Envista Holdings Corporation (NYSE:NVST) Q1 2024 Earnings Call Transcript

Envista Holdings Corporation (NYSE:NVST) Q1 2024 Earnings Call Transcript May 2, 2024

Envista Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: My name is David and I’ll be your conference call facilitator this afternoon. At this time, I’d like to welcome everyone to Envista Holdings Corporation’s First Quarter 2024 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I’ll now turn the call over to Mr. Stephen Keller, Principal Financial Officer of Envista Holdings. Mr. Keller, you may begin your conference call.

Stephen Keller: Good afternoon and thanks for joining the call. With me today is Amir Aghdaei, our current President and Chief Executive Officer, and Paul Keel, who will assume the position of President and CEO later this afternoon. Given that today is Paul’s first day with Envista, Amir and I will be leading the call and we’ll handle the Q&A at the end of the prepared remarks. Before we begin, I want to point out that our earnings release, the slide presentation supplementing today’s call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations.

It will remain archived until our next quarterly call. During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted our year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the first quarter of 2024 and references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we may describe certain products and devices that have applications submitted and pending certain regulatory approvals are available only in certain markets. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe, anticipate or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements except where is required by law. With that, I’d like to turn the call over to Amir.

Amir Aghdaei: Thank you, Stephen. Good afternoon, and welcome to Envista’s First Quarter 2024 Earnings Call. We appreciate you taking the time to join us today. Before we discuss our first quarter earnings, I would like to take this time to quickly discuss our leadership transition. In late February, the Board announced that they were launching a process to find my successor to lead Envista through the next phase of our development. At the time, our Board indicated that they were looking for an accomplished public company CEO who had successfully ran complex, multinational and multidivisional businesses. Ideally, the Board wanted to find someone who had experience in dental or medtech with a strong commitment to continuous improvement and lean operating principles.

They were looking for a unique candidate, who could build another legacy and further accelerate our vision of digitizing, personalizing and democratizing dental care. We’re excited to formally introduce you to Paul Keel, who will be appointed President and Chief Executive Officer later this afternoon. Paul joins Envista from Smiths Group, a UK based engineering and technology company with annual revenue of around $4 billion. During his time at Smiths, Paul transformed the portfolio through disciplined M&A and organic growth investments. Prior to Smiths, Paul has spent 16 years at 3M where he had a variety of roles, including leading both medical and dental businesses. Prior to 3M, Paul has spent time at GE, General Mills and McKinsey. Paul’s background, experience and track record make him a uniquely qualified to lead Envista as we move forward.

Paul, welcome to Envista.

Paul Keel: Thanks Amir. I want to start by thanking you for all you have done for Envista and the dental community. I have known and admired Envista and its predecessor companies for many years and have been impressed with everything that you and the team have accomplished over the past decade. In addition to standing up Envista as a publicly traded company, you’ve advanced the portfolio, strengthened operations and articulated a clear and compelling vision for the company’s future. It is an honor and a privilege for me to now take over leadership of Envista as we move into our next phase of growth. Before I turn the call back over to Amir and Stephen, I’ll take this opportunity to let you know why I chose to leave a high performing company in Smiths to join an equally wonderful company here at Envista.

First and foremost, I am passionate about the powerful mission of improving patients’ lives that is shared by all who participate in the dental industry, my colleagues, our customers, our peers and our partners. Innovation has been a constant pillar across my career and Envista is a company where technology clearly matters and above all, oral care is a patient centric business where a relentless focus on customers, a clear strength of Envista’s, serves all stakeholders. My focus over the coming weeks will be threefold, customers, colleagues and operations. With respect to the first, I’ll hop on a plane next week for the Envista Summit in Barcelona where I’ll connect and reconnect with customers and partners. I have heard from a great many already and I’m grateful for the warm welcome.

