Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Yes. Yes. So really good. David, clear aligner has been growing continuously in the past 15 years, honestly. And in the last 3 to 5 years, has accelerated even further. If you look at the ortho business, there's a $2 billion bracket and wire business. We have about -- roughly about 20% market share in that space. It is flat to low single digit, and we have been performing a lot better. We have been performing mid-single-digit continuously in the past several years, and it has really recovered a lot faster than we had anticipated. Then you go to the aligner space, so roughly about a $3 billion market, 3 segments in it: direct-to-consumer, we're not participating in there; the general practitioners, another 1/3; and then the orthodontist. The orthodontist had $1 billion market, has the same growth profile as our wall aligners. So think about it in this format that we are focused on our current customer, and we are giving them options, option of the bracket and wire, option of aligner. From a customer, from a patient perspective, I'm going to go through this procedure for 12 to 18 months, paying the same amount of money and orthodontist is going to give the best possible option to me. And what we are hearing from our current customers, they want to have this optionality. They want to be able to offer clear aligner, they want to be able to offer bracket and wire, and they want to be able to do that. They have a product that it is, based on what we are hearing, it meets every requirement from transparency, ease of use, software as well as being able -- give control to the orthodontist to do what they need to do. And they can interchange it. They can provide a combination of the 2. Another interesting fact that we have seen is that recovery on the clear aligner versus the bracket and wire, in our current customer is almost the same. We're now seeing a radical shift from one place to another. And they're excited about what we have done, and they continue to see and use that going forward. And a clear aligner business is beginning to ramp up pretty quickly, both from a capacity as well as the number of dentists. Short answer, for our customer base, we have given them an option to use what's best for them. And they are taking advantage of it and this is providing the growth potential for us in the long run. We're going to do about $15 million to $20 million this year. We think the path to $100 million is fairly clear over the next couple of years. We want to be the #2 players in the premium segment and the orthodontist segment. And we think that the product, the relationship, the training and education and capacity will give us that opportunity for growth over time.

Okay. What do you think your mix is today? Amir, it sounds like it's heavily weighted to traditional Ormco customers. What is the Ormco versus kind of competitive account dynamic you're seeing? And can you get to this $100 million in 3 years, really just harvesting traditional Ormco accounts?

Yes. So we had about 20% market share and varies by geographies. But these are what I call elite orthodontists in U.S. and other places. That's all they do. They do that every day. By the way, these are the same people that they adopted clear aligner a lot faster than anybody else because, for example, a Damon treatment system is not that different than the process and the procedure that the clear aligners are using. We're not going after the customer who does only aligner or he's considered a platinum user. We're going after the customer base, our customer base that continue to use bracket and wire, and they see it as an add-on. And normally, orthodontists, they don't like to have multiple systems in their office because it creates a lot of confusion and complexities. They become an expert on the Damon system. And what we have seen, there's a small number of customers that we have trained and worked with, they are becoming a Spark expert. We have customer now that has done more than 500 cases. We have more than 20 or 30 customers that they have done more than 100 case, and they're ramping up pretty quickly. We signed up about 500 customers before COVID. We added another 300 in the past 3 or 4 months and now, we are in China, they have clinical approval as well as manufacturing approval. They're adding that capacity and dentists in China, and we are starting a new front in Europe. I think that combination of that 20% market share that we have gives us enough of a runway for the first tranche, that $100 million goal that we are after.

Okay. And your traditional bracket and wire business was actually relatively consistent during this very substantial expansion for clear aligners. Are you at all -- are you concerned at all about an acceleration in the cannibalization of your bracket and wire business, if you really aggressively pursue these Ormco customers these next 3 years?

