Envista Holdings Corp (NVST) 2022 Q4 法說會逐字稿

Good afternoon. My name is Chelsea, and I will be your conference call facilitator. At this time, I would like to welcome everyone to Envista Holdings Corporation's Fourth Quarter 2022 Earnings Results Conference Call. (Operator Instructions) I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin.

Good afternoon, and thanks for joining the call. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. 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 available on the Investors section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations. It will remain archived until our next quarterly call.

As announced on January 30, 2022, we closed the divestiture of our treatment units and insurance business for both 2021 and 2022. The results of this business are reflected as discontinued operations in our financial statements as required by generally accepted accounting principles. All references in these remarks and accompany presentation to earnings, revenues and other company-specific financial metrics relate only to the continuing operation of Envista's business, except for the cash flow measures. 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 impact year-over-year performance. Unless otherwise noted, all references in these remarks a company-specific financial metrics relate to the fourth quarter of 2022 and references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets.

During the call, we will 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 filings, 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 where as required by law. With that, I'd like to turn the call over to Amir.

Thank you, Stephen, and good afternoon to everyone. We appreciate you taking the time to join us on today's call. I'm pleased to report that for the full year 2020 -- 2022, then Envista team delivered another strong performance. Our core sales growth was up 4.1% for the full year. We achieved an adjusted EBITDA margin of 20.1%. This represents a 40 basis point of expansion in adjusted EBITDA over 2021. We experienced a slowdown in growth in some portions of our business in the fourth quarter. This was expected and primarily related to challenges related to the COVID outbreak in China, the geopolitical issues related to the conflict in Ukraine and continued depressed environment for capital equipment, driven by higher interest rates and lingering economic uncertainty.

As we reflect on our performance in 2022, as well as our future outlook. I think it is important to provide some context about the underlying demand for dental solutions. As I have shared on previous calls, my leadership team and I have spent a significant amount of our time in the field meeting with dental professionals in their clinics to understand what is happening in real time. It is not an overstatement to say that in 2022, we collectively spent time with over 1,000 clinicians across North America and Europe.

What I hear consistently for private practice clinicians, group practices, institutions as well as DSOs is that they are incredibly excited about the long-term prospects of the intel market. We see significant opportunities to grow their business by investing in and expanding their specialty treatment offerings. They further see opportunities to enhance their capabilities, optimize their workflows and digitize their offices. While clinicians are confident in the long term, they remain mindful of the short-term headwinds driven by increased interest rates, the possibility of recession, general economic uncertainties and global geopolitical risks.

We continue to monitor patient traffic and appointment bookings for specialty procedures. So far, patient demand has been resilient, but we do expect continued volatility going into 2023. While the market remains dynamic, I think it's important to point out that Envista continues to deliver despite the volatile global supply chains, geopolitical challenges and persistent inflation. Our culture underpinned by the Envista Business System, EBS, enables us to continuously deliver for our customers and shareholders. We leverage EBS principles daily to deliver our commitments. We quickly identify potential risk and opportunities and deploy EBS tools such as daily management or problem-solving process and value stream mapping to ease supply chain uncertainties, improve our operational capabilities, reengineer existing processes and continuously drive productivity.

Our ability to produce results in the face of uncertain times, is a direct reflection of our continuous improvement and customer-centric culture, our strategic differentiation and the continued transformation of our portfolio. Before I turn it over to Howard to discuss our fourth quarter results in more detail, I want to provide more color on the progress we made in 2022 against our long-term priorities of accelerating our growth, expanding our operating margins and transforming our portfolio.

In 2022, we made significant progress in driving commercial execution across our portfolio. Core growth in our orthodontics business was over 15% in 2022, as a Spark continues to deliver industry-leading performance. We're pleased to announce that together with orthodontic partners, we have started over 300,000 Spark cases around the world.

In 2022, we nearly doubled the number of active Spark doctors and further improve utilization rates of individual clinicians. Leveraging our EBS toolkit, we systematically manage our funnel of new clinicians and develop standard work to flawlessly onboard new Spark customers. Spark is widely seen as the leading nuclear aligner system in the market and our disciplined execution allows us to capitalize on this promise.

