Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Hi, everyone. Welcome to the 2021 JPMorgan Healthcare Conference. My name is Casey Woodring, and I'm a member of the Life Science Group and Diagnostics Equity Research team here at JPMorgan. Today, it's my pleasure to introduce the management team of Envista. [Operator Instructions] And with that, let me turn it over to Amir.

Thank you, Casey. Thanks for having us. I'm going to refer to specific pages in here to get us started. I'll give you a little bit of a view of Envista on Page 3. We're about $2.8 billion based on 2019 revenue. This is all come off 28 acquisition as part of Danaher. We've been independent and publicly traded since September of 2019. About 55% gross margin, mid-teens EBITDA based on 2019. It's commission of a large number of brands. Brands have been around for a long period of time and have tremendous amount of industry experience and knowledge. We're really like this industry. We have -- it has some macro trends that keep us excited about making a contribution here. A global aging population, digitization, emerging market, and then increased focus on aesthetics are some of the macro trends that I can touch on. And on Page 4, in the past 12 months or so, we have been going through a significant transformation. This transformation has allowed us to exit about 5% of our portfolio that was low-growth, low-margin, and we have built a new normal. This new normal has about 85% of our portfolio in more of a consumable, and revenue that it is small equipment by some $5,000 that doesn't really require installation and maintenance. We're really strong in ortho business and implant, about half of our business is in data space, all sold directly. And that segment of a specialty product and technologies are about 10% higher margin than our equipment and consumable which are mostly sold through indirect. I would like to touch on Page 5 and who we are and what do we stand for. We're a company, a med tech company that is focused on professionals, professionals that really value providing the best service to their customers. We are partnering with this professional to improve patients' lives. We focus on giving them the tools and capabilities to bring dental care to masses and bring in confidence. We believe in customer centricity, in innovation, respect, continuous improvement and empowerment on accountability at the leadership. We come with the heritage of a EBS that it is built based on lean, innovation and growth and leadership. We truly believe in a continuous improvement and we think that there is plenty of room for getting better, doing better and helping and serving our customers better. On Page 6, we want to bring the EBS to live. We want to show you some of the transformation that we have done. We had a complex organization prior to 2016, over 10 different operating companies that in the past few years, we have reduced it to 3. We had over 230 different sites, distribution centers, manufacturing, sales offices. The end of last year, less than 100 sites. Last year, we set a goal to take about $100 million permanent cost out of the system. Through the sacrifices of our team, through the focus on lean and EBS, we were able to accomplish that objective. We're focused on innovation that matters, launching product that people can see productivity and predictability. In spite of all the challenges in 2020, and we continue to invest in the next-generation of implant called N1, a new clear aligner, that is by far one of the best-in-class solution out there, Spark, and continue to build a platform, an operating system, that really simplifies the digital workflow, and in DTX. This innovation, we continue to roll out in '21, and we continue to invest in that. We focus on growth with the brands that have been around for over a century. When we have started, we have over 11 different brands in treatment unit and in imaging. By end of last year, we have reduced those to 5. We have exited about 5% of our business that they were low-growth, low-margin. These include Pelton & Crane in North America as well as our treatment unit business in Latin America. We have a stronger portfolio that is poised for growth, and leadership, a pillar of success, continuity and leadership. The leadership has been in place since 2016, over 200 years of dental and Envista experience. EBS is at core of what we do. We are set for transformation, and we're going to continue to execute on these pillars to build a better company for years to come. On Page 7, we talked about building a better Envista, a differentiated Envista that it is based on principles of EBS. Since the IPO and prior to that, we mentioned we're going to build a company that has better and accelerated growth. We want to get to a mid single-digit growth category in the most attractive segment of the dental. We want to continue to expand our margin, we've made a significant step forward, but there is plenty of opportunity for us to operating leverage through mix and through productivity to continue to expand our margin. And we want to have a capital structure that gives us an opportunity to continue to do M&A to improve our growth. At the end of Q3, we're in the best possible position from a cash position. We are well on our way in building a differentiated Envista. In Page 8, I want to paint the picture of what you can expect as we go forward. In our 2 segment, in our equipment and consumable, in 2019, that was a negative low single-digit growth with the exit of Pelton & Crane and adding infection prevention, about $100 million of new business. High margin and high demand, I think we can change that business to a low single-digit growth over time. The software, the platform that we are building around our imaging, would make that transformation happen, focus on innovation in our consumable business. Our specialty business with a low single-digit growth in 2019, our intention is to make that a high single-digit growth over time. And it's going to happen because of underpenetration of both ortho and implant and innovation that we put in the market. We have an opportunity to build a mid single-digit business that is helping emerging markets have access to dental care and continue to expand and work with the DSOs in this market. On Page 9, we talk about infection prevention. In 2019, we had $175 million business. We have over 40% share in the dental and less than 10% share in medical. 80% of this business was in U.S.