Good morning, everyone. We'll get started here. My name is Jeff Johnson. I'm one of the Senior Medical Technology Analysts at Baird. 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.
That is-
Go right to Q&A.
what I like to hear. All right. Straight into Q&A. If anybody in the room has questions, please feel free to raise your hand, ask questions. I can repeat them from here. I think, Paul, you've been at Envista just over two 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 two days from now out in Mahwah. Maybe I'll cut through the first couple questions I had here. But you have exceeded those LRP targets each of the last two years. So what's gone right in a macro that has not been overly supportive, probably over those two years?
Yeah. As you've mentioned, Eric and I both joined Envista a little over two years ago. We grew up in dental, 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 number one of the thesis was that dental's a fundamentally good category, and that the air pocket in 2023 and 2024 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 believed is that Envista was a fundamentally good company. We knew the assets well, having grown up in 3M's business. We'd competed with this company. We'd tried to buy many of the components of it.
We thought that it was a good set of assets that could be managed better. Then third, consistent with your question, is we thought, okay, better market, better managed company, the financial results ought to get better as well. Looking back across the last two 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 is I think the middle part was absolutely true, that the strength of that portfolio now has become clearer over the past two years. We put a lot more money into new product development, a lot more money into the commercial front end.
We've now gained share across the portfolio, most categories, most years. Then third, probably most visibly is yes, the financial performance is better pretty much across the P&L. 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.
Yeah. 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 four 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 am not sure volumes have really picked up much in the last couple of years.
Yeah. No, I think our checks would say about the same. Many nice things about dental. One is there is great data, especially in the U.S., on data. You can just pop onto BLS and you can pull down total dental procedural spending by year. You can even see procedure inflation by year, or you can just ask ChatGPT to pull it all down for you. It gives you a good indication of how close the market is back to its pre-COVID levels. The two things I think that you would see is that dental almost always outgrows the broader GDP. That has again been the case two of the last three years. Inflation in dental is almost always above CPI. That again, is true. Now when you break it down into the categories that you ask 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 is a bigger public insurance component of that. Consumables typically does better on a relative basis than other parts of dental when macro uncertainty is high. It is not sensitive to consumer sentiment because it is covered. I think you are seeing exactly that. Most of the consumables players, us included, are overperforming the long-term trend for those two reasons. One, dental inflation is a little bit higher, so you get more price in consumables. Secondly, it is not impacted by consumer sentiment like the specialty categories, which you will probably come on to.
Yeah. Okay. As you talked about consumables there, on the equipment side, obviously a very big pull forward in 2022 into 2023 even. Had maybe a couple of years of digesting some of that pull forward in that. Is that where you feel like now we are back to at least that market sustainably being a growth market, even if it is low to mid-single digits, something like that?
Yep. 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 , three years. Second half of last year, it started to turn back to growth until right now it is the fastest-growing category in dental because of two reasons. Principally, your question, easy comps. Very easy comps. So growing as a result of that. The second is, it is 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 are 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 rate.
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 have heard some mixed things over maybe the last six 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?
Yeah, the answer is baked right into your question. When the DSO segment is well-funded, they use that funding to open clinics. 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 have 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. As we talk about kind of the equipment and dental consumables part kind of as the core part of your business before you get into specialty, any difference U.S. versus Europe versus the rest of the world, if you just kind of think from a high level, those combined core businesses?
Yeah. Specific to us, yes, there's a difference. In those two businesses in particular, we overweight to North America. So we're the number one player in diagnostics in North America, and it's by far our largest market. 3/4 or so of our business is generated in North America. C onsumables, also our biggest market is North America. So those two businesses for us are growing high single digits right now. As the U.S. returns to its more stable kind of low single-digit growth in those two 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?
Yeah. If we're going through the world on dental spending, I would say fastest growth, developing markets ex-China right now. Second fastest growth, Europe.
Okay.
Third fastest growth, low single digit North America. The slowest market, which I am sure you will come onto, is China because of VBP.
Yeah. A couple things there I want to go to. 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 is a little bit hotter probably than we would 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 are just into your second year of price increases here in the last couple of months, so hard to predict nine 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?
Yeah. I think three 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 is largely public data through the services side of dental, right? What is 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 are seeing, I would say likewise from our competitors, we think is durably around a point to a point and a half of price over time. I think all the discussion is accurate, too, in terms of just the fact that we have 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. As we saw what we now believe is true, and here we are six 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. For that reason, we tried to get ahead of it with a little bit of a price increase mid-year. 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. 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 the rest of the world. That market seems like it's maybe been a little bit tougher here over the last couple of years from a demand perspective, but would love your thoughts.
