Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Okay. Good afternoon, almost good evening. Thanks for sticking with us. Great day. And we're going to push forward with a couple more dental panels. Next, we have another recent addition to our coverage universe, Envista. Envista is a manufacturer of dental equipment and supplies. And with me today, I have Amir Aghdaei, President and CEO; and Howard Yu, CFO.

I've got a long list of questions. But Amir, I'm just going to actually kick it off. It's been a long day and a great day, and I think maybe a little bit more of an upbeat day, quite honestly, on dental based on the 5 or 6 industry participants that we've had that had preceded you. So I would just love to kick it off there, get your high-level thoughts on what's going on in the industry, what you can share, maybe what's evolved over the past 3, 4 or 5 weeks?

Okay. Thank you so much, Jon. Thanks for having us. Headline is, we are encouraged. We're encouraged. We're seeing a recovery, a slow recovery, but we're encouraged with what we're seeing. But let me kind of break that down for you a little bit. And the best way to go about it is by geography. About 15% of our business is in APAC, China included. They went through really a fast drop at the end of January and they have come back. What we are seeing in APAC is over 90% of offices open. Patients are coming back. And we are really encouraged by steady recovery as we are seeing step by step. About 10% of our business is in Nordic and DACH regions. And some of these geographies never really shut down dental offices. The others have been ahead of the pack from opening up and making sure that there is a continuity plan. And we are encouraged with what we are seeing in Germany, in Switzerland, Austria and Nordic countries. And then the other 75% of our business is Western Europe and North America. My view on that, 75% is 50% of offices are open today or they are in the process of opening. And you have seen many different information from various sources, that we have seen patients are slow and steady coming back, about 30% to 40% of patients are coming back. We saw the bottom of this pandemic in April. We were down almost 60% in April. And we are seeing very gradual, slow recovery throughout the quarter, throughout May. And then we have visibility on a daily and weekly basis. We think Q2 would be probably the lowest in the year, and we have several scenarios of how the recovery would take shape. We are encouraged with what we have seen in the past couple of weeks. And we're prepared and ready to get dentists back to work as quickly as possible. We want nothing more for industry to come back to a healthy situation and patients get better quality of life by getting the support that they need. Dentists are eager to go back to work. And so what we have seen is, it's not necessarily a capacity issue but is primarily driven by patients and to a large degree, the fear as well as the economical factors play an important role in here. So that is just a little bit of a quick summary for you, both from a geography perspective as well as what we have seen in here.

That was a quick summary and a great summary. And maybe just to follow up on that, Amir. Is it just the industry continuing to put one foot in front of the next? In other words, practices opening, which you alluded to, then the elective procedures coming back. Are you seeing that yet? And then the third step in my mind would be hygiene, right, because there's been some trepidation behind hygiene, the hygienist reporting to work. Maybe talk to us about, is it for one step in front of the other and are we at a point yet where you're starting to see hygiene come back online?

Yes. Yes. Very good, very good, Jon. A lot of that has to do with the specific geographies and the local laws. Just to give you a little bit of feel, I'll answer the question, but let me give you one thing. I mentioned China is coming back and it's come back rapidly. For example, the ortho business, the hygiene business, the restorative is back to normal and go on. On the other hand, the implant that is requiring invasive surgery, the government, the local government has put a series of structure and limitation in place, and that is slower in coming back. While other parts of the business is rapidly growing, that is a little bit tempered at this point until it comes back. Now you take a step back to other geography. What we have seen is the less invasive procedures are coming back a lot faster. So what are they? Ortho, clear aligners, some restorative. Those that they have lower RPM, lower kind of damage to the tissue and all that, they are coming back a lot faster. Those that require 1,000, 2,000 RPM of drilling and some of the really difficult cleaning cases, they are a little bit more challenged. So now let me turn that a little bit around and talk about this geography, going and getting implant. You walked into a very sterile situation even before. Basically, you're going to a surgery process. So that has not been an issue is the safety is not an issue. You can go and do an implant today. It's safe. We are doing everything possible. Doctors are doing everything possible to do that. It is that, as I mentioned, it's that fear and the individual cases and economical factors that are limiting that to come back. And we have seen a lot of different creative ideas on how some of the dentists and DSOs are really trying to bring patients back as quickly as possible, not only on the economical side, but also through a variety of different teledentistry tools and others. That's what we have seen a little bit. Ahead of the recovery is ortho and resto, and we are beginning to see a state by state, geography by geography, procedure by procedure, we're beginning to see a ramp in our daily reviews.

