DENTSPLY SIRONA Inc. (XRAY) Q3 2021 Earnings Report, Transcript and Summary

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

Thank you, Brian. And good morning, everyone. Welcome to our Third Quarter 2021 Earnings Conference Call. I'd like to remind you that an earnings call, press release, and slide presentation related to the call are available in the Investors section of our website at www. dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we 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, 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'd now like to turn the call over to Don Casey, our Chief Executive Officer.

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

Thank you, Don. Good morning and thanks to all of you for joining us to discuss another strong quarter in our fiscal year 2021. As a reminder, my remarks today will be based non - GAAP financial results unless otherwise noted. Please refer to the reconciliation tables at the back of the press release and slides, both of which are posted in the Investors section of our website. In the third quarter, we delivered strong revenue growth across the business in both consumables and T&E &E. The business deliver organic revenue growth of 21.1% and reported growth of 19.4%. Because of the pandemic, it makes it difficult to gauge growth. I want to point out that we also posted robust organic sales growth versus 2019 pre -COVID levels. Compared to the third quarter of 2019, reported sales grew 11.1% and organic sales grew 10.7% driven by growth in both segments and across all regions. This performance against the 2019 baseline confirms the steady recovery trend we have seen in 2021. Gross profit was $624 million or 58.4% of sales. Our margin rate remains steady, reflecting a balanced contribution from all of our businesses and a more normalized mix. Looking back, we have deliver headroom 50 basis points of gross margin expansion since Q3, 2019, the pre -COVID baseline attributed to portfolio optimization on our efforts to simplify the organization over the last few years. As you all know, the global supply chain environment continues to be a challenge in terms of cost, availability of components, and labor across industries. So far, we have been able to meet demand at a normal pace and continue to work on various operational strategies to minimize the impact to our customers and to our P&L. Now, turning to SG&A. In the third quarter, we had expenses of $373 million or 34.9% of sales. This ratio remains below pre -COVID 2019 levels, reflecting the benefits from our efficiency improvement initiatives. Quarter-over-quarter SG&A increase as we ramped plan SG&A investments, particularly in sales and marketing, to support our growth plans in the strategic areas, including clear aligners, implants, and digital capabilities. Q3 spending on R&D was up 31.6% year-over-year to $35 million. We expect this level of increased investment to continue as we are committed to delivering innovation and great solutions to our customers. As a result of the heightened emphasis on our own R&D over the last few years, we are pleased to see a much healthier solutions pipeline, as Don will discuss later. Turning now to profitability. Operating profit grew to $216 million versus $197 million last year. Operating margin was 20.2%. Looking back, we have delivered 230 basis points of operating margin expansion since Q3, 2019, the pre -COVID baseline. We have expanded margins and we have also made meaningful investments in our business, which are essential to fund sustainable long-term growth initiatives. Net interest and other expense increased versus last year, mainly due to the impact from foreign exchange fluctuations. Regarding taxes in the quarter, our effective tax rate increased to 23.4% from 20.3% in the prior-year quarter, primarily due to geographic mix of pre -tax income and our continued business recovery from COVID. Turning to earnings, EPS was $0.68 versus $0.67 in the prior year quarter. Moving to segment performance versus the third quarter of 2020, Consumables and Technology & Equipment grew 15.9% and 25.3%, respectively. Both segments posted a strong growth across all product categories. The Consumables segment had sales of $440 million, an organic increase of 15.9% versus the prior year. Overall growth was strong across all regions and in all categories, most notably, within the Endo and rest of parts of our portfolio, which represent a strategic priorities for our business. This quarter, we launched ProTaper Ultimate, the first major endodontic platform innovation launched in our Endo business in more than 5 years. Market reactions, thus far, have been very positive. Additionally, the rebound in the preventive business particularly in the U.S. continued in Q3. The consumables market has been resilient and our teams are executing well through the recovery. Currency favorably impacted consumable sales by 1.3% offset by a reduction of 4.8% due to the divestitures and discontinued products. Moving onto technologies and equipment segment results, T&E organic sales grew 25.3% versus the prior year, with a strong overall growth in all regions and product categories. Growth was most notably driven by the digital category and implants. There continues to be a strong momentum on increasing digital capabilities within dental offices. Demand is high for digital devices such as Primescan and imaging equipment such as our new Axeos unit. We're