Earnings Call Transcript - NVST Q2 2023

Operator, Operator

Hello. My name is Chelsea, and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation's Second Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin your conference call.

Stephen Keller, Vice President of Investor Relations

Good afternoon and thanks for joining the call. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. I want to point out that our earnings release, the slide presentation supplementing today’s call and the reconciliations and other information required by SEC Regulation G related to any non-GAAP financial measures provided during the call are all 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. During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted our year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the second quarter of 2023 and references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we may describe certain products and devices that have applications submitted and pending on the regulatory approvals that are available only in certain markets. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe, anticipate or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. 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 over the call to Amir.

Amir Aghdaei, President and CEO

Thank you, Stephen. Welcome to Envista's second quarter 2023 earnings call. We appreciate you taking the time to join us today. As anticipated, our performance in the second quarter accelerated as we continue to focus on partnering with dental professionals to digitize, personalize and democratize oral care. This quarter, we delivered core revenue growth of 2.1% and achieved an adjusted EBITDA margin of 19.1%. Sequentially, our adjusted EBITDA margin increased 90 basis points versus Q1 2023. We expect our performance to continue to accelerate in the second half of 2023 and we are positioned to meet our full year guidance of low single-digit growth and adjusted EBITDA margin of 20% or greater. Before I turn it over to Howard to discuss our second quarter results in more detail, I want to take this opportunity to provide further perspective on the current operating environment and then offer an update on our progress towards our strategic priorities. Globally, the dental market remains dynamic. While patient demand remains resilient, macro uncertainties, including geopolitical risks continue to weigh heavily in the mind of both patients and clinicians, creating an uneven operating environment. In the second quarter, we saw some notable but not widespread weakness in higher-end dental procedures, including adult orthodontic cases and full arch restorations. This weakness mostly came in the form of patients postponing treatments versus cancelling the procedures. Offsetting this weakness, we saw strength in the demand for restorative dental care and have further seen a continued commitment from clinicians to make selective investments in their practices. Clinicians are working to digitize their practices, and as a result, we saw strong growth in our DEXIS IOS business in the second quarter. As we look to the second half of the year, we expect dental demand to remain resilient and our performance to strengthen as we focus on execution. Long-term, we continue to work to accelerate our core growth, expand our margins and transform our portfolio. Envista Business System, EBS, underpins our execution rigor and we use it every day to continuously improve our operational capabilities in order to better serve our customers and our shareholders. Two recent examples of EBS in action include the successful development and launch of a new product in our Orascoptic business and an Annual President's Kaizen focused on improving customer satisfaction and streamlining our internal operations in our orthodontic business. For those of you less familiar with our full portfolio, Orascoptic is a leading provider of loupes for all dental professionals, including oral surgeons, orthodontists, dentists and dental hygienists. The business operates within our Specialty Products & Technologies segment. Recognizing the need to drive innovation and growth, the Orascoptic leadership team used the EBS towards a customer tool to design the next generation of loupes, the RDH Elevate targeting the dental hygienist market, a predominantly female market that has traditionally been underserved. The RDH Elevate is a titanium frame designed to eliminate discomfort, while still prioritizing style with custom designs that are lightweight and affordable. It’s a high-quality fashion-centric