Morning everyone. Thank you for joining us for this session of the BofA Healthcare Conference. I'm Michael Cherny, the Healthcare Tech and Distribution Analyst. It's my pleasure to have with us, Envista. We have Howard Yu, Chief Financial Officer, Stephen Keller, VP of Investor Relations. We're gonna do primarily a fireside chat. I know the recent report, I guess just last week, I've completely lost track of time, so I apologize. Maybe just, Howard, just kick things off in terms of let's reframe the quarter a bit-
Sure.
In terms of some of the moving pieces on numbers, especially how you think about both the E&C, equipment sales performance of the quarter, and then also how that factors into the reiteration and continuation of guidance.
I would say that overall, our Q1 performance was in line with our internal expectations, albeit probably on the lower end of that, driven by a little bit of softness, particularly in the E&C side of the business, namely the imaging piece. You know, and we've said all along that we had continued to build throughout the year, that Q1 would be the most challenging quarter, with the expectation that we have a full year at low singles due to top line growth, core growth, as well as EBITDA margins in excess of 20%. As it relates to progression, I would say that, you know, the comps certainly get easier for us, especially on the E&C side moving forward.
You'll, you'll see that in terms of both the core growth as well as the margin profitability improving. It'll be relatively modest Q2, and then in the back half of the year we'll see some stronger growth as well as some stronger margin expansion as well. On the E&C side, in Q1, we actually had growth of last year that was mid-single digit in North America in particular. We were able to, you know, deal with any sort of supply chain constraints, and I think that the market overall, we were able to capture a little bit of that excess share last year. This year is a little bit more challenging in light of some of the macros as well as the interest rate hikes. We would anticipate that that overall as a business will continue to be a little bit slow here in 2023.
Just to make sure to get this completely correct, nothing has changed even though you, like you said, you're at the lower end of your internal plan, but nothing has changed in terms of your confidence in the guidance or your ability to hit that low single digit organic 20% plus EBITDA margin?
Absolutely, Michael. There's no thesis changing as it relates to Q1. We've expected a challenging quarter in Q1. We indicated that throughout, and that things would build both from a core growth perspective as well as margins throughout the year. We feel very confident at the low single digit core growth for 2023, as well as the margins at 20%. Keep in mind as well that we've done a couple of acquisitions that will last the one year now. The IOS business will become core growth here in Q2, starting in April 20th officially. Our Osteogenics becomes part of core in Q3.
Maybe just, you know, sticking on. I usually like to lead with the good, but I think right now we'll maybe talk about some of the short-term challenge.
Sure.
Hopefully not forever, but maybe talk about imaging a bit. I know you haven't been shy about the fact that there's been challenges macro-oriented in that business. Where do you think you are from both, not only a product perspective, but also a kinda organizational, operational perspective? I know your head of the division just left recently. As you think about that area of the business, especially in an uncertain macro environment, how does that factor into how you think about the contribution of imaging within the build for the rest of the year?
Yeah. I think imaging specifically, excluding the intraoral scanner-
Right
With the larger ticket prices, they're gonna naturally be impacted. Remember that our customers, in that business are also just consumers broadly, they're hearing things around the macros, concerns around potential recession. They're well aware of the interest rates that have gone up, you know, 3x over the last year. In those instances where they're thinking about a larger ticket item purchase, they may decide to defer that, you know, a quarter or two or maybe even up a year. I think that that's fully in the expectations that we have. It's consistent with the guide that we provided. We don't think that imaging is gonna be a fast grower here in 2023.
We do recognize that the comps get easier, and so even as it pertains to the imaging business, I would say as it relates to the core growth component, Q1 is probably the low. We'll see some moderations in the decline in Q2, and then in the second half, given some of the comps, that we'll see some modest growth.
