Envista Holdings Corporation (NYSE:NVST) Q4 2022 Earnings Call Transcript

Envista Holdings Corporation (NYSE:NVST) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Good afternoon. My name is Chelsea and I will be your conference call facilitator. At this time, I would like to welcome everyone to the Envista Holdings Corporation’s Fourth Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin.

Stephen Keller: Good afternoon and thanks for joining the call. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. 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. They will remain archived until our next quarterly call. As announced on January 3, 2022, we closed the divestiture of our Cabo treatment units instruments business for both 2021 and 2022.

The results of this business are reflected as discontinued operations in our financial statements as required by generally accepted accounting principles. All references in these remarks and accompany the presentation to earnings, revenues and other company-specific financial metrics relate only to the continuing operations of Envista’s business, except for the cash flow measures. 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 year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the fourth quarter of 2022 and references to period-to-period increases or decreases in financial metrics are year-over-year.

We may also describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets. During the call, we will be making 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 as required by law.

With that, I’d like to turn the call over to Amir.

Amir Aghdaei: Thank you, Stephen and good afternoon to everyone. We appreciate you taking the time to join us on today’s call. I’m pleased to report that for the full-year 2022, the Envista team delivered another strong performance. Our core sales growth was up 4.1% for the full-year and achieved an adjusted EBITDA margin of 20.1%. This represents a 40 basis point of expansion in adjusted EBITDA over 2021. We experienced a slowdown in growth in some portions of our business in the fourth quarter. This was expected and primarily related to challenges related to the COVID outbreak in China, the geopolitical issues related to the conflict in Ukraine and continued depressed environment for capital equipment driven by higher interest rates and lingering economic uncertainty.

As we reflect on our performance in 2022, as well as our future outlook, I think it is important to provide some context about the underlying demand for dental solutions. As I have shared on previous calls, my leadership team and I have spent a significant amount of our time in the field meeting the dental professionals in their clinics to understand what is happening in real time. It is not an overstatement to say that in 2022, we collectively spent time with over 1,000 clinicians across North America and Europe. What I hear consistently for private practice clinicians, group practices, institutions, as well as DSOs is that they are incredibly excited about the long-term prospects of the . It sees significant opportunities to grow their business by investing in and expanding their specialty treatment offerings.

They the opportunities to enhance their capabilities, optimize their workflows, and digitize their offices. While clinicians are confident in the long-term, they remain mindful of the short-term headwinds driven by increased interest rates, the possibility of recession, general economic uncertainties, and global geopolitical risks. We continue to monitor patient traffic and appointment bookings for specialty procedures. So far, patient demand has been resilient, but we do expect continued volatility going into 2023. While the market remains dynamic, I think it’s important to point out that Envista continues to deliver, despite the volatile global supply chains, geopolitical challenges and persistent inflation. Our culture underpinned by the Envista Business System, EBS, enables us to continuously deliver for our customers and shareholders.

We leverage EBS principles daily to deliver our commitments. We quickly identify potential risks and opportunities and deploy EBS tools, such as daily management or problem solving process and value stream mapping to ease supply chain uncertainties, improve our operational capabilities, reengineer existing processes, and continuously drive productivity. Our ability to produce results in the face of uncertain times is a direct reflection of our continuous improvement and customer centric culture, our strategic differentiation and the continued transformation of our portfolio. Before I turn it over to Howard to discuss our fourth quarter results in more detail, I want to provide more color on the progress we made in 2022 against our long-term priorities of accelerating our growth, expanding our operating margins, and transforming our portfolio.

In 2022, we made significant progress in driving commercial execution across our portfolio. Core growth in our orthodontics business was over 15% in 2022 as the Spark continues to deliver industry leading performance. We’re pleased to announce that together with our orthodontics partners, we have started over 300,000 Spark cases around the world. In 2022, we nearly doubled the number of active Spark doctors and further improved utilization rates of individual clinicians, leveraging our EBS toolkit to systematically manage our funnel of new clinicians and develop standard work to flawlessly onboard customers. Spark is widely seen as the leading nuclear aligner system in the market and our disciplined execution allows us to capitalize on this promise.

