My name is Stephanie, and I'll be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation's Second Quarter 2024 Earnings Results Conference Call. I will now turn the conference over to Mr. Steven Keller, Principal Financial Officer of Envista Holdings. Mr. Keller, you may begin.

Good afternoon and thanks for joining the call. With me today is Paul Keel, our President and Chief Executive Officer, and Eric Hammes, who will assume the position of Chief Financial Officer tomorrow. Paul and I will be leading the call today and will handle the Q&A at the end of the prepared remarks. 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 and will remain archived until our next quarterly call. During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted our year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the second quarter of 2024, and references to period-to-period increases or decreases in financial metrics are year over year. During the call, we may describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets. We will also make forward-looking statements within the meaning of the federal securities laws, 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 they are 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 Paul.

Thank you, Stephen. Good afternoon, and welcome to Envista's second-quarter 2024 earnings call. We appreciate you taking the time to join us today. We'll cover three items in the next 30 minutes or so and then reserve the last half hour for Q&A. I'll start with some opening thoughts on the quarter, on my first 90 days with Envista and on the broader dental market. I'll then turn it over to Stephen to walk us through the numbers, and we'll come back later in the presentation with a strategic update and outlook for 2024. Four thoughts by way of introduction. First, Envista is a fundamentally good business. With significant unmet global demand, dental has proven to be a secularly growing market over time, and Envista is well positioned to serve this demand, holding a top-three position in the most attractive segment. As a former Danaher business, we have a high-performing continuous improvement culture, which is evident in our strong operations and talented people. Having spent most of my career in other structurally advantaged companies, I know what they look like and can see that this company is built on a very solid foundation. With that as a starting point, I would also say that our recent performance does not reflect our full capabilities much less our vast potential. While free cash flow is strong in the quarter, up 41%, our core growth of negative 3% and adjusted EBITDA margin of 10% was below expectations. As Stephen will explain in a moment, these include a number of one-time and non-cash charges. Excluding the impact of these items, we believe this implies an underlying performance of the business in line with Q1. Even at these levels, though, we are capable of more. And as such, we are swiftly taking action to position our company for better performance moving forward. To that end, we filled three critical executive roles in Q2. We're making important investments in Spark manufacturing technology to improve profitability and support long-term growth. We're drawing down channel inventory in our distribution businesses connecting us even more closely to end-user demand, and we're continuing to make growth investments in our largest and most profitable business Nobel Biocare. We're excited by the return potential of these investments. On the back of all this, we are reinstating full-year guidance of negative 1% to negative 4% core growth and 10% to 12% adjusted EBITDA margin. The P&L impact of the actions I mentioned are concentrated in Q2 and Q3, and we expect to return to growth in Q4. Absent one-time and non-cash charges that Stephen will detail later, we believe that the underlying performance of our business will be more in line with modest growth in low-teens margins on a full-year basis. As you will recall, I joined Envista on May 2, and my first 90 days with the business has been both productive and encouraging. As I previewed on our Q1 earnings call, I focused the lion's share of my time over the past few months in three primary areas: customers, colleagues, and operations. With respect to the first, I've had the pleasure to meet with dozens of customers, key opinion leaders, and business partners. With close to two-thirds of our business sold direct, our customer connectivity is strong, and the quality of our portfolio is well recognized. Stakeholders know that Envista is a great company, and they want and expect even more from us. Regarding my colleagues, I have connected with nearly all of our top 150 leaders as well as many of our front-line teams. They also know how strong your company is and are similarly eager and committed to performing up to our potential. Ours is a continuous improvement culture, which means we know we must be better tomorrow than we are today. The opportunities I've seen in just the first 90 days are both meaningful and actionable. As far as this and our predecessors have come across our 100-plus year history, our brightest days are still ahead. Finally, in terms of operations, I expected to find a capable organization, and I've not been disappointed. I have visited most of our largest sites around the world already, and the benefits of the Envista business system are readily apparent. EBS is an important differentiator for us. However, even here, there remain opportunities to extend the impact of EBS across our global footprint. There is more we can do to convert our capabilities into consistently strong results. This is what good companies do. And most of what I've seen across my first 90 days supports what I said on the previous slide. Envista is a fundamentally good company. Before I turn it over to Stephen, let me say a few words about the dental market as well as our relative performance within it. In total, we estimate that the global dental market grew low single digits in the quarter. Compared to its longer-term growth, this relative market softness that we and others have commented on continued in Q2, driven by macro factors like higher interest rates, moderate consumer confidence, and rebalancing of demand following the post-COVID market surge in late 2022 and '23. On the positive, patient traffic remained steady and several of our larger customers enjoyed solid growth in the quarter. Looking at sector-specific conditions, the implant market was flat to slightly positive in Q2 with value outperforming premium and single tooth procedures faring better than full arch cases. While we underperformed the market in the second quarter, we took steps to improve our overall performance. We have significantly increased our local training programs aimed at supporting our top customers and their referral networks, delivering more than 800 local training courses in H1 alone. In addition, year to date, we've had more than 5,000 customers participate in national events aimed at attracting and developing new doctors. We believe these investments are starting to pay off. In North America, our performance relative to the market also improved. Our new customer win rate in Nobel is up, and sales from new customers grew both year over year as well as sequentially. Furthermore, on a global basis, our value implants business grew for a second consecutive quarter as we continue to build momentum in this important segment. The orthodontics and dental consumables markets also saw flat to low single-digit growth in Q2, and we gained share in both of these segments. On the ortho side, our traditional bracket and wire business saw a solid uptick with particular strength in emerging markets. Reported sales growth for Spark slowed in the quarter as we're now deferring a larger portion of case revenues. As described in our filing, we recognize a portion of Spark revenue at the start of the case and the balance over the treatment time. This change in deferral has no impact on the cash flows or true economics of the business. Indeed, we believe our case starts grew above market in the quarter. Diagnostics was the only major dental market segment experiencing a contraction in Q2, down mid-single digits, impacted by the higher interest rate environment I mentioned earlier. Our business contracted high single digits in the quarter as we saw the continued impact of exiting some lower priority, more price-sensitive geographic markets. In summary, it's been an encouraging first three months for me at Envista. I'm pleased with our ability to attract world-class talent and impressed with how quickly the organization is moving to enact the changes needed to improve our trajectory moving forward. We still have much to do, but we're off to a promising start. With that as an overview, I'll turn it over to Stephen to take us through the numbers.

