Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

I think the music will die down. We'll get going. Jon Block from Stifel. Good to see everyone again for the afternoon. And for our next session, we're excited to be rejoined by Envista's CEO, Paul Keel. Paul, thanks for coming. I'm sure you remember, you were appointed CEO at Envista a little over a year ago, and you did me a huge favor because we were really hoping Envista was going to come. You only had a month or so on the job and you still attend the Jaws & Paws. So I'll start there. At that point in time, a lot needed to change, a lot needed to get, call it, accomplished in a relatively short period of time.

So I'll start like State of the Union. Walk us through what has worked out well over the past 12 months and maybe what's proven to be a little bit more challenging in the seat so far?

Okay. I will begin by reciprocating the thanks to you, Jon, and to Stifel. It's a great conference, one of the more important dental conferences. And right now, the timing is perfect with so much going on in the macro. It's good to bring this all together. So thanks for doing that. So yes, when I was with you last year, I think your first question was what drew me back to dental? I've been in and out of dental for 20-something years now. And I told you there were 3 kind of fundamental beliefs and it will answer your question about what has come in as planned and then what has been a surprise. So the 3 fundamental beliefs first started with the industry that dental remained a secularly attractive market and that the question marks if something fundamentally had changed to dental post COVID that led to the slowing in '23 and '24. That was my first belief. I don't think anything has fundamentally changed in dental. The second core belief was knowing the Envista portfolio over the years, my view is a fundamentally good company. We have made some mistakes that all was catalyzed by the guidance coming out of COVID, and that led to sort of some downstream consequences, but I thought the core portfolio was still really good. And then the third is I thought the timing was good. I thought this cyclical rare downturn in the underlying dental market, coupled with the capital markets reaction to the public players led to a unique opportunity. So now fast forward a year into the role. And I would say most of that thesis has played out as expected. I think in terms of the dental market, as I said, there's a couple of important trends that have accelerated post-COVID, but the fundamentals of what make dental an interesting category long term unchanged. The core positions that Envista has in what I think of as the more interesting segments of dental, specialty, both implants and ortho. We like our consumables business, and we think the diagnostic piece kind of stitches it all together. I think all of that, that was true. If there's one thing that was a surprise, and it was probably the same for everyone in the room is nobody saw the macro uncertainty of Q1 tick up. And so now there's a question of which of those kind of prevailing forces, the return of global dental to its long-term historic growth versus the impact on interest rates and consumer confidence from the macro uncertainty, how those are going to play out across 2025. But most of the things inside our control at Envista played out about as I expected.

Okay. Okay. So you're mentioning some of the questions around the industry and trends, and so I'll push a little bit on trends. You talked about 1Q '25 industry trends stable with 2H '24. That was sort of the commentary. How about end market demand trends of late? And anything to call out through the various geographies?

Yes. Let me spin through both the categories, the procedure categories and then do geography. So for us right now, our orthodontic business is the fastest growing. Of course, the clear aligner piece has always been a particular accretive grower for us. That continues. And then we have seen a bit of an acceleration on the bracket and wire side. We can talk about whether there's any shift in terms of orthodontist preference for the different therapies, but orthodontics is a faster business for us. Our consumables business is doing very well right now. As you -- as the audience will know, about 60% of all dental is reimbursed, either private insurance or government pay. So it's not uncommon to see consumables, which is one of those covered categories do better when uncertainty goes up. So our consumables is doing pretty good. I would say implants is in the middle -- both our premium and our challenger business had accelerated across the second half of 2024. So slow, steady improvement on implants. And then the one for us that's still in contraction is diagnostics in the equipment category. Now to give you the same answer geographically, no surprises there. Fastest for us is certainly developing markets. Let's say China to the side because there's unique aspects there with VBP, but pretty much every emerging market for us right now is accelerating. Second for us is probably Europe. Europe is doing a little bit better than the U.S. And the one that is still stable, but slower than the others would be the U.S.

We just had -- I was joking, I hate using an N of 1 or an N of 2, but we just had a dental panel. And we had 2 general dentists up here, and they sounded pretty upbeat on what they were experiencing from -- and they acknowledged a very slow '24. When I push them when things might have started to turn or thaw, it was sort of like late '24 into early '25. Any green shoots, Paul, that you can point to here in North America? Or is it -- you know what, no, for now, it's still stable at best?

