Envista Holdings Corp Q2 FY2022 Earnings Call

My name is Chelsea, and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation's Second Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin your conference call.

Hello, and thanks for joining us on the call. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. I want to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations. It will remain archived until our next quarterly call. As announced on January 3, 2022, we have closed the divestiture of KaVo Treatment Unit and Instrument business. For the first and second quarters of 2022 and the full year of 2021, the results of this business are expected to discontinue operations in our financial statements as required by generally accepted accounting principles. All references in these remarks and accompanying presentation to earnings, revenues, and other company-specific financial metrics relate only to continuing operations of Envista's business except for cash flow measures. During the presentation, we will describe some of the most significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics related to the second quarter of 2022 and references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices that have applications submitted and pending certain regulatory approvals that are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities law including statements regarding events or developments that we believe, anticipate, or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they were made, and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I’d like to turn the call over to Amir.

Thank you, Stephen, and welcome, everyone to Envista’s Q2 2022 earnings call. I want to start today’s call by thanking our employees for delivering another solid quarter despite supply chain disruptions, accelerating inflation, and severe COVID-related lockdowns in China. Our team delivered mid-single digit core growth, expanded our adjusted EBITDA margins, and successfully integrated our newly acquired intra-oral scanner IOS business. Our resilient performance is a testament to our strategic differentiation and our proven track record of execution. Before I turn it over to Howard to discuss our second quarter results in more detail, I want to reiterate our long-term vision, provide some insight on current market conditions, and offer a quick update on our progress toward our strategic priorities of accelerating growth, expanding operating margins, and transforming our portfolio. At Envista, our focus is to partner with dental professionals to improve patients' quality of life by digitizing, personalizing, and democratizing oral care. We're committed to the dental community by spending a significant amount of time in the market, meeting dental professionals to further understand their businesses, workflows, and needs. I just recently returned from a road trip where I met with over 100 customers across the U.S. While there is no doubt that talk of inflation and the potential for an economic slowdown weigh heavily on clinicians' minds as they look out over the next 6 to 12 months, it is also clear that patient traffic remains robust, and dental professionals remain confident in the long-term prospects of the industry and their businesses. Doctors in private and group practices continue to invest in their specialty treatments and are looking for ways to expand their capabilities, improve their workflows, and digitize their offices. It’s an opportunity to enhance their efficiency and the predictability of treatments. DSOs remain committed to opening new offices, but are limited by supply chain and capacity constraints including the lack of staff in dental offices. While we expect there may be additional uncertainties in the market short-term, we continue to believe that the dental market is resilient and has ample room to grow over the long-term. Turning to our Q2 progress with a uniquely positioned portfolio. Our orthodontic business continues to deliver strong results. Our core bracket and wire business grew low-single digits as a result of our differentiated Damon solution. The new Damon Ultima system, which provides orthodontists more control for faster and more precise finishing, continues to gain share. This innovative solution commands a premium price by improving the way orthodontists move teeth. While we are proud of the strength of our bracket and wire business, it is our Spark Aligner business that continues to accelerate rapidly, again delivering year-over-year core growth of over 100%. It initially took us three years to achieve 100,000 new Spark case starts. In the last six months, we have started an additional 50,000 cases, and we expect to further expand our position. The Spark solution is gaining momentum as we partner with top orthodontic professionals and clinics globally. In Q2, we were proud to sign a long-term agreement with Svět rovn átek, an orthodontic clinic based in the Czech Republic. Svět rovn átek is a global leader in clear aligner therapy and is responsible for more clear aligner cases than any other clinic in the world. This long-term partnership with the leading orthodontic clinic further validates the strength of the Spark Aligner solution. Our solutions for implant-based tooth replacement grew mid-single digits in the quarter. We continue to see robust growth in premium implants and our regenerative solutions. In addition to our strong commercial execution, we also signed two important agreements to further our mission of partnering with dental professionals to digitize, personalize, and democratize dental care. First, we entered into a long-term agreement with dentalcorp, North America's only publicly traded DSO. Based in Canada, dentalcorp has more than 500 offices and is a leader in the placement of implants in Canada. Together, Nobel Biocare and dentalcorp have trained hundreds of clinicians and created a network that offers the latest tooth replacement solutions from Nobel Biocare. This agreement extends our partnership and further strengthens dentalcorp's ability to provide the highest quality of care to its patients. Earlier this month, we also announced that Nobel Biocare and Boston University will partner in a philanthropic initiative for the next decade. Through this partnership, Nobel Biocare will provide $4 million, $400,000 per year in products as an in-kind educational grant to the Boston University Henry M. Goldman School of Dental Medicine, GSDM. Students and residents at GSDM will have an opportunity to place and restore implants using this grant. This partnership will help us train the next generation of implant placers in North America. In addition to driving growth and investing in our strategic initiatives, we remain intently focused on expanding our margins. In Q2 2022, we achieved an adjusted EBITDA margin of 19.7%. This represents a 40 basis point margin improvement versus Q2 2021. The Envista Business System, EBS, and its focus on continuous improvement drives our execution. It helps us to offset and countermeasure the impacts of inflation and supply chain challenges while supporting our ability to invest for long-term sustainable differentiation and growth. In the quarter, we used EBS to drive discipline in pricing, achieving greater than 200 basis points of net pricing. Further, we took additional actions to streamline our organization and ensure that we can continue to invest in our strategic priorities while managing inflation and expanding our margins. We've optimized our regional organizational structure and delayered our operating companies to improve customer experience and provide us more flexibility as we move throughout the year. We're proud of the work we have done to date and remain focused on further optimizing our operations to effectively deal with the challenging macro environment. While we expect persistent inflation-related concerns, supply chain challenges, and geopolitical issues to impact 2022 and beyond, we're confident that our continuous improvement culture rooted in EBS will allow us to deliver short-term results and invest in our long-term priorities. The transformation of our portfolio continues. The acquisition of Carestream Dental's IOS business has been successfully integrated into Envista, and we have relaunched the product under the DEXIS brand name. We intend to integrate the DEXIS scanner into our DTX platform to further simplify and optimize our specialty implant and auto workflows. During the period that we owned this business in the second quarter, we achieved $5.5 million in revenue despite the lockdown in Shanghai that limited our ability to source the scanners. With the factory opened since early June, we are now building scanners in bulk, and we are well positioned to drive above-market growth in the second half of the year. We see significant interest from clinicians and our distribution channel. The DEXIS IOS solution is a well-regarded scanner, providing high performance and an attractive price point. The 3800 wireless scanner recently received a 2022 Red Dot Design Award that recognized its lightweight, convenient, and effective design. The jury specifically called out its balanced symmetry and minimal elegance that is not only practical but also a pleasure to operate. With our attractive portfolio and robust R&D pipeline, we expect the DEXIS IOS solution to accelerate our growth and enable us to partner with clinicians to digitize, personalize, and democratize dental care. On July 5, we closed the acquisition of Osteogenics' BioMedical, a U.S.-based manufacturer of regenerative solutions. This acquisition is consistent with our strategy of focusing on the fastest-growing segments of the dental market and providing dental professionals with complete workflow solutions. Osteogenics is a very respected company with a solid brand, a history of innovation, and strong ties with leading clinicians. This business is complementary to our implant offerings and will further position us as the leader in implant-based tooth replacement and provide a significant opportunity to create value for patients, our clinicians, and our shareholders. While we're excited about the strategic moves that we have made, we see opportunities to further improve our portfolio. We're committed to pursuing a disciplined approach to capital deployment. We utilize our EBS-driven M&A approach to manage a robust pipeline of inorganic partnerships and investments and are actively cultivating new opportunities. I will now turn the call over to Howard to go through our second quarter financials and provide more details on our segment performance.

