Envista Holdings Corp Q2 FY2025 Earnings Call

Hello. My name is Ina, 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 2025 Earnings Results Conference Call. I'll now turn the call over to Mr. Jim Gustafson, Vice President of Investor Relations of Envista Holdings. Mr. Gustafson, you may begin your conference call.

Good afternoon. Thanks for joining Envista's Second Quarter 2025 Earnings Call. We appreciate your interest in our company. With me today are Paul Keel, our President and Chief Executive Officer; and Eric Hammes, our Chief Financial Officer. Before we begin, 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. 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 results. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the second quarter of 2025 and references to period-to-period increases and decreases in financial metrics are year-over-year. During the call, we may describe certain products and solutions 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 and 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 may differ materially from any forward-looking statements that we may 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 will turn the call over to Paul.

Thank you, Jim. Good afternoon, and welcome, everyone. We appreciate you taking the time to join us today. On today's call, I'll kick us off with some opening thoughts on our Q2 and first half performance as well as a brief strategic and operational update. Eric will then take us through the financials in more detail, and I'll wrap things up with some closing thoughts. As always, we'll then open it up for your questions. Slide 4 summarizes three things: year-to-date results, progress executing the value creation plan that we laid out at our March Capital Markets Day, and an update to our 2025 full year guidance. Let's begin on the left with Q2 and H1 performance. Q2 was another solid quarter for Envista with strong revenue and EPS growth and good margin expansion. Core growth came in at 5.6%, aided by some customer buying in advance of expected price and tariff increases. Adjusted EBITDA margin was 12.4%, up 240 basis points from Q2 of '24, supported by good growth in G&A productivity and offset in part by transactional FX losses related to the softer dollar. Adjusted EPS was $0.26, the result of the EBITDA growth that I just mentioned coupled with a lower tax rate, which Eric will say more about in just a moment. Moving to the middle of the slide, we delivered broad-based growth across our portfolio with both reporting segments and all major geographies in positive territory. Equipment & Consumables was up roughly 7% and Specialty Products grew just shy of 5%. In the same way, we're continuing to make progress on the operations front. In addition to continued reductions in Spark unit cost and design cycle times, we're off to a good start on implementing the tariff mitigation plan that we outlined on our Q1 call. And we continue to move forward as well on our people priorities with sustained improvements in employee engagement and development. Moving to the final column, given our performance and good momentum, we are updating our 2025 full year guidance. We now expect core revenue growth of 3% to 4%, up from 1% to 3% previously, and adjusted EPS of $1.05 to $1.15, up $0.10 from earlier guidance. Adjusted EBITDA margin is unchanged at approximately 14%, although EBITDA dollar expectations increased as a result of the stronger growth guidance. At our Capital Markets Day in March, we laid out a value creation plan consisting of four components: guided by our purpose, centered on our values, focused on our priorities and framed by our 2025 guidance and medium-term outlook. Let's turn now to progress made in the first half in support of this plan. Beginning with growth on the left side of the slide, we're working to accelerate growth through the four pillars we discussed in March: better accessing untapped growth in our core markets, extending our rich history of new product innovation, penetrating a prioritized group of attractive adjacencies and amplifying our organic growth with accretive M&A. In terms of better accessing market growth, we saw further gains in H1 on the price work that we began last summer. This helped support a meaningful increase in sales and marketing investment to accelerate activities like our various brand campaigns and global customer education programs. For example, we held several high-impact customer events, including a highly successful Nobel Biocare symposium in late May. With more than 75 globally renowned speakers, close to 50 master classes, two live surgeries, and nearly 1,700 attendees, the symposium celebrated the 60th anniversary of the invention of dental implants by Dr. Brånemark and Nobel Biocare while also looking to the future by unveiling several of the latest innovations in digital dentistry. We also hosted several other global customer events, including ortho and implant events in China with close to 1,000 clinicians participating in each. In addition to ramping sales and marketing, we increased R&D by 14% in the half. This enabled a number of important new product launches, including Spark Retainers, Spark BiteSync Class II corrector, scanning solution from Implant Direct and the next release of DTX Studio Clinic with additional AI features enabling doctors to go from image review to implant planning in less than 90 seconds. On the adjacency front, we drove further penetration in both DSOs and emerging markets. With respect to the former, we have now installed DEXIS CDCTs and DTX AI implant planning in all 1,000-plus sites of one of the largest DSOs in America. This milestone represents a significant advancement in digital dentistry, enhancing diagnostic accuracy, supporting clinical collaboration and greatly improving the patient experience. With respect to emerging markets, we delivered double-digit growth in the second quarter across our Latin America, Indo Pacific and Middle East and Africa regions. Rounding out our growth update, we closed two small acquisitions in the first half, both at attractive EBITDA multiples to further accelerate the organic efforts we have underway. On the operations front, we continue to enjoy strong contributions from EBS, our continuous improvement methodology that is central to how we deliver results, develop our people and advance our culture. By way of example, we reduced G&A spending by 15% in the first half while maintaining customer service levels above 95%. We also announced plans to expand our manufacturing footprint in China with a new site in Suzhou that will produce aligners, implants, brackets and wires, and some diagnostic equipment. Consistent with our local-for-local supply chain strategy, the primary focus of this site will be to support growing China demand. Finally, with respect to people, we continue to advance our high-performing continuous improvement culture as engagement and talent development continue to climb along with our growing momentum. Having now covered the high points of the quarter and the first half, I'll turn it over to Eric to walk us through the details.

