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My name is David and I'll be your conference facilitator this afternoon. At this time, I'd like to welcome everyone to the Envista Holdings Corporation's Third Quarter 2024 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions]. I'll now turn the call over to Mr. Amit Bhagwat, Vice President of Strategy at Invest Holdings. Mr. Bhagwat, you may begin your conference call.

Good afternoon and thanks for joining Envista's third quarter 2024 earnings call. 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's section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investor's 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 relate to the third quarter of 2024 and references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we may describe 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 Securities 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 filing, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they 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, Amit. Good afternoon and welcome, everyone. We appreciate you taking the time to join us today. In today's call, I'll kick it off with some opening thoughts on our third quarter performance as well as what we're seeing from the broader market. Eric will then take us through the 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, principally due to a larger impact from the change in Spark revenue deferral that was detailed on our last call. This is indeed what transpired. Reported results for Q3 were lower than Q2, and this was principally driven by the larger deferral impact, while underlying results were about the same quarter-over-quarter. Our underlying growth in Q3 was similar to or maybe a bit better than the broader market, which was generally flat. We gained share in orthodontics and diagnostics and held share in consumables. We under grew the market in implants, although the gap narrowed, providing early evidence that our growth investments 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. Consistent with what we shared last quarter, we expect Q4 to return to growth on a reported basis. I'll now touch on the dental market in Q3 and go a bit deeper into our relative performance. As I just mentioned, the overall market was generally flat. The implant segment, though, was up slightly in Q3, with single tooth procedures again outpacing full arch. Our single tooth volume grew mid-single digits globally, while our full arch volume was down low single digit. Overall, growth accelerated modestly quarter-on-quarter in our implant business, with premium growth above Q2 and value hosting a third consecutive quarter of positive growth. The orthodontic segment saw flat to slightly positive growth in the quarter, largely unchanged from Q2. Our underlying performance was a bit better than this, as we continued to gain share in clear aligners. Spark shipment, as well as the number of ordering doctors, were both up double digits in Q3, and Spark on demand is generating good traction in the early stages post-launch. The diagnostic segment remained soft, down mid-single digits in Q3. On a worldwide basis, our business also contracted, although we again outgrew 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 quarter, including a new CBCT platform, enhanced software for our DEXIS intraoral scanner, and additional surgical functionality in our DTX treatment planning platform. The consumable segment was flat to slightly positive on a sell-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. This strengthens capital efficiency for our channel partners and improves operating stability for us. To summarize our Q3 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. I'll now turn it over to Eric to take us through the details.

