DENTSPLY SIRONA - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 came in ahead of internal expectations with revenue $0.879B and adjusted EPS $0.43, driven by Europe/ROW growth and cost discipline; GAAP EPS was $0.10 as non-GAAP margins expanded despite U.S. weakness tied to Byte and softer CAD/CAM.
• Versus S&P Global consensus, XRAY delivered a beat on revenue ($879M vs $854M*) and adjusted EPS ($0.43 vs $0.30*), and a beat on EBITDA ($150M* vs $123M*), supported by lower OpEx and an $8M Byte customer refund adjustment; management maintained FY organic sales and EPS guidance while raising reported sales on FX.
• Guidance: FY25 organic sales down 4% to 2% and adjusted EPS $1.80–$2.00 maintained; reported sales raised to $3.6–$3.7B; adjusted EBITDA margin outlook increased to >19%; Q2 organic sales expected down mid-single digits with adjusted EPS up YoY.
• Stock-relevant narrative: continued transformation and margin expansion, digital adoption (DS Core), and improving Germany offset by U.S. Byte drag and tariff headwinds (approx. $0.10 EPS, ~$50M annualized exposure), plus near-term caution on U.S. CAD/CAM demand and cash conversion.

What Went Well and What Went Wrong

What Went Well

• Adjusted EBITDA margin expanded to 19.0% (+220bps YoY) on transformational savings, tighter OpEx and an $8M Byte refund adjustment; adjusted EPS rose to $0.43 (vs $0.42 LY) despite lower sales.
• Europe posted its second consecutive quarter of growth (+1.1% organic), with Germany delivering a third straight quarter of growth; imaging performed well across all regions, and Wellspect grew +8% organically.
• Digital ecosystem traction: DS Core surpassed 42,000 unique users, >50,000 connected devices, and >100,000 monthly lab orders; new AI-powered DS Core Diagnose complements CBCT; Primescan 2 workflow sped up (e.g., 90% faster simulations).

What Went Wrong

• U.S. organic sales fell 14.9%, with Byte a ~9.8% headwind; CAD/CAM and IPS declined, partially offset by imaging/Wellspect; distributor inventory changes were mixed (CAD/CAM +$4M seq.; imaging +$6M seq.).
• Orthodontic & Implant Solutions declined sharply (-20.0% net; -17.7% organic), reflecting Byte roll-off (~$40M YoY, ~13%) and lab/implant weakness; SureSmile down slightly in U.S. despite double-digit growth in Europe/ROW.
• Cash conversion was soft: operating cash flow fell to $7M (vs $25M LY) due to timing of receivables and inventory build; adjusted FCF conversion was -14%.

Transcript

Operator (participant)

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

Andrea Daley (VP of Investor Relations)

Thank you, Operator, and good morning, everyone. Welcome to the Dentsply Sirona 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.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we 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 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. I will now turn the call over to Simon.

Simon Campion (CEO)

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 Cueto 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. Now, 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 Dentsply Sirona. 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. Wellspect 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 Byte. 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 from 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: enable 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. Forty years ago this year, Dentsply Sirona 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 chairside 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 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.

It 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 CBCT and integrates an AI-powered 3D rendering tool for better patient communication. This is currently available in Europe and is pending 510(k) 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 increased 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 510(k) clearances with five additional filed and pending. Moving to customer engagement and experience. In Q1, we launched revamped company and SureSmile websites to improve customer interactions. The redesigned dentsplysirona.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 Dentsply 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 U.S. 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 unit, 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 had 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 cost, 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. Byte 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, SureSmile performance in Europe and rest of the world, and continued momentum for Wellspect 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 Byte customer refund adjustment in the quarter. Adjusted EPS in the quarter was $0.43, 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 31. Our Q1 net debt to EBITDA ratio was 3x, consistent with the prior quarter. 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 solutions segment, which includes endo, resto, and preventive products, organic sales increased 0.4% due to growth in Europe and rest of the world, partially offset by lower volumes in the U.S. 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 solutions segment, organic sales declined 17.7% with a net negative Byte 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 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 U.S. 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 solutions segment, saw organic sales decline 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 centers 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 Wellspect 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 comp 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 seven 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 Wellspect and imaging. Changes in distributor inventory for CAD/CAM contributed to the year-over-year decline. Distributor inventory levels in the U.S. increased sequentially by approximately $4 million, compared to an approximately $9 million sequential increase in the prior year quarter. Meanwhile, U.S. 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 Wellspect. 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, Wellspect, 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%-4%, with a 2% Byte 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-$3.7 billion, above our previous range of $3.5 billion-$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-$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 Byte.

