Q2 2025 Envista Holdings Corp Earnings Call
Hello. My name is Ena and I will be your conference call facilitator. This afternoon.
At this time I would like to welcome everyone to investor Holdings. Corporation, second quarter, 2025 earnings results conference call.
Online 7. Please unmute to prevent any background noise. After the speaker's remarks. There will be a question and answer session. If you would like to ask a question during that time simply Press Start, then the number 1 on your telephone keypad, if you would like to withdraw your question, please press star. Then the number 2.
I'll now turn the call over to Mr. Jim Gustafson, Vice President of Investor Relations of Envista Holdings. Mr. Gustafson, you may begin your conference call.
Good afternoon. Thanks for joining in vista's. Second quarter, 2025 earnings call. We appreciate your interest in our company with me today are Paul Keel our president and chief executive officer and Eric, Hammes our Chief Financial Officer.
Before we begin, I want to point out that our earnings release, the slide presentation supplementing, today's call and the reconciliations and other information required by SEC regulation, G relating to any non-gaap Financial measures provided during the call, are all available on the investor section of our website www.ind.com.
The audio portion of this call will be archived on the investor section of our website. Later today Under The Heading events and presentations.
During the presentation, we will describe some of the more significant factors that impacted year-over-year performance.
The supplemental materials describe additional factors that impacted our results. Unless otherwise noted references in these remarks to company, specific Financial metrics, relate to the second quarter of 2025 and references to period to period, increases and decreases in financial metrics our year-over-year.
With that, I will turn the call over to Paul.
Thank you, Jim. Good afternoon, and welcome everyone. We appreciate you taking the time to join us today. On today's call, I'll kick us off with some opening thoughts on our Q2 and first half performance, as well as a brief strategic and operational update.
Eric will then take us through the financials in more detail and I'll wrap things up with some closing thoughts. As always, we'll then open it up for your questions.
Slide 4 summarizes three things: year-to-date results, progress on executing the value creation plan that we laid out at our March Capital Markets Day, and an update to our 2025 full-year guidance.
Let's begin on the left with Q2 and H1 performance.
Q2 was another solid quarter for in Vista with strong revenue and EPS growth and good margin expansion.
Core growth came in at 5.6%, aided by some customer buying in advance of expected price and tariff increases.
Adjusted ebit on margin was 12.4% up 240 basis points from Q2 of 24 supported by good growth and GNA productivity and offset in part by transactional FX losses related to the softer dollar.
Adjusted EPS was 26 Cents the result of the ebit dog growth that I just mentioned coupled with the lower tax rate, which Eric will say more about in just a moment.
Moving to the middle of the slide.
We delivered broad-based growth across our portfolio with both reporting segments and all major geographies in positive territory.
Products grew just shy of 5%.
In the same way, we're continuing to make progress on the operations front. In addition to continued reductions in spark unit costs and design cycle times, we're off to a good start on implementing the tariff mitigation plan that we outlined on our Q1 call.
And we continue to move forward as well. On our people priorities with sustained improvements in Employee Engagement and development.
Moving to the final column giving our given our first half performance and good momentum. We are updating our 2025 full year guidance.
We now expect core Revenue, growth of 3 to 4% up from 1 to 3 previously, and adjusted, EPS of a $15 to a $1.15 up 10 cents from earlier, guidance.
Adjusted Eva margin is unchanged at approximately 14% although ebit dot dollar expectations increase as a result of the stronger growth guidance.
At our Capital markets day in March, we laid out a value creation plan. Consisting of 4 components
Guided by our purpose, centered on our values, focused on our priorities and framed by our 2025 guidance and medium-term Outlook.
Let's turn now to progress made in the first half in support of this plan.
Beginning with growth, on the left side of the slide, we're working to accelerate ours through the 4 pillars, we discussed in March.
Better accessing untapped growth in our core markets. Extending our Rich history of new product innovation.
Penetrating a prioritized group of attractive. Adjacencies and amplifying. Our organic growth with the creative m&a.
In terms of battery accessing market growth, we saw further gains in H1 on the price work that we began Last Summer.
This helps support a meaningful increase in sales and marketing investment to accelerate activities, like our various brand campaigns and Global customer education programs.
for example, we held several high impact Customer Events, including a highly successful Nobel biocare Symposium in late May
With more than 75 globally, renowned speakers close to 50 master classes 2, live surgeries and nearly 1700 attendees. The Symposium celebrated, the 60th anniversary of the invention of dental implants by Dr. Branmar and Nobel biocare while also looking to the Future by unveiling several of the latest Innovations in digital Dentistry.
We also hosted several other Global Customer Events, including Ortho and implant events in China with close to a thousand clinicians participating in each.
In addition to ramping sales and marketing, we increased R&D by 14% in the half this enabled. A number of important new product launches, including spark retainers spark bite, sink Class, 2 corrector ormco Edge, free adhesive, a digital full Arch, scanning solution from Implant Direct. And the next release of DTX, Studio Clinic with additional AI features, enabling doctors to go from image review to implant planning in less than 90 seconds.
On the adjacency front, we drove further penetration in both DSOs and emerging markets.
With respect to the former, we have now installed dexus cdcps and DTX, AI implant planning in all 1,000 plus sites of 1 of the largest dsos in America.
This Milestone represents a significant advancement in digital Dentistry. Enhancing diagnostic accuracy supporting clinical collaboration and greatly improving the patient experience.
