XRAY Q2 2025: Tariff Headwinds Climb to $80M, Pressuring Margins
- New Leadership with a Customer-Centric Focus: The new CEO is prioritizing hands-on engagement with the field and driving operational discipline, which can lead to enhanced customer support and ultimately revenue growth.
- Margin Expansion and Expense Control Initiatives: Management emphasized ongoing cost-saving programs, effective tariff mitigation measures, and disciplined expense management that have already resulted in adjusted EBITDA margin expansion and EPS growth despite a challenging environment.
- Commitment to Innovation with DS Core Investments: The team is focused on leveraging DS Core as a foundation for digital and procedural transformation, signaling a strategic push into integrated, high-value, digitally enabled dental solutions that could drive long-term growth.
- Increased Tariff Impact: Tariff headwinds have grown from an expected $50M to an $80M annualized impact, which puts significant pressure on margins and could limit future profitability.
- Weakness in Key Segments: There are concerns over declining performance in important segments, with CTS and value implants facing double-digit declines and persistent softness in the U.S. market, indicating underlying demand issues.
- Execution and Strategic Uncertainty: Management expressed the need to further evaluate several initiatives such as addressing soft CTS performance and distributor relationships, highlighting uncertainty over the company’s immediate execution and the impact of ongoing market headwinds.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Reported sales | Q3 2025 | no prior guidance | expected to be down slightly on a sequential basis | no prior guidance |
Adjusted EBITDA margin | Q3 2025 | no prior guidance | expected to decline due to tariff‐related costs | no prior guidance |
Adjusted EPS | Q3 2025 | no prior guidance | sequentially lower | no prior guidance |
Sales | FY 2025 | no prior guidance | maintaining full year 2025 outlook | no prior guidance |
Adjusted EBITDA margin | FY 2025 | no prior guidance | maintaining full year 2025 outlook | no prior guidance |
Adjusted EPS | FY 2025 | no prior guidance | maintaining full year 2025 outlook | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Leadership Transition and Enhanced Operational Discipline | Q3 2024 noted leadership changes and restructuring ; Q4 2024 discussed board additions and enhanced execution discipline ; Q1 2025 featured a CFO search and appointment of new SVP, underscoring transition efforts | Q2 2025 focused on Dan Scavilla’s first call as CEO, the new CFO’s integration, and an even stronger emphasis on streamlined operations and margin enhancement | Increased focus on operational discipline; leadership transition remains consistent with an added emphasis on execution and cost optimization |
Evolving Tariff Management and Global Trade Headwinds | Q1 2025 detailed a $50 million annualized tariff impact with planned mitigations ; Q3 and Q4 2024 had no mention | Q2 2025 reported an increased annualized impact (up to $80 million) and described active mitigation efforts and a cautious strategic approach | Intensification of tariff challenges with a shift from preliminary impact to more explicit mitigation strategies |
Margin Expansion and Cost Discipline, including Restructuring Initiatives | Q3 2024 and Q4 2024 emphasized restructuring programs (e.g., $200 million first program, SKU optimization) and incremental margin improvements ; Q1 2025 noted 220‐bps EBITDA expansion from cost discipline | Q2 2025 highlighted a strong adjusted EBITDA margin of 21.1% (up 360 bps) driven by further expense controls, operational streamlining, and cost discipline | Progressive improvement in margins with continued restructuring initiatives and enhanced cost control measures |
Digital Transformation through DS Core Investments and Digital Dentistry Innovation | Q3 2024 reported DS Core adoption (32,000 unique users with frequent software updates) ; Q4 2024 showed growing user numbers (over 37,000) with integration of Primescan I ; Q1 2025 noted 42,000 users and new capabilities like DS Core Diagnose | Q2 2025 reported further growth with 50,000 unique users, more connected devices, and continued investment in innovation and integration with hardware and software | Steady expansion of the digital ecosystem with enhanced features and growing market penetration |
Persistent Underperformance in Core Segments (Implants, CTS, and Related Markets) | Q3 2024 and Q4 2024 reported declining implant sales, challenges in CTS, and market underperformance ; Q1 2025 detailed declines in implants (up to 17.7% in OIS) and poor customer relationships for implants | Q2 2025 continued to report persistent underperformance in implants and CTS, with strategic initiatives underway to address declines and competitive pressures | Consistent negative performance across key segments with ongoing remedial actions but no major turnaround yet |
Successful New Product Launches in the CAD/CAM Segment (e.g., Primescan 2) | Q3 2024 highlighted the successful launch of Primescan 2 with over 900 global units sold, boosting CAD/CAM growth ; Q4 2024 emphasized Primescan 2’s integration with DS Core and subscription increases ; Q1 2025 showcased enhancements in Primescan 2 with lower internet requirements and faster simulations | Q2 2025 did not mention new CAD/CAM product launches | Reduced focus in the current period relative to previous quarters, suggesting this topic was less emphasized recently |