Okay. Fantastic. And I'm actually going to pivot now with some questions a little bit more specific to Envista's business. And Amir, I want to jump into the implants. You highlighted better premium implant trends in the most recent quarter, in the March quarter. Obviously, a lot going on in the March quarter with the COVID-19 in the dental industry. But you talked about premium was up mid-single digits pre-COVID versus low-single digit in the prior quarter. And I think that up mid-single-digit growth maybe had a day or 2 tailwind, but still better results coming out of the premium implant business. Can you talk to some of the initiatives that you've put in place? And do you think some of those, some of the traction that it looks like you had in January and February, again, pre-COVID, but are those sustainable going forward even before N1 takes hold?

Yes, Jon, all along, we had known this and we verified it over and over that we did not have a product gap in our portfolio on our premium implant. Nobel Active is the most used implant, procedure implant in the world and our product was never an issue. We had some customer experience challenges, specifically around customer service, around some of the day-to-day activities. And then we had multi-layers of managers that really didn't allow us to get as close as we needed to in different geographies, to be specific in Western Europe and in North America. Starting in Q3, we started really seriously going after a modification of that customer experience as well as the channel structure. In Q4, as we talked about, as we saw better performance, better margin, we decided not to wait any longer. We made changes in the management structure, both in Europe, in Western Europe as well as in North America. We start making some changes, delayering the organization, centralizing some activities, improving our customer service. And as painful as that was, we started seeing a shift in there based on what we are hearing from our own field organization and customers. By the time we came to January and February in Western Europe and North America, in spite of challenges in China, our premium implant business was a mid-single-digit performance, the combination of those 2 months, which we're really pleased. We thought that now we're in a really good place. We can move forward with that. And all of the changes that really hasn't been impacted from an organizational perspective, we have been very protective of our sales organization. We have done significant amount of training and education, Nobel symposium, which normally gets about 1,200 to 1,300 people every year. We have 12,000 people signed up for this year. And we did a combination of virtual training, live training. In one session, we had 5,500 people attend. And I think we are set to come out of this in a very different momentum on the premium side of our business. On top of it, Jon, we have been talking about new generation of implant with N1 continuously. We got the CE approval for Europe. We got that a couple of weeks ago. We can sell that in all countries, except a few of them, and we are registering now that in Europe. We think this would be meaningful for us in second half of this year. And we think N1, just the product itself, is a really important breakthrough, but also lift the overall Nobel halo effect as a premium player, as an innovation leader in this area now that solving some of these customer experience issues should put us in a very good place as we go forward. So we're encouraged. We really are encouraged about our premium implant position.

That's helpful color. And Howard, maybe if I can pull you in. We started to explore, to follow up on N1, the beginning of the year, really last year, beginning of this year. We started to explore what we, in Stifel, were calling sort of the hidden price opportunity associated with N1. The thought being, it's a premium platform so I would like to think on the actual implant, there's probably a little bit of price, who knows, mid-single digit, give or take. But then maybe if you can kind of talk about the system and how the system works. In other words, do you have to use Envista abutment? And if so, what does that mean? Like what's the attach rate on a Nobel implant? Is it 0.6, 0.7? And will that dramatically increase to a 1:1 on the N1 platform?

