Envista's Q3 2025 Earnings Call: Contradictions Emerge on Spark's Profitability, Tariff Mitigation, and VBP Impact in China

Date of Call: None provided

Financials Results

• Revenue: $670.0M; core sales up 9.4% YOY; FX contributed roughly +200 bps
• EPS: $0.32 adjusted EPS, up $0.20 YOY (more than double Q3 2024)
• Gross Margin: 56.1%, up 330 basis points YOY
• Operating Margin: 14.5% adjusted EBITDA margin, up 540 basis points YOY

Guidance:

• Core revenue growth for full-year 2025 expected at approximately 4% (raised from prior 3–4%).
• Adjusted EPS guidance revised to $1.10 to $1.15 (prior $1.05 to $1.15).
• Full-year adjusted EBITDA margin unchanged at approximately 14%; Q4 expected to be roughly at that level.
• Management expects to offset full-year tariff costs on a dollar basis and sees only a modest remaining Spark deferral benefit in Q4.

Business Commentary:

* Revenue and Earnings Growth: - Envista Holdings Corporation reported core growth of 9% in Q3, with an adjusted EBITDA margin of 14.5%, up 500 basis points from Q3 2024. - The growth was driven by strong performance across all major businesses, supported by productivity gains and a Spark deferral benefit.

• Spark Aligner Business Milestones:
• The Spark aligner business achieved its one millionth case since launching in 2019 and reported revenue nearing $300 million, funded entirely by operating profits from other Envista products.

• The business became profitable in Q3, marking a significant milestone after six years of operational and cost improvements.

• Implant Performance and Strategic Focus:

• The implant segment delivered a fourth consecutive quarter of positive growth, with strong performance in North America, notably above market growth.

• Envista is focused on expanding its implant portfolio with new multi-unit abutment and zirconia highly translucent bridge products.

• Financial Guidance and Margin Expansion:

• Guidance for full-year 2025 includes core revenue growth of approximately 4% and an adjusted EPS range of $1.10 to $1.15.
• Adjusted EBITDA margin guidance remains at approximately 14%, reflecting continued productivity improvements and stronger business performance in the U.S.

Sentiment Analysis:

Overall Tone: Positive

• "We posted another solid quarter, delivering strong revenue and earnings growth and good margin expansion." Company raised full-year guidance (core growth to ~4%) and reported adjusted EPS of $0.32 (more than twice prior year) with adjusted EBITDA margin up 540 bps, citing continued momentum across major businesses.

Q&A:

• Question from Allen Lutz (Bank of America): Now that Spark is profitable, how should we think about the trajectory of margins from here? Separately, can you talk a little bit about the market share of that business? Where are we today and where do you think that business can go?
  Response: Management: Spark is expected to reach fleet-average margins over time due to unit-cost, setup/design and commercial efficiencies; it continues to outgrow the market (high-teens growth vs market low-single-digits) and is approaching ~$300M in revenue.

• Question from Allen Lutz (Bank of America): On slide 9, volume/mix/price added 240 bps to EBITDA with price around a little over 200 bps—can you unpack contributions and how to think about embedded levels into Q4?
  Response: Management: Price accounted for just over 200 bps of the 240 bps; anchor on full-year guidance—Q4 implied roughly ~14% adjusted EBITDA and EPS $1.10–$1.15.

• Question from Elizabeth Anderson (Evercore): Can you comment on China—impact from VBP (value-based procurement) and whether you're seeing pauses in buying or other consumer/environmental headwinds?
  Response: Management: Ortho VBP is proceeding (timing could slip into 2026); implant VBP is expected but unannounced—company is monitoring closely with provincial leaders and clinicians.

• Question from Elizabeth Anderson (Evercore): Tariffs were a bigger headwind this quarter—should we expect a similar level in Q4 and going forward?
  Response: Management: Tariff costs rose to ~$8–9M in Q3 (from ~$4M prior); expect a run rate near ~$10M/quarter forward but are on track to offset full-year tariff costs on a dollar basis.