With respect to Emerging Markets, we delivered double-digit growth in the second quarter across our Latin America, indo-pacific and Middle East and Africa regions.
Rounding out our growth update, we closed 2, small Acquisitions in the first half, both at attractive, ibitta multiples to further accelerate. The organic efforts we have underway.
On the operations front. We continue to enjoy strong contributions from EBS. Our continuous Improvement methodology that is Central to how we deliver results, develop our people and Advance our culture.
By way of example, we reduce GNA spending by 15%, in the first half while maintaining customer service levels above 95%.
We also announced plans to expand our manufacturing footprint in China with a new site in Suzhou, that will produce a liners implants, brackets, and wires, and some diagnostic equipment.
The primary focus of this site will be to support growing China, demand.
Finally, with respect to people, we continue to advance our high-performing, continuous Improvement culture, as engagement and talent development continued to climb along with our growing momentum.
Having now covered the high points of the quarter and the first half, I'll turn it over to Eric to walk us through the details.
Thanks, Paul. In the second quarter, we delivered sales of 682 million.
For sales in the quarter, increased 5.6% and currency, exchange rates, added about 200 basis points.
Our Q2 adjusted gross margin was 54.4%. An increase of 20 basis points versus the prior year, despite foreign exchange rates being a headwind to margins.
We'll cover more on the FX in detail, specifically in our margin walk, but the weaker dollar trend from Q1 to Q2.
Resulted in a net FX transaction loss from balance sheet remeasurement.
from an operational perspective, We performed in line with our expectations with good performance across our Global Supply Chain, including another strong quarter of spark unit cost reduction,
Our adjusted Evita margin for the quarter was 12.4%, which was 240 basis points better than the prior year.
Overall, margins were hurt by the net FX impact already mentioned but helped by strong performance in volume price and continued GNA productivity.
Adjusted EPS in the second quarter was 26, Cents, up 15 cents compared to the same quarter of last year and above our expectations.
Our non-gaap tax rate for the quarter was 33.3% better than our expectations due to strong income generation in the United States.
As I'll cover in the assumptions. Underpinning. Our 2025 guidance.
We anticipate our full-year tax rate to be similar to the Q2 tax rate.
Finally, we generated 76 million of free cash flow in the quarter down from last year due to higher working capital.
Let's now turn to 2 Bridges to help break down our year-over-year results beginning with sales,
Core revenues grew 5.6% in the quarter with positive growth in all major businesses and geographies.
Volume growth in Q2 was up about 400 basis points and ahead of our expectations.
we saw improved volume growth in several businesses notably, brackets and wires, Diagnostics and implants
Our growth in Q2 was also helped by a favorable prior year comparable as well as some customer buy ahead.
We estimate this. Buy ahead at approximately 10 million, which we expect to unwind in the second half.
For an exchange was a Tailwind of approximately 12 million, 12 million or about 200 basis points.
at our March Capital markets day, we noted an opportunity for improved price execution at in Vista
Which is even more important today with the increased tariff activity.
Our Q2 results reflect these efforts with price up, 9 million dollars year-over-year contributing about a point and a half of growth.
Spark deferral was roughly neutral in Q2, although we expect the year-over-year benefit to ramp meaningfully in Q3
And finally, we had a minor benefit from the two small acquisitions that Paul mentioned earlier.
Turning to the adjusted IBA margin, Bridge volume and mix delivered a 160 basis point improvement, reflecting particularly strong growth in the quarter from high-margin businesses like consumables and brackets and wires.
Improved pricing delivered a 130 basis point improvement in margin compared to last year.
We had a net gain of 20 basis points from the combination of productivity and Investments.
This was driven by year-over-year reductions in GNA as well as spark unit costs offset by increased investment in sales and marketing and R&D to support future growth.
Increased care costs compressed margins by 60 basis points in the quarter.
I'll cover more on our full year, net impact of tariffs when I discuss our 2025 guidance.
transactional, FX losses brought a 240 basis, point headwind in the quarter,
With the structural diversity of our Global business.
There is not typically a need for financial hedging. However, with currency volatility, higher of late, we did increase our hedging positions in Q2, in order to decrease balance sheet transaction exposure on a go forward basis.
Margin improvement from the absence of 1-time costs that occurred in Q2 of last year.
Turning to segment performance or Revenue in our Specialty Products and Technology segment grew 7.2% year on year with core sales, growth of 4.7%
In our Orthodontics business.
Spark was up low, double digits, and brackets and wires was up high. Single digits helped by the customer buy ahead, but offset in part by continued decline, in China related to preparation for vbp.
On the implant side, premium delivered another quarter of positive growth globally, including North America, and Challenger returned to growth as expected.
In Q2, our Specialty Products and Technologies business had an adjusted operating margin of 13.5%, up over 400 basis points year-over-year. Despite a 200 basis point headwind from transactional FX losses,
Volume price and net productivity were all positive in this segment. In addition to the benefit from prior year, 1-time items,
Moving to our equipment and consumable segment, core sales in the quarter increased 7.3% versus prior year, including double digit growth in consumables against the soft comparable last year.
Diagnostics core sales growth was also positive, including mid single digit growth. In our largest market, North America
Adjusted operating margin for this segment improved 140 basis points versus Q2 2024 driven by volume growth and price capture.
FX transaction, losses were a 300 basis, point headwind in ENC in Q2,
Let's now turn to cash flow.
