Q1 2023 Envista Holdings Corp Earnings Call
Speaker 1: ??
Speaker 1: We further hear that Clinicians and Business Owners in both private and group practices, institutions, as well as the SOs, remain excited about the long-term prospects of the dental market. It sees significant opportunities to grow their business by investing and expanding their specialty treatment offerings. The further see opportunities to enhance their capabilities, optimizing their workflows and digitize their offices. While the dental community remains confident in the long-term, they are also mindful of the short-term uncertainty driven by higher interest rates, the lingering risk of a recession and the various geopolitical risks occurring around the world. This uncertainty is a very important factor for the health of the community. The short-term uncertainty is expected to create a degree of volatility as we move throughout 2023. One area that I think is worth providing additional insights into is the Chinese market. Patient demand in China was very soft in the early part of Q1 as a country navigated its way through the COVID-related slowdown. As more dental offices reopened and people became more comfortable, seeking out care. Overall, we expect patient volumes in China to accelerate throughout 2023. However, we do expect some volatility as we believe some consumers may deprioritize spending on dental care in the short-term to focus their spending and travel.
Speaker 1: or other leisure activities that there were less available to them during the pandemic lockdowns. With regards to BBP, today the program is playing out largely as expected. We have seen significant reduction in prices in the public sector as well as the anticipated spillover.
Speaker 1: into the private market.
Speaker 1: What is too soon to be sure, the early indication is that demand for implants should increase as we pick up additional share in the public sector and the VBP program positively impacts long-term patient demand.
Speaker 1: Overall, we remain optimistic about the long-term growth of our China business, and we believe that after 2023, China will once again be a growth engine for Envista.
Speaker 1: at a sold-out event in VISTA Summit. During the event, we provided high-impact training in orthodontics, implantology, endodontics, and digitally enabled clinical procedures, as well as introduce clinicians to the latest advancements in dental care. These type of events allows us to engage with our customers to learn, educate, and lead the dental community, ultimately enhancing our ability to drive long-term growth.
Speaker 1: A uniquely positioned orthodontic business continues to perform well delivering double digit core growth despite the challenges in China and Russia.
Speaker 1: A Daemon Ultima system is making inroads in both North America and Europe as we convert more customers to this powerful and efficient system.
Speaker 1: This innovative solution commands a premium price by improving the way orthodontists move teeth and demonstrate a commitment to innovating for orthodontic community.
Speaker 1: Our Spark Align-Air business continues to perform well, delivering strong sequential growth as well as over 70% year-over-year growth.
Speaker 1: In the quarter, we added a record number of active new doctors, setting us up for continued growth in 2023 and beyond.
Speaker 1: Our solutions for implant-based tooth replacements decline low single digits in the quarter drop down by significant declines in both Russia and China.
Speaker 1: Our implant businesses in Europe perform well, and we believe that we are outperforming the market in Europe driven by disciplined commercial execution.
Speaker 1: We are benefiting from our focused and providing comprehensive solutions.
Speaker 1: For implant-based tooth replacement and as a result we are seeing growth in both digital solutions and regenerative materials. The osteogenic business we acquired last year is performing well and we are starting to benefit from an EBS driven focus on commercial execution and lean management.
Speaker 1: Going forward, we expect our implant franchise to grow at or above the market.
Speaker 1: Adjusted EBITDA margins in the first quarter decline 150 basis point to 18.2%.
Speaker 1: A temporary decline was anticipated and is primarily driven by lower volumes as well as our long-term investments in growth.
Speaker 1: Each of our businesses remain focused on using EBS to optimize their operating structure and improve productivity.
Speaker 1: Our equipment and consumables, E&C business, provides a case study in EBS at work.
Speaker 1: By sales declined in the E&C segment this quarter are adjusted to offer the margins increase 110 basis points.
Speaker 1: The increase was driven by systematic focus on driving margin expansion through price optimization, temporary cost controls, the emphasizing of non-strategic and less profitable businesses, and geographies and structural cost reductions.
Speaker 1: We are confident that we have increased the long-term profitability of the ENC segment and expect margin to further expand as the market for large equipment stabilizes and are more profitable inter-oral scanner, Iowa's business, continues to accelerate.
Speaker 1: We expect margin to expand as we move throughout 2023.
