Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

Perfect. Hello, everyone. Good afternoon. This is Rachel Vatnsdal with the life science tools and diagnostics team here at JPMorgan. Today, we're going to have Envista's presentation. As is typical with most of these breakout sessions that you've been in, it'll be 20 minutes of a presentation and then roughly 20 minutes of Q&A. So with that, I will invite Amir and Stephen up to the podium.

Thanks for having us here. This is over 4 years since we have been independent as an independently publicly traded company. I wanted to give you a quick status update of our transformation, where we are and what to expect moving forward. You all are familiar with that. I'm not going to read it. Simply put, that we are keeping the 2023 guidance that we had provided before with us intact. We are working through it. It's been a challenging year. A lot happened during 2023. We've been able to manage through it. But when we look at it, the macro environment continues to remain really volatile across the board. You've got the geography aspect of it, interest rate as well as resource. When you talk to DSOs, one of the biggest problems that they have is recruiting, maintaining and getting resources in order to be able to expand in different geographies. And then the macro issues around the geopolitical continues to be a forefront. You had the Ukraine to begin with; now in Israel, we have a company in -- outside Tel Aviv that has been impacted by it, but we are trying to manage through it and a lot of that is kind of thing that we cannot plan for it, respond to it. We're trying to put our energy around what we can control. In the past 4 years, we have completely changed our portfolio through a series of exit acquisition. We have put ourselves in a really different place. And we expand -- we expect to expand margin as we go forward and expect to see growth accelerated over time. That's the promise we made when we came out of Danaher, that this independent company is going to be a lot faster, a lot quicker in getting margin expansion, growth trajectory to be built and focused on the specialty. In the past 4 years, we have been able to prove that, and we continue to make progress toward that journey. We're about $2.5 billion, $2.6 billion company, over 13,000 employees, about half of them in manufacturing, distribution. About 50% of our business is in North America. But for those of you who may not know our history, only 4 years ago, about 55% of our business used to be equipment and consumable. Today, that number is less than 40%. 60% of our business is sold directly as ortho as well as implant. Over 80% of our business is now consumables, things that people use in an ongoing basis. And even on our equipment business, we have a really different mix than what we had only 4 years ago. We have completely transformed our mix over time. We report in 2 different segments: Equipment & Consumables and Specialty business, basically implant, ortho and Specialty, which is sold directly and Equipment & Consumables, which is sold indirectly. About 60% of our business is implant and ortho and the other 40% is divided between categories such as imaging, restorative, endodontic as well as infection prevention. Emerging market continues to play an important role in our growth despite of some of the challenges that we have seen in the past couple of years. We're committed to it. We have a significant presence in different geographies such as China and others, and we're going to continue to see that over years. I wanted to talk a little bit about who we are, what we stand for. We see ourselves as a primary partner for clinicians in order to improve people's lives. We come out of Danaher. We have that heritage of a continuous improvement, but we adjusted those values, the reality of the dental market by putting customers in the center of what we do every day, focus on patient, focus on the dentist, innovation that matters and make a difference. When, normally, people think about innovation, they think about product innovation, but we think about business innovation, how we are providing support and help to DSOs to be more productive. How do we think about long-term impact of what people do in dentistry in order to improve quality of life of a patient, respect, diversity and coming to work, being your authentic, yourself. We have been able to make significant progress in changing the management structure. Out of the top 150 that run this company, about 1/3 of them now are female and we have been able to improve and grow our talent over the last 4 years. Continuous improvement is close to our heart and what we do every day. Continuously look at what we can do to improve margin, to improve growth, to build a better company that we can be proud of and leadership and