourth quarter, while our CTS business experienced a decline, we observed growth in CAD/CAM in certain regions, particularly in the U.S. We had promising growth in our scanners, mills, and printers. The main challenges were related to imaging and instruments, especially imaging, which contributed to the overall declines in our CTS portfolio. Regarding pricing, customers are leaning towards lower-priced scanners. Primescan Connect has gained notable momentum, resulting in a shift in our sales mix from Primescan AC and CEREC Primescan to Primescan Connect. These factors illustrate some of the pricing dynamics we are facing.

Got it. That's really helpful. And maybe one more for you. If we think about capital deployment, I understand what you said about returning more than 75% of free cash flow to investors. Should we consider that the dividend will grow in line with EPS growth and the remainder will primarily be for share repurchases, although you've mentioned some small M&A? Is that the correct way to view the mix, especially between dividends and share repurchases moving forward?

Yes, it is. So we would expect to grow dividends pretty consistent with our earnings growth, which should be double digits over the next several years. So that's the right way to think about our dividend. And then on share repurchases, we said about $600 million of share repos over the next three years. And that's pretty consistent with our current view based upon our cash flow projections. Thank you.

All right. Thanks guys. Good morning. First one, Glenn, this one might be for you. But the 2024 top line guidance of around 1% organic at the midpoint, give or take. Based on your comments, I'm getting almost 100 bps or maybe even a little bit more than 100 bps of growth from ortho alone, just based on how you frame SureSmile and Byte. So can you just give a few more details on the other key products? I'm guessing CTS is the biggest drag and Wellspect would be up, but maybe if you can frame some of the other key product lines as well just as you think about the various growth rates for 2024?

Sure, Jon. Thanks for the question. I'll keep it to the segment level. I think that's probably appropriate. So, obviously, the fastest-growing area we would expect in 2024 is ortho and implants. I mentioned double-digit growth for SureSmile, over 20% growth in Byte. On the implant side, we expect to see really strong growth continuing in China. So I would put strong growth at above 25% in 2024. And we expect a return to growth in our U.S. implants business in the back half of the year. So ortho and implants as a segment, I would say, is going to be the fastest-growing area for us in 2024. EDS, our Essential Dental Solutions segment, I would say nominal growth. It's going to be really largely dependent on patient traffic. So right now, we're kind of modeling it to be flattish overall in 2024. And then CTS is expected to be down year-over-year. Again, similar dynamics to what we saw in the fourth quarter and full year of 2023 where CAD/CAM should continue to grow. So scanner growth, growth in our 3D printer and Primeprint and growth in our mills, but that's going to be likely offset by declines in imaging. And so right now, we're not projecting any real improvement in imaging going into 2024. But overall, CTS, we're modeling to be down year-over-year. And then lastly, outside of dental, Wellspect Healthcare should continue to put up some decent growth, I would say mid-single digits as a low bar for our Wellspect business.

Thank you, Jon. Regarding SKU optimization, we're concentrating on Endo and Resto, aiming for approximately 60% of our SKUs in that area. We have approached this carefully and conducted various pilots in different regions, which has given us strong confidence in our ability to implement it. We anticipate seeing the benefits start to emerge towards the end of 2024 and into 2025 and beyond. Additionally, as mentioned in our prepared remarks, we plan to explore other areas of our portfolio beyond Endo and Resto. As we pointed out in the previous earnings call, we have established a team to focus on this initiative, collaborating with our country and regional leadership teams. While the company has previously undertaken similar efforts, we aim to provide better visibility for our commercial teams and customers, ensuring we do not repeat past mistakes and are approaching this with great care.

I would like to add that 2024 is significantly focused on our extensive network. We are implementing standardized processes that will provide visibility not only for 2024 but also as we move into 2025 and 2026. This will help us establish clear KPIs and forward-looking metrics. Initially, the steps we take may not be highly visible on the commercial side, but we are already seeing benefits in our inventory management by simplifying our portfolio and removing non-revenue-generating SKUs as we prepare for 2025 and 2026.

Okay. Let's try this again. Can you hear me?

Now much better.

