Q2 2022 Envista Holdings Corp Earnings Call
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Yeah.
My name is Chelsea and I will be your conference call facilitator. This afternoon.
At this time I would like to welcome everyone to in Vista Holdings Corporation second quarter 2022 earnings results Conference call.
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After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during that time Press Star then the number one on your telephone keypad.
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I will now turn the call over to Mr. Steven Keller, Vice President of Investor Relations Oven Vista Holdings.
Kelly you May begin your conference call.
Hello, and thanks for joining us on the call with US today are Amir <unk>, 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 dot and Mr. Ko Dot com. The audio portion of this call will be archived on the <unk>.
Investors section of our website later today under the heading events and presentations and will remain archived until our next quarterly call.
As announced on January .
2022 we have closed the divestiture of Kabul treatment Nielsen debt instrument business for the first and second quarters of 2022, and the full year of 'twenty 'twenty. One the results of this business are reflected as discontinued 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 investor's business, except for cash flow measures.
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 year over year performance.
Otherwise noted references in these remarks to company specific financial metrics relates to second quarter of 2022 and references to period to period increase their 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 Steven and welcome everyone to investors 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-19 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 I O S 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.
Provides 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 <unk>, our focus is to partner with dental professionals to improve patients' quality of life by digitizing.
Personalizing and democratizing or cure.
We're committed to the dental community by spending a significant amount of time in the market, meaning 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 vein heavily clinicians mind as they look out over the next six to 12 months is.
It is also clear that currently patient traffic remains robust.
In 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 treatment and are looking for ways to expand our capabilities, improving the workflows and digitizing their offices.
They see opportunity to enhance their efficiency and the predictability of treatments.
Dsos remain committed to opening new offices, but are limited by supply chain capacity constraints.
And the lack of his staff and dental offices.
While we expect there may be additional uncertainties in the market short term, we continue to believe that the dental market is resilient and has ample room to grow over the long term.
Turning to our Q2 progress with a uniquely positioned portfolio, our orthodontic business continues to deliver strong results.
Our core bracket and wire business grew low single digits as a result of our differentiated Damon solution.
The new Damon all too much system, which provides or to dawn is more control for faster and more precise finishing continues to gain share.
This innovative solution commands a premium price by improving debate or to Donnish move teeth.
Why do we are proud of the strength of our bracket and wire business is our spark a lineup business that continues to accelerate rapidly.
Again, delivering year over year core growth up over 100%.
It initially took us three years to achieve 100000, new spark case starts.
In the last six months as you have a sudden an additional 50000 cases and we expect to further expand our position.
The <unk> solution is gaining momentum as we partnered with top or <unk> professionals and clinics globally.
In Q2, we were proud to sign a long term agreement with the best somewhat not take an orthodontic clinic based in the Czech Republic.
So bad from what my take is a global leader in clear Aligner therapy and is responsible for more clear aligner cashed us than any other clinic in the ward.
This fact in partnership with the leading orthodontic clinics further validates the strength of the spark aligner solution.
Our solutions for implant based tooth replacement grew.
<unk> grew mid single digits in the quarter.
We continue to see robust growth in premium implants, and our regenerative solutions.
In addition to our strong commercial execution. We also signed two important agreements to further our mission of partnering with dental profession profession.
Professionals to digitize personalize and democratize dental care.
First we entered into a long term agreement with dental Corp.
North America is the only publicly traded DSO.
Based in Canada, dental core as more than 500 offices and he is the leader in the placement of implants in Canada.
To get a Nobel biker and dental Corp have trained hundreds of clinicians and created a network that offers the latest tooth replacement solutions from Nobel Byker.
This agreement extends our partnership and further strengthen dental corp's ability to provide the highest quality of care to patients.
Earlier. This month, we also announced that normal biker and Boston University.
Partner and upfront Tropic initiatives for the next decade.
Through this partnership Nobel by here, we provide $4 million $400000 per year in products as in Con educational grant to the Boston University's Henry M. Goldman has screwed up dental medicine G. S. P M.
