Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thank you for being here. Welcome to the Jefferies 2022 London Healthcare Conference. I'm Brandon Couillard. I cover the dental space here at the firm. Very happy to have Envista with us at the conference this year. And joining us this morning for this fireside conversation, CEO, Amir Aghdaei; as well as CFO, Howard Yu; and in the audience, Head of IR, Stephen Keller. So Amir, Howard, thank you for being here.

Thank you, Brandon.

Good to be hear.

Maybe to kick off, It'd be, I think, helpful to get your kind of state of the union on dental right now, what we see kind of macro-wise. Your business held up, I think, quite a bit better, certainly in the third quarter. But what's your kind of global view of dental and degree to which or maybe not so much that macros having an impact?

Thanks for having us here. So maybe we start with Specialty businesses segment. By segment, I know we talk about geography and then wrap it up with where we stand and our position. So the way to look at dental, you got to look at it from a specialty point of view, implant, ortho, endo; and then everyday dental, cleaning, hygiene and other pieces. Overall, the pace in volume hasn't -- really radically hasn't slowed down. It's robust. People are confident about the long-term view of the market. And on the specialty side, you take a look at, for example, the number of implant placed, that hasn't slowed down. It's -- just continues to have -- to see that mid-single-digit growth continues. And keep in mind that a lot of these are placed by really specialists or surgeon, perios, and they continue to see if we go and sit down, and we do that all the time. Twice a quarter, we spent the entire time visiting city after city after city and this is in large number of our customers. If you go take a look at the calendar to see what it's supposed to look like over the next 8 weeks, 10 weeks, 12 weeks, and, they're full. There aren't just any cancellation, and continues to see that. So on the implant side, we are not seeing any kind of a slowdown whatsoever at all. I'll come back to the geography in a second, but overall in the macro level. And on ortho side, there is a tale of 2 cities. Especially the orthodontist, the people who walk in to get their post-teens, preteens getting services and get treatment, they continue to see continuation of the business. Nobody normally walks into an order orthodontist with the intention of exploring, they walk in with the intention of going through treatment. And then a large number of -- and that's why you're seeing the clear aligner change. A large number of GPs, general practitioners, that have been doing clear aligners, they are seeing a significant slowdown. The population that goes through that segment is normally 25 to 45 years old. And given all the macro information that you all know is a little bit of a slowdown on discretionary income. But the segment we are focused on, which is orthodentistry, we haven't seen any issue on that. And then on a day-to-date dental for lack of better description, DSOs as in volume kind of fluctuates, but not radically or rapidly. Spending is a little bit lower. So the number of patients are the same, spending is a little bit lower. So that's from a various segment point of view, geography. China is about $250 million of our business and it's really difficult to call it. We had the zero COVID, Shanghai, lockdown and all that, a little bit of uptick in Q3 and a little bit of an uncertain environment, given the volume-based purchases as well as other criteria. Russia, very choppy, very volatile. We couldn't get any product into the country in Q2. We've got some product in, in Q3. So we saw a ramp. Now we are waiting to see what the next ramp look like. Europe, as a whole, Europe is slowing down, not radically, but it is slowing down. And U.S. continues to be fairly robust. When we think about emerging markets, if we take China out of the equation, we haven't seen any slowdown. I mean we are continuing to grow double digit in those areas. So that's a little bit of a geography segment. Now take a step back and take a look at us. We have been in a public domain for about 3 years. We have shifted our portfolio radically. Over 60%, 63% of our business is on our specialty. Over 85% of our business are consumable now. We have done organic portfolio shift and inorganic activity. So we have put ourselves more on the growth segment of the market. And we've shown in the past 3 years that we are able to operate rapidly in an uncertain environment. We took over $100 million cost cut. We improved our margin over 500 basis points in a 2-year time period. And we have continued to perform mid-single-digit despite of all of this choppiness. And the reason for it is because we're very focused on a specific segment, orthodontist. We are focused on oral surgeon. We are focused on specific geographies. And despite of all of that, we continue to see opportunities for growth in the short term as well as in the long run, we think we are really clearly differentiated and have the opportunity to really get to that long-term view of a high single digit 22%, 23% EBITDA. So we are moving away from that, and we think that's very achievable.

I'd like to start with -- sticking with Ortho, Spark business continues to do well despite softer macro backdrop. How much of that business has come from your existing kind of Damon wire and bracket customer base versus maybe market share?