In terms of colleagues, I couldn’t be more impressed with the leaders that I have met this far and I’m looking forward to engaging with the entire organization. We’re focused on recruiting a new leader for Nobel Biocare as well as a permanent CFO and were encouraged by the prospects. And as it pertains to operations, I am a lifelong believer in the compounding power of continuous improvement. I learned this firsthand at GE and 3M and we implemented it to good effect at Smiths. No one does this better than the Danaher family of companies and I will start my own EBS immersion shortly after this call, building on my own experiences over the previous three plus decades. Envista is an amazing company with leading positions in all key oral care segments, deep and distinctive global capabilities, enviable gross margins and cash characteristics, and a world class team.

I believe there is significant opportunity to create value for all stakeholders. I understand the work we have ahead and I am energized by the opportunity. I believe in this company and I voted with my feet much more to come in the weeks and months ahead as I begin to meet and engage with as many of you as possible. And with that, I’ll turn it back over to Amir.

Amir Aghdaei: Thanks Paul. Turning to our results, the first quarter proved challenging as we delivered modest growth while continuing to prioritize investments to drive long-term growth and profitability. In the quarter, we saw core sales growth of 0.4% and achieved an adjusted EBITDA margin of 14%. The lower margin was driven by unfavorable mix coupled with the strategic investments intended to reignite growth in our North American implant business and drive margin improvements in Spark. While we haven’t hit the inflection point, we’re confident that our investments will drive long-term value creation. Before I turn it over to Stephen to discuss our first quarter results in more detail, I want to take this opportunity to provide more color on the current operating environment and then offer a quick update on our progress toward our strategic priorities.

Globally, while the macroeconomic environment remains largely stable, we continue to see mixed trends across dental market. Overall, patient traffic remains resilient. However demand appears to be soon more toward basic hygiene and restorative treatments. Demand for higher end specialty procedures, including adult orthodontic cases and full arch implant restorations, remain more muted. Further, private practice clinicians and DSOs remain cautious about near-term investments in both equipment and clinic level inventories. Despite some of the near-term challenges, we remain cautiously optimistic about demand trends in 2024. Long-term, we are confident that patients will prioritize dental care and the clinicians will proactively invest in areas that help them digitize their practice, making them more productive and ensuring that they can provide high quality personalized care.

Focusing on Envista’s progress in Q1, overall, our orthodontic business continues to outperform the market, driven by sustained performance in Spark Clear Aligners. During the quarter, we saw over 15% growth in Spark with double-digit sequential growth in the number of active doctors. Our growth remains widespread, with robust progress both in North America and Europe as well as rapid growth in our emerging markets. We believe that Ormco’s comprehensive portfolio, including Brackets & Wires and aligners and our focus on the orthodontic specialists creates a sustained competitive advantage and a more stable business with ample opportunity for long-term share gains. Our implant business declined modestly in the first quarter as very strong growth in China was offset by modestly weaker market demand in Western Europe and continued underperformance in North America.

As we have discussed, we are taking aggressive steps to address our commercial performance issues in North America. We have overhauled our commercial leadership team, are upgrading our training and education capabilities, improving our marketing and adding significant commercial resources to help accelerate our growth. Utilizing our European playbook, we have refocused the sales team, refined our priorities, enhanced our standard work, and rolled out proven sales tools to drive growth. In the fourth quarter — in the first quarter in North America alone, we provided training to over 3000 clinicians and clinical staff members. We further increased the number of infill smart courses aimed at developing and supporting the referral networks of our specialist customers.

While it’s obviously too early to declare victory, we are confident that we are taking the right steps to address our performance issues and believe that our strong brands, leading product portfolio and dedicated community of implant specialists position us to return to market level growth as we exit 2024. While our adjusted EBITDA margins were below historical level in the quarter, we are steadily making progress against our long-term goals. The Spark team continues to drive improvements in long-term profitability by focusing on pricing, portfolio management and manufacturing cost reductions. In the first quarter, we successfully helped six President Kaizen events in four countries targeted at driving automation, digitation and productivity across order entry, design and manufacturing.

