DENTSPLY SIRONA Inc. (XRAY) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the First Quarter 2021 Earnings Conference Call for Dentsply Sirona. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kari Dixon. Thank you. Please go ahead.

Thank you, Tamia and good morning everyone. Welcome to our first quarter 2021 earnings conference call. I would like to remind you that an earnings call press release and slide presentation related to the call are available at our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today’s call, we make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. In today’s conference call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about 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 would like to now turn the call over to Don Casey, our Chief Executive Officer.

Thank you, Kari and thank all of you for joining us this morning. I hope you are all safe and well. We are pleased with our performance this quarter. Dental market continues to show a gradual recovery, highlighting its underlying strength and attractiveness. Dentists have shown real resilience and a commitment to their patients during the pandemic and now in the recovery. And we are very proud of how our team has continued to support our customers as patient volumes have improved. I want to thank all the Dentsply Sirona employees around the globe. Their performance has been remarkable. They have kept our workplaces safe and operating. They have delivered for our customers and have kept making progress on key company initiatives. It is a privilege to be part of this organization. On today’s call, Jorge and I will focus on three things. The first is our results for the quarter. That will be followed by a revised guidance for 2021, and we will finish the call updating our operating priorities with a focus on our long-term growth plans. Now moving to Slide 6, we are pleased with our performance in the first quarter. Revenues reached $1.027 billion, up 12.1% on an organic basis. In the first quarter, we continued to be disciplined around expenses, resulting in an adjusted operating margin of 21.3%, up 630 basis points versus the prior year. Adjusted non-GAAP EPS in was $0.72, up 67% versus last year. Other actions taken by the team helped generate positive cash flow from operations of $49 million. To provide details of our performance for the quarter, I will now turn the call over to Jorge.

