Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the William Blair Growth Stock Conference. Thanks for joining us in the next session that we're going to be working through in the next half hour is Envista Holdings. Thank you, all. I'm John Kreger. I'm the analyst at William Blair that covers Envista. And I've been asked to tell you that for any conflicts or other disclosures you can see williamblair.com. So please check that up. What we're going to do in the next half hour is a fireside chat. From the company, we've got Amir Aghdaei, CEO; Howard Yu, CFO; and Stephen Keller, Head of IR. So thanks to all of you guys for joining us. I know it's early there. I thought to get started. Amir, maybe you could take a minute and just sort of tell us where you are on the spin-off journey from Danaher. What's been completed so far and what's still yet to come from your perspective?

Thank you, John. Thanks for having us this morning. So it's been close to about 18 months since separation from Danaher. Right prior to IPO and doing IPO, we continuously talked about a company that is growing faster than what we had seen in the past, a company that has better margin, and M&A would be another tool that we will put to work. I want to look back in the past 18 months, despite the fact that 12 or 13 months of that has been in the middle of COVID, we have been able to make significant progress. We made a commitment to take about $100 million permanent cost out of our run rate. And team has done an outstanding job making that reality. We closed a gap in our margin proxies in the market, and we were able to really set ourselves up in a different format coming out of COVID, hopefully, as we go forward. We talked about growth. And the driver for growth for us was -- a big part of that is direct businesses and NPIs that we have been working on in the past several years. We have spent close to about $500 million in the prior 3 years to build new product that has -- that gives dentists opportunity to be a lot more productive and be a lot more predictable. These product categories now are in the market. You can talk about [ Spark ], it has grown almost 50% every quarter. Infection prevention has been an important part of our growth story as well as commercial improvement as well as N1 in implant and China has come back a lot stronger than we expected. So the growth story is something that we are really proud of and we have seen that in the past 3 quarters. Just to give you a little bit of a feel in Q1, compared to 2019, we had a double-digit growth. We have talked about mid-single-digit growth in an ongoing basis, and we feel pretty confident that we are going to be able to maintain that going forward. Last but not least is about M&A and our ability to really put cash to work. We have never been as good a place as we are today from an equity perspective. The capital structure of company has been as strong as it has ever been. And now we have an opportunity to use as another tool to continue to change the portfolio and continue to accelerate and put resources around growth areas. One more thing I want to talk about before we open it up. All of that has happened because of transformation inside the company. Since separation from Danaher, we have been able to develop a culture that it is build based on customer centricity, based on innovation that really truly matters, a culture that it is build on based on respect, diversity, inclusion, ability to come to work and be your authentic yourself, a culture that it is built based on continuous improvement and EBS at the heart of it, and we can continuously improve things as we go forward and a culture of leadership, accountability and empowerment. Those acronyms are being the pillar of the new Envista, the circle, we call them, is something that allows us to really ready the organization in building a better future in the dental industry, having an impact about how we can give better access, better oral care, democratize this industry as we go forward. We're really proud of what we have done, and we think the future of this industry and this company would be very bright. John, let me hand it back to you.

Thanks, Amir. That's a great set up. Maybe 2 quick follow-ups to that. What's left to do on the spin journey so to speak? And you mentioned M&A and never being better -- in a better position. To the extent you're willing, can you elaborate on where you'd like to go at more domestic, more non-U.S.? Anything that you could pass along would be helpful.

So as you know, we report to the market, our Consumable & Equipment (sic) [ Equipment & Consumable ] segment as well as our Specialty business. In our Equipment & Consumables segment, which is about half of our business and is mostly sold indirectly, we have really managed that portfolio very differently than what we had it before. We exited close to about $100-some million dollar of that business that wasn't growing. It was low-margin, low-growth. That business is in a far better place has ever been, and the consumable nature of that business now has higher margin, higher-growth momentum, and we feel really good about that segment of our business. Treatment unit, instrument, imaging products, as well as endo, resto, infection prevention, that half our business has been growing, it's a much better margin. In fact, a lot of the restructuring that took place came from that part of the business. And Specialty part, our ortho business, we are in a really unique position because we are probably the only company that has a combination of bracket and wire and clear aligner. And our bracket and wire [ stock ] has been over 10% in the past several quarters, and we now have 1,400, 1,500 customers that they place aligner with us. We call them active customer, which means that every 4 weeks, they place a case with us. That combination, same organization, same go-to-market, really put us in a position of advantage. What we need to do, continue to do, build capabilities in various geographies, get more and more registration done, more and more capability in different geography, expand that business as rapidly as possible. We now have capacity not only enough for 2021 but also for part of 2022. What is left to do in our Implant business, we have gone through a tremendous amount of shift and change. As you recall last year this time, we told you that we had to exit some geographies and the value implant part of our business. So those proxies, those changes hopefully in second half are going to bear fruit for us. The commercial execution on implant has become a lot better as we go forward. We feel good about where we are in Europe, in China. North America, we're making progress. And then new product that we have put in place are beginning to get momentum. So I take a step back to what else do we need to do in here. We need to continue to execute the core [indiscernible] specific on the Implant side. We need to continue to build capacity and expand our Spark business. And we need to make sure that if we have gap in our portfolio, we are able to do it either organically or inorganically. And that's bringing me to the second part of your question. We have made it very clear from very early stages that our segment of the market that is growing a lot faster and we are under indexed, value implant is a good example of it. It is a geography play. And in some geographies, we have limited or no presence. So that could be a good -- really target for us to be able to do some inorganic activities, partnership collaboration. Regenerative is about $1 billion business growing double-digit, and we have less than 3% market share. It is not something that we can do organically. We're going to look for opportunities to do partnership, collaboration, inorganic activities and continue to look at future, AI, software, integration capability, workflow management, that we can partner with others and use our cash, use our financial strength to accelerate our growth going forward.

