DENTSPLY SIRONA Inc.

Good day everyone and thank you for standing by. Welcome to the Ten Splice Serona First Quarter 2024 earnings 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 that session, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. We ask that you please keep your questions to one in one follow-up. Please, the advice at today's conference is being recorded. I would now like to hand the conference over to the Vice President of Investor Relations, Andrea Daly. Please proceed.

Thank you, operator, and good morning everyone. Welcome to the Ten Splice Serona First Quarter 2024 earnings call. Joining me for today's call is Simon Campion, Chief Executive Officer. Glenn Coleman, Chief Financial Officer. And Andreas Frank, Chief Business 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 .dentspliceserona.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 uncertainties. Our most recently filed Form 10-K and any updating information in subsequent SEC filings list 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 offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance, and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to prior your quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Simon.

Thank you, Andrea, and thank you all for being here with us this morning for our Q1 2024 earnings call. Today, I'll begin, as usual, by providing a summary of our recent performance. Glenn will cover Q1 financial results and the full year outlook. And I will finish by providing an update on our strategic operating plan. Now starting on slide three. In Q1, organic sales declined by 1.9%, driven by lower sales in connected technology solutions and essential dental solutions, partly offset by growth in orthodontic and implant solutions and well-specced health care. Within CTS, imaging equipment experienced larger than expected headwinds, driven by continued unfavorable macroeconomic conditions and competitive pressure. Regionally, the macroeconomic environment in Germany remained challenging. For the quarter, organic sales were roughly flat, excluding Germany. In April, we conducted our quarterly global customer survey covering 12 countries with nearly 1,500 respondents. Survey results indicate that in the U.S., patient volumes are stable and dentist sentiment is relatively unchanged. In Canada, a new government health policy designed to help lower and middle-income families is rolling out in the first half of 2024, which we believe has resulted in patients delaying treatments until this benefit is in effect. In Germany, we were pleased to see procedure utilization and dentist outlook improve slightly. All other European markets included in the survey remain relatively stable. In Asia-Pacific, dentists in Australia continue to exhibit more negative sentiment. We saw mixed feedback in Japan. While there was a decline in patient volumes, dentists were positive around the imminent change in reimbursement for intraoral scans. Finally, in China, patient volumes are stable but remain low compared to other markets. As we execute on our strategic objectives, it remains crucial that we consistently seek input from customers to inform our decisions so that we can validate that we are on the right path. We appreciate so many taking the time, quarter after quarter, to provide us with this substantial and valuable input. Our first quarter adjusted EPS was 42 cents, which was an increase of nearly 8% and in line with our expectations despite softer sales. For the full year, we are maintaining our outlook range for organic sales and adjusted EPS, but trending towards the low end of both ranges. We're taking a cautious stance here with the macro uncertainties that continue to impact parts of our business, most notably imaging. We're also adjusting net sales for an additional FX headwind. Though we believe these headwinds are transient, we are actively taking additional measures, such as tightening cost controls, to better position us to deliver on our profitability and EPS targets for the year. We remain confident in our long-term trajectory. We have a comprehensive portfolio and are making progress on our strategic objectives. In fact, today we announced that we plan to execute up to $150 million in share repurchases in the second quarter. Moving to slide four, I would like to share some select business highlights. We are advancing innovation and progressing initiatives across our business. DS Core remains a key focus of our innovation. We are delivering enhancements and seeing strong uptick in adoption rates from new users and increased utilization rates from existing users. We also piloted DS Core Enterprise with a large DSO in the US. Given the shared experience to date, we are jointly exploring increasing the scope and size of this pilot. I have already shared the dynamics impacting our imaging business. To better position our portfolio, we expanded our offerings through the relaunch of Orthophos SL, a 2D and 3D imaging line in Europe. Bringing this product line back to market broadens our imaging portfolio and provides flexibility to our customers with more options at different price points. Therefore, we believe bringing this solution back to our customers will improve performance. Additionally, in CTS, we recently launched Axano Pure, a new treatment center with advanced features at an improved price point and Midwest Energo, a portfolio of electric handpieces. These innovations bring new efficiencies and enhanced capabilities to our customers, a continued key demand from customers captured in our quarterly survey. In EDS, we continue to roll out X-MART ProPlus in additional markets, which included Japan in Q1. X-MART ProPlus is an endo-motor solution that enables dentists to focus more on the procedure rather than the tools. Our data shows that the motor optimizes performance of Densby-Sarona's endodontic filing systems and has differentiated attributes that set it apart from its competition, and we are pleased with the uptake of this technology thus far in Europe and in Japan. We also remain committed to advancing sustainability. We are a mission-driven organization focused on improving health and access to care, and we are proud to partner with organizations such as the International Association for Disability and Oral Health, who promote equitable access to high-quality oral health care for patients with disabilities. This partnership builds upon the work we have already done in this area with the University of Pennsylvania to provide equipment for their care center for persons with disabilities, which serves several thousand patients each year. Lastly, our WellSpect Healthcare business achieved a new milestone with the validation of its emission reduction targets by the Science-Based Targets Initiative. We believe WellSpect Healthcare has long-standing leadership and expertise in sustainability that can benefit our entire company. And with that, I will hand the call over to Glenn for a more detailed financial update.