In addition to Spark, we also saw low single-digit core growth in our traditional brackets and wires business in 2022. This growth was despite relatively weaker performance in China and Russia, which normally deliver oxide growth for our traditional brackets and wires. Our relative out performance in brackets and wires is driven by our commitment to orthodontics and our ability to bring effective innovation to a mature industry. Our Damon Ultima product continues to go rapidly by providing orthodontist with more precise finishing capabilities, allowing them to reduce share time and improve office efficiency. We have developed standard tools to bring customers through the ultimate journey and support them with targeted and effective education.

Outside innovation, we are focused on our commercial execution. With over 40% of our brackets and wires business in emerging markets, it is imperative that we reinforce our position as the partner of choice for new orthodontic professionals in emerging markets. To that end, we are pleased to be the only multinational supplier to be chosen during China's orthodontic volume-based procurement process. This is a testament to the value that Ormco brackets and wire solution provides in all markets. Long term, we are confident in our broad orthodontics offerings, our portfolio is differentiated and uniquely positioned to both benefit from and help drive further expansion of orthodontic treatments globally.

Turning to our solutions for implant-based tooth replacement, we delivered solid mid-single-digit core growth in 2022 despite significant volatility in China and Russia, 2 normally important growth drivers for this business. Led by strong relative performance in Europe, our premium business continues to perform well. It benefited from our focus on providing comprehensive solutions for implant-based tooth replacements. And as a result, we are seeing strong growth in both Digital Solutions and regenerative materials. The osteogenic business that we acquired in July of 2022 is off to a strong start. This business is now fully integrated and is starting to benefit from an EBS driven focus on execution and management. We expect our strong implant franchise to continue to grow at or above the market.

Critical to our long-term strategy is our commitment to expand operating margins through disciplined execution and a focus on continuous improvement. As discussed in 2022, we delivered a 40 basis point of expansion of adjusted EBITDA margins. We achieved these results while making significant investments in our long-term growth and also facing both meaningful inflation as well as intermittent supply chain disruptions. Each of our businesses are driving improvements in productivity, systematically aligning our prices and driving down operational costs.

In addition, we continue to optimize our organizational structure to improve the customer experience while creating more flexibility to deal with uncertainties in the macro environment. During the second half of 2022, we eliminated more than $30 million of structure costs and continue to look for ways to further streamline our organization. 2022 was another important year in the transformation of our business. We further shifted the portfolio to higher growth and more profitable segments of dental, where we can create and sustain competitive advantage.

In 2022, we benefited from the divestiture of a slower growing lower profitability, treatment unit and instrument business. This transition both improve our overall growth and profitability, while reducing our exposure to more cyclical segments after dental market. Given the economic uncertainty, the transformation of our portfolio puts us in a much stronger position as we move forward. In the past year, we closed 2 strategically important acquisitions that positions us to drive digitization of the dental market while exposing us to higher growth segments within the industry. As promised, our acquisitions delivered more than $40 million in revenue in 2022 and will enable us to accelerate core growth long term.

While we are excited about the strategic moves that we have made today, we see opportunities to further improve our portfolio. We're committed to pursuing an active but disciplined approach to capital deployment. We utilize an EBS-driven M&A approach to manage our robust pipeline of inorganic partnerships and investment and are actively cultivating new opportunities. I will now turn the call over to Howard to go through our fourth quarter financials and provide more details on our segment performance.

Thanks, Amir. On a reported basis, fourth quarter sales increased 1.4% to $660.8 million. Sales in the quarter were negatively impacted by 4% due to foreign currency exchange rates while acquisitions contributed 3.1% of growth in the quarter. Our core sales growth was 2.3% compared to the fourth quarter of 2021. Our year-over-year growth reflects solid mid-single-digit growth in our Specialty Products & Technologies segment, offset by a slight decline in our Equipment and Consumables segment. Geographically, our developed markets grew 3.5%, driven by very strong growth in Western Europe, offset by more modest growth in North America. Taken together, China and Russia declined significantly in Q4, while other emerging markets grew low single digits.

Our fourth quarter adjusted gross margin from continuing operations was 56.2%, a decrease of 90 basis points compared to the prior year. The decrease in gross margin was driven by a combination of inflation and strong growth of Spark somewhat offset by pricing. Our adjusted EBITDA margin for the quarter was 20.9%, which is 240 basis points higher than Q4 of 2021. The expanded margins were primarily driven by the EBS cost and productivity initiatives undertaken by our team throughout 2022.