The students and residents at G. S. T M, you'll have an opportunity to place and restore implants using this grant.
This partnership it help US train the next generation of implant places in North America.
In addition.
And to driving growth and investing in our strategic initiatives, we remain intensely focused on expanding our margins.
In Q2, 2022 we achieved an adjusted EBITDA margin of 19, 7%.
This represents a 40 basis point of margin improvement versus Q2, 2021.
The Investor business system E B S and his focus on continuous improvement drives our execution.
It helps us to offset economists here the impacts of inflation and supply chain challenges, while supporting our ability to invest for long term sustainable differentiation and growth.
In the quarter, usually be S to drive discipline in pricing.
Human greater than 200 basis point of net pricing.
Further we took additional actions to streamline our organization and ensure that we can continue to invest in our strategic priorities, while managing inflation and expanding our margins.
We optimize our reach and our organizational structure and de layered all operating companies to improve customer experience and provide us more flexibility as we move throughout the year.
We're proud of the work we have done to date and remain focused on further optimizing our operations to effectively deal with the challenging macro environment.
While we expect persistent inflation related concerns supply chain challenges and geopolitical issues to impact 2022 and beyond with confidence that our continuous improvement culture rooted in E. P. S will allow us to deliver short term results and invest in our long.
Term priorities.
The transformation of our portfolio continues.
The acquisition of chair Shamed Dentals iOS business has been successfully integrated into N Vista, and we have relaunched the product under the <unk> brand name.
Yeah.
We intend to integrate the death, Texas scanner into a D. T X platform to further simplify and optimize our specialty implant and ortho workflows.
During the period.
That we owned this business in the second quarter, we achieved $5.5 million in revenue. Despite the lockdown in Shanghai that limited our ability to source of scanners.
With the factory opened since early June and a scanner is now being built in bulk we are well positioned to drive above market growth in second half of the year.
We see significant interest from clinician and our distribution channel.
The Texas, Iowa solution is well regarded the scanner.
Provide providing high performance at an attractive price point.
The 3800 wireless Iscan I recently received a 2022 red Dot design awards that recognize it's lightweight convenient and effective design.
Did you were you specifically called out is balanced symmetry and minimalist elegance studies not only practical but also a pleasure to operate.
With our attractive portfolio and robust R&D pipeline, we expect the Texas, Iowa solution to accelerate our growth and enable us to partner with clinicians to digitize personalize and democratize dental care.
On July five we closed the acquisition of Austin <unk> biomedical.
U S based manufacturers of regenerative solutions.
This acquisition is consistent with our strategy of focusing on the fastest growing segments of the dental market.
Providing dental professionals with complete workflow solutions.
<unk> is a better risk.
The company, but the solid brand and history of innovation and a strong ties with leading clinicians.
This business is complementary to our implant offerings and we further position us as the leader in implant based tooth replacement.
It provides and this is a significant opportunity to create value for patients our clinicians.
Clinicians and our shareholders.
While we are excited about the strategic moves we have made today, we see opportunities to further improve our portfolio.
We are committed to pursuing a disciplined approach to capital deployment.
We utilize our E. B S driven M&A approach to manage a robust pipeline of inorganic partnership and investment in our <unk>.
Actively cultivating new opportunities.
I will now turn the call over to Howard to go through our second quarter financials and provide more details on our segment performance.
Thanks Omar.
Before we begin I would like to remind you that our second quarter results are compared against prior year are based on continuing operations, reflecting the sale of our combo treatment unit and instrument business as discontinued operations.
On a reported basis second quarter sales increased one 3% to $645 8 million.
Sales in the quarter were negatively impacted three 6% due to foreign currency exchange rates and acquisitions contributed <unk>, 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 nine 6% driven by solid performance in our implants and core bracket and wire businesses, an outstanding performance and our spark clear aligner business.
On a geographic basis, Western Europe delivered core sales growth of 11%, while North America increased 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 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 digits versus Q1 of 2021.