We further redesigned our packaging to improve the customer experience while reducing both material and shipping costs. Our continuous improvement actions have resulted in significant reductions in our production cost per aligner. The team remains focused on driving operational improvement to bring Spark’s margin to our fleet average. Outside of Spark, we further took action to streamline our business and reduce costs across the portfolio. We expect to see the impact of these cost savings as we move through 2024. One of our priorities remains building a better, stronger and more growth oriented portfolio. A primary component of this goal is continuing the transformation of our traditional equipment business into a comprehensive diagnostic solution business combining best-in-class imaging solutions with industry-leading AI and diagnostic capabilities.

In Q1, DEXIS launched its dental implant ecosystem, giving clinicians the ability to manage the entire implant workflow from diagnosis to delivery with one integrated tool set. Additionally, the recently released updates to our DEXIS IS ScanFlow software, further expanding our AI capabilities to boost clinicians productivity by automating precise data capture and simplifying key steps in case planning. With these tools, clinicians now efficiently, digitize the soft and hard tissues after oral cavity for fixed, removable or implant cases. As DEXIS evolves into a more differentiated solutions focused business, we have made the decision to concentrate our focus on geographies and product categories with the most competitive advantage. While this has created some short-term headwinds, it should position us for faster growth as we move forward.

We believe our improved focus is already starting to pay off as we saw our North America business delivered solid growth in Q1. Despite continued softness in demand for large equipment, we expect our North American diagnosis business to deliver mid-single-digit growth for the full year 2024. Returning to full year growth in North America signals an important turning point in the evolution of our equipment and consumables segment. I will now turn the call over to Stephen to go through our first quarter financials and provide more details on our segment performance.

Stephen Keller: Thanks, Amir. In the first quarter, we delivered sales of $623.6 million, on a reported basis, this represents a slight decrease over the first quarter of 2023. Adjusting for the impact of currency exchange rates, core sales for the quarter grew 0.4%. This reflects growth in our Specialty Products and Technologies segment, offset by a slight decline in our Equipment and Consumables segment. From a geographic perspective, our developed markets declined 1.7% with North America and Western Europe declining by a similar amount. Our emerging markets grew 10.2% in the quarter with very strong growth in China, offset by continued volatility in Russia as well as weaker demand in Latin America. Our first quarter result — our first quarter adjusted gross margin was 57.4%, a decrease of 70 basis points compared to the prior year.

The decrease in gross margin was driven by unfavorable product mix and VBP driven price reductions. While our gross margin declined year-over-year, we did see a sequential improvement driven by higher sales of consumables, reduction in Spark manufacturing costs and our other productivity initiatives. Our adjusted EBITDA margin for the quarter was 14%, which is 420 basis points lower than in Q1 of 2023. The lower adjusted EBITDA margins were partially anticipated and primarily driven by lower gross margins, unfavorable geographic mix and significant investments in both Spark and the turnaround in North America implants. Our first quarter adjusted diluted EPS was $0.26 compared to $0.38 in the comparable period of the prior year. Core revenue in our Specialty Products and Technologies segment increased by 0.8% compared to the first quarter of 2023.

Solid growth in Western Europe and very strong growth in emerging markets was offset by declines in North America. Within this segment, our orthodontic business grew low-single-digits with Spark continuing to outperform. Our Bracket & Wires business declined mid-single-digits as solid growth in emerging markets could not offset weaker demand in developed markets. Despite slower growth in the quarter, we remain confident that our orthodontic business is outperforming the market with clinicians continuing to value our comprehensive portfolio and our focus on the orthodontic specialist. Our implant business declined modestly in the first quarter as strong growth in China was offset by underperformance in North America. Encouragingly, our value implant business grew in the quarter, driven by strong growth in both Western Europe and China.