Speaker 1: and we remain on track to deliver a full year guy of greater than 20% adjusted the EBITDA margins for the year.
Speaker 1: We will continue to invest for long-term growth while further optimizing our operations to deal with volatile macro environment.
Speaker 1: We remain focused on building a stronger, differentiated, and more growth-oriented portfolio.
Speaker 1: A two most recent acquisitions, DexSIS and O.S. and O.S. continue to perform in line with our expectations.
Speaker 1: delivering combined sales of greater than 20 million dollar in the quarter. As we move through Q2, the Texas IOS business will be included in our growth results followed by our Sygenics in Q3.
Speaker 1: Combined, both businesses are expected to contribute over 75 basis points of a core growth to Envista in 2023.
Speaker 1: While we are excited about the strategic moves that we have made today.
Speaker 1: We see additional opportunities to further improve our portfolio.
Speaker 1: We are committed to pursuing a disciplined approach to capital deployment. We utilize our EDS driven M&A approach to manage our robust pipeline of inorganic partnerships and investment and are constantly cultivating new opportunities. I will now turn the call over to Howard to go through our first...
Speaker 2: quarter of 2022 on a recorded basis.
Speaker 2: The year over year declining for sales was primarily the results of weakness in China and Russia as well as general weakness in demand for a large capital equipment. It is noteworthy that excluding the impact of Russia and China, our specialty products that I can technology segment grew 7% driven by the strong performance.
Speaker 2: in Spark Aligner business. Geographically, as anticipated, we declined substantially overall in both Russia and China.
Speaker 2: The decline in Russia was primarily due to unusually strong performance in the first quarter of 2022 as clinicians pre-purchased inventory at the start of the conflict in Ukraine. In China, demand was down significantly in the quarter as the country managed through COVID-related slowdown. As Amir mentioned,
Speaker 2: Demand was very slow in the first part of the quarter, but started to recover later in the quarter.
Speaker 2: We expect activity in China to accelerate throughout 2023.
Speaker 2: Outside of Russia and China, other markets were mixed. We saw double digit growth in other emerging markets as well as high single digit growth in Europe .
Speaker 2: In North America, sales declined mid-single digits weighed down by its relatively high exposure to our traditional imaging business. It is important to note that our imaging business had a strong performance in the first quarter of 2022.
Speaker 2: as he picked up incremental share through our effective supply chain management and were not yet faced with the impact of higher interest rates.
Speaker 2: Our first quarter adjusted gross margin was 58.1%, which is down 110 basis points from prior quarter or prior year.
Speaker 2: The decline in gross margin was primarily attributable to lower volumes.
Speaker 2: Unfavorable mix due to the slowdown in sales of specialty solutions in China and Russia.
Speaker 2: favorable mix due to the slowdown in sales of specialty solutions in China and Russia, and continued investment.
Speaker 2: in our long-term growth. Our adjusted EBITDA margin was 18.2%, which represents 150 base points decline versus Q1 of 2022.
Speaker 2: Our adjusted diluted EPS in the quarter was 38 cents compared to 47 cents in the comparable period of the prior year. The lower operating margins combined with an increase in interest expense from higher interest rates drove the reduction in EPS in the quarter.
Speaker 2: Core revenue and our specialty products and technology segments grew by 3%.
Speaker 2: In the first quarter, our combined orthodontist business grew more than 12% with Spark continuing to expand rapidly. Our implant phase 2-3 placement business declined low single digits in the quarter, negatively impacted by both China and...
Speaker 3: There's aileroned Chinese American
Speaker 2: Adjusted operating profits in the segment was 21.6% in the first quarter.
Speaker 2: This is down 60 basis points from Q1 of 2022, primarily due to the lower sales from China and Russia, as well as the continued investment.
Speaker 2: to drive long-term growth. Turning to our Equipment and Consumable segment.
Speaker 2: Core sales in the first quarter decreased 11.7% compared to Q1 of 2022. The decline in sales was due to continued slowdown in equipment volumes as well as modest decline in our consumable sales.
Speaker 2: Our traditional imaging business declined double digits in the quarter with lower volumes across most geographies.
