We're gonna get started here. My name is Jeff Johnson, and I'm the Senior Medical Technology Analyst at Baird. Our next presentation this morning is from Envista Holdings, a leading manufacturer of dental consumables and equipment with a top- three share position across implants, orthodontics, dental imaging, and general consumables. With us today from Envista, we're happy to have Chief Executive Officer Amir Aghdaei and Principal Financial Officer, incoming interim CFO as well, Stephen Keller. Amir, I'll turn it over to you if you have a few comments you wanna make, and we'll go right into Q&A.
Great. Thank you for having us in here. September 19 is 4 years since we have become an independent company. Just for the—most of you probably know us a little bit about our history, but, Envista came about as an outcome of 30 acquisitions over a 10-year time period. These acquisitions were part of Danaher between 2004 and 2014. We spent over $7 billion buying these companies in various segments. Starting 2015, we started consolidating them under one umbrella, and by 2019, we created the independent company, Envista. Just give you, ground us a little bit, we have 4 different businesses, and we're reported in 2 different segments. We have a consumable business, number two, number three positions, and it has 4 elements into it. It's endo, resto, infection prevention, and small devices. We're in over 90% of all dental offices worldwide.
All of that is sold through distribution. We have an imaging business that has, again, three pieces into it. It's 2D, 3D, intraoral scanner, with a software umbrella that connects all of that. That combination is our equipment and consumable business, over 40% of our business. The imaging part is our number one position in the world with over 160,000 install base. So we feel really good about those two segments. What we have done since separation, refined the portfolio. We position it in higher growth, higher margin, and they're performing. Both of those at proxies, market proxies, or above it on both of those businesses. That brings us to our specialty business. We have an ortho business. For all practical purposes, we're the number two player on the ortho as a whole.
This is a combination of bracket and wire clear aligner. we've been growing double-digit for the past several years. We started from basically nothing in 2017 clear aligner, and now we're the fastest- clear aligner. our focus purely is on orthodontist, both on our bracket and wire and clear aligner. feel really good about that segment of our business, growing double-digit, and it's improving margin continuously. The last piece of our business is the implant. That's the area that we are going through a transformation. We are making serious changes, and this is—we have done that in other three businesses, and we are going through the same process on the implant side. Our goal is to get that back to proxies or above proxies by 2024, 2025.
You put that combination together, two-segment, 60% direct, higher margin growth areas, the other 40% through distributors. If you wonder why we have all these pieces together, the way we look at dentistry is it's an opportunity to really digitize this industry, take a lot of waste out of it. In order to do that, you have to start with diagnostics. When a patient walks in, if you have all the modalities, if you have software that you can pull all these different pictures together, then it gives you an opportunity to develop a treatment planning. You can do endo, ortho, implant. That's what we got. And then our consumable basically gives us an opportunity to open the door and answer a lot of needs that dentists have worldwide.
Since the separation, what we have been able to accomplish is about 450 basis points of a margin improvement, change the portfolio. About 100 basis points as a whole, the portfolio is growth compared to the reference industry. We have changed it, so long-term growth is about 100 basis points better than it was about 4 years ago, compared to proxies. In the past 3 years, the compound annual growth rate has been about 4%. This year is a little bit challenging, but our goal is, if you look at 2026, our goal is to get this business to be mid-single digit plus, high single digit with 22.5% EBITDA, and we feel really good about being able to get there based on the activities that we are undertaking.
It gives you- hopefully, it gives you a little bit of a feel. About 12,000 employees. Almost every geography you can imagine, we are in with a great set of brands. Envista is a holding company, so at the hand of dentist, you don't see any Envista product. You see all, yeah, Kerr, Sybron Endo, Nobel, and many other brands. Hopefully, that gives you a little bit of a feel for-
Yeah, no, that's a great overview, Amir. Yeah, no
S tarting who we are and what we do, to begin.
Yeah, you knocked out the first few of my questions, though, so.
Yeah, happy, happy.