Emergent Decline in the Byte Aligner Business | Q3 2024 described a voluntary suspension of Byte aligners due to regulatory reviews and noted its dilutive impact ; Q4 2024 detailed significant revenue impacts, write-offs, and strategic shifts away from Byte ; Q1 2025 cited a negative 4% impact on organic sales and significant overall contribution to declines | Q2 2025 reported continued negative impacts from Byte aligners (including a $4 million adjustment) as part of an overall decline in the OIS segment | A consistent decline with strategic redeployment of resources underway, maintaining a negative influence on performance |
Shifting Market Sentiment and Domestic Demand Softness | Q3 2024 highlighted U.S. retail demand softness and surveys showing flat patient traffic with mixed sentiment ; Q4 2024 emphasized soft retail demand in the U.S. due to macro pressures ; Q1 2025 showed a drop in U.S. dentist sentiment and significant organic sales declines in the U.S. | Q2 2025 noted continued softness in U.S. domestic demand with an 18% decline in U.S. sales and ongoing market uncertainty, though patient volumes remain stable per surveys | Continued caution amid mixed market signals; domestic demand remains challenged while patient volumes are stable |
Execution and Strategic Uncertainty in Addressing Operational Challenges | Q3 2024 mentioned operational challenges including the Byte suspension and restructuring efforts, alongside strategic investments ; Q4 2024 highlighted enhanced sales execution, portfolio assessments, and transformational initiatives ; Q1 2025 focused on supply chain optimizations and tariff mitigation as part of execution improvements | Q2 2025 emphasized hands-on execution by the new CEO, streamlining operations, and a cautious strategic approach given volatile external factors | Ongoing focus on execution and strategic investments with incremental improvements, although macro uncertainties remain |
Emerging Unresolved Risks (e.g., the German Tax Dispute) | Q3 2024 addressed a developing situation with German authorities with immediate cooperation ; Q4 2024 noted ongoing discussions and a belief that the issues were without merit, albeit with a slow resolution ; Q1 2025 detailed active cooperation with German authorities amid uncertain timing | Q2 2025 did not mention any emerging unresolved risks | Reduced discussion in the current period, suggesting the risk is not an immediate focus despite continuing uncertainty |
Diminished Focus on Earlier Concerns like Supply Chain Disruptions and Weak Organic Sales Performance | Q3 2024 and Q4 2024 revealed significant attention on supply chain optimization and organic sales challenges, with restructuring and SKU optimization efforts underway ; Q1 2025 maintained a focus on supply chain improvements and acknowledged organic sales declines across regions | Q2 2025 emphasized strong supply chain leadership, improvements in ERP deployment, and margin gains, indicating progress in mitigating earlier concerns | Earlier concerns are being actively addressed; improved operational efficiencies are reducing the spotlight on past supply chain and organic sales issues |
-
Tariff & Ortho
Q: Updated tariffs and BiTE adjustments?
A: Management noted tariffs have shifted from $50M to a gross $80M annualized impact—with about $25M affecting 2025—while a $4M BiTE adjustment was recorded and SureSmile grew 3.3% despite U.S. headwinds. -
Implant Performance
Q: How did premium versus value implants perform?
A: Premium implants fell by roughly 5% amid legacy-to-new product transitions, whereas value implants dropped in low double digits due to Middle East volatility and lab challenges. -
U.S. Market
Q: Is U.S. underperformance execution or macro-driven?
A: Management is still assessing the split, emphasizing that stronger field execution should eventually offset current macro headwinds, though a precise breakdown remains under review. -
Growth Strategy
Q: What is your growth mix—organic or inorganic?
A: The team favors organic growth through enhanced in-house efficiency, while remaining open to opportunistic acquisitions when strong cash flows allow, maintaining a balanced long-term approach. -
DS Core Focus
Q: How do DS Core investments compare to hardware?
A: Management is committed to both advancing DS Core software and refining hardware, integrating these to deliver complete procedural solutions and balanced growth. -
Distributor Channels
Q: What is the view on distributors versus direct sales?
A: Leadership is actively engaging with key partners like Shine and Patterson, taking a long-term view without any imminent shift toward a larger direct sales model. -
Investment Strategy
Q: How will future investments be allocated?
A: The firm plans to reallocate savings into customer-facing innovations without a radical increase in overall spending, keeping current models largely intact. -
Operational Initiatives
Q: Are ERP and SKU rationalization efforts on track?
A: Ongoing initiatives such as ERP upgrades and SKU rationalization remain in progress as planned, with management committed to driving further operational efficiency. -
Turnaround Strategy
Q: What distinguishes your turnaround approach?
A: Early in his tenure, management underscored a focus on listening and learning to enhance execution, while maintaining steady investments in core products and customer service to support long-term stability.
Research analysts covering DENTSPLY SIRONA.