Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Thank you for inviting us. I'm sorry, go ahead, Rachel.

No, I was saying good afternoon, everyone. But thank you. This is Rachel [indiscernible] from the Life Science Tools and Diagnostics team here at JPMorgan. I'd like to introduce Envista. [Operator Instructions] So with that, let me turn it over to Amir.

Thank you, Rachel. Thanks for inviting us. Going to follow sort of all sort of slides in here, I'm just going to refer to the number. So hopefully, we can say on it. So September 18, 2019 was the beginning the formation of Envista dental company that is purely geared to helping professional to improve people's lives. Since then, has a tremendous amount of changes has taken place in the industry. But to begin with, I want to talk about the dental market. Back in March and April of 2019, 2020, there were a lot of negative views toward the industry as a whole. But industry has proven to be resilient, has bounced back up and the new norm given our opportunity to recognize that digital capability is really allowed to see more patients solve a lot more problems and be a lot more productive. And what we are seeing is the clinician as a whole remain confident in the industry as a whole. If you look at the number of deals, the number of acquisition that has taken place in the last 6 to 9 months is a clear indication of a change in trajectory in this industry. We believe industry is going to be a lot stronger after we go through some of these changes in 2022. The growth that we expect is going to be different and it has a lot more momentum because of lack of penetration as well as opportunities that we have discovered in the past 2 years. Talking about the company, we really have transformed this business in the past 2 years. We took a low single-digit flat company, and we have moved it to a mid-single-digit grower as it stands today, and we have added over 300 basis points of margin in less than 2 years. We did that through a series of changes in our portfolio. In 2020, we moved away from about 5% of the business that had low margin and limited growth. In 2021, we divested the Cabo treatment unit and instrument and we were able to put that in the hands of a company that we have total trust that they have the same cultural values that they can provide support and services to customers. We announced the acquisition of the Carestream IOS is a category that we were missing in our portfolio and a product that we really feel good about expanding and scaling up over time. We obtained FDA for our breakthrough implant system called N1 at the end of the year. And today, we just signed an agreement and announced an agreement with one of the largest DSOs, Pacific Dental. Steve and his team are innovators, a company that really truly value digital transformation, and that gives us an opportunity to develop and use AI as a method to improve acceptance rate in the dental industry. We remain confident in our ability to deliver on the promises that we have madewith a company that has competitive advantage, sustainable differentiation and move from a mid-single digit to a mid-single-digit plus grower. And over time, that's not a ceiling that we can continue to add to it. We made a commitment at the time of IPO that we will build a company that has 50 to 75 basis points of margin improvement year after year, and we feel really good about our ability to really deliver on it. We want to do an effective capital deployment and the firepower that we have today far exceeds when we separate it from Danaher. Our goal is to maximize shareholders' value while helping professional to truly improve the quality of lives of their patients. To move us to Slide #4, give you a little bit of feel for what the company stands for. We have closed about 12,000 employees in 140 countries with over 125 years of innovation. Over 2,000 patents and leading brands in value segment. In the past 12 months, the continuing operation without KaVo is about a $2.5 billion business. 60% of our business are now specialties. They're endo and implant and 40% equipment and consumable. That shift in the past 18 months, and we have started the 50-50 setup, 50% specialty and 50% equipment and consumables, and we have been able to make that shift in the past 18 months. Over 60% of our business is direct, and over 85% of our -- what we sell are considered consumables. Even our equipment, majority of them are less than $10,000 and can be sold remotely implemented and through IoT support it and provide the capabilities that customers are looking for. We have been able to build our organization that a team of 12,000 people are passionate about what they do, a passion about people's lives and passion about the practitioners. On the next page, on Page 5, gives you a little bit of a feel for the 2 segments and $1.5 billion segment that has one of the best combination of orthodontics treatment between bracket and wire, a clear aligner purely focused on the premium segment of this market. And our implant business, over a $1 billion of implant business that it is well known around quality, delivery and innovation. Over 90% of that segment is done directly and it has over 23% margin in the past 12 months. Another $1 billion of our business is imaging and software and a variety of consumables. Over 90% of that business is indirect, and we have been able to improve the margin of that business in the past 18 months to over 20%. We're really proud of what we have been able to do to build a digitally-enabled workflow that pieces work together, improve quality, productivity and predictability of the outcome of the clinicians around the world. In Page 6, I want to paint the picture for you of a $20 billion market and our position in each segment of this market. Our equipment and consumable when it comes to the 2D, 3D, a $2 billion market that is growing mid-single digit, and we're the #1 player in that area. About $1 billion of IOS that we didn't have a presence in there. Now with the acquisition of the Carestream, it gives us an opportunity to participate in a segment that is growing more than 10%. IOS, not only as a product by itself was an add-on to the procedures that we are providing really continue to build that competitive advantage and differentiation. And our consumable and infection prevention, a $7 billion market that a norm is a low single-digit growth, and we are #2, #3, #4 players depending on what segment that you think about. In each one of those, we want to create competitive advantage. We want to make sure that what we offer is a premium quality, delivery, innovation and customer service. That's what we stand for. That's what Envista and the heritage that we bring from Danaher. EBS, allows us to continuously improve what we do day in and tea. What we are really excited about is on the specialty part of our business, a $5 billion of implant market that is growing mid-single digit, mid-single-digit plus, and we are the #2 player in there. Really strong