seeing a growing trend in dental offices upgrading from 2D to 3D units and we are observing this trend in all global markets. Our clear aligners franchise drove a strong year-over-year growth this quarter. The aligners market continues to grow faster than most categories and the aligners business is a key contributor to our growth strategy. In the dentist directed channel, SureSmile, continues its expansion domestically and internationally. In addition, the new software we recently launched has been positively received by the market due to its significant user experience enhancements. The upcoming launch of vPro will be another key differentiator for SureSmile offerings. As you may recall, when we acquired P ropel earlier in the year, with indicator our intention to utilize it for SureSmile as well. SureSmile is on track to meet our run rate goal for the year. After a very strong first half in 2021, the DTC channel experienced softness in Q3. We believe this is largely attributed to COVID recovery dynamics and seasonality. Given the run rate we're seeing for Byte in the second half of this year, there is a possibility we may not fully achieve the annualized run rate goal for this year. DTC is an exciting new category in the dental industry. And Byte is strategically position for growth with its focus on customer experience and key differentiators, such as high provide and high engagement with customers through the entire aligner journey. Lastly, within T&E, currency favorably impacted sales by 1.2%, as well as a benefit from acquisitions of 7.7% offset by a reduction of 9.4% due to divestitures and discontinued products. Now I'll turn to financial performance by region during the third quarter. U.S. sales were $399 million, a growth of 25.3% versus last year. Organic sales growth was 20.1%. U.S. dental sales volumes remain at close to normal levels in both segments, despite COVID variance that spike late in the quarter. European sales were also $399 million, a growth of 13.6% versus last year. Organic growth was 17.8%. Similar to the U.S. sales, the majority of product lines in consumables and T&E are running at pre -COVID levels or better. Rest of the world sales were $271 million, a growth of 20.1% versus last year. Organic sales growth was 27.8%, reflecting recovery in demand across consumables and T&E. The APEC region has delivered continued growth for our business throughout the entire fiscal year 2021. Next, I'd like to cover cash flow. In the third quarter of 2021, we generated operating cash flow of $172 million and free cash flow of a $137 million. During this quarter, we paid our regular dividend and we paid long-term debt of $296 million, which mature in July. We finished the quarter with cash on hand of $281 million. Year-to-date, we have generated $435 million in operating cash flow and $334 million in free cash flow. On a year-to-date basis, we have deployed more than $248 million to fund strategic acquisitions, including Datum and Propel Orthodontics. We have also returned a total of $158 million to shareholders through dividends and share buybacks. Our financial position and balance sheet remains strong. We are well-positioned to continue to deploy capital strategically. Now let me provide an update on our financial expectations for 2021. Based on the solid performance of our business year-to-date, and the current market trends, we are increasing our estimates for 2021 as follows. We are tightening our revenue outlook by increasing the bottom of our range. We now expect revenues to be in the $4.25 billion to $4.3 billion range. With respect to EPS, we are increasing and narrowing our estimates for fiscal year 2021, the new EPS outlook range is now $2.87 to $2.92. This range is based on a new assumption for the euro to USD rate of 116. This is lower than fiscal year '21 budget assumption of 122, and lower than last quarter's assumption for the second half of the year up 118. Given our long euro exposure, a weaker euro represents a net headwind to our P&L. Overall, we're very pleased with the current momentum on our business, on our new 2021 outlook for revenue and earnings reflect that confidence. To close my remarks, we're proud to share the progress we're making in our sustainability journey. As you may remember, we indicated a few months ago that we were taking substantive steps to advance sustainability. I am happy to report that just a few weeks ago, we share our sustainability strategy with a broad range of stakeholders at DS World, and also published our 2020 Sustainability Report and our 2025 goals. It is our commitment to be transparent and accountable with respect to our strategy and goals. Going forward, we will measure our progress within 3 sustainability very close; healthy planet, healthy smiles, and healthy business. To support our healthy miles pillar, this quarter we enter into a 5 year partnership with Smile Train and committed 5 million to the organization. Smile Train is a nonprofit organization that provides corrective surgery for children with cleft lips and pallets across the world. We're excited by the opportunity to help improve oral health for children worldwide. I encourage you to visit the sustainability hub on our website to checkout our metrics and actions within each of our sustainability verticals. We are convinced that our commitment to sustainability will deliver long-term value to our stakeholders. With that, I will now turn the call back to Don.