Thanks, Don. Good morning, and thanks for joining us. As a reminder, my remarks this morning will be based on non-GAAP financial results. Let me start with a few overall comments. In the first quarter, we delivered strong results, reflecting growth on both Consumables and Technologies & Equipment. These results were ahead of our internal financial expectations, owing to a stronger-than-anticipated recovery in global dental demand. We expect the macro environment to remain uncertain, but our focus on execution and our ability to adapt ensure that we will be well positioned against multiple scenarios. We are seeing the global dental markets gain traction, and our teams are executing well, utilizing the strength of our portfolio for the benefit of our customers. Q1 performance confirms the momentum in our business and provides a solid starting point for the fiscal year. Let’s look at Q1 in more detail. As Don mentioned, the business delivered strong organic revenue growth of 12.1% versus last year. Our reported growth was 17.5%. Consumables posted organic growth of 21.2% in the first quarter versus last year. As a reminder, our PPE business is immaterial. Sales across all product categories rebounded in the quarter. These results reinforce our view of dentistry as a necessity with resilient underlying growth trends. Technologies & Equipment organic sales grew 5.8% versus last year, led by Equipment, Imaging and implants. Gross profit was $611 million or 59.5% of sales. This strong outcome was primarily driven by favorable mix. While we saw higher shipping costs, our execution and supply chain initiatives largely offset the impact. It is likely that higher shipping costs and other inflationary items in the supply chain will persist for the next few quarters. Our teams will continue to address these challenges as effectively as possible. Before I start discussing the specific SG&A numbers, I would like to underline a presentation change that you will see going forward. As we continue to ramp up investments for innovation and growth, we will report R&D spend on our P&L separately from SG&A. You will see, in our quarterly results, we have made this change on the face of our financial statements. Spending on R&D was up 8.8% in the quarter to $37 million, and we would expect to see this trend continue as we progress through the year. As we invest more significantly in R&D, we are making sure we have the right mechanisms to maximize the benefit of the spend by ensuring alignment with the strategic priorities and a strong return on investment. We are focused on scale innovation that has the ability to drive a meaningful growth impact for the business and many opportunities remain. Regarding SG&A in Q1, our teams demonstrated a strong operating discipline across the enterprise. As a percent of sales, SG&A declined 350 basis points to 34.6% versus last year. On an absolute basis, SG&A increased by $22 million or 6.6% versus the prior year. The reduction in the Q1 SG&A ratio reflects benefits from volume-related operating leverage, improvement in productivity and benefits from our 3-year restructuring projects. Also, we were cautious on our investment spend approach in the first quarter. Going forward, we will accelerate the pace of those investments, which we will discuss later. While we have been measured on our spending in certain categories, we are ramping up investments in sales and marketing resources, R&D and digital infrastructure to support our medium- and long-term growth plans. Operating profit grew over 67.2% compared to last year to $219 million. It represents a margin expansion of 630 basis points to 21.3%. As explained earlier, our margin rate benefited from the gross profit margin on sales mix, combined with operating leverage and investment spending increasing at a lower rate than our sales growth. Moving on, net interest and other expense increased $9 million, reflecting higher levels of debt versus last year. The non-GAAP tax rate in the first quarter was 22.9%, a decrease compared to 24.6% in the prior year quarter, which was a function of the changes in the U.S. versus non-U.S. pre-tax income mix. Non-GAAP EPS was $0.72, up 67.4% versus the prior year quarter. The Consumables business performed – the Consumable business performance in the first quarter was strong. Sales were $430 million, an increase of 21.5% versus the prior year. Growth was the strongest in rest of the world and grew double-digits in both the U.S. and Europe. Sales grew in all categories led by Endo and Restorative. The consumables market has been resilient and is recovering well. These results also reflect the ongoing progress optimizing promotional strategies and improving demand creation tools. We are strengthening our relationships with dentists, delivering clinically relevant products with strong incentives for them. We are, of course, also seeing a rebound in dealer orders as they ramp up purchases to meet anticipated demand. Currency favorably impacted sales by 4.6%, offset by a reduction of 4.3% due to divestitures and discontinued products. Moving on to the Technologies & Equipment segment results, T&E sales grew 14.8% versus the prior year. The launch of our new Axeos imaging unit is going very well. As expected, digital dentistry was negatively impacted by the difficult CAD/CAM comp in Q1, resulting from the strong sales in early 2020. Our Clear Aligners franchise performed very well in the quarter, and the overall SureSmile and Byte teams are excited about the growth trajectory. Our estimates indicate that our Clear Aligners portfolio will deliver in excess of $300 million in annual run-rate sales in the fourth quarter of 2021. Currency favorably impacted sales by 5.7% as well as the benefit from acquisitions of 8.6%, offset by a reduction of 5.3% due to divestitures and discontinued products. On Slide 11, you can see our organic revenue performance by region during the first quarter. U.S. sales were $347 million, representing growth of 15.7% versus last year. Organic sales growth was 4.8%, with strong Consumables sales offsetting a decline in Technologies & Equipment. European sales were $418 million, a growth of 12.1% versus last year. Organic growth was 8.1% compared to the prior year, driven mostly by strong Endo sales. Rest of the world sales were $262 million, a growth of 30.3% versus last year. Organic sales growth was 30.8%, reflecting the recovery in demand. Next, I’d like to cover cash flows. In the first quarter of 2021, our operating cash flow was $49 million, a $59 million improvement versus last year. We returned a total of $112 million to shareholders through dividends and share buybacks and deployed $92 million to fund the acquisition of Datum. The company finished this first quarter with strong cash on hand of $318 million and committed credit facilities of another $1 billion. Approximately $350 million of short-term credit facilities expired in April and were not renewed. Our strong balance sheet and credit metrics provide a solid foundation for a balanced capital allocation. We will continue to return cash to shareholders while appropriately investing for growth in the business. Now, let me provide an update on our financial expectations for 2021. We were pleased to see a faster than anticipated market recovery in the first quarter. We are seeing healthy demand continuing into the second quarter, driven by positive momentum in patient confidence and procedure volumes with the vaccine rollouts. These positive trends provide us with optimism for the rest of the year. At the same time, we remain cautious given the market conditions in certain geographies. While there may be near-term volatility, the long-term underlying growth dynamics of the dental market remain intact. Based on that, we are revising our outlook for fiscal 2021. We are now expecting fiscal 2021 reported sales to be in the $4.1 billion to $4.3 billion range. This range equates to a reported sales growth rate of approximately 23% to 30%. From an organic sales perspective, the range provided equates to an organic growth rate of approximately 18% to 25%. Our new non-GAAP EPS range for fiscal ‘21 is now $2.75 to $2.90 compared to our prior outlook of $2.60 to $2.80. This full year outlook includes the shift of investment spend of approximately $0.05 from Q1 into the remainder of the year. There are two risks to this outlook that are worth highlighting: COVID-19 and potential supply disruptions regarding shipping costs and availability of certain semiconductors. We are mindful of the lessons learned about this virus, especially considering that some countries are experiencing increases in cases, with governments intervening with restrictions. Before I turn the call back to Don, we would like to share a quick update on our efforts around ESG. We continue to believe a strong ESG program can facilitate top line growth and reduce costs. It can contribute to reducing legal and regulatory risks, while improving employee engagement. In close collaboration with our Board of Directors, I am chairing an effort with members of a cross-functional team to ensure that our ESG objectives are aligned with our purpose and mission of improving access to oral health care globally. In April, we posted our first-ever sustainability flag sheet and environmental scorecard. They are available for review on the Sustainability section on our website. We are measuring and analyzing our ESG data. I am excited to share more of our findings with you as we develop and track additional metrics. Finally, I want to thank our almost 15,000 associates around the globe for their great ongoing dedication and results. With that, I will now turn the call back to Don.

