DENTSPLY SIRONA Inc. (XRAY) Earnings Call Transcript & Summary

Hi, everyone. Thanks for joining. I'm Lily Lozada. I'm part of the med tech team here at JPMorgan. Very happy to have the Dentsply Sirona team with us here with us today. I'll pass it over to CEO, Dan Scavilla, and then we'll do some Q&A afterwards.

Thanks, Lily, and good afternoon, everyone. My name is Dan Scavilla, CEO of Dentsply Sirona. I joined the team five months ago. Prior to that, I spent 10.5 years at Globus Medical in various roles, including CFO, COO and CEO. There, we actually had a great opportunity of taking our revenue from $300 million to $3 billion. And in doing that, really focus on sustained profitable growth, and delivering best-in-class margins in the med dev arena. Prior to that, I had 28 years with Johnson & Johnson. There, I had worked in pharmaceutical, biologics, consumer health care and med dev. In J&J, that gave me an exposure to multiple areas in the health care environment, also taught me a lot of business models that I feel are applicable today. I joined Dentsply Sirona, and I may refer to that as DS or Dentsply Sirona, I may call DS as we go through this conversation. Really, when I realized the strength of our brands, the brand loyalty that we have with our customers and the fact that we have an integrated portfolio that really will allow us to shape the future of dentistry and connected dentistry using our DS Core platform. I promise not to read this next slide. It's the forward-looking statements and shown as needed. So we'll move on. What I do want to cover is the obvious, who are we? Where do we play? I want to talk about, again, the strength and breadth of our portfolio. And I'm going to show you real examples of what exists today as we shape the market as well as where we're going to go in the near term. We'll then pivot into the return to growth action plans that we have underway. So let's start with an overview. Dentsply Sirona is a global diversified dental technology leader. We operate in over 100 countries, and we touch approximately 400,000 practitioners a year through our training programs. In addition to that, in the past four years, we've launched over 50 new products while still remaining the leader on single-visit dentistry, celebrating 40 years with our CEREC Mill system, which continues to be the benchmark in the industry. If you look at the pie charts, you can see that through our integrated and diversified portfolio, we drive a lot of strength, not only in the product segments, but also in the geographic markets, which creates great opportunity for us as we go forward. As we reset our foundation, we believe that we can grow at or above the market and provide attractive returns to our shareholders. This is a quick look at the market and where we play broken out by business segment. The real message here is that our TAM currently is $33 billion a year, growing between 3% to 4%. And what that offers for us is sustained growth over time, not only as we turn around and continue to grow, but it really does create a great area and hunting ground for us to grow faster or further with opportunities to expand each year through these type of items. If you look a little bit further into this market and then you look at how we play by business segment and our sales, I'll focus on the middle of the slide here and you look at some of the key brands, and these are strong brand names with the dentist strong brand recognition, these are just a snapshot of what we offer. We have so much more I couldn't fit it on to this page. We really have a broad and diverse offering to meet a lot of different needs throughout the spectrum of cares. Down the bottom, you can see where we index within those markets, holding first or second position in most areas. except orthodontics and implants where we do under-index. I'll talk about that more in future slides. I want to pivot to the challenges and the priorities of our dentists and really want to go through some of these things. We'll start with the challenges. So the first is we see from surveys over the past few years, and it's remained consistent with us, about half or 54% of the patients turned down treatments that are offered by the dentist. And of course, that has revenue impacts, the ability to close out a deal and move forward with them. There are operational constraints with, say, 36% of the dentists are concerned about whether it's the efficiency and the time in the chair or the amount of chairs that they have, but they have a constraint of how many patients they can see or visit for several different reasons. And finally, most or almost 80% of the dentist see the cost as a key barrier for them to really push forward with the digital dentistry and adopting it, bringing it forward. At the same time, if you move over to the right-hand side of the chart, the priorities in their focus area and not surprisingly, 65% want to grow their practice and drive profitability, right, to increase income, put more things through. Obviously, more than half are focused on operational efficiencies, more throughput means more patients, more chair time, therefore, more profits that help them grow. And they all recognize that patient outcomes can obviously say, they all want excellent ones, but in particular, using a digital approach and a streamlined approach can help do that in a more repeatable fashion. We know that connected dentistry is a great way to do this. We believe that our DS Core platform, which is functioning today and expanding is a way for us to address these things. And I'll give you an example of where we are -- where we're uniquely positioned along these ways is we have products throughout all of these, implantology, orthodontics, endodontics and restorative. And we have the ability