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. To 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. We are 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 Primescan 2, 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 U.S. 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. With that, I will open it up for questions.

Operator (participant)

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 one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. Please limit to only one question and one follow-up question. Stand by while we compile the Q&A roster. Our first question comes from Elizabeth Anderson of Evercore ISI. Your line is now open.

Elizabeth Anderson (Research Analyst)

Hi guys. Good morning, and thanks so much for the question. I was hoping that you could expand a little bit more on the tariff impact. I know you said it was incorporated in your guidance, and I appreciate that. That's super helpful, and I imagine that has some impact. I was just wondering if you could help us sort of spell out that in a bit more detail. Yeah.

Simon Campion (CEO)

Good morning. Elizabeth Anderson here. Yeah, as you noted, we have factored the tariffs into the current guidance with where tariffs are today. We have contemplated approximately $0.10 of impact today, and we have been recovering that throughout the year. On an annualized basis, we think the tariff exposure as of today is about $50 million. As you know, we have a large manufacturing footprint outside of the U.S., and about half of our U.S. sales are generated from goods that are manufactured outside of the U.S.

Anything else that comes in, we've got some options for how to deal with those, but we won't provide any color on what we think that is right now if there's any retaliatory impacts from Europe. We have plans in place to deal with any subsequent issues.

Elizabeth Anderson (Research Analyst)

Got it. No, that's super helpful. Thank you. Appreciate the additional color. Another question. Could you update us on where we are with sort of the CFO search? I know Herman was obviously temporary and an interim, so just wanted to get your latest thoughts there as well.

Simon Campion (CEO)

Yeah. We're making good progress on that, Elizabeth. We have a number of candidates, I would say, in the late phases of this process. We are hopeful that we're going to get home on that in the not-too-distant future.

Elizabeth Anderson (Research Analyst)

Great. Thank you so much.

Simon Campion (CEO)

Thanks, Elizabeth.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Michael Cherny of Leerink Partners. Your line is now open.

Michael Cherny (Healthcare Technology & Distribution Equity Research Analyst)

Good morning, and thanks for taking the question. Maybe if I can just dive in a little bit on the orthodontic side a little further. Obviously, the Byte rolloff continues, but as you go through that process, can you give us a little more sense on what you're hearing from your customer base, kind of how the SureSmile pitch has gone beyond here? I'm sorry if I missed a segment, but any differences in your view on the eventual potential expansion beyond the current GP market?

Simon Campion (CEO)

Yep. Good morning, Michael. Let me deal with the second part first. As you know, we redeployed some of our Byte resources into different parts of our business, and they have contributed to the new dentsplysirona.com and your suresmile.com websites that are also working on e-commerce. In parallel to all of that, the software and R&D teams are at the moment collecting inputs from customers about what the new user interface needs to look like. We are making good progress on that, and we expect to be in a position to improve that by the end of the year or maybe into early next year. It is clear to us that we do need to reengage with the orthodontist community. The vast majority of the volume is in that area. We think we have a meaningful solution for them with SureSmile and all the benefits that we think customers gain from that, customers and patients.

We do need to improve the user experience because it's not just about the orthodontist, him or herself. It's about their staff members having to navigate a new software and the challenges that that causes. We need to make that more seamless. I would say we will be providing more information on our intentions over the next quarter or two with respect to the orthodontist community.

Michael Cherny (Healthcare Technology & Distribution Equity Research Analyst)

Perfect. That's it for me for now. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Kevin Caliendo of UBS. Your line is now open.

Dylan Finley (Equity Analyst)

Thank you very much. This is Dylan Finley on for Kevin Caliendo. Starting off first, some impressive execution on EBIT margin. In particular, it looks like OIS had some favorability at about a 17% EBIT margin. First off, is this a reasonable run rate to start with looking at the rest of the year? Any context behind that number?

Simon Campion (CEO)

Yeah. Good morning, Dylan. Let me be a bit more general than just OIS. I think we saw an improvement in Q1 for sure. I know that when we released guidance back in February, we had some, what shall we say, spotty margin profile throughout the year. We are pleased now that we have managed to smooth that out. I think you should consider where we landed for Q1 as indicative of where we land for the rest of the year. For sure, across all of our businesses, we are focused on A, driving growth, but also being very judicious with our SG&A. That is all helping throughout the P&L.