option. Since its recent debut, we have seen rapid adoption contributing to our high single-digit growth in this business. This is a great demonstration of how utilizing EBS can accelerate our product development plans, igniting growth and improving customer satisfaction. Turning to our Ormco orthodontic business, in the second quarter, the leadership team ran a President's Kaizen, aimed at advancing our EBS journey while driving continuous improvement throughout the organization. During the concentrated week-long session, the orthodontics team ran 11 individual Kaizens involving over 100 employees. Each Kaizen was focused on a different process that was standardized, simplified and improved. Our team successfully identified and implemented concrete improvements that produced over $5 million in annual cost savings, while enhancing our customer experience. Demand positively impacted our full orthodontic business, including Spark, and is another step in our journey of consistently improving margins. Focused on our progress in Q2, our uniquely positioned orthodontic business continues to perform well, driven by sustained performance in the Spark Clear Aligners. Once again, Spark was able to drive significant year-over-year growth, while also growing double digits sequentially. We continue to leverage EBS to drive the Spark growth formula and we are consistently adding new doctors, increasing case volumes at existing doctors and growing our revenue per case. Spark is well positioned to contribute to Envista's long-term growth. While our traditional bracket and wire business was negatively impacted by U.S. sanctions on Russia, we continue to make progress with our Damon Ultima system worldwide. This innovative bracket and wire solution provides orthodontists more control for faster, more precise finishing. In the U.S., more than 30% of our sales of Damon products now consists of Damon Ultima. In Europe, penetration continues to accelerate. Our solutions for implant-based tooth replacements declined low single digits in the quarter, with solid growth across most geographies impacted by declines in Russia and pockets of weakness in North America. In China, we grew mid-single-digit, offsetting the impact of value-based pricing (VBP) through increased volumes driven by an accelerated demand for implants, as well as meaningful gains in market share. VBP has narrowed the pricing difference between Nobel Biocare and other competitors in the local market and this has encouraged many clinicians to opt for our leading implant solutions. As expected, our adjusted EBITDA margin improved sequentially over the first quarter of 2023, increasing 90 basis points to 19.1%. This expansion occurred despite a temporary reduction in high-margin sales to Russia, the impact of the China VBP price reductions, and our continued investments in our long-term growth initiatives. We leverage EBS to manage margins through a systematic focus on price optimization, cost controls, structural cost reductions and deemphasizing non-strategic and less profitable businesses and geographies. We expect margins to expand in the second half of 2023 and we will remain on track to deliver full-year guidance, while making meaningful investments in long-term growth. We remain focused on building a stronger differentiated and growth-oriented portfolio. Having owned it for more than one year, our DEXIS IOS business is now included in our core growth and is contributing to improvements in both growth and margin within our Equipment & Consumables business. The IOS market remains underpenetrated and DEXIS IOS is well positioned to capitalize on growth in this area. In July, we reached the one-year anniversary of the Osteogenics Biomaterials acquisition. Moving forward, Osteogenics will be reported as core growth within the Specialty Products & Technologies segment. This business continues to perform well and will be accretive to our growth in 2023 and beyond. Combined, both acquired businesses are expected to contribute a minimum of 75 basis points of core sales growth for Envista in 2023. While we are excited about the strategic moves that we have made, we see additional opportunities to further improve our portfolio. We’re committed to pursuing a disciplined and strategic approach to capital deployment. We utilize our EBS-driven M&A approach to manage a robust pipeline of inorganic partnerships and investments, continuously cultivating new opportunities. I will now turn the call over to Howard to go through our second quarter financials and provide more details on our segment performance.

