DENTSPLY SIRONA Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

DENTSPLY SIRONA Inc. is the world’s largest manufacturer of professional dental products and technologies, with a 137-year history of innovation and a wide array of diagnostic and therapeutic products across the dental industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

DENTSPLY SIRONA (XRAY) is a global leader in the design, development, manufacturing, and marketing of a wide range of dental and oral health products and technologies. The company’s portfolio spans consumables, equipment, and technology solutions.

  • They operate through the following three segments:
    • Technologies & Equipment: This segment develops and sells dental equipment, technology solutions, and software. They represent the highest margin segment for the company.
    • Consumables: This segment manufactures and sells a range of consumable dental products such as restorative materials, preventative products, and endodontic instruments. The consumable segment provides more steady, but lower revenue.
    • Orthodontic & Implant Solutions: This segment deals with manufacturing of oral implants, abutments, prosthetic components, and digital orthodontic solutions. They focus on restorative material products.
  • Geographic Revenue: * In 2022, the United States accounted for 37% of net sales, while Europe accounted for 33% of net sales. The rest of the world accounted for 30%.
  • The company caters to dentists, orthodontists, dental technicians, dental labs, and other healthcare professionals.
  • The dental industry is characterized by a growing prevalence of dental diseases, such as cavities and gingivitis due to many factors like aging population and diet, and an increased demand for oral hygiene products.
  • The adoption of digital technologies is transforming the dental industry, with increasing use of CAD/CAM (Computer-Aided Design/Computer-Aided Manufacturing) systems, 3D printing, and teledentistry. The shift towards digitalization offers benefits of greater efficiency, precision, and personalized patient care.
  • The company faces competition from both large, established dental equipment companies and smaller, more focused players. * Large Competitors: Straumann Holding AG, Danaher Corporation, Envista Holdings Corp., and 3M Company, are the largest competitors. * Other Competitors: Zimmer Biomet, Align Technology, and smaller dental manufacturing companies make up the other competitive landscape.
  • There is an increasing consolidation in the dental industry by large players, which is also creating new opportunities for small players to specialize and differentiate.

What Makes DENTSPLY SIRONA Unique?

  • Breadth of Product Portfolio: DENTSPLY SIRONA offers a comprehensive range of dental products and technologies, spanning the entire spectrum of dental care, from basic consumables to advanced imaging and CAD/CAM systems. It provides a “one-stop shop” for dental professionals.
  • Innovation and Technology: The company has a strong focus on research and development, evident in its continued introduction of innovative products. The company is a leader in digital dentistry and technology-enabled solutions.
  • Brand Recognition and Reputation: DENTSPLY SIRONA’s brands are well-recognized and respected in the dental community with over 130 years of experience in developing products.
  • Extensive Distribution Network: It has a global presence, allowing it to sell products on a massive scale. Its broad sales network includes distributors, retailers, and healthcare professionals.
  • Global Scale: Being a large company, it can effectively utilize its scale and reach to improve operations and margins.
  • High Customer Switching Costs: The transition to a new product, brand, or digital platform often involves significant time and financial investment, as well as training costs. The need for these changes creates switching costs for customers, particularly with digital software.
  • Strong Customer Base It has a highly recurring and loyal customer base due to its brand and quality.

Financials In-depth Analysis

Dentsply Sirona’s financials reveal that the company’s gross profit margin is above 50%. The net profit margin, however, is considerably lower, around 7%, indicating that the company still has some costs that need management. The company’s revenue has been increasing consistently, albeit not substantially.

  • Revenue in 2022 was $3.961B, while the net income was $393.6 million.
  • Looking at their Q3 earnings for 2023, Net sales were $918.9 million versus $929.8 million for the same period the year before. The net loss for the quarter was $(280.6) million vs income of $30 million in 2022.

Note that the net income in the previous quarter was heavily affected due to a goodwill impairment charge. Excluding this, the net income would have been quite positive.

  • The company’s return on invested capital (ROIC) is around 7.9% which is quite low for a company with such history. But ROIC without goodwill is at 16% showing that the goodwill impairment had affected their ROIC.
  • Their leverage ratio is around 3.9x which suggests the company has high debt. Debt reduction is a focus of the company.
  • The working capital has been decreasing, which is not a positive sign for the company.
  • The company’s free cash flow is volatile, suggesting that it may face difficulty in investing in new projects and innovations.
  • The company has significant amounts of goodwill and intangible assets, and that indicates a substantial amount of growth by acquisitions.
  • The company also has substantial debt in relation to its assets and it should be watched.