Yeah. You can segment the implant world. Let's do it by premium versus challenger, then let's do it geographically, as you asked about in your question. The premium piece, of course, much more concentrated from a supplier perspective. The two main suppliers are most of the share. That's us and Straumann in premium. 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 seven or eight suppliers to get to that same share captured by the two main ones in premium. But the category grows a little quicker. Maybe a little bit better than mid-single digits. The combination of the two 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. It 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. 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 one of the fastest-growing unit volume markets, again, because of VBP, and we'll unpack that.
Yeah. Again, we'll get there. On the implant side, I think five of the last six 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. 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. Challenger, 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 two. Again, just take your pulse on that and see how you answer it.
I would agree with your first. I might modify your second. In the first, especially in premium, the workflow gets sold, not the screw. And so, the two 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. 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. 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. 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. 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. 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. 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 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.
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 is correct. That is 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 the weighted average of the two grows faster.
At this point, it is only what, 10%, 15% of your category revenue?
About 15%.
Yeah. From there, can that be done organically? Does that have to be done inorganically? 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. As I mentioned, it is growing organically nicely, faster than the premium side, but off a smaller base. Challenger tends to be an active category in dental from an M&A perspective. Our two challenger business 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, then our second use is to do accretive M&A. We did three small bolt-on acquisitions over the past 18 months. All three 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 an unattractive return. No, I wouldn't do a bad deal.
No, but if we talked about a mid to long-term positive, decent ROIC that dilutes EPS in the short run?
I would prefer not to answer a hypothetical.
Yeah.
Our track record
No, I guess my point is just there are some big things out there that could come up, properties. But is first year EPS dilution a no-go for you? So if we hear something comes to the market and our math would say it might be dilutive, do we just rule that out for you?
The bullseye for us, when we say accretive, we mean three things. We love to buy something that grows faster than Envista. We like something that has better margins than total Envista, and we like something that can be bought for a lower multiple than Envista. The three deals we did hit all three of those dead bullseye. Would I do one that's in the second ring in terms of margin?
Yeah. No, I don't mean to get into those kind of hypotheticals.
Yeah, somewhere on the bullseye.
I'm just trying to understand if there was a hard line in your mind. VBP China implants, has that process fully now gotten underway and visibility on still that 10%-15% maybe price reduction this time in a second round as opposed to the 40% or 50% we saw last time?
Yeah. Let me answer it even more broadly because the more interesting part of VBP right now is the ortho side.
Right. And that's what I want to get to, the ortho side.
All right. Let me just hit both at the same time. VBP in China, everyone will be familiar, healthcare reform, dozens of categories have gone through VBP in China. It started with pharmaceuticals, went into med tech. Three years ago, the Chinese government started on dental. The first one was implants. The second one, which just started, is ortho, and they decided to do a second implant VBP at the same time as they're doing the first ortho VBP. As a hasty generalization, all VBPs have the same three steps. The government announces the category, and it asks all the public hospitals to submit their prior year purchases and their current year forecasts for the suppliers of that category. It goes in a big database, 5,600 or so public hospitals in China.
The second step is it looks at the suppliers that aggregate to about three-quarters of the total share, and it invites them to bid on all of the volume, so the piece above, outside that 75%, plus they reduce the supplier count by one. They say, "Here's your opportunity for more share in the public hospitals. Tell us what you would bid for that volume." The third step is they announce the winners, and the new price goes into effect. About 40% of the dental market in China goes through the public hospitals. About 60% of it is private. But what happens in the public informs pricing in the private. We are in that third phase right now. They announced the categories, they collected all the volume from the hospitals, and they asked all of us to bid. We're now waiting to hear step three, who are the winners.
The important thing for suppliers is that while ortho and implants are sold directly, the logistics are through distribution. Distribution has learned to reduce inventory in advance of announcing the winners because that inventory gets repriced. When the new price gets announced, they revalue that asset, so they draw down inventory. For us, big numbers, we have a $70 million ortho business in China and the government, or I mean the channel takes out 10%-20% of inventory so that there isn't as big a restatement. The net of that is it shifts some volume for us from out of Q3, when this process is underway, and it puts it back into either Q4 or Q1 when the new price gets announced. All of this is playing out like any other VBP.
It's that piece, how much channel gets drawn down in the very near term that we're paying attention to right now.
Is that channel inventory drawdown that's happening right now both ortho and implant?
It's mostly ortho. A typical VBP reduces price by 50%, a first-round VBP. We expect the same thing with ortho. That's what we saw three years ago with VBP 1 on implants. The second VBP for implants is going to be much smaller, 10%-20% price reduction. The channel impact is commensurately smaller.
Okay.
Ortho's really the game right now.