Q2 free cash flow was 76 million a decline of about 10 million when compared to the second quarter of last year as improved sales and margins were offset by increases in working capital, which were driven by our faster growth.
First half free cash flow was also down from last year, primarily driven by the low incentive compensation payout of q1 2024.
Our first half free. Cash conversion was 84%.
Which is typical of a normal first half.
As discussed at Capital markets day, we expect free cash flow conversion over time to be around 100%.
Our balance sheet remains strong and stable, with a net debt to adjusted EBITDA of approximately 1 time, providing welcome stability and flexibility, especially in periods of heightened macro uncertainty.
Finally, we deployed $82 million in Q2 to repurchase 4.8 million shares of stock.
On a year to date basis. We've repurchased 100 million dollars for a total of 5.9 million shares. As we continue to execute our 250 million, 2-year repurchase authorization
I'll now say a few more words about our updated guidance that Paul noted earlier.
Slide 13. Summar, the changes.
A core sales, growth range of 3 to 4% versus 1 to 3 previously.
EPS of a dollar 5 to 1.15 versus 95 cents to a dollar 5 previously.
An adjusted Evita margin unchanged at around 14%.
Slide, 15 details, some of the assumptions. Underlying, the updated guidance.
First, we continue to expect the dental Market to remain stable with no significant Improvement or deterioration in the second half.
For exchange rates. We now expect the benefit of approximately 150 basis points to reported sales for the Year. This is based on June ending FX rates.
We anticipate the adjusted ebita impact from the weaker dollar to be neutral with no benefit as the translation benefits for the full year are roughly offset by the transactional losses incurred in the first half.
For the full year, we continue to expect our supply chain pricing and cost savings actions to offset the impact of increased tariffs.
Recognizing that the Tariff landscape continues to be dynamic. This is based on tariffs that have been announced to date.
as noted previously, we expect the 2024 change in our spark deferral to generate a $30 million year-on-year, Revenue benefit in the second half with a significant majority in Q3
There's no change to our expectations regarding the previously implemented. Restructuring
Our tax rate estimate has improved. As I mentioned earlier, and we now forecast an adjusted rate of 33% for the year.
This is the result of improved us profits, which increases the basis of our interest expense deduction,
We are still assessing the impact of the recently enacted changes in US federal tax law.
In addition, we have a project underway to further reduce our Global Tax Rate over time.
We will update you regularly as things progress.
As we've already covered our stock buyback program, I'll turn it back over to Paul to wrap things up.
Thank you, Eric a few closing thoughts on the quarter.
First, underlying Dental market conditions, in Q2 were pretty similar to what we see in recent quarters.
While macro uncertainty continues to be high the underlying Dental Market remains stable.
Second our Q2 results were positive, including core growth of roughly 5 and a half percent. We posted just shy of 3% core growth for the first half.
Reflecting this good start, we've raised full gear growth guidance, to 3 to 4 percent. Along with an updated, EPS range of 1.5 to 1.15.
I'll close by noting that this progress is made possible by the wonderful talent and commitment of our Global Institute.
We appreciate all you do in the service of our stakeholders.
In the same way, we're grateful for the support. We receive from our customers partners and shareholders.
That completes our prepared remarks and will now open it up for Q&A.
Thank you, ladies and gentlemen, we will now begin the question and answers session.
Should you have a question please press star followed by the 1 on your telephone keypad.
You will hear a prompt that your hand has been raised, and should you wish to cancel your request? Please press star 4 to 2. If you're using a speaker phone, please, leave the handset. Before pressing any Keys 1 moment, please for your first question.
Thank you. And your first question comes from the line of Elizabeth Anderson from evercore isi, please go ahead.
Hi guys. Um thanks so much for the question and congrats on a really nice quarter. Um, you know, I I think you know, there's been a lot of confusion about the the sort of state of the dental Market were you surprised by sort of the, the strength that you saw across the portfolio and your different businesses? Um, this quarter like, was it, you know, turn around driven do you think it was the the main drivers were Market driven and sort of how are you thinking about the broader Dental macro at this point? Thank you.
Hi Elizabeth. Thanks. Uh, for kicking us off, um, maybe a couple more thoughts on the market and then a, a few comments on, um, our specific, uh, performance. In addition to what we, we just covered, uh, starting with the the market. Um, you know, we continue to see green macro shoots. So, uh, I would say, Q2 macro was incrementally better to, to q1. Uh, unemployment still very low, um, interest rates uh, in many markets notably Europe continue to come down. And then the big change Q2 from q1 was the tick back up and consumer confidence. Both the June. And the preliminary July numbers were were pointed northward? Which helps
Um having said that about the macro, I think In fairness the preponderance of dental specific data that um that you guys get and that we get things like the recent Ada survey or or some of the third-party uh research. Uh they all continue to point to a a slow but Stable Market.
Um, so I think that captures the, the market, uh, conditions, uh, specific to us, um, you know, in addition to, to what we said earlier. Uh, we had particularly strong growth in our Orthodontics business. Uh, both the brackets and wires side as well as the clear liner side. Um, we're strong, uh, we also had, uh, very good growth on both sides of our consumables business core Dental, as well as infection prevention.
Um, we had similarly, uh, balanced growth in implants with both premium and Challenger, uh, in positive territory. And then it was nice to see Diagnostics, uh, return to growth, especially with the uh, mid single digit, uh, performance, in both North America and Europe.
