Q3 2024 Envista Holdings Corp Earnings Call

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David: My name is David, and I'll be your conference facilitator this afternoon. At this time, I'd like to welcome everyone to the Investa Holdings Corporation's third quarter, 2024 earnings results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers are marked, 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 keypad.

If you would like to withdraw your question, please press star then too on your telephone keypad.

Speaker Change: El Nautre in the call over to Mr. Amit Bagwatt, Vice President of Strategy at Invest in the Holdings. Mr. Bagwatt, you may begin your conference call.

Amit Bagwatt: Good afternoon and thanks for joining in this dust third quarter 2024 earnings call.

With me today, our Paul Peel, our President and Chief Executive Officer, and Eric Hamist, our Chief Financial Officer.

Before we begin, I want to point out that our earnings release, the slide presentation supplementing today's call.

and the Reconciliation and other information required by SEC Regulation G relating to any non-gap financial measures provided during the call are all available on the investors section of our website www.investacle.com

The audio portion of this call will be archived on the investor section of our website, later today under the heading events and presentations. It will remain archived until our next quarterly call.

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.

Unless otherwise noted, references in these remarks to company specific financial metrics relating to the third quarter of 2024, and references to period to period increases or decreases in financial metrics a year over a year.

During the call, we made described certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets.

We will also make forward-looking statements within the meaning of the federal security's laws, including statements regarding events or developments that we believe anticipate or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC pilings and actual results might differ materialies from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are 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 return the call over to Paul. Thank you, Amir. Good afternoon and welcome everyone. We appreciate you taking the time to join us today.

Today's call, I'll kick it off with him opening thoughts, center third court of performance, as well as what we're seeing from the broader market.

Eric will then take a suit and numbers in more detail. I will come back at the end with some closing remarks and then we'll open it up for Q&A.

Slide 5 summarizes Q3 performance. The headline is that results came in as expected.

On our last earnings call, we said that we expected underlying performance in Q3 to be similar to Q2, although reported results would be lower. Principal do to enlarge your impact from the change in spark revenue deferral that was detailed on our last call.

This is indeed what transpired, reported results for two three were lower than Q2 and this was principally driven by the larger deferral impact. While underline results were about the same quarter of a quarter.

Our underlying growth in Q3 was similar to or maybe a bit better than the broader market, which was generally flat.

We gain chair in orthodomics and diagnostics and health chair in consumables. We underbrough the market and implant although the gap narrowed providing early evidence that our growth investment are having a positive impact. We'll say more about this in just a moment.

With Q3 coming in as expected, we are reconfirming our full-year guidance of negative 1 to negative 4% reported core growth and 10 to 12% adjusted EBITDA margins.

Speaker Change: Consistent with what we shared last quarter, we expect Q4 to return to growth on a reported basis.

On now touch on the dental marketing Q3 and go a bit deeper into our relative performance. As I just mentioned, the overall market was done really flat.

The implant segment, though, was obslightly in Q3 with single-tooth procedures again outpacing Paul Arch. Our single-tooth volume grew mid-single digits globally while our full-art volume was down low single digits.

Overall, growth accelerated modestly quarter-on-quarter in our implant business with premium growth above Q2 and value posting a third consecutive quarter of positive growth.

Speaker Change: We are a Vedonic segment, soft-black, to slightly positive growth in the border, largely unchanged from Q2. Our underlying performance was a bit better than this, as we continue to gain share in clear aligners.

Speaker Change: Spark Shipments, as well as the number of ordering doctors, were both up double digits in Q3 and Spark on the man is generating good traction in the early stages post launch.

The diagnostic segment remains soft, down mid-single digits in Q3.

And the World Wide Basis, our business also contracted, although we again out-group the market.

North America, where we generate well over half of our diagnostic sales, was once again a relative bright spot, up low single digits with additional share gains.

In support of this, we introduced a number of new offerings in the border, including a new CDC T platform, enhanced software for our Dexus intro-horroral scanner, and additional surgical functionality in our DTX treatment planning platform.

The Consumer World segment was flat, to slightly positive on a cell out basis, and our performance was roughly the same.

As discussed on our last earnings call, with global supply chains currently stable, our strong operational capabilities allow us to deliver high-service levels with lower channel inventory.

Distranced Capital, Efficiency for our Channel Partners and Improved Operating Stability for us.

The summarized RQ3 performance results came in as expected.

We know we have plenty of work ahead of us, but I'm encouraged by the enthusiasm for change and commitment to improvement that I see across our organization.

Speaker Change: I'm now turning it over to Eric to take a suit with details.

Eric: Thanks Paul. First off, I just wanted to say how great it is to be part of the Investor team and to help deliver on our common purpose of partnering with professionals to improve lives.

I have a personal passion for healthcare and for dental specifically, so it's great to be back in the industry.

I've had a chance to meet many of you, our investors, coverage analysts, and broader stakeholders over the past three months.

It's been exciting to build a shared perspective on how in VISTA can deliver meaningful value creation moving forward.

Let's now turn to our Q3 results.

Eric: In the third quarter, we delivered sales of 601 million, adjusting for the impact of currency exchange rates, core sales for the quarter decline 5.3%.

