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spk10: My name is David and I'll be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to the Invista Holdings Corporation's first quarter 2023 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, please press star and the number one on your keypad. If you would like to remove your question, please press star and the number two. I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Invista Holdings. Mr. Keller, you may now begin your conference.
spk11: Thank you. Good afternoon, and thanks for joining 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.investacode.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. During the presentation, we will describe some of the most 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 first quarter of 2023, and references to period-to-period increases or decreases in financial metrics are year-over-year. During a call, we may describe certain products and devices that have applications submitted and pending certain regulatory approvals are available only in certain markets. We 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 I'm
spk04: certainties including the those sets with interest you see five actual result Mike ...different material from any... ...forward-looking statements that we... ...say. ...forward-looking statements... ...only as... of the date that they are made and we do not assume any obligation to update any forward-looking statement. except where it's required by law. With that, I'd like to turn the call over to Amir. Thank you. Stephen, welcome to NVISA's first Q&A for the summer of 2023. We appreciate you taking the time to join us.
spk07: Despite a volatile macro backdrop, we continue to make progress against our long-term strategic priorities. As anticipated, the first quarter proved challenging with our core sales down 2.4%. The strong growth in much of our specialty products and technology segment was offset by challenges in China and Russia. Further, we continue to see weakness in our large capital equipment business driven by higher interest rates and lingering economic uncertainty. While the market is dynamic, we continue to focus on our long-term goals of accelerating organic growth, expanding operating margins, and transforming our portfolio. Our team uses Invista business system EBS principles daily to to improve our operational capabilities, re-engineer existing processes, and continuously drive productivity with the goal of delivering for our customers, their patients, and our shareholders. We're making investments focused on our purpose of partnering with dental professionals to improve patients' lives by digitizing, personalizing, and democratizing dental care. Before I turn it over to Howard to discuss our first quarter results in more detail, I want to take this opportunity to provide more color in the current operating environment and then offer a quick update on our progress towards our strategic priorities. At Invista, we pride ourselves on being customer-centric. Our leadership team and I systematically engage with our customers and their patients. The EBS concept of GEMBA means that we regularly meet with them at the point of impact, at their offices, their operatories, and or at training events.
spk04: Our goal is to understand what is happening in real time and ensure we are meeting the short and long-term needs of our customers. As we spend time I'm at Gamba. We continuously hear from the dental community that overall patient demand remains resilient. Patients have grown understanding of the link between oral health and overall health. They continue to progress. prioritize spending on dental procedures. We further hear that clinics, clinicians, and business owners in both private and group practices. Institutions as well as DSOs remain excited about the long-term long-term prospects of the dental market.
spk07: They see significant opportunities to grow their business by investing and expanding their specialty treatment offerings. They further see opportunities to enhance their capabilities, optimizing their workflows and digitize their offices. While the dental community remains confident in the long term, they also are mindful of the short-term uncertainty driven by higher interest rates, the lingering risk of a recession, and the various geopolitical risks occurring around the world. This uncertainty is expected to create a degree of volatility as we move throughout 2023. One area that I think is worth providing additional insights into is the Chinese market. Patient demand in China was very soft in the early part of Q1 as the country navigated its way through the COVID-related slowdown. Starting in March, we did see an acceleration of patient demand as more dental offices reopened and people became more comfortable seeking out care. Overall, we expect patient volumes in China to accelerate throughout 2023. However, we do expect some volatility as we believe some consumers may deprioritize spending on dental care in the short term to focus their spending on travel or other leisure activities that were less available to them during the pandemic lockdowns. With regards to VBP, today the program is playing out largely as expected. We have seen significant reduction in prices in the public sector as well as the anticipated spillover into the private market. What is too soon to be sure, the early indication is that demand for our implants should increase as we pick up additional
spk04: share in the public sector and the VBP program positively impacts long-term patient demand. Overall, we remain optimistic about of the long-term growth of our China business. And we believe that after 2020, China will once again be a growth engine for investor. Turning to our Q&A. On progress. In February, we hosted over 1,600 dental professionals in Las Vegas. the sold-out event in the summit. During the event, we provided high
spk07: impact training in orthodontics, implantology, in orthodontics, and digitally enabled clinical procedures, as well as introduce clinicians to the latest advancements in dental care. These type of events allows us to engage with our customers to learn, educate, and lead the dental community, ultimately enhancing our ability to drive long-term growth. A uniquely positioned orthodontic business continues to perform well, delivering double-digit core growth despite the challenges in China and Russia. A Damon Ultima system is making inroads in both North America and Europe, as we convert more customers to this powerful and efficient system. This innovative solution commands a premium price by improving the way orthodontists move teeth and demonstrate a commitment to innovating for the orthodontic community. Our Spark Aligner business continues to perform well, delivering strong sequential growth as well as over 70% year-over-year growth. In the quarter, we added a record number of active new doctors, setting us up for continued growth in 2023 and beyond. Our solutions for implant-based tooth replacements declined low single digits in the quarter, dragged down by significant declines in both Russia and China. Our implant businesses in Europe perform well, and we believe that we are outperforming the market in Europe, driven by disciplined commercial execution. We are benefiting from our focus on providing comprehensive solutions for implant-based tooth replacement, and as a result, we are seeing growth in both digital solutions and regenerative materials.