In Q4, we took further actions to streamline our organization to ensure that we can continue to expand margins, while investing for growth. Our fourth quarter adjusted EPS was $0.52 from continuing operations compared to $0.46 in the comparable period of the prior year. This represents a 13% increase year-over-year. Core revenue in our Specialty Products & Technologies increased 4.5% compared to the fourth quarter of 2021. Strong growth in Western Europe was offset by significant declines in China and Russia.

Within this segment, our orthodontics business grew more than 15% year-over-year in the fourth quarter, with Spark continuing to outperform. Our bracket and wires business grew low single digits in North America, but was dragged down by double-digit declines in China and a more modest decline in Western Europe. Despite the macro volatility, we are confident that our orthodontic business continues to outperform the market. Clinicians value our comprehensive orthodontic portfolio and our focus on the orthodontic specialist. Our implant-based tooth replacement business declined modestly in Q4 of 2022 versus Q4 of the prior year.

This decline was primarily driven by double-digit decline in China and Russia combined. Outside of Russia and China, we delivered positive low single-digit growth, led by solid performance in Europe. Our regenerative's business, including the newly acquired Osteogenic's business continues to accelerate. For the fourth quarter, our Specialty Products & Technologies segment had an adjusted operating profit of 20% and -- this was down 210 basis points versus the same period in the prior year, primarily due to Spark and our continued investment to drive long-term growth as well as a decrease in sales in China and some currency headwinds.

Turning to our Equipment & Consumables segment. Core sales in Q4 decreased by 0.9% compared to Q4 of 2021. The decline in sales was due to the continued slowdown in equipment volumes offset by very strong growth in our consumables business. Our traditional imaging business declined double digits in the quarter with lower volume across most geographies. The lower growth was partially attributable to the strong performance in Q4 of 2021, driven by pent-up demand as well as the macro headwinds, including inflation, rising interest rates, COVID-related challenges in China and geopolitical uncertainties.

Further, we continue to deemphasize nonstrategic geographies and concentrate our efforts in markets where we can build a long-term sustainable competitive advantage. This allows us to accelerate both growth and margins over the long term. Our new DEXIS iOS business accelerated in the fourth quarter, and we continued to make investments to set this business up for long-term success. We remain focused on expanding our reach and optimizing our global distribution. Clinicians remain very interested in investing in iOS solutions to help them improve their overall workflow. The DEXIS iOS solution is well positioned to outperform the market, and we expect this business to be a contributor to our core growth in 2023 and beyond.

On the consumables side, our restorative and endodontics business grew more than 7% in Q4, with strong growth in most markets. Our team continues to execute and we are well positioned to continue delivering results at or above market growth. As expected, our infection prevention business increased double digits in Q4 of 2022 compared to the softer Q4 of 2021. The pandemic-related spikes in demand and inventory levels have now normalized, and we believe moving forward, this business will grow more in line with long-term market trends.

Equipment & Consumables adjusted operating profit margin was 27.2% in the fourth quarter of 2022 versus 21.4% in Q4 of 2021. Our continued strong margin improvement was driven by a favorable sales mix and improved pricing as well as our relentless focus on driving productivity. As we move into 2023, the inclusion of our more fully integrated iOS business will further support the growth of our equipment and consumables business while also positively contributing to our profitability. In the fourth quarter, we generated free cash flow of $95.1 million, and we ended the year with over $600 million in cash.

For the year, our free cash flow was markedly lower than prior year due to several factors, including the elimination of cash flows associated with discontinued operations, onetime transaction costs associated with our acquisitions and divestiture and the timing of tax payments and higher capital expenditures to support our long-term growth initiatives. As discussed in our last earnings call, we remain committed to our midterm goal of delivering free cash flow in excess of net income. We made significant progress in the fourth quarter driven primarily by sequential improvements in working capital.

As we move into 2023, we remain focused on driving free cash flow, while continuing to invest in our long-term growth initiatives. Overall, our balance sheet remains strong, and we have ample liquidity and the flexibility to pursue appropriate long-term investments. I'll now turn the call over to Amir to provide an update on our 2023 outlook as well as some closing comments.

Thanks, Howard. Looking forward, we remain confident in our strategy and long-term outlook. The dental market is attractive, underpenetrated and has a strong growth trend. Our business is strategically differentiated and we have a proven track record of execution. We have conviction in our ability to deliver on our long-term financial targets of accelerating growth to high single digits and expanding our adjusted EBITDA margins to over 22.5% by 2026. While we remain confident in our long-term targets, we are also mindful of the volatile macro environment.

