DENTSPLY SIRONA Inc.

Please be advised that today's conference is being recorded. I would now like to hand the call over to Andrea Daly, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to the Densly-Thorona First Quarter 2025 Earnings Call. Joining me for today's call is Simon Campion, Chief Executive Officer, and Rich Rosenzweig, Executive Vice President, Corporate Development and General Counsel. I'd like to remind you that an earnings press release and slide presentation related to the call are available on the investor section of our website at www.densplacerona.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 lists some of the most important risk factors that could cause actual results that differ from our predictions. 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's 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 the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the investor 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 joining us this morning for our Q1 2025 earnings call. Today, I'll cover our full agenda as Herman Kudo has completed his interim CFO assignment with us. My prepared remarks will include an overview of our recent performance, our Q1 financial results, and an update on our 2025 outlook. I'll then finish with our foundational initiatives and strategy. Before we get started, I want to provide you with some thoughts and comments on the global trade situation and how we're viewing it relative to our business. As a multinational company operating in over 100 countries with a global supply chain, the current and potential tariffs create headwinds and risks in our business. We are confident that the work we've done to strengthen our foundation improves our ability to navigate these potential challenges. As the situation began to evolve, we developed plans to mitigate potential impacts to our business. We continue to monitor the changing landscape and are poised to pivot as necessary. But let's start with some key points on slide three. In the first quarter, we continue to make progress towards driving reliable and sustainable performance from Dents by Serona. Let's run through a few highlights. In Q1, we delivered organic growth in two of our three global regions and continued to improve operational efficiency. Organic sales exceeded our expectations and while down 4.4%, it did include a negative 4% bite impact. Imaging performed well in the quarter with our heightened focus resulting in growth across all regions. WellSpec Healthcare delivered another quarter of growth across all geographies, fueled by new product introductions and solid execution. Europe also delivered growth for the second quarter in a row, while Germany, our largest market in Europe and our second largest market globally, delivered a third consecutive quarter of growth. We were pleased to see EBITDA margin expansion and EPS growth in the quarter, reflecting our transformational savings, improving operational efficiency, and bite. We continue to drive internal financial discipline while also seeking to improve our commercial excellence, including customer experience, a work in progress. Our approach for IDS this year serves as a great example of this. While we spent 60% less than we did in 2023, our sales results exceeded those in 2023. a testament to the innovation that we continue to deliver, focused on enabling great clinical outcomes, improving efficiency for our customers, and enhancing treatment acceptance rates. Our commitment to customers and investors remains on delivering meaningful progress through thoughtful transformation, customer-centric product innovation, and disciplined execution. During the first two weeks of April, we once again conducted our quarterly customer survey with over 1,100 respondents. As planned, we also began to leverage our virtual sales team to gather customer input, reaching nearly 1,000 additional respondents. Results indicate that our major markets remain relatively unchanged from a patient volume and procedure utilization standpoint. Not surprisingly, we saw a drop in U.S. dentist sentiment, with about half expressing concern or expecting impact on the rapidly changing economic conditions and the potential implications on patient footfall and treatment acceptance rates. Despite this, results indicated dentists remain strongly interested in driving efficiencies through workflow improvement. In Japan, dentists also see increased usage of digital equipment as a top opportunity. This feedback, while in a period of dental market uncertainty, demonstrates a clear alignment to our strategy, enabling efficient effective and profitable dentistry by providing tangible, meaningful and measurable outcomes for our customers through product innovation and connected technology. For 2025, we are maintaining our outlook for organic sales and adjusted EPS while increasing reported sales for foreign currency translation changes. This outlook does reflect the current tariffs. Despite the increased uncertainty in the macroeconomic environment, we delivered Q1 ahead of our expectations and remain confident in executing against our commitments. We will cover more details on outlook a little bit later. Given the current environment, we are also taking a proactive and disciplined approach to managing our balance sheet with actions taken in the quarter to strengthen our positioning. Now, before we discuss financial results in more detail, I'd like to share some recent business highlights on slide four. starting with innovation. In March, we took the opportunity at IDS to invite our customers to experience the power of connected dentistry. 