position on the premium side. We have an opportunity to continue to add to our portfolio on the value aspect of these. The orthodontics business, the Bracket and wire business, $2 billion market that is growing low single digit, and we continue to gain share. Several years prior to COVID, we were growing mid-single digit. In the past 2 years, we have been growing double-digit in that segment. And we think at norm, this is a business that we can continue to keep momentum through innovation, through international expansion and through the network effect of people that we have that the pioneer in that business teaching, educating and showing what it could look like over time. A $2 billion segment that we are really committed to, but also open the door for us to be on the clear aligner segment. A $4 billion market that is growing over 20%. As far new entrants in that space has given us opportunity to establish ourselves and pair the momentum for years to come. In the next page, why I mentioned why we are so excited about these specialty businesses on Page 7. I want to paint a picture for you and the people who really can improve their quality of their lives and what the penetration look like and why the penetration is so low. About 500 million people around the world, they have some level of [indiscernible]. And if you look at all the cases, ortho cases, clear aligner and bracket and wire, that's only 16 million case store, less than 3% penetration. The $6 billion market is growing over 20%, and it's a combination of the clear aligner that 20% plus the bracket and wire. Our intention is to be the #2 player in this space, through what we provide, which is a differentiated set of product categories. And we think the combination of innovation, quality of service plus education will really give us an opportunity to make a difference in this segment. And the implant part, 200 million people can afford and can use that service today. To the best of our ability, we know that they have been placed about 20 million implants per year and 12 million, 13 million or 14 million people. Can you imagine the impact that this has and the quality of life of people that they're not able to choose, they're not able to really have better life, better way of presenting themselves when it comes to any ability to have confidence in what they do day-to-day. We think we can make a huge difference in here and be a player, a #1 player in this segment as we continue to invent, to invest and grow this segment. On Page 8, painting a picture for what we are doing today in orthodontics segment. We mentioned that we have close to about a $500 million business that is growing double digit with a high EBITDA margin. 20% of our sales in this segment comes from products that they are less than 3 years old. Innovation plays a really important role. The Damon Ultima that was introduced only last year has made a huge difference in closing, bonding, putting control in the handle orthodontics to provide best services to their customers. Last year, we did over 500 events and over 75,000 people got trained. This is the network effect. This is where we see those pioneers, learning, teaching and creating a followership around best practices around the world. When we do have Ormco forum 1,000 people show up, participate, teach each other. We enabling these best practices to take place around the world. 70% of this business comes from outside United States. And there is significant opportunity in these emerging markets as we work through COVID to see a quality of life to be improved in this 15, 20 largest metropolitan cities around the world, similar to what we have done in China, creating a $200 million business in less than a decade. Now we have an opportunity to really make an impact in here. In 2021, 1.9 million people quality of life change because of what we did. Our intention is to double that in the next 5 to 10 years. Through innovation, through education and services and through building that customer experience. Spark achieved $100 million run rate last year in late November. We have shipped over 100,000 cases from where we started to where we are able to do that is one of the fastest category. We have over 2,500 dentists orthodontists that they place cases on us in an ongoing basis. The macro drivers plus what we do give us confidence to be able to build a double-digit growth business in this segment and be differentiated, give customers choices. On the implant segment on Page 9, we have been around titanium screws and innovation for quite some time now. We continue to innovate. And one is the last part of what we have done in the past several years. TiUltra and Xeal is some of the best services that have been introduced. DTX is a software, is a platform that allows you to integrate diagnostic, planning and execution in open architecture. Receive file from anyone, and we are willing to provide that information to anyone in order to improve the dental industry productivity across the board. We did over 750 events and we trained over 100,000 people last year. We have over 1,300 people that they are helping, supporting, providing, training and education, 1,300 sales reps selling our implant product and we have an opportunity to continue to use capital deployment and M&A to add to our regenerative to a value impact to our prostatic to really make a difference, to make sure that people who wanted to implant are able to do it and see the best possible outcome. We talked about the number of implants that they were placed. We placed over close to about 3 million impact last year. We normally focus on the most complicated cases, both on orthodontics and implant. Over 1.5 million people received our implant last year. The N1 has been in Europe, got approved by FDA at the end of December. This is a completely different system that changes the dynamic of a placement of impact reduces the healing time, reduces the complexity and simplifies an art by digitizing it. As a driller speed of less than 50 RPM compared to 1,000 RPM, can you imagine the noise, the vibration and what the difference that makes. This is the protocol that exists does not require 5 or 6 steps. 