Despite the resilience of the dental market, we expect 2023 global demand to be choppy, Mountain expectations for a recession are likely to be heavy on the minds of both patients and clinicians. The geopolitical situation related to the Ukraine conflict and the associated risk of energy crisis in Europe as well as China's COVID-related uncertainty and the consumer sentiment will create additional volatility. In light of this macroeconomic background for 2023, we expect to deliver low single-digit core growth and adjusted EBITDA margins of over 20%.

We expect our core growth to accelerate throughout 2023 as China stabilizes and we benefit from the impact of our acquisitions. Margins are also anticipated to accelerate throughout 2023 as we benefit from the streamlining of our organization and cost reductions as well as the shift of our portfolio mix towards higher-margin products. Our full year guidance reflects a balanced view of managing through a more volatile economic and environment while continuing to invest for long-term growth, expanding our margins and transforming our portfolio. We're pleased with our 2022 results and remain optimistic about the future of the dental industry.

Moving forward, our priorities remain the same. We will accelerate growth, expand our operating margins and transform our portfolio through active and disciplined capital deployment. Our intention is to be the leader in orthodontics providing the differentiated and integrated suite of treatment options, including brackets and wires and clear aligners. Our comprehensive offering empowers orthodontics to provide the best treatment modality for each and every patient. We will further accelerate our growth in implant-based tooth replacement by leveraging our premium implant franchise to provide full solutions across the implant workflow, including regenerative prosthetics offerings by utilizing our premier diagnostics and digital capabilities. We will continue to grow and broaden access to highly profitable and differentiated consumable business.

Finally, we will leverage our strength in imaging and diagnostics to build digitally integrated workflows from diagnostics to treatment planning to execution for our clinical partners. Given the near-term macro uncertainty, we will lean heavily on our EBS culture to both improve execution, drive efficiency and improve cost. We see significant opportunities to invest organically and inorganically in the dental market. We have the financial flexibility and management focus to further accelerate our growth trajectory via disciplined capital deployment and inorganic investments.

The progress we made this quarter and in 2022 is a direct reflection of our culture centered and continuous improvement and commitment that we have to our customers and the dental industry. Our purpose is to partner with dental professionals to improve patients' lives by digitizing personalizing the marketers in dental care. We're excited about our continued growth journey in 2023 and beyond.

Thanks, Amir. That concludes our formal comments. We are now ready for questions.

(Operator Instructions)

And we'll take our first question from Jason Bednar with Piper Sandler.

Good afternoon, Amir and Howard. Apologies in advance earning background noise here. Maybe just to start, Amir, it's a pretty dynamic environment right now, as you alluded to in your opening remarks. But the dental consumer in the U.S. and I think most of Europe seems healthier today than I think a lot of us were fearing and others dental that have talked more positively about demand visibility improving. Implants north or outside of China and us assume like they're an okay spot based on your comments here today. I know it might not be perfect visibility, but you're really close to the end market, as you alluded to. I really just like to start with getting your impression, if you could expand further on your prepared remarks on the health of the dental consumer in the U.S. and Europe and their willingness to spend on discretionary dental procedures?

Thanks, Jason. What we have seen is the patient demand remains resilient. Through all the reviews that we have done, visits that we have, what we are seeing the bookings remain the same and specific on our specialty businesses, there is continuity around patient traffic. The challenges on a macro perspective is to continue to see softness in China that started in Q4, and we have seen that to continue in Q1 and volatility that we see in Russia seems to persist. In large imaging equipment is also under a tremendous amount of pressure from investment by large GSOs, opening new offices as well as the interest rate and inflation related. We expect Q1 growth to be muted. But as we go further through the year, we're going to see a faster growth through 2023.

In the long run, we feel confident that this industry has a tremendous amount of runway. And our capabilities to manage through some of these volatilities have proven became commodities a lot stronger as we get to a more of a stable situation.

All right. Maybe then on -- if I pivot over to part of the guide here. I thought the EBITDA margin guide here looks pretty solid guys, considering you have the proppant headwinds from VBP. Howard, would you be able to help us think through the magnitude of those VBP headwinds you're absorbing what EBITDA margin might have been without those pressures? And then also along that margin vein, can you speak to where we're at with Spark in terms of its impact on EBITDA margin profile in '23, whether you think about that in absolute terms or in terms of incremental margin? Sorry for throwing a few in there together?