Thanks, Paul. Before reviewing our second-quarter results in detail, I would like to comment on a non-cash impairment charge related to goodwill and intangible assets that we recorded in the second quarter. As Paul mentioned, the general market softening driven in part by higher interest rates and moderate consumer confidence has contributed to reduced revenue, operating margins, and expectations for future cash flows. These effects, coupled with the decline in our stock price, have resulted in the estimated fair value of certain parts of our businesses to fall below their carrying value. Therefore, we recorded a $1.2 billion non-cash charge from goodwill and intangible impairments in the quarter. Turning to our results in the second quarter, we delivered sales of $633 million. Adjusting for the impact of currency exchange rates, core sales for the quarter declined 3.2%. This reflects growth in our specialty products and technology segment, offset by a 10-point decline in our equipment and consumables segment. Outside of typical business drivers, sales in the quarter were also impacted by two unusual dynamics. First, as Paul mentioned earlier, we have increased the proportion of revenue we are deferring on new Spark cases. The increase in deferral is based on our current best estimate of aligner usage rates and the timing of future shipments. As the number of completed Spark cases continues to grow, we empirically adjusted our estimates to reflect actual experience, better matching revenue, and aligner use by our customers. It is important to note that this change only impacts the timing of revenue, creating a near-term impact on reported results. This change does not impact the underlying performance of the business nor does it impact the timing of cash flows associated with cases sold to doctors. Second, in addition to changes in Sparks deferred revenue, Q2's reported revenue was also impacted by a strategic decision to reduce consumable inventory in the North American distribution channel. Over the last few years, we have worked to reduce the number of weeks on hand of our distribution partners. Given our strong operational performance and consistently high customer service rates, we took the decision to further reduce inventory in the channel and believe that this is better for both our own business and our distribution partners. We closed Q2 with North American channel inventory at roughly half the levels we had at the peak of 2023. While this creates a near-term impact on growth and margin, it positions Envista for better performance moving forward. Geographically, our developed markets declined mid-single digits with both North America and Europe declining in the quarter. Nearly all of the decline was driven by the increase in Spark deferrals and the realignment of dealer inventory. Excluding these impacts, developed markets grew modestly. Our emerging market business grew low single digits in the quarter. Russia delivered high-double-digit growth versus sanctions impacting Q2 of 2023. China declined low single digits against a very strong second quarter in the prior year. While there has been near-term volatility in China and Russia, these are good markets for us. We have been serving customers here for a long time, and we are well positioned for continuing long-term profitable growth in these critical markets. Our second-quarter adjusted gross margin was 54.2%, a decrease of 370 basis points compared to the prior year. The decline was driven by lower volumes associated with channel inventory reduction, less favorable mix, and one-time costs associated with technology investments in Spark manufacturing. Our adjusted EBITDA margin for the quarter was 10%, which was 910 basis points lower than in Q2 of 2023. I will walk you through the components of this in a moment. Our second-quarter adjusted diluted EPS was $0.11 compared to $0.43 in the comparable period of the prior year. Our free cash flow in the quarter was a bright spot as we delivered $86.3 million of free cash flow, a 40% increase versus prior year. Given the unusual dynamics in both our core growth and adjusted EBITDA margins, we have added two additional bridges to provide further transparency regarding our quarterly results. For the reported revenue perspective, the increase in Spark deferrals negatively impacted top-line results in the quarter by $11 million or roughly 107 basis points. We expect to recognize all the deferred revenue over the next 18 months. Commercially and operationally, we continue to make progress in Spark. In the quarter, we saw a greater than 20% increase in the number of active Spark doctors. And year to date, we have launched Spark in six additional countries. We expect Spark to continue to be a growth engine for Envista over the long term. When it comes to the realignment of dealer inventory, the impact reduced our sales volumes by greater than $17 million in the quarter as compared to last year. With channel inventory levels now less than half of where they peaked in 2023, we expect to see sequential growth in consumable sell-in as we move through the second half. Further, long term, we expect sell-in to match sell-out more closely leading to more consistent growth and the opportunity for additional shares. Outside of these two major dynamics, we saw a solid contribution to growth driven by pricing in the market. And as you can see from the bridge, our adjusted EBITDA margins in the quarter were down 910 basis points year over year. A little over a third of this reduction was driven by one-time costs that are not expected to repeat. As mentioned, these include investments to further improve Spark manufacturing, where unit costs declined double digits in the quarter. After, another roughly one-third of the impact was driven by the increase in Spark revenue deferrals and the decrease in dealer inventory. In the case of dealer inventory, we did not anticipate further drawdowns moving forward, although there will be a year-over-year impact in Q3 relative to higher levels of 2023. Similarly, while Spark deferrals will result in further P&L headwinds in the near term, it provides an equal and offsetting tailwind down the road. Deferred Spark revenue will be recognized fully over the next 18 months and consumable sell-in should normalize in line with sell-out of our process. As discussed on previous calls, we continue to make strategic investments, particularly in the implant business. The investments are centered on training and education, sales and marketing, and R&D, all aimed at accelerating growth. Provided we are successful in this regard, the high-margin profile of this business should result in attractive returns for these investments. A few other items of note: we delivered 100 basis points of margin expansion from price in the quarter and delivered 100 basis points of net productivity. Turning now to segment performance, core revenue in specialty products and technologies increased by 0.9% compared to the second quarter of 2023. Our orthodontic business grew mid-single digits with Spark delivering growth despite the increase in deferred revenue. Our brackets and wire business grew solid mid-single digits as we saw robust growth in Russia and China balanced with more tepid demand in other parts of the world. Implants declined low single digits in the second quarter. Our value implant business posted modest growth, a continuation of improving performance that we saw in Q1. Our premium business was impacted by the continued market weakness in full arch implant restorations and continued underperformance in North American markets. However, as Paul mentioned, we are starting to see benefits from the investments we are making. Our performance relative to the market has improved, and we continue to protect existing customers and win new business at an accelerated rate. For the second quarter, our specialty products and technology segment had an adjusted operating profit of 9.1%. This was down 960 basis points versus the same period in the prior year, driven by the impact of investments, one-time costs, and deferred revenues described previously. Core sales in equipment consumables segment in the second quarter decreased by 10.1% compared to the second quarter of 2023. Our diagnostics business declined high single digits. The decline was primarily driven by weakness outside North America. Encouragingly, our North American business grew as demand is stabilizing. Emerging markets saw a large decline in the quarter, driven by the combined effect of the muted macro conditions and our de-emphasizing our non-strategic geographies and solutions. With these efforts, we continue to refine our focus and concentrate our energy in markets where we can build and maintain sustainable competitive advantage. Our consumables business declined double digits in the quarter, driven by the drawdown in channel inventory in North America. As discussed, patient demand remains resilient, and we continue to strengthen our partnership with our distributors to drive sell-out. Equipment and consumables, adjusted operating profit margin was 16.1% in the second quarter of 2024 versus 25.7% in Q2 of 2023. Most of the decline was directly related to volume and mix, along with some discrete investments in our distribution partnerships and in diagnostics marketing. We expect equipment and consumables growth and margins in Q3 to remain challenged due to the year-over-year comparisons. Conversely, Q4 should show a marked improvement with both year over year and sequentially as we position our E&C business to deliver growth in 2025 and beyond. In the second quarter, we generated free cash flow of $86.3 million, a 41% improvement versus prior year. Our increased cash flow was driven primarily by improved collections and better vendor management. We believe that our improving free cash flow is indicative of the solid underlying performance of our business. I'll now turn the call over to Paul for a strategic update.

