Envista Holdings Corporation

Hello, my name is David and I'll be your conference call facilitator this afternoon. At this time, I'd like to welcome everyone to Invista Holdings Corporation's fourth quarter 2024 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 the star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star and the number two. I'll now turn the call over to Mr. Jim Gustafson, Vice President of Investor Relations at Invista Holdings. Mr. Gustafson, you may begin your conference call.

Good afternoon. Thanks for joining Invista's fourth quarter 2024 earnings call. We thank you for your interest in our company. With me today are Paul Keel, our President and Chief Executive Officer, and Eric Hammes, our Chief Financial Officer. Before we begin, I want to point out that our earnings release, the slide presentation supplementing today's call, and the reconciliation and other information required by SEC Regulation G relating to any non-GAAP financial measures providing during the call are all available on the Investors section of our website, www.investico.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations. During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials described additional factors that impacted the year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the fourth quarter of 2024, and references to period-to-period increases and decreases in financial metrics are year-over-year. During the call, we may describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe, anticipate, or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. and actual results may differ materially from any forward-looking statements that we may make today. These forward-looking statements speak only as of the date that are made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I will turn the call over to Paul.

Thank you, Jim. Good afternoon and welcome, everyone. We appreciate you taking the time to join us today. We'll cover five items on today's call. I'll kick us off with some opening thoughts on our fourth quarter results, the steps we took in 2024 to improve performance, and a summary of our guidance for 2025. Next, I'll turn it over to Eric to take us through the numbers in more detail. I'll wrap things up with some closing remarks, and then we'll open it up for your questions. Slide four summarizes three things, Q4 results, 2024 performance, and our 2025 outlook. I'll touch on each in turn. Results for Q4 were again in line with our expectations. We delivered core growth 2% and an adjusted EBITDA margin around 14%. We saw continued improvement in our implants business, including North America, which has been a particular focus for us. We had another quarter of share gains and gross margin improvement in SPARC, and further operational improvements in areas like working capital and customer service supported by EBS. As has now been the case for the past several quarters, the global dental market was soft but stable. We are seeing some headwinds in specific geographic markets, and macro volatility remains high. In terms of full year performance, 2024 was a year of transition for us. We refreshed our leadership team, took numerous actions to support improved performance, and delivered against the 2024 guidance we reinstated on our Q2 call. Specific to that, Core growth and adjusted EBITDA came in at negative 1.5% and 11.8% for 2024, both within their respective ranges. And we generated just over $300 million of free cash flow, a 35% increase over the prior year. With underlying growth and margin around 1 and 14% across 2024, no visible changes yet in the dental market and high macro uncertainty, we're guiding to something similar for 2025. Core growth of 1% to 3% and adjusted EBITDA margin of approximately 14%. To provide additional transparency, we're adding a third guidance metric this year, EPS, which we expect to come in between $0.95 and $1.05 per share. Two final items to note. First, a recently completed restructuring is expected to generate roughly $20 million of gross annualized savings moving forward. And second, earlier today we announced that our board has authorized share repurchases of up to $250 million over the next two years. While this is something new for our company, Invista is a highly cash-generative business. And as Eric will explain shortly, we feel this is an appropriate addition to our capital allocation priorities. On my first call with you in May, I said we'd sharpen our focus in three areas, growth, operations, and people. Let me give you a quick update on our progress in that regard. Three items with respect to growth. First, we took the decision to invest an incremental $25 million to accelerate growth in our highest margin businesses like Nobel Biocare. We're beginning to see the benefit of this investment with Nobel improving across the year and returning to growth in Q4. Spark is a second area where we continue to make progress. Excluding the net impact from deferral, Spark grew double digits in 2024, and we've achieved consecutive quarter-on-quarter gross margin improvement across the year. As we've shared previously, we expect this business to turn operating profit positive in the second half of 2025. And third, we're driving increased new product activity across Invista. having launched several new platforms, including Spark on Demand, new DEXA sensors, and the next generation CBCT platform. On the operational front, we continue to enjoy strong contributions from the Invista business system, our continuous improvement methodology that is foundational to progress across our entire company. Some examples from 2024 include cutting Spark customer setup times in half and unit costs by over 25%, driving double-digit productivity gains in one of our largest Nobel BioCare points, and a double-digit reduction in consumables inventory through the use of dynamic Kanbans and improved overstock visibility without impacting scrap or service levels. Alongside EBS, the work we're doing to capture price and productivity supports operating leverage, and strong cash flows support the $250 million share buyback program that I mentioned earlier. Finally, with respect to people, we refreshed our senior team by quickly onboarding three world-class leaders, all with deep dental market knowledge and global operating experience. We made meaningful investments in engagement and talent development. We continued our support of the Invista Smile project, our philanthropic foundation with over $2 million of contributions in 2024. And we made progress on a host of other people priorities, including a 25% decrease in recordable safety incidents and record participation in employee feedback surveys. Before I turn it over to Eric, I'll touch on the dental market in Q4, as well as our relative performance therein. In total, the global market was flat to slightly up, with implants growing low single digits, ortho and consumables roughly flat, and diagnostics down mid single digits. Our implants business also grew low single digits, with Nobel and Challenger both in positive territory. Orthodontics market growth was impacted by a sharp slowdown in China. as industry participants began drawing down inventories in preparation for BBP implementation sometime this year. Excluding China, our brackets and wire business was up low single digits, and our aligner business grew double digits, resulting in continued market share gains for Spark. The diagnostic sector contracted again in Q4, as did our business. We experienced negative imaging growth in several key markets, including China, and our iOS business contracted as well. While we expect lower interest rates to support increased diagnostics demand, we are not yet seeing compelling evidence of this in our order book. Finally, the consumable sector was flat to slightly positive on a sellout basis, and our performance was roughly the same. Channel inventories were stable quarter on quarter, and our service levels remained high, but general dental patient traffic was mostly flat in the quarter. Having summarized Q4, 2024, and 2025 guidance, I'll now turn it over to Eric to take us through the details.