Thanks, Paul. In the second quarter, we delivered sales of $682 million. Core sales in the quarter increased 5.6% and currency exchange rates added about 200 basis points. Our Q2 adjusted gross margin was 54.4%, an increase of 20 basis points versus the prior year despite foreign exchange rates being a headwind to margins. We'll cover more on the FX in detail, specifically in our margin walk, but the weaker dollar trend from Q1 to Q2 resulted in a net FX transaction loss from balance sheet remeasurement. From an operational perspective, we performed in line with our expectations, with good performance across our global supply chain, including another strong quarter of Spark unit cost reduction. Our adjusted EBITDA margin for the quarter was 12.4%, which was 240 basis points better than the prior year. Overall, margins were hurt by the net FX impact already mentioned, but helped by strong performance in volume, price, and continued G&A productivity. Adjusted EPS in the second quarter was $0.26, up $0.15 compared to the same quarter of last year and above our expectations. Our non-GAAP tax rate for the quarter was 33.3%, better than our expectations due to strong income generation in the United States. As I'll cover in the assumptions underpinning our 2025 guidance, we anticipate our full-year tax rate to be similar to the Q2 tax rate. Finally, we generated $76 million of free cash flow in the quarter, down from last year due to higher working capital. Let's now turn to two bridges to help break down our year-over-year results, beginning with sales. Core revenues grew 5.6% in the quarter with positive growth in all major businesses and geographies. Volume growth in Q2 was up about 400 basis points and ahead of our expectations. We saw improved volume growth in several businesses, notably Brackets & Wires, Diagnostics and Implants. Our growth in Q2 was also helped by a favorable prior year comparable as well as some customer buy-ahead. We estimate this buy-ahead at approximately $10 million, which we expect to unwind in the second half. Foreign exchange was a tailwind of approximately $12 million or about 200 basis points. At our March Capital Markets Day, we noted an opportunity for improved price execution at Envista, which is even more important today with the increased tariff activity. Our Q2 results reflect these efforts with price up $9 million year-over-year, contributing about 1.5 points of growth. Spark Deferral was roughly neutral in Q2, although we expect the year-over-year benefit to ramp meaningfully in Q3. And finally, we had a minor benefit from the two small acquisitions that Paul mentioned earlier. Turning to the adjusted EBITDA margin bridge. Volume and mix delivered 160 basis point improvement, reflecting particularly strong growth in the quarter from high-margin businesses like Consumables and Brackets & Wires. Improved pricing delivered 130 basis point improvement in margin compared to last year. We had a net gain of 20 basis points from the combination of productivity and investments. This was driven by year-over-year reductions in G&A as well as Spark unit costs, offset by increased investment in sales and marketing and R&D to support future growth. Increased tariff costs compressed margins by 60 basis points in the quarter. I'll cover more on our full-year net impact of tariffs when I discuss our 2025 guidance. Transactional FX losses brought a 240 basis point headwind in the quarter. With the structural diversity of our global business, there is not typically a need for financial hedging. However, with currency volatility higher of late, we did increase our hedging positions in Q2 in order to decrease balance sheet transaction exposure on a go-forward basis. Lastly, we benefited from a 230 basis point margin improvement from the absence of onetime costs that occurred in Q2 of last year. Turning to segment performance. Core revenue in our Specialty Products & Technologies segment grew 7.2% year-on-year with core sales growth of 4.7%. In our orthodontics business, Spark was up low double digits and Brackets & Wires was up high single digits, helped