Thank you, Stephen. Over the next few slides, I'll share additional background on our recent executive appointments, highlight areas of particular focus for us in H2, and go into a bit more detail on the full-year guidance I sketched out earlier. On July 15, we announced three new members of our executive team: Eric Hammes as the CFO; Stefan Nilsson as the President of Nobel Biocare; and Veronica Acurio as President of Orthodontics. Eric joins us from Rockwell Automation where he served as Vice President of FP&A. Prior to Rockwell, Eric spent over 25 years at 3M, where he held a variety of senior financial and operational leadership roles, including Chief Accounting Officer, CFO of 3M's healthcare business, Director of Finance for 3M's orthodontics division and SVP of Finance for 3M International, which represents roughly two-thirds of the company's revenue. In addition, to his deep finance and accounting experience, Eric has also held several senior operating roles, including EVP of Business Transformation, Chief Country Governance Officer, and EVP of Enterprise Operations with responsibilities spanning 170 manufacturing sites and over $30 billion in annual production. Relevant to Envista, Eric's entire career has been in businesses with a focus on growth and a continuous improvement culture. His experience is global, having lived and worked in the US, Europe, and Asia, and he knows our dental markets well having worked in and around them for many years. At the same time that we welcome Eric to Envista, I would like to express my deepest gratitude to Stephen Keller who capably served in an interim capacity while we searched for a permanent CFO. As Eric is with us today on the call, I'll ask him to say a few words of introduction prior to his appointment as CFO tomorrow. Eric, welcome to Envista.

