Envista Holdings Corporation

Hello, my name is Ina 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 2025 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, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number 2. I'll now turn the call over to Mr. Jim Gustafson, Vice President of Investor Relations of Invista Holdings. Mr. Gustafson, you may begin your conference call.

Good afternoon. Thanks for joining Invista's second quarter 2025 earnings call. We appreciate 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 reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the investor section of our website, www.investico.com. The audio portion of this call will be archived on the investor section of our website later today under the heading Events and Presentations. 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 results. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the second quarter of 2025, 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 solutions 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 and 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 they 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. On today's call, I'll kick us off with some opening thoughts on our Q2 and first half performance, as well as a brief strategic and operational update. Eric will then take us through the financials in more detail, and I'll wrap things up with some closing thoughts. As always, we'll then open it up for your questions. Slide four summarizes three things. Year-to-date results, progress executing the value creation plan that we laid out at our March Capital Markets Day, and an update to our 2025 full year guidance. Let's begin on the left with Q2 and H1 performance. Q2 was another solid quarter for Invista with strong revenue and EPS growth and good margin expansion. Core growth came in at 5.6%, aided by some customer buying in advance of expected price and tariff increases. Adjusted EBITDA margin was 12.4%, up 240 basis points from Q2 of 24, supported by good growth and G&A productivity, and offset in part by transactional FX losses related to the softer dollar. Adjusted EPS was 26 cents, the result of the EBITDA growth that I just mentioned, coupled with the lower tax rate, which Eric will say more about in just a moment. Moving to the middle of the slide, we delivered broad-based growth across our portfolio with both reporting segments and all major geographies in positive territory. Equipment and consumables was up roughly 7%, and specialty products grew just shy of 5%. In the same way, we're continuing to make progress on the operations front. In addition to continued reductions in spark unit cost and design cycle times, we're off to a good start on implementing the tariff mitigation plan that we outlined on our Q1 call. And we continue to move forward as well on our people priorities with sustained improvements in employee engagement and development. Moving to the final column, given our performance and good momentum, we are updating our 2025 full-year guidance. We now expect core revenue growth of 3% to 4%, up from 1% to 3% previously, and adjusted EPS of $1.05 to $1.15, up 10 cents from earlier guidance. Adjusted EBITDA margin is unchanged at approximately 14%, although EBITDA dollar expectations increase as a result of the stronger growth guidance. At our capital markets day in March, we laid out a value creation plan consisting of four components, guided by our purpose, centered on our values, focused on our priorities, and framed by our 2025 guidance and medium-term outlook. Let's turn now to progress made in the first half in support of this plan. Beginning with growth on the left side of the slide, we're working to accelerate ours through the four pillars we discussed in March. Better accessing untapped growth in our core markets, extending our rich history of new product innovation, penetrating a prioritized group of attractive adjacencies, and amplifying our organic growth with a creative M&A. In terms of better accessing market growth, we saw further gains in H1 on the price work that we began last summer. This helped support a meaningful increase in sales and marketing investment to accelerate activities like our various brand campaigns and global customer education programs. For example, we held several high-impact customer events, including a highly successful Nobel Biocare Symposium in late May. With more than 75 globally-renowned speakers, close to 50 masterclasses, two live surgeries, and nearly 1,700 attendees, the symposium celebrated the 60th anniversary of the invention of dental implants by Dr. Brennemark and Nobel Biocare, while also looking to the future by unveiling several of the latest innovations in digital dentistry. We also hosted several other global customer events, including ortho and implant events in China, with close to 1,000 clinicians participating in each. In addition to ramping sales and marketing, we increased R&D by 14% in the half. This enabled a number of important new product launches, including Spark Retainers, Spark ByteSync Class 2 Corrector, scanning solution from ImplantDirect, and the next release of DTX Studio Clinic with additional AI features, enabling doctors to go from image review to implant planning in less than 90 seconds. On the adjacency front, we drove further penetration in both DSOs and emerging markets. With respect to the former, we have now installed DEXA CDCTs and DTX AI implant planning in all 1,000 plus sites of one of the largest DSOs in America. This milestone represents a significant advancement in digital dentistry, enhancing diagnostic accuracy, supporting clinical collaboration, and greatly improving the patient experience. With respect to emerging markets, we delivered double digit growth in the second quarter across our Latin America, Indo-Pacific, and Middle East and Africa regions. Rounding out our growth update, we closed two small acquisitions in the first half, both at attractive EBITDA multiples to further accelerate the organic efforts we have underway. On the operations front, We continue to enjoy strong contributions from EBS, our continuous improvement methodology, that is central to how we deliver results, develop our people, and advance our culture. By way of example, we reduced G&A spending by 15% in the first half, while maintaining customer service levels above 95%. We also announced plans to expand our manufacturing footprint in China. with a new site in Suzhou that will produce aligners, implants, brackets and wires, and some diagnostic equipment. Consistent with our local for local supply chain strategy, the primary focus of this site will be to support growing China demand. Finally, with respect to people, we continue to advance our high performing continuous improvement culture as engagement and talent development continue to climb along with our growing momentum. Having now covered the high points of the quarter and the first half, I'll turn it over to Eric to walk us through the details.

