Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

All right, good morning. I'm trying to mess with my camera here, I'm sorry. Trying to get it on my screen. There we are. So good morning, everyone. Thank you for joining us. As many of you hopefully know, my name is Jeff Johnson. I'm the senior medical technology analyst at Baird. Or I guess I need to change that. I'm one of 2 senior medical technology analysts at Baird. Congratulations to Mike Polark, who just rolled out coverage of a new med tech list last week here at Baird. But our next presentation today is from Envista, a leading manufacturer of dental consumables and equipment products. And with us today from Envista, we're pleased to have CEO, Amir Aghdaei; Chief Financial Officer, Howard Yu; and VP of Investor Relations, John Bedford. So gentlemen, good morning, and thank you for joining us today. Before we jump in, Amir, I thought I'd throw it to you, see if there's any overarching comments you want to make, and then we can get right into Q&A.

Jeff, thank you so much for having us. It's -- September 18 is exactly 12 months since our IPO. 12 months ago, we talked about accelerating growth, expanding our margin and building a better portfolio. Despite of all the challenges in the past 7 or 8 months, we have been able to take a giant step forward by building a better portfolio. I feel really confident about what is ahead. As we go through the discussion, we can tell you a little bit about what we have done, but we feel really good about progress we have made and been able to manage and navigate through the challenging times in the past 6 or 7 months, thanks to 12,000 of our employees and dedicated relationship that we have had with our customers. Jeff, back to you.

All right. Thank you, Amir. And yes, I definitely want to jump in and talk about some of those company-specific factors. I want to focus on the long term and some of the changes you're making structurally. But I'm going to start on the short term. And I hate doing that, but this is where 80% of the people who are on this webcast are -- probably want me to ask these questions first. So let me get through those and then we'll talk bigger picture. But if we take kind of some of the commentary you've made on your 2Q call and then try to roll forward into some of the things that were said a few days later on Dentsply's call, since then Schein and Patterson's call, we can convince ourselves that maybe your June was down 15%, maybe 20% year-over-year or so. You did talk about July getting better than June. Dentsply talked about their July being almost back to flat. So is our June down 15% to 20% not too far off? And is it crazy to think about July maybe having been back at least ballpark down mid-single digits, flat, something like that?

Yes. As we mentioned during the April time frame, April was like a bottom of the trough for us with over 60%, negative 60%, and Q2 were minus 45%. So you do that math, you're not that far from what you're working through. May was a lot better than April. June was a lot better than May, and that trend has really continued. To be honest, it has taken us a little bit by surprise how quickly this has returned to -- we don't call it normal, but the ramp-up has been a lot faster than what we expected. And we are optimistic. We are cautiously optimistic. We are just hoping that we are able to maintain that momentum going forward. But the mix also has been a really interesting transformation. As you can imagine, a lot less hygiene, a lot more specialty like restorative, endo, ortho and implant pieces that really has worked in our favor because that's what we wanted to see. We wanted to see the specialty businesses growing a lot faster. We are, as I said, optimistic. We're cautious. We are trying to kind of manage and maneuver our way through this. We are -- we haven't issued any guidance, but we've been positively surprised with how quickly this has come back and in different geographies, by the way, and follows exactly what we have seen and heard in -- following the COVID situation in various geographies.

Yes. And I guess what's interesting is even Patterson on their recent call, they and Schein seemed to see maybe some growth in July. Now they have the PPE benefits and some air purification -- some things that maybe manufacturers such as yourself won't see fully. But they talked about positive growth in July. But Patterson, I thought, encouragingly talked about that sustaining even into August. And so one, have you seen any fall-off in kind of the July, August trends that you've been seeing? It sounds like you're saying you continue to be encouraged. More importantly -- I'll let you answer that August question. But more importantly, as we keep doing our survey work, the ADA has been doing their survey work, we do see volume settling in down somewhere double digits. We're at 15% in our surveys. I think ADA a little worse than that maybe but somewhere in that ballpark. So to your point, on some of the restorative stuff, there's been some mix -- positive mix in there and what have you. But do some of those short-term factors then moderate going forward? Do they lessen? And do we then settle in as we get into 4Q at something closer to a volume growth-driven revenue number?

Yes. We have not seen yet any kind of downtrend. And the survey that you do, ADA does, is -- really reflects in how we see the business moving forward. But what is really interesting, Jeff, is despite the fact that you have that minus 10%, minus 15% patient volume, when patients come to offices, they get a lot more done. And for example, we have really good relationships with some of the DSOs, and they are providing information to us. And we have also a whole lot of sensors around our sensors that gives us an indication of what is actually taking place in offices. What we are seeing is ASP, or average spending per patient, has gone up because they get more done in each one of those visits, but there is a level of kind of a steadiness in various businesses as we go forward. We have been fortunate that our infection prevention has continued to accelerate because of the PPE requirement. China has continued to moderately just accelerate month after month as they get back to normal. We have yet to see any kind of downtrend in any one of our businesses. In fact, when I look at our equipment business, it's what we expected to recover a lot of store. That has not been the case. And we are seeing a steady improvement month after month going forward. Visibility, unfortunately, is really low in here to see what we expect in Q4. But what I can tell you is about 40% of our business is in September. What we have seen in July and August is very encouraging. We got to see what September look like. That gives us a little bit more confidence walking into Q4 and going forward. What we have been -- the way we have been operating is to make sure that we protect the investment, the growth opportunities. In under no circumstances we have backed out of that. We have refined our portfolio. And already, we have gotten everybody back to work now ready for any potential uptake either in September or in Q4 to make sure that we are there for our customers as we go forward.

