Earnings Call Transcript - NVST Q4 2021

Operator, Operator

My name is David, and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation's Fourth Quarter 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I'll now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin your conference call.

Stephen Keller, Vice President of Investor Relations

Thank you. Hello, and thanks for joining us on the call today. With us here in the room are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. I want to point out that the earnings release, the slide presentation supplementing today's call and the reconciliation and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are available on the Investors section of our website. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations. It will remain archived until our next quarterly call. As announced on January 3, 2022, we have closed the divestiture of our KaVo Treatment Unit and Instrument business. For the fourth quarter and the full year 2021, the results of this business are reflected as discontinued operations in our financial statements as required by generally accepted accounting principles. Additionally, the financial statements to be included in our 10-K for the fiscal 2021 will reflect KaVo Treatment Unit and Instrument business as discontinued operations as required by GAAP. All references in these remarks and accompanying presentation to earnings, revenues and other company-specific financial metrics relate only to the continuing operations of Envista's business except for cash flow measures. 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 year-over-year performance. Unless otherwise noted, all references in these materials and supplemental materials to company-specific financial metrics relate to the fourth quarter of 2021, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets. During the call, we will 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 that they are made and we do not assume any obligation to update any forward-looking statements, except where as required by law. With that, I'd like to turn the call over to Amir.