Thanks, 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 full year 2024 outlook. Let's begin on slide five. Our first quarter revenue was $953 million, representing a decline of .6% over the prior year quarter. On an organic basis, sales declined .9% as foreign currency negatively impacted sales by approximately $7 million or 70 basis points. On a constant currency basis, sales highlights in the quarter included approximately 53% growth in China, 14% growth in our global aligners business, 9% growth in CAD-CAM, and 5% growth in WellSpect Healthcare. These improvements were offset by declines in imaging equipment, where we continue to experience the effects of market conditions and increased competition. In addition, our essential dental solutions segment had -over-year declines, largely due to a tougher comp. Despite lower sales, EBITDA margins expanded 30 basis points due to restructuring savings and net investment hedges. Growth margin was flat -over-year, but improved 140 basis points on a sequential basis. Adjusted EPS in the quarter was $0.42, up 8% from prior year, largely due to higher EBITDA margins, a lower share count, and a lower effective tax rate. In the first quarter, we generated $25 million of operating cash flow, compared to an outflow of $21 million in the prior year quarter. The -over-year improvement is attributed to improved cash collections and a lower build of inventory. We continue to maintain a strong balance sheet with cash and cash equivalents of $291 million on March 31. In the first quarter, we had a slightly higher leverage ratio than the first. Our Q1 leverage ratio was 2.6 times, slightly higher than our long-term target rate of 2.5 times. We expect leverage to increase marginally in the second quarter, with a plan to end the year at approximately 2.5 times. These projected leverage ratios reflect the share repurchases that Simon noted earlier. Let's now turn to first quarter's segment performance on slide 6. Starting with the Essential Dental Solutions segment, which includes endo, resto, and preventive products, organic sales declined .5% due to tough -over-year comp. As a reminder, EDS organic sales grew .5% in the first quarter of 2023, which benefited from a significant increase in the second quarter. The second quarter was a bit more difficult, with the price increases. Shifting to the orthodontic and implant solution segment, organic sales grew 5.6%, with strong growth from aligners up 14%. SureSmile, our professional aligner brand, grew 9% and continues to benefit from market share gains, new product offerings, and differentiated outcomes. We're expanding further in certain international markets, including Japan and Brazil, which we believe will lead to continued momentum in SureSmile. Flight, our -to-consumer aligner brand, grew 18% over the prior year quarter. Flight growth accelerated through the period, as the increase in customer interest and impression kit orders that we discussed on our last earnings call began to convert to aligner cases. Implants and prosthetics grew low single digits in the quarter, highlighted by growth in China due to VVP, and partially offset by declines in the US and Europe. Our value implants segment delivered double-digit growth, and on the premium side, the new EV family of implants and prosthetic solutions grew double digits, outpacing the declines we've seen in legacy brands. Wrapping up our dental performance, CTS, our connected technology solution segment, saw organic sales decline .7% versus the prior year quarter, and was below our expectations, largely due to double-digit declines in imaging equipment. Our global CAD-CAM business was a bright spot, and grew high single digits driven by increased demand in the US. Moving to WellSpect Healthcare, organic sales grew about 5%, with sales growth across all regions as we continue to benefit from new products launched in the last 12 months. We expect WellSpect to grow faster in the second quarter, with high single digit growth over the prior year. Now let's turn to slide 7 to discuss first quarter financial performance by region. US organic sales grew .4% due to strong growth in aligners in CAD-CAM, partially offset by lower sales of imaging equipment, as well as a tougher comp in EDS. US CAD-CAM had a strong quarter with double-digit growth in intra-oil scanners, mills, and 3D printers at both the wholesale and retail level. Distributor inventory levels increased sequentially by approximately 90% in the last year. US CAD-CAM is a $9 million, consistent with normal seasonality. We expect US CAD-CAM distributor inventory levels to fluctuate quarter to quarter, and be roughly flat by the end of the year compared to current levels. Turning to Europe, organic sales declined 5.8%, primarily due to lower essential dental solutions and equipment and instruments volume across the region. This decline was partially offset by SureSmile, which grew over 20% in the region, highlighted by higher demand in Spain, France, and Italy. Germany, our largest market in the region, was down double digits versus the prior year quarter. We continue to see prolonged recessionary trends in Germany, largely affecting our equipment business. Excluding Germany, Europe organic sales declined 1.9%. Rest of world organic sales were approximately flat in the quarter, as significant implants growth in China was offset by softer demand for equipment in Japan and Canada. With that, let's move to slide 8 to discuss our updated outlook for 2024. We're lowering our reported sales range by $50 million to reflect the additional FX headings due to the recent strengthening of the dollar versus the euro and other major currencies. The current FX rates, we now expect reported sales to be within the range of $3.91 billion to $3.97 billion. We are maintaining our outlook range for organic sales, which is for flat to .5% growth, but trending to the low end of that range based on our first quarter results and the imaging business. Our current outlook assumes stronger organic sales growth in the second half of the year, primarily driven by double digit growth in aligners, strong CAD CAM demand, and improvements in EDS and US implants. Moving to profitability, our outlook for adjusted EBITDA margin of greater than 18% remains unchanged from our prior guidance. Adjusted EPS is trending towards the low end of the outlook range of $2 to $2.10 due to the lower sales expectations. Consistent with the trends we saw on the first quarter, we expect that second quarter organic sales will decline low single digits versus the prior year period. We also expect about a $20 million headwind from foreign currency. Sequentially, reported sales are expected to increase in the second quarter based on normal seasonality. We anticipate second quarter adjusted EPS will be down slightly year over year, primarily due to a higher tax rate, partially offset by a slight improvement in adjusted EBITDA margin. With that, I'll now turn the call back over to Simon.

