Envista Holdings Corporation

Hello, my name is Chelsea and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Invista Holdings Corporation's second 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, Press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star and then the number two on your telephone keypad. 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.

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.nvistaco.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 more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted our year-over-year performance. Unless otherwise noticed, references in these remarks to company-specific financial metrics relate to the second quarter of 2023. And references to period-to-period increases or decreases in financial metrics are year-over-year. During a call, we may describe certain products and devices that have applications submitted and pending under regulatory approvals or available only in certain markets. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe, anticipate, or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn over the call to Amir.

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

Thanks, Amir. In the second quarter, we delivered sales of $662.4 million. This represents an increase of 2.6% over the second quarter of 2022 on a reported basis. Acquisitions contributed 1.7% of growth, while foreign currency exchange rates negatively impacted sales by 1.2%. Poor sales for the quarter grew 2.1%. Our growth reflects continuing growth in our specialty products and technology segment as well as a return to growth in our equipment and consumables segment. From a geographic perspective, Europe grew high single digits while North America declined low single digits. Emerging markets grew mid-single digits with strong growth in most markets but being weighed down by the decline in Russia. China grew in the quarter with a strong rebound in volume offsetting the VBP-related price declines. For 2023, we expect China to show modest growth net of the VBP pricing impact. Our second quarter adjusted gross margin was 57.9%, which is down 80 basis points from prior year. The decline in gross margins was primarily attributable to an unfavorable product mix, VBP-driven price declines, and continued investment in our long-term growth. Our adjusted EBITDA margin was 19.1%, which represents a 60 basis point decline versus Q2 of 2022, and a 90 basis point sequential improvement from Q1 of 2023. Our adjusted diluted EPS in the quarter was 43 cents compared to 48 cents in the comparable period of the prior year. The reduction in the EPS for the quarter was primarily driven by an increase in interest expense from higher interest rates. Core revenue in our specialty products and technology segment grew 1.7%. In the second quarter, our combined orthodontic business grew high single digits with SPARC continuing to expand rapidly. Our traditional bracket and wires business declined high single digits, negatively impacted by the Russian sanctions. As we have discussed, we expected this impact in the quarter, and we anticipate being able to resume shipment of these products to Russia again in the third quarter. Our implant-based tooth replacement business declined low single digits in the quarter. We saw solid growth across most geographies, offset by pockets of weakness in North America. China grew mid-single digits with strong volumes, offsetting the impact of VBP pricing. Adjusted operating profit in this segment was 18.7% in the second quarter. This is down both year-over-year and sequentially as we continue to invest in our long-term growth and are managing the impact of VBP-driven price declines. Turning to our equipment and consumable segment, core sales in the second quarter increased 2.9% compared to Q2 of 2022. The return to growth in E&C segment is driven by our continued strong partnership with our key distribution customers, as well as our EBS-focused execution, which helps drive strong sellout and ensure we are driving performance all the way to the clinics. Our equipment business grew low single digits, driven by strong growth in iOS, which is now part of core growth, and by the improving performance of our traditional imaging business. It is important to note that we continue to de-emphasize non-strategic geographies and solutions in order to concentrate our efforts in markets where we can build a sustainable, competitive advantage. This will allow us to accelerate both growth and margins over the long term. On the consumable side, we delivered mid-single-digit growth driven by strong performance in our restoratives and endodontics businesses and modest growth in our infection prevention business. Globally, we believe that the distributor sellout of our consumable solutions continues to outpace the market. Channel inventories remain healthy, and we expect this business to continue to perform well throughout 2023. In the second quarter, adjusted operating profit in the equipment and consumable segment was 25.7%. This represents 400 basis points of margin improvement versus prior year. Margin performance in the equipment and consumable segment is truly a demonstration of the power of EBS. We are relentlessly focused on driving productivity, optimizing our operating structure, and managing price to protect and deliver improving margins. In the second quarter, we generated $61 million of free cash flow and ended the quarter with over $650 million in cash. We continue to make progress on our cash flow management and remain committed to our midterm goal of delivering annual free cash flow in excess of net income. We have a strong balance sheet that provides us the flexibility to pursue additional inorganic growth opportunities when the right assets become available at attractive valuations. Now, I will turn the call over to Amir to discuss our outlook for the balance of the year and provide closing comments.