Thanks, Paul. In the second quarter, we delivered sales of $682 million. Core sales in the quarter increased 5.6%, and currency exchange rates added about 200 basis points. Our Q2 adjusted gross margin was 54.4%, an increase of 20 basis points versus the prior year, despite foreign exchange rates being a headwind to margins. We'll cover more on the FX in detail specifically in our margin walk, but the weaker dollar trend from Q1 to Q2 resulted in a net FX transaction loss from balance sheet remeasurement. From an operational perspective, we performed in line with our expectations, with good performance across our global supply chain, including another strong quarter of SPARC unit cost reduction. Our adjusted EBITDA margin for the quarter was 12.4%, which was 240 basis points better than the prior year. Overall, margins were hurt by the net FX impact already mentioned, but helped by strong performance in volume, price, and continued G&A productivity. Adjusted EPS in the second quarter was 26 cents, up 15 cents compared to the same quarter of last year, and above our expectations. Our non-GAAP tax rate for the quarter was 33.3%, better than our expectations due to strong income generation in the United States. As I'll cover in the assumptions underpinning our 2025 guidance, we anticipate our full-year tax rate to be similar to the Q2 tax rate. Finally, we generated $76 million of free cash flow in the quarter, down from last year due to higher working capital. Let's now turn to two bridges to help break down our year-over-year results, beginning with sales. Core revenues grew 5.6% in the quarter, with positive growth in all major businesses and geographies. Volume growth in Q2 was up about 400 basis points and ahead of our expectations. We saw improved volume growth in several businesses, notably brackets and wires, diagnostics, and implants. Our growth in Q2 was also helped by a favorable prior year comparable, as well as some customer buy-ahead. We estimate this buy-ahead at approximately $10 million, which we expect to unwind in the second half. Foreign exchange was a tailwind of approximately $12 million, or about 200 basis points. At our March Capital Markets Day, we noted an opportunity for improved price execution at Invista. which is even more important today with the increased tariff activity. Our Q2 results reflect these efforts with price up $9 million year over year, contributing about a point and a half of growth. Spark deferral was roughly neutral in Q2, although we expect the year over year benefit to ramp meaningfully in Q3. And finally, we had a minor benefit from the two small acquisitions that Paul mentioned earlier. Turning to the adjusted EBITDA margin bridge, volume and mix delivered 160 basis point improvement, reflecting particularly strong growth in the quarter from high margin businesses like consumables and brackets and wires. Improved pricing delivered 130 basis point improvement in margin compared to last year. We had a net gain of 20 basis points from the combination of productivity and investments. This was driven by year-over-year reductions in G&A, as well as SPARC unit costs, offset by increased investment in sales and marketing and R&D to support future growth. Increased tariff costs compressed margins by 60 basis points in the quarter. I'll cover more on our full year net impact of tariffs when I discuss our 2025 guidance. Transactional FX losses brought a 240 basis point headwind in the quarter. With the structural diversity of our global business, there is not typically a need for financial hedging. However, with currency volatility higher of late, we did increase our hedging positions in Q2 in order to decrease balance sheet transaction exposure on a go-forward basis. Lastly, we benefited from a 230 basis point margin improvement from the absence of one-time costs that occurred in Q2 of last year. Turning to segment performance, core revenue in our specialty products and technology segment grew 7.2% year-on-year, with core sales growth of 4.7%. In our orthodontics business, Spark was up low double digits, and Brackets and Wires was up high single digits, helped by the customer buy-ahead, but offset in part by continued declines in China related to preparation for VBP. On the implant side, Premium delivered another quarter of positive growth globally, including North America, and Challenger returned to growth as expected. In Q2, our specialty products and technologies business had an adjusted operating margin of 13.5%, up over 400 basis points year over year, despite a 200 basis point headwind from transactional FX losses. Volume, price, and net productivity were all positive in this segment, in addition to the benefit from prior year one-time items. Moving to our equipment and consumables segment, core sales in the quarter increased 7.3% versus prior year, including double-digit growth in consumables against a soft comparable last year. Diagnostics core sales growth was also positive, including mid-single-digit growth in our largest market, North America. Adjusted operating margin for this segment improved 140 basis points versus Q2 2024, driven by volume growth and price capture. FX transaction losses were a 300 basis point headwind in E&C in Q2. Let's now turn to cash flow. Q2 free cash flow was $76 million, a decline of about $10 million when compared to the second quarter of last year, as improved sales and margins were offset by increases in working capital, which were driven by our faster growth. First half free cash flow was also down from last year, primarily driven by the low incentive compensation payout of Q1 2024. Our first half free cash conversion was 84%, which is typical of a normal first half. As discussed at Capital Markets Day, we expect free cash flow conversion over time to be around 100%. Our balance sheet remains strong and stable, with a net debt to adjusted EBITDA of approximately one time, providing welcome stability and flexibility, especially in periods of heightened macro uncertainty. Finally, we deployed $82 million in Q2 to repurchase 4.8 million shares of stock. On a year-to-date basis, we've repurchased $100 million or a total of 5.9 million shares as we continue to execute our $250 million two-year repurchase authorization. I'll now say a few more words about our updated guidance that Paul noted earlier. Slide 13 summarizes the changes. A core sales growth range of 3% to 4% versus 1% to 3% previously. EPS of $1.05 to $1.15 versus $0.95 to $1.05 previously. An adjusted EBITDA margin unchanged at around 14%. Slide 15 details some of the assumptions underlying the updated guidance. First, we continue to expect the dental market to remain stable with no significant improvement or deterioration in the second half. For exchange rates, We now expect the benefit of approximately 150 basis points to reported sales for the year. This is based on June ending FX rates. We anticipate the adjusted EBITDA impact from the weaker dollar to be neutral with no benefit as the translation benefits for the full year are roughly offset by the transactional losses incurred in the first half. For the full year, we continue to expect our supply chain, pricing, and cost savings actions to offset the impact of increased tariffs. Recognizing that the tariff landscape continues to be dynamic, this is based on tariffs that have been announced to date. As noted previously, we expect the 2024 change in our SPARC deferral to generate a $30 million year-on-year revenue benefit in the second half, with a significant majority in Q3. There's no change to our expectations regarding the previously implemented restructuring. Savings are tracking well, as reflected in our recent G&A improvements. Our tax rate estimate has improved, as I mentioned earlier, and we now forecast an adjusted rate of 33% for the year. This is the result of improved U.S. profits, which increases the basis of our interest expense deductions. We are still assessing the impact of the recently enacted changes in US federal tax law. In addition, we have a project underway to further reduce our global tax rate over time. We will update you regularly as things progress. As we've already covered our stock buyback program, I'll turn it back over to Paul to wrap things up.