Yes. I mean, listen, if we were having this conversation in December of last year, I would have told you a lot of green shoots. The 3 macro indicators that are most important for dental are unemployment rates, second are interest rates and the third is consumer confidence. In the second half of last year, all 3 of those were yellow heading into green. We had 5 successive months of consumer confidence improvement in the U.S. across the second half of last year. We had 3 Fed fund cuts across the fall and unemployment was at historic lows. So we were of the view that '25 was going to be a pretty good year for dental. The question mark then came kind of through that macro uncertainty in the whole tariff environment across Q1. As the audience will know, we've now had 5 consecutive months of consumer confidence degradation in the U.S. Yesterday, we had a surprisingly positive rebound of consumer confidence. The Conference Board reported something like a 12-point bump. So maybe that's headed the right way. Unemployment is still very, very low. And your guess is good to mine as what's going to happen with interest rates, but I think probably likely to continue to be supportive. So yes, I think there's reasons to be optimistic.

Okay. Okay. We'll take it. I'm going to bounce around and I'm going to go by division, and I'll start with your biggest or implants. Obviously, an important division, roughly 40% of revenue. I'm going to try to break it apart by premium and Challenger. Challenger 1Q '25 contracted after solid growth in '24. I think it was mostly a day's headwind. You had 2 fewer selling days. You remain confident in Challenger growth specific to 2025.

Yes. And I -- my view, parallel here is, I think the Q1 low single-digit contraction was principally driven by 2 fewer selling days. Our challenger business is heavily weighted to the U.S., and that's where the fewer selling days played a role. So we'll see. But I think we'll have -- we'll return to growth in that business. We've been gaining momentum.

And how about -- and of course, I'm throwing stuff actually on a dental panel, I heard about 30 minutes ago, but I think none of this will come as a surprise. 2 dentists up here doing a lot of implants, 1 close to 500 a year. The other one, I think, was 180 placing a year and both talked about probably more value than premium at their practice. They didn't see that changing in their view in the near term. For you guys, you're under-indexed to value, right? What's preventing you with a solid balance sheet from maybe pursuing some assets in that area? Is it the asks are still too high in this environment? Maybe talk to us on what's prevented Envista from getting bigger in a space they've talked about is maybe making sense over the past handful of years?

Yes. Maybe I'll start my response just from a capital allocation perspective. So Envista, like a lot of the dental companies, generates more cash than it can consume. Our first preference is to put surplus capital back into organic growth in high-margin businesses like these that have secular underlying growth drivers. By far, the highest risk-adjusted return for any marginal dollar for us will always be organic. In 2024, we decided to put an extra $25 million into accelerating growth in our highest margin businesses. And then the improvement that you noted in both our premium and our challenger businesses are a consequence of that. Now we still have money left over after we fully fund all of our R&D programs and all of our sales and marketing efforts, and that does make M&A available to us. We didn't do any M&A in 2024. That wasn't because of availability of assets. It wasn't because of multiple. It was just because I was squarely focused on stabilizing Envista and getting the core operations improving. We got 3 quarters under our belt now of improving performance, and that's allowing us to free up some more calories to think about inorganic growth. And for sure, Challenger is one of the categories we look at.

So organization is in a better place today with those 3 quarters to digest a potential deal there versus when you were first coming in and you had a lot of things that were top of the pecking order.

Yes. When I joined the CFO role and the President of our 2 biggest businesses were open, we're lucky to recruit 3 really strong leaders, 2 of whom I've worked with for 20 years. So yes, I think we're in a much better place than we were 12 months ago.

Okay. On the premium side, I was going to ask why -- not why North American lagged, but I think you've really already addressed that with the yellow and the consumer confidence and the interest rates. So I'll just go and ask my second question specific to premium. You came in and you said I want to turn around this business. And you did. And I think you did it quicker than maybe some people had anticipated. But what work remains to be done? And again, this is more specific to the premium side of the equation.