Thanks, Paul. I'm thrilled to join Envista at such an exciting time for the company. Our leading brands in the most attractive segments of dental coupled with the strength of our people create the foundation to compete, grow and win. Like so many of you, I see the unique opportunity at this time in Envista's decorated history to create real value for all our stakeholders. In the weeks and months to come, I look forward to meeting our partners and customers, my colleagues, and our shareholders.

Thank you, Eric. Moving forward, Stefan Nilsson joins us from Colosseum Dental, where he was CEO for over five years. Under his leadership, Colosseum more than doubled in revenues growing to be Europe's largest dental service organization. Envista is highly customer-centric and few are as well positioned to understand the needs of our customers as Stefan, who was one himself for many years. He knows firsthand the distinctive strengths on which we're building as well as specific opportunities for us to be even more competitive. Prior to Colosseum, Stefaan was CEO of GrandVision in Brazil, a leading optical service provider. And before that, he spent over 18 years at Nestle in a variety of operations, marketing, and general management roles around the world. Like Eric, Stefan brings relevant breadth and depth to Envista. Underpinning our global reach, Eric and Veronica will be based at Envista's headquarters here in Southern California, while Stefan will be based at Nobel's HQ in Zurich. Veronica Acurio brings to Envista more than 30 years of dental and MedTech experience. She was most recently President of 3M's largest business, the roughly $5 billion medical solutions division. Prior to that, she held various commercial, operational, and business leadership roles of increasing responsibility, including SVP of 3M Health Care in the Greater China region, Managing Director of 3M Taiwan, VP of Business Development for 3M Health Care in Latin America, and Global Business Director of 3M Oral Care's restorative business. Like Eric and Stefan, she's lived and worked all over the world, including the US, Asia, and Latin America. Like Stefan and Eric, Veronica knows dental specifically and medtech more broadly. And like Eric and Stefan, she has consistently demonstrated the commercial, financial, and operational excellence needed to realize the exciting potential we all see here at Envista. Having touched on our progress in Q2, let's now look forward to the second half where we'll intensify our focus in three particular areas: growth, operations, and people. Growth remains our first priority. With the high margins that accompany our leading positions, accelerating top-line growth is the key to even faster expansion in earnings and cash flow. We'll see this play out in dental consumables as we expect to return to sell-in growth in Q4 with meaningfully lower channel inventory. We'll see the same in implants as the investments we are making continue to pay off. And we'll see this in our fastest growing business Spark, where our attention remains squarely focused on expanding the number of ordering clinicians and associated case volume. Moving on to operations, we have more opportunity to optimize our cost structure, continuing to save where we can, so we can invest where we want. As Spark is still highly dilutive to overall margins, the faster it has grown, the more margin compression we've absorbed. As Spark continues to scale, this margin headwind will eventually shift to accretion. A good part of this is driven by volume, and we are amplifying the benefit through the technology investments mentioned earlier. And most importantly, people make all the progress possible. The sustained success of Envista will hinge on our ability to further advance our culture of performance, inclusion, and continuous improvement. The fact that we are able to so quickly attract world-class leaders points to the enormous upside in this company that the Envista team will unlock together. And this all begins with delivering on our updated 2024 commitments. So let's turn to those now. As mentioned at the outset, we are reinstating full-year guidance of negative 1% to negative 4% core growth and 10% to 12% adjusted EBITDA margins, inclusive of the one-time and non-cash charges that Stephen detailed earlier. We are acting now to position Envista for improved performance moving forward. The P&L impact of the actions covered on today's call will be even larger in Q3 before a projected return to growth in Q4. Excluding the impact of the one-time and non-cash charges, we would expect modest core growth and low teens EBITDA margins for the year. We will build on this momentum as we move into 2025. Four closing thoughts before we open it up for your questions. First, I'll underline again that dental is an attractive market with proven long-term growth drivers. We are seeing a short-term softening here in 2024, but over any meaningful period of time, this market has grown at stable GDP-plus rates. Second, Envista has built leading and defensible positions in the most exciting segments of the dental market. Our portfolio is well-balanced, both by category as well as by geography. And the business has high margins and strong cash flow characteristics, allowing us to self-fund the steady growth embedded structurally in our markets. Third, we need to do more to access this opportunity, and we are swiftly taking the actions needed to accelerate top- and bottom-line growth. The actions taken in Q2 and Q3 should allow us to return to growth in Q4 and then carry the momentum forward into 2025. Finally, and most importantly, we are propelled by the significant opportunity we clearly see in front of us to create even more value for our key stakeholders. I applaud my colleagues for the encouraging progress we've made together in my first three months. And in the same way, we're grateful for the strong support we enjoy from our customers, partners, and shareholders.