Yes. And as you talk about some of that higher intensity of dentistry being done or maybe case acceptance has moved higher, you have a little shadow on the X-ray. And in the past, you might have said, hey, I'll look at it in 6 months again. Now you're saying, okay, doc, why don't you fill it because I don't want to come back in 3 months or 6 months? I think some of that behavior is going on. Do you think that steals from 2021? And this is the last kind of question I'm going to ask on actual trend and your expectations. But as we get into 2021, I still feel like, given the macro, what the ADA is saying on expected dental expenditures and all that, 2021's still below 2019 levels. Would that still be your gut? But more importantly, and this is where I think investor sentiment and mindset needs to shift, 2021 should be a good, healthy base that you can then build off of future growth. Is that right? So whether it's above or below '19, it feels like to me you've really made some changes here where you could put in that base in '21, and now we can think about '22, '23 and beyond being kind of the growth that we were talking about when you IPO-ed a year ago.

Yes, that's exactly it. It's -- that's exactly how we are looking at it. We went through this process. About 85% of our portfolio now are -- I call it more of a consumable. Even our equipment in that 85% or $5,000 and below that you can buy doesn't require installation, doesn't require going through maintenance as heavy equipment. About 15% are, I would say, $5,000 and above. This 85% are essential, are the things that we use on a day-to-day basis. My -- our gut feel says that the 2021 is more like 2019 but with some differences, that equipment is going to be a little bit slower in catching up. On the other hand, when I look at the portfolio that we have, our clear aligner, we have doubled the capacity so far compared to 2019, and we're going to double the capacity again for 2021. It's ramping up. We had made a commitment that, that's about $15 million to $20 million this year. We're staying with that commitment regardless of what happened in the first half. The ramp has been really good. And then when you take a look at that ramp, that can be an important factor of 100 basis to 200 basis growth between that and N1 for us going forward. We have about a $150 million infection prevention business. We had it in 2019. It's growing over 30% now, and we have over $25 million past due. We have added capacity. 25% to 30% capacity has been added and were just coming online in Q3. We think this is going to be a $275 million business. That's another 200 basis point of growth compared to where we were in 2019. And we have taken about $110 million, $120 million worth of product categories that they were not growing. They were not contributing to our EBITDA in any way or shape. That is an accelerator on growth. Last but not least, we are on our way to take about $100 million worth of permanent costs out of the system. We're well on our way to do that. We've put all of that together where you will see a very different business model that has a better growth trajectory, better margin, a better portfolio. So why I say 2021 is more like 2019, these changes that we are making, we expect to see a low mid-single-digit growth that we had promised during the IPO. We think that's what you can expect from us as you go forward with a much better margin profile in 2021.

Yes. And of that...

And a lot of that -- I'm sorry. Please.

No. No, I'm sorry, I didn't mean to interrupt. Go ahead.

Yes. And a lot of that, Jeff, has been -- environment plays a really important role, don't get me wrong, that we got to be cautious. A lot of it are the kind of things that we have done in the past 9 months or so. If anything, we used the past 6 or 7 months to accomplish about a 2 to 3 years' worth of work that we were going to do over a more of a slower pace, but we were able to do all of that in a rapid format very quickly.

Yes. No, that's helpful. And I think it's one of the things that I think makes your stocks so interesting here. And you talked about it in that, but let's break a few things down, is the $100 million of cost savings, up from, I think, $60 million that you were talking about at the IPO, again that's maybe accelerating some of those activities that you were talking about. That's maybe harder for you to execute on but easier for us to understand. That's just a number. That's something you're taking out, and will let you and your training at Danaher and all that kind of -- and Howard, his ability to manage P&L. We'll just kind of accept that $100 million. But I think what's interesting is then when we look within the businesses, and you touched on it on infection control and some of the changes you're making in equipment; your heavy equipment, now probably what, $350 million, something like that, probably, let's say, that comes down a little bit next year; infection control up to $275 million next year, not only do those offset the good growth versus the lack of growth, now I don't have to worry about the equipment and consumables business being a headwind or declining.

Right.

But the margin profile just within E&C -- and I want to talk about that $100 million of cost savings and maybe the margin benefit of specialty, but just even within E&C, as infection control goes up, heavy equipment and break-even Pelton & Crane down, it seems like you should have some margin leverage even within Equipment & Consumables. Is that a fair way to think about it?

That's a very fair way to look at it. The infection prevention has free -- average margin, which is about -- almost 20%. Our specialty is about 10% higher in margin. Our equipment and consumable are 10% lower. Infection prevention is more of a specialty business. So you look at it, about $100-some million extra coming in, $100 million extra going out, $100 million with no margin, 0 EBITDA. $100 million coming in with a specialty type of margin. So that mix really changes not only the growth but also the margin profile.

And where do you think -- just last question on the infection prevention product and all the CaviWipes. And I mean, what you're really selling there, the sprays and the wipes and things like that, it's not a onetime purchase.

Right.