Got it. I know you've spiked on IOS, I think rightfully so, 'cause that's obviously a newer product. How is your you know, essentially Envista or DEXIS stamp of approval resonating in the market versus where it was at a Carestream? I guess, you know, it's only been a year now, but what have you added to the platform that didn't exist before as you've scaled it, especially in what seems like a, I'm not gonna call it price competitive market, but at least a market where there is some price sensitivity?
I mean, overall we feel good about the performance of our new IOS business. I think we did in excess of $12 million in the quarter. We're focused in on, you know, building out that global distribution, working with our partners to go ahead and get that product and all of the, you know, individuality within, the full spectrum of the product. We have, you know, a low end, we have a higher end as well. We're able to meet the customers where their demands are at. We're excited about that. As it relates to the growth, we, you know, we said that our acquisitions in aggregate will add over 75 basis points of growth to the year. Clearly that performance is gonna step up throughout the year as well.
You know, we see this as a unique opportunity for us to be able to work with our distribution partners and sell these products there, but also to integrate it into our specialty functions along with DTX and be able to meet specialty workflow considerations and needs there as well. This is I think it's a, it's a, it's a home run product for us overall.
I guess, are we at a point now where, you know, at least within the IOS market, that customers are willing to look at workflow as the leading indicator versus price or price point as the leading indicator, or is it still mixed? I guess, is there a difference among type of practitioners in terms of who care about maybe a workflow application or usability more?
Yeah. I think workflow is important, in particular in the specialty side. Where we have specialists that wanna look at, overall impressions, being able to bring in the DTX platform of the software suite and have more predictive models as it pertains to that, I think that there's probably more importance on that integration in that space, in that segment of the business. As it relates to individual general practitioners and the like, some of them use them for multiple purposes. It's, it's just point of, you know, scanning in some cases, and others will have more integration. It depends on the individual offices for sure.
Got it. Sticking within E&C for a bit, you had made a comment on the call, and if I'm miswording this, please tell me, but focus on prioritization, deprioritization of geographies. Can you give us a little sense on maybe some more color on what that means and how to think through where demand curves would shape in terms of what led to that decision?
Yeah. I think the comment was specific to kind of broad-based larger product imaging units. Most of our business, you know, on the imaging side, I think 70% of it is North America driven. If you expand to Western Europe, I think it captures almost 90% of that business. The point here is we don't wanna be focused in on a product that's a larger ticket item in a region or in a specific country where we don't have critical mass infrastructure and the like. It's just harder to support those products. You know, we wanna win where we've made our focus and where we have a larger presence and scale, and I think that was the impetus of that comment.
it seems like it gets to a fairly minor number when you talk about the exposure in U.S.
It does.
Western Europe. Is it something that was completely contemplated as in the guidance at the start of the year as well?
It was.
Okay.
It was. I think that, you know, everything that we've spoken to has been pretty consistent with the guidance that we provided.
Then maybe turning to infection prevention, obviously, it was a stalwart throughout COVID.
Mm-hmm.
Nothing wrong with it now, it's just we're seeing normalization demand. What have you seen in terms of the changes that, you know, especially recently, your customers have been asking for you, not only from a what you're selling, but how much of it they wanna stock?
I would say overall, our infection prevention continues to be, you know, what we view as a market leader, particularly in the dental space. Our Metrex brand and CaviWipes particularly have been demanded by name, and it's very common in many dental practices. We did see a pretty massive spike during COVID, as you mentioned, Michael, and had dealt with the comparisons thereafter for a while as distributors and customers worked through some of that inventory. What we've said about infection prevention is that we see that as a low single-digit grower on a pretty consistent basis. We actually had a little bit of comps, you know, even in Q1, we actually had double-digit growth in infection prevention. I don't think that's to be expected longer term.
I think that that's a business that we can count on to be reliable, stable. Sell-out continues to be very strong. Inventory levels at our distribution base also seem like they're right in the slot of what we want. We see that as being a low single-digit grower long term.
Any worries or thoughts on commoditization within that category or product line, or?
