Envista Holdings Corporation

My name is Chelsea and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Invista Holdings Corporation's second quarter 2022 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, press star then the number one on your telephone keypad. If you would like to withdraw your question, you may press the pound key on your telephone. I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Invista Holdings. Mr. Keller, you may begin your conference call.

Hello, and thanks for joining us on the call. With us today are Amir Agday, 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 investor section of our website, www.investico.com. The audio portion of this call will be archived on the investor 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 3rd, 2022, we have closed the vestiture of Cabo Treatment Units and Vet Instrument business. For the first and second 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 presentations to earnings, revenues, and other company-specific financial metrics relate only to continuing operations of Invista'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 second quarter of 2022, and 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 available only in certain markets. During the call, we will make forward-looking statements within the media of the federal securities law, 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 of the date that they were 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.

Thank you, Stephen, and welcome everyone to Invista's Q2 2022 earnings call. I want to start today's call by thanking our employees for delivering another solid quarter. Despite supply chain disruptions, accelerating inflation, and its severe COVID-related lockdown in China, our team delivered mid-single-digit core growth, expanded our adjusted EBITDA margins, and successfully integrated our newly acquired intraoral scanner, iOS Business. Our resilient performance is a testament to our strategic differentiation and our proven track record of execution. Before I turn it over to Howard to discuss our second quarter results in more detail, I want to reiterate our long-term vision, provide some insight on current market conditions, and offer a quick update on our progress toward our strategic priorities of accelerating growth, expanding operating margins, and transforming our portfolio. At Invista, our focus is to partner with dental professionals to improve patients' quality of life by digitizing, personalizing, and democratizing oral care. We're committed to the dental community by spending a significant amount of time in the market meeting with dental professionals to further understand their businesses, their workflows, and their needs. I just recently returned from a road trip where I met with over 100 customers across the U.S. While there is no doubt that talk of inflation and potential for an economic slowdown is weighing heavily on clinicians' minds as they look out over the next six to 12 months, it is also clear that currently patient traffic remains robust and dental professionals remain confident in the long-term prospects of the industry and their businesses. Doctors in private and group practices continue to invest in their specialty treatments and are looking for ways to expand their capabilities, improving their workflows and digitizing their offices. They see opportunity to enhance their efficiency and the predictability of treatments. DSOs remain committed to opening new offices, but are limited by supply chain and capacity constraints, including the lack of staff in dental offices. While we expect there may be additional uncertainties in the market short term, we continue to believe that the dental market is resilient and has ample room to grow over the long term. Turning to our Q2 progress, with a uniquely positioned portfolio, our orthodontic business continues to deliver strong results. Our core bracket and wire business grew low single-digit as a result of our differentiated Daemen solution. The new Daemen Ultima system, which provides orthodontists more control for faster and more precise finishing, continues to gain share. This innovative solution commands a premium price by improving the way orthodontists move teeth. While we are proud of the strength of our bracket and wire business, it is our spark aligner business that continues to accelerate rapidly, again delivering year-over-year core growth of over 100%. It initially took us three years to achieve 100,000 new spark case starts. In the last six months, we have started an additional 50,000 cases, and we expect to further expand our position. The SPARC solution is gaining momentum as we partner with top orthodontic professionals and clinics globally. In Q2, we are proud to sign a long-term agreement with Sveta Ravnatec, an orthodontic clinic based in the Czech Republic. The vet from Onitech is a global leader in clear aligner therapy and is responsible for more clear aligner case tests than any other clinic in the world. This long term partnership with the leading orthodontic clinic further validates the strength of the SPARC aligner solution. Our solutions for implant-based tooth replacement grew mid-single digits in the quarter. We continue to see robust growth in premium implants and our regenerative solutions. In addition to our strong commercial execution, we also signed two important agreements to further our mission of partnering with dental professionals to digitize, personalize, and democratize dental care. First, we entered into a long-term agreement with Dental Corp., North America's only publicly traded DSO. Based in Canada, Dental Corp has more than 500 offices and is a leader in the placement of implants in Canada. Together, Nobel Biocare and Dental Corp have trained hundreds of clinicians and created a network that offers the latest tooth replacement solutions from Nobel Biocare. This agreement extends our partnership and further strengthens Dental Corps' ability to provide the highest quality of care to its patients. Earlier this month, we also announced that Nobel Biocare and Boston University will partner on philanthropic initiatives for the next decade. Through this partnership, Nobel Biocare will provide $4 million per year in products as-in-kind educational grant to the Boston University's Henry M. Goldman School of Dental Medicine . Students and residents at GSDM will have an opportunity to place and restore implants using this grant. This partnership will help us train the next generation of implant placers in North America. In addition to driving growth and investing in our strategic initiatives, we remain intently focused on expanding our margins. In Q2 2022, we achieved an adjusted EBITDA margin of 19.7%. This represents a 40 basis point of a margin improvement versus Q2 2021. The investor business system, EBS, and its focus on continuous improvement drives our execution. It helps us to offset and countermeasure the impacts of inflation and supply chain challenges while supporting our ability to invest for long-term, sustainable differentiation and growth. In the quarter, we use EBS to drive discipline in pricing, achieving greater than 200 basis points of net pricing. Further, we took additional actions to streamline our organization and ensure that we can continue to invest in our strategic priorities while managing inflation and expanding our margins. We optimized our regional organizational structure and de-layered our operating companies to improve customer experience and provide us more flexibility as we move throughout the year. We're proud of the work we have done today and remain focused on further optimizing our operations to effectively deal with the challenging macro environment. While we expect persistent inflation-related concerns, supply chain challenges, and geopolitical issues to impact 2022 and beyond, we're confident that our continuous improvement culture rooted in EBS will allow us to deliver short-term results and invest in our long-term priorities. The transformation of our portfolio continues. The acquisition of CareStream Dental's iOS business has been successfully integrated into Invista and we have relaunched the product under the DEXIS brand name. We intend to integrate the DEXIS scanner into our DTX platform to further simplify and optimize our specialty implant and ortho workflows. During the period, that we own this business in the second quarter, we achieved $5.5 million in revenue despite the lockdown in Shanghai that limited our ability to source scanners. With the factory open since early June and scanners now being built in bulk, we are well positioned to drive above-market growth in the second half of the year. We see significant interest from clinicians and our distribution channel. The Texas iOS solution is well regarded scanner, providing high performance and attractive price point. The 3800 virus scanner recently received a 2022 Red Dot Design Award that recognized its lightweight, convenient, and effective design. The jury specifically called out its balanced symmetry and minimalist elegance that is not only practical but also a pleasure to operate. With our attractive portfolio and robust R&D pipeline, we expect the Texas IOS solution to accelerate our growth and enable us to partner with clinicians to digitize, personalize, and democratize dental care. On July 5th, we closed the acquisition of Ostergenics Biomedical, a US-based manufacturer of regenerative solutions. This acquisition is consistent with our strategy of focusing on the fastest-growing segments of the dental market and providing dental professionals with complete workflow solutions. Ostergenics is a well-respected company with a solid brand, a history of innovation, and strong ties with leading clinicians. This business is complementary to our implant offerings, and we further position us as the leader in implant-based tooth replacement, and provides in this a significant opportunity to create value for patients, our clinicians, and our shareholders. While we're excited about the strategic moves that we have made today, we see opportunities to further improve our portfolio. We're committed to pursuing a disciplined approach to capital deployment. We utilize our EBS-driven M&A approach to manage a robust pipeline of inorganic partnership and investment and are actively 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. Thanks, Amir.