Thanks, Amir. Before we begin, I would like to remind you that our second quarter results are prepared against the prior year based on continuing operations, reflecting the sale of our KaVo Treatment Unit and Instrument business as discontinued operations. On a reported basis, second quarter sales increased 1.3% to $645.8 million. Sales in the quarter were negatively impacted, 3.6%, due to foreign currency exchange rates, and acquisitions contributed 0.9% growth to reported sales. Core sales growth was 4% compared to the second quarter of 2021. Our year-over-year core sales growth reflects solid performance in our Specialty Products and Technology segment, offset by weakness in our equipment and consumables segment. Our Specialty segment delivered core growth of 9.6%, driven by solid performance in our implants and core bracket and wire businesses along with outstanding performance in our Spark clear aligner business. On a geographic basis, Western Europe delivered core sales growth of 11%, while North America increased 0.5%. North America was weighed down by its higher exposure to infection prevention and by modest destocking in our distributor channel. Our business in China was down 0.3% versus the prior year due to the extended lockdowns in Shanghai. As expected, activity in China ramped up very quickly late in the quarter as Shanghai reopened. In Russia, we declined mid-single digits versus Q1 of 2021. This decline followed a strong Q1 driven by forward buying at the start of the conflict in Ukraine. Outside of Russia and China, emerging markets continue to grow nicely off pandemic lows, up approximately 20% versus Q2 of 2021. Our second quarter adjusted gross margin was 58.7%, increasing by 40 basis points compared to the prior year due to higher volume and favorable mix, partially offset by the impact of inflation and our material costs. The adjusted EBITDA margin was 19.7%, which is approximately 40 basis points higher than Q2 of 2021 and in line sequentially. As previously discussed, in Q2, we continued to invest in our long-term innovation while increasing spend on travel and in-person customer-facing activities. Our adjusted EBITDA was also negatively impacted by one-time costs related to investments in our newly acquired DEXIS IOS business. The overall investment was slightly lower than expected as we effectively redeployed available resources resulting from the KaVo divestiture towards the IOS business. In Q2, we also took actions to both eliminate the remaining stranded costs and further streamline our organization to ensure that we can continue to expand our margins while investing in long-term growth. Our second quarter adjusted EPS was $0.48 compared to $0.46 in the comparable period of the prior year. Our Specialty Products & Technologies segment core revenue increased by 9.6% compared to the second quarter of 2021, driven by solid growth in both our implants and core bracket and wire businesses along with continued impressive growth from Spark. In the second quarter, our combined orthodontic businesses grew 17% versus the prior year, and our core bracket and wires grew low single digits, while Spark revenue continues to accelerate. Despite the toughening macro environment, we remain confident that our Spark business has immense potential to drive growth over the long term, and we are continuing to invest in order to capitalize on this opportunity. Our implant-based tooth replacement business grew mid-single digits in Q2 2022 versus Q2 of the prior year, driven by strong growth in all emerging markets, excluding Russia, with more modest growth reported in the developed markets. In addition to the growth in core implants, our regenerative business continues to accelerate. Our Specialty Products & Technologies segment adjusted operating profit finished at 22.8% in the second quarter. This is down 120 basis points from Q2 of 2021, primarily due to the significant increase in investments to drive long-term growth, as well as the increase in customer-facing activities we participated in the quarter. Sequentially, we drove 40 basis points of margin improvement versus Q1 of 2022 in this segment. Our second quarter equipment and consumable segment core sales decreased by 4.7% compared to Q2 of 2021. While price positively impacts sales by approximately 4%, lower volumes across our imaging, restorative, and infection prevention businesses saw core sales drop compared to the second quarter of 2021. From a geographic perspective, growth was down in both developed and emerging markets. Our traditional imaging business declined mid-single digits in the quarter. We saw very modest growth in North America, offset by a meaningful decline in both Europe and China. Europe's weakness is attributed to inflation and uncertain macro environment complicated by the Russia-Ukraine conflict, while China was meaningfully impacted by the Shanghai lockdown. As Amir mentioned, our new IOS business delivered $5.5 million in the quarter, and we are very pleased with the outlook for this business. Clinicians remain very interested in investing in IOS solutions to help improve their overall workflow. Our Restorative & Endodontics business declined in the quarter, primarily driven by distributor destocking in North America and weakness in China related to the COVID lockdown. Our business in Western Europe was up modestly, and other emerging markets performed well in the quarter. As expected, sales of our infection prevention solutions continued to decline from elevated pandemic demand. Despite the decline in revenue versus the prior year, Q2 inventory sellout trends reported by our distribution partners indicate that we are gaining market share in our core dental market. Further, we saw a sequential increase in revenue of over 25% versus Q1 of 2022. This supports our belief that sell-in and sell-out are more balanced, and that this business should return to growth in the second half of 2022. Long term, we continue to expect this business to grow mid-single digits. Equipment & Consumables adjusted operating profit margin was 21.7% in the second quarter of 2022 versus 19.7% in Q2 of 2021. Solid margin improvement in imaging, restorative, and infection prevention solutions was supported by the increased price versus the prior year. These improvements were partially offset by material cost increases related to inflationary pressure on commodities and materials that impacted our businesses. Overall, the inclusion of the IOS business gives us confidence that our Equipment & Consumables business will grow faster and be more profitable as we move forward. In the second quarter, we generated $11.9 million of free cash flow and ended the quarter with more than $500 million in cash after closing the Carestream Dental IOS acquisition. Free cash flow in Q2 was lowered due to cash restructuring costs, transaction costs related to our acquisitions, timing and payments of certain incentive compensation, and increases in our accounts receivables related to the timing of customer orders and payment patterns. Overall, our balance sheet is very strong, and we have ample liquidity even after closing the acquisition of the IOS business in Q2 and the Osteogenics acquisition in early Q3. We have the flexibility to pursue additional inorganic growth opportunities when the right assets become available. Now, I’ll turn the call over to Amir to discuss our outlook for the balance of the year and provide closing comments.