Thank you, Paul. That concludes our formal comments. Paul and I will now take your questions.

And our first question will come from Elizabeth Anderson with Evercore ISI.

Hi, everyone. Thank you for the question and congratulations on getting started. As we look ahead for the rest of the year, could you provide some insight into the actual run rate of the business? I'm calculating that the midpoint of your EBITDA guidance for the second half of the year is around $125 million, within the range of approximately $100 million to $150 million. Is that an accurate reflection of the business's current run rate as we consider the second half of the year and beyond? I understand there are several one-time items in this quarter, but I'm more focused on the outlook for the latter half of the year. Thank you.

Thanks for the question, Elizabeth, and it is the right place to start. So let me recap, there were, as you said, a number of moving pieces in the quarter. We announced reported core growth of negative 3% and reported EBITDA margins of 10%. If we adjust for the one-time and non-cash impacts, underlying performance was more like positive 1% core growth and 14% EBITDA margin in the quarter, pretty similar to what we announced in Q1. Now on a full year basis, we've reinstated guidance of negative 1% to negative 4% core growth and 10% to 12% EBITDA on a reported basis. But on a similar normalized basis, excluding the one-time and non-cash effects, we expect to deliver a similar 1%-ish core growth and 14%-ish EBITDA margin for the full year. Now looking at the second half by quarter, I had again underlined that the impact of the one-times will be larger in Q3 than Q2, and this will show in the Q3 reported result. Conversely, the impact will be less in the final quarter. So we expect to return to growth in Q4, allowing us to build momentum heading into 2025. And most importantly, I'd go back to where I began in this is a fundamentally strong company. With our underlying performance in the quarter above our reported results, it was still below our demonstrated capabilities. So we have a clear line of sight to what improvements are required to improve our trajectory, and many of those actions are underway already. We have work to do here, but we're pointed in the right direction.

Thank you for the helpful context. I understand that it provides a starting point of an implied 200. As we look ahead, particularly in the implant business, what key actions are you considering in the short term compared to those that might have a longer-term trajectory? I recognize that the macroeconomic environment is what it is, but what do you view as the near-term and potentially longer-term priorities for the business?

That's a great question. When it comes to implants, we need to start with the market and margin dynamics. This is a well-established growth area. Currently, premium growth has slowed, particularly regarding full arch procedures, while value has performed slightly better. We anticipate both will pick up momentum in the future. We are seeing improvements on both fronts of our business. Our gap in premium market growth narrowed this quarter, and we experienced a second consecutive period of growth in the value sector. Additionally, margins are an important aspect of this equation. One appealing aspect of these businesses is that increased growth leads to enhanced earnings and expanded margins. We are committed to making the investments initiated in the first quarter and continuing through the second quarter to drive growth in implants, which amounts to roughly $6 million per quarter. Although this has some short-term effects on margins, history shows that the growth achieved ultimately offsets such impacts over time.

Hey. Thanks. You mentioned a few times that you think the long-term growth rate in dental is like a GDP-plus type of rate. I guess how are you thinking about the market getting to there? And in terms of how you're thinking about getting to growth in sort of the fourth quarter, what does that entail in terms of underlying market growth for the balance of the year here near term?

I've been involved in the dental market for about 20 years, during which we've experienced significant ups and downs. Throughout this time, we've seen two notable contractions that many of us will recognize in our lifetimes. This shows that while the dental market is affected by broader economic factors, it is not as sensitive as other categories. We're noticing a similar trend currently. Regarding the second half of the year, our return to growth in the fourth quarter largely depends on how the one-time events we mentioned unfold, rather than on any macroeconomic improvements. I anticipate that 2025 will show a slight improvement in market conditions compared to 2024, which will also benefit us. The long-term growth drivers for the dental market remain unchanged.