spk04: The osteogenic business we acquired last year is performing well. And we are starting to benefit from an EVF. and focus on commercial execution and lean management. Going forward, we expect our implant franchise grow at or above market. Adjust EBITDA. The margins in the first quarter declined 150 basis points to 18.2%. The client was anticipated and is primarily driven by lower volumes, as well as our long-term investment. in growth.
spk07: Each of our businesses remain focused on using EBS to optimize their operating structure and improve productivity. Our equipment and consumables E&C business provides a case study in EBS at Work. While sales declined in the E&C segment this quarter, our adjusted operating margins increased 110 basis points. The increase was driven by a systematic focus on driving margin expansion through price optimization, temporary cost controls, the emphasizing of non-strategic and less profitable businesses, in geographies and structural cost reductions. We're confident that we have increased the long-term profitability of the EMC segment and expect margin to further expand as the market for large equipment stabilizes and our more profitable inter- or scanner iOS business continues to accelerate. We expect margin to expand as we move throughout 2023 and we remain on track to deliver a full-year guide of greater than 20% adjusted EBITDA margins for the year. We will continue to invest for long-term growth while further optimizing our operations to deal with volatile macro environment. We remain focused on building a stronger, differentiated, and more growth-oriented portfolio. Our two most recent acquisitions, Dexus iOS and Ostergenics, continue to perform in line with our expectations, delivering combined sales of greater than $20 million in the quarter. As we move through Q2, the Dexus iOS business will be included in our growth results, followed by Ostergenics Inc.
spk04: combined both businesses are expected to contribute over 75 basis point of a core growth to invest in 2020. While we are excited about the strategic moves that we We see additional opportunities to further improve our portfolio. We're committed to pursuing a different discipline approach to capital deployment. We utilize our ES3 driven M&A approach to manage a robust pipeline of inorganic partnerships and investment around constantly cultivating new opportunities. I will now turn the call over to Howard to go through our first quarter financials and provide more details on our segment performance.
spk09: Thanks, Amir. In the first quarter, we delivered sales of $627.2 million. This represents a decrease of 0.7% over the first quarter of 2022 on a reported basis. Acquisitions contributed 3.3% of growth, while foreign currency exchange rates negatively impacted sales by 1.6%. Core sales for the quarter declined 2.4%. The year-over-year decline in core sales was primarily the result of weakness in China and Russia, as well as general weakness and demand for our large capital equipment. It is noteworthy that excluding the impact of Russia and China, our specialty products and technology segment grew 7%, driven by the strong performance in Spark aligner business. Geographically, as anticipated, we declined substantially overall in both Russia and China. The decline in Russia was primarily due to unusually strong performance in the first quarter of 2022 as clinicians pre-purchased inventory at the start of the conflict in Ukraine. In China, demand was down significantly in the quarter as the country managed through COVID-related slowdown. As Amir mentioned, Demand was very slow in the first part of the quarter, but started to recover later in the quarter. We expect activity in China to accelerate throughout 2023. Outside of Russia and China, other markets were mixed. We saw double digit growth in other emerging markets, as well as high single digit growth in Europe. In North America, sales declined mid-single digits way down by its relatively high exposure to our traditional imaging business.
spk04: It is important to note that our imaging business had a strong performance in the first quarter of 2022. As we picked up incremental share through our effective supply chain management, and we're not yet with the impact of higher interest rates. Our first quarter adjusted gross margin 58.1%, which is down 110 basis points from prior year. The decline in gross margin was primarily attributable to lower volumes. Unfavorable markets due to the slowdown and sales of specialty solutions in China and Russia, and continue to invest in our long-term growth.
