Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

We're going to go ahead Q&A format. I'll kick things off. If you guys have questions, raise your hand, shout out and you guys obviously take precedent.

So trends, I'm going to sort of pick-up Amir, I mean your where you guys sort of left off on the earnings call. In North America and Europe, you talked about a difficult December and January due to Omicron and then in Feb, you saw a ramp take place in North America and Europe, which continued in March. Maybe just at a high level, please talk about the current momentum. In other words, that momentum that you identified in February and March has a sort of continued or sustained momentum here in the early part of 2Q?

Yes. The short answer, John, is yes. We haven't seen anything that has given us an indication that there is a change in trend in the North America and Europe. The #1 thing that we hear is not about demand, it's about supply. And the supply primarily is number of dentists, availability, staff continue some of the largest players such as DSOs continue to have challenges, getting as many people to offices they can. Demand hasn't slowed down. But you also got to consider that we are focused on a very different segment of the market. We're focused on the specialists or surgeons, orthodontists today, some of the DSOs. What they're telling us is continuation of what they have seen after that really difficult December and January. So that varies by geography, by the way, you go to China has its own dynamic and other places.

And we'll get into that. Certainly, I think we have to sort of break out China and talk about that separately. But to your point, looking back on things, Amir, it was clear that, that December, January was very specific to Omicron and that how we exited 1Q was more indicative of the underlying market, and we can extrapolate that a little bit into 2Q.

Exactly.

Okay. And as I said, we'll talk about China separately, maybe about what about other markets such as China. I think, Howard, and some of your commentary, there was an assumption that China was going to open a little bit more broadly in the month of June. And I mean here we are June first. Are you starting to see some green shoots at that market starting to reopen for you guys?

Yes. I think so, John. Our original expectation was that for us, we have our warehousing in China for China, in Shanghai. And so we had anticipated that, that would open up mid-May time frame. That didn't happen. And so -- but the good news is we're operating on a skeletal crew now and we think that within the next 5 to 10 days that things will open more broadly for us as it relates to warehousing. So certainly, China is pretty unique in that instance.

And I'll ask like the naive sell-side question where you're not on the ground doing the operations. But talking about that plant in Shanghai, hey, the assumption was it was going to open up in mid-May. That didn't happen, but now it's a skeleton crew. Does that change anything for 2Q or if it's say, if it's open for most of June, we're able to get the products out rev record, and it doesn't really matter that it didn't take place in mid-May. You still have plenty of time in the month of June to go ahead and get things out the door. How does that work?

I think that we will have some -- likely some backlog at the end of June, John, as it relates to China specifically. I mean when we get back online, clearly, we're ramping up as quickly as possible, and we anticipate a pretty strong June. That said, that lockdown that started at the end of March persisted a bit longer than we had anticipated for sure.

Okay. Very helpful. And I just got a couple of more near-term ones and then we have so much to talk to you about SP&T and E&C and hopefully, we'll get to everything. If not I'll follow up with you. But maybe just a couple more. Howard, in the guidance, there's 2 big components for you guys in China and Russia. And cumulatively, it's around 14% of sales, give or take. I think specific to your guidance, there was the assumption that China would be up year-over-year. And things are so fluid, and we were just talking about it. Do you still think that's the case? And maybe if it is, it's a little bit more [ 2-age ] related based on your prior commentary, but if you can talk to that, that would be great.

I'd say while we remain focused on delivering that full year 6% to 8% is what we talked about, John. We also don't want to underestimate the impact of what's going on in the macro. And so certainly, we're staying on top of that situation and adjust accordingly. I think as it relates to the guide, probably the low end of that guide is a good base point overall for us given the current situation.

Okay. And that would be my last question, which seems -- that seems to be a fair place to be, right? You gave 6 to 8 out of the gate before the world changed. The world changed in a lot of ways, specifically 2 of your biggest markets being Russia and China, you're keeping the 6 to 8, which I thought was a little bit heroic, quite honestly, on the 1Q call. But maybe just to level set it's, hey, guys, with all that in mind, we might be better as not the midpoint, but closer to 6 as a base case rather than the 7% to 8% might be a good place to be.