through DS Core to use one platform, one ecosystem for our dentists to actually provide a synergized approach for their patients. And whether you're a DSO, a multi or single facility owner, we can actually meet the needs of this over time, whether you are a general practitioner, you want to get into specialty or specialty you want to expand, using DS Core as a base allows us to meet those needs and expand those needs in a way that no others can. I'm going to give you a real-life example with this and walk through what we have today that's out there. So we're going to talk about indirect restoration, which is about 30% of office revenues in the U.S. We've taken a crown, which is the indirect, and that can be a multi-visit. Sometimes it can be a week or more for that to occur from first to second visit. And we've reduced it down to an hour utilizing what we offer today. So whether you come in with an intraoral scan, which is what you see on your left-hand side of the pictures, which will bring the data into an AI-driven diagnostic tool so we can understand what's going on and offered treatments and then plan what those treatments are, again, using AI in the middle. And then through our current capital, we can actually make custom crowns in this case, as we talk about this and do the treatment. So, one visit, one hour, looking through a simplified workflow, shortening how we do design time with our mills themselves and offering several different things, we have lower barriers to entry and scalability that exists today. And then really, what this does is unlocks opportunities for our dentists to go drive this even more. This is really exciting because it exists today. It's coming up. It's the first realization of DS Core, which I would tell you is think about DS Core as an iPhone and then the applications or the apps that come on this. In this case, indirect restoration is one of those type approaches. If you look and say, where are we going from there, again, utilizing DS Core one ecosystem, the constant base coming out to these other indications, we're looking to accelerate our investment in R&D that will allow us to bring these additional features onto the DS Core platform to further enhance connected dentistry. Implantology is one of our top priorities, followed by comprehensive orthodontics. And if you remember a few slides back, I shared with you that we're under-indexing in those areas. So increasing our investment and our focus there is one way we're looking at return to growth in those areas in particular. But as we want to maintain our lead in endodontics and restorative, we also want to bring that on to offer a suite of workflows for our customers as we go through this. So now that we've talked about our scale and our potential, I want to shift into our return to growth plans that we have in place. Simply said, we've underperformed the market over the past several years, and we recognize the need to do something differently and do something urgently with that. What I will walk you through is a plan that I formulated over the past 5 months that is in play. And what I would tell you is this is executing an action plan with measurables. It's not a theoretical plan, but it really is a tangible approach that we have in play as we go through this. I'm going to start with the first two pillars. I have five, but the first two are going to go as follows: the customer-centric mindset, putting the dentist at the center of everything we do is something that we need to improve in Dentsply Sirona. While we have great products, and as I mentioned, really strong brand loyalty, we have focused internally for several reasons in the past that we have to change. I'd like to say we have to turn our chairs outwardly facing and look at our customers and work with them in a more proactive fashion. Ways to do that are multifaceted, and I'm giving you a sample of some of these things. This is not all comprehensive on these slides. But the first thing is within the segments that I showed you, so endodontics versus implants versus ortho, I'm going to create a KOL board to work with me for each one of those. And I'm going to use that in a way to understand how are they seeing practices and the market evolve, competition evolve as we're looking to develop plans and moves and strategies, I want to bounce it off of these key opinion leaders in a way that creates engagement with them as they help us turn this around. Going one step further, clinical education is key to anything that we do, especially in implants and ortho. And we're going to increase that to about $40 million a year. That's double what it is today for our investment to actually drive clinical education, using KOLs to do that, but also reaching out to other dentists to actually create a stronger presence than we have had in the previous few years. Enhancing dentist engagement in R&D really means getting a handful of other dentists besides the KOLs I mentioned, to work at earlier stages with our R&D team for hands-on feels for the products. Are they appropriate? Will they work with their workflows and drive the efficiencies that we want to do. And so again, creating more engagement at an earlier stage of a product ideation is the key with that. And then this really does fall under the customer-centric mindset. We have to increase our investment in our sales force education. We've had high turnover. We've hired reps back, but we have to really put an investment in there so that they understand the dental workflows, the multiple workflows, the ability to really partner with the dentists and offer our products in a more comprehensive fashion. So that's the first pillar that's underway that allows us to reengage the market in a stronger position than I believe we've done in the past several