Yeah, so let me try to rephrase here a couple of my questions, but you have done a fantastic job of repositioning the company into those high-margin, high-growth areas and the, you know, de-emphasizing the lower-margin, lower-growth areas. Is there anything more that needs to be done on portfolio management at this point? Any gaps or any areas left to de-emphasize either direction, I guess?
You know, portfolio management is something. This is a little bit of a – I worked for Danaher for quite some time before we became Envista and managed two different platform. Portfolio management is a standard process. We do that in an ongoing basis. We have a M&A committee that looks at all the target on a monthly basis, and. I think what we needed to do, the fundamental pieces we needed to do, we have done, but we're gonna continue to look at opportunities to reset, reposition ourselves. So just give you one specific example. In the past 12 months, we take a look at imaging as a whole, and say: You know, where is the competitive advantage? Where do we have a position that we can ask for premium prices, but also add value?
As an outcome of it, we decided we're gonna probably exit about 10% of the business. Lower, more of a commodity, margin is not there, and, and, you know, really, we are not competing. We are not a cost position player. So we decided we're gonna exit out of those geographies and double down. We have spent about $1 billion, I would say, in the last four years in acquiring companies, early investment, and we have exited about $400 million. We sold about $400 million, but also proactively exited probably about $150 million-$200 million. Just we exited without really spending a whole lot of energy on it. As an outcome, portfolio has become where it is. Moving forward, we have gap in our portfolio, very specific areas, but we wanted to make sure the fundamental is in place.
We feel good about it before we go add another billion-dollar worth of acquisition over the next three or four years.
On those gaps, I mean, an obvious one might be 3D printing. What else? Any others that you
So on the 3D printing, that's a really interesting. You hear a lot about it. We know the install base, we know where it is. So, you're a much better judge of this than I am. It took about, probably about 15 years clear aligner to become more of a standard treatment procedure. IOS, probably five years, and it's in its earliest stages. Still, with all of that, it is less than 30% penetrated. 3D printing at this point is a technology that has yet to become mature, and purely it's because of resin, it's because of component and material. If you get to a point that you can really print same-day crown, then you can see the breakthrough. So we are working with SprintRay very closely.
We have bundled our IOS to it, but today what you can do is barriers, night guard, and things, temporary crown. I think in the next 3-5 years, this is gonna become an important part of the overall offering. If you want to digitize your office, you really need to have that IOS, and you need to have a 3D printer. But you put that aside, where we think that there is significant opportunity for simple, I mean, we're not just doing acquisition for sake of acquisition.
We're trying to simplify the workflow in here. To me, I'm industrial engineer, dental offices is one of the most underutilized asset in this country. You take a look at 30 hours, you got a $1 million worth of asset in there. A lot of waste has been, you know, through the process. People are sitting there waiting. You take stuff from one system to the next. So productivity is what we are after. How do we create productivity? Software, AI, connecting solution from one piece to another. That's where we are putting a lot of energy. And then, from a component perspective, if you look at the implant, the prosthetic part, the permanent crown is really disconnected from the rest of the process. CEREC did a great job in solving one specific problem around chairside, but the opportunity is much broader, bigger. If I may, I answer one more thing in this?
If you look clear aligner, what is, what is it clear aligner that really has changed the industry? Digitization. Digitization gave the GP opportunity to provide procedures that otherwise they would not been able to do. You get an IOS, you have a file, you send it, somebody design it for you, send it back, and through that process, now you see clear aligners are being produced, $4 billion market has been created. You go about 100 million three-unit bridges, and you look at the number of implant compared to three-unit bridges, as well as, you know, other solutions. The reason we haven't been able to break through that, that digitization, that simplification hasn't happened.
So anything that we can do in that area to make that a standard procedure, implant to be a standard procedure, I think that would be a breakthrough for industry as well as for us. So value implant, add to it AI, prosthetic design, service capabilities, prosthetic that really happens throughout the process, 3D printing, guided, navigated surgery. You combine all of that to simplify it, I think you would have a breakthrough on the implant side, similar to what we have done on that side.