Jeff, just a couple
Yeah
important points, I think, on the back of that. One would be coming out of the second quarter. We gave, I think, a pretty similar view of what Paul just mentioned, right? We knew where we were in the process. We saw the bidding taking place. We saw the volumes coming in. And we understood the timing of this to be, call it, early to mid fourth quarter in terms of when we would then have more of the definitive these companies one.
Yep.
Maybe these companies didn't, and then you would have the proceed. I'd say all of that is the same. I'm talking both implants, but again, to Paul's point, ortho's really the important one. The piece that's newer information for us is now because we are further along in that process, and here we are towards the end of third quarter, we are seeing the drawdown, if you will, of inventory on the ortho side.
Okay.
Probably about $10 million for us that we're seeing in softer revenues in Q3. Majority of that we expect to be coming back in fourth quarter. If timing is uncertain, maybe you have a little bit more movement in that. But that also says that we're in the process so much that customers, distributors, and consumers, it looks more definitive now in how it's happening because we're getting information from our channel partners that they are managing in, and then they will manage out.
For us, again, it means maybe a little bit lighter revenues in Q3, Q4. And then importantly, I would say we also have good confidence. Paul mentioned he was just recently in China. Our teams are confident in what we're hearing from the customers in public hospitals. Our channel partners are seeing us as a valued participant in the future in VBP, and our supply chain is ready. A lot of uncertainty. But we do feel confident that as we're getting into the now back half of this year, we're seeing the process manifest in execution.
Couple quick follow-ups here. So that $10 million you referenced, how is that compared to what you expected the inventory drawdown to be in the second half of this year, when you last updated guidance?
Yeah. I would say similar in total when we look at
just pull forward
full second half
the 3Q.
A little bit heavier in Q3. We expect a little bit more rebuild in Q4. All of that sitting in a guidance that is unchanged for us.
Yep
Right, which I should have mentioned.
You guys are a very large implant player in China, I think 30% or something. Straumann.
The second-largest player, yeah.
second-largest player. Straumann bigger than that, but between the two of you, a very big share. In ortho, I believe the same is true. In brackets and wires, you have a decent size share.
Biggest.
Yeah.
Biggest player in revenue terms.
The odds that you get squeezed out, that you're the vendor that goes away seems pretty small.
Are low.
Yeah, yeah.
But, I mean, it's an un-
Yeah
It's an uncertain. We expect to win.
But okay. So there's that.
Others have been surprised.
Okay, and then we have 1.5 minutes, Paul, but the other issue, when implant VBP 1 happened, prices came down both on the implant but also on the procedures.
Yeah
That stimulated a lot of patient demand for implants. They could now afford that instead of getting a crown or a bridge or something like that. It made sense to get an implant.
Yeah.
In ortho, it doesn't sound like the procedural price is necessarily going to come down. If you have to give up 40% or 50% on price, how do you make that up between market share versus other manufacturers and/or end market getting accelerating demand wise?
Yes. A VBP for high-share suppliers is generally a good thing. You are likely to come out of the process with more share than you went in, and you are likely to get more volume because more of the public hospitals now order from you at that new price. That can be amplified if the procedure price is lowered as well because now patient demand goes up in addition. In implants, it was very good for us and Straumann because the procedure price was cut in half at the same time that the supply price was, so patient volume doubled. Ortho, we do not think they are going to drop the procedure price.
The winners in VBP will still get that expanded volume because now they are going to be in more public hospitals, and they are going to pick up that extra share from those who were not invited to bid and the one or two players who got kicked out of the process. Our volume in ortho, we expect, will still go up. I do not think it will be that same gaudy doubling of volume that we saw with implants.
Okay. Still not a big headwind from this, but we do not get that slingshot effect necessarily that it felt like we got for a couple of quarters after VBP 1.
We think if it plays out like other VBPs and implants in particular, we will be stronger after VBP than we are today, and today we are the number one player.
Okay. We are about 30 seconds over, but Eric, I will just ask you real quick. I think you talked about China was down a little bit year-over-year in the first half of this year. You expected it to be up a little bit in the second half and up year-over-year in 2027. Maybe that second half 2026 needs to be reevaluated or no?
I would say in large part. We still expect China to be modestly growing second half.
Okay.
But likely declining in Q3 as we talked about channel preparation.
Okay
As long as we do not have a shift in the implementation, call it the date in which prices are active in the market, we would expect to grow in fourth quarter.
And 2027. I think you said that last time, right?
2027, we would expect our China business to be slightly growing.
Okay. All right. I think we are going to stop it there. Please join me in thanking Paul and Eric for a great overview here of Envista. Our next presentation is set to begin at 10:15 A.M. Eastern, include Universal Health Services in the Grand Ballroom, Cartera in Grand Ballroom 3, Alumis in Empire Ballroom, and Fate Therapeutics in the Empire Ballroom 2. Thank you.
All right.