Yes. So as you probably have tracked us, we've started by signing up 5 customers at a time and then expanded it months after months after months. And that group, that active doctors, our definition of active doctors is somebody who does 5, 6 cases per month. So we train them, we sign them up, we get them going, and then that group is kind of 10% growth continuously quarter after quarter after quarter. But to be specific, if you take a look at the market, if you look at clear aligner, there are basically 3 segments into this: the orthodontist segment, GP segment and direct to consumers. Orthodontist segment is about 1/3 of it. We are primarily focused on that segment, and we have started exactly, as you said Brandon, with our Damon customers. A large number of clear aligners are placed by orthodontist. They are the one that -- they understand the methodology and procedure better than anybody else. So we went after our own customers. We started expanding there and then they became sort of evangelist for us. They started teaching other people and then we have seen more and more add-on. Europe is the fastest-growing region for us, and the reason for it is because of exactly this Damon customers and then people that they have transitioned and see Spark as a product that it is best in the market. I'm not bragging about it, you guys can do your own homework, as well as the quality of service and support that they get and this combination treatment. Same company provided bracket and wire as well as clear aligner, 1 price, 1 group of support. Then there is a strong network of key opinion leader experts. 70% of our business is outside the United States, and that has rapidly grown. We started with our own customers, but now we are seeing more and more people signing up for training, and after training, following up and just expanding months after months, quarter after quarter. We ended up about $70 million in 2021. We're committed that we're going to triple the size of that business by 2024, and we are well on track in order to be able to do that. GP, direct to consumers, a lot of things that you're seeing and hearing is in that segment, a lot of slowdown, a lot of changes. The segment that we are focused on continues to perform extremely well. And how much of it is gain share? How much of it is our own customer? It's really difficult to differentiate and say how much comes from what segment. The reality remains this market has plenty of opportunity for growth. And we have proven that we can get focus, show the value proposition and continue to expand in that segment.

Even the -- either Chinese competitor, angelalign. I hear more and more about entering the U.S., European markets. How is pricing in the aligner market? Do you have to compete on price? Or is it stable?

We have really -- we've never started competing on price. And the reason for it, quality of the product and the segment. We are focused on the premium segment. We are focused on the med tech, the people who are providing significant service and support. Nothing against direct to consumers. I think they provide significant value and they have really educated the market. But somebody who walks in a orthodontist office, they don't just walk in and get clear aligner. They get a CBCT, they do a whole assessment. They go through a whole set of treatment. At the end, they may decide if they're going to give them a clear aligner or bracket and wire. And that segment pricing, so you got to take a look at the consumer pricing and then what does that impact -- the impact on us. That segment price hasn't changed at all since the state continues, and honestly, they have told us because the product is so good, that you may want to go price it higher. And so it hasn't been a factor at all for us, the pricing on the clear aligner because of the segment, because of the product, because the service that we have done.

I'd like to shift gears maybe over to implants. And any KPIs or metrics or numbers you can share with us to kind of gauge how N1 is doing? Really with Spark, you're able to kind of share doctors and growth in kind of the user base. But anything you share as far as how N1 is doing in Europe in particular, where it's been for at least a year now with the slow launch.

So you go back 3 years ago when we started, we got approval in obviously Australia and New Zealand and then FDA in U.S., Spark, and the way we measured it, number of active doctor. And our definition, I mentioned that what that is, but we train, use and then make sure that after 30 days, 60 days, 90 days, they get to 3 cases, 5 cases, 10 cases. And that was our definition of ramping up, following exactly the same model, signing up 5 ortho-surgeon. The difference between implant and ortho is you got to take them to a place that they can place an implant live. And in a lot of places like the United States, you have to have license. There are very few states that you can go in and do a live surgery on other states, like Arizona is one of them. So we take about 5 people. We take over 48 hours. They place 3, 4, 5 implant, then we go to their office, we train them, we educate them and then they start using it. So far in the United States, we have done about 150 people, 150 people that have gone through that process and they're beginning to use it and continue to add. In Europe, followed exactly the same process, and we have strapped that up. So a number of users is a really important factor in here and how quickly they transition or they add and want to. There's a difference between the Spark and N1. Spark, we didn't have a market. We didn't have any place. So whatever we came and we got was our own gain on ARPU. In N1, some of it is replacement of the Nobel Active. So it's a little bit of a cannibalization, but higher price on the premium side. And if you use N1, you're able to do more impact, over 10%, 15% more because of ease of use. So that's how -- what we are measuring. That's the KPI. How many implants are you using, using N1? How fast this is getting replace -- replacing your traditional model. We think it's going to be a factor as we continue to expand the portfolio in our growth in '23, '24, then becomes a really important part of our implant. Putting that aside, our premium implant continue to grow in the past 8 quarters. Every quarter that has done a better job. High single-digit growth continuously. And a lot of that has been because of commercial execution, innovation in some of the services, add-on that we have done, inorganic activities from biomaterial and as well as a whole lot of digital and prosthetic capabilities. So we are looking at an end-to-end solution and adding to that portfolio and building capabilities to make that a really important part of our growth trajectory going forward.