Thanks, Paul. First off, I just wanted to say how great it is to be part of the Envista 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 Envista can deliver meaningful value creation moving forward. Let's now turn to our Q3 results. In the third quarter, we delivered sales of $601 million. Adjusting for the impact of currency exchange rate, core sales for the quarter declined 5.3%. Our specialty product and technology segment declined 5.2%, and the equipment and consumable segment declined 5.6%. Similar to last quarter, sales 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 the decision to draw down channel inventory. In addition to the benefits that Paul described previously, this also matches sell-in to our distributors more closely with sell-out to our end customers. While this supports a healthier overall supply chain for both our partners and Envista, it resulted in a notable year-on-year reduction to our sell-in, resulting in lower revenue of approximately $12 million in Q3 and $25 million year-to-date. The biggest impact came in North America, but we also brought down channel inventory in some other markets, as I'll explain shortly. We will show additional details on the impact from these two changes in a moment. Geographically, our North America business declined mid-single digits and West Europe declined 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 declined low double digits, mainly driven by weaker diagnostic sales. We're also lowering channel inventories 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 percentage points lower than prior year. Our adjusted diluted EPS in the third quarter was $0.12, compared to $0.43 in Q3 of 2023. And finally, we delivered $63 million of free cash flow this quarter, compared to $77 million in Q3 of last year. Free cash flows year-to-date were $179 million, up 45% versus prior year. To bring additional transparency to our revenue and margin dynamics in the quarter, we have provided two bridges similar to last quarter. Let's take a look at each. Specific 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. 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 sell-ins. 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 Envista, and we have seen good contributions from several of our businesses this year and in Q3. This is underpinned by the strength of our portfolio, the quality of our leading brand, and our continuous innovation. Let's now take a look at our margin bridge for Q3. Adjusted EBITDA margins declined 10.5 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 dealer inventory realignment. Our continued growth investments accounted for nearly a 0.5 of margin reduction year-over-year, while the largest portion went into our premium implants business. We are making smaller investments in several of our other businesses. All of these investments are aimed at revitalizing growth across our portfolio. For example, we continue to improve our offerings in value implants through investments and innovation, which have helped accelerate our North America growth. In Q3, we also experienced nearly 400 points of margin headwind 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 1.5 of margin expansion this quarter from the net productivity gains and solid price performance. Turning now to segment performance, core revenue in the specialty products and technology segment declined 5.2% versus prior year. Our orthodontic business declined low double digits in the third quarter, driven by the net Spark revenue deferral impact. Without this effect, orthodontic revenues grew mid-single digits. Consistent with the broader aligners segment, Spark saw slowing case growth but continues to take share, with active Spark doctors growing double digits. Spark continues to be a key growth driver for Envista. Our brackets and wires business declined slightly versus prior year, as strong growth in Russia and China was countered by weaker demand in other markets. We realized positive price growth in both our Spark and brackets 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 implants business and an improving trend in Nobel. Full-arch case demand remained weak, though we have seen stable case volumes over the past several quarters. Single implant treatments remain resilient, as mentioned previously. Our premium implants business was up slightly in Europe, while China was soft in the period. In the third quarter, our specialty products and technologies business had an adjusted operating margin of 7%, down 12.7 percentage 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 consumables segment, core sales in the quarter decreased by 5.6% versus prior year. Our diagnostics business declined mid-single digit. This decline was driven by weakness outside of North America. We are encouraged to see that our strongest and largest diagnostics 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 remained weak. Our consumables business sellout in North America grew 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. Our adjusted operating margin for this segment declined 460 basis points versus Q3 2023, mainly driven by lower volumes, FX, and the continued investment in our distribution partnerships and sales coverage. In the third quarter, we generated free cash flow of $63 million compared to $77 million over the comparable period last year. Our year-to-date free cash flows were $179 million up $55 million, or 45% over prior year, driven by improved working capital management and lower capital expenditures. The stronger year-to-date cash flows allowed us to repay $100 million of our US dollar-denominated term loan in Q3, further bolstering our strong balance sheet. Having covered the details of our Q3 performance, I will now turn the call back over to Paul.

Thank you, Eric. As mentioned at the outset, we're reconfirming full year guidance of negative 1% to negative 4% core growth and 10% to 12% adjusted EBITDA margins, inclusive of the one-time and non-cash charges that we covered earlier. We expect to return to growth in Q4. I'll 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 turns yet from our customers. Second, our Q3 results came in as expected. A solid start, but still below our longer-term potential. Third, consistent with this, we are reaffirming our full year guidance as outlined on the prior slide. And fourth, and maybe most importantly, we're thoughtfully and systematically putting 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 redoubling our commitment to the Envista business system, which is the foundation of our culture of performance, inclusivity, and continuous improvement. We held what we call a CEO Kaizen last week, covering eight key priorities, seven locations, and five businesses. Every member of our senior team played an active role, 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, welcoming over 350 customers to a DSO 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. Envista's focus on partnering with professionals to improve lives remains front and center in everything we do. I'll 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.

[Operator Instructions] 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 markets improving with this improved execution? You noted some areas and working cap and other places where that seemed to be improving or was this kind of just a cautious first quarter out of the gate kind of situation? If you could sort of parse through those different pieces, that would be helpful. Thank you. Hello?

Can you hear us now, Elizabeth?

Oh, yes, I can hear you now. Thank you.

Okay. Sorry for that. You missed us thanking you for the question as well as the encouragement. So it's worth saying again, we appreciate it. Let's see. You asked 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? With 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 growth still remains slow. Slower than, you know, the historical sort of three to five percent 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. You know, people point to interest rates coming down and then, of course, unmet patient demand is still very high. But at present, there just isn't enough tangible evidence of improvement 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 Danaher, execution at Envista, I'd say, was pretty good. 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. So, as I talked about, you know, in my closing comments, we're trying to thoughtfully and systematically shore 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, and the list goes on. Envista, in my judgment, knows how to deliver, and we've 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 previously. With that, maybe, Eric, do you have any thoughts on guidance?

