Envista Holdings Corporation (NVST) Earnings Call Transcript & Summary

You're allowed to if it's a piece of sales collateral. But otherwise, you got to use real employees, real...

Employees. Got to be...

Dentist or the dental tech down there, she's real customer or...

I think top left is fake.

Yeah top left.

Top right and bottom left, I think are real. I think that's an employee bottom left sitting in the chair of a patient.

That's right.

I recognize them.

All right. Good morning, everyone. We'll get started here. My name is Jeff Johnson. I'm one of the senior medical technology analysts at Baird. And our next presentation this afternoon is from Envista Holdings, a leading manufacturer of dental consumables and equipment. With us from Envista today, we're happy to have CEO, Paul Keel; and CFO, Eric Hammes. Paul, I'll turn it over to you if you have any prepared remarks for a few minutes, and then we'll go straight into Q&A.

Jeff, I have no prepared remarks.

What I'd like to hear. All right. So straight into Q&A. And if anybody in the room has questions, please feel free to raise your hand, ask questions. I can repeat them from here. So I think, Paul, you've been at Envista just over 2 years now. You've held an Analyst Day about 18 months ago. You laid out some LRP targets. I've been told not to ask about those LRP targets since there's an analyst meeting coming up 2 days from now out Mahwah. So maybe I'll cut through the first couple of questions I had here. But you have exceeded those LRP targets each of the last 2 years. So what's gone right in a macro that has not been overly supportive probably over those 2 years?

Yes. So as you mentioned, Eric and I both joined Envista a little over 2 years ago. We grew up in dental. So in and out of dental for 20-something years. And we wanted to come back to dental. Our thesis was threefold. And that is what our first Capital Markets Day in March of 2025 covered. tenet #1 of the thesis was that dental is a fundamentally good category and that the air pocket in '23 and '24 was predictable after the COVID disruption and that the market would generally return to its consistent pre-COVID long-term growth rate. Second thing we believe is that Envista was a fundamentally good company. We knew the assets well, having grown up in 3M's business. We've competed with this company. We tried to buy many of the components of it. And we thought that it was a good set of assets that could be managed better. And third, consistent with your question is we thought, okay, better market, better managed company, the financial results ought to get better as well. And looking back across the last 2 years, I would say the thesis was generally right. A couple of the components have played out more clearly than others. I think there is credible evidence that the market is better today than it was in 2024, not yet back to 2019. You'll probably ask more questions about that. Second, as I think the middle part was absolutely true that the strength of that portfolio now has become clearer over the past 2 years. We put a lot more money into new product development, a lot more money into the commercial front end. And we've now gained share across the portfolio, most categories, most years. And then third, probably most visibly is, yes, the financial performance is better pretty much across the P&L. And then Eric and his team have done a lot of good work on the balance sheet as well. So I think broadly speaking, the original thesis was correct.

Yes. No, that makes sense. Let me pull on that string. You said you think the market is in a better place than it was in 2024. Maybe if we just go around the world here on your 3 main -- 4 main segments, consumables, do you feel like patient demand from a U.S. or global perspective is better or worse than it was in 2024? It would seem our checks, I'm not sure volumes have really picked up much in the last couple of years.

Yes. No, I think our checks would say about the same. Many nice things about dental. One is there's great data, especially in the U.S. on data, you can just pop on to BLS and you can pull down total dental procedural spending by year. You can even see procedure inflation by year. You can just ask ChatGPT to pull it all down for you. And it gives you a good indication of how close the market is back to its pre-COVID levels. The 2 things I think that you would see is that dental almost always outgrows the broader GDP. That has again been the case 2 of the last 3 years. And inflation in dental is almost always above CPI. That, again, is true. Now when you break it down to the categories that you asked about, consumables is one of the covered categories in dental. About 60% of all dental gets reimbursed in the U.S. from private insurance. In other markets, there's a bigger public insurance component of that. And so consumables typically does better on a relative basis than other parts of dental when macro uncertainty is high. It's not sensitive to consumer sentiment because it's covered. I think you're seeing exactly that. Most of the consumables players, us included, are overperforming the long-term trend for those 2 reasons. One, dental inflation is a little bit higher. So you get more price in consumables. And then secondly, it's not impacted by consumer sentiment like the specialty categories, which you'll probably come on to.

Yes. Okay. So let's -- as you talked about consumables there on the equipment side, obviously, a very big pull forward in '22 into '23, even had maybe a couple of years of digesting some of that pull forward in that. Is that where you feel like now we're back to at least that market sustainably being a growth market even if it's low to mid-single digits, something like that?