Thank you, Eric. A few closing thoughts on the quarter. First, Underlying dental market conditions in Q2 were pretty similar to what we've seen in recent quarters. While macro uncertainty continues to be high, the underlying dental market remains stable. Second, our Q2 results were positive, including core growth of roughly 5.5%. We posted just shy of 3% core growth for the first half. Reflecting this good start, we've raised full-year growth guidance to 3% to 4%. along with an updated EPS range of $1.05 to $1.15. I'll close by noting that this progress is made possible by the wonderful talent and commitment of our global Invista team. We appreciate all you do in the service of our stakeholders. In the same way, we're grateful for the support we receive from our customers, partners, and shareholders. That completes our prepared remarks, and we'll now open it up for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star four by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star four by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Thank you. And your first question comes from the line of Elizabeth Anderson from Evercore ISI. Please go ahead.

Hi, guys. Thanks so much for the question and congrats on a really nice quarter. You know, I think, you know, there's been a lot of confusion about the sort of state of the dental market. Were you surprised by sort of the strength that you saw across the portfolio and your different businesses this quarter? Like, Was it, you know, turnaround driven? Do you think it was the main drivers were market driven and sort of how are you thinking about the broader dental macro at this point? Thank you.

Hi, Elizabeth. Thanks for kicking us off. Maybe a couple more thoughts on the market and then a few comments on our specific performance in addition to what we just covered. Starting with the market, You know, we continue to see green macro shoots. So I would say Q2 macro was incrementally better to Q1. Unemployment still very low. Interest rates in many markets, notably Europe, continue to come down. And then the big change Q2 from Q1 was the tick back up in consumer confidence. Both the June and the preliminary July numbers were pointed northward, which helps. Having said that about the macro, I think in fairness the preponderance of dental specific data that you guys get and that we get, things like the recent ADA survey or some of the third party research, they all continue to point to a slow but stable market. So I think that captures the market conditions. Specific to us, you know, in addition to what we said earlier, We had particularly strong growth in our orthodontics business. Both the brackets and wires side as well as the clear aligner side were strong. We also had very good growth on both sides of our consumables business, core dental as well as infection prevention. We had similarly balanced growth in implants with both premium and challenger in positive territory. And then it was nice to see diagnostics return to growth. especially with the mid-single-digit performance in both North America and Europe. Maybe I'd also note that the growth was steady across the quarter. You'll recall that we released Q1 earnings on May 1st, and I think in one of the Q&A, someone asked us how April was coming in. We mentioned that it was coming in, you know, consistent with our expectations. and that that momentum now, as we have the full quarter behind us, did continue across May and June. Anticipating a similar question on this call, July's almost in the books for us, so we have a good first look there. And again, July was very consistent with our steady performance and expectations. So on balance, you know, as we put all of this together, I'd say this is a positive step forward for Invista. Our plan is generally working and we'll just keep working the plan. So thanks for the question.

Thanks so much. Can I just double click maybe once more on the brackets and wires comments? That was certainly one area of outsized growth versus what we traditionally see in that market. Could you tell us a little bit more about the drivers of that outsized growth in the quarter? Thank you.

