DENTSPLY SIRONA Inc. (XRAY)

Executive Summary / Key Takeaways

• Dentsply Sirona is undergoing a significant transformation, leveraging its deep history and broad portfolio to pivot towards a digitally connected future in dentistry, aiming to improve operational efficiency and enhance customer experience.
• First quarter 2025 results showed a 4.4% organic sales decline, primarily due to the impact of the Byte aligner suspension and softness in implants/prosthetics and CAD/CAM, but were partially offset by growth in Wellspect Healthcare and imaging products.
• The company is focused on driving efficiency through multi-phase restructuring, ERP modernization, and supply chain optimization, alongside strategic investments in high-growth areas like SureSmile aligners, digital workflows (DS Core), and commercial capabilities (virtual sales team).
• Despite macroeconomic headwinds, competitive pressures, and specific business challenges (Byte review, German tax investigation, distribution dynamics), management maintained its full-year 2025 organic sales and adjusted EPS guidance, raising reported sales and adjusted EBITDA margin outlook based on favorable FX.
• Key factors for investors to monitor include the execution of transformation initiatives, the impact of global trade policies/tariffs, the outcome of the Byte strategic review, performance in core segments like implants and CAD/CAM, and the success of digital ecosystem adoption (DS Core).

A Legacy Forged in Innovation Meets a Digital Imperative

DENTSPLY SIRONA Inc. (NASDAQ: XRAY) stands as the world's largest diversified manufacturer of professional dental products and technologies, a position built over a 138-year history marked by innovation. From the pioneering introduction of CEREC technology some 40 years ago, which ushered in a new era of digital dentistry, to the strategic merger of DENTSPLY International and Sirona Dental Systems in 2016, the company has consistently sought to shape the dental landscape. This history, however, also brought complexity, particularly in integrating disparate systems and processes across acquired entities. Recognizing this, Dentsply Sirona has embarked on a multi-year transformation journey, a strategic imperative aimed at streamlining operations, enhancing efficiency, and fundamentally reshaping the organization to capitalize on the evolving demands of modern dentistry, particularly the accelerating shift towards digital workflows.

Within the competitive dental industry, Dentsply Sirona operates across several key segments, facing established rivals like Bausch + Lomb (BLCO), Align Technology (ALGN), and Danaher Corporation (DHR) in various product categories. While competitors like DHR leverage scale and operational excellence across diversified portfolios, and ALGN dominates the clear aligner market with rapid innovation and strong brand loyalty, Dentsply Sirona's strategic positioning centers on offering a comprehensive, integrated suite of dental solutions. This includes technologically advanced equipment, a broad range of consumables, and increasingly, cloud-enabled digital platforms designed to connect workflows and improve practice efficiency. The company's ability to offer everything from imaging and CAD/CAM systems to implants, aligners, and essential consumables provides a unique value proposition, fostering customer loyalty through bundled solutions and integrated digital ecosystems. However, this broad scope also presents challenges, requiring significant investment across multiple fronts and exposing the company to varied market dynamics and competitive pressures in each segment.

The Digital Core: Powering Connected Dentistry

At the heart of Dentsply Sirona's strategic evolution is its commitment to technological differentiation, particularly through its digital ecosystem anchored by DS Core and advanced hardware like Primescan 2. The company views its scanners as the "gateway to patient treatment and clinical workflows" and the hub of digital dentistry.

DS Core, the company's cloud-based platform, is central to this vision. It is designed to support numerous digital workflows and integrate seamlessly with hardware like CAD/CAM and imaging platforms. The platform has demonstrated significant traction, surpassing 42,000 unique users and 50,000 connected devices. It is also processing over 100,000 lab orders each month, indicating its growing adoption and utility in connecting dental practices with laboratories. A key benefit of this cloud-based approach is the acceleration of software updates; historically, CEREC software updates could take up to two years, but DS Core enables updates as often as quarterly, deployed instantaneously. This rapid iteration allows the company to quickly bring new capabilities to market. Recent additions include DS Core diagnosed, which complements 3D imaging with an AI-powered 3D rendering tool for enhanced patient communication (currently available in Europe, pending U.S. clearance).

Hardware innovation complements the software platform. The enhanced Primescan 2, for instance, offers functionality improvements such as a 50% reduction in internet speed requirements and 90% faster SureSmile simulations when used with DS Core. These quantifiable improvements directly translate to enhanced efficiency and a better experience for dental professionals and patients, facilitating improved scanning workflows and increased patient engagement.

Compared to competitors, Dentsply Sirona's integrated digital ecosystem provides a distinct advantage. While ALGN excels in its proprietary aligner software, XRAY's DS Core aims to connect a broader range of procedures (implants, endo, aligners, chairside) on a single platform. This integrated approach, coupled with hardware like Primescan 2, offers workflow efficiencies that competitors with more siloed offerings may struggle to match. The company's R&D efforts, which it expects to maintain at least 4% of annual net sales, are increasingly focused on these digital workflow solutions and software development, including clinical application suites and cloud deployment, aiming to alter the return trajectory of its innovation pipeline. This strategic focus on a connected digital future is intended to strengthen the company's competitive moat, drive market positioning, and support long-term growth by enabling more efficient, effective, and profitable dentistry for its customers.

