Earnings Call Transcript - NVST Q3 2022

Operator, Operator

My name is Britney, and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to the Envista Holdings Corporation's Third Quarter 2022 Earnings Results Conference Call. I would now like to 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, and good afternoon. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. I want to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations. They will remain archived until our next quarterly call. As announced on January 30, 2022, we have closed the divestiture of our Cabo treatment units instruments business for the first three quarters of 2022 and the full year of 2021. The results of this business are reflected as discontinued operations in our financial statements as required by generally accepted accounting principles. All references in these remarks and accompanying presentation to earnings, revenues and other company-specific financial metrics relate only to 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, references in these remarks to company-specific financial metrics relate to the third quarter 2022 and references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we may also describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets. Further, we will be making 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 as required by law. With that, I'd like to turn the call over to Amir.

Amir Aghdaei, CEO

Thank you, Stephen. Good afternoon, and welcome to Envista's third quarter 2022 earnings call. Today, we are pleased to announce that despite a challenging macro environment, our team has once again delivered a strong quarter with mid-single-digit core growth and over 20% adjusted EBITDA margins. Our culture shift around customer centricity, innovation, respect, continuous improvement and leadership, coupled with the Envista Business System, EBS, is what drives our performance and allows us to deliver on our long-term objectives of accelerating growth, expanding operating margins, and transforming our portfolio. Our strategic differentiation and a proven track record of execution give us confidence that we can continue to balance accelerating growth and expanding margins. Before I turn it over to Howard to discuss third quarter results in more detail, I want to take this opportunity to reiterate our long-term vision, provide some insight on core end market conditions and offer a quick update on the progress towards our strategic priorities. I will also provide a brief update on how we are embedding sustainable environmental, social and governance, ESG principles into our strategy. At Envista, our focus is to partner with dental professionals to improve quality of life by digitizing, personalizing, and democratizing oral care. We continue to engage with our customers to learn, educate and lead the dental community. On September 7, we hosted over 1,200 dental professionals in Vienna, Austria at the sold-out Envista Summit. This European event was a great opportunity to articulate our vision for the future of dentistry while highlighting the combined strength of the Envista portfolio. We provided high-impact training in orthodontics, implantology, and digital workflows and introduced clinicians to the latest advancements in dental care that will transform dentistry over the coming decade. The feedback from the event was very positive and highlighted the long-term opportunities in the dental market, the importance of our unique and individualized solutions, the desire for premium training and education, and the opportunity for Envista to lead and shape the future of dentistry. While private and group practices and dental service organizations (DSOs) remain excited about the promising outlook for dental, there is no doubt that the impact of inflation and potential for an economic slowdown, coupled with various geopolitical risks around the world, including the conflict in Ukraine, continues to weigh heavily on clinicians' minds. While patient traffic remains robust and schedules for specialty procedures, including implants, remain busy, doctors are more cautious and thoughtful about their investments. Having said that, both private group practices and DSOs continue to invest in expanding their specialty treatments and are looking for ways to enhance their capabilities, improve their workflows, and digitize their offices. We see opportunities to improve the efficiency and predictability of their treatments. While we expect there to be some continued uncertainty in the market over the short term, we remain confident that the dental market is resilient and has ample room for continuous improvement and growth over the long term. Turning to our Q3 progress. Our orthodontic business continues to deliver strong results. Spark delivered greater than 100% year-over-year revenue growth while also driving double-digit quarter-over-quarter growth in the number of active Spark doctors. We recently announced the launch of Smart Clear Aligners Release 13, which features differentiated integrated hooks, the CBCT true root feature, and real-time approval in the Spark-approved software. All of the innovations are aimed at further enhancing treatment planning while continuing to build a sustainable competitive advantage for Spark. In addition to Spark, our traditional brand wire business is also growing and outgrowing the market, delivering mid-single-digit growth globally. We continue to gain traction with our new Damon Altima system that provides orthodontists more control for faster and more precise finishing. Our solution for implant-based tooth