Yeah, for brackets and wires specifically, I would say there's two big contributors to that. The first is, although we talk more about our investment in sales and marketing on the implant side, we have been increasing our activity on the ortho side as well. And You know, investment there tends to return nicely, especially because of our very strong position on the bracket and wire side. You know, the second is there's some question of whether there's a shift from clear aligners to brackets and wires. We'll probably get another question on that as we go through the Q&A. I think maybe on the margin that helped a little bit, although the – kind of mix globally in case starts between brackets and wires and aligners has been generally stable now for about a decade, three quarters to brackets and wires and a quarter to aligners. But, you know, kind of consistent with all of our businesses that we talked through in the prepared remarks, consistent, intentional progress on the brackets and wires side.

Great. Thank you so much. Congrats on the quarter.

Thank you. And your next question comes from the line of Jeff Johnson from Beard. Please go ahead.

Thank you. Good evening, guys. Paul, I was wondering if I could just ask another question on the brackets and wires business. Not so much about the clear aligners versus brackets and wires, but I think you said China was still down year over year, kind of ahead of VBP. The last two quarters, I think your China brackets and wires business has been down 50%, 5-0%. Any way to put us in a range of how much it was down this quarter? And are we at the point now where inventory levels have been adjusted and we could look to China VBP on the ortho side to be growth additive as opposed to dilutive moving forward into the back half of this year? And then maybe one other VBP question if I could.

Sure. So maybe just the context on what's driving the pre-VBP decline in the bracket and wire segment as well as us. And then I'm looking at Eric, see if he can dig out the number for China specifically. But we learned, all of us learned this from the implant VBP, both ortho and implants are direct businesses, of course. But in China, we rely on the channel for logistics because it's such a vast and fragmented market. And so anticipating that prices will come down with VBP, we don't want to have a lot in the channel. So we're careful of how much we put into inventory there. And then some customers, the more sophisticated customers, anticipate a reduction in the procedure price, so they might be delaying treatment, you know, anticipation of that. So, again, having gone through it with implants, we very much anticipated negative growth for brackets and wires in the first half. Now, when the procedure price gets announced and then the product pricing follows that, we expect the converse. that there'll be an increased step up in both patient demand, but also putting a little bit more into the, use the word channel, although it doesn't behave the same way as a channel would in the U.S., but a little bit more into inventory to satisfy that demand. Eric is still digging. I see if he's got the number.

Yeah, Jeff, just on your question about the the movement of the growth rate. So I'll just talk it through by quarter and give a little bit of color. So in the first quarter, we talked about ortho, mindful that our business in China in ortho is almost all brackets and wires, 95 plus percent. It was down almost 50% year over year in Q1. We were up modestly in Q2. Part of that was our own team strategy and out of the implant playbook to make sure that we're driving, you know, penetration pre-VVP, which we think ultimately just helps us out post-VVP. But put the two together, I mean, it was still down, you know, 20 to 30% on a year-over-year basis first half. We anticipate Q3 to be, call it, in the ballpark of flat. And then we're going to have, you know, estimated robust growth in Q4. But there's a lot of uncertainty around that, right? The only thing we know today is what's come through the service BVP and then prospectively, you know, the timing of the product BVP. But I think we also know that BVP timing is a little bit elusive. But it's going to be, you know, should be robust growth in the second half. It is dependent on how BVP ultimately gets implemented.

All right, that's helpful. And then maybe to follow up on VBP, just obviously, you know, a lot of chatter about a second round of VBP for dental implants starting next year. You guys are putting some China infrastructure in place. You know, one, that added infrastructure, how much does that cushion or kind of protect your likely ability to participate in that VBP, number one? And number two, just, you know, a lot of chatter about it, not a lot of specifics, just any detail you can provide us. Do we think it's going to happen early in the year? Historically, we've seen second rounds maybe be less price declines than maybe what you see in the first round, things like that. Just any idea kind of how that second round of implant-based DBT might play out next year in China. Thank you.

All right, let me take both parts of the question and turn here, Jeff. So first, with respect to local manufacturing and VBP, local manufacturing did not appear to play a role in the first implant VBP, nor have we received any communication that'll be a factor in the ortho VBP that's currently underway. Market share, customer satisfaction, and, of course, price have been and we expect will continue to be the most important VBP criteria. Now, as local manufacturing, you know, indirectly supports all three of those, our investment in China, you know, should be on the margin helpful in strengthening what we consider to be an already pretty good VBP position. So that was your first question. Second, with respect to VBP2 timing for implants, we have not received any communication on that. So I'm afraid at this stage I don't have any better information than you do.

Understood. Thank you.

Thank you. And your next question comes from the line of John Blahnik. So, Steve, please go ahead.