Yes. Well, listen, I think that's a generous characterization. I'm not sure it's empirically rigorous. I would say we're making progress, but we're not turned around. I think it's now 4 consecutive quarters of accelerating growth in our premium business and 2 positive quarters. So pointed in the right direction. But that's a good category. I think premium, once total dental returns to its longer-term historic growth ought to be a 4% to 5% grower, and we're not growing at 4% to 5%. So what's worked for us and what more do we have to do? Three things have worked for us. The first is, as I mentioned in my previous comment, we recruited a very good leader, a guy named Stefan Nilsson, who built the largest DSO in Europe, Coliseum. We recruited him across. I lived in Zurich to lead Nobel. And having a really customer-centric leader in that business is so important. Implants is such a direct customer-centric business, having been a customer of both us and Straumann, having Stefan lead it, that has reaped good rewards. Second thing we did, as I referenced earlier, is we prime the pump. Even at a time where Envista was having some trouble with margin contraction, we thought the right risk-adjusted bet to take was to put more money back into Nobel to try to get that growth acceleration that we just talked about. And in a 65%, 70% gross margin business like that, if you get a little bit of top line growth, you can't help but have margin expansion. And so we think that will prove to be a reasonable bet that we took. And then the third thing I think we're getting better at in Nobel is just getting back to good old-fashioned operational excellence. The sorts of things that built Danaher and had helped Envista have such a great start as a public company, having the trains run on time, clear accountability, data visibility, a stable set of priorities. We had gotten away from a lot of that in '23 and early '24 with all the chaos that was in the company. So those are the 3 things that are working well in Nobel. I would say the 2 areas we'd like to do even better. The first is there's a lot of opportunity in the global premium implants world. And we still are not tight enough on the prioritization of what we're going after. Every developing market is just a cornucopia of opportunities. Of course, the U.S. and Europe are such big markets. We're very focused on those. And then there's many interesting adjacencies to the core implant business in that category, regen, treatment planning, equipment. So the first thing I think we need to do even better on is get a tighter list of priorities and strategies, and we're working on that in this year's strategic planning cycle. The second thing is we just have to make the results even better. Of course, we have an inspiring peer in our business who performs really well and shows what is possible in this category. And premium implants is an oligopoly. There's only 4 players, and there's only 2 big players. So there's a lot of additional performance that we can deliver.

I think you mentioned 4% to 5% is what you think the growth can be in premium implants. You mentioned some initiatives at the company. At your Capital Markets Day, you had a slide that showed a lot of future innovation potential for Nobel. Can we think about some of that innovation starting to play out as early as next year, 2026?

Yes. So of that $25 million incremental investment, a decent chunk of it went into R&D. The biggest piece went into upfront commercial activities, filling sales territories, more marketing activity. The second biggest chunk of it was for clinical education. We have -- we brought back the Nobel Symposium. We had stopped doing that when we're trying to save our way to greatness. That's happening this week in Las Vegas. We already have 1,400 doctors signed up from around the world. So that was the second big piece. The third piece of what you're asking about is R&D. And there's 3 areas that we're investing heavily. The first is just the implant portfolio. You can never have all of the SKUs covered in terms of dimensions, mandible, maxillary, zygomatic implants, Conical parallel. There's always some gap in your portfolio. That's the fastest turnaround new products. Those we're working on. Those will have an impact in 2026. The second category is around regenerative. That's probably a larger value creator long term, but the development cycle is longer. You get into Class II, maybe even biologics in that category. The regulatory path is a little more complicated. And then the third piece is the software that stitches it all together. We have an advantage there because we have a diagnostic business that all they do is think about image capture and software. So we leverage our relationship with DEXIS to try to accelerate development there.

Okay. So that's sort of the road map when you think about the innovation [indiscernible] implants.

Exactly right.

Okay. I'm going to shift gears. I'm going to go over to tariffs and come them back to the business. like many other global players, you're impacted by tariffs. On the call, you talked about, hey, the company's ability to mitigate the impact from supply chain flexibility, G&A productivity and price increases. And then you said, look, this is going to take a little bit of time to implement. So you sort of walked us to the different margin profiles between 1H '25 and 2H '25. Just to level set, is there a gross tariff figure that you can share with investors when we think about the amount that you're offsetting?