replacements grew mid-single digits in the quarter as we continue to improve our commercial execution and accelerate sales of our premium implants and regenerative solutions. We remain focused on delivering margin expansion while investing in our long-term growth initiatives. In Q3 2022, we achieved an adjusted EBITDA margin of 20.2%. This represents a 60 basis point margin improvement versus Q3 2021. In the quarter, we delivered 40 basis points of adjusted gross margin improvement driven by productivity improvements and 160 basis points of net pricing offset by meaningful inflation. We also took steps to strengthen our supply chain and add more flexibility across our businesses. In the spirit of continuous improvement, we focus on streamlining our organization to both protect and expand margins while speeding up decision-making. As we move forward throughout the balance of the year and into 2023, we will intensify efforts to further optimize our organizational structure to improve the customer experience while creating more flexibility to deal with uncertainties in the macro environment. The transformation of our portfolio continues as we emphasize our most differentiated solutions by making additional investments in our fast-growing specialty businesses and continuing to add to our digital capabilities. In our traditional imaging business, we have made a strategic decision to focus on key geographies where we have a sustainable competitive advantage. This allows us to reduce structural costs while further optimizing our portfolio, leading to both accelerating growth and improving margins over the long term. In the third quarter, we took steps to set this business up for lasting growth. We have now fully rebranded the intraoral scanner to DEXIS and are expanding our customer reach while optimizing our global distribution. The DEXIS portfolio offers a full range of intraoral scanners that are coupled with a powerful and intuitive software solution that enables accurate digital impressions, improves scanning procedures and speeds, and offers flexible workflows. While the DEXIS is a scanner, software, and is configured as an open and stand-alone system, they also now work closely with our DTX Studio clinic software, providing clinicians the opportunity to bring all X-ray images, photos, 2D, 3D, and extraoral and intraoral imaging formats into one clear, comprehensive view, thus simplifying diagnostics, workflows, and increasing confidence in interactions with patients. The DTX Studio Clinic includes assisted intelligence features like Smart Fusion, which automatically aligns the digital surface models from the DEXIS intraoral scanner with any CBCT scan and is a unique and powerful tool for efficient implant planning. We're honored that the DEXIS DTX Studio software suite, which includes DTX Studio clinic, has been awarded the Celeron best-of-class technology award for the second consecutive year, selected by a distinguished panel of dental technology experts. Celeron award winners are recognized for groundbreaking technology that expands possibilities for the world of dentistry. In addition to our focus on digital workflows, we continue to expand our capabilities in implant-based tooth replacements. As previously announced, we completed the acquisition of Osteogenics BioMedical, a U.S.-based manufacturer of regenerative solutions in early Q3. Bone regenerative therapies are increasingly becoming an important part of implant-based tooth replacement procedures. By providing clinicians with the best-in-class solutions, we can better support them in delivering the best possible patient care while also capturing more value from each implant procedure. This business is off to a strong start. Within Envista, we are excited about its ability to create lasting value for patients, clinicians, and our shareholders. As we make progress in our journey to digitize, personalize, and democratize dental care, it's important to also keep sustainability initiatives top of mind. To that end, I'm proud of our recently released sustainability report. This report continues to outline our progress in embedding environmental, social, and governance principles in our strategic approach. While we are still relatively new as an independent company, we have made solid progress in quantifying our environmental footprint, addressing climate-related risks and opportunities, and fostering a diverse and inclusive workplace for our employees. Some of our progress includes achieving 99% gender and ethnic equity in the United States, ensuring an efficient and stable supply chain through proactive supplier management that reflects our values and supports business continuity, incorporating the Task Force on Climate-related Financial Disclosures recommendations, identifying relevant climate-related risks and opportunities, and integrating oversight into our existing enterprise risk management processes, analyzing eight environmental metrics, including Scope 1 and 2 greenhouse gas emissions, water consumption, and waste generation. By investing in our ability to offer sustainable solutions, we intend to secure the success of our communities, employees, customers, and shareholders. We're building upon the ESG initiatives that we have undertaken as a newly public company. I'm pleased with our achievements to date, and I look forward to further progress in our journey to partner with dental professionals to digitize, personalize, and democratize dental care. I will now turn the call over to Howard to go through our third quarter financials and provide more details on our segment performance.