Decline followed a strong Q1 driven by forward buying at the started the conflict in Ukraine.
Outside of Russia, and China emerging markets continue to grow nicely our pandemic lows.
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 in our material costs.
The adjusted EBITDA margin was 19, 7%, which is approximately 40 basis points higher than Q2 of 2022 point 2021 and in line sequentially.
As previously discussed in Q2, we continue to invest in our long term innovation, while increasing spend on travel and in person customer facing activities.
Our adjusted EBITDA was also negatively impacted by onetime costs related to investments in our newly acquired deck. This iOS business.
The overall investment was slightly lower than expected as we effectively redeployed available resources, resulting from the Cabo divestiture towards the iOS business.
In Q2, we also took actions to both eliminate the remaining stranded costs and further streamline our organization to ensure that we can continue to expand our margins while investing in long term growth.
Our second quarter <unk> adjusted.
Adjusted EPS was <unk> 48.
Compared to 46 in the comparable period of the prior year.
Our specialty products and technologies segment core revenue increased by nine 6% compared to the second quarter of 2021, driven by solid growth in both our implants and core bracket and wire businesses, along with continued impressive growth from spark in.
In the second quarter, our combined orthodontic businesses grew 17% versus prior year and with our core bracket and wire is growing low single digits, while Sparc revenue continues to accelerate.
Despite the tougher macro environment, we remain confident that our spark business has immense potential to drive growth over the long term and we are continuing to invest in order to capitalize on this opportunity.
Our implant based tooth replacement business grew mid single digits in Q2, 2022 versus Q2 of the prior year driven by strong growth in all emerging markets, excluding Russia with more modest growth reported in the developed markets.
In addition to the growth in core implants, our regenerative business continues to accelerate.
Our specialty products and technology segment adjusted operating profit finished at 22, 8% in the second quarter. This is down 120 basis points from Q2 of 2021, primarily due to the significant increase in investment the long term growth to drive long term growth as well as the increase in customer face.
Activity, we participated in the quarter sequentially, we drove 40 basis points of margin improvement versus Q1 of 2022 in this segment.
Our second quarter equipment, and consumables segment core sales decreased by four 7% compared to Q2 of 2021.
While price positively impacted sales by approximately 4% lower volumes across our imaging Distortive and infection prevention businesses saw a core sales dropped compared to the second quarter of 2021.
From a geographic perspective growth was down in both developed and emerging markets.
Our traditional imaging business declined mid single digits in the quarter.
We saw very modest growth in North America, offset by a meaningful decline in both Europe and China.
Europe's weakness is attributed to the inflation and answer certain macro environment complicated by the Russia, Ukraine conflict, while China was meaningfully impacted by the Shanghai Lockdown.
As Amir mentioned, our new iOS business delivered $5 $5 million in the quarter and we are very pleased with the outlook of this business.
Clinicians remain very interested in investing in iOS solutions to help improve their overall workflow.
Our restorative and endodontics business decline.
A decline in the quarter, primarily driven by distributor Destocking in North America, and weakness in China related to the Covid Lockdown.
Our business in Western Europe was up modestly and other emerging markets performed well in the quarter.
As expected sales of our infection prevention solutions continue to decline from elevated pandemic demand. Despite the decline in revenue versus prior year Q2 inventory sellout trends reported by our distribution partners indicate that we are gaining market share in our core dental market.
Further we saw a sequential increase in revenue of over 25% versus Q1 of 2022.
This supports our belief that sell in and sell out are more balanced and that this business should return to growth in the second half of 2022.
Long term, we continue to expect this business to grow mid single digits.
Equipment <unk> consumables adjusted operating profit margin was 21, 7% in the second quarter of 2022 versus 19, 7% in Q2 of 2021 solid margin improvement in imaging restorative and infection prevention solutions was supported by the increased price versus.
Prior year.
These improvements were partially offset by material cost increases related to inflationary pressure on commodities and materials that impacted our businesses.