For the first quarter, our Specialty Products and Technologies segment had an adjusted operating profit of 15.1%. This is down 650 basis points versus the same period in the prior year, with the decline largely due to unfavorable mix the pricing impact of the China VBP program and significant investments in our North American implant and Spark businesses. As discussed, we are continuing to make substantial investments in our implant business to set us up for long-term growth. Investments in the quarter included adding over 60 sales and marketing resources, significantly increasing our training education activities and making onetime investments in a deep analysis of our market and our customer segmentation. Turning to our Equipment and Consumables segment.

Core sales in the first quarter decreased by 0.2% compared to the first quarter of 2023. Our Diagnostic business declined mid-single-digits in the first quarter versus the prior year. The decline was primarily driven by weakness outside North America. Encouragingly, our North American business grew as demand stabilized. Emerging markets saw a large decline in the quarter, driven by the combined effect of the muted macro conditions and are deemphasizing of nonstrategic geographies and solutions. With these efforts, we continue to refine our focus and concentrate our energy in markets where we can build and maintain a sustainable competitive advantage. Our consumable business grew low-single-digits in the quarter, driven by the stabilization of the North American distribution channel.

Patient demand in North America remains resilient, and we continue to strengthen our partnerships with our distributors to drive sell-out. Outside of North America, weaker patient demand led to some softness in sell-out. As we move through 2024, our focus remains on partnering with our distributors to drive sell-out of our solutions. We will continue to actively manage price and we believe we are well positioned to gain share in our focus markets. Equipment and Consumables adjusted operating profit margin was 21.7% in the first quarter of 2024 versus 21.8% in Q1 of 2023. As anticipated, we saw a greater than 200 basis point sequential improvement in operating margins as our consumables business stabilized, and we improved our overall sales mix.

As we move through 2024, we continue to streamline our operations and sharpen our focus in this segment and we believe that we are well positioned to accelerate growth and improve operating margins. In the first quarter, we generated free cash flow of $29.3 million, which was a significant improvement versus the first quarter of the prior year. Our increased cash flow was driven primarily by improved vendor management, lower incentive compensation payments and lower CapEx. We continue to focus on improving our free cash flow and remain committed to our longer term goal of delivering annual free cash flow in excess of net income. I’ll now turn the call over to Amir to provide some closing comments.

Amir Aghdaei: Thanks, Stephen. We remain confident in our strategy and long-term outlook. The dental market is attractive, underpenetrated and is supported by solid growth trends. Our businesses are strategically differentiated and we have a proven track record of executing in a dynamic environment. We have conviction in our ability to create meaningful value over the long-term. The Envista team remains focused on three key priorities to improve our short-term execution and build the foundation for long-term value creation. First, we plan to further accelerate our orthodontic business by providing orthodontic specialists with a differentiated and integrated suite of treatment options, including Brackets & Wires and Clear Aligners.

We will continue to drive sequential margin improvements in our Spark business. Our second area of focus is driving growth of our implant business. Globally, we plan to position our premium and value implant franchises to provide full solutions across the implant workflow, including regenerative and prosthetic offerings. We will utilize our premier diagnostics and digital capabilities to create differentiation and win customers. Our top priority in this effort is to improve our commercial execution in North America. We have made targeted investments and now see a path to reinvigorating growth. Our goal is to be growing at or above the market as we exit 2024. Finally, as we move through 2024, we will further utilize Envista Business System, EBS, to optimize our cost structure.

We intend to reduce the structural cost by an additional $30 million annually with the full year impact being realized in 2025. Our continuous improvement culture will allow us to further consolidate our operations, streamline our corporate functions and drive out G&A spending across the organization. Our purpose is to partner with dental professionals to improve patients’ lives by digitizing, personalizing and democratizing dental care. We remain focused on delivering long-term value for patients, our customers, our employees and our shareholders. On a personal note, I would like to take this opportunity to thank the Envista team, our customers, our partners and our shareholders for allowing me to lead this business over the past nine years.

I’m proud of what we have accomplished and I’m committed to the long-term success of Envista. I will remain both a senior adviser and shareholder and remain excited for the future of Envista.