Yes, thanks, Paul. Elizabeth, good to hear from you again, and thanks for the question. So, I'll maybe comment on two things. I'll comment on guidance, and then I'll just give, you know, 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. 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, you know, good foresight to what our forecast capability looks like also helps us to be credible in the financial space. Specific to 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. Core growth aligned with our expectations or 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 consumables sell out ortho globally. 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 but stable is how we see it. Operationally, we performed well as well in Q3. I think price and free cash flow generation were two great examples of that. So net-net 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 Envista out.

Got it. And maybe just as a quick follow-up, you guys talked about sort of inventory reductions that you guys are doing and sort of the improvement of working capital that comes with that. Maybe one, like sort of where is that opportunity and sort of how far through that opportunity are we in? If you could comment on the Q-over-Q change in that inventory dynamic, that would also be helpful. Thank you.

Yeah, why don't 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. In many parts of the supply chain, 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, you know, it exists in multiple markets. And so there's still some work to go. We think that other participants in the market 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?

Yes, just a couple of points. So Elizabeth, I think maybe just to put a stake in the ground on one of the things in our prepared remarks, year-to-date cash flows, $179 million, up $55 million year-over-year, up almost 50%. I think just as a starting point, that shows the strength of our underlying performance. We know it's a little bit challenging to 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 at Envista. 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 disciplined CapEx. 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 Baird. Please go ahead. Your line is open.

Thank you. Good afternoon, guys. And congratulations as well on the quarter. I wanted to focus on the Spark deferrals. $27 million this quarter and $11 million last quarter. I think, Eric, last quarter, when you and I talked intra-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 the cases 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 would be helpful to hear what the answer is.

Yes, got it, Jeff. So let me first just start by level setting on Spark aligners as a business. And this is just kind of an overarching comment for everybody to be aligned with the solution. So for starters, you know this well, we sell Spark 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. 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. But about two thirds was timing of the deferred revenue. So when we made the change last quarter, 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. Hopefully that helps. Maybe just as a 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. So 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 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 we'll flow through it. Let's say whatever you're normalized at that point, spark margin is. Thanks.

Yes, 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.

Thank you.

We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead. Your line is open.

Great. Thanks for taking the question. So you've been kind of at the company, I guess, six months now or so. And so I guess you're starting to see some traction with some of the initial growth investments. And, you know, has anything come to light in terms of the necessary investments you need to make and 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, have there been any surprises? And then I use that as a looking forward point for 2025. The short answer on the first part of the question is, no. I would say writ large, with a few minor adjustments, things have played out largely as expected. 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. You know, 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. Same for the portfolio. When Danaher 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. Now having lived and breathed with these for the past two quarters, that's also true. 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, you know, may have eroded a bit or lost focus a touch over the past two years. 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? You know, one of the things we're rebuilding is the reinvestment, not just in growth, but in our operating rhythm, you know, the relaunch of EBS and also rebuilding our focus on longer term developing talent. All of those take energy, attention and resources, but all of those are high return investments. You're probably specifically asking about the $6ish million a quarter we've been putting in, principally into Nobel, but as Eric mentioned, other businesses also, you know, in high gross margin businesses that will more than pay for itself. But we have to get the business to grow. The easy math is if we get back to market growth, market gets back to the 3% to 4% to 5%, you know, that it's had over time and we match that, 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, you know, more often than not, it plays out favorably, but there's work to be done to make it real.

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 the time frame of quarter centuries as well as fiscal quarters, you just can't see winning long term without having a big presence in China. So, 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. So 2025, you know, tough to see too far ahead, Erin. 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 Jon Block with Stifel. Please go ahead. Your line is open.

Great, thanks, guys. And good afternoon. I think implants moving to flat is sort of going to be, you know, the focal point for investors tomorrow. It's another quarter where you narrow the gap relative to market growth, which is certainly encouraging. So maybe just a couple of questions, Paul, in any particular geographies that stood out 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 and cease exiting 2024 or those ongoing into 25 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. In Europe, we have and continue to perform in line with market that the market's growing there, as are we. Our gap 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 BBP 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 implant 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. Now, if the investment thesis proves true here, those are self-funding investments. And so that's what makes med tech 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 is a similar theme, which is overall margin improvement. So for Spark, where you 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 Spark's gross margin, the trend line, or when we might be able to think about Spark moving to positive EBIT margin? Thanks.