No, not really. Because, again, as I said, the clear aligner has been there for 15 years. The Ormco business continues to grow the bracket and wire for 3 reasons. Innovation. If you look at the original system of Damon, we have done multiple innovation web off that and more to come. 25% of that business today comes from product that have been less than 3 years old. So we have put a lot of energy around innovation. Training and education. David, as you well know, the traditional orthodontist, they don't teach as much of it, not at least in the United States. You learn from mentors and coaches through training. So the more training and education you do, the more people see the outcome of it. And Ormco has done a really outstanding job in that front, in Ormco Forum and other methods. And last, but not least, is around emerging market. China is an important growth trajectory and factor for us on the traditional bracket and wire. Russia has been continuously growing over time. So you teach people, you train them, you support them, and you will see that growth to continue on, admitting there is plenty of room, further opportunity for growth and a traditional bracket and wire business. The Spark now gives us an opportunity to really access a broader set of needs in there. We're not only an orthodontics company. We have imaging product. We have infection prevention. We have restorative. We have a handpieces that now we can address a much broader set of needs of our orthodontists. We are adding to that portfolio. We are adding to the back. So our sales force, they can walk into an office and answer as many questions as is needed to make those orthodontists successful over time.

Okay. Are you finding in the cases where some of your traditional Ormco customers may have been working with another competitor, are you finding you have to offer the product at a discount? And I mean for you who's not in the business, a discounting strategy actually makes some sense. Should we think about something about a 10% discount to sort of open up those accounts?

Honestly, we haven't seen it. In fact, this is -- I'm repeating what I've been told from some of the best customer, they're telling us not to do that because the product stands on its own. It is a really good product. They're happy with the level of support. We have room to do that. We can do it, if we need to. We have a small group of people that we sign them up, we train them, we give them a opportunity to participate and as they ramp up, we take some of those promotions away. But discounting has not been the approach that we have taken in order for us to be present in this space.

Okay. Very helpful. Maybe just to transition a little bit to N1 for a second here. Obviously, growing the product out in Europe. Maybe just help us understand a little bit of how the -- how you see the European loss for N1 going from here. And then we haven't really gotten a firm time line from you on U.S. N1. Maybe you could firm that up for us as well.

Absolutely. Happy to do it. David, as you know, it was approved in Europe, and now we're getting the CE Mark company -- country by country. One of the things that we have been really pleasantly surprised, we introduced it in Belgium and France in the past 2 weeks. We invited some of the best doctors, oral surgeon in that area. 70% of people who attended the meeting, they placed order the same day. They saw it. They see it. They see the impact of it, and they really are gravitating that that's what they want to do. They -- it has really taken us by surprise, to some degree, because you normally go do the training. You -- we launch it, you show it and then it takes some time. Next 5 countries are taking place this week. Next 5 countries, we're going to launch it, and then we're going to continue to do that over time. At this point, over 25 to 30 dentists that have placed a multiple of N1 in patients and what we are hearing, and this is what we heard on the Spark, we like to be able to have these dentists to be our advocate, to say, this is the product I want. That's what I want to use, and I want to switch. So all our approach has been land, demonstrate that the product can stand on its own and let that team to be kind of the center of gravity. As you can imagine, some of these oral surgeon, they have a network. 90% of work happens in other places, and they get the most difficult cases coming to them. If they teach their network, if they tell them what the answer is, you're going to see rapidly this is growing. Our goal is to have between N1 and the Spark about 100 to 150 basis point of growth this year, and it's going to be a really important factor for us next year. We're building capacity for all of that to be in place. We're talking to the FDA. They have all the material. We have been going back and forth answering question. I can't predict the time line. Right now, intent -- internally, we are assuming that it's going to be second half of 2021. And all the capacity is in place. If it happens sooner, then excellent. If not, that's what the planning looks like at this point in the horizon that we are looking at.

Of that 100 to 150 basis points of growth, Amir, is it safe to assume the majority of that this year is coming from Spark versus N1?

Both. So like so we said $15 million to $20 million with Spark. This is what we are after this year. So you think about last year, we did a very small amount. So a big part of it in the second half obviously, capacity. So far, year-to-date, we have doubled the capacity of the Spark compared to last year, and our goal is to double it again to end of the year. So we are building the capacity in there. And N1, 2 factors, which is really important to mention. Implant versus abutment. So in our traditional, about 60%, 65% of the time, we got the abutment. The other 35%, 40% of the time, they use somebody else's abutment. In N1, there is a linkage -- IP linkage as well as a creative methodology that really makes it 100% attachment rate. So that attachment is a really important part of the growth. And there is going to be some cannibalization on N1. Absolutely. People are going to move from Nobel Active to N1, but that growth over time, combination of abutment, plus the new growth, is going to compensate and is going to accelerate the growth. N1 is also premium-priced versus Nobel Active because of ease of use, because of the time to heal. So combination of all of that put this in a better place. But it is fair to say that a good part of the growth in second half is Spark, but we're counting on it in 2021 to be a combination of the 2. Four factor: N1, and Spark, infection prevention is about a 200 basis point of the growth, and continuation of a China growth. Those 4 factors makes us feel really comfortable about what is ahead.