Thank you, Glenn. Moving on to our strategic update on slide 9. On our last earnings call, I shared the progress we plan to make in 2024 on our foundational initiatives, including supply chain transformation and skew optimization. We expect these programs to contribute meaningfully to enhancing and sustaining profitability over the long term. We are actively executing each initiative with financial benefits expected to begin in the second half of 2024. We expect that accelerating enterprise digitalization will enable both our customers and our organization to benefit from digitalizing and harmonizing workflows. I already share the uptick in DS Core adoption rates, which includes both dental practices and labs, and which we believe reflects the value it can bring. The new products in our pipeline with expanded connectivity will further enhance the value of embedding DS Core in digital workflows. We've heard firsthand that customers appreciate the workflow efficiencies that we envisioned with this unique, differentiated, and unifying platform. We expect our ERP modernization to also play a part in accelerating enterprise digitalization. It is more than a system rollout. It is a true business transformation. Through our phased approach, we plan to transition each country to a single commercial entity in a way that enables consistent business processes and implements a range of enhancements to simplify how we conduct business with our customers, improve our operations, and accelerate our innovation. We are currently piloting this rollout in several locations, with phased deployments expected to start mid-year. Lastly, on enterprise digitalization, we are also advancing our data and AI strategy. We are leveraging the expertise of a leading cloud service provider that supports our digital platforms. We expect this important work will improve our customer experience and increase efficiency as we implement our new ERP and bring more functionality to DS Core. Next, let's cover our progress on our objective to win in high growth categories such as ortho, implants, and continence care. In ortho, we have invested in sure smile reps in Japan and frontline support for Byte. We are already seeing the growth in Byte, with sales increasing nearly 18% in Q1, and we expect more than 20% growth for the full year. Byte Plus, our hybrid solution with in-office scanning and connectivity, also continues to expand and has now moved from pilot phase into commercial launch. Feedback has been positive and the business is exceeding its KPIs on this initiative as we continue to ramp the model. Sure Smile remains on track to launch in Brazil in the second quarter. We believe this is an important market to further drive geographic expansion in this business. In the US, we have invested in our implants business, expanding the team and enabling them with tools, trainings, and growth-orientated compensation plans. Implants in China has been a bright spot for our business with the first year of VBP exceeding our expectations. While we expect the program to continue to result in increased volume, we anticipate growth rates in China will moderate for the remainder of the year, given the tougher comps. We are also investing in capacity expansion for our well-specced healthcare business to support the growth and vision from new product launches. The business delivered mid-single digit growth in Q1 and with its innovation pipeline, we expect the momentum to continue through the remainder of the year and beyond. Lastly, supporting our ability to drive a high-performance culture, we started this year off with well-defined strategic and operational goals. We set clear 2024 KPIs across the company to monitor progress and drive performance. We believe this rigor will enable us to make better decisions as we navigate the dynamic external environment. Moving to our final slide, I would like to reinforce a few key points. First, I want to reiterate that fulfilling our commitments is essential. In Q1, we delivered nearly 8% adjusted EPS growth despite softer sales. While we see this as a positive, we know it is only part of what we need to deliver on, and as such, we remain focused on achieving all of our commitments. Second, we have and will continue to take proactive steps to improve our competitive position, like our global investments in our aligners business and the reintroduction of the Orthos SL imaging line. In addition, we are continuing to put additional measures in place to improve cost and efficiency. To that point, our strategic initiatives remain on track. We have a clear strategy, detailed plans, and well-defined KPIs that we watch closely and refine as needed. As we execute these initiatives, we believe our business will be better positioned for that. And with that, let's now open it up for questions. Operator?

Thank you. And I will open the lines and as a reminder, press star 1-1 to get in the queue. To remove your questions, simply press star 1-1 again. And please, keep your questions to one and one follow-up. Stand by while we compile the Q

&A roster. And our first question comes from the line of David Saxon

with Needham & Company. Please proceed.

Great. Good morning, Simon and Glenn. Thanks for taking my questions. Maybe to start out on guidance, last quarter you called out growth expectations for each of the business. So, you know, one quarter in, would love to get an update on kind of how you're thinking about growth for each of the businesses. I'd assume CDS kind of comes down, but would love your thoughts on that.