No problem, Jason. So as it relates to VBP, let me go ahead and provide a little bit of a quick framework here. For us, our China business on the specialty side is about 100 -- actually a little bit over $175 million, $100 million or over $100 million in the implant side and over $75 million on the ortho side. Remember that most of our business, we focus is on the private sector. That's about 70% of our collective business there. And that's a faster-growing segment. We see that as being more opportunities to differentiate with innovation.

VBP is primarily impacting the public sector. And so of course, the goal of VBP, as we know, is to reduce treatment costs and therefore, expand access overall. DSOs will certainly be involved in it as well. And at this point, we do expect a little bit of spillover into the private sector. So as it relates to the outcome of VBP and where we sit today, implants, it's a national program. The bidding is complete, and it's being currently rolled out Envista, our brands have won in both categories as well.

And so we expect that it's going to be reasonably favorable for us as it relates to being a selected vendor, but recognizing, of course, that the pricing on that side will probably be about a 50% drop. On the ortho side, much smaller so far. VBP is only impacted about 15 provinces, we think that it's less than 10% of the collective market there. We were, as Amir said in the comments, the only multinational selected to win on the bracket and wire side, we think that the pricing there is going to be a headwind of about 35% roughly. And in both these cases, we're reasonably pleased with the outcome, certainly being selected there.

Your next question around margins, maybe I'll address the Spark question. Spark is currently in investment mode. Clearly, we're seeing the momentum and are very encouraged by our growth on that business. And so we'll continue to invest there. For the duration of 2023, I think we're going to continue to be in investment mode. Clearly, that business is dilutive to our margins today. We think that longer term that we can get the margins up above fleet average. But today, it is dilutive and will be likely for the duration of 2023 as well. The 1 thing that we have seen that certainly is very encouraging as it relates to our investments, is that quarter-over-quarter sequential productivity and the automation investments are paying off. And so we're continuing to see that improve quarter-over-quarter.

Maybe just real quick. I mean any sizing on expected margin impact from VBP?

I think if you do the math on that, I'm going to say it's roughly about 70 basis points, maybe a little more than that could be. And so that's take it somewhere around $20-plus million.

Our next question will come from Elizabeth Anderson with Evercore ISI.

I guess my first question is just sort of maybe if you could talk a little bit more about the underlying trends that you're seeing in the first quarter so far. I know that you just obviously talked about China, but maybe focusing more on North America and Europe?

Yes. Happy to do it. Thank you, Elizabeth. We have to talk a little bit segment by segment. In orthodontists, what we have seen, that continuation of expansion of our Spark business remain consistent, quarter-to-quarter, let's give you a little bit of a feel Q4 versus Q3, we had about a 25% step-up. And we're not seeing anything that changes our review so far on that continuation. Bracket and wires in North America and Europe continue to perform. But in emerging markets, specifically China and Russia, we haven't seen yet any major trends or change in trajectory as we saw in Q4.

To give you a little bit of a feel, China the double-digit decline for us in Q4 and Russia was very volatile quarter-to-quarter. And that hasn't really changed in walking through January. In the implant side, outside those 2 geographies, we have performed well and continue to perform well, and it is getting our operational, our commercial execution is getting better, as you recall, if we go back a couple of years later ago, we decided that we have to make some improvement and changes in our go-to-market and activities around commercial execution in Europe.

The outcome of that has been a continuous improvement. We're doing the same thing in North America and in U.S. And we think with those changes, we're going to see a continued progress as we move forward through 2023. Our consumable business had a high single-digit growth in Q4 and really outperformed the market. Howard talked about the IPS and that business. Now we have a lot better visibility on a sell-in and sell-out, and we think that's going to be a positive approach as we move forward. And the last part of our business, we haven't yet seen any change in the imaging side of our business as we walk into the Q1.

But I want to highlight a couple of things about the imaging. About 1/3 of that business is services and its annuity business and continuation of what we have been doing in the past several years. And iOS, as Howard mentioned, we have seen a step-up quarter after quarter and that step-up continues throughout Q1. Putting all of that together, what we expect a slower ramp throughout the year, specifically the front part of the year. And as certainty come into our focus in China, we expect to see higher growth, higher margin as we walk throughout the year.

That's very helpful. I guess as a follow-up, I would also be curious about your comments and maybe more for Howard, about the sensitivity of the operating margin guidance that you just gave us to the sort of macro growth, obviously, with the low single-digit core guide, if we were to get to the sort of upper end of that, how do you see that potential flexibility there?