And at that momentum. Now as we have the full quarter behind us, did continue across May and June. Uh anticipating a similar question on this call. Um, July is almost in the books for us. Um, so we have a, a good first look there. And again, July was very consistent with our steady, uh, performance and expectations.
So uh on balance, um, you know, uh, on as we put all of this together, I'd say this is a, a positive step forward for for in Vista.
Our plan is generally working and we'll just keep working the plan. So, thanks for the question.
Thanks so much. Um, can I just double click maybe once more on the brackets and wires comments? That was certainly uh, 1 area of outside. Um, growth versus what we traditionally see in that market. Could you tell us a little bit more about the drivers of that outside growth in the quarter? Thank you.
Yeah, for brackets and, and wires specifically. Um, I would say it, it's, uh, there's 2 big contributors, uh, to that. Um, the first is although we talk more about our our investment in sales and marketing on the implant side, we have been increasing our activity on the ortho side uh, as well. Um, and uh you know, investment, there tends to return return nicely especially because of our, our very strong position on the the bracket and wire side. You know, the second is there's some question of of whether
There's a shift from clear aligners to, uh, to brackets and wires. We, we'll probably get another question on that as we go through the Q&A. Uh, I think maybe on the margin that that helped a little bit, although the the, uh, kind of mix globally in case starts between brackets and wires and aligners has been generally stable now, for, for about a decade, uh, 3/4 to, to brackets and wires in a quarter to, to aligners. Um, but, you know, kind of consistent with with all of our businesses that we talked through, in the prepared remarks, um, consistent intentional, uh, progress on the brackets and wire side,
Great. Thank you so much, congrats on the quarter.
Thank you and your next question comes from the line of Jeff Johnson from bear. Please go ahead.
Thank you. Good evening guys. Uh Paul was wondering if I could just uh ask another question on the brackets and wires business uh not so much about the clear liners versus brackets and wires but I think you said China was still down, year-over-year kind of ahead of vbt. Uh, the last 2 quarters, I think you're China, brackets and wires business is down, been down, 50% 50%. Any, any way to put us in a, a, a range of how much it was down this quarter and, and are we at the point now where inventory levels have been adjusted and we could look to China vbp
On the ortho side to be growth additive as opposed to dilutive uh moving forward into the back half of this year and and then maybe 1 other vbt question if I could.
Uh, sure. So maybe just the context on, what's driving, the pre vbp decline in the Bracken wire, uh, segment as well as us. Um, and then, uh, I'm looking at Eric, see if you can dig out the the number for, for China specifically. Um, but, uh, we learned all of us learned this from the implant, uh, vbp both uh, uh, Ortho and implants are direct businesses, of course. Um, but in China, we rely on the channel for Logistics because it's such a, a vast and, you know, fragmented Market. Uh, and so anticipating that prices will come down with vvp. We don't want to have a lot in the channel. Um, so we're careful of how much we we we put into inventory there and then some customers, the more sophisticated customers anticipate a reduction in the procedure price so they might be delaying, um, treatment, you know, anticipation uh, of that. So uh, we vary again.
And having gone through it with implants, um, we very much anticipated, uh, negative growth for brackets and wires in the first half. Now, when the procedure price gets announced, and then the, um, product pricing, uh, follows that we expect the Converse that they'll be, uh, uh, increased step up in, in both patient demand. But also putting a little bit more, uh, into the, the use the word Channel, although it's, it doesn't behave the same way as as a channel, would in, uh, in the US, but a little bit more into inventory, to satisfy, that demand. Uh, Eric is still digging. I see if he's got the number. Yeah, Jeff just, uh, on your question about the, the movement of the growth rate. So I'll just talk it through by quarter and and give a little bit of color. So,
Mindful that our business in China in Ortho is almost all brackets and wires 95 plus percent. Uh it was down almost 50% year-over-year in q1. Uh, we were up modestly in Q2 um, part of that was our own team strategy out of the implants Playbook to make sure that we're we're driving, you know, penetration pre vvp, which we think ultimately just helps us out post vvp. Um, but put the 2 together. I mean, it was still down, you know, 20 to 30% on a year-over-year basis. First half.
We anticipate uh, Q3 to be call it in the ballpark of flat. And then we're going to have, you know, estimated robust growth in Q4,
But there's a lot of uncertainty around that, right? The only thing we know today is what's come through the, the service bvp and then prospectively, you know, the timing of the product. DVP. Um, but I think we, um, we also know that that vbp timing is a little bit elusive, um, but it's going to be, you know, should be robust growth in the second half. It is dependent on on how vvp ultimately gets implemented.
All right, that's helpful. And then maybe the follow-up on vbp, just obviously, you know, a lot of chatter about a, a VB a second round of vbp for dental implants, starting next year, you guys are putting some China, uh, infrastructure, uh, in in place, you know, 1 that added infrastructure. Uh, how much does that cushion or, or kind of protect your likely ability to participate in that vbp? Number 1,
Uh, and number 2, just, you know, a lot of chatter about it. Not a lot of specifics, just any detail. You can provide us. Do we think it's going to happen early in the year? Uh, historically. We've seen second rounds. Maybe be less price, uh, declines than than, maybe what you see in the first round. Things like that. Just any idea, uh, kind of how that second round of implant-based DBT might play out next year in China. Thank you.