Thanks, Howard. While we are pleased with our performance here today and confident about the long-term resilience of the dental market, we’re mindful of the macro environment and the related short-term challenges. Continued supply chain issues, persistent inflation, geopolitical risk, and the increased risk of additional severe COVID lockdowns in China are impacting the prospects of the second half of 2022. Given this background and increased downside risk to demand, we are updating our guidance for the balance of 2022. We now expect our core sales to grow mid-single digits for the full year 2022. Our newly acquired businesses, including both Carestream Dental's IOS and Osteogenics, are expected to deliver 2022 sales of between $50 million to $60 million. We remain committed to achieving an adjusted EBITDA margin of 20% for the full year. Our priorities remain the same. We will accelerate growth and expand our operating margins and further transform our portfolio through our active and disciplined capital deployment. We’re well-positioned to be the leader in both orthodontics and implant-based tooth replacement. Our complete workflow offerings, including our imaging and diagnostic solutions, will improve the productivity of dental professionals while empowering them to provide personalized and predictable treatments for each patient. Our EBS heritage and focus on continuous improvement will allow us to consistently deliver results while investing to build sustainable competitive advantage. Our purpose is to partner with dental professionals to improve patients’ lives by personalizing, digitizing, and democratizing dental care. We’re focused on delivering long-term value for patients, our customers, our employees, and our shareholders.