-based. We have added capacity. We have extended to outside U.S., and we are participating in the medical space. Our goal is to add $100 million of high-margin consumable to our equipment and consumable business. This business have added over 200 basis point of growth in Q3 of 2020, and that trend continues. We have demand for it, a brand that stands on its own and a past wanted backlog that is a clear indication of capacity that we have been building and the demand about a different change in the standard work and care around infection prevention. On Page 10, I want to touch on 2 specific segment of our business. To the best of our ability, our knowledge is that market of orthodontics. In 2019, and potentially in 2020, 15 to 16 million cases were started. We think there are 500 million people that they have a need and they can afford some level of ortho treatment. This market has plenty of opportunities for growth. Clear aligner, bracket and wire, is a market that has significant runway, $5.5 billion market, over 20% growth on the aligner side and a flat to low single-digit growth. We will be -- we are and we will be a major player in this segment. We think less than 20 million people that received implant in 2019. We think over 200 million people, they seek such treatments annually. Again, a market that it is truly underpenetrated, less than 10% penetration, $5.5 billion market size, growing mid single-digit. We have a strong brand, clear differentiation, and we can make a difference in the quality of life of people who have that need. These are the markets that we make investment, these are the markets that we want to be differentiated and make a difference in the quality of life, enabling practitioners, dentists to be more productive and get better clinical arc. On Page 11. I mentioned about our traditional bracket and wire business. This is a $2 billion market. It is growing low single-digit, mid single-digit, now at -- clear aligner on top of it, significant opportunity for growth and make a contribution. Over 70% of our business is outside United States. We have a network of training and education that done by professionals. Orthodontists teaching other orthodontists. Every year, we do over 500 events. We train over 75,000 people. Innovation is a cornerstone of what we do. Over 20% of our business comes from product that they're less than 3 years old. In the second half of '20, we have increased the capacity in our clear aligner by 250%. We have over 1,000 active orthodontists that they are placing cases on us on clear aligners. And we are seeing a high single-digit growth in this segment of our business, with plenty of opportunity for runway and over 20% EBITDA margin. We are committed to this space. We're committed to best-in-class solution and orthodontics that make a difference in improving people's quality of life. We give people options of using bracket and wire as well as clear aligner to get the best outcome. In Page 12, talk about the implant business. Nobel is a brand that has been around and has a halo effect about quality. It's about innovation. We have over 1,300 direct sales force, feet on the street, teaching, helping and supporting our customers. Every year, we do over 750 events and train more than 100,000 clinicians. This is an opportunity for us to continue to expand organically and inorganically. We think we have an opportunity to participate in deploying capital in the value implant as well as the biomaterial. Organically, we have introduced the N1, a revolutionary implant system. It is in Europe today. In more than 10 countries, 300 doctors, they have placed an N1 implant, and 2/3 of them have come back and placed a second set of orders. We're working in the United States going through the proper procedures. This clinical advantage of N1 is really pronounced. Speed that we use in the drill of a 50 RPM versus a traditional of over 1,000 RPM. Most implant, they use multiple steps. The drill protocol here really make a difference because it causes less damage. As an outcome, the healing time is a lot faster. Faster learning curve, easier to train is going to make a difference, not only on all surgeon, but also on DSOs and others that they want to help expand the implant market. We think innovation and our execution would allow us to increase our growth trajectory in this business to mid single-digit and high single-digit over time. In Page 13, the pandemic, as unfortunate as it was, give us an opportunity to radically change not only the portfolio but the cost structure. We took $100 million permanent cost out of our portfolio. This is a combination of indirect spend and real estate, headcount reduction in areas that we didn't have growth potential. We closed over 10 sites. Reduced headcount in our non-ortho business by over 10%, while adding over 1,000 people to our ortho business, over 40% increase. And we have an opportunity to continue to make investment. In '21, we intend to invest additional $30 million building capacity, commercial capabilities, and adding 1 more facility that purely focus on building clear aligners. Our goal is to build a business that is high-teens and even higher over time, an EBITDA margin. In Page 14. In 2003 to 2015, as part of Danaher, we did more than 25 acquisitions. In 2016 to 2020, we only did 3. We created over $1 billion free cash flow between 2017 and 2019. At the end of Q1 -- Q3 of 2020, we're in the best possible balance sheet and capital structure. We have reduced our net debt by over 20% with $1.1 billion at the end of Q3. We have an opportunity to put capital to work, use M&A to continue to expand while delever, and put ourselves in the best possible situation. On Page 15, you see what we intend to do, create a consumable and equipment workflow-oriented portfolio that starts with imaging, diagnostics; built the largest imaging company with over 150,000 installed base; use our infrastructure and platform for planning, for treatment; and then execute on ortho and implant. Our traditional consumable are supporting this workflow, while our equipment are add-on to what we are building, an end-to-end solution that is integrated, connected, providing productivity and predictability. As I mentioned at the beginning, over 85% of our business now is in a high-value workflow solution and in a consumables. Our last slide, talk about what we stand for. A company that is focused on professional, a med tech company that wants to make a difference in this industry, a company that is going to continue to grow sales, improve margin and accelerate -- through acquisition accelerate growth. EBS is how we do things. And we're going to continue stay on that mission to make a difference in this industry. Thank you so much.