Sure. I mean, at any given time, we know what the tariff exposure is from tariffs that are currently in force and then you could annualize that, you could multiply it by 12. But as we've learned, that changes day by day. So on the Q1 call, I think we had a couple of questions from the sell side about what was that number. And I said something like I could give it to you, but it's going to be different tomorrow. And sure enough, it was a week later, it was very different. So we think the much better useful information for investors is to understand our categories of exposure and our ability to navigate those categories. So right now, our biggest exposure is still U.S. manufactured goods that we sell in China, and that's concentrated on our Nobel business. Nobel has 2 main manufacturing sites, one in the U.S., one in Sweden. So our mitigation action right now is shifting supply that goes into China from our U.S. site to our Swedish site. We'll have to see. Maybe the China situation stabilizes further and the Europe situation gets hotter, we'll start moving production honestly back to the U.S. But that's our biggest category. The second biggest category are raw materials and semi-finished goods that come out of China into U.S. factories. That now is less of a concern because China came down even further on the implant side or on the tariff side. And then our third biggest exposure is products that we make in our European footprint that we sell in the U.S. That category right now, we're spending a lot of time on because of the threatened increase in tariffs to the EU. In every case, our 4 biggest businesses have manufacturing on 2 or 3 continents and all of our products or most of our products, their registration allows manufacturing across all the sites. So we have pretty good but not perfect flexibility to move manufacturing if we need, which then comes back to your part of the question. Big numbers, it probably takes about 6 months to really move that. And so that's why you get this lagged impact. You get the tariff impact in the first 6 months, you're then able to mitigate it in the second half.

Okay. That was great. That was great color. Very helpful. I'll just sort of push a little bit. That recent tariff news you reported and to your point, is like a week or 2 later, you had the U.S.-China news, and that's where you have a good amount of exposure, as you just described. So does that recent tariff news help increase the confidence around the 2025 guidance? Because you had said that confidence moved, I think the words were a bit lower on the 1Q '25 earnings call due to tariff headwinds, supposing some of those tariff headwinds subsided a bit. So again, does it help increase the confidence around the '25 guide, the recent news?

Yes. So when I think of confidence or I think of risk, I think of it in terms of the confidence interval or the standard deviation around the expected results. So I think our expected outcome or guidance for the year, I'm still confident in. On the Q1 call, the error bars were wider because there were so many different outcomes or potential outcomes. Is the tariff situation less volatile than it was in Q1? Yes, I think it is. I still think there's risk there. But I think the distribution of potential outcomes is probably tighter than it was a month ago.

You're much more articulate framing it than I was. So thank you. I'll take it. Okay. And then I'm trying to ask a handful of companies this question today and tomorrow. What about the impact on 2026 from the tariffs? And again, there's so many moving parts, what's today has gone tomorrow. And we're trying to ask that question because the pushback I'm getting from investors is, hey, look, the inventory dynamics may blunt the '25 impact, right? So do we just sort of annualize the '25 impact? Or is it materially different because of the inventory dynamics when we think about '26?

I think in the case of our business specifically, the inventory piece is not a major factor. And I say that for 2 reasons. First, 2/3 of our business is direct. There is no inventory. It's doctor orders it, we ship it. So it doesn't come into play. And then the second, in the parts of our business that do go through distribution, that's our consumables business and part of our equipment business. You'll remember last year, we brought down those inventory levels about in half. And so the weeks of inventory in the channel are much reduced. As -- how does 2025 tariffs impact 2026, there could be 2 kind of countervailing impacts. One is if indeed this does -- the tariffs do trigger an inflationary environment, there ought to be a tailwind to growth. There ought to be more available pricing to the suppliers. That would be a benefit. And then, of course, the offsetting effect from that is increased input costs. It should be more of a hit on cost of goods sold. So we'll get around to 2026 guidance after we deliver 2025, but I don't think inventory is going to be a major player.

Okay. Okay. Fair enough. And maybe one more just tariff related. You had mentioned a handful of initiatives to help mitigate the tariff impact. One of them was price. And price has been like challenging elusive in dental, right, for the past handful of years. And looking through your information in 10-Qs, it seems like you got maybe right around 1% for price. What was the -- what were you implying, Paul, in terms of how much price you would need to take in order to offset the tariff headwind? In other words, is it like 1 goes to 2? Does 1 need to go to 4? And how do you get price in an industry where that has seemed to be pretty challenging over the last couple of years?

Yes. So maybe 3 thoughts on this. So one, opening up the aperture across a longer period of time in dental. The growth model in dental has always been GDP plus. If GDP globally is 2% to 3%, dental has always grown 3% to 5%. And the delta is usually price. Most dental players got 1 to 2 points of price pre-COVID. That was pretty consistent. You're correct that in '23 and '24, that was harder to come by. We had a lot of investors ask us this question specifically about price, and that's why we've started sharing it when we do the waterfall. From memory, it was something like 50, 60 basis points of price in 2024, and it was the 1 point of price in Q1 that you referenced. So price is available in dental. How much more would be required to cover tariffs? That's the net of what is the tariff and how quickly we can move our supply chain. We think -- yes, we think in a tariff-inflated environment, we'll have to get more price than what we got historically. But by far, the bigger lever is us moving supply across our global footprint.