Thanks, Amir. That concludes our formal comments. We are now ready for questions.

And our first question will come from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys. Thanks so much for the question. I guess my first question, thanks for all the color on the drivers of the different segments and product areas in the quarter. I think, one of the key questions we've been thinking about with the uncertain macro environment out there is, as we were wrapping up Q2 and maybe into Q3, can you sort of go through how you sort of see market volumes in the different areas and implants and orthodontics, etc. in terms of the back half of the year?

Yes, happy to do that, Elizabeth. Thank you. What we are seeing, and as I mentioned, we have been traveling and talking to a large number of our customers and customers that they’re not currently buying from us. And what we are seeing is overall outlook is very positive. In fact, my latest visits were with 100 oral surgeons, some of whom are telling us that they have patients booked up to about October. So you have this challenge of specialists continuing to see a ramp and continuation of a patient flow. And that’s what we have been seeing. On implant placement, we see that a continuation of the growth as we go forward. And we are confident that what we are offering really meets the requirements. The same thing on orthodontics. We're going to keep in mind that what we are offering is really different than what the norm looks like. We are very focused on a small number of orthodontists that that’s all they do. They start the treatment by getting a CBCT to understand their patient anatomy before we offer any type of solutions. If you look at that segment, we are continuing to see momentum on starts moving forward as we have demonstrated that in Q2 as well. On the other hand, three macro events are really impacting the risk, and that’s why a change in guidance moving forward. Top of the list is inflation; increased rates are weighing heavily on capital equipment investment in the long run. We saw somewhere between 25% to 30% reduction in inventories in the channel between Q2, end of Q2 to the beginning of Q1. So that’s one really important factor to see in here, capital equipment, as well as in inventory reduction. We think the European economy and risk associated with the energy supply are going to weigh heavily in this industry. Right now, as expected, Europeans are on vacation, and the forecast, what we see after September is just not as clear as what we have seen in the past. We’re waiting for the dust to settle to see where this ends up. And last but not least, it’s a slower recovery in China and there is an additional severe risk of lockdowns. So in order to put all of this together about 14%, 15% of our business is in Russia and China, which is unpredictable; we’re not sure exactly where it’s going to end up. We got the European challenges ahead of us. In North America, what we are seeing is a continuation of growth, both on a DSO and specialists. We’re trying to balance all of these and make sure that we land in a place where we can continue to make investments, deliver margins, see the long-term growth opportunities, and ensure that we come out of this situation much stronger as we did in 2022. That’s a little bit of a perspective and macro view that we have on the market with various segment and how we are managing our investment and priorities.

That’s super helpful. And maybe one for Howard or you could answer as well. You mentioned the distributor destocking in the quarter. Could you give us a little bit more color on sort of like what happened with the destocking there, and then also how long you expect that to last?