Our specialty products and technology segment decline 5.2%. And the equipment and consumable segment decline 5.6%.

Similar to last quarter, failed in Q3 were impacted by two significant dynamics outside of normal business drivers. We will cover both of these now.

First, as we previewed on our last earnings call, the net impact from our recent spark deferred revenue change was significantly higher in Q3.

This impact reflects the combined change from both our initial case revenue recognition, as well as the timing of recognizing our deferred revenue.

Together, Q3 revenues were $27 million lower as a result of the change.

As a reminder, this change has no impact on our cash flows or the underlying economics of the spark business.

The net impact from our spark revenue deferral change will be meaningfully lower in Q4 and eventually turn to a tailwind in 2025.

Important to note, without the deferral change, spark grew positively in Q3.

Second, as outlined last quarter, we took to this vision to draw down channel inventory. In addition to the benefits that Paul described previously, this also matches selling to our distributors more closely with sellout to our end customers.

While the support of healthier overall supply chain for both our partners and in Vista, it resulted in a notable year on year reduction to our selling, resulting in lower revenue of approximately $12 million in Q3 and $25 million year today.

The biggest impact came in North America, but we also brought down channel inventory in some other markets as I'll explain shortly.

Eric: We will show additional details on the impact from these two changes in a moment.

Geographically, our North America Business Decline mid-Single Digits and West Europe Decline High Single Digits

Most of our developed market decline can be accounted for by the spark net deferral change and the lower dealer inventory.

Our China Business declines low double digits, mainly driven by weaker diagnostic fails.

We're also lowering channeling mentors in this market.

Our third quarter, adjusted gross margin was 52.8% a decrease of 490 basis points versus prior year.

Our adjusted EBITDA margin for the quarter was 9.1%, which is 10.5% at points lower than prior year.

Eric: Our adjusted deluded EPS in the third quarter was 12 cents, compared to 43 cents in Q3 of 2023.

Eric: And finally, we delivered $63 million of free cash flow this quarter compared to $77 million in 2,3 a last year.

Free cash flows year to date, where $179 million, up 45% versus prior year.

Eric: The Bring Additional Transparency to our revenue and margin dynamics in the quarter. We've provided two bridges similar to last quarter. Let's take a look at each.

Pacific to our year-over-year revenue, the Spark deferral net change accounted for approximately $27 million of sales reduction.

We expect to recognize all of this deferred revenue over the next 18 months.

Eric: The next meaningful impact on revenues was from the dealer inventory realignment in North America, which accounted for nearly 12 million of year over year sales reduction.

Important to note, in Q3, this was only the result of higher 2023 Selen. From Q2 to Q3 of this year, our sequential channel inventory position was stable.

Another item of note on the revenue bridge is the contribution to growth from pricing this quarter. This is an area of focus for and desktop, and we have seen good contributions from several of our businesses this year and in Q3.

This is underpin by the strength of our portfolio, the quality of our leading brands, and our continuous innovation.

Eric: Let's now take a look at our margin bridge for Q3.

Eric: A Joseph Ebaton margins decline 10 and a half percentage points relative to the same period last year.

Half of the margin reduction was driven by the spark net revenue deferral change, as well as consumable steel or inventory realignment.

Our continued growth investments accounted for nearly a point and a half of margin reduction year over year. While the largest portion went into our premium inflants business, we are making smaller investments in several of our other businesses.

All of these investments are aimed at revitalizing growth across our portfolio.

Eric: For example, we continue to improve our offerings in value and plants to investments in innovation, which have helped accelerate our North American growth.

In Q3, we also experienced nearly 400 points of margin headwinds from two primary effects.

Most significantly, our impact from FX was more pronounced as a result of transaction losses.

In addition, incentive compensation was a headwind year over year.

Partially offsetting these headwinds, we delivered a point and a half of margin expansion this quarter from the net productivity gains and solid price to performance.

Turning now to segment performance, core revenue in the specialty products and technology segment decline 5.2% versus prior year.

Our orthodonic business decline low double digits in the third quarter, driven by the net spark revenue deferral impact.

Eric: Without this effect, orthodonic revenues through mid-single digits.

Consistent with the broader aligners segment.

Sparksaw slowing case growth continues to take share with active spark doctors growing double digits.

Bar continues to be a key growth driver for indista.

Our brackets and wires business decline slightly versus prior year as strong growth in Russia and China was countered by weaker demand in other markets.

Eric: We realize positive price growth in both our start and bracket and wires businesses.

Implant growth was flat versus prior year.

In North America, our gap relative to market continued to close, helped by mid-Single Digit Growth in our value in plants business and an improving trend in no balance.

Full-Arch case demand remained weak, though we have seen stable case volumes over the past several quarters.

Single-in-flat treatments remain resilient as mentioned previously.

Our premium implant business was up slightly in Europe, while China was soft in the period.

Eric: In the third quarter, our specialty products and technologies business had an adjusted operating margin of 7% down 12.7% at points relative to prior year.

This decline was primarily driven by the net impact from our spark deferral change, in addition to growth investments and FX.

Moving to our equipment and consumable segment, core sales in the quarter decreased by 5.6% versus prior year.