Thank you, Jorge. Moving on, I wanted to provide some additional perspective around our strategy and priorities going forward. Moving to Slide 17 in the presentation. Our priorities have remained consistent over the last few years, which has allowed us to stay very focused on delivering consistent results. These priorities are to grow revenues 4% to 5% long-term through a combination of organic and inorganic activities. The second is to drive our margin to 22% by 2022. Essential to these efforts is the third priority. Simplifying the organization to better leverage our scale as one of the largest companies in the dental space. When we meet these goals, we deliver consistent and sustainable double-digit EPS, growth. Moving to Slide 18 to detail some of the progress we've made against those priorities. Growth is our overriding priority, with the objective being to deliver 4% to 5% topline increases long-term. We've made important progress against this goal. In addition to the 21% growth for the quarter, year-to-date, we have delivered an Increase of 35.9% versus 2020. It's also worth noting that for the entire year 2019, the last period prior to the pandemic, organic growth was 6.1%. This kind of performance gives us confidence in our growth strategy and our priorities. We will keep driving growth by focusing on 4 areas. They include building on our leading role in digital dentistry, accelerating our rapidly growing clear aligner franchise, delivering major innovations in critical areas, and building out our capabilities and faster growing parts of the world. Our portfolio moves over the last few years also reflect these priorities and have resulted in increasing our exposure to faster growing areas of the dental markets. Turning to the next priority around margin expansion. We are confident that we will deliver the 22% margin goal by the end of 2022. We are realizing the benefits of the 3 year restructuring plan, as well as portfolio reshaping efforts. Our team also continues working on simplifying the organization both structurally, as well as how we work. A great example of this is our Comprehensive Enterprise Modernization Program under Jorge's leadership that increases the use of automation and digital tools across the Company to improve efficiency and the customer experience. These efforts have helped us deliver significant headcount efficiencies and we are on track to deliver the $250 million in savings that we outlined in 2018. Looking out to the future, our strategy outlined on Page 19 is to develop superior integrated workflows built on diagnostic excellence, easy-to-use treatment planning, and essential products that improve outcomes for patients and dental practices. On Page 20, Dentsply Sirona's impressive digital foundation is outlined. It starts with a large global footprint in imaging with major brands like Schick, Orthopos, Galileo, and our newest addition, Axeos. Our large CEREC franchise that includes both chairside and DI is another critical component in our robust digital foundation. As Jorge noted, coming out of the pandemic, both of these digital businesses have strong momentum as dentists globally are looking to upgrade their practices. By adding these more powerful diagnostic tools like Primescan and 3D imaging, they can incorporate more complex procedures into their practice with confidence. Adding these more sophisticated diagnostic tools also creates an opportunity to take advantage of treatment planning for complex cases like implants and clear aligners. Treatment planning helps the dentists map out the entire procedure. This increases their efficiency while elevating their confidence, which can lead to better results for the patients. Dentsply Sirona is one of the largest providers of treatment planning in all of dentistry with brands like Cedexis, CEREC, Atlantis, Simplant, and SureSmile. We look at this digital foundation as one of our most important assets and this area is a major investment priority for us. These will drive faster innovation, expanded treatment, planning capabilities, and accelerated progress in the areas of artificial intelligence. These efforts are now supported by over 500 software engineers within Dentsply Sirona today. that are helping us continue leading the digital dental revolution. Moving to Page 21, innovation is our lifeblood and we have delivered several innovations in 2021 in key areas like Implants and Endo. At DS World, several of our major innovations were on display. Rather than just launching products, our customers could see our approach is based on simplifying critical workflows from diagnosis to delivering the final treatment in ways that can transform their practices. Our ability to work across the entire procedure is truly unique to Dentsply Sirona. The fact that we address so many of the key procedures gives us a real advantage as we look to become the essential partner to the practice. A great example of this was the comprehensive re-stage of our implant business announced last month. For us, it's not just about launching a new screw in abutment. It is about rethinking the entire implant workflow and bringing all the assets of Dentsply Sirona together to help simplify things for the dentist. It starts with moving to 1 brand name, Dentsply Sirona Implants. It includes adding tools to Primescan that actually allow for edentulous scanning, a real breakthrough while also advancing innovative multi and single tooth replacement capabilities. It includes a Simplant treatment planning refresh, and a comprehensive continuing education program to support a digital approach to implants. It allows us to deploy Lucitone to enhance performance of digital dentures. We have a best-in-class bone growth product with OSSIX. The team here is also really excited about the launch of PrimeTaper. This is an immediate load, self-tapping product that is built off a well-known procedure. The system has launched in the U.S. and EMEA to excellent initial reviews. And this is the kind of integrated innovation across a critical procedure that we believe transforms dentistry. We're also adding new products to our MIS value implant business to continue building momentum in this rapidly growing franchise. At DS World, we also launched ProTaper Ultimate in the endodontic space, as Jorge mentioned, representing a major innovation in this important therapeutic area. It's more than a file, and it includes a great cleaning product. As well as a new obturation system that includes a new bioceramic sealant. Early users of the system, which we call the trifecta, are really excited about the ProTaper Ultimate system as it simplifies the procedure significantly. We have also launched a major software upgrade in CEREC 5.2, as well as SureSmile 7.6. CEREC 5.2 is so powerful that it makes Primescan feel like a totally new product and it takes its category leading speed and accuracy to new levels. SureSmile 7.6 makes major progress around our user interface. We also have a full slate of news for our Clear Aligner franchise. As we have 2 brands, we're maximizing the investment in both R&D and manufacturing by offering the innovations across both the SureSmile and the Byte businesses. Innovations in this space include our vibration technology, vPro, and Hyper Byte for improved comfort. We, also, are launching new whitening products in the near term. To finish the discussion around innovation, there was major progress in 2021 that will pay dividends going forward. I would also note that we have a very robust pipeline going forward that we will bring to the market in the future. Moving now to Slide 22. To summarize, our strong performance year-to-date gives us confidence going forward for the remainder of 2021. We have good momentum leading into the future. Our results reflect the underlying resilience of the dental market and our team's disciplined performance against our operational goals and progress against our key strategic priorities. Based on this, as Jorge said, we are raising our '21 earnings outlook. Going beyond the quarter-to-quarter discussion, we also believe that Dentsply Sirona is well-positioned to transform dentistry and deliver sustainable growth going forward. And with that, we will now open the call to questions.