Thanks, Jorge. I would now like to provide some perspective around 2021 and beyond, by outlining our strategy and operating priorities. Let’s move to Slide 15. Our strategy and priorities have been consistent over the past 3 years. We believe that Dentsply Sirona will grow long term by delivering superior integrated workflows built on diagnostic excellence, easy-to-use treatment planning and essential products that improve outcomes for patients and dental professionals. Our priorities are driving revenue growth, improving margins and creating a simplified organization that takes advantage of scale. There’s still a lot of work to be done, but our team is confident that the margin and cost-saving goals we have outlined in the past will be delivered. For us, the focus now really turns to accelerating growth. Our strategy has been refined to reflect the continued evolution of the dental space. There has been a strong growth in specific segments of the market, highlighted by aesthetic areas like clear aligners and implants. Many of these higher-growth areas have been enabled by digital dentistry, driving good growth there. Dentists and DSOs increasingly look to enhance their practices by participating in these higher-growth areas that involve more complex procedures. This leads to an increased willingness to invest in equipment and training both areas where Dentsply Sirona is a leader. Products like 2D and 3D imaging become essential to improving their diagnostic capabilities. More practices are also recognizing the utility of incorporating digital scanners as an essential part of their office workflow. These more sophisticated digital devices, when combined with increasingly easy-to-use treatment planning, lets dentists offer things like clear aligners, implants or complex restorations to their patients. This is better for the patient and better for the economics and efficiency of the practice. Dentsply Sirona is uniquely suited to thrive in this market. We have both Imaging and digital impression businesses that form the foundation of the digital ecosystem. When combined with our treatment center business, we have one of the largest installed bases of digital assets in all of dental, a critical cornerstone for our strategy going forward. The company has deep expertise in treatment planning and workflow management with well-recognized names like SureSmile, Sidexis, Atlantis, SIMPLANT and CEREC. And Dentsply Sirona has a full portfolio of essential consumable products that are critical components in many major procedures. The large installed digital base powered by a suite of treatment planning and other workflow tools combined with these essential products, make us very optimistic that we can deliver real solutions to our customers. In addition to delivering against that strategy, we will measure our success by meeting or exceeding critical targets that we have set for ourselves. Our growth is now targeted at 4% to 5% plus going forward. We are committed to improving our margin to reach the ‘22 goal by the end of 2020. Our efforts around organization simplification and scale will allow us to hit the cost saving target of $250 million through the end of the restructuring plan. Delivering on our growth, margin and organizational saving goals will allow us to target double-digit adjusted EPS growth and create sustainable value for our shareholders. Moving to Slide 16, there are three components of our growth plans: organic innovation, acquisitions and improving our global commercial capabilities. We are investing increased time, financial resources and human capital to accelerate our organic innovation. Our innovation approach has been revamped to focus on procedures and workflows versus individual product. This allows us to better meet our customer needs. As Jorge said, R&D investment has been increased significantly in 2021, and we expect that trend to continue into the future. The increased resources will be directed to critical procedure workflows in faster-growing areas like clear aligners, implants, restorations and endodontics. To further demonstrate our commitment to innovation, I mentioned during our last call, a new consumables innovation center will be opened this year in Charlotte to complement our other centers of excellence around the world. Our portfolio work will also give Dentsply Sirona a greater exposure to faster growing parts of the market while eliminating slower growth, less profitable areas. In the past 12 months, analog lab and the traditional orthodontic businesses were exited. We deployed capital and added Byte and Datum to boost our clear aligner and implant platforms, respectively, increasing our presence in higher growth categories. Our team also has a good pipeline of opportunities to continue enhancing our workflow solutions and digital technologies. Critical to innovation is the ability to rapidly scale and globalize it. Dentsply Sirona has an extensive network of over 5,000 commercial people in over 100 countries that will allow us to take full advantage of our innovation pipeline. There have been several investments made to enhance our commercial effectiveness. These investments include tools like salesforce.com globally. We have improved our training program to allow Dentsply Sirona to approach our customers as one company with comprehensive solutions. And our sales force excellence program is being rolled out globally over the remainder of this year. As Jorge mentioned, there has also been good progress made on shifting our promotional program to be more retail demand focused. In addition, all these efforts are supported by an extensive clinical education program that has engaged over 1 million dental professionals over the last year. The highlight of our clinical education efforts in 2021 will be DS World, a major event in the U.S. We have announced that this event will be a hybrid this year with a major live as well as online component. On Slide 17, our major introductions over the past few years are displayed. We are seeing the benefits of those efforts in 2021 with products like SureFil one, Primemill, Axeos and a major SureSmile software upgrade. The team is also very excited about our back half of 2021, where we will see major launches in several critical areas, including implants and endodontics. Moving to Slide 18, strategic acquisitions are important to our overall growth plan. As we are now had Byte for about 5 months, we are very happy to report that the integration is on track. Byte is performing well, and we believe it has a very bright future. That business is expected to be accretive to our long-term financial targets and non-GAAP EPS in 2021. The acquisition has also given our clear aligner business important critical mass in areas like supply chain and R&D. We continue to expect our total clear aligner business to exceed a $300 million run rate by the end of 2021. We are also pleased with the integration of the Datum acquisition as well. This is helping improve our critical implant platform. Moving to Slide 19, in closing, the dental market continues to demonstrate resilience and the strong underlying fundamentals that make it attractive. We are pleased with our performance this quarter. It should be noted that there remains some uncertainty around the continued impact of the pandemic and the recovery will not be uniform across the globe. Despite all this though, we expect to see a continued gradual improvement in the overall dental market. As the recovery continues, the company expects to increase investment to support our growth initiatives throughout the year to drive growth rate. We believe that there are many lessons learned during the pandemic that will help us operate more efficiently going forward. And as we have seen this quarter, Dentsply Sirona is well positioned to capitalize on the continued recovery. And with that, I will turn the call back to Kari. Thank you.

Thank you, Don. And now we will open for Q&A.

[Operator Instructions] Your first question comes from Nathan Rich of Goldman Sachs. Your question please.

Thanks. Good morning Don and Jorge. Maybe starting with the revenue performance in the first quarter, it sounds like the market improved kind of more than you anticipated, and you definitely highlighted the broad based strength that you saw in the quarter. How do you think this plays out over the balance of the year? It doesn’t look like you have really changed your revenue assumptions for future quarters despite the strength you have seen in the first quarter. So just – can you help us think about just revenue cadence over the balance of the year?

