Going, John Block from Stifel. Good to see everyone again for the afternoon. For our next session, we're excited to be rejoined by Envista 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 gonna come. You only had a month or so on the job, and you still attended Jaws and Paul. I'll start there. At that point in time, a lot needed to change. A lot needed to get, you know, call it accomplished in a relatively, relatively short period of time. I'll start with, 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, John, and to Stifel. It's a, a great conference, one of the, more important dental conferences. Right now, the timing's perfect. There's so much going on in the, in the macro. It's good to bring us all together. Thanks for doing that. Yeah, when I was with you last year, I think your first question was, what drew me back to dental? You know, I've been in and out of dental for 20-something years now. I told you there were three kind of fundamental beliefs, and it'll answer your question about what has come in as planned and then what has, has been a surprise.
The three fundamental beliefs first started with the industry, that dental remained a secularly attractive market and that, you know, the question marks if something fundamentally had changed to dental post-COVID, that led to the slowing in 2023 and 2024. 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, you know, 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. I thought the core portfolio was still really good.
Okay.
and then the third is I thought the timing was, was good. I thought this cyclical, rare downturn in the underlying dental market, coupled with the capital market's reaction to, the public, players, led to a, a unique opportunity. Now fast forward a year into the role, and I would say most of that thesis has played out, as expected. you know, I think, in terms of the, the dental market, as I said, you know, there's a couple 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, you know, the more interesting segments of dental, specialty, both implants and ortho. we like our consumables as a 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, you know, nobody saw the macro uncertainty of Q1 tick up. Now there's a question of which of those kind of prevailing forces, the return of global dental to its longer-term historic growth versus the impact on interest rates and consumer confidence from the macro uncertainty, how those are goingto play out across 2025. Most of the things inside our control at Envista played out about as I expected.
Okay. Okay. So you're mentioning, you know, some of the questions around the industry and trends, and so I'll push a little bit on trends. You know, you talked about 1Q 2025 industry trends stable with 2H 2024. That was sort of the commentary. How about end-market demand trends of late and anything to call out through the various geographies?
Yeah. Let me spin through both the categories.
Okay.
The procedure categories and then do geography. 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. We have seen a bit of an acceleration on the bracket and wire side. We can talk about whether there is, you know, any shift in terms of orthodontist preference for the different therapies, but orthodontics is a fast-growing business for us. Our consumables business is doing very well right now. As you, the audience, will know, about 60% of all dental is reimbursed, either private insurance or government pay. It is not uncommon to see consumables, which is one of those covered categories, do better when uncertainty goes up. Our consumables are 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. Slow, steady improvement on implants. The one for us that is still in contraction is diagnostics in the equipment category. If I give you the same answer geographically, no surprises there. Fastest for us is certainly developing markets. Let's set China to the side 'cause there are 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 US. The one that is still stable but slower than the others would be the US.
Yeah. We just had, you know, 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 two general dentists up here, and they sounded pretty upbeat on what they were experiencing from, so they acknowledged a very slow 2024. When I pushed them when things might have started to turn or thaw, it was sort of like late 2024 into early 2025. Any green shoots, Paul, that you can point to here in North America, or is it, you know what? No, for now, it's, it's still stable at best.
Yeah. I mean, listen, if we were having this conversation in December of last year, I would have told you a lot of green shoots. You know, the three 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 three of those were, you know, yellow heading into, to green. We had five successive months of consumer confidence improvement in the US across the second half of last year. We had three Fed fund cuts across the fall, and unemployment was at historic lows. So we were of the view that 2025 was gonna be a pretty good year for dental. The question mark then came kind of through that macro uncertainty, you know, in the whole tariff environment across, Q1.
As the audience will know, we've now had five consecutive months of consumer confidence degradation in the U.S. Yesterday, we had a surprisingly positive rebound of consumer confidence. Conference Board reported something like a 12-point.
Yep.
Bump. Maybe that's headed the right way. Unemployment's still very, very low, and your guess is as good as mine as what's gonna happen with interest rates, but I think probably likely to continue to be supportive. Yeah, I think there's reason to be optimistic.
Okay. Okay. We'll take it. I'm gonna bounce around, and I'm gonna go by division, and I'll start with your biggest for implants. Obviously, an important division, roughly 40% of revenue. I'm gonna try to break it apart by premium and challenger. Challenger 1Q 2025 contracted after solid growth in 2024. I think it was mostly a day's headwind. You had too few reselling days. You remain confident in, in challenger growth, specific to, to 2025?
Yeah. In my view, parallel here is I think the Q1, single low single-digit contraction was principally driven by too few selling days. Our challenger business is heavily weighted to the US, and that's where the few selling days played a role. We'll see, but I think we'll return to growth in that business. We've been gaining momentum.