Thanks, Paul. In the fourth quarter, we delivered sales of $653 million.

Currency exchange rates impacted sales negatively year over year by 90 basis points. Adjusting for the impact of currency, core sales in the quarter increased 2%. Our specialty products and technology segment declined slightly, and equipment and consumables segment increased 6.4% year on year. As Paul noted, we delivered positive growth across both of our implant portfolios, and Spark delivered another strong quarter of growth, excluding the net impact from our deferral change. In addition, our consumables business posted strong growth in the quarter, although this was off of a low comparable in Q4 2023. when our sell-in was impacted by the cyber attack on our channel partner. We also saw a significant slowdown in China, both in our diagnostics business, where the competitive dynamics are challenging, and in our orthodontics business, for the reasons Paul just mentioned. Our fourth quarter adjusted gross margin was 57.2%, an increase of nearly 500 basis points versus the prior year, helped by a transactional foreign exchange benefit. Our adjusted EBITDA margin for the quarter was 13.9%, which was 170 basis points lower than the prior year. Adjusted EPS in the fourth quarter was 24 cents, down 5 cents compared to the same quarter of last year. Finally, we delivered 124 million in free cash flow in Q4 and a total of 303 million in free cash flow for the full year, up 35% versus 2023. We provided two bridges to help break down our year-over-year results. Let's first turn to the sales bridge. For year-over-year revenue, exchange rates were a headwind of approximately $6 million due to the dollar strengthening. The SPARC revenue deferral change accounted for about $7 million in the quarter. This is consistent with the guidance we provided in the Q3 earnings call. On a full year basis, the net deferral change was a headwind of $45 million. This will turn into a tailwind in 2025, which I'll say more about in a moment. Consumables sell-in was up high teens in the fourth quarter for the reasons mentioned. Our estimated year over year impact from the favorable comparison is $20 million in sales. Excluding this impact, our dental consumables business grew low single digits. The net impact from the remainder of our businesses resulted in flat sales year over year. This includes growth in our implant businesses and another growth quarter for SPARC offset by declines in diagnostics and China. Turning to the adjusted EBITDA margin bridge, we had a net productivity gain of 80 basis points in the quarter as we continue to drive efficiency in several areas of our operations. We saw an improvement of another 80 basis points coming from positive core growth inclusive of dental consumables and the growth margin benefit noted earlier. The impact from the SPARC net deferral change was a headwind of 90 basis points. Investments in the business resulted in 130 basis point decline in adjusted EBITDA margins. Similar to other quarters, the largest portion of our Q4 investment was in Nobel BioCare, where we continue to strengthen our capabilities in commercialization, clinical, and R&D. We are also making investments in areas like challenger implants R&D, SPARC commercialization, and dental consumables sales coverage. Lastly, we had 110 basis point decline in adjusted EBITDA margins from other items. This includes a foreign currency transaction gain and a year-over-year increase in incentive compensation against a low 2023 payout comparable. Turning to segment performance, core revenue in the specialty products and technology segment declined 40 basis points year-on-year. In the orthodontics business, there were a number of puts and takes in the quarter. On the positive side, as Paul described, Spark continued to perform well. Brackets and wires, however, were down mid-single digits in the quarter as China declined 50% due to VBP preparations. We expect the China orthodontic market to continue to be slow for the next couple of quarters. Excluding the decline in China, brackets and wires were up low single digits with solid growth in both North America and Europe. Implants delivered another quarter of improved performance of growth. Adding to what Paul said earlier, this marked the fourth straight quarter of growth for Challenger, as well as the third straight consecutive quarter of improvement for Nobel in North America. Still more to do here, but we're encouraged by our trajectory. It's also worth noting that the full arch category saw good growth in the quarter, a positive signal for our premium implants business. In the fourth quarter, our specialty products and technology business had an adjusted operating margin of 11.5%, down almost 400 basis points year over year. This decline was driven by the net impact from our Spark deferral change, in addition to growth investments and the decline in orthodontic China volumes. Moving to our equipment and consumables segment, core sales in the quarter increased by 6.4% versus prior year. As I mentioned on the sales bridge, The main driver of this increase was a low prior year comparable for our dental consumables business. Our diagnostics business declined high single digits. This decline was felt across several geographies, driven by macroeconomic conditions and by low-cost competition in developing markets. China, in particular, continued to experience sharp declines. North America also declined mid-single digits after three straight quarters of growth. Our consumables business grew in the high teens year on year. Our sellout was relatively flat year on year, consistent with prior quarters and the overall market. Emerging markets were strong, especially Russia, but as with our other businesses, China saw declining sales. Our adjusted operating margin for this segment increased 570 basis points versus Q4 2023, mainly driven by higher consumables volumes and FX transaction gains partially offset by continued investments in the business. As mentioned previously, Q4 cash flows were strong as we generated free cash flow of $124 million compared to $100 million over the comparable period last year. Our full year free cash flows were $303 million, up nearly $80 million over prior year, driven by improved working capital management and lower capital expenditures. The INVISTA team executed well in Q4. As many of you know, INVISTA has an excellent balance sheet and good underlying financial strength. Across the past two quarters, we've worked to improve our capital deployment flexibility. We recently executed on repatriating over $300 million of international cash to the United States at a low incremental tax rate. This tax obligation was accrued in the fourth quarter, impacting our GAAP tax rate and GAAP earnings per share. As a reminder, we have three capital priorities. First, we aim to invest in growing our business organically, including meeting growing demand, gaining share, and investing in innovation that will drive long-term value creation. Second, we will continue to target accretive M&A opportunities that provide attractive risk-adjusted returns on capital and help us to improve our product portfolio and global reach. Third, we will aim to return surplus cash from these first two priorities to shareholders. Consistent with this, we announced today that our board of directors authorized up to $250 million in share repurchases between now and the end of 2026. As Paul mentioned at the start of the call, we're initiating 2025 guidance, expecting 1% to 3% core growth, EBITDA margins of approximately 14%, and adjusted EPS of $0.95 to $1.05. Let me go through a few of the underlying assumptions in our guidance, which we hope are helpful for you all to better understand our business expectations. First, our guidance does not assume significant improvements or, for that matter, deterioration in the dental market in 2025. Our guidance assumes FX rates flat with year-ending 2024, namely 1 euro to 1.04 US dollars. the stronger U.S. dollar represents about a 2% year-on-year headwind to 2025 revenues. On tariffs, this is clearly a fluid situation with uncertainty as to how the situation lands globally. As with anyone who operates in Canada, Mexico, and China, we have some exposure, but we benefit from a balanced global supply chain that allows us to respond flexibly to shifting dynamics. Until there's greater clarity on the tariff landscape, we have not included anything for tariffs in our guidance. We anticipate orthodontics VVP to be implemented in China at some point in 2025. Therefore, we anticipate bracket and wire sales in China in the first half of 2025 to be slow with the related market dynamics that we just saw in the past quarter. For the SPARC net deferral change, we expect a modest year-on-year headwind in the first quarter with about two-thirds of the 2024 deferral impact to be recognized as a benefit in the second half, with the largest amount expected in the third quarter. We expect a gross benefit of $20 million in annualized savings from our recent restructuring, with the majority of this benefiting 2025. Please note this benefit will be partially offset by investments in commercialization and R&D aimed at driving long-term growth in the business. We forecast our effective tax rate to be 37% for 2025. We recognize this tax rate is high relative to our history, and we're working on strategies to decrease it. The main factor contributing to the high tax rate is a cap on U.S. interest expense deductibility related to a significant intercompany loan. And finally, as mentioned, we expect to execute the buyback across the next two years with a commensurate impact in 2025. As we look at the totality of our 2025 guidance assumptions, We anticipate slower core growth in the first half, with Q1 slightly down year over year, and stronger growth in the second half. With that, I'll turn the call back over to Paul. Thanks, Eric.