Yes. Let me answer the question on N1 specifically, what it is, that system. And Howard, if you can answer the question on the pricing. So N1, just simply put, is 6 different component that forms that system. Number one is the drill. It's a set of drills. Normally, if you go get an implant, you use 5 or 6 drills. We think that within 1 or 2 drill that you can get that -- create that space to put the implant in there. That drill protocol uses less than 50 RPM versus a traditional drill uses over 1,000 RPM. That has serious damage into the bone and tissues. So it allow you to get a faster healing time. The second one is the cone connection that goes on top of that drill that you're doing. And it is a combination of easy to use. It's a lot tighter than the implant shape itself. I'll answer the question about the connectivity, just a second. The shape itself, it allows a faster osseointegration. You can place the implant immediate, so it's optimized for immediate placement. It had a [ whole set ] of new surface, both on implant itself as well as on prosthetics. These 6 pieces goes together. In the past, you bought the implant, you could put that conical connection, that cone connection in some other solution. The attachment rate on those were between 60%, 65%. Now it is because of this IP-protected and because of this tight connection, 100% connection between the cone connection, the conical connection and the implant itself. And the whole system goes together, which allow you to have better performance, but also gives you a patented environment. Nobel Active is the most copied implant in the world. This would allow you to really create differentiation, ease of use, faster recovery. And I have stood in front of a patient who took a N1. And they couldn't even recognize that the implant was being placed because they couldn't hear the noise, the shaking that you normally get, they didn't feel that. And imagine if you're not causing that much damage, the healing time is a lot faster. So that's a little bit on the implant itself. Discuss a little bit about the pricing?

So Jon, as Amir mentioned, there's some clear differentiation here with this product that we're in the process of launching, and that will command a premium. So while we haven't firmly finalized the pricing, we believe that the productivity gains that the practitioners will have as a result of utilizing this product and this new system, certainly, they'll be willing to pay a little bit more. And so we do anticipate some pricing uplift here. And one of the notable things just overall for us is, where we have had a pretty consistent cadence in product launches, so if you think about our ortho business, for example, where we have had some steady innovation releases, we've been able to secure some pricing there. So we feel good about our ability to go ahead and capture that with the N1 as well.

And we've mentioned that we took the first order this week in Germany, and we're in the process of delivering on it. So it has become real now.

Okay. Great. And maybe just to push, for N1 versus a prior Nobel Active, where 20% or 30% of the time maybe you were using a competing abutment, if there's such a thing, Amir or Howard, on a like-for-like basis, is this a 15%, 20% lift on, call it, complete system ASP? In other words, a portion of that is strictly on the implant itself and the other is the lift coming off of the 1:1 abutment attach rate?

Yes. I think, Jon, that's a good way to think about it. Certainly, the absolute implant pricing will go up. But beyond that, you're absolutely right that if we capture this additional 30% to 35% abutment capture rate and take it up to 100%, that will clearly lead to additional, both revenue as well as margin there.

Okay. Fantastic. I want to hit a lot of topics so I'm going to move forward to ortho. And Amir, you talked about it a little bit earlier, but I just wanted to get your thoughts on what COVID-19 does in the overall orthodontic market. You talked about ortho coming back. You also mentioned clear aligners. So do you think there's going to be this big move to clear aligners in order to minimize chair time and visits? And if so, is Spark in a position already to capitalize on that?

Yes. So to begin, ortho is normally a lot less invasive than other specialties. So we think that the comeback, what we are seeing not only on clear aligner, but also on the bracket and wire, believe it or not, we're watching it very carefully, and we think they both are going to come back faster. And when we talk to the doctors, they are really quickly, they're trying to increase their hours and use a whole set of different tools such as virtual consultation to get these back as quickly as possible. It is really early, but we think that this is going to accelerate. We may accelerate the move to aligner in near term, but the aligners have been around for a long period of time. There are cases, and we have been told continuously, that in many cases, as you well know, Jon, we are really focused on segment of the market that are orthodontists. We're not going after GPs or direct-to-consumers. That group of orthodontists, those 8,000, 9,000 in the United States and the worldwide $2 billion business, it's looking for the best possible option to treat a variety of different cases. And having options in their hand, of bracket and wire as well as clear aligner, in this case, Spark, same software, same company, it gives them that option to provide the best possible solution. We are excited about what we're seeing. We don't think this is going to cannibalize our business. If anything, it's going to open a new front for us in this segment. We have been continuously innovating in our traditional Damon bracket and wire franchise, and that business has been growing mid-single digit for the past several quarters, and we expect that to be in the same space as we go forward. Just to give you a little bit of a feel, a bit of a view, we were going extremely well in January and February in Spark. China got approval, both not only from a clinical, but also manufacturing. We're able to receive 100 cases in January alone. China has come back exactly as it was back in January, and we are beginning to see cases coming back from Australia, New Zealand, North America, Europe. So the V-shaped recovery for us on Spark, and we had a small position, it is one of the very few places that we are seeing that taking place. We have 50 basis point of growth in Q1 alone because of Spark. We have made a commitment to that 50 basis points. And we think we are able to do that. We are building capacity now to make sure that we are prepared for 2021 in order to be able to ramp up if there is a need and demand for it, if there are some of those changes taking place, we can see up to about a 1% growth out of this only in 2020 alone.