Do you make that a closed system? I mean, just as I hear that.
No.
You know, my struggle has always been this digital pathway that you and some of your, you know, other peers are talking about. Makes a ton of sense, and I t otally agree with you on the inefficiency in the dental office. The problem is monetizing it. It's if it's not going to be directly tied to you have to use your implant, your prosthetic, your abutment, your everything, your IOS, and nobody likes closed systems. So it's like the dual-edged sword there, right? And that's, that's the challenge i s how do you monetize these digital pathways?
Okay, so let's take the aligner as an example to see what has happened.
Which is an iterative process, and you're making 60 aligners. So that, the digitization of clear aligner, to me, makes a ton of sense because it simplifies the pre-treatment planning. A GP doesn't have to do anything. Hit send, and aligners show up at their door, right?
Exactly. Right.
Not even a GP for you guys in ortho. Yeah, but in the others, that's where I struggle a little bit more.
So let's take, let's take, diagnostic or acceptance as a simple process. One out of every 4, and, you know, best of the best is 30%, average, 25%. People walk into the DSOs, they do a diagnostics, they walk out. Acceptance rate is about 25%-30%. How do you change that? In order to change it, is you have to do visualization, you have to be able to show what the system is telling you, you have to do simulation.
So when we look at the DSOs as a whole, or any GPs, I'm not latching on, i f you have that kind of capability right in front of you, it improves acceptance rate. Acceptance rate in the United States, every 1% is $4 billion.
So, in-face visualization, video visualization.
Exactly.
Those kind of things, right?
Simulation. Okay, so when that happens, we say, "Well, how do you monetize it?" I monetize it through... Today, we have a whole set of SLA capabilities around our imaging. If I add AI to it, if I add visualization to it, that gives me an opportunity to monetize on the software. It gives us an opportunity to monetize on whatever next is gonna happen through that treatment planning. But you got to make some investment to make that happen. You can't just go in and say, "Well, I'm. You mentioned closed system. We are subscribed to this open architecture. Up to about nine months ago, we didn't get a single case from our own IOS. All of them came from everybody else, and we haven't changed anything. We continue to accept cases and aligner from every system, every solution.
Same thing on the imaging side. When we are building this infrastructure, we're not forcing people to just go to our OP 3D or use it, but if you use ours, it's simpler, it's easier. That's the method we are putting in place.
All right. Fair enough. Well, let's move on to a couple of product segments that, you know, I think you're right, the ortho business has been on, you know, on this very consistent, strong growth path. I think we all feel as investors, we can just kind of lock in, 3, 3.5 points to company-wide growth from ortho. If it's 20% of revenue, growing 15% is kind of the simple math on getting, you know, 3% growth or something to company-wide. Is there anything with the Spark business that we should have on our radar screen?
You know, I know it's not going to double every year the way it has been off the smaller base, but is that still the right number? You talk about double digits, you know, kind of, is it right to think about brackets and wires, kind of low, mid-single digits over time, maybe not right in this macro, but low mid-singles, and Spark still growing at a very strong rate, so kind of the overall ortho into that low to midish teens kind of range?
Yeah. Yeah, absolutely. You absolutely have it correct. And I think the bracket number—So we had mid-single digit growth for 4 or 5 years, before we came to the COVID era. Now that we have a clear aligner, that it is best in class in the market, we can give people opportunity for a combination treatment. Some of the things that we have seen in the past, probably six months or so, you talk about cannibalization. It's not cannibalization of the bracket and wire, it's ability to really give people opportunity to use one versus the other. So, so what else can you expect? We are gonna, in Q4, we're gonna open a new factory in Europe, and, and that gives us an opportunity to deliver within five working days in Europe, which is one of our fastest-growing areas.
For Spark?
For Spark.
Right. And then our goal is. And, and we have been in investment mode for four years now, and we're gonna continue to do that. But the margin, Spark margin is below fleet average.
It's becoming bigger and bigger part of our equation. We expect that margin to... It has been improving every quarter. We expect that to get to fleet average by end of next year. That, by itself, combination of growth plus the margin change, it really changes the dynamic of our portfolio.