Moat Analysis

  • Intangible Assets: DENTSPLY SIRONA boasts a portfolio of well-established brands and has patents and regulatory licenses, which are difficult for competitors to replicate and allow it to command premium pricing, creating an economic moat. Although this is a good moat, but the fact that technology is changing rapidly can make it susceptible to new players.
  • Switching Costs: The company’s products and services are tightly integrated into dental practices, which creates high switching costs for dentists and labs, enabling the company to maintain customers and gain an advantage.

  • Cost Advantage The company is known for its economies of scale and extensive distribution, which provides it a lower cost as compared to its competitors. The company is also known to have a global presence which helps it in economies of scale.

    • Moat Rating: 3 / 5: The company’s moat is primarily built upon intangible assets and switching costs, but the company needs to ensure they continue to maintain these sources. Also, their lack of a strong network effect or cost advantage compared to their major competitors further weakens their moat. It’s a good moat, but it isn’t very wide as some other players have their own brands and strong infrastructure and also switching costs can weaken by the new innovations in dentistry such as more automation and new platforms.

Risks that Could Harm the Moat and Business Resilience

  • Technological Disruption: The rapid pace of technological change in the dental industry could make the company’s products obsolete, or if new products are adopted very quickly, or there may be emergence of new competitors creating new products which quickly overtake the companies.
  • Increased Competition: Increasing competition from both established and emerging companies could erode the company’s market share and pricing power. This may reduce company profits.
  • Economic Downturns: Economic recessions can cause a decline in discretionary spending, which may reduce demand for dental services and products, affecting the company’s revenues. Also due to inflation, there may be increased input costs.

  • Regulatory Changes: Changing healthcare regulations and dental standards could potentially impact product pricing, market access, and operating costs. Any major restrictions in various countries can hurt the supply chain.

  • Business Resilience: DENTSPLY SIRONA is a strong player in the dental industry with good revenue recognition and an established brand, making it reasonably resilient to economic disruptions. The shift towards digitalized products further protects it from disruptions, provided it can adapt to the emerging trends, but it does face technological disruptions due to rapidly changing technologies. Management has taken steps to cut costs and improve revenue to manage the business, and has shown good progress in that area.

Understandability Rating

  • Understandability: 3 / 5 DENTSPLY SIRONA’s business is relatively straightforward to understand as it manufactures and sells products and equipment to dental professionals. However, its complex accounting practices, international operations, diverse products, and the fast changing trends in dentistry make it somewhat complicated for a non-professional investor. Its financial statements also require expertise to completely comprehend. Therefore it gets a 3/5 in understandability.

Balance Sheet Health Rating

  • Balance Sheet Health: 3 / 5 Dentsply Sirona has a decent, but not great balance sheet. While the company has a good amount of assets, it also has a large debt and liabilities burden, which is typical for a company with a big history of acquisitions. The free cash flow is also volatile and the cash reserves are very small given the size of the business.

Based on their latest earnings call, the management had been forced to do a goodwill impairment of $1.3 billion. A high goodwill amount and an unexpected impairment are generally not good signs. This clearly shows that the company had overpaid for acquisitions. Another big issue as seen in the results was a decline in gross margin, indicating that the company is facing increased input costs. Also due to an increase in credit default, their accounts receivable has been hurt. Also, the high debt of the company has caused its net income to plummet. The company has acknowledged all of the issues and is working to address these shortcomings. If management is able to improve in these areas, its financials would be much better.

Recent Concerns, Controversies and Problems

  • The company recorded a significant goodwill impairment charge in the past few quarters, primarily related to its acquisitions. This is a sign that the company had overpaid for many of its acquisition targets and shows lack of management expertise in capital allocation.
  • The company has seen several issues with profitability and has struggled to improve its margins. This has been driven by increasing competition and supply chain constraints. Although, it had shown success in previous quarters, it still needs more steps to solidify the gains.
  • The company’s debt levels are quite high, indicating that it may face difficulty in investing and growing at a rapid pace. The company needs to bring down debt levels and that will help it improve its finances.
  • Also, it has faced some issues related to certain product lines, but they are not major issues for the business in general.

The management is taking action to address these problems. It is focusing on increasing sales, cutting costs, and decreasing debt. They are also working on innovations to help the long-term health of the business. The progress in these efforts need to be followed to properly assess the future.