Yes. So Elizabeth, we're always looking for continuous improvement. Even when we have softer top line, we're going to continue to EBS and look to improve our efficiencies, productivity as well. As Amir indicated in the prepared comments, we took some pretty substantial actions even on the structural side in the second half and continue to fine-tune that in the fourth quarter as well. And so you can see and expect us to do what we need to operationally, still protecting obviously, the long-term growth drivers for us. We mentioned that in the context of Spark, certainly.

But in other areas where we have innovation that will drive growth further in the future. We're going to continue to invest there. But as it relates to operations and ensuring that we get the productivity gains, certainly, that will be a focus -- a fundamental tenant of EBS and one that we continue to deploy year-over-year.

Our next question will come from Jeff Johnson with Baird.

Two things stood out to me in the quarter, guys, and I want to ask on both of them. One, your Western European growth is strong again. This is the second quarter in a row that I think your 3-year compound annual growth rates and not even a stack growth, just your compound annual growth rate over a 3-year period, now up into the upper single, if not low double digits. I think over the last couple of quarters, that acceleration, it sounds like it's timed pretty well to some DSO wins you've had with Spark over in Europe.

So one, I mean, is there anything -- what can you say about the underlying market, I guess, ex Spark in Western Europe? Is the consumer demand there for dental services still solid? Or is it more out performance on your part? And two, how to think about that European growth then once you anniversary through a couple of those DSO wins in the back half of this year. Does that come back down? Does that normalize to kind of that end market growth? Or can you sustain kind of that elevated growth?

Thanks, Jeff. So we the simple answer is that a lot of it has to do with execution. And -- but let me just walk you through why we feel confident that, that growth is going to continue. As you recall, if we go back, and I'll walk you through both implant as well as the ortho part of our business. We started a very systematic approach and geography by geography, training a small number of orthodontists carrying them to ramp, and then we move to the next level and the next step and next level. And countries such as Spain became really a poster child for us of how do you go systematically change the business and create a sustainable growth over time.

You mentioned DSO, yes, it is a factor, but it's a lot broader in Western Europe, it's a lot broader than DSOs. We look at the number of individual practitioners that they have signed up to our program, and they're ramping up. That is a very wide implementation and execution plan. And it wasn't only the product, it's training education after sales support as well as what we call digital clinical success capabilities that we put in place. We took that model, we went to the next geography and we replicate it from Spain to France and so on and so forth.

And we're beginning to see that momentum taking shape geography by geography, and we have a lot more room to go in the European side and specifically on ortho side. Our Bracket and wire has always performed well. We always had a great relationship with Orthodontists in Europe, and that has given us the opportunity to open door to show additional capabilities to make him successful. And we have an incredible team on the ground that also really plays an important role and partners that really they see this company as their own company. They see the product, they have a responsibility to show other peers what products can do. On implant side, as you recall, I mentioned that before, about 2 years ago, we really changed our go-to-market activities, we had some challenges around customer experience.

We consolidated a lot of our order and management contract activities. Just to give you a feel in a 2-year time period, we hired close to about 350 people in Prague, and we built an Envista product center based on continuous improvement, daily management and standard work consolidated with 15 different languages, really change the model of our customer experience from local one-to-one to a more of a broader holistic approach, and our implant as the outcome has continued to perform every quarter positively.

And more as to the consumable side, we have such a small share in the consumable in Europe, the team has done a great job creating a heat map, again, using the standards of EBS, take a look at geography by geography, partnering with distributors, understanding dynamic on the market, putting training and support in place, and we have continued to gain momentum and gain share. So what you see in Europe is a broad performance across all of our businesses. And we are confident that, that is going to continue to grow. We're replicating some of those capabilities in U.S. And we are hoping that you will see the same momentum in the U.S. as we go through 2023 and 2024. Hopefully, that gives you a little bit of a perspective and our approach, and we're confident that we make those comments about 2025, 2026, we feel confident the approach that you're taking is going to pay off in the long run.

All right. That's very helpful, Amir. And then the other number that really slowed out to me is that Endo-Resto number up 7% in those 2 businesses. Unless I'm missing something in my checks, I don't think the market is growing nearly that fast. So how much of that is share gains for you versus how much is pricing? And it seems like that business has stepped up, at least if I use your E&C margins as a proxy that your pricing efforts really kind of picked up in the second half of '22. So as you anniversary some of those mid-'22 price increases. How are you thinking about price increases in '23? Can you support the same level of price increase again in '23? Or just how should we think about that?