Hey, guys. Good afternoon, and thanks for the time. Maybe just to kick it off for SPARC, I think in the slides you mentioned improving gross margins. So, can you talk about, you know, is the thought that SPARC turns EBIT positive in the back part of this year to H25? You know, if so, any thoughts on the trajectory going forward? And then maybe just a quick tack on in that one. Were there any recent changes to Spark pricing in the marketplace? And then I've just got a tighter follow up. Thanks.

Yeah, thanks, John. I'll just take that. So our plan for Spark, and I think it's really in most of our pre-read remarks as well, is that Our performance trend to profitability remains unchanged. So, you know, second half 2025 is when we believe it'll turn to profitability. That's still our view. That's still our view. Along that trend, you know, we're now on multiple quarters. I don't even remember the track record, but probably eight to ten quarters of consistent consecutive quarter-on-quarter unit cost down. This quarter we were down year over year almost 20 plus percent in unit costs, which means our, you know, spark growth margins are improving. So the plan remains the same. Our profitability trend, I would say, is on track. And importantly, beneath that, the key pieces of that trend remain on track, right? The business in terms of primary case start growth, volume growth overall for revenues, unit costs. And then Paul mentioned as well, you know, design. So design lead times for us, which are maybe less important on a profitability basis, but very important for us on a competitive basis. All of that, you know, remains in good standing. So, you know, we'll give you our update as we go through the second half in terms of the numbers, but we do expect to be profitable in the second half. And then on your last or second comment around price, you know, very moderate changes for us year over year in price. So not really material, I don't think, for the purpose of the call here today. You know, we had, you know, low, low single digit price growth year over year in Spark, which effectively means we're flat. So that's where we're at today.

Fair enough. Thanks for that caller. And then, you know, Eric, maybe I'll just stick with you. Anything to call out? I mean, you got half the year in you got half the year down, but anything to call out with the phasing 3Q, 4Q, you know, top line by division, or maybe even more importantly on the EBITDA margin side, maybe that was the only, I don't know, just relative to our estimates, the only blemish in what was a really, really strong quarter was the EBITDA margin. You explained that in the bridge, some of that was FX related. But when we think about for the balance of the year and your actions to offset some of the tariffs, How should we be phased or weighted between 3Q or 4Q or any color you can provide? Thank you.

Yep. Yeah, excellent. So let me do that in two shots. John, let me just talk first on core growth and then on margins and fully understand the spirit of the question too. So if you just look at our guidance, I'll just talk midpoint of our guide, which is where we see our full year. We should be about a point better in terms of core growth in the second half. And I'd say there's really three big moving pieces within there. One is our SPARC deferral. So effectively flat year on year in terms of the deferral change that we've been, you know, laying all the breadcrumbs for every quarter. That'll be about a $30 million benefit in the second half year over year with a significant majority, call it 80% in Q3. which ultimately, you know, yields about a two-point benefit in terms of growth. So that's, call it a tailwind for us. We talked in the pre-read remarks about buy ahead. We estimate that our Q2 buy ahead of our announced price increases, which were earlier in the quarter, were about a $10 million benefit. We think that comes back largely in Q3, maybe a bit in Q4. So that's a point of growth going in the other direction. And then just be mindful that our first half growth was held up by about a point in dental consumables favorable comp. That was based on us really bringing the dealer inventory channel last year to a point of health, which all happened in the first half of last year. So those are kind of the big three points on the growth. If you do all that math, you'll find that the rest of our business is stable to call it slightly improving in the second half. And then on margins, our margin guide at approximately 14%. What that means is we're about two points better in the second half. We would expect, as we typically do seasonally, that volumes are a tailwind for that. We're going to continue to drive good productivity. So as we just talked about, you know, spark gross margin, spark unit costs will be on the plus side of the ledger. GNA will continue to deliver year over year. And we expect to get, you know, a good amount of price. On a full year basis, of course, what we're really seeing here is upside versus our original margin guide on what we would call just core operations, volume, price, productivity. But FX is diluted for us. And that's, you know, a favorable translation benefit, but it's offset fully by the first half transaction losses. And versus our original guide, that's about a 50 to 70 basis point headwind. We saw a lot of that, of course, in the first half, but it's factored into our full-year guidance.

Perfect. Very helpful. Thank you.

Thank you. And your next question comes from the line of Steven Valliquette from Visual Security. Please go ahead.

Thanks. Good afternoon. I guess on clear aligners, you know, one of your competitors also talked about seeing some decent levels of patient scans. and practitioner case submissions in the second quarter, but then they called out that some patients were not following through with case conversion and treatment. So it does not seem like that was happening for Invista given your strong growth, but I guess I'm just curious historically, is this a phenomenon that has been noteworthy enough to impact your results in various quarters historically, just running just how prevalent this is really across the industry, regardless of whether you were seeing that this quarter or not? Thanks.

For us, our Spark business has had pretty consistent growth. Again, you know, Eric couldn't remember the number of quarters that the unit cost is sequentially reduced. I can't remember the number of successive quarters that we outgrew the market. So for us, we expected to outgrow the market again in Spark, and that's what we did see. So specific to whether Our doctors are having slower patient conversions. Anecdotally, you know, 10,000 orthodontists, you get a lot of anecdotes. But for us, no, I don't think I would point to that as a meaningful impact in our Q2.