Howard Yu, Chief Financial Officer

Thanks, Amir. In the second quarter, we delivered sales of $662.4 million. This represents an increase of 2.6% over the second quarter of 2022 on a reported basis. Acquisitions contributed 1.7% of growth, while foreign currency exchange rates negatively impacted sales by 1.2%. Core sales for the quarter grew 2.1%. Our growth reflects continuing expansion in our Specialty Products & Technologies segment as well as a return to growth in our Equipment & Consumables segment. From a geographic perspective, Europe grew high single digits, while North America declined low single digits. Emerging markets grew mid-single digits with strong growth in most markets, but being weighed down by the decline in Russia. China grew in the quarter with a strong rebound in volume offsetting the VBP-related price declines. For 2023, we expect China to show modest growth net of the VBP pricing impact. Our second quarter adjusted gross margin was 57.9%, which is down 80 basis points from the prior year. The decline in gross margins was primarily attributable to an unfavorable product mix, VBP-driven price declines and continued investment in our long-term growth. Our adjusted EBITDA margin was 19.1%, which represents a 60-basis-point decline versus Q2 of 2022 and a 90-basis-point sequential improvement from Q1 of 2023. Our adjusted diluted EPS in the quarter was $0.43, compared to $0.48 in the comparable period of the prior year. The reduction in the EPS for the quarter was primarily driven by an increase in interest expense from higher interest rates. Core revenue in our Specialty Products & Technologies segment grew 1.7%. In the second quarter, our combined orthodontic business grew high single digits with Spark continuing to expand rapidly. Our traditional bracket and wires business declined high single digits, negatively impacted by the Russian sanctions. As we have discussed, we expected this impact in the quarter and we anticipate being able to resume shipment of these products to Russia again in the third quarter. Our implant-based tooth replacements business declined low single digits in the quarter. We saw solid growth across most geographies, offset by pockets of weakness in North America. China grew mid-single digits with strong volumes offsetting the impact of VBP pricing. Adjusted operating profit in this segment was 18.7% in the second quarter. This is down both year-over-year and sequentially as we continue to invest in our long-term growth and manage the impact of VBP-driven price declines. Turning to our Equipment & Consumables segment, core sales in the second quarter increased 2.9% compared to Q2 of 2022. The return to growth in the E&C segment is driven by our continued strong partnership with our key distribution customers as well as our EBS-focused execution, which helps drive strong sellout and ensures we are driving performance all the way to the clinic. Our Equipment business grew low single digits driven by strong growth in IOS, which is now part of core growth and by the improving performance of our traditional imaging business. It is important to note that we continue to deemphasize non-strategic geographies and solutions to concentrate our efforts in markets where we can build a sustainable competitive advantage. This will allow us to accelerate both growth and margins over the long term. On the Consumables side, we delivered mid-single-digit growth driven by strong performance in our Restoratives and Endodontics businesses, and modest growth in our Infection Prevention business. Globally, we believe that the distributor sellout of our Consumable solutions continues to outpace the market. Channel inventories remain healthy and we expect this business to continue to perform well throughout 2023. In the second quarter, adjusted operating profit in the Equipment & Consumables segment was 25.7%. This represents 400 basis points of margin improvement versus the prior year. Margin performance in the Equipment & Consumables segment is truly a demonstration of the power of EBS. We are relentlessly focused on driving productivity, optimizing our operating structure and managing price to protect and deliver improving margins. In the second quarter, we generated $61 million of free cash flow and ended the quarter with over $650 million in cash. We continue to make progress on our cash flow management and remain committed to our midterm goal of delivering annual free cash flow in excess of net income. We have a strong balance sheet that provides us the flexibility to pursue additional inorganic growth opportunities when the right assets become available at attractive valuations. Now I will turn the call over to Amir to discuss our outlook for the balance of the year and provide closing comments.

Amir Aghdaei, President and CEO

Thanks, Howard. Looking forward, we remain confident in our long-term strategy as well as our ability to deliver our outlook for the full year 2023. We expect core sales to grow low single digits and to achieve adjusted EBITDA margin of 20% or greater for the full year. While we are confident in our outlook for 2023, it is important to note that we do anticipate some continued quarterly volatility. The second half of last year was volatile, with a relatively strong third quarter followed by a much weaker fourth quarter. Given last year's performance, we expect results to accelerate throughout the remainder of 2023 and for the fourth quarter to be our strongest quarter for both growth and margins. Before we conclude the call, I would like to acknowledge the leadership change that we announced last week. After more than 20 years with Danaher and Envista, my partner, friend, Howard has decided to pursue a new opportunity outside Envista in the dental industry. As the original CFO of Envista, Howard has had a tremendous impact on our business and helped position us for long-term growth. He has been an important adviser to me and the whole investor team and we will miss him after he leaves in late September. Howard? Thank you for your leadership, your partnership and many contributions to Envista.

Howard Yu, Chief Financial Officer

Thank you, Amir. I truly appreciated the opportunity to work with you and the entire Envista team. I am proud of what we accomplished as a new public company and I’m confident that Envista will continue to deliver on its vision of digitizing, personalizing and democratizing dental care. Envista is well positioned to continue to accelerate growth, expand margins and further transform the portfolio.

Amir Aghdaei, President and CEO

I want to reiterate that our priorities remain the same. We intend to accelerate growth, expand our operating margins and further improve and transform our portfolio through active and disciplined capital deployment. Our EBS focus and continuous improvement culture will help us manage through short-term volatility while progressing towards our long-term targets. We are institutionalizing EBS within our culture and operations, ensuring that each leader across Envista is retrained and exceptionally knowledgeable in our tools and best practices. Year-to-date, we have held 10 one-week EBS back to basics training designed to re-immerse each leader in our business system. This initiative hasn’t only been impactful to our business performance, but also engaging and enabling our leaders to execute our continuous improvement approach. We intend to continue and further enhance our training as we move forward. We are well positioned to be a leader in both orthodontics and implant-based tooth replacement. Our comprehensive clinical offerings, including our imaging and diagnostic solutions will improve the productivity of dental professionals while empowering them to plan and deliver personalized and predictable treatment for each patient. Our purpose is to partner with dental professionals to improve patients' lives by digitizing, personalizing and democratizing dental care. We’re focused on delivering long-term value for patients, our customers, our employees and our shareholders.