How about, you know, and of course, I'm throwing stuff at you. I have a dental panel I heard about 30 minutes ago, but I think none of this will come as a surprise. Two dentists up here doing a lot of implants. One close to 500 a year. The other one, I think it was 180 placing a year. Both talked about probably more value than premium at their practice. They did not see that changing in their view in the near term. For you guys, you are under-indexed to value, right? What is 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 talked about as, you know, maybe making sense over the past handful of years?
Yeah. Maybe I'll, I'll start my response just from a, 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, you know, 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. You know, in 2024, we decided to put an extra $25 million into accelerating growth in our highest-margin businesses. The improvement that you, you noted in both our premium and our, 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.
did not do any M&A in 2024. That was not because of availability of assets. It was not because of multiple. It was just because I was squarely focused on stabilizing Envista and getting the core operations improving. You know, we got three quarters under our belt now of improving performance, and that is 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.
Organization is in a better place today with those three 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.
Yeah. Yeah. When I joined the CFO role and the president of our two biggest businesses were open, you know, we were lucky to recruit three really strong leaders, two of whom I'd worked with for 20 years. Yeah, I think we're in a much better place than we were 12 months ago.
Okay. On the premium side, I was gonna ask why, you know, not why North America's lagged, but I think you've really already addressed that with the yellow and the consumer confidence and the interest rate. I'll just go and ask my second question specific to premium. You came in, you said, "I wanna turn around this business," and you did, and I think you did it quicker than maybe some people had anticipated. What work remains to be done? Again, this is most specific to the premium side of the equation.
Yeah. 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 four consecutive quarters of accelerating growth in our premium business and two positive quarters. Pointed in the right direction. That's a good category. I think premium, you know, once total dental returns to its longer-term historic growth, ought to be a 4%-5% grower, and we're not growing at 4%-5%. 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 Stephen Nielsen who built the largest DSO in Europe, Colosseum. We recruited him across. I lived in Zurich to lead Nobel.
and having a really customer-centric leader in that business is so important. You know, implants is such a direct customer-centric business. Having been a customer of both us and Straumann, having Stephen lead it, that has reaped good rewards. Second thing we did, as I referenced earlier, is we primed 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. In a, you know, 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. We think that will prove to be a reasonable bet that we took.
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 helped Envista have such a great start as a public company, you know, 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 2023 and early 2024 with all the chaos that was in the company. Those are the three things that are working well in Nobel. I would say the two 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 US 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. 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. You know, of course, we have an inspiring peer in our business who performs really well and shows what is possible in this category. Premium implants is an oligopoly. There are only four players, and there are only two big players. There is a lot of additional performance that we can deliver.
I think you mentioned four to five is what you think, you know, 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?
Yeah. So of that $25 million incremental investment, a decent chunk of it went into R&D. The biggest piece went into upfront commercial activities, building sales territories, more marketing activity. The second biggest chunk of it was for clinical education. We have a, we brought back the Nobel Symposium. We had stopped doing that when we were trying to save our way to greatness. That is happening this week in Las Vegas. We already have 1,400 doctors signed up from around the world. That was the second big piece. The third piece of what you are asking about is R&D. There are three areas that we are investing heavily. The first is just the implant portfolio. You know, you can never have all of the SKUs covered, in terms of dimensions, mandible, maxillary, zygomatic implants, conical, parallel. There is always some gap in your portfolio. That is the fastest turnaround new products.
Those, we're working on. Those will have an impact, in 2026. The second category is around regeneratives. That's probably a larger value creator long-term, but the development cycle's longer. You get into class II, maybe even biologics in that category. Regulatory path is a little more complicated. 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. We leverage our relationship with DEXIS to try to accelerate development there.
Okay. So that's sort of the roadmap when you think about the innovation scheme to implants.
Yeah. Exactly right.
Okay. I'm gonna shift gears. We're gonna go over to tariffs and come then 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. You said, "Look, this is gonna take a little bit of time to implement." You sort of walked us to the different margin profiles between 1H25 and 2H25. Just a 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. As we've learned, that changes day by day. On the Q1 call, I think we had a couple of questions from the sell side about what was that number. I said something like, "I could give it to you, but it's gonna be different tomorrow." Sure enough, it was a week later, it was very different. We think the much better, useful information for investors is to understand our categories of exposure and our ability to navigate those categories. Right now, our biggest exposure is still US manufactured goods that we sell in China, and that's concentrated on our Nobel business.