I'll wrap up with a few closing thoughts before we open it up for your questions. First, while the secular attractiveness of dental remains the same, we do not yet see strong evidence of an uptick in demand to the mid-single-digit range that is more typical of this market over time. Put another way, market growth is currently slow but stable. Second, our Q4 and full-year results came in as guided. Core growth and margins fell within expected ranges, and we returned to growth in the fourth quarter as promised. Third, we initiated 2025 guidance consistent with our 2024 trajectory and stable market conditions, 1% to 3% growth and around 14% EBITDA margin. Fourth, the economic engine of Invista is strong, generating more cash in 2024 than we consumed. This, coupled with the repatriation work that Eric described earlier, support the share repurchase program that we announced this afternoon. And fifth, and maybe most importantly, we're thoughtfully and systematically putting in place the necessary building blocks for continued improvement moving forward. I'll close by thanking my 12,000 capable and committed colleagues around the world. I'm grateful and encouraged by the progress we're making together. And in the same way, we appreciate the strong support we enjoy from our customers, our partners, and our shareholders.

And with that, we'll open it up for your questions.

At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue by pressing star and two. We'll take our first question from Elizabeth Anderson with Evercore ISI. Please go ahead. Your line is open.

Hi, guys. Congrats on the quarter, and thanks for all the details around the guide for 25. You know, your 25 guide came in line with what you've been indicating as sort of the run rate and sort of what we've been expecting. Can you tell us a little bit more about where you could sort of outperform versus sort of that initial expectation and sort of any risks to that guidance as we think about the year?