I'm learning the new technology here, so thank you. We're discussing the lower end related to the SKU rationalization of products, but I want to focus a bit more on the higher end. As you consider what is included in the 2024 guidance, how much of that is derived from a quasi vitality index, specifically regarding some of the new, more high-end products and how much conversion can occur in the near-term pipeline, particularly with new instrumentation?

Yeah. I think relative to the SKU rationalization optimization, there's really no benefit baked into our cost reduction efforts in 2024. That would be more of 2025. If you're talking about new product launches and the impact in our guidance for 2024, we have a couple of product launches in the back half of the year that we are obviously counting on to drive some of the revenue growth and obviously some of the margin improvement. Simon, you want to comment on those?

And then the additional piece here around DS core, Michael, we launched that DS World 2 years ago now, almost. We added to it with the communication canvas in May of last year and the SureSmile simulator in September. We just launched some more capability around the user experience and user interface. Each time we have incrementally added or improved the user experience and added clinical functionality, we have seen an uptick in the number of accounts using DS Core. So that will continue to be central to any new product introductions or new software introductions in 2024 and beyond.

Understood and helpful. You mentioned the improvements anticipated in the US implant segment of the business. Considering the multiyear guidance extending to 2026, how significant is the US recovery factor in driving the organic growth for that multiyear contribution?

I think what we noted at Investor Day and all our hypothesis and assumptions from Investor Day across all of our businesses and margins, et cetera, remain intact. What we said was we expect to grow above the market in Aligners. We expect to grow above the market in our connected technologies in a normal macro environment. And our intention is to get back to market growth in the implants business by 2026. So that's what's baked into our assumptions around revenue growth and our $3 of EPS target in 2026. Glenn, do you have anything to add to that?

Thank you. Good morning, everyone, and congratulations on meeting your targets in a challenging environment. The ability to achieve this is recognized by those of us who have been with the company for a long time. I wanted to focus on the 2026 target of $3 that you just discussed. You mentioned in your presentation this morning that you feel confident about that. Glenn, when considering the 13 cents in cost savings contributing to incremental EPS this year, even if we assume that this figure might double next year due to the cost savings being back-end loaded, which might be optimistic, we would still need the core EPS growth, excluding cost savings, to be significantly above 10%, likely reaching the low teens, outside of just cost savings over the next two years to reach $3. I would appreciate your insights on this, especially given the limited organic growth expected this year and the uncertainty about when organic growth might increase. Thank you.

Yeah. Thanks for the comment. I think first and foremost, nothing has changed relative to what we communicated back in November. And where we expected to land for 2023 and our view of where we expect to land by 2026. We had indicated back in November that we expected lower growth in 2024 with a tough challenging macro environment. But we do expect to see organic growth get back to a normalized rate and growing in that 4% to 6% range starting in 2025. So that's a key component for us getting to the $3. On the restructuring savings, obviously, we're making a number of investments this year that's offsetting the gross savings from the restructuring program. But obviously, a lot of these investments we're making, we're expecting to get returns on. So, overall, that should help us get towards that $3 EPS target.

Thank you for that information. Simon, I'd like to ask a broader question. You mentioned that EDS is expected to remain relatively stable this year, likely within a couple of points of market performance. What was the pricing in EDS for 2023, and what do you anticipate it will be in 2024? More importantly, you're investing just over 4% in R&D. I assume much of this goes towards general consumables, but we've been hearing from both public and private dealers, as well as some of your main manufacturing competitors, that there's been a stagnation in innovation in consumables for the past five to seven years. This has allowed private label products and lower-priced branded alternatives to gain traction, putting pressure on higher-end branded consumables. How vital is innovation in consumables for you? Will that 4% R&D figure allow for meaningful investment in that area? Additionally, how should we approach the future of EDS given these emerging trends? Thank you.