Howard Yu, CFO

Thanks, Amir. Before we begin, I would like to remind you that our third quarter results are compared against the prior year based on continuing operations, reflecting the sale of our Cabo treatment unit and instrument business as discontinued operations. On a reported basis, third quarter sales increased 3.9% to $631.1 million. Sales in the quarter were negatively impacted by 4.1% due to foreign currency exchange rates. Acquisitions contributed 3.1% of growth on a reported basis. Core sales growth was 4.9% compared to the third quarter of 2021. Our year-over-year core sales growth reflects solid performance in our Specialty Products & Technologies segment, offset by weakness in our Equipment and Consumables segment. On a geographic basis, Western Europe delivered core sales growth of over 9%, while North America was flat as that region was weighed down by its higher exposure to traditional imaging equipment. Our business in China was up 9.2% versus the prior year, reflecting the expected ramp-up in activity after the reopening of Shanghai late in the second quarter. Outside of China, emerging markets continue to grow nicely from pandemic lows, up over 15% versus Q3 of 2021. Our third quarter adjusted gross margin was 59.2%, increasing by 40 basis points compared to the prior year due to higher volume, pricing actions, and productivity improvements, partially offset by the impact of inflation and continued investment in our long-term growth initiatives. The adjusted EBITDA margin was 20.2%, which is approximately 60 basis points higher than Q3 of 2021 and was sequentially about 50 basis points higher than Q2 of 2022. Considering the uncertain macro environment, we took actions in the quarter to further streamline our organization to ensure that we can continue to expand our margins while investing for growth. Our third quarter adjusted EPS was $0.47 compared to $0.45 in the comparable period of the prior year. Our Specialty Products & Technologies segment core revenue increased by 11.3% compared to the third quarter of 2021, driven by strong growth in our premium implant business, above-market growth in our core brackets and wires business, and continued impressive growth from Spark. In the third quarter, our combined orthodontic business grew over 20% versus the prior year, with brackets and wires growing mid-single digits and our Spark revenue continuing to accelerate rapidly. Despite a more challenging macro environment, we remain confident that our Spark business has a meaningful opportunity to grow, and we are continuing to invest to capitalize on this opportunity. Our implant-based tooth replacement business grew mid-single digits in Q3 2022 versus Q3 of the prior year, driven by high single-digit growth in premium implants and strong growth across our emerging markets. In addition to the growth in core implants, our regenerative business, including the newly acquired business of Osteogenics, continues to accelerate. Our Specialty Products & Technologies segment adjusted operating profit was 20.8% in the third quarter. This is down 250 basis points from Q3 2021, primarily due to significant increases in investments to drive long-term growth as well as increasing customer-facing activities we participated in during the quarter. Our third quarter Equipment and Consumables segment core sales decreased by 4.7% compared to Q3 of 2021. This decline was driven by a slowdown in equipment business volumes, offset by solid growth in price and volumes in our consumables business. Our traditional imaging business declined double digits in the quarter with lower volumes across most geographies. The lower volume was partially attributable to strong performance in the second half of 2021 as well as macro headwinds, including inflation, rising interest rates, and an uncertain geopolitical environment caused by the conflict in Ukraine and the Zero COVID policy in China. As Amir indicated, we have made the decision to focus our efforts on key geographies where we have a sustainable competitive advantage. This will help us to accelerate both growth and margins over the long run. In developed markets, we also experienced weaker commercial performance as well as some supply chain challenges related to certain chips, both of which negatively impacted our revenue in the quarter. We continue to make investments in our new intraoral scanning (IOS) business and are focused on setting up this business for enduring success as we quickly expand our reach and optimize our global distribution. Clinicians are very interested in investing in IOS solutions to help them improve their overall workflow. The DEXIS intraoral scanning solution is well positioned to outperform the market. We are taking steps to address our commercial execution in North America and Europe and are focused on accelerating the performance across our full imaging portfolio, including IOS. On the consumables side, our Restorative & Endodontics business grew more than 7% in Q3, benefiting from solid underlying demand, increased prices, and normalized volumes in the channel. As you recall, this business did see a modest destocking in North America in the second quarter. Geographically, we saw solid growth in North America, a very modest decline in Western Europe, and strong double-digit growth in the emerging markets. As expected, sales of our infection prevention solutions increased double digits in Q3 compared to a softer Q3 of 2021. We believe that our infection prevention business is normalizing now that total inventory both in the channel and at clinicians' offices are returning to standard levels. Additionally, we are seeing more balanced sell-in and sell-out figures, suggesting that this business should return to a more stable, normalized long-term growth rate. Equipment & Consumables adjusted operating profit margin was 26.1% in the third quarter of 2022 versus 20.8% in Q3 of 2021. Our strong margin improvement was driven by favorable sales mix, our actions to increase overall productivity, and price increases, partially offset by cost increases related to the inflationary pressures on commodities and materials that impacted our businesses. Overall, the inclusion of the IOS business supports our belief that our equipment and consumables business will grow faster and be more profitable as we move forward. In the third quarter, we generated $19.7 million of free cash flow and ended the quarter with over $500 million in cash. Our free cash flow in Q3 2022 was lower than the prior year, in part due to the elimination of free cash flow associated with our discontinued operations as well as cash payments for one-time transaction costs, restructuring investments, and tax payments. We also continue to make long-term capital investments in Spark that will support our growth and improve our margins through automation. Despite the lower free cash flow in the short term, we remain focused on the midterm goal of delivering free cash flow in excess of net income and expect to see significant improvements in free cash flow in the fourth quarter and into 2023. Overall, our balance sheet is strong, and we have ample liquidity and flexibility to pursue appropriate long-term investments. Turning to our full year outlook. Despite the continued challenges in the macro environment, including persistent inflation, continued supply chain issues, geopolitical risk, and a potential energy crisis in Europe, we are reiterating our guidance for core growth and profitability and expect to deliver mid-single-digit core growth for the full year 2022, along with an adjusted EBITDA margin of 20% for the full year. We further expect our acquisitions to add greater than $40 million in sales for the full year 2022. This acquisition forecast is down modestly, reflecting a likely slower growth in Europe and China, the impact of currency, as well as the impact and timing of the DEXIS IOS rebranding and repositioning. Ultimately, we expect our acquisitions to deliver more than 75 basis points of annual growth within three years. While we do anticipate a more challenging operating environment in Q4 and in 2023, we remain confident in the future of the dental market as well as the resilience of our reshaped portfolio. Our strategic differentiation, coupled with our proven track record of execution, gives us confidence that we can continue to accelerate growth while driving consistent margin expansion. I'll now turn it over to Amir for some final thoughts.