spk09: Our adjusted EBITDA margin was 18.2%. which represents 150 basis points decline versus Q1 of 2022. Our adjusted diluted EPS in the quarter was 38 cents compared to 47 cents in the comparable period of the prior year. The lower operating margins combined with an increase in interest expense from higher interest rates drove the reduction in EPS in the quarter. Core revenue in our specialty products and technology segments grew by 3%. In the first quarter, our combined orthodontics business grew more than 12%, with Spark continuing to expand rapidly. Our implant-based tooth replacement business declined low single digits in the quarter, negatively impacted by both China and Russia. Adjusted operating profits in the segment was 21.6% in the first quarter. This is down 60 basis points from Q1 of 2022, primarily due to the lower sales from China and Russia, as well as the continued investment to drive long-term growth. Turning to our equipment and consumable segment, core sales in the first quarter decreased 11.7% compared to Q1 of 2022. The decline in sales was due to continued slowdown in equipment volumes as well as modest decline in our consumable sales. Our traditional imaging business declined double digits in the quarter with lower volumes across most geographies. The lower growth was partially attributed to strong performance in Q1 of 2022 as well as macro headwinds, including inflation, rising interest rates,
spk04: COVID-related challenges in China and the geopolitical uncertainty caused by the conflict in Ukraine. Further, we continue to emphasize strategic geographies and concentrate our efforts in markets we can build a long-term sustainable competitive advantage. This allows us to accelerate both growth and margins over the long term. This business performed in line with expectations in the quarter, and we continue to make investments for long-term success. We remain focused on expanding our reach and and optimizing our global distribution.
spk09: Clinicians remain very interested in investing in iOS solutions to help them improve their overall workflow. The DEXIS iOS solution is well positioned to outperform the market, and we anticipate this business will continue to contribute to our core sales growth in 2023 and beyond. On the consumable side, we declined low single digits with strong growth in infection prevention solutions offset by relative weakness from restoratives and endodontics. 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 accelerate throughout 2023. Equipment and consumables adjusted operating profit margin was 21.8% in the first quarter of 2023 versus 20.7% in Q1 of 2022. This 110 basis points of margin improvement despite the lower sales volume, is a demonstration of EVS in action. We relentlessly focus on driving productivity, optimizing our operating structure, and managing price to protect and deliver improving margins. It is important to note that as we move through 2023, the inclusion of a fully integrated iOS business will further support the growth of our equipment and consumables business while also positively contributing to our profitability. In the first quarter, we consumed $14.4 million of free cash flow and ended the quarter with more than $575 million in cash. Historically, Q1 is our weakest quarter for free cash generation, owing to the seasonality of supplier payment and impact of annual incentive plans. Overall, our balance sheet is strong,
spk04: and we have the flexibility to pursue additional inorganic growth opportunities when the right assets become available at the appropriate valuations. Now, I will turn the call Over to Amir to discuss our outlook for the balance of the year and provide closing comments. Thanks, Howard. Looking forward to remain confident in our strategy and our ability to deliver our outlook for the full year. year 2023. We expect core cells to grow for low single digits and to achieve EBITDA margins of over 20% for the full year. As we have discussed, we anticipate our core growth to accelerate
spk02: throughout 2023 as China stabilizes and we benefit from the impact of our acquisitions.
spk07: Marginal also anticipated to accelerate throughout 2023 as we benefit from a streamlining of our organizational cost reductions as well as the shift of our portfolio mix toward higher margin products. While we are confident in our outlook for 2023, it is important to note that we do anticipate some continued quarterly volatility as the world continues to navigate through the geopolitical situation related to the Ukraine conflict, consumer confidence in China, as well as the continued impact of interest rate increases and lingering economic uncertainty. Our EBS focus and continuous improvement culture helps us manage this volatility while progressing against our long-term targets. Our priorities remain the same. We will accelerate growth, expand our operating margins, and further transform our portfolio through active and disciplined capital deployment. We are well positioned to be a leader in both orthodontics and an implant-based tooth replacement. Our complete 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 treatments 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.
spk11: Thanks, Amir. That concludes our formal comments. We are now ready for questions.
spk04: At this time, if you'd like to ask a question, please press the and one key on your telephone keypad. Keep in mind, you may remove yourself from the question key at any time by pressing star and two. Again, If you'd like to ask a question, press star and 1. We'll take our first question from Elizabeth. Please go ahead, your line is open. Hi guys, thanks so much for the question.
spk03: I appreciate your commentary about sort of the pacing of the year and how that's progressing versus the first quarter.
