DENTSPLY SIRONA Inc.

Good day and thank you for standing by. Welcome to the Dentsply Sirona first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, just press star 11 again. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to your host, Andrea Daly, Vice President for Investor Relations. Andrea, please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to our first quarter 2023 earnings call. Joining me for today's call is Simon Campion, Densly Serena's Chief Executive Officer, and Glenn Coleman, Chief Financial Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the investor section of our website at www.densplyserona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainty. Our most recently filed Form 10-K and any updating information in subsequent SEC filings lists some of the most important risk factors that could cause actual results to differ from our predictions. Additionally, on today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures 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 will now turn the call over to Simon.

Thank you, Andrea. And thank you all for joining us this morning for our Q1 2023 earnings call. Today, I'll start by providing an overview of our recent performance. Glenn will cover Q1 results and our updated 2023 outlook. And then I will finish by providing a strategic operating update. Starting on slide five, we were pleased to begin 2023 with a strong quarter delivering more than 5% organic sales growth. Our top line return to growth with consumables and our aligner businesses, SureSmile and Byte, delivering double-digit growth. The US region grew nearly 15% in the quarter, driven by the strength in consumables and aligners, in addition to some favorable timing of CAD-CAM dealer orders. Outside of the US, we saw some growth in Europe, while performance in the rest of the world was flat due to the headwinds in China. In addition to revenue performance, we also over-delivered on adjusted EPS. As we have repeatedly noted, fulfilling our commitments internally and externally is a top priority for this leadership team. The combination of the progress we are making on our strategic objectives, our organizational transformation, and our Q1 performance is increasing our confidence in our trajectory through this transition year. As a result, we are now raising the low end of our 2023 outlook for net sales, organic sales growth, and adjusted EPS, which Glenn will cover in a moment. In Q1, we participated in IDS in Cologne, Germany for the first time since 2019. The trade show was well attended with more than 120,000 dental professionals from 162 countries. I was impressed by the power of our presence at the event and proud of the way our commercial team engaged with customers. It was very clear that there is cachet associated with Dennis by Sirona in this industry. We think it's vital to our success to leverage this reputation into a greater customer and patient-centric approach as we execute on our transformation plans. Additionally, two weeks ago, we brought together our top leaders across the company for a leadership summit to reinforce and engage on our short and long-term expectations. Hearing from customers, investors, board members, and other CEOs delivered a palpable impact, and I believe further motivated this team to believe in our future, to get some swagger back, to think boldly and courageously, and to bring their best to our company every day. Our purpose for change is clear, to make Dentsply Sirona a better place for employees to work in, for customers to work with, and for shareholders to invest in. I am very pleased with the engagement and traction that we are beginning to achieve, with our customers, employees, and partners. We have built positive momentum inside and outside of our company, which is critically important for all our stakeholders. We are also delivering on our ESG commitments and are proud to announce that the first ever global standard protocols for digitalized cleft treatment have been developed through our partnership with FDI and Smile Train, the world's largest cleft-focused organization. These protocols are expected to significantly improve the accuracy and efficacy of the current treatments by providing dental professionals with a comprehensive digital clinical approach across all stages of care for these patients. This initiative builds upon an ongoing global partnership we have with SmileTrain, which has funded over 1,000 cleft surgeries to date and is an excellent example of how we can contribute to our vision of transforming dentistry to improve oral health globally while giving back to our communities. And with that, I'll turn it over to Glenn for greater financial detail. Glenn?