Okay. And the -- right now, I feel like on Spark, you may be able to go even faster. Is capacity right now really the barrier? I mean if you had more capacity, is there much more demand than capacity at this point?

Yes. It was -- to be very transparent, it was an issue about probably 3, 4, 5, 6 months ago. Right now, our turnaround time is less than 10 days. So from the time that you place a case, validate it, receive it, and our goal is to continue to reduce that over time. So we have been building capacity. We have used EBS and standard process improvement and lean as well as on the onboarding. So it is not as much of an issue as it was 4, 5 months ago. We feel really good about the capacity that we have today, and we are signing up more and more and more customers as we go forward.

Okay. Understood. And then, Amir, just the -- a business that was struggling a bit pre-COVID is the E&C business. Help us understand, there were some structural issues in that business prior to COVID, and the COVID environment is probably not going to help on the margin. How are you feeling about the trajectory of that business versus single businesses as we head into next year?

Yes. About half of our business is Equipment & Consumables. So I'm going to do this math pretty quickly. What we have done, 85% of our business now, I will consider to be consumable. And why I make that statement is because a lot of our equipment now are less than $5,000. So you -- that you can buy, install it, and you need it on a day-to-day basis. Sensors, Nomad, handheld X-ray and many instrument pieces. So only 15% of our business now is high-end equipment. So we took about $120 million, $130 million of equipment to treatment center in U.S., in Latin America that had very low margin, not growing at all. We took that out of the equation. In -- and the rest of it is in a really good shape, competitive advantage, product that is latest, and we continue to make investment on. Then coming back to the traditional consumable. We had about $150 million of infection prevention business, that it is more like a specialty from a margin perspective. We're adding another $100 million of that business. So you took about $120 million out that had a lower margin. You replace it with $100 million business that has a higher margin in infection prevention. You took $120 million out. We created a very different dynamic on Equipment & Consumables that we had only 9 months ago. Lower more of a transactional things, better margin, better product. I think it will put us in a completely different place. Last, but not least, David, we started talking a little bit about pent-up demand and inventory. Inventories have been the lowest that I have ever seen. So that gives us an opportunity, as dentists go back to work, to see that sell-out accelerate over time.

Okay. And then just lastly, team, kind of pulling this all together, anything left to do on portfolio optimization? I mean is it -- is there -- are you more hesitant to do deals right now, Amir, given the environment and all the things that's going on? Is there anything left in the portfolio that you think could be divested to get to some of your growth goals faster?

We come from that heritage of Danaher that you constantly look at your business and try to position in the best possible format. Our goal is to build a better Envista. Higher growth, higher margin, the portfolio that is set up for growth. You would do that through organic activities, as we talked about, and inorganic activities. Sometimes inbound, sometimes outbound. Our point of view, at this point, is that the cultivation that we have done in the past 5 or 6 years, hopefully, as the environment is stable, we would be able to do more M&A going forward. And we're going to constantly looking at our portfolio to see is it set up to meet the requirement of the industry and puts us in a better place going forward. We don't have any immediate plan right now, but we are constantly looking at that in an ongoing basis. So that's how we operate. That's how we manage this business. And what we have learned and what we have seen in Danaher in the past 37 years and Fortive in the past 4 or 5 years, that's the recipe that we follow. Our message is very simple. We're going to build the company, organically grow better than the market with a good margin, continuous improvement, take that back, put it into the growth and innovation and continue to do acquisition in order to build a better company over time.

Okay. Well, we're a little bit over. But I think it's a good place to stop. Amir, Howard and John, thank you so much for spending time with us here. Enjoy your meetings today. I appreciate you taking the time and being at the conference.