spk04: Could you help us in understanding
spk03: And how that's trending so far in April, for example, how is sort of China doing versus the first quarter.
spk04: And then similarly for both the U.S. and Europe thing. Thank you, Elizabeth.
spk07: But China, starting in March, we have seen offices opening and people are beginning to seek more and more of a dental support and dental care. So we anticipate, almost as we go through the year, we anticipate that wrap to take place. But I want to clarify this. This is not the same wrap that we saw in 2020 after COVID. There is going to be some uncertainties, but China in Q2 is in a far better place than what we saw in Q1, which was basically for two months, it was just completely shut down. At one point, 75% of our own people, they had COVID, and we had asked them not to come to work and stay home and take care of their well-being. So we expect to see a better performance as we go through the year in China. April and Q2, we expect to see the impact of iOS to becoming part of our core growth, comp for imaging becoming a lot better, as we touched on China and Resto Endo have better performance. So what we have seen in April is a continued expectation of what we had expected in Q2. We're confident as we go through the year, we're going to see both core growth and margin improve sequentially while dealing with some of the uncertainties that is ahead of us.
spk05: Got it. That's very helpful. And how are the U.S. and Europe trending versus in the second quarter so far versus the first quarter?
spk07: We have had a really good performance in Europe in the past six or seven quarters. In fact, both on our ortho business as well as our implant business, we have performed very well. We mentioned that our implant business in Europe have been performing and we think above the market continuously and nothing that we have seen had changed our position, our point of view on it. Our ortho business also, specifically on clear aligners, the spark business has had a much better run in Europe and a lot of that has to do with the execution.
spk04: Our ability to really put EBS at work. Geography by geography. Geography. country by country, expand that business. So what we have seen so far in the first four or five weeks of the quarter is a continuation of that performance. We have a small base. compared to North America, it's a really small base of imaging. Majority of our imaging capital equipment is in the U.S. And our consumable also growing above market and has been growing above market in Europe for the past several years. But it's in a small So overall, Europe continues to perform very well. In the U.S.,
spk07: We have some challenges around execution that we are addressing in a specific pocket. We're fixing those, and we expect to see better performance as we go forward throughout the quarter and for the rest of the year.
spk05: Got it. Thank you very much.
spk10: We'll take our next question from Jeff Johnson with Baird. Please go ahead. Your line is open.
spk06: Thank you. Good afternoon, guys. Amir, I think one thing we haven't heard, you did a good job, I think, of giving us kind of the implant numbers across most of the globe. And I understand in Europe, they were up nicely and potentially above market. We got the adjustments out of China and Russia. But I didn't hear anything on the U.S. or the North American business, maybe from an implant standpoint. Was that one of the businesses that you're addressing some execution challenges in? Or how should we think about the implant business from a domestic performance standpoint this quarter?
spk07: Thank you, Jeff. If you go back, I want to take us back a couple of years back. We looked at first on the value in plan. We said we had some challenges around multi-branded approach, so we fixed that. Then on customer experiences specifically around our premium business, around Nobel, we went after it. We delayed the organization. We put the structure in place. And as I just mentioned, for the past seven or eight quarters, we have seen a continuous performance improved in Europe. Quarter after quarter, continue to form better and better as we go forward. We're going through a very similar process in the U.S. If you look at our value implant, we have done an incredible job, the management team and the team have done an incredible job going back, becoming a lot more customer-centric, putting energy around taking care of our customers, solving some of our operational issues, and revamping the portfolios. And the result is obvious. It's going to take a little bit longer, but we're going to see a similar approach in North America with our value implant. We have pockets of challenge with our premium implant in the U.S. And following the same recipe that we have done in Europe, detail orientation, EBS, customer-centered,
spk04: model I just solve those you just make sure that training and education top of our our priority list. And I expect all of us expect to see better performance in North America as we go throughout the year. We know what the source of the problem is. We know where we have had some challenges, and we are responding to them and executing fairly well. And performance would improve. There are signs in the data that our performance in North America would improve as we go throughout the year. All right. That's helpful. Thank you. And then the other point of clarity I'd appreciate is just when I think about your comments on consumables down low single You specifically highlighted a couple of areas.
spk06: of strength there, offset by maybe some challenges in endo and resto both. You know, it's kind of the exact opposite what we heard this morning from one of your competitors. They were up double digits in resto and endo. So, you know, if I take your low single digits and assume resto and endo were down, I don't know, mid-single digits or something, just taking a stab, How is there a 15-point difference, I guess, between you and Dentsupply? And not asking so much on what they did, but it seems like the market would be up then with what they did better. How are you lagging the market in those areas by that extent, I guess, is what I'm wondering.