Stephen Keller, Vice President of Investor Relations

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

Operator, Operator

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

Elizabeth Anderson, Analyst

Hi, guys. Thanks so much for the question. Howard, sorry to see you go. Congratulations on your new opportunity. I think just maybe a sort of a last question as you go through your last earnings call. How do we think about the current demand environment? I know we’ve talked about some of the ups and downs over the first half of the year and into the second quarter. But as we kind of parse apart as we started to be in the third quarter, broadly speaking, by like China, Europe and North America, that would be helpful to hear more color there? Thank you.

Amir Aghdaei, President and CEO

Yeah. Thank you, Elizabeth. Overall, patient demand remains resilient. What we hear from doctors, group practices, and DSOs, they remain bullish on the long-term outlook for dental demand, but we’re mindful of the macroeconomic risks. What we are seeing is the continued strength in general and restorative care. We see some isolated weakness in higher-end dental procedures such as postponement of treatment versus canceling it. These include full arch restoration and some adult-type of support on the ortho side. We are seeing some caution from clinicians resulting in managing inventory in a much more strict format than we have seen before, specifically on implant bracket and wire. Segment-by-segment, implant-based tooth replacements are exhibiting resilient demand, but we are seeing some notable but not widespread weakness in high-end procedures. Orthodontics remains resilient, except Russia, which is volatile, and we have some challenges there. Our traditional imaging has improved significantly, but also demand remains weak due to macro concerns and high interest rates. However, our comps are becoming a lot easier to manage as we go through the second half. IOS continues to see strong demand from doctors, as well as group practices and DSOs, as they intend to digitize and expand their capabilities. Regarding Consumables, demand remains stable and resilient. When looking at geography-by-geography, Europe demonstrates resilient demand, but as you can imagine, this is summer vacation and some rolling vacation to the northern part of Southern Europe. In North America, we haven’t seen any significant change. Demand continues to be resilient, with pockets of weakness in high-end procedures. In China, I was there last week, and what we saw was demand as expected has improved significantly compared to the COVID-impacted comparables, and we expect to see further increase in the second half. However, there are some key issues, such as customer sentiment and focus on spending, which seem to be leaning more towards travel than dental care. Russia remains volatile, and the ongoing conflict doesn't really allow for a direct forecast of what to expect quarter-to-quarter. The rest of the world, especially emerging markets, has resilient demand and we have performed extremely well. So, considering all of this, the forecast we provided and communicated is low single-digit growth, which considers all these variables, along with the anticipated benefits from acquisitions and EBS initiatives. We feel positive about what we can deliver in the second half and for the whole year.

Elizabeth Anderson, Analyst

Got it. That’s super helpful. And maybe just sort of similarly, for people who are looking at the full year margin guidance saying, okay, we’re two quarters in, and yes, the margins are definitely improving sequentially and took a very nice step up Q-over-Q. How do you think about that versus the ramp into the last two quarters of the year? Any particular profitability drivers to call out in the third quarter versus fourth quarter or any other sort of details you can provide for us for how to think about that?

Amir Aghdaei, President and CEO

We expect, as we have said before, that the second half is going to be stronger, and as we go through the year, that we’re going to see better performance. If I break it down, the growth will come largely from the Specialty Products & Technologies segment. Spark continues to add new doctors and existing doctors are putting in more new cases. We’re going into different geographies, prices are improving, and gross margins are likewise improving. The combination of IOS and the Osteogenics acquisitions will improve our core growth. We expect these acquisitions to have an over 75 basis points impact on our core growth for the full year. Additionally, we will have a much easier comp, especially in Equipment, considering what we dealt with last year in Russia and China. Demand is driven by improved volumes and better margins, primarily in Specialty Products. Throughout the year, we have focused on improving gross margins, and productivity via EBS is notably visible. As we have seen in the Equipment & Consumables business in Q2, we expect to continue to drive further improvement as we go into the second half. We have systematically begun to move away from non-strategic, less competitive businesses which is now beginning to pay off nicely. Overall, we feel confident about what we have ahead of us in the second half.

