We're on the clock. We're going to get started. John Block with CFLA. Next up, we have Dentsply Sirona, one of the world's leaders in the dental market. Joining us is Simon Campion, Chief Executive Officer. I'll go ahead and run through a bunch of questions. Guys, as always, if you have any stuff for Simon, just throw up your hand and feel free to ask him a question. I'm going to start off, Simon, maybe just an overall update. One Q25 results were well ahead of guidance. Revenue is still down mid-single digits. Year- over- year, almost all of that was attributable to Byte. EPS was well above guidance. Just help us out. I mean, you're a global company. You have a huge reach throughout a ton of international markets.
Can you speak to the current landscape and how the overall market's faring amidst, you know, what I'll categorize as a turbulent macro backdrop?
Yeah, sure. Thanks, John, and thanks for the invite. You're right. Q1 was better. Most of that mid-single digits was due to the comp with Byte. When we take that out, we're actually declined just in the partial decimal points. The macro, and we do this survey every quarter with about 1,100 customers around the world. Macro has not changed meaningfully, I would say, on a global basis. Patient traffic continues to be relatively stable, although still not at pre-COVID levels. Hard to believe after five years, but that's where we are. In terms of customer sentiment, we saw a slight degradation in customer sentiment, but just very slight. That's more of a numerical thing than anything else. For example, in the US, the numerical sentiment dropped a little bit.
That was people moving from, "We're not concerned," to, "We're a little bit concerned." It is just a numerical value. We also leveraged our relatively new virtual sales team, and they conducted about 1,000 interviews. It was pretty similar to our normal survey. We are tracking that virtual survey every week. We continue to talk to customers about what they are seeing. No meaningful change week to week either with that survey. The last couple of weeks, John, I have probably met with certainly in excess of 20 customers, and we have asked them similar questions. They are not seeing a change in footfall. They are not seeing a change in purchase intent either. I think it is pretty much par for the course with what we have seen for the last several quarters. I think Germany, we have seen decent performance in Germany the last couple of quarters.
Our impression of the German market, based on some customer feedback too, is it's improving slightly.
Okay. Germany, ongoing improvement slightly. And you've experienced that for a couple of quarters. Now, how about if I tried to push on the U.S. a bit? I think it was on the Q1 2025 earnings call, you talked about survey feedback that sort of straddled Liberation Day. There were survey results post-Liberation Day coming back with dentist sentiment somewhat concerned. Has that sentiment translated into more purchasing concerns among the dentists? Has it hit patient traffic? Or do you believe it was just, hey, more of that knee-jerk reaction to the tariffs at the time?
Yeah, I think it was more of a knee-jerk reaction. Again, it's back to that we get a numerical value from the data we gather. The main move was people were not concerned before Liberation Day, and they shifted into, "I'm a little bit concerned." When you assign a numerical value to that, that's how that shakes out. Again, these customers, bar two or three last week in the U.K., about 20 of them are US-based customers. They have said to me in person, no change in footfall that they're detecting and no change in customers' intent to purchase a treatment proposal, for example.
Okay. That was very helpful. Thanks, Simon. That's great color. I think I'm going to push on. Throughout answering one of the first couple of questions, you said, "However, not back to pre-COVID." It's almost hard to believe here five years later. It is pretty amazing. If I challenge you and sort of said, what do you think is behind that? Those challenges that we went through, hey, there was a pull forward in demand, but now we're so far removed from that and arguably normalized. What are some of the variables that you think are preventing dentistry more broadly from getting back to some of those pre-COVID levels?
Yeah, I just think it's an awareness around oral health. It's continued sensitivity about pricing. I mean, since COVID, we've had, I think, fluctuations in sentiment in the broader markets, high interest rates, which definitely impacts CTS. We saw a slight improvement in that over the past year or so and now more recently. We'll see what happens in the future. I think interest rates have constrained capital equipment in the last several quarters. We called it out first in Germany in 2023. I think it's just a general, what should we say, malaise about the importance of oral health.