Thank you. [Operator Instructions]. And to everyone who is participating in the Q&A session today, we kindly ask that you please limit yourself to 1 question and 1 follow-up. And our first question will come from the line of Elizabeth Anderson with Evercore. Your line is now open.

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

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

Okay. Thank you. That's helpful. And maybe just switched over to the clear aligner. I know you said that maybe there was a slight about if weakness in sort of the DTC market. Can you go into maybe what you think is driving that, and then maybe contrast it to how you're seeing SureSmile.

Thank you for the question. The DTC segment obviously benefited from the pandemic. And as we're kind of entering this recovery phase, we're seeing across not just the DTC clear aligner space, but a number of consumer businesses -- consumers have choices in terms of where they're spending discretionary income. And all of a sudden, people are going on vacations and other things. So we think we're seeing a little bit of seasonality and we're seeing some competition for discretion. And are we spending among our core target audience what we think going forward first is that look, we think clear aligners are clear aligner strategy is predicated on look, we've got a DTC space and we've DTC entry and we have obviously a director Dennis entry and we'll look to, see growth in both of those segments. As what we saw in Q3 -- again, a little bit of seasonality. We think this is a little bit of consumers looking at other discretionary spending. I would tell you we were -- obviously, when we sit down and prepare all this stuff, we would reflect on the fact that in basically the second quarter of 2018, we had 0 sales in Clear Aligners and today we've got a -- if it was as independent SBU, it would be 1 of our more significant franchises and 1 that we expect to continue providing a lot of growth into the future.

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

Now, they're a little bit divergent. SureSmile continued to -- it continues to perform as we thought. It's demonstrated very, very consistent results. We're optimistic as we begin to push that outside the U.S. and we have made progress doing that, that we expect to see continued growth on SureSmile. The plans for Byte are also to begin to pick that up. I mean, we're looking at Byte in a couple different ways. I mean, the first is we have new products that are coming that direction, Part 1. Part 2 is we believe that there's opportunity to expand this outside the U.S. We think the DTC channel in places in Asia and other areas is doing pretty well. So we really think that we've got a great product and want to participate in those regions. And then one of the things that we remain optimistic about is we really think that Byte is going to play a role with our relationships with the professional. Obviously, when people come into Byte, not everybody is eligible for Byte. They can be referred over to dentists that we believe that would have Primescan and other things and go right into SureSmile. So the Byte to us is a strategic play that gives us opportunities to grow in a number of different areas.

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

Thank you. Next question, please.

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

Thanks. Don, I hate to nitpick after a beat-and-raise quarter, but just following up on last questions. You did have targets out there for the clear aligners about $300 million for the year, so where are you trending on Byte versus that $200 million Byte targets that you've laid out? And how do you know it's not a competitive issue? Obviously, they need to see channels gotten pretty competitive.