Yes, I think so, John. I think that's a good base case for us.

Okay. Okay. That's great. That's very helpful and helps I think us put in perspective the June quarter and the rest of the year. SP&T, so I'll start there, and there's a lot to talk to that, hopefully, I'll get to E&C. But Amir, between wires and brackets and clear aligners in the orthodontic market, can you talk about the evolution between the 2 in terms of share of share dynamics? I think when we went into COVID, you saw a lot of practices move their workflow to clear aligners because they could continue cases remotely. Did that stay intact or did that unwind as the industry began to reopen in a bigger way?

Yes. That's good takeaway. When we went to a COVID, direct-to-consumer took tremendous amount of momentum, right? You saw a lot of companies that they go purely on a digital demand generation and you saw a tremendous amount of uptick in that one. Now you come into realities, you're seeing that, that model, the business model can't really hang itself. It cannot operate in that format when you have $1,000 just cost of acquisition. We got $700 or $800 worth of operating expenses. You cannot make any money out of that. So as an outcome, what you have to do, you have to continuously increase prices. So you get increased prices so, well, why am I going online? I can go and see a general practitioners or orthodontists and get a better treatment for almost the same cost. But let's put that aside for a moment. According to our own estimate, there are about 20 million cases, orthostatic cases took place last year. 15 million of them are bracket and wire. We talked a lot about clear aligners about 15 million of these cases continue to be bracket and wire. It's not growing double digit. It's growing low single digit what we are taking share will continue to be a major player in that space. That 5 million cases, they're growing double digit. They're growing over 20% over time. And now we have become a major player in that space as well. What we see today is the overall market. We don't break it down between bracket and wire and clear aligner. We see that overall 20 million cases, about a $5 billion to $6 billion market, growing double digit. And it's going to continue to grow double digit over time. We have about a 10% share today. We want to be the #2 player in that space as a whole over the next 3 to 5 years, and we want to be the #1 player under Ortho segment of that space. That 75% number of cases that today are solved by bracket and wire is not going to go away, Clear aligner I'm not going to replace it. And if you wonder why is that if you're going to treat an average patient, you're going to charge them $4,000, $5,000. What you pay supplier is almost 25% of it.

It's a lot of fee.

A lot of fee. If you charge somebody $4,000 or $5,000, would you pay the lab fee to bracket and wire, less than 5% of it. So now take that model and deploy it in emerging markets. Can somebody spend $4,000 or $5,000 to get their kids through treatment? No. But can they spend $800 or $900? The answer is yes. And if your lab fee is still a couple of hundred dollar and your chair time expenses are lower, your labor cost is lower, that still makes a tremendous amount of sense.

Make that model work.

That's why 70% of our business is outside U.S. That's why the bracket and wire continue to grow difficult cases, the financial model, allow that segment to hang in there continue to grow. On top of it, we are changing the model as well. If you look at the Damon Ultima, the new generation of the Damon system. Average number of time that you needed to go see a dentist to go through a full treatment is 50% lower with Damon Ultima. So now you got a solution that gives you the right answer has lower share time, costs you less, why wouldn't you use it? And again, you got to think about our focus is orthodontist. That's what they like to do, that we have given them an option to do that. That's why we continue to be bullish in on that space.

So that's why, hey, look, this market is not going away. It's going to grow low singles. But for all those reasons, we're going to grow mid-single digit.

Exactly.

Right. Can you just help us out with some numbers, and I'm just going to round for sanity purposes. But in the North American market, there's roughly 10,000 orthodontists. How many of those are regular customers of Ormco's wires and brackets products?