Okay. And then if I could ask one follow-up just on Spark, and could you talk about what underlying normalized growth would be kind of for Spark for you and just underlying traction in the market competitive dynamics that you can speak to in the various different markets that you participate from a geography perspective? Thanks.

For Spark, the clear aligner category is experiencing high single-digit growth, and we have been outpacing this category over time. In the upcoming quarters, our reported results will be somewhat affected due to increased deferred revenue, but the underlying business growth will remain strong. Specifically, we've seen a significant increase in the number of ordering clinicians and submitted cases. The number of ordering clinicians grew substantially in the quarter, while submitted cases increased at a healthy single-digit rate. We are optimistic about sustained growth for Spark, which will contribute positively to Envista. Regarding profitability, Spark is currently reducing our margins, and as it grows, we are facing more margin compression. However, we made progress in lowering our unit costs, which decreased significantly in the quarter, and we expect this to contribute positively moving forward. Over the last several years, we've funded the growth of Spark through our operating income and cash flow, and we anticipate that this will become a positive factor as the business becomes accretive.

Great. Thanks, everyone. Good afternoon. There are some data points suggesting that Envista's implants division improved, with growth aligning more closely to the market compared to previous quarters. So, do you feel confident that you have the right portfolio to return to market growth, specifically a mix of premium value? Are you sure that the current investments will be enough to achieve that growth? If so, what is the timeline and what do you expect to accomplish?

Hey, John, thanks for the question. So first, on portfolio, yes, at the combination of Nobel in our two value businesses, these are good portfolios. We're well positioned to compete globally in both categories. The second thing I would say is my view, having been working in the business now for three months, is that we did not invest sufficiently previously in either of these businesses, and that's what caused the management team to start putting money back in in Q1, continued in Q2, and we intend to do the same here across the back half of the year. You pointed to the leading indicators we are also looking at that give us confidence that those investments are starting to pay off. But we've got to now convert that into the results that we shared with you guys. In terms of timing, I don't know we're yet in a position where I can call when that will turn positive, but we hope to make that sequential improvement across the second half and then carry that momentum into '25.

Got it. Very helpful. To shift gears a little bit, I thought I heard in the commentary mention for Envista, a modest growth in mid-teens margins. When considering the 2024 numbers, it may seem far off, but when you normalize this year's numbers, you noted a 1% top line and a 14% EBITDA margin. So, is that modest growth, call it in mid-teens, something we shouldn't have to look too far down the road for? In other words, can we use the normalized numbers for '24 and might we land in that range for 2025? Thanks for your time.

So let me take it in steps. So yes, I did say that the 1% core growth normalized in 14% EBITDA fairly characterized our underlying performance. That's above what we reported in Q1; it's normalized in Q2. And if you work through the math, that's about what we're guiding to for the full year. Again, adjusting for the one-time and non-cash expenses. So that's point number one. Point number two is going to we're not yet giving guidance for 2025. We'll come on to that. But our goal here in the second half is to get back to growth in Q4. I want to, again, emphasize Q3 reported results will be difficult, and then carry that momentum into '25 and hopefully do better, consistent with our kind of continuous improvement culture.

Thank you. Good afternoon, guys. Maybe going back to some of the value implant comments you made earlier, we don't talk about that part of your business very often. We don't get much insight into it. My understanding has been some of that Alpha product has come off the market given the MDR issues in Europe a couple of years ago. In the US, I think your Implant Direct business has a lot of older style implants that the market has maybe started moving somewhat away from over the last five years or so. So do you think you have the right value implant portfolio today, and how do you kind of beef that up, I guess, over the next few years if that market is at least starting to trend in some areas?

It's an important segment for us, so let me address your question. You asked about Implant Direct and Alpha-Bio and whether we think we can enhance that portfolio moving forward. Regarding Alpha-Bio, it's actually doing quite well for us, showing high-single-digit to low-double-digit growth right now. You're correct that Implant Direct has been the slower grower of our two businesses, primarily operating in North America, while Alpha-Bio is mainly outside of North America. Now, about our value implants portfolio, it's a promising category and one of the fastest growing in dental, and we definitely want to expand it. Our initial approach is to grow organically from a solid foundation we already have. As you know, we've successfully engaged in accretive M&A over the years, so that option will remain available as well.

That's helpful. Regarding the Spark business and the increased deferrals, are we estimating around an additional $150 per month for each case being deferred? Have we observed these changes in deferral rates previously, usually due to rising acuity or taking on more complex cases? With these tougher cases, there may be a need to defer some revenue for further refinements later. What is driving the increased deferral? My second question is how far the increased deferral rate might push the profitability breakeven point for the Spark business. At one point, we believed breakeven could occur by the end of 2025. Does this extend that timeline further? Thank you.

