Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Okay. Good afternoon. We're going to go ahead and get started. I'm Tycho Peterson from the life science team. It's my pleasure to introduce our next company this afternoon, Envista. Breakout's going to be right after across the hall in the Georgian Room. And with that, let me turn it over to Amir.

Pleasure to be here. Thanks for spending time with us. So let me just spend a bit of time, introduce the company to you and then do a deeper dive in some of the challenges and opportunities ahead. To begin with, I'm sure you all know the routine about the disclaimer, but let me tell you a little bit about what we stand for, about a $2.8 billion business. It came about as an outcome of about 25 acquisitions over a 15-year time period. 56% gross margin, half of it is direct, half of it indirect. And it is really positioned in the best segment of the industry. The macro trends really puts us in a position that we can see that continue to grow over time. And I'll give you a little bit more insight on what the hypothesis and the story look like over the next several years. We have a great position in emerging market. We come from Danaher, with that kind of a heritage behind us, been in the market since September '18. Let's talk a little bit about how we are organized. This $2.8 billion business is set up in 2 different segments, specific segments. One is around Equipment & Consumables, categories such as treatment unit, imaging, handpieces fall into KaVo Kerr category. 90% of this business is indirect and goes through various channels, in different geographies. This is the outcome. This is where we got to dental. We started buying a series of companies in this space and started expanding very rapidly over time. The other segment is more of a specialty, we call it the specialty businesses. And it has 2 segments in it: it is ortho as well as the implant. The ortho business is anchored around Ormco, and I'll give you detail about the market itself and our position. And we have been in that segment for quite some time, so we have really good heritage around moving teeth and solving a lot of really complex issues. Damon System, you may know about it, it's the cornerstone of this business, and we have extended over time. Regarding to the implant business, through acquisition of 2 companies, we bought Implant Direct on the value side of implant, and then we added Nobel over time. It's about $1 billion business, and we have been able to kind of transition that since the acquisition of Nobel over the last 4 or 5 years. I will say about 65%, 70% of our businesses are in the most attractive segment of the dental industry. We have a strong position in emerging markets, and a really good position from a technology, R&D as well as access to customers with these 2 segments. Let's talk a little bit about the hypothesis around Envista. I'd like you to remember 3 things. Envista, as a separate company, is posed for accelerated growth. We have gone through a significant transformation over the past 3 or 4 years. We now think that we are really positioned very well through our specialty businesses, through NPI execution as well as our position in emerging markets to see a better growth, sustainable growth over time. Envista would have better margin as we go forward. And the reason for that is the mix of the businesses that we have. Our specialty business has much better margin, direct access to customers as well as, as I said, out of tradition of Danaher, productivity improvement, cost saving. We're going to see better margin going forward. Last, but not least, is the M&A, another leverage that will allow us to build this business over time. Under Danaher umbrella, we did not have the highest priority adding to this portfolio. And we had some work to do from simplifying, cleaning the infrastructure, now under a new Board, with the ability to really make decisions a lot faster and we have continued to do cultivation over time, we would be able to add that in order to change the portfolio, change the mix and the growth segment and the margin as we go forward. We're building a new company. This new company has a new culture. We are in a process of instilling a very simple philosophy around respect, around making a commitment, delivering on that commitment, around diversity and inclusion. We're building a company that focus on the outcome, making a commitment and continuing to build this transaction and relationship with the customer over time. We've been building a company that is based on innovation. And last, but not least, the continuous improvement. These 4 letters of ROIC is something that we want to be a pillar of this new company as we make a transition and build that fort. We come from the heritage of the continuous improvement. We have an opportunity to create a $3 billion agile company that is focused purely on serving and protecting the customers, giving better clinical outcome over time. That would not happen unless 12,000 of our employees are committed to that culture. We're in the process of building that, and we're going to continue to reinforce that moving forward. I mentioned about the transformation that has taken place in the past 3 or 4 years. In 2004, we got into the dental business and in a tradition of understanding the market, we started buying a series of companies and started creating over $2 billion worth of business continuously by acquiring companies. For those of you who are familiar with Danaher heritage and culture, we normally buy a marquee brand, we take cost out of it, we put into the innovation, and we keep adding to it over time. Unfortunately, we did not follow that recipe in here for a variety of reasons that I do not want to spend a whole lot of energy since it is behind us. The current management team took control of the business in 2016. Over a 3-year time period, we started consolidating various operating companies, various brands and footprint. We took 44 manufacturing sites, and we reduced it to 24. Over 170 sales offices, CRMs, ERP and many different fragmented view of how we manage this business, we started consolidating that and bring it to the format that it is today. In the process of that transformation, we were able to save about $90 million. We took an opportunity, tried to invest that $90 million in sales and marketing and innovation in order to position ourselves for growth in the long run. We started building the capability around R&D, on a specific segment that had growth potential. We built resources and capabilities in our direct business as well as in our emerging market. We have done a lot of that work. A lot of it is behind us. But we still have opportunity to continue to see that continuous improvement as we go forward. The 3 elements of growth margin as well as M&A is alive and well and through continuous improvement and this transformation, we would be able to demonstrate that as we go forward. I