Eric: Our Diagnastics Business Decline Mid-Single Digits. This decline was driven by weakness outside of North America. We are encouraged to see that our strongest and largest Diagnastics Market, North America, grew for a third straight quarter while also increasing market share.

Both China and Europe experienced sharp declines as the global diagnostics market remains weak.

Our consumables business sell out in North America through low-single digits in the quarter. Our distribution relationships continue to be strong, and we believe this business is well-positioned to grow in the fourth quarter.

Outside of North America, consumables grew mid-Single digits in Europe and double digits in Russia.

Eric: Our adjusted operating margin for this segment decline 460 basis points versus Q3, 2020-23, mainly driven by lower volumes, FX, and the continued investments in our distribution partnerships and sales coverage.

Eric: In the third quarter, we generated three cash flow of 63 million compared to 77 million over the comparable period last year.

Our year-to-date pre-cash flows were 179 million up 55 million or 45% over prior year. So, we're in by improved working capital management and lower capital expenditures.

The stronger year-to-date cash flows allowed us to repay a hundred million dollars of our US dollar denominated term loan into three. Further bolstering our strong balance sheet.

Speaker Change: Having covered the details of our Q3 performance, I will now turn the call back over to Paul.

Paul: Thank you Eric.

As mentioned at the outset, we're re-confirming, full-year guidance of negative 1 to negative 4% core growth and tend to 12% adjusted EBITDA margins, inclusive of the one time and non-cast charges that we covered earlier. We expect to return to grow in Q4.

Paul: A wrap-up with a couple of closing thoughts before we open it up for your questions.

First, in total, the dental market is soft but stable. Consumer sentiment is mixed as well. There are some positive signals, interest rates are coming down, and the post-COVID demand surge of 22 and 23 has now largely normalized.

But we don't hear compelling enough evidence of an overall market turn, yes, from our customers.

Tech in our Q3 results came in as expected. A solid start but still below are longer-term potential.

Third, consistent with this, we are reaffirming purple your guidance as outlined on the prior slide.

and fourth and maybe most importantly, we're thoughtfully and systematically quitting in place the building blocks for improved performance moving forward.

For example, we announced important additions to our senior team in Q2 and filled other important leadership roles, deeper in our organization in Q3.

We are retoubling our commitment to the invested business system, which is the foundation of our culture of performance, inclusivity and continuous improvement. We help what we call a CEO-Kyzen last week covering eight key priorities, seven locations and five businesses.

Every member of our senior team played an act of rule, as well as more than 200 of my colleagues.

And with the first component of our circle values being customer centricity, we are stepping up clinician engagement even further.

Welcome you over 350 customers to a DSL event in China, more than 400 orthodontists to our North American Ormco forum, and more than 500 doctors to a clear-aligner event in India.

Paul: and this is focus on partnering with professionals to improve lives, remains front and center in everything we do.

How close, by thanking my 12,000 colleagues around the world for the encouraging progress we've made across the last six months. And in the same way, we're also grateful for the strong support we enjoy from our customers, partners and shareholders.

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

At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind to move yourself from the question key, let any time by pressing star and two.

We'll take our first question today from Elizabeth Anderson with Evercore ISI. Please go ahead. Your line is open.

Hi guys, thanks so much for the question. Great first quarter out of the gate, it's really nice to see you guys delivering on better than the guidance that you outlined for us last quarter. Can you talk about whether this was kind of like a function of marketing, proving, Mrs. Improved Execution, you noted some areas and working cap in other places where that seemed to be improving or which is kind of just a cautious first quarter out of the gate kind of situation. And if you consider parse through those different pieces, that would be helpful. Thank you.

Paul: and the

Paul: The End

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Paul: Hello.

Hello. Hello. Hello.

and the speaker is in the comments. I can hear you now great. Thank you. Sorry for that. You missed us. Thank you for the question as well as the encouragement. It's worth saying again. We appreciate it.

I let you ask about three things. If I remember correctly, you asked about market execution and then guidance. Why don't I take the first two and then I'll ask Eric to do the third.

Paul: We're going to respect to the market regrettably it was not a contributor to our performance above expectations in Q3. As we talked about in our prepared remarks,

Dental Market Grout still remains slow, slower than the historical sort of 3 to 5% that we all know over time and quite a bit slower than the post-COVID run-up.

Now there are a couple of early signals that things will or may improve moving forward. People point to interest rates coming down and then of course, unmit patient demand is still very high.

I bet if President there just isn't an obtained relevant to expect an imminent upturn anytime soon. With respect to execution though I think we can credibly say that we're beginning to resharpen our edge. If we put things in a broader context.

Across the first couple of years following the spin from Danahir, an execution at Investet, I'd say was pretty good.

Paul: It's really been just the past two years where we lost focus on some of the core building blocks that we all know are fundamental to consistent delivery.

I'm so as I talked about, you know, in my closing comments, we're trying to thoughtfully and systematically short up this foundation.

Things like resetting guidance at what we think is a more sustainable level, reinvesting growth across the year, relaunching EBS to improve our execution.

Paul: and the list goes on. Invest in my judgment, know how to deliver and we demonstrated that with good consistency across the first couple years as a public company.

So at the same time that we're building new capabilities, we're really very focused on rebuilding that consistent execution rhythm that has worked for us off previously.