In addition to Spark, we also saw low single digit core growth in our traditional brackets and wires business in 2022. This growth was despite relatively weaker performance in China and Russia, which normally delivered outsized growth for our traditional brackets and wires. Our relative outperformance in brackets and wires is driven by our commitment to orthodontics and our ability to bring effective innovation to a mature industry. Our Damon Altima product continues to go rapidly by providing orthodontics with more precise finishing capabilities, allowing them to reduce share time and improve office efficiency. We have developed standard tools to bring customers through the ultimate journey and support them with targeted and effective education.

Outside innovation, we are focused on our commercial execution. With over 40% of our brackets and wires business in emerging markets, it is imperative that we reinforce our position as the partner of choice for new orthodontics professionals in emerging markets. To that end, we are pleased to be the only multinational supplier to be chosen during China’s orthodontic volume-based procurement process. This is a testament to the value that brackets and wire solution provides in all markets. Long-term, we are confident in our broad orthodontics offerings. Our portfolio is differentiated and uniquely positioned to both benefit from and help drive further expansion of orthodontics treatments globally. Turning to our solutions for implant-based tooth replacements, we delivered solid mid-single-digit core growth in 2022, despite significant volatility in China and Russia, two normally important growth drivers for this business.

Led by strong relative performance in Europe, our premium business continues to perform well. We benefited from our focus on providing comprehensive solutions for implant-based tooth replacements, and as a result, we are seeing strong growth in both digital solutions and regenerative materials. The Osteogenics business that we acquired in July of 2022 is off to a strong start. This business is now fully integrated and is starting to benefit from an EBS driven focus on execution and management. We expect our strong implant franchise to continue to grow at or above the market. Critical to our long-term strategy is our commitment to expand operating margins through disciplined execution and a focus on continuous improvement. As discussed in 2022, we delivered a 40 basis point of expansion of adjusted EBITDA margins.

We achieved these results while making significant investments in our long-term growth and also facing both meaningful inflation, as well as intermittent supply chain disruptions. Each of our businesses are driving improvements in productivity, systematically aligning our prices and driving down operational costs. In addition, we continue to optimize our organizational structure to improve the customer experience while creating more flexibility to deal with uncertainties in the macro environment. During the second half of 2022, we eliminated more than $30 million of structure costs and continue to look for ways to further streamline our organization. 2022 was another important year in the transformation of our business. We further shifted the portfolio to higher growth and more profitable segments of dental where we can create and sustain competitive advantage.

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In 2022, we benefited from the divestiture of a slower growing, lower profitability treatment unit, and instrument business. This transition both improved our overall growth and profitability, while reducing our exposure to more cyclical segments at the dental market. Given the economic uncertainty, the transformation of our portfolio puts us in a much stronger position as we move forward. In the past year, we closed two strategically important acquisitions that positions us to drive digitization of the dental market, while exposing us to higher growth segments within the industry. As promised, our acquisitions delivered more than revenue in 2022 and will enable us to accelerate core growth long-term. While we’re excited about the strategic moves that we have made today, we see opportunities to further improve our portfolio.

We’re committed to pursuing an active, but disciplined approach to capital deployment. We utilize an EBS driven M&A approach to manage our robust pipeline of inorganic partnerships and its investment and are actively cultivating new opportunities. I will now turn the call over to Howard to go through our fourth quarter financials and provide more details on our segment performance.

Howard Yu: Thanks Amir. On a reported basis, fourth quarter sales increased 1.4% to $660.8 million. Sales in the quarter were negatively impacted by 4%, due to foreign currency exchange rates, while acquisitions contributed 3.1% of growth in the quarter. Our core sales growth was 2.3%, compared to the fourth quarter of 2021. Our year-over-year growth reflects solid mid-single-digit growth in our Specialty Products and Technology segment offset by a slight decline in our Equipment and Consumables segment. Geographically, our developed markets grew 3.5%, driven by very strong growth in Western Europe, offset by more modest growth in North America. Taken together, China and Russia declined significantly in Q4, while other emerging markets grew low-single-digits.