Our assessment is about 8,000, not far, but about 20% of them are Damon customers. 95% of our bracket and wire business comes from 2,000 customers. I don't need to go do an ad in NFL. And the 2,000 names and they are on my cell phone. I know who they are. I have a relationship with them. We have been with them for about a decade or so provide the best level of support to them, and they are the 1 that also they're using clear aligners.

So that's where I wanted to go with Amir. Maybe we can walk through some math. So 8,000 orthodontists, 20% of them are using your wires and brackets, right? So call it 1,600 what number of those 1,600 already using Spark and where is the opportunity to further tap into that already established relationship?

We have -- that was our original starting point. Our original starting point with a Damon customer and there is significant runway still plenty of runway. So what we've got to do and what we have been doing, one by one, demonstrating the product has the efficacy is the best in the market. They see the value of it and we transition in 1 after another. You know that very well. We started with this approach of signing 5 customers at a time, training them, getting to about 3, 4, 5 cases, make sure that they're in good place, sign the next 5. That approach has gone up from 0 to 100,000 cases in less than 2 years, from 100,000 to 150,000 cases, less than 5 months. So when you sign them up, when you do a case per month, we call them active doctors. It goes from 12, 10 cases per year to 100 cases per year in 12 to 18 months. So as you activate them, can they ramp up very quickly, and they can continue to activate. So just sustain that program has significant run rate. We made a commitment that we're going to triple the size of this business. We feel very comfortable to be able to do that. Now we're going to different geographies registering we're signing them up. Just to give you a little bit of a feel of Spain is now the fastest-growing country for us on the clear aligner. So U.S., we have done that. We're going to Europe geography by geography.

And I've heard about some of your traction in EMEA. Maybe just to go back to North America for a second. Of those -- sorry, how many orthodontists in North America are using Spark? And then what's the overlap with the 1,600 regular wires and brackets users if I have that correct?

When this business was really small, John, it wasn't hard to talk about it. Now that it's becoming really competitive, we rather not to share the information and the number of orthodontics because it's becoming a really competitive space. What we can tell you is we continue to see growth on a clear aligners double-digit, both on new customers as well as the existing cases quarter after quarter after quarter. But we have gotten now large enough.

Understood.

That we don't want to give you that level of information.

Some of that information. Okay. Maybe 1 more on wire, call it, the ortho division and maybe this is more specific for Spark. I feel you guys garnered a lot of goodwill when you launched Spark and you were very specific to the ortho channel. The orthos are being run over, right? There was direct-to-consumer companies, GPs were pushing it. You guys said, "Hey, we're for you, right? We're all about the ortho. It seems like you're selectively selling Spark a little bit to the GP as well. And I tell you, if the GPs are doing orthodontics, we want to make our product available. Amir, do you have to be a little bit strategic there, surgical in nature in terms of how you tackle the GP opportunity in the risk that you might alienate the orthos if you go too aggressively in that direction?

Yes, it's a really good question, and we have been that debate continuously, and we have decided not to go down that path. So how could that be possible? Let me take any DSO. Let's take Pacific, 850 offices, close to about 3,000 dentists. Pacific has 200 orthodontists inside their own network. We're selling to the orthodontist. We're working with them. They are developing the network. They're creating this hub-and-spoke model. I do the difficult cases. I'm going to train you. You can do simple cases and send it back to me. That network effect is working in our favor by focusing on orthodontics. And then teaching, helping other people while doing the difficult cases. That's the approach that we have taken, and it works extremely well.

Okay. Okay. So to your point, you'll be very careful about GPs and even within the DSOs, you're actually selling to the specialist in that hub and spoke.

Okay. We're not stopping from -- if GP comes and say, I want to buy. We're not telling them no. But our primary focus, what we market, what we target is for the orthodontics.

I'm going to pivot and try to time manage as best I can. Implants. Maybe just to break down your portfolio, 85% premium 15% value. Is that a good dart through in terms of how you got to shake out?

Perfect. Yes.

