Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

And what percent of the ortho that you're seeing are new to aligners or I guess, new wish to aligners? I know there's certainly some orthos that will have tested out really not gotten in versus where you're taking away from established peers.

I would say that the vast majority of -- again, we focus and concentrate on the ortho space. And so I would say the vast majority of our newer Spark customers in Ortho have historically used aligner therapies previously. And so while there may be a subset minority group of those who are trying aligners for the first time, I would say the majority of these folks have been steeped in aligner with therapy and understanding the dynamics of that for several years. And so if I call them competitive wins, that's maybe the right way to think about it. And they are -- we are concentrating first in primarily our Ortho customers or gaming customers on the bracket and wire side and recognizing that we have a history with them. We have met the customer's need clinical outcomes are all consistent. And so being able to put that into a liner therapy certainly helps us win those accounts.

Got it. Certainly helpful. And then I guess, aside from the product, which I have seen and looks very good state resistant. How much of what you're doing on -- whether it's the IOS side or other areas, and I keep personally coming back to workflow. How much of that filters into your ability to continue to drive this outside spark growth?

I think that's something that we thought about thoroughly even as we went into IOS and the importance of integrating that into kind of our broader DTX software. And so that's important for treatment planning that's important for treatment execution. And so we see this as being an important piece of it. That all said, we maintain an open architecture. And so whether they use us specifically on all the other pieces of it or not, we think that it's important to provide doctors choices. And so whether they're using our scanners or not, they're able to utilize our Spark and our line therapy.

And then sticking with Ortho, at least in the quarter, bracket and wires growth seems like it starts to normalize back towards traditional levels. I know there was a period of excess outsized growth because of channel participation by some of your peers are lack thereof. Is this now back at what you think will be the normalized long-term [indiscernible] run rate? Are there still pockets where you can pick up excess share that because of lack of availability, how do you think about the bracket and wires business on top of the overall.

Sure. So within our bracket and wire profile, we've grown ahead of market consistently for many years. Part of that is because the innovation that we provide most recently with our Damian Ultima product, but also because of our exposure to emerging markets. And so about 70% of our bracket and wire business is outside the U.S. And so where there is a little bit of a slowdown, we've historically grown very fast in places like China and in places like Russia. And so given the current dynamics with all the COVID issues that we've seen in China and the like, I mean, literally, they were down for better part of January and February between the COVID incidence and the lunar holiday. And so I think that 2023 in many regards for us in China is a bit of a reset year given the COVID dynamics as well as the VBP implications. And so certainly, in 2024 and beyond, we see that driving quite a bit of the growth consistently that we've seen historically, and we'll see in the future, and that also impacts the area like bracket and wires for us.

Perfect segue to maybe talk a bit about China. Certainly unfortunate dynamic of the COVID outbreak you had in your factory, which was a shocking number here on the call. But I appreciate your commentary about being a transition year. I don't think it's any surprise anyone who knows your story about VBP being an immediate impact. What I would love to know a little bit more whether it's either in the quarter or how you think about the rest of the year, beyond that, but this whole dynamic of price versus volume -- or price versus share, I guess. So we know what the pricing adjustments were. We know that -- and I hope not putting words in your mouth, but that pricing maybe came out a little less bad than maybe could have been. Where do you see that going in terms of relative from the public, the private transition? And then what is the visibility you have on -- because of your position with VBP, the ability to pick up incremental new share on implants. I guess how does that phase in which is the guidance.

So a lot maybe to unpack there, but let me start and you can ask follow-up questions as you see fit. I would say that VBP is playing out in China largely as we expected. We anticipated that there would be a pretty major haircut in terms of the pricing associated with the public sector. And we've always said that there would be some spillover into the private sector. I think what we're finding is that the spillover on the private sector is accelerating a little bit. But to your point earlier, I think that the reductions in pricing was maybe a little bit moderated from what could have been the worst case scenario there as well. And so the way we think of it is that we put a stake in the ground and said about 20 -- in excess of $20 million associated with VBP in China. And we still think that, that's largely about the right number. We think that as one of the winners of that bidding process, the whole idea here is that volumes would be then consolidated to the wing group, right, or one of the winners. -- as well. And then because of VBP's intent in its entirety was really to provide more access of care. And so in theory, more volume should come along as well with that. And so we hadn't contemplated large numbers for those types of things. But to the extent that we see some additional spillover into the private sector, we think that we're going to see some volume ramping up throughout the tail end of this year and certainly well into 2024.

And so just along those lines, I want to make sure I have everything. So $20 million is a gross impact for the year, gross negative impact. It's going to be on revenue and on profit. So yes. But that doesn't assume -- it's not $20 million net of any volume impacts that you're...

That's right. That's right.

That pacing of the volume you expect to be -- not to get into specific guidance, but we do have the 26 targets out there. That's a pretty steady ramp over into '24 and beyond as the way you think about that business.

I think that's one of the factors that will continue to grow that business. I mean even before VBP, China was growing for us double digits. We probably have 7 or 8 years pre-COVID, pre VBP that had sustainable double-digit growth for us in China. And so in 2024, we think that we'll get back to that. And as a tailwind to that potentially after this reset, if the volumes come, then that's going to be some additional volume opportunity as we see it.

And so I guess, along those lines and thinking back to the 26 targets that you had updated the Business Summit, the 26 growth targets assume that China is a normalized growth versus where it would have been slower, faster?

Maybe easiest to say in the context of we feel as though our long-term growth in 2026, getting to the mid-single-digit plus high single digit in terms of core growth as well as EBITDA, adjusted EBITDA margins in excess of 22.5%. That stays completely intact despite the headwinds associated with the pricing on the VBP and the volumes that may subsequently follow and add to that on the volume side.