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

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

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

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 star 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. 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. Howard, sorry to see you go. Congratulations on your new opportunity. I think just maybe as sort of a last question as you sort of go through your last earnings call, how do we think about like the current demand environment? I know we've talked about some of the ups and downs over the first half of the year and into the second quarter, but as we kind of parse apart, you know, as we started to be in the third quarter with sort of maybe broadly speaking by like China and Europe and North America, that would be helpful to hear more color there. Thank you.

Yeah, thank you, Elizabeth. Overall, patient demand remains resilient. What we hear from doctors, group practices, DSOs, they remain bullish on the long-term outlook for dental demand, but they're mindful of the macroeconomic risks. What we are seeing is a continued strength in general restorative care, We see some isolated weakness in higher-end dental procedures, such as postponement of treatment versus canceling it. There's a full arch restoration and some adult type of support on the ortho side. And we are seeing some caution from clinicians resulting in managing inventory, a lot more strict format than what we have seen before, specifically on implant, bracket, and wire. On a segment-by-segment basis, Implant-based tooth replacement is resilient demand, but we're seeing some notable but not widespread weakness in high-end. Ortho, resilient, except Russia that is volatile and we have some challenges there. Our traditional imaging, we have improved it significantly, but also demand remains weak due to macro concern and high interest rate. But our comps are becoming a lot easier to manage as we go through the second half iOS, we see a continued strong demand, both from doctors as well as group practices and DSOs, because they intend to digitize and expand their capabilities and are consumable. What we are seeing is demand is stable and resilient. When I look at the geography by geography, Europe demand is resilient. But as you can imagine, you know, this is summer vacation and it's summer rolling vacation through north to southern part of Europe. In North America, we haven't seen any significant change. We see demand continue to be resilient. As I mentioned, pockets of weakness in high-end procedures. China, I was in China for a week last week as well. We saw demand as expected has improved significantly compared to the COVID-impacted comparables. And we expect to see further increase in second half But there are some key issues, customer sentiment, as well as some focus on spending, such as travel versus dental care. Russia continues to be volatile, continuing the conflict in there. Doesn't really allow you to have a direct forecast on what you can expect quarter to quarter. The rest of the world, emerging market, our demand has been resilient, and we have performed extremely well. To put it all back together, I think the forecast that we put together and communicated at low single digit considers all these variables in here. And given some of the acquisition as well as EBS, we feel positive about what we can deliver in second half and for the whole year.

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

We expect, and we had said that before, Elizabeth, that second half is going to be stronger. And as we go through the year, we're going to see better performance. And if I break it down to say, where is the growth coming from? Growth is going to come to a large degree on a specialty product and technology. Spark continues to add new doctors, existing doctors. They're putting more new cases. We're going to different geographies. Prices are improving. Growth margin is improving. Acquisition becoming part of our core growth combination of iOS plus oestrogenics, we expect those to improve and impact our core growth by over 75 basis points. And then we would have a much easier compass, specifically on equipment, considering what we had to deal with last year in Russia and China. So core growth are driven by these factors that we talked about on top of being very targeted on how our go-to-market operates. And even outside Our volume and mix is improving, specifically on the specialty part. Profitability of Spark, the gross margin is improving every quarter, and the impact of the EBS-driven productivity is very visible and obvious. As you have seen in our equipment and consumable business in T2, we expect to continue to drive that as we go forward in second half. And as we mentioned before, we have been very targeted geographies, businesses, that they're not really competitively advantaged. They're not growing. They're not profitable. And we have moved away from them very systematically, quarter after quarter. And that really now is beginning to pay off. And we have more work to do in here. But we feel confident about what we have ahead of us in the second half.

Got it. Thanks so much.