Overall, the inclusion of the iOS business gives us confidence that our equipment consumables business will grow faster and be more profitable as we move forward.
In the second quarter, we generated $11 9 million of free cash flow and ended the quarter with more than $500 million in cash after closing the care stream dental iOS acquisition.
Free cash flow in Q2 was lower due to cash restructuring costs transactional costs related to our acquisition.
Timing of payments of certain incentive compensation and increases in our accounts receivables related to the timing of customer order and payment patterns.
Overall, our balance sheet is very strong and we have ample liquidity, even after closing the acquisition of the iOS business in Q2 and the <unk>.
Osteogenic acquisition in early Q3.
We have the flexibility to pursue additional inorganic growth opportunity when the right assets become available.
Now I'll turn the call over to him here to discuss our outlook for the balance of the year and provide closing comments. Thanks.
Thanks Howard.
While we are pleased with our performance here today and are confident about the long term resilience of the dental market.
Mindful of macro environment.
The related short term challenges continued supply chain issues.
Persistent inflation geopolitical risk and the increased risk of additional to be Covid lockdowns in China are impacting the prospects of the second half of 'twenty to 'twenty two.
Given this background and increased downside risk to the demand we are updating our guidance for the balance of 2022, we now expect our core sales to grow mid single digits for the full year 2022.
Our newly acquired businesses, including both care stream dental this iOS and osteogenic are expected to deliver 2022 sales of between $50 million to $60 million.
We remain committed to achieving an 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 through active and disciplined capital deployment.
We are positioned to be the leader in both orthodontics and in implant based tooth replacement.
A complete workflow offerings, including imaging and diagnostic solutions will improve the productivity of dental professionals, while empowering them to provide personalized and predictable treatment for each patient.
Our ABS 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 professionalize professionals to improve patients lives.
By Personalizing digitizing democratizing dental care.
Their focus on delivering long term value for patients our customers are.
Our employees and our shareholders.
Thanks, Amir that concludes our formal comments, we are now ready for questions.
At this time, if you would like to ask a question. Please press the star and one Keith on your Touchtone phone.
You may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one to ask a question.
And our first question will come from Elizabeth Anderson with Evercore ISI. Your line is open.
Hi, guys. Thanks, so much for the question I guess my first question. Thanks for all the color on the drivers of the different segments and end product area. This quarter. I think you know one of the key question is when thinking about you know with the uncertain macro environment out there as 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 in implants, and orthodontics et cetera.
In terms of the back half of the year.
Yeah happy to do that if it's a bit thank you.
<unk>.
What we're seeing and as I mentioned, we have been traveling and talking to a large number of our customers and.
<unk> that theyre not currently buying from us and what we have seen is overall all to look at.
Is very positive in fact.
Latest ER visits or with 100 or surgeon some of them are telling us that we have.
Patients booked up to about October .
So you have this challenge of.
Especially as continue to see a ramp and continuation of our patient flow.
And that's what we have been seen.
<unk> implant.
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 their requirements.
The same thing on orthodontists.
We've got to keep in mind, what we are offering is really different than what the norm looks like we are very focused on a small number of orthodontists.
That's all they do is start the treatment by getting a CVC T understanding the patient anatomy before we offer before they offer any type of solutions.
Yeah.
If you look at that segment you continue to see momentum on our starts moving forward then as we have demonstrated that in Q2 as well.
And then a hand three macro events are really impacting the risk and that's why the change in guidance moving for top of the list is inflation increase rate of increased rates is weighing heavily on.
Capital equipment investment in the long run.
We saw some are between 25% to 30% reduction in inventories in the channel between Q2 end of Q2 beginning of Q1.
So that's one really.
The important factor to see in here capital equipment as well as in inventory reduction.
I think the European economy, and risks associated with the energy supply is going to weigh heavily in this industry.
Now as expected European out on vacation and the forecast what we see after September it's just not as clear as what we had seen in the past.
Waiting for duster set out to see where this ends up and last but not least is a slower recovery in China.