This is Stephen's last call in the hot seat. So I'm not going to let him get off too easy. I'm going to pitch that one to Stephen.

Jeff, you're on the right track regarding the additional deferral, and you're correct about the factors behind it. The increased deferrals come from two main areas: our enhanced data monitoring of overall usage rates and, more importantly, our projections of the mix we anticipate going forward. Since we are focusing more on the orthodontic segment, we are also handling more comprehensive cases. As we assess our growth, it's sensible for us to defer a bit more revenue for the anticipated future cases. This is our current situation. Regarding profitability, there is a short-term effect on it. However, we expect to see continued improvement in profitability as we navigate these deferral impacts. We plan to provide a detailed view of long-term profitability and growth for Spark during our Capital Markets Day in the first quarter of next year, where we will discuss the overall Envista portfolio's growth and the profitability of the various segments.

Hey, everyone. Thanks for taking the question. Maybe first, can we just talk a little bit about the kind of normalized EBITDA margins that you guys are talking about? I think you're talking about a 14% kind of quote-unquote normalized EBITDA margin in the quarter versus the 10% reported. Can you just bridge us what those four points are? There's a very helpful slide on EBITDA margin bridge, but a lot of points in there. So what are the four points you guys would consider get you to a normalized EBITDA margin range as we think about the run rate, especially going into '25?

Yes, you can break it down into three main areas that need normalization. First, there are one-time costs from the quarter that won't occur again. We made investments to enhance our Spark manufacturing technology, which includes some non-recurring costs. This accounts for about a third of the issue. Second, as mentioned in our presentation, roughly 300 basis points relate to the loss in profitability and the increased deferral of Spark revenue, along with the reduction in dealer inventory. Lastly, there are longer-term investments we flagged, specifically in North American implants. We chose to invest before seeing increased sales because we understand the margin profile of the business, and this is a solid investment. When we normalize for these three factors, we arrive at approximately a 14% EBITDA margin.

Okay.

This requires some effort when you're trying to.

Yes, understood. I'll ask a follow-up to that and another one. Just put them together here. As you're talking about the 300 basis points there, Spark margin headwind, you also mentioned that that needs to annualize, right? That will be next year. So do we think of that as 300 basis points of EBITDA margin headwind every quarter for the next couple of quarters until it annualizes? Then the other follow-up question is just the specialty and technologies section op margins are kind of half of what they used to be a year ago. What gets those back up more meaningfully? I think we're about 9% right now. What gets that to a mid to high teens number again in the next couple of years? Thank you.

To clarify, the 300 basis points are not solely tied to Spark; they are also linked to the reduction of dealer inventory. As Paul mentioned in his prepared remarks, Q3 will likely present more challenges regarding the reported adjusted EBITDA margin due to these factors. However, as we approach Q4, we expect these issues to stabilize and move closer to our underlying performance. Could you remind me what the other question was?

Related to our SP&T margins.

Yes, the SPT margins are being significantly affected by one-time costs and ongoing investments. These one-time costs will not occur again, and the investments will generate returns over time. Therefore, we can anticipate a recovery in SP&T margins. However, Q3 will be somewhat challenging across the portfolio, but as we move into Q4, things should begin to normalize.

Thank you very much. First question here. As you discuss the investments made in Novel this past quarter, it appears that most of it was focused on sales and marketing. I'm curious from a product perspective if you believe that the Novel products you currently have are adequate to sustain a premium market long-term growth rate, or if you expect that more investment in R&D in 2025 will be necessary to achieve that.

The approximately $6 million per quarter invested in Nobel encompasses new product development, research and development, as well as sales and marketing efforts. A significant part of this investment aims to enhance the new product pipeline. Overall, the implant portfolio is solid and we compete effectively on a global scale. However, this is a dynamic sector that relies heavily on evidence and clinician engagement, making it constantly evolving. Over the past few years, we realized that our investment levels were insufficient compared to market advancements, which led to us not keeping pace. We are now focused on correcting that imbalance.

Thank you. Helpful. And then as a follow-up, kind of switching gears about for your business, you work with dealers. How do you feel where you sit today in those relationships? Do you think those relationships are mutually beneficial? Or do you see anything in those partnerships you'd like to change?

Yeah. I mean, I think you started in the right place. Two-thirds of our business is in the specialty categories, which tend to go direct. So the general topic is less central to Envista than it is to some of our peers. But specific to the one-third that does go to distribution, we don't call them distribution partners lightly; we really mean that. We've been working with these folks for decades and where we go to market with our channel partners, we're glad we do. We see real value from what they bring. And I think they tell you this as part of my onboarding reconnecting with the industry, I spoke to my counterpart at all of our large partners, and I was encouraged by the collaborative relationship between the two organizations.