Dylan Finley (Equity Analyst)

Very helpful context. Thanks. And then just one last follow-up. When I look at EPS, your guidance for QQ being up on a year-over-year basis sort of implies at least $0.92-$0.93 in the first half of the year. Typically, seasonally, we expect to see 4Q equipment really drive the bottom-line result there. Context, I guess, perhaps behind why 2Q might be a bit soft. Are you conservative? Are there implications from the tariff perspective? Anything on that?

Simon Campion (CEO)

From a tariff perspective, I would say there's more in the tariffs for the back end of the year. I would say Q2 is normal seasonality that we see as well, Dylan. That's about as much color as I can give you on that. In the survey that we've done, footfall is still stable within preventative and resto. There is some slight negativity in the market around tariffs. Let's see how that shakes out and if people will postpone stuff. Yeah, generally, though, it's just normal seasonality and a back-end weighting of the tariff impact.

Dylan Finley (Equity Analyst)

Thank you.

Andrea Daley (VP of Investor Relations)

David, we're having some challenges hearing you clearly. If you can please ask for the next question. David, it looks like you're next in queue. Can you hear us? Do you want to go ahead with your question?

David Saxon (Equity Research Analyst)

Yeah. Yeah. Great. Good morning. Hopefully, you can hear me okay. Maybe I'll start on CTS. The mix there was interesting to see. In equipment, growth obviously accelerated. Wanted to ask how much of that was driven by the comp versus any improvement in kind of underlying demand. On the CAD/CAM side, what was the impact of dealer inventory, and what are you seeing in iOS price and volumes?

Simon Campion (CEO)

Yeah. Good morning. Good morning, David. Let me start with the second part first and the inventory. I think as we noted in the prepared remarks, inventory dropped on the CAD/CAM side but increased on the imaging side. I think net is probably a reasonable wash there between both. We are at about normal historical levels on inventory across the board here with our main partners. No significant impact, I would say, there. On the pricing on the scanners, we have not seen that much of a notable change in the quarter. I think net for our CAD/CAM business, there was about a $1 million degradation from prior year. Not that significant. Yeah, that's about it on the front piece.

Andrea Daley (VP of Investor Relations)

Yeah. Did you have one more part to your question there, David?

David Saxon (Equity Research Analyst)

Yeah. I mean, I think that was about it. My second question, maybe I'll ask on implants. On the U.S. side, it looks like it was down in the quarter. I guess, are you seeing any progress on that front? Premium grew nominally, I think you said in the script. Any color around what it did in the U.S. specifically? Thanks so much for taking my questions.

Simon Campion (CEO)

Yeah. Premium grew nominally. The degradation that we saw in some of our legacy brands was offset by growth in the EV family. That was good to see. We've been out with customers a lot over the past several weeks. The theme that continues to surface here is the importance of commercial teams and the relationship that the reps have from a clinical perspective and also from, let's say, an organizational perspective with their implant customers. It strikes us as if we're still in the rebuilding phase.

That's what customers are saying to us, that reps need clinical savviness and also to be very strong at building relationships, which, as you know, takes some time. We have now completed the retraining of our sales reps on the implant side so that they're more clinically savvy. We are in the process, they're actually in the building right now, of retraining our sales managers on what good sales management looks like. Again, we had a disappointing quarter. There's no way to say it any other way on implants. We continue to try and improve our performance there and improve the quality of our commercial team and improve relationships with these customers. It is an area of intense focus for us as it has been for two years, and it's disappointing that we have not made more focus than we had expected.

David Saxon (Equity Research Analyst)

Great. Thanks so much for taking my questions.

Operator (participant)

Thank you. Our next question comes from Vik Chopra of Wells Fargo. Your line is now open.

Simran Kaur (Analyst)

Hi. Good morning. This is Simran on for Vic. Thanks for taking the questions here. Just a quick follow-up on the tariff impact in 2025. What mitigation strategies do you have in place? Is that assumed in the $0.10 that you're guiding to for the year? Maybe just on mitigation, what are some strategies you can deploy more near-term? What do you have sort of longer-term?