And then there is additional CBD locks risk of locked lockdowns. So in order to put all of this together about 14%, 15% of our business is Russia and China.
Unpredictable, we're not sure exactly what it's going to and we got the European challenges ahead of Us in North America, what we are seeing a continuation of our growth both on a DSO as well as especially as we're trying to balance all of these and make sure that we land in a place that we can continue to make it back.
<unk> deliver margin see the all in the long run the growth opportunities and make sure that we come onto this situation much stronger as we did in 2022.
It's a little bit of a prospective and macro view that we have under market.
With value segment, and how we are managing our investments and priorities.
That's super helpful. And then maybe one for Howard or are you.
As well you mentioned the distributor destocking in the quarter could you give us a little bit more color on like what happened with yesterday's Destocking. There and then also how long do you expect that to come.
Last didn't 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 on two at about 85% of our overall portfolio our consumables.
Only about 15%, what we call equipment of about five to 10000 dollar towards equipment normally distributors do not cheap any.
Stocking they placed an order with deliberate directly.
The other areas other traditional consumable as well as the infection prevention.
The natural inventory that distributors Kip Europe U S. Other geographies have come down as I mentioned, 25% to 30%.
During the quarter, obviously, they are preparing to deal with the uncertain environment. Thus preserving cash but also there is a proxy of play as Howard talked about about infection prevention, our expectation is now with the position at.
We have known all along the sell out and sell and match, we have really good visibility on it but those are some of the challenges that we're dealing with as we go the delta in Q4 with dealing with as we go forward with.
Think this managing distribution tightly managing inventory tightly 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.
Yes, we can hear you Jeff go ahead.
Yeah, great. Thank you I'm in a car so I just wanted to make sure. So.
Just a couple of questions here.
When I look at your updated guidance it looks like Youre kind of guiding to very similar mid single digit core growth at a company wide level over the second half Thats almost exactly what you delivered in the first half obviously, you just laid out three or four things in the in the quarter and going forward. They are a little more concerned about so how do you keep up that that kind of mid single digit growth it seems to.
Implied in your updated guidance for the back half of this year against what seems to be pretty stable comps is that as the destocking comes off as China comes back those help offset some of your other concerns is it kind of as simple as that.
Tap is.
You're absolutely correct, we can expect to see a little bit of uptick in second half versus the first and the reason for it is.
Let's take a look at our businesses.
We are confident that the auto business is going to continue.
To progress and get better as we go for rethink that.
That momentum that we've seen on the spa. The number of active doctors are ramping up we are signing up new doctors and as far as growth is just something that we are building capacity have continued to build capacity that acceleration of growth is something that we're expecting to be in.
Ongoing for years to come not only second half we expect to see.
First half was negatively impacted by two elements one was.
China.
Shoe and we are assuming that there is no more locked down in second half if that happens then we got to deal with it as it comes.
And also the Ips are infection prevention.
<unk> had it in the first half the core growth was negatively impacted by about 200 basis point due to infection prevention inventory correction. So thats. Another positive thing that we're seeing the second half the rest of our business implant placement continues to make progress we're fairly confident.
And that that would move forward.
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. So you know over each of the last two quarters, we are seeing some greater traction.
On the pricing front and we anticipate that that will continue also here in the second half.
Yes, that's helpful Howard and Amira, both with Howard.
Segue right into my my follow up question that I wanted to ask on pricing in the plus 2%. This quarter, how does that compare versus one two I think you were talking to another round of increases April one. So just what was it in <unk> versus the plus 2% this quarter and do you see that staying at plus 2%. The rest of this year does that tick higher throughout the year. Thank you.
Yes.
Thanks, Jeff we did actually see an incremental step up in our pricing traction in the second quarter.
Seeing even in the first quarter, we saw a step up from what we saw in the second half of last year as well so.
The processes in place and we feel good that each of the Opco 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.
As you indicated Jeff.
Had a couple of different price increases and we think that those will hold into the second half as well.
Alright, that's great. Thank you.
Sure.