So let me ask a couple of follow-ups there, Amir. The 50 bps of growth on a $3 billion base implies about $15 million for Spark in 2020. If I heard you correctly, even in the midst of COVID-19 pandemic, it seems like you're still committed to that $15 million number. Is that fair this year?

The minimum.

The minimum. Okay. Great. And then let me ask you on a near term and a long term on Spark. The near term is, just how do we think about that trajectory next year? I'm not looking for a hard number, but I mean, clear aligners is difficult because everything is customized, right? There's treatment planning. There's got to be, I think, a bigger support system that many investors realized 2 or 3 years ago. Can $15 million go to $50 million in year 2? Can $15 million go to $75 million? Just talk about any constraints you have from a capacity standpoint on where this product can go year 2.

Yes. So you got to look at the cases, the number of cases that we can provide. And obviously, that is driven by the number of customers that we have signed up. So let me break those for you. Customers are asking for it. So I don't want to say there's unlimited number, but those that we have targeted, they have told us that they want it, they're willing to experiment, and they're willing to expand it very quickly in that space. We have the infrastructure and capacity we're building now to be able to double and triple the number of cases that we are putting in place as we go through 2020. We think that we have the capacity now layering in from an operational perspective to get that number to be a much more meaningful number in 2021, 2022. We like this to be in a $100 million category over the next 2 or 3 years. We like us to have 4%, 5% market share. That's the direction that we are going. And we're trying to ramp that up as quickly as possible, 3 elements in here. Product can stand on its own and we feel really good about it, we're going to continue to innovate. Production capacity and capabilities around case management, and we are building all of that. And last but not least is about customer experience. We're not going to compromise on that customer experience part. Around case management support, we think that's a differentiator. Put these 3 pieces together, I think we have a value proposition that is really different than what is out there and allow us to build an Ormco franchise to be able to create a new front in this area.

Okay. And one more on Spark, again, great color and then I want to move over to DSOs. But we do a lot of surveys in the field, and the feedback that we got on Spark, it's early, but it's very positive. I mean, docs liking the product, talking about solid outcomes, et cetera. You're taking a little bit of a different approach than some of your competitors. SureSmile is selling to orthodontists and GPs. Straumann, GP and getting into ortho. You're confining yourself for now and I think for the next several years to just the ortho channel because of the relationships you have with Ormco and the ortho channel. When we look out 3 to 5 years and there's going to be the #2 player in this market to emerge, do you think Spark can be that #2 player despite the fact that you're still going to be somewhat confined to only one part of the market being ortho and not GP?

That's what we are aiming for. We are aiming to be the key player in here on the premium side, again, on the premium side. And we think if we can make orthodontists successful, if they can be our champion, if they can position that, teach others, I think that would be the beachhead that we are looking for, and it's going to expand it over time. That notion of orthodontists, when you go outside North America, it's not as confined as we speak about it. In Europe, you have people that they do multidiscipline. In other geographies, you have people that they do multidiscipline type of support. But we want to make sure our core customers are satisfied, are on board, are supported. There's a little bit of -- as you well know, there's a little bit of a love-hate relationship out there in some of these segments. Our intention is not to alienate our core customers in any way or shape and let the market slowly and thoughtfully take its position and move forward. If product is good, if capacity is there, if the relationship and support is in place, I think that would give us a competitive advantage that we are looking for in order to be able to expand to other categories. But we want to make sure that we are thoughtful. Let's do the first thing well. Let's make sure those people are happy and satisfied before we take the next step in here.