Amir Aghdaei, President & CEO

Thank you, Stephen, and welcome, everyone, to Envista's fourth quarter 2021 earnings call. I want to begin by thanking our employees for delivering an outstanding 2021. Despite a challenging macro environment with COVID-related headwinds, numerous supply chain disruptions, and significant inflation, our employees delivered outstanding results by partnering with dental professionals to improve the lives of patients and expand access to our care. Our employees' passion and dedication allowed us to deliver on our commitments to our clinicians and our shareholders. For the full year 2021, we delivered core revenue growth of 29% over 2020 and 8.9% over 2019. While we did see some softening in patient volumes in late Q4, continuing into January, our view is that this is primarily related to staff shortages and patient cancellations driven by the Omicron variant and increasing rates of infection. As infections peak, we believe patient volumes will come back with limited loss of demand. We're still growing significantly above pre-pandemic levels and we continue to benefit from the repositioning of our portfolio, our improved commercial execution and our long-term investments in innovation. For 2021, our adjusted EBITDA margin was 19.7%, representing a greater than 650 basis point improvement over the pandemic impacted 2020 and delivering over 400 basis points of improvement versus 2019. Before I turn it over to Howard to discuss our fourth quarter results, I want to provide more color on our progress towards our long-term priorities of transforming our portfolio, accelerating our growth and expanding our operating margins. 2021 was a transformational year for Envista. We took significant steps to reorient our portfolio to higher growth, higher margin segments of the dental industry where we can create competitive, sustainable advantage. We announced and completed the divestiture of the KaVo Treatment Unit and Instrument business, shifting our business from a 50:50 split between our two reporting segments to a more attractive 60:40 mix in favor of the faster growth and higher margin Specialty Products & Technologies segment. Greater than 80% of our sales are now consumables and over 60% of our sales are direct to clinicians. In late December, we also announced the planned acquisition of Carestream Dental's intraoral scanner business. Expected to close in Q2 of 2022, this acquisition is consistent with Envista's long-term strategy and will help support the digitization of dental workflows. IOS scanners are a large fast-growing segment of the dental industry that has above average profitability. IOS scans are a critical first step to many high-value specialty dental procedures, including implant surgical guides, prosthetics and clear aligner treatments. Carestream Dental's IOS business is a very attractive entry point into this segment. The business comes with a proven suite of scanning solutions that include both a proficient hardware platform and powerful software capabilities. It is a substantial global business with significant growth upside over the long run. We're confident that we can accelerate the growth of this business by increasing customer reach and expanding into underpenetrated geographies and customer segments. This acquisition also comes with a strong R&D team and a promising development pipeline that will further accelerate dental digitization for years to come. Lastly, our proven EBS tools and processes allow us to improve quality, delivery and long-term operating margins of this business. While we took significant steps to transform our portfolio through inorganic actions, we are also focused on accelerating our growth through organic investment in innovation and commercial execution. As a result of this focused investment, we have made meaningful progress across our businesses. With a uniquely differentiated portfolio, our orthodontic business continues to deliver strong results, delivering core growth of 38% versus full year 2020. We offer clinicians a full range of orthodontic treatment options enabling us to provide better, more personalized treatment plans to more patients for better outcomes. We continue to invest in innovation to accelerate our performance. In our core bracket and wire business, the Damon Ultima solution, which was designed for faster and more precise finishing in treatment, continues to grow nicely in North America. We recently launched this solution in Europe and hosted eight Damon Ultima events across six countries in Europe, educating more than 600 clinicians on this innovation. The broader Damon system has now been in Europe for 25 years and continues to be a leading solution in brackets and wires. Our Spark clear aligner business continues to grow rapidly, hitting a $100 million run rate in November of 2021, more than a year ahead of our original plan. In December of 2021, Dr. Ignacio Arias Ambel of Madrid, Spain, treated 100,000 patients with the Spark, demonstrating the global reach of this differentiated and best-in-class aligner treatment. We're confident that our focus on partnering with professionals to deliver and drive predictable and superior outcomes for patients will help us become the leading orthodontic solution provider to a specialist worldwide. Our implant business continues to accelerate, delivering over 30% core growth in 2021. Our focus on innovation and commercial execution is key to our recent success and will allow us to drive and deliver sustainable high single-digit growth in implants. With over 1,300 direct feet on the street, we work with clinicians every day to deliver the best-in-class implant regenerative and prosthetic solutions. In 2021, we hosted over 750 events and trained more than 100,000 clinicians on new products, new technologies and best practices in implantology. Long-term innovation remains a critical part of our success. We are pleased with the continued success of our TiUltra and Xeal surfaces that are designed to promote bone and soft tissue integration. Globally, over 30% of premium implant sales now feature these innovative surface treatments. In December 2021, we received FDA clearance for our N1 implant system in the U.S. Following our Spark playbook, we're now focused on rolling out N1 to a committed group of key experts and ambassadors, who will then advocate for the product and help to train other clinicians. We expect N1 to support the continued acceleration of our implant business growth in 2022 and beyond. Our diagnostics and digital businesses continued to perform well, delivering core growth of over 25% in the full year 2021 as dental professionals remained confident in the outlook for their practices and remained focused on investing for the long term. Our imaging offerings, combined with our DTX Studio software solution provide our customers with a seamless diagnostic workflow and integrated digital experience. We continue to invest in DTX in advanced assisted intelligence solutions. In Q4, our DTX Studio Clinic 2.3 in the United States was released. This new version features many improvements, including an AI-based functionality that assists clinical users in automatically ordering formats for the X-rays, saving time and effort and allowing clinicians to spend more time with patients. Finally, we continue to focus on establishing a strong relationship and partnership with DSOs, which will be an important factor in achieving our long-term growth targets. In January, we announced a novel development partnership with Pacific Dental Services to focus on the AI support of clinical image analysis in PDS supported practices as well as across the dental market. Envista and PDS aim to harness the power of data and machine learning to transform the way in which dentists use clinical imagery to diagnose, plan and treat patients. Our long-term goal is to help clinicians identify and validate the best treatment options leading to increased acceptance rates and improved patient outcomes. In addition to new technologies, long term, we are positioned well to meet the needs of DSOs and can offer a comprehensive set of clinical solutions to DSOs as they work to expand dental care worldwide. In 2021, our DSO business grew by more than 25% and now represents approximately 10% of our total sales. In addition to driving growth, we remain focused on expanding our margins. In 2021, we achieved a full year adjusted EBITDA margin of 19.7%. This represents over 650 basis points of margin improvement versus 2020 and more than 400 basis points of margin improvement since the IPO. The Envista business system and our focus on continuous improvement is a foundation that drives our short and long-term profitability. We continuously work to reduce structural costs, consolidate our footprint, improve productivity and drive operational improvements, all while enhancing the customer experience. Across our businesses, adjusted gross margins improved more than 250 basis points in the full year 2021. This is despite some of the inflationary headwinds we have seen as well as investment in ramping up production of Spark. Today, our EBS driven daily management and focus on execution has allowed us to mitigate many of the significant supply chain disruptions that the world is currently experiencing. I will now turn the call over to Howard to go through our fourth quarter financials and provide more detail on our segment performance.