Before we begin, I would like to remind you that our second quarter results are prepared against prior year based on continuing operations, reflecting the sale of our CAVO treatment unit and instrument business as discontinued operations. On a reported basis, second quarter sales increased 1.3% to $645.8 million. Sales in the quarter were negatively impacted, 3.6% due to foreign currency exchange rates, and acquisitions contributed 0.9% growth to reported sales. Core sales growth was 4% compared to the second quarter of 2021. Our year-over-year core sales growth reflects solid performance in our specialty products and technology segment offset by weakness in our equipment and consumables segment. Our specialty segment delivered core growth of 9.6% driven by solid performance in our implants and core bracket and wire businesses and outstanding performance in our spark clear aligner business. On a geographic basis, Western Europe delivered core sales growth of 11%, while North America increased 0.5%. North America was weighed down by its higher exposure to infection prevention and by modest destocking in our distributor channel. Our business in China was down 0.3% versus prior year due to the extended lockdowns in Shanghai. As expected, activity in China ramped up very quickly late in the quarter, as Shanghai reopened. In Russia, we declined mid-single digit versus Q1 of 2021. This decline followed a strong Q1 driven by forward buying at the start of the conflict in Ukraine. Outside of Russia and China, emerging markets continue to grow nicely off pandemic lows, up approximately 20% versus Q2 of 2021. Our second quarter adjusted gross margin was 58.7%, increasing by 40 basis points compared to the prior year due to higher volume and favorable mix, partially offset by the impact of inflation and our material costs. The adjusted EBITDA margin was 19.7%, which is approximately 40 basis points higher than Q2 of 2021 and in line sequentially. As previously discussed, in Q2, we continued to invest in our long-term innovation while increasing spend on travel and in-person customer-facing activities. Our adjusted EBITDA was also negatively impacted by one-time costs related to investments in our newly acquired DEXIS iOS business. The overall investment was slightly lower than expected as we effectively redeployed available resources resulting from the CAVO divestiture towards the IOS business. In Q2, we also took actions to both eliminate the remaining stranded costs and further streamline our organization to ensure that we can continue to expand our margins while investing in long-term growth. Our second quarter adjusted EPS was 48 cents compared to 46 cents in the comparable period of the prior year. Our specialty products and technology segment core revenue increased by 9.6% compared to the second quarter of 2021, driven by solid growth in both our implants and core bracket and wire businesses, along with continued impressive growth from Spark. In the second quarter, our combined orthodontic businesses grew 17% versus prior year, and with our core bracket and wires growing low single digits, while Spark revenue continues to accelerate. Despite the toughening macro environment, we remain confident that our Spark business has immense potential to drive growth over the long term, and we are continuing to invest in order to capitalize on this opportunity. Our implant-based tooth replacement business grew mid-single digits in Q2 2022 versus Q2 of the prior year, driven by strong growth in all emerging markets, excluding Russia, with more modest growth reported in the developed markets. In addition to the growth in core implants, our regenerative business continues to accelerate. Our specialty product and technology segment adjusted operating process finished at 22.8% in the second quarter. This is down 120 basis points from Q2 of 2021, primarily due to the significant increase in investments to drive long-term growth, as well as the increase in customer-facing activities we participated in the quarter. Sequentially, we drove 40 basis points of margin improvement versus Q1 of 2022 in this segment. Our second quarter equipment and consumables segment core sales decreased by 4.7% compared to Q2 of 2021. While price positively impacted sales by approximately 4%, lower volumes across our imaging, restorative, and infection prevention businesses saw core sales drop compared to the second quarter of 2021. From a geographic perspective, growth was down in both developed and emerging markets. Our traditional imaging business declined mid-single digits in the quarter. We saw very modest growth in North America, offset by a meaningful decline in both Europe and China. Europe's weakness is attributed to inflation and uncertain macro environment complicated by the Russia-Ukraine conflict, while China was meaningfully impacted by the Shanghai lockdown. As Amir mentioned, our new iOS business delivered $5.5 million in the quarter, and we are very pleased with the outlook of this business. Clinicians remain very interested in investing in iOS solutions to help improve their overall workflow. Our restorative and endodontics business declined in the quarter, primarily driven by distributor destocking in North America and weakness in China related to the COVID lockdown. Our business in Western Europe was up modestly, and other emerging markets performed well in the quarter. As expected, sales of our infection prevention solutions continue to decline from elevated pandemic demand. Despite the decline in revenue versus prior year, Q2 inventory sellout trends reported by our distribution partners indicate that we are gaining market share in our core dental market. Further, we saw a sequential increase in revenue of over 25% versus Q1 of 2022. This supports our belief that sell-in and sell-out are more balanced and that this business should return to growth in the second half of 2022. Long-term, we continue to expect this business to grow mid-single digits. Equipment and consumables adjusted operating profit margin was 21.7% in the second quarter of 2022 versus 19.7% in Q2 of 2021. Solid margin improvement in imaging, restorative, and infection prevention solutions was supported by the increased price versus prior year. These improvements were partially offset by material cost increases related to inflationary pressure on commodities and materials that impacted our businesses. Overall, the inclusion of the iOS business gives us confidence that our equipment consumables business will grow faster and be more profitable as we move forward. In the second quarter, we generated $11.9 million of free cash flow and ended the quarter with more than $500 million in cash after closing the CareStream Dental iOS acquisition. Free cash flow in Q2 was lowered due to cash restructuring costs, transactional costs related to our acquisitions, timing of payments of certain incentive compensation, and increases in our accounts receivables, related to the timing of customer order and payment patterns. Overall, our balance sheet is very strong and we have ample liquidity even after closing the acquisition of the iOS business in Q2 and the Osteogenics acquisition in early Q3. We have the flexibility to pursue additional inorganic growth opportunities when the right assets become available. Now, I'll turn the call over to Amir to discuss our outlook for the balance of the year and provide closing comments.