Good morning Nathan, let me start and then Don will add some comments. Listen, if you go back, we – a quarter ago, we decided to provide guidance because we believe in our ability to execute, and we were optimistic about the recovery in the dental markets. I think Q1 confirmed that. It came in a little bit better than what we thought. Clearly, that gives us confidence for the rest of the year. As a result, we actually increased the bottom of the range of our revenue by $100 million when you think about it. And our – the better than expected revenue for us in the first quarter was not $100 million, it was less than that. So, we are reflecting our higher level of confidence in the rest of the year based on that change, and also all the other changes that we did with our guidance. We still think that the second half of the year is going to be a little bit higher than the first half. That is consistent with historical patterns. I think in the past, if you go back several years, what you see is that the first half is typically 47% of the total year. This time, we think the first half is going to be a little bit higher than that, but not much higher. So, all of the risks and opportunities, that we talk about in our prepared remarks, are factor into that. But net-net, we are more optimistic about the revenue for the year. That’s why we are raising our overall guidance. There are risks that we have to be mindful of, but we are optimistic about the future.

Yes. Nathan, the only thing I would add. Look, we are trying to be as transparent as we can. I mean that’s why we were kind of alone in offering guidance last time. And look, we feel good about how the first, the category came back and how we performed. And the only thing I would add to Jorge’s discussion is we are watching numbers in India, Brazil other places where we have a pretty significant presence and it’s a little uncertain. Look – and as we get more certainty about what the pace of the recovery is, we have demonstrated that we are willing to change our guidance, as Jorge just mentioned. But again, we thought the quarter was good. We think the rebound is coming. We are gratified with how the company is performing.

That’s helpful. And if I could just ask a follow-up on gross margin, Jorge, I think you kind of reached a multiyear high in 1Q, so very strong performance. Could you just maybe help us think about the sustainability of margins at those levels? You highlighted some moving pieces just around mix and shipping costs. So, just would be interested to get your thoughts on, how that plays out over the balance of the year?

Yes. Good question, Nathan. Clearly, very happy with the gross margin rate we had in the quarter. As you know, we don’t guide gross margin rate because, similar to SG&A, both fluctuate from quarter-to-quarter. In Q1, we had a great mix. Consumables – the consumables growth of 21.5% that certainly contributed significantly to the strong margin rate in the quarter. So, there are other things going on with the gross margin rate. So, those are temporary in nature or fluctuating in nature, if you will. In our gross margin rate, we are also seeing the benefits of many of the restructuring initiatives and portfolio optimization initiatives that we have executed over the last couple of years. So, I think that is very important. But we prefer to think in terms of the operating profit margin because it captures the fluctuations in gross margin and SG&A at the same time. And what I can tell you is, based on the good margin rate – gross margin rate in Q1, based on our expectations for the rest of the year, we are very much on track to delivering the 21% operating profit margin that we have committed to delivering at the end of this year. So that is, for us, the most important metric. As things move around, there will be fluctuations between gross margin and SG&A, but again, targeting a good strong 21% operating profit margin.

Great. Thanks so much.

Thank you.

Thanks Nathan.

Your next question comes from Elizabeth Anderson of Evercore. Your question, please.

Hi guys. Thanks so much for the question. I guess how are you thinking about the digital dentistry sort of cadence for the rest of the year? Obviously, you had a tough comp and then things got easier. But what – you have any programs going on besides sort of the revamp post COVID? Like in terms of the trade-in programs ex-U.S., you obviously have DS World in September. I just wanted to know if there is anything else we should think through there?

Elizabeth, I think you have it pretty much accurate. I would tell you the One DS program is performing like we had hoped. As we get into the back half of the year, we will probably tweak that again to reflect what did we learn in the first half of the year? So, we think there is some opportunities there. You correctly captured the fact that we are beginning to do the trade-in program around the world. And then whether it’s directly digital or not, the clear aligner business is really an important component of that. We have been very happy with how SureSmile has been performing. I mean obviously, Byte has been a terrific addition. And we think, obviously, we are very happy with how that’s performing and the runway in front of that. But SureSmile is tightly integrated with Primescan, and we feel that, that integration really lets dentist practice clear aligners pretty easily. We are pretty optimistic that, that business is gaining steam, and we think that’s going to be a nice addition and a nice way to accelerate our presence with CEREC. So look, as you think about the cadence, I am not going to tell you quarter to quarter to quarter to quarter, but I certainly think the back half, we are pretty excited about what we are offering, and we are excited about the promotional juice that we have. And we think as SureSmile gets bigger and stronger, that’s an obvious benefit. That reflects what we think will reflect well on Primescan.

Perfect. And just to your point there, in terms of – can you give us your updated thoughts on the integration efforts between Byte and SureSmile, what are dentists sort of saying now as they have had a little bit more time to digest the acquisition and sort of where are you seeing the first signs of sort of an integrated offering there?

