Envista Holdings Corp Q2 FY2025 earnings call

• Q2 was a solid quarter with strong revenue and EPS growth, good margin expansion. Core growth was 5.6% aided by customer buying in advance of price and tariff increases. Adjusted EBITDA margin was 12.4%, up 240 basis points. Adjusted EPS was $0.26.
• Progress on the value creation plan: Broad-based growth across portfolio, continued reductions in Spark unit cost and design cycle times, implementation of tariff mitigation plan, and progress on people priorities with improved employee engagement.
• Growth initiatives: Accelerated growth through 4 pillars (better accessing market growth, new product innovation, penetrating adjacencies, amplifying organic growth with M&A). Increased sales and marketing investment, 14% increase in R&D, drove penetration in DSOs and emerging markets, and closed 2 small acquisitions in H1.
• Operations: Strong contributions from EBS, reduced G&A spending by 15% in H1 while maintaining customer service levels above 95%, announced expansion of manufacturing footprint in China.

In the Specialty Products & Technologies segment, core revenue grew 7.2% year-on-year with core sales growth of 4.7%. The Equipment & Consumables segment saw core sales increase 7.3% versus the prior year. The Specialty Products & 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. The Equipment & Consumables segment's adjusted operating margin improved 140 basis points versus Q2 2024, driven by volume growth and price capture, with FX transaction losses being a 300 basis point headwind in E&C in Q2.

• Updated full year guidance: Core revenue growth 3% to 4% (up from 1% to 3% previously), adjusted EPS $1.05 to $1.15 (up $0.10 from earlier guidance), adjusted EBITDA margin unchanged at approximately 14%.
• Assumptions: Dental market expected to remain stable, FX benefit of ~150 basis points to reported sales, supply chain, pricing, and cost savings actions to offset tariff impact, Spark Deferral to generate $30 million year-over-year revenue benefit in second half, tax rate forecast at 33% due to improved U.S. profits.

• Currency volatility, which led to transactional FX losses impacting margins.
• Uncertainty around tariff activity and its impact on margins.
• Impact of VBP on the business, particularly in China where inventory management and customer behavior are affected by anticipated price reductions.

Q: Congrats on a really nice quarter. I think there's been a lot of confusion about the sort of state of the dental market. Were you surprised by sort of the strength that you saw across the portfolio and your different businesses this quarter? Like was it turnaround driven? Do you think it was -- the main drivers were market driven? And sort of how are you thinking about the broader dental macro at this point?

A: Elizabeth, thanks for kicking us off. Maybe a couple more thoughts on the market and then a few comments on our specific performance in addition to what we just covered. Starting with the market, we continue to see green macro shoots. So I would say Q2 macro was incrementally better to Q1. Unemployment still very low. Interest rates 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 pointed northward, which helps. Having said that about the macro, I think in fairness, the preponderance of dental-specific data that you guys get and that we get, things like the recent ADA survey or some of the third-party research, they all continue to point to a slow but stable market. So I think that captures the market conditions. Specific to us, in addition to what we said earlier, we had particularly strong growth in our orthodontics business, both the Brackets & Wires side as well as the Clear Aligner side were strong. We also had very good growth on both sides of our Consumables business, Core Dental as well as Infection Prevention. We had similarly balanced growth in Implants with both Premium and Challenger in positive territory. And then it was nice to see Diagnostics return to growth, especially with the mid-single-digit performance in both North America and Europe. Maybe I'd also note that the growth was steady across the quarter. You'll recall that we released Q1 earnings on May 1. And I think in one of the Q&A, someone asked us how April was coming in. We mentioned that it was coming in consistent with our expectations. And that, that momentum now as we have the full quarter behind us, did continue across May and June. Anticipating a similar question on this call. July is almost in the books for us. So we have a good first look there. And again, July was very consistent with our steady performance and expectations. So on balance, as we put all of this together, I'd say this is a positive step forward for Envista. Our plan is generally working, and we'll just keep working the plan. So thanks for the question.

Q: Can I just double-click maybe once more on the Brackets & Wires comments? That was certainly one area of outsized growth versus what we traditionally see in that market. Could you tell us a little bit more about the drivers of that outsized growth in the quarter?

A: Yes. For Brackets & Wires specifically, I would say it's -- there's 2 big contributors to that. The first is although we talk more about our investment in sales and marketing on the Implant side, we have been increasing our activity on the Ortho side as well. And investment there tends to return nicely, especially because of our very strong position on the Bracket & Wire side. The second is there's some question of whether there's a shift from Clear Aligners to Brackets & Wires. We'll probably get another question on that as we go through the Q&A. I think maybe on the margin that helped a little bit, although the kind of mix globally in case starts between Brackets & Wires and Aligners have been generally stable now for about a decade, 3 quarters to Brackets & Wires and a quarter to Aligners. But kind of consistent with all of our businesses that we talked through in the prepared remarks, consistent intentional progress on the Brackets & Wires side.