by the customer buy ahead, but offset in part by continued declines in China related to preparation for VBP. On the implant side, Premium delivered another quarter of positive growth globally, including North America, and Challenger returned to growth as expected. In Q2, our Specialty Products & Technologies business had an adjusted operating margin of 13.5%, up over 400 basis points year-over-year despite a 200 basis point headwind from transactional FX losses. Volume, price, and net productivity were all positive in this segment in addition to the benefit from prior year onetime items. Moving to our Equipment & Consumables segment. Core sales in the quarter increased 7.3% versus prior year, including double-digit growth in Consumables against a soft comparable last year. Diagnostics core sales growth was also positive, including mid-single-digit growth in our largest market, North America. Adjusted operating margin for this segment improved 140 basis points versus Q2 2024, driven by volume growth and price capture. FX transaction losses were a 300 basis point headwind in E&C in Q2. Let's now turn to cash flow. Q2 free cash flow was $76 million, a decline of about $10 million when compared to the second quarter of last year as improved sales and margins were offset by increases in working capital, which were driven by our faster growth. First half free cash flow was also down from last year, primarily driven by the low incentive compensation payout of Q1 2024. Our first half free cash conversion was 84%, which is typical of a normal first half. As discussed at Capital Markets Day, we expect free cash flow conversion over time to be around 100%. Our balance sheet remains strong and stable with a net debt to adjusted EBITDA of approximately 1x, providing welcome stability and flexibility, especially in periods of heightened macro uncertainty. Finally, we deployed $82 million in Q2 to repurchase 4.8 million shares of stock. On a year-to-date basis, we've repurchased $100 million or a total of 5.9 million shares as we continue to execute our $250 million 2-year repurchase authorization. I'll now say a few more words about our updated guidance that Paul noted earlier. Slide 13 summarizes the changes, a core sales growth range of 3% to 4% versus 1% to 3% previously. EPS of $1.05 to $1.15 versus $0.95 to $1.05 previously. And adjusted EBITDA margin unchanged at around 14%. Slide 15 details some of the assumptions underlying the updated guidance. First, we continue to expect the dental market to remain stable with no significant improvement or deterioration in the second half. For exchange rates, we now expect a benefit of approximately 150 basis points to reported sales for the year. This is based on June ending FX rates. We anticipate the adjusted EBITDA impact from the weaker dollar to be neutral with no benefit as the translation benefits for the full year are roughly offset by the transactional losses incurred in the first half. For the full year, we continue to expect our supply chain, pricing and cost savings actions to offset the impact of increased tariffs. Recognizing that the tariff landscape continues to be dynamic, this is based on tariffs that have been announced to date. As noted previously, we expect the 2024 change in our Spark Deferral to generate a $30 million year-on-year revenue benefit in the second half with a significant majority in Q3. There is no change to our expectations regarding the previously implemented restructuring. Savings are tracking well as reflected in our recent G&A improvements. Our tax rate estimate has improved, as I mentioned earlier, and we now forecast an adjusted rate of 33% for the year. This is the result of improved U.S. profits, which increases the basis of our interest expense deduction. We are still assessing the impact of the recently enacted changes in U.S. federal tax law. In addition, we have a project underway to further reduce our global tax rate over time. We will update you regularly as things progress. As we've already covered our stock buyback program, I'll turn it back over to Paul to wrap things up.

