Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Perfect. Hi, everyone. This is Rachel Vatnsdal from the JPMorgan Tools and Diagnostics team. Today with me, I have Amir Aghdaei from the Envista team along with Howard. And so first, we're going to start off with a presentation with a presentation from management and then followed by Q&A. So during the Q&A session, you either can submit questions online through the portal. For those of you watching the webcast or if you're here in person, feel free to raise your hand. We do have mic runners with mics. So just make sure to raise your hands.

Thank you so much. Thanks for having us in here. Good to be back again and happy new year to all of you. I wanted to give you a little bit of a perspective of Envista, we have been in public market for over 3 years now. We came out of Danaher as a spin-off. And I'll give you a little bit of a feel for the company itself, the performance and what we see happening in the market, and then we'll open it up for any kind of question and answer. We -- in the long run, we remain pretty confident that the outlook of industry as a whole remains intact. Yes, we've got a little bit of volatility in the short run. And the reason that we have that level of confidence is because we have radically changed our portfolio in the past 3 years and really position ourselves in a high-margin, high-growth area, and there is significant opportunity for all the work that we have done to see the benefit of it as we go forward. We made a commitment last year around March time frame that we are going to build a business that is high single-digit growth over time and had a 22.5% margin. Despite whatever we have seen in short term, our view of the long run hasn't changed at all. And we can tell you a little bit about why we feel confident about it. Macro environment in the short term remains really volatile, and it is driven by a few factors. China, it's about 10% of our business, combination of COVID, VBP, macroeconomics around potentially a property bubble as well as others really has an impact in the consumer weakness. In Europe, the impact of Russia invasion of Ukraine as well as the energy crisis has an impact in ability to really average European family of 4, have about a EUR 10,000 of energy expenses that is really radically different than only 3, 5 years ago. And around the world, the interest rate is specific in North America, wage inflation, kind of creating a little bit of uncertainty, more of a pause more than anything else, and it's impacting access to the capital market. Our full year guidance remains intact, and we feel confident that in the long run, we're going to be able to work through some of these challenges and get ourselves in a better place as we go forward. For those of you who may not be familiar with our company, we came about as an outcome of 28 acquisition over a 10-year time period as part of Danaher, from 2004, '05 to about 2015. We put all of that together. We created about a $2.5 billion company that it is in 4 key areas. It's an implant, ortho, diagnostics as well as what we call everyday dental, which is restorative [ endo ] and infection prevention. About 53% of our business is in North America. We have been able to radically change this portfolio. Over 60% of it is direct now. We go back only 3 years ago, that number would have been less than 50%. Over 85% of the products that we sell are consumable less than $10,000 people buy it in an ongoing basis. And about 25% of our business is on what we call emerging market. 10% of that is China, the other 15% other geographies. Some of our brands have been around for over a century Kerr, has been around for 120 some years. So we are everywhere in many different geographies, over 12,000 employees, 140 different countries. And if you look at the number of patents that we have, some of the industries that we have been in, like Ormco, to a large degree, you can give a credit for creation of the ortho business, Bracket and Wire. Nobel, as a foundation of the titanium screw and so on and so forth. Really proud of our heritage, but the issue is how do you transform and transition this business going forward. When we came out of Danaher, one of the key things that we put in place was creating a culture, a culture that is stand on his own. We brought a lot of good thing out of Danaher. And we put a lot of energy around customer and customer centricity, innovation that matters, innovation that makes a difference around diversity, inclusion, really radically changed our management structure and go-to-market activities around respect. And obviously, the core of our operational excellence around continuous improvement and last but not least, run empowerment, leadership, accountability. And these 5 values that we call it Circle has been at the core of creation of this company as we stand it up as we build a heritage of the outcome of this acquisition that have come together. So I wanted to give you a little bit of a perspective, pre-IPO, the last 3 years and what is ahead. We used to be flat to declining about 15% mid-teens EBITDA. And our business was, as I said, about almost 55% indirect. And what we did, we are sort of consolidating a whole lot of activities, put it together between 2019 and 2021, we radically changed this business through portfolio management. We had about a 500 basis point of margin improvement. We saw it taking about $125 million of structural costs. These aren't onetime costs. The costs that completely came out. We consolidated the whole to the site. We moved away from some of the businesses and we really put ourselves in a very different format over 60%, as I said, our business is direct today. In line with what we have said in the guidance, we have put a lot of energy run implant, ortho, diagnostics, software, and we are really positioning ourselves to be a change agent and the leader in this industry going forward. Obviously, you can't look back and say a great job I have done in the past, Trust me. This is -- for us, this is the beginning of a transformation and the beginning of a road ahead. I wanted to give you a little bit of a perspective of what makes us different. We're operationally have a proven track record of continuous improvement. Majority of our management team come with that kind of a background, that kind of pedigree out of the Danaher myself, Howard, we have been around it for almost 8 years in the dental side. We took, as I said, about $125 million cost out in a 2-year time period. Real estate, workforce