Excellent. Sounds good. Let's pivot to demand. What's the latest you guys are hearing from your field sales force on demand and sort of patient volumes now that we've lapped the early days of the pandemic?

So back -- maybe certainly Q3, we saw slowly months after months, patients are coming back. Patients feeling more comfortable going to dentist office. What everybody talks about a Zoom effect. You see yourself a lot more often and you're working from home. Majority of us used to be on the road all week. Now we have opportunity to walk out and go see a dentist an hour in the middle of our meeting. So even the volume wasn't necessarily as it has been before, let's say, 10% or 15% below. Our large customers, our specialists or DSOs, they told us that average spending per patient has gone up. So they have the same turnover volume -- dollar volume that they had before, even though with a smaller number of patients. What we have been seeing recently outside except specific in some geographies that continue to have challenges in Europe specifically and a couple of providences actually in China and places like India and Brazil, the volume has continued to ramp up. I can tell you this, John, dentists have never been this optimistic in the past 6 years that I've been around. And you take a step back, so why is that? Why -- what has changed? Last year, in spite of all the news that we heard, they made more money than they originally anticipated or expected because of government incentives, because of ramp that took place very quickly. The beginning -- all of us are beginning to figure out that digital dentistry is real, it's not just a hypothesis, it's not hype. And I'll tell you a specific example of it. I know orthodontists that they're able to see 30 to 40 patients a day. That was almost impossible 2 years ago. People sitting in waiting rooms and inefficiency that existed, people -- dentists have figured out to be how digitally capable, a lot more savvy, open hours has changed, after hours in order to accommodate a lot more patient, #1 issue is resources and support resources. What we feel and what we hear is a very optimistic view of what the future is going to look like. This industry is underpenetrated, has tremendous amount of runway and you're not going to double the number of dentists in the next 5 or 10 years. So you need to focus on improving productivity, improving predictability, use digital tools in order to make sure that you provide better care, faster care, better quality care, using the same infrastructure and resources that you have. And that's what we hear from industry. AI, digitization, analytics are real, and people are beginning to think and use them a lot more effectively as we have seen in other industries.

Great. Do you think the higher spending per visit can be sustained as we go further and further into the recovery? Or do you think it will sort of get back down to more kind of normal pre pandemic levels?

At some point, it's going to get back to normal, but I don't think that would be in the next 12 to 18 months. And the reason for it, we all have been at home. We haven't been going out. We haven't been buying things. We haven't been going shopping as used to our -- disposable income that majority of people have had have been used and redirected in different format. And you hear the healthcare, dental care, oral care has become more and more important. And a lot -- as you all were aware of, a lot more discussion about expansion of the health care, focus on well-being, and I think that has a profound effect in how we look at this industry in the future than what we have done in the past. It used to be more of an elective procedure. I think it is going to be basic necessities that as we become older as high-growth market, they have more of a middle class. As this becomes more available, this is a standard of care that would be available to a large number of people worldwide.

Great. Okay. Another thing I wanted to ask you about was infection control. You guys have had tremendous growth in that category. If you kind of look at the customer level, do you expect their demand levels for PPE to remain elevated? Or again, do you expect that to eventually normalize?

So dental industry, dental offices have been some of the safest places to go even prior to pandemic because of the -- you go to get an implant, as you walk into the emergency room OR set up, the way it's set up. And if anything pandemic has made it a lot more important to create a safe environment. Now let's step back and talk about where do we stand today and what do we see future is going to look like. We have a very close view of the inventories and past due and backlog and usage of the market. 50% of our business is in Dental and 50% in Medical. In Dental, almost 80% of that business in North America. In the last 12 months, we have extended that business outside North America to China, Europe and other places. And then in Medical -- in Dental, we have 40% market share. In Dental -- in Medical, we have less than 5% market share. And it is -- a lot of different segments in Medical. And where we are really present, we have differentiation because of our product, because of our capabilities. So we take a step back, we say, if we continue to extend outside the U.S. both Medical and Dental, if we continue to expand resources around innovation and capacity to build a [ front-end ] medical and extend it and if standard of care is in a format that dental offices continue to use more of a product that we put out there, we feel really confident that this is going to be a double-digit business with a high-margin for us going forward. And as you recall, John, we took about $100-or-so million worth of business that was low growth, low margin in 2020, Pelton & Crane, our treatment unit at Brazil, and we have replaced that with $100 million business that is high growth, high margin and has runway in the long run. At some point, this is going to be a new reality, but in a really different format, a much higher run rate than it has been in the past with the opportunity to get to more of a mid- single-digit growth. And we are okay with that because the mix, the portfolio that we have built is exactly what we wanted. Higher growth on the specialty, low mid single-digit growth on consumable equipment, that mix put us in a mid- single-digit growth with potential upside with a much better margin going forward.

Sounds good. Okay. Next topic I wanted to pivot to geographic differences. So you guys obviously have a global perspective on this industry, I think much more than investors do. Can you talk about differences that you see in the U.S. versus Europe versus Asia? And I'm thinking specifically as certain regions, we see the virus surge and then slow down. Does that influence your business? Do we have an opportunity from perhaps pent-up demand in other regions to surge, similar to what we saw in the U.S. in the fall?