Howard Yu, CFO

Thanks, Amir. Before we begin, I'd like to remind you that our fourth quarter results are based on continuing operations reflecting the sale of our KaVo Treatment Unit and Instruments business. Accordingly, the quarterly results of KaVo Treatment Unit and Instruments business are reported as discontinued operations. Fourth quarter sales increased 5.8% to $651.8 million. Reported sales were negatively impacted by 0.5% due to foreign currency exchange rates and further negatively impacted by 0.3% related to other discontinued products. Our core sales growth was 6.6% compared to the fourth quarter of 2020. Our year-over-year growth reflects solid growth from our orthodontic, implant and imaging businesses, which was offset by temporary weakness in our Infection Prevention business. Geographically, Western Europe grew 15%, while North America grew 1.8%, dragged down by its greater exposure to Infection Prevention. Overall, emerging markets continue to expand from pandemic lows, growing 12.8% despite relative weakness in China driven by localized pandemic lockdowns. Our fourth quarter adjusted gross margin from continuing operations was 57.1%, increasing by 60 basis points compared to the prior year due to higher volume, favorable product mix and productivity initiatives across our portfolio. The adjusted Q4 2021 EBITDA margin was 18.5%, which is 110 basis points lower than in Q4 of 2020. As expected, in Q4, we continued to invest in our long-term innovation while increasing spend on travel and in-person customer-facing activities with the continued easing of the pandemic-related lockdowns. Our adjusted EBITDA was also negatively impacted by approximately $4 million in stranded costs related to the sale of the KaVo Treatment Unit and Instruments business. We expect to address the estimated greater than $10 million of annual stranded costs in 2022. Our fourth quarter adjusted diluted EPS was $0.46 from continuing operations compared to $0.43 in the comparable period of the prior year. Our Specialty Products & Technologies segment core revenue increased 14.5% compared to the fourth quarter of 2020, driven by strong growth in premium implant and continuing strong growth from Spark. In the fourth quarter, our orthodontics business grew over 20% with our core bracket and wire business growing mid-single digit and Spark continuing to accelerate. As Amir mentioned, sales of Spark hit a $100 million run rate in late 2021, and we continue to invest to drive growth. Our implant business grew double digits in Q4 2021 versus Q4 of 2020, and we continue to accelerate realizing double-digit sequential growth in the quarter. Our Specialty Products & Technologies segment adjusted operating profit expanded by 150 basis points, reaching 22.1% in the fourth quarter. This expansion is despite the increase in Spark and N1 investment and despite the increased spend in customer-facing activities. Our fourth quarter Equipment & Consumables segment core sales from continuing operations decreased by 3.3% compared to Q4 2020. Strong demand and solid execution in our imaging business drove the results in the segment with core growth of 9% compared to the fourth quarter of 2020. Our core rest and endo business also performed well in Q4, delivering mid-single-digit core growth. This was led by strong performance in Europe and Latin America. Sales growth continues to be driven by sellout and channel inventories remain at healthy levels. As expected, sales of our Infection Prevention solutions declined from peak pandemic demand. Despite the lower Q4 sales, inventory sellout trends reported by our distribution partners indicate that we are gaining market share in our core dental market. Long-term, we expect this business to grow mid-single digits. Equipment & Consumables adjusted operating profit margin was 21.4% from continuing operations in the fourth quarter of 2021 versus 23% in 2020. Solid margin improvement in our imaging and restorative solutions was offset by the slowdown in infection prevention. Further, we experienced some inflation related to chemical commodities that impacted our infection prevention business. The segment was also burdened with approximately $4 million of stranded costs in the quarter related to the sale of the KaVo Treatment Unit and Instruments Business. We have begun to address these stranded costs and are confident that we will be able to minimize the impact as we move through 2022. With the sale of the KaVo Treatment Unit and Instruments Business and the pending acquisition of Carestream Dental's IOS business, we are confident that our equipment and consumable business will grow faster and be more profitable. For the fourth quarter, we generated free cash flow of $157.1 million, and we ended the quarter with over $1 billion in cash. Our working capital increased in the quarter due to our increased sales, selective inventory builds associated with our restructuring activities and proactive supplier management, allowing us to ensure supply stability while mitigating inflation. Our balance sheet is very strong, and we have ample liquidity to both close the acquisition of Carestream Dental's IOS business while also pursuing additional inorganic growth opportunities as they become available. Looking forward to 2022, barring any major COVID-related disruptions, we are expecting to deliver core growth of between 6% and 8% and expecting to deliver a full year adjusted EBITDA margin of greater than 20%. Our guidance reflects our balanced focus on accelerating growth while continuing to expand margins. In 2022, we expect to continue to significantly invest in our long-term growth initiatives, including Spark, N1 and our digital workflow solutions. Further, we expect to continue to increase our spending on customer-facing activities, which we curtailed during 2020 and 2021 due to COVID. In terms of phasing, we expect our adjusted EBITDA margins for the first half of 2022 to be in the high teens as we continue to invest in our long-term growth while also addressing our stranded costs related to the sale of the KaVo Treatment Unit and Instruments business. For the second half of 2022, we expect our adjusted EBITDA margins to be higher as we benefit from the portfolio transformation and continue to focus on driving productivity while investing in growth. It is important to note that our guidance does not reflect the impact of the pending acquisition of Carestream Dental's IOS business. We currently expect this to close in Q2, and we'll provide updated guidance related to the underlying business as well as planned integration and growth-related investments once we have closed the transaction. I'll turn the call over to Amir for some closing comments.