spk07: Yeah, really good question, Jeff. A good part of that, you've got to take a look at proxies from one point of view. If you compare the proxies of Q1 of this year versus last year. Howard touched on it. We are somehow managing through that, trying to get ourself in a better place. We have a really good feel for selling and sellout. And if I look at the sellout, we have information at the distributor level that we can take a look at the sellout. We're really confident on the sellout. And we have gotten ourselves, we moved out of this situation of Inventory versus seller. We got out of that situation a while back, and we are in the habit of really looking at what is selling, what's the sellout look like. We compensate our team very differently, and we think it is a temporary situation, what we saw in Q1. We have confidence that overall restoendo, specifically also what we saw in our infection prevention, is going to get back to the growth and continue to see the momentum that we have seen in the past. We think this business is low single-digit growth. We have been outperforming the market, and as Howard touched on it, really good from a margin perspective. I know the result on Q1. I'm not disputing it, but we are confident that we are able to get the result that we expect as we go through the year in North America as well as worldwide in our consumer business.
spk04: That's helpful. Thank you. We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead. Go ahead. Your line is open. Great. Thanks. Can you give and the traction you're seeing across that business relative to your expectations. so far and generally how would you characterize kind of demand trends in this sort of environment?
spk03: Thanks.
spk04: Thank you, Erin. So a hybrid go-to-market approach in here and IO. So the reason that we wanted to be in this category because it's under-penetrated. Less than 15% of offices are a lot more penetrated.
spk07: than, you know, general practitioners, people who do endo ortho, I'm sorry, endo implant and other categories. So we know the market is underpenetrated. And what we have seen also, the reason that we got into it, we wanted to be at the Beginning of diagnostics, anybody who walks in the office, having an iOS in there is a productivity gain, but also gives you an opportunity to move to a more of a digital workflow approach. So with that as a background, what we did, we have a hybrid approach that our ortho business, implant business, they do not sell that as independent product, but they have clinical offering that they can put it together and offer that to their customers. That part of the business is really accelerating, and we are very pleased with what we have seen. Not only product versus product, but also the entire workflow. So we have been able to demonstrate that iOS with a Spark works seamlessly. Our iOS and 3D printing with a Sprint Ray work really well on same-day crown, barriers, and others. So that portion is ramping up pretty nicely. It's meeting expectations. The rest of that has been through channel execution and empowering channel. CareStream had a really good presence in some geographies, not really as much of a presence in other geographies. So we have engaged our traditional imaging DEXs channel and we are activating them. The activation model looks like after you sign contract and do training, co-travel, events, marketing activities, and then funnel building and the ramp. We're really pleased with what is taking place with the top five, six partners that we have in the U.S., and we are focusing on the top 20, 25 partners in Europe. We're ramping those up. We're beginning to see the momentum getting built up. It is ramping up. It's Q1 was better than Q4 so far. We're getting
spk04: accelerating this, and we think it's going to be an important part, as we mentioned, also GenX plus iOS are going to be an important part of our growth trajectory this year. Over 75% This is one of the growth above fleet average margin. So we're really pleased with the work we have done. It's picking up, and we're going to continue to use EBS. even get it better, higher margin, better product, better categories, better execution, and that's what you can expect from us. Okay, thanks. And then a one on Spark.
spk03: The growth is strong, but do you have any metrics around reorder rates, retention rates across your Spark customers?
spk04: And in the Any metrics you can give, I guess, on front of where you're staying in now and also where you hope to get to in terms of market share across that spectrum. So year over year, our business is up 70%.
spk07: So that 70% is a really good indication of the number of cases that we received, the number of active doctors. We had a record number of new doctors using SPARC in Q1. So the way we are approaching this, and we have been at it since 2017, a small number of people. We go to a specific geography. We get a small group of people, 5, 10 at a time. We teach them. help them, work with them, wrap them up, make sure that they are really in good place, then we go to the next geography, next territory. This model has really worked for us very well. The reason that we wrapped up so quickly in Europe, because we replicated what we did in Spain, in France. We're taking that, taking to the next geography. So what we're seeing in here, we mentioned that before, that from case zero, number one, to 100,000 It took us almost three years. From 100,000 to 200,000, it took us close to about nine months. 200,000 cases to 300,000 cases, five and a half months. And we are approaching 350,000 cases. And this ramp, it gives you a really good indication of the number of dentists that we are signing up, And then after they get signed up, then the volume with existing dentists continue to go up. So active doctors, we manage that very closely. Number of submissions, number of cases shipped, and the overall production output. All of these, every one of those measures are double-digit growth, quarter to quarter.