Okay. I'm going to focus on various divisions now. You mentioned CTS. When you look at CTS and implants, prosthetics, divisions, both of those, I believe, are expected to be down in 2025. They're very important divisions collectively, a little less than 50% of revenue. Talk to us about the roadmap to return these divisions to growth and maybe the timing. If you want to take them one at a time, because I'm guessing they have unique attributes, right? CTS might be an interest rate thing. If you could break down those two and that timeline to return to growth, that would be great.
Yeah. On the CTS piece, I think that is heavily impacted by interest rates and customer, when I say customer, I mean dentist sentiment, because they're obviously impacted by patient footfall. The general practitioner, a significant portion of their revenue comes from, let's say, the consumables part of the business, the restorative and preventative. That is highly dependent on patient footfall. If they're not seeing an improvement in that, I think they take a double look at investing heavily in capital equipment. We do know that above $20,000 or $25,000, they tend to finance those pieces of capital equipment. I think that's been a handbrake, so to speak, on CTS. We continue to invest in it. Again, we feel that our CTS business, you can improve the efficiency of a dental practice, improves the outcomes for that dental practice, helps them improve treatment acceptance rates.
Particularly with DS Core, again, it's anecdotal, but I heard it as recently as yesterday when I was with some customers that the inclusion of patients in their treatment planning, so to speak, improves the likelihood that the patient will accept that proposed plan. We have been driving for a number of years now our DS Core platform, the ecosystem that we call it. I think we have meaningfully increased the penetration of DS Core, certainly in the US market, but also globally. Globally, we increased the number of users by 14% quarter over quarter in Q1. We increased the number of connected devices by 25% in the first quarter, quarter over quarter. We increased the utilization of DS Core to send orders to labs by 58%. I think we're getting meaningful traction with that. We've invested heavily in it.
As you think of an ecosystem, and let's think of many of you out there probably have iPhones and iPads and AirPods and MacBooks, we are now in the process of installing the apps, so to speak, on DS Core. When I say an app, I mean a dental workflow. So aligners, implants, endo, resto, they're beginning to appear on DS Core now. That is where we feel we will get the benefit of DS Core pulling through other parts of our business in the consumable side. On implants and prosthetics, this has been a continued challenge for us for the past two and a half years or so since I arrived at the company. I would say that I underestimated the importance of the sales rep in the implant community. It is arguably more important than the product.
We had a lot of transition of the sales force in the last several years. We've rebuilt that. We have recently retrained them because they need to be super experts at clinical outcomes. Basically, they're an extension to the implant practice. I think we underestimated that. I underestimated that. We have been taking measures to resolve that. We will be putting implants, the first phase of implants, on DS Core later this year. We feel that will help us too. We are going more local with our clinical education and partnerships with customers. Our portfolio, while it has probably modest gaps, I do not think those gaps are big enough to preclude us from being competitive in the marketplace.
I think it's the sales rep and it's the challenges that some customers have in doing business with our company that we're now in the process of remediating that has held us back on implants.
If I tried to push on those two a little bit, it seems like on implants, some of that is my wording, but a little bit more in your control. You talked about improving the sales force and a couple of other things. CTS, a little bit of an interest rate environment, et cetera. Do you see the return to growth in either of those divisions as likely as soon as 2026? Or do you think that might take some more time to build?
I do not want to abdicate responsibility for CTS to the environment. Some of its challenges that we have had too, to be fair. We addressed those in certain areas. We brought out a more competitive scanner a couple of years ago that certainly helped. We addressed the gap in our portfolio in imaging. Several years ago, we discontinued a mid-range CBCT. We brought that back in the middle of last year. That has helped us globally, but particularly in Germany. Macro has an impact, but.
The company specific?
It is also some company-specific things that we have been remediating. On the implant side, I think we have to take responsibility for that. The market is reasonably robust. We have simply made some footfalls in that space that we are trying to resolve. One of those, I would say, some footfalls have been recent footfalls. As we speak to customers about what is the value proposition to do business with us, we are a complex company. We have been moving down the simplification path over the past couple of years. We have been engaging with all these customers in the more recent past. We are in the midst of a very robust data acquisition with, I think it is 650 customers around the US about the challenges they face, e-commerce, ordering, phones, et cetera.