Thank you, Simon. Good morning, and thank you all for joining us. Today, I'll provide more detail on our first quarter results and an update on our 2023 outlook. Dentsply Serona had a very strong start to 2023, with first quarter organic sales growth of 5.1%, exceeding our outlook of approximately 1%. The first quarter outperformance on the top line of about $40 million was driven by stronger than expected growth in consumables and aligners. Our top line results also drove better than expected adjusted EPS. Though we're still in the early innings of our transformation work and have more work to do, we believe that delivering consistently on our commitments is critical to rebuilding investor confidence. So let's begin on slide seven. Our first quarter revenue was $978 million, which represents reported sales growth of 0.9%. Foreign currency negatively impacted sales by approximately $40 million as compared to the first quarter of 2022. Excluding the impact from foreign currency, organic sales grew 5.1%, with strong regional performance in the U.S., Europe, and Latin America. Excluding China, organic sales grew 6.6% overall. EBITDA margin of 16.4% was consistent with our outlook of at least 15%. On a year-over-year basis, EBITDA margin contracted 320 basis points due to continued foreign exchange and inflation headwinds, partially offset by favorable mix from consumables and profitability improvements in aligners. SG&A as a percentage of sales increased 220 basis points in the quarter, primarily due to commercial headcount investments and trade events with customers, both of which we believe will drive better sales performance later this year. Adjusted EPS in the first quarter was 39 cents as compared to 54 cents in the prior year quarter. We attribute 10 cents of the EPS decline to commercial investments, $0.10 to higher inflation and below the line expenses, and $0.04 to foreign currency headwinds. This was partially offset by a $0.09 tailwind from strong organic sales. Operating cash flow in the quarter was an outflow of $21 million due to unfavorable changes in working capital, primarily driven by accounts receivable and accounts payable timing. Operating cash flow is also impacted by increased operating expenses associated with commercial investments and non-recurring charges such as restructuring and remediation costs. As a reminder, we still expect to have significant cash outflows for severance and restructuring costs for the remainder of the year. In the first quarter, we returned $27 million of cash to our shareholders through dividends And we announced a $150 million accelerated share repurchase program. A reduced share count in the quarter was primarily driven by the initial receipt of shares in March under the terms of the ASR. The ASR was completed at the end of April. Let me now turn to our segment performance in the quarter on slide eight. Organic sales and technologies and equipment, or T&E segment, grew 1.7% while organic sales in the consumable segment grew 9.8%. The T&E organic sales growth was led by strong growth in aligners, up over 25% in the quarter versus prior year, as well as strong growth in our CAD-CAM business, particularly in the U.S. These improvements were partially offset by lower volumes in implants, imaging, and instruments. Aligner has grew double digits for the third consecutive quarter, driven by strong growth in both SureSmile and Byte. SureSmile continues to benefit from regional expansion, particularly in Europe, and new product offerings and clinical differentiation. Our direct-to-consumer Aligner brand, Byte, also saw strong growth, despite slowing consumer spending trends, driven by higher customer conversion rates and lower customer acquisition costs. which not only drove higher top-line revenues, but also better profitability. Our CAD CAM business grew mid-single digits in the quarter, primarily due to wholesale demand in the U.S., which was expected, as dealers had exited 2022 at lower inventory levels. The equipment and instruments business declined by mid-single digits in the quarter, driven by lower demand in the U.S. and Europe, but was partially offset by strong imaging growth in Canada. Implants was down high single digits in the quarter and performed in line with our projections. We continue to work through headwinds in China, including the impact of VBP. While we saw reduced patient traffic year over year, trends are improving, and we expect China to return to growth later this year. Moving to consumables, organic sales grew approximately 10%, primarily attributable to strong demand for restorative and preventive products. Retail demand for consumables was strong, particularly in comparison to the prior year period, which was impacted by the Omicron variant. The current year quarter also saw stable patient traffic across most geographies. Now let's turn to slide 9 to discuss first quarter financial performance by region. U.S. organic sales grew 14.6%, driven by higher volume in consumables, aligners, and CAD-CAM. While patient traffic in the U.S. continues to be stable, we did see lower demand for imaging equipment, which we attribute to higher interest rates and recessionary concerns in the market. Our U.S. CAD CAM dealer inventory levels grew $10 million sequentially in the first quarter, consistent with the expectations we laid out on our February earnings call. We expect CAD CAM dealer inventory levels to fluctuate quarter to quarter and be slightly lower by the end of the year compared to current levels. Turning to Europe, organic sales grew 1.1% due primarily to strong growth in both consumables and aligners. This growth was partially offset by softer demand for imaging equipment. Rest of world organic sales were approximately flat versus the prior year. Excluding China, rest of world organic sales had a strong quarter and grew 5.7%, led by strong demand for imaging equipment and consumables. In China, as expected, we experienced lower sales across the portfolio, as well as headwinds and implants due to the continued impact of VBP. With that, let's move to slide 11 to discuss our updated outlook for 2023. We've updated our full-year outlook to reflect our better than expected performance in the first quarter, as well as our increased confidence for the remainder of 2023. We're increasing the low end of our full year net sales range by $50 million to a new range of $3.9 billion to $3.95 billion, with organic sales now projected to be flat to up 2%. This represents a 100 basis point increase to the low end of our previous outlook range. While we're still operating in a challenging macro environment, we are seeing a stable to improving patient traffic in key markets. In addition, Foreign currency exchange rates are largely unchanged compared to our prior outlook, and as such, we're still expecting FX will be a 100 basis point headwind to full-year net sales, most of which was realized in the first quarter. Based on current FX rates, we expect a minimal impact for the remainder of the year. We estimate full-year EBITDA margin to be greater than 18%, unchanged from our prior outlook. Given the better than expected organic sales performance to start the year, we're also raising our full year adjusted EPS outlook by 5 cents on the low end, which brings our adjusted EPS range to $1.85 to $2. The updated EPS outlook includes a weighted average share count of approximately 214 million, which includes the previous mentioned ASR. For the second quarter, we expect a slight sequential increase in sales and adjusted EPS over the first quarter. On a year-over-year basis, Q2 organic sales is expected to decline, as the prior year included the benefit of some backorder recovery and a better capital equipment demand environment. While we anticipate fluctuations in our quarterly sales performance, we expect the first half of the year to show organic sales growth over the prior year period. We are confident in the progress we're making, but remain cautious on the external environment, particularly with capital equipment, as well as the overall macro challenges in certain markets such as China, Brazil, and Australia. Wrapping up my second quarter comments, we expect even margins will be at least 16%. Let's move to slide 12 to quickly touch on upcoming changes to our segment structure. Starting in our second quarter, we'll begin reporting using a new segment structure. The new structure will include three dental segments, which are connected technology solutions, implant and orthodontic solutions, and essential dental solutions. WellSPECT Healthcare, which operates in the confidence care market for urinary and bowel dysfunction, will be the fourth segment. The revised structure aligns with the new operating model that we detailed on our last earnings call and we believe will provide greater transparency in our financial reporting. And with that, I'll now turn the call back to Simon.