Okay. Fantastic. I've got a handful more topics. We'll see if we can get there in the next 5 minutes. DSOs, your positioning within the DSO market has been very strong. On the Stifel bus tour in December, we were able to see that firsthand, your relationship with Heartland, the biggest DSO player, was certainly on display. I think, Howard, you called out in 1Q '20, despite core growth down 14%, I believe you mentioned DSOs were up high single digits. So one, is that correct? And two, Howard, maybe you can just discuss the dynamics between price and volume that you're experiencing at DSOs would be helpful.

Sure. Sure, Jon. So that is correct. Despite the impact of COVID, I mean, for the full quarter in Q1, within our top 10 DSOs in North America, we had high single-digit growth. And so you can imagine that category continues to be a very robust growth category for us. We're pleased with the win rates that we've had when we've gone up to bid, specifically when those larger DSOs come into RFP processes. I think that we're very pleased with the results there. I would say within the DSO space, there is some pricing. Obviously, the transparency, the volumes that come through there, there clearly is some pricing impact. But we really look at replacing that with the excess volumes that we're driving, I mean, the growth there alone. And then secondly, one of the things that Amir has talked about, and I think also mentioned during the bus tour in December, is that a lot of these DSOs are interested in getting into more of the specialty work. And so to the extent that we can expand the portfolio of products that we sell into these DSOs, particularly around implants, for example, that is going to grow substantially our share there. And also because we have better margins, higher ASPs in that space, that's going to give us a lift from a margin perspective overall.

So Howard, just a follow-up there, maybe looking out. It sounds like we should expect certainly DSO to grow, call it, well above corporate maybe for the next 12 to 24 months with a little bit of an offset on a pressure point from a price or margin standpoint. Is that fair?

I think that's a fair assessment. Again, the volume is more than making up for any concessions we make on pricing.

Okay. Okay. Great. A couple of more topics. Amir, DI, we've heard it throughout today, even on the corporate dental panel with a couple of DSOs, the equipment that they're thinking about bringing into the practice and DI seems to stand out, right? It's, hey, $25,000 to $30,000. The return seems to be pretty clear. Maybe in a COVID-19 environment, that's where they want to dip a toe in the water. So just talk to us about sort of the three-headed monster approach you're taking. You've got Medit for that more price sensitive, your own KaVo X Pro, the 3Shape agreement for the European market. Is this strategy taking hold and is KaVo X Pro currently shipping as we sit here today?

Well, we had to make some priority calls in here on where we wanted to put our energy while trying to preserve our cash and making sure the growth priorities are really lining up. We put significant amount of resources and energy in 3 areas in spite of all the challenges. We continue to build the Spark infrastructure and capacity. We continue to add to the N1 capacity, manufacturing capacity. And we have increased our infection prevention capacity 24/7, 3 shifts, and we added incremental capacity. This is $175 million business that is growing over 30%, and we think that we can get another 25% capacity by June. So we've put money into those, make sure that we don't slow it down in any way or shape. And we directed some CapEx, some expenses in other areas to make sure that we come out of this situation and we manage and preserve cash. That was some of the priority decision that we needed to make. So that's position -- question #1 and the first piece. Second part is that we had to start looking at this and say, is this market one solution or is a combination of the solutions. And we had ended up in a place that if we build a platform, software infrastructure that connects the diagnostic to planning to execution, then we have an opportunity to provide maybe more to point solution, a point solution with the X 500, a high-end solution with the 3Shape partnership and somewhere in the middle in order to be able to create our own solution. And we are pushing all those 3 in parallel, continue to build it as we go forward. We saw a really good momentum on Medit last year, even back in December. Unfortunately, all of the things happening in January, we're going to get back at it as soon as we can.

Okay. Well, look, guys, I want to be cognizant of time and stay on time. I'm going to stop there. I do want to take a moment. I know you guys had a very busy day. You made a concerted effort to join the conference, to join Jaws & Paws. So I really appreciate that. I think it was great to catch up in a very productive 30 minutes. And Amir and Howard, look forward to catching up in the coming weeks and certainly on your 2Q conference call.

Thank you so much, Jon.

Thanks, Jon. Take care.

Thanks.