A couple of things. Tycho, we're not going to give you the exact numbers on Byte, but it's a little bit soft. I mean, we're not talking a major issue. We want to be as transparent as we possibly can. So we're telling you guys what we're seeing. We don't think it's a competitive issue that's where we feel like we're losing ground to other entries based on a lot of different things. Obviously, we're serving in the market. We obviously pulse and watch what's going on with unique visitors. We -- our process involve somebody coming into the franchise, buying a diagnostic kit and then hopefully buying aligners, so we have an opportunity to really talk to people and see where they're departing the funnel. And at this point, we really don't feel that there is a -- been a significant change in the momentum of getting people from what kind of the purchasing the diagnostic kit, to actually purchasing diagnostics. We feel that it's much more of a narrowing of the funnel than losing people to competitors in the funnel.

Okay. And then follow-up on supply chain, obviously topping issue or. I'm just curious what you're seeing in the channel in terms of inventory levels, our dealers starting to stockpile? Are you running into shortages? Are you able to pass on higher shipping costs? Can you maybe just give us a little bit of a walk through on what you're seeing on the supply chain side right now?

In fact, I'll take that question. Yes. As I indicated in my remarks, there are challenges. So far -- I also said this. So far for us, we have not been impacted in terms of our ability to manufacture products or to supply our distributors. It is something that we are monitoring very closely. The supply chain team is doing a great job because the reality is, it is harder now to find certain components. It is more expensive in some cases to procure certain materials. We have managed all of that so far. So with respect to what we're seeing in the inventory pipeline or channel, we haven't seen any major disruption or any changes, really, of material significant at this point. But as you know, this is a global situation and it's something that is hard to predict at this point. But so far, we -- our financials are not -- have not been impacted by the supply and -- supply chain issues in a material way older than some elevated costs that we have been able to upset. Or in some cases, for example, we did a price increase, we announced a price increase effective October first, some of that helps upset some of the incremental costs that we are all facing.

Okay. And then on the cost side is wage inflation in kind of the hiring challenges changed your kind of customer view on automation digital to digitization. I mean, having a tough time staffing these days is that kind of driven more towards digital in your perspective or is it too early?

No, I think we think so. Certainly, there are shortages of labor in many space s, many industries and dental is 1 of them. Staffing issues, as you said, and dentist offices are becoming a little bit challenging and all of that motivates our customers to think about ways of improving the automation, the efficiency and their practices. And I think that is reflected on the strong momentum that we have, that we have seen in all of our digital equipment, including digital scanners and 3D units, so I think that is happening. I think there is accelerating in that trend and it's something that is going to really expedite this digital transformation that we have been talking about for a little while now.

Okay. Thank you.

Right. Thank you. Next question, please.

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

Hey, guys. This is Tom Stephan on for John. Thanks for the questions. Sorry to belabor this, but want to go back to Byte. Can you guys just elaborate a bit on the macro headwinds you called out? Maybe specifically how they look today versus what you saw in 3Q. Are those headwinds maybe abating a bit relative to 3Q? And then as attack on, did the Apple iOS changes have any impacts on Byte results? And if so, do you believe you're starting to navigate those challenges?

I'll answer it. Thanks, Tom, for the question. I'll answer the second part first and the first part, second. Look, the Apple change obviously impacts how Facebook and other things are purchased and how we interact with that. We -- 1 of the reasons we bought Byte was they have a really, really good team that is very sophisticated in how we go about creating demand and how we use different aspects of the digital mix whether it's search engine optimization, whether it's social media, whether it's doing things like affiliates or insurance or other things so, we've worked our way through that. In terms of what headwinds are we seeing in Q3 that are different than Q2? What Q3 is vacation time? I mean, look, you had our our feeling is and we've looked at this and we've talked to a number of our customers or potential customers and people, we get them in. Hey, look, you expend $20 with us to get the diagnostic kit. Why aren't you could take the next step and literally people were talking about, well, we were taking our first vacation since the pandemic and other things. So statistically, we, basically, we think there's seasonality associated with people going on vacation, people heading into school, and then it is somewhat confounded by what's going on and the kind of the pandemic where you've got pent-up demand for consumer spending in other areas. And the thing that we're still trying to quantify and we were going to continue to watch it and work through it. Obviously, there was a change in the third quarter about government payment related to pandemic recovery things, so we're working through a bunch of this stuff, but I really -- I think Tycho just said it well, I do want to point out that we just posted a pretty significant growth in the quarter and we're raised, and 1 of the things that we look about, we have a broad-based portfolio and we think that we're growing in the majority of it and we're optimistic that we're going to grow Byte in the future.