You know, we think that that product is, you know, like I said earlier, it's demanded by name. We think that it's got a long history. Customers, you know, and dental practitioners have been able to count on the product, its efficacy. Even some of the new formulations that we've utilized have had really sound and positive reviews. We think that that business is here to stay.
I guess let's turn to Spark.
Sure.
Never a bad time, I would say to do that. I know comparing various different companies is never gonna be apples to apples.
Mm-hmm.
That being said, the absolute growth rates you continue to put up are mind-bogglingly high. I guess it's a word I'll add to my vocabulary over time. Maybe give us a little bit more insight on what do you think is driving that, especially because, you know, we talked about the macro worries on dental, its, you know, consumer pocketbooks potentially being hamstrung, and yet we don't see any signs of that hitting Spark at any point. Maybe give us a little more color into the why behind that.
Sure. Sure. I mean, to start, we're incredibly pleased with the performance of our Spark business. It grew in excess of 70% year-over-year. As it relates to all the meaningful statistics for us there, whether you're talking about active doctors that are starting, recurring doctors that continue to, you know, provide cases and getting shipments product, products sent to them as well. Even regionally, I mean, we're growing pretty substantially in Europe as well. I'd say maybe I call it all cylinders are firing. I think a lot of that has to do, at least for us, is the reaffirmation and the validation of picking the right market.
As we talked about, we went into the orthodontic specialists, the people who kind of bread and butter is built on movement of teeth. Whether they're talking about the bracket and wire or whether you're talking about aligner therapy, that's the folks that are gonna make a meaningful difference and continue to do so. Whether it be the individual features associated with it, if you look at it, you know. I would, you know, ask everyone to go and take a look at it and go to Gemba and see for yourself. The clarity is quite good. I would say force retention as it relates to the movement of teeth, the contact with the teeth themselves, the stain resistance. I mean, the list goes on.
We feel really proud about the product, and we would expect it to win in the marketplace, and we are. One thing to keep a note, and maybe not to be overly positive, is to say, hey, you know, the Spark business for us today is below our fleet margin profile. That's something that we've talked about. We're gonna continue to invest in this business, given all the momentum that we see and the traction that we're seeing in the marketplace. That's something that we've made a conscientious decision to do here in 2023 as well. We will continue to invest in that business. Over time, we're confident that that's gonna meet and exceed the fleet average in margins. We're seeing that every quarter sequentially increase productivity and the margin profile as well.
Is there a break point that you're thinking of, whether it's certain revenue baseline, certain, you know, growth rate slowdown, where it doesn't make sense to not invest? I know that's a circuitous word.
Yeah.
I guess, what are you looking for before you start to pull back on the overinvestment in a good way?
Yeah.
Get to that fleet or above margin?
Sure. Scale's important, and I mentioned earlier that Europe has been a big source of growth for us. We're investing, and we're gonna produce product closer to the customer so that we ensure turnaround times and meeting the customer demands. That's a meaningful investment in Europe for us this year. We hope to get that factory up and running sometime in late Q4 or late, you know, second half of this year as well. Until we get to a point where the growth actually does slow down, you know, Amir and I have been 100% committed to fueling these long-term growth initiatives, despite some of the macros and other things that are going on, this is something that we wanna continue to fuel and make sure that we're taking a long view at it.
I appreciate the commentary on the Western Europe expansion. Where do you think you are on global coverage versus where you eventually wanna land?
You know, I think we've seen the growth. We started this journey in Australia. We moved it over to North America. We've seen the traction there, and then we moved into Western Europe, Spain specifically. We expanded that model into France. There's a lot of runway here. I think you were kinda saying it in the comments yourself, and the thought process for us is we're gonna continue to hit every country, be systematic about it, and ensure that every onboarded doctor has an incredible experience with this product. We'll look more into Asia and growing and expanding there as well.