Yes, it's important. And you're correct. We talked about the growth side the equation outgrew the market. We had double digit growth of ordering doctors, et cetera. 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 Spark. And that gives us confidence. These gross margin improvements are following an organized manufacturing improvement schedule, an EBS approach that my predecessor executed very well, and we continue to do here. So we have good confidence in the continued margin improvement of Spark. And sometime in 2025, as we said, we expect it to cross over into operating margin positive.

Jon, I'll just add another point to that, I think is important. So, of course, everything Paul said was spot on. We would love to have volume growth in the Spark business. We expect and we forecast to have volume growth in the Spark 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 and 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.

That was great. Thanks, guys.

We'll take our next question from Michael Cherney with Leerink Partners. Please go ahead. Your line is open.

Afternoon, and thanks so much for taking the question. Maybe if I can come back again to the investments you made. Appreciate you calling out with the focus 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?

Yes, 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. And now as our growth continues to accelerate, we expect those investments to be fully funded from our operating performance.

Got it. Thank you.

Take our next question from Kevin Caliendo with UBS. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my question. I 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 things in the bridge that you provide us, and I'm just wondering maybe 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 Spark deferral certainly will be less based on what your commentary is. Can you just maybe talk about 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.

Got it. Kevin, thanks for the question. So yeah, so the good and the bad, if you will, on a third quarter, you know, results 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, you know, most of the material feedback is as we look forward, the Spark 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, for Jeff's question, my comment, you know, 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. So 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 certainly more muted in fourth quarter. To Paul's prior, you know, comment to the prior question, investment levels, you can think of as going largely, you know, 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 Spark revenue impact in 2024, you know, 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. Erin 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, 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 to do there or areas that you think that there's opportunities?

I'm going to 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 we have and we don't have any 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 math no longer matches. So we're constantly refining and honing our portfolio. And, you know, we put a lot of a lot of energy into that.

Yes, thank you so much.

[Operator Instructions] Take our next question from Brendan 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 payoff? And then I had a follow-up on implant.

Yes, the investments follow on three different horizons. Those that have the most immediate effect and that I think we can see impact already from those in the middle tier, which are more of a medium term return. And then those are a third group that are longer term. The first group are commercial investments. So this is, you know, refilling vacant territories, doing near term customer events, et cetera. 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 -- customer education and the different events we run for that. 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 generate momentum in the market. I'd also remind people, you know, that the gentleman we selected to lead Nobel Biocare, Stephan 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 Stephan on Board.

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 of 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 that we'll be able to return to growth in North American implants, which will go back to several of the preceding questions. 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 Vivek Chopra with Wells Fargo. Please go ahead. Your line is open.

Hey, good afternoon and thank you for taking the question. Congrats on a nice quarter. Apologies if this has already been asked, but I was bouncing around. So two questions to 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, Vivek. 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, pick any five-year period. It's typically a three, 4% or 5% grower globally. My best guess of normalized growth for the global dental market is still in that range. Now, 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 watch. People watch from the clinical perspective. They look at a couple of things. Look at patient traffic in general dentistry that's remained stable. Of course, they look at case starts in orthodontics and consultations in implants. All of those are sort of flattish, not taking up yet. 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. 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 way 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 1Q into 4Q? And is there any impact from sales shortages? Thank you so much.

From the hurricanes? Is that right, Vivek?

Yes. From the recent hurricanes.

So I'd say, yes. We have a lot of customers in Florida and the Southeast, and it's been hard. You know, a lot of them have had their clinics closed. A lot of them have had damage to their equipment, et cetera. So for the folks who live in that part of the world, 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 Envista side.

And there are no further questions on the line at this time. I will turn the program to Paul Keel for any additional or closing remarks.

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 results in the quarter coming in largely as expected. And I would say, in addition to that, more broadly that, as we talked about on our Q2 earnings call, Envista 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. 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.