We have set up a small group to get that data, and then we will go and remediate those. We want to eliminate all the reasons for a customer not to engage with us or do business with us. That is where we are focused now, in addition to improving the skill set of our commercial team, aligning our business units and commercial teams more closely to drive meaningful messages to our customers, and continuing to innovate. We just hired a new head of R&D for our implants business. Putting it on DS Core is going to help increase the value proposition of engaging with us.
Okay. Couple more divisions that I want to hit on, and then we'll go over to margins. For orthodontics, a lot of moving parts. I would think, what, growth reenters the equation once the Byte headwind is lapped, which will be another two to three quarters. Specific to SureSmile, I think it was modestly down in the most recent quarter. Can growth reappear as soon as this or next quarter once that DSO loss is lapped, which I think is imminent?
Yep. The DSO loss is imminent, and that has impacted the US team for sure. We would have had modest growth ex that DSO loss, I think, in Q1. In Europe, we grew double digits again for SureSmile, and that's now becoming a rather meaningful number to us. As we've discussed before, the software that we utilize for SureSmile is rooted in our legacy kind of wires and brackets core orthodontic business. The back end works very well. The front end needs work. Again, when you think about a customer, we need to broaden the aperture in how we define a customer. It's not just the clinician. It's also members of staff who engage with us and engage with our software. Again, the value proposition, why would I shift from company A to U?
Would I got to retrain all my staff on a more complex system? We are simplifying that. We expect to complete that. We have been modestly reengaging with the orthodontic specialist community more recently. That is our trajectory there. We expect, as we called out two or three years ago, orthodontics to be a meaningful grower for us. I think we have, apart from that localized headwind, meaningfully grown. We expect that to continue and indeed accelerate as we reengage with the orthodontist community, rather, and fix the front end of our software.
That orthodontist initiative, call it for SureSmile, think about that more 2026 and 2025, fair, as you fix the front end of the software? Or can you start pushing in later this year?
Yeah, we think we can start pushing later this year again. Our European business has done very well. That is more orthodontist-focused than our US business. So we've been gathering the learnings from the experience we've had in Europe to see if we can accelerate prior to a software upgrade in the US.
I started off the conversation. I said, "Hey, you beat the revenue, and you did in the quarter, but the EPS was well ahead." Despite the negative revenue growth in the quarter, all four divisions, and you guys give some great details, were up year over year on a margin basis. It has not happened since you started providing that level of information. Maybe if you could just talk about what allowed that to occur. I know the OIS got a little bit of a help from the $8 million Byte refund adjustment. How do we think about continued margin expansion going forward?
Yeah. I think certainly the Byte adjustment helped, but also some of our volumes were better than we expected in the first quarter. I think arguably the meaningful thing for us, as we consider the work that we've done in the past two and a half years, has been the improvement or the reduction in expenditure. We had a high expense base. We've taken out, I would say, several hundred million dollars over the past couple of years of expenses. That's now beginning to appear in the P&L. I think that if we even get to modest levels of growth, the impact in the P&L will be meaningful. Moving forward throughout the rest of the year, obviously there are certain quarters around the world that have got higher revenue impact, and that will affect the margins.
Also, some of the transformational work that we have done and continue to do will continue to improve the middle of the P&L. I would say our discipline around expenditure is very, very high. I think we gave the example of our presence at IDS in Q1, where I think we significantly reduced expenses and improved our sales from that event. We do not need to be the big shiny penny all of the time. We need to be very diligent about how we spend, and we have been so, and we will continue to be so.
Let me hit on, I'll still focus on margins maybe a little bit longer term. When I was going through the model and trying to prep some questions, I was thinking, let me take a close look at the OPEX. From an OPEX perspective, OPEX was down 14% year over year in the first quarter of 2025. I've got it down 9% for 2025. Can this even move lower into 2026? You still have some projects around ERP, plant consolidation, SKU rationalization. Do we think about 2025 as sort of the new OPEX base to grow from off that level?
I would not say I am going to give guidance here about what we are going to do for 2026. I would say that the diligence we have put in around how and where we spend has been very heightened since we got here, and that will continue into 2026. We would expect to begin to see benefits throughout 2026 and beyond around ERP, around SKU, around network. We have reduced our network footprint and distribution center footprint by 10 in the past two years. We would expect to continue to see benefits from that in the medium to long term. In parallel with some investments that we want to make, we have invested selectively in SureSmile. We have seen a benefit. We have elected to invest in implants. We have yet to see a benefit, as we discussed earlier on. Those markets are areas where we have good portfolios.