So you're gonna say: "Well, why are you confident in 2026 number?" A big part of it is because of this margin change.
Yeah. Yeah. And do I need to think about, just thinking about my model and thinking about when Align has opened a facility in China, when they open their Polish manufacturing facility, gross margins come down initially for the first 6 months or so, and then come up as efficiencies and scale build in that factory. Is that just as I think about the gating of my 2024 margin, will a European Spark facility be enough that I need to take a little down and then up in the first segment?
The investment to the European facility went in place last year.
Okay, okay.
Because some of the long lead item, it takes like 9-12 months. We signed the facility, we got approval for it, and it's actually coming in production in October. What we have done is, the more automation we put in place, the less labor we need. Labor is the most important part of that growth, that gross margin equation. So just give you a feel on our factory in Mexicali. In the middle of COVID, we built a factory. In nine months, we hired 2,000 people. We haven't added anybody to Mexicali, but as we have done automation, we have added more lines.
Same model is playing itself as we go through our factory in Eastern Europe. There's gonna be impact. I'm not telling you it is, but it's on the CapEx side. But we think the incremental volume plus logistics. Logistics is such an importantc part of this equation. We don't have to ship it from China or Mexicali. We can ship it from Europe. That was gonna save us a ton in the process.
And still confident, last question on ortho. Still confident that the brackets and wires, especially into those emerging markets, where you've got kind of a developing middle class that can afford ortho, but probably clear aligners yet, is that still the kind of growth driver of brackets and wires, even in a market where we're seeing clear aligner penetration?
There's a little bit of a hiccup in Russia, as we all know. But outside of that, think about it as one-third, one-third, one-third. One-third North America, one-third Europe, one-third everywhere else. That one-third everywhere else has been growing double-digit. So even if the other two-thirds is, like, flat, t hat's how the growth has, that model has worked for 5, 6 years. A little bit of a step down this year because of China VBP, because of the Russia, but the model that we have in mind is, that's gonna continue low single digit, and this year, if we can get it to flat, that would be great.
But that combination, that gives us a really good position to be differentiated in the market.
Okay, so that's the 20% of your business that's ortho. If we move on to, hopefully, this is gonna be a quick 1.5 minutes, the 40% of your business, that's the general consumables and equipment. What do you call that division now? Ian, no, what, Steven, what's your, Equipment and Consumer. E- E&C.
E&C.
Yeah, I knew I was blanking on E&C. Your E&C segment, any update, any latest thoughts on kind of market? I always think of that business for you is gonna grow at, maybe a little bit below right now with some of your emerging market stuff but eventually at, slightly above. So is market kind of still in that 2-3, 3-4- and you can kind of be somewhere ballpark-ish over time?
Yeah, I've been looking at this, you know, actually, you gave me some indication many years ago, five, six years ago, said, "Well, what is driving that?" It's GDP.
It's GDP plus. Correlation, in case, I mean, I'm a math major, if you look at correlation, causation, GDP plus. You look at every geography, you look at what's the GDP look like, equipment and consumables line up specifically with that. When GDP is in a good place, it's going well. When interest rates are high, equipment is a little bit impacted, but the overall market looks the same. But if I look at it in a, you know, longer-term horizon, we get that to a mid- to low-single-digit, above fleet average.
You know, you got 40% of the business that is everyday use, low single digit, above fleet average margin, or at fleet average, I think it's a great add-on to the overall thing. So I got 60%, you know, faster growth, higher margin, 40%, low single-digit growth at proxies.
But consistent-
Consistently, I.
Generates cash.
Can deliver. Now we've got a really good combination in that. The only thing, this year, the only thing is equipment. We've got to see what happens in the next three months or so about interest rate. I don't expect anything radically is gonna change, but the tax, you know, at the end of the year because of tax relief, a lot of people buy equipment at the end of the year. So we're hoping that will repeat itself, so we'll see a bump on the equipment side. But consumable is pretty consistent. Sell out, sell in, you can see it, inventory is being managed very carefully.