Thank you, Glenn. Moving on to our strategic update, starting on slide 14. First, I want to reiterate our strategy to transform dentistry by digitalizing dental workflows, driving product and service innovation, and delivering an exceptional customer and patient experience through an engaged and diverse workforce. Said simply, To fulfill our strategy, we must focus on a simple, more secure, and connected workflow experience that our clinic and lab customers trust to deliver better treatment journeys and patient outcomes. As we execute on our strategy, we continue to be intently focused on improving the delivery of our products and services in a predictable, repeatable, and reliable manner, and we are making good progress. On slide 15, you will see the 2023 and beyond strategic objectives that I shared with you at the start of this year. We are focused on five core tactical and strategic objectives, which are to, one, deliver on our annual growth and margin commitments, two, enhance and sustain profitability, three, accelerate enterprise digitalization, four, win in aligners and implants, and five, create a high-performance culture. This is our true north, and as we make progress on these objectives, we have our eye on fulfilling our commitment to return to industry growth and increase profitability. Turning to slide 16 for a progress update on our objectives. Starting with our overarching goal to achieve our annual growth and margin commitments, Q1 provided us with a good start, showcasing our focus on fulfilling commitments. In February, we announced our new operating model and restructuring plan. In Q1, we made meaningful progress on the transformation work with workforce reductions largely complete in regions outside of Europe. We are in active discussions with applicable workers' councils to align on our plans. As we look for other opportunities to enhance and sustain profitability, we have already identified and are executing on some network and operational simplification opportunities. Enterprise digitalization is critical to our success, and we have made significant progress in this regard. We received board approval for our multi-year ERP implementation project and have selected the next generation platform. On our strategic objective to win in aligners and implants, we are seeing great traction with another quarter of double-digit performance in both SureSmile and Byte. Byte not only delivered top-line growth but also made significant strides on improving operational performance. With SureSmile, we have a clinically differentiated solution compared to the other offerings on the market. These clinical benefits, which include fewer refinements and shorter treatment time, are resonating with customers and contributed to the strong continued growth in this business in Q1. We launched DS OmniTaper in the US this past quarter. With this product, We now have a full range of premium implants, all of which are harmonized with one EV digitally enabled connection. While VBP in China has been a headwind for us since September, securing a winning position in the VBP process will allow us an opportunity to acquire incremental volume that will support long-term growth in our business. We are also working to create a high performance culture. This is critical to enable achievement of our other strategic objectives. and foundational to driving long-term value creation for our stakeholders. Our new operating model is taking shape, providing clarity, efficiency, and putting the customer back at the center of everything we do with compliance at the forefront. This operating model gives meaning to the KPIs that we have identified and rolled out across the organization. It enables us to set the right expectations and guardrails with clear lines of measurement and accountability. I am also excited to announce that as part of our new operating model, we are elevating the role of quality within our organization, and we have hired a new SVP of quality and regulatory affairs. This individual will be part of my leadership team and will be key to ensuring that customers and quality are at the center of everything we do. As a team, we have made solid progress on our strategic objectives. We remain confident that our transformation plans combined with more normalized market conditions will position Dents by Sirona to grow revenue in line with the market while also increasing profitability. The combination of these positive factors can enable Dents by Sirona to deliver meaningful earnings improvement with adjusted earnings per share of $3 targeted in 2026. Now, let me close with a few remarks on slide 17. The year is off to a strong start. While 2023 remains a transition year with a challenging macro environment, we are increasingly optimistic about what we can deliver. For that reason, we are raising the low end of our full year outlook. We are making significant progress on our transformation and strategic objectives. We committed to taking decisive action at Dents by Sirona, and we are boldly putting our plans into motion to improve the company and its performance. This is just the beginning. There is more hard work ahead of us to transform our company, but we are confident that our plans place the company on the right path. Progress will be aided by our collective experience, the support of the board, and the belief that has been instilled in our leadership. Later this year, we look forward to sharing more details with you all at our upcoming investor day on November 9th in Charlotte. And with that, I will open it up for questions.

Thank you.

At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your questions, simply press star 1 1 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Elizabeth Anderson with Evercore. Elizabeth, your line is open. Please go ahead.

Hi, guys. Thanks so much for the question. I mean, obviously, this was a nice outperformance in the first quarter, especially given everyone's worries about the dental market. And we're seeing you raise the low end of your guidance. Can you talk about sort of trends that you saw either sort of towards the end of the quarter or into April, just as people kind of continue to wonder about the shorter-term volatility? And then secondly, can you also talk about the aligner profitability? Where is the real drivers of that? And kind of if you can talk about sort of when you expect that to be sort of positive from a corporate margin contributor, that would be helpful. Thank you.

Morning, Elizabeth. It's Glenn. You know, relative to trends in the quarter, I think we saw really strong trends in January and February. March, not so much. So March was a little bit weaker than the first two months. But as we look forward to April, we're actually seeing a very stable environment. So April looks good as well here. So trending-wise, obviously, we outperformed the quarter. A lot of that came in, I would say, January and February, but we're seeing positive trends even in April here. So that's a good sign overall. And When you think about the outperformance in the first quarter, clearly the trends were very favorable in consumables. Improved patient traffic, procedure recovery was very strong, and it was pretty much across the board, across all consumable categories. So our endo and resto business was actually up double digits. Saw really good performance in both the U.S. and Europe. Preventative was up double digits as well. We did have some easier comps when you look at our consumables business. So obviously I mentioned Omicron impacted the first quarter of last year in a negative way, so that helped the year-over-year growth rates. And we have put forward some price increases last year and this year that will take effect in May. So we probably saw a bit of a pre-buy in certain cases with dealers on some consumables. But on the whole, we were delighted to put up almost 10 percent growth in consumables, so the trends there were quite positive. Relative to the aligner profitability, I think the key around this is our bite business. And the most important thing is really looking at the quality of the funnel and how we're targeting customers. And we're seeing an increase in our overall customer conversion rates, which really help to reduce customer acquisition costs and drive increased profitability. So when you look at our outperformance on EPS, Clearly, a lot of it was due to the stronger-than-expected organic performance, but also we did see a nice improvement in our aligners business and particular bite, and we expect that to continue as we go forward here.

