Dentsply Sirona: The Rebuilding Begins

SimonSkafar

Dental instrumentality and consumables shaper Dentsply Sirona (NASDAQ:XRAY) has recovered immoderate banal value momentum complete nan past 3 months, outperforming nan broader med-tech space, arsenic good arsenic peers/comps for illustration Envista (NVST) and Straumann (OTCPK:SAUHY), but nan longer-term image has been beautiful rough. With nan anterior guidance squad tossed retired for failing to thrust capable improvement, aft being brought successful pursuing ongoing execution issues aft nan awesome merger of Dentsply and Sirona backmost successful 2016, Dentsply is erstwhile again starting complete pinch a caller guidance team.

There's decidedly capable present to make a rehabilitation effort worthwhile. The institution has under-executed successful areas for illustration imaging, implants, and clear aligners, but nan institution still has a very reliable beingness successful nan market, a wide merchandise portfolio, and a ample world income unit that gives nan institution leverage to increasing spending connected dental attraction extracurricular of well-established markets like nan U.S.

Right now, nan marketplace seems to beryllium pricing astir 2%-3% semipermanent gross maturation and modestly amended free rate flow, pinch nary existent anticipation of meaningful structural separator aliases free rate travel conversion improvement. While I do understand that Dentsply hasn't earned nan use of nan uncertainty and that nonaccomplishment is very overmuch an action for nan caller guidance team, this is an early-stage turnaround worthy watching, moreover arsenic 2023 figures to beryllium a unsmooth year.

Waiting To Hear How It Will Be Different This Time

New guidance (a caller CEO and CFO) was brought successful past twelvemonth pinch a instruction to cleanable up and amended Dentsply aft years of underwhelming financial capacity and accounting issues that led to a humble restatement successful 2022. Having been connected nan occupation since August, I would expect to perceive nan CEO person astatine slightest immoderate wide initiatives successful mind for really to thrust improved capacity and to laic those retired connected nan upcoming net convention telephone (fourth 4th net are scheduled for February 28).

Broadly speaking, I deliberation location are apt strategical initiatives that astir investors will work together should beryllium a priority. First ought to beryllium disposing of non-core operations. For years now, Dentsply has operated Wellspect, a shaper of bladder and bowel-control products that it acquired arsenic portion of a larger woody for Astra Tech (acquired from AstraZeneca (AZN)) much than a decade ago. The institution seldom talks astir this business, but a caller Bloomberg article suggested that guidance was evaluating nan carve-out/disposal of nan business pinch a imaginable valuation of $1B. Given nary synergies pinch nan ongoing dental business, this should person been done agelong ago.

There are besides meaningful opportunities to further streamline nan portfolio. There are a batch of products pinch Dentsply's portfolio (particularly successful nan consumables business) that aren't really increasing and don't make capable margins aliases rate travel to proceed connected arsenic portion of nan company. While keeping immoderate of these will make sense, I expect that location are important divestiture and streamlining opportunities here, and paring nan portfolio of low-return products tin thrust higher gross maturation (addition by subtraction), amended margins, and nan opportunity to consolidate manufacturing and distribution operations.

I besides expect to spot a renewed committedness to R&D and merchandise innovation, arsenic good arsenic improved go-to-market strategies. While Dentsply has held onto bully stock successful nan imaging abstraction (chairside CAD/CAM), it has mislaid crushed successful implants to rivals for illustration Envista and Straumann and arguably hasn't maximized its opportunities successful nan clear aligner abstraction (where Align (ALGN) remains far-and-away nan marketplace leader).

…But 2023 Will Be Challenging

Turning astir a ample business is difficult enough, but operating conditions successful 2023 are going to beryllium much challenging arsenic macro headwinds unit nan business.

Europe represents astir 40% of nan business and looks much difficult successful 2023 connected macroeconomic concerns, and nan aforesaid could beryllium existent for nan U.S. arsenic nan system slows. Dental agency visits are still beneath pre-pandemic levels, but request for dental services has been much economically-sensitive than different healthcare services successful past cycles, and I judge that whitethorn beryllium a situation later this year.

China is besides a challenge. In summation to ongoing issues pinch nan COVID-19 pandemic, value-based pricing has created headwinds for participants for illustration Envista and Dentsply, pinch Dentsply talking astir 40% value cuts for nan business successful 2023.

Although orthodontics was previewed arsenic an area of spot successful nan 4th fourth (management guided to nan precocious extremity of its scope for nan 4th fourth erstwhile it presented astatine a ample sell-side convention successful January), and aligners should beryllium beardown successful 2023, instruments are apt to spot much pressure. Management did endorse $3.00/share successful net arsenic an exit-rate target for FY'25, arsenic good arsenic a semipermanent operating separator of 20%, but 2023 will apt beryllium a measurement back.

This whitethorn really extremity up helping nan restructuring and turnaround process. Tougher end-market request conditions should springiness much clarity into which products successful nan portfolio are existent maturation drivers and which products much aliases little conscionable thrust on pinch underlying demand.

The Outlook

Modeling ever involves guesswork, but modeling a turnaround without proceeding guidance springiness much elaborate guidance connected its priorities and strategical plans is fundamentally throwing darts blindfolded. I'm modeling 2% to 3% semipermanent gross maturation mostly conscionable connected nan ground of Dentsply's position arsenic a awesome subordinate successful nan dental attraction space; while it is surely imaginable that mediocre execution could thrust moreover much stock loss, simply stabilizing nan business should let for low-single-digit gross growth.

Should guidance return a much fierce position connected restructuring, I deliberation mid-single-digit maturation is simply a reliable target. Imaging, implants, and clear aligners tin support mid-single-digit growth, and perchance amended than that pinch much focused efforts connected higher-growth markets for illustration intraoral scanning, biomaterials, aligners, and caller technologies for illustration 3D printing.

A batch depends connected really overmuch gross guidance is consenting to locomotion distant from successful nan short word and what their appraisal is of nan company's expertise to sustainably compete and summation stock successful these higher maturation markets. Dentsply has a beingness successful each of these markets, and truthful I do deliberation that a operation of revamped innovation, improved go-to-market (more effective/efficient income efforts), and selective M&A tin thrust amended growth.

On nan separator side, 20% doesn't onslaught maine arsenic a peculiarly eager semipermanent target, peculiarly if guidance is consenting to actively pare distant low-return products and restructure nan income effort. This institution has generated astir 13% free rate travel margins for a agelong time, and I see that a reasonable baseline, pinch betterment into nan high-teens imaginable pinch amended execution.

I deliberation nan marketplace is fundamentally valuing nan institution arsenic what it is coming - a large, established subordinate struggling to consistently turn and thrust existent operating leverage. Given nan way records of nan caller management, I deliberation this is apt a low-end estimate for what tin beryllium accomplished pinch these assets. If they tin execute, I deliberation a guardant aggregate of 2.75x to 3x is attainable, and that would thrust a importantly higher adjacent worth (in nan mid-$40s).

The Bottom Line

Without knowing what guidance plans for Dentsply, beyond nan comparatively little overviews offered backmost successful January, it's difficult to urge that readers bargain this stock. That said, I spot a batch of imaginable present and if guidance lays retired a way for existent change, including restructuring nan portfolio and nan income approach, past this is simply a sanction I'd eagerly revisit.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.