Speaker Change: Now with that, maybe Eric, do you have any thoughts on guidance?

Yeah, thanks Paul. I was a bit here for me again and thanks for the question. So I'll maybe comment on two things. I'll comment on guidance and I'll just give you my view of color on Q3. So regarding guidance, I would say first off, we aim to set a motivating but achievable bar.

But we also want to deliver at consistent performance levels. So our balance, of course, is to strive for and strike a balance between both.

I think the recent reinstatement of guidance in Q2, that was a good step. Obviously we reiterated that guidance here today.

I also think the additional depth that we've been providing on the underlying performance level.

has been received well. We hope you all, you know, see that as a way to understand better our underlying core growth and our underlying margins.

Speaker Change: And then I would just say also internally we are working to improve our insight and foresight. We know that a good financial process that provides good foresight to what our forecast capability looks like also helps us to be credible in the financial space.

Pacific the Q3, just a couple points, I would say on the back of Paul's comment, the quarter did play out much like what we thought.

Cord growth align with our expectations are slightly better.

We were particularly encouraged by several areas of improvement. Most of that we noted in our prepared remarks North America diagnostics was one, dental consumable, sell out, orthogloboli, and then the sequential trend that we've been seeing in North America Nobel.

Still pockets, obviously, of market weakness, and I think the characterization of slow-bottes stable is how we see it. Operationaly, we perform well as well in Q3, I think price and free cash flow generation. We're two great examples of that. So...

NetNet, Q3, was a good step on rebuilding our credibility. We obviously know that getting back to positive reported growth and improved margins is something we need to do. So getting the absolute value creation, if you will, of indistob.

I'm glad to meet you all. I'm glad to meet you all.

and I'm working capital that comes to set.

Speaker Change: Maybe one, where is that opportunity and how far through that opportunity are we in?

If you could comment on the QRQ change in that inventory dynamics that would also be helpful.

Speaker Change: Thank you.

Yeah, when I take the sort of the general approach here in terms of normalizing our channel inventory levels, and then Eric can talk specifically about inventory on our balance sheet and how that plays out in cash flow.

So, the channel inventory piece, you know, this is a relic of the supply interruptions first in COVID and then the, you know, sharp demand uptick post-COVID. You know, in many parts of supply to people added buffer inventory and that's been taking a while to kind of work its way down. We talked specifically about North American channel inventory and I think that's well understood, but as Eric pointed out in his comments.

Speaker Change: You know, it exists in multiple markets and so there's still some work to go. We think that other participants in the market are have a similar dynamic and that might be contributing to the slower rebound of the dental market that there's still some buffer inventory to normalize.

But Eric, you want to talk specifically about our balance sheet.

Eric: Yeah, I just took a couple of points, so I'll live a bit, I think, maybe just to put a stake in the ground on one of the things that I prepared remarks, year to date cash flows.

Eric: [inaudible]

Eric: Challenging the sort of read through the net spark deferral impact, but I think that's a helpful guide as you just sort of think about the underlying value creation and in VISTA.

Most of that, so as we look at the year over year improvement, most of that is driven by strong working capital performance. And I would say discipline cap X.

Within that, to your direct question, we've been roughly flat in working capital turns year over year. But we have made improvements in working capital turns in inventory. Last year at this time we were at about 4.0 this year, we're at about 4.3.

We still see opportunity to deliver upwards there, but as we compare ourselves to sort of our peer groups and the market, I would say our current working capital position is a good solid working capital foundation.

Great, thank you so much.

We'll take our next question from Jeff Johnson with Beard. Please go ahead. Your line is open.

Thank you, good afternoon guys and congratulations as well on the quarter. I want to focus on the spark deferral, 27 million this quarter is 11 million last quarter. I think Eric last quarter when you and I talked in for quarter anyway, it sounded like there were no catch-up provisions last quarter in the deferral rate. So I guess I'd start with number one was there any catch-up provisions in this quarter was that 27 million deferred out of just a case that were performed this quarter. Number one, number two, when I do the math on how many cases I think you did this quarter and obviously I don't have a crystal ball on that, but it seems like you're deferring almost 35-40% maybe even a little north of 40% of spark.

revenue per case, which I just don't understand. And then more importantly, how does the deferral rate change so much from 2Q to 3Q and then back down in 4Q? I would think you set a deferral rate that kind of takes four quarters to anniversary through. So maybe just those three questions on the deferral, it would be helpful to hear what the answer is.

Speaker Change: Yeah, got it, Jeff. So let me first just start by level setting on...

you know, spark aligners of the business. And this is just kind of an overarching comment for everybody to, you know, be aligned with the solution. So, for starters, you know this well.

Speaker Change: You know, we sell SPARC as a complete treatment solution. Important to note that consists of two things. So it consists of the initial shipment of aligners, and then it consists of the refinements. The refinements that come, if you will, after the initial shipment of aligners, if it's needed in the case.

Speaker Change: That's important, it's important to your question, because we recognize a portion of the revenue on the initial shipment. We then recognize a portion of the revenue on that refinement experience, if you will.

To your first question of the three, we didn't have any change, you know, you called it catch-up. There was no change in our deferral rate. There was no change in our timing as we went from Q2 to Q3, so no change there. I can just confirm that right away.

to your point on the dollar progression by quarter.