consolidation, offices, we had over 190 offices when we started this process. We have about 40 -- over 40 manufacturing sites. We've got about 20 of them now. We started consolidating. And outside ortho, between 2020 and 2021, we reduced our head count by almost 20%, and we doubled the size of our ortho business. We built a factory in the middle of COVID in 9 months. We hired 2,200 people and really ramped up our clear aligner significantly moving forward. Spent over $30 million CapEx building that capabilities. And we think that there is significant opportunity outcome of work that we have done, but now further expanding that while getting this balance of growth and margin in line as we go forward. I thought it would be good to take a step back and take a look at the market as a whole. Dental market, if you look at out-of-pocket insurance, all of that, it's about a $350 billion spend worldwide. About half of the population, they have missing tooth. About 5 billion people that have Malocclusion. And as you see a whole lot of significant opportunity for aesthetic, older population, increasing focus that you've seen in some of the emerging markets. There are, give or take, about 2 million clinicians worldwide. So this is -- it's not changing radically. The shift is taking place a lot more female, over 55%, 60% of the dentists that they're coming out of schools are female now. And a good way to look at it is dentists per capita. Germany got 85, China got 45 This gives me a little bit of a feel about 65% American as a whole, they have access to dental care. It doesn't necessarily they use it less than 7% in Latin America. So this is to a large degree a more of a elite industry that hasn't yet democratized. And the reason for what it stops it is skills. It takes about 10 years, $0.5 million to get a degree in this space. Cost is really costly, it's very expensive. And the combination of pain and time that it takes is not something that people get up, all excited about going to a dentist. So that combination really hasn't allowed this industry to rapidly change over time. Out of that $350 billion doctors spent $75 billion on equipment, consumable, labs and a variety of different areas. At $75 billion, a good way to look at it is a combination of services, what they pay in lab and what they spend in offices. And this industry as a whole is attracting a lot of new investment. You have seen the DSOs, a number of IPOs. If you only go back 3, 4 years ago, there were only 3 or 4 major categories, major stock in the place. Just take a look at it now, it's almost 12 or 15 companies that have gone IPOs and you've seen rounds of A and B and more and more of a consolidation. The spin-off is taking place. So there is a lot of investment is coming and the industry is bifurcating to the specialized ortho, endo, implant, high margin, really specialized and more of a day-to-day stuff, hygiene, break-fix type of pain management, proactive management is preventative and that is really changing the nature of the industry and where the money is going to be spent. We are focused on about $25 billion out of that $75 billion. And we are set up as equipment and consumable business. And if you look at it, we're #1 in imaging side and a $2 billion that is growing low single digit, about, give or take, about $7 billion to $8 billion of consumables. We have a whole set of product categories in there. We're new into the IOS. We just bought Carestream IOS less than 9 months ago, gives us an opportunity to open a new front. And in specialty side, there are $2 billion of bracket and wire. And that business has been $2 billion for quite some time, not growing that much, but we have been taking share, and we are growing mid-single digit continuously due to innovation and the format that we're going about $4 billion clear aligner -- we're opening a new front. We start growing very rapidly. And the way we look at the implant it is end-to-end. We call it more of an implant-based tooth replacement. And why we call it $11 billion? It's not because you only get a titanium screw, you go in first for diagnostics, then they develop a plan for you, then you do the surgery, then you get some biomaterial bone graft regenerative, then you get a temporary and eventually, you get a crown, you get it permanent. That end-to-end is about $11 billion. We are going to be the #1 player in data space. We have all the capabilities to do that organically and inorganically. And we're going to be the #2 player on the ortho side. Some of the work that we have done is going to really position us to be a major player. We already have over 25% or so market share on the Bracket and Wire side and the clear aligner is a new category for us that we are opening a new front growing there. Let’s talk about industry as a whole, what is the past today and the future. In the past, this industry was mostly analog. It was a lot of impressions and stone model, creating replicating that, very inefficient. A lot of implants that they were placed without any CBCT, basically touch and look and feel how you have done in the past. When people talk about digital dentistry, it's already here. Everybody is using to a large degree, CBCT. They're using some of the practice management system, AI is becoming a norm in this industry. But the problem is multiple system, none of them work together. So you end up going from one system to the next, taking the data from one place, taking it to the other place, and it's really complex, very confusing. A good way to look at this is if you look at the manufacturing and other places, IT change to this industry and really simplified it, consolidated and big players of SAP, Oracle, really standardize it. in dental industry because it's so fragmented, every system, every product has its own set of operating model. And none of them work together. None of them have any kind of -- you've got to build a whole lot of API to connect from one piece to the next. What's in the future and any greater workflow. So the word that I constantly think about is waste productivity. You walk to a dental office. What is the first thing that they would do for you? You just sit there and fill a bunch of paperwork. 