Thank you for that. Maybe to start, can we just get an update on the market environment now heading into 2021? Third quarter is significant beat versus consensus. Was that a result of pent-up demand? And how concerned are you with spiking cases and looming lockdown procedures now heading into 2021?

We saw in Q3 a good ramp, as you mentioned, Casey. The bottom for us was in the April time frame when we were down almost 80%. In Q3, we saw, minus a couple of percentage. The volume has started coming back. And we are encouraged. We are optimistic, cautiously optimistic. The dentists, they have figured out how to managed through pandemic by staying open longer, by providing a safe environment, and as far as we can tell, even though with the visibility as limited as it is, that trend is continuing. Volume, I'm sure you have seen a lot of surveys that says volumes have not back to what the 2019 was. However, the spending per patient is higher than it was before. Combination of all of that, plus everything that we talked about in the past 20 minutes, give us the confidence that we can manage through this transition, and we are really optimistic about the future of this industry. We think by second half of this year and through 2022, we'd be in a very good place, and the industry as a whole would be in a very positive space.

Okay. Maybe turning to China quickly. Now that's back to growth for you as of third quarter, posting high single-digit growth. How much of your China dental business is equipment versus specialty consumables versus traditional consumables? And maybe how fast is each product category growing in China? And maybe just can you elaborate a little on why this is such an exciting market for you guys moving forward?

Yes. Of course. So we started that 50-50 that I mentioned at the beginning, 50% equipment and consumable, 50% specialty and technologies. That was the norm in China before 2020. Throughout the year, because of some of the trends that the Chinese government had put in place and move from a public to private sector, we were able to really accelerate our growth in our specialty businesses. We know that we are gaining share in ortho business because of these trends. And our implant business has accelerated significantly in the second half. So today, I would say, our consumable business -- our specialty business is growing a lot faster in China than it was before, that high single-digit growth that you're seeing, a big part of that is because of the specialty growth. Innovation, training and education as well as the commercial execution. We have also built capacity, manufacturing service repair capacity in China. With over 1,000 people, now we have organization stand-alone that can meet the needs of customers in China. Let me give you 2 examples. We had an Ormco Forum in November with over 1,000 people participating; Nobel Symposium in December, over 1,000 people participating. They are looking for training and education and innovation, and we're there to help them. We think our plan in China is going to continue getting back to that traditional double-digit growth continuously with the things that we have done and investment that we are making. And that shift is going to continue. It's improve the mix, improve direct, and it's going to be a much better business in the long run, while growing double-digit.