Great. Thanks so much. Okay. Stand by for our next caller.

And our next question comes from the line of Jeff Johnson with Bayard. If your line is open, please go ahead.

Thank you. Good morning, guys. Glenn, maybe just following up on the 2Q question there from Elizabeth. Just, you know, you're guiding to negative organic growth in the quarter. You just put up the 5.1%. And I understand what you're saying on maybe the price increase pulling some business forward. But, you know, you also talked about a solid April increase. I guess when I look at your three-year staff comps, they actually are fairly stable in first, second, and third quarter. So not a whole lot of volatility going from one quarter to the other on kind of the comps you're going to come up against. So what would change that business by a full, call it five, six, seven points, wherever you're guiding to end up in that second quarter?

Yeah, so just, Jeff, thanks for the question. On a sequential basis, we did mention that we expect to see a slight sequential increase in both revenue and EPS. Some of it because of the really strong performance in the first quarter, that being somewhat timing related for consumables. But keep in mind last year's second quarter is our toughest comp quarter. We did see some backorder recovery in the prior year quarter. And overall, when we look at the equipment market, last year is more favorable versus this year when we're being very cautious on, you know, larger equipment spending, especially imaging as an example. You know, we feel quite good about our overall first half of the year performance and our guidance. We do expect to see a bit of a decline on organic sales growth based upon our guidance, and we're going to continue to be cautious on the equipment environment. But just keep in mind, for the first half of the year, when we look at what we said back in February, we do expect to see organic growth. We do expect to outperform our initial comments on the first half of the year, and we're being cautious because it's still very early in the year. Having said that, we do expect to see in the second quarter an improvement in our China business, both on a sequential and year-over-year basis. And we do expect to post growth in our ortho business given the strong momentum that we have. But again, we're going to continue to be very cautious on the equipment environment given what we're seeing from a recessionary perspective and also a macro slowdown. Simon, I don't know if you want to add anything.

Yeah, good morning, Jeff. You know, you all do your surveys. We've also started doing our own surveys. And we have a 1,600 dentist survey that we completed just in April. In relation to technology and equipment and capital spend, there is still some bearishness from customers around the world, in the U.S. and Australia in particular, about their willingness to invest in some high-end capital equipment. So that's a factor in our consideration as we move into Q2 and beyond.

All right, that's helpful. And then maybe just one follow-up question, but first, Simon, maybe you and I can just share each other's surveys. Then if I share mine, maybe you'll give me yours back too, and that would be helpful. But just on the implant business, what was the implant number X China? I don't think I heard that. And, you know, I'm sure you saw overnight Strauman put up three, three and a half percent in plant growth. Might have been a little below that, I guess, depending on their ortho business. You know, so what is the path back from your high single digit decline to Strauman's kind of low single digit organic growth this quarter? What's the path back to getting, you know, closer to what I'm sure is kind of a market rate that Strauman is almost setting there with their one quarter report? Thanks.

Jeff, thanks for the question. Our implants business, excluding China, is down low single digits, largely due to the U.S. being down. And that's not surprising to us. It was in line with our expectations. The road for us to get back to growth really comes from two markets. So China being the first, and obviously I think we all know the challenges of VBP. For us, in total in China, we were down 30% in the first quarter. The good news is we're seeing a really nice recovery as we exit Q1 and even stronger recovery in the month of April relative to our implants business in China. So we are much more optimistic, but I'm not yet reflecting that in the full year numbers because I want to see some more data points before I get too bullish on China. But the signs of recovery are there, especially volume in implants in China. So we feel good about that. The other part is the U.S. business. And we've lost share over the last couple of years in implants. We've underinvested. And as we spoke about previously, we've made significant investments in our commercial organization to add more resources, add more reps. We have a significant training program that we're rolling out. We've got all of our implant reps, in fact, coming in to Charlotte in the month of May, which is going to be another step forward here. Our territories are now filled. And I am expecting to see better implants performance starting here in the second quarter in both the U.S. and China. So, yes, we were down in implants. down low single digits if you pull out China. I think as we move forward, we should be talking about growth in our implants business and showing sequential improvement from this point forward. Simon, you want to add anything?

Yeah, Jeff, just one more comment on implants in China. You know, we have not been selective in terms of the implants that we offer in China as a result of EBP. All the products that we're offered by Dentsply Sirona in China pre-VVP continue to be offered by Dentsply Sirona in China post-VVP. So customers can choose whatever product they use and haven't been forced down any particular corridor.

Understood. Thank you. Very helpful. Thank you.

Thank you.

Stand by for our next caller.

Next up, we have Erin Wright from Morgan Stanley. Erin, your line is open. Please go ahead.

Great. Thanks. Can you quantify the distributor timing dynamic across the CAD CAM segment? Was that primarily U.S., and how should we be thinking about the quarterly progression? And just broadly speaking on equipment demand trends and how the order book is shaping up, How is the traction at IDS? And if you could give us some broad sense of how you're seeing things there and how we should think about the quarterly progression across core equipment.