270 million clinical record in this country is in one system, Epic system. Why am I filling up this paperwork continuously. They take a 2D, 3D, IOS, then you go to the next office. They do the same thing again. And none of these work together, this has caused lack of productivity, a whole lot of dependency on a staff. As an outcome rather than really simplifying this process, you have a lot of handover and hand out from one place to another. I spent 2 hours to go just get a cleaning. It just doesn't make any sense the way it is being managed today. The self-service in dental industry is something that it is at an infancy stage. And then predictability. You go from one place to another, you get a different type of treatment over time. What is it that we want to do? We want to digitize it. We want to personalize it, and we want to democratize it. So how do we digitize it? You said whatever modality that you use in pictures, IOS, 2D, 3D, I want to collect all that information, all that's anatomy, put it in one place, use AI, read through all of that information in order to give you clinician a personalized treatment plan. You don't have to spend your time reading and doing all of that. We want to present that to you in front of you so you can spend your time with the patient because that's where your time should be spent rather than playing with various tools and capabilities. If you do that, if you do it well, then we can democratize it. We can really give global access to as many people as possible. You can use your asset more effectively. You can see more patient. You can come to a more of a self-service model. Why do I need to have somebody to check me in when I can check in on my cell phone. Why can I not have my invoice in a record sitting in there like any other industry. That's what we are after. We're trying to create this digital capability to give dentists a personalized relationship with the patient so we can democratize it. Great. How would that look like? You take all these modalities in an open architecture. You collect all that information, you create a repository cloud-based, put all that data in there. By the way, that exists today with all your MRI, you can get it radiology, it does it, hearing. I manage a lot of that already exists in various industries. We want to bring it to the dental industry, not as a peace solution as a complete solution. Bring it in, try to consolidate it, use assisted intelligence, sort through all that data. There are millions of images that they're being taken every day. So you can go back and analyze anomalies, you look at the -- detect the challenges that you have, so given you planning ortho planning, endo planning, implant, prosthetic and then build a plan for you just think about this, that you have all that information available. Even if you don't want to use robotics, it gives you opportunity to do assisted surgery, guided surgery, that capability exists today. We are selling some of that capabilities and others have it in order to be able to have consistent performance, consistent treatment in order to really democratize this industry. I think in the last 2 or 3 years, we are already beginning to see the outcome out. Average orthodontist before COVID, they see about 30, 40 patients per day. Today, that number is 80% because of some of the remote monitoring capabilities. because the value that they see in being able to provide that remotely, that don't have somebody sitting in their office for 2 hours for a simple checkout. That's the grand vision of what we want to do, and we want to do it piece by piece through portfolio management, through innovation and through the level of service and support that we give to everybody in the industry. So let's take it one level deeper. How are you going to do that? It starts with diagnostics to start with these images. We have over 165,000 installed base today. Think about these as sensors, collecting information. When you collect that information, you can put it in that central database that we talked about. So 2D, 3D, IOS, sensors, even just simple pictures. You're collecting all that information, put it in one place. We're the #1 player in the diagnostics area, we have a significant infrastructure with salespeople, we sell through distributors. We ask that in the United States, we have 1,500 calls per day. Our products are known for quality, 60-day guarantee. You don't want it, you can send it back to us, and we are building a digital ecosystem, open architecture, open platform that we are trying to create them and give people opportunity to really see that. 200 million cases are being handled today, 10% of offices, they have our product. You go to the implant. We got about 1,300 salespeople. Last year alone, we trained 30,000 doctors in placing an implant. We start thinking about the number of innovation that we have done in this space, all on 4, TiUltra N1 gives us an opportunity to really democratize this industry moving forward. Over 1.5 million patients were treated in 2021 by us. Under ortho side, we have over 500 salespeople. We have an opportunity to really completely give a different level of support, Bracket and Wire, clear aligner. You can use it in combination with the same company Last, in 2021, we had 3,000 events, and we trained 50,000 people on how to use our product to go forward. And clear aligner in case you haven't seen the Spark, we already encouraged you do your own homework is the fastest-growing clear aligner around the professional side. And it's a product that is really stand on its own. It has the efficacy, the best in the market. 1.9 million people were treated by us in 2021. So what do we want to build in here, focus on attractive segment, ortho, implant, DSOs, and digital capabilities to that digitize, personalized de-marketize add M&A. M&A and portfolio management on top of it, use our culture and continuous improvement to accelerate the growth, to build a leadership position in the market to improve the return on a compound and return going forward. We made a commitment last year, we said we're going to be able to take this mid-single digit to high single digit. That's not a ceiling. We think we can do that in the next 3 or 4 years, 22.5% margin. We improved it by 500 basis points in the past 3 years. We think there is significant opportunity to improve margin and get our EPS compounded annual growth of over 10% going forward. That's the model we want to build. We think we have the capabilities, the leadership, the relationship with customers to build that going forward. We really like this industry. It has decades of runway because of how underpenetrated it is. We are strategically differentiated and we have a proven track record to build a growing margin oriented and use M&A very thoughtfully to build a different company moving forward. With that, we wanted to open it up for any feedback question that you have for us.