That's until Howard buys a value implant provider. Okay. So 85, 15 is a good place to be right now. And the question that I get all the time from investors is John, you're bullish on Envista. They've got a massive implant business. Look what happened to clear aligners in 1Q. Look at the consumer isn't this the next shoe to drop and you're being naive. And the answer is?

3000 oral surgeons in the United States, they place 70% of our implants. Again, I'm not dismissing the macro thing. I'm just going to bring it down to say, who are we dealing with. There is more demand today than there is supply. There's more demand for all and 4 full restoration than there is actual dentists that they can do that. So the issue for us is not that the demand is not there. The entire number of implants that were placed last year is 20 million and 15 million people. And these 500 million people that they can use implant. The reason they're not getting it, cost, complexity, fear, all of them. Our primary focus is work with the existing customer, try to make them a lot more effective give them a full-blown solution of diagnostics, AI tools, regenerative, prosthetic, so they can do more and then is training. Training and education plays such an important role in here to get more people place more implant. Again, we're not ignoring the broader sense, but we don't think that what you're seeing in other areas is going to be the same as what we are seeing on the implant side.

Okay. And do you run a little bit of a higher risk because of that premium weighting the 85-15, where if there was pressure on the consumer, where the doc leans more to value because they can be a little bit more price sensitive to the consumer? I mean, do we have to be cognizant of that in terms of a risk?

It has to do with segmentation, John. So let's say, you're going to do a full 4 restoration, it's called all on 4. You put 4 implants. You basically have no put 4 in plant, you put a titanium bar on top of it and you restore that. That's $25,000. And it's a onetime investment for the rest of your life. Are you going to be worried about $10, $20 less cost.

You want to do it the right way.

You want to do something that your reputation stays intact. We want to deal with the company that I've been around for 35 years, anything goes wrong, I'm standing behind it. And I'm going to teach you hard to do that. It's a different segment. If you just started doing implant, you want to get your hands in there, you're in university in [ DSO ], yes you want to use value. We think there is going to be more shift, but 2 different segments, that upper segment where we are focused those 70% at 3,000 orthodontics -- I'm sorry, oral surgeon, they're not going to shift all of a sudden and say, well, recession is coming, therefore, let me go buy an unknown implant that I have no experience. So different dynamics it's going to slow down, but it's not going to be a complete shift. And the reason we said is we bought a value implant first with the assumption that, oh, maybe this is going to change, that was 2014. Eight years later, we have seen the dynamic. It's not happening. It's not going all the way that. There's a little bit more growth on the value side, depending on the geography and the segment, but premium hangs in there for good.

And maybe just a couple of more questions on implants and again, guys, just make sure you get my attention, if you have any questions. We hear about some hot pockets from a macro perspective in Europe, right? We heard it last night in a different industry in animal health. But there aren't even any areas across your big landscape, if you would, where macro issues are popping up and you're starting to see demand on implants fraying a little bit?

Outside what we just talked about China is specific and the challenges in China. And by the way, we don't think the China situation is a long trend...

Which is more on a locked.

It's a locked up. We haven't seen anything that gives us an indication that the implant business is going to slow down.

Okay. Still remains. You guys obviously had a good 1Q. A lot of players in the implant industry had a good 1Q and you haven't seen that underlying demand fray at all in any markets.

We haven't seen it. And we talked to a lot of DSOs. They're not seeing any slowdown in demand. As I said, they're more worried about. Can I get enough hygienist, assistant dentist supply side has become really difficult for them to be able to serve that market.

Okay. Maybe 1 more for your implant division, and it has to do with N1. Obviously, that platform was approved in Europe well before the U.S. And again, you guys have a lot to talk about in the most recent earnings call, there wasn't a lot of time devoted to N1, right? And it actually took someone of a back seat. Just talk to us Amir about that's been in Europe for longer -- are there any things that you can point to for investors of, yes, that product was out there for longer, and we're now starting to see accelerated share gains. And then maybe we, as investors, can extrapolate that over to the U.S. where it was approved a year and change later?