Thank you. Our next question comes from Jon Block with Stifel. Your line is open.
Good afternoon.
Oh, Hey, Hey, Howard maybe just for the first question Amir I'm.
And sorry, if you 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've had catch up from Omaha, and then there was.
A wave that might hit some subtraction in June but would just love your thoughts on how <unk> progressed, and then how were treated as a tack onto that just add anything on the cadence for <unk> or for Q. I mean, obviously mid single digit top line for the year and that was sort of the number in one age should it just be think about growth being linear throughout 2020.
Two or was there any sort of fluctuation between three Q4 Q as we adjust models for the back part of the year and then I've just got a follow up.
Okay.
So the Q2 things so.
China Lockdown.
China did not open Shanghai did not open to early June .
So March April most of March April and May you basically had very limited business two way end of the quarter. So he was not linear at all it was a we.
We had orders in our hands, we have customers waiting in the last three weeks of the quarter four weeks of quarter, we were able to really catch up and make sure that those appointment I will not cast of people have.
<unk> in the hand tools and half the other part of this.
We're talking about the Q2 two is specifically.
Areas, such as consumable business as well as and.
And as far clearer liner and auto we did not see any major changes in.
The rap the continuation and yes, we saw a little bit of a change in inventory, but not on the sellout.
Traditional consumable or even on a start.
Equipment, I'm, sorry on traditional consumable or a spark or bracket and wire but.
But we did see a step down on it.
Shipment.
Started to liberate the stronger start becoming a slower and slower as we went for throughout the quarter and I think it was a continuation of the news in the market.
A little bit of a conservatism.
And on the part of investment as well as some challenges.
On opening new de Novo's resources getting.
It's simply getting building the capacity that they need so simple answer in Q2, we did not see that linearity that we add the kind of a cost center, but he values by segment if values by geography, and as we started looking at those strikes kind of counter measure and manage it throughout the quarter.
Now for the rest of the year, So John I would say that as it relates to phasing in the second half that.
Typically our Q3 quarters, a little bit lighter.
Facing standpoint, with the holidays taken in much of Europe during that period as well, but we do see that we 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 on the phasing and then does that mean, you're just taking a step back I'd love your thoughts on the iOS business, maybe just talk to US you you announced the deal around year end I think it closed in April and then here we are arguably whatever three months later a lot going on in the world over the past seven or eight months the world and I think even specifically the I O S.
So where do you stand today, what have you guys achieved in terms of maybe the early what you wanted a chop with the deal and the integration and how do you feel on this going forward. What do you think about your your long term growth rates and goes with the business.
Yeah.
Thanks, Jeff we had a hypothesis that has not changed at all and in that regard we knew the market was about $1 billion growing double digit as we knew and has been validated that it is less than 15% penetrated and he has penetrated in various geographies. Various segment for example, those that they do clear.
Elena majority of them they do have one.
But in many other segment 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 on how these systems, we're working in an open environment versus a CRO.
Those environment, then and I know that you know what I am referring to receiving five from others, sending five to others versus just being a closed system selling them. So we knew a lot of that it was validated we did a lot of due diligence before we entered the.
The market.
When we started after the close we selected and we knew exactly we needed to do three six the number one thing that we wanted to do was expansion of the channel.
<unk> is less than 10% market share.
And it's an awesome product over 30% EBITDA margin.
We talked to they said the product is really good the infrastructure for support expanding the board by what's just not there are specific in geographies like in the U S. So we knew by going to a hybrid model I put in that part of our ortho implant business as well as put.
In our channel who will take the first step in at least making it available to people who wanted 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.
Wanted to improve the operational capabilities improved gross margins reliability and here we have taken the first step, but as you can imagine the lockdown has limited our ability, but we have built now a service support capabilities around it we're looking at the demos that exist everywhere.
To make sure that they're up to date and up to speed and we're going to continue to work on that this is the hallmark of UBS and what we stand for and I think we can do a lot better job in here last part is about portfolio on R&D.