Okay. Maybe let's stick on implants in N1, a phased rollout, so to speak, for you finally got in the U.S. What are you hearing from practitioners on side-by-side versus competition? And where none is establishing share, especially in the U.S., North America.

Yes. I think N1 is -- and we've said this consistently, it's an entirely different protocol and procedure. And so we're in the early days. We're in the process of building up our clinical ambassadors that are going to help us drive and expand the knowledge around the power of N1. And so I think that, that's first and foremost. The reality is, because it's a uniquely different procedure, it takes face-to-face training to get more adoption associated with it. And so that can obviously slow down some of the ramp in growth as well. I think the other thing to keep in mind here because we were just talking about Spark earlier is that N1 is going to be utilized for many of our existing doctors. And so the thought here is that there's going to be some cannibalization where Spark and particularly on the aligner side, that was essentially a new frontier for us. And so that's going to obviously read out in core growth much quicker. It's going to have a stronger impact right away. N1 we think is going to have a slower ramp-up in essence because of those things. We also think that because it's a new protocol, we're having to do -- or we're thinking of it in terms of impacting at the education level. And so a few weeks ago, I was on the East Coast meeting with the Mayor and a prominent dental school about the N1 and what we can do there to get more inroads and teach this thing so that it becomes more standard, a standard of treatment or a standard of understanding for these dentists that are going to come out to the workplace. And so this is a long play for sure. Not something that we're going to see is immediately impacting it, but certainly something that's going to be part of our long-term growth strategy and the 2026 numbers that we talked about earlier.

And I guess outside of one, how do you think about your stratification right now of your implant business broadly? I know that we're all wondering if and when there will be a recession in it looks like a recession. So how do you think about that dynamic of where you sit in premium, where you sit in value and what you're trying to do to enhance, stabilize, improve, grow, whatever you want to call it, both those areas of the business?

Yes. Sure. So I think even independent of N1, we feel really good about our product portfolio. So we kind of hadn't done as good of a job about talking about the ramp-up and the opportunity that we've seen and experienced as it relates to our surface technology. So both our TiUltra as well as our Xeal product has been doing exceptionally well. And so if you think about us in the context and maybe to your question, how do I see us relatively stack up. I think we have a great commercial team overall. We have products that are well valued clinicians that clearly can count on the outcomes associated with our product in the implant space. As it relates specifically to the recessionary concerns and the like, I think people understand the importance of clinical outcome. And even the health -- the liaison and link between overall health and dental health these days more. And so when you think about a loss of tube, what's the clinical outcome that's superior. It's the dental implant versus what historically had been like a 3-unit bridge, right? That's not even a permanent solution. And implant is a permanent solution, the Auto integration. It's almost in some cases, as good as their original teeth. And so -- and then as it relates to concerns around potential cost of an implant, I would say that the manufacturing costs or the costs that we charge to our doctors is a relatively small percentage compared to the overall procedural costs. And so even if you're talking about a premium implant, it's fairly small as it pertains to the overall procedure. So we don't see that as being a major impact.

Turning back to the call last week, you mentioned I think us in terms of executional challenges, which is not something we typically hear out of Envista or obviously legacy Danaher in terms of just some consistent process improvement DBS-EBS ingrained in everything we do -- it seems like some of that was tied to imaging. But anything else you want to address or touch on relative to what you saw and how much more, I guess, kaizen work is going into the whole EBS flywheel.

What I would say is the culture of Envista is that results matter. And so when you see businesses that have performed historically, we don't have as much of a tendency to unearth or get deep down into the individual components of the working and even the EBS tools, meaning it's more about sustaining that the positive growth and the efficiencies and the productivity -- when you have quarters where it might be slightly different than what our expectations are in any sort of business, that's where we're going to go more to Gemba, -- we're going to look at opportunities where we've had, for example, where we've had pretty consistent execution and commercial delivery. If we've had routine, let's say, turnover in personnel, right? I mean we've seen certain regions do better than others in getting that region back up to speed, whether it be triaging with regional managers or whether it be ensuring that the onboarding process of a new sales rep or training associated with that or the co-traveling with that follows a specific best-in-class practice. I think that what we're talking about now in terms of commercial execution in that example is making sure we see what works the best and then applying it to each of those spots. And so that's the type of execution that we're talking about, bringing back that process, seeing what's best-in-class and ensuring that we utilize that across the board.

We're in low on time, but I'd be remiss if I didn't ask about M&A because, a, it's a cost the market and be a big focus on Envista. Where do you think you sit right now in terms of both capability opportunity? And does any calculus change in this rising rate environment in terms of how you think about return rate thresholds, riskiness of a deal? I know there's a typical playbook that I think of when this is going to pursue M&A in your limited time. So curious how you think about the environment right now?

Yes. So I'd say that portfolio management, both in terms of looking to add on as well as divesting and we've done a little bit of that since we've been a public company as well, is an ongoing kind of standard work process. And we're always looking at and cultivating dozens of companies. And so we're going to be thoughtful and prudent about where we deploy capital. We do want to deploy capital. We've talked about areas around value implants potentially, biomaterials, software. Those are all areas that we're going to be particularly thoughtful about and thinking about -- but we're also mindful, as you said, about interest rate hikes and the like. And so it's important for us, it's not about the speed, it's about making the right execution as it relates to acquisitions themselves. And so we're going to be prudent about that process. But we are definitely looking forward to deploying further capital.

Perfect. Well, I see the 0. We're out of time. But Howard, Stephen, thank you so much for being here. Really appreciate time and thank everyone for joining us at the conference.

Thanks, Michael. Thank you.