Amir Aghdaei, President & CEO

Thanks, Howard. We are pleased with our 2021 results and remain very optimistic about the future of the dental industry. Given our recent portfolio moves, we are now more focused on the faster-growing, higher-margin and most attractive segments within dental. We continue to work with our clinical partners to streamline their operations and improve patient care while expanding access to oral care around the world. Moving forward, our priorities remain the same. We will accelerate growth, expand our operating margin and continue to further transform our portfolio through active and disciplined capital deployment. Our intention is to be the leader in orthodontics, providing a differentiated and integrated suite of treatment options, including brackets and wires and clear aligners. Our comprehensive offering empowers orthodontists to provide the best treatment modality for each patient. Based on our broad portfolio and this powerful combination, we plan to triple our Spark business in the next three years while continuing to gain share in wires and brackets. We will further accelerate our growth in implants by leveraging our premium implant franchise to provide full solutions across the implant workflow, including regenerative and prosthetic offerings by leveraging our diagnostics and digital capabilities. We will continue to grow and broaden access to our highly profitable and differentiated consumables business. Finally, we will leverage our strength in imaging and diagnostics to build digitally integrated workflows from diagnostics to treatment planning to execution for our clinical partners. We will continue to utilize our EBS heritage to both improve our execution and drive margin expansion. We are committed to delivering annual margin expansion. Finally, we continue to see significant opportunities to invest organically and inorganically, and we have the financial flexibility and management focus to further accelerate our growth trajectory. We have disciplined capital deployment and inorganic investments. As we continue in our journey to digitize, personalize and democratize the dental industry, we are excited about hosting our first Investor Summit, designed to highlight our unique and differentiated product portfolio and digitally integrated solutions. This event would bring together our historically popular Ormco Forum and Nobel Biocare Symposium with a brand-new technology track to create a three-track agenda designed to educate and train dental professionals in every aspect of dentistry united by our best-in-class customer experience and products. The progress we made this quarter and in 2021 is a direct reflection of our culture centered on continuous improvement and our commitment to our customers in the dental industry. Our purpose is to partner with dental professionals and improve patient lives by personalizing, digitizing and democratizing dental care. We're excited about our continued growth journey in 2022 and beyond.

Stephen Keller, Vice President of Investor Relations

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

Operator, Operator

And we'll take our first question from Elizabeth Anderson with Evercore. Please go ahead, your line is open.

Elizabeth Anderson, Analyst

Hi guys, thanks so much and congrats on a nice quarter. Maybe to kick us off, Amir, can you talk – give us a little bit more details on the impact of Omicron this time around? It seems like it was maybe a little bit, obviously, different than earlier waves, either by different areas or sort of also as we go into January, how those trends have been continuing? Thanks.

Amir Aghdaei, President & CEO

Thank you, Elizabeth. What we saw at the end of Q4, the last two weeks of December, a lot of feedback from our partners in various DSOs and companies that we work with is a significant slowdown in the past, in the last two weeks of December. And that was purely because of the infection ramping up, increased rate of infection, a lot of cancellation as well as staff shortages. First, this trend continued in the first two weeks of January as well. What we are seeing now is a ramp back up to normal demand and patient volumes. And we think that as infections move past the peak, patient volumes would come back with limited loss of demand. Overall, we are really optimistic about underlying demand, remaining mindful of continued risk of COVID. We think that we are really centered in helping support our customers to manage through this challenging time. We do not see that as being a major impact on our growth as we go throughout the year.

Elizabeth Anderson, Analyst

Thanks so much. And maybe the follow-up, Howard, I know you gave the guide for the full year with the first half versus second half margin differences in some of the details there. I was just thinking about maybe the demand profile. Can you share any more details you can about sort of how you see demand progressing as we go through the year? And anything else that would be good to call out just in terms of the phasing of the quarters?

Howard Yu, CFO

Sure, sure. Thanks for the question. Yes. As we indicated, we see the full year guide is growing 6% to 8% with the adjusted EBITDA margins north of 20%. If we talk about Q1, with some of the slowdown that we saw very early on in the quarter, we expect mid-single-digit growth, core growth here in Q1 and high teens EBITDA, particularly as we work through some of the stranded costs as well as continue to fortify a lot of the investments that we're making. As Amir indicated, we're really pleased with where our Spark business is and we're prepared to go ahead and continue to invest in that business. So you're seeing a little bit of softness there. But then throughout the year, I'd say, with each quarter, you're going to see improvements in our growth rates as well as our margins.