Thanks for the question, Elizabeth. Sure, let me quickly recap the framework for the guidance, and then I'll cover the upsides on the growth side, and maybe I'll ask Eric to do the same thing for margins. So the framework for the guide, pretty straightforward. It centers on the same three things that we discussed in our prepared remarks. First, you know, when you normalize out for the various puts and takes in 24, we saw fairly consistent underlying growth in margins across the year. That's the 1% top line and 14% EBITDA that we've talked about. Second, importantly, the dental market conditions for 2025 are expected to be broadly similar to 2024. And then thirdly, you know, as recent events have reminded us, there is a fair bit of macro uncertainty at the moment. So you put all three of those together and that gets you to the 1% to 3% growth and 14% margin guide. Now, in terms of potential upsides to that, you know, I would note three in particular. You'd have to start with SPARC, consistently taking share and expanding gross margins. Add to that that the vast majority of ortho cases are treated by orthodontists, where we have a particularly strong position, so we feel like we have good momentum on the SPARC side. Implants is another potential upside, having turned positive in Q4. You know, we recognize that one point is far from a trend, but the positive growth and the continued progress across the year, you know, have been the expected outcome of the work that we're doing and the investments that we're making. So we like our progress there. And then third, I think I'd point to diagnostics. It's another area where we have a strong leadership position, particularly in North America. Now, that sector, of course, has been under pressure for a while now, but the market will come back. Every new clinic needs diagnostic equipment. Every dental procedure begins with a 2D, 3D, and or inter-oral scan. So, if that market returns quicker than as currently expected, that, of course, would be constructive for Invista as well. Eric, maybe I'll turn it over to you for thoughts on the margin side.

Yeah, excellent. Thanks, Paul. Elizabeth, thanks for the forward-leaning question. Appreciate it. So I would say three things in terms of opportunity for profit margin. First, I would just, on the back of Paul's comment on growth, anything we can do, of course, relative to core growth, volume, price, you know, connected with the upside that Paul talked about, spark, implants, diagnostics. Everybody on the call here is aware we've got strong gross margins across our portfolio. And every point of growth is helpful for us to grow profits and to a degree margin rate. So growth would be one possible upside. Second opportunity, I would say it would be over delivery on spark profitability. I think we've shown in the past multiple quarters that we've made good progress here. We've talked about many quarters of cost down sequentially. We've talked about multiple quarters of gross margin improvement, largely driven by that cost. And I think the foundation that we have of a really great manufacturing technology platform of automation kind of against the backdrop of our global network for manufacturing is an opportunity. We will be stepping up our investments there capitally in 2025. We, of course, have our commitment out there for Spark profitability in 2025. But if we can go further faster, that's upside for us. And then I think the third area I would point out would be G&A costs. We talked on the three prepared remarks around an announcement structuring. It's mostly focused on G&A. It's embedded in our guidance, but, you know, we think that there's more that we can do there. On the risk side, you know, maybe, again, just extending Paul's comment on the macro, tariffs affect interest rates. These are all examples of risks to our outlook. We saw, as many did, the strong dollar strengthening in Q4. That's consistent with our guide. It took about two points off in terms of FX or growth. It also hits us with about 50 basis points of a headwind on margin rate. It's in our guide again. But recent announcements and sort of what we're seeing in the political landscape just gives us a bit of pause and maybe there's some risk there. I'll pause there, Elizabeth. Again, thanks for the question, getting us kicked off and through the forward lean.

Yeah, no, that's super helpful. Thanks so much. I was wondering if we could maybe drill down also on the implant business. It was obviously really nice to see that return to low single-digit growth this year. How do you sort of think about your expectations for that business? And can you give us a little bit more detail about sort of the incremental investments, whether that was sort of in the product development in what areas or on the go-to-market strategy?

So, sure. Like Spark, we like the momentum that we're seeing on the implant side. We talked about the positive growth for both the Challenger business as well as Premium and Q4, and then the fourth successive quarters of growth for Challenger. I guess that's helpful in a couple of regards. First, you like to see the positive growth, but second, it gives us confidence that the changes we're making and the investments that we're putting in are bearing fruit. Of course, these things are more than just putting money into the business. We had a leadership change in Nobel that trickled down to a change in the way our go-to-market approach, some of our commercial activities in North America. We're doing more on the clinical side. We're stepping up our game on the innovation side. You know, all of those things helped in the quarter, but they also build momentum heading here into 25.

Very helpful. Thank you.

We'll take our next question from John Block with Stifel. Please go ahead. Your line is open.

Thanks, guys, and good afternoon. I'm sort of wondering where I want to go with the questions. Maybe the first one, Eric, I thought I heard you correctly, the 50% decline in China wires and brackets as the industry participants sort of drew down, you know, for VBP. Where are you with the size of that China wires and brackets business? And maybe I'll try to be somewhat brave. I don't know, pre-VBP hit, was this around $50 to $60 million? And, you know, anything more in the cadence to $25 when they're done drawing down And I'm guessing you think you're a beneficiary of that from a vols perspective into 26. So a lot there, but I'll pause.

Yeah, sounds good, John. Yeah, so you heard it right. Q4, I mentioned the prepared remarks about 50% reduction year over year in brackets and wires. I won't talk kind of in depth about the size of our China business, but the way to think about our view of 2025 is that As the market prepares, so as, you know, call it, you know, procedures or customers slow their purchases, we saw a version of that in Q4. We think we'll continue to see a version of that in Q1 and Q2, in addition to the fact that the channel is sitting with, you know, sort of a normal level of inventory, but that has to get repriced, you know, for a preparatory VBP somewhere, you know, mid-year. That's perspective. So the way we think net-net about brackets and wires next year is it'll be down in the first half. We hope it'll be up in the second half as VVP comes around. And we're modeling it based on how we saw our implant business in China, you know, over the last two years basically move through VVP. Lots of variables that can play out there, but that's how we're thinking about it next year.