spk03: Great, thank you.
spk10: We'll take our next question from John Block with Stiefel. Please go ahead. Your line is open.
spk01: Thanks, guys. A couple questions, and I'll break them up. The first is on VBP.
spk04: I thought in the prepared remarks you said you had expected the spillover from public to private. Maybe I have this wrong, but I thought you expected that pressure to remain largely within public and sort of That was a different take from a couple of your competitors. So can you clarify, and maybe more specifically and importantly, is VBP, China, they're playing out as expected for you guys. When we think about the low single-digit growth, growth for full year and maybe just as a that we are are we with vbp specific to ortho thanks yeah happy to do it, John. So let me just kind of frame this again based on what we have said before. We have about $100 million of implant business in China and about
spk07: $75 million auto business. We started moving to a more of a private sector almost three years ago, prior to COVID. We moved our business and focused most of our energy on the private sector. Almost 70% of our business today is on the private sector. So that's just to give you a little bit of a frame. We knew and anticipated, and it has pretty much played out exactly what we expected, that this is going to start on the public side, but it's going to have a spillover, spillover on the private side. So let me talk about the implant, and then I'll tell you about ortho. So we are selected as one of the winners, both on the premium as well as on the value side, which means, at least the initial thing, they said we should expect higher volume. We're not counting on it. But what we are counting on is the impact in our current business on the pricing as well as the volume. So that is, so far, is playing out exactly as we expected. If we get a higher volume, that would be an incremental business that we can expect going forward. We think that this is continuing, the spillover has wrapped up, and we are beginning to see the full impact of it. On the auto side, so far, less than 10%, 15% of our business is impacted by it. And to a large degree, it's because of how it's been executed and implemented. We don't have much of a business on the clear aligner side in China, and that has always been intentional. We wanted to get momentum going in some geographies. We prioritized. We wanted to establish a standard work. But our Ormco business is the only business, non-Chinese and multinational, that has been approved and accepted as part of the VVP process.
spk04: So we expect that this is going to have success. impact, but the impact is at the short term is not going to be as profound as on the implant side. and all back together. He has communicated that this is going to have about a $20 million impact in our business. top line as well as the bottom line in 2023. So far, we haven't seen any that tells us otherwise if you get any medium long term increases in a volume then great that That would provide additional access to care for people. Well, I will see the impact of it in a positive form.
spk07: over $20 million headwind, we consider both impact on public as well as on the private side. And this compare is purely based on 2023 sales and margin versus 2022 sales and margin.
spk01: Okay. That was great. That was a lot of color. And, you know, for the second question, I'll apologize in advance because it's a little direct and it's long, but You know, for E&C, if I go back to the time at the IPO, this was supposed to be like a GDP plus or minus business, not sexy. And I get it, right? We've had a pandemic. We've got the interest rates. We've got potentially a recession right around the corner. But what is this business? You know, every quarter its weakness overshadows your S&P business. It's down six quarters in a row. This quarter, it was down 12% off a negative three comp. You had some divestitures to try to strengthen it. You're through that. And, you know, maybe that's just opinion. But looking forward, with DEXA's iOS coming into organic beginning in April, I believe, or now, you know, imaging headwinds soon being labbed. Can you just frame what this business is for investors going forward? Can you better put guardrails around it? And then, Howard, just as a tap on... You know, you guys are sticking to the low single-digit growth. I know you want to stay away from specific 2Q guy, but is 2Q positive or negative as we think about the ramp in the back part of the year? Thanks, guys.
spk07: Of course. So let me address this. John, you know, I've been around dental now, Howard and I, over eight years. We pretty much... you know, recognize this early in the process that there are some categories that they are becoming more and more commoditized, differentiation becoming more and more difficult. And if you look at competitors in that space, because of this lack of differentiation, the price and it becoming a lot more aggressive in those areas. If you look at, I'm giving you one example, the number of players on the imaging side, and let's take China as an example. Compare that to five years ago, 10 years ago.