Sure. So I think your first question was around pricing, I would say, very, very modest pricing on the EDS side in 2023, and we expect even more modest pricing in 2024 and beyond. Now with respect to innovation, as we noted in November, we brought on a new Chief Technology Officer, who is driving a far more disciplined and organized process than we've had historically at Dentsply Sirona. We've made, I think meaningful changes to how we innovate and how we milestone and monetize new product introductions. Around innovation in EDS, I think the 4% is an okay number. For now, we have to be extraordinarily diligent with how and where we spend that 4%, and that's what Kevin is doing right now. A large part of that 4% is going towards the digitalization of dentistry and DS Core. We do see that as no pun intended as core to our future. And we have seen the improvement in adoption as we expand the clinical functionality of it. We do spend a significant amount of money on innovation in our EDS portfolio. I mentioned the launch of the X-Smart Pro device late last year, which we'll launch in the US later this year. So we are innovating; the feedback is positive on that. We need to be extraordinarily diligent with respect to identifying unmet clinical needs in the EDS portfolio, so that the products that we launch are meaningful and are not simply me-too products and make a difference to the patient outcomes and to clinical efficiency. Is there an opportunity for lower prices? For sure. And we have demonstrated that we are prepared to do so where appropriate. We launched Primescan Connect in the DI space two years ago. As Glenn noted, we've seen a rapid uptick of that, particularly in 2023. And as Glenn also noted, we have both premium and value-based implants, which showed similar growth trajectories in Q4. So we are not afraid of the value segment when we know what we're getting into.

And I think one comment to add is that it’s not just about basic chemistry. A lot of it has to do with packaging, with delivery methods to make the practice more efficient, and one area that I would also point out in terms of focus is digital materials. So both in terms of milling, as well as printing, that's an investment that we lean behind and where we see good growth going forward.

Great. Thanks. So can you talk a little bit more about the implant competitive environment right now across the geographies and underlying demand there, but also more just from a competitor disruption standpoint, can that present any sort of opportunities for you? Thanks.

Hey, Erin, thanks for the question. Let me start with China specifically. And then maybe Andreas can take the competitive piece. We've been super happy with China performance on implants this year. We grew significantly in implants this year in both the private and public sectors. That led to growth overall in China despite the headwinds that we had in early 2023. And as Glenn noted, we expect more than 25% growth in implants again in China in 2024. So it clearly shows that our team can execute in China with respect to implants. We've, as I noted previously, our portfolio across the board, but particularly in Implants, is very, very competitive. The 2,000 customer survey that we did last summer told us that our portfolio is very, very competitive and has no meaningful gaps. So we're quite comfortable with it. We have demonstrated, I think, progress in the U.S. where we slowed the deterioration throughout the year. And as Glenn noted, we expect to grow implants in the U.S. in 2024 and in response to a previous question, I noted that as part of our $3 bridge, we expect implants to be growing at market rate by 2026. That's our expectation.

Yes, we just add a couple of things. I mean our fourth quarter performance in Implants & Prosthetics was the best quarter that we had all year. We actually grew double digits. Obviously, a lot of that coming from China, but we also had really good performance in Europe. And so the two together obviously drove a good result for us. We did see improvements in our U.S. Implant business, but it's still declining. So, we are not happy with where we're at there. We do expect to dig it back to growth in the second half of 2024. We've done all the things to turn that business around. So, we feel good about improved performance in our U.S. implants business, but overall, we did see less of a reduction in the U.S. in the fourth quarter as well.

Yes. I'm just thinking sort of back to portfolio commercial excellence where we've made investments, but also clinical education, which is an area that we have built upon and leaning into. So, you've heard the comments previously. So, I think that's one important point. The other element is the implant part also comes with the prosthetic solutions, and that's where we have a very competitive portfolio, including customer abutments and a highly digitized workflow that links into DS Core over time. So that's an area that we also feel will be an important driver of incremental growth here over the period.

And one moment for our next question. Our next question comes from Brandon Vazquez with William Blair.

Hi, thanks for taking the question. First on a modeling perspective, you guys are pointing to about 100 basis points of EBITDA margin expansion in 2024. Can you just talk about maybe the cadence of that expansion through the year? I know you guys have made a lot of recent commercial investments. So maybe they need some time. Should we think of this more as in the back half of the year, we'll see some of this margin expansion, or should we be modeling for this to be pretty evenly split throughout the year?

Yes. It's more back-end loaded, but we would expect EBITDA margin expansion both in Q1 and Q2, but more of the expansion coming in Q3 and Q4. And the main reason behind that is some of these investments that we're making are more front-end loaded in the year and the restructuring savings obviously are more benefiting the back end of the year. So we do expect EBITDA margin expansion starting in the first quarter, but most of it will happen in the back half of the year.