• Question from Michael Cherney (Leerink Partners): Where do you feel best about your positioning on implants today and where can you push harder (R&D/sales)?
  Response: Management: Implants show sustained improvement—four consecutive quarters of positive growth, led by above-market North America performance and supported by recent product launches.

• Question from Jeff Johnson (Baird): On organic growth adjustments—is underlying core growth closer to 5–6% after removing the $10M buy-ahead? Also, should we model the typical VBP destocking/recovery pattern for implants in China?
  Response: Management: Underlying Q3 growth is ~5–6% after removing deferral/buy-ahead; expect VBP 2 to follow the typical destock then rebound pattern but likely smaller than VBP1.

• Question from Erin Wright (Morgan Stanley): Given SP&T results, are you seeing any shift between brackets/wires and clear aligners—are aligners taking share?
  Response: Management: No material structural shift—clinicians choose therapy case-by-case and Envista sees no clear evidence of aligners materially displacing brackets/wires.

• Question from Jonathan Block (Stifel): Consumables were up double-digits—what drove this outperformance and is it sustainable?
  Response: Management: Outperformance was broad-based (notably infection prevention) and strong DSO demand; consumables are relatively resilient given insurance coverage and remain supported.

• Question from Jonathan Block (Stifel): Regarding the Spark deferral benefit, what's left in Q4 and how should we model 2026?
  Response: Management: The deferral produced roughly a $30M full-year tailwind for 2025 with only a low-to-mid-single-digit remaining impact in Q4; Q3 absolute revenue and profit are the appropriate baseline going into 2026.

• Question from Steven Valiquette (Mizuho Securities): Is current Spark marketing spend adequate to sustain improved ROI or will you increase spend to drive volume?
  Response: Management: Current funding is appropriate; only modest incremental spend when entering remaining geographies—Spark is now a scaled (~$300M) business.

• Question from Michael Fries (Jefferies): Can you elaborate on recent diagnostics trends and outlook for growth?
  Response: Management: Diagnostics turned positive for a second consecutive quarter after prior contraction; interest-rate driven delays in site openings historically affected demand, and early signs of recovery are encouraging but it's early.

• Question from Brandon Vasquez (William Blair): Can you comment on DSOs—any particular strength and competitive positioning?
  Response: Management: DSOs are a strong channel for Envista—double-digit imaging growth in top DSO partnerships and solid share gains across Nobel, Ormco and consumables.

• Question from David Saxon (Needham): With Q3 margin performance and the capital markets day targets, where could margins go next year?
  Response: Management: Use ~14% adjusted EBITDA as the near-term anchor; the capital markets day framework (core growth plus leverage) remains the path to margin improvement, though 2026 specifics are premature.

• Question from Kevin Caliendo (UBS): Break down Spark's high‑teens growth between same‑store increases vs. new geographies and any divergence between retail docs and DSOs in the U.S.?
  Response: Management: Spark grew high single-digits in North America and double-digits elsewhere; it performs relatively better with specialist orthodontists (retail) than with DSOs.

• Question from Jason Bednar (Piper Sandler): Within implants' low-single-digit growth, how did Premium vs Challenger perform this quarter?
  Response: Management: Premium drove the growth (strong), while Challenger was closer to flat; total implants grew for the fourth consecutive quarter.

Contradiction Point 1

Spark's Profitability and Market Share

It involves differing perspectives on Spark's profitability and market share, which are crucial metrics for evaluating the company's strategic performance and investor expectations.