Thank you. This is Dan Clark speaking on behalf of Mike. I wanted to revisit the topic of the implant. Paul, you've been here for a short time, yet you've already mentioned an increase in new customer acquisitions resulting from the changes in the sales strategy. How should we anticipate the pace of this progress moving forward, considering you are observing some early improvements?

Yeah. I mean, that's how you accelerate growth in a high-margin category like implant. One of the good and the bad things about specialty dental is that it tends to be pretty sticky. If you have a customer and you treat them well, you often have them for decades. But the flip side of that is if you do lose a customer, it's a little bit more work getting them back on your side of the ledger. So that's why we spoke about the uptick in new customer wins or in new customer wins because it has an impact in the quarter, but it's also a longer-term proven indicator that your underlying business is improving. So listen, we're very far from declaring victory in premium implants in North America. What I meant to signal on this call was two things: one, we're continuing to invest in that payoff; and two, we see green shoots that it's starting to yield benefits. I think I'm going to avoid discussing the specifics at this moment. For competitive reasons, we won't go into the timing of our new product pipeline, but generally, things are moving in a positive direction. First, the digitization of workflows and implants is well understood. We're lucky to have both the diagnostics business and a specialty business, which allows us to connect the two sides effectively. This represents an opportunity for us, and we are dedicating time to it. Second, we've talked about the balance between premium and value offerings, and we realize we are underrepresented in the value category, which is another area we're targeting. Lastly, there's the prosthetic aspect, particularly in crown and bridge solutions, where we believe we can enhance our involvement. Our unique position allows us to engage with all facets of the solution.

Good afternoon. Thank you for your questions. Paul, I wanted to start by discussing pricing. It's encouraging to see the pricing initiatives you've implemented throughout the organization and the positive effects observed in the second quarter. Given your extensive experience in the dental market, you've witnessed the changes in pricing dynamics and the shift in pricing power over the past few decades. I would love to hear your insights and high-level perspective on the future of pricing within your portfolio, including any comments on SP&T or E&C.

Thank you for the question. To summarize, we had approximately 8.5 million in positive pricing for the quarter, which represents just over a point of growth for us. The pricing varied by segment; we experienced higher prices in orthopedics and consumables, while implants and diagnostics saw less. Overall, pricing remained relatively stable around that point of positive growth. From my experience in this category, it tends to be less sensitive to price changes compared to other investment sectors and medtech categories. I'm looking to understand if that remains true as I reconnect. The fundamental factors that allow us to maintain higher prices are quite complex and would require a longer discussion than this call permits. However, to address your question, I believe there is more potential for us in this area.

Okay. All right. That's helpful. And then just as a follow-up, I wanted to focus a little bit on the Spark manufacturing investments that you're making. And just maybe you can give us some flavor of the benefits or the contributions from those investments, any details on what exactly you're doing that's hitting the P&L and not just CapEx? How much cost are you taking out of the process with these investments? I don't know if you'd be willing to provide it or not, but just quantitatively, what do these actions mean for Spark gross margins if we're sitting here 12 or 18 months from now?

Yeah. So let's see, three parts to your question. The first is just a reminder: we're building this business for long-term success. We've built this organically entirely out of operating income and cash flow, and we put in place a foundation for a very large and lasting business. We have a global manufacturing footprint in place. Second thing I would say is that I visited two of those facilities so far in two different continents and have been impressed with the trajectory of the improvement, both the scale-up of capacity as well as the drive down of unit costs, and I referenced that in my prepared comments. Now specific to your question about how does that play out in the P&L, we had a double-digit decrease in unit costs in our Spark business in just the quarter. So this business on a gross margin perspective is profitable, but we still need to cover at the operating income level that large investment I mentioned in the global supply chain. And that's what's causing us to continue focusing on reducing unit costs. So they shift from being margin dilutive to margin accretive.

Thank you. That does conclude the time we have for questions today. I would like to now turn it back to our presenters for any closing remarks.

Thank you. As we noted in our prepared comments and echoed in the Q&A, this is a good business with leading positions in the best segments of a pretty attractive dental market. We have high gross margins, good cash flow, and a strong balance sheet. Underpinning all of this, we have a positive culture centered on performance, inclusion, and continuous improvement. So from my perspective, most of the foundational elements of success are already in place at Envista. Our focus now is on generating better and more consistent performance from this strong foundation. And we're moving swiftly in this direction as evidenced in Q2 with the executive hires, the growth investments, and the one-time actions. While the P&L impact of this work will continue across Q3, the positive benefits should become more apparent in Q4, allowing us to build momentum as we roll into 2025. Thanks, everyone, for joining us on the call and for your continued help and support.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.