David, it's Glenn Alllaw. I'll take that one. So, just in terms of sequencing for the year, obviously with our Q2 guidance color that we provided, you know, we expect to be down organically about 2% in the first half of the year, which would imply we expect to be up close to 3% organically in the back half of the year to get us flat on a full year basis. If we look at it by our different business segments, I would expect essential dental solutions to get back to a flattish number on a full year basis. That's going to be down, obviously, in the first half of the year, but we expect the back half of the year to grow low single digits, pretty much in line with what patient traffic should be. Ortho, we're expecting to see really good performance there, certainly double digit growth. Coming off a quarter of 14%, I expected to grow faster in the second quarter, and then the back half of the year, you know, exceeding 20% for our total ortho business is what we're projecting right now, which would put us, you know, in a really good shape relative to that part of our business. Have really good momentum, and if you look at what's happening there, obviously, we're seeing an acceleration of BITE, a combination of the BITE Plus program that's now fully commercially launched. We're seeing really good impression kick growth, which is a lead indicator for future sales, and so we're capitalizing on some of the competitive dynamics there from a BITE perspective. And sure as mile, you know, we are making some significant commercial investments both in Brazil and Japan. We talked about those in our prepared remarks, and so ortho, we feel very good about our path forward in terms of putting up some very solid growth. For implants, I would say low single digit growth, similar to what we posted here. In the first quarter, so that should be pretty consistent. The dynamic there, though, is I think we'll see a slowdown in China with tougher year over year comps, offset by better performance in both our US and European implants business. But overall, that should be pretty consistent growth, I would say, throughout the year. CTS, obviously, we were disappointed in the quarter. We were down close to 6% organically. I would expect another challenging quarter here in Q2. We do expect, though, to see better performance in the back half of the year. It's still expected to be down year over year in the back half of the year, but improvements from the first half, we were encouraged by, obviously, the CAD CAM growth that we saw here. That should continue as we move forward. Imaging, while disappointing, we're obviously taking some actions internally to address the competitive dynamics. So we're relaunching Orthophos SL in Europe. Simon commented on that in his prepared remarks. That's great, because it's a broader product offering at lower price points for our customers. And even in the first couple weeks of Q2, we're seeing some good traction there. So I feel good about that plan. We're looking at promotional activities across different countries to see where we should be providing more promotional activities for our imaging equipment, implementing additional financing programs to address the higher interest rate environment, and then doing some additional sales training. I think we're doing all the right things on imaging right now. It's going to be a tough environment for a full year basis, but that should put us overall in better shape in the second half of the year, although still CTS is going to be most likely down mid-single digits on a full year basis. And then, obviously, we'll expect good momentum here in Q1. We expect faster growth in Q2, and that should be growing kind of mid to high single digits on a full year basis. So that gives you a little bit of color across our businesses. Hopefully, that was helpful.

Yeah, super helpful, Glenn. Thanks for all that color. Maybe I'll ask my follow-up on the North America implants business, maybe just give an update on kind of how that team is doing. You know, you have a competitor who's dealing with their own issues, so I wonder if that maybe accelerates your path to growth. I think original expectations were in the back-up, and then maybe even to market growth. I think that was in 2026. And then, you know, I would love to hear your thoughts on what market growth actually is currently. Thanks so much.

Good morning, David. It's Simon. So as we've said before, would you expect to be growing or posting some growth in the back half of 2024? And then, as you said, the plan is to get to market growth by 2026. You know, as we've said, we have created a new team. We've given them the tools and the training. We did see some positive signs, I would say, in the quarter. We're growing in the DSO business in implants. And, you know, as you know, that part of the dental industry is not going away and is, in fact, accelerating. The decline of large accounts has, for the most part, stopped. So we think we've stemmed the bleeding to a large extent. We have heavily invested in clinical education, which was one of the areas that the company stepped away from in the past. And we've seen a significant increase in our presence at different educational fora throughout Q1. And as we've communicated before, in Q2, we'll have the World Implant Summit in Miami, which is another reflection of our commitment to the implant family. And we're expecting almost 500 attendees there, of which we expect in excess of 50% to be from North America. So we feel we're making all the right steps in implants. It has for sure taken longer, I think, than we expected, given our history in different med tech industries. But as we speak to customers, they're saying, you're making the right moves. It's just going to take a while to turn the corner here, given the complexity of the implant market and the complex referral network that's required. And your question on market growth, I would think market growth in implants is mid-single digits in general. Notwithstanding the current macro climate where there's probably pressure on implants, given its elective nature. Okay, great. Thanks so much.

Thank you. One moment for our next question, please. And it comes from the line of Jeff Johnson with BERT. Please proceed.

Thank you. Good morning, guys. Simon, I thought maybe step back here just a second. You talk about bringing orthoFOS SL back to the European market. You've got a lower price treatment center that I think you're launching as well. Obviously, PrimeScan Connect a couple, year and a half, two years ago, you launched at that lower price point. You don't rush these decisions out the door if it's just cyclical, if it's just a short-term interest rate shock kind of thing, things like that. So what does this decision to move down the pricing scale tell us maybe about end markets, about competition, where your competitive positioning that historically with the Serona brand had been at the premium end where it's going right now? I would just love kind of your lay of the land there and kind of what's driving your thought process and some of this move to the lower price points.

You know, in relation to orthoFOS SL, Jeff, you know, I think aside from any macro issues, I think that was the discontinuation of that product line a number of years ago was a strategic error given the mix of dentist's willingness to buy value or buy premium. So we had a significant gap we felt in our imaging line that can be addressed by the reintroduction of orthoFOS SL. It fills out our line and now offers us a set of price positions for different types of dentists and DSOs in Europe in particular. So it's not a rush decision given the macro situation. It is a gap that we identified and we're now setting about filling it. I think that's consistent with other parts of our business too. We have we always had lower end treatment centers and we have value based implants as well. So serving the needs of the variety of customers that we provide technology to is a strategic objective of ours.

That's fair. I guess maybe to think about it in a more consolidated way, you know, and maybe Glenn, you could help here is do you think your blended revenue per system sale if we're talking at treatment centers at imaging within CAD CAM, anything like that, does that need to keep moving down over the next few years? Is there kind of a secular downward pressure on kind of those blended ASPs just as NICS continues to move those value or do you think in a better economy we'll come back to premium product and premium prices reaccelerating a little bit and maybe that blended ASP per system or whatever can stabilize? Thanks.