years. The second pillar, which is somewhat of a result of doing that well, is reigniting sustainable growth. And the first thing is we need to accelerate our investment in innovation, which is R&D. And we're currently at about 4% or $150 million a year. I'm looking to increase that at double digits over the next 24 months. If I can get it all done in one day, I'll do that with a turnaround. I want to do it in a prudent fashion. I might take a few steps up. But what we're looking to do is put a meaningful amount of dollars more into R&D to further accelerate the realization of the DS Core platforms I shared with you on a previous slide and to bring to market more appropriate products, but more importantly, connected dentistry and the holistic offerings that can be out there through DS Core as a way to go do that. The U.S. is the one that needs most of the turnaround. It's been the one underperforming the most in each segment. And so working through how to invest in that and drive that while keeping EMEA going. And the reason I put that in there is I want you to understand, EMEA has been growing at or above market over the past year and should continue to gain momentum there. In other words, it's not broken, don't mess with it, focus on the U.S., get that up and running while we expect EMEA to perform for us and generate cash for us to help strengthen the U.S. approach. The next move, while sounding simple, is a big move, unifying commercial functions, around marketing needs under the new Chief Commercial Officer, CCO. We had five different leaders running commercial and trying to move forward as one was a difficult thing. So creating the Chief Commercial Officer role, consolidating all of commercial under that allows us to move in Unity to move faster and to be consistent in what we do. That was done and hired three months ago and is in play to move forward. And then reengaging and expanding, which is key here in the U.S., our dealer networks for the equipment. We mentioned just really about an hour ago that we had signed the Benco deal. More news of that will come over the next several days and next several months. We'll continue to do that. But what we're looking to do, again, is not only reengage what we had, but go beyond that so that we can create faster penetration, more feet on the street to take our products further and deeper into the market at a better rate than where we've been. So that's the commercial side of the pillars. The next two are really more about the internal side of, okay, what do we do to do this better and support the field and our customers. The first one is empowering performance. And so we're creating a turnaround plan, which is going to take funds from certain parts of the P&L, middle of the P&L, but some of it is in cost of goods sold as well and focus that in, as I mentioned, on commercial growth and innovation. And so the transformation office was established a few months back to actually drive this and stay in touch with this so that we get it done. We have metrics, we have meetings, we have a structure to realize this and drive it so that it becomes a reality. The other thing which sounds common sense, and it is, is we actually, as a company, need to make faster decisions with the customer in mind. There are several reasons and several items where we've taken too long to do that. So streamlining down who's involved, holding accountability to do it at a fast pace allows us to change the customer experience, whether it's through a dealer or direct to have our customers more satisfied by us moving faster as a company and being more competitive. In order to do some of these things, we're putting an AI strategy in place. I have hired someone to drive the AI team, mostly for efficiencies. And so what I'm looking there are some basic things, how do you run accounts payable or accounts receivable, how do you do your filings for R&D or even for the FDA, different items like that, that allow us to do things faster, consistently with less manpower, so we can put more manpower on the street or in our R&D shops along those lines. Now I say that because AI is also very deep in the R&D area, but I don't want to play with that. I'm leaving that separate under our leader, Kevin, while we focus more on the business needs of AI here in this return to growth plan. And then simply just data analytics. We have a lot of information. We have to do a better job at looking at predictive analytics and moving proactively. And again, as we get back to growth and as we stabilize the commercial side, we streamline this down. I'm looking to really use a lot of information to drive moves faster and deeper. On the scaling of the organization, I'm looking to unlock this year about $100 million in the middle of the P&L, a little bit in COGS, but the rest of that in order to bring it into funding the commercial side and the innovation. So this is not a drop-down for our shareholders yet. That will come as we grow and as we launch new products and get it that way. This is a way to pay for the reorganizations that I want to do for the return to growth approach. Part of that, some obvious things. I think that Dentsply Sirona over the years has been a collection of acquisitions that were never integrated. And I think that we need to move into an integration phase. That would include rationalizing legal entities, creating common IT systems. Some of that is underway currently, but needs to be done at a different scope at a different rate. And also through support functions, creating centers of excellence so that we can actually use less people to address things faster in a more consistent way, which will free up money again for us to drive commercial and innovation over the long term. Also with supply chain, we have a lot of facilities. I