Yes, I can answer that, Elizabeth, as well. So I mentioned about a 25% to 30% reduction, but let me provide some color on it. About 85% of our overall portfolio are consumables. Only about 15%, what we call equipment costing about $5,000 to $10,000. Those equipment normally distributors do not chip any stocking; they place an order, and we deliver it directly. The other areas are traditional consumables as well as infection prevention. The natural inventory that distributors keep in Europe, U.S., and other geographies have come down, as I mentioned, 25% to 30% during the quarter. Obviously, they are preparing to deal with an uncertain environment; they’re preserving cash, but also there is a proxy at play as Howard talked about infection prevention. Our expectation now with the position that we have known all along is that sell-out and sell-in match. We have a really good visibility on it, but those are some of the challenges that we are dealing with as we go with delta in Q4 we’re dealing with as we go forward. We think managing distribution tightly and managing inventory is coming to norm in the short term until there is a little bit of clarity over the long-term horizon.

Got it. Thank you.

Thank you, guys. Good afternoon. Can you hear me okay?

Yes, we can hear you, Jeff. Go ahead.

All right. Yes. Great, Howard, thank you. I’m in a car, so I just wanted to make sure. So just a couple of questions here. So Amir, when I look at your updated guidance, it looks like you’re kind of guiding to very similar mid-single digit core growth at a company-wide level over the second half. That’s almost exactly what you delivered in the first half. Obviously, you just laid out three or four things in the quarter and going forward that you’re a little more concerned about. So how do you keep up that kind of mid-single digit growth that seems to be implied in your updated guidance for the back half of this year against what seems to be pretty stable comps? Is that as the destocking comes off, as China comes back, those help offset some of your other concerns? Is it kind of as simple as that?

You are absolutely correct. We expect to see a little bit of uptick in the second half versus the first. And the reason for it is we take a look at our businesses. We are confident that the ortho business is going to continue to progress and get better as we go forward. We think the momentum that we are seeing on Spark—the number of active doctors is ramping up. We are signing up new doctors, and Spark growth is something that we are continuously building capacity for. That acceleration of growth is something that we expect to be ongoing for years to come, not only in the second half. The first half was negatively impacted by two elements. One was China, and we are assuming that there are no more lockdowns in the second half. If that happens, then we will need to deal with it as it comes. And also the infection prevention had in the first half: the core growth was negatively impacted by about 200 basis points due to infection prevention inventory correction. So that’s another positive thing that we are seeing in the second half. The rest of our business in implant placement continues to make progress. We are fairly confident that it will move forward, and as you said, we are trying to manage this, knowing some of this uncertainty. That’s why we think mid-single digit growth is really relevant given where we stand today.

Hey, Jeff. This is Howard. Maybe one other addition there. I think that we’re encouraged by some of the traction that we’re seeing in pricing as well. Over each of the last two quarters, we’re seeing greater traction on the pricing front, and we anticipate that that will continue also here in the second half.

Yes, that’s helpful, Howard and Amir both. But Howard, that was segued right into my follow-up question that I wanted to ask on pricing, the plus 2% this quarter. How does that compare versus 1Q? I think you took another round of increases on April 1. So just what was in 1Q versus the plus 2% this quarter? And do you see that staying at plus 2% the rest of this year, or does that tick higher throughout the year? Thank you.

Yes. So thanks, Jeff. We did actually see an incremental step-up in our pricing traction in the second quarter. We saw even in the first quarter, we saw a step-up from what we saw in the second half of last year as well. So the process is in place, and we feel good that each of the operating companies are taking a systematic approach, realizing some of the inflationary factors to be considered as well as ensuring that we’re growing with the market or better than the market in each of those areas. I think for the second half, we’re going to continue to see that traction and probably even a little bit of a step up as you indicated, Jeff. We've had a couple of different pricing increases, and we think that those will hold into the second half as well.

Good afternoon.

Hey, Jon.

Hey, Howard. Maybe just for the first question, Amir, and sorry if you may have touched on this. But just talk to us on how trends played out throughout the second quarter. We're getting some of that; like April might have had catch from Omicron and then there was a wave that might have hit some traction in June. But would just love your thoughts on how 2Q progressed. And then Howard's sort of attack on to that. Just anything on the cadence for 3Q or 4Q? I mean, obviously, mid-single digit top line for the year, and that was sort of the number in 1H. Should I just think about growth being linear throughout 2022? Or is there any sort of fluctuation between 3Q, 4Q as we adjust models for the back part of the year? And then I’ve just got a follow-up.

