Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

All right. Jon Block with Stifel. And thanks, everyone, for joining us today. Great day, and we're going to get back after it tomorrow. We're excited to be joined by Envista's CEO, Paul Keel. Paul very recently took over the helm on May 1. So wasn't easy, but we truly appreciate the quick turnaround and the willingness to participate in the conference. And welcome, hopefully, the first year of many that we have you here.

I want to just start off taking the role, and I think it's probably a good place to start. So maybe if you could talk about the opportunity that you saw at Envista, what led you to take the role, the opportunities that you see in front of you, would be helpful.

All right. Well, thanks for the question, Jon, and thanks for you and Stifel for putting on the conference. It's fun to see it get bigger every year or so. Kudos to you. So I've been in and around this company, Envista, and the sector, oral care, now for 20 years. My first participation was in the early 2000s. I was the strategy and M&A lead for 3M's health care business, which is now a separate publicly traded company called Solventum. And that was at the time that Danaher was building its dental platform. So all of the assets that now comprise Envista, I looked at from an M&A perspective from 3M. After that, I had my first CEO job, which was running 3M specialty dental business. So now I was competing with Envista, and my appreciation for the company grew, seeing it first as a competitor for the assets with Danaher, and then competing in the market with those assets. The folks who were running Envista back then, in the early 2000s, are still personal friends of mine, although we were fierce competitors, high character people, and that stuck with me. Shortly thereafter, I went to Europe where I was running 3M's Western Europe operations. Health care is the biggest part of that, and oral care is a substantial component of that. So the point I'm making is I've seen this business from multiple perspectives, multiple geographies across 20 years. I got a call last fall from a couple of members of the Envista Board asking, did I want to come back to Southern California, where I was when I ran 3M's specialty dental business, and then back to oral care? Was not looking to make a change. I was happily running what's now a very high-performing FTSE 100 company, and Central London was a pretty decent place to be. But I thought the opportunity was too compelling to ignore. And it centered around 3 fundamental beliefs, and I suspect the number of people in the room share these because you're at the conference. The first was the secularly attractive nature of oral care. It's this unique industry where it's characterized by almost boundless end user or patient demand, multiple statistics support that, coupled with a pretty bounded competitive set. So you have a $25 billion to $30 billion category that consistently, predictably grows 4% to 5%, and you only have a half a dozen real global players. So as a consequence, all participants in oral care do pretty well. Clinicians, dentists, on average, do better than your typical health care provider. Specialists, on average, do better than your typical GP. In the categories in oral care, where there's distribution, maybe 1/3 of the market, not many global distributors, they tend to do, on average, better than other health care distributors. And then the manufacturers, all of us do pretty well. So first, fundamental belief is that this is a great category, one with secularly attractive dynamics. The second was, knowing the business for 20 years, I knew this was a great company. It's one of 2 players that is in all -- that has material positions in all of the oral care segment. And Danaher bought the right businesses for the most part. So I knew it was a good company. And then the third is I thought it was a unique time both in the performance of the company relative to its potential and also what's a predictable, I think, softening in the oral care market, which I've seen a couple of times across my career. I thought those combined for a unique opportunity, not just for shareholder value creation, but also for customers and employees. This is a mission-driven industry, and the opportunity to change people's lives, as our customers do, makes for a pretty gratifying experience. That's what got me on a plane from Heathrow to LAX.

Fantastic. Very helpful. I'm going to continue to sort of have some high-level questions, we'll get a little bit more granular over time. But you mentioned some of the statistics around dental, I think there's always a debate amongst investors about the long-term growth rate of the market, the health of the market, there are cyclical components within clear aligners and implants. So when we think about the long-term growth rate, are you comfortable -- I think you might have alluded to earlier in some of your comments, 4% to 5%, I know that's not going to be year in, year out, but do you think that low single, low to mid-single digit is the right place to be with what your past experience tells you about the marketplace?

Yes, Jon, I do. I've worked in 3 of the big sectors in health care. I've worked in pharma. I've worked in oral care, and I've worked in medical products. And then outside of health care, a few other industries. Every industry has a cyclical nature to it. Bad industry, cycle down. Average industries have sort of a sinusoidal pattern to them. Most health care segments, and dental in particular, cycles in a northeast direction. So there's a predictable right now softening of the dental market. It's driven by the post sugar high from COVID and the lull that comes from that. It's driven a little bit by the unusually high interest rate environment. And then it's driven by some country-specific exogenous factors. The 3 biggest developing markets being Brazil, Russia and China, each of them going through their own sort of turbulence. But over time, those who have been in and out of this industry, investors who've put money into it, it's a predictable grower.

Okay. I said we're going to get a little bit more granular over time, so I'll move to Envista's portfolio. And I think that's what's kept me a supporter of the stock. I just look at some of the assets and it's #2 player in implants, of meaningful scale. It's a $0.25 billion clear aligner business. It's an oligopoly in wires and brackets. And then you've gotten smaller, arguably, in some areas of dental where you might want to be smaller, right, on the equipment side of things. So if we think about Envista's portfolio relative to that 4% number that you just gave, give or take, for the dental market, are you working with the collection of assets in your opinion that might allow you to grow north of said dental market growth?