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

Good afternoon. Thank you for taking the question. So I want to dive in a little bit more to the commentary you made around the back half of the year, if I could, Howard, in terms of the cadence and the year-over-year comps. You tend to have some level of 3Q to 4Q ramp, but it sounds like we should be expecting something fairly steeper than normal. I know you're not commenting specifically on giving quarterly guidance, but in terms of those moving pieces, how should we think about, aside from comps, some of the biggest differences between the expected 3Q and 4Q growth?

Yeah. So, Michael, I think that we do see and have anticipated this throughout. And I think even when we provided guidance, we talked in context of first half being a big Slower sluggish both on in terms of growth as well as around the margin profile certainly as the mirrors described As we see that improved growth and the volume come through that's clearly going to have some pull effect In a positive manner on the margins and so that's one thing and you know we've emphasized as part of EBS productivity Look no further than spark. I think that every quarter sequentially we continue to see improvements in that margin profile and And we'll see a significant step up here in the second half as well. You know, China's recovering. That's going to certainly improve those margins. We talked about China. And if that business grows, even with the BBP impact, we feel confident that we're going to see that profitability show up. We talked about the iOS ramp. And so as that business, which is, you know, as we acquired, faster growing, but also improved margins. And so we'll see that fall through as that growth continues to happen. And then, you know, just basic around EBS and the productivity improvements that we look to do. We've taken some actions even in the second quarter, which will yield some results here in the second half. And so we feel confident that that's going to help drive some of that. Clearly, Q4 is going to be the most significant, largely because it's the largest revenue quarter for us. And so you're going to see margins step up significantly between Q3 and Q4.

And just one other maybe housekeeping question or anything else, but you had a pretty nice sequential step down, especially versus the last few quarters in corporate expenses. Is that part of those targeted restructuring that you've done? Is that something we should consider to be sustainable relative to the overall profit metrics?

Yeah, I think when we look at things around productivity gains, restructuring, I mean, we want to be mindful. about customer-facing, folks that are in the manufacturing plants, and to impact those things the least. And so clearly, we're going to go ahead and take actions where we can, not impacting our customer centricity and focus there. And so we will see continued impact on the corporate, as you've seen already.

Got it. Thanks so much. Sure.

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

Hey, guys. Good evening. Thanks for taking the questions, and Howard, best of luck in the new role. I'll miss the good dinners and the detailed conversations we've had in the past, so good luck on that. Maybe a mirror. Yeah, maybe a mirror. I could ask you a question on Europe and a question on implants. Okay. Europe, as you were ticking through your answer to Elizabeth, you said maybe some vacations and all that. I mean, I know we hear that frequently in Europe, but leading economic indicators not the best right now. One of your competitors came out with a report tonight and reported... softer than expected European performance. I cited Germany specifically from a macro standpoint. Obviously, they have a big legacy business in Germany, so maybe it's nothing more than that. But just how comfortable are you with what we're seeing macro-wise in Europe that the European business can stay healthy and continue to contribute to that improving growth profile here in the second half?

Yeah, thanks, Jeff. Over 25% of our business comes from Europe. And for the past I would say eight quarters we have performed extremely well in Europe. And what is driving it? I'll talk about macro in a second. I'll answer your question. But I want to tell you what we have been doing that results in this odd performance. Our clear aligner business in Europe is the fastest growing part of our business. And it's purely because of segmentation, the network effect, the training, education, and very systematic rollout. that we have started in Spain and we are extending it to France and going geography by geography. And we are expanding that business very rapidly toward Europe. Our implant business, and I think, you know, we talked about this a few years ago, is that we have to improve our execution in Europe. We have delayed the organization. We have improved customer experience. Every geography has very targeted focus to the customers that building relationship and growing that. So our implant business performs extremely well compared to the other geographies worldwide. Look at our consumable business has been going high single digit every quarter for the past eight quarters. So I want to talk about macro, but let's figure out what the macro look like versus our performance. Macro in Europe, exactly the same thing. You said, Jeff, you're hearing the same thing. But on the ground, what we execute, segments we're going after, We're being very targeted, very deliberate, and we have improved the customer experience throughout Europe by consolidating and building a new customer center in Prague, and we are building a new factory for a Spark delivery so we can reduce the turnaround time significantly in Europe. All of that has allowed us to be doing extremely well, and we are replicating a lot of those success stories in U.S. as well. Important execution always trumps macro. And that's what we have done in Europe, done it in China. We have done it in emerging markets. We are replicating it in North America as we go forward.