As a robust hardware. It has it is software that it is a really good software today, but we need to any graded into D. T X, we need to integrate it into our workflows and we are working on it to make sure that this is going to happen as quickly as possible.
We've got a great product.
<unk> market.
Good price performance in.
And a better channel now with a better productivity and with the R&D Bacchanalia is back in this.
We think you know we've got something in their hand that he is going to enable us not only grow the Irish by itself, but help our specialty businesses in the long run we're really pleased with what we have done in here, so far and expect great growth overtime as all come off this acquisition and integration.
And then maybe if I can just quickly ask a clarification question I think last quarter, you had iOS contributing 35 to 45 mill for the rest of the year. I think you said both businesses I believe including of Osteo as 50 to 61 is that correct and two to the underlying iOS change upwards.
Anyway, Thanks, guys.
No you're absolutely correct. Those numbers are absolutely right, 35% to $45 million of iOS about $5 $5 million in Q2 since we owned it we think that the Asa Genesis about a $15 million for rest of the year. So you 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 there not been considered as part of our core growth until about a year. After the acquisition, but they are really changing the format. The mixture of our business going forward. The iOS by itself. It was going to add about a 50 basis point of our growth in the law.
Long run about 30 40 basis points of our margin Osteogenic acquisition is.
Almost doubling the size of our.
Biomaterial, just give you a little bit of a feel for it for every.
Implant that is placed 75% to 80% of them they either need at ball.
A rebuild or a membrane and if you look at the price ratio is about a five to one for every $5 of implant every dollar of implant you normally sell 2025% of the bio material. We have been so under index in that area now we haven't and we are.
Less than 10%, even with our suggestions now we have an opportunity to really ramp that up you've got about 900 to a $1 billion worth of implant business and very small presence in biomaterials combination of these two acquisition really puts us in a different place as we go forward.
All good thanks for the color.
Thank you John .
Our next question will come from Michael Cherny with Bank of America.
Good morning, and thanks Ross.
Hey, Thank you for all the color so far.
I wanted to take a little bit maybe more of a medium term basis call. It 18 months or so 24 as you're thinking about your R&D efforts, especially given the strength <unk> had in spark integration on Texas iOS as examples how do you think about the bifurcation of products over time and the reason I'm asking is as all the themes of this call have.
Been clearly, there's a level of uncertainty coming into the market regarding current end market demand is 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 and Vista position to be able to bifurcate both the high end and low end of all of the different end markets you plan.
Thanks Mark.
I'm going to point.
For the past two to three years first before I answer that question.
You started coming out of Danaher every day about a 50% equipment and consumable.
<unk> been exposed to a lot more distribution heavy equipment in the past two years, we have completely shifted our portfolio.
You too.
About a.
5% of our business in 2020, we basically moved away from it we sold the combo treatment instrument.
And another for.
$400 million business, and we put ourself, if we look at exposure to market, we put ourself in a very different place couple of acquisition has put us in a lot more specialty a lot more to Iraq 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.
<unk>, the leading auto providers, the combo treatment of a bracket and wire as well as spark clear liner has not changed at all.
I think that that combination provides unique differentiation.
Both from a pricing as well as finish as well as quality, 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 investment.
We're being very prudent.
Long term versus short term and that space. When we look at our implant placement Park, we have made significant progress on the premium side.
And a lot of it has been honestly due to commercial execution.
Ty Altra and seal.
Surfaces have made a huge difference in the end 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 here and changed our model as we go forward.
Execution Ebs at the core of what we do we have an opportunity to really ramp up our value implant organically as well as inorganically to bid that segment to become an important part of our growth going forward and as I mentioned, we have really shifted our.
Traditional equipment to be part of the overall of what we offer end to end solution.
From an R&D perspective, we have been very thoughtful.
Doing things not because we want to be an equipment provider, but doing things allows us to optimize the entire workflow. That's why we're putting so much energy on software and integration open architecture platform.
We prefer people buy our products, but regardless if you want to use other company's product, we still want to improve productivity and predictability.