Great. That's really helpful. And then just on the 2021 top-line guidance, the implied 4Q, I think suggests maybe a modest sequential growth. And T&E sounds like it will be very strong just due to DS World. So on the other side of that, how should we think about consumables? Are there any puts and takes on the end markets or just, in general, growth and the trajectory there? Thanks.

Yes, Tom. I'll take the question. I think the -- there is a good increase from Q3 to Q4 sequentially. So when you do the math, I mean, that -- the sequential growth implied is several percentage points, probably 4% to 5% points, so that is a good jump. There is -- specifically with respect to your question about consumables, there's always -- between quarters, there is always a possibility of timing, situations, and I indicated before we announced a price increase for October 1st, and this is the annual price increase that we normally put in place. Every time we do, we make this announcement, there is probably a movement of revenue from month-to-month or quarter-to-quarter. And so there's a possibility that there was some acceleration, probably not material, but some acceleration of consumable sales from Q4 into Q3 and anticipation of the price increase. And there is a couple of order things like that that are timing-related. What -- but the macro point is, there is sequential growth. The organic growth rate that we are indicating for total 2021. If you just look at the range from 22% to 25% and it's closer to 25% organic growth, total top-line revenue growth versus last year. Those, those are strong numbers.

Got it. Thanks, guys.

Thank you, Tom. Next question.

Thank you. And our next question will come from the line of Jeff Johnson with Baird. Your line is now open.

Thank you. Good morning, guys. Don, you sound pretty optimistic about the implant business in the third quarter, even though that business has been lagging the market. I'd be interested to hear, not just year-over-year when that business might just have been a little pressured a bit last year, but just on how do you feel like you're performing relative to the market in the third quarter? That's ahead of the PrimeTaper launch and just maybe the expectations over the next several quarters for that business?

Yeah. Jeff, thanks for the question. On imaging, we had a good quarter and we feel like we've got some pretty good momentum going on in a -- for a number of reasons. I mean, I actually mentioned miss for the first time today. But if you look at our value segment, we are seeing good progress there. Part 1, Part 2 is obviously getting ready for the restage we had spent a ton of time out with KOLs and we feel pretty good that that was starting to have a positive effect. Do I think we're growing exactly at category? I think we're probably a little bit lighter than the category, but as we did the restage, we feel very good that we will have an opportunity to -- I've always said, first, we want to grow, then we want to grow with the category. I think what you saw this quarter is we're growing. And now, with the restructuring and restage, we feel confident that we're going to get -- it's not going to happen tomorrow morning, but we feel in the very foreseeable future, we'll be growing at the category level.

Yeah. Fair enough. And then I guess we each have to ask our own Byte questions, I apologize for that. But when thinking about that product line, you probably have at least 3 or 4 with some visibility, I would assume, from the time those test maybe something converts over to a case into revenue in that. So just an y update on fourth quarter, you've probably got 2 out of 3 months in decent visibility at all, that just relative to 3Q, or we continue to see some sequential step-down off 3Q, sequential stability versus 3Q, just any kind of color relative to that third quarter number would be helpful.

Jeff, I am going to stay away from giving numbers for Q4, but I think we have been pretty transparent with respect to the softness that we saw in Q3 and the fact that because of that softness in Q3, we think there's a chance we're going to miss our $200 million goal for the year, run rate for Byte. So that basically explains what we are seeing right now in -- with Byte.

Yeah, Jorge and I mean, just just following up on that guy, You're right now at about a 260 to 65 million run rate. Third quarter just kind of continues in the fourth quarter. That at least ballpark kind of how we should be thinking about it.

I think I've said SureSmile is very much on track to meet or exceed the $100 million run rates and then bites us a little bit behind. So I think ballpark, you're probably close.

Fair enough.Thanks.

Thank you. Next question, please.