All right, that's helpful. Thank you. And then the implant question, you know, I think you gave enough detail on Europe and China this quarter. We can kind of back into that North American number probably was down about mid-single digits year over year. Is that close? And if it is, how does that compare to maybe the 1Q performance? I know you've talked about some company-specific efforts to kind of re-stimulate growth in that business. You know, when do you expect that to get back to a positive growth in the industry? I think we're hearing on the North American dental implant market, especially with regards to your business, is M1 maybe just not scaling at this point, still waiting for some evidence there, but also some trade down to value happening that's maybe not going to the implant direct business, but to some of the other value players in the U.S. So, you know, as I kind of throw those things out there, just how much of that seems to fit with kind of what you're seeing and how do you think about this business over the next maybe six to 12 months? Thanks.

Yeah, those are all really good questions, Jeff, as you usually have a tremendous amount of insight and point exactly what the challenges are. And we're not shying away from discussing what the macro issues are versus what the challenges on executions are. The macro in North America continues to be resilient. We are not seeing anything that says radically the implant business has changed. On the other hand, some of the high end selective procedures like, you know, full arch restoration. It's $25,000 to $30,000 investment. And if people can wait a little bit longer, they will wait for it. They postpone it. They're not canceling it. They're postponing it. When we talk to the oral surgeons and the people that we work with, they're not seeing a radical shift in the number of patients that they're coming through. They see a little bit of a postponement. What we see on the ground is tighter inventory control. And to be very specific, You know, if you used to buy one month's worth of inventory at the oral surgeon, now they're buying two weeks at a time. And so why is that important? We manage things at the local level, at the regional level, then we go to the geography, even at the zip code level. When we point at pockets of challenge, there are pockets of North America implant business that does extremely well because they do the fundamental. They do the basics very well. We've got a great brand. We've got a great product portfolio. We've got a dedicated community of surgeons. We have pockets of localized execution challenge. For example, when there is an open territory, those regions that they have somebody standing by, jumping there, cover the territory, they don't see a drop. Those that they don't, it takes three to six months to fill that territory. As an outcome, we see a drop in that segment. Those that they have a really good on-the-ground inventory management, daily work, funnel management, they see performance managed through all of those. But those that they don't, we see a significant discrepancy between performance. In Europe, we have been able to solve a lot of these problems. We have consistency from one region to the next. In U.S., we're going through the same process. Each region is standardizing the daily work, funnel management, you know, replacement of those open territories. We are confident that this is going to improve every quarter. And as we go forward, our intention is to get the growth at or above market. At this point, we know for a fact that we're not performing in our full potential.

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

Hey, thanks. Good afternoon. I mean, it would be helpful if you could just unpack exactly what you saw in imaging in the second quarter, whether it was up or down on a year-to-year basis, and that improvement just a function of your comps, and how you're thinking about that segment in the second half of the year.

Yeah. Thanks, Brandon. To make sure that it was a little bit soft, you asked about imaging, correct? Imaging business in performance? Yes, sir. Okay, absolutely. If you recall, we talked about a little bit of a macro issue. So, let's figure out who actually buys imaging product. There are three groups of people. One, you open a new operatory, you add to existing setup, or you open You know, if you're DSO, you open a new location. That has slowed down to some degree because of interest rate, because of resources. Two, you do replacement. Replacement of existing product that they are five, six, seven years old. And that also has been impacted to a degree. And last but not least, you haven't had it. You want to put a CVCT in. You want to put the iOS in. in order to be able to expand the capabilities that you have in office. That segment, as we talked about, the iOS growth has been in place. But you put the macro aside, what we have done, we have started looking at segment geographies, product categories that have competitive advantage. They're linked to our overall strategy, and we have really growth potential in the long run. Starting 2.2, 2.3 of last year, we started exiting specific geographies and segments. And that really had an impact. Then we deployed a whole set of standards around roadmap management, value proposition, go-to-market, customer experience. These have been at work. We're beginning to see the outcome of all of that in 2.2. If you look at our imaging business, to be transparent, declined double-digit in Q1. It improved significantly in Q2. Obviously, additional iOS put it in a positive, low single-digit positive, but even without iOS, our traditional imaging business improved significantly in Q2 versus Q1, and we expect that improvement continues throughout the year. So, sum it up. Macro is what it is. EBS at work tried to do things right, manage the portfolio, focus resources and investment to our high growth differentiated product categories and continue to improve our go-to market. That's what we're doing. That's the outcome that we expect. More profitable and get back to growth second half and continue that through 2024. Thank you.