Amir Aghdaei, CEO

Thanks, Howard. Moving forward, our priorities remain the same: accelerate growth, expand our operating margins, and continue to further transform our portfolio through active and disciplined capital deployment. Our intention is to partner with dental professionals to improve lives. Our diversified and comprehensive portfolio positions us as the partner of choice for clinicians globally. In orthodontics, we will continue to provide a differentiated and integrated suite of treatment options, including brackets and wires and clear aligners that empower specialists to provide the best personalized treatment for each patient. In our implant-based tooth replacement business, we will leverage our diagnostic and digital capabilities to provide clinicians with complete implant workflow solutions, including regenerative and prosthetic offerings. This solution for everyday dental will broaden access to our highly profitable and differentiated consumable business. We will leverage our strength in imaging and diagnostics to build seamless, open, and digitally integrated workflows from diagnostics to personalized treatment planning to execution for our clinical partners. Finally, we continue to draw upon our EBS heritage to drive a balance of growth and margin expansion across the economic cycle. We have a strong, committed, and capable team, and I'm proud of our culture focused on customer centricity, innovation, respect, continuous improvement, and leadership. As we continue to digitize, personalize, and democratize dental care, we're excited about the future of dentistry. We're strategically differentiated and have a proven track record of execution. Even in a more challenging economic environment, we see significant opportunity to accelerate growth, improve margins, and create long-term value for patients, customers, employees, and shareholders.

Stephen Keller, Vice President of Investor Relations

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

Operator, Operator

We'll take our first question from Elizabeth Anderson with Evercore ISI. Your line is now open.

Elizabeth Anderson, Analyst

Hi guys, thanks so much for the question. Thanks for all the color on your thoughts on what you saw in the quarter, and I appreciate the context of the changing dynamics. Can you guys sort of extend that out and talk about what you're seeing currently as we’ve both gotten through the first month in the fourth quarter? And then also to the extent I understand that you're not formally guiding this evening, but if you can narrow down the wide spectrum of opportunities as you're seeing them for 2023, could you provide any insights there? Thanks.