Speaker 2: The lower growth was partially attributed to strong performance in Q1 of 2022, as well as macrohead wins, including inflation, rising interest rates, COVID related challenges in China, and the geopolitical uncertainties caused by the conflict in Ukraine.
Speaker 2: Further, we continue to de-emphasize non-strategic geographies and concentrate our efforts in markets where we can build a long-term, sustainable competitive advantage. This allows us to accelerate both growth and margins.
Speaker 2: over the long term.
Speaker 2: Our new Dexas iOS business performed in line with expectations in the quarter, and we continue to make investment to set this business up for long-term success.
Speaker 2: We remain focused on expanding our reach and optimizing our global distribution.
Speaker 2: Clinicians remain very interested in investing in iOS solutions to help them improve their overall workflow.
Speaker 2: The Dexas IOS solution is well positioned to outperform the market and we anticipate this business will continue to contribute to our poor sales growth in 2023 and beyond.
Speaker 2: On the consumable side, we declined low single digits with strong growth in infection prevention solutions offset by relative weakness from restorative and endodontics.
Speaker 2: Globally, we believe that the distributor sellout of our consumable solutions continues to outpace the market.
Speaker 2: Channel inventories remain healthy and we expect this business to accelerate throughout 2023. Equipment in consumables adjusted operating profit margin was 28.8% in the first quarter of 2023 versus 20.7%
Speaker 2: in Q1 of 2022.
Speaker 2: This 110 basis points of margin improvement, despite the lower sales volume, is a demonstration of EBS in action.
Speaker 2: We relentlessly focus on driving productivity, optimizing our operating structure, and managing price to protect and deliver improving margins.
Speaker 2: It is important to note that as we move through 2023, the inclusion of a fully integrated IOS business will further support the growth of our equipment and consumables business while also positively contributing to our profitability.
Speaker 2: In the first quarter, we consumed $14.4 million of free cash flow and ended the quarter with more than $575 million in cash.
Speaker 2: Historically, Q1 is our weakest quarter for free cash generation owing to the seasonality of supplier payment and impact of annual incentive plans.
Speaker 2: Overall, our balance sheet is strong and we have the flexibility to pursue additional inorganic growth opportunities when the right assets become available at the appropriate valuations. Now, I will turn the call over to Amir to discuss our outlook for the balance of the year and provide closing silence.
Speaker 1: Thanks, Howard. Looking forward, we remain confident in our strategy and our ability to deliver our outlook for the full year 2023.
Speaker 1: We expect core sales to grow low single digits and to achieve EBITDA margins of over 20% for the full year.
Speaker 1: As we have discussed, we anticipate our core growth to accelerate throughout 2023 as China stabilizes and we benefit from the impact of our acquisitions.
Speaker 1: Margin are also anticipated to accelerate throughout 2023 as we benefit from a streamlining of our organization and cost reductions, as well as the shift of our portfolio mix toward higher margin products.
Speaker 1: While we are confident in our outlook for 2023, it is important to note that we do anticipate some continued quarterly volatility as the world continues to navigate through the geopolitical situation related to the Ukraine conflict.
Speaker 1: consumer confidence in China as well as the continued impact of interest rate increases and lingering economic uncertainty. Our EBS focus and continuous improvement culture helps us manage this volatility while progressing against our long-term targets. Our priorities remain the same.
Speaker 1: We will accelerate growth, expand our operating margins, and further transform our portfolio to active and disciplined capital deployment.
Speaker 1: We are well positioned to be a leader in both orthodontics and an implant-based tooth replacement.
Speaker 1: Our complete clinical offerings, including our imaging and diagnostic solutions, will improve the productivity of dental professionals while empowering them to plan and deliver personalized and predictable treatments for each patient.
Speaker 1: Our purpose is to partner with dental professionals to improve patients' lives by digitizing, personalizing, and democratizing dental care.
Speaker 1: We're focused on delivering long-term value for patients, our customers, our employees, and our shareholders.
Speaker 4: Thanks, Mir. That concludes our formal comments. We are now ready for questions.
Speaker 5: At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind you may remove yourself from the question queue at any time by pressing star and two.
Speaker 5: Again, if you'd like to ask a question, press star and 1. We'll take our first question from Elizabeth Anderson with Evercore ISI. Please go ahead, your line is open.