want to talk a little bit about the market and position in each one of these segments. I mentioned Equipment & Consumables as well as specialty. Equipment & Consumables has 3 specific segments. The top part of that is imaging. It's about a $2 billion market, products such as IOS, sensors, 2D and 3D fall into this category. We are the largest player in this space with over 150,000 installed base. This is an important category, not only because of the product itself, but it's the beginning of a workflow. The moment you go to a dentist's office, the first thing they do is do a diagnostics, try to understand what is the right treatment. That diagnostics set the process to do planning and do execution. One of the very first things that we did was consolidating this brand and building R&D capabilities and put in resources around software capabilities in order to unify our imaging offer while also connected to the rest of the workflow. The second category is traditional equipment and handpieces. KaVo has been around since 1909. The tactile of how people use is something that connect them to KaVo, German brand, a brand that people use in a school and continue to use it moving forward. This category is under pressure from a cost perspective as well as emerging market and DSOs are looking for a different set of offering. Depending on the geography, we're #2 or #3 in here, segment of it, we feel really good about the investment that we have done as well as the support that we have created on the handpiece side. We have brought a whole set of new product category, and we have consolidated our footprint and continue to work and making sure that we have product and meet the requirement of the market. The last category, which is about $7 billion, is day-to-day consumable that dentists used. And this is such a wide category from infection prevention, endo and restorative. We have been very thoughtful about what category do we want to be in. Those areas that are differentiated that we can create a competitive advantage linked to the rest of our portfolio are the areas that we are putting energy and resources around it. This category also has many dynamics driven by DSOs, driven by private label and online, making a serious impact in this category. Top part of this equation, that Equipment & Consumables, our hypothesis is that it's a 0 to 1% growth category. And our intention is to make sure that we are in the most attractive part of it and continue to create margin that we can use in order to really ramp up our Specialty business. Let me move to the next category, which is implant, about a $5 billion market, about mid-single-digit growth. There are 3 specific segments to it. About $2 billion of it is in a premium segment. Nobel is a known brand, has been around for a long period of time, has a halo effect around innovation and relationship with customer. We're in a good position. We have done in the last 4 or 5 years a lot of work to get Nobel to be more of a continuous improvement culture, a lot of innovation lined up and really accelerate growth in here. The next category is about a $2 billion of value, Implant. The difference between the 2 is the capabilities, what you offer and technology around it. On the value side of this, we are under-indexed, and we have had some challenges around coordinating our activities in different geographies. And another $1 billion of that $5 billion is around regenerative, bone graft, every time that you create, damage the bone, you need to put that in place. And we came to this market late, now we are building our capabilities to build that category and grow it over time. We are committed to this space. We think it has plenty of opportunity for growth. It is underpenetrated, and all the effort that we have done in the past 3 or 4 years has positioned us well in order to be able to accelerate growth in this category. Next is the traditional bracket and wire. $2 billion market, flat, low single-digit growth. We are performing better than the market. We are growing almost mid-single digit in an ongoing basis. And the driver behind it is threefold. Emerging market, high-growth market is over 30% of this business. Training and education plays an important role for us to really bring new customers that they know how to use these kind of capabilities. We have put many efforts to run innovation. 15% of our revenue now comes from products that they are less than 3 years old. And commercial execution, we've done a great job. This team is really excited about the opportunities ahead and doing a really good job executing quarter after quarter and moving forward. Last category is the clear aligner, $2.5 billion segment, growing double digit. We are now entering this market with the introduction of Spark, past 510(k). It is in Australia, U.S. We have an opportunity to make that a big part of our growth equation as we go forward. We like this market. This market has underlying trends that they're here for a long run. We like the market because emerging market plays a really important role. 1.5 billion people will come in here and one of the very first thing that they look for is the quality of care, dental care. If you look at developed markets versus emerging markets, North America, Western Europe, 65% of people have access to dental care. You go to some of the emerging market, that number drops rapidly to a single digit. Given an opportunity to -- for people to be able to provide that dental care through training, education, presence is a noble cause, and it does the right thing for the business. DSO is playing an important role in here. We're one of very few companies that are able to provide full solution to DSOs, enabling them to do more specialty work. And then digitization plays an important role to integrate the workflow together. Software is going to be an important part of this equation as we go forward. Last, but not least, I mentioned about underpenetration of implant. Over 1 billion people are going to be over 60 years old by 2050. This is a population that we can start taking the cost, the scale, the fear and try to digitize the process to make it simpler so more people have access to that basic necessity. I want to talk a little bit about DSOs because I think it is a really important segment, especially in the United States. Now we are beginning to see it in some other parts of the world. Some estimate, that's about 15% of the market today. It's growing double digit. It's growing very rapidly. As I mentioned, about 2 years ago, we started putting the team together that is dedicated on DSOs. You have account managers that they get up in the morning and only think about Aspen, Heartland as well as others in this category. We are one of the very few companies that can meet the requirement of DSOs. As they have built the capabilities, what they need to do, they need to do a lot more specialty type of work to improve their retention, to improve the profitability