Amir Aghdaei, CEO

Yes, of course. Thank you, Elizabeth. What we have seen so far in Q4 is very consistent with what we saw in Q3, so not a major change. The situation remains a little bit uncertain regarding specific geographies. For example, in Russia, we had some challenges in Q2 in getting products into Russia, but we saw double-digit growth in Q3 after a mid-single-digit decline in Q2. In China, despite having experienced a low single-digit decline in the first half, we saw a step up in Q3 because of the robust need that was identified. Given the uncertainties on the ground, we remain confident that the guidance we provided remains intact, and we're not changing that. But taking a step back a bit to look at the macro environment, I can say that in the past year, I have been on the road, visiting customers, and I've talked to hundreds of individual practitioners, group practices, DSOs, and distributors. There is a common trend that we hear over and over across these visits. If I put the macro aside, patient volume remains stable. In the specialty business, the majority of specialties have their schedules booked for the next couple of months, but resources continue to be a major challenge, and inflation is impacting CapEx decisions. The third factor we consistently hear is the need for digital transformation. If you pull all of that together, the simple answer I can share is that the need for productivity is higher than it has ever been. This is where we shine; the EBS has a competitive advantage that we can talk about regarding asset utilization. We can talk about what we can do to leverage the capabilities that exist to help the industry move forward. The traditional business models do make this transformation more difficult, but in the past two years, we have seen an innovative disruption that can move the industry forward. It's going to be rocky a little bit in the short term, but we are confident that this industry is ripe for growth, and we are well-positioned to lead it in a variety of segments by providing people with what they need to maximize the productivity of their assets.

Operator, Operator

And we will take our next question from Michael Cherny with Bank of America. Your line is open.

Michael Cherny, Analyst

Good afternoon, thank you for taking the question. You spent some time talking about the situation in China. Let's talk about the future in China again, against the backdrop of not providing guidance. But can you fill us in a bit about what's going on with the VBP side regarding your communications and how you think about positioning the business to best succeed or manage through any pricing headwinds that you expect to see, especially among the difference between your public and private hospital exposure?

Amir Aghdaei, CEO

Yes, I’m happy to do that, Michael. As I mentioned, in Q3, our China business grew high single digits, nearly 9%, after experiencing a mid-single-digit decline in the first half. Obviously, a lot of that was due to the Shanghai lockdown and a slowing macroeconomic environment induced by China's Zero COVID policy. Despite these challenges, in our quality economic outlook, we expect continued growth in our specialty business in China. The imaging business is expected to experience softer performance dependent on the macroeconomic environment. Regarding the VBP, on the implant side, the VBP is already underway, and we expect to see results hopefully by the end of November. As we discussed before, we think that in the public sector, the prices will come down materially, possibly over 50%. Price declines will primarily come in return for volume increases for the winning bidders. This will be mainly driven by greater access to care in the remainder of 2022 and 2023. We have provided risk-adjusted guidance for 2022. We need to monitor the volume and price dynamics before we can provide any guidance for 2023. To answer your question, China is largely a self-paid patient process. Over 70% of our business on the implant side comes from the private sector. We have been shifting our business to continue targeting the private sector on the premium side, and I think we have a solid position there. We're going to continue building capabilities in that space, where the private sector is growing much faster. As for the traditional implant business, this will likely be impacted as well, but the details are still in flux. It's difficult to comment on impact for 2023, but we are considering various scenarios to ensure we manage through the uncertainty and maintain our long-term view communicated earlier this year: by 2026, we aim to achieve high single-digit growth with margins of 22.5% and above. Regardless of short-term challenges in China, we feel we can commit to that long-term target.

Operator, Operator

We will take our next question from Jeff Johnson with Baird. Your line is open.

Jeff Johnson, Analyst

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

Howard Yu, CFO

Yes, we can hear you, Jeff.

Jeff Johnson, Analyst

All right, thanks Howard. So I have two questions here for me. They are both still trying to look at 2023, and again respecting that you're not giving guidance. But Howard, I guess help us understand the European core growth at 9.3% and the emerging markets at 15%. Where are we in terms of easy comparisons from last year, especially given shutdowns and other factors? How should we think about those two markets as they normalize in the upcoming quarters regarding whether growth will be driven by end-market pull-through rather than just comps? Thanks.

Howard Yu, CFO

Yes, sure, sure, Jeff. I do think that we've had some sizable swings due to those comparisons. We discussed this primarily in the North American context of infection prevention, for example, where we were off COVID peaks. As we've lapped those highs here in the second half, we anticipated growth, and indeed products are more normalized both in the channel and in clinicians' offices. We feel comfortable about that. More broadly, regarding Europe, there are some macro concerns with the impending energy crisis looming there. Until we get clarity on various macro conditions, we feel positively about the consistency of that business's ability to grow. On the other side, as for our IOS business, we are feeling very optimistic about growth prospects. Over 70% of that business is driven by sales outside the U.S. Thus, we continue to feel bullish and expect to outperform the market. Spark is another example, where Europe has been an incredible frontier for us regarding super adoption and fast growth. As Amir has indicated in previous calls, the ramp-up in Europe has quickly surpassed growth seen in any other region, so we’re excited about that as well.