think we can significantly reduce those. That will take some time, but we need to begin now in 2026 so that we can bear fruit probably in 2028 with that. Finally, when you're looking at the customer first and you're driving your training and putting funds in for the commercial side, funding it through the middle of the P&L and getting results, we ought to deliver financial strength for our shareholders. And that would be developing capital allocation programs that I think can enhance shareholder return beyond what we have today. I'm working with the Board currently on that. I plan to bring that out as early as our upcoming earnings call in February, where we can actually come out with enhanced ways that I think will benefit the team. I believe we need to improve free cash flow. I'm a big fan from my Globus days of the power of having cash and the freedom cash gives you to move and move quickly. And so I'm looking to actually not only do that, but one of the levers I'm looking to do is bring inventory down by about 20% from where it is. Of course, I want to do receivables and payables and make some improves there. But with cash, as you know, you can do some share repurchases, you can move on bolt-on acquisitions. It will give us a lot more freedom than I believe we have today with it. And while we have a decent cash flow, I think it can become a lot better through the items that I've laid out. And then finally, just implementing a tax strategy to enhance shareholder returns. That's a very powerful way to do it. While we have several, they are disjointed and I have plans in place to create one that will actually marry up with our DS Core strategy, driving the connected dentistry as a main flow, which will open up opportunities for us to actually further optimize some of our tax structures and improve where they are today. So it's a lot of talk that rather than doing promises my styles to actually demonstrate actions. I believe in doing actions that drive results are more powerful than saying where you're going to be someday in the future. So since the third quarter earnings call that we had, just some key things, and I won't read them all, but as we did announce today, we did sign on Benco. That's a new capital distributor for us. They have done disposables for us in the past. But again, we're opening the pathway. It's the first one out of the gate. We're excited to partner with them on this, see great opportunity with it. Yesterday, Mark Bezjak, we announced we'll actually run the U.S. organization under my Chief Commercial Officer. And Mark comes from Zimmer. He's got a great background of how to drive large and complex sales forces with multiple products. This is going to be a big add for us in our return to growth, our focus into how to drive the U.S. The second part of that is the bullet right below it. We've aligned our U.S. commercial teams vertically, in other words, by segment, so we match the market. So, in the past, while we may have had reps that specialized, our area directors, our managers, our VPs were all specialists covering all -- generalists covering all of the areas. Now we have from top to bottom, one team that focuses only implants, a separate team that focus only on ortho, another team on endo, et cetera. And that's going to create focus. We'll create goals and incentive programs for all of them to go drive those businesses. But as we create that focus while investing in innovation to enhance DS Core for those other applications I mentioned, I feel like we're positioned to really drive it forward in a strong way. As I mentioned, we implemented the transformation office as well to make the return to growth a reality, hold us accountable and get it done. And we mentioned as well that we appointed Don Zurbay. He was the former CEO of Patterson. He'll join our Board, and I think he'll be a great add to us because he not only brings in the dealer relationship, which we're strengthening and expanding, but he also brings a good voice of the dental market on to the Board of Directors. So I'm really excited to work with Don on this and utilize his knowledge not only to build our dealers deeper and better into who we are, but to also move faster in our turnaround plan using his experience. And we also mentioned that we created a growth and value committee with the Board. And I'll just explain that quickly is we're in operations mode right now. We're executing a return to growth plan. I had mentioned on my earnings call that will take about 24 months. And while it becomes operational, I don't want to lose track of the strategic value that we can go do. So this committee will be looking at strategic moves. And what I mean by that is capital allocation, possible divestitures, possible acquisitions. debates about strategically where do we want to be. So when we do get back into a stronger position, we can pivot and move quickly and not lose track creating that from scratch in a few months from now or 24 months from now as I think we exit this turnaround plan that we have. So, Lily, before we get up here, just to wrap up very simply. I just want to remind you, very highly attractive market, $33 billion TAM growing 3% to 4% a year. We really have a market-leading position with our integrated portfolio. The strength is really in the fact that we have all of these offerings and can offer them out to specialists, generalists or all the above and really are shaping the future of connected dentistry with what we have today and what we're investing to have in the near term to create the DS Core and realize it for all of our customers. And then finally, as I mentioned, moving with urgency in a return to growth plan so we can focus on broader things and better long-term sustained growth. So, thank you. And Lily, I'm all yours.