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

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

Yeah. Thanks for the question. Good morning. Listen, it's hard to predict how long the supply chain issues are going to last because, again, this is not something unique to the dental industry, this is impacting pretty much all manufacturing industries globally. So we are a relatively small piece of that big, big equation. We are taking a lot of actions to minimize the impact. Procurement, doing a lot of great work trying to identify new sources for certain components. We are renegotiating certain contracts ensuring that we have access to supply for some key components on a predictable basis. So that's all short-term things that we're doing. I think there are some more long-term solutions that are somewhat related to the supply chain issues, but also related to our desire to be more efficient and improve the margins of our products. So for example, in many cases we are harmonizing certain products or components that we were sourcing for -- from different source -- from multiple sources. We're now trying to consolidate. We're trying to harmonize the design of these components and that should help us improve the reliability of the supply. And then we're trying to make sure that we look at the balancing of our manufacturing operations, ensuring that we have at the right time the right components to ensure that the lines are working efficiently for predictable periods of time as opposed to a stopping and starting based on unpredictable patterns of supply. There's a lot of things going on and the -- like I said before, the supply chain team is doing a great job and that's why so far we have not impacted our ability to manufacture products.

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

I don't think so. No, we watch inventory very closely are in internal inventory. Inventory in the channel. And our objective, but all-time is to ensure that our manufacturing process is smooth and the worst thing that you can do for any manufacturing processes to move inventory levels to drastically from period-to-period. So our goal at all times is to keep inventory levels relatively stable are actually long term goal is frankly to decrease days of inventory and that's the key internal goal that we track and measure very closely.

Thank you. Next question.

Thank you. And our next question will come from Jason Bednar with Piper Sandler. Your line is now open.

Hi, this is Coreen (ph) on for Jason. Thanks for taking the questions. So first on SureSmile and I guess, the Clear Aligner business more broadly; can you provide for more color on some of your marketing and DTC plans here for the remainder of the year and into next year? What level of investments should we expect here? And if any color there would be helpful.

Sure. On SureSmile, the program that we're running today is about how we see it. We're looking at pulling some different, slightly different levers in SureSmile that will include some DTC, but from an overall P&L construct, nothing radically different about that. On Byte -- Byte, there's a lot of levers. I mean, obviously paid social is a big deal and we obviously follow that very closely, but one of the things we've done since acquiring Byte is really helping them look at search engine optimization and how do you do a better job creating content that's really meaningful to potential customers. We have a very aggressive affiliate marketing program and we continue to have a pretty good program aimed at insurers. So as we think about that, the level of marketing within Byte is -- we don't expect it to change. We've been very disciplined, like we're not going to go chase unprofitable volume, and that's been a key thing for us. But also the other thing that we're very mindful of, we think it's got a really good runway in front of it. And let's make it less reliant on a single way, paid social and what's broaden its exposure to anybody looking for to do a DTC clear aligner through other means. So again, within the overall construct of both the clear aligner P&L, total franchise P&L, as well as the individual products. We don't see radical changes coming as this quarter or as we look out over the next couple of years.

Helpful. Thank you. And then just one last one for us. Can you speak to some of the early impact even seen from activate? I mean, I know it's early, but can you share how many docs have been taken advantage of this program? And is there any pull-through that you've been seeing so far from it?

Yeah. DS, we've been really happy with DS Activate, really happy. And part of DS Activate is we actually have people come in and physically attend our Academy and you know It's going well when you can't find a parking place prior to your earnings call because the doctors are all here for Thursday activate. So without giving you a specific numbers, we believe and that program is principally North America. It's going well.

Next question, please.

Thank you.

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

Good morning. Just a quick question for me. The high end of organic growth target of 22% to 25% you gave for the full year, I think, implies essentially flat year-over-year growth in Q4, if my math is correct, just trying to understand the puts and takes here. I initially thought it might be something that would be what the softer T&E quarter. Given early orders pulled into Q3, but that doesn't sound like the case based on what you said earlier. So any color you can give here will be helpful.

Justin, thank you for the question. I know, I think are -- if you go to a 25% end of the range, actually from an organic growth perspective, the implied growth would be close to 5%.

Okay. Maybe I could check my math here. And second question for me would just be any update on what you're seeing in other regions outside the U.S., in terms of patient volume and spend. Just trying to think about what you're including in your guidance from a geographic perspective. Thanks.

Thank you. There's nothing really major to highlight about regional performance other than what I said earlier, which is, for example, in the third quarter, all regions performed really, really well. And we're not seeing any deviation from that. COVID continues to be a little bit of a shadow there. Do you see a few small markets? For example, Australia, New Zealand, parts of China where there are lockdowns. But honestly, those lockdowns have not affected our sales in a material way because those markets are small

for us. So the -- our expectation in the fourth quarter from a regional standpoint is a continuation of what we saw in Q3.

Got it. Thank you.

Next question, please.