How important is the Carestream business to your implant franchise and, I guess, to orthodontics as well?

We were a bit of handicapped to a large degree because if you look at every other players, the use of bundle, intraoral scanner with implant with ortho, it is so integral to the part of what you do on the specialty side. We signed an agreement with 3Shape. We met them, and we sort of offering those in the last 1 year, 1.5 years. Now that we have our own product, we think it's going to be a huge add-on, as in the stand-alone product, you can sell it as a point solution. And then you can integrate it with DTX and a workflow combination. So think about going to an office, getting an intraoral scanner, developing implant, doing the surgery, having the 3D printing capability, same-day aligners, same-day temporary implant walking out with a solution, right, not coming back again. It's a huge productivity gain and simplification of the process and improvement of predictability. So far, we've seen good reaction on it. We have gone through a change of the logo, change of branding, registration. So we've gone through a lot of that presence, also integration with our overall portfolio, with our software. So it's taken a little bit of time to get that going, but we think it's going to be a really important part of our overall offering. Finally, we have an end-to-end solution that we can offer.

On Carestream, what new geographies will you roll that product out into next year? And will we see an upgrade to the scanner, maybe going in the IDS...

70% of this business is outside the United States, so it has been and it's going to continue to be. Europe plays an important role and in other geographies. So what you're going to see in the next probably 3 months, 3 or 4 months, is an integration of this product with our software tools. So you can sell it independently as just a tool that replaces the impression -- traditional impression model and the material or you can integrate it into your overall ortho implant. And so that software integration is going to be available. We'll have it probably by January, February. And then we are building a roadmap that we would have 2023, 2024, continue adding to the capabilities of this portfolio. The product, as it stands today, the 3800 is a great, brand-new product. It's a wireless capability, is priced extremely well. And from what we are hearing, we did do due diligence and later on, has proven to us that the product really hit the mark, both from performance as well as of a pricing point of view. We're just going to put it out there, have people to talk about it, make sure that people see the productivity gain, and then we'll be able to extend it into our own channel, distribution channel, as well as bundling it with our ortho and implant business, which we have started doing.

If I look at next year, that business rolls into the base sometime in 2Q, given kind of all the commercial attraction. Is it reasonable to think that maybe that could add 100 basis points to organic growth next year?

50 basis points. For sure, it's going to add 50 basis points of organic growth and 40 basis points of the margin. This business is -- when you look at our fleet average, it's about 40 basis points above our fleet -- above fleet average when you add it into our core capability, 50 and 40.

I think that, Brandon, would be over a few years, and so that's the idea. And so it will certainly start ramping up next year, but we anticipate 50 basis points of top line accretion as well as 40% margin expansion over the next few years.

Shifting over to E&C. Could you just help us understand what's going on in imaging? I think the math would maybe imply that, that category alone is maybe down 15% or 20% in the third quarter. Is that in the ballpark? And what are you doing in terms of managing margin? You do talked about deemphasizing, I think, some regions. Just help us pick that part.

Absolutely. So 3 factors to consider. One is just the reality of interest rates. If you're going to go borrow $50,000, $100,000, and pay 7% interest rate, maybe you can wait a little bit longer. So macro plays a really important role. Russia, China plays an important role. In our lack of -- we talked to some of the DSOs, they can't get contractors to open new de novos. So that plays an important role. And -- but that's across the board for everybody. We underperformed in Q3. And if you look at the proxies, we were below proxies and the equipment set. So a major factor -- we did the same thing -- for those of you who have followed us, we did the same thing about 3 years ago, we valued implant in some geographies. We did it with our treatment unit. We said we want to make sure that we have businesses that are differentiated. If you have a product in a geography that is being treated like every other product and you're under constant cost ratio, and it's not integrated into your overall offering, we didn't see a reason for us to stay there and fight that fight. So we started exiting some of the geographies on imaging. That it is not integrated to implant or ortho, it is a stand-alone. There are many other solutions out there, same price, lower price, and the only differentiation is on price. Deemphasize some of the specific geographies in order to maintain margin and to put energy. So no wonder we have been able to keep the margin as is, EBITDA of 20%, and continue to invest in ortho and implant. This is a shift of portfolio management that we have been doing in the past 2 or 3 years. Shift in resources, shift in R&D investment from 1 location to other in order to get to the higher growth. So we deemphasized specific geographies. We moved away from it. We deemphasized specific SKUs, we narrowed the focus on where we want to be and we doubled down on software and some of the other areas that we want to see. If you look at the E&C, it's 500 basis points better margin than our -- and the specialty, and it's by design. We wanted to make that shift to take place. And then on a smaller base, continue to grow that, that is differentiated over time. Now digging a little bit further into the E&C. Infection Prevention, proxies have changed. It's continued to grow at a double-digit growth in Q3. Our traditional consumer, restorative, endo, at mid-single-digit growth in Q3. And we're gaining share in some of those categories. Equipment part. About 1/3 of that business is contract, SLA sensors, and it's just kind of continuous to be good. The other 2/3 is the one that we decided intentionally on top of the macro to really deemphasize it. We started in Q2. We've continued to do that in Q3 to set ourselves up for a different trajectory as we go forward.