Elizabeth Anderson, Analyst

That’s helpful. Thanks.

Operator, Operator

We'll take our next question from Jeff Johnson with Baird. Please go ahead, your line is open.

Jeff Johnson, Analyst

Thank you. Hey, guys, good afternoon. Two questions here for me. One, just on the price increases. We've confirmed with a couple of the dealers, you did take a price increase here at the start of the year. Seems like 2% to 3% kind of holding across most of consumables. Is that a fair way to think about it? And then two, is there any pricing power in any other parts of the portfolio? We've heard anecdotally some of the implant guys taking price increases? Would like to know what you're doing there maybe or anything else in the portfolio? Thanks.

Howard Yu, CFO

So yes, Jeff, I don't think that – we don't – institute across-the-board price increases. Each of our opcos are taking appropriate pricing actions to drive growth while protecting and expanding our margins. Pricing should be seen as a tailwind, as you indicated. We have done some of that in some of our businesses. I would say that it wouldn't be limited just to the consumables piece. You mentioned implant, even as it relates to orthodontics as well we see that as being an opportunity. Longer term, I think, we continue to believe that our focus on innovation is the key to maintaining and expanding average selling prices and margins as well as we look to drive growth.

Jeff Johnson, Analyst

Yes. All right. That's helpful. Thank you. And then, Amir, maybe on Spark, you hit that $100 million run rate earlier than I think any of us were expecting. It sounds like about $75 million for the full year and you're talking about now tripling that over three years. So is that a fair way to think about it? $75 million in 2021 going to $225 million over the next three years? And what are you seeing just in the short run here? Have you – in clear aligners, I know you're in market share-taking position, so it's hard to see kind of a slowdown if there's been a pull forward or some discretionary spending dollars that aren't as strong this year as they might have been in the heat of last year. But just what are you seeing for the clear aligner demand side of the equation over the next few quarters? Thanks.

Amir Aghdaei, President & CEO

Yes, of course. Your calculation is not wrong. You are close to what we are seeing, not exactly those numbers, but it's not far off. We have created, and we have talked about this continuously, a differentiated solution and it is really focused on a professional medtech segment of the market. And that has been proven that it is truly differentiated. People see the value of it, not only on the product itself, but on training, education and service and support and the way that we bring people up to speed and continue to support a movement. For sure, there has been some pull forward. But we don't expect that, that would have any impact on our ramp as we go forward. As you know very well, we started through a very phased approach of adding dentists every quarter and seeing them coming up to see that process has continued as we have gone forward. To give you a little bit of a feel both on the production as well as the number of dentists that are now using Spark as their primary clear aligner, we are seeing double-digit growth in the number of dentists, number of doctors that are using it. And it is across geographies. In fact, in Europe, our wrap is exceeding what we saw in North America. So we are pretty confident that what we have done, the approach that we have taken is working and some of the things that you're seeing in the market actually have proven the approach that we took, showing a steady, and making sure that we provide a differentiated solution is working. We feel that's going to be the trend to continue as we go forward.

Jeff Johnson, Analyst

Thank you.

Operator, Operator

We'll take our next question from John Kreger with William Blair. Please go ahead. Your line is open.

John Kreger, Analyst

Hey, thanks very much. Amir, could you talk a little bit more about the Carestream strategy? I'm curious, if you look at that installed base to what degree are those sort of your customers already? Or are they kind of a new customer opportunity? And how is the integration at this point? Will you be up and running, let's say, with Spark and other solutions right away, or should we assume that will take some time?