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

Hi, good morning. This is Allen in for Mike. Thanks for taking the questions. I guess, going to the operating margin and target for '22 at 22%. Can you talk about some of the swing factors there, sort of, rank order? You mentioned investments in SG&A by the implant rebranding, labor supply changes. How should we think about the rank order of those themes? Thanks.

Thank you. I think there is. There needs to be a good contribution from all areas of the P&L to grid cycle and we feel good about all of them. So starting with the top-line, we have certain targets that we want to hit. And we have been explicit about our 4% to 5% target for revenue growth. So that is an important factor. And then keeping a stability from a gross margin perspective, we have been trending very well, very steady from a gross margin perspective. And then there are further opportunities for cost savings both in COGS as well as an SG&A that we are actively pursuing and implementing and a lot of them have to do with what we call our enterprise modernization program that includes a process, harmonization, and centralization. That's something that we still I have a long ways to go. I think there is a tons of opportunities from an automation perspective that should improve our cost base. And then further possibilities to optimize our footprint, both in terms of manufacturing as well as facilities, in general. I think as we learn how to live with the post-pandemic or new ways of doing business post-pandemic, I think there are some interesting ideas to rationalize software footprint as well. So there's tons of things. The last thing I would mention is from a product design perspective. The teams continue to do great work trying to improve the cost of materials, tying to improve the design so that it's cheaper to manufacture and more efficient overall. So those are all important levers that we are actively pursuing. And when you add all of them together, that's where we feel good about the 22% target.

Great. Thank you very much.

Thank you.

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

Hi. Good morning. Thanks for the questions. Jorge, maybe a high level question. You highlighted a lot of the product opportunities, I guess as we think about going forward, how do you think about maybe investing more aggressively to go after some of those opportunities? You now obviously also have the added dynamic of inflation cost pressures. I guess, has that changed how you're thinking about the historical balance that you've see between reinvesting in the business, but also being on the path to 22% margins? It'd be great to get your sense of how you're thinking about that dynamic as we head into 2022.

Yes. Thanks, Nathan. I don't think our thinking has changed pretty substantially. I think what we're facing right now is reinforcing a lot of the beliefs that we had going into this pandemic. And so that reinforcement is translating into our strong desire to invest more and faster with respect to a lot of ideas that we have in the pipeline, and Don and I have indicated how we are really proud of the increased R&D activity that we have, What is coming out of that work. And we have a number of great ideas that we expect to bring to the market in the near future and they are reflective of some of the important macro trends. Digitazation, changes in behaviors from consumers and things like that. So I think this is just again, reinforcing the ideas we had before and it's just pushing us to move faster and we're really excited about the opportunities, frankly, I mean, is there are great opportunities and we're really excited about trying to do is all of this things faster.

And then just a very quick follow-up, have you seen -- I think you said something a little bit of it and I just kind of wanted to revisit. Have you seen stock in by the distributors? I know there's a lot of focus on inflation and the price increases that could be coming. Do you feel like inventory levels at all have changed at all with your distribution partners?

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

Great. Thank you.

You're welcome.

Thank you. This concludes our question-and-answer session for today. So now it's my pleasure to hand the conference over to Don Casey, Chief Executive Officer, for closing comments and remarks.

Yes. Thanks so much. And thanks for all the time you guys gave us and great questions as always. Look, I'd summarize by saying. We feel really good about a quarter. It's been doing this a long time. It's rare that you get to talk about a 20% plus organic with a beaten res. And there's some stuff that we're very, very excited about it. Jeff really appreciated the question on implants and when you're seeing double-digit implant growth, something we haven't seen a long time. Are we fee there's tremendous momentum on our T&E business and consumables, which is a question we typically get. We feel that we've innovated across a broad platform. So we feel good about that and I would just pull back a little bit out of the quarter-to-quarter discussion. It was almost 3 years ago to the day when we announced the restructuring. Basically since then, we feel that we're really on track in terms of growth. I mean, if you look at what we did in '19 and then as we get into this, kind of, recovery phase in the pandemic, we were hitting the margin targets that we put out. We already delivered the headcount. We feel very good about the fact that we've created not only a more simple organization, but 1 that's much more functional. And our team in here is really excited about the future. For those of you guys who got to attend DS World, you could kind of see how we're laying things out from a procedure perspective and why we think Dentsply Sirona is really well-positioned to become the essential partner and in terms practices all over the world. I'll close it out, and say thank you all and look forward to catching up in some of the one-on-one sessions.

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