All right, let me take uh both parts of the question in turn uh here Jeff so, so first, first, with respect to local manufacturing and vbp, um, local manufacturing did not appear to play a role in the first implant vbp. Uh, nor have we received any communication, that will be a factor in the ortho vbp, that's currently underway, uh, market share customer satisfaction and of course, price. Um, or have been. And we expect, we'll continue to be the most important, bbp criteria. Now, as local manufacturing, you know, indirectly supports all 3 of those, uh, our investment in China, you know, should be, uh, on the margin helpful in, strengthening what what we consider to be an already pretty good bbp position.
So that was your first question. Uh, second, with respect to BBP 2 timing for implants, we have not received any communication on that. So, I'm afraid at this stage, I don't have any better information than you do.
Understood, thank you.
Thank you. And your next question comes from the line of Jan blanik from stifel. Please go ahead.
Uh, Hey guys, good afternoon and thanks for the time. Maybe just to kick it off for spark. I, I think in the slides, you mentioned,
Improving growth margins. So can you talk about? You know, is the thought
That spark turns ebit positive in the back part of this year to age 25, you know if so any thoughts on the trajectory going forward? And then maybe just a quick tack on in that 1 were there any recent changes to spark pricing, uh, in the marketplace and then I've just got a tighter follow-up. Thanks.
Yeah, thanks John. I'll I'll just take that. So our plan for spark and I think it's really in most of our, you know, pre-read remarks as well. Is that
Our performance Trend to profitability remains unchanged. So, you know, second half 2025 is, is when we believe it'll, it'll turn to profitability. Um, that's still our, that's still our view, that's still our view. Um, along that Trend, you know, we're now on multiple quarters. Um I don't even remember the track record but probably 8 to 10 quarters of consistent consecutive quarter.
In good standing. So, you know, we'll give you our update as we go through the second half in terms of the, the numbers. Um, but we do expect to be profitable in the second half. Uh, and then on your last or second comment around price, uh you know, very moderate changes for us year-over-year in uh, in price. So not really material. I don't think for the purpose of, uh, the call here today, you know, we had, you know, low low single digit, uh, price growth year-over-year in spark which effectively means we're, we're flat. So um, that's where we're at today.
Fair enough, thanks for that caller. And then, you know, Eric, maybe I'll just stick with you, anything to call out, I mean, you got half the year in in um you got half the year down but anything to call out with the phasing 3 q4q you know Topline by division or maybe even more importantly on the IBA margin side. Maybe that was the only I don't know just relative to RS. Emits, the only blemish in what was a really really strong quarter, was the EBA margin that you explained that in the bridge. Some of that was FX related. But when we think about, for the balance of the year and your actions to offset some of the tariffs, how should we be phased or weighted between 3 Q or 4 q, or any color? You can provide? Thank you. Yep. Yeah, excellent. So let me let me do that in 2 shots, John, let me just talk first on core growth. Um, and then on on margins and and fully understand that the sphere of the question too. So if you just look at the, our guidance, um, I'll just talk midpoint of our guide which is where we see our our full year. Uh we should be
About a point better in terms of core growth in the second half, um, and I'd say there's really 3, big moving pieces within their, um, 1 is our spark deferral. So, effectively flat year-on-year, in terms of the deferral change that we've been, you know, laying all the breadcrumbs for every quarter.
That'll be about a $30 million benefit in the second half year-over-year, with a significant majority, call it 80%, in Q3.
um which ultimately, you know, yields about a a 2-point benefit in terms of of, of growth. So that's
Call it a, a Tailwind for us.
Um, we talked in the pre-read remarks about buy ahead. Um, we estimate that, our Q2 buyer head of our announced price increases which were earlier in the quarter were about a ten million dollar benefit. We think that comes back largely in Q3 uh, may be a bit in Q4, so that's a a point of growth going in the other direction. Um, and then just be mindful that our first half growth was, was held up by about a point in Dental consumables favorable comp. Um, that was based on us really bringing the dealer inventory Channel last year to a, to a point of Health, which all happened in the, in the first half of last year. Uh, so those are kind of the Big 3 points on the growth. If you do all that math, you'll, you'll find that the rest of our businesses stable to call it slightly improving in the in the second half. Um, and then on margins, our margin guide.
At approximately 14% what that means is we're about 2 points better in the second half. We would expect, uh, as we typically do seasonally that volumes are a Tailwind for that. Um, we're going to continue to drive good productivity. So as we just talked about, you know, spark gross margin. Spark unit costs will be on the plus side of The Ledger, um, GNA will continue to deliver year-over-year and we expect to get, you know, a good amount of price.
Um, on a full year basis. Of course, what we're really what we're really seeing here is upside versus our original margin guide on what we would call just core operations volume price productivity. Um, but FX is diluted for us, and that's, you know, a favorable translation benefit, but it's offset fully by the first half transaction losses, and versus our original guide. That's about a 50 to 70 basis. Point headwind. Um, we saw a lot of that, of course, in the, in the first half, but it's factored into our our full year guidance.
Perfect. Very helpful. Thank you.
Thank you. And your next question comes from the line of Steven Valkanis from Isuzu Securities. Please go ahead.
Yeah, thanks. Good afternoon. Um, I guess on clear aligners, you know, one of your competitors also talked about seeing some decent levels of patient scans.