accountability, making sure that we have a feeling of ownership for what we do at the local level. These values is what has really created differentiation for us and what is in the heart of the company that we have built in the past 4 years. We call them CIRCLe. And it is the acronym that starts from customer centricity, innovation, respect, continuous improvement and leadership. We recognize people who really demonstrate and make sure, every year, we have a nomination and we communicate that continuously. Let me talk about -- a little bit about the dental market. About $350 billion spent worldwide. And the growth, think about it as GDP plus. The macro trend behind this continues to be the -- this is an industry that has legs over it for decades to come. I'll talk about it a little bit more as we get to various segments. Over 2 million dentists worldwide, and if you look at it, the best way to describe that penetration and access to dental care is through the number of dentists per capita. Places like Switzerland and Germany, you got 85 dentists per 100,000. You go further down in China, India, what you will see, it's only 6% to 7% of people that have access to basic dental care. 65% of Americans, they have access to it. It doesn't necessarily mean they use it. Some of the key elements why dental hasn't transformed is because of cost. Cost continues to be a major issue. Skill set, it takes about 10 years for somebody to start practicing the basics of dentistry. Pain, time to healing. There's opportunity for innovation in all of those areas. Last but not least, about $75 billion spent, suppliers in lab and in office, and there are plenty of players and some really good players in here making a huge difference. But the number of acquisitions, the number of IPOs, the number of investment has accelerated greatly since 2019. You see this business, not as necessarily as recession proof but recession resilient. What we saw in 2018, what we saw in 2020 after COVID is a really good indication. This is an industry that can -- test, over time -- can prove the test of time and kind of stay on its own, goes through volatility to some degree, but over long run has plenty of potential. What is happening in the industry, a little bit of a bifurcation, bifurcation of specialties, people who do ortho, endo and implant and a whole lot of DSOs that they are getting a large number of people coming to this network. Not all DSOs are the same. But in the United States, out of 150,000 offices, 200,000 dentists, about 20% of them now owned by DSOs. The other thing that we see in the United States is specifically, and beginning to replicate in other places, is group practices. Four or 5 people are coming together, creating something really different around digitization, customer self-service, providing better service to customers and differentiating themselves over time. Why are we so excited about this market is because more and more, there are evidence of oral health and overall health. You know that it has significant impact in diabetes. Chewing your food, being able to really fully enjoy the quality of life is something that everybody deserves to have. A lot of undertreatment and many different variation of the treatment. And there are some procedures that is really difficult to postpone. If you don't go to an ortho treatment before age of 13 and 14, you're going to have a whole lot of problem over time. So preventative becomes an important part of this equation. Pain management has always been a center of dentistry, anesthetic and pain management. And if you think in the long run, you would be able to do a lot of preventative through your DNA analysis, looking at your heritage, take a look at the kind of habits that you have and see what you need to do in order to really get yourself in a better place. Last but not least, insurance coverage has had up and down in what they cover, what they do not cover but there are a variety of different form or shape, financial treatment is coming in place to be able to give people the ability to get that dental care that they want. This industry is underpenetrated. And the reason that it's underpenetrated because it's not well understood and it's not well communicated. It's not front and center. It should become a standard care. Everybody deserves to have it. And by democratizing this, you have an opportunity to really make a difference in the whole quality of life of people. Let me talk about 2 segments why we are so excited about this specialty business. About 5 billion people, they have some level of malocclusion that they can get better to smile, they can be able to get -- present themselves, have confidence if they have that ortho treatment. If you look at the number of cases that start every year, about 500 million people, they can really take advantage