Nobel has two main manufacturing sites, one in the U.S., one in Sweden. 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, and then we'll start moving production out of Sweden, you know, back to the U.S. That is 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 farther on the implant side or on the tariff side. 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, you know, threatened increase in tariffs to the EU. In every case, our four biggest businesses have manufacturing on two or three continents, and all of our products, or most of our products, their registration allows manufacturing across all the sites. 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 six months to really move that. That's why you get this lagged impact. You get the tariff impact in the first six 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, it's like a week or two later, you had the U.S.-China news, and that's where you have a good amount of exposure as you just described.
Yeah.
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 2025 earnings call due to tariff headwinds. Supposedly, some of those tariff headwinds subsided a bit. You know, again, does it help increase the confidence around the 2025 guide, the recent news?
Yeah. 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 result. I think our expected outcome, our 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? Yeah, 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? Again, there's so many moving parts, which today has gone tomorrow. We're trying to ask that question because the pushback I'm getting from investors is, "Hey, look, the inventory dynamics may blunt the 2025 impact," right? Do we just sort of annualize the 2025 impact, or is it materially different because of the inventory dynamics when we think about 2026?
I think in the case of our business, specifically, the inventory piece is not a major factor. I say that for two reasons. First, two-thirds of our business is direct. There is no inventory. It's, you know, doctor orders it, we ship it. It does not come into play. 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. The weeks of inventory in the channel are much reduced. As for how 2025 tariffs impact 2026, there could be two 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. Of course, the offsetting effect from that is increased input costs. You know, it should be more of a hit on cost of goods sold. We will get around to 2026 guidance after we deliver 2025. I do not think inventory is gonna be a major player.
Okay. Okay. Fair enough. And maybe one more just tariff-related. You had mentioned, you know, a handful of initiatives to help mitigate the tariff impact. One of them was price.
Yeah.
Price has been, like, challenging, elusive in dental, right, for the past handful of years. Looking through your information in 10Qs, 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 one goes to two? Does one need to go to four? How do you get price in an industry where that has seemed to be pretty challenging over the last couple of years?
Yeah. Maybe three thoughts on this. 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%-3%, dental has always grown 3-5%, and the delta was usually price. Most dental players got 1-2 points of price pre-COVID. That was pretty consistent. You're correct that, in 2023 and 2024, 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.
Yeah.
From memory, it was something like 50-60 basis points of price in 2024, and it was the one point of price in Q1 that you referenced. 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 in a tariff-inflated environment, we'll have to get more price than what we got historically. By far, the bigger lever is us moving supply across our global footprint.
Where you feel like you have that flexibility through the different confidence in the product registration.
That's the bigger piece of work. Yeah.
Okay. I'm gonna pivot and see what I can get to in the last four or five minutes. Spark, in the current environment, it seems like it's growing, you know, mid to high single digits year- over- year. That's exit deferral noise, as I put it.
Yeah.
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, you know, 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 aligner, it's like, go back a number of years. As you and others were thinking forward, it was, "Hey, we're probably gonna be growing, you know, the industry's probably gonna 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, you know, more representative of SP&T margins of 15%-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.
Yeah. Two thoughts. One, let me give you a general clear aligner thought, and then I'll give one specific to our business. The general clear aligner thought is investors are at an advantage here because you have two 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. Angelalign reports every six months, and they've been doing it for a bunch of years. 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, Angelalign, 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, our clear aligner business. There is 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. Every line, we have three plants around the world: Mexico, Czech Republic, and China. All the lines are exactly the same. We start with one plant, one line, prove it out, expand it across that site, move to the next plant, do it again. We now have 20 straight quarters of sequential unit cost reduction.
You know, unless statistics simply do not work, we have confidence that that trend line will continue and turn positive.
That will turn positive. Is that still what takes this business to 15%-20% margins longer term, or do you need to be, pardon the expression, you know, more price disciplined? Or, or have you started to be more price disciplined in the field with Spark?
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 two reasons. The first is we have the largest market share in traditional orthodontics. We've had the number one or number two position for 60 years, and so we already call on every orthodontist. We already have a very capable salesforce 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. It's like the old, you know, Jesse James, "Why do you rob banks?" That's where the money is. That's where we focus, and we think that will be supportive of margin expansion moving forward, a more concentrated focus.
Specific to your price question, there are kind of two different mechanisms of price in Clear aligners. There is the ASP measure that many of us follow because that is how Align reports. That is revenues divided by total cases. That does not tell you price per SKU. 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 mixed dynamic a little bit at play.
Yeah, I think that, I think that's at play.
Okay. That was very helpful. Guys, I'm gonna end it there. I probably should have stopped. Any last-minute questions for Paul? Okay. Paul, thanks very much for your time.
Thanks, everybody. Thanks so much.