Speaker 6: Hi guys, thanks so much for the question. I appreciate your commentary about sort of the pacing of the year and how that's progressing versus the first quarter. Could you help us understand how that's trending so far in April , for example, how it's sort of trying to doing versus the first quarter, and then similarly for both the US and Europe .
Speaker 1: Almost as we go through the year, we anticipate that wrath to take place.
Speaker 1: But I want to clarify this. This is not the same ramp that we saw in 2020 after COVID. There is going to be some uncertainties, but China in Q2 is in a far better place than what we saw in Q1, which was basically for two months. It was just completely shut down.
Speaker 1: At one point, 75% of our own people, they had COVID, and we had asked them not to come to work and stay home and take care of their well-being. So we expect to see better performance as we go through the year in China. April and Q2, we expect
Speaker 1: to see the impact of iOS to becoming part of our core growth, comp for imaging becoming a lot better.
Speaker 1: As we touched on China and resto endo have better performance. So what we have seen in April is a continued expectation of what we had expected in Q2. We're confident as we go through the year we're going to see both core growth and margin improve sequentially while dealing with some of the uncertainties that is ahead of us.
Speaker 1: seven quarters. In fact, both on our auto business as well as our implant business, we have performed very well. We mentioned that our implant business in Europe have been performing and we think above the market continuously and nothing that we have seen had changed our position and our point of view on it.
Speaker 1: Our work to business also is specifically on clear aligners, Spark business has had a much better run in Europe . And a lot of that has to do with the execution. There are ability to really put EBS at work, geography by geography, country by country.
Speaker 1: expand that business. So what we have seen so far in the first four or five weeks of the quarter is a continuation of that performance. We have a small base compared to North America, a really small base of imaging. The majority of our imaging capital equipment is in the U.S.
Speaker 1: And are consumable also growing above market and has been growing above market in Europe for the past several years, but it's in a smaller base. So overall, Europe continues to perform very well. In the US, we have some challenges around execution that we are addressing.
Speaker 1: in a specific pocket. We're fixing those and we expect to see better performance as we go forward throughout the quarter and for the rest of the year.
Speaker 1: pockets, we're fixing those and we expect to see better performance as we go forward throughout the quarter for the rest of the year. Got it. Thank you very much.
Speaker 5: We'll take our next question from Jeff Johnson with Baird. Please go ahead, your line is open.
Speaker 7: Thank you. Good afternoon guys. Amir, I think one thing we haven't heard, you did a good job, I think, of giving us kind of the implant numbers across most of the globe. And I understand in Europe they were up nicely and potentially above market. We got the adjustments out of China and Russia. But I didn't hear anything on the US or the North American business maybe from an implant standpoint. Was that one of the businesses that you're addressing some execution challenges in?
Speaker 1: We're going to have to be the layered organization. We'll put the structure in place. And as I just mentioned for the past seven or eight quarters, we have seen a continuous performance improved in Europe . Core after quarter continued from better and better as we go forward. We're going to a very similar process in US. If you look at our value in plan.
Speaker 1: We have done an incredible job, the management team and the team have done an incredible job, going back to becoming a lot more customer centric, put in energy around taking care of our customers, solving some of our operational issues, and revamping the portfolio. And the result is obvious, it's going to take a little bit longer, but we're going to see a similar approach.
Speaker 1: in North America with our value implant. We have pockets of challenge with our premium implant in US, and following the same recipe that we have done in Europe . Detail orientation, EBS at work, customer centric model. Try to solve those issues, make sure that training and education is at the top of our priority list.
Speaker 1: And I expect, all of us expect to see better performance on implant in North America as we go throughout the year. We know what the source of the problem is, we know where we have had some challenges and we are responding to them and executing fairly well. And performance would improve.
Speaker 7: single digits and I think you specifically highlighted a couple areas of strength there offset by maybe some challenges in endo and resto both. You know it's kind of the exact opposite what we heard this morning from one of your competitors that they were up double digits in resto and endo. So you know if I take your low single digits and assume resto endo were down I don't know mid single digits or something just taking a stab.
Speaker 7: How is there a 15 point difference, I guess, between you and Dent Supply? And not asking so much on what they did, but it seems like the market would be up then with what they did better. How are you lagging the market in those areas by that extent, I guess is what I'm wondering.