Amir Aghdaei, President & CEO

Hey, John, let me maybe just give a little bit of frame this on the IOS market first, and then I answer that question. We think this market is over $1 billion, is growing double digit. We think this market has above EBITDA compared to the rest of the product out there. And our estimates are that this is less than 15% penetrated. So there are some key numbers in there to think about. The business was about close to about $60 million last year. If you go back and take a look at it mathematically or since the introduction of 3600, 3700 and 3800, Carestream has less than 10,000 installed base worldwide. So now take a look at the ramp that is taking place, the access that we can provide and integration with the DTX and then the 3,400 salespeople that we have out there access to geographies and DSOs. It gives us an opportunity to take this business and bring it to a different level, continue to invest in R&D and integrate it into our software. And then EBS plays such an important role in here to improve delivery, quality and margin over time. We have been looking at, as you well know, in this space for almost five or six years, and we found that Carestream IOS has many of those qualifications that we have been looking for. It's a great product. Its hardware is really good, and it has a suite of software that is already in place. And where we can add value is really complementary to what Carestream has done in the past. I can't comment a lot until this deal is completely closed, but we expect integration, the DTX to take place as soon as the deal is closed in Q2. And we expect a ramp throughout the year in various geographies as we go forward. We think the impact in the next few years is going to be over 50 basis points of core growth to our run rate as well as over 40 basis points of margin expansion. So it is a really complementary business that is going to help us not only on its core as a product but also in our intention of digitizing the industry as a whole.

John Kreger, Analyst

Sounds great. Thanks for all the detail.

Amir Aghdaei, President & CEO

Thank you, John.

Operator, Operator

We’ll take our next question from Jon Block with Stifel. Please go ahead. Your line is open.

Jon Block, Analyst

Hey, good afternoon. Just first one on N1. And if you guys can just talk to the rollout cadence in the U.S. and will Omicron delay the pace of that rollout a little bit? And then maybe just to level set as a tack on, I think previously, you guys have talked about 300 doctors trained in Europe on N1, what’s that off of a base of just so we can sort of size up where you are in the training process in Europe since it was obviously approved over there several quarters ago? And then I’ll ask a follow-up.

Amir Aghdaei, President & CEO

Yes, I’m happy to give you that, Jon. Exactly correct. We started training in Europe. And we have several hundred dentists that are now using N1 actively. Actively, in our opinion, is more than one-time purchases that are beginning to transition some of their current usage to N1, and they’re beginning to see the outcome of that. They’re giving us some really good feedback. Our approach in the U.S. is very similar to what we did with Spark. We’re going to have to create these cohorts of five to ten people in a smaller, safe setting. In fact, the first group is going to take place this weekend. We’re going to teach them, train them, bringing them up to speed. These are the key experts, ambassadors to let them become very familiar with the product, use it in their facility. We’re going to put people on site to work with them. And as they become comfortable, they’re going to start teaching and rolling this out on our behalf. Then we will sign up the next cohort, the next cohort and the next cohort going forward. I want to do a little bit of a compare for you. With Spark, the way rollout has taken place, now some of the key experts in some geographies in Spain, as an example. They are creating its followership model that they train on their own, inviting a large number of orthodontists, they see the value, they can show cases and see a migration and transition to Spark. Our goal with N1 is to replicate that model in 2022 in North America, with thoughtful, really diligent about how we want to go about it and manage in a safe environment, a cohort or a group of people that they can truly see the value of it a step-up. Besides N1, our implant businesses, specifically Nobel, in Q4, premium implants grew double digits compared to 2020 and double digits compared to 2019. Our performance has improved significantly, and we are beginning to see and have seen in the past six quarters quarter-after-quarter better performance. I think N1 is just going to be an addition to what our team in North America in Europe and in China has been doing for us, which is getting this business to high single-digit growth on an ongoing basis.

Jon Block, Analyst

That’s great. That was very helpful. And just as a second question, and I might try to fit two in there, Howard, for you. More than 20% EBITDA margins, I just felt previously when you guys used to talk high teens, I mean, when you say more than 20, and you said talk 50 to 75 bps per annum, just maybe some clarity, like what does that mean? Is the 50 to 75 bps that you used to talk about intact off the 19.7%? And then admittedly a second – separate second question in there. Can you just get the Street comfortable with a mid-single-digit infection prevention long term? I think if there was any blemish in the quarter, it was just around Infection Prevention. Why the confidence you guys alluded to some of the sellout data. I know you’re going into new markets there, but why should we feel confident in that MSD long term? Thank you.

Howard Yu, CFO

Sure, John. So let me go ahead and answer the first one as it relates to the EBITDA guide. We remain focused on delivering balanced performance. We’ve said that all along of accelerating growth while expanding our margins. In 2022, we’re raising our growth outlook and still expanding our margins. But we also are planning to make some pretty significant investments to sustain and certainly to ultimately accelerate our long-term growth. And so as you recall, at the time of the IPO, we went from no growth to low single-digit growth to mid-single-digit growth, and now we’re taking it up to the single-digit plus growth and looking to even drive higher over the long term. So certainly, the 50 to 75 basis points is something that we committed to on a per annum basis. We’ve driven over 400 bps of margin expansion in the last two years. We think that we want to be balanced in our approach, and we certainly want to invest where we see the long-term growth and the opportunity. And so we’re taking advantage of that opportunity. We’re still going to deliver some margin expansion. Also, keep in mind the reality of where we’re at today. We know that there are some inflationary factors that are impacting our business a little bit here as well. And so we want to be thoughtful and prudent about what we lay out for next year and for 2022.