It’s interesting, Elizabeth. So, our research when we were looking at Byte, told us there were going to be some people who like Byte and some people don’t. I mean the people who are in the clear aligner business think having another clear aligner brand that’s driving general patient demand is a good thing. People who don’t necessarily like clear aligners, whether they are going to the dentist office or not, don’t. We haven’t seen a whole lot of movement from that. But that being said, look, we are 5 months in, and they are seeing good benefit on SureSmile. We continued to improve things like customer service and delivery times, and we actually opened a large manufacturing facility that’s really beginning to benefit us on the SureSmile side. And they are excited about what that means. And most of them are taking a wait and see when are you guys going to begin to bring a Byte offering into the dentist office. For us, it’s less about the Byte offering than it is about the Byte patients who aren’t necessarily eligible for a Class 1 treatment – beyond a Class 1 treatment. Again, if we get 1 million unique visitors into the Byte universe, and half of them are eligible for Class 1, where are the other half going? How we deliver on that becomes a really important part of how we think about Byte, but it’s not top of mind when we go into most dentists office, and we are excited. Look, we have been working hard on how that integration is going to work in front of the dentist. And again, we are pretty excited about what that can be. And just a little side note, one thing we mentioned when we did the acquisition, critical mass in R&D and critical mass in supply chain is important, and we are seeing that. All of a sudden, if there is an innovation that you could bring to Byte, can you bring that to SureSmile? Can we learn something from Byte to put on SureSmile? Is there stuff that we can learn from SureSmile and put on Byte? And that’s going on, and that’s proved beneficial to us. And look, we – as you can tell, we are reaffirming the fact that we think our clear aligner franchise is going to be delivering on a run rate basis in excess of $300 million as we exit the year. So we are – you can tell we are pretty bullish on our clear aligner business.

Great. That’s very helpful. Thank you.

Your next question comes from Tycho Peterson of JPMorgan. Your question please.

Hi, good morning. Don, wondering if you could just give us a pulse check on what you are hearing from dental practices? I think if I go back to last quarter, you talked about offices being back to kind of 80% pre-pandemic levels. So, based on the numbers you are seeing now, are we at or above pre-pandemic levels? And then anything on the mix front in terms of more complex work versus routine? And then lastly, you talked about single rebound in dealer orders as they ramp purchases. I am just curious how you think about dealer stocking inventory at this point?

Yes. Thanks, Tycho. First, look, the ADA came out yesterday and was talking, kind of at that magic 90% level. I would tell you, we tend to think the more productive practices may be a little bit higher than that. I would also tell you, it’s different in different parts of the world. If you look at Asia Pacific, you look at China, Japan, they are a little bit depressed, but they are better than what we see in North America. And then Europe is a little bit uneven. There are parts of Europe that are kind of in above the 90% level. But there is no place around the world right now that we see absolute patient volume traffic exceeding pre-pandemic levels. In some places, it gets close. That being said, the thing that’s really kind of continued driving a lot of volume for us and others, you look like the implant businesses across all the dental competitors. You can see that more complex procedures continue to be a trend that you see. And the dentists we talk to – and it’s nice, by the way, we are starting to be able to talk to a lot more people face-to-face, is that they learned. I mean they learned during – over the last year that I can do clear aligners I can do a little bit more complex implants. And we feel that’s a really good trend for us long-term because the minute they recognize that they need to add and stay doing these more complex procedures, because it’s generating a higher revenue per patient than what they saw pre-pandemic, they tend to be pretty interested in digital equipment. So, we like that. And then just in terms of dealer orders, Tycho, it’s interesting. I would tell you the – we all learned over the course of the pandemic how much inventory do we really need. I tend to think the dealers, while they are getting a little bit more aggressive right now I don’t think that the absolute level of inventory they are going to hold is going to go back to pre-pandemic levels. It might get near, but they have learned. We are a pretty efficient supplier. How much do they need to carry upfront? And I don’t want to speak for those guys, but I – what we are seeing is, yes, good orders. How much are they going to come back, all the way back? We don’t know, but we are very happy with what the trend we are seeing right now.

Okay. That’s helpful. Two quick ones for Jorge on the operating margins, I think you had originally said last quarter the first quarter would have the weakest margins, obviously, up 630 basis points. So, can you talk a little bit about how much of that was mix versus cost savings? And then separately, on R&D, now that you are breaking it out, can you just give us a rough sense of how much is split between the two divisions?

Yes. Thanks, Tycho. Yes. We said last quarter that Q1 is typically, from a revenue perspective, the weakest quarter. And we also said that the operating profit margin was going to be a few points below what we experienced in Q4. As we said in our prepared remarks, and I think you have seen this across the board, the industry overall bounced back faster than what we were expecting in the first quarter. And as we were planning for spending patterns and investments in the first quarter, we were cautious and we thought that we needed to manage investment for a certain amount of revenue. And as we were getting closer to the end of the quarter, we realized the industry was coming back faster. So as a result of that, I think the margin rate in Q1 was much higher than what you would normally see in a typical first quarter. We clearly continue to see the benefits from structural changes that we have made as well. So, we are very much on track to achieving the savings that we committed to delivering by the end of ‘21, beginning of ‘22. In the first quarter, we realized further savings in the restructuring plan of close to $16 million. And the company continues to operate very lean and efficiently. I think there is typical expenses that we used to incur that – because people are not traveling and events are very limited. None of that spend is happening yet and so all of those factors contributed to a very strong operating profit margin rate in the quarter. As we look forward, we believe we will maintain a healthy margin rate. We are very much on track to get into the 21% rate by the end of this year. We will have to make some investments that we didn’t make in the first quarter. I mentioned in my prepared remarks how we shifted – we are shifting at least $0.05 from the first quarter into the remainder of the year and those $0.05 are very specifically linked to projects that we know we are already executing on, but they were not executed entirely in the first quarter. So, that’s how I would describe the performance from a rate perspective. I think the second part of your question was about the 2 segments and how the rates – the margin rate for both segments. Clearly, the operating leverage that we have in consumables is much, much higher than technology and equipment. The mix in Q1 was very strong on the consumables side, and that certainly helped tremendously with the strong gross margin rate and operating profit margin rate. As we go throughout the year, we expect consumables to remain healthy. But as Don indicated, actually in the prior question, the cadence of our technology and equipment should improve throughout the year. And that kind of balances the mix and the rate a little bit. So hopefully, that answers your question.