Operator, Operator

Thank you. Our next question will come from Michael Cherny with Bank of America. Your line is open.

Michael Cherny, Analyst

Good afternoon. Thanks for taking the question. I want to dive in a little bit more into the commentary you made around the back half of the year, if I could, Howard, in terms of the cadence and the year-over-year comps. You tend to have some level of Q3 to Q4 ramp, but it sounds like we should be expecting something fairly steeper than normal. I know you’re not commenting specifically on giving quarterly guidance. But in terms of those moving pieces, how should we think about aside from comps, some of the biggest differences between the expected Q3 and Q4 growth?

Howard Yu, Chief Financial Officer

Yeah. So, Michael, we do see and have anticipated this throughout and even when we provided guidance, we talked in context of the first half being a bit slower and sluggish, both in terms of growth and around the margin profile. Certainly, as Amir described, as we see improved growth and volume come through, that’s clearly going to have some positive pull effect on the margins. We’ve emphasized as part of EBS, productivity improvement, look no further than Spark. Each quarter, we continue to see improvements in that margin profile, and we’ll see a significant step-up here in the second half as well. China is recovering, which is also going to improve those margins. We talked about the recovery in China, and if that business grows even with the VBP impact, we feel confident that we’re going to see profitability show up. We discussed the IOS ramp, and as that business grows, it also brings improved margins so that growth will contribute as well. Basic operations around EBS and our productivity will provide continued success, and we have taken actions in Q2 that will yield results in the second half. Clearly, Q4 will be the most significant, largely because it’s the largest revenue quarter for us, leading to substantial margins. The improvements will be evident as we close out the year.

Operator, Operator

Thank you. Our next question comes from Jeff Johnson with Baird. Your line is open.

Jeff Johnson, Analyst

Hey, guys. Good evening. Thanks for taking the question, and Howard, best of luck in the new role. Maybe Amir, I could ask you a question on Europe and one on implants. So regarding Europe, as you were explaining to Elizabeth, you said you may encounter vacations and all that. I know we frequently hear that in Europe. One of your competitors came out with a report tonight and indicated softer-than-expected European performance, citing Germany specifically from a macro standpoint. So how comfortable are you with what we’re seeing macro-wise in Europe that the business can maintain its health and continue to contribute to that improving growth profile in the second half?

Amir Aghdaei, President and CEO

Yeah. Thanks, Jeff. Over 25% of our business comes from Europe. For the past eight quarters, we have performed extremely well in Europe. What is driving this? I’ll talk about macro in a second, but I want to tell you about our results. Our Clear Aligner business in Europe is the fastest-growing part of our business and it’s purely because of segmentation, the network effect, training, and education. We have a very systematic rollout starting in Spain, extending into France and now expanding geography by geography. Our implant business, we talked about this before—we have worked to improve execution in Europe. We have delayered the organization and improved customer experience. Every geography is very targeted with a focus on building relationships and growing. Our consumable business has been growing high single digits every quarter for the past eight quarters. Now, regarding the macro situation, we are hearing the same concerns you mentioned. But on the ground, what we execute, the segments we go after, and our targeted approach have improved customer experience. We have consolidated operations and are building a new customer center in Prague to reduce turnaround time. All of this has allowed us to perform extremely well, and we are replicating many of these success stories in the U.S. as well. Macroeconomic issues are important, but effective execution can mitigate macro factors. That’s what we have accomplished in Europe, as well as China and emerging markets. We’re replicating it in North America as we go forward.

Jeff Johnson, Analyst

All right. That’s helpful. Thank you. And then regarding implants, I think you gave enough detail on Europe and China this quarter. If we back into the North American number, it seems like it was down about mid-single digits year-over-year. Is that correct? And how does that compare to the Q1 performance? You’ve mentioned efforts to re-stimulate growth in that business. When do you expect that to turn positive? Additionally, we’re hearing on the North American dental market, particularly in your business, that trade down to value is occurring, potentially not just within Implant Direct but others in the value space. How do you see that aligning with what you’re experiencing over the next six months to a year?