So, we had about $10 million in Q2. We told you today we had about $27 million in Q3. And then just to give you a forward view, Q4 will be lower than Q3. It'll be on a similar level, call it, to Q2.

The main reason why the impact was so large in third quarter

is because of the sort of the makeup of the...

Timing on our deferred revenue, so about a third of the Q3 impact.

was related to the initial recognition, so no major change from Q2.

Speaker Change: But about two-thirds was timing of the deferred revenue. So when we made the change last quarter,

Speaker Change: We also made a change to the period that we're recognizing the deferred revenues over. And so that's why we had such a larger, call it outsized impact in Q3 of this year.

And then just to your point on case rates, I mean, you can kind of do the math based on our balance sheet and our deferred revenue. I'll let you do that one on your own. We won't sort of disclose that one publicly.

Speaker Change: hopefully that helps maybe just as a

Speaker Change: forward view from there. We have commented on the fact that all of this will catch itself up in the next 18 months, a portion of that in 2025.

And I think really important just for the economics part of this, none of this impacts the economics of the business. Again, you see that in our strong cash flows in the quarter.

That's great. If I can ask just one follow up on all that and then I'll get back in queue.

Historically, we think of deferrals, when they happen, they're typically going to be matched, as you said, to refinements later down the road. So while that revenue comes back on the

Speaker Change: income statement, which is helpful. It tends to be offset by refinement costs.

and things like that. So, out of this $27 million, especially when you said there was a one-third, two-third kind of split the way you described it in that, is any of that deferred revenue, when it comes back onto the income statement, is it more likely to flow through at a higher incremental margin? Or is it more likely to be matched by period costs on refinements, and so will flow through it, let's say, whatever your normalized at that point spark margin is? Thanks.

Speaker Change: Yeah, great, great thought, Jeff. Thanks. So I think the way to think about it is a significant portion of the revenue impact

drops down through gross margin dollars and operating profit dollars. That's both as we're seeing the lower revenue year-over-year, but that's also going to be same-similar as the revenue comes back over the next 18 months.

Speaker Change: Thank you.

We'll take our next question from Aaron Wright with Morgan Stanley. Please go ahead, your line is open.

You know, has anything come to light in terms of the necessary investments you need to make in terms of what's been easier or harder kind of to address as we head into 2025? And I guess what I'm trying to get at here is kind of what incremental investments are necessary into 2025 and how should we think about where margins are landing here. Thanks.

So thanks, Aaron. It's a good question. Let me ask or answer it kind of generally, the first six months, you know, have there been any surprises? And then use that as a looking forward point for 2025.

The short answer on the first part of the question is no. I would say, you know, writ large, with a few minor adjustments, things have played out largely as expected. You know, Eric and I have been in and around the market for a while.

and so I think we knew both the opportunities and the challenges.

Specifically, our thesis was that it's always been, remains, and will continue to be a structurally attractive market. Nothing I've seen in the first six months has suggested that's changed.

Speaker Change: Same for the portfolio, you know, when Dan and Herb put this together, they bought good businesses.

From the outside, we suspected that they had been made better, you know, first through the Danaher business system and then through EBS.

You know, now having lived and breathed with these for the past two quarters, that's also true. You know, for sure, the very nature of continuous improvement is that we have to keep making them better, but that's clearly a capability we have, so that's played out.

Coming in, of course, I knew that there were some senior leadership gaps that we had to fill. I've been pleased with both the caliber of the people that we're attracting, as well as how quickly those folks are getting up to speed.

And then I would say, you know, consistent with my earlier remarks,

I knew that from looking from the outside, I suspected that some of the really good operating discipline that the company had in the first years may have eroded a bit or lost focus a touch over the past two years.

You know, I think we're being transparent with you that that has been the case and we're focused on rebuilding it.

Now, to your second question, what does that imply for 2025? One of the things we're rebuilding is the reinvestment, not just in growth.

Speaker Change: but in our operating rhythm, you know, the relaunch of EBS and also rebuilding our focus on longer-term developing talent.

Speaker Change: All of those take energy, attention, and resources, but all of those are high-return investments.

Speaker Change: You're probably specifically asking about the six-ish million a quarter we've been putting in principally into Nobel, but as Eric mentioned, other businesses also.

Speaker Change: out

You know, in high gross margin businesses, that will more than pay for itself. But we have to get the business to grow. You know, the easy math is if we get back to market growth, you know, market gets back to the three to four to five percent, you know, that it's had over time. And we match that.

Speaker Change: we will generate more additional gross margin dollars than we're investing to get that growth accelerated. So Eric and I have seen this movie before and more often than not, it plays out favorably, but there's work to be done to make it real.

Speaker Change: And a quick just follow-up just on China, what you're seeing right now where there are areas of strength versus weakness and how you're thinking about, you know, that market heading into 2025. Thanks.

Yeah, I mean, China, you always have to talk near and long term. The second one is easier. We're firmly convicted that long term, it remains a very attractive market. Global players like us, who think as much in a time frame of quarter centuries as well as fiscal quarters.

