My name is Chelsea, and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation’s Second Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin your conference call.

Hello, and thanks for joining us on the call. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. I want to point out that our earnings release, the slide presentation supplementing today’s call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.envistaco.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. It will remain archived until our next quarterly call. As announced on January 3, 2022, we have closed the divestiture of KaVo Treatment Unit and Instrument business. For the first and second quarters of 2022 and the full year of 2021, the results of this business are expected to discontinue operations in our financial statements as required by generally accepted accounting principles. All references in these remarks and accompanying presentation to earnings, revenues and other company-specific financial metrics relate only to continuing operations of Envista’s business except for cash flow measures. During the presentation, we will describe some of the most significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics related to the second quarter of 2022 and references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices that have applications submitted and pending certain regulatory approvals are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities law including statements regarding events or developments that we believe, anticipate or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they were made, and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I’d like to turn the call over to Amir.

Thank you, Stephen, and welcome, everyone to Envista’s Q2 2022 earnings call. I want to start today’s call by thanking our employees for delivering another solid quarter despite supply chain disruptions, accelerating inflation and a severe COVID-related lockdown in China, our team delivered mid-single digit core growth expanded our adjusted EBITDA margins and successfully integrated our newly acquired intra-oral scanner IOS business. Our resilient performance is a testament to our strategic differentiation and our proven track record of execution. . Before I turn it over to Howard to discuss our second quarter results in more detail, I want to reiterate our long-term vision, provide some insight on current market conditions and offer a quick update on our progress toward our strategic priorities of accelerating growth, expanding operating margins and transforming our portfolio. At Envista, our focus is to partner with dental professionals to improve patients’ quality of life by digitizing, personalizing and demarketizing oral care. We’re committed to the dental community by spending a significant amount of time in the market, meeting the dental professionals to further understand their businesses, their workflows and their needs. I just recently returned from a road trip where I met with over 100 customers across the U.S. While there is no doubt that talk of inflation and potential for an economic slowdown is weighing heavily on clinician’s mind as they look out over the next 6 months to 12 months. It is also clear that currently patient traffic remains robust, and dental professionals remain confident in the long-term prospects of the industry and their businesses. Doctors in private and group practices continue to invest in their specialty treatments and are looking for ways to expand their capabilities, improving their workflows and digitizing their offices. It’s the opportunity to enhance their efficiency and the predictability…

Thanks, Amir. Before we begin, I would like to remind you that our second quarter results are prepared against prior year based on continuing operations, reflecting the sale of our KaVo Treatment Unit and Instrument business as discontinued operations. On a reported basis, second quarter sales increased 1.3% to $645.8 million. Sales in the quarter were negatively impacted, 3.6%, due to foreign currency exchange rates and acquisitions contributed 0.9% growth to reported sales. Core sales growth was 4% compared to the second quarter of 2021. Our year-over-year core sales growth reflects solid performance in our Specialty Products and Technology segment offset by weakness in our equipment and consumables segment. Our Specialty segment delivered core growth of 9.6%, driven by solid performance in our implants and core bracket and wire businesses and outstanding performance in our Spark clear aligner business. On a geographic basis, Western Europe delivered core sales growth of 11%, while North America increased 0.5%. North America was weighed down by its higher exposure to infection prevention and by modest destocking in our distributor channel. Our business in China was down 0.3% versus prior year due to the extended lockdowns in Shanghai. As expected, activity in China ramped up very quickly late in the quarter as Shanghai reopened. In Russia, we declined mid-single digit versus Q1 of 2021. This decline followed a strong Q1 driven by forward buying at the start of the conflict in Ukraine. Outside of Russia and China, emerging markets continue to grow nicely off pandemic lows, up approximately 20% versus Q2 of 2021. Our second quarter adjusted gross margin was 58.7%, increasing by 40 basis points compared to the prior year due to higher volume and favorable mix partially offset by the impact of inflation and our material costs. The adjusted EBITDA margin was 19.7%,…

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

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

And our first question will come from Elizabeth Anderson with Evercore ISI. Your line is open.

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

Yes. Happy to do that, Elizabeth. Thank you. What we are seeing, and as I mentioned, we have been traveling and talking to a large number of our customers and customers that they’re not currently buying from us. And what we are seeing is overall outlook is very positive. In fact, latest visits were with a 100 oral surgeons. Some of them are telling us that we have patients booked up to about October. So you have this challenge of specialist continue to see a ramp and continuation of a patient flow. And that’s what we have been seen. On implant placement, we see that a continuation of the growth as we go forward. And we are confident that what we are offering to really meet the requirements. The same thing on orthodontists. We're going to keep in mind what we are offering is really different than what the norm look like. We are very focused on a small number of orthodontists that they are – that’s all they do. They start the treatment by getting a CBCT understanding their patient anatomy before we offer – before they offer any type of solutions. If you look at that segment, we are continued to see momentum on a starts moving forward and as we have demonstrated that in Q2 as well. On the other hand, three macro events are really impacting the risk. And that’s why a change in guidance moving forward. Top of the list is inflation, increased rate of – increased rates is weighing heavily on capital equipment investment in the long run. We saw somewhere between 25% to 30% reduction in inventories in the channel between Q2, end of Q2 to beginning of Q1. So that’s one really important factor to see in here, capital equipment, as well…

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

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

Got it. Thank you.