Okay, very helpful. And maybe I'll pivot for the other question. Paul, you know, your implant portfolio certainly seemed to close the gap to market growth quicker than, you know, certainly we were thinking. Congrats there. I think maybe just to take a step back, what's embedded in the 2025 guidance? I don't think you touched upon this from two perspectives. One, you know, market growth for implants, which I think the slides show have been around low single digits. But what's embedded for Invista's growth relative to market? I mean, you've already gotten there. So is it more of the same or just trying to figure out what's the assumption within the top line guide? Thanks.

Yeah, I mean, I'd be lying if I said that our guide gets down to specific market shares in specific categories and what we think is going to happen with that market. But, you know, generally speaking, John, we think will continue to gain momentum in our implant business for all the reasons that I addressed in Elizabeth's call. We're not expecting a dramatic change in the implants market in 25 relative to 24. If the market does turn more quickly, of course, that'll be constructive for us, and that would be an upside to the guide. But broadly speaking, while the leading indicators for the market, you know, all the green shoots that you're well familiar with, consumer confidence, interest rates, employment levels, all of that, while they're favorable, you know, we're just not seeing a tangible uptick in patient flows or in our own order book. So same conditions, market conditions, 25 to 24 in the guide. If that happens quicker, that would be an upside.

Fair enough. Thank you.

We'll take our next question from Michael Cherney with Lear Inc. Partners. Please go ahead. Your line is open.

Hi. Good afternoon, or good evening, I guess. Thank you for taking the question. This is Ahmed Mohamed from Mike Cherney. First, I want to ask about SPARC profitability and how it will impact total operating margin when it does become profitable in 2-H, I think you mentioned. So, like, what's the contribution on that kind of immediately and then also, like, in the long term?

Yeah, I mean, I think, Michael, thanks for the question. I think we've disclosed previously, Spark's about a $250 million business for us. So it's about 10% of sales. So, you know, the math is easy there. Every point of margin improvement gives you 10 basis points of benefit at the Invista level.

So rule of thumb, that's probably a good way to think about it. Got it.

And does the guidance assume diagnostics getting better for Invista? I know you said that the market is soft, but like what point does the numbers sort of bottom out? Is it driven by being depressed? Is it driven by a need for more innovation? Any color over there would be helpful. Thank you.

Sorry, Michael. You're asking what's causing the market softness, or what was another question?

I said, sorry, what does the guide assume for diagnostics? What point do numbers kind of bottom out? And is the weakness due to, for Invista, is the weakness due more because of visits, or is it a need for more innovation?

Yeah, I can take that. So, I mean, just as a reminder, our diagnostics business in 2024 was down, you know, mid to high single digits. Fourth quarter, we talked about it being down high single digits. We expect the diagnostics business clearly to be better, you know, say flat to low single digit type of growth. And that's multiple factors. So, you know, we don't expect significant market recovery from the fourth quarter, but the market's improved a little bit as we've gone through the year. And then many of the participants on the call know that we also had, you know, some favorable comps, if you will, in 2024. So we exited a few geographies. That was to help the profitability of the business. You know, some of those things will help us to deliver a, you know, a modestly better growth rate next year. And then as Paul opened in his, you know, remarks to Elizabeth's question, you know, this is a market we would hope, you know, gets a little bit better in 2025. But again, we're assuming that it trends flat versus effectively how we exited the year.

Got it. Thank you so much. We'll take our next question from Jeff Johnson with Baird. Please go ahead. Your line is open. Hey, Jeff, you might be on mute. Yeah, guys, sorry. I was on mute. Sorry about that.

Hey, so I guess just a couple of clarifying questions here. Eric, if I could, on Spark, I'm just trying to understand the message here just on kind of clear aligner market and kind of Spark's performance relative to the market, which I think was above market, obviously. But you talked about in the press release that Spark revenue down double digits with the deferred revenue. In your slide deck, Spark is up double digits X the deferred headwinds. in your email you sent out it sounds like cases for spark were up mid single digits do i just connect those dots that pricing was up or asps were up five to seven points or something in the quarter uh just one can you confirm that ballpark accuracy and and two if cases are growing mid single digits how do you think that's performing relative to the clear aligner broader market thank you yeah jeff thanks let me just lay out

Yeah, there are a lot of numbers in your question. Let me just lay out the facts, and then I'll turn it over to Eric to add color. So on SPARC, revenues for deferral neutral, X neutral, I think you said grew double digits in Q4 and in 2024. That was correct. The number of ordering doctors also grew double digits in Q4 and 2024. And that's now many successive quarters now, both of margin gain and we think above market growth or market share gains. So hopefully that clarifies it. Eric, is there anything more you wanted to add to that?

No, I think you got it, Paul. Jeff, maybe just another leg to that. So as we go into then 2025, we gave this detail in the sort of the guidance assumptions or the guidance considerations. Two-thirds of the 2024 SPARC deferral headwind, that's about $45 million, turns accretive next year. We've been given the same number for the last couple months, so no big change there, with a little bit of color just around the first half, second half. First half will be a little bit of a headwind. Second half will be a tailwind. And that gets us effectively to the same numbers you mentioned in the beginning.

Yep, got it. That all connects. Okay, that's helpful. And then just, I guess, one other bigger picture question in the diagnostic side. You know, hearing a little chatter out there that you might have a new iOS you're coming out with this year, internally developed through the Dexis brand. You know, one, anything you can talk about there? You know, it seems like the CareStream product that you acquired hasn't really developed. picked up much share in the last year and a half that you've owned that asset or so. Just any thoughts there on whether or not this might help you better participate in that iOS market? Thanks.