Okay. Let me answer the Q2 thing. So China lockdown—China did not open until early June. So March, April, most of March, April, and May, we basically had very limited business toward the end of the quarter. So it was not linear at all. We had orders in our hand. We had customers waiting. And the last three weeks of the quarter, four weeks of the quarter, we were able to catch up and make sure that those appointments were not canceled, and people had equipment and tools in hand. The other part of this, we’re talking about Q2 specifically. Areas such as consumable business as well as the Spark clear aligner and ortho, we did not see any major changes in the ramp, the continuation. Yes, we saw a little bit of a change in the inventory, but not on the sell-out and traditional consumable or even on a start on equipment—I'm sorry, on traditional consumable or a Spark or bracket and wire. But we did see a step down on equipment start a little bit stronger and started becoming slower and slower as we went forward throughout the quarter. I think it was a continuation of the news in the market, a little bit of conservatism, and part of investment as well as some challenges in opening new de novos, resources, and simply getting building capacity that they need. So simply answering Q2, we did not see that linearity that we had become accustomed to, but it varies by segment, it varies by geography. And as we started looking at those right, going into countermeasure and managing it throughout the quarter. Now for the rest of the year...

Yes. So Jon, I would say that as it relates to phasing in the second half, typically our Q3 quarters a little bit lighter just from a phasing standpoint with the holidays taken in much of Europe during that period as well. But we do see that we will grow mid-single digits here in the third quarter, a little bit heavier growth probably in the fourth quarter. And that will also be true of our profit profile. We think that our EBITDA—adjusted EBITDA margins will be slightly stronger in the fourth quarter than in the third, just because the volumes are substantially larger in the fourth quarter. And so that’s our point of view today.

Got it. Very helpful on the phasing. And then just Amir, just taking a step back, I love your thoughts on the IOS business. Maybe just talk to us; you announced a deal around year-end. I think it closed in April, and then here we are arguably whatever, three months later. A lot’s gone on in the world over the past seven months or eight months, the world, and I think even specifically the IOS market. So where do you stand today? What have you guys achieved in terms of maybe the early results that you wanted to chop with the deal and the integration? And how do you feel about this going forward when you think about your long-term growth rates and goals with the business?

Yes. Thanks, Jon. We have a hypothesis that has not changed at all in that regard. The market was about $1 billion, growing double-digit. We knew and has been validated that it is less than 15% penetrated. And it’s penetrated in various geographies and segments. For example, those that do clear aligners, the majority of them have one. But in many other segments, IOS is really not that penetrated. We knew also that there is significant price differentiation. It is really an obvious point solution versus a fully integrated, complete solution and how this system we’re working in an open environment versus a closed environment. I know that what I’m referring to—receiving files from others, sending files to others versus just being a closed-system cylinder. So we knew a lot of that; it was validated. We did a lot of due diligence before we entered the market. When we started after the close, we selected—and we knew exactly we needed to do three things. The number one thing that we wanted to do was to expand the channel. Carestream IOS has less than 10% market share, and it’s an awesome product with over 30% EBITDA margin; whoever we talk to said the product is really good. The infrastructure for support, expanding it worldwide, was just not there, specifically in geographies like in the U.S. So we knew by going to a hybrid model like putting that part of our auto implant business as well as putting it in our channel, we would take the first step in at least making it available to people who want to buy it. And so far, we have seen good uptake. The second part of this was about operational improvement. Even though it has a really strong reputation, we wanted to improve the operational capabilities, improve gross margin, and reliability. Here, we have taken the first step, but as you can imagine, the lockdown has really limited our ability, but we have built now a service support capability around it. We are looking at the demos that exist everywhere to make sure that they are up to date and up to speed. We’re going to continue to work on it. This is the hallmark of EBS and what we stand for. I think we can do a lot better job in here. The last part is about portfolio and R&D. It has robust hardware. It has software that is really good today, but we need to integrate it into DTX; we need to integrate it into our workflows, and we are working on it to ensure that this is going to happen as quickly as possible. We’ve got a great product in an awesome market, good price performance, in a better channel now with better productivity, and with the R&D backing this, we think we’ve got something in our hand that is going to enable us not only grow the IOS by itself but help our specialty businesses in the long run. We are really pleased with what we have done here so far and expect great growth over time as a result of this acquisition and integration.

And Amir, if I can just quickly ask for a clarification question. I think last quarter, you had IOS contributing $35 million to $45 million for the rest of the year. I think you now said both businesses, I believe, including Osteogenics, are $50 million to $60 million. One, is that correct? And two, to the underlying IOS change up or down in any way? Thanks, guys.