of it. They can go through a standard treatment. But at any point in time, over 20 million people have an ortho case start. To the best of our ability, we think that's about 23 million, 24 million per year and about 2/3 of them is still are bracket-and-wire. So when you think about the clear aligner and possibility of clear aligner, only 8 million cases. And there are a lot more to be done in this space. We're really proud of what we have done in here and a lot of others really have become -- this clear aligner and dentistry in this space has become really more of a standard care. A lot more people talking about it. You see a lot more advertisement and the variety of different form or shape, educating people, the importance of this, and this is going to have a positive impact. The industry, as a whole, and for us specifically, the same thing on implant, half of people, they have missing tooth, half of people, 4 billion people. In this country, 45 million people, they're not able to chew their food. They're having problems, a lot of people over the age of 65. So there's an opportunity to really make a difference in here. You take a look at how many people are actually getting implant. Every year, all the implant companies combine, they sell over 20-some million units of titanium screws. That's less than 5% penetration of people who can really use implant and change their life. There are 100 million 3-unit bridges are placed every year. The average life of a 3-unit bridge is 5 to 7 years. You got to come back and do it again. Insurance playing a role, but to a large degree, ability to teach people to use implant as a standard care is such an important factor in here. Implant is one of the most profitable procedures that anybody can do. And in order to really make it a standard of care, you got to do a lot more training. You got to do a lot more education. You're going to simplify so people are not afraid of doing it going forward. You look at these 2 segments, you look at what the next 10, 20, 30 years, there's plenty of opportunity to really digitize, to change standard of care, to be a major player in order to improve the quality of life of people. We participate -- you remember that $75 billion that we talked about, about $25 billion of it is our core focus area. And if you look at it in each one of those segments, about $11 billion of it is treatment planning for missing tooth from the time that you go to a diagnostic to planning, to placement, as well as your provision, $11 billion. We're the #2 player in that space. Nobel has been around for 35 years. Yes. Looking back a little bit, we want to acknowledge the heritage of Nobel, but there is plenty of opportunity for us to continue to make a difference in this space. We also have other value players such as Implant Direct as well as ABT, part of that portfolio of $1 billion business. In the orthodontics business, as I mentioned, about $6 billion, we're the #1 ,#2, depending on what segment you look at it on. Bracket and wire business, that business is flat to low single-digit growth. We have been taking share and been growing. In clear aligners, we're the fastest-growing clear aligner on the ortho side with the Spark and continue to make progress in there. Imaging 2D, 3D IOS, with a new entry into the IOS segment. We're the largest imaging provider worldwide. And with IOS now, we have an opportunity to really make a difference with software, putting all of that together. In an $8 billion consumable, we're #2, #3, depending on the category. And we have been -- some of our brands have been around for 130 years. We are the combination of over about 30 companies that was formed in dental inside Danaher from 2004 to about 2015, and we have been in this transformation and migration since then and since becoming an independent company. What we want to do in this space, we want to digitize the industry by partnering with professionals. And the main reason behind it is in efficiencies that exist in the system, self-service ability to really diagnose, use AI, put it in the cloud, do a better job on the planning, so dentists can spend a lot more time with the patient to develop personalized plan, because there is an opportunity to truly democratize this industry. That's our model. That's what we want to do in the decade to come. We have done a good job to get ourselves here. There's plenty more to do. In each segment, we think about customers, customer at the center of what we do. If you look at it on our diagnostic piece, we get over 1,500 customer interaction per day. We have an opportunity with IoT to actually dive into a lot of systems and see what is taking place. We guarantee a 60-day return policy. We look at our installed base, we got 165,000 installed base. 10% of all the dental offices worldwide, they have one of our