This two things different in N1 and Spark, and that's why we have a different approach. We didn't have a clear aligner. So say, open a space for us to go do all of that. We have an existing implant business that is growing double digit. So N1, to some degree, a little bit of a cannibalization to begin with and then expansion over time because you do more of it. Spark, you could really train people, remotely through a variety of different places. N1, you can't train people. It's a completely protocol, different protocol. People have to place an implant, in front of you. You need to teach them how to do that. In a COVID environment, it's almost impossible. It's been impossible to get 5 or 10 people or a weekend to place 3 implants, 4 implants, so you can teach them. So what has happened, some of the key learning use the same model, take 5 people, 1 weekend, 48 hours, have them place 5 implant. They feel comfortable, then transition it, put it in place, sign up the next 5, sign up the next 5. That's the approach that we have taken in U.S., we call them ambassadors. Every weekend, we're trying in 5 or 10. Most of these are current customers. If they feel comfortable doing that, they're going to transition. And the oral surgeons, they have a referral network. If they feel comfortable, they're going to tell the referral network started using this, then you're going to see this taking place. When I'm walking away from it, we're just going to very systematic approach. By the way, the implant business is growing. I mean all the changes that we have done on the commercial execution and other pieces is going double digit, it's taking share.

And so that traction, the growing double-digit in implants are taking share. That really doesn't have any N1 in it. Is that fair? That's an underlying business no aid from N1 yet showing up in those numbers even in Europe.

No. A lot a bit, but it's not really the major driver for double-digit growth in Europe, a little bit. But now our sales force has a lot more to talk about. You've got an iOS. You got regenerative, you got digital, you got prosthetic -- and you have N1 as well. So you have a whole set of solutions that you can go in there and offer similar to our ortho sales force. They can offer a whole set of different capabilities that's unique. It's differentiated, and we can operate and deliver on it.

It's a good segue. You mentioned iOS, I want to go there. So you paid roughly $600 million for Carestream iOS, $60 million in revenues. You talked about a $40 million contribution for 8 months in 2022. You call it the balance of this year. Maybe, Amir, why the modest expects out of the gate, right? If I just sort of pro forma the numbers, it's flattish year-over-year. What has a -- from a company's perspective, are you doing from an infrastructure standpoint in '22 and then do we think about a notable inflection in '23 off that $40 million for the balance of the year?

Answer the expectation for this year, and then I'll talk a little bit of the long run.

Yes. So John, I would say that the jump up point, I know you said $60 million was actually $57 million. And so it is a little bit more modest as a jump-off point. Yes, we do think that, that $40 million plus or so is a pretty good number for the year. Again, we acquired this business and closed the business in late April. And so for the duration of the year, we think that, that's going to be a pretty reasonable growth rate for us. And of course, in 2023, we're going to anticipate faster, higher growth. This is a double-digit business for sure longer term.

And how about some of the investments in here? And how quickly are you able to go ahead and implement some of those changes?

Yes. So we're focused on 3 areas with the Carestream iOS. First 1 is in commercial. They have less than 10% market penetration because they really haven't had access. We've got 3,400 sales force in our sales organization, distribution. We already done signed all of those people. So from a commercial access point of view, we are in a very different place than Carestream. Second 1 is around operation. We are known for operational excellence, EBS. We think there is opportunity for us to improve quality, delivery margin. The moment we have access to that operational capabilities in Shanghai, we think we can do that. And we think about a $10 million or so integration expenses this year plus R&D. We want to integrate that into the DTX. We want to bundle it as part of our ortho and implant solution. We will sell it independently, but we'd like to sell it half of the price, same sort of capabilities that the product has out there with an incredible support of structure. We think this business is going to be a huge growth factor for us independently as well as part of our overall ortho and implant business.