spk04: How many new players are in there and what the pricing is taking place? So it's fact. It's reality. It is what is taking place. And then we, that's the reason we walked away from Peloton X-ray. That's the reason. We,
spk02: We put that outside, and then we kind of replace it, continue to replace it. What we have done in the past probably 12 months or so, a lot more aggressively with the
spk04: is a higher equipment business. So think about it, about a one-third of this business is a contract software and it's that kind of annuity. That is two-thirds to a large degree is either the NOVA's that DSOs are building and adding
spk07: capacity or renewal, that you have all the product process that, you know, has been there for six or seven years, you want to replace it. But the novas are not taking place as rapidly as they did before. Then you have some challenges around, you know, getting a note and paying six or seven percent. So it has an impact on higher value add, higher expense cap exports. On the other geographies that we talked about when the differentiation is not really that clear, well, we have been very thoughtful, very specific. We are exiting some product categories, some geographies, intentionally try to make sure that this business is profitable and differentiated. Outcome, you're seeing the decline that you're seeing, but you're seeing the margin improvement. At some point, and we are getting to that point very closely, that's the business we want to have. There is no more exit. There is no more moving away from it. And that business, what is remaining, I'm talking purely on the imaging DEXA side, we would then have an opportunity to build around it and try to create differentiation and build a momentum and workflow capabilities that we can really see the benefit of the growth on it. On the consumable side, we feel really good about that business. High margin. We have had momentum. We have outperformed. in the past several quarters, and we think Q1 is more of an anomaly. We'll get it back on track. This is a business. We do have the guardrail around it. We know it's intentional of how we have gone through it, and we're going to get it in a stable situation. We're going to continue to improve it going forward. And for 40 shifts that we have done, not only inorganically, but organically is going to put it in a far better place going ahead than what we have seen in the back. John, we're looking a little bit of a long term. We're trying to see what 2023, 4, 5, 6 look like. And if we don't take some of these pain now, we're going to continue to deal with these challenges going forward.
spk04: So we have decided to be more aggressive in this portfolio shift. geography shift to set ourselves up for the long-term re-office in 2026. Six, that we said we're going to be high-single-digit. 22.5% margin. We're not moving away from it. And in order to get there, we have to make some of these decisions. You're right. We don't typically give a guide on a quarterly basis. What we have said and continue to feel is that, hey, our core growth as well as our margin profile will improve throughout the year. That being said, I think that we will deliver low single-digit growth in the second quarter. That's consistent.
spk09: with the guide. We look at scenario planning here on a consistent basis. We look at the macro environment and then contemplate our company specific opportunities and risks. And we still feel good about the full year. And we think that things will improve here in the second quarter.
spk01: Thanks, guys. I appreciate all the comment. Thank you. Of course.
spk10: We'll take our next question from Michael Kearney with Bank of America. Please go ahead. Your line is open.
spk08: uh afternoon and thanks for taking the questions maybe a quick follow-up on a try again with john's last comment but again without being able to give quarterly guidance is it embedded though in the full year low single digit guidance that you'll be exiting the year with growth in enc we haven't uh
spk07: We haven't gone down the path of providing guidance on a specific segment of the business, but I can tell you this, that we're trying to build a portfolio that every part of it adds to the capability of overall business. We want to be the number one player on the ortho side with orthodontists. In order to do that, outside the product itself, The digital transformation, iOS, plays an important role. We want to be the number one player in the end-to-end tooth replacement implant base. In order for us to do that, imaging, consumable plays an important role, and we've got to consider organic as well as inorganic activities. But consumable business by itself, we are in more than 90% of offices worldwide. 130 years of track record, really differentiated product. We feel really good about that, and we have finally kind of gotten over the infection prevention inventories and use. It's in a really good place. No single-digit business. This is what we expect, and that's what we hope to get.
spk04: And the changes that we described on the imaging side, we hope that it's going to come. to a transformative stage that we expect by second half of this year. The low single digit performance, it's going to be really hard when you have part of the business is declining. That would be really difficult. difficult to do that. So we have contemplated what changes you need to take place to be able to land based on the guidance that we have provided. And we feel really confident and good at this point about the guidance that we have provided. I appreciate that. And so maybe I guess I'll flip to the complete opposite side of the performance. In the quarter, and that being Spark, you talk about the record new number.
spk08: you talk about the education that you're going into doing with these docs I assume these are not net new doctors to using aligners for the most part so a lot of these wins I'm guessing are displacements please correct me if I'm wrong there but how does that education process go and what are the key drivers that allow you to go in and see to put up these incredibly strong growth numbers.