Okay. Thank you for that. We've had a couple of questions come in through the web page whilst you're speaking. So maybe just -- so the first one, what's driving an increase in the long-term revenue growth target from low single digits to mid single-digit growth now up to just flat to mid single-digit growth? And what are sort of the drivers there that [indiscernible]

So a few things, Casey. As I mentioned, we exited about 5% of the business that was declining, almost double-digit, limited margin contribution. We're replacing it with a business that is growing double-digit with the norm consumable margin, step 1. Step 2, a lot of innovation that we have talked about. We spent over $500 million in R&D in 3 years between '17, '18 and '19. A lot of that is coming to form. We saw some of it in 2020. We continue to invest in capacity building in 2020. We're beginning to see the outcome of it in 2021. Innovation is another element. Last but not least, our own execution, commercial execution, innovation execution, leadership that really takes ownership and executes, own it, own customers, committed to make a difference, a unified team has rallied around one cause. EBS is at the heart of what we do and how we have been able to make that transformation happen.

Got it. And the other question that I have here is that looking at your LFL versus Straumann, it seems clear that you've lost share even this year. How do you aim to fix this issue?

We have a set of challenges that we started [ at first ] in 2019. In 2019 -- at the end of 2019, we started making some changes in leadership in the structure in Europe. We doubled down in China. We started making those shifts take place. Second half of last year, we started seeing the outcome of that, both in China and Europe. When I see books are not closed yet, but we are really optimistic about what we have done. We put a lot of energy around the DSO. Our DSO in North America in Q3 was high single-digit growth on impact. Combination of commercial execution, plus the new product and innovation, not only N1 but surface -- new surface, new categories that goes around N1, it's going to be the driver in closing that gap, getting us to a mid single-digit growth and high single-digit growth over time. $1 billion franchise with a tremendous brand position with new innovation, I think we are on our way to get this business back on track on a mid single-digit, high single-digit growth over time.

Okay. Maybe just one. In light of the recent acquisition of Bite from Dentsply, maybe can you just talk about what your current view is on the competitive dynamics in the clear aligner market and maybe how Spark is differentiated in technology, pricing and some of those factors?

Yes. Of course. We really like what we have seen in the market on the clear aligners side. A market that has started almost 15 years ago, it is $3.5 billion, clear aligners, $3.5 billion, plus bracket and wire $5.5 billion market that is thriving. And it's bringing a lot of new patients and customers, a lot of advertisement and others. So we are encouraged. But coming back to the clear aligners side, there are 3 distinct segments. There's a direct-to-consumer segment, growing double-digit; thriving, many companies are participating in it. That's not our target segment. We haven't been there, plus we don't have the expertise to be in that area. 1/3 of the market of that $3.5 billion is around general practitioners. These are great dentists that they have added some new capability to what they do today. 1/3 of this market are professionals, orthodontist, the people that they decide what is the best answer for patients. We have decades of relationship with these segments, with these customers. 90-some percent, 95% of our business in bracket and wire comes from these customers. They're the one that they want to have optionalities. They're the one that they want to provide the best outcome to their patient. Their reputation, their capability is on the line. That's where we are focus. Spark is a differentiated product focused on professionals, giving them optionality, a product that is a stain-resistant, is clear, is easy to use, software-friendly, give control in the hand of orthodontist. We're focused in that segment and the best and brightest and the people who are on top of their career. We think that's where opportunity for us is to make a contribution. We're proud. Others, we encourage with millions, hundreds of million dollars that is spent on advertising and bringing a whole lot of new patients. And we would see the outcome of that because orthodontists are seeing more and more patients. Our business is growing double-digit. Our bracket and wire is growing high single-digit, combine that with the Spark double-digit growth over 20% margin, I think we have a very targeted segment for growth for years to come.

Got you. Just had another one come through. Maybe if we just can go back to the business trending into 2021. Maybe can we get a little more granular on recent weeks? Some med tech names have said that throughout the back half of September and first half of January, things have slowed down a bit back due to the pandemic. So just sort of wondering what you're seeing currently as there is a resurgence of cases now?