Yes, it does. That’s helpful. And then one last one for Don before I hop off on Byte, has pricing been relatively in line with your expectations since you closed the deal? I know there is a fair amount of promotional activity in that market?

Yes. It’s – it really hasn’t moved a whole lot versus what we saw when we were doing diligence.

Okay, thank you.

Thank you, Tycho.

Your next question comes from Erin Wright of Credit Suisse. Your questions, please.

Great. Thanks for taking my questions. My first one is how should we be thinking about what’s embedded in expectations for 2021 for Primescan? And how you’re thinking about the upgrade cycle? And are you seeing any changes in terms of practitioner adopting for more stand-alone Primescan versus full chairside system in this sort of environment?

Yes. Thanks, Erin. We’ve kind of evolved our approach to CEREC, and obviously, with Primescan. If you look 2 years ago, and I know you’ve been following us longer than that, it was all about chairside. Chairside was critical to us, and we continue to believe that it’s a differentiator for us over the marketplace. We are seeing a trend where there is more interest in stand-alone DI units, and we felt that we were not competitive 2 years ago. So that’s one of the reasons we kind of bifurcated our approach with Primescan, there was – obviously, there is a full chairside, but we were selling a unit that didn’t come with the software that let it become instantly chairside, and we’ve seen good growth there. So the art form for us is how do we continue driving our DI presence aggressively and then over time, shift those people up to chairside. So as we look out over 2021 and probably beyond that, we expect to see the DI side of the business growing faster than the chairside. But then what we’re effectively doing is creating an installed base where we can go right back in and sell them – the advantage of chairside right after that. So it – you may see a little bit of a lag in how fast chairside grows. But in aggregate, we expect CEREC to grow quite nicely over the course of 2021 and beyond.

Okay, great. And then can you provide an update on the DSO strategy at this point? Are you seeing greater traction there? How have some of the digital dentistry offerings been gaining traction potentially in those DSO accounts?

Yes, obviously, the DSOs tend to be a much more North American impact. We feel that we’ve done pretty well against DSOs, more people – a lot of them are very, very interested in workflow, particularly with something like a SureSmile. And we didn’t – again, you almost have to think of there is the 500 to 700 offices as a group and then you kind of think of the 50 to 100 kind of group practice offices that are not necessarily household names. We tend to – we’ve been doing well in kind of these midsized DSOs. But we’ve been very competitive in some of the larger DSOs with both – some of our digital entries around Primescan as well as SureSmile. So when you say update on our strategy, our strategy is to compete and win, and do it in such a way that we’re building out our growth rate at a good margin and then how do we grow from there. But not – no big change in strategy, and we feel we’ve done pretty well in DSOs without necessarily calling okay, what went on at Aspen, what went on Heartland, bang, bang, bang, all the way down the line.

Okay, great. Thank you.

Let me put it this way, Erin, DSOs will grow year-on-year for us.

Perfect. Thanks.

Your next question comes from Jon Block of Stifel. Your question please.

Hi. This is Trevor on for Jon. Thanks for taking my questions. Just starting with the operating margin, your guidance implies no material improvement for the balance of the year. So should we still be thinking about exiting the fourth quarter with the strongest margin of the year or just any changes to the cadence there?

Yes. Thanks for the question. As I indicated before, margins are going to fluctuate quarter-to-quarter depending on mix, depending on the cadence of investments and other things. Overall, what we’re expecting and that’s what we’re reflecting in our numbers is that we will be around the 21% level for the remainder of the year. We’re trying to balance a number of things for us. Starting with the top line, we want to make – we want to deliver in the short-term, which we are. We also want to make investments to ensure that we actually hit the 4% to 5% top line growth rate that we are targeting. So that’s going to require investments, and they will happen throughout the year. Our restructuring projects continue to deliver. Those will – some of them require investments that have paybacks a few quarters later. So, all of those things contribute to some fluctuation throughout the year. If Q4 turns out to be a very high quarter from a revenue perspective, it’s possible that the operating profit margin will be over 21%. On average, that’s what we are modeling for the year, and that is consistent with our goals for this year and is consistent with our goal of achieving 22% as we go into ‘22. So to get to 22% next year, there are some investments we have to make this year. And so we have to balance all of those priorities for the company.

Great. That’s helpful. And then maybe just on digital dentistry, you noted you saw a decline in the quarter coming off a difficult 2020 comp. But can you just comment on how the category performed relative to expectations and maybe how things looked exit in the quarter into April?