Stephen Keller: Thanks, Amir. That concludes our formal comments. Amir and I will now be available to take your questions.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Elizabeth Anderson with Evercore. Please go ahead. Your line is open.

Elizabeth Anderson: Hi. Good afternoon guys. Thanks so much for the question. Congrats Amir on your next endeavors and it will be exciting to work with you all going forward. If we can talk about one thing that stood out to me in the press release, in the call, is there were some scattered comments about the forward demand environment for the rest of 2024. And — but there was no guidance reiteration or guidance update. So I was wondering if you could comment specifically the guidance for 2024 and for the second quarter?

Amir Aghdaei: Thank you Elizabeth. Given the leadership transition, I think we need to give Paul a little bit of opportunity to assess the current situation and build a viable plan that balance of the year and long-term outlook. In the meantime, Envista remains focused on our key priorities, which is further accelerate orthodontic business, continue to expand Spark margins to bring it to fleet average, drive Spark growth. Secondly, continue to accelerate our implant business by turning around the North American plant. We would like to get back to the market growth by end of 2024 and at or above market growth in rest of the world as we have proven that we are able to do that. And I think further optimizing our cost structure is going to give us that freedom that we need in order to improve our structural cost by over $30 million. We’re going to see the full impact of that in 2025 and continue to drive EBS, improve our execution going forward. Thank you, Elizabeth.

Elizabeth Anderson: Got it. And maybe just as a follow-up. Obviously, you guys talked specifically on some details about the investments made in the first quarter. I hear what you’re saying about 60 head counts in implant. Can you talk about sort of the level of spending that entailed any other sort of like revenue driver investments you made in the quarter? And then how to think about the cadence of that for the second quarter? And maybe and if you can speak further along, that would also be helpful.

Stephen Keller: Sure, Elizabeth. Yes, we obviously did make some significant investments in the quarter, some of which are onetime and then some of which will continue on. So we probably made around about $10 million worth of investments in the quarter, across the areas that we talked about. So, commercial resources, a little bit more on the upfront for training and education some partnership programs, some of our distributors as well as some of the activities that we’re doing on Spark side to drive margin improvement. Then we also did some onetime expenses around just kind of verifying our customer segmentation using some third-party resources. So I’d say most of the costs will repeat. But if a couple of — But maybe 20% of it was — 20%, 30% of it is onetime in nature, and the rest of it will — or kind of will be invested and continuous in our going-forward run rate.

Obviously, the goal here of these investments is to get our implant business, specifically in North America is to grow at or above the market. It’s a highly profitable business as soon as that performance turns, those investments pay for themselves very quickly.

Elizabeth Anderson: Got it. Thanks so much for the question.

Operator: We’ll take our next question from Jon Block with Stifel. Please go ahead. Your line is open.

Jonathan Block: Thanks, guys. Good afternoon. Maybe I’ll just jump right into Spark. Amir, I thought I heard a number of up 15% year-over-year, which is clearly taking share to your point. But just trying to back into numbers, I think it was down a bit quarter-over-quarter, 4Q ’23 to 1Q ’24. Angel has been out there. They’re predominantly in the orthodontic channel, which is where you reside. They’ve been pushing harder into EMEA and US, where you have been taking share. So maybe if you could first just talk to my numbers or maybe verify them or where they may be wrong? And number two, what you’re seeing from that particular player which sort of seems to be the new kid on the block within US and EMEA? Thanks.

Amir Aghdaei: Yes. Thank you, Jon. So just to reiterate, the year-over-year, Spark grew over 14 — over 15%. So revenue was up 15%. But it did not grow sequentially. And a good reason for that normally, Q1 is slower, it ramps up pretty quickly over time. The sequential double-digit growth in the number of active doctors that gives us the confidence that this business is going to continue to grow over time. We further see — kind of sequential strong growth in the number of primary submission. The way we look at this business is by geography and — it is what we call a Spark growth model is where we enter how many people we train, how many people that start signing up and 30 days, 60 days, 90 days, the number of cases that they place.