Dan, you've been in the seat for a few months now. Can you talk a bit about what attracted you to the CEO role at Dentsply? And what from your prior experience do you think you can leverage the most to make change at the organization?

Yes, it's a great question, Lily. For me, like I said, it was really interesting. The brand strength really caught my attention. I thought that, that was a great thing to have. When I talk to dentists, the brand loyalty, as I mentioned, is amazing. And what I mean by that is -- when they talk about Dentsply Sirona, they say we and us, they don't say you. They sit there with me and say, what are we going to do? How can I help? What are we doing here? And so that really caught me as well when I did it that way. When I learned what DS Core is and can be and shape it, you have all of these great materials that are stunning. At the same time, you have executional issues. We got to get out of our own way. We have to make tougher decisions. We have to move faster with more urgency. In other words, it's broken, it needs to be fixed, and I happen to like that part of that challenge. So I think what you have is great raw materials to work with. the need to change some things in an execution approach that's there. From my past, it plays well with Globus when we did the acquisition of NuVasive and doubled our size, we had to do rapid integration under extreme competitive pressures, and we're able to do that successfully and drive that business. I'm looking to bring that experience, both what I did right and what I did wrong and fix that in a way here that can be meaningful.

You talked a lot about your return to growth pillars. It sounds like you've made a good amount of progress since you last updated us in the third quarter. How should we be measuring your performance over the next 12 to 24 months as you tackle these items?

Yes. I think there's some tangible measures, some that we share, some that we won't. So for example, onboarding of dealers, I think, is a great signal that our capital will be returning to health. And I think as you see these roll out over time, we'll say we've reestablished that. That's one that I think is measurable and something to see. The verticalization of our sales force in the U.S. that I just talked about, while that may be slightly disruptive, should create a slowdown in the loss back to a breakeven to eventual growth. And I think we can measure that through the quarter sequentially to say, is that taking effect and where is it taking effect by business segment I think those two are readily measurable with that. Our spending in clinic, which I think is vital. It's not something that will be public. I'm signaling that I'm doubling it and we'll go heavy in there. I'm not sure I'm going to report out how much we spend on that. It would just be one of those. In theory, when you do it and you create demand, then we should see a lift in sales. So ultimately, it's going to be the signing of dealers. It's going to be a change in the velocity of the company back to growth. And I think it's going to be from all of those factors I mentioned.

One of the announcements you guys released this week was the creation of the value -- the growth and value creation committee. It sounds like there will be a focus on capital allocation and portfolio management. You guys have a pretty broad portfolio in dental. So can you talk about how you feel about the state of the current portfolio, where you see any room for additions or subtractions when we can expect to see some of those changes?

Yes. And I think there's a couple of things, right? So what I do want to call out, the value and growth committee is not about how you divest assets. It's going to be about looking at a strategic look of where do we want to be three to five years from now. Like I said, a lot of us in the C-suite have a lot of execution to do right now in the next 12 to 24 months. And while I'll be active with that, shaping a strategy to the extent that's needed, I think I'm asking the Board with great Board experience to help me do that. So it's really more about where do we see the potential. I personally want to actually get all of these business segments back to health, then we can decide, does this work well as an integrated portfolio? Does it flow through connected dentistry with our DS Core? And if the answer is no, it's better served to the shareholders and the businesses not to have it, then of course, we'll do the right thing. I happen to believe that we have the benefit to turn these back to health and actually add versus subtract. But also at the same time, I would tell you, other than small tuck-ins, I don't think we're in a position to do large acquisitions in the next 12 or 24 months. However, after that, with a strong cash flow and a deleveraged balance sheet, I think we should. And I'm not convinced that all of them or even any of them would be in dental.

Maybe we could dig a little bit deeper into the U.S. business. You talked about doing really well in some markets like EMEA, but the U.S. has struggled the last few quarters. So what specifically have you done over the last few months to turn around the U.S. business? And what -- how should we think about this business looking in 2026? Like is this a business that looks like what we saw in the third quarter? Or do you think we could see some improvements in the near term?