Speaker Change: You just can't see winning long term without having a big presence in China. So, you know, we're focused on the long term and continuing to invest aggressively there.

I would balance that with what we all know, near-term right now, volatility is high in China. There's high geopolitical volatility, which then impacts macroeconomic volatility. And then specific to dental, we have the BBP volatility.

Speaker Change: So, 2025, you know, tough to see too far ahead, Aaron, but I think in the near term, you know, it'll still be a little bit turbulent, but, you know, we're undeterred. We'll continue investing in that market knowing that down the road it'll pay off.

Okay, thank you.

We'll take our next question from John Block with Stiefel. Please go ahead, your line is open.

Amir Aghdaei: Amir Aghdaei

Great, thanks guys and good afternoon. I think implants, moving to flat...

is sort of going to be the focal point for investors tomorrow, just another quarter where you narrow the gap relative to market growth, which is certainly encouraging. So maybe just a couple of questions. Paul, any particular geographies that stood out?

Speaker Change: for the implant turnaround or the implant improvement, pardon me. And then you sort of alluded to the $6 million in answering a prior question, but how do we think about those investments? In other words,

Do those wind down, you know, and cease exiting 2024, or are those ongoing into 2025 as you see compelling returns? And then I'll just ask a follow-up.

All right, let me take the two parts sequentially, you know, starting with the geographic part of your question.

Speaker Change: You know, in Europe, we have and continue to perform in line with market that the market's growing there as are we, you know, that our gap is has been in North America. And as you correctly inferred in your question, that gap has been closing.

Outside of those two bigger markets, Latin America and East Europe are both good markets for us and both good markets, meaning the market grows and we grow in them.

China is a little bit harder to read because of the VBP effect, volume up quite a bit, price down quite a bit, but net-net it has been favorable for us.

Looking forward to 2025 in the second half of your question. We continue to, we intend to continue investing not just in our implants business, but in growing all of the portfolio.

We think we have good businesses in the right segments, all of which can profitably grow, and you have to invest in that to make it happen.

Speaker Change: Now, if the investment thesis proves true here, those are self-funding investments.

And so, you know, that's what makes medtech such an interesting category and has made dental such a good investment over time.

If you can get these businesses to grow, and it's a secularly growing category, you can afford to keep fueling that growth. Some of the very strong players in our market have done exactly that.

And so it's a well-known model that we're working to rebuild.

Got it. Very helpful. And then I guess just the second question, it's a similar theme, which is...

overall margin improvement. So for SPARC, you know, you've had some good growth. I thought I heard you mention, or everybody called out price realization, but I didn't hear anything about margin improvement. So are there any metrics you can point to in regards to SPARC's gross margin, the trend line, or when we might be able to think about SPARC moving to positive EBIT margin? Thanks.

Speaker Change: Yeah, it's important. And you're correct. We talked about the growth side of the equation, outgrew the market. We had double-digit growth of ordering doctors, etc. I'm glad you asked about profitability. This, I think, Eric, correct me if I'm wrong, six straight quarters of gross margin improvement in SPARC.

and that gives us confidence. You know, these gross margin improvements are following an organized manufacturing improvement schedule. It's an EBS approach that, you know, my predecessor executed very well and we continue to do here.

So, we have good confidence in the continued margin improvement of SPARC, and sometime in 2025, as we said, we expect it to cross over into operating margin positive.

John, I'll just add another point to that I think is important. So of course everything Paul said was spot-on.

John: We would love to have volume growth in the SPARC business, we expect and we forecast to have volume growth in the SPARC business.

But importantly, our margin improvement efforts rely less on volume and much more on, call it the end-to-end supply chain, the four walls of our manufacturing.

internally our design process. So, in my view as an operator, that's a great place to be, right? If we can get volume, that will be, of course, hugely beneficial, but we can get margin improvement, as Paul mentioned, just by being tighter in the operations that we have right in front of us.

Speaker Change: That was great. Thanks guys.

Amir Aghdaei

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

Michael Czerny: Afternoon, and thanks so much for taking the question. Maybe if I can...

Michael Czerny: Come back again to the investments you've made. Appreciate you calling out with the...

focused on Nobel. As you think going forward, given that you came to this business with a bit of a blank slate, how are you thinking about the right level of investments beyond here? What are the push and pulls you're going forward as you think about the reinvigoration of the product portfolio and what will the early returns you've had from the Nobel investments teach you about how to scale or not scale those investments going forward?

Yeah, thanks Michael. It's the right question. We think about two things in parallel. So we think about accelerating growth and we think about improving productivity and the two go hand in glove. So you have to pay for your growth. Part of that comes from productivity and part of it comes from the high margin nature of these businesses when they grow.

So as we look forward, this year was a you know sort of a rebalancing year for us where the investments to restart growth exceeded the incremental gross margin dollars that we generated from them.

As Eric showed on the waterfall earlier, we are getting net productivity, almost a point of it, in the quarter, which helped fund some of that investment.

Speaker Change: Got it. Thank you.

and Amir Aghdaei. Thank you for watching. I'm Stephen Keller.

We'll take our next question from Kevin Caliendo with UBS.

Yes, please go ahead, your line is open.

Hey guys, thanks for taking my question.