Thank you, Eric. A few closing thoughts on the quarter. First, underlying dental market conditions in Q2 were pretty similar to what we've seen in recent quarters. While macro uncertainty continues to be high, the underlying dental market remains stable. Second, our Q2 results were positive, including core growth of roughly 5.5%. We posted just shy of 3% core growth for the first half. Reflecting this good start, we've raised full-year growth guidance to 3% to 4%, along with an updated EPS range of $1.05 to $1.15. I'll close by noting that this progress is made possible by the wonderful talent and commitment of our global Envista team. We appreciate all you do in the service of our stakeholders. In the same way, we're grateful for the support we receive from our customers, partners, and shareholders. That completes our prepared remarks, and we'll now open it up for Q&A.

And your first question comes from the line of Elizabeth Anderson from Evercore ISI.

Congrats on a really nice quarter. I think there's been a lot of confusion about the state of the dental market. Were you surprised by the strength that you saw across the portfolio and your different businesses this quarter? Was it turnaround driven? Do you think the main drivers were market driven? And how are you thinking about the broader dental macro at this point?

Elizabeth, thanks for kicking us off. Maybe a couple more thoughts on the market and then a few comments on our specific performance in addition to what we just covered. Starting with the market, we continue to see green macro shoots. So I would say Q2 macro was incrementally better than Q1. Unemployment still very low. Interest rates in many markets, notably Europe, continue to come down. And then the big change Q2 from Q1 was the tick back up in consumer confidence. Both the June and the preliminary July numbers were pointed northward, which helps. Having said that about the macro, I think in fairness, the preponderance of dental-specific data that you guys get and that we get, things like the recent ADA survey or some of the third-party research, they all continue to point to a slow but stable market. So I think that captures the market conditions. Specific to us, in addition to what we said earlier, we had particularly strong growth in our orthodontics business, both the Brackets & Wires side as well as the Clear Aligner side were strong. We also had very good growth on both sides of our Consumables business, Core Dental as well as Infection Prevention. We had similarly balanced growth in Implants with both Premium and Challenger in positive territory. And then it was nice to see Diagnostics return to growth, especially with the mid-single-digit performance in both North America and Europe. Maybe I'd also note that the growth was steady across the quarter. You'll recall that we released Q1 earnings on May 1. And I think in one of the Q&A, someone asked us how April was coming in. We mentioned that it was coming in consistent with our expectations. That momentum now as we have the full quarter behind us, did continue across May and June. Anticipating a similar question on this call, July is almost in the books for us. So we have a good first look there. And again, July was very consistent with our steady performance and expectations. So on balance, as we put all of this together, I'd say this is a positive step forward for Envista. Our plan is generally working, and we'll just keep working the plan. So thanks for the question.

Can I just double-click maybe once more on the Brackets & Wires comments? That was certainly one area of outsized growth versus what we traditionally see in that market. Could you tell us a little bit more about the drivers of that outsized growth in the quarter?

Yes. For Brackets & Wires specifically, I would say there are two big contributors to that. The first is although we talk more about our investment in sales and marketing on the Implant side, we have been increasing our activity on the Ortho side as well. Investment there tends to return nicely, especially because of our very strong position on the Bracket & Wire side. The second is there's some question of whether there's a shift from Clear Aligners to Brackets & Wires. We'll probably get another question on that as we go through the Q&A. I think maybe on the margin that helped a little bit, although the mix globally in case starts between Brackets & Wires and Aligners has been generally stable now for about a decade, three quarters to Brackets & Wires and a quarter to Aligners. But kind of consistent with all of our businesses that we talked through in the prepared remarks is consistent intentional progress on the Brackets & Wires side.

Congrats on the quarter.

And your next question comes from the line of Jeff Johnson from Baird.

Paul, I was wondering if I could just ask another question on the Brackets & Wires business, not so much about the Clear Aligners versus Brackets & Wires. But I think you said China was still down year-over-year kind of ahead of VBP. The last two quarters, I think your China Brackets & Wires business has been down 50%, 5-0 percent. Any way to put us in a range of how much it was down this quarter? And are we at the point now where inventory levels have been adjusted and we could look to China VBP on the Ortho side to be growth additive as opposed to dilutive moving forward into the back half of this year? And then maybe one other VBP question, if I could.

Sure. Let me provide some context on the factors contributing to the pre-VBP decline in the Bracket & Wire segment. I'm also checking with Eric to find the specific number for China. We have learned from the implant VBP experience; both Orthodynamics and Implants are direct businesses. In China, we depend on the channel for logistics due to the market's vastness and fragmentation. Considering that we expect prices to decrease with VBP, we're cautious about how much inventory we maintain there. Some of our more discerning customers are delaying treatments because they anticipate a reduction in procedure prices. Having experienced this with Implants, we expected negative growth for Brackets & Wires in the first half. Once the procedure price is announced and product pricing follows, we foresee an increase in patient demand and will likely increase inventory to meet that demand. Eric is still looking into the specifics, and I will check if he has the number.

Yes, Jeff, regarding your question about the growth rate movement, let me break it down by quarter. In the first quarter, we discussed Ortho, noting that our China business in Ortho relies heavily on Brackets & Wires, over 95 percent, which saw close to a 50% decline year-over-year in Q1. We experienced a slight increase in Q2, partly due to our team strategy from the Implants playbook aimed at boosting penetration before the value-based pricing (VBP) takes effect, which we believe will positively impact us afterwards. However, putting the two together, we still faced a year-over-year decline of 20% to 30% in the first half. For Q3, we expect performance to be around flat, but we forecast significant growth in Q4. There is, however, considerable uncertainty regarding this. Currently, we can only account for what we’ve observed from the service VBP and the anticipated timing of the product VBP, which is somewhat unpredictable. Nonetheless, we should see strong growth in the second half, contingent on how VBP is ultimately rolled out.