Okay. All right. Appreciate the color. Thanks.

Thank you.

And your next question comes from the line of Brandon Vasquez from William Blair. Please go ahead.

Hi, this is Russell on for Brandon. Thanks for taking the question. Last quarter, you mentioned that you were able to broadly offset the impact of tariffs and continue to believe so, given things are always bound to change. But could you give any updates as to the mitigants and implementations and future timelines you mentioned previously?

Yeah, I can take that, Russell. So maybe just a point of bearing just to get everybody calibrated. In our second quarter margin walk, we did show what our Q2 impact was from tariff costs. So that would be net of supply chain actions, of course, but just the cost that we expensed in the P&L. That was about $4 million. It was roughly 60 basis points of margin dilution. And then as we look out to the second half of this year, based on the timing of tariffs, and then also just how the expense rolls through our balance sheet, gets capitalized, and then hits expense, we would expect, call it $15 to $20 million of tariff cost in the second half, roughly even by quarter. At this point in time, we feel like the tariff landscape is at least reasonably stable to predictable for now. And then our playbook remains unchanged. So in the first quarter call, we talked about Number one mitigation is actions that we're taking within our supply chain. That's with suppliers. That's with our own distribution network. That's also with source of supply, shifting source of supply around the world to our, you know, multi-geo sites. The second would be costs. And I think we see, you know, good momentum on that already when we've reduced costs like GNA, as Paul mentioned, you know, 15% in the first half year over year. And then the third to a lesser degree is priced. And we would see, you know, all three of those being able to offset the call at 15 to $20 million in tariff cost headwinds in the second half equal by quarter, if you would.

That's helpful. Thanks. And I saw in the quarter challenger returned back to growth after slight decline in the previous quarter and premium implants continue to grow well. Could you talk about what changes you saw in Challenger and any commentary you have on the overall implant market? Thanks.

Yeah, on the Q1 call, you're correct. We had negative growth for the first time in a number of quarters in our Challenger business. We posited that that was because we had two fewer billing days in Q1. In a direct business, that does have an impact. On the call, we said we expected Challenger, nothing had changed fundamentally in our Challenger business, and we expected Q2 to then return to that normal low single-digit positive trajectory. And that's what happened. So it played out pretty well as we expected.

I don't think there's much more to say on that.

Thank you.

And your next question comes from the line of Jason Bednar from Piper Sandler. Please go ahead.

Hey, good afternoon. Thanks for taking the questions. Yeah, just wondering if we can talk about maybe how dental practices are behaving here. You talked a lot about stability, but maybe talk about private practices, especially other small business owners. They've got operating uncertainties. They're getting notified of tariff-related price increases. What are you seeing in terms of the behavioral response from the dental community the last few months? Are we seeing brand substitution, any buying changes in response to where you guys have taken price? Are you seeing equipment purchase decisions elongating, anything like that? Thank you.

Yeah, maybe. So two parts that you touched on, Jason, the price piece and then equipment purchases. You know, we put the word price a couple of times, I guess, in our prepared remarks and now in our questions. But the quantified piece of price is very small, a point and a half in Q2. I think it was a point in Q1. So our price increases are modest, certainly less than CPI. And, oh, boy, certainly less than what we're seeing in input inflation in our own P&L. So I would say our price increases have been well received by the market. They would rather have no price than very modest price. But we're careful not to push things there. So that's on the price front. With respect to equipment purchases, yes, for sure we've seen, you know, across the last many quarters a delay in equipment purchases. You've seen that across the diagnostic segment. We did, as we mentioned, have a positive quarter for diagnostics, which was encouraging to see. As interest rates continue to come down, that will be supportive. But at some point, technology upgrades, new sites, DSO expansion, all of those things require equipment. So at some point, the diagnostic market, we believe, has to pick up.

That's helpful.

And then, Eric, just if I could squeeze in one on maybe just a quick bridge on EPS guidance. I'm seeing the net of $0.10 in the raise, a couple pennies maybe from buybacks, a little over a nickel on the tax rate. I think the balance coming from the core revenue upside is Are there any other factors you'd call out as influencing EPS raise, anything working against you that you're absorbing? It sounds like maybe tariffs, you're kind of lapping through here, and maybe that's part of the factor here of why EBITDA margins remain in the same. But just anything else you'd call out in that EPS bridge, if my numbers are accurate there?