of those practices. In the past 3 or 4 months, we have been really successful to demonstrate our ability to meet their basic business requirement. Some of the largest implant RFPs that have come to the market in the past 3 to 4 months, we have been able to demonstrate our value. And now we have partnerships with some of the biggest DSOs in the United States over the next 3, 4, 5 years. This is the beginning of a trend that we are really committed to and we think has significant impact in our growth trajectory over time. It has an impact from a margin profile, but the thing to consider is the specialty businesses have much higher margin. So as we grow our relationship with them, as we allow them to do a lot more specialty type of work in a direct format, that mix is in our favor. We have over 60 people dedicated to it. We have done a really good job in building those ongoing relationships with them to train them, educate them and stay with them as they try to accomplish their business objectives. Our path to growth in the short term comes through 3 elements: the NPI, new product introduction, and a specifically clear aligner in 2020. That would make a meaningful impact. Our core customers in that area are orthodontists. We're not interested, we're not going after direct to consumers or GPs. We're using the current relationship that we have with orthodontists in our own core bracket and wire business. Orthodontists were first to adopt clear aligners. They understand the value of a combination solution. They understand the relationship and the support that they need. Clear aligner really make an important -- would be an important factor for us in growth. Emerging market. We have changed our footprint and our growth trajectory. 23% of our business today comes from an emerging market. In China, we have been growing double-digit in an ongoing basis. We have made significant investment. We're going to see the outcome of that in a mid-single digit, double-digit growth in that segment. Last, but not least, a lot of work that we have done in the past several years around inventory correction, around rationalization of our brand, around SKU modification, most of these are going to be behind us. That combination will get us from a flat to a low single digit, and that momentum would take us through a mid-single-digit growth over the next 3 to 5 years. Quickly touching on some of the key product. I talked about clear aligners. In the past 3 years, we have been working with dedicated group of people to prove a product that stands on its own and has better software capabilities, better clarity, less sustained -- less stained -- stain resistant as well as the use of the relationship and the software that we have already. We're developing a new implant system that it is used through clinical trials. The last set of product that we put out there is almost 10 years old, and it's one of the most well used, copied worldwide, it's called Nobel Active. The new system: much simpler, a lot easier to use and causing less damage to bones and tissues. We're entering the IOS digital impression market on 2 segment, value segment as well as a premium, that is well integrated to our diagnostics, planning and execution. And last, but not least, software. I mentioned our ability to spend significant amount of resources to create that seamless workflow that give the dentists productivity that they're looking for. I want to talk a little bit about the margin trajectory. We talked about $90 million saving in the past 3 years or so. And under the Danaher umbrella, we had an opportunity to really invest, make that transformation happen. We are committed to continue that trajectory of saving productivity that we have seen in the past 3 years, and there is more opportunity for us. As we see the growth going with a different mix, the operating leverage gives us a chance to change our margin profile. We are committed to about a 200 basis point of margin expansion over the next 3 years. It's going to come from a portfolio mix. It's going to come from rationalization and better productivity as we go forward. On the margin side, the material productivity through consolidation of our SKU and brand as well as the indirect cost as we become more unified in how we go to market, as we scale up, that gives us an opportunity to get better ROI on investment that we put out there as well as the productivity gains. Our intention is to put that money into the margin expansion, unlike what we have done in the past 3 years. We've done significant brand consolidation. There is more opportunity to do that as well as site consolidation and supplier consolidation. We know how to do that. We have done it. We're going to continue to execute that plan going forward. And then M&A, the very last part of this equation is about what are the opportunities. We want to look for opportunities that change our portfolio to more of a growth-oriented, tuck-in, add-on to existing capabilities that we have. We have over 3,000 salespeople. Half of those are selling direct. We're in many geographies, giving them more capability, putting them in an area that they can accelerate growth. That's our first and foremost priorities. There are technology acquisitions that we can get ahead of the market and create differentiation. And last but not least, there are plenty of opportunities for adjacencies. But we want to be thoughtful, sought by doing this tuck-in, making sure that we can execute it and then ramp this up over time. Over the past 3 years, we have been able to create over $1 billion free cash flow. That gives us the license and the capability to be able to do acquisitions. As a point of reference, when we started in 2004, we are less than $400 million worth of business. Today, that mix has completely changed. 70% of our business are consumable. We are able to deal with potential recession far better than we did in the past. Ability to have a mix that it is put specifically in the growth areas, the emerging market piece gives us a chance to continue to see this transformation over time. I started by talking about what is the hypothesis in here. From a flat to low single-digit to mid-single-digit growth driven by emerging markets, driven by NPI, new product introduction, driven by specialties, continue to expand margin over time through that change as well as cost-saving opportunities and put M&A as another lever to change our mix over time, all of that would be possible through continuous improvement mindset and the culture that we bring with us from Danaher. The management team comes from a dental industry plus the Danaher knowledge. We're committed to these set of commitments that we are putting out there. We have a team that it is capable. We're building the culture to make that a reality. I want to thank you for giving us an opportunity to introduce us to you. And hopefully, we can answer specific questions in a different session. Thank you, Tycho.