Amir Aghdaei, President & CEO

Let me answer the IPS question. So we outlined the underlying macro drivers. The safety protocols are going to continue to exist and will be in place, and it’s a long-term trend, and it’s not going to change. We know that there is an expansion of the offices, and people are getting a lot more sophisticated on how they treat patients going forward. So the underlying macro trends are there. The business has been very focused on dental. We have over 50% – up to about 60% market share in the dental in the U.S. and not a whole lot of presence in Europe as well as on the medical side. So combining those with what has been happening. If you look at the sellout on a sell-out basis, we continue to take share in dental. We continue to see long-term growth opportunities in medical. What we saw in the second half is a combination of overstock inventory. Not necessarily all of our inventory. There was a little bit of holding that took place in 2020, demand picked. People need to work through that inventory. The inventories are coming down. We are pretty confident that by Q2 in the second half, this business is going to get back to what we expected to be normal, high profitability as well as mid-single-digit growth, what it used to be before COVID. With all the changes that we have undertaken, with the management effort, consolidation of some of our activities, focus, and EBS focus on the commercial, we think we have runway in this business. So we are committed, and we’re confident that we can get this back on mid-single-digit growth in a high profitability part of our portfolio, most likely by the second half, if not sooner.

Jon Block, Analyst

That’s great color on both. Thanks, guys.

Amir Aghdaei, President & CEO

Thank you.

Operator, Operator

We’ll take our next question from Erin Wright with Morgan Stanley. Please go ahead. Your line is open.

Erin Wright, Analyst

Great. Thanks. A follow-up on Spark here. Can you speak to the traction in U.S. versus international markets and how the broader international rollout is progressing? And how also you’re incorporating Spark into maybe some of your DSO relationships and the strategy on that front? Thanks.

Amir Aghdaei, President & CEO

Yes. Thank you, Erin. The reason that the approach that we have taken is – I want to go back to our bracket and wire business. We have close to about 20% share. 70% of that business is outside the U.S. We have significant presence in emerging markets in Europe. We have an incredible training and education program, and we have done a really good job. While everybody is moving away from that business, we just continue to take share in there. So we have said our first effort and Spark was to go back to the true and tested customer base of Ormco. That was in the U.S., in Europe, and now we’re signing, we’re registered and we’re going through the registration process, approval process. Geography by geography, we are really strong in our base business of Ormco. And the way we are approaching it is to make sure that orthodontists and those that are primarily focused on these procedures see the value of the Spark and also see the value of a combination of the same company, giving them a competitive advantage, giving the tools that they can become really productive. That has been our first approach. Then we’re sort of looking at, as you said, the DSOs. If you look at some of the new announcements that we have made, relationships with some of the largest DSOs in the U.S. and Europe, they have an orthodontist capability inside those DSOs. Pacific, Vitaldent, they already do a large number of cases. They already use a large number of aligners. Our focus on orthodontists and professionals is not changing. We’re just expanding that. And last but not least, a lot of GPs now are coming to us and asking to learn about Spark as they are seeing the benefit of it as they’re learning and coming up to speed. So as we had said, we’re not after direct to consumers, but those that are committed to the orthodontics segment, and who want to give people options, improve the quality of life, we’re there to help them to do a better job to provide better services to their patients. We’re going to follow that trend, and we think there is a significant amount of runway for us in that space.

Erin Wright, Analyst

Okay. Great. And in terms of M&A, can you speak to the pipeline at the moment and where the focus is, especially following your Carestream acquisition, what makes sense at this juncture?

Amir Aghdaei, President & CEO

Yes, happy to do it there. I mean we have outlined our priorities for us. And this is – honestly, it’s not a new thing. This is my year seven in dental. In the past seven years, we have been cultivating various companies. We have been analyzing the market, and we are looking at various strengths. What we are seeing where there is an opportunity for differentiated solution in order to really improve patients’ lives is in the implant. Not necessarily only in implant itself from diagnostic all the way to prosthetics. In that space, we see opportunities for adding to our value implant portfolio, regenerative, prosthetic pieces and continue to add digital capabilities around AI, guided surgery, robotic navigated surgery. Look at the orthodontic space, ortho space, we see this combination of bracket and wire as well as clear aligner offers significant opportunity for us to become a lot more digitally capable. I want to put something in here. Last year, we put two new releases of Spark out there. This year our intention is to really ramp that up to be the product of choice. In order to do that, we want to create an open platform that we can integrate other capabilities, other software tools, and other AI tools, so we can give people choices, both in that two segments that we talked about: ortho and implant through digitally enabled workflow integration, that’s where we want to be focused. We have been cultivating the company, working with company, and we’re going to continue to stay on that trend.