Yeah, listen, when we talk to our customers, their number one concern is costs and cost increases in their practices. So we want to make sure that we have alternatives for our customers, whether it be premium price products where they want a premium price product or trade down value brands. I think when we look across our portfolio, we're well positioned in each of the different categories. So implants, we have a premium product, we have a value implant product that's very good. We talk about CTS and PrimeScan Connect, even in EDS we've got trade down and what we call fighter brands such as Zermack as an example and even in ortho, right? Byte is a lower cost alternative for ortho treatment. So I think it's important you have alternatives for customers. How this plays out over the long term we'll have to see. But we do know that right now, you know, the number one issue our customers are telling us that they're seeing is an increase in cost in their practices. So we want to be there for them with a comprehensive portfolio and supporting whatever it is that they need, whether it be premium or value products.

Yes, thanks. Thank you. One moment for our next question, please. This is a control line of Kevin Caliendo with UBS. Please proceed.

Thank you very much. This is Dylan Finley on for Kevin. Question, Simon in the prepared remarks talked about the tightening of cost controls to enhance profitability. Now, is that incremental to all the efficiency reductions you've set forward on the path to the 2026 EPS target? And on the sort of timing perspective, would these efforts have an impact on the bottom line in 2024 or is this more of a 25 benefit?

Yeah, thanks for your question. This is Glenn. So I think on the whole, if we see more revenue softness and pressure on our top line, we're going to continue to take actions across the organization in terms of looking at how to be more efficient in different areas of the organization and looking at areas to bring our costs down where we can. So these would be incremental actions if we see additional top line revenue pressure. And obviously, those would be 24 actions.

Thank you. One moment for our next question, please. This is from the line of Elizabeth Anderson with Evercore ISI. Please proceed.

Hi, guys. Thanks so much for the question. I was wondering if you could talk a little bit more about the gross margin line. It came in a bit stronger than I had been modeling. I just want to understand, is that sort of just a reflection of things? Is that a reflection of some of the restructuring efforts that you guys have already changed, I guess, with a view to kind of understand what the sustainability of that looks like across the rest of the year? Thank you.

I think gross margins were a little bit better than we were expecting. We were expecting, though, to see an improvement from where we landed in Q4. Q4 was artificially low. We talked about the reasons back in Q4 around that. So on a -over-year basis, our margins are essentially flat. I would expect going forward what we just produced here in Q1 results at .6% or so. It's going to be pretty consistent on a full-year basis. I wouldn't expect much of a margin expansion or contraction story. It will probably go down slightly in Q2, and then as we get more volumes in the back half of the year, go back up again. But we're probably going to be, Elizabeth, around this range, I would say, for the remainder of the year. Overall, pricing is stable. We're not getting price increases, but we're not seeing significant decreases anywhere in the portfolio. Obviously, in certain areas, we're getting some increase. Other areas are going down. But overall, it's kind of flattish on a price perspective. The key for us is driving more volume. As we get more volume, we'll continue to see, hopefully, better gross margin performance. But right now, I would just say, expect our gross margins to be pretty consistent with what we put up here in Q1.

Elizabeth Mertz Got it. And just in terms of across the quarter that you saw in the results across the months of the first quarter, would you say that was sort of like a stable trajectory across the quarter? Are you thinking that certain parts are getting incrementally better or worse? I'm just trying to make sure that we understand some of the jump off points as we think about particularly to Q, but then obviously in the context of the broader guidance that you gave. Thanks.

I'm not sure I understood the question. Could you just

repeat that, Elizabeth?

Oh, just in terms of like, I think you talked about like stable US visit volume and things like that. So I'm just trying to understand like across the first quarter, like what sort of deteriorated as we moved across the first quarter, maybe what got stronger, just so we kind of have a good sense of like the cadence as we're thinking about like the two Q growth rates and then in the context of what you said for the fully thing.

Yeah, no, listen, we saw a strong momentum in ORTHO throughout the quarter. I'm expecting that to continue, as I mentioned earlier, going into Q2. So we should see faster growth in ORTHO even versus the 14% that we put up in Q1. I think the area of disappointment and even in March was disappointing was our CTS business and imaging. And so we are expecting that challenging environment to continue going into Q2. So it, you know, model conservative numbers, probably similar declines or even more declines in CTS in Q2. So that's kind of, I would say, the dynamic relative to how the Q1 numbers played out. That CTS was disappointing and so some good momentum in ORTHO, which is going to continue going into Q2. But overall, again, we're expecting Q2 organic growth to be pretty similar to Q1, down about, you know, 2% ish.

Okay, thank you.

Thank you. One moment for our next question, please. And it comes from the line of Jason Bednar with Piper Sandler. Please proceed.

Hey, good morning. Thanks for taking the questions. Wanted to zoom in here on the imaging discussion. And sorry for belaboring the point here, but really trying to understand maybe what changed versus when you first gave guidance a few months ago. Are these pricing and share dynamics that are shifting in the category? And then you're now responding accordingly, like you intimated in your response to Jeff's question. Or are you seeing offices just having set equipment budgets and, you know, those budget dollars are shifting to other categories than high tech, especially those that are, you know, maybe more under penetrated relative to imaging and where new product development is higher, like scanners and 3D printing? Is that what's going on?

Jason Simon here. I think the imaging part of our business, it's the highest price point arguably within the dental space. And with the macro situation and continued pressure on the macro situation and the outlook for interest rates continuing to be higher for a longer than expected period of time, I think people are just hitting the pause button on that. As you noted and as Jeff noted, we've been the high price player in this market for a couple of years. We felt that there was a gap in that space. OUS that would be addressed by orthophosis SL and that's why we have reintroduced it. But as Glenn said, and I think in response to one of his one of the earlier questions, we are actively working not only by the reintroduction of orthophosis SL, but also with respect to financing and promotional programs with our distribution partners to try and begin to address the challenges in the imaging market globally. And obviously, we have noted numerous times in the past, we are arguably outweighed in Germany and that economy is under significant pressure now. And so the legacy Serona side of our business continues to struggle in Germany in particular.