Um, for us, our spark business has had pretty consistent growth again. I, you know, Eric couldn't remember the number of quarters that the unit cost the sequentially reduced. I can't remember the number of successive quarters that we outgrew the market. Um so
For us, we expected to outgrow the market again in, uh, spark and, and that's what we did see. So specific to whether um, our doctors are having slower patient, um, conversions.
Anecdotally.
You know, 10 10 thousand orthodontists, you get a lot of anecdotes. Um, but uh for us, no, I don't think I, I would point to that as a, a meaningful impact, uh, in our Q2.
Okay. All right. I appreciate the color, thanks.
Thank you. And your next question comes from the line of spending Vasquez for million Blair. Please go ahead.
Hi. This is Russell on for Brandon. Thanks for taking the question. Uh, last quarter, you mentioned that you were able to broadly offset the impact of terrorists and continue to believe so, uh, giving things are always bound to change, but could you always give any updates as to the mitigants and implementations and future timelines? You mentioned previously
Yeah, I can take that Russell. Um, so maybe just a, a, a point of bearing just to get everybody calibrated, um, in our second, quarter margin walk. Uh, we did show what our Q2 impact was from tariff costs. Um, so that would be net of supply chain actions, of course, but just the cost that we expensed in the p&l, uh, that was about million dollars. It was roughly 60 basis points of margin dilution. Um and then as we look out to the second half of this year, based on the timing of tariffs and then also just how the expense rolls through our balance sheet uh gets capitalized and then hits expense. We would expect call it 15 to 20 million dollars of tariff cost in the second half roughly even by quarter at this point in time. We feel like the Tariff landscape is at least, you know, reasonably stable to, you know, predictable for now. Um, and then our Playbook remains unchanged. So in the first quarter call, we talked about number 1, mitigation is
Actions that we're taking within our supply chain that's with suppliers that with our own distribution Network. Um that's also with source of Supply, uh, shifting source of supply around the world to our, you know, multi Geo sites.
Uh, the second would be costs and I think we see you know, good momentum on that already when we've reduced costs, like GNA. As Paul mentioned, you know, 15% in the first half year-over-year and then the third to a lesser degree is is price. And we would see, you know, all 3 of those being able to offset the call at 15 to 20 million dollars in tariff cost, headwinds in the second half, equal by quarter. If you would
Uh, that's helpful. Thanks. And I saw in the quarter, Challenger returned back to growth after slight decline in the previous quarter. Uh, and premium implants continue to grow. Well, uh, could you talk about what changes you saw, um, in Challenger and any commentary you have on the overall implant Market. Thanks.
Yeah, and the, the q1 call. Uh, we, uh, you're correct. We had negative growth for the first time in a number of quarters in our Challenger business business. We posited that that was because, uh, we had 2, fewer billing days in q1, in a direct business that does have an impact. Uh, on the call, we said we expected Challenger. Nothing had changed fundamentally in our, uh, Challenger business. And we expected Q2 to, then return to that normal, um, low single digit positive trajectory, um, and that's what happened. So, it it played out pretty well as as we expected it. I, I don't think there's much more to say on that.
Thank you.
And your next question comes from the line of Jason begner from Piper Sandler, please go ahead.
Anything like that. Thank you.
Uh yeah, maybe so 2 parts that you touched on Jason, the the the price piece and then equipment purchases. Um, you know we we put the word price, a couple of times I guess in our prepared uh remarks and now in our questions but uh, the the Quantified piece of price is very small, a point and a half in Q2, I think it was a point in q1, so our price increases are are modest. Certainly less than CPI.
And oh boy certainly less than what we're seeing in input inflation in our in our own p&l. Um so I would say our our price increases have been well uh, received by the the market. It would rather have no price than very modest price, um, but we're careful not to not to push push things there. Uh, so that's on the the price front, um, with respect to equipment purchases, yes. From for sure. We've seen, you know, across the last, many quarters, a delay in equipment purchases. Um, you've seen that across the diagnostic segment, um, we did, as we mentioned, have a positive quarter for Diagnostics, which was, um, uh, encouraging, uh, to see. Um,
As interest rates, come continue to come down, that will be, uh, supportive. But at some point, um, technology upgrades new sites, DSO expansion, all of those things require equipment. So, you know, at some point, you're going to have the diagnostic Market We Believe has to has to pick up.
Well that's helpful then Eric. Just if I can, you know, get squeezed in 1 on you know maybe just a quick bridge on EPS guidance. Um I'm I'm seeing a you know to the the net of 10 cents and the raise a couple pennies maybe from BuyBacks a little over a nickel on the tax rate. I think the balance coming from the core Revenue website or any other factors. You you call out as influencing EPS Rays, any anything working against you that you're absorbing? Um, it sounds like maybe tariffs. You're you're kind of lapping through here and maybe that's, that's part of the factor here of why IA margins remain in the same, but just anything else you'd call out in that Epps Bridge, it's my numbers are are accurate there.
No, let me just repeat, maybe to make sure we're we're on the same page and then, uh, maybe just a confirming point. So, uh, I mean, our core growth I think is self-explanatory by our our range. And and the drop down at at, uh, gross margins, I think is is pretty obvious tax rate, you know, flat versus where it's been for the first half of the year. Um, shares. You know, we did have a hundred million dollars in share of purchase in the first half of the year.
we would expect that to moderate obviously the the um, you know, Global equities Market was pretty favorable in the first half and
You know, if you just look at our share buyback authorization, um, will likely be, you know, something of a metered level in the second half and then I think it really gets back to your, your core question, the, the 2 big trade-offs, um, which I mentioned in a, in a, in a previous answer, are, you know, the the better operational, you know, performance versus our original guide that volume dropping down at gross margin. Uh, it's a little bit of price. It's the work that we're doing in GNA, uh, and it's the Improvement that we're seeing in in spark growth margins.