Yeah, a lot of the distributor timing is related to the U.S. business, so that is specific to the U.S. And as we talked about throughout 2022, we were reducing our dealer inventory levels for CAD CAMP. And so we exited 2022 in a very good position. And so now we're seeing essentially retail demand translate to wholesale demand at our dealers. But we did see a good pickup. So when we talk about timing, it's really last year was a low quarter versus this year and seeing more normalized inventory levels. Overall, when we look at the volume gains, we did see good volume gains in our DI business. Our CEREC mills performed quite well in the quarter. Maybe we could circle back to that with Simon in just a few minutes. Obviously, the concerns in our business are really around the recessionary environment, higher interest rates, and the effect it's having on the higher-priced equipment, such as imaging. And so we're being very cautious. We were down in the quarter on our imaging equipment, so we're being cautious as we go forward. But I think ultimately there's probably more upside than downside in our forecast relative to equipment. but we're going to continue to be cautious until we see more positive data points. So with that, Sami, you want to make any additional comments?

Yeah, so just two comments, Aaron. We are getting traction now on Prime Scan Connect, particularly in Europe, where we saw sequential improvement month over month in the quarter. And then there's a lot of noise and discussion in the marketplace about milling versus printing. And we continue to be of the opinion here that, Milling for crowns offers more durability. 3D printing has much lower strength than a milled crown. The speed is quicker, which, as we know, is important for customers, particularly when you think of the impact on staffing levels in the dentist market today. And then the aesthetics and the accuracy of milling versus printing is very much in Milling's favor. We were brought a range of colorists, for example. So we will be on the front foot here with respect to milling versus 3D printing on a go-forward basis. We continue to believe that milling is the best option for patients, and we're pleased to have the market-leading mill in our portfolio.

And then, Aaron, on your question on IDS, I had the pleasure of joining my first IDS in Germany this past go-around. And, you know, we did see a lot of good momentum and customer interest in our DS core software, how it's digitalizing the entire workflow for our customers. So really good interest and progress on getting orders for PrimeScan Connect coming out of IDS. And so we were really enthusiastic about a lot of the progress and customer feedback we received, you know, at that convention. Great.

And If I could add just one more just on the portfolio optimization, where are we at now with SKU rationalization and to the extent there are divestitures, can you speak to use of proceeds here? Thanks.

Yeah, so I'll take the SKU rationalization piece, Erin. We've made very good progress on RESTO and ENDO. We haven't eliminated any SKUs yet. That's a work in progress. As we have noted before, We're going to be very diligent and thoughtful about where and when we reduce SKUs, but we have, as we've noted, all the data available to us now, and we are beginning to test in different markets if we can eliminate specific SKUs. As we did note in our prepared remarks, we have seen some opportunities for network optimization, and we have begun to take those opportunities. in a couple of sites this past quarter, and those sites have been notified. And then I'll let Glenn take the other part of that question.

Yeah, obviously, in our last earnings call, we talked about a significant amount of interest in our wealth spec asset, so we're still evaluating different alternatives relative to what to do with that asset, one of which could be divesting, another could be keeping the asset because it is very attractive, it's performing very well. both in terms of the top line and bottom line. So no decisions have been made around that. To the extent we were to divest that asset, obviously use of proceeds would likely go towards paying down debt and possibly buying back shares. But again, no decision made on WellSpect. I would also say that we've concluded the rest of our evaluation on the portfolio at this point in time. We do not expect any more significant divestitures coming out of that review. Having said that, just keep in mind a portfolio review is part of an ongoing assessment that we do. It's not a one-and-done process. So as part of our regular cadence and operating model, we do a continuous evaluation of portfolio. But for the initial go-around, we've concluded. And at this point in time, there's no further significant divestitures expected. Thank you for your questions.

Thank you. Okay. Stand by on the line for our next caller.

And our next question comes from Brandon Vasquez with William Blair. Brandon, your line is open. Please go ahead.

Good morning. Thanks for taking the question. First, I just wanted to ask about, sorry, clear liners in, you know, where are you guys seeing the most success? Maybe what channels specifically? I'm curious if you could talk a little bit about what is it about your technology that is able to allow you to deliver these fewer refinements and shorter treatment times compared to the competition?

Sure. I'll start and then maybe ask some others to comment. So I think first off, our aligners business had a record quarter, both Sure Smile and Bite. Not only did we see a double-digit sequential improvement, but obviously up 25% year over year. If I look at the two businesses, starting with Sure Smile, I think a big part of the growth is driven by regional expansion, particularly in Europe. We also do have clinical differentiation of our product. And to give you some context, three out of four cases require no revision, which is a big deal in the aligner space. And so we're really showing clinical differentiation that is driving increased market share, especially with the GPs. And so that's a big part of our growth story. We're also winning more with DSOs, so we've got a couple of DSO wins in the aligner space as well. All of that is enabling us to have really strong growth coming out of SureSmile. On the Byte side, I think we're doing a much better job of targeting customers and driving better customer conversion rates that I mentioned earlier. In addition, we've rolled out our My Byte app, which is giving a full CUSTOMER TREATMENT PLAN TO OUR CUSTOMERS, ENGAGES THEM THROUGHOUT THE ENTIRE PROCESS, AND WE'VE ALSO ROLLED OUT HYPERBITE, WHICH IS HELPING SPEED OF TREATMENT FOR CUSTOMERS ON THE DIRECT-TO-CONSUMER SIDE. SO ON THE WHOLE, WE ARE CAPTURING MORE MARKET SHARE IN BOTH DIRECT-TO-CONSUMER AND THE GP SPACE, AND OBVIOUSLY, THIS IS STILL AN UNDER-PENETRATED MARKET AND ONE OF THE FASTEST-GROWING AREAS BECAUSE AESTHETICS ARE STILL A VERY FAST-GROWING AREA IN THE DENTAL SPACE. some further comments?