Amir Aghdaei, President and CEO

Yeah. Those are all really good questions, Jeff. As always, we have significant insights into what challenges lie ahead. Regarding the macro situation, the North American market remains resilient. We are not seeing any drastic changes in the implant business. High-end selective procedures like full arch restorations, which represent a significant investment, lead patients to postpone treatments rather than cancel them. Conversations with oral surgeons indicate there’s no radical decline in patient numbers. Instead, we are seeing a tighter inventory control approach. To be specific, instead of ordering one month’s worth of inventory, many oral surgeons are now ordering only two weeks at a time. We have managed this at local levels and on a regional basis, down to zip codes. In North America, we see performance that varies; there are pockets of strong performance driven by local inventory management. We have a solid brand and product portfolio with a dedicated community of surgeons ripe for growth. Meanwhile, in regions with open territories, the lack of representation affects performance. Although we expect further consistency in Europe, the U.S. is undergoing similar processes, aiming for standardized operations and territory management. We are confident that growth will improve each quarter, and our goal is to restore growth to match or exceed market growth.

Operator, Operator

Thank you. Our next question will come from Brandon Couillard with Jefferies. Your line is open.

Brandon Couillard, Analyst

Yeah. Thanks. Good afternoon. It would be helpful if you could just unpack exactly what you saw in imaging in the second quarter, whether it was up or down on a year-over-year basis and that improvement just a function of easier comps and how you’re thinking about that segment in the second half of the year?

Amir Aghdaei, President and CEO

Yeah. Thanks, Brandon. The performance of imaging business was a little soft. There are three groups that typically purchase imaging products: one, opening a new office; two, adding to an existing setup; or three, if you’re a DSO, opening a new location. There has been some slowdown due to interest rates impacting decisions. Secondly, we have replacements for older products which have also decreased. Lastly, there are those who want to buy an IOS or CDCT. The segment has shown growth but is challenged by the overall macro climate. We began exiting some specific geographies starting in Q2 of last year, which also affected performance. Our EBS initiatives aimed at managing value propositions and improving the customer experience are beginning to pay off. In Q1, our imaging business declined double-digit, but improved significantly in Q2. Traditional imaging improved, and we expect further growth throughout the year on the back of these efforts.

Brandon Couillard, Analyst

Helpful. Thank you. And Howard, wish you all the best as well. Just two quick questions from me. What was the effect of the one extra selling day in the quarter, and what should we pencil in for free cash flow conversion for the year?

Howard Yu, Chief Financial Officer

Yeah. Thanks, Brandon. As it relates to the one extra selling day in the quarter, it wasn’t as meaningful, because we did have more growth on the E&C side, which is mostly a distributor type of business, and so I would say that that didn’t have a significant impact. In terms of free cash flow, we continue to improve. We talked about the midterm goal of getting free cash flow in excess of net income, and we feel that the second quarter is a good illustration of how we are tightening up on working capital and boosting profitability. We anticipate further improvements in the second half, with Q4 being a major contributor.

Operator, Operator

Thank you. Our next question will come from Jon Block with Stifel. Your line is open.

Jon Block, Analyst

Thanks, guys. Good afternoon. For the 2023 guidance, you seem to have confidence, but it is a steep slope for 2H. Amir, you talked about a dental market that showed some slowdown, particularly in the high-end. You’ve got a roughly $1 billion implant business and nearly $0.25 billion run rate in Clear Aligner. So, what does the guidance assume or embed for the balance of the year? Are you extrapolating out current trends that you can achieve the guidance, or is there an underlying assumption for a market pickup in those high-end types of cases?

Amir Aghdaei, President and CEO

Thank you, Jon. We have a process in place for continuous scenario planning which considers all different variables and helps inform our expectations. In our model, we anticipated that VBP would significantly impact results, but we have not assumed a significant uptick in volume. We know Russia will be volatile, and there’s a high growth model for Spark with detailed tracking of metrics from our training program. Our funnel management provides insight into our conversion rates, new products, and marketing strategies. All of this helps build our core growth assumptions for the second half driven mainly by Specialty Products & Technologies. Spark is leading the way, and we expect improvements from acquisitions such as IOS and Osteogenics contributing positively. The return of profitable equipment, easier comps in the second half, and increasing volumes together with an improved pricing mix ensure profitability continues to enhance as we move forward.