But unfortunately a lot of that or all of that is lost by the better FX on the top line falling down at effectively zero adjusted EV. But uh which is this first half transaction loss offset by a little bit better translation. Um and we're you know upbeat if you will on minimizing the transaction exposure going forward, because we've entered into Hedges against our largest exposures that's euro to dollar and um Euro to R&B
So, I think you've got the rest.
Sorry, just to make sure I'm clear like relative to your prior guide. And then to today's guide update, you, you do have some EPS benefit coming in though, from share buyback, activity that you've done to date and the drop in the tax rate assumptions. Correct. Correct. Yeah. Small amount. Small amount from share buyback. Um and then basically the difference between our original guide which was a 37% tax rate uh and today year to date and for the full year we're projecting 33.
Right. All right. Thank you.
Thank you. And your next question comes from the line of Alan Lutz from Bank of America. Please go ahead.
Price increases on the come. So as you think about uh, you know, you kind of talked to Paul a little bit about maybe there weren't as many that you've observed. Can you talk a little bit about the market acceptance of price increases today versus, uh, and whether that's coming from tariffs and how that compares versus prior quarters and prior years, uh, across both your segments and whether or not, any of, that's new. Thanks.
Yeah, I mean, generally speaking, um, you can get a good read of it. Um, by looking at volume growth relative to price growth. Um, that's a good kind of, um, objective measure of of acceptance. We were whatever 5 and a half percent in the quarter 1 and a half from Price 4 from volume. Um, you know, that would suggest it was it was favorably received, uh, and I would say the current environment helps um, you know 1, uh,
You know, somebody asked earlier, um, you know, dentists are consumers as well, and the price of everything they're buying is going up. So, they're used to,
You know, CPI uh kind of level uh price increases and their their practice and their their life. Um, and again, you know what we took the 1 and a half is is well below that. So I don't want to say that, you know, our customers are happy to get a point and a half price increase, but relative to a, you know, 3% pricing increase of uh, plus 3%. Price increase on everything else. They're buying. I think they understand it.
They know we're not making money on the price increase; that doesn't quite cover our own input inflation.
Great. Thank you.
Thank you. And your next question. Kevin Kando from UBS. Please go ahead.
Good afternoon, guys. Thanks for taking my questions.
When we think about, I'm just trying to maybe
Calculator, understand what the core margin of the business looks like when we...
Take out all of the spark benefit later this year, and we think about exiting the year, I know that was the number you like to talk about last year, but as we get into the second half of this year and the exiting of this year is, are we if I'm doing the math, right? Are we close to like 14%? Is it a little bit higher than that? How how should we think about that? And is it a good way to think about going into 26 off? That kind of Baseline.
Yeah, Kevin I I can take that. I think. Um, I think the easiest Baseline if you will to work from is the margin bridge that we provided in our, you know, Q2 results. Not not that second quarter, you know, Standalone is sort of the the be all end all for a full year. Um but I would just say if you look at that our you know, volume price productivity that the elements of the Walk, most of those are, you know, pretty sustainable levels of margin Improvement.
Maybe save a little bit from, you know, our mention that we've got about 10 million dollars in Q2 uh relative to price buy ahead which which obviously helped our margins. Um, but we would not consider the transactional FX, which is mostly that 240 bips to be really part of a, you know, ongoing call it, you know, forward sustained rate. Um, and if you take that into account, you know, we're at we're at 15%, I would back that down, um, for the reason I already mentioned back it down for the, you know, slightly better volume growth in Q2 due to price Polo head. Um, and uh, and then I think it gets you back pretty close to the called the 14% that you were mentioning, and then just maybe as a kind of a 4 warning, even though we get a large spark deferral, gain year-over-year in the second half on a sequential basis. It's it's really not meaningful. We're we're already in the environment uh in terms of Revenue dollars in the first half.
That's effectively at the same basis of what we will, um, recognize in the second half. So, big year-over-year gain, um, but not really much on a sequential movement basis. And I think all that kind of ties back to the 14% margin that last year we were helping everybody to understand, uh, on an underlying basis.
That's helpful and you mentioned in your release that the BBB would have an impact on your tax rate, 33% for the full year, you know, reflecting the higher us profits. But you're assessing the impact of the BBB. I know part of the story is here that the tax rate over time should go down. Is, is there any change to that or any sort of long-term?
Targets on the tax rate, and this does, the BBB affect that either positively or negatively.
Every company is so first order of business is to, you know, to, to get into the legislation. Second order of business is to see what what else comes as a second order impacts to the legislation. So there's there's a, you know, a shoe to drop typically that that we wouldn't even be aware of yet. Um, I would just really go back to the, the core, the core work that we're doing, um, to improve our tax rate. And that's
The, uh, inner company loan that we have. So we have a large inner company loan between the US and Europe, uh, that comes with interest expense that we pay on an inner company basis.