Yeah, so just, you know, we've spoken before about the investment that we've made in DSOs, adding some headcount there, and we had nice growth in that business in the first quarter. But, you know, one of the ways that we are winning with some of our DSO partners is through digital scanning and aligners. So we've had, you know, pretty robust traction where we place our PrimeScan products and then enable some of the DSOs to begin to drive their aligner business in a more meaningful way. So we had good traction from that regard in our SureSmile business in particular in the first quarter.

Got it. Thanks. And then can I go back to China for a second? You know, if you look at, I know you had a big exposure more to the private side of that market. Are price cuts spilling into the private side at all? I think we've heard a little bit of mixed reviews on that. And are you guys kind of happy with volume increases to help offset these price declines? Like how are volume growth trends looking relative to your expectations, especially as we move through into the back half of the year? Thank you.

Yeah. So keep in mind, most of our business in China is in the private sector. And yes, we are seeing the price spill over into the private sector. As we previously talked about, we're seeing price reductions anywhere from 35% to 40%, and that's, in fact, what's happened. The good news is we are a winner in the VBP space, and we are seeing a pickup in volumes, and it's sequentially getting significantly better here in the month of April. But, again, I don't want to get too excited yet because I need to see more proof points and more data points before I become more bullish. But definitely the volumes are picking up in the short term here. We're very encouraged by what we're seeing in the month of April. I don't expect the volume to offset the price reduction in the second quarter for implants. So I do expect implants overall in China will be down, even though the total business in China should be flat or up. But I think once we get to the end of this year, the volume should offset the price reduction. And I previously made a comment last call that I expect China to be flat on a full year basis, despite being down 30% in the first quarter. I think my view right now is China should be growing this year, given what I'm seeing right now in the last couple of months. So we're more bullish on China, but still cautious. Thanks for your question.

Thank you. Operator, do we have another question?

Yes. Our next question comes from the line of John Block with Stiefel. John, your line is open. Please go ahead.

Great. Thanks, guys. Simon or Glenn, just to a more high level, when you guys say return of dental industry growth for the company, how do you view that industry growth? And I ask because the industry growth really deviates so much depending on your weightings for aligners, implants, equipment, etc. So when we think about your portfolio, you know, what do you think that industry growth looks like? And then over what period of time do you expect to get there?

Yes, so John, good morning. It's Simon. I would say, you know, on average, we think it's growing in the 3% to 5% range. Clearly, there are hot spots within that, you know, aligners, In particular, maybe some of the mills and the 3D printing is also growing at a faster clip. But then we have areas that are in the 1% to 2% range in the consumable business. We've spoken before about getting back to $3 of EPS by 2026. As we noted, we believe we're on track to that. And we previously commented that getting back to market growth in that timeframe is a key driver. to getting to that $3 of VPS in 26. So that's the kind of time frame that we are thinking about it. As we've noted before, we have transformation work to get through. We now have ERP to get through as well. So there is much hard work to do for us here to get there, but our confidence is increasing in our ability to get this done and to move Dense by Sirona back to that market growth rate.

That was great. That was a great call. Thanks, Simon. And then I think the second one, Glenn, might be a little bit more for you, but I think the investments for the quarter or 10 cent drag year over year. I don't believe the 25 cent that you called out last quarter changed. So, you know, the 25 cents is unchanged for the year. How do we think about the cadence? In other words, is it sort of another dime or so for 2Q, you know, turn sort of flattish in a 3Q and exit the year, call it accretive? And sort of the follow-on to that would be, Glenn, you know, as a function of that cadence that I just laid out, is there any more specific color on 2Q EPS as a result of those investments? Thanks, guys.

Yeah, I don't want to give too much specifics on an EPS guide for commercial investments, only to say that obviously we expect it to continue throughout the remainder of the year. But keep in mind, we should have offsets now starting in the second quarter with our restructuring program, right? So Part of the investments and the reason why we had to do the restructuring was to fund those investments, whether it be North America commercial sales, DSOs, or ERP systems compliance, et cetera. So yes, the commercial investments are going to be with us from a headwind perspective for the rest of this year, but we should start to see the restructuring savings kick in and be much more meaningful in the back half of the year. So when we look at the EPS cadence, we do expect to see a slight sequential increase in EPS in Q2. And then we should see a much better performance when those restructuring savings kick in in Q3 and Q4. Keep in mind, the reason why the restructuring savings happened later this year is a lot of what Simon had in his prepared remarks around still having to get through the Workers Council approvals in Europe, which is where a large part of the savings come from. So that work is still ongoing. It's one of the reasons why we're still being conservative in our EPS guide until we get through that work and those discussions. We want to make sure that we don't have any delays or timing issues pushing out. So once that's finished, I think we'll be much more confident that our EPS can be achieved or exceeded. But that's still work in front of us.

Thanks, guys. Appreciate it. Okay. Hold the line while I bring the next caller on.

Our next question comes from Jason Bedner with Piper Sandler. Jason, your line is open.

Thanks. Good morning, Simon and Glenn. Thanks for taking the questions, and a nice start to 23 here. I wanted to come back to maybe where we started on the consumables growth. It was impressive. I'm trying to really get a sense of maybe what underlying growth might have been If we exclude some of those one-time elements like easier Omicron comps and weather-related closures that might have happened to offices last year. You mentioned good retail demand, but then also trying to reconcile that against commentary around patient traffic stability. So, again, just maybe considering all those points and then the buy-in you mentioned ahead of the May price increase. If you could just wrap into your answer maybe how sellout performed versus sell-in for consumables.