Speaker 1: Yeah, really good question Jeff. A good part of that, we've got to take a look at proxies from one point to view. If you compare the proxies, I've given one of these years versus last year, how are touched on it? We're somehow managing through that, try to get our sub in a better place. We have a really good feel for selling and sell out. And if I look at the sell out, we have information at the distributors level that we can take a look at the sell out.
Speaker 1: We're really confident on this setup. And we have gone ourselves, removed out of this situation of inventory versus solar. We got out that situation a while back. And we are in the habit of really looking at what is selling, what's the solar look like? We compensate our team very differently. And we think it is a temporary...
Speaker 1: This business is low single digit growth. We have been outperforming the market and as Howard touched on it, really good from a margin perspective. I know the result on Q1, I'm not disputing it, but we are confident that we are able to get the result that we expect as we go through the year in North America as well as what Biden are concerned about.
Speaker 8: you're seeing across that business relative to your expectations so far? And generally, how would you characterize kind of CAD, CAM demand trends in this sort of environment? Thanks. Thank you, Erin. So we have a hybrid go-to-market approach in here on iOS.
Speaker 1: The reason that we wanted to be in this category because it's under penetrated less than 15% of offices Orto offices are a lot more penetrated than you know general practitioners Who do endo orto I'm sorry? Endo implant and other categories, so we know the market is under penetrated
Speaker 1: workflow approach. So with that as a background, what we did, we have a hybrid approach that are ortho business, implant business. They do not sell that as independent product, but they have clinical offering that they can put it together and offer that to their customers.
Speaker 1: That part of the business is really accelerating and we are very pleased with what we have seen. Not only product versus product, but also the entire workflow. So we have been able to demonstrate that iOS with Spark works seamlessly. iOS and 3D printing with the Spring
Speaker 1: same-day crown, barriers, and others. So that portion is ramping up, pre-NICD, is meeting expectation. The rest of that has been through channel execution and empowering channel.
Speaker 1: Carestream had a really good presence in some geographies, not really as much of a presence in other geographies. So we have engaged our traditional imaging DEXs channel and we are activating them. The activation model looks like after you sign contract and do training, co-travel.
Speaker 1: events, marketing activities, and then funnel building and the ramp. We're really pleased with what is taking place with the top five, six partners that we have in the US, and we are focusing on the top 20, 25 partners in Europe . We're ramping those up. We're beginning to see the momentum getting built up. It is ramping up. It's Q1 was better than Q4 so far.
Speaker 1: So we're really pleased with the work we have done. It's picking up and we're gonna continue to use EBS to even get it better, higher margin, better product categories, and better execution. That's what you can expect from us.
Speaker 8: Okay, thanks. And then a quick one on Spark. The growth is strong, but do you have any metrics around reorder rates, retention rates across your Spark customers, and any metrics you can give, I guess, on that front or where you stand now and also where you hope to get to in terms of market share across that specialty market you targeted? Thanks.
Speaker 1: So year over year, our business is up 70%. So that 70% is a really good indication of the number of cases that we received, the number of active doctors. We had a record number of new doctors using Spark in Q1. So the way we are approaching this, and we have been added for a...
Speaker 1: Cut out since 2017. A small number of people go to a specific geography. We get a small group of people, five, ten at the time. We teach them, help them work with them, ramp them up, make sure that they are really in good place. Then we go to the next geography, next territory.
Speaker 1: This model has really worked for us very well. The reason that we wrapped up so quickly in Europe , because we replicated what we did in Spain in France. We're taking that, taking to the next geography. So what we're seeing in here, we mentioned that before that from case 0, number 1 to 100,000, it took us almost three years.
Speaker 1: From 100,000 to 200,000, it took us close to about nine months.
Speaker 1: 300,000, 200,000 cases, 300,000 cases, five and a half months. And we are approaching 350,000 cases. And this ramp, it gives you a really good indication of the number of dentists that we are signing up. More information in the BLINKS
Speaker 5: Every one of those measures are devil's digit growth, according to court. Great, thank you. We'll take our next question from John Block with Steeple. Please go ahead. Your line is open. Yeah. Thanks, guys. A couple questions that I'll break them off. The first is on the VBP. And I thought in the preparatory remarks, you said you had expected the spill over.