80% of the time, you can do that with 2 drills. And it gives you an opportunity to really any grade, a lot quicker, a lot faster as an outcome, less damaged to the tissue and bone. This is really important for oral surgeon, but even more important for those that they wanted to [indiscernible] for DSOs for total solution providers. This can make a huge difference by popularizing democratizing implantology. On Page 10, I want to talk about the transformation at work. It took over $100 million of annual savings. It took over $100 million cost in the past 18 months. And indirect spend and real estate on head count reduction, we closed over 10 sites, manufacturing and distribution sites. We have consolidated a journey that we have been on a predictable business model that can deliver quarter after quarter. We have shifted our workforce, reduced over 15% of our workforce in the territories and areas that we were not advantaged. We increased our auto business by over 50% the number of employees. We built a factory in 9 months. We added over 1,000 people from the time we started to the time we got all the approval and ready to go. By October, November, we received all approval and they start shipping in December. We are able to do impossible thing because of the caster that we are building in Envista. We have now capacity of making investment and continue to use that as another lever for us to build for the future. In Page 11, we did over 25 acquisitions between 2003 and 2015. Coming out of COVID really puts us in a position to use this another lever in here. We have created over $1 billion of free cash flow that we can put to use. In September 18 of 2019, when Envista was formed, we had over $1.3 billion of net debt. Today, that's about $700 million. We are in a very good position to use capital in order to really make sure that we fill the portfolio gap to look at adjacency and to create a compelling value proposition in this space. On Page 12, we just signed an agreement with Carestream to buy their intraoral scanner. One of the best product that it is in the market, we have known Carestream for quite some time, and we have spent a good deal of time doing our due diligence and a $1 billion market that is growing double digit. This category is less than 15% penetrated. The 1.8 million dentists out there, they are beginning to see the value of digitally enabled workflow rather than the traditional using impression material. One out of every 7 product that comes out of the lab to dentist office has to go back for a rework. Imagine the possibilities, what the digitally-enabled workflow provides from a productivity and predictability. This business of over $60 million as over 30% EBITDA above our fleet average and is a critical first step towards diagnostics. EBS is in our broad is what we have built up. We can improve the margin. We can improve the quality and delivery of this business, and we intend to build R&D capabilities to make software and integration and important part of the Carestream IOS. We expect this category to give us over 50 basis points of core growth improvement over the next 3 years and over 40 basis point of a margin improvement over the next 3 years. We're really excited about adding to our portfolio, and we think this is a step on to a really thoughtful process of a capital deployment in order to make Envista a stronger company. This transaction is expected to close in Q2 2022. On Page 13, I want to talk about the Pacific Dental Services and AI, similar to IOS that is going to be a standard operating model in the next 3 to 5 years, we believe that AI is going to be an important part of diagnostic and execution. We think AI would be in every office is improves acceptance rate of the people who are coming in, getting the best quality services. We're really excited about working with Pacific Steve Thorne and his teams are the pioneer in this space with over 850 offices. Pacific is the largest privately owned DSO and our largest customer. They have incredible site capabilities. We can work with them closely to improve how they treat patients every day, 2 million to 3 million patients go through this system, and it gives us an opportunity to collaborate with his team -- with Steve and his team to improve acceptance rate and every case as we go forward. It gives us an opportunity to demonstrate the true value of AI. We're both committed to make that available to everyone else, prove, show it, demonstrate it, teach and help everybody else to build a better future for this industry for years to come. PDS is committed to use DTX in every one of those offices, and we are working together in joint development to annotate all those images to make sure that we leverage that database to provide the best solution, digitally enabled solution to every dentist in that system. 3,000 dentists would have an opportunity to elevate what they do every day. Thank you to Steve and his team to partner with us in order to really change the dynamic of this business. All of this is built based on a culture that we call CIRCLe. The culture of customer centricity, innovation respect culture of continuous improvement and culture of leadership. We're really proud of what we have been able to put together in the past 2 years. I'm proud of our employees during the COVID and their commitment to help us to really shape the industry as we go forward. We have modified our portfolio to be a lot more customer-centric. We're putting a lot more energy around where there is an opportunity for differentiation. We have continued to invest in innovation, DTX, N1, Spark and many other things that we are doing on Damon Ultima system, or example of what we would be doing, and there is a lot more to come in 2022 and 2023. And respect is as a foundation of Envista, a diverse and inclusive environment that people can feel comfortable and safe and be their authentic themselves when they come to work. We have started the ERG group. We put our first ESG group out there, and we continue to train, educate and change the dynamic of our workforce to be reflective of the environment that we are part of. We want to make a difference in this industry, and we would do that true by transforming ourselves to make sure that we are really truly reflective of the environment that we operate. We have taken a very complex organization, and we have simplified it as where EBS comes in place. We started it over 230 offices and rooftop were less than 100 now. There is more work to be done in here. And we are committed into that continuous improvement. We have an outstanding leadership team. Over 200 years of Envista and dental has come together as a unified team with a common goal. I'm proud of Envista, what we have been able to do to transform ourself on Page 15, to commit to and deliver to a business has gone from low single-digit flat to mid-single digit today with the goal of building at a mid-single-digit plus high single-digit growth, a business that now is closing the gap and improving margin continuously, 50 to 75 basis points of margin improvement every year. Putting acquisition another lever in here with over $1 billion of free cash flow that we can put to work and demonstrate that we can use investors' money in the best possible format and return as possible outcome as outcome of our action, built on that culture of CIRCLe values. We have come a long way in 2 years. We're proud of what we have done, and we look forward to make a difference in people's lives on those patients that they get treated by our product. Those 3 million people that they get ortho treatment. There's 3 million implant that we place and tens of millions of people that they get are imaging, they use our consumables. We're building a business for ages, and we are just getting started. Thank you so much for inviting us. Rachel, let me take it back to you.