All right. That's helpful. And then maybe the follow-up on VBP. Just obviously, a lot of chatter about a second round of VBP for dental implants starting next year. You guys are putting some China infrastructure in place. One, that added infrastructure, how much does that cushion or protect your likely ability to participate in that VBP, number one? And number two, just a lot of chatter about it, not a lot of specifics. Just any detail you can provide us? Do we think it's going to happen early in the year? Historically, we've seen second rounds maybe have less price declines than maybe what you see in the first round, things like that. Just any idea kind of how that second round of implant-based VBP might play out next year in China?

All right. Let me take both parts of the question and turn here, Jeff. So first, with respect to local manufacturing and VBP, local manufacturing did not appear to play a role in the first implant VBP, nor have we received any communication that will be a factor in the Ortho VBP that's currently underway. Market share, customer satisfaction and, of course, price have been and we expect will continue to be the most important VBP criteria. Now as local manufacturing indirectly supports all three of those, our investment in China should be on the margin helpful in strengthening what we consider to be an already pretty good VBP position. So that was your first question. Second, with respect to VBP 2 timing for implants, we have not received any communication on that. So I'm afraid at this stage, I don't have any better information than you do.

And your next question comes from the line of Jon Block from Stifel.

To start off with Spark, you mentioned improving gross margins in the slides. Can you elaborate on whether Spark is expected to achieve positive EBIT in the latter half of this year, specifically in the second half of 2025? If so, what are your thoughts on the progress moving forward? Additionally, were there any recent changes to Spark pricing in the market? I have a more specific follow-up as well.

Thank you, Jon. I'll address that. Our plan for Spark, as noted in our preread remarks, is that our performance trend towards profitability remains unchanged. We expect to reach profitability in the second half of 2025, which is still our perspective. We've maintained this trend for multiple quarters, likely around 8 to 10 quarters of consistent quarter-on-quarter reductions in unit costs. This quarter, we saw a year-over-year decrease of over 20 percent in unit costs, which indicates that our Spark gross margins are improving. The plan remains intact, and our profitability trend is on track. Importantly, the key components of that trend, including primary case start growth, overall volume growth for revenues, and unit costs, are all aligned. Additionally, design lead times, while less critical to profitability, are significant for our competitive position, and they are also in good shape. We will provide updates throughout the second half regarding the numbers, but we do anticipate becoming profitable in the second half. Regarding your second comment on pricing, we experienced very modest year-over-year price changes, which were not materially significant. We saw low single-digit price growth year-over-year in Spark, effectively meaning we are flat. That's our current status.

Fair enough. Eric, perhaps I should just continue with you. Is there anything you want to highlight? You've completed half the year, but is there anything to point out regarding the performance in the third and fourth quarters by division, or more importantly, regarding the EBITDA margin? Relative to our estimates, the only concern in what was an otherwise very strong quarter was the EBITDA margin. You clarified that issue in the bridge, noting some was due to foreign exchange. As we consider the remainder of the year and your strategies to mitigate some of the tariffs, how should we expect the distribution between the third and fourth quarters? Any insights you can share would be appreciated.

Yes. Yes. Excellent. So let me do that in two shots, Jon. Let me just talk first on core growth and then on margins, and fully understand the spirit of the question, too. So if you just look at our guidance, I'll just talk the midpoint of our guide, which is where we see our full year. We should be about 1 point better in terms of core growth in the second half. And I'd say there's really three big moving pieces within there. One is our Spark Deferral. So effectively flat year-on-year in terms of the deferral change that we've been laying all the breadcrumbs for every quarter. That will be about a $30 million benefit in the second half year-over-year, with a significant majority, call it, 80% in Q3, which ultimately yields about a 2-point benefit in terms of growth. So that's a tailwind for us. We talked in the preread remarks about buy ahead. We estimate that our Q2 buy ahead of our announced price increases, which were earlier in the quarter, was about a $10 million benefit. We think that comes back largely in Q3, maybe a bit in Q4. So that's a point of growth going in the other direction. And then just be mindful that our first half growth was held up by about 1 point in Dental Consumables' favorable comp. That was based on us really bringing the dealer inventory channel last year to a point of health, which all happened in the first half of last year. So those are kind of the big three points on the growth. If you do all that math, you'll find that the rest of our business is stable to slightly improving in the second half. And then on margins, our margin guide at approximately 14%. What that means is we're about 2 points better in the second half. We would expect as we typically do seasonally that volumes are a tailwind for that. We're going to continue to drive good productivity. So as we just talked about, Spark gross margins, Spark unit costs will be on the plus side of the ledger. G&A will continue to deliver year-over-year, and we expect to get a good amount of price. On a full-year basis, of course, what we're really seeing here is upside versus our original margin guide on what we would call just core operations, volume, price, productivity, but FX is dilutive for us. And that's a favorable translation benefit, but it's offset fully by the first half's transaction losses. And versus our original guide, that's about a 50 to 70 basis point headwind. We saw a lot of that, of course, in the first half, but it's factored into our full year guidance.