Howard, wish you all the best as well. Just two for you. What was the benefit of the one extra selling day? in the quarter? And then what should we pencil in for free cash flow conversion for the year?

Thanks. Yeah. So I think, thanks, Brandon. I think with regards to one extra selling day in the quarter, it wasn't as meaningful because we did have more growth on the E&C side, which is mostly a distributor type of business. And so I would say that that's not going to be or didn't have as much of an impact And then as it relates to free cash flow, look, we continue to improve. We talked about the midterm goal of getting free cash flow and excess of net income. We feel that, you know, second quarter is a good illustration of how we introduce some more discipline as it relates to working capital, as well as profitability improving. And so we'll see that here, certainly in the second half with Q4 being the largest contributor.

Okay, thank you. Our next question will come from John Block with Steeple. Your line is open.

Thanks, guys. Good afternoon. For the 2023 guidance, you know, you guys seem to have confidence, but it still is a steep slope for 2H. And, Amir, you talked about a dental market that showed some slowdown. I think you said in the higher end part of the market. You've got a billion-dollar-ish implant business. You're not far off from almost a quarter billion dollar run rate in clear liners. So I guess where I'm going with this is, what does the guidance assume or embed, you know, for the balance of the year? Are you extrapolating out, call it the current trends and you guys can get there? Or is there an underlying assumption for a market pickup with some of those, what you're describing as higher end types of cases?

So, thank you, John. You know, we have a process in place that we continue to work through. We have done that from Indiana and since separation, and that's a scenario plan. We continue scenario plan what the expectation look like, and we consider all the different variables into that model. In that model, we anticipated that VBP is going to be an important factor, but we didn't really assume significant uptick on the volume. We knew Russia is going to be volatile. We have a growth model on a spark. We know exactly, because from the time that we put a training program, we get people in, we know what happens 30 days, 60 days, 90 days after. We know the active doctors, how many cases do they put in place, implant placement, and we have funnel at least about 90 days we can look at our funnel and take a look at the conversion ratios what would that look like NPI's new product introduction as well as the marketing program when we put all of that together our core growth assumption in second half is based on growth on specialty product and technologies to a large degree the spark is driving it Acquisition is moving to the core growth. We got over 75 basis point of impact for the full year, but iOS came to play only starting end of April. We have a full second half in here. We have osteogenics in second half. We have easier comps specifically for equipment. We have China out of the COVID. The ramp is taking place. As I mentioned, I was there last week. We're seeing a good uptick in here. So a combination of all of that, plus what we're seeing on improving mixed margin, profitability, gross margin improvement as far, productivity that we are getting, what Howard talked about, some of the changes we have done on G&A and Q2, that gives us the confidence to see what the second half is going to look like. That's how we have built this plan. So far, it's playing exactly what we expected. We said every quarter is going to be better than the previous quarter. We have proven that in Q2 result, and we expect that will take off, assuming some of the seasonalities between Q3 and Q4. We think second half is going to look a lot better than the first half, and confident that we can deliver what the guidance that we have provided.

Okay.

That was very helpful. I guess it just sounds like you're not embedding in a pickup in the market, Amir. You're pointing to sort of company-specific variables and momentum in some of those businesses that give you the confidence on the 2-H step-up, if that's correct. Maybe just... Yeah. Okay. Great. Thank you. Maybe just to pivot a little bit more specific to Russia. So the Russia revenue headwinds, maybe, Howard, if you can quantify that, you know, the swing in the wires and brackets growth rate of nearly 1,000 bps sort of implies it could be 10 million or 10 million and change. And Maybe if you can give a more specific number and then how that returns. In other words, is that all a 3Q23 event, in your opinion, or is that somewhat staggered between 3Q and 4Q23? Thanks, guys.