40 years ago this year, Dents by Serona propelled dentistry into a new era with the introduction of CEREC. Those dentists who have embraced this transformational technology deliver exceptional care for their patients at the chair side while growing their businesses meaningfully. With the introduction of our DS Core ecosystem in 2022, we initiated the transition into the next chapter, digitally connected to dentistry. As we continue to expand its functionality and connectivity with our CAD, CAM, and imaging platforms, we believe our technology can further expand the penetration of digital dentistry. We see evidence of this with the platform continuing to gain traction and has now surpassed 42,000 unique users, 50,000 connected devices, and we are processing over 100,000 lab orders each month. We continue to add new capability to the platform, and in Q1, we added DS-Core Diagnose, complementing our 3D imaging solutions. This new capability brings the flexibility and benefits of the cloud and DS-Core workflow to CVCT and integrates an AI-powered 3D rendering tool for better patient communication. This is currently available in Europe and is pending 510K clearance in the U.S. We also enhanced PrimeScan 2 with new functionality and accessories. Functionality enhancements include a 50% reduction in internet speed requirements, 90% faster SureSmile simulations, and integrated carrier detection that is now available in certain markets and is also pending FDA clearance in the U.S. We believe these additions will facilitate an improved scanning experience and increase patient engagement. This platform embodies our clear intention to enable seamless connectivity, faster workflows, and smarter integrations. This leads to our customers experiencing added flexibility, improved efficiency, and with that, the opportunity to improve treatment acceptance rates, all of which drives practice growth. Our NPD discipline and pace is also evident in our approach to seeking regulatory clearances. Already this year, we have received three 510K clearances with five additional filed and pending. Moving to customer engagement and experience. In Q1, we launched revamped company and SureSmile website to improve customer interactions. The redesigned DensifySerona.com improves navigation, search functionality, and usability. making it easier for users to find information, to contact us, and to purchase products. The new SureSmile.com is designed to complement our company website, creating a cohesive and integrated experience between the two sites for our customers. Additionally, and in parallel, we have also been hard at work designing a new e-commerce platform to include self-service capabilities, simplify returns, leverage AI to drive customer engagement, and optimize the reorder process. Our goal, ultimately, is to make our digital platform simple, intuitive, and easy to use. I've spoken in a variety of our investor engagements, including these earnings calls, about the robustness of our portfolio. While we continue to work earnestly at improving this portfolio for the reasons we've just discussed, we also recognize that our customers experience pain points when they engage with Dents by Sirona. To ensure we capture these, we have been closely engaging with dozens of customers over the past couple of months. We also recently kicked off an in-depth assessment of our US customer base to better understand how and where we need to improve. We expect this work to provide key insights that we can use to develop the next phase of our action plans, focus on improving our interactions, and delivering what customers need and care about most. As with everything we do, we are taking a thoughtful, data-driven, and disciplined approach to make well-informed, customer-centric decisions. Now let's wrap up our highlights with operational updates. In March, we announced the appointment of David Ferguson as SVP of our global business units managing our dental product portfolio. David is a seasoned healthcare executive with extensive experience in developing and executing strategic growth plans, as well as building and aligning high-performance teams. We continue to make progress on ERP modernization with two additional phases in the U.S. rolled out. Both deployments have gone as expected with minimal disruption. We have leveraged learnings from each launch to drive continuous improvement into subsequent deployments. Lastly, and importantly, we are delivering on plans to optimize our global supply chain. This quarter, we completed the closure of one of the manufacturing sites we announced last year bringing the total number of manufacturing and distribution sites now closed to 10 since we started this work. Our supply chain team continues to make robust progress on optimizing our network, improving efficiency, driving out costs, and enabling a better customer experience. Let's move to Q1 results on slide five. Our first quarter revenue was $879 million, representing a decline of 7.7% over the prior year quarter. On an organic basis, sales declined 4.4%, as foreign currency negatively