Yeah, that makes sense. Simon, I'll actually pick up on that last part of the response. Just with on Germany, I think you've been identifying these headwinds in that market for nearly a year now. I think it was two Q of last year, we really first started talking about challenges in Germany. Did it take another step lower in the quarter? I mean, it sounded like it was still sluggish, but I'm just trying to tease out like, did it take another step lower or are we seeing more of the same out of that market? Or yes, I may be asked a different way to the headwinds here that you're experiencing from Germany on your growth performance. Did those lessen meaningfully here near term as we anniversary through the first step down we saw in that market last year?

We actually had Jason, we actually had 300 respondents to our survey in Germany this quarter, which is meaningful. There is continued pessimism in that market about their practices and the dental industry as a whole. But the singular bright spot arguably in the survey from Germany is that the pessimism has reduced. In fact, it's back to the level that we experienced when we did the survey in July of last year when we began to highlight the imminent challenges that Germany was going to face. There was an improvement in sentiment, but it's still negative and is in line with some of the other more negative countries such as Australia and New Zealand as well.

Yeah, we just add Jason that Germany in the first quarter was down over 15%. We expect double digit declines here in the second quarter. I do think we'll see better performance in the back half of the year, although it's still going to be down year over year in the back half of the year as well. But these are pretty substantial headwinds that we're dealing with right now in Germany. It has not gotten better from a results perspective. We've been seeing double digit declines now for four consecutive quarters. So, yeah, we do expect a bit of improvement with the relaunch of orthophos with respect to some of the customer sentiment data that we're seeing, but it's going to be challenging through the remainder of the year, probably less challenging though, hopefully in the back half of the year. All right, great. Appreciate the call, guys. Thank you.

Thank you. One moment for our next question, please. And it comes from the line of John Block with Stifo. Please proceed.

Good morning. Jordan Bernstein on for John. Just wanted to continue a bit of the discussion on the shift to value here in dental, but specific to value implants, performance seems solid in the quarter. Another player mentioned solid performance in value implants last night as well. So are we seeing an accelerated mix shift in the industry as dentists, DSOs have now battled higher costs for a handful of quarters? And if so, what does that mean for the in-point portfolio of dense by Serona? And how are you positioned there? Thanks.

Yeah, I think we have seen a shift over the past several quarters that people are very interested in the value-based part of the implants business. And we are fortunate that we have a robust portfolio in value and a robust portfolio in the premium segment. Obviously, our results have been dramatically affected in Q1 by the performance in China, where we've been benefiting from VBP. And as we noted, we expect to continue to see solid volumes from China, although the growth rates will drop as we anniversary the benefit that we have foreseen for that. Is there a strategic shift to value? I would say it's definitely heading that way. But as an organization where we've been under pressure for a number of years on our implants business, it may present an opportunity for us to present ourselves as the value and premium-based company within the implants world. Andreas?

Yeah, maybe just to add a little bit more to that is I think the implants market overall is still, we're still talking about adding penetration with additional accounts, additional customers. And so we have a robust innovation pipeline both for the value and the premium segment. And in premium in particular, I think a lot of the digital connectivity, the integration across technology and the workflows will continue to be important to those customers that really value sort of that integrated benefit that they can get in the premium segment. Not to say that there's also obviously a different value proposition that some of the other accounts are looking for that are moving more towards value.

Great, thanks. And then for my follow-up, I'll focus on Byte, a solid momentum there in the first quarter. It sounds like you commercially launched with Byte Plus. Seems like it's out there at 30 locations if I have that right, which is up five quarter over quarter from the pilot. Any early feedback that you're able to share from the dentists on Byte Plus would be appreciated. And then maybe how impression kits are trending thus far in 2Q.

Thanks. Yeah, thank you for the question. I think Byte Plus, we're getting positive feedback from the customers. I can imagine sort of this in-office scan. It allows us to capture an incremental portion of those customers or consumers that are already coming through our website. So it's a very good use of sort of our ad spend and dollars that way. We see that as we roll out, it's very important to be locally penetrated so that we're actually accessible to those patients that come through the website. And that's why it's important to add, you'll see I think an accelerating ramp here in terms of the actual offices that are part of the network and part of our providers. So it's still early on, right? 30 or 35 sites now, as you said. And I think Glenn will circle back on the second part of your question.

Yeah, on the impression kit growth, I mentioned it earlier without the specific number. We're still seeing impression kit growth that's in excess of 50%. And obviously not all of that's going to convert to revenue, but that's one of the lead indicators to revenue growth. And so impression kit growth remains quite robust for us. And I would also add that Byte also has rolled out a bunch of new products, accessory products, teeth whitening, cleaners for the aligners, other wellness products. And that's actually got a really high attach rate. So that's very encouraging as well as we go forward. Still a small part of our Byte business, but that's going to be an area of growth opportunity in the future.

And a final comment here, just to come back to the original part of your question. Many of those sites where we have been in pilot have not only seen benefit from the Byte portfolio, but many of those customers have now signed up to the practice so that they can begin their preventative restorative treatments as well. These are customers who in many cases would not have had a primary dentist previously.

Thank you.