No, let me just repeat maybe to make sure we're on the same page, and then maybe just a confirming point. I mean, our core growth, I think, is self-explanatory by our range and the drop down at growth margins, I think, is pretty obvious. Tax rate, you know, flat versus where it's been for the first half of the year. Shares, you know, we did have $100 million in share repurchase in the first half of the year. We would expect that to moderate. Obviously, the, you know, global equities market was pretty favorable in the first half and You know, if you just look at our share buyback authorization, we'll likely be, you know, something of a metered level in the second half. And then I think it really gets back to your core question. The two big tradeoffs, which I mentioned in a previous answer, are, you know, the better operational, you know, performance versus our original guide. That's volume dropping down at gross margin. It's a little bit of price. It's the work that we're doing in G&A. and it's the improvement that we're seeing in Spark gross margins. But unfortunately, a lot of that or all of that is washed by the better FX on the top line falling down at effectively zero adjusted EBITDA, which is this first half transaction loss offset by a little bit better translation. And we're upbeat, if you will, on minimizing the transaction exposure going forward because we've entered into hedges against our largest exposures. That's euro to dollar and euro to RMB. So I think you've got the rest.

Sorry, just to make sure I'm clear, like relative to your prior guide and then to today's guide update, you do have some EPS benefit coming in though from share buyback activity you've done to date and the drop in the tax rate assumptions, correct?

Correct. Yeah. Small amount, small amount from share buyback. And then basically the difference between our original guide, which was a 37% tax rate, and today, year-to-date and for the full year, we're projecting 33%.

Right. All right. Thank you.

Thank you.

And your next question comes from the line of Alan Lutz from Bank of America. Please go ahead.

Good afternoon. Thanks for taking the questions. The most recent ADA survey flagged that there could be some price increases or dentists are at least expecting more price increases on the come. So as you think about, you know, you kind of talked a little bit about maybe there weren't as many that you've observed. Can you talk a little bit about the market acceptance of price increases today versus and whether that's coming from tariffs and how that compares versus prior quarters and prior years across both your segments and whether or not any of that's new? Thanks.

Yeah, I mean, generally speaking, you can get a good read of it by looking at volume growth relative to price growth. That's a good kind of objective measure of acceptance. We were, whatever, 5.5% in the quarter, 1.5% from price, 4% from volume. You know, that would suggest it was favorably received. And I would say the current environment helps. You know, one... Somebody asked earlier, dentists are consumers as well, and the price of everything they're buying is going up. So they're used to CPI kind of level price increases in their practice and their life. And again, what we took, the one and a half is well below that. So I don't want to say that our customers are happy to get a point and a half price increase. But relative to a 3% price increase, plus 3% price increase on everything else they're buying, I think they understand it. They know we're not making money on the price increase.

That doesn't quite cover our own input inflation. Great. Thank you.

Thank you.

And your next question comes from the line of Kevin Caliendo from UBS. Please go ahead.

Afternoon, guys. Thanks for taking my questions. When we think about, I'm just trying to maybe calculate or understand what the core margin of the business looks like when we take out all of the SPARC benefit later this year. When we think about exiting the year, I know that was a number you liked to talk about last year, but as we get into the second half of this year and the exiting of this year, is If I'm doing the math right, are we close to like 14 percent? Is it a little bit higher than that? How should we think about that? And is it a good way to think about going into 26 off that kind of baseline?

Yeah, Kevin, I can take that. I think the easiest baseline, if you will, to work from is the margin bridge that we provided in our Q2 results, not the second quarter baseline. you know, standalone is sort of the be all end all for a full year. But I would just say, if you look at that, our, you know, volume price productivity, the elements of the walk, most of those are, you know, pretty sustainable levels of margin improvement, maybe save a little bit from, you know, our mention that we've got about $10 million in Q2 relative to price buy ahead, which obviously helped our margins. But we would not consider the transactional FX, which is mostly that 240 bps, to be really part of an ongoing, call it forward sustained rate. And if you take that into account, we're at 15%. I would back that down for the reason I already mentioned. Back it down for the slightly better volume growth in Q2 due to price pull ahead. And then I think it gets you back pretty close to the called the 14% that you were mentioning. And then just maybe as a kind of a forewarning, even though we get a large spark deferral gain year over year in the second half, on a sequential basis, it's really not meaningful. We're already in the environment in terms of revenue dollars in the first half that's effectively at the same basis of what we will recognize in the second half. So big year over year gain but not really much on a sequential movement basis. And I think all that kind of ties back to the 14% margin that last year we were helping everybody to understand on an underlying basis.

Got it. That's helpful. And you mentioned in your release that the BBB would have an impact on your tax rate. You're 33% for the full year, reflecting the higher U.S. profits, but you're assessing the impact of the BBB. I know part of the story is here that the tax rate over time should go down. Is there any change to that or any sort of long-term targets on the tax rate? And does the BBB affect that either positively or negatively?

Yeah, I mean, we're still assessing it. As you can imagine, every company is. So first order of business is to, you know, to get into the legislation. Second order of business is to see what else comes as a second order impacts to the legislation. So there's a, you know, a shoe to drop typically that we wouldn't even be aware of yet. I would just really go back to the core work that we're doing to improve our tax rate. And that's the intercompany loan that we have. So we have a large intercompany loan between the U.S. and Europe. That comes with interest expense that we pay on an intercompany basis. And the deductibility of that interest is capped by the size of our U.S. profits. And that's mainly the reason why our rate came from the originally expected 37 to now 33. The more we can do in either eliminating that entity, which is the work we're doing, or in improving U.S. profits, which is some of the work we're seeing when we grow products like brackets and wires, consumables, We improve our spark profitability. All of that will help, and it will get us back to something of a normalized tax rate. At this point in time, I wouldn't say the federal act is significantly helpful to our tax rate. For sure, not on a normalized ongoing basis. There might be a one-time shot that helps, but not on an ongoing basis.