Well, we’re not going to comment on April, but digital dentistry performed well. We were kind of in a little bit of a unique situation where we had a very strong DS World in Q4 2019, and we were somewhat limited from a supply chain perspective. So there was a lot of movement from Q4 into Q1, creating a pretty tough comp for us. All that being said, relative to where we are in the recovery and what we’re seeing in terms of interest from dentists literally on a global basis, we feel digital dentistry is doing pretty well. And we feel that – again, the thing that we’ve seen coming out of the pandemic is a lot more interest in, I would say, more complex procedures with 2D, 3D. Remember, digital dentistry isn’t just all CEREC. For us, it also talk about imaging 2D, 3D and cone beam. You’re seeing a lot more interest in complex procedure and the digital assets make that diagnosis a lot easier and the treatment planning works pretty well for those guys. So overall, look, as you see clear aligners, as you see implants move, a lot of that’s being powered by these much more sophisticated digital diagnosis and treatment planning. And as a result, you’re seeing good solid demand in digital dentistry. And some of that’s obscured in our case around a comp that was specifically unique to Q1 2020.

Great. Thank you.

Your next question comes from Jeff Johnson of Baird. Your question, please.

Thank you. Good morning, guys. Don, maybe just a couple of clarifying questions, if I could. First, just on Byte, our math, which sometimes struggles to be accurate, but our math would suggest that Byte may be over $40 million in revenue this quarter, that’s a couple of quarters sooner than I thought they could get there. So one, are we ballpark accurate there? And two, looking at some of the consumer review sites and things like that. I mean the feedback on Byte has been noticeably very, very good. And we think about the cost structure there, and that’s not just customer acquisition costs but also then support and things like that. Just maybe an update on what you’re seeing on the cost side, and if you’re more bullish, less bullish on the accretion that you’ve been expecting from an EPS perspective from that deal here going forward? Thanks.

Yes, Jeff. We will split the question. I’ll talk about Byte, and then I’ll let Jorge deal with revenue and margin and long-term financial impact. Look, the reason we bought Byte is we thought that they had a – first, a really, really good product. They had a great team and culture out there that was very customer-focused, and we remain very, very customer-focused in terms of those reviews. Literally, we – something we look at as a team on a hourly and nightly basis. So yes, it’s really important to us as we think about how do we maintain high Net Promoter Scores and how do we create the brands that we feel we want, which in our mind is, again, we’re reaching out to a segment of the population that has not necessarily come into the dentist office, tends to be a little younger, and they don’t necessarily have a specific relationship with a dentist. So we – as we think about how do we attract those patients, correctly put them in, are they eligible for Class 1, and we want to maintain a really strong relationship with that patient, and we do. We’ve got a fantastic operation out in Salt Lake City. It’s one of the treats that we – when we go visit our Byte team, we get to go out there. And then from a supply chain perspective, one of the reasons that we were excited about Byte is that we think we’ve built a world-class manufacturing operation in Mexicali. And we feel that, that’s going to give Byte a real opportunity to deploy what we think is great technology. But in terms of specific revenue and financial expectations, I’ll turn that over to Jorge.

Yes, Jeff. Thanks for the question. Listen, we – as Don said, we’re very, very happy with the performance of Byte. We are tracking with our business case. We were happy about the opportunity. We have owned Byte for only 5 months, right? So we’re happy with what we’re seeing. I just reaffirm our views of the total revenue for the clear aligners franchise for us in excess of $300 million for this year. Is there some upside? Perhaps, but it’s early to start counting on things like that. We need to keep working on the integration. Integrating new companies, especially companies that are relatively young, takes time, and it takes investment and it takes a lot of effort from the entire organization. So we have to balance all of those things. We need to learn a lot of things about the direct-to-consumer business, and we’re balancing all of those things, net-net, very happy, very much on track with our business case.

Thank you. And then, Don, just maybe as a follow-up to your Primescan commentary, and I think we’d all agree that DI is probably the longer term but bigger growth opportunity. But is that at all fading your thoughts on Primemill upgrade opportunities? Even if CAD/CAM isn’t going to be – or chairside isn’t going to be a big driver or future growth, I think you still have 50,000 or 60,000 installed CEREC across the globe. I’d assume Primemill upgrades can still be pretty meaningful over the next year or two, even if chairside isn’t a big growth driver for the company going forward? Thanks.

Yes. And Jeff, I don’t want to say that chairside is not going to be a growth engine. I tend to think that – look, what we’re seeing is an evolution where scanners are now kind of becoming de facto, a standard practice in a lot of offices around the world. But even that, North America and parts of Europe are way ahead of other places. In terms of Primemill, look, we’re really early in Primemill. I mean kind of the bummer for us is we launched it and then we go into the pandemic. But the economics of full chairside dentistry still are very, very attractive to the individual dentists, and that’s something that we absolutely sell. So one of the reasons we’re as comfortable as we say we are in terms of let’s drive some DI is because that’s a great upgrade opportunity in our mind. Let the dentist get comfortable with DI and then let’s go sell them on the benefits of chairside. So we’re very bullish on Primemill. I mean first – and I know, Jeff, we actually had the opportunity to actually show you this. I mean look, we’re basically scanning and delivering a really accurate, well-made crown in under an hour with full chairside with Primemill, given the speed. And now that we’ve got our Tessera blocks in, we’re super excited about what that means as a total integrated system. So look, I would tell you, Primemill, very early game, very early in the process. We are very, very bullish on what Primemill can be. And look, if this winds up that we expand our overall digital footprint starting with the scan by 15%, 20% over time. And they don’t necessarily buy mills the first time, believe me, there will be somebody knocking on their door to sell them a Primemill not too far down the line because the economics are really, really compelling and the patient experience for something like single-visit dentistry or 1-hour dentistry, really good.