Simon Campion (CEO)

Yeah. Good morning. There are no mitigation strategies contemplated in the $0.10 that we're offsetting at this point in time. Your considerations for what we could do in the future. In some areas, we have not quite dual manufacturing capability, but let's say we have one type of file, an endo file that's made in Switzerland, one type that's made in the U.S. Right now, we are trying to move a U.S. customer to a U.S. manufactured file, for example. That work is underway right now. We are also actually, right now, building some strategic stock in certain areas, and we're going to import that into the U.S. to prepare us for what might come in the future. We also think we have some optionality to redistribute stock that we have in some of our DCs around the world into U.S.-based distribution sites, which would help.

Obviously, we will continue to be extraordinarily prudent with our expenses moving forward. The lever that I'm sure people would be most reluctant to pull is some strategic price increases. I think our customers are already expressing some concern about that, what that may mean across the board, particularly with reimbursement of dental procedures being compressed. That is obviously a lever that we have contemplated. If we were to do so, it would be very strategic and in certain areas only.

Simran Kaur (Analyst)

Okay. Great. Maybe just for my follow-up, could you provide any timing updates or visibility on the resolution of the German tax situation? Sort of what is the current status of working with the authorities in Germany and responding to their requests?

Simon Campion (CEO)

Yeah. I know that's a question at the front of many people's minds, including ours. The best answer I can give you is we're continuing to work with them. We're continuing to meet with them. We have provided a lot of files. We're cooperating with them. At this point in time, I don't think they know, and therefore, we don't know about when there's a likely resolution. A resolution is likely to be some time out, and the magnitude of that resolution is, at this point, impossible to define. As I've noted before, though, just if I can just finish on that point, we remain very confident in our position. If any ruling goes against it, we will appeal it, and we will go until the end here. We had lots of advice when the merger happened. We continue to get advice that this is standard as recently as Q1. Our position is unchanged. There's nothing to see here.

Simran Kaur (Analyst)

Okay. Great. Thank you.

Simon Campion (CEO)

You're welcome.

Operator (participant)

Thank you. Our next question comes from Jon Block of Stifel. Your line is now open.

Jon Block (Senior Analyst)

Great. Thanks. And good morning. Simon, maybe I'll just try to wrap up some questions in one. If you can maybe provide a bit more color just on current trends. Simply put, there was really big 1Q upside, but no change to the full-year guidance. And I get it. There's certainly a ton of moving parts, which we touched on a bit. But is it just when we look back, it was sort of a good amount of conservatism to the 1Q guide? Or is there anything to call out that you're seeing as you look forward by product line or by region? And then I'll ask the follow-up.

Simon Campion (CEO)

Okay. All right. Thanks, Jon. I think we had, as we call out in the script, we had a couple of one-times in Q1, some timing things there. But I think they only contributed, let's say, nominally to our overperformance.

I think we're being, as we were with the original guide, I just think we're being a little prudent here with respect to the outlook for dental. Nothing from our survey, and as I noted, we have over 2,000 respondents in total. Nothing has materially changed with respect to footfall in dental practices. Nothing that we see has dramatically changed, certainly in North America, with respect to customer sentiment around purchases. We're really pleased to see some improvements in Germany, at least in our performance. I think the interesting thing from the data that we've gathered, Jon, is the data generation straddled Liberation Day. We saw a drop in sentiment pre and post-Liberation Day in general. It did not move from concerned to very worried. It moved from not concerned to somewhat concerned. When you net it out, it was just a slight degradation.

I think we're just being prudent here. There's a lot of moving parts in the macroeconomy and dental in particular. I would classify it as prudence, and let's see where things go from here on in.

Jon Block (Senior Analyst)

Got it. That was great. That was very helpful. I don't think anyone argues with being prudent. I think just to shift gears for the second question, SureSmile was down. I think the words were slightly year-over-year, and I get it. There's still that drag from the DSO customer. Just to push you a bit, when you hit the gas in Ortho and you feel like the software is where you want it to be, what's the strategy on how to compete or how to win? I just ask that because when I look at that landscape, you've got a player from China that's been very aggressive on price. You have another player that's able to leverage their wires and brackets franchise, and then you have sort of the big incumbent, if you would. Maybe just talk to us a little bit on where you see the opportunity to go into a market like that and compete and win, again, when the software is where you want it to be. Thank you.

Simon Campion (CEO)

Yeah. Thanks for the question, Jon. I think software is one area that we can leverage. DS Core and our scanner are a pretty powerful combination that we have. I think that's one lever that will interest people for sure. I think the second one here is that you mentioned price.