What is the outlook for Spark's margin trends now that it's profitable in Q3? Also, what is Spark's market share? - Allen Lutz (Bank of America)

2025Q3: We expect Spark margins to reach fleet average. This is due to consistent unit cost progress and improvements in setup and design times. The Spark business has grown faster than the global aligner category, even at its current scale. The competitive advantage includes deep positions in key geographies and a global supply chain. Spark has significant upside potential. - Paul Keel(CEO)

Were you surprised by the strength in your portfolio, and do you think it was market-driven or due to a turnaround? - Elizabeth Hammell Anderson (Evercore ISI)

2025Q2: Spark's profitability trend remains on track for the second half of 2025. There has been consistent unit cost reduction quarter-over-quarter, with a 20% decrease year-over-year in Q2. Pricing changes are minimal, with low single-digit growth, effectively flat. - Eric Hammes(CFO)

Contradiction Point 2

Tariff Mitigation and Impact

It involves the company's strategies and expected outcomes regarding tariff mitigation, which directly affects financial forecasts and operational planning.

Will tariffs remain a headwind, as seen in Q3? - Elizabeth Anderson(Evercore)

2025Q3: We expect tariffs to cost about $10 million per quarter going forward. Our objective is to offset these costs, which we are on track to do for the full year. Tariffs are a minimal noise factor for us going forward. - Eric Hammes(CFO)

What are the net and gross impacts of tariffs on Envista's business this year? Do you have any assumptions regarding the tariff pause? - Jason Bednar(Piper Sandler)

2025Q1: Envista's guidance includes tariff activity in effect today. No assumptions are made regarding future changes. The expected outcomes are maintained with the same expected impact from the tariffs that are already in effect. There is a chance of benefits if inflation heats up, supporting pricing, or downside if COGS and margins are pressured. - Paul Keel(CEO)

Contradiction Point 3

VBP Impact and Market Conditions in China

It highlights differing expectations regarding the impact of Value-Based Procurement (VBP) in China, which could affect the company's market strategies and financial planning.

Can you elaborate on China's current market conditions and the impact of VBP on your operations? - Elizabeth Anderson(Evercore)

2025Q3: The VBP for orthodontics is underway, and we expect it to impact us in the second half of this year or early 2026. There's a second VBP for implants expected, though specifics are not yet known. Our government affairs team is in regular contact with provincial leaders. - Paul Keel(CEO)

What are your expectations for VBP in China and how is it factored into guidance? - Elizabeth Anderson(Evercore ISI)

2025Q1: VBP is progressing as expected with procedure cost VBP underway and supply cost following later. Consolidation of supply is expected, potentially benefiting larger market share players like Envista. A soft first half is anticipated, with benefits expected in the second half. - Paul Keel(CEO)

Contradiction Point 4

Spark's Profitability and Market Share

It involves the timeline and market share expectations for Envista's Spark business, which are critical for understanding the company's growth prospects and financial performance.

How should we think about Spark's margin trajectory now that it's profitable in Q3? Can you discuss Spark's market share? - Allen Lutz (Bank of America)

2025Q3: We expect Spark margins to reach fleet average. This is due to consistent unit cost progress and improvements in setup and design times. The Spark business has grown faster than the global aligner category, even at its current scale. - Paul Keel(CEO)

How will Spark's profitability affect overall operating margins? - Ahmed Muhammad (Leerink Partners)

2024Q4: Spark's profitability will contribute 10 basis points of margin improvement for Envista. The path to profitability is expected in the second half of 2025. - Paul Keel(CEO)

Contradiction Point 5

Diagnostics Expectations and Market Recovery

It involves expectations for the diagnosis business, which impacts the overall growth and market positioning of Envista's products.

What are the recent trends and growth outlook for diagnostics? - Michael Fries (Jefferies)

2025Q3: Diagnostics have shown two quarters of positive growth, with a new iOS product launch contributing. Interest rates are impacting site additions and equipment purchases. The category has potential for further growth. - Paul Keel(CEO)

Does the guidance assume any improvement in diagnostics for Envista? - Ahmed Muhammad (Leerink Partners)

2024Q4: We expect flat to low single-digit growth in diagnostics, with a modest improvement from previous geographies leaving. Market recovery is not significantly expected in 2025. - Eric Hammes(CFO)