One moment for our next question, please. And it comes from the line of Nathan Rich with Goldman Sachs. Please proceed.

Hey, good morning. This is Sarah Conrad. I'm for Nate. I just wanted to dive a little more into implant performance. You had pointed to a potential macro impact from the elective nature of this treatment, which is pretty consistent with what we've been hearing. But I guess we've heard from some peers that they've been pointing to a sequential softening in the demand environment for implants in the first quarter. So can you discuss any changes to implant market demand that you've seen or changes in your consumer survey? And then as we think about that improvement needed in the U.S. implant business in the second half, can you just break out what we saw in Europe and North America implants in 1Q?

Sure. I think we've said before on calls such as these that with respect to implants, maybe we're not the best company to provide any macro analysis given our performance in the past. I think we have for sure seen a little bit of pressure from our customer survey about the elective nature of procedures. In general, overall it's stable. The U.S. was about the same. Germany's sentiment around implants actually improved a little bit in the quarter, but elsewhere it's diminished. So net-net, it's probably about even on a global basis. Yeah, and just by

geography, in the first quarter, both the U.S. and Europe were down low to mid-single digits year over year. We just looked at our implants business. Obviously, overall we grew the category that was largely driven by China and the growth we saw there. And if you look at the portfolio, we grew double digits within value implants and we're down in premium.

Thank you. And then as we look to those 2026 EPS target of $3 and the path you laid out to 4% plus organic growth in 2025, do you believe that what level of organic growth is needed in the second half of 2024 to remain on pace to reach those 25 and 26 targets?

Yeah, this is Glenn. I'll take that one. I think first and foremost, nothing has changed relative to our path or our confidence to getting to the $3 of EPS by 2026. When we laid out our targets in November of last year relative to getting to the $3, we basically assumed a normal macro environment, a non-recessionary environment, and normal patient traffic really beginning in 2025. We knew that 2024 was going to be a challenging year. We assumed very little growth in those assumptions. And so we'll have to see how the rest of the year plays out. But our path to $3 remains unchanged. We still need 4% organic growth over the period to get to $3. If you look at that bridge, though, two thirds of it are things in our control, things such as the restructuring savings, our global operations, and transformation work that we're doing, improvements in our ortho profitability, and some of the other things around net investment, hedges, and so forth. All the things in our control are on track, and we're executing against those. The $0.40 to $0.45 that's dependent on the 4% organic growth, we'll have to see if the macro environment improves going into next year. Obviously, if it doesn't, it will create pressure on our ability to get to $3. But right now, we assume very little growth in our initial assumptions in 2024, but a return to a more normal macro environment and getting to that 4% plus growth in 2025. And so obviously, we'll have to see how the rest of the year plays out.

Thank you. One moment for our next question, please. And it comes from the line of Justin Lin with William Blair. Please proceed.

Hey, guys. Good morning. Thanks for taking the questions. I'll focus first on buy, you know, that sort of slightly different question. How much of the strength and acceleration you kind of alluded to do you think is still kind of attributable to that sort of that SDC bonus, if you will, or is there some other kind of dynamic at play here, like, consumers perhaps get going for more affordable options, getting macro uncertainties, really just trying to get a sense of how sustainable this growth is?

Yeah, so I think, Simon, I think for sure we're benefiting from SDC. We have invested behind the growth that we are seeing, increasing the number of treatment planners, being very selective, but increasing our commercial activities with respect to advertising. We have provided new financing options, because as we've shared before, that this population are lower income families and individuals than perhaps would choose another type of a liner. So we've been very proactive, and I think that's helping drive performance today. But it is select investment that drives profitable revenue growth. We are not investing to lose money here. We are driving profitable revenue growth, and we continue to see profits accrue from our buy business. And as Glenn had said, we do expect to be north of 20% growth for buy this year.

Got it. And just a follow up question on Byte Plus specifically, can you kind of remind us whether Byte Plus margins would be better than regular Byte and kind of maybe, you know, the timing around Byte overall kind of getting to corporate margins?

Yeah, I think overall there's not a significant differential in the margins for Byte Plus versus Byte. There's a bit of a higher cost, but we're getting some of that back through price. So I wouldn't look at the margin differential as anything significant between the two. Relative to Byte getting back to corporate margin averages, right now I would say that is not part of our plan over the next three years. We obviously are planning on seeing an improvement in our Byte profitability over the period, but I don't yet have a clear line of sight that we can get back to our corporate averages. I think if we can get significant improvement though, that is going to be our goal here and get faster revenue growth. Got it. Super helpful. Thank you so much.

Thank you. One moment while we get our next question. And it's from Alan Lutz with Bank of America. Please proceed.

Good morning. Thanks for taking the question. A quick one for Glenn. I think in your prepared remarks, you talked about a 30 basis point benefit from restructuring savings in the quarter. I think that gets to about a penny against a 13 cent sort of implied guide here as part of the ETF outlook. Can you talk about where restructuring savings came in versus your expectations and sort of the cadence for that bucket over the course of the year? Thanks.

Yeah, so the 30 basis point improvement was our overall EBITDA margin improvement. Obviously, there's a lot of puts and takes in that number. So that's not necessarily the, I'll just say the net benefit from our restructuring activities. I would just say though, when we look at the restructuring plans that we've got that have been ongoing and being executed against over the last, call it five quarters, we're on track. I would expect most of the incremental savings to come here in the back half of the year. In fact, if I look at the EPS guidance, if you assume a 20 cent increase in the back half of the year versus first half of the year based upon the comments that we've made, about a third of that improvement is going to come from higher organic growth in the back half of the year and two thirds coming from the restructuring savings. So that's the way to think about how the cadence of the restructuring savings is going to hit. So clearly what that means is we're expecting our operating expenses on a dollar basis to come down in the back half of the year with the work that we're doing.