Jeff Johnson, Analyst

Thanks, that's all helpful. And then, Amir, maybe just as a follow-up, where is your pricing on a net basis so far this year? Additionally, how does that compare to past years? More importantly, philosophically, how do you think about pricing going into next year when you've got rising costs that you need to cover, but at the same time, dentists might feel less optimistic about their business with frustrating reimbursement rates?

Howard Yu, CFO

Sure, Jeff. With regard to pricing, we're encouraged. Historically, we've seen price degradation until approximately the second half of 2021, when we started observing some pricing traction. We continue experiencing this here in 2022, as indicated by over 150 basis points of growth coming from pricing. We anticipate that this tailwind will continue, especially in the fourth quarter. What we're trying to build is a more systematic approach to pricing. So even if inflation moderates, we still expect to see some modest pricing. Long-term, however, we've always viewed innovation as what helps us win the day regarding ASP increases and profitability. You can see that in our implants with the move from TiUnite to TiUltra and in our brackets and wires business as we transition from Damon Clear to Damon Altima. So again, the long-term strategy remains focused on innovation to expand margins and drive growth.

Jon Block, Analyst

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

Howard Yu, CFO

Yes, we can hear you, Jon.

Jon Block, Analyst

Great, thanks guys. To start on SP&T with Spark, where are you in regards to tapping into your core 2,000 or so Ormco orthodontists versus bringing on new non-Ormco orthodontists into the Spark equation? Any color would be really helpful. Also, we haven't heard anything on N1 for a while within SP&T. I think implants were up mid-single in premium and you guys mentioned high single-digit growth on the premium side? Was there any tailwind to that or what should we expect for that product into 2023? Then I'll ask my follow-up?

Amir Aghdaei, CEO

Yes, thank you, Jon. I'm happy to answer that. We are seeing, as we mentioned, double-digit growth in the number of customers actively using Spark. Our target has always been specialists. We have focused on specialists. As you correctly articulated, we started with Ormco Damon customers, offering a complete solution to them by helping them understand that we provide the same company, the same salary sources, and capabilities with training, education, and expertise in the market. That's how we got started, and we began expanding from geography to geography. What's been interesting recently is that this expansion has allowed us to grow our bracket-wire business because we enable customers to choose between clear aligners or brackets and wires, allowing them to deliver the best solution at the same price from the same company. To answer your question about N1, the combination of Spark and N1 has yielded over 250 basis points of growth year-over-year. N1 follows a similar process to Spark; we initiate with small groups and then extend based on our learnings. We have a dedicated team to teach, demonstrate, and supervise the process and we are rolling out our framework successfully in North America similar to our successful approach in Europe. N1 will definitely become an essential part of our growth strategy. In conjunction with commercial execution, new innovations have significantly bolstered our premium implant performance, allowing for high single-digit growth. We believe there are many opportunities for growth and expansion for our implant-based tooth placement in the long run.

Jon Block, Analyst

Got it, very helpful, thanks. Just taking a different direction. I know we're not going to get detailed '23 guidance, but I think you mentioned E&C should improve from here, while SP&T seems to have solid momentum. On the other side, you've got some VBP headwinds likely in '23. So at a high level, are you comfortable with modestly accelerating revenue growth in '23 off this mid-single-digit number in 2022 when we roll up all the moving parts as we head into next year?

Amir Aghdaei, CEO

Jon, it is really difficult at this point to call for 2023. We're focused on delivering Q4, continuing to invest in our long-term growth. We see significant opportunities in our Spark orthodontic solution, implant-based tooth replacement, IOS, and broader imaging diagnostic solutions. We will be thoughtful with a disciplined approach to inorganic activities going forward. What I can confirm is that we are committed to the long-term guidance previously provided: that our core sales growth will reach mid-single-digit plus, high single-digit, with over 22.5% EBITDA margins and EPS growth exceeding 10% by 2026. We remain focused on that commitment despite potential short-term challenges and with our proven track record, we believe in our ability to manage this balance of growth and margin successfully.

Erin Wright, Analyst

Great, thanks. How would you characterize the current traction you're seeing across Carestream and the IOS business? I think you mentioned strength overseas, but how are the integration efforts and outcomes playing out according to plan given the macro environment we're in?