Yes. I mean I would say 3 things with respect to portfolio. The first is, this is a dynamic market. You just feel it in today's agenda, seeing the different companies and the innovation that happened. So you have to continually be working on your portfolio in this market. And every couple of years, different sectors will be hotter than others and you have to have the scale, both in terms of your product portfolio, but also your geographic reach, to access those different markets that will be hot at any time. The second thing I would say is that the core portfolio of Envista is very good. I think, objectively, it's the most complete oral care portfolio amongst the major players. But the third thing I would say is there are some segments of the market now where we're under-indexed that I think we'd like to have more exposure to. We're very highly indexed on clear aligners. That's helpful. We're the second largest player in that. We're well-indexed on premium implants. We're less well-penetrated in value implants, in particular, in developing markets. That's a very fast growth category right now. So constantly looking at the portfolio, we'll continue to do that, adding new product lines, either organically, like we did through Spark, or M&A like we did with our biologics business, and then trying to strengthen developing markets exposure over time.

When we think about the current portfolio, what would you cite as the key growth drivers? And I don't mean that as an obvious question, like, well, look, Spark's growing really quickly. I just mean there might be referencing that. But are there underlying assets that maybe investors aren't paying attention to with some levels of improvement that you can sort of pinpoint and say, growth opportunity or growth potential to call out?

I mean you saw it across today's agenda, the 3 fastest growing parts of the market right now are clear aligners, intra-oral scanning and value implants and developing markets. Spark is a -- it's a great story. I can applaud it because I had nothing to do with it. Five years ago, every dental player knew that the clear aligner opportunity was going to open up from an IP perspective. Every one of us made it a top priority. I know that having led one of the competitors. But the folks who came before me at Envista built this thing. And it took a substantial commitment of attention, time and capital. There's a couple of hundred million dollars into that. And I think that will be a big tailwind for Envista moving forward. On the intra-oral scanning side, the company did a good acquisition 2 years back with the Carestream piece. That's about -- intra-oral scanning is about 50% penetrated now, so a lot of runway ahead there. And I've already commented on the opportunity here for value implants for us.

Okay. And I want to take a step back, looking at your history, you spent time as President of the Oral Care segment in 3M. You're now coming back into the dental environment some years later. Maybe just talk to us as what you would point to areas of dental that are most exciting to pursue to capture. And then on the flip side, and I'm not saying you were there so many years ago, but what's really changed the most over that period of time?

Yes. So I mean it's -- I'm on week 4 now, and it's been a fun return. My second day on the job, I was in New Orleans with you at the AAO. And then from that, I went to Barcelona for a big Envista summit. And then in New York meeting investors this week. So a couple of observations based on that rechristening, if you will. A couple of things that have changed, a couple of things that haven't changed. The clearest most visible change is the digitization of oral care. It was one of the last health care categories to fully embrace digitization. It really started about 20 years ago. But you see it today, every practice, whether it's general dentistry or one of the specialties, begins with a digital x-ray and an intra-oral scan. Most treatment planning now is done completely digitally, most typically with some AI support to it. And then most therapeutic or the treatment component of that had some personalization. Walking around the AAO floor, the number of 3D printing companies, the number of dental monitoring companies, the number of treatment planning companies, it's very, very exciting. So that is probably the biggest change. What hasn't changed in the business is the structural nature of the industry, this combination of huge unmet demand, a regulated business, so it's hard to create global players, the regulatory environment being different country by country until you just have structurally a very attractive industry. And the same folks that have been leading it now since I was last in it are still generally the leaders today.

Are the ones that are front and center.

Yes. That's why I was so anxious to get back.

And so to sort of pull in the thread of coming back, you get the call from the Board, you're coming with a fresh pair of eyes, Envista has been on that journey over the past 12 to 24 months. I'm just curious what you would cite as opportunities for improvement for the enterprise.

Yes. Let me give you a balanced view of what's working and then what we're working on.

Okay.

So the things that are working, we touched on, it's the right portfolio, it's the right collection of products, and it's the right global reach. We're in generally the right market. The second thing, being a Danaher company for the first 15 years of our lives, the trains run on time. This is a very operationally competent company. Look at the balance sheet, in good order. Look at any of the canonical operating metrics, customer service, working capital turns, cost of goods sold, all are in good. And the customer centricity and the market positions, as you referenced, it's nice to walk into a company that has a top 3 position in every category. That's all working well for Envista. A couple of things we're working on. Our biggest, most profitable business is our Implants business, in particular, our premium implants, Nobel Biocare. And it is not growing in North America. Businesses with 75% gross margins when they're growing, they have a built-in margin accretion for the enterprise. When they're contracting, it works against you from a margin perspective. Got to get North America growing again. Second thing is we have this perverse impact from a very fast-growing clear aligner business that right now is also margin compression, because it is dilutive to the overall Envista margin. We know from studying the track record and history of align that this is a scale-intensive business, you get to a certain scale with a clear aligner business, it shifts from being a headwind to a tailwind. We got to keep this thing growing, we've got to stick to our convictions, continue to fund it, and it will turn to a big cash generator for Envista. Third thing is the organization right now, it's been a tumultuous couple of years for oral care. It's been a tumultuous 18 months for Envista. Change of CEO, we have open CFO and President roles for Nobel. It's a lot of change for an organization. Those are 3 of the more important leadership positions. So we have to get the team back together, stabilize and get this thing pointed back in the right direction.

And maybe to build on that last point, on the earnings call, we heard you talk about customers, colleagues and operations. And earlier in this conversation, you talked about the customers, right, or even spending time with customers. You mentioned being out in Barcelona. If I pivot to colleagues, there are some openings and some important ones, right? So when we think about a permanent CFO, when we think about a new leader for Nobel Biocare, like, any updates or rough time lines that you're willing to share with us on how that might play out?