So for the most part, we're just working the same way we were in first quarter. Sounds good. Guys, thank you so much. That's helpful.

Thank you. And your next question comes from the line of right, Erin, from Morgan Stanley. Please go ahead.

Great. Thanks. It's Erin. There were a couple of deals, I think, that you did, like smaller deals. I don't think it was anything material from an M&A perspective. But can you just remind us, like, what are you looking for in terms of just bigger picture from an M&A perspective and external kind of inorganic opportunities, your willingness to kind of execute on those and just how you're thinking about kind of M&A across your business. Thanks.

Yeah, maybe I'll just reiterate our capital allocation priorities that we talked about in the March Capital Markets Day. A high margin business like ours with good core positions, the highest risk-adjusted return of any available dollar is going to be organic. That's our highest priority for capital investment. Second for us is accretive M&A. You know, we grew up inside Danaher. We think we have pretty good M&A capabilities, and dental is a pretty active M&A market. So we look at a First year, Eric and I, we intentionally didn't do any M&A because we thought that there was higher return on effort just in core operations and execution. But now that we feel that the business is getting some momentum and pointed in the right direction, we have been spending a little more time on M&A. The two deals we did in the first half were very small. from memory, they were single-digit millions investment and all at accretive multiples, you know, which fit our accretive M&A target. Would we do something bigger as we continue to get momentum? Yeah, I think if we have the available capital and, you know, we have something that fits in a segment we know well, a prioritized adjacency or in the core, and You know, there's good consolidating or growth synergies.

Yeah, we'd like to do more.

Okay, great. Thank you.

Thank you. And your next question comes from the line of Vic Chopra from Wells Fargo. Please go ahead.

Hey, good afternoon. Thanks for squeezing me in, and congrats on a nice quarter. Apologies if this has already been asked. I've been bouncing around a little bit. But maybe just sort of talk about the different variables behind your 2025 guidance range. And what gets you to the low end versus the high end of your guidance?

Yeah, let me just hit that then, Vic. Appreciate the question. So core growth, we delivered about three points of growth. First half, our guidance is three to four. It implies second half at around 4%. I would say if you just go back to our original guidance, just think through our Q4 call and what we laid out as opportunities for better growth. I think those opportunities for better growth are largely the same today. It's continued strong growth in our, you know, Spark business. It's probably accessing now, you know, some of the growth that we're seeing from, you know, better new products. Paul talked in his pre-read remarks about, you know, some of the performance we're seeing in, in Ormco brackets and wires, or even our, our Dexus portfolio. So for the most part, You know, our growth upside is not dissimilar to the, you know, to the upside that we saw at the early outset of the year. For the most part, it's going to be, you know, macro, that stable, soft and stable dental market, you know, turning in a different direction. We don't expect that to be the case, but, you know, that could define the downside, if you will, of our growth in the second half and therefore the low end of the range. And then I would say for the most part, it's a similar narrative relative to the profit. So the upsides that we originally saw entering the year were things like spark gross margin, automation of our factory, improving design cycle time, reducing our G&A costs. As those things continue to perform, that is baked into our guide and roughly the midpoint. But to the degree that we can, you know, outstrip that and or outstrip on the volume side, you know, there's upside there. And I think likewise, it's the macro that largely defines the downside for us. If we were not able to mitigate, you know, the tariff range that I mentioned, that would be, you know, that would be potential downside for us. We think our guidance is, you know, pretty reasonably footed. And at this point in time, the midpoint's a good place to be thinking about it.

Great. Thank you very much.

Thank you.

That ends our question and answer session. I'll now turn the call back to Mr. Paul Kuehl for any closing remarks.

Okay. Thanks, everyone, for tuning in. Maybe I'll just quickly underline a couple of thoughts to put a wrap around the quarter. First thought would be that Q2 was another step forward for Invista, and we had good revenue and profit growth converting into double-digit EPS growth. We talk quite a bit about our performance being generally broad-based with all of our major businesses and geographies delivering positive growth. We're, of course, pleased by that, incrementally so, because it's in response to intentional plan that we're executing. We're focused on executing that plan that we laid out at the Capital Markets Day in March. And in addition to the growth, we think we see progress across operations and people as well, you know, the three categories of priorities we're focused on. And in support of all that, we invested some of the gains in Q2 back into continued momentum and growth in the form of increased R&D, sales and marketing. And as the last or two questions ago touched on, a bit of M&A. I think that covers it well for today. Thanks again for listening in and I wish everybody a good day and a good week.

This concludes today's call. Thank you for participating. You may all disconnect.