And your next question comes from the line of Steven Valiquette from Mizuho Securities.

I guess on Clear Aligners, one of your competitors also talked about seeing some decent levels of patient scans and practitioner case submissions in the second quarter, but then they called out that some patients were not following through with case conversion and treatment. So does that seem like that was happening for Envista, given your strong growth? But I guess I'm just curious, historically, is this a phenomenon that has been noteworthy enough to impact your results in various quarters historically? Just wondering how prevalent this is really across the industry regardless of whether you were seeing that this quarter or not?

For us, our Spark business has had pretty consistent growth. Again, Eric couldn't remember the number of quarters that the unit cost has sequentially reduced. I can't remember the number of successive quarters that we outgrew the market. So for us, we expected to outgrow the market again in Spark, and that's what we did see. So specific to whether our doctors are having slower patient conversions, anecdotally, 10,000 orthodontists, you get a lot of anecdotes. But for us, no, I don't think I would point to that as a meaningful impact in our Q2.

And your next question comes from the line of Brandon Vazquez from William Blair.

This is Russell on for Brandon. Last quarter, you mentioned that you were able to broadly offset the impact of tariffs and continue to believe so given things are always bound to change. But could you give any updates as to the mitigations and implementations and future timelines you mentioned previously?

Sure, I can take that, Russell. To provide some clarity, in our second quarter margin analysis, we indicated the impact of tariff costs, which accounted for about $4 million and resulted in roughly 60 basis points of margin dilution. Looking ahead to the second half of the year, considering the timing of tariffs and how those expenses affect our balance sheet, we expect to incur between $15 million to $20 million in tariff costs, distributed fairly evenly across the quarters. Currently, we believe the tariff environment is relatively stable and predictable. Our strategy remains unchanged. As mentioned in the first quarter call, our mitigation efforts include working with suppliers and optimizing our own distribution network, as well as diversifying sourcing to our multi-geo sites. Additionally, we are seeing significant progress in cost reductions, such as a 15% decrease in G&A costs in the first half compared to last year. Lastly, while price adjustments play a smaller role, we anticipate that all three strategies will help us manage the $15 million to $20 million tariff cost headwind in the second half, evenly spread across the quarters.

That's helpful. And I saw on the quarter, Challenger turned back to growth after a slight decline in the previous quarter and Premium implants continue to grow well. Could you talk about what changes you saw in Challenger and any commentary you have on the overall implant market?

Yes. On the Q1 call, you are correct. We experienced negative growth for the first time in several quarters in our Challenger business. We attributed this to having two fewer billing days in Q1, which does affect direct business. We mentioned that nothing had fundamentally changed in our Challenger business and anticipated that Q2 would return to the normal low single-digit positive growth trajectory. And that’s what occurred. Everything played out as we expected. I don't have much more to add on that.

Your next question comes from the line of Jason Bednar from Piper Sandler.

Just wondering if we can talk about maybe how dental practices are behaving here. You talked a lot about stability. But maybe talk about private practices, especially they're small business owners. They've got operating uncertainties. They're getting notified of tariff-related price increases. What are you seeing in terms of the behavioral response from the dental community in the last few months? Are we seeing brand substitution? Any buying changes in response to where you guys have taken price? Are you seeing equipment purchase decisions elongating anything like that?

Yes. There are two parts to address, the pricing aspect and equipment purchases. We mentioned price several times in our prepared remarks and during the Q&A. However, the actual increase in price has been minimal, 1.5 points in Q2 and 1 point in Q1. Our price increases are modest, definitely lower than the Consumer Price Index and significantly less than the input inflation affecting our own profit and loss statement. I believe our price increases have been well accepted by the market; they prefer no increase over a slight one. We are being careful not to push boundaries there. Regarding equipment purchases, we have indeed observed delays in these purchases over the past few quarters, particularly in the Diagnostics segment. Despite this, we had a positive quarter for Diagnostics, which was encouraging. As interest rates continue to decline, this trend will be beneficial. However, technology upgrades, new sites, and DSO expansion will eventually necessitate new equipment. Therefore, we expect the diagnostic market to improve at some point.

That's helpful. And then Eric, just if I could squeeze in one on maybe just a quick bridge on EPS guidance. I'm seeing the net of $0.10 in the raise, a couple of pennies maybe from buybacks, a little over $0.05 on the tax rate. I think the balance is coming from the core revenue upside. Any other factors you'd call out as influencing EPS raise? Anything working against you that you're absorbing? It sounds like maybe tariffs are lapping through here, and maybe that's part of the factor here of why the EBITDA margins remaining the same. But just anything else you'd call out in that EPS bridge? My numbers are accurate there?