In one area, we are competing very well. We should be competing even more robustly. In another area, we have failed to turn the tide at this point in time. Once we get that, we should see the flow through into the P&L.
Okay. And just sticking with a little bit more of a long-term thought or focus for the time being, let's look at 2025. The constant currency growth is expected to be down 2% to 4% year over year. Again, that Byte headwind is roughly 200 basis points, and you'll lap that. So call it close to flat on a normalized basis. You talked about maybe orthodontics getting a kicker from moving into the orthodontist community, some other initiatives that you have in implants. Can we think about that flat normalized in 2025 when you look forward? Do you think that will accelerate going into 2026?
Yeah, we should be a growth company. That's very clear. We believe we have the technology to be a growth company. We've invested a whole lot in our CTS business from an innovation perspective over the past several years. As I noted to one of your earlier questions, we're now in the process of putting the apps on the ecosystem where we should begin to see to realize some benefit in other parts of our business aside from just CTS. We should be growing very robustly in SureSmile, in ortho. We need to just stem the tide on implants and get that back moving in the right direction. In CTS, we feel we have a right to win there. The ecosystem that we have developed and continue to expand, I mentioned 14%, 25%, and 58% growth quarter over quarter in some of the key metrics.
As we begin to expand that, I think that ecosystem will benefit our entire portfolio. For a company as broad as ours, we should be winning. That is what we are focused on. We have been very diligent with our costs. We are not here to be second or third. We are here to win. We have failed to ignite that so far. The promise of this company is very good. The vehicle through which we believe we can fulfill that promise is DS Core and is reengaging with the specialist communities that we have ignored for many, many years.
I think that's very encouraging when you look forward. Again, it's not specific 2026 guidance in any shape, way, or form, but intention of, "Hey, we should be a growth company." Do not think about that OPEX space as you have to grow from there. There's still other opportunities around some of those past initiatives that you've discussed.
Yeah. I mean, listen, I mentioned ERP. I mentioned SKU. I mentioned network. I spoke about it on, I think it was the Q4 call about third parties helping us with our expense base to take some of the back office stuff off our shoulders. We think there's an opportunity there. We're in the process of quantifying what that may look like. We are, again, I've said it a few times now, the diligence with which we view our expenses is very, very high and will continue to be. We don't want to, we know we can't cut our way to growth, so we're being selective about it.
Understood. I'm going to shift gears and talk about how you're selling. I'll hit on distributors. Simon, if you don't mind, maybe just an update of where you currently stand with Patterson. I think I might have the months off a little bit, but I believe you put them on, call it on notice, roughly 11 months ago. Is there a new agreement in place? Of course, the transparency isn't quite as great with them being bought recently, but is there a new agreement in place? Were the economics altered, if you would?
I would say since their change in ownership in February or so, I think the extent of our discussions with them has deepened and accelerated. We continue to be very important to them as they continue to be very important to us. The talks, our discussions are ongoing, and I would say they're positive and have deepened in the past eight or so weeks. I would say in general too, last week, I know that before we went live here, I was in the U.K. We met with a couple of our very important distributors in the U.K. The European distributor market is more fragmented than the U.S. market, I would say. We have been, what should we say, restoring our relationships with some key distributors in Europe and in the U.K. in particular.
Similarly in the U.S., we have two very important distributors in the U.S. I think we have, over the past two or so years, improved relationships, notwithstanding our difference of opinion with Patterson historically. I think we've improved our relationships with them. Hopefully, when we collaborate better together, I think we perform better together.
Just so I understand it, you said the pace of conversations or talks have picked up over the past eight weeks. If we get to month 12, I do not think anything technically changes. It still continues to run off the prior deal, if I have that right, until a new deal is put in place, and then the structure would change. Is that correct?
I mean, listen, we do not have an equipment deal with one of the main distributors, and they continue to sell our products. They continue to service our products. We continue to work together and educate together. It is not a precursor to anything. As I said, the talks have accelerated, deepened, and I would say we have more common ground now than we had in January.