Great. And let me just answer the first part of the question. Again, I want to give you a little perspective background we had changed our inventory management, our sell-out and sell-in. We have tremendous amount of insight on what is taking place on the ground. We changed the compensation of our team and sell-out. We put a whole sort of marketing program around education and training. We look at our traditional consumer business didn't have a whole lot of new product to offer. We look at what we have done in the past 6 months and what is the head in the next 12 months. It's just a revamp of that business completely, high margin, really well executed, well differentiated. We think the consumable business has an opportunity to be a major factor in our growth and margin profile going forward.

And a combination of exactly what you touched on price and why we feel confident that prices that we have put in place. It's not across the board. It's not geography by geography. It's very specific and targeted when we have had innovation when we have had differentiation. And we think in 2023, we're going to have a wholesale in new product categories in that space that gives us an opportunity to ask for premium and customers would see the value of what we put in place. But across the board, just answering the question, do we expect the same pricing to stay in 2023 as 2022? We think it's going to be a little bit muted, we did not count on across-the-board price increases, but we have and continue to see price increases, as I mentioned, around innovation and when we are differentiated. So we don't think this is going to be a radical change going forward from what we have seen in the past.

We're confident that, that mid-single-digit to high single digit in our consumable and now that we have IPS in a more of a balanced format, is something that we can maintain going forward in the long run.

Our next question will come from Jon Block with Stifel.

However, Amir, maybe I'll just start with a rough bridge on some of the moving parts. So for Spark, we're talking about a 300 basis point contribution to revenue growth in 2022. Maybe if you want to comment on that. But more importantly, is that a good assumption for 2023, maybe 250 to 300 bps to revenue growth -- maybe you can talk about the contribution from price this year, Amir, based on your comments just to Jeff's question, maybe that lands around 100 bps. And then the offset, right? VBP is that 100 bps, the other way, imaging? Is that 100 bps the other way? Maybe if you could just talk around some of those major categories, the headwinds and tailwinds and anything else that I'm not supposedly calling out to sort of arrive with the low single-digit core revenue growth, please?

Yes. So no problem, Jon. As it relates to Spark, what we called out was that our innovation, Spark being included in there would generate in excess of 200 basis points. I think that we've done well ahead of that in 2022. In 2023, we anticipate Spark as well as some other innovation to help drive over 250 basis points of that growth top line. Keep in mind that when we talk about margin headwinds and things like that, that Spark is, again, currently dilutive to our fleet average as it relates to margins. And so we continue to work through that, but long term, we expect that to be north of the fleet average. And so there's a little bit of a counter impact there.

As it relates to pricing this year, we had in excess of 150 basis points for the full year of pricing, a lot of that coming as Jeff had asked earlier, coming by way of the equipment and consumables business. And so we think that there will continue to be a tailwind associated with pricing broadly. Now -- of course, that's before VBP. And as we indicated earlier, we think that VBP can be upwards of $20 million of impact. That obviously would be both the top line and a margin impact. And so that probably is about 70 basis points going the other way as well. And so hopefully, that provides a little bit of the math and the modeling for you.

Yes, that's great. And maybe just a quick tack on to that, Howard. And that was great color. When we think VBP going into '24, obviously, that sort of normalizes, what about imaging? Is your imaging business, you're going to focus on call it, some core opportunities. Do you sort of reset the base maybe 2H '23 is a good way of thinking about it, where the drag sort of diminishes at that point in time, the back half of '23. Maybe that's a component of the accelerating revenue growth throughout the year and then I got a quicker question.

Yes, Jon, you're absolutely correct. So we took some very specific action that has started in Q2 of 2021. We decided that we are just going to participate in areas that we really are differentiated, and Legion ask for price premium and also it was more of an integrated to the overall offering that we have rather than competing on a point solution. So we have continued through that process in Q3 and Q4. And we think that you have seen the performance and the margin on the consumable and equipment side, a good part of that is attributed to the changes that we have done and redirecting investment, redirecting our resources to areas that has higher growth, higher margin over time.