What % of the orthos that you're seeing are new to aligners or, I guess, new-ish to aligners? I know there's certainly some orthos that will have tested it out and really not gotten in versus where you're taking away from established peers.
I would say that the vast majority of... Again, we focus and concentrate on the ortho space. I would say the vast majority of our newer Spark customers in ortho have historically used aligner therapies previously. While there may be, you know, a subset minority group of those who are trying aligners for the first time, I would say the majority of these folks have been, you know, steeped in aligner therapy and understanding the dynamics of that for several years. You know, if I call them competitive wins, that's maybe the right way to think about it. We are concentrating first in primarily our Ormco customers or Damon customers, on the bracket and wire side, and recognizing that we have a history with them.
We have met the customers' needs. Clinical outcomes are all consistent. Being able to put that into aligner therapy certainly helps us win those accounts.
Got it. Certainly helpful. I guess aside from the product, which I have seen, and, yeah, it looks very good, stain resistant. How much of what you're doing on whether it's the IOS side or other areas, and I keep personally coming back to workflow, how much of that filters into your ability to continue to drive this outside Spark growth?
I think that's something that we thought about thoroughly even as we went into IOS and the importance of integrating that into kind of our broader DTX software. That's important for treatment planning. That's important for treatment execution. We see this as being important piece of it. That all said, you know, we maintain an open architecture, whether they use us specifically on all the other pieces of it or not, we think that it's important to provide doctors choices. Whether they're using our scanners or not, they're able to utilize our Spark and aligner therapy.
Sticking with ortho, at least in the quarter, bracket and wires growth seems like it started to normalize back towards traditional levels. I know there was a period of excess outside growth because of channel participation by some of your peers or lack thereof. Is this now back at what you think will be the normalized long-term bracket and wires run rate? Are there still pockets where you can pick up excess share that because of lack of availability? How do you think about the brackets and wires business on top of.
Sure.
The overall ortho?
Sure. Within our bracket and wire profile, we've grown ahead of market consistently for many years. Part of that is because the innovation that we provide most recently with our Damon Ultima product, but also because of our exposure to emerging markets. About 70% of our bracket and wire business is outside the U.S. Where there is a little bit of a slowdown, we've historically grown very fast in places like China and in places like Russia. Given the current dynamics with all the COVID issues that we've seen in China and the like, I mean, literally, they were down for better part of January and February between the COVID instance and, you know, the lunar holiday.
I think that 2023, in many regards for us in China, is a bit of a reset year given the COVID dynamics as well as the VBP implications. Certainly in 2024 and beyond, we see that, you know, that driving quite a bit of the growth consistently that we've seen historically and we'll see in the future, and that also impacts an area like bracket and wire for us.
Yeah. Well, perfect segue to maybe talk a bit about China.
Sure.
you know, aside from the unfortunate dynamic of the COVID outbreak you had in your factory, which was a shocking number to give on the call. I appreciate your commentary about it being a transition year. I don't think it's any surprise to anyone who knows your story about VBP being a immediate impact. What I would love to know a little bit more, whether it's either in the quarter or how you think about the rest of the year versus volume or price versus share, I guess?
Okay.
We know what the pricing adjustments were. We know that, I hope I'm not putting words in your mouth, but that pricing maybe came out a little less bad than maybe could have been. Where do you see that going in terms of, you know, relative from the public to private transition? What is the visibility you have on, because of your position within VBP, the ability to pick up incremental new share on implants? I guess, how does that phase in with-
Sure
...the guidance?
A lot maybe to unpack there, but let me start and you can ask follow-up questions as you see fit. I would say that VBP is playing out in China largely as we expected. You know, we anticipated that there would be a pretty major haircut in terms of the pricing associated with the public sector. We've always said that there would be some spillover into the private sector. I think what we're finding is that the spillover on the private sector is accelerating a little bit. To your point earlier, I think that the reductions in pricing was maybe a little bit moderated from what could have been the worst-case scenario there as well.