Thanks, Howard. While we are pleased with our performance here today and are confident about the long-term resilience of the dental market, we're mindful of macroenvironment and the related short-term challenges, continued supply chain issues, persistent inflation, geopolitical risk, and the increased risk of additional severe COVID lockdowns in China are impacting the prospects of the second half of 2022. Given this background and increased downside risk to demand, we're updating our guidance for the balance of 2022. We now expect our core sales to grow mid-single digit for the full year 2022. Our newly acquired businesses, including both CareStream Dental's IOS and Ostergenics, are expected to deliver 2022 sales of between $50 to $60 million. We remain committed to achieving an adjusted EBITDA margin of 20% for the full year. Our priorities remain the same. We will accelerate growth and expand our operating margins and further transform our portfolio through active and disciplined capital deployment. We're well positioned to be the leader in both orthodontics and in implant-based tooth replacement. Our complete workflow offerings, including our imaging and diagnostic solutions, will improve the productivity of dental professionals while empowering them to provide personalized and predictable treatments for each patient. Our EBS heritage and focus on continuous improvement will allow us to consistently deliver results while investing to build sustainable competitive advantage. Our purpose is to partner with dental professionals to improve patients' lives by personalizing, digitizing, and democratizing dental care. We're focused on delivering long-term value for patients, our customers, our employees, and our shareholders.