Yeah. So, let's see. A couple questions in there specific to diagnostics. First, you picked up on there have been a lot of new product introductions on the diagnostic side. There was some additional functionality to the current version of the iOS we launched last year. There was also new sensors, 2D sensors, and we introduced a new 3D CBCP platform. So a lot of innovation work on the diagnostic side. And yes, the chatter you're picking up is correct. You know, the iOS market, a lot of innovation in the category, and you got to keep up. So we will be introducing additional functionality, additional version of that platform. of that iOS moving forward. So per usual, your G2 is right, Jeff.

Yeah. Anything you can say on that, Paul, as far as how it might differ from the current care stream, or is that something you don't want to talk about yet?

Well, there'll be a couple of dental shows coming up. We got Chicago coming up. We got IDS.

So we'll be saying more soon. Understood. Thanks.

We'll take our next question from Kevin Caliendo with UBS. Please go ahead. Your line is open.

Thanks. And thanks for taking my question. I appreciate it. Paul, you've been in the job for nine months. And yeah, I think it's been, I don't want to say shocking, but I think investors have to be happy with the fact that guidance has been very consistent with your commentary. And there haven't been a lot of surprises. And now we're, you know, a month or so away from an analyst day, which I'm suspect is going to be you providing some kind of long-term guidance. One, I wanted to kind of confirm that. And, and two, you know, what should we be expecting at this analyst day in terms of not, not specifics, but like what, how comfortable are you, you know, making long-term projections about the market and have there been any surprises or anything that, you know, either you feel better about or worse about when you think about putting together sort of long-term plans for the company?

Thanks for the question, Kevin. Let's see, you had two parts in there. First, any surprises in the first nine months, and then second, what should you expect for the capital markets day here, one month from today, in fact. So you're right, the first nine months, no major surprises. You know, both Eric and I have been in and around dental for decades, and we came back to it because of three principle beliefs. First is that it is a secularly attractive market. All of the long-term growth drivers we're aware of, pretty much all levels of the value chain have favorable economics, and that aside from COVID and maybe one year after or post the global financial crisis, this market always grows. So good market was point number one. Point number two is it's a great portfolio of businesses. Every one of the pieces of Invista has a good market position and all of them can be made better. Which is the third reason, you know, we jumped to the opportunity. You look at the continuous improvement mindset that's embedded in Invista and the culture where, you know, people here really want to get better each and every day. You can just see how you could turn that potential into improved performance moving forward. So with that as a backdrop, that brings us to next month's CMD. You know, we had the good fortune to speak to a lot of folks who are on this call. And you guys told us you were interested in four things. So we just put together an agenda that, you know, responds directly to that. First is embedded in your question. You know, people want to know what's our thought on long-term value creation here and how do you kind of operationalize that? So I'll start with that. Secondly, investors told us they'd like a deeper dive into our two biggest businesses, implants and ortho. So you'll hear from Stefan and from Veronica on that front. And then third, also embedded in your question, we owe the market reinstated medium term targets. So Eric will finish up the agenda on March 5th. with the financial wrapper to the plan, including medium-term guidance. The fourth item, of course, is you guys would like some exposure to the broader management team. So we'll have the full group there, both folks who are newer to Invista, but also some of our longer-standing colleagues. So that's our plan. New York Stock Exchange, 9 till noon on March 5th. We sent out a press release today, and we hope all you guys can make it.

Thank you very much. I appreciate that. Look forward to seeing you there. Yeah, it should be fun.

We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead. Your line is open.

Great, thanks. So on the equipment and consumable side, there were some moving pieces, I think, in the quarter in terms of sell-in versus sell-out trends. I think some of that's just from a comp perspective, but you know, what are you seeing right now kind of year to date and how do we think about sort of that quarterly progression across that sort of segment for the balance of the year?

Yeah, yeah, perfect. So I'll hit your point on the growth piece and then I'll just talk about margins a little bit if that's embedded in the question. So I think we've been pretty transparent as we've gone through the last many quarters. So the first point maybe to make here is in the consumables business relative to distribution, comma relative to the channel. Nothing really dramatically changed there as we moved through the quarters. So from second quarter to third quarter to fourth quarter, we've had very consistent inventory levels. I would say relatively lean inventory levels. And we see that as positive because our overall delivery performance, service performance is strong, even with lean working capital management with our distributed partners. So that's point number one. Most of the revenue move, we're talking about then, and we show that in our revenue bridge, that is primarily due to last year's cyber attack on the distribution channel. It's about $20 million. It drove a good portion of the consumables and the E&C business. Underlying, we had sellout within dental consumables roughly in line with where it's been the last several quarters, you know, flat to low single digits, which we see as being in line with the markets. So that's kind of point number two. And then on the margins, the margins, we were up about 570 basis points year over year. We were also up sequentially. A lot of that comes from the volume that I just mentioned on a year over year basis. We also had a pretty significant transaction gain. So as the dollar strengthened, our net monetary assets provided us a gain basically in the exchange, and that was partially offset by incentive comp. So let me pause there, see if there's any further questions to dig into.

Yeah, so thanks. That was really helpful. Can you talk a little bit, too, about your positioning as it relates to tariffs and potential offsets? And have you been able to do anything kind of proactively to better position yourself in terms of exposure or anything you can quantify as well on that front? Thanks.