Amir Aghdaei, CEO

Yes, of course. Thanks, Erin. When we started the process, we established three work streams. The first was operational: we wanted to ensure supply and operational capabilities, and we have ramped that up as quickly as possible post-COVID lockdowns in Shanghai. I believe operational integration is going extremely well. We have rebranded the products, established significant capabilities, and see opportunities for continuous improvement and margin expansion over time. The second work stream was around innovation. The first part of this was the software integration with DTX, providing a complete solution workflow for both our ortho business and implant business. The first revision of the integration is now available, and we expect to fully integrate DEXIS IOS with DTX by the end of the year. The third work stream focused on go-to-market strategies, expanding distribution, and effectively positioning our offerings across different geographies. We're actively addressing channel inventories and transitioning past Carestream products to DEXIS. We feel very positive and optimistic about the long-term potential of our IOS products, and the more we explore it, the more confident we become. We're entering a phase of under-penetration with ample opportunities for growth and distribution in 2023 and beyond. To give you a few numbers, even while we only owned the Carestream business for about two months in Q2, we sold approximately $5.5 million of products. In Q3, that grew to $10 million. So in summary, we believe the trajectory points toward steady improvement moving forward.

Erin Wright, Analyst

Okay, thank you. Just a quick one on Spark; when do you anticipate meaningfully entering the GP category?

Amir Aghdaei, CEO

Our primary focus hasn’t changed. We remain committed to serving specialists. We are a premium medtech company and our goal is to ensure that those who place implants conduct a significant volume and are provided with the best possible solutions. Our focus remains on specialists, but we won’t turn away demand from GPs wanting to push our product. An important aspect of our partnerships with DSOs is through their hub-and-spoke business model, where large DSOs have orthodontists within their organization. We work closely with these orthodontists, facilitating the movement of GPs to utilize our product. There’s been a significant demand for it, and as we receive approvals in various locations, we will keep up with this demand. In summary, there's a strong focus on specialists while keeping avenues open for GPs.

Nathan Rich, Analyst

Great, thank you. Amir, how are you thinking about the near-term outlook for traditional imaging? You mentioned two factors: weakness in North America and the deemphasis of certain geographies. Is the weakness in North America mainly due to the macro environment? Could you elaborate on the deemphasis of those geographies and what impact that might have on sales into next year?

Amir Aghdaei, CEO

Absolutely, thanks, Nate. So, let me first paint a picture regarding our imaging business. One-third of our imaging revenue comes from sensors and service contracts, which are fairly stable, even in a downturn. The remainder is influenced by the DSOs that heavily invest in new office setups, which has had a positive impact on our imaging business for several quarters. Some of the recent softness is attributed to supply chain-related challenges, inflation, and resource constraints in opening new stores, which our customers are also feeling. Macro issues in the U.S. and Europe, as well as in China, have also impacted this as you mentioned. The softness in North America is partly due to this mix, compared to the highs we saw last year. However, it is crucial to clarify that our commitment to imaging and diagnostics has not wavered. We see this as essential for evaluations and procedures and view our acquisition of IOS as an additional route to provide practitioners with comprehensive solutions integrated with our DTX software for an end-to-end workflow. However, we have made the decision to deemphasize some geometries where selling the productas standalone isn’t differentiated and does not align with our business model. We are focusing resources where we can foster sustainable competitive advantages. Portfolio management is key to our continuous improvement and EBS. This approach helps us manage margins while creating value in high-growth parts of our business. The observed improvements in our imaging, equipment, and consumables margin is partly intentional as we work to optimize our resources towards higher growth.

Nathan Rich, Analyst

Thanks. Regarding the implant VBP, do you have insight into how much volume has been submitted for bids at this point, or is that still pending? Do you believe you will have visibility on the impact of the program when you provide guidance for '23 in February?

Amir Aghdaei, CEO

Our expectation is that by the end of November or early December, we should have results regarding the top two players in the premium segment. This will provide us with substantial insight as it relates to 2023. While we can't specify how much volume to expect, we know the public sector will significantly feel it. As mentioned earlier, approximately 30% of our business is public sector-related. When you factor in both premium and value segments, this will fundamentally affect our overall guidance. We'll wait for results so we can build our 2023 forecast accurately while watching Q4 closely and adjusting as needed as we enter 2023.

Stephen Keller, Vice President of Investor Relations

Thanks, everyone, for joining. We appreciate your continued interest in Envista. We look forward to connecting with you in future investor events and at our next quarterly call. Have a great afternoon and evening.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.