Erin Wright, Analyst

Great. Thank you.

Operator, Operator

We’ll take our next question from Nathan Rich with Goldman Sachs. Please go ahead. Your line is open.

Nathan Rich, Analyst

Hi, good afternoon. Thanks for the questions. Howard, I maybe wanted to ask on the building blocks to the 6% to 8% organic growth. I think in 2021, the innovation products that you called out drove 300 basis points of growth last year. I guess, could you maybe talk about what you’re expecting from those products in 2022? And then going back to your comments on cadence kind of starting at mid-single-digit growth in the first quarter, it implied that you, I think, end the year at the high end or maybe even a bit above that 6% to 8% range. Is that just driven by the kind of effect of sequential growth in these products as they continue to ramp? Appreciate any details you could share around that.

Howard Yu, CFO

Sure, Nate. So maybe for the first part of that question, consistent with what we’ve said and what we believe here as it relates to the guide for 2022, we think that the Spark and N1 will deliver at least north of 200, somewhere between 200 and 300 basis points of growth once again here in 2022. And so – and clearly, you’re going to see the mix up, as we said, in the specialty side as that growth has been, and we’ve enjoyed faster growth in that segment of the business. And so we’ll continue to see that as well. Bearing in mind again that this guidance does not contemplate the Carestream Dental IOS acquisition. So that’s the first piece. And then as it relates to phasing and the like, yes, we think that we see a little bit of slowdown here in the first quarter, and that’s why we see the mid-single-digit growth and it will ramp up to get us likely on the high end of that guide, if not slightly north of that by the end of the year. We’ll see a steady, consistent improvement in growth quarter-over-quarter is the plan here.

Nathan Rich, Analyst

Okay. Great. And then if I could ask on China. Could you maybe just go into a bit more detail on how it performed in the fourth quarter? I know you said it was below the 13% growth in emerging markets, but can you maybe talk about what you saw in the fourth quarter? And so far here in the first quarter. And then related to that, I think you have Spark in China now as well. It’s a clear aligner market that’s dominated by two players right now. I guess, what is the uptake of Spark been like in China as we think about that market opportunity? Thank you.

Amir Aghdaei, President & CEO

Sure. Happy to answer that, Nate. The China’s zero COVID policy is in place and continues to be in place. Fifteen provinces hit various levels of lockdown in Q4. The Omicron variant continues to be an important factor, specifically given the Winter Olympics, travel and many other elements play a role in. But let me break that down for you. Our specialty business, our implant and ortho in the quarter was growing double digits and that trend continues as we have come through 2022. In our consumable and equipment business, we saw general weakness there. The decline was primarily in that segment and low single-digit decline. We expect that it’s going to continue weakness in Q1. But in the long term, we think that we are really confident in what is taking place in China. We have a significant presence; it is an underpenetrated opportunity. We’re building – continue to build capabilities in manufacturing, marketing, and sales, working with DSOs. Answering your question about Spark, we have been very thoughtful about priorities where we wanted to start building presence, building capabilities. We have the product already approved. We not only have from a clinical perspective but also manufacturing capabilities in China. But this is a process that we have taken step by step, geography by geography, making it successful, take the next one. That’s the approach that we are taking. The last part of that, Nate, is at every other geography. We’re not focused on the low-cost direct-to-consumers commodity-based. Our bracket and wire is growing rapidly in China, focusing on the professional, medtech professional. Spark is exactly positioned in that space. That’s where we want to be really in a good position. And we say we want to be the number one player in the dental space. That’s the space that we are focusing on, and we let the pull through from those people who teach it, establish it, show the outcome and create a domino effect and network effect, and we’re going to see the outcome of that over time as we have seen in other geographies.

Nathan Rich, Analyst

Thanks very much.

Operator, Operator

And in the interest of time, I’ll turn the program back to Mr. Stephen Keller for any closing comments.

Stephen Keller, Vice President of Investor Relations

Thank you, everyone, for your time today. We really appreciate it. If you have any questions, we’re here, happy to take any calls. But have a great afternoon, a great evening, and thank you for your time.

Operator, Operator

This does conclude today’s program. Thank you for your participation and you may now disconnect.