Yes. We answer that by going back and taking a look at our business in the past, about 50% of our business are sold through distribution. Inventories and big distributors, January 1, 2020, December 31 are 40% lower. So we have 40% less inventory in the channel. That's a really important factor because that says there is no buffer out there. As people need it, they place an order and they receive it. The other thing, I mentioned that before, that dentists that we know, the market that we survey, they tell us, unless government tells them to close offices, they're not doing that. They have learned how to be -- in fact, before I say anything else, dental office is one of the safest places that you can go to. Has always been a very clean environment and continues to be that. The fact that people are not traveling as much, in fact, have brought more people to dental offices. The fact that people don't have a lot of opportunity for leisure travel has given them opportunity to invest in self-improvement and aesthetics. What we are seeing as I mentioned, cautiously optimistic is in spite of all the headline, we have not yet seen a direct impact in the volume in the order rate. We're watching; this very carefully. Our visibility falling now. We're on our own. What we need to control in order to manage through these, build a better, stronger business while we know this industry, a significant runway in the long run.

Got you. Just had another one come through. Are margin targets now higher than before? And what gives you the visibility?

So yes, Casey, this is Howard. Yes, I think that we've talked about margins and the actions that we've taken in 2020, as Amir presented just earlier. Clearly, we believe that we'll be expanding margins going into 2021 from the 2019 levels that we've historically seen, largely around product mix and growth, but also around some of the cost actions that we've taken as well of the more permanent nature that will enable us to expand those margins quite a bit.

Okay. Is there any sort of update on the N1 launch timeline you can provide? Are you guys still tracking towards the back half of 2021 in terms of the U.S. launch? And is there anything that we should be thinking about there as you enter this year?

Yes. Casey, we introduced it in Europe, passed the CE approval process. Unfortunately, the pandemic causes a little bit of a issue because we'd like to do live surgery with 15, 20 ortho surgeon in the room, so they can see it, they can see in action. In spite of all of that, it is in 10 countries in Europe. We have trained over 1,000 dentists. 300 dentists in Europe, they have placed an implant in N1. They placed an order. They received it. And 2/3 of them have come back and placed the second batch of implants. They're really excited about it. A lot of them, they're giving us a lot of good feedback, and we continue to add prosthetics, surface capabilities, other tools around it, because it's not just a titanium implant, it's a whole system. In U.S., we're going through the approval process. We're working with FDA. We're hoping that we can answer all those question, but we're not really thinking -- we're building capacity but we're not counting on it. We think it's going to be more at a later half of this year. Capacity is in place. We started building it last year and continued to expand it this year.

Okay. And then maybe just on the M&A environment. How would you sort of characterize that now currently? And where do you see the most significant opportunities to sort of build out inorganically? Are there any gaps in your portfolio that could potentially be filled through acquisitions? And then maybe what portion of the business do you view as noncore and are maybe looking to continue to divest and restructure?

You can see all the organic work that we have done really has put us in a very different place from a capital structure, capital deployment point of view. I mentioned that our net debt is in the best possible solution. We are active portfolio managers. We're going to continue to look at our portfolio to make sure that we are positioned for success. We're differentiated. We're targeted at the best growth opportunities over time. But if I look at $5.5 billion of implant business, 3 segments in it: premium with Nobel, we are really positioned well; value, $2 billion, growing 6%, 7%, 8%, we are under indexed; $1 billion biomaterial, growing double-digit, we are under indexed. This gives us an opportunity to explore partnership and other opportunities. Software, AI, robotics are going to be an important part -- implant industry -- dental industry as a whole. We have done significant investment organically, but there are opportunities for us to partner to early investment to continue to extend that digital workflow integration.

Okay. I got one more quick one before we wrap up that just came through. Is the $30 million in incremental spend referenced in the slides, is that CapEx? Or would that be in the middle of the P&L? And then is there any sense of magnitude of expansion versus 2019? For example, would it be more than 100 bps?

Yes. So clearly, we feel good about the activities that we've taken, both in terms of the portfolio management as well as the cost takeouts that we've done in 2020. That positions us well to come out of this pandemic with margin expansion. And I would say that the $25 million -- over $25 million or $30 million of investment is broad in the specialty space. That would be -- incorporate both capital as well as in the P&L.

Okay.

Casey, thank you for having us. We feel really encouraged with the good organic work that we have done in 2020. $100 million cost coming out, 5% of portfolio moving out, a whole lot of investment and innovation. I think we're in the best possible position today. And I think capital deployment would be another lever that we can use in 2021 to really accelerate our growth, our margin and build a better company for years to come. Thank you so much.

Okay. Thank you, guys, for participating today.

Thank you, Casey.

Have a good one.