Where you feel like you have that flexibility through the different continents in the product registration...

That's the bigger piece of work.

Okay. I'm going to pivot to see what I can get to in the last 4 or 5 minutes, Spark. In the current environment, it seems like it's growing mid- to high single digits year-over-year. That's ex the deferral noise as I put it. Are you still tracking to turning EBIT positive for Spark in the back part of this year?

Yes. A number of our investors in the meetings earlier today asked me that question. I'm on record so many times saying we'll be profitable in the second half that if we're not, you'll be asking that question of somebody different this time next year.

Okay. And then longer term, I mean, one is turning the corner and turning the corner on this $250 million business is obviously important to overall Envista. But I think for a lot of the players in clear aligners, like go back a number of years, as you and others were thinking forward, it was, hey, we're probably going to be growing -- the industry is probably going to be growing 15%, and we might even be growing north of that because we'll be taking share. How do you go from just turning the corner on profitability to ultimately scaling this to more representative of SP&T margins of 15% to 20%. Talk to us on how you do that in a somewhat modest volume environment and what that may or may not mean for Spark pricing?

Yes. So 2 thoughts. One, let me give you a general clear aligner thought, and then I'll give one specific to our business. So the general clear aligner thought is investors are at an advantage here because you have 2 publicly traded companies with multiple reporting periods where you can map out what does margin look like at different revenue levels. Align, of course, reports quarterly and have been doing it for 20-something years. And then Angel reports every 6 months, and they've been doing it for a bunch of years. So very easy for you to see what an algorithm looks like growth against margins. That would be thought number one. Most of these businesses are similar. The manufacturing footprint for, as I understand it, Align, Angel and us is not that dissimilar. The second, specific to us, improvement in margins for us is not -- the guidance we give, the turning profit in the second half is not volume dependent. The much, much bigger lever is our ability to automate the global footprint we have for our clear aligner business. And there's a very good pipeline of different automation pieces that are in place. We have a pilot facility in Pomona, California, where we test and prove out each of these steps. And then every line, we have 3 plants around the world, Mexico, Czech Republic and China, all the lines are exactly the same. So we start with one plant, one line, prove it out, expand it across that site, move to the next plant and do it again. And we now have 20 straight quarters of sequential unit cost reduction. And so unless statistics simply don't work, we have confidence that, that trend line will continue and turn positive.

And that will turn positive. Is that still what takes this business to 15% to 20% margins longer term? Or do you need to be, pardon the expression, more price disciplined? Or have you started to be more price disciplined in the field with Spark?

So yes, it is a competitive category, clear aligners. We choose to participate in a very specific segment of the clear aligner segment. We currently only call on orthodontists. And we do that for 2 reasons. The first is we have the largest market share in traditional orthodontics. We've had the #1 or #2 position for 60 years. And so we already call on every orthodontist. We already have a very capable sales force around the world calling on orthodontists. That's the first reason we focus there. The second reason is 75% of all orthodontic cases are treated by orthodontists. So it's like the old Jesse James, why do you rob banks? Well, that's where the money is. So that's where we focus, and we think that will lead to -- will be supportive of margin expansion moving forward, a more concentrated focus. Specific to your price question, there's kind of 2 different mechanisms of price in clear aligners. There's the ASP measure that many of us follow because that's how Align reports. That's revenues divided by total cases. That doesn't tell you price per SKU. So as Align does more simple cases, which tend to be more profitable because it has fewer revisions where you give away the additional aligners. As you do more simple cases, your profitability goes up, but your total revenue divided by total number of cases goes down, your ASP. On a SKU-by-SKU basis year-over-year, we tend to get price in clear aligners, just like we tend to get price in brackets and wires.

Okay. So there could be that mix dynamic a little bit...

Yes, I think that's at play.

Okay. That was very helpful. Guys, I'm going to end it there. I probably should have looked up. Any last minute questions for Paul? Okay. Paul, thanks very much for your time.

Thanks, everybody. Thanks, Jon.