No. Let me just repeat maybe to make sure we're on the same page and then maybe just a confirming point. So I mean our core growth, I think, is self-explanatory by our range and the drop-down at gross margins, I think, is pretty obvious. Tax rate, flat versus where it's been for the first half of the year. Shares, we did have $100 million in share repurchase in the first half of the year. We would expect that to moderate. Obviously, the global equities market was pretty favorable in the first half. And if you just look at our share buyback authorization, we'll likely be something of a metered level in the second half. And then I think it really gets back to your core question, the two big trade-offs, which I mentioned in a previous answer, are the better operational performance versus our original guide, that's volume dropping down at gross margin. It's a little bit of price. It's the work that we're doing in G&A, and it's the improvement that we're seeing in Spark gross margins. But unfortunately, a lot of that or all of that is washed by the better FX on the top line falling down at effectively zero adjusted EBITDA, which is this first half transaction loss offset by a little bit better translation. And we're upbeat, if you will, on minimizing the transaction exposure going forward because we've entered into hedges against our largest exposure: euro to dollar and euro to RMB. So I think you've got the rest.

Sorry, just to make sure I'm clear, like relative to your prior guide and then to today's guide update, you do have some EPS benefit coming in though from share buyback activity that you've done to date and the drop in the tax rate assumptions. Correct?

Correct. Yes. Small amount from share buybacks and then basically the difference between our original guide, which was a 37% tax rate, and today, year-to-date and for the full year, we're projecting 33%.

And your next question comes from the line of Allen Lutz from Bank of America.

The most recent ADA survey indicated potential price increases, and our dentists are anticipating further price hikes. Paul, you mentioned previously that you haven't observed as many price increases. Can you discuss the market's current acceptance of price increases compared to previous quarters and years, and whether these changes are influenced by tariffs? Additionally, is there anything new in this regard?

Yes, generally speaking, you can gauge it by comparing volume growth to price growth, which serves as a good objective measure of acceptance. In the last quarter, we saw a growth of 5.5%, with 1.5% coming from price and 4% from volume. This indicates a positive reception. The current environment plays a role in this as well. Dentists, like any consumers, are facing rising costs in their purchases, experiencing price increases similar to CPI levels in their practices and daily lives. The 1.5% increase we implemented is much lower than that. While our customers may not be thrilled about a 1.5-point price increase, they likely understand it in light of the more than 3% increases on other items they are purchasing. They recognize that we are not profiting from this price increase, as it doesn't fully cover our input inflation.

And your next question comes from the line of Kevin Caliendo from UBS.

When considering the core margin of the business without the Spark benefit later this year, I'm trying to understand what that looks like as we approach the end of the year. I know that was a topic of interest last year. As we move into the second half of this year, are we close to around 14%? Is it slightly higher than that? How should we approach this, and is it a good idea to use that baseline for planning going into 2026?

Yes, Kevin, I can take that. I think the easiest baseline, if you will, to work from is the margin bridge that we provided in our Q2 results, not the second quarter stand-alone is sort of the be-all, end-all for a full year. But I would just say, if you look at that, our volume, price, productivity, the elements of the walk, most of those are pretty sustainable levels of margin improvement. Maybe save a little bit from our mention that we've got about $10 million in Q2 relative to price buy-ahead, which obviously helped our margins. But we would not consider the transactional FX, which is mostly that 240 bps to be really part of ongoing, call it, forward sustained rate. And if you take that into account, we're at 15%. I would back that down for the reason I already mentioned, back it down for the slightly better volume growth in Q2 due to price pull-ahead. And then I think it gets you back pretty close to the, call it, the 14% that you were mentioning. And then just maybe as a kind of a forewarning, even though we get a large Spark Deferral gain year-over-year in the second half, on a sequential basis, it's really not meaningful. We're already in the environment in terms of revenue dollars in the first half that's effectively at the same basis of what we will recognize in the second half. So big year-over-year gain, but not really much on a sequential movement basis. And I think all that kind of ties back to the 14% margin that last year we were helping everybody to understand on an underlying basis.

Got it. That's helpful. And you mentioned in your release that the VBP would have an impact on your tax rate, 33% for the full year is reflecting the higher U.S. profits, but you're assessing the impact of the VBP. I know part of the story is here that the tax rate over time should go down. Is there any change to that or any sort of long-term targets on the tax rate? And does the VBP affect that either positively or negatively?