Really appreciate the adjusted EBITDA bridge for 3Q. And just looking at your guidance.

For 4Q, we can sort of imply what the margin is going to be. It's certainly better than what it was in 4Q, but it's still not optimal. And I'm just thinking about some of these...

Speaker Change: things in the bridge that you provide us, and I'm just wondering maybe how they might be how they might change for 4Q and maybe thinking about that as sort of a baseline for

As we enter into 25, you had productivity as a positive, net price as a positive. The SPARC deferral will certainly will be less based on what your commentary is. Can you just maybe talk about?

Speaker Change: how to bridge to 4Q a little bit. I know you're not going to know exactly in all the specifics, but just generally speaking, it would be really helpful to see how some of these line items change and how to think about it as going into 2025.

Speaker Change: Got it. Kevin, thanks for the question. So yeah, so the good and the bad, if you will, on a third quarter, you know, result and a guide is there's only one quarter left, right? So we can all do the math and...

use the guidance range. So I think what I would say for starters, and it's probably most of the material feedback, is as we look forward,

the SPARC deferral. So as we move from Q3 2024 to Q4 2024, that $27 million in revenue impact that we talked about in the revenue bridge,

which has, you know, per Jeff's

question, my comment.

A fairly heavy fall through to the bottom line, that's the single biggest item as we move from Q3 to Q4. And I'll just use it as another chance to remind the group here that we expect about a $10 million revenue year-over-year impact.

from SPARC, call it similar to Q2 than we do in Q4. Other major moving parts, I think seasonality.

Seasonally, we have typically a better absolute volume and revenue quarter in Q4. We also called out on our, call it other items, bridge of adjusted EBITDA, that we had a larger transaction loss within Q3.

If you have a way to guess or estimate FX, let me know, but we expect that to be certain.

certainly more muted in fourth quarter.

Speaker Change: To Paul's prior comment to the prior question, investment levels you can think of as going largely sideways, consistent level of investment as we go from Q3 into Q4. And then we're not talking, obviously, today about

2025. We're not providing any, you know, guidance into the future, but the biggest thing we'll be talking about as we get to the end of fourth quarter is the estimate that we have for how that SPARC revenue impact in 2024

It turns to a positive in 2025. Be mindful that it's over 18 months, not just 12 months.

Fair enough. And if I can ask a quick follow-up. Aaron asked about, now that you've been there, about the investments that you're making.

I'm going to ask it a little differently. Now that you've been there and you've looked at

your product portfolio. Yeah, I think originally there were some comments around implants and maybe what you could do there, but are you happy with your product portfolio now? Is there somewhere that you might want to invest outside, acquire certain products, divest certain product lines, like skew rationalization? Is there anything more

Speaker Change: to do there or areas that you think that there's opportunities?

Why don't I take this one? And I'll answer it short-term and long-term, you know, short-term the company's been working on this portfolio now for, you know, coming up on 20 years and it's good. We're happy with the categories that that we have.

and we don't have any...

Speaker Change: in a near-term intention to make significant changes to the portfolio.

Medium and longer term, though, this is a dynamic category and, you know, the clinical needs are always moving forward, competition is always moving forward, and our customers are always moving forward.

And if there's one thing, you know, I've learned over time in med tech is that if you take your eyes off the forest for too long, you know, one day you walk into it and the map no longer matches. So we're constantly refining and honing our portfolio.

Speaker Change: And, you know, we put a lot of energy into that.

Speaker Change: Guys, thank you so much.

And as a reminder, if you'd like to ask a question today, please press the star and one keys on your telephone keypad.

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

Hi everyone, thanks for taking the question. I just wanted to stick on the implants for a second, maybe to help us understand a little bit of what things are and aren't working.

Maybe just talk a little bit about comparing the implant organization today to what it was a year ago, right? Like, where have you made significant investments and what specific investments are starting to really pay off? And I had a follow-up on implants as well. Okay. Thanks, Stephen.

Yeah, the investments follow along three different time horizons.

Speaker Change: those that have the most immediate effect and that I think we can can see impact already from, those in a middle tier which are more of a medium term return, and then those are the third group that are longer term.

Speaker Change: The first group are commercial investments.

So this is, you know, refilling vacant territories, you know, doing near-term customer events.

Speaker Change: etc.

The lion's share of the investments year-to-date have been in that category, and as we talked about the closing of the gap to market in North America, we think is directly connected with that investment.

The middle term is more clinical in nature, patient education or customer education and the different events we run for that.

Speaker Change: We're starting to see a bit of improvement in that regard.

And then the third is new product development. And, you know, in the implants category, that can be a couple of years to get the product developed and then a couple of years for it to, you know, generate momentum in the market.

I'd also remind people that the gentleman we selected

Stephen Nielsen, you know, comes from the industry. He built the largest

DSO in Europe and so he has a very unique perspective on what customers need both clinicians and multi-site operators from an implant solution and that's been a very powerful addition to our understanding of the market.

and so we're pleased to have Stephen on board.

Speaker Change: Okay, great, thanks. And then on implants as well, I think in the slide deck it said that value implants in North America were up, I believe, mid-single digits. Just curious if you could comment on how Premium is doing as well, as you guys are making comments that the gap is closing on the implant side in North America. Is that for both the Nobel side and the value side, or more so the value? Just any commentary between the two segments and how they're performing. Thanks.