Yes. No, you hit the nail on the head. During COVID, clinics were shut down, nobody bought equipment. When the lockdowns were lifted, some dental providers also got government funding. Everybody bought equipment, record year for dental equipment in 2021 and then the air pocket you talked about. The diagnostic category was in contraction for 2.5, 3 years. Second half of last year, it started to turn back to growth. And so right now, it's the fastest-growing category in dental because of 2 reasons, principally, your question, easy comps, very easy comps, so growing as a result of that. The second is it's a category that is getting a lot of innovation right now, both on the hardware and the software side. All of the AI things we're all familiar with apply in these large data sets you get, in particular, from a 3D CBCT image. You can draw a lot of clinical findings with a bit of math. So yes, right now, diagnostics growing mid- to high single digits. Over time, that will settle back down into its long-term low single-digit growth rates.

And where is the willingness to spend, especially on some of the larger DSOs and other kind of large customers on those diagnostics and other kind of equipment. We've heard kind of some mixed things over maybe the last 6 months or so on slowing down some DSO expansion, things like that. Just where do you think the large customer is at in making those purchases?

Yes. I mean the answer is baked right into your question. When the DSO segment is well funded, they use that funding to open clinics. If you open a clinic, you need to buy equipment. Specific to the U.S., I would say that the DSO market is still under pressure. In that big run-up year, Jeff knows this well, in 2021, a lot of private equity dollars went into DSO at very high valuations. You then had that air pocket we've talked about. And so that put pressure, I think, on the balance sheets of a lot of U.S. DSOs. So yes, I would say that market is still working through that.

Okay. And as we talk about kind of the equipment and consumables part kind of as the core part of your business before you get into specialty, any difference U.S. versus Europe versus rest of the world, if you just kind of think from a high level, those combined core businesses?

Yes. Specific to us, yes, there's a difference. In those 2 businesses, in particular, we overweight to North America. So our -- we're the #1 player in diagnostics in North America, and it's our -- by far, our largest market, 3/4 or so of our business is generated in North America. Consumables, also our biggest market is North America. So those 2 businesses for us are growing high single digits right now. So as the U.S. returns to its more stable kind of low single-digit growth in those 2 categories, we're trying to increase our penetration in other markets, which will help kind of amplify that growth.

Health of those end markets, though, in Europe, we've heard mixed things on dental spending in some European countries, just generally speaking, Europe holding in?

Yes. If we're going through the world on dental spending, I would say fastest growth developing markets ex China right now, second fastest growth in Europe, third fastest growth low single-digit North America. And then the slowest market, which I'm sure you'll come on to is China because of VBP.

Yes. A couple of things there I want to go to. But Eric, let me just ask you on pricing. Paul has kind of alluded to it as inflation. But you guys, I think, are running at about 1.8% consolidated company-wide pricing this year. It's a little bit hotter probably than we'd expect longer term. But where do you think pricing settles out on kind of a pure apples-to-apples or like-for-like basis over the next couple of years? Can you take a third round of price increases next year? I know you're just into your second year of price increases here in the last couple of months, so hard to predict 9 or 10 months from now. But is this a market where every year, you should be able to push price or the last couple of years with tariffs and oil prices and that giving you some cover to maybe do it a little more or more frequently than you might going forward?

I think 3 things. One, at the market level, as Paul talked about in terms of just the macro, our view is that long term, the dental market and what you see in terms of dental market price inflation, that's largely public data through the services side of dental, right, what's coming out from dental clinicians runs at or above CPI. We think that continues to be the case going forward. And then our price and what we're seeing, I would say, likewise from our competitors, we think, is durably around 1 point to 1.5 points of price over time. I think all the discussion is accurate in terms of just the fact that we've gotten a little more price because of some of the exogenous effects, right? We took a little bit in the tariff environment as many companies did in addition to actions in supply chain and G&A. And as we saw what we now believe is true, and here we are 6 months removed from the conflict in the Middle East, we believe that, too, is going to create some pressure, if you will, in general raw material markets. And so for that reason, we tried to get ahead of it with a little bit of a price increase midyear. But you can expect Envista to have a durable point of price somewhere in that range over a normal horizon. China side. China VBP is a dynamic that we're all managing.

All right. We'll get into that maybe in a few minutes. But Paul, let me go back on the dental implant side, just kind of the state of dental implant demand globally, if we again look at it, kind of U.S., Europe and rest of world. That market seems like it's been a little bit tougher here over the last couple of years from a demand perspective, but I would love your thoughts.