Yes. I mean we're still assessing, as you can imagine, every company is. So first order of business is to get into the legislation. Second order of business is to see what else comes as a second order impact to the legislation. So there's a shoe to drop typically that we wouldn't even be aware of yet. I would just really go back to the core work that we're doing to improve our tax rate. And that's the intercompany loan that we have. So we have a large intercompany loan between the U.S. and Europe. That comes with interest expense that we pay on an intercompany basis. And the deductibility of that interest is capped by the size of our U.S. profits. And that's mainly the reason why our rate came from the originally expected 37% to now 33%. The more we can do in either eliminating that entity, which is the work we're doing, or in improving U.S. profits, which is some of the work we're seeing when we grow products like Brackets & Wires, Consumables, we improve our Spark profitability. All of that will help, and it will get us back to something of a normalized tax rate. At this point in time, I wouldn't say the Federal Act is significantly helpful to our tax rate. For sure, not on a normalized ongoing basis. There might be a onetime shot that helps, but not on an ongoing basis. So for the most part, we're just working the same way we were in the first quarter.

And your next question comes from the line of Wright, Erin from Morgan Stanley.

There were a couple of deals, I think, that you did, like smaller deals. I don't think it was anything material from an M&A perspective. But can you just remind us what you are looking for in terms of just bigger picture from an M&A perspective and external kind of inorganic opportunities, your willingness to execute on those and just how you're thinking about M&A across your business?

Yes. Maybe I'll just reiterate our capital allocation priorities that we talked about in the March Capital Markets Day. The high-margin business like ours with good core positions, the highest risk-adjusted return of any available dollar is going to be organic. That's our highest priority for capital investment. Second for us is accretive M&A. We grew up inside Danaher. We think we have pretty good M&A capabilities, and dental is a pretty active M&A market. So we look at a lot of things. In our first year, Eric and I, we intentionally didn't do any M&A because we thought that there was higher return on effort just in core operations and execution. But now that we feel that the business is getting some momentum and pointed in the right direction, we have been spending a little more time on M&A. The two deals we did in the first half were very small. From memory, they were single-digit million investments and all at accretive multiples, which fit our accretive M&A target. Would we do something bigger as we continue to get momentum? Yes, I think if we have the available capital, and we have something that fits in a segment we know well, a prioritized adjacency or in the core. And there's good consolidating or growth synergies, yes, we'd like to do more.

And your next question comes from the line of Vik Chopra from Wells Fargo.

Congrats on a nice quarter. Apologies if this has already been asked. I've been bouncing around a little bit. But maybe just sort of talk about the different variables behind your 2025 guidance range. And what gets you to the low end versus the high end of your guidance?

Thank you for your question, Vik. In the first half, we achieved approximately 3% core growth while our guidance remains at 3% to 4%, indicating an expectation of around 4% growth in the second half. Looking back to our original guidance, the opportunities we identified for improved growth remain largely unchanged. We continue to see strong growth in our Spark business and are beginning to capitalize on new products. Paul mentioned in his prior remarks the positive performance in our Ormco, Brackets & Wires, and DEXIS portfolios. Overall, the potential for growth is quite similar to what we observed earlier this year. The primary concern influencing our growth downside in the second half is the soft but stable dental market, which we do not foresee changing significantly. Regarding profitability, the early year upside factors, including Spark gross margin improvements, factory automation, enhanced design cycle times, and reduced G&A costs, are still relevant. These factors are factored into our guidance around the midpoint, but if we can exceed those expectations or improve volume, there is potential for further upside. However, macroeconomic conditions will largely dictate any potential downsides. If we're unable to manage the tariff impacts I mentioned, that could also pose a downside risk. We believe our guidance is solidly based, and at this stage, the midpoint appears to be a sensible benchmark.

That ends our question-and-answer session. I will now turn the call back to Mr. Paul Keel for any closing remarks.

Thank you all for joining us. I want to highlight a few key points to summarize the quarter. Firstly, Q2 represented another positive advancement for Envista, with strong revenue and profit growth leading to double-digit EPS growth. We have discussed that our performance has been broadly positive, with all major businesses and regions showing growth, which we view as a rewarding outcome of our strategic plans. We are committed to executing the strategy we presented during our Capital Markets Day in March. Alongside this growth, we also recognize the progress being made in our operations and workforce, which align with our three main priorities. To support our momentum, we reinvested a portion of our Q2 gains into furthering our growth through increased research and development, as well as sales and marketing efforts. Regarding mergers and acquisitions, I believe that covers everything for today. Thank you once again for your attention, and I wish you all a great day and week ahead.

This concludes today's call. Thank you for participating. You may all disconnect.