But your assumption is correct that we expect this business to kind of normalize in second half of this year a new base and new starting point in 2024. But I want to add us to -- I mentioned that before that 1/3 of this business is services and annuity business. That is going to continue. And the iOS is going to become part of our core growth in Q2, we're seeing momentum. That's another add to this business that we think -- the market is under penetrated. We have a really good product. We have a great distribution relationship, brand. And I think that's going to be an add-on that we could count on in order to be able to bring this business back up in a different format than we have had in the past.

Got it. Got it. Very helpful. And then just a second question, admittedly, some annoying modeling questions, but -- when you guys say greater than 20% adjusted EBITDA margin for 2023, I mean, I think you did 20.1% in 2022. And so -- are you saying flat? Are you saying modestly up? Or are you saying up, but less than the 50 to 75 bps that you maybe usually target on an annual basis? And then the last one would just be the accelerating revenue growth to throw a dart at a starting point, clearly, it's got to be pretty modest in 1Q, but is it still in the green to start the year?

Maybe I'll answer the margin expansion question first. And first of all, Jon, as you know, I mean, when we spun and became a public company, we had committed to 50 to 75 basis points of margin expansion. I think over the 3-plus years that we've been a public company, we've delivered over 450 basis points. And so certainly, margin expansion is 1 of the things that we look at and we remain very focused in on. That said, I mean, there's quite a bit here as it relates to unpacking a lot of the macros and the uncertainties going into the year. And so we want to be prudent as it relates to what we lay out for the EBITDA margin. And so we did 20% just north of 20% in 2022. We're committing to do that at a minimum here in 2023 as well.

And then maybe your second question as it relates to core. Look, we're going to -- we see that our growth is going to accelerate through the year. Q1 is challenging. I mean with all that's going on in China, and Russia and the macros, I think that we want to be prudent and say that it will build throughout the year. We expect Q4 to be very strong -- it's not going to impact our normal seasonality. We see Q2 and Q4 as being the largest revenue quarters of the year. But certainly, Q1 is going to be challenging.

Our next question will come from Nathan Rich with Goldman Sachs.

Maybe just building on Jon's question. Just in terms of Amir, how you're thinking about the long-term targets. Is your thinking around time line change at all for both realizing the accelerated growth as well as margin improvement just given the near-term uncertainty in the market. And I wanted to get a better sense of kind of what you're looking for to drive improvement over the course of 2023. I'd imagine China is probably a major factor in that. But some of the pressures that we're seeing on equipment, the VBP impact, those take a little bit longer to kind of annualize -- so if there's any other kind of specifics that you think you want to highlight in terms of cadence over the course of the year, that would be helpful.

Yes. Thanks, Nathan. We put those targets back in Q1 of 2021, we have made a series of assumptions. The assumption that we are going to meet some challenges along the way. Our clear aligner is going to continue to grow that 3x target that we put out there we knew that margin is going to improve over time. Nothing that we have seen in the past 12 months really has changed our view that those targets that we communicated in 2026, high single digit, 22.5%, north of 22.5%.

Nothing that we have seen has changed our view towards that. And momentum that we saw in 2022, specifically with some of the challenges in Q4, despite of all of that coming in producing results that we have produced gives us the confidence that fundamental capabilities that exist in this company around continuous improvement remains alive and well. So walking into 2023. We got exactly as you highlighted, some of VBP challenges, Russia, China, we have contemplated that. We made the assumption that these lingering issues are going to stay with us.

They're not going to quickly go away, we developed a set of scenarios from best case, worst case scenario, soft landing. And what we think that mid-single-digit growth above 20% EBITDA is something that it is achievable. Do we have upside, we will see as we go through the year to see how the market evolves. But based on visibility that we have today, based on the information available today, we think targets are very achievable. The continuous improvement, cost reduction, improvement in our margin is just in our DNA.

We're going to continue to do that regardless of what we see in the environment. And we have plenty of opportunities. You just saw that what we did with Howard communicated in Q4 a lot. We have a year ahead of us, plenty of opportunities to become better in what we do to build a better relationship with our customer to improve our commercial execution and to march down the path of long-term strategy of digitizing, demarketizing, personalizing this industry make a meaningful difference. And we're committed to it. We have methods and tools to be able to execute on it.

All right. Great. I think with that -- sorry, I think with that -- yes, really appreciate it. So thank you very much. Appreciate your interest in Envista, and we look forward to connecting with you at future events. Thank you.

Thank you, ladies and gentlemen. This does conclude Envista Holdings Corporation's Fourth Quarter 2022 Earnings Results Conference Call. We appreciate your participation.