impacted sales by approximately 330 basis points. Vice had a negative 4% impact, representing most of the decline. On a constant currency basis, sales highlights in the quarter included double-digit growth for equipment and instruments, sure-smile performance in Europe and rest of the world, and continued momentum for well-specced healthcare. These improvements were offset by declines in CAD-CAM and IPS. Despite lower sales, adjusted gross margin was roughly flat. Adjusted EBITDA margins expanded 220 basis points, benefiting from lower operating expenses and reflecting our transformational savings, internal financial discipline, and an $8 million bite customer refund adjustment in the quarter. Adjusted EPS in the quarter was 43 cents. up 3.7% from prior year, largely due to higher adjusted EBITDA margins and a lower share count, partially offset by a higher tax rate. In the first quarter, we generated $7 million of operating cash flow compared to $25 million in the prior year quarter. The year-over-year decline is primarily attributable to timing of cash collections and a higher build of inventory. We finished the quarter with cash and cash equivalents of $398 million on March 31st. Our Q1 net debt to EBITDA ratio was 3x, consistent with the prior quarter. And in Q1, we entered into a bridge loan agreement to pay down short-term debt. Let's now turn to first quarter segment performance on slide six. Starting with the essential dental solution segment, which includes endo, resto, and preventive products, organic sales increased 0.4% due to growth in Europe and the rest of the world, partially offset by lower volumes in the US. EDS performance in the quarter reflected stable patient traffic, which I spoke to earlier when sharing our customer survey results. Shifting to the orthodontic and implant solution segment, Organic sales declined 17.7%, with a net negative bite impact of approximately $40 million year over year, or about 13%. SureSmile declined slightly in the quarter due to the prior year loss of a DSO customer in the U.S., partially offset by double-digit growth in both Europe and the rest of the world. We continue to see aligners as a strategic growth opportunity for us globally. Implants and prosthetics declined mid-single digits in the quarter, driven by lower lab volumes globally and lower implant sales in the US and Europe. Sales of premium implants grew nominally, as our EV family of implants and prosthetic solutions outpaced declines in legacy brands. Wrapping up our dental performance, CTS, our connected technology solution segment, So organic sales declined 0.5% versus the prior year quarter, largely due to declines in CAD-CAM predominantly in the U.S. Growth in equipment and instruments offset the majority of this decline, with imaging performance a bright spot, posting growth across all three regions, as we benefited from an easier comp with the prior year while navigating a softer retail environment. Our treatment center's business also contributed to growth as a result of a one-time delivery of equipment for a large new institutional customer in EMEA. Moving to WellSpec Healthcare, organic sales grew 8% with sales growth across all three regions as we continue to benefit from new product launches and execution. As a reminder, in Q2 of this year, we will have a more difficult time due to a distributor we onboarded in the prior year period. We continue to expect this business to deliver mid-single-digit growth for the full year. Now let's turn to slide 7 to discuss first quarter financial performance by region. U.S. organic sales declined 14.9%, primarily due to the negative 9.8% impact from Byte. CAD-CAM and IPS also declined in the quarter, which were partially offset by growth in WellSpec and imaging. Changes in distributor inventory for CAD-CAM contributed to the year-over-year decline. Distributor inventory levels in the US increased sequentially by approximately $4 million compared to an approximately $9 million sequential increase in the prior year quarter. Meanwhile, US imaging growth benefited from changes in distributor inventory levels. Distributor inventory in the U.S. increased sequentially by approximately $6 million compared to an approximately $7 million decrease in the prior year quarter. We ended Q1 at about historical averages for CAD-CAM and imaging distributor inventory levels. Turning to Europe, organic sales increased 1.1% driven by performance in Germany, equipment and instruments, SureSmile, and WellSpec. Germany, our largest market in the region, posted another quarter of growth, driven primarily by CTS. While we remain cautious on the German economy, we have seen encouraging signs of a rebound, particularly in equipment. SureSmile posted double-digit growth as it continues to show positive momentum in the region. The organic sales growth for Europe was partially offset by declines in CAD-CAM and IPS. Rest of the world organic sales grew 3.1% with growth in imaging, well-spec, and implants in China as the primary drivers, partially offset by a decline in CAD-CAM. With that, let's move to slide eight to discuss our updated outlook for 2025. We are maintaining our 2025 outlook for organic sales and adjusted EPS. Organic sales are expected to be down 2% to 4% with a 2% bite impact on the full year. We are revising our outlook for reported sales to reflect