Performance Under Pressure: Q1 2025 Insights

Dentsply Sirona's financial performance in the first quarter of 2025 reflected the ongoing impact of external headwinds and internal strategic adjustments. Net sales decreased by 7.7% year-over-year to $879 million. On an organic basis, sales declined by 4.4%, with foreign currency translation posing a significant 3.3% headwind.

The organic sales decline was primarily attributable to the Orthodontic and Implant Solutions (OIS) segment, heavily impacted by the voluntary suspension of Byte aligner sales and marketing announced in October 2024, as well as lower volumes in implants and prosthetics across all regions. The Connected Technology Solutions (CTS) segment also saw a slight organic decline of 0.5%, mainly due to lower CAD/CAM volumes driven by softer demand and competitive pricing pressures, although this was partially offset by growth in imaging products and treatment centers.

Despite these challenges, other segments demonstrated resilience. The Essential Dental Solutions (EDS) segment achieved 0.4% organic growth, fueled by strength in Europe and Rest of World, particularly due to favorable pricing in restorative products, which helped counter lower volumes in the United States. Wellspect Healthcare continued its strong performance, posting 8.0% organic growth driven by higher volumes across all regions, benefiting from new product launches.

Profitability metrics showed mixed results. Gross profit as a percentage of net sales saw a slight decline of 10 basis points to 53.0%. This was influenced by unfavorable absorption on lower volumes, negative foreign currency translation, and an unfavorable product mix (Endo, CAD/CAM, implants), although these were largely offset by lower warranty costs and one-time revenue benefits. Operating expenses saw notable improvements, with Selling, General, and Administrative (SGA) expenses decreasing by 13.6%, primarily due to reduced costs associated with the Byte business following the suspension and savings from restructuring activities. Research and Development (R&D) expenses also decreased by 14.8%, reflecting a disciplined approach to investment prioritization.

Segment adjusted operating income saw increases in CTS (due to improved margins from lower warranty costs) and EDS (driven by lower costs, favorable pricing, and organic growth). OIS segment adjusted operating income declined due to lower organic sales, despite some cost reductions and an $8 million favorable adjustment related to Byte customer refunds. Wellspect Healthcare's adjusted operating income increased, benefiting from organic sales growth and improved manufacturing leverage.

Overall, while top-line growth remained challenged by specific segment issues and macro factors, the company demonstrated progress in managing operating expenses and improving profitability in certain segments, reflecting the early impacts of its transformation initiatives.

Strategic Transformation and Operational Discipline

Dentsply Sirona's response to market pressures and internal performance challenges is centered on a multi-faceted transformation strategy. Building on the Phase 1 restructuring initiated in February 2023, which substantially met its $200 million annual cost savings target, the company approved a Phase 2 plan in July 2024. This new phase aims for an additional $80 million to $100 million in annualized structural and operational synergies by the end of 2025, involving a net reduction of approximately 2-4% of the global workforce and expected non-recurring charges of $35 million to $50 million. These initiatives are designed to streamline operations, optimize the global footprint (with 10 manufacturing and distribution sites closed since the work began), and align the cost structure with strategic growth objectives.

A critical component of this transformation is the ERP modernization project, a multi-year effort to implement a new global SAP S/4HANA system. This phased rollout, which saw its first U.S. deployment in November 2024 following the U.K. launch in August 2024, is intended to improve customer experience by harmonizing systems and processes, while also driving internal efficiencies.

Alongside cost and operational efficiency, the company is strategically investing in areas identified for high growth and enhanced customer engagement. This includes accelerating DS Core capabilities, improving SureSmile orthodontic software, and enhancing commercial execution. A notable investment is the establishment of a virtual sales team in the U.S., designed to broaden customer reach and generate demand by engaging with accounts not frequently visited by field reps. This team is already making over 2,000 calls daily, providing leads and generating revenue. The company is also developing a new e-commerce platform to simplify customer interactions and optimize the reorder process.

The review of the portfolio is another key strategic lever. While the voluntary suspension and ongoing review of the Byte aligner business represent a significant challenge, the company is actively evaluating strategic options and redeploying valuable Byte resources (in areas like demand generation and software development) to strengthen the SureSmile platform. Separately, the exploration of strategic alternatives for the Wellspect Healthcare business, announced in February 2025, aims to unlock value from a segment where the company has invested strategically over the past two years, positioning it for future growth.

These initiatives, from large-scale restructuring and ERP implementation to targeted investments in digital platforms and commercial capabilities, underscore Dentsply Sirona's commitment to reshaping itself. The goal is to become a more agile, efficient, and customer-centric organization capable of driving sustainable, profitable growth in a dynamic market.