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

At this time, if you would like to ask a question, please press the star and 1 keys on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star 1 to ask a question. And our first question will come from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys. Thanks so much for the question. I guess my first question, thanks for all the color on the drivers of the different segments and product areas in the quarter. I think, you know, one of the key questions I've been thinking about, you know, with the uncertain macro environment out there is, you know, sort of as we were wrapping up Q2 and maybe into Q3, can you sort of go through how you sort of see market, you know, volumes in the different areas and implants and orthodontics, et cetera, in terms of the back half of the year

Yeah, happy to do that, Elizabeth. Thank you. What we are seeing, and as I mentioned, we have been traveling and talking to a large number of our customers and customers that they're not currently buying from us. And what we are seeing is overall outlook is very positive. In fact, latest visits were with 100 oral surgeons. Some of them were telling us that we have patients booked up to about October. So you have this challenge of specialists continue to see a ramp and continuation of a patient flow. And that's what we have been seeing. On implant placement, we see that a continuation of the growth as we go forward, and we are confident that what we are offering will really meet the requirements. The same thing on orthodontists. We got to keep in mind what we are offering is really different than what the norm look like. We are very focused on a small number of orthodontists that they are, that's all they do. They start the treatment by getting a CBCT, understanding the patient anatomy before we offer, before they offer any type of solutions. If you look at that segment, you'll continue to see momentum, and it starts moving forward, and as we have demonstrated that in Q2 as well. On the other hand, three macro events are really impacting the risk, and that's why a change in guidance moving forward. Top of the list is inflation. Increased rates is weighing heavily on capital equipment, investment in the long run, we saw somewhere between 25% to 30% reduction in inventories in the channel between end of Q2 to beginning of Q1. So that's one really important factor to see in here, capital equipment as well as inventory reduction. We think the European economy and risk associated with the energy supply is going to weigh heavily in this industry. Right now, as expected, European are on vacation, and the forecast, what we see after September, is just not as clear as what we have seen in the past. We're waiting for dust to settle to see where this ends up. And last but not least, this is slower recovery in China, and there is additional severe risk of lockdowns. So in order to put all of this together, about 14%, 15% of our business is Russia and China. Unpredictable. We're not sure exactly where it's going to end up. We've got the European challenges ahead of us. In North America, what we are seeing, a continuation of a growth both on the DSO as well as the specialists. We're trying to balance all of this and make sure that we land in a place that we can continue to make investment, deliver margin, see in the long run the growth opportunities, and make sure that we come out of this situation much stronger as we did in 2022. That's a little bit of a perspective and macro view that we have on the market with various segments and how we are managing our investment and priorities.

That's super helpful. And maybe one for Howard or you could answer as well. You mentioned the distributor de-stocking in the quarter. Could you give us a little bit more color on sort of like what happened with the sort of de-stocking there, and then also how long you expect that to come to last and sort of be over?