And this continues to be the model that we have followed. And now we are beginning to see a widespread expansion, not only on a developed market, but also on emerging market, places that we have really entered, we are beginning to see a growth, notable strength in the first quarter. We’re confident in the approach that we have taken. We think we’re going to continue to grow this business. Product is proven to be superior. The level of support and capabilities that we do. We got to make sure that we balance that growth with the margin expansion as we go throughout the year. The team is pretty excited about possibilities ahead, and we feel really confident about the work that we have done in the past five years or so. I’m not sure exactly who you’re referring to a new kid in the block in various geographies.

But I think — from our point of view, we have been really focused on orthodontist and that’s where our focus has been, and we still have plenty of room to grow. To just give it to you Jon, a little bit of an insight, only less than 50% of the traditional Ormco, Bracket & Wires specialists today are active Spark customers. So there is plenty of opportunity in that space, and there are a whole lot of other opportunities to go after the other portion that we haven’t yet entered or we haven’t yet — haven’t been engaged to it.

Jonathan Block: Great. Thanks for that color, Amir, and maybe just a second question. Elizabeth asked about the SG&A, Stephen, quite honestly, I might have been a little bit confused on what component was onetime? I’ll follow up off-line there. But let me maybe just focus on the gross margins. I thought that was the highlight for the quarter. It was up solid Q-over-Q. You do have that higher cost base as you reinvest in the business. So can you give us a little bit more color on the trajectory of gross margins from here? Do we use that 1Q ’24 sort of the new starting point? And do you think those move higher throughout the year? I’m just trying to balance faster Spark growth in lower-margin division, but also improving those particular margin. So yes — I guess if you can help us out with the trajectory from here on GMs for the balance of the year. Thanks guys.

Stephen Keller: Yes, sure. And obviously, there’s a little bit of seasonality in the gross margins. But generally speaking, you would expect it to continue — our margins to improve, our gross margins to improve as we go through the rest of the year, again, with some normal seasonality patterns. Fundamentally, what you’re going to see is continued improvement in Spark margins being a big driver of this. And then to the extent that we start growing our North — getting North American implants back to kind of market level growth, that will also be an improvement in the margins. Obviously, Q4 margins were very depressed. That was a lot significantly related to the lower sales of consumables that hit us in that quarter, again, partly because of the cyber security issue that had hit in the North American distribution channel.

So you should see positive margin progression throughout the year. And sorry if I was a little bit confusing — sorry about on the SG&A piece, just to be clear about $10 million of investments that we made, and you could say, about 70% of those are kind of investments that will be ongoing and about 30% of that was kind of onetime in nature. Hopefully, that clarifies it a little bit more.

Jonathan Block: Certainly does. Thank you.

Operator: We’ll take our next question from Jeff Johnson with Baird. Please go ahead. Your line is open.

Jeffrey Johnson: Thank you. Good evening, guys. Paul, welcome, Amir, thanks for the conversations over the years. I’ve appreciated all your insights in the dental space. That’s for sure. Stephen, let me just ask a question on that $10 million SG&A investment. I think last quarter, we heard from you or the team that there were some added investments that could — wouldn’t be leveraged necessarily in 1Q, but then you would leverage them going forward. So it sounds like there were added investments on top of the 4Q investment. So the $10 million base you’re talking about in 1Q, I guess, maybe even could you give us kind of a six months, how much has it been invested maybe over the last six months or something? And how much of that continues. Again, without guidance here, I think we’re all just trying to figure out plus or minus of this 14% EBITDA number in the first quarter, where to go over the next few quarters? Thanks.

Stephen Keller: Yes, sure. So look, some of the investments that we made in the fourth quarter were people who were added throughout the quarter. And then in this quarter, we had the full year impact of — or the full quarter impact of those people. So I think we probably made a little bit less than $10 million in the first — in Q4 investments, but probably between $5 million to $10 million in Q4. So cumulatively, we probably made around $15 million to $20 million in investments. And again, at that level, same thing about — about 70% of it should be in the run rate going forward and about 30% of it was probably onetime in nature.