Okay. Okay. Great. And Howard, maybe just to jump over to margins. Just want to think about the trajectory into '23. You have some of the investments in Carestream that you're making that are a little bit front-end loaded. You still got some stranded costs out there, right, from some of the other businesses. It's hard -- why would the margin expansion accelerate in '23? Is those 2 like one-timers, disappear or essentially go away and then we should think about a healthy revenue trajectory as well. So maybe just update us with your thoughts and my thoughts around margin expansion accelerating into '23?

Yes. I think, John, that certainly, we anticipate margin expansion. I mean, what we've talked about is 50 to 75 basis points on a consistent basis. I mean we're not putting a ceiling on that by any means. The investments that we talked about, they are one-timers in nature. And so as Amir talked about that $10 million associated with the iOS that's going to happen this year. These stranded costs will work through those this year as well. And so going forward, we anticipate that 50 to 75 basis points of margin expansion continues to stay intact.

Okay. And maybe just talk to us about the appetite for more deals. So when I look at the balance sheet, I think it was in and around $1 billion cash at the end of 1Q '22 the $600 million for Carestream, I think it was $120 million or $130 million for Osteo and other deal that you recently did. So a couple of questions. Howard, for you, like the pro forma cash firepower to do more deals. And Amir, just from a company standpoint, the appetite and ability to absorb and execute simultaneously across the board?

Sure. So maybe that first part of the question, you're right, we had $1 billion -- in excess of $1 billion at the end of Q1 enabled us to pay for the Carestream now Dexus iOS with cash on hand. We continue to have a very strong balance sheet. And so we've talked about this about aggressive but disciplined approach acquisitions. We'll continue to look at that. In terms of space, you alluded to maybe something around value implants that would be 1 of those areas that we look at in addition to look at regenerative as well. Similarly, prosthetic implants, digital workflows, including diagnostics and AI. And so All of those areas, I think, are in play for us.

Between 2008 and 2010, we all come from Danaher. Danaher have bought 18 companies uncontested during that difficult situation. I think the same thing is available to us over the next 18 to 24 months. In a good cash position, we got to operationally, we have proven that we have track record of execution. And we are building a strategically differentiated company that organically is going to grow other years double-digit but mid-20s EBITDA. This is going to add another lever for us that we built something totally different as we go forward. Our expectation is over the next 2, 3 years, we're going to put several billion dollars to work is adding capabilities, exactly what Howard said to build the end-to-end solution. So when we walk into an office, we can offer you the best possible capabilities. If you want to buy integrated solution or point solution. One key piece is that differentiate us. We subscribe to an open architecture. We want to buy other products, connect to us, no problem. That's what we want to do. We want to give dentists, we want to give practitioners a choice, prove to them that, that integration really works that you can digitize, you can personalize, you can democratize this industry.

That's great. And 1 last one. I want to make sure I'm going 1 minute over on supply chain because it's so fluid. And we hear in medtech, but we hear it all across the board. Howard, how are you navigating inflationary costs? What about any component shortages? And I'll ask a quick tack on after that.

Yes. So I would say, as it relates to inflation, we deploy our EBS and we've consistently done that. We haven't had a lot of to date, supply chain issues that have impacted the customer, our on-time deliveries have stayed intact. And then obviously, we're using pricing to offset some of that inflation as well across -- not across the board, but certainly, we look at each of the opcos and they go ahead and institute it based on the current conditions.

And so on that last point price, which is my last question. In the 10-Q, price was 150 basis points year-over-year contributor in 1Q '22 compared to basically nothing, 30 bps in 2021. I mean are there additional price increases that we should think we just had a company earlier that said they're instituting something come July 1. Is that 150 sort of a low point when we think about the year-over-year contributor to growth, and we should have fact a little bit more of that going forward?

Yes, I think so. I think that pricing will continue to be tailwind for us here in 2022.

Okay. Jon did everything I could. Guys, thanks so much for your time.

Appreciate it. Thanks, Jon.

Thank you. Great to see you.

Of Course. Thanks.