Yeah, I can answer that, Elizabeth, as well. So I mentioned about 25% to 30% reduction in But let me provide some color into it. About 85% of our overall portfolio are consumables. Only about 15% what we call equipment of about $5,000 to $10,000. Those equipment normally distributed do not keep any stocking. They place an order, we deliver it directly. The other areas, the other traditional consumable as well as the infection prevention, The natural inventory that distributors keep in Europe, U.S., other geographies have come down, as I mentioned, 25 to 30 percent during the quarter. Obviously, they are preparing to deal with uncertain environment. They're preserving cash. But also, there is a proxy at play, as Howard talked about, about infection prevention. Our expectation is now we're in the position that We have known all along the sellout and selling match. We have a really good visibility on it. But those are some of the challenges that we are dealing with as we go. We dealt with it in Q4. We're dealing with it as we go forward. We think this managing distribution tightly, managing inventory tightly is becoming the norm, at least in the short term, until there is a little bit of a clarity over the long-term horizon.

Got it. Thank you.

Thank you. Our next question will come from Jeff Johnson with Baird.

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

Yeah, we can hear you, Jeff. Go ahead.

All right. Yeah, great, Howard. Thank you. I'm in a car, so I just wanted to make sure. So just a couple questions here. So, Amir, when I look at your updated guidance, it looks like you're kind of guiding to very similar mid-single-digit core growth at a company-wide level over the second half. That's almost exactly what you delivered in the first half. Obviously, you just laid out three or four things in the quarter and going forward that you're a little more concerned about. So how do you keep up that kind of mid-single-digit growth that seems to be implied in your updated guidance for the back half of this year against what seems to be pretty stable comps? Is that as the destocking comes off, as China comes back, those help offset some of your other concerns? Is it kind of as simple as that?

You're absolutely correct. We expect to see a little bit of uptick in second half versus the first. And the reason for it is, take a look at businesses. We are confident that the auto business is going to continue to progress and get better as we go forward. We think that That momentum that we are seeing on Spark, the number of active doctors are ramping up. We're signing up new doctors. And Spark growth is just something that we are building capacity, have continued to build capacity. That acceleration of growth is something that we are expecting to be an ongoing for years to come, not only second half. We expect to see – first half was negatively impacted by two elements. One was the China issue, and we are assuming that there is no more lockdown in second half. If that happens, then we've got to deal with it as it comes. And also the IPS, or infection prevention – uh had a in the first half the core growth was negatively impacted by about 200 basis points due to infection prevention inventory correction so that's another positive thing that we are seeing in second half the rest of our business Implant placement continues to make progress. We are fairly confident that that will move forward. And exactly as you said, we are trying to kind of manage this, knowing some of this uncertainty. That's why we think mid-single digit is really relevant, given where we stand today.

Hey, Jeff, this is Howard. Maybe one other addition there. I think that we're encouraged by some of the traction that we're seeing in pricing as well. And so over each of the last two quarters, we're seeing some greater traction on the pricing front, and we anticipate that that will continue also here in the second half.

Yeah, that's helpful, Howard and Amir, both. But, Howard, that segued right into my follow-up question that I wanted to ask on pricing, the plus 2% this quarter. How does that compare versus 1Q? I think you took another round of increases April 1. So just what was it in 1Q versus the plus 2% this quarter? And do you see that staying at plus 2% the rest of this year, or does that tick higher throughout the year? Thank you.

Yeah, so thanks, Jeff. We did actually see an incremental step-up in our pricing traction in the second quarter. We've seen, even in the first quarter, we saw a step-up from what we saw in the second half of last year as well. So, you know, the process is in place, and we feel good that each of the opcos are taking a systematic approach, realizing some of the inflationary factors to be considered, as well as ensuring that we're growing with the market or better than the market in each of those areas. I think for the second half, we're going to continue to see that traction and probably even a little bit of a step up, as you indicated, Jeff. We've had a couple of different price increases, and we think that those will hold into the second half as well.

All right. That's great. Thank you. Sure.

Thank you. Our next question comes from John Block with Steeple. Your line is open.

Good afternoon. Hey, Howard. Maybe just for the first question, Amir, and sorry if you may have touched on this, but just talk to us about how trends played out throughout the second quarter. You know, we're getting some of that, like April might have had catch-up from Omicron, and then there was a wave that might have hit some traction in June, but we'd just love your thoughts on that. how 2Q progressed, and then how we're sort of attack on that. Just anything on the cadence for 3Q or 4Q? I mean, obviously, mid-single-digit top line for the year, and that was sort of the number in one age. Should it just be – think about growth being linear throughout 2022, or is there any sort of fluctuation between 3Q, 4Q as we adjust models for the back part of the year? And then I've just got to follow up.