Jeffrey Johnson: Yes. Fair enough. And then, Amir, I’m going to push an issue that I’ve pushed the last couple of quarters, and you and I tend to butt heads on that or at least disagree on it. I know what I’m hearing in my checks and those checks, at least in the North American implant market, would suggest some pretty sizable price concessions on some mobile active implants. Maybe it only select accounts, primarily in the full arch multicase multi-implant bundling in that. But I have started hearing that especially just over the last three or four weeks. Your 1Q gross margin did hold in. I agree with Jon, better than I thought, especially in the context of what I’ve been hearing on the pricing side. So Stephen’s comment was that maybe gross margins could improve a little bit from here?

My fear is 2Q would take a step down given some of the pricing things I’m hearing. So just kind of maybe put all that together, tell me why I’m dead wrong on that or kind of set me straight again, if you will. But again, I know what I’m hearing. So I’m just trying to figure out kind of the gross margin progression and pricing in the North American implant business. Thanks.

Amir Aghdaei: Yes. Of course, I’m not going to say you’re dead wrong. Your very knowledgeable and you do your homework, your homework all the time. What we saw in Q1 was about 20 basis points of a price erosion. This is primarily in China as VBP. If you look at what happened to China in Q1 of last year, we had a very limited business and a lot of growth in Q1 of this year. So that has had an impact in our overall EBITDA and impact in our margin. And we saw some — also some price erosion in our Equipment business, but your question is primarily around North America and implant. We’re not seeing it yet. We have not seen that. We haven’t seen it in Q1. We didn’t see it in Q4. We have some performance issue. We’re trying to improve our trajectory on growth, but it — the price has not been an issue for us in here.

Specifically on the Nobel side and the price, we have a very disciplined approach to pricing, and we continue to see erosion, not necessarily because of the price, because of this full arch, because of that specialized type of procedure that costs $25,000 to $30,000. That the market has been a little bit muted. And this is — I don’t think this is only us. We are underperforming, but the market has been challenged as well. But to answer your question, we haven’t seen it. We have not seen a price erosion on the premium implant. I’d love to hear where you have — who you’re getting that information. But across the board, we have a large constituencies, there’s a specialist with referral network, and we have visibility to it constantly monitoring it.

We have not seen a price erosion.

Jeffrey Johnson: Fair enough. Thank you.

Amir Aghdaei: Of course.

Operator: We’ll take our next question from Kevin Caliendo with UBS. Please go ahead. Your line is open.

Kevin Caliendo: Thanks and thanks for taking my question. I want to talk about implants a little bit, too, but maybe in a different context. When you talk about getting back to market growth, what is market growth? Like what do you think the market is growing now? And it seems if we canvas the publicly traded dental providers. They’re all talking about increasing their share in implants and growing faster in implants in the second half of the year and into next year. And I guess just what I’m trying to understand is where are we now? What do we expect the growth rate in that industry to be? Again I know it’s depressed currently, but when you talk about getting back to industry growth, what exactly are you aiming for targeting?

And is it simply a matter of — I guess, the second half of that is once we understand what those numbers are, is it simply a matter of better education, more people in the field. Do you think that your portfolio is what it needs to be to get there as it’s currently constructed? Thanks.

Amir Aghdaei: Thank you, Kevin. A really good question. But let’s just look back a little bit, and then I’ll answer the question. So the transition, if you go back, we’ve got a five to seven-year horizon, what you will find is — and we’re talking volume. Volume of impact. The premium implant only four companies constitute a major part of that has been growing mid-single-digit, low-single-digit, 3% to 5%. So that has been the volume growth. And the other side of that equation, which is more about what we call value or newcomers in that space. That has been growing 7% to 8% volume, but the prices have been coming down significantly. So the size of the premium and the value from a dollar perspective is almost the same. So that’s traditionally.