I'm not expecting any radical change in that space. Anything from a Russia standpoint on relief on some of the import issues in that?
This is one of the most complicated thing we have ever dealt with. They put a whole set of, you know, new guidance in place. We got licensed in some areas. We're trying to decipher what that means, that you can ship stuff to. So we got licenses in some of the product. We expected to get that in September, and we got it last week. We are trying to decipher, to specifically figure out what would that look like. They said it's gonna have an impact, and it had a less impact than what we expected in Q2, less than $10 million.
We are hoping that we can get that in Q3. We have yet to see it, but we are working through it to see if we can clear that up going forward. That's only on a specific segment of our business, mostly bracket and wire, a little bit implant.
Oh, that's right. I always think it's on the E&C side, but it's not. J ust to complete that Russia thought, if it doesn't fall into the third quarter, still confident it comes back in the fourth quarter, though?
It comes back. We haven't lost any of it because we, the inventory is on the ground. People had enough of it, and we have found all kinds of various logistic way to get to Russia. If you go through Mexicali, if you go from Sweden, which is one of our factories, they don't fall into the American-produced product. We can get it. Some product is specifically just kind of for now, you gotta get a license for it to get it in.
Okay. And on the implant side, you know, that's where there's been some a little bit of hiccup on, on VBP, although that seems like it's turning the corner, volumes are starting to out, out grow, the price headwinds there. So still think that China can actually, by the back half of this year and into next year, be a grower in implants? Is that still a fair comment?
You know, I was in China 4 weeks ago, 4 or 5 weeks ago, and I went and visited a bunch of our DSOs and one of the largest public hospital. So the volume has ramped up significantly, and you wonder, you know, "What happened? All of a sudden, everybody's placing implant." It was a little bit of a subdued demand prior to that.
But two other factors in here that is really interesting: The price of a 3-unit bridge is almost becoming similar to the implant. A lot of people are thinking, "Why would I do this when I can do that?" The second part, the price difference between value and premium has closed.
So as an outcome, you say, "Well, I can put a German-made, the Swiss-made, American-made, why would I do this other one? Because the price difference is not that much." So you gotta... You know, we normally talk about who's winning. Let's figure out who's losing in this process. A lot of people who were stuck in the middle between value and premium, they're having a hard time now. The premium guys are getting a lot more business.
We had a small business on the value side with our ABT. That has been accepted in the hospital, but the volume is increasing rapidly to a format that is really substituting the VBP 35%-40% price. But Jeff, I'd be foolish if I assume that China is gonna get back to normal.
You got so many different variables in place, consumer confidence, the housing, the interest. People are not spending money, and that's what we heard over and over and over in hospital, DSOs, private practices. Right now, it looks awesome. I can't tell you what the next 3, 6 months is gonna look like.
Okay, fair enough. Fair enough. And then on the other part of your implant business, primarily thinking about North America, maybe some of these issues have bled a little bit into Europe as well. But we know that, you know, you guys are a big player in full arch. All-on-4
All-on-4
All-on-4 cases, things like that. That, I think, is where we're hearing in our checks, you have had some deferrals.
Challenges, right
B ecause of high interest rates and $30,000 case costs and that. So, so that I would expect just macro-wise, is gonna be tied more macro-wise. When the macro improves, that part of your business can improve.
On the other part of your single implant business, you know, what have trends looked like there? It feels like you, you've kind of undergrown the market the last couple quarters on the single implant side. What's the pathway to getting that back to at least market?
Exactly. So the reason I talked about the other three pieces, I wanna tell you a story of what we have done in order to really get those businesses on track.
You've gotta have a clear value proposition and strategy. I can walk you through imaging, consumable, ortho part, that this is our strategy: combination treatment, point of entry and diagnostic, consumable everywhere, expansion of the channel. The heritage of Nobel was around innovation. They came in, they say, "Well, we created the market, we innovated, we..." Great, thank you. What's the next thing you need to do there? If there is a segment of the market that values that premium and is willing to pay 2x the price, how big is that segment? And are we providing premium service to that segment? That's the process that we are going through, try to kind of understand. Because what has happened, specifically in North America, look at the number of players that have come in.