Thank you for that great overview in your -- so maybe to kick it off, just in light of recent COVID cases, can you talk about the current market environment and what you guys are seeing in terms of spiking cases, any possible restrictions being able to see patients and customers and really just in general, heading into '22?

Yes. So I think, Rachel, this is Howard. Thanks for the question. We feel good about where we're positioned here. We're clearly cautiously optimistic with regards to some of the spikes that we're seeing in COVID and the most recent variant here. But I think clearly, the lockdowns that were suffered in the early part of this thing in 2020 are far behind us. I think that the industry as a whole is shown to be very resilient and capable of being able to address any PPE concerns and sanitation concerns as well. And so the vast majority of us who go see our doctors, operate under a different protocol, whether we're waiting in the parking lot before being seen, but everyone is working through that, and we seem to have a very effective process that works for our customers, and we have not seen that impact as it relates to our business.

Perfect. That's great to hear. So maybe shifting over to Carestream. So on the Carestream IOS acquisition, you guys mentioned that, that market was less than about 15% penetrated. So can you talk about where you think you can get that over time from a penetration standpoint? And then what are your plans to scale this business?

Yes. Thank you, Richard. 70% of the business of Ormco and Carestream IOS is outside the United States. And Carestream, by default has had a very different go-to-market strategy in U.S. than us or most other dental companies. We work through one distributors, and they also have small CAD/CAM distributors. As we mentioned, we got over 3,400 salespeople. 1,800 of them are sell directly, in ortho and implant. So we're now able to put this product in their hands, integrate it to what we do, so they can sell it directly to their customers. We also are able to expand the distribution channel, significantly to our imaging distribution and place this in the DSO side where we have significant presence. From a technology perspective, we intend to make investment in R&D and agree that into our overall procedures and continue to improve the margin and quality and delivery of this system after the deal closes. We have a thesis about return on invested capital, and we like to see a double-digit return on invested capital for larger acquisitions within 5 years. And we are committed to deliver on it, which means that significant growth opportunity in here is plan, and we are going to be able to execute on it as soon as the deal is closed. We think that at the minimum with the market at double-digit growth, but our intention is to outpace that and start gaining share as we get through 2023, 2024. From the penetration, I'm sorry, Rachel, I didn't answer the question on penetration. I think this is going to be a standard care diagnostic in a 1.8 million offices around the world in the next 5 to 10 years. I think there is significant opportunity for growth in this segment. We know we have about Carestream IOS has about a 10,000 installed base. And if you look at penetration being less than 15% today, there is so much opportunity for growth for decades to come.

Helpful. And so maybe shifting gears to China. So China had another really great year for Envista. So how much of that is dental business is equipment versus specialty consumables versus traditional consumables? And how fast are each of those product categories going specifically in China? And then in general, can you just elaborate on why China such a target an exciting market for you guys?