Take a look at the traditional. Now let me tell you what’s going in the last 12 months, and I answer your question. At the end of each quarter, there are publications that shows a number of implant plays in each geography. So we know in 2023, 4.4 million implants were placed in North America. We know the first half of the year — we are talking premium implants. We know the first half of the year, it was low-single-digit, 2% to 3% growth. Second half of the year, flat. The number of implants that were placed in second half of the year compared to 2022 was almost flat. We don’t yet have the Q1 information, but what we are seeing is more of a muted market from a number of the volume of implants. And you think about a single implant, interior versus exterior a full arch of multi-implants.

A large number of implant goes to the multi-unit as well as full arch. So when the full arch of a $25,000, $30,000 is not happening, driven by interest rate, driven by uncertainties in the market, that’s what you’re going to see. The number is not growing as fast as what we have seen in the past. So what do we expect? What we expect — when we say we want to be at the market growth, we expect that gap that we have seen in the past four to six quarter in North America to close by end of this year. We know that we have either performing at market or above it outside North America. We also know that we have been performing below market growth in North America and our goal to close that gap by end of this year. Did I answer your question?

Kevin Caliendo: Yes. I think that’s been super helpful. I guess the incremental question is, do you think that the trend of value versus premium continues? Like how much of that do you think is purely economic, consumer-driven? Or is that here to stay for a longer period of time? It felt like there was an inflection point there. Like as you said, in the second half of the year, does that recover — do you think that can recover?

Amir Aghdaei: Kevin, we got into the value implant a lot earlier than premium. We bought Implant Direct, 2012, if I’m not mistaken.

Stephen Keller: 2010.

Amir Aghdaei: 2010. And our hypothesis at the time was that value implant is going to take a significant amount of share out of the premium. Five years through that process, we recognize that is not the case. Both segments are growing. And we have been at it since 2010. So if you look at 14 years, that gives us plenty of opportunity to take a look. The value implant is growing because the segment, the group that they’re using that are very different, than the group that they use in this premium. People who are charging $5,000 to $6,000 for single implant. People who are charging $25,000 to $30,000 for full arch, is a different segment that uses and values that premium bond. We think this market has significant opportunity for growth.

Less than 10% of people who can use implant today are using it. Over 100 million three-unit bridges are being placed every year, over 30 million dentures. These are all targeted really good candidates for implant. The more people that they can use it and see the value of it, we think the market has plenty of opportunities both on the premium side as well as the value side. But we haven’t seen an erosion of the premium because of the value. That we have not seen. We’ve seen both of them growing, value is growing a lot faster, prices are dropping, premium is growing not as fast, but prices are hanging in there.

Kevin Caliendo: Super, super helpful. That’s great color. Thank you so much for that.

Amir Aghdaei: Of course.

Operator: We’ll take our next question from Brandon Vazquez with William Blair. Please go ahead. Your line is open.

Brandon Vasquez: Hi, everyone. Thanks for taking the question. I just wanted to ask kind of first like a high-level question. Over the past several years, you guys have done a great job of removing costs from the business to kind of deliver on some margin expansion. Now we’re at a point where, arguably, we need to add a little bit of cost back, for example, in the implant side of the business. I guess, the question being, do you think in order to get back to market growth rates, you have to add back much of the cost that we took out of the business was under investment by taking some of these costs out part of the issue and what that kind of means for the margin potential as you reaccelerate the top line?

Stephen Keller: Brandon, thanks for the question. I think you have to separate this in two different things. I think from a — we did — we’ve talked about in the past calls when — it’s specific to Nobel and Nobel North America, we probably did — coming out of COVID, we probably thought we were a little bit more efficient and we probably got some false signals around that. And we probably cut a little bit too deep on some of our commercial resources, and we are adding those back in, and that’s what you’re seeing now. In terms of the overall cost level, I think we do see opportunities to continue to streamline over the long-term. That’s why one of our goals is to take out $30 million of incremental cost here — structural costs here going forward.