Yeah, I would say overall probably mid-single digits if you exclude some of the year-over-year easier comps and price increases and some of the buy-ins. There's probably about half of it true real underlying improved demand and the other half just some easier comps and timing relative to Q2 versus Q1. So very strong, but it was across the board. It wasn't just in one geography. It wasn't just in one part of our consumables business. As I mentioned earlier, We were really pleased to see the growth across endo, restorative, preventive across the globe. So, I think it's a good sign relative to patient traffic coming back because some of the comments just around these comps is really a U.S. comment.

Sure. Yeah, no, I understand. That's helpful. Thanks, Glenn. Maybe then looking at one other deviation, at least relative to how we were thinking about things for the quarter, but maybe on the other side, T&E operating margin in the quarter, it does look like it's stepped down. It was a little bit lower than what we were thinking. I'm sure some of this is tied to VVP, also probably some of the investments you're making in plants and clear aligners. But when we look at, I think it was 12.2% operating, adjusted operating margin for the segment. Is this a low watermark for segment profitability? And If so, how are you thinking about the pace of improvement for T&E margins from here? Again, understanding you're changing your reporting methodology, so I guess however you want to ask that question with the segments of the products that are currently in that category.

Yeah, no, I think certainly the profitability was impacted by VBP, so that did have an impact. There were also some other, I'll call them non-recurring charges that are reflected in our numbers. in the T&E segment. So we're able to absorb those and still deliver really good performance. I do expect we'll see better performance in the T&E segment, although we're going to be changing our segments to your point, but that part of our business should show improvements. But again, I don't want to underestimate the strong profitability improvements in ortho. Ortho did show really good progress sequentially year over year, and we're expecting to see better performance in our ortho business going forward. So to your point, I would expect there's probably a low watermark for our T&E segment.

Okay. And just real quick, follow-up. Any quantification on where you currently sit with ortho profitability?

No. I would just say we're making really good strides. You know, we had questions on, you know, is BITE profitable? I'll just tell you BITE was profitable in the quarter, just to alleviate that question that we typically get. But, no, I think on the whole we feel good about it. It's still dilutive to the overall corporate margins, so we have more work to do, but we intend on making progress each and every quarter. And the team's done a real nice job to not just get this top-line performance going in a meaningful way, which is going to help on the leverage side, but also working on profitability improvements.

All right. Very helpful. Thanks so much.

Thank you. Stand by for our next caller.

And our next question comes from the line of Michael Czerny with Bank of America. Michael, your line is open. Please go ahead.

Hi. This is Dan Clark on for Mike. Are you seeing or hearing of any recent impacts to equipment demand? Just thinking through potentially tighter lending standards that might be hitting the market as a result of recent banking headlines? Thanks.

Yeah, so good morning. It's Simon. Obviously, the survey that I quoted earlier on with those 1,600 customers around the world, while sentiment about capital purchases has not gotten worse since the last time we did the survey in February, there is still some heightened concern from customers about making those investments. So Glenn commented earlier on about some some thoughtfulness that we've put into Q2 and beyond with respect to that part of our portfolio. And until our survey or all your surveys point to a more favorable environment, then we'll continue to exhibit some caution in that space. Thanks.

And just a quick clarification. Are you still seeing supply chain issues in equipment and instruments?

So I would say that the supply chain status has not got any worse at all. In fact, we would say probably a slight improvement. Last year we had these middlemen who were supplying electronic components. They are still playing a role, although their role is being reduced each and every month. We are making a lot of internal progress with respect to our turnaround times as well, so I would say it's less of a concern than it has been in the past, but We are still very watchful about it. Thanks.

Please stand by for our next question.

And our next question comes from the line of Nathan Rich with Goldman Sachs. Nathan, your line is open. Go right ahead.

Thanks. Good morning. Thanks for the questions. Maybe a numbers one to start. I'm just trying to reconcile the first quarter top line outperformance relative to your guidance and then your commentary on where 2Q organic growth would be. It seems like you outperformed by about $40 million relative to your initial expectations. I think you called out the CAD-CAM inventory. Stocking was about $10 million. The consumables buying ahead of the price increase seems to be about $20 million. Are those in the right ballpark? And I guess, does that $30 million total kind of turn into a headland in 2Q? And I guess in either case, It seems like you're kind of tracking at the high end of your guidance for the year. So is there anything else in the back half of the year that we should have on the radar? Because it seems like you've kind of pointed to sales improving throughout the year this year.

Thanks for your question. So the overperformance in Q1 was consumables. I would also highlight ortho outperformed. and CAD-CAM. I don't know the exact amounts for each of the buckets, but clearly those are the three big drivers for us. Within CAD-CAM, I would say that the mills also outperformed. So some of it timing, but yeah, there was good, strong underlying demand, though, outside of some of the timing items that we've called out relative to consumables, as an example, in the pre-buys. So patient traffic was much stronger. That helped to drive the consumables outperformance. Our ortho takes share of has absolutely created more upside versus our forecast. We're being cautious for the rest of the year. If you look at our guidance right now, obviously we're not projecting to show sequential improvement in the back half of the year versus the front half of the year. We're being cautious around the equipment environment. And I think it leaves us opportunity to overachieve if things continue to go well. But we're obviously expecting to see improvement in China to see improvements in our implants business continuing to see momentum with ortho and if the macro environment does not erode then I think there's opportunity to you know do better and probably get to the upper end of our guidance range or even better than that so we'll see how the rest of the year plays out but to your point we've got good momentum here in the first quarter but being cautious especially around the equipment environment

Great. And then, Simon, maybe a follow up just on R&D. How are you thinking about, you know, the allocation of R&D dollars between consumables and equipment and some of the growth categories that you talked about? And, you know, Can you talk maybe about the timeline for making those changes and, you know, where you're kind of focused on bringing innovation to market and when we could potentially see, you know, some of those fruits come to bear as we think about the forward?