Okay. Very helpful. How about the other side? This might be standing on its own two feet, but you've sort of kicked off a virtual Salesforce initiative that, I don't know, I think through the earnings calls, you seem to feel very strongly about. Maybe if you could bring us current, where that currently stands in terms of the number of reps, where they're spending most of their time. Are you starting to see orders come out of that initiative? I'm guessing that's dilutive. When do you think that actually can turn accretive for you guys?
I'll have five questions in there. Yeah, that's all right. I'll forget someone, but I'm a big believer in virtual sales. I think it's a great vehicle to increase your reach to customers. As we know, in the U.S., there are, what, 155,000 GPs and another 20,000-30,000 specialists. A lot of them, some of them would be high-value accounts to us. Others would be lower-value accounts to us and higher-value accounts to others. The value proposition to send in a field-based sales rep in his or her car is lower for those accounts. We will phone them up. These reps, and there's approximately 100 of them now based in Charlotte, are making about 2,000 phone calls a day. They have already engaged meaningfully with 21,000 accounts.
We're using them, as I noted in your first question, to drive more survey awareness or sentiment awareness in the marketplace. They have sold themselves almost $1 million of product. Importantly, the funnel of potential orders is in the several million dollars range. We have seen, as we expected and demanded, good partnership and collaboration between the virtual sales team and the field-based sales team to maximize the return from that business. Whether it sits in the virtual sales or the field-based sales, I'm not so concerned as long as someone sells something to someone. So far, it's on track. We're about where we expect it to be. Some of the customers that we're speaking to haven't heard, haven't seen a rep for several months because their value just isn't big enough.
The very first sale, I think I noted this on the Q4 call, the very first sale was to a customer that had bought $1,800 worth of product in 2023. The first sale was for $1,600. It is agnostic to whether it is a direct business like endo, resto, or sorry, endo implants or aligners or a distributor-based sale. The very first sale was a distributor account. We connected with the distributor, and the process went ahead in its usual way. I'm a big believer. I think it is a great vehicle. We've got really good feedback from customers. The data they're providing is helping us to make some decisions.
Is that a little bit behind the scenes? What's going on with Patterson is if you're going to take this on and have a virtual sales force that's going to generate some sales that are direct, but also that are augmenting distributors and going through that channel, it's like, "Look, guys, if we're going to take this on and shoulder this burden, we'd also want a little bit of better economics on your side.
No, it was the consideration of virtual sales was separate to anything with respect to dealers. We have said from the get-go here that we need to create our own demand, that we can't rely on our distributors. We shouldn't rely on our distributors to create demand. We've been driving that with our field-based sales team. That is why we created the virtual sales team to reach those customers that would not normally be reached by us and to have our message rather than a distributor message into those customers. As I noted, the first sale was a distributor-based sale. We are agnostic to where it goes. Just as long as the revenue line moves north, I'm not so concerned with how it works.
Okay. Last one or two minutes. I do want to quickly hit on tariffs. You detailed $0.10 this year. It seems like closer to $0.20 on an annual basis. Simon, did anything get better with the China-U.S. news post-quarter? I know things are seemingly always evolving, but maybe a little bit. I believe you only have a small amount of exposure there when I say China-U.S. In terms of Dentsply Sirona, should we be more sort of have our ears perked up in terms of any additional news flow in terms of what is going on, potential tariffs, U.S., EU?
I would say there are two answers to the first part of your question. The impact of China-U.S. on us is nominal. It is less than a couple of percentage points of our revenue. Our suppliers are a very low percentage there too. It does not really move the needle a whole lot one way or the other. I would say the bigger impact for arguably the dental market, the general market in general, has an improved sentiment in the marketplace. I think the stock market certainly reacted more favorably to that news. I think it is more general positivity that a deal was struck. In relation to the impact of tariffs on us, you said $0.10, which is correct. For the rest of the year, we have contemplated that remaining the way it is.
As you know, about 50% of our U.S. sales come from our manufacturing sites outside of the U.S. Any further degradation or increase of those tariff numbers would have to be contemplated by us. As I noted on the Q1 call, we have options. We are building some extra product selectively. We are redistributing some of the product that's in our distribution sites around the world to locate them in the U.S. in advance of any tariffs. We are taking action to mitigate the potential risk.
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