Yes. So I'm going to take us back a little bit. We started in early 2010, 2011, 2012, less than $20 million market. We're a $250 million business today in China. The driver behind this are first in macroeconomics in China, 1.3 billion people. Middle class is expanding. A lot of people, it's all out of pocket and dental. And they really -- when they go to dentist offices, it is they want to get European, American, the best possible product. Privatization plays a really important role in near age. If you go back only 3 years ago, there was a 50-50 public versus private in China. The latest assessment that we have today, 60% of services today is done through the private segment. We have been really focused on the private part through training and education, that network effect, teaching, helping, supporting, first in Tier 1 cities, then Tier 2 and Tier 3 cities. We have factory we have R&D, marketing and a significant service and training organization in China. Within the macro trends, plus what we do on the specialty side, has plenty of opportunity for us to keep that double-digit momentum, double-digit core growth momentum for years to come. We have been able to maintain that. We're going to continue to do that. And we haven't even talked on acquisition in China specifically. These all have been mostly through organic activities. We now have capabilities approved in China to be able to produce product, sell it in China, even ship it outside China that will give us an opportunity to create that competitive advantage. This is not only China, but the rest of emerging market is going to be an important factor for us from a growth perspective as we manage through 2022, 2023 coming out of COVID.

Great. And then shifting gears over to N1. So N1 recently received FDA 510 clearance. So what is that initial phase of U.S. rollout look like in terms of customer engagement? And then how should we think of revenue ramp over time for N1, specifically during 2022?

Yes. I'd like to use a similar approach that we did with the Spark. If you recall, 2 years ago, we said our goal is to have cohorts of 5, 10, 20. We try to get them through 3 cases, they will go to their offices, and we just expand that months after months, quarter after quarter. We reach $100 million run rate. I encourage you to take a look at companies our size, and see how fast they have been able to grow in the past 2 years. We reached 100,000 case in 2 years. We have over 2,500 orthodontics that they placed cases on us every month. This approach of a launch and a cohort and expand is exactly what we want to use with N1. We have done that in Europe, we're doing it in U.S. We just started doing that in U.S. But there is a little bit of a difference between N1 and Spark. You have to go to OR. You have to place 2, 3 implants in a safe environment. Given the COVID challenges, is it made it a little bit more difficult to get 15, 20 people in OR, have each one on place 3 implant, 40 or 50 implant over a 2-, 3-day time period. That model, in spite of all of his challenges has worked in Europe. We have close to about 300 people that they're using in N1 an ongoing basis, and we're going to do that in the U.S. Our premium implant is performing extremely well as it stands today, has reached above market momentum in the past several quarters. And I think N1 in 2022, 2023 gives them an opportunity continue to perform double digit over time and start taking share. That's what we are after a long term. Sustainable business that we can continue to maintain and expand.

Perfect. And then one quick one, and then we can wrap up. So you highlighted today that M&A is key to your strategy. You recently divested cargo, which is one of the lower growth assets. So can you just walk us through what are you targeting for M&A? Are there any gaps in the portfolio that you think you would like to target in the upcoming year or 2 and we will end with that.

There are 2 segments that we want to be every premium player, #1, #2. One is on ortho, the other one in implant. When we look at this segment, we don't look at it just a product end to end from a diagnostic to execution, to planning, to final solution. When we look at that portfolio, we look at this stuff that we can do on our own organically, such as N1, the Spark, DTX and some areas that we don't -- we are better off to do inorganic or the partnership as we have done with AI with Pacific. When we look at the implant and the value implant, we are under-indexed, and these are regional players. So best way for us to expand our value implant, through acquisition. Regenerative is over a $1 billion market that is growing double digit with every implant that you place, there is regenerative that goes with a bone craft and biomaterial. We have less than 4% market share. We think there is opportunity for us to have down through acquisition, lab and prosthetics, material, AI and software and then an emerging market on different geographies, in that priority. This year is the seventh year that I've been in dental. We brought this notion of cultivation from Danaher, and we do that in an ongoing basis. Our business development team is doing an awesome job cultivating continued developing partners at we can pull the trigger at the right time. And the culture matches when the valuation is in the right format. And when we can together do something really incredible. Acquisition is going to be an important part of our goal, our future. And we think on top of what we are committed to, this is not the level that we can put to use.

Perfect. Thank you. And unfortunately, we have run out of time. So that's all we have time for today. And thank you, here and everyone else for joining today. Hope you have a great rest of your day.

Thank you, Rachel.