Yes. No, you’re absolutely correct. Those numbers are absolutely right: $35 million to $45 million IOS, about $5.5 million in Q2 since we owned it. We think that Osteogenics is about a $15 million for the rest of the year. So we add them up—$50 million to $60 million growth in core part of our business. Obviously, when we take a look at the growth versus core growth, they are not being considered as part of our core growth until about a year after acquisition. But they are really changing the format, the mixture of our business going forward. The IOS by itself is going to add about 50 basis points of growth in the long run, about 30-40 basis points of margin. The Osteogenics acquisition is almost definitely in the size of our biomaterials. Just to give you a little bit of a feel for it—for every implant that is placed, 75% to 80% of them either need a bone rebuild or a membrane. If you look at the price ratio, it’s about a 5:1; for every $5 of an implant, you normally sell $1 of biomaterial. We have been so under-indexed in that area. Now we have—it is less than 10%, even with Osteogenics. Now we have an opportunity to really ramp that up. We’ve got about a $900 million to $1 billion worth of implant business and a very small presence in biomaterial. The combination of these two acquisitions really puts us in a different place as we go forward.

Good afternoon, and thanks for the color so far. I want to think a little bit maybe more on a medium-term basis, call it 18 months or so or 24 months. As you think about your R&D efforts, especially given the strength you’ve had in Spark integration on Dexis IOS as examples, how do you think about the bifurcation of products over time? And the reason I’m asking this is, as all the themes of this call have been, clearly there’s a level of uncertainty coming into the market regarding current end-market demand. There are also pieces of uncertainty that continually come up relative to potential for trade down in various areas of the economy. How do you feel as if right now, both in terms of what you have and what you have in the pipeline, Envista’s position to be able to bifurcate both the high end and low end of all the different end markets you play in?

Thanks, Michael. I’m not going to point to the past two to three years first before I answer that question. We started coming out of Danaher, about 50% Equipment & Consumables being exposed to a lot more distribution, heavy equipment. In the past two years, we have completely shifted our portfolio. We took about 5% of our business in 2020, and we basically moved away from it. We saw the KaVo Treatment Unit and Instrument, and other, a $400 million business. We put ourselves, if you look at the exposure to the market, we put ourselves in a very different place. A couple of acquisitions have put us in a lot more specialty, a lot more direct higher-margin business, and that’s what we’re going to continue doing. Upon saying that, the question is, what are we going to do in the next 18 months? Our long-term view of becoming the leading ortho provider with the combined treatment of bracket and wire as well as Spark clear aligner has not changed at all. We think that that combination provides unique differentiation, both from a pricing and a finish perspective, as well as quality of what we provide, and the network that we have and the exposure that we have worldwide. So we’re not backing off at all in any of those investments. We’re being very prudent long-term versus short-term in that space. When we look at our implant placement part, we have made significant progress on the premium side, and a lot of it has been due to commercial execution. TiUltra and XEAL, the surfaces have made a huge difference, and one is going to make a huge difference in the long run. So we’re not counting on a lot of new R&D to come in here and change the model as we go forward. Execution, EBS at the core of what we do, we have an opportunity to ramp up our value implant organically as well as inorganically to build that segment to become an important part of our growth going forward. As I mentioned, we have really shifted our traditional equipment to be part of the overall offering of what we provide in an end-to-end solution. From an R&D perspective, we have been very thoughtful on doing things not because we want to be an equipment provider but doing things that allows us to optimize the entire workflow. That’s why we are putting so much energy into software and integration, open architecture platforms. We prefer people to buy our product. But regardless, if you want to use other companies’ products, we still want to improve productivity and predictability of dental offices, DSOs, group practices, and universities. So we’re being thoughtful on where to invest and how to manage these. But short answer in the long run, I think we have a clear eye toward 2023, 2024, 2025. We think the approach that we have taken in the past several years is going to help us become a much better company from a growth margin perspective and truly differentiate ourselves so that practitioners want to do business with and partner with for the long run.

Thank you, Amir. And then just one more quick follow-up. I think I know the answer to this, but obviously, you talked about a lot of short-term variability. Any changes whatsoever to the long-term targets you laid out back in April at the Investor Day?

No, not at all. We think that high single-digit growth is very much within reach; we have said that by 2025, we want to be high single-digit plus other years, double-digit growth, and get our EBITDA to 22.5%, 23%. 50 to 75 basis points of growth. We don’t think anything has changed in the short term that moves our position on that long-term commitment and perspective.