And the deductibility of that interest is capped by the the size of our us profits. Um, and that's mainly the reason why our rate, you know, came from the originally expected 37 to now 33. The, the more we can do in either eliminating that entity which is the work we're doing or in improving us profits which is uh some of the work we're seeing when we grow products like brackets and wires consumables, we improve our spark profitability. Um all of that will help and it will get us back to you know something of a of a normalized tax rate. Um at this point in time I wouldn't say the the you know the federal act um is significantly helpful to our tax rate uh for sure not on a
You know, normalized ongoing basis there might be, you know, 1-time shot that helps, but not in an ongoing basis. So, for the most part, we're just working the same way. We were in first quarter.
That's good, guys. Thank you so much. That's helpful.
Thank you. And your next question comes from the line of right, Aaron from Morgan Stanley. Please go ahead.
Great. Thanks. It's Aaron. Um,
I'm there were a couple of deals. I think that you did, like smaller deals. I don't think it was anything material from an m&a perspective.
but can you just remind us like what are you looking for in terms of just bigger picture from an m&a perspective and external kind of, you know, inorganic opportunities, your willingness to kind of execute on those and and just how you're thinking about kind of m&a across your business, I think
Yeah, maybe I'll just reiterate our Capital allocation priorities that we've talked about in the March uh, Capital markets day. The the, you know, a high margin business like ours with good core positions. The uh, highest risk adjusted return of any available dollars going to be organic. That's our highest priority for Capital. Um, uh investment, uh, second for us is a Creed of m&a. Um, you know, we grew up inside danaher, we think we have pretty good, uh, m&a capabilities and dental is a pretty active m&a Market. Uh, so
We look at a lot of things, um, in our, uh, first year Eric and I, um, we intentionally didn't do any m&a because we thought that there was higher return on effort, um, just in core operations, and execution. Um, but now that we feel that the business is, is getting some momentum and pointed in the right direction. Um, we have been spending a little more time on m&a. Uh, the 2 deals we did, uh, in the first half, were very small, um, uh, from memory, they were, um, single digit Millions, uh, investment and all at a Creed of multiples, um, you know which which, uh, fit our accretive emanate, uh, Target. Um, would we do something bigger as, as we continue to get momentum. Um, uh, yeah, I think if, if we have the available capital and um, you know, we, we have something that fits in a segment, we know. Well, a prioritized adjacency or in the core and, you know, there's good consolidating or
Growth synergies. Yeah, we we uh, we'd like to do more
Okay, great. Thank you.
Thank you, and your next question comes from the line of Big Chopra from Wells Fargo. Please go ahead.
Hey, good afternoon. Thanks for squeezing me in. Congrats on a nice quarter. Apologies if this has already been asked; I've been bouncing around a little bit. But maybe you could talk about the different variables behind your 2025 guidance range and what gets you to the low end versus the high end of your guidance.
Yeah, let me just, uh, hit that. Then I appreciate the question. So, uh, core growth.
Um it's continued strong growth in our, you know, spark business, it's probably accessing. Now, you know, some of the growth that we're seeing from, you know, better new products, Paul talked in his pre-read remarks about, you know, some of the, the performance we're seeing in, in ormco, Brackets and wires or even our our dexus portfolio. So, for the most part, you know, our growth upside is not dissimilar to the, you know, to the upside that we saw, uh, at the early outside of the, of the year, um, for the most part it's going to be, you know, macro that stable soft and stable Dental Market, you know, turning in a different direction. Um, we don't expect that to be the case, but, you know, that could Define the, the, the downside, if you will of our, um, of our growth in the, in the second half and therefore, the, the low end of the range. And then, I would say, for the most part, it's, it's a similar, you know, narrative relative to the profit. So, the upsides that we originally saw entering the year were were things like spark gross margin.
You know, automation of our factory, uh, improving design cycle time, reducing our GNA costs. You know, as those things continue to, um, perform, that is baked into our, you know, our guide and roughly the midpoint. Um, but to the degree that we can, you know, outstrip that and or outstrip on the volume side, you know, there's upside there. Uh, and I think likewise it's the macro that largely defines the, uh, the downside for us. Um, if we were not able to mitigate, you know, the
The tariff range that I mentioned, um, that would be, you know, that would be potential downside for us. We think our guidance is, you know, pretty reasonably footed. Um, and at this point in time, uh, the midpoint is a good place to be thinking about it.
Great, thank you very much.
Thank you.
That answer question and answer session. I'll now turn the call back to Mr. Paul kill for any closing remarks.
Uh okay uh thanks everyone for tuning in. Uh maybe I'll just quickly underline, a couple of thoughts to to put a wrap on the quarter. Um, first thought would be that Q2 was another step forward for investa and we had good revenue and profit growth, uh, converting into double digit, uh, EPS growth,
Uh, we talked quite a bit about our performance being generally broad-based, with all of our major businesses and geographies delivering positive growth. Um, we're of course pleased by that, incrementally so, because it's in response to an intentional plan that we're executing.
Um, we're focused on executing that plan that we laid out at the Capital Markets Day in March, and in addition to the growth, we think we see progress around operations and people as well. You know, the three categories of priorities we're focused on.
Um, in support of all that, we invested some of the gains in Q2 back into continued momentum and growth, uh, in the form of increased R&D, sales, and marketing. And as the last, or two questions ago, touched on a bit of M&A,
I think that covers it. Well, uh, for today, thanks again for listening in, and I wish everybody a, uh, good day and a good week.
Is today's call. Thank you for participating. You may all disconnect.