Okay. Let me answer the Q2 thing. So China locked on – China did not open. Shanghai did not open until early June. So March, April, most of March, April, and May, we basically had very limited business to the very end of the quarter. So it was not linear at all. We had orders in our hands. We had customers waiting. And the last three weeks of the quarter, four weeks of quarter, we were able to really catch up and make sure that those appointments are not canceled, people have equipment in their hand, tools in their hand. The other part of this, we're talking about the Q2 specifically, areas such as consumable business as well as smart, clear, and ortho, we did not see any major changes in that. the ramp, the continuation. And yeah, we saw a little bit of a change in the inventory, but not on the sellout, on traditional consumable or even on a start on equipment, I'm sorry, on traditional consumable or on a spark or bracket and wire. But we did see a step down on equipment. Started a little bit stronger and it started becoming slower and slower as we went forward throughout the quarter. And I think it was a continuation of the news in the market, a little bit of a conservatism on the part of investment, as well as some challenges. on opening the new de novas, resources, getting, you know, simply getting, building the capacity that they need. So simple answer in TUTO, we did not see that linearity that we had become kind of accustomed to, but it varies by segment, it varies by geography. And as we started looking at those, try to kind of countermeasure and manage it throughout the quarter. Now for the rest of the year.

Yeah. So, John, I would say that as it relates to phasing in the second half that, you know, typically our Q3 quarter is a little bit lighter just from a phasing standpoint with the holidays taken in much of Europe during that period as well. But we do see that we'll grow mid-single digits here in the third quarter. A little bit heavier growth probably in the fourth quarter, and that will also be true of our profit profile. We think that our adjusted EBITDA margins will be slightly stronger in the fourth quarter than in the third, just because the volumes are substantially larger in the fourth quarter. And so that's our point of view today.

Got it. Very helpful on the phasing. And then, Samir, just taking a step back, I'd love your thoughts on the iOS business. Maybe just talk to us. You announced a deal around year-end. I think it closed in April, and then here we are, arguably, whatever, three months later. A lot's gone on in the world over the past seven or eight months, the world, and I think even specifically the iOS market. So where do you stand today? What have you guys achieved in terms of maybe the early that you wanted to chop with the deal and the integration, and how do you feel on this going forward when you think about your long-term growth rates and goals with the business?

Thanks, John. We have a hypothesis that has not changed at all in that regard. We knew the market was about a billion-dollar growing double-digit. We knew and has been validated that it is less than 15% penetrated. And it's penetrated on various geographies, various segments. For example, those that they do clear aligner, majority of them, they do have one. But in many other segments, iOS is really not that penetrated. We knew also that there is significant price differentiation. And it is really obvious point solution versus fully integrated complete solution and how these systems were working in an open environment versus a closed environment. And I know that you know what I'm referring to, receiving file from others, sending file to others versus just being a closed system cylinder. So we knew a lot of that. It was validated. We did a lot of due diligence before we entered the market. When we started after the close, we selected and we knew exactly we needed to do three things. The number one thing that we wanted to do was expansion of the channel. CareStream iOS has less than 10% market share. And it's an awesome product, over 30% EBITDA margin. Whoever we talked to, they said the product is really good. The infrastructure for support, expanding it worldwide was just not there, specifically in geographies like in the U.S. So we knew by going to a hybrid model, like putting that part of our ortho implant business as well as putting in our channel, we would take the first step in at least making it available to people who wanted to buy it. And so far, we have seen good uptake. The second part of this was about operational improvement. Even though it has a really strong reputation, we wanted to improve the operational capabilities, improve gross margin, reliability, and here, We have taken the first step, but as you can imagine, the lockdown has really limited our ability, but we have built now a service support capabilities around it. We are looking at the demos that exist everywhere to make sure that they're up to date and up to speed. And we're going to continue to work on it. This is the hallmark of EBS and what we stand for. And I think we can do a lot better job in here. Last part is about portfolio and R&D. As a robust Our hardware, it has a software that it is a really good software today, but we need to integrate it into DTX. We need to integrate it into our workflows, and we are working on it to make sure that this is going to happen as quickly as possible. We've got a great product in an awesome market, good price performance, in a better channel now, with a better productivity, and with the R&D back in this – We think, you know, we've got something in our hand that is going to enable us not only grow the IOS by itself, but help our specialty businesses in the long run. We're really pleased with what we have done in here so far and expect great growth over time as an outcome of this acquisition and integration.

And, Amir, if I can just quickly ask a clarification question. I think last quarter you had IOS contributing 35 to 45 mil for the rest of the year. I think you now said both businesses, I believe, including Avastio, is 50 to 60. One, is that correct? And two, do the underlying iOS change up or down in any way? Thanks, guys.