Yeah, maybe I'd say three things, Aaron, on the tariff side. You know, we'll start with the obvious. It is a pretty fluid situation. With the Canada and the Mexico pieces on hold for, you know, 30 days, I guess, as of today, only the China piece is currently in place. And the impact, you know, to invest from that is relatively small. You know, that, of course, could change at any time. Which brings me to the second thought. It's one that Eric mentioned in his prepared remarks. You know, until there's greater clarity and stability as to how things might play out on the tariff front, I just want to underline that we don't include any tariff-related impacts in our 2025 guide. And then third, maybe most importantly, I think what the nut of your question was, You know, while we are a global business, and so by definition, we're exposed to various uncertainties, you know, tariffs included, we're also fairly well positioned to respond to any shifting landscapes. So we've long architected our supply chains with a local for local mindset, you know, meaning we aim to source materials in the same country or region where we manufacture. And then we try to serve our customers in a particular country or region from local sources of supply. So all of our big product categories, all of our largest supply chains have manufacturing on multiple continents. For example, we make Spark in Mexico, in Czech Republic, and in China. We make consumables in three different countries. We make implants in three different countries. et cetera. So, you know, while the bad news is that uncertainty is high, the good news is that we're fairly nimble and able to respond to what shifts. You know, that just comes down to moving with urgency and executing well. And I think that's something we're pretty good at.

Okay, great. Thank you.

We'll take our next question from Alan Lutz with Bank of America. Please go ahead. Your line is open.

Hey, this is Dev on for Alan Lutz at B of A. Thanks for taking my question. I had a couple here just, you know, on Spark, you know, multiple quarters of, you know, margin expansion there. I think you guys have discussed that quite thoroughly. You know, I'm just trying to quantify that a bit. I think you've mentioned double-digit declines in unit costs in the last quarter and Is that the right way to think about the cadence of the margin improvement there? You know, would love some help trying to, you know, kind of framing the pace of that gross margin expansion, whether, you know, year-over-year or quarterly. That'd be great. Thanks.

So are you, I think you're asking is there, should you model a double-digit unit of reduction every quarter for SPARC? Now you're testing my math. No, I think there's probably some diminishing returns as we move down that cost curve. But you should plan on continued unit cost improvement on Spark. And as we talked about on previous calls, certainly an improvement in the market would help. But our improvement to date has not been driven by that. It has been driven by a very organized manufacturing technology strategy. All of the lines have the same design across the three sites. We have a pilot plant in California where we design the innovation, and then we roll it out across the lines, across the plants. And so that leads to not only predictable improvement, but it also leads to that flexibility that was in Aaron's question. Similar equipment, similar lines, similar regulatory filings for all the sites. So, you know, if things, you know, require a response here moving forward, we're relatively well positioned to do that.

Thanks, Paul. That's helpful. And then just one cleanup question here on the deal inventory reduction. I think, you know, with 18 million had been in 2Q, 12 million in 3Q. I'm just trying to figure out, you know, is that a one-time headband in full year 24? Is there a portion of that that's considered as maybe a reversal or a tailwind in 25? Or should we maybe think of that as just, you know, consumables moving more in line with sellout as we move forward?

Yeah. So the latter is really the right point. So since Q2, we've been at the inventory, the months of inventory, the weeks of inventory in the channel that we see as healthy and our distribution partners see as healthy. We effectively moved sideways, so no change to that in inventory dollars or in overall weeks on hand in Q3 and Q4. And then to your point, you know, we would like that very much to be similar, consistent, in line into 2025. So no real major comp issues to deal with, if you will, when we get into 2025.

Great. Thank you.

We'll take our next question from Steven Vallecat with Mizuho Securities. Please go ahead. Your line is open.

Thanks, guys. Thanks for taking my question. So I'm listening to a couple of calls simultaneously here, but I'm wondering if anybody touched on the cadence of the EBITDA margin for 2025. I guess with the 14% EBITDA margin guidance for the full year 2025 coming in, essentially in line with just the just reported 4Q results. Just curious, you know, whether that EBITDA margin will be in a sort of a tight range quarterly throughout, you know, this year, or does it step down, then re-ramp? Just want to get more color on that, if you can expand on that further. Thanks.

Yeah, great question. And we haven't specifically talked about margin cadence. What we did cover in our prepared remarks, and we talked about a bit in a couple of the opening questions and comments, is we do expect slightly lower core growth in the first half. We expect slightly better core growth in the second half. For us, a lot of that is based on how we see the progression of China overall and BBP and effectively a version of what we saw in fourth quarter, which was slower bracket and wire market, slower purchases in Q4 playing out in the first half. And our business is sizable enough in China that that has an impact on the overall Invista growth rate. So slower core growth, first half, a little bit better second half. Spark deferral is also something that we get the headwind back as a tailwind next year in the second half. And then to your question on margin, I would just say, you know, we won't talk about specific quarter or half margin guide, but because of the healthy growth margins that we have, we will have slightly lower margins in the average in first half and slightly better in the second half as well. I think that's the easiest way to play it out for now.

Okay. That's perfect. Thanks.

We'll take our next question from Brandon Vasquez with William Blair. Please go ahead. Your line is open.