Hey, good morning. Its Jason here. I wanted to start maybe with a follow-up on Byte. Definitely sound more bullish than I think where we were maybe in the second half of last year, maybe hard to break down. But how much of the 20% growth would you characterize as maybe share gains from the other DTC player exiting the market versus just a healthier view of the macro and I guess, maybe versus benefits you're making yourself? Just trying to understand maybe what's exogenous here versus what's attributable to your own actions in that 20% growth outlook as we really try to think about what's sustainable beyond 2024.

I think the majority of the growth is coming from the competitive dynamics that have taken place over the last couple of months. So, certainly, more than half of that growth.

Yes, I think we would expect Byte to continue to have healthy growth going forward beyond 2024. So, I'm not going to say it’s going to be 20% plus, but certainly, it's going to be a faster-growing part of our portfolio even beyond 2024.

Before I proceed, let’s focus on Byte for a moment, Jason. We showed last year that we can achieve positive net income on the Byte platform. This remains a key expectation for us moving forward, even as we invest to seize the opportunities that have emerged. We are not aiming to capture every available opportunity; rather, we are concentrating on the profitable ones. In terms of the resins and the printing equipment, the what gives us confidence there I think is the shift of the market looking for a safe and secure and a connected solution that is applicable to their office, right? So, we're moving from sort of this very early adopter technology segment in printing to a more sort of workflow-focused customer segment, and that's where our Primeprint is positioned, and that's sort of where we're looking to grow our solution here and also integrating our materials and our workflows for dentures and sort of other splints, printed impressions, drill guides, the usual sort of applications that you would see in an office with Primeprint.

Good morning. I may have possibly missed this, but I don't think it was mentioned. Did you guys talk about any impact quantification of how Shine's issues may have impacted your fourth quarter? Is there any talk about that or if not, can you talk about that? Thanks.

Yes. No, we haven't mentioned anything around that impact. I would just say we've built some conservatism into our guidance back in Q4. We really didn't have any significant impact from that incident. So, obviously, there was some impact, but you have also some dynamics of where we saw improvements in other orders coming from dealers. So, for our business, minimal impact, and that's all we're going to say about that. Thanks.

And then just a quick follow-up on Byte, which is popular today. I hear the great data point about the impression kit ramp and also some of the orders starting to follow through. I'm assuming, though, when you say, hey, the conversion rate, we expect that to improve, you haven't seen evidence yet of that. Is that fair?

That's fair. Our conversion rates are pretty consistent from what we've seen in the last couple of quarters. So that's correct. I do believe, though, if Byte Plus is successful, and that's our hybrid model, that could potentially help our conversion rates tick up, but we have not seen it yet.

And this concludes today's question-and-answer session. I would now like to turn the conference back to Simon Campion for closing remarks.

Thank you. Thank you, operator. So thanks to you all for joining today's call. Before we close, I would like to leave you all with some key points. Firstly, we are well positioned in attractive industries. We have the largest end-to-end dental portfolio that is more than 45% digitally connected. We do have leading brands and strategic objectives that focus on high-growth areas such as aligners, implants, our digitalization strategy enabled by DS Core and Continence Care. Secondly, our transformation is taking place. And while there is more work ahead, we do have a clear and actionable path to accelerate profitable growth. We expect that 2024 will be an inflection year for improved profitability and adjusted EPS growth. Thirdly, we are building a durable, sustainable business that's better positioned to navigate external challenges and capitalize on new market opportunities as we move forward. We remain with our conviction that we are on the right path to deliver meaningful value over the long term. As you may have already seen earlier today, we also announced Eric Brandt's intent to retire from the Board of Directors following our May Annual Meeting. Eric has served as a Director of the company for nearly 20 years and as Chairman for six years. I would like to express a sincere thanks to Eric for his many years of services to Dentsply Sirona and wish him all the best in his future endeavors. And finally, on behalf of our management team, I would like to extend our gratitude to all our employees for their tenacious commitment to the business and the ongoing transformation process. And we especially want to express our appreciation to those employees who have been impacted by our restructuring program and wish them the very best in their future endeavors. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.