Yeah. No, you're absolutely correct. Those numbers are absolutely right. $35 to $45 million IOS, about $5.5 million in Q2 since we owned it. We think that Osteogenics is about $15 million for the rest of the year, so you add them up, $50 to $60 million growth in core part of our business. Obviously, when we take a look at the growth versus core growth, they're not being considered as part of our core growth until about a year after acquisition, but they are really changing the format, the mixture of our business going forward. The iOS by itself is going to add about a 50 basis point of a growth in the long run, about a 30, 40 basis point of a margin. Ostergenics acquisition is almost dabbling the size of our biomaterial. Just give you a little bit of a feel for it. For every implant that is placed 75 to 80 percent of them they either need a bone rebuild or membrane and if you look at the price ratio is about a 5 to 1 for every $5 of implant every dollar of implant you normally sell 20 25 percent of the biomaterial we have been so under index in that area that Now we have less than 10%, even with osteogenics. Now we have an opportunity to really ramp that up. We've got about a $900 to $1 billion worth of implant business and very small presence in biomaterial. Combination of these two acquisitions really puts us in a different place as we go forward. All good.

Thanks for the call.

Thank you. Thank you, John. Our next question will come from Michael Cherney with Bank of America.

Hey, thank you for all the callers so far. I want to think a little bit, maybe more on a median term basis, call it 18 months or so, 24. As you think about your R&D efforts, especially given strength you've had in Spark, integration on Dexis iOS as examples, how do you think about the bifurcation of products over time and The reason I'm asking this is, as all the themes of this call have been, clearly there's a level of uncertainty that's coming into the market regarding current end market demand. There's also pieces of uncertainty that continually come up relative to potential for trade down in various different areas of the economy. How do you feel as if right now, both in terms of what you have and what you have in the pipeline, Invista's position to be able to bifurcate both the high end and low end of all the different end markets you play in? Thanks, Mark.

I'm going to point to the past two to three years first before I answer that question. We started coming out of Danaher with about a 50% equipment consumable, you know, being exposed to a lot more distribution, heavy equipment. In the past two years, we have completely shifted our portfolio. It took about a 5% of our business in 2020, we basically moved away from it. We sold the Cabo treatment unit instrument and another $400 million business. And we put ourselves, if you look at exposure to market, we put ourselves in a very different place. Capital acquisition has put us in a lot more specialty, a lot more direct, higher margin business. And that's what we're going to continue doing. Okay, upon saying that, The question is, what are we going to do in the next 18 months? Our long-term view of becoming the leading ortho provider with the combo treatment of a bracket and wire as well as SPARC clear aligner has not changed at all. We think that that combination provides unique differentiation. both from a pricing as well as finish, as well as quality what we provide, the network that we have, the exposure that we have worldwide. So we're not backing off at all in any of those investments. We're being very prudent, long-term versus short-term, and that is space. When we look at our implant placement part, we have made significant progress on the premium side. And a lot of it has been, honestly, due to commercial execution. The surfaces have made a huge difference in there. N1 is going to make a huge difference in the long run. So we're not counting on a whole lot of new R&D to come in here and change the model as we go forward. Execution, EBS at the core of what we do, We have an opportunity to really ramp up our value in plant organically as well as inorganically to build that segment to become an important part of our growth going forward. And as I mentioned, we have really shifted our traditional equipment to be part of the overall of what we offer, an end-to-end solution. From an R&D perspective, we have been very thoughtful on doing things not because we want to be an equipment provider, but doing things that allows us to optimize the entire workflow. That's why we are putting so much energy on software and integration, open architecture platform. We prefer people buy our product, but regardless, if you want to use other companies' products, we still want to improve productivity and predictability of dental offices, DSOs, group practices, universities. So we're being taught where to invest, how to manage this. But short answer in the long run, I think we have a clear eye toward 2023, 2024, 2025. And we think the approach that we have taken in the past several years is going to help us to become a much better company from a growth margin perspective and truly differentiate it.

practitioners want to do business with and partner with for the long run thank you amir and just one more quick follow-up i think i know the answer to this but obviously you've talked about a lot of short-term variability any changes whatsoever to the long-term targets you laid out back in april the investor day no not at all we think that high single digit growth

It's very much within reach. We have set the 2025. We wanted to be high single-digit plus auto years, double-digit growth, get our EBITDA to be 22.5%, 23%, 50% to 75% basis point of growth. We don't think anything has changed in the short term that moves our position from that long-term commitment and perspective. Great. Thanks so much.

Of course.

Thank you. Our last question will come from Nathan Rich with Goldman Sachs.