Our fourth quarter adjusted gross margin from continuing operations was 56.2%, a decrease of 90 basis points, compared to the prior year. The decrease in gross margin was driven by a combination of inflation and strong growth of Spark, somewhat offset by pricing. Our adjusted EBITDA margin for the quarter was 20.9%, which is 240 basis points higher than Q4 of 2021. Expanded margins were primarily driven by the EBS cost and productivity initiatives undertaken by our team throughout 2022. In Q4, we took further actions to streamline our organization to ensure that we can continue to expand margins while investing for growth. Our fourth quarter adjusted EPS was $0.52 from continuing operations, compared to $0.46 in the comparable period of the prior year.

This represents a 13% increase year-over-year. Core revenue in our specialty products and technologies increased 4.5%, compared to the fourth quarter of 2021. Strong growth in Western Europe was offset by significant declines in China and Russia. Within this segment, our orthodontics business grew more than 15% year-over-year in the fourth quarter with Spark continuing to outperform. Our bracket and wires business grew low-single-digits in North America, but was dragged down by double-digit declines in China and a more modest decline in Western Europe. Despite the macro volatility, we are confident that our orthodontics business continues to outperform the market. Clinicians value our comprehensive orthodontics portfolio and our focus on the orthodontics specialist.

Our implant-based tooth replacement business declined modestly in Q4 of 2022 versus Q4 of the prior year. This decline was primarily driven by double-digit decline in China and Russia combined. Outside of Russia and China, we delivered positive low single digit growth led by solid performance in Europe. Our regenerative business, including the newly acquired Osteogenics business continues to accelerate. For the fourth quarter, our Specialty Products and Technology segment had an adjusted operating profit of 20%. This was down 210 basis points versus the same period in the prior year, primarily due to Spark and our continued investment to drive long-term growth, as well as a decrease in sales in China and some currency headwinds. Turning to our Equipment and Consumables segment.

Core sales in Q4 decreased by 0.9%, compared to Q4 of 2021. The decline in sales was due to the continued slowdown in equipment volumes offset by very strong growth in our consumables business. Our traditional imaging business declined double digits in the quarter with lower volume across most geographies. The lower growth was partially attributable to the strong performance in Q4 of 2021, driven by pent-up demand, as well as macro headwinds, including inflation, rising interest rates, COVID related challenges in China and geopolitical uncertainties. Further, we continue to deemphasize non-strategic geographies and concentrate our efforts in markets where we can build a long-term sustainable competitive advantage. This allows us to accelerate both growth and margins over the long-term.

Our new DEXIS iOS business accelerated in the fourth quarter and we continued to make investments to set this business up for long-term success. We remain focused on expanding our reach and optimizing our global distribution. Clinicians remain very interested in investing in iOS solutions to help them improve their overall workflow. The DEXIS iOS solution is well positioned to outperform the market and we expect this business to be a contributor to our core growth in 2023 and beyond. On the consumables side, our Restorative & Endodontics grew more than 7% in Q4 with strong growth in most markets. Our team continues to execute and we are well-positioned to continue delivering results at or above market growth. As expected, our infection prevention business increased double-digits in Q4 of 2022, compared to the softer Q4 of 2021.

The pandemic related spikes in demand and inventory levels have now normalized and we believe moving forward this business will grow more in-line with long-term market trends. Equipment and Consumables adjusted operating profit margin was 27.2% in the fourth quarter of 2022, versus 21.4% in Q4 of 2021. Our continued strong margin improvement was driven by a favorable sales mix and improved pricing, as well as our relentless focus on driving productivity. As we move into 2023, the inclusion of our more fully integrated iOS business will further support the growth of our equipment and consumables business, while also positively contributing to our profitability. In the fourth quarter, we generated free cash flow of $95.1 million and we ended the year with over $600 million in cash.