Outlook and Forward Vision

Looking ahead, Dentsply Sirona's full-year 2025 outlook reflects a blend of cautious optimism regarding internal execution and continued awareness of external uncertainties. Management is maintaining its guidance for organic sales, expecting a decline of 2% to 4%, which includes an anticipated 2% negative impact from the Byte business. Adjusted EPS guidance is also being maintained in the range of $1.80 to $2.00.

However, based on foreign currency rates at the end of Q1 2025, the company has revised its outlook for reported sales upwards to a range of $3.6 billion to $3.7 billion (from $3.5 billion to $3.6 billion) and increased its outlook for adjusted EBITDA margin to greater than 19% (from >18%), attributing these changes to favorable FX impacts. This guidance explicitly incorporates the expected impact of current tariffs, estimated at approximately $0.10 per share or $50 million on an annualized basis.

The outlook assumes that the macroeconomic environment, particularly for capital equipment, will remain challenging. Management expects SureSmile and Wellspect Healthcare to continue driving growth, helping to partially offset anticipated declines in the CTS segment. EDS is expected to grow in line with global patient traffic, supported by recent product launches. The company believes that the strategic actions taken in 2024 and those planned for 2025 will lead to improved commercial execution and performance in areas like CTS and Implants.

For the second quarter of 2025, the company expects organic sales to decline mid-single digits year-over-year, primarily due to the Byte impact, with no significant FX impact anticipated. Sequentially, reported sales are expected to increase due to normal seasonality and the positive impact from IDS sales. Adjusted EPS is anticipated to be up year-over-year, driven by adjusted EBITDA margin expansion, offset by a higher tax rate.

While the previously stated $3 adjusted EPS target for 2026 is now considered unachievable in that timeframe due to persistent external pressures and specific business challenges, management emphasizes that the transformational work within their control remains on track and is contributing positively to EPS. The Phase 2 initiatives are expected to continue driving margin improvement and EPS growth beyond 2025. The company's focus remains on executing its strategic plans, driving efficiency, and making targeted investments to enhance its competitive position and unlock long-term value.

Navigating Headwinds and Competitive Crosscurrents

Despite the strategic focus and operational improvements, Dentsply Sirona faces several notable risks and challenges that could impact its performance and the investment thesis. Macroeconomic conditions, including weaker global growth, potential recession risks, and high interest rates, continue to pressure demand for capital equipment and elective dental procedures. Competitive pressures, particularly for lower-priced imaging and implant products, pose a risk to market share and pricing power.

Global trade policy and tariffs, including recent U.S. actions and the potential for retaliatory measures, create headwinds for the company's global supply chain and profitability. Geopolitical conflicts, while not materially impacting overall operations currently, introduce uncertainty, and restrictions on cash repatriation from Russia pose a specific liquidity challenge for funds held in that country.

The voluntary suspension and ongoing regulatory review of the Byte business introduce significant uncertainty regarding the future of that segment and could require further investment or lead to discontinuation. The company is also involved in multiple securities litigation and stockholder derivative suits, and while it intends to defend these vigorously, unfavorable outcomes could result in significant liabilities. The German tax investigation adds another layer of legal and financial uncertainty.

Furthermore, the company's goodwill and indefinite-lived intangible assets, particularly within the Implant Prosthetic Solutions and CTS segments, remain at risk of future impairment if financial results deviate from forecasts or market conditions deteriorate. The dynamics with key distributors, highlighted by the non-renewal notice to Patterson Companies (PDCO) for equipment distribution, could also impact sales channels if new agreements are not reached.

In the competitive landscape, Dentsply Sirona's financial metrics, such as gross and net margins, have lagged some competitors like BLCO and ALGN, potentially limiting pricing flexibility. While its integrated portfolio and digital ecosystem offer differentiation, competitors like ALGN demonstrate faster innovation cycles in specific high-growth areas like aligners, and DHR leverages scale for cost advantages. Successfully executing the transformation, mitigating these risks, and effectively leveraging its technological strengths and strategic investments will be crucial for Dentsply Sirona to improve its competitive standing and deliver on its long-term potential.

Conclusion

Dentsply Sirona is a company in the midst of a profound transformation, seeking to leverage its extensive history and broad portfolio to navigate a challenging global market and capitalize on the accelerating digitalization of dentistry. The first quarter of 2025 highlighted both the persistent headwinds impacting key segments like Byte, implants, and CAD/CAM, and the early benefits of operational discipline and strategic investments in areas like Wellspect and the digital ecosystem.

While macroeconomic uncertainty, competitive pressures, and specific business risks present ongoing challenges, the company's multi-phase restructuring, ERP modernization, and targeted investments in digital platforms and commercial capabilities are foundational to its strategy. The vision of a connected dental future, powered by DS Core and integrated technologies, offers a compelling long-term narrative. Maintaining full-year guidance despite Q1 organic sales declines underscores management's confidence in its execution plan and the anticipated benefits from transformation initiatives and strategic investments throughout the year. For investors, the story of Dentsply Sirona is one of a legacy player actively reshaping itself, with the success of its digital pivot and operational turnaround being critical factors to watch as it strives to unlock value in a dynamic and competitive industry.