Got it. Thank you.

Thanks, Jeff.

Thanks, Jeff.

Your next question comes from Brandon Couillard of Jefferies. Your question, please.

Hey, thanks. Good morning. Don, if we just look at the Consumables business, it’s been a bit of a mixed bag for a while, but showed some improvement in the first quarter EBIT comp notwithstanding. Where do you think you’re gaining share or losing share in that category? Which areas are still lagging? And which areas do you think you’re maybe picking up some share?

Yes. Again, our Consumable business, just to break out some components for – as a little bit of a background, you kind of our preventive business, the resto business, our endo business and our lab business. I would tell you the resto and the preventive businesses have been, we think, doing well. Our endodontic business, which is large and very, very profitable, we’ve been very happy with the performance over the last two quarters. We’re very optimistic that we will pick up some introductions in the back half of this year, which we think will be important to create some momentum on that business. And then lab has kind of been a little bit of a challenge for us. There is two components. One, we kind of got out of the analog lab business, which was a significant piece, which leaves us the digital lab business. We think over time, that’s going to allow us to accelerate growth right there. When you look at stuff like our digital denture program, our 3D printing ingredient, Lucitone, we think we have an opportunity to grow there. So in terms of what we do in the first quarter, where did we gain share? One, wouldn’t it be great if we all had some syndicated data, so we can answer this question with some degree of precision? But we are happy with how – we think we held serve on endo. We think we did pretty well on the rest on the resto and preventive businesses. And then lab, it’s kind of hard to tell, but we were happy with the performance of that business in the quarter.

And then switching over to implants, while since you spiked that out as a positive within the T&E segment, can you be a little more specific on the growth rate of implants in the first quarter, do you think that franchise can grow in line or faster than the corporate average this year?

Yes, Brandon, the implants business performed well in the quarter is one area where we are spending a lot of time, investing a lot of money, making progress. We are not where we want to be, but Q1 was a good quarter. We are – as we have indicated before, we are not growing yet with the category. That is a key priority for us. And everything we are doing right now is aiming to approach that number at some point, and there is a lot of opportunities. We have a great portfolio. We have a number of brands that we are trying to optimize. We just completed the acquisition of Datum this quarter, which is a valuation of our conviction about growing that business. And it’s very early on, but we are very excited about that acquisition. It’s small, but it’s going to be a main contributor. We are very bullish on the capabilities that we have with Atlantis and with other parts of the portfolio, so work in progress moving in the right direction.

Thanks.

Your final question comes from Jason Bednar of Piper Sandler. Your question, please.

Hi. This is Korinne on for Jason. Thanks for taking squeezing us in. So first, following up on the Primemill question, do you have any early insight on how many of those have been sold to new users versus existing users that are upgrading? And then additionally on that, you said you spent the year building up capacity. Has that been able to meet the demand? Or is it still too early to tell on that?

So first, yes, I would say Primemill right now has been principally an upgrade. We’ve been happy that we have attracted new users to full chairside. Typically, what we see, it’s actually easier to sell DI. Then you go into full. We’re attracting new people by selling DI and then you upgrade them to chairside a little bit down the line. But so far, I’d say Primemill has been mostly an upgrade. If you look back on the product that it’s actually replacing, that’s about 7 years old. So this was a needed innovation. And right now, we feel very good about capacity. I would say to characterize things, in Q4 ‘19, we had a very, very big DS World. We were capacity constrained. And actually, mill was really introduced at that time period. It took us a while to clear that up, which is one of the reasons we have a tough comp in – from Q1 2020. Right now, we feel good about our ability to meet demand over time.

Thank you. And then one last one, on Axeos, we’ve seen some pretty attractive promotions going on in certain parts of the world. We are just wondering, are those competitively driven and then how has demand been here now that we’re a couple of quarters into the launch?

On Axeos, demand has been good. First, it’s a really, really good product. I mean we took a – we were a little bit behind coming into the wide field of new business, but we think our product is best-in-class. And by the way, if you actually look at the capabilities, look at the new software that we put in that with Axeos, it’s a really, really good product. In terms of the individual promotions by region, look, there are different parts, we’re going to respond competitively as we need to. But by and large, one of the things that our Chief Commercial Officer, Walter Petersohn and Jorge have put in place, we have a pretty disciplined approach to pricing. We don’t want one region to get to the point where they are creating a great market opportunity that lets things move around the world. So I would tell you, first, look, we want to be competitive with Axeos. It’s a great product, the more places we can sell that to better. Are we – is there differential promotions? Yes, that goes on typically throughout the entire company. But again, we think we’ve got excellent discipline in terms of establishing a floor in terms of how things are promoted on a regional basis or if we’re going to make a big bid on a DSO business, that all runs through a pretty sophisticated pricing process. So thanks.

Thank you.

And this concludes today’s conference call. Thank you for participating. You may now disconnect.