spk07: Yeah, thank you, Mark. So we are purely focused on orthodontists. We're not any direct-to-consumer. We're not stopping anybody in the GP area to come and buy a spark, but our focus is on orthodontists. You know, 8,000 of them in the U.S. and about 20,000, 25,000 worldwide. Orthodontists, they know how to move teeth. One-third of all the aligners today worldwide are placed by orthodontists. They're the first one who adopted clear aligners. So it's not education. It's not about clear aligner is a good answer. It's about the combination treatment. It's about case. It's about technology. It's about changing the workflow and offices. So the approach that we have, we have some chief speakers in different geographies. We have people that have done more than 1,000 cases They have developed protocols. They are able to teach and share their best practices. That's the value of InVista Summit and other places. We go to a geography. The sales organization rallies the orthodontists, their territories. We bring 50, 100, 200 people in one of these training programs for two or three days. We share best practices. We show the technology. We show the integration with diagnostics. And then we follow up with them. We follow up and we get them to sign up for the first case. We go to their offices. We teach them how to do that. We provide network. We provide support to them. We get them to the third case. By the time they get to a five or six case on a monthly basis, we know that they're committed and we continue to provide personalized support to them. We have been in this space for 35 years. This is not a new business for us. Same group of people that have made
spk04: made Damon successful more than 20% market share. Have grown this business for the past several years. The same group of people are providing different set of products to the same customer base. And majority of them have been the one that they have either been using competitors or they haven't been using competitors. Now they have a choice of having a combination of treatment that they have in their offices and they can offer. Our job is to give them choices. What we hear from them, they're treating a lot more patients. They're very happy with the product that they're getting, and they are telling their Friends and people that follow them. This is the product of the future.
spk07: Technology-wise, product-wise, software support, that's how we create differentiation in here, and we intend to just continue to expand it as we go forward, geography by geography.
spk04: Great. Thank you.
spk10: We'll take our next question from Brandon Vasquez with William Blair. Please go ahead. Your line is open.
spk00: Hi, everyone. Thanks for taking the question. The first one I just wanted to ask on kind of the first quarter performance relative to your own expectations, just because it came in a little bit below consensus, but of course you don't really give a hard guide to kind of a quarterly basis. So curious how the quarter trended relative to your own numbers and what it means for your expectations of where you would fall within your full year guidance?
spk07: So just to give you a little bit of a feel, combination of China and Russia had close to about 200 basis point of a negative growth in Q1. Close to about 200 basis. So we looked at the entire business, what we could forecast and predict, and we had a really good feel for what we expect as we go forward. The imaging part delivered a little bit less than what we expected. And we know exactly where and what to do about to turn it over. But from an expectation perspective, that significant drop on China and Russia was higher than what we had expected. We knew it was going to be challenging. But, you know, that 200 basis point is something that is just, you know, incredible. And it was really hard to deal with it going forward. But it's not far from what we expected. Overall, the rest of the business had a really good handle on it. We had anticipated that this is going to be challenging. We knew China is going to ramp up over time. And Russia continues to be a little bit of an unstable. We really do not know exactly what to expect in here. Q1 of last year, just to keep in mind, because of anticipation of
spk04: war in Ukraine, there was a tremendous amount of buying in Russia that took place to really stockpile that and go on forward. So we had a bit of a proxy challenge too. Not only in Russia, but on equipment, in anticipation. Take a look at the interest rate changes. This is started in about March of last year. So, and we were able to deliver, continue to deliver despite some of the challenges around the supply chain. We have an incredible imaging business in Q1 of last year. So Proxys played a really important role in it. Okay. Thanks. And then just as another follow-up,
spk00: But reaffirming guidance for greater than 20% was, you know, positive. But kind of doing the math on the cadence of the year, if you just kind of assume sequential improvements, maybe one or two points each quarter, To get to that full year number, you kind of need to exit at a pretty strong number. Consensus has like 21 and a half and maybe even need to be a little more given Q1 was a little bit below the street. That seems pretty strong. Is that directionally correct? You'd be exiting this year at a pretty solid, if not one of your strongest, EBITDA margin quarters that you've ever seen? Yeah.
spk09: Brandon, what we've said is that we're going to continue to improve on the margin throughout the year, so you'll see improvement here in Q2 and then particularly in the second half, clearly to get to that 20% or north of that adjusted EBITDA number will require us to deliver and we have plans to execute on getting those expanded margins as we move throughout the year.
spk02: OK, thanks for taking the questions.
spk11: Thank you. Okay, I think we're at time now, so really appreciate everyone joining us today. Thank you very much, and we look forward to connecting with you over the balance of the quarter. Thank you.
spk02: This does conclude today's program. Thank you for your participation, and you may now disconnect.
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