Yes. So I mean you can segment the implant world. Let's do it by premium versus challenger and then let's do it geographically, as you asked about in your question. So the premium piece, of course, much more concentrated from a supplier perspective. The 2 main suppliers are most of the share, that's us and Straumann in premium. And it is right now globally growing low single digits. The challenger side, also about half the market, much more fragmented from a supplier perspective. You probably need to get to 7 or 8 suppliers to get to that same share captured by the 2 main ones in premium. But the category grows a little quicker, maybe a little bit better than mid-single digits. And the combination of the 2 globally is a mid-single-digit growing category for implants. If you then go across the columns, break it down geographically, developing markets, by far the fastest-growing category or geographic mix right now, double-digit growth in emerging markets for implants. Second fastest right now is Europe. Procedure prices tend to be lower in Europe. And so isn't as impacted by consumer sentiment as it is in the U.S., which is the slower growing low single digit for implants right now. And then again, slowest growing from a revenue perspective right now at this particular instance because of VBP, I would say, is China, although it's the one of the fastest-growing unit volume markets, again, because of VBP, and we'll unpack that.

Yes. Again, we'll get there. On the implant side, so I think 5 of the last 6 quarters, you guys have been low single digits on your dental implant global revenue growth, probably being bolstered a little bit, I'd assume, by Procera and by some of the biologics in that. So help me unpack premium implants, I would peg you guys at kind of low single-digit growth, maybe a little bit below market. I don't know if that's fair or not. And Challenger, it's just -- it seems like Straumann gets most of the challenger growth, and it's tough for anyone else to get much growth in Challenger over the last year or 2. Again, just take your thoughts on that and see how you answer it.

So I would agree with your first. I think I might modify your second. So in the first, especially in premium, the workflow gets sold, not the screw. And so the 2 main players, the reason they do so well is because they have full end-to-end workflows. They have a diagnostic solution. In our case, we have a very good diagnostic business. In the case of Straumann, they just bought a good intraoral scanner to try to strengthen their front end of the workflow. And then there's a very important software piece, a treatment planning step where you take the CBCT, you take the intraoral scan and you develop the treatment plan for the patient. This is oral surgery, very important that you place the implant correctly, so you don't impact nerves or anything like that. And then there are other digital steps that attach to that. There's different equipment you can use to design if you want a placement guide to make sure you get that implant exactly right. There are some devices that will physically help guide your hand as you place that implant. We have a good solution there. And then there is the products that go into the treatment. There is the screw which is the implant. But on top of the implant, there's a component called an abutment. And then like any other medical procedure, there are regenerative biologics that support the healing and the preparation of the site. There's growth factors, there's collagen matrices, all of that. And it's that whole workflow that you sell. Correct in your question is that individual components of that workflow grow more quickly than the screw itself. The regen part industry-wide grows very fast. We have the highest share in regen in North America. So that part of our business is doing very well. We're particularly good at the digital side because of our diagnostic business. That's growing very well. And then you're right, the implant itself part of that is the slowest growing part of that workflow right now. The second question that I was going to take a little -- was going to modify is I think many people are growing faster in challenger than in premium. Our challenger business outgrows our premium. You are correct. Straumann's challenger business called Neodent grows faster than its premium business. There's no other big player that has both. So...

I guess let me phrase the question this way. I would think if you needed to bolster your implant business, it would be more on the challenger side.

No, that's correct. Yes. That's simple math, where we over-index on premium call it, 85% premium, 15% challenger. As I mentioned, Challenger grows faster than premium as a category. So we want to increase the percent of our total business from Challenger, so that's the weighted average of the 2 grows.

At this point, it's only, what, 10%, 15% of your category?

Yes. About 15%, yes.

Yes. And from there, can that be done organically? Does that have to be done inorganically? And inorganically, does it have to be done by cobbling together a couple of different businesses? Just how do you attack that issue, which is not an easy issue to solve?

Our primary strategy is what we can control. That is to grow it organically. And as I mentioned, it is growing organically nicely, faster than the premium side, but off a smaller base. And so Challenger tends to be an active category in dental from an M&A perspective. Our 2 Challenger businesses, we got through acquisition and we'd look at M&A in Challenger. But we have such a strong organic value creation opportunity in Envista. Our primary use of capital is organic growth. And then our second use is to do accretive M&A. We did 3 small bolt-on acquisitions over the past 18 months. All 3 were in implants.

If you had to do a decent-sized deal in Challenger implants, could something like that be done that isn't dilutive? Or would you accept a little dilution to do that?

No, I wouldn't do a deal that had unattractive return.