Hey, good afternoon, Amir and Howard. Thanks for taking the question. I guess just trying to tie things together. It seems like there were really three things that had a pronounced impact on sales in the second quarter: the lockdowns in China, the pull forward you mentioned of sales in Russia into the first quarter, and the destocking effects. I guess, is it possible to quantify the impact that those three items had on second quarter performance, just as we think about the more normalized run rate of the business and how it performed in the second quarter? And then I think one of the things that really stood out was the performance of the Specialty segment. Amir, you talked about the strong volumes that specialists are seeing and the traction that you’ve made in the DSO and large group practices. I guess, how do you feel about your ability to continue to drive demand for your specialty portfolio in a soft market backdrop, especially if that persists for a longer period of time? Thank you.

So maybe, Nate, I’ll take the first part of that question, and then Amir can take the second. I would say as it relates to China, as Amir indicated, those lockdowns went substantially longer than we had anticipated. I think we said that the growth in China in the quarter was relatively flat, slightly down, I believe. That’s a business that we’ve historically seen grow double digits. So if you think about it in that context, that’s probably a point of overall growth impact to the quarter. I would say in Russia, if you normalize the first half, it’s probably reasonable. At the beginning of the conflict there, there was a substantial buildup and pull-in of customer-generated orders that came in the first quarter. That subsided here in the second quarter. And so on an aggregate basis, first half, I think that that’s probably a total reasonable. Lastly, in terms of the destocking, there are a couple of different factors going on there. One of them, when we talk about the infection prevention, clearly continuing to destock. We feel as though the sell-in is healthy, and we’re actually gaining market share. For that reason, we have confidence that that’s going to turn around, and we’re going to see some growth regarding infection prevention here in the second half. I think that we saw a little bit of weak taking down on the inventory side as it relates to the rest of the business as well by a few of our large distributors that should have been worked out. We see that in the second half, and we get back to normal growth as well.

To answer your question, how do we generate demand? Let me just give you some statistics in here, and maybe that would be helpful. In Q2, the sequential growth for Spark was 27.8% on just production output, cases shipped. If you look at new doctors, we are adding almost double-digit new doctors being added and active doctors are ramping up as well. So we keep adding new doctors while those that are in there continue to do more and more cases. We are seeing that trend continue. There’s nothing in there that has caused us to change our views on that product category. If you look at our traditional bracket and wire, three years prior to COVID, it was growing mid-single digits. We have seen a similar performance as the Damon Ultima is really making a difference. So our orthodontists’ overall franchise is doing a great job continuing to make progress, taking share, and this is because of the segment that we are focused on and because of how we go to market and the training and education. Now, coming back to the implant side, the majority of customers that we deal with are looking for a way to place more implants utilizing the same assets that they have. They look at DSOs; they want to place more implants. You go to some of these group practices; they want to do more full arch. That is possible through digitization, using guided navigated surgery, using AI, using simulation. So the way to generate demand is to protect your current base, expand what they are doing, and start going after your competitors. That current base we have, if they just continue to do more, which is what they want to do, gives us confidence in what we see on demand generation going forward. We have expanded our traditional consumable reach, signing up additional distributors in Europe and other geographies. Given what we have now on the equipment and specifically with IOS, it gives us more leverage to go to various distributors selling directly as well as selling through distributors. The combination of all of that gives us confidence that the demand generation expansion will continue as we go forward.

Thanks. That’s really helpful. If I could just sneak in one quick follow-up for Howard. On the margins, you guys always operate with expense discipline. You mentioned the commitment to the 20% EBITDA margin this year, and you took some streamlining actions, I guess, in the quarter. Could you maybe quantify the magnitude of savings that you expect from those actions? And is there anything else planned over the balance of the year as we think about margin cadence and getting to that 20% margin for the year?

Yes. So Nate, we have confidence that we’ll take the actions required to go ahead and deliver that and land this thing at 20%, despite making committed long-term investments. As Amir mentioned, we will continue to fuel these growth initiatives and ensure that we’re able to achieve those long-term targets that we talked about earlier. As it relates to some of these actions, we take them across different areas as well. Overall, on the balance, we believe that we’ll be able to hit the 20% adjusted EBITDA margin for the full year.

Thanks, Nate.

I think that’s—we’re out of time here. So really appreciate everyone for tuning in today. Thank you so much. If you have any other questions, please feel free to reach out to us, and we’re happy to schedule calls offline as well. So thank you so much, and have a great rest of the day.

Thank you, ladies and gentlemen. This concludes today’s conference call, and we appreciate your participation. You may disconnect at any time.