Yeah, sure. Sure, John. So the majority of the impact as it pertains to Russia, because it didn't impact all products with sanctions, right? So it's mostly U.S.-born products. And so that had a disproportionate impact on our bracket and wire had a little bit of impact on our implant as well. And so I think we had said that sales would be impacted in that particular segment by up to $10 million. I think in the end, we probably was a little shy of that as it relates to the impact, but clearly very profitable business for us. And what we said is that the licenses should get cleared and that we should be able to resume shipping all these products here in the third quarter. And so we would anticipate that we're not losing those orders, whether they get made up here in the third quarter or fourth quarter, or whether there's some broader impact associated with all the things that are going on in Russia. Certainly, you know, it's pretty volatile, as Amir has pointed out. But we feel confident in our position there. We think that we'll be able to continue to get our business, you know, as a key component of our growth in the emerging markets, particularly as it turns to our specialty products. And so we feel confident about what we're going to be able to do there in the second half.

Okay, perfect. Thanks for the call, guys. Sure.

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

Hey, thanks for taking the questions, and I'll echo the same sentiments here, Howard. You know, congrats on the new role, and we'll miss working with you. I wanted to start with the questions here, maybe another question on the EBITDA margin guidance and the implied improvement here in the second half. And apologies up front if I missed any of this. I've been hopping between a couple calls. But I'm trying to reconcile maybe the EBITDA margin you posted here in the second quarter for your two reporting segments in the context of that second half margin ramp that you have out there. So I guess the question is, does the margin improvement more come from SP&T? Given the low level we're at here in the first half of that segment, and I hear what you're saying on the improvements you expect to see from SPARC, or does the margin momentum build even further in E&C after what was a really nice quarter, I thought, here in the second quarter? So really just trying to get a sense of the source of the margin improvement as we think about that steeper ramp in 2H.

Yeah, so thanks, Jason. I think that we will see significant improvement in the second half as it relates to margin profile coming from the SP&T segment. We talked about the impact associated with the Russia sanctions, and so as we get through some of those, that's going to bring back much of the bracket and wire business and the implant business associated with Russia, and clearly those are at higher than fleet average margins, right? And then as it relates to sequential or first half, second half comparisons, We've talked about the SPARC profitability profile continuing to improve every quarter sequentially. And so we'll clearly see that happen here in the second half as well. And then, you know, even with some of the acquisitions, the osteogenics business, that goes into core, brings through volume along with this, some improved margins as well, we anticipate. And then just overall volumes improving on the specialty side. And so while we did have some growth, In the second quarter, we anticipate growth in the specialty being a little bit accelerated here in the second half, and so that will be the case. We're clearly pleased with the performance on E&C margin expansion of around 400 basis points. We don't want to commit to saying that that's going to improve further yet. We also know that with the EBS culture that we're going to continue to look to get additional productivity there. And then you'll see some margin improvement, as we talked about earlier in the call, around the corporate functions too.

All right. All right. That's really helpful. It definitely sounds like, you know, probably more coming from SP&T. But maybe for a follow-up, the E&C price declined here on a year-over-year basis in the second quarter. I think it was something down 80 basis points. It was about a three-point sequential step down. Can you talk about what the source of that step down was, what the delta was in equipment and consumables pricing from 1Q and 2Q? It was just a bigger quarter-to-quarter change than we're accustomed to seeing, but also trying to understand maybe how much of this pricing move was strategic to drive the better volume growth that we saw here in the second quarter.