Howard, the comp in E&C gets a lot easier in the fourth quarter, but given some of these imaging dynamics, probably continues. Is it reasonable to think maybe that segment is still flat to down in the fourth quarter?

I think that's true, Brandon. I mean, as Amir indicated, we're going to see continued lift from the lower comps around our Infection Prevention. And so we'll probably see double-digit growth there in Q4. But the imaging piece, Amir is absolutely right, that we'll probably likely see a double-digit decline there still in Q4.

Sticking with you. You talked about, I think, a kind of a framework of 50 to 75 basis points of EBITDA margin expansion a year. Just looking to '23, is that still a reasonable sort of base case assumption for next year? Are there any puts and takes to keep in mind?

Well, we're not providing any guide for 2023. I think as Amir has indicated, we're focused here on delivering Q4 of 2022. That said, I think that our longer-term targets, and Amir alluded to it earlier in this conversation, of getting to 22.5% adjusted EBITDA by, let's call it, 2026 still stays intact.

Maybe just touch on China for a minute. How does the profitability of that region compare to the rest of Envista. And I guess -- maybe if you could just put some numbers around kind of the VBP on implants.

It is the same as the fleet average. So some of this deemphasis that we have done is in China. Imaging is 2x of what it is only a few years ago. And we deemphasized some of these categories in China to make sure that profitability stays intact, and we can shift resources to more of a differentiated ortho, endo and implant. So a lot of the VBP today, as we know it, is on the implant side, and it is in the public sector. We have a 70-30 business. 70% of our implant -- premium implant is in private and majority of that is growing rapidly. The other 30% is in the public segment. We think that would be impacted, pricing-wise, by over 50%. So -- and we hope, and we have been told and -- but yet to be seen that, that would be compensated by additional volume. So you take a look at all of that, all of this available, we have already contemplated what the VBP would look like for us in Q4. And we're well aware of what the impact of that in 2023, and we are putting that into our forecast as we go forward. We are not considering a radical shift of recovery, but we think it's going to be an uncertain environment until we get there. The same thing that is happening in implant is going to happen in ortho. The timing of that is not as clear. We think somewhere in Q1, Q2 of next year.

Maybe just talk about the capital allocation. Are there any areas that are priorities for M&A? And any previews ahead of IDS next year?

Yes. We have done 3 public acquisitions since being independent, Matricel, Osteogenic and Carestream. We have done a smaller investment in the startups and others. Over a 3-year time period, we created over $1 billion of cash. We had the opportunity to really be tough or be very specific, we do -- are diligent. But if you take a look at it -- let's take a step back, say, what are we interested? End-to-end digital workflow that brings productivity. Productivity becomes a lot more important as you go forward because of resources, because of lack of resources, inflation, macro, so you're going to become a lot more productive at dentistry like all other industries. They have to figure out how to do more with less. So digital is going to help with that self-service integration, less software. So what does that really mean? We're going to put a lot of energy on implant, value implant, we are under-indexed. Osteogenic-type biomaterial, prosthetic, software, that's where we're going to put a lot of energy on. Acquisition, you cannot call it. We're continuously cultivating. We have a standard process in place. We review them on an ongoing basis. And when the timing is right, we're going to do the right thing, adding to our portfolio. But why do we wanted the acquisition and why is that important? We're trying to position ourselves for faster growth, higher margin and a differentiated portfolio. We're doing a lot of that organically. Acquisition is just going to accelerate that. All the numbers that we have provided in the past hasn't contemplated and have considered any inorganic piece. All of this is going to be add on as we go forward.

Super. Unfortunately, we're out of time. So we'll have to leave it there. Howard, Amir.

Thank you so much.

Thank you.

Appreciate it.

Thank you.