Speaker 5: from public to private and maybe I have this wrong but I thought you expected that pressure to remain largely within public and sort of that was a different take from a couple of your competitors so can you clarify and maybe more specifically importantly is VBP in trying to playing out as expected for you guys
Speaker 1: When we think about the low single digit growth, core growth for a full year, and maybe just as a tack on to that, where are we with VBP specific to ortho? Thanks. Yes, happy to do it, John . So let me just kind of frame this again based on what we have said before. We have about $100 million of implant business in China and about $75 million of ortho business.
Speaker 1: 70% of our business today is on the private sector. So that's just to give you a little bit of a frame.
Speaker 1: We knew and anticipated, and it has pretty much played out exactly what we expected, that this is going to start on the public side, but it's going to have a spillover, spillover on the private side. So let me talk about the implant and then I'll tell you about ortho. So we are selected as one of the winners both on the premium as well as on the value side.
Speaker 1: which means, at least the initial thing, they said we should expect higher volume. We're not counting on it, but what we are counting on is the impact in our current business on the pricing as well as the volume. So that is, so far, is playing out exactly as we expected. If we get higher volume, that would be an incremental business that we can expect going forward. We think that this is continue, this spillover has wrapped up.
Speaker 1: and we are beginning to see the full impact of it. On the auto side, so far, less than 10, 15% of our business is impacted by it. And to a large degree, it's because of how it's been executed and implemented.
Speaker 1: We don't have much of a business on a clear aligner side in China, and that has always been intentional. We wanted to get momentum going in some geographies we prioritize. We wanted to establish the standard work. But our own co-business is the only business in China that is going to be a business that
Speaker 1: non-Chinese and multi-national that has been approved and accepted as part of our as part of the VVP process.
Speaker 1: We have communicated that this is going to have about a $20 million impact in our business headwind in top line as well as the bottom line in 2023. So far we haven't seen anything that tells us otherwise. If we get any medium long term increases in the volume, then great. That will provide additional access to care for people and we will see their impact of it in a positive form. That $20 million over $20 million headwind, we consider both impact on public as well as on the private side. And this compare is purely based on 2023 sales and margin versus 2022 sales and margin.
Speaker 5: Okay, that was great. There's a lot of color. And for the second question, I'll apologize in advance because it's a little direct and it's long. But for E&C, if I go back to the time of the IPO, this was supposed to be like a GDP plus or minus business, not sexy. And I get it, right? We've had a pandemic. We've got the interest rates. We've got potentially a recession right around the corner. But.
Speaker 5: But what is this business? And every quarter, its weakness overshadows your SP&T business. It's down six quarters in a row. This quarter, it was down 12% off a negative 3 comp. You had some divestitures to try to strengthen it. You're through that. And maybe that's just opinion, but looking forward.
Speaker 5: And then Howard, just as a tap on, you know, you guys are sticking to the low single digit growth. I know you want to stay away from specific 2Q guide, but is 2Q positive or negative as we think about the ramp in the back part of the year? Thanks, guys. Of course. So let me add this. John , you know, I have been around dental now.
Speaker 1: the price and it becoming a lot more aggressive in those areas. If you look at, I'm giving you one example, the number of players and the image inside. And let's take China as an example. Compare that to five years ago, ten years ago, how many new players are in there and what the price is taking place.
Speaker 1: So it's fact, it's reality, it is what is taking place. And then that's the reason we walked away from Peloton and Crane, that's the reason we carved out a carbo treatment unit instrument and we put that outside and then we kind of replaced it, continued to replace it.
Speaker 1: What we have done in the past probably 12 months or so, a lot more aggressively is on the higher equipment business.
Speaker 1: So, think about it, about one third of this business is contract, software, and it's that kind of annuity. The other two thirds are to a large degree is either the NOMAS that DSOs are building and adding capacity or renewal.
Speaker 1: that you have all the product process that has been there for six or seven years, you want to replace it. But the numbers are not taking place as rapidly as they did before. Then you have some challenges around getting a note and paying six or seven percent. So it has an impact on higher...
Speaker 1: value add, higher expense, cap export. On the other geographies that we talked about when the differentiation is not really that clear, well we have been very thoughtful, very specific. We are exiting some product categories, some geographies intentionally, try to make sure that this business is profitable and differentiated.