Yes, it's a great question. So we've done a lot. So I've been five months. I brought Aldo in as Chief Commercial Officer about three months ago. We actually centralized all of commercial operations, all of activity under him again to move faster in a consistent way. At the same time, we had a different customer service and tech service group. Tech service handles your capital equipment, customer service, your customers. We brought them under one leadership so that they can actually work in a really good fashion together and no longer have a handoff, which is disruptive to our customers, which is a complaint I heard from customers. Further, that team will actually enhance how we work with dealers because sometimes you're actually servicing a customer through a dealer, and there were gaps in the past. So I feel like those structures have closed those off. The verticalization will create a focus. The enhanced education yet to happen, both for reps and Clin Ed will further bring that into it. As you look at 2026, I would love to tell you we're going to turn first quarter and off we go. But in the reality, if you think about capital, even as we sign these dealers, we need to train them, then they need to go get a pipeline, then they need to go execute that. So to me, the second half of 2026, I should see the lift of dealer adds I think from spending on Clin Ed in the first half, again, I'd want to see more proactive or some increases of business in the second half. So my thought to you would be, I think we need to change momentum over the next couple of quarters. I want to see sequential improvements in the second half of '26. I'll venture so far to say for me, I'd like to see a plus sign on the sales in the fourth quarter, and I want to get into market growth at least in 2027. That's something I have to go execute. It's a stretch, but it's possible.

Yes. Those comments on sequential improvements and positive growth in the fourth quarter, does that apply to the company more broadly? Or is that specific to the U.S.

I would say the company more broadly only because of the size of the U.S. So again, Europe is actually tracking and doing well and gaining momentum. I'd want to see that carry forward. It's really my focus is, as I said, don't mess with that. It's working well. It's really getting the U.S. from the negative to a breakeven to a positive in which will lift the entire company.

Maybe we could talk a little bit more about the broader dental market. What have you been seeing in terms of demand and consumption trends across capital and consumables? And how has that trended exiting 2025?

Yes. I mean, obviously, like anything you've heard from other companies, I mean, higher interest rates slow down capital purchases, uncertain economics can certainly put doubt in a consumer's need for an elective approach. All of those matter and all of those will change. I would answer it differently. Macro trends are out there and they're important, but we have a long way to go to return to health. And so our issue is internal, improving who we are to get to market growth first. Then we can worry about are the interest rates high or is consumer concern there. So I think for me, regardless of what's happening with the market, we have a pathway that we should return to health and grow. And quite frankly, even when we're in the market, we should grow at or above regardless of what the market does.

How much does that return to growth in the fourth quarter rest on an improvement in the underlying dental market?

Nothing.

Nothing. Anything you'd call out in terms of notable products in 2026 that we should be keeping an eye on or...

Yes, it's a great question. I've certainly beaten DS Core, right, as my big plug in commercial there. I don't want to signal that we're only a software company. That's not it. It's just the ability for us to actually streamline the providers' thing and actually reduce their training needs and their complexities. That excites me because I think that DS Core is the linkage of all of the products that we currently have in go. I would say right now, the additional applications in DS Core are probably the ones I want to focus on with it more than implantable products.

Maybe we can shift gears and talk about Wellspect for a second. You did a strategic review of the business last year, decided to keep it under the Dentsply family. So how should we be thinking about this business and your approach to it in 2026? There's a lot going on in dental. How big of a focus from a spend and innovation standpoint is Wellspect?

Yes, it's a great question. So I'll start with that. The dental team and the Wellspect team are separated completely. There's not this interaction. The team who are my direct reports on dental to knock it each day and debate should I be doing Wellspect or dental. And so that is not a drain on our ability to actually go execute at all with it. The reason that I retained Wellspect was we did put it out for bid and the bid was significantly below the intrinsic value. And not only was that a concern for me of giving away value that wasn't realized, it would have triggered debt covenants that required significant cash payments. And in addition, Wellspect delivers 40%, that's 4-0 percent of our annual cash flow. pulling that out in the middle of a turnaround was not the right move for an undervalued sale that would have actually resulted in an overall cash loss. So what I did is I have funded that independently of dental. We're actually setting up an independent Board, so it's not even in the Dentsply Sirona Board with that. We're going to let it run that way. And I've pulled out most of the support departments to have them stand-alone so that it can be functioning by itself. Now as that continues to grow and add value, that will be great in the future if it is not a fit and it's better served for others to divest and we'll do that.

Maybe shifting gears a little bit to the P&L. You highlighted an increase in R&D spend over the last few years or over the coming years. I just want to clarify, I know 6% to 7% of revenue is a figure that's been thrown around, which would be a pretty significant step up. So what do you see as a good target for R&D as a percentage of sales?

Yes, it's a great question. There's a couple of things out there now. So we spend $150 million a year. It's about 4% of sales, but it's also what's reported on the P&L because we're software driven, there is a fair amount that is actually capitalized on the balance sheet. So if you look from a cash basis today, we're actually spending 5% of our funds on R&D. 1% gets up on the balance sheet and amortized over time, the rest is there. There is no magic number. You want to be able to flex it. But if I were giving you a magic number, I would like to get it to about 6% on the P&L. That would be roughly 7% selling from a cash basis. So I'm looking to increase this from this current 4% to 6% by effectively executing this return to growth plan, generating sales, creating the funds to go do that.