The way we think of it is that, you know, we put a stake in the ground and said about 20, you know, in excess of $20 million associated with VBP in China, and we still think that that's largely about the right number. We think that, you know, as one of the winners of that bidding process, the whole idea here is that volumes would be then consolidated to the winning group, right? Or one of the winners as well. Because of VBP's intent in its entirety was really to provide more access of care, and so in theory, more volume should come along as well with that.
We hadn't contemplated large numbers for those types of things, but to the extent that we see some additional spillover into the private sector, we think that we're gonna see some volume ramping up throughout the the tail end of this year and certainly well into 2024.
Just along those lines, I wanna, you know, make sure I have everything. $20 million is a gross impact for the year, gross negative impact.
It's gonna be on revenue and on profit, yeah.
That doesn't assume. It's not $20 million net of any volume impacts that you're-
That's right. That's right.
That pacing of the volume you'd expect to be a, not to get into specific guidance, but we do have the 26 targets out there.
That's right.
...a pretty steady ramp over into 2024 and beyond is the way you think about that business.
I think that's one of the factors that will continue to grow that business. I mean, even before VBP, China was growing for us double digits. We probably have, you know, seven or eight years pre-COVID, pre-VBP that had, you know, sustainable double-digit growth for us in China. In 2024, we think that we'll get back to that. As a tailwind to that, potentially after this reset, if the volumes come, then that's gonna be some additional volume opportunity as we see it.
I guess along those lines and thinking back to the 26 targets that you had updated at the Envista Summit.
Mm-hmm.
The 2026 growth targets assume that China is a normalized growth versus where it would have been slower, faster.
May be easiest to say it in the context of we feel as though our long-term growth in 2026 getting to the mid-single digit plus high single digit in terms of core growth, as well as EBITDA, adjusted EBITDA margins in excess of 22.5%, that stays completely intact, despite the headwinds associated with the pricing on the VBP and the volumes that may subsequently follow and add to that on the volume side.
Okay. maybe let's, you know, sticking on implants and N1, you know, a phased rollout, so to speak, for it. You know, it's finally got in the U.S. What are you hearing from practitioners on side by side versus competition and where N1 is establishing share, especially the U.S., North America?
Yeah. I think N1 is, and we've said this consistently, it's an entirely different protocol and procedure. We're in the, you know, early days, we're in the process of building up our clinical, you know, ambassadors that are gonna help us drive and expand the knowledge around the power of N1. I think that that's first and foremost. The reality is, because it's a uniquely different procedure, it takes face-to-face training to get more adoption associated with it. That's gonna obviously slow down some of the ramp and growth as well. I think the other thing to keep in mind here, because we were just talking about Spark earlier, is that N1 is gonna be utilized for many of our existing doctors.
The thought here is that there's gonna be some cannibalization, whereas Spark, and particularly on the aligner side, that was essentially a new frontier for us. That's gonna obviously read out in core growth much quicker. It's gonna have a stronger impact right away. N1, we think is gonna have a slower ramp-up, in essence because of those things. We also think that because it's a new protocol, we're having to do, or we're thinking of it in terms of impacting at the education level.
A few weeks ago, you know, I was on the East Coast meeting with Amir and a prominent dental school about the N1 and what we can do there to get more inroads and teach the thing so that it becomes more standard, you know, a standard of treatment or a standard of understanding for these dentists that are gonna come out into the workplace. This is a long play for sure. Not something that we're gonna see as immediately impacting it, but certainly something that's gonna be part of our long-term growth strategy and the 2026 numbers that we talked about earlier.
I guess outside N1, how do you think about your stratification right now of your implant business broadly? I know that we're all wondering if and when there will be a recession or something that looks like a recession. How do you think about that dynamic of where you sit in premium, where you sit in value, and what you're trying to do to enhance, stabilize, improve, grow, whatever you wanna call it.
Sure
areas of business?