I think our price position has been pretty competitive with respect to our aligner offering. That is number two. Number three, as we think about and as we keep hearing from customers of all types, whether they are GPs or endos or orthos, they want efficient procedures, and they want the patient to get in their chair, and they want the patient to accept their treatment plan. They do not want the patient to come back for refinements. We do know, and we have spoken about it before, that we have fewer attachments with our device, which makes it more efficient for the customer. We have fewer refinements, so the patient is not coming back. When you combine all of those things together, I think we do have a value proposition that will resonate with the orthodontic community.

Now, of course, the competition in that space, we're not going to take it lying down. I would suggest that there is lots of room for competition in that space. The aligner market is arguably underpenetrated when you think of the total population. And we do have some unique opportunities with robotic wires and with our advanced SureSmile software as well. We are not being, there's no bravado here from our part. We have to fix the software. We have to redirect our sales team or add to our sales team. We have to really develop a compelling value proposition to shift customers from a competitor into our business. I guess the final piece I would say, and we shared this data before. We did a pretty robust survey late last summer. I think it was about 250 orthodontists.

They do have multiple brands on their shelf that they can choose from. We just need to move our brand up near the top and grab some more of that. It's 80% of the volume is with the Ortho. I'm sure we can continue to grow in the mid-single double-digit growth area with the GPs, but the volume is in the Ortho. If we want to be meaningful, we need to be with Ortho's.

Jon Block (Senior Analyst)

Understood. Thank you.

Operator (participant)

Thank you. Our next question comes from Jeff Johnson of Baird. Your line is now open.

Jeff Johnson (Senior Research Analyst)

Thank you. Good morning. Simon, I think we're all learning here through this earning season on the questions they ask about tariffs and all that. Maybe if I could ask just a couple more clarifying, I don't want to beat a dead horse here.

The $50 million annualized as you're talking about, the $0.10 EPS impact, as I do the math, it seems like it's about $25 million that is layering in this year to get down to that $0.10. One, should we expect that $25 million this year to go up to the $50 million annualized next year? Do you think you could mitigate some of that into next year, number one? Number two, does that $50 million annualized figure that you give, does that assume the current 10% tariff outside of China or the kind of liberation day tariff rates that were higher in some of the European markets? The third part just on tariffs is, do you have much exposure of products made in the U.S. sold in China or China-made products sold in the U.S., vice versa, or is most of it Europe-based? Thank you.

Simon Campion (CEO)

I was trying to remember all those parts of that question, John, or Jeff rather. With respect to the last part, we have nominal exposure, very nominal exposure to China. We have manufacturing there, but it is for China. Less than 5% of our materials are from China. Very nominal. The $0.10 does translate to, as you said, $24 million-$25 million. Any further exposure, I think there are, as I noted in one of my previous answers, we have not contemplated any mitigation efforts, whether that is stock builds, whether that is product swap-outs, or whether that is more cost synergies for us, or in certain cases, in certain cases, price increases in strategic areas. We have not contemplated that. If anything were to go, it does contemplate the 10% today.

If the liberation day numbers come out, then we'll have to do further work to decide what we would do there. I think in contemplation of that, we have begun those strategic stock builds. We are looking at relocating product from DCs around the world into North American DCs so that any impact that we would see from a liberation day 2.0 tariffs would be offset by product already being in country.

Jeff Johnson (Senior Research Analyst)

All right. That's helpful. Thank you. Then just a cash flow question, if I could. I know you do not guide to cash flow, but CapEx has been up kind of in that upper $150 million-$180 million-$200 million level the last couple of years. Free cash flow kind of down in that low to mid $100 million level over the last couple of years. Should we expect CapEx to come down at all this year, free cash flow to go up? Just on the short-term funding that you talked about, it seems like some high interest rate on that or a little bit higher interest rate, I guess I should say, to be fair. Just wondering, how are you feeling on cash? Is there any kind of cash issues we need to be worrying about here in the short run? Thank you.

Simon Campion (CEO)

With respect to, let me take the CapEx piece first. I think we're doing a lot of, what shall we say, one-time, longer-term projects such as ERP that we would expect would begin to roll off. We've been successful so far with ERP with respect to the launches. We're within a hair's breadth of our originally contemplated budget for ERP. We're pleased with that.