They have closed the gap, providing good service, good product, at a much lower cost.
This is not premium going, becoming value. This is, prices are high, but the level of service that they provide, the training, education, and such, you've gotta create enough of a differentiation that say it is worth doing that. Where is that differentiation? It's around innovation, training, education, customer support, prosthetic. We have had gaps in our execution in various places. We get the business. When we go to get prosthetic, there is a breakdown in there. As an outcome, after one or two times, individual practitioners say: "Well, I'm paying that much money, I wanna get that service." So we're doing a deep dive into every aspect of this. I'm hoping... I'm not hoping, I'm working on it.
We're working on it to get this back on track and we start getting back on the proxies by 2024, 20. By the way, you say, "Well, why do I believe you?" I'm, I'm asking you to take a look at what we did on, consumable and we have done that.
Yeah, you've got the track record.
That's our heritage, of going back, take a look at it, understand it, put the standard processes in place, turn a corner, and start performing. The other thing about, I mean, you know this, dental industry, very slow transition.
So even if you come up with the best and greatest, you gotta be thoughtful about, "I'm gonna put it in place, prove the concept, have some people to kind of play a missionary role, tell everybody else, and start transitioning it." Same thing has happened with N1, as an example. We have put it out there, people love it, but there is not enough-- it hasn't had enough of an impact in the industry to transition a whole lot of people over. We just gotta be thoughtful about this. We're not in it for next quarter. Obviously, we've gotta deliver, but in the long run, we feel really good about being able to turn that around.
All right, so in the last minute and a half, let me just ask two questions. I know you haven't guided on 2024 yet. I know you're not gonna give me 2024 guidance here, but let me ask two questions. One is, you know, as we talk about kind of this multi-quarter turnaround in the dental implant business, China, still some uncertainty once we get past this initial kind of bump back in volume and that. You know, Street's hanging out at 6.5% growth next year. Feels to me a little aggressive, relative. I think I'm sitting at a little over 5%. Just at 6.5% growth, that is closer to, I think, your 2026 goal. Would you recommend Street kind of reassess how they're looking at next year?
I'll let my advisor have that conversation with all of you one-on-one, but we haven't guided for 2024, and we're not ready to do that. But what I can tell you is, three segments is doing extremely well. I'm hoping that, given what is happening, we're gonna continue to maintain that. Then, our intention is to turn the implant business around and start seeing better performance in 2024.
From an EBITDA perspective, you're still comfortable, I think. I don't wanna put words in your mouth, but still comfortable on the 20% guidance for this year. 22.5% is the 2026 goal. Should we be straight lining from here to there? Is there a little more back-end load as you talk about kind of eventually getting Spark up there, getting the implant business maybe later next year turned around, things like that?
Yeah, we said 50-75 basis points per year. Spark is gonna play a really important role in here to get us that bump. We're gonna see it in the second half of 2024. I think we're gonna have a much better margin structure as we come out of 2024.
And then in 2025, 2026, we will get to exactly what we have committed.
Still some improvement maybe next year. Again, not putting words in your mouth but think about a little steepening of that ramp as you get into 2026.
In 2025, 2026. As soon as we turn that around, that's the biggest factor. IOS is coming, beginning to start getting momentum. IOS has a higher margin than the rest. And then, we're de-emphasizing some of the exits that we have done. Prosthetics are gonna level off in 2024, because we exited almost 10% of our imaging business over the past 20, over the past 4 quarters.
All right. Well, I think we're a little bit over here, so we'll end there, but thank you, Amir, for the time.
Oh, you are welcome.
It was always great talking to you.
Thank you. Appreciate it.
As a reminder, next presentation set to begin at 9:05 A.M. Eastern Time, include Charles River Laboratories, PTC Therapeutics, Vor Biopharma, and Vistagen Therapeutics. Thank you.