Dental offices Dsos group practices universities.
So.
<unk> talked for where to invest how to manage these.
But short answer in the long run I think we have a clear eye towards 2023 2020 for 2025, and we see the approach that we've taken in the past several years is going to help us to become a much better company from a growth margin perspective and truly differentiate it.
That practitioners want to do business with and partner with for the long run.
Thank you Amanda just one more quick follow up I think I know the answer to this but obviously you've talked about a lot of short term variability any changes whatsoever to long term targets you laid out back in April at the Investor Day.
No not at all.
Think that high single digit growth.
In.
It's very much within reach we have set the 2025, we wanted to be high single digit plus.
Although years double digit growth get our EBITDA be 22, 523% 50 to 75 basis point of growth. We don't think anything has changed in the short term that moves our position from that long term commitment in perspective.
Great. Thanks, so much.
Of course.
Thank you.
Our last question will come from Nathan Rich with Goldman Sachs.
Hey, good afternoon, I'm, Aaron Howard thing Thanks for taking the question.
I guess I'm, just trying to tie things together. It seems like there are really three things that had a pronounced impact on sales in the second quarter.
Lockdowns in China. The pull forward you mentioned a sales in Russia and in the first quarter and the Destocking effects I guess is it possible to quantify the impact of 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 you know.
I think one of the things that really stood out was the performance of the specialty segment.
Amir you talked about the strong volumes as specialists are seeing in traction that you've made in the DSO in large group practices I guess, how do you feel about your ability to continue to drive demand for your specialty portfolio.
In a in a softer market market backdrop, especially if that persists.
For a longer period of time. Thank you.
So maybe I'll take the first part of that question then I 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 have.
We seen and grow double digit 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 is a substantial buildup and pull in.
You know customer generated orders that came in in the first quarter that subsided here in the second quarter and so on an aggregate basis first half I think that thats 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 and when we talk about the infection prevention I'm clearly continuing 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 out.
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.
Taking down in the inventory side as it relates to the rest of the business as well by a few of our large distributors should have been worked out and we see that.
In the second half that would get back to normal growth as well.
And second question, how do we <unk>.
<unk> generated demand let me let me just give you some statistics in here and maybe that would be helpful.
In Q2, the sequential growth.
For spark.
It was 27, 8%.
<unk>.
Production output cases shipped.
And if you look at.
New doctors.
Close to about almost double digit new doctors being added.
Active doctors.
Couple of digit just adding to what they ought to have been doing so keep adding new doctors.
Or was that they are in their continued to do more and more cases.
And.
We have seen that trend to continue.
There's nothing in there that has caused us to change our view.
That product category.
If you look at our traditional bracket and wire.
Three years prior to Covid it was growing mid single digits.
And we have seen a similar performance Damon the Ultima is really making a difference. So our orthodontist overall franchise is doing a really good job continuing to make progress taken share and because of the segment that we are focused because of how we go to market.
And the training and education now come back on the implant side.
Majority of customers that we deal with it.
They are looking for way to place more implant.
Utilizing the same assets that we have they have.
We look at Dsos. They wanted to place more impact you go to southeast group practices, they want to do more full arch.
That is possible through digitization.
Using guided navigating a surgery.
Using AI uses stimulation should debate 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 wanted to gives us confidence in what we see on the demand generation going forward, we have expanded our traditional consumer reach signing up additional distributors in Europe and other geographies.
Yes.
Given what we have now on the equipment is 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.
Okay, and one quick follow up for Howard.
You know on the margin you guys as always I think operate with expense discipline.
You mentioned that.
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, certainly.
We have confidence that we will take the actions required to go ahead and deliver that in Atlanta, staying at 20% despite making committed.
Long term investments as of mirrors mentioned, we will continue to fuel all of 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, we take them across different areas as well and so again overall on balance we believe that we'll be able to hit the 20% adjusted EBITDA margin for the full year.
Thanks very much.
I think thats.
I think we're all the 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 had 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.
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