Sure. I think even independent of N1, we feel really good about our product portfolio. You know, we kind of hadn't done as good of a job about talking about the ramp up and the opportunity that we've seen and experienced as it relates to our surface technology. Both our TiUltra as well as our Xeal product has been doing exceptionally well. If you think about us in the context, and maybe to your question, how do I see us relatively stack up, I think we have a great, you know, commercial team overall. We have products that are well valued, clinicians that clearly can count on the outcomes associated with our product in the implant space.
As it relates specifically to the recessionary concerns and the like, I think people understand the importance of clinical outcome and even the health, the liaison and link between overall health and dental health these days more. When you think about a loss of tooth, what's the clinical outcome that's superior? It's the dental implant versus what historically had been like a three-unit bridge, right? That's not even a permanent solution. An implant is a permanent solution. The osseointegration, it's almost, in some cases, as good as their original teeth. As it relates to, you know, concerns around potential, you know, cost of an implant, I would say that the manufacturing cost or the cost that we charge to our doctors is a relatively small percentage compared to the overall procedural cost.
Even if you're talking about a premium implant, it's fairly small as it pertains to the overall procedure. We don't see that as being a major impact.
Turning back to the call last week, you mentioned, I think you used the term executional challenges.
Mm.
which is not something we typically hear out of Envista or obviously legacy Danaher in terms of just consistent process improvement, DBS, EDS ingrained in everything we do.
Yeah.
Seems like something that was tied to imaging, anything else you wanna address or touch on relative to what you saw and how much more, I guess, Kaizen work is going into the whole EDS flywheel?
What I would say is, you know, the culture of Envista is that results matter. You know, when you see businesses that have performed historically, you know, we don't have as much of a tendency to unearth or get deep down into the individual components of the working and even the EDS tools. Meaning it's more about sustaining that, the positive growth and the efficiencies and the productivity. When you have quarters where it might be slightly different than what our expectations are in any sort of business, that's where we're gonna go more to Gemba. We're gonna look at opportunities. Where we've had, for example, where we've had pretty consistent, you know, execution and commercial delivery, if we've had, you know, routine, let's say, turnover in personnel, right?
I mean, we've seen certain regions do better than others in getting that region back up to speed, whether it be triaging with regional managers or whether it be, you know, ensuring that the onboarding process of a new sales rep or training associated with that or the co-traveling with that follows a specific best-in-class practice. I think that what we're talking about now in terms of commercial execution in that example is making sure we see what works the best and then applying it to each of those spots. That's the type of execution that we're talking about, bringing back that process, seeing what's best in class, and ensuring that we utilize that across the board.
We're running low on time, I'd be remiss if I didn't ask about M&A because A, it's a big focus of the market, and B, big focus of Envista. Where do you think you sit right now in terms of both capability, opportunity, and does any calculus change in this rising rate environment in terms of how you think about return rate thresholds, riskiness of a deal? I know there's a typical playbook that I think of when Envista's gonna pursue M&A even in your limited time. Curious how you think about the environment right now?
Yeah. I would say that portfolio management, both in terms of, you know, looking to add on as well as, you know, divesting, and we've done a little bit of that since we've been a public company as well, is an ongoing kind of standard work process, and we're always looking at and cultivating, dozens of companies. You know, we're gonna be thoughtful and prudent about where we deploy capital. We do wanna deploy capital. We've talked about areas around, you know, value implants, potentially biomaterials, software. Those are all areas that we're gonna be particularly, you know, thoughtful about and thinking about. We're also, you know, mindful, as you said, about, you know, interest rate hikes and the like. It's important for us.
It's not about the seed, it's about making the right execution as it relates to acquisitions themselves. We're gonna be prudent about that process. We are definitely looking forward to deploying further capital.
Perfect. Well, I see the zeros. We're out of time. Howard, Stephen, thank you so much for being here. Really appreciate your time. Thank you everyone for joining us at the conference.
Thanks, Michael.
Thank you.