Nathan, we brought in Andreas Frank, who's our chief business officer with us today, who leads our GPU. So I'll give Andreas an opportunity to take that question.

Thank you, Simon. So I think I'd point to our new operating model that we're putting in place. And first and foremost, that enables us on the investment side and on the innovation side to have a more dynamic resource allocations. One of our biggest investment areas is clearly software. So we're continuing to invest behind DS Core. and to enable that platform with next-generation clinical applications as we upgrade our software stack. And then secondly, as we continue to execute on our portfolio optimization and simplification strategy, fewer R&D dollars will be spent towards maintenance, which will free up resources to also invest behind more meaningful innovation products that solve significant challenges for our patients and for our customers.

Okay. Hold the line for the next question.

And our next question comes from the line of Rachel Vansdal from JP Morgan. Rachel, please go ahead. Your line is open.

Great. Thank you for taking the questions. So first I'm here just on the visibility that you have into customers' CapEx budgets. So you've spoken a fair amount today about the caution you have around equipment and instrumentation. So could you just walk us through the conversations you're having with customers? And at this point, do you expect CapEx budgets to be pressured into 2024? And then as a follow-up, you flagged some strength in equipment and instrumentation within Canada. So can you just talk about what drove the strength there relative to the U.S.

and Europe?

So I would say that we've obviously read all the surveys that you all put out. We've done our own work as well. I don't know if – I don't have the details to say if they're capital budgets are being constrained in any way with respect to the dollars that are in those budgets, but their willingness to spend it is certainly being constrained. We discovered that one in four customers in that survey across the globe, across the entire globe, were exhibiting caution around capital equipment spending. So that's the data that we have to go on. And then with respect to your question on Canada, some of that's demand, but also some of that is timing as well. So that's the greatest color we can give you on that.

Thanks. And then maybe a quick one here on clear aligners. You noted that SureSmile invite grew double digits in the quarter. So can you just walk us through how much of that performance in clear aligners has been driven by greenfield winds versus brownfield?

Thank you.

Well, as Glenn noted earlier on, we've seen really robust growth for I think the third quarter in a row now in SureSmile and Byte. I also noted that we are gaining traction with some DSOs as we bring our imaging equipment in there as well, and they're expanding their offerings to include our SureSmile offering. We've also expanded globally, so we have We are present in excess of 50 countries now. And then as Glenn noted too, we have been passing or rolling through an improved process at Byte in relation to customer acquisition, ensuring that the customers that we are bringing into the funnel are more likely than in the past to end up ordering aligners. We have... We've worked on our sales incentive program and the sales training programs with our Salesforce onboard SureSmile and Byte. So there are a lot of legs to the line or stool that we are using to drive increased growth and increased profitability.

Okay, stand by for our last question.

And our last question comes from Michael Patusky with Barrington Research. Michael, the line is open. Please go ahead.

Great. Good morning. Good morning, guys. Hey, I may have missed this, but have you guys talked about sort of cadence of free cash flow for the rest of the year? I mean, Q1 is always seasonally weak, but usually Q2 bounces back. But I know you're only expecting sort of modest EPS growth. Could you just talk about, to any extent you can, sort of what you expect in terms of cadence for free cash for the rest of the year? Thanks.

Thanks for the question. I think first and foremost on Q1, obviously we had a cash outflow from operations. That was not unexpected. We had non-recurring expenses associated with the restructuring, a lot of one-time items from last year that we paid in the first quarter of this year, and timing of receivables and payables. I just think as we go forward, keep in mind we have more restructuring and non-recurring payments that are going to be made. So this year overall will be a A LOWER YEAR THAN WHAT YOU TYPICALLY WOULD SEE ON FREE CASH FLOW AND FREE CASH FLOW CONVERSION. HAVING SAID THAT, WE DO EXPECT TO SEE IMPROVEMENTS THROUGHOUT THIS YEAR ON BOTH OUR FREE CASH FLOW PERFORMANCE AND FREE CASH FLOW CONVERSION. SO IT WILL CERTAINLY GET BETTER AS WE GO FORWARD, BUT THIS WILL BE A YEAR THAT'S LOWER THAN MOST NORMAL YEARS GIVEN THE RESTRUCTURING EFFORTS AND THE PAYMENTS THAT HAVE TO BE MADE ASSOCIATED WITH GETTING THE ANNUALIZED SAVINGS THAT WE'VE QUOTED FOR 2024.

It's fair to say it should be sequential growth sort of going forward, two, two, three, four.

Yes.

All right. Awesome. Thanks, guys.

Thank you.

And that concludes our Q&A for today. I would like to now turn it back to Simon Campion, Chief Executive Officer, for closing remarks. Simon?

Thank you. And thank you all for your thoughtful questions this morning. I would I'd also like to thank the entire Dents by Sirona team, including those employees who have left the organization recently for their valuable contributions to our company and their unwavering commitment to our customers. While we have much more hard work ahead of us, I am energized by our progress and the passion and belief that our team has that we can deliver a brighter future for this organization together. Thank you.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.