As that rolls off, we should expect CapEx to improve and free cash flow to improve. With respect to the financing, we're being prudent. We had an opportunity, and we decided to take it. There are no other issues that was put in place to address. It was just to help us out with short-term debt, gives us some flexibility. Just given the current environment, we thought it was prudent to be prudent.

Jeff Johnson (Senior Research Analyst)

Fair enough. Thank you.

Operator (participant)

Thank you. Our next question comes from Jason Bednar of Piper Sandler. Your line is now open.

Jason Bednar (Senior Research Analyst)

Hey. Morning, everyone. I want to follow up first on Jon Block's first question just to see if we can put an even finer point on the U.S. market. Simon, you mentioned maybe some more cautious commentary on U.S. dentist sentiment from your quarterly survey. I'm trying to process that in the context, I guess, of what you're seeing real-time at the patient level and also at the doctor level. Are you observing any patient reticence in moving forward on treatment, particularly in areas like ortho or implants? Are doctors putting a pause, even a temporary pause, on equipment purchase decisions? Do you think your survey is just an indicator of mood and concern rather than anything that's yet materializing in the end market?

Simon Campion (CEO)

Good morning, Jason. I would say the survey, both surveys that we've done in terms of footfall, no great difference in the U.S. In terms of intent to purchase, no great difference either, to be fair, in the U.S. Over the past couple of weeks, I've been out with I visited about 17 customers over the past three or four weeks.

I've asked them the same question. I've asked them about footfall. I've asked them about patient treatment acceptance rates. I've asked them about their intent to purchase. These 17 or so customers have said they have not seen a change in patient footfall or patient traffic. They have not seen a difference in treatment acceptance rates for the procedures that they offer. If they needed to buy some equipment, they would buy it. In the 1,000 people that we surveyed with our inside sales team, the vast majority were just waiting to see what would happen with tariffs. They had not indicated that they would trade down to lower-priced consumables or that they would halt any capital equipment purchases. I think the survey, again, over 2,000 customers, I think there is just not much change for now. It is no better or no worse.

I think given the situation that we're all hearing about, I think we would take no better or no worse movement into the survey.

Jason Bednar (Senior Research Analyst)

Okay. All right. That's helpful. Maybe over to another important market for you. It's really good to see that Germany's been performing better, some durability on that growth. As we think about comps in that market in particular, I think you have maybe one or two, maybe three more quarters of really favorable comps, but I think it's just maybe a quarter or two. How do you think that market performs once we anniversary those easier comps? Do you think that durability you've seen the last few quarters, does that sustain as we exit this year and look beyond?

Simon Campion (CEO)

Yeah. I think we have probably one more quarter of favorable comp. We've now posted three quarters in a row, Jason, of growth. Again, with respect to the survey that we have from Germany, stable, steady as you go from Germany. We've definitely improved our execution over there. Our CTS business has done well in Germany, particularly imaging and instruments. To answer your question, we have confidence moving forward in Germany. We have indeed in our top 11 countries, so growth in Q1 in six of the top 11 countries. We're pleased about that. There are certain geographies in EMEA that we are now intently focused on doing a German turnaround in those geographies as well. Hopefully, over the next couple of quarters, we'll begin to be able to share more than just Germany with you from a performance perspective.

Jason Bednar (Senior Research Analyst)

All right. Thank you.

Operator (participant)

Our next question comes from the line of Brandon Vazquez. Brandon, go ahead. Your line is now open.

Brandon Vazquez (Senior Analyst)

Hi, everyone. Thanks for taking the question and squeezing me in here. Simon, maybe one for you first. When you look at DS Core, it started to get a pretty good scale here and a lot of followers, a lot of subscribers, I mean. Can you talk about other than the total number of people on there? What are some of the key operating metrics that you guys are looking at, either from accounts that are on there when you compare it to the accounts not on DS Core? What gets you excited internally when you look at the metrics under the DS Core users?

Simon Campion (CEO)

Yeah. Good morning, Brandon. We're pleased with where we are. As I noted in the prepared remarks, 43,000 users. I think an important metric here is the number of accounts or number of connected devices. So we're at in excess of 50,000 connected devices now.

We're processing over 100,000 orders every month through our labs. They're the type of important things that we are looking at. We're also seeing an increase in the number of accounts who are paying for the DS Core subscription. I think the impact of that, to be fair, is nominal right now. As we add more capability and functionality to it, we expect that to grow. It's definitely creating some stickiness for us in the marketplace. People seem to like it. I actually got to experience it myself last week when I visited my own dentist, and it certainly changes the experience of sitting in a dental chair. We have a lot of innovation coming around the workflows and how they are connected into DS Core. We noted previously that the first phase of implants on Core is going to come out later this year.