Jon Block, Analyst

Great. That was very helpful. I guess it just sounds like you’re not embedding in a pickup in the market. I mean, you’re pointing to company-specific variables to justify this step-up. Also just to pivot a little more specific to Russia, could you quantify the revenue headwinds there? The swing in the wires and brackets growth rate of nearly 1,000 bps implies it could be around $10 million, if you could confirm that and tell us when you expect that to return. Is that all a Q3 2023 event, or is it staggered between Q3 and Q4?

Howard Yu, Chief Financial Officer

Sure, Jon. So, the majority of the impact concerning Russia comes from U.S. born products, and it has affected our bracket and wire business significantly, with some impact on implants. We had indicated earlier that the sales would be affected by up to $10 million; however, it appears we were slightly shy of that. The good news is that licenses should get cleared, so we anticipate resuming our shipment of these products in the third quarter. We don’t expect to lose those orders, but how quickly they will be made up—whether in Q3, Q4, or otherwise—depends largely on the ongoing volatility in that region. We maintain a confident outlook for growing our business in emerging markets, especially in our Specialty Products.

Operator, Operator

Thank you. Our last question will come from Jason Bednar with Piper Sandler. Your line is open.

Jason Bednar, Analyst

Thanks. Thanks for taking the question and I’ll echo the sentiments here, Howard. Congrats on the new role and we will miss working with you. I wanted to start with the EBITDA margin guidance and the implied improvement here in the second half. I apologize if I missed something; I’ve been hopping between calls. I’m trying to reconcile the EBITDA margin you posted here in the second quarter for your two reporting segments in the context of that ramp. Does the margin improvement come more from SP&T reaching a low base? Also, I hear your comments on Spark, where will the margin growth come from E&C after what was a nice quarter?

Howard Yu, Chief Financial Officer

Yeah. Thanks, Jason. Significant margin improvement is indeed expected in the SP&T segment in the second half. We discussed previously the impact of the Russia sanctions and anticipate that many of our bracket and wire products can return, boosting margins accordingly. Furthermore, Spark’s profitability profile continues to improve on a sequential basis each quarter, and this will also translate to the second half. The acquisitions will drive volume increases while contributing to improved margins, with Osteogenics becoming part of core growth. We believe overall growth in SP&T should accelerate significantly. In terms of E&C, the growth in margins was quite strong at approximately 400 basis points, but it’s more difficult to commit to further improvements just yet. We expect to maintain the focus on productivity gains as we refine our corporate functions.

Operator, Operator

Thank you. Our last question comes from Nathan Rich with Goldman Sachs. Your line is open.

Nathan Rich, Analyst

Great. Thanks for taking the question, and Howard, let me add my congratulations and best wishes as well. Could you please talk about the situation in China over the past few months, especially from a consumer demand perspective? Additionally, how have your expectations for China over the back half of the year changed relative to what they were three months ago or at the start of the year?

Amir Aghdaei, President and CEO

Yeah. Thanks, Nate. As I mentioned, I had a great week in China, meeting with some of the largest hospitals in Shanghai, several DSOs, many customers, and our own team. The VBP in China has played out as we anticipated—prices for public sector products have decreased by nearly 50%, but volumes have surged. We actually see demand increasing significantly over prior year comparables. Fifteen provinces have increased price for orthodontics after observing impacts on the implant sector before proceeding. Overall, patient traffic is strong. Two significant trends we are witnessing are that the gap between premium and value products has widened. Clinicians are pulling toward premium brands. Additionally, there is a growing preference among clinicians for implant placements versus three-unit bridges due to the diminishing price differences. DSOs are becoming increasingly comfortable placing implants, benefiting our volume growth. Although there are challenges—like the housing crisis and slower overall consumer expenditure—these circumstances seem to only affect the broader economy. We expect China to be fairly flat for 2023, especially considering the impact of VBP, but based on our observations, growth is improving and will continue in the second half.

Howard Yu, Chief Financial Officer

Yeah. Nate, I do think that we continue to look at all operations, ensuring the size of operations aligns with our cost structure. In China, we’ve taken some restructuring steps without affecting customer-facing roles, and the response has been positive. The imaging business also underwent changes, and we’ve taken steps to right-size it too, ensuring alignment with customer-centric policies.

Stephen Keller, Vice President of Investor Relations

Thanks, everyone. We appreciate your time today, and we look forward to talking to you guys next quarter. Thank you very much.

Operator, Operator

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