Yes, I'd say three things. First, you heard correctly, value now has posted three consecutive quarters of growth. Secondly, value does continue to grow more quickly than premium. Both segments of the market, though, do grow and we're encouraged by that. We're making progress in both.

And then the third piece of it, specific to North America for Nobel, we've now seen a couple quarters in a row where our quarter-over-quarter growth has accelerated.

still below the market, but again closing that gap which gives us confidence.

Speaker Change: that, you know, will be able to return to growth in North American implants, which will go back to, you know, several of the preceding questions. You know, that's when that business really starts to generate nice economics and this funding model works more smoothly.

And we'll take our next question from Vic Chopra with Wells Fargo. Please go ahead, your line is open.

Hey, good afternoon and thank you for taking the questions. Congrats on a nice quarter. Apologies that this has already been asked but I'm bouncing around. So two questions for me. One, maybe just talk about how you're thinking about the forward trajectory of the dental market which is clearly being pressured in the U.S. You know, what's your visibility into a dental market recovery as you move into next year? And then I had a follow-up. Thanks.

Thanks for the question, Vic, and welcome to the coverage universe. Your question has not been asked, so we're grateful for it.

Dental market looking forward, I'd say two things. One, you know, a lot of people on this call have been following dental for many years and over time, you know, take any five-year period, it's typically a three, four, five percent grower globally.

My best guess of normalized growth for the global dental market is still in that range.

Speaker Change: Now, you know, I've been taught early that you can give people a number or you can give them a date, but don't give them both. I don't know when the dental market will fully normalize. I mentioned a couple of the early indicators that people watched.

People watch from the clinical perspective, they look at a couple of things, look at patient traffic.

Speaker Change: in general dentistry, that's remained stable. Of course, I look at case starts in orthodontics and those are consultations in implants. All of those are sort of flattish, not picking up yet.

Speaker Change: And then there's the macro indicators. There's, of course, interest rates are important for this category, both because some equipment gets financed, but also because additional clinic ads are typically financed.

Speaker Change: You know, on other calls of participants in the sector, they've tried to figure out how much interest rate over how long leads to a market growth. I'm not that smart, but I think generally the two are correlated.

And then, of course, GDP and consumer confidence are other good macro indicators.

You know, we had a decent GDP print today. I think that's encouraging. Consumer confidence depends on what your starting point is. If your starting point is July, it's ticked up modestly. If your starting point is pre-COVID, it's still got a ways to go.

Thank you for that comprehensive answer. My second question is, have you seen any impact as a result of the recent hurricanes? You know, have you seen procedures move from 3Q into 4Q and then any impact from saline shortages? Thank you so much.

Speaker Change: from the Hurricanes.

Speaker Change: Is that right, Vic?

Yeah, from the recent hurricane.

Speaker Change: All right.

So I'd say yes, you know, we have a lot of customers in Florida and the Southeast and it's been hard. You know, a lot of them had their clinics closed, a lot of them have had damage to their equipment, etc. So for the folks who live in that part of the world, you know, our heart goes out to them. We're trying to do whatever we can to help them get going again.

but we're a global business and as difficult as the southeast has been for our customers, it's not a material effect on the INVISTA side.

Speaker Change: And there are no further questions on the line at this time. I'll return the program to Paul Keel for any additional or closing remarks.

Paul Keel: Okay, well, thanks everyone for tuning in. We appreciate you taking the time. As we mentioned in our prepared comments, we're pleased with our result in the quarter coming in largely as expected.

Paul Keel: And I would say in addition to that, more broadly, that as we talked about on our Q2 earnings call, Invista is a fundamentally good company with leading positions in what we think are some of the best segments of what has proven to be a pretty good market over time.

The company has good, high gross margins, good cash flow, a strong balance sheet, and underpinning all of this.

We have a positive culture centered on performance, inclusion, and continuous improvement. So the core building blocks of success are in place, and our focus now is on generating better and more consistent performance from this foundation.

Now, our first step in this direction was reinstating 2024 guidance at more credible levels. Now, we did this in Q2. And a second of many steps is to more consistently do what we say, and we hope there's evidence of that here in Q3.

Paul Keel: Now, having said all that, we still have much work to do in order to perform at a level consistent with our capabilities, but we are encouraged by the pace of improvement over the last six months and are eager to build on this momentum moving forward.

So with that, I'll wrap it up and again, thank everyone for joining us today and for your continued help and support. Have a great day and a good week. Thank you.

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

Paul Keel: The End

Paul Keel: www.heart.neu

Paul Keel: [music]

Paul Keel: [music]

To be continued...

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Speaker Change: Bun-ndan bun-ndan. Mn-m. We are so robust that depending on what you decide you've got to stay and play the game for the next seven days and thenM. For whether it be Monday or Wednesday we have been demanding it over and over M. So the good and the bad and we justI mean we can't impose anything on anybody even if we want to. So the game's real, you get to decide which one you decide whether you want to play it for or not, I mean who wants to play it for. Come on, let's play it.. Come on, let's play this one here. In the back let's play this. We've got the cups of monopoly.

Speaker Change: [music]