diagnostic product. We have 55,000 installed base of sensors, DEXIS in United States. One out of every 3 office in U.S. has one of our products. And that software, DEXIS, is uniform and unified in standard of the care. And we are going through a digital transformation in order to build the infrastructure, AI, FDA-approved capability to, not only capture image but to provide input to a dentist, so they can do a better job simulating, communicating, executing the plan that they want to do. Really proud of what we have done. We have some heavy lifting to do, shifting some of our portfolio. And addition of the Carestream IOS has really completed our diagnostic portfolio. In implant, as I mentioned, we're the #2 player in here. We have about 1,300 people on the ground, providing support and teaching people how to place implant, showing what the full arch capability look like. And we have over 65% Net Promoter Score in that area, all on 4 center of expertise, about 500 of them now throughout the world that you can go in there, and rest assured that you can get the best full arch treatment that you can deserve. And then, when it comes to, really, training and education, this is the most important thing that we can do to help people to place more implant. Last year, over 1,200 events, 30,000 people. And on innovation, Nobel is built based on creativity, innovation, new services, new biomaterial, N1 as a next generation of things. And we have a lot more work to do in here. About 1.5 million patients every year they take our implants. And we have an implant in people's mouth that has been there for 35 years now. And ortho is a significant transformation over time. We have over 500 people on the ground. They're teaching, building a network. We've got an incredible training and education. The reason Spark is so successful is, not only because of a product, because of this network. 3,000 events, 50,000 people have gone through the training. 1-on-1, 2-on-1, 3-on-1 and 4-on-1 over time, geography by geography, hands-on training by individual. And we continue to innovate around the bracket-and-wire as well as on our clear aligners in order to really improve the quality of the treatment over time. By far, we are the first and the last standing company in bracket-and-wire area that continues to innovate in here because the standard of the care in -- outside United States requires bracket and wire, Case 1 treatment, compliance needs that treatment. And lastly, on consumable, we have array of product around restorative, endodontic, matrix and Orascoptic. Matrix is a standard. You see it in almost every offices. CaviWipes is well known. That color that you see is what is known in every dental offices. And Kerr been around for almost 130 years, well known from a chemistry integration. And Orascoptic, people who actually use it, they see the difference in how they can treat and see and improve the patient care over time. I want to talk about what makes us different. We have gone to an attractive segment, changed our portfolio. We're trying to create connected solution and continue to use M&A and partnership, use our value system and EBS in order to create market leadership, in order to create accelerated growth, in order to create compounded return over time. We're at the beginning of journey. We have a lot more to do as we go forward. But if you look at the 2024, what are our priorities. If you recall, when we started, we said we're going to triple the size of our Spark business in 3 years, we did that in 2 years. We have made a commitment to double the size of that in the next 3 years. Clear aligner continue to expand it in ortho segment, improve the margin, make sure that we accelerate our implant growth over time. 50% of our business is outside the U.S. and it is at proxies or above proxies. We need to turn around our North America through training education through support to customer experience. But last but not least, this is our heritage. This is what we know, how do we improve our G&A. How do we take cost out of the system. We think we can take another $30 million cost out and we'll see the full benefit of it at 2025. We do these things, that long-term commitment, long-term plan that we have communicated stays intact. I've had a hard time and challenging time in 2023. We have made progress. We think there is a lot more for us to do because this is an awesome industry. It's attractive. People need it. We're making a difference. We're beginning to build a proven track record around margin acceleration, around growth, around M&A. And we're going to be able to build a differentiated opportunity and product categories and a company that is focused on growth, accelerated margin and use that as an outcome to improve patient life, help our employees and customers and create value. Thank you so much.