Hey, good afternoon, Amir and Howard. Thanks for taking the question. I guess just trying to tie things together, it seems like there were really three things that had a pronounced impact on sales in the second quarter. The lockdowns in China, the pull forward you mentioned of sales in Russia into the first quarter and the destocking effects. I guess, is it possible to quantify the impact that those three items had on second quarter performance, just as we think about the more normalized run rate of the business and how it performed in the second quarter? And then, you know, I think one of the things that really stood out was the performance of the specialty segment. Amir, you talked about the strong volumes that specialists are seeing and traction that you've made in the DSO and large group practices. I guess, how do you feel about your ability to continue to drive demand for your specialty portfolio in a softer market backdrop, especially if that persists for a longer period of time? Thank you.

So maybe, Nate, I take the first part of that question, and then Amir can take the second. I would say as it relates to China, as Amir indicated, those lockdowns went substantially longer than we had anticipated. I think we said that the growth in China in the quarter was relatively flat, slightly down, I believe. That's a business that we've historically seen grow double digits. And so if you think about it in that context, that's probably, you know, a point of overall growth impact to the quarter. I would say in Russia, you know, if you normalize the first half, it's probably reasonable, i.e., you know, at the beginning of the conflict there, there was a substantial buildup and pull in of, you know, customer generated orders That came in the first quarter that subsided here in the second quarter. And so, on an aggregate basis, first half, I think that that's probably a total reasonable. And then lastly, in terms of the stocking, I mean, there are a couple of different factors going on there. 1 of them is when we talk about the infection prevention. Clearly, continue to destock. We feel as though the sell-in is healthy and we're actually gaining market share. And for that reason, we have confidence that that's going to turn around and we're going to see some growth as it relates to the infection prevention here in the second half. I think that we saw a little bit of weeks taking down in the inventory side as it relates to the resto business as well by a few of our large distributors. should have been worked out, and we see that in the second half that we get back to normal growth as well.

To answer your question, how do we generate demand? Let me just give you some statistics in here. Maybe that would be helpful. In Q2, the sequential growth for Spark was 27.8% on just production output, cases shipped. And if you look at New doctors close to about almost double digit, new doctors being added. Active doctors, double digit, just keep adding to what they have been doing. So keep adding new doctors. Those that they are in there continue to do more and more cases. And we are seeing that trend to continue. There is nothing in there that has caused us to change our views on that product category. If you look at our traditional bracket and wire, three years prior to COVID, it was growing mid-single digit. And we have seen a similar performance, the Damon Ultima is really making a difference. So our orthodontist overall franchise is doing a really good job continuing to make progress, taking share, and because of the segment that we're focused, because of how we go to market and the training and education. Now, coming back on the implant side, majority of customers that we deal with, they're looking for a way to place more implants utilizing the same assets that we have, they have. If you look at DSOs, they want to place more implants. You go to some of these group practices, they want to do more full arch. And that is possible through digitization, using guided, navigated surgery, using AI, using simulation. So the way to generate demand is protect your current base, expand what they are doing, and Start going after your competitors. So that current base that we have, if they just continue to do more, which is what they want to do, gives us confidence in what we see on the demand generation going forward. We have expanded our traditional consumable reach. signing up additional distributors in Europe and other geographies. And given what we have now on the equipment, and specifically with iOS, gives us more leverage to go to various distributors, selling directly as well as selling through distributors. Combination of all of that, that's how we feel comfortable that that demand generation expansion is going to continue as we go forward.

Thanks. That's really helpful. If I could just sneak in one quick follow-up for Howard. On the margins, you guys always, I think, operate with expense discipline. You mentioned the commitment to the 20% EBITDA margin this year. You took some streamlining actions, I guess, in the quarter. Could you maybe quantify the magnitude of savings that you expect from those actions? And is there anything else planned over the balance of the year as we think about margin cadence and getting to that 20% margin for the year?

Yeah, so, Nate, we have confidence that we'll take the actions required to go ahead and deliver that and land this thing at 20%. Despite making committed long-term investments, as Amir has mentioned, we will continue to fuel these growth initiatives. and ensure that we're able to achieve those long-term targets that we talked about earlier. As it relates to some of these actions, I mean, we take them across different areas as well. And so, again, overall on the balance, we believe that we'll be able to hit the 20% adjusted EBITDA margin for the full year. Thanks, Nate.

Thanks very much.

I think we're out of time here, so really appreciate everyone for tuning in today. Thank you so much. If you have any other questions, please feel free to reach out to us, and we're happy to schedule calls offline as well. So thank you so much, and have a great rest of your day.

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