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

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

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

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

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

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

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

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

All right, that's great. Thank you.

Sure.

Thank you. Our next question comes from Jon Block with Stifel. Your line is open.

Good afternoon.

Hey, Jon.

Hey, Howard. Maybe just for the first question, Amir, and sorry if you may have touched on this. But just talk to us on how trends played out throughout the second quarter. We're getting some of that like April might have had catch from Omicron and then there was a wave that might have hit some traction in June. But would just love your thoughts on how 2Q progressed? And then Howard sort of attack on to that. Just anything on the cadence for 3Q or 4Q? I mean, obviously, mid-single digit top line for the year, and that was sort of the number in 1H. Should it just be think about growth being linear throughout 2022? Or is there any sort of fluctuation between 3Q, 4Q as we adjust models for the back part of the year? And then I’ve just got a follow-up.

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

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

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

Yes. Thanks, Jon. We have a hypothesis that has not changed at all in that regard. The market was about $1 billion, growing double-digit. We knew and has been validated that it is less than 15% penetrated. And it’s penetrated on various geographies, various segments. For example, those that they do clear aligner majority of them, they do have one. But in many other segments, IOS is really not that penetrated. We knew also that there is significant price differentiation. And it is really obvious point solution versus fully integrated, complete solution and how this system we’re working open environment versus a close environment. And I know that what I’m referring to receiving file from others, sending file to others versus just been a co-system cylinder. So we knew a lot of that. It was validated. We did a lot of due diligence before we entered the market. When we started after the close, we selected and we knew exactly we needed to do three things. The number one thing that we wanted to do was expansion of the channel. Carestream IOS has less than 10% market share. And it’s an awesome product, over 30% EBITDA margin, whoever we talk to, they said the product is really good. The infrastructure for support, expanding it worldwide was just not there, specific in geographies like in the U.S. So we knew by going to a hybrid model like putting that part of our auto implant business as well as putting in our channel, we will take the first step in at least making it available to people who want to buy it. And so far, we have seen good uptake. The second part of this was about operational improvement. Even though it has a really strong reputation, we wanted to improve the…

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

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

Good. Thanks for the color.

Thank you, Jon.

Thank you. Our next question will come from Michael Cherny with Bank of America.

Hey, Michael.

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

Thanks, Michael. I’m not going to point to the past two to three years first before I answer that question. We started coming out of Danaher about 50% Equipment & Consumables being exposed to a lot more distribution, heavy equipment. In the past two years, we have completely shifted our portfolio. We took about 5% of our business in 2020, we basically moved away from it. We saw the KaVo Treatment Unit and Instrument and other a $400 million business. And we put ourselves, if you look at the exposure to market, we put ourselves in a very different place. A couple of acquisition has put us in a lot more specialty, a lot more direct higher-margin business, and that’s what we’re going to continue doing. Okay, upon saying that, the question is, what are we going to do in the next 18 months? Our long-term view of becoming the leading ortho provider with the combo treatment of a bracket and wire as well as Spark clear aligner has not changed at all. We think that, that combination provides unique differentiation both from a pricing as well as finish as well as quality of what we provide, the network that we have, the exposure that we have worldwide. So we’re not backing off at all in any of those investments. We’re being very prudent long-term versus short term and that is space. When we look at our implant placement part, we have made significant progress on the premium side. And a lot of it has been obviously due to commercial execution. TiUltra and XEAL, the surfaces have made a huge difference in there, and one is going to make a huge difference in the long run. So we’re not counting on a whole lot of new R&D to come in…

Thank you, Amir. And then just one more quick follow-up. I think I know the answer to this, but obviously, you talked about a lot of short-term variability. Any changes whatsoever, the long-term targets you laid out back in April at the Investor Day?

No, not at all. We think that high single-digit growth in – is very much within reach, we have said that 2025, we wanted to be high single-digit plus other years, double-digit growth, get our EBITDA be 22.5%, 23%. 50 to 75 basis point of growth. We don’t think anything has changed in the short term that moves our position that long-term commitment and perspective.

Great. Thank you so much.

Of course.

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

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

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

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

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

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

Thanks, Nate.

Thanks very much.

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

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