Question. What drove the increase of direct to your customer mix, it was like less than 50% just like around 60%?

Yes. So the more our implant and ortho business, the more that, that grows, and it's growing a lot faster, all of that is showed directly. Our consumable and our diagnostics is sort through distribution. So that's one. This is growing a lot faster, is 60%. It's growing a lot faster. The second part, we changed the portfolio. In 2020, we exited about $150 million worth of business that was low growth, low margin. In 2021, we sold about $400 million of our treatment unit and instrument that was through distribution, combination of a portfolio management, divestiture, acquisition as well as the growth in our specialty really shifting that very radically. Our direct business has 10% higher margin that are indirect.

Okay. So it's not a change in the way that this is all the mix?

The mix -- is the mix is radically changing our portfolio is changing. We're not -- simply answer your question, we're not an anti-distributor in any way or ship. We want to give people as many opportunity to buy our product. But specialty businesses, you really got to train your customers on the protocol and surgery, all on for. So you have to do that yourself.

Okay. Let's wait for the mic. And then -- there you go.

So what's driving the increase in acceleration in the implant business?

Yes. So I mentioned that there are about 4 billion people worldwide that they have missing tooth. In this country, 40 million people, they can't chew their food. They have gum diseases, they're missing tooth. So to begin with, you’ve got 4 billion people that they have missing. Then you take a look at what is the traditional model of fixing that? Traditionally, about 200 million people that go and look for a solution and 3-unit bridge, they call it. They basically take 2 tooth on each side, they ground it down and they build a bridge on top of it. The average time that a [ breach ] last is between 5, 7 years, and then you have to go redo it again. This time, you have 2 other --healthy tooth that you have destroyed in the process. So you said why people are not doing implant because it's been a little bit scary. Think about it. You got to take a Bracket and Decker inside somebody's mouth and drill a hole in it. Not a lot of people feel really comfortable doing that. So the education, the training, being able to give them shown how the protocol works under supervision is something that is really important. More and more people, also people are recognizing the connection between mouth to body. If you have issues in your mouth, it has impact diabetics, overweight, obesity, heart attack, a lot of connection between the 2. So people are beginning to become a lot more aware of ability to be able to do that. And a lot of people feeling beginning to use technology to help them to be able to place implants. Combination of all of that, plus middle class in some of the emerging markets, aesthetically a lot more focus. I mentioned that the amount of the group -- some of the places that place more implant than any other places in the world compared to population is Brazil, Spain, Italy. They spend a lot of time and money on aesthetics as an outcome, how you look, are you smart gives you confidence. So that combination of all of that, why the implant market is growing 7%, 8% in an ongoing basis.

And just maybe as it relates to you guys, it's been a good market for a while. So why is it increasing now for you guys specifically?

Why is -- why are we increasing?

Why is the growth for you guys within implants accelerating more meaningfully as…

Yes. So we bought a company called Implant Direct over 10 years ago. And that was maybe about $100 million and a $4.5 billion market, very specific and a geography. Then we bought Nobel in 2015. Nobel is -- has about 25%, 30% on the premium side. So we have pulled all of that together. Commercial execution has been a really important part of this, EBS at work, we have improved the cadence of how we improve -- deliver product. Operationally, we have improved it. So continuously improving a segment in the market in order to be able to differentiate ourselves versus everybody else. And we think that there is also -- it's a beginning of a lot of opportunities, as I mentioned, about $11 billion market. We have about $1 billion in that segment, and we think that we can add to it significantly over time.