the change in foreign currency rates as of the end of Q1. And we now expect reported sales to be in the range of $3.6 billion to $3.7 billion, above our previous range of $3.5 billion to $3.6 billion. Moving to profitability, we are increasing our outlook for adjusted EBITDA margin to greater than 19%. attributable to the positive impact of FX rates flowing through the P&L. Adjusted EPS remains unchanged from our prior guidance in the range of $1.80 to $2, which reflects the current state on tariffs and trade policy. Now let me provide some color on our expectations for the second quarter. We expect second quarter organic sales to decline mid-single digits versus the prior year period, primarily as a result of the negative sales impact from BITES. We do not expect an impact from foreign currency based on rates at the end of the quarter. Sequentially, reported sales are expected to increase in the second quarter based on normal seasonality and the positive impact from sales associated with IDS. We anticipate second quarter adjusted EPS will be up year over year, primarily due to adjusted EBITDA margin expansion offset by a higher tax rate. Now let's move to our strategic update on slide nine. As we continue on our path to improve all aspects of our company, we've also adapted our approach along the way as needed. We've shared our formula for growth, focused on customer and return-centric innovation, clinical education, and commercial excellence. We know that growth won't come by chance. It will come from the choices we make, the focus we bring, and the value we create and deliver. Our focus on growth must also be accompanied by a scalable and lean cost structure. For 2025, we've embarked on the next set of strategic actions. We deliver best-in-class innovation and believe we are uniquely positioned to shape connected dentistry across clinical procedures. We continue to deepen our customer focus and clarify our value proposition, which, as I've noted, centers on enabling great clinical outcomes, improving workflow efficiency, and enhancing treatment acceptance rates. we are also evolving the nature of the conversations we have with our customers to be value-oriented. Our innovation pipeline is healthy, with the projected value of the NPD portfolio more than doubling over the last 12 months. Through the benefits of cloud-based software and solutions, we're bringing new capabilities and functionality to the market at an accelerated pace. Historically, CEREC software updates could take up to two years to complete, We are now leveraging the benefits of our cloud-based solutions to develop software updates on a more frequent basis, as often as quarterly, and releasing those updates instantaneously. And we're doing so more efficiently by increasingly leveraging AI tools alongside our software development teams, supporting code generation and automating test creation. I've already spoken about our most recent enhancements for both PrimeScan 2 and DS Core. With each new release, we see increased adoption and stickiness as we deepen the connectivity of our digital ecosystem. We've had some feedback from our customers on opportunities to further enhance the experience with PrimeScan2, and we have rapidly implemented changes, such as improved compression and simulation speed, and will continue to adapt the platform to meet customer needs. We are recognized as a leader in clinical education, and we continue to fulfill our commitment in this area. We've already kicked off DS World 2025 events with our first held in Dubai. This was the third year we've hosted the event in this market, and we saw more than a 10% increase in participation, as well as higher sales compared to last year. We're also broadening and deepening our customer reach and enhancing our customer experience through our virtual sales team. a team focused on the US market and based in our Charlotte headquarters. This team now makes over 2,000 customer calls a day, driving sales, providing quality leads to our field-based sales team, and gathering customer insights. As we've spoken about before, virtual sales plays an important role in creating our own demand. This team has now reached out to over 21,000 accounts, approaching $1 million in revenue and generating several million dollars in leads. We continue to shape the organization and deliver on our initiatives to strengthen the company's foundation. Our ERP modernization continues with more deployments planned later this year, including the remaining U.S. deployments. We expect to begin additional European launches later in 2025 with completion expected in 2026. We also continue to deliver on our supply chain transformation and SKU optimization work. Now I'll wrap up on slide 10 with a few summary remarks. Q1 results exceeded our expectations. That said, we are not satisfied and rest assured we will keep driving towards reliable, sustainable performance. We're maintaining our 2025 outlook for organic sales and adjusted EPS. Our financial discipline and operational efficiency are improving, which will benefit us as we navigate through an increasingly uncertain external environment. We are executing with intention, reshaping the organization and driving efficiencies. We are also committed to enhancing the customer experience and investing for the future. And with that, I will open it up for questions.