Perfect. Thank you for that presentation.

Of course.

So first off, I wanted to dig into 4Q and some of the trends throughout the year. So you'd expect that the core growth was going to decline low single digits in 4Q and down slightly for the year, while adjusted EBITDA margins were expected to land in that range of 18% to 19%. So can you walk us through how 4Q has really trended relative to your expectations?

So obviously, we're not in a position to really talk about Q4 or 2023 or talk about the guidance in 2024. But as I mentioned at the beginning, we think the guidance that we have provided stays intact. There has been a challenge in Q4 for a variety of reasons, cybersecurity and many other things. But we've been able to manage through it. And while doing that, building capabilities that we need in order to really deliver that long-term view as we go forward.

That's helpful. I want to follow up on that Henry Schein cybersecurity incident. So can you kind of walk us through, you flagged during your 3Q earnings that you weren't really assuming a worst-case scenario, but we saw that kind of persist throughout the quarter. So having seen some of the recent updates, can you update us on both your U.S. and OUS sales trended in the quarter relative to your expectations in light of those cybersecurity and the impact there?

So Henry Schein is a great partner. We've got a great relationship with them, very transparent. We work with them very closely. This is my year 9 in this industry, and I've always had a really good partnership with Stanley and his team. So the #1 challenge for us is visibility. We have had very limited visibility on what is taking place from a -- stock in perspective. So if you take a look at it, they have consumable and they stock 6, 8, 10 weeks, and we had visibility to the SKU level of what -- how much inventory they have, what's the sell-out look like versus sell-in, and we lost that visibility through Q4. We know customers are able to get the product, but we haven't been able to see exactly what is taking place on the ground. Equipment side, most of that has not been stocked. They get an order from customers, they place that order for -- to us. We ship it and they install it. And for the first couple of months, we are not getting any orders because of all the issues, back-envelope writing and spreadsheet. As we went through Q4 by December, it got better, but it's still -- we're lacking visibility of what is taking place. We know, from a sell-out data that if you look at the proxies, we feel good about that because we feel like we are at proxy or better. But when you look at the sell-in, what's going on in inventory and that's little bit -- has been a little bit choppy. So in the case of inventory management, we normally take a look at the entire year, and we think that's going to sort itself out as we go through 2024.

Got it. That's helpful. And then I appreciate you're not giving us formal 2024 guidance until the next earnings call, but I do have to ask a few framework questions. So you noted that you do expect to have core growth in 2024 and adjusted EBITDA margin expansion. But can you walk us through, now that you've had some additional time, some of the trends that you just highlighted on the lack of visibility, how should we think about the framework even just for market growth for next year?

So you all have seen a lot of research and data that's coming in ADA services that patient traffic has kind of stabilized, 85% to 95% pre-COVID, and that's a really good thing to see. We have tremendous insight into what is taking place on the DSO level. DSOs, they can take a look at daily number of patient, average spending, and also because of our position in the premium segment, we have a really great visibility on scheduling. What's going on, I can go to any office, orthodontist office or a surgeon and they can show you the schedule for the next 4 weeks, 6 weeks, 8 weeks. So let me talk about the DSOs. ASP, which is an average spending per patient, has been lower than it has been before. And the reason for it is purely, on high end, ortho treatment, implant, All-on-4 that hasn't recovered. It hasn't come back. Patients are there, average spending is there. And then you go to the specialty business, what they have done in order to make sure that they're using their assets in the most effective format, they have reduced their hours. They have less hours in the office, but they're completely booked, but in a smaller format. High end, a full arch restoration, that's $25,000 to $30,000. And it is -- it just doesn't happen to you overnight. It is a process. So you can wait out the 2 or 3 months. You can wait, and that's what we are seeing in here. Patient volume steady, the spending on the high end continue to be muted. And then on the equipment side, majority of the equipment are bought through expansion, either replacement, expansion of services, opening new offices and. Not only the interest rate has played the role, but also resources. Dental hygienist, front office thing has slowed down this expansion of de novos, which were the fastest segment of the market. So that hasn't changed radically. That's what we're seeing in the market. We're expecting that becomes more of a norm as we go through the year. We would see a better performance going forward. But there is no radical movement, down or up as far as we can tell.

Got it. That's helpful. And then last question on 2024. How should we just think about margins from a jumping off standpoint given how dynamic has been?

So we are well known for margin expansion. But what we have done, we have been always focused on building a balanced portfolio that require some investment in order for us to be able to see the return of that over time. For a pre- -- since 2017, we have started -- we got introduced Spark Clear Aligner business in 2017, we have been in investment mode and continue to build capacity, resources, training education and that category, by itself, continues to be below fleet average, but it is improving. Every quarter is improving. We expect that category to be at fleet average by 2025, so that's one piece. The other part, we talk about Nobel, those priorities, I'm walking through those priorities. Nobel is a high-margin business. If you see at proxies or above it, that's going to have a direct impact in our margin. Last but not least, what we can control, which is continue to take cost out. EBS, that work around procurement, about footprint, about Kaizen on the floor in order to get more productivity. Combination of those 3 things, we said by 2026, we'll be at 22.5%, we think doing these 3 in 2024 and shifting the portfolio will get us there in the long run.

Okay. That's helpful. Then I wanted to follow up on some of your comments around Spark. So you unveiled the new targeted doubling Spark revenues by 2026. I wanted to talk about how are you thinking about investing thoughtfully in that Spark business? And how should we think about the growth trajectory there?