That's helpful. Thank you very much.

Thank you. One moment while we get our next question. And it's from the line of Michael Petoskey with Barrington Research. Please proceed.

Hey, good morning. So I was wondering, you know, DF Core was highlighted quite a bit at the investor day and you guys called it out again today as you know, there's progress being made in terms of utilization, new accounts, et cetera. I'm just wondering, is there a point in time where you guys start actually quantifying, hey, this is the percentage gain in terms of new accounts, these are some metrics around utilization? Like if given that, you know, this is an initiative that certainly will take you deeper with accounts and give you some margin expansion opportunities, I mean, would it make sense to start quantifying this at some point?

Thanks. Well, that's a good question and we'll take it under advisement. You know, DS Core has got multiple benefits for us, right? It is a unifying platform across all of our capital equipment. And so, you know, as we roll forward, we would expect to see the benefit in the capital side of our businesses. And then as we increase more functionality, we do expect to be able to monitor, to some extent, the software arm of that business in particular. But to your point on quantifying the performance of DS Core, you know, I think we've said we're in excess of 20,000 accounts now with DS Core. We've just come off our largest quarter of DS Core subscriptions. We've added a number of new different functions to it in the past quarter, and we will continue to add new functionality to it throughout the year. And we have a very aggressive goal for our expectations with respect to subscriptions in 2024. As I said, you know, we see it as a unifying platform. And we are already, as we noted in the prepared remarks, in pilots with some DSOs, and we're hoping to expand that pilot. The benefits that DS Core accrues to customers, whether they're labs, DSOs, or individual practices are significant. And customers are beginning to share sentiment on the positive experience they're having with it -à-vis efficiency of their practice.

Yeah, I mean, I think I see all that, that's why I'm interested in as much data as you guys are willing to provide. All right, a follow-up question. I'm going from that to a tiny part of your business relative, WellSpec. I'm just curious, Glenn, so I think you said mid-single digit to -single-digit performance for 2024, if I heard that correctly. And I'm just looking sort of at the back half comp there. And I guess I say this in context of the fact that you just delivered 5% growth versus a pretty easy first quarter comp. I guess what gives you the confidence that you can sort of deliver -single-digit growth in that given that the comp, particularly in Q4, is really tough?

Thanks. Yeah, so listen, just to reflect on statements we've made before, we're pretty happy that WellSpec remains part of our business, as we noted in the remarks. We're investing in innovation and capacity expansion for WellSpec. We have launched a number of new products that are still accruing customers and performance. And in fact, over the next couple of weeks, we will launch yet another new product, Low Freq Erigo Sleeve, which is directed at the spinal injury patients who have limited hand mobility and dexterity. So we're opening up another market for ourselves with the launch of that new product. And confidence is high that we can get to our numbers in 2024 on WellSpec. As we've noted, it's a macroimmune business. We've got a new general manager in place in Gothenburg who knows the home care business extraordinarily well. And he is shaping the team over there, and we expect continued and, indeed, accelerated performance from that group moving forward.

Okay, so essentially, if I was encapsulating that response, new products are going to be a meaningful part of what helps drive that second half performance against, again, really tough comps.

New products and execution.

Yeah. Okay, very good. Thank you, guys.

Thank you. And our last question, one moment, please. Our last question is from Erin Wright with Morgan Stanley. Please proceed. Great.

Sorry. Excuse me. Thanks. Can you provide us with an update on skew rationalization? Just remind us on how that impacts the top line, too, as well, if at all, for you? And then, how meaningful is that? Or where do we stand on skew rationalization in your efforts there? Thanks.

Hey, Erin. It's Andreas. So, I think we've talked about before skew rationalization and optimization really is focused right now on our endo and resto portfolios. We're well on the way there. We're in the process of eliminating those skews that are, you know, really sitting in our system, not driving revenue. So, that helps us with operational efficiencies across various plans. So, we're realizing this benefit now. And then, as we look at the next phase, which is optimizing a certain number of brands that we have in both of those areas, we're very closely coordinating this also with our network optimization efforts, right? And we're being very, I think, thoughtful and selective here so that we can, in fact, transition the revenue and the brands to other product lines that we have in the portfolio. So, I think, as of today, we're progressing towards the plan that we have laid out for 2024. And I think more meaningful benefit to come out of that program in 2025 and 26.

Okay. All right. Thank you so much. Thank you. And now, I would like to turn it back to Simon Campion for final comments.

Thank you. Thank you all for joining today's call. Before we close, I would like to leave you with some key points. Dentspace is well positioned in attractive industries. We do have a robust, customer-centric portfolio that supports -to-end dental workflows. While on the path of innovation. Our transformation continues to take shape operationally and culturally. Although there's much more to be done, we believe that executing on our plans will accelerate growth, profitable growth. Innovation stands as a vital part of our strategy. We have a healthy pipeline, and as we improve our customer-centricity and discipline execution, we expect to deliver more value for our stakeholders. And finally, on behalf of the management team, I want to extend our gratitude to all Dentspace Roam employees for their ongoing commitment to the business and to our transformation journey. Thank you.

And with that, thank you for participating. You may now disconnect.