You talked about double-digit increase in spend over the next few years. Where are those increase in dollars going from a product standpoint?

Well, that's what I was talking about with the double digit is in R&D itself. And so what I'd do is I'd like to increase that up from the 4% to the 6%, which is probably almost a $50 million increase over the next 24 months. But that comes from the middle of the P&L, synergies in IT, finance, HR, legal, common systems, rationalizing legal entities, streamlining production facilities.

So what products or areas of the business do you see as priorities for investment? And where are those additional R&D dollars going?

Yes. So a couple of things. Like I said, the fact that we can build out our DS Core platform is key. And when you say, which ones do you want to do, the fact that we under-index in implants and ortho, that's why they're the main focus. We have really solid products with our implants. We have great products to offer with SureSmile, both robotically bent wires and others. Bringing and modernizing that orthodontic software and getting deeper with the ortho team is probably one of the top priorities, but also flexing the muscles we have with our implants, standardizing and making sure the education is known of what we offer. Those -- that's where most of our investments are going.

Shifting elsewhere in the P&L. You've sized your tariff exposure is $80 million gross on an annual basis. So how have mitigation efforts progressed relative to your expectations? And how should we think about your ability to offset that $80 million?

So a couple of things. So you're right, it was $80 million that was put out there. If we look today, we've done several different things. One is obviously looking at the existing transfer pricing and how we're approaching that and how we should be approaching that in a new environment. That in itself can create some relief naturally. There has been some release from just changes in Swiss rates and things like that from when we had initially put that out there. We have taken some price, and we plan to take some additional price strategically in this area. And what I think is that $80 million gross number in today's dollars, I probably have down below $40 million. I have to finish up the '26 plan, get it approved by my Board. But I would think that, that's probably closer to $35 million to $40 million of exposure today if we're successful in getting these things done.

Touching on some below-the-line items. Interest expense has bounced around quite a bit. Any color on how we should be thinking about that in 2026? Similarly, tax has stepped up quite a bit. What is a more normalized tax rate look like for you? And when can we get there?

Right. So, two questions. The first one is I think the interest rate was a back and forth with what we were doing with temporary credits to buy things and to pay off debt to move around. I think we'll stabilize that at a consistent rate in 2026. I would actually like to, through capital allocation, retire debt and deleverage not only from growing EBITDA, but also paying down and not replenishing debt. I'm not sure how much of that will be done in '26, but certainly in '27, I want to see lifts along those ways. The increased tax rate back to talking about transfer pricing was really a matter of shifting profit from the U.S. into other jurisdictions and actually not having enough profit to use your carryforward losses. So an adjustment of transfer pricing itself as technical as we want to be, will shift some of the profit allocation that can trigger these, which will actually lower your tax rate. I'm actually not concerned about that. I won't tell you the going-forward rate that I plan because I have to get it approved and reviewed back to the structure that I was talking about in my presentation. But I would say a 26% to a 28% tax rate in '26 is probably realistic, and I want to get below that as we stabilize, bring in new tax structures and drop that down. I don't have a carryforward rate yet, but it's certainly that 25% or less is my target.

One last question in the minute that we have here. Any updates on the CFO search and the profile that you're looking for to support the return to growth plan that you outlined?

Yes,. So you saw everything I'm looking to do in the return to growth plan. I want someone with experience in that. And Matt was not a bad guy with that. He didn't have the depth of experience I need to do this at the time and urgency in which I want to do it. I had begun some of the searches. Unfortunately, they didn't turn out. And so post this conference, I'm going to go full bore. I would think that by June, we probably have the capability of finding someone if this works out. The good news is the appointment of Mike Pomeroy with a GE background and large company flow, both in public and private, -- he's a great interim ad. And so he's actually removed the pressure for me to actually move quickly. I want to be very selective. I want a CFO who knows manufacturing and transfer pricing and reorganization that can free up these funds so we can realize our commercial potential.

Great. Well, we're just about out of time with that. So we'll wrap it up there. Thanks so much, Dan.

Thank you, Lily.

Thank you for joining, and thanks, everyone, for listening.

Thank you. Bye.