Yeah, I mean, you know, as we talked about, we allow each of the opcos to, you know, look at how they go ahead and maximize growth, profitability, And pricing is part of that equation. And so I will say that on the ENC side, there was some, you know, pricing concessions given on the imaging hardware side. You know, with concerns around the interest rates and the like, we want to meet customers where they need it. And so quite honestly, we'll go ahead and be willing to move a little bit on that pricing to go ahead and secure that business. And I think that we've done a nice job of doing that. And certainly being mindful of the overall margin profile. And so we'll continue to focus in on making and executing on that front as well. And, you know, maybe as a related matter here, we talked about inflation and things like that. I know that that topic hasn't come up, but we have seen some moderation here in the second quarter and particularly around direct materials. And so that affords us a little bit of opportunity to work around pricing to secure those deals on the imaging side. So we feel good about that. You know, pricing, Each of the opcos are a little bit different with regards to that. The big pricing impact as it relates to the specialty is clearly coming from VBP in China. Other than that, we've seen some nice pricing upticks in businesses like Spark, as well as Bracket and Wire, and as well as our consumables areas within EMC. And so, again, this is exactly the plan is to let the opcos manage to improve growth as well as profitability.

Very helpful. Make sure the extra color there as well on the inflationary structures there.

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

Great. Thanks for taking the question. And Howard, let me add my congratulations and best wishes as well. I guess, could you maybe talk about you know, how China played out over the last few months, especially from a consumer demand standpoint. And, you know, I'd be curious to get a sense of how your expectations for China over the back half of the year, you know, maybe change relative to what they were, you know, three months ago or coming into the year.

Yeah, thanks, Nate. You know, as I mentioned, I had a really Great week in China. I meet with some of the largest hospitals in Shanghai, largest DSOs and many customers, as well as our own team. You know, China VBP, it's played out exactly as expected. So really brought the prices down and the public sector somewhere close to almost 50%. But the volume has increased. You can definitely see the volume has increased. And as an outcome of that, this ramp that they expected, and we were watching this very carefully, is beginning to take place. Fifteen provinces on the ORTO side have increased price. They have gone through BBP, but they're pausing to see what's the impact and impact look like before they take the next step. So now unpacking that, we are seeing a strong patient traffic. And two other phenomenons are happening in here. One, the gap between the premium and value has closed significantly. So if the gap is closed, a lot of clinicians, they're making a decision, hey, go for a premium plan. Go buy Nobel because the gap is not that much. The second part that we witness, and it is very much at play, is the three-unit bridge versus the impact. the price gap between the two procedures has closed significantly. And a lot of clinicians are beginning to think, hey, better place implants than doing that three-unit bridge, given that the price difference is not that much. And the DSOs and some others, they're beginning to become really comfortable in placing implants. As an outcome, we are seeing a significant volume growth. Watch it very carefully to see what's going on in the implant, what's going on with the pricing, And the volume growth has been better than what we expected, and prices are pretty much playing exactly as we had anticipated. Now, putting that aside, there are still some challenges on the ground. The housing crisis, the slower growth, consumer spending, all of that is realities that the China economy as a whole is dealing with it. What we're talking is specific on a specialty part, such as small segment of the market which we think is going to continue to be resilient going forward. We expect China to be flat for 2023, impacting with a huge impact on the VBP, and given that Q1 was a really difficult quarter. But it has improved, and we expect to see more improvement in the second half.

Great. And maybe, Howard, a quick follow-up for you. You know, I appreciate the color on EBS. And you're also kind of looking at certain restructuring actions in China to kind of right size that business. You know, I think also, you know, you've taken some actions in equipment. I'm just curious if, you know, you could maybe help us think about the magnitude of those and are those savings that we should expect to help the back half of the year when it comes to a margin standpoint?

Yeah, Nate, I do think that. We continuously look at all of our operations and make sure that the size of the operations as it relates to the cost structure and the like are commensurate. And so certainly in China, we've taken some actions. And to date, even as the mirrors come back last week, none of those restructurings have impacted the customer-facing components. And if anything, I think the team is even more focused I would say that that's also true on the imaging side. As we alluded to, that business had not been growing for several quarters now, and so taking the appropriate actions to right-size that business was also the right thing to do. And so we'll clearly see that impact, you know, throughout the rest of this year as well as some of those actions were taken earlier in this year.

Great. Thank you.

Sure. Thanks, everyone. Appreciate the time. We look forward to talking to you guys next quarter. Thank you very much.

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