Speaker 1: Outcome, you're seeing the decline that you're seeing, but you're seeing the margin improvement.
Speaker 1: At some point, and we are getting to that point very closely, that's the business we want to have. There is no more exit, there is no more moving away from it, and that business, what is remaining, I'm talking purely on the image index side, we would then have an opportunity to build around it and try to create differentiation.
Speaker 1: and build momentum and workflow capabilities that we can really see the benefit of the growth on it. On the consumable side, we feel really good about that business. High margin, we have had momentum, we have outperformed in the past several quarters, and we think Q1 is more of anomaly. We'll get it back on track. This is a business. We do have the government around it. We know
Speaker 1: It's intentional how we have gone through it and we're going to get it in a stable situation. We're going to continue to improve it going forward. And for all the shifts that we have done, not only inorganically, but organically is going to put it in a far better place going ahead than what we have seen in the back.
Speaker 1: intentional of how we have gone through it, and we're gonna get it in a stable situation. We're gonna continue to improve it going forward. And for all the shifts that we have done, not only inorganically, but organically, is gonna put it in a far better place going ahead than what we have seen in the back. John , we're looking a little bit of it long term.
Speaker 1: We are trying to see what 2023, 4, 5, 6 look like. And if we don't take some of these paying now, we are going to continue to deal with these challenges going forward. So we have decided to maybe be more aggressive in this portfolio shift, geography shift, to set ourselves up for the long term view of the 2026 that we said we are going to be a high single digit, 20, 20.5 percent margin. We are not moving away from it, and in order to get there, we have to make some of these decisions in intro.
Speaker 2: Yeah, and John , you're right, we don't typically give a guide on a quarterly basis. What we have said and continue to feel is that, hey, our core growth as well as our margin profile will improve throughout the year. That being said, I think that we will deliver low single-digit growth in the second quarter.
Speaker 9: here in the second quarter.
Speaker 5: Thanks guys, I appreciate all the color. Thank you. Of course. We'll take our next question from Michael Kearney with Bank of America. Please go ahead, your line is open. Afternoon and thanks for taking the questions. Maybe a quick follow up, I'm going to try again with John's last comment.
Speaker 5: Again, without being able to give quarterly guidance, is it embedded though in the full year Los Angeles guidance, they'll be exiting the year with growth in E&C? We haven't gone down the path of providing guidance and it's specifically sick.
Speaker 1: on the ortho side with orthodontist.
Speaker 1: In order to do that, outside the product itself, the digital transformation, iOS plays an important role.
Speaker 1: We want to be the number one player in the end-to-end tooth replacement implant base. In order for us to do that, the imaging consumable plays an important role, and we've got to consider organic as well as inorganic activities.
Speaker 1: But consumable business by itself, we are in more than 90% of offices worldwide. 130 years of track record.
Speaker 1: really differentiated product. We feel really good about that and we have finally kind of a gone over the infection prevention inventories and use is in a really good place. No single-digit business this is what we expect and that's what we hope to get and the changes
Speaker 1: that we describe and the image inside, we hope that it's going to come to a transformative stage that we expect by the second half of this year.
Speaker 1: It's going to be really hard when you have part of the business is declining double-digit. That would be really difficult to do that. So we have contemplated what changes need to take place to be able to land based on the guidance that we have provided. We feel really confident and good at this point about the guidance that we have provided.
Speaker 2: I appreciate that. So maybe I guess I'll flip to the complete opposite side of the performance in the quarter and that being Spark. You talk about the record number of Dr. As. Can you talk about the education that you're going into doing with these docs? I assume these are not net new doctors using aligners for the most part. So.
Speaker 5: a lot of these winds I'm guessing are displacements. Please correct me if I'm wrong there, but how does that education process go and what are the key drivers that allow you to go in and continue to put up these incredibly strong growth numbers? Yeah, thank you, Mark. So we are purely focused on orthodontists.
Speaker 1: One third of all the aligners today worldwide are placed by orthodontists. They're the first one who adopted clear aligners.
Speaker 1: liner is a good answer. It's about the combination treatment. It's about case. It's about technology.