We have increased the speed of our SureSmile simulations by 90% when it's used with Primescan 2 and DS Core. We are putting a lot of time and effort into ensuring that this ecosystem is driving our performance moving forward. The important thing for us is to get these, what shall we say, consumable workflows onto DS Core. Endo-preventative, aligners, implants where the margins are attractive and where they are the bread and butter of dental offices and can become the bread and butter for Dentsply Sirona as well.

Brandon Vazquez (Senior Analyst)

Okay. Thanks. Simon, maybe as a follow-up, I've always appreciated you guys take very measured and data-driven approaches when you're kind of making commercial changes here. You're once again talking about doing some surveys to better understand what areas you can improve upon. Talk to us about what segments of the business you're still running these surveys in, what segments of the business that you're most acutely focused on that still need some commercial tweaks, you think, to turn around. Thanks.

Simon Campion (CEO)

Yeah. No, I think the survey is pointed in a different way to, I think, what your question is asking. The survey is less about the work that we're doing, is less about, let's say, implants or aligners or capital equipment. It's more about when the customer or their office staff engage with Dentsply Sirona, what challenges do they face? Do they face challenges with respect to invoicing or billing or the speed at which we answer the phone or our e-commerce platform or our return policy so that we can begin to smooth out the customer experience for our customers that is not related to the performance of our product?

Because I think that has been a challenge for us historically. We've spoken before about all the ERP systems that we had, the 14 of them. That has certainly made things quite complex for customers. Our e-commerce experience was not great compared to some of our competition. They are the areas that we are focused on. That is part of the reason why we have been out in the field over the past couple of months meeting customers. This survey will get feedback from in excess of 500 customers, is our plan, across the GP and specialist spaces, but also from other staff members who engage with us as well. The office manager or the individual who places purchases or makes the phone calls to Dentsply Sirona or to our distributors.

It is going to be very comprehensive, and that will form the backbone or the design input, so to speak, for how we continue to improve the company.

Operator (participant)

Thank you. We have time for one more question. The next question comes from Erin Wright with Morgan Stanley. Go ahead. Your line is open.

Erin Wright (Analyst)

Great. Thanks for squeezing me in. On margins, did you, I guess, accelerate any of the cost management kind of initiatives there? Were there any costs that were pushed out at all? I guess, how should we be thinking about that quarterly progression or any sort of anomalies that we should be thinking about in terms of the second quarter? My second question, I will just ask them both upfront, is just more bigger picture in terms of the guidance and the change in management today and the departure. I guess any sort of context there on the departure as well as who was involved in terms of formulating the guidance? Presumably, you're taking full ownership of this guidance here. Thanks.

Simon Campion (CEO)

Yeah. Good morning, Erin. With respect to expenses, nothing has got pushed out to any of the quarters. In fact, we see a very, very modest sequential improvement as we roll through the year with respect to OpEx. Nothing has got pushed out. In relation to our guidance, Glenn Coleman, he wasn't part of it. Glenn had left by that point in time. Glenn made a personal decision to leave Dentsply Sirona. Herman Cueto stepped in in November, December, and was here with us through the end of March. He helped us put guidance together along with the great finance team that we have. There's not much more to say on that.

With respect to our CFO search, as I answered earlier today, we've got a number of great candidates in the final phases here. I'm hopeful that in the not too distant future, we'll be in a position to make an announcement about that. Expenses are under control, guidance is ours, and hopefully we will have some news on the CFO in the not too distant future.

Erin Wright (Analyst)

Thank you so much.

Operator (participant)

Thank you. This does conclude the question and answer session. I would now like to turn it back to Simon for closing remarks.

Simon Campion (CEO)

Thank you. In closing, I would like to recognize the entire Dentsply Sirona team for their commitment to our customers and the transformational journey that we are on together. We're hitting key milestones. We continue to innovate in a very meaningful way, launching new products and technology.

We're taking consistent action to advance our plans. As you hopefully have seen, we are continuing to mitigate risk. As we navigate through an increasingly uncertain external environment, we continue to be focused on what we can control, maximizing the value that we can deliver for our customers, which we continue to believe, in turn, will unlock the true potential of our company for all stakeholders. Thank you for joining us today.

Operator (participant)

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