Hi, everyone. Thanks for taking the question. I wanted to start on dental implants. You guys have had a nice couple of quarters here of improvements, especially on the Nobel side, which is really encouraging. I'm curious, though, if you can, I know this might be a hard kind of exercise, but maybe parse out, you know, as you guys look at improvements, is this simply a factor of, you know, your year-over-year comps are a little bit easier, or are you actually seeing commercial improvements, or are you seeing improvement in end markets? You had made an interesting comment that full ARCH cases actually had good growth. that kind of suggested to me that there might have been a little bit of macro in there. So I'm just curious if you could parse any of those out to give a better understanding of how durable the Nobel improvements can be going into 2025.

Yeah, let me see if I can drill down into that. So, you know, maybe three things. First, we don't see a marked improvement in the underlying market, but we did see continued improvement of our business across the year. turning to positive and Q4 for both premium and challenger, both in North America and globally. So without improvement in the market, but improvement across our business, we do think that the work we're doing, the investments we're making are driving that improvement. And we're confident in them and we think that'll continue moving forward. The second thing I would say is that we focus a lot, understandably, on the implant side of Nobel, but we're seeing good strength across that entire portfolio. Our regenerative and digital solutions businesses both were up nicely in 2024, and our prosthetics business was also doing very well. So pretty good progression across that portfolio. Now moving into 2025, If we do get, you know, a faster return to, you know, pre-COVID levels for implants, all of this work that we're doing in strengthening the business, of course, will benefit us. You know, the rising tide will be a better position to take advantage of it.

Great. That's helpful. And on the Spark side, do you think you could just bridge us a little bit into what are the main contributors to get from where you are today to operating profitability in the back half of 2025? Thank you.

Yeah, I mean, our base plan, what we stand behind in our guide to return to profitability in the second half is mostly within our control. It is those manufacturing improvements that I mentioned. You know, we have a whole pipeline of automation steps, you know, lean manufacturing steps, and we just roll those out one by one in a very organized, consistent way until we have predictable improvements in the unit cost. That's the main driver of it. On top of that, additional value or additional volume, you know, if our share gains accelerate, that can only help. If the market recovers more quickly, that can only help. And we have been getting a little bit of price on our clear aligner business, and that adds to it as well, of course. So a lot of different vectors pointed, you know, in a positive direction, and I think you hear that in our enthusiasm for the business.

You know, the team's just doing a great job of it. And we'll take our next question from Vic Chopra with Wells Fargo.

Please go ahead. Your line is open.

Hey, good evening, and thanks for taking the questions. Just two for me. I guess maybe on the first one, on your top line guidance, can you talk about what gets you to the high end versus the low end of that guidance? And then I had a follow-up question, please.

What gets us to the high end of our revenue guide versus the low end? You know, I think it goes back to those upsides that we talked about before, and I would I would point to the same three, Vic. Spark, as we've talked about, a lot of ways that could go better than what's in the base guide. Our second thing we talked about was implants. That was embedded in the previous question. And then the third, I guess we don't talk a lot about diagnostics because that category has been under pressure, but we have a strong position in it, and the category, we think, has to come back. You can't operate a dental clinic without diagnostic equipment. You can't start a dental procedure without some type of diagnostic step. So some version of those, you know, break in the right way would get you to the higher end of that range.

Great. That's helpful. And then a good segue to my follow-up question. Maybe just talk about the dental capital equipment environment. You know, what are you hearing from your sales forces as they're out there talking to dental practices and DSOs? Thank you.

I think the question is, capital equipment sales to DSOs, is that?

Yeah, what are you seeing in the field? What are you hearing from your sales folks? This may be high-level commentary on the capital equipment environment.

Thank you. So let me just take two parts of it. Let me say, you know, what are we hearing from DSOs and then what are we hearing about capital equipment? The DSO market, you know, I think is doing pretty well. The stronger, getting stronger in that, the biggest players, the Heartlands, the Aspens, the, you know, MV2s of the world, these are well-run companies and they have many sites and they're often in several categories. So the, the, The population of suppliers that can really serve them at the levels they need is relatively small. You know, you need to have good national coverage, a consistent product, Salesforce coverage. And if you can do it across multiple dental categories, that's helpful. So we think DSOs are a big opportunity for us. With respect to capital equipment, it's consistent with the commentary we had on the diagnostic side. You need it to open a clinic. You need it to, you know, expand a DSO, but it happens to be a financed category, so it's sensitive to interest rates. Now, there's been, what, three interest rate cuts since the fall. That's helpful, but interest rates are still up, you know, several hundred basis points from where they were during COVID and pre-COVID. So I think we still need to see, you know, cheaper money out there before there's going to be a sharp inflection in the diagnostic equipment market. With that, I think we are up against the time. So I'm going to wrap things up here and thank all of you for participating and for your questions. Maybe I'll close just with a couple high-level thoughts, you know, reminding everyone why we are so excited about the opportunity we see in front of us. First, at the highest level, dental is a fundamentally attractive category. All of the structural long-term drivers we've talked about over time and the high gross margins and the opportunity for pretty attractive economics. Second, Invista is a great company. Leadership positions in some of the very best categories in that attractive dental market. And then third, having been on board now for nine months, it's clear to me that we have both the capabilities and the culture to turn that potential into improved performance. Hopefully, you're seeing elements of that across 2024, and I want you to know we're committed to building on that momentum here in 2025. With that, we'll wrap it up. Hope you guys can join us on the fifth next month at the Capital Markets Day and wish everybody a good day and a great week. Thank you.

This does conclude today's program. Thank you for your participation and you may now disconnect.