Speaker 1: a good answer. It's about the combination treatment. It's about case. It's about technology. It's about changing the workflow and offices.
Speaker 1: So the approach that we have, we have some chief speakers in different geographies. We have people that have done more than a thousand cases, they have developed protocols, they are able to teach and share their best practices. That's the value of the NMSIS Summit and other places. Go to your geography.
Speaker 1: the sales organization rally the orthodontists, their territories. We bring 50, 100, 200 people in one of these training programs for two or three days. We share best practices. We show the technology. We show the integration with diagnostics. And then we follow up with them.
Speaker 1: to a five or six case on a monthly basis, we know that they're committed and we continue to provide personalized support to them. We have been in this space for 35 years. This is not a new business for us. We have a team of people that have made Damon successful, more than 20% market share.
Speaker 1: have grown this business mid-single digit for the past several years. The same group of people are providing different set of products to the same customer base. And the majority of them have been the ones that have either been using competitors or they haven't been using it as much. Now they have a choice of having a combination of treatment that they have in their offices and they can offer.
Speaker 1: Our job is to give them choices. What we hear from them, they're treating a lot more patients, they're very happy with the product that they're getting, and they are telling their friends and people that they follow them, that this is the product of the future. Technology-wise, product-wise, software support.
Speaker 1: That's how we create differentiation in here, and we intend to just continue to expand it as we go forward, geography by geography.
Speaker 1: we create differentiation in here. I mean, it tends to just continue to expand it as we go forward geography by geography. Great. Thank you.
Speaker 5: We'll take our next question from Brandon Vasquez with William Blair. Please go ahead, your line is open. Hi everyone, thanks for taking the question. The first one I just wanted to ask on kind of the first quarter performance relative to your own expectations just because it came in a little bit below consensus but of course the first quarter performance relative to your ideas. You know what I am against most? No. No. No.
Speaker 10: You don't really give a hard guide to kind of a quarterly basis. So curious how the quarter trended relative to your own numbers and what it means for your expectations of where you would fall within your full year guidance. So just to give you a little bit of a feel, combination of China and Russia.
Speaker 1: At close to about 200 basis point of a negative growth in Q1. Close to about 200 basis. So, to look at, we looked at the entire business, what we could forecast on predict and see, and we had a really good feel for what we expect as we go forward. The imaging part delivered a little less than what we expected.
Speaker 1: And we know exactly where and what to do about the turn of the world. But from an expectation perspective, that...
Speaker 1: significant drop on China and Russia was higher than what we had expected. We knew it's going to be challenging but you know that 200 basis point is something that is just you know incredible and it was really hard to deal with it going forward. But it's not far from what we expected. Overall the rest of the business had a really good handle on it.
Speaker 1: We had anticipated that this is going to be challenging. We knew China is going to ramp up over time. And Russia continues to be a little bit of a unstable. We really do not know exactly what to expect in here. Q1 of last year, just to keep in mind, because of anticipation of war in Ukraine, there was tremendous amount of buying in Russia took place to really stockpile that and going forward. So we had a little bit of a proxy challenge too.
Speaker 1: roton rolling near as well
Speaker 10: Okay, thanks. And then just as another follow up, you know, the EBITDA reaffirming guidance for a greater and 20 percent was positive, but kind of doing the math on the cadence of the year if you just kind of assume.
Speaker 10: sequential improvements, maybe one or two points each quarter. To get to that full year number, you kind of need to exit at a pretty strong number. You know, consensus has like 21 and a half and maybe even need to be a little more given. Q1 was a little bit below the street, but seems.
Speaker 10: pretty strong. Is that directionally correct? You'd be exiting this year at a pretty solid, if not one of your strongest, EBITDA margin quarters that you've ever seen.
Speaker 2: Brandon, what we've said is that we're going to continue to improve on the margin throughout the year. So you'll see improvement here in Q2 and then particularly in the second half. Clearly to get to that 20% or north of that adjusted EBITDA number will require us to continue to improve on the margin throughout the year.
Speaker 4: We're delivering. We have plans to execute on getting those expanded margins as we move throughout the year. Okay. Thanks for taking the questions. Thank you. Okay. I think we're at time now, so I really appreciate everyone joining us today. Thank you very much, and we look forward to connecting with you over the next quarter.
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