For the year, our free cash flow was markedly lower than prior year, due to several factors, including the elimination of cash flows associated with discontinued operations, one-time transaction costs associated with our acquisitions and divestiture, the timing of tax payments and higher capital expenditures to support our long-term growth initiatives. As discussed in our last earnings call, we remain committed to our mid-term goal of delivering free cash flow in excess of net income. We made significant progress in the fourth quarter, driven primarily by sequential improvements in working capital. As we move into 2023, we remain focused on driving free cash flow, while continuing to invest in our long-term growth initiatives. Overall, our balance sheet remains strong and we have ample liquidity and the flexibility to pursue appropriate long-term investments.

I’ll now turn the call over to Amir to provide an update on our 2023 outlook, as well as some closing comments.

Amir Aghdaei: Thanks, Howard. Looking forward, we remain confident in our strategy and long-term outlook. The dental market is attractive, underpenetrated and has a strong growth trends. Our business is strategically differentiated and we have proven track record of execution. We have conviction in our ability to deliver on our long-term financial targets of accelerating growth to high-single-digits and expanding our adjusted EBITDA margins to over 22.5% by 20 26. While we remain confident in our long-term targets, we are also mindful of the volatile macro environment. Despite the resilience of the dental market, we expect 2023 global demand to be choppy. Mounting expectations for a recession are likely to be heavy on the minds of both patients and clinicians.

The geopolitical situation related to the Ukraine conflict and the associated risk of energy crisis in Europe, as well as China’s COVID-related uncertainty and the consumer sentiment will create additional volatility. In-light of this macroeconomic background for 2023, we expect to deliver low-single-digit core growth and adjusted EBITDA margins of over 20%. We expect our core growth to accelerate throughout 2023 as China stabilizes and we benefit from the impact of our acquisitions. Margins are also anticipated to accelerate throughout 2023 as we benefit from the streamlining of our organization and cost reduction, as well as the shift of our portfolio mix toward higher margin products. Our full-year guidance reflects a balanced view of managing through a more volatile economics and environment, while continuing to invest for long-term growth, expanding our margins, and transforming our portfolio.

We’re pleased with our 2022 results and remain optimistic about the future of the dental industry. Moving forward, our priorities remain the same. We will accelerate growth, expand our operating margins, and transform our portfolio through active and disciplined capital deployment. Our intention is to be the leader in orthodontics, providing differentiated and integrated suite of treatment options, including brackets and wires and clear aligners. Our comprehensive offering empowers orthodontics to provide the best treatment modality for each and every patient. We will further accelerate our growth in implant-based tooth replacement by leveraging our premium implant franchise to provide full solutions across the implant workflow, including regenerative prosthetics offerings by utilizing our premier diagnostics and digital capabilities.

We will continue to grow and broaden access to highly profitable and differentiated consumable business. Finally, we will leverage our strength in imaging and diagnostics to build digitally integrated workflows from diagnostics to treatment planning to execution for our clinical partners. Given the near-term macro uncertainty, we will lean heavily in our EBS culture to both improve execution, drive efficiency, and improve cost. We see significant opportunities to invest organically and inorganically in the dental market. We have the financial flexibility and management focus to further accelerate our growth trajectory via disciplined capital deployment and inorganic investments. The progress we made this quarter and in 2022 is a direct reflection of our culture centered and continuous improvement and commitment that we have to our customers and the dental industry.

Our purpose is to partner with dental professionals to improve patients’ lives by digitizing, personalizing, and democratizing dental care. We’re excited about our continued growth journey in 2023 and beyond.

Stephen Keller: Thanks Amir. That concludes our formal comments. We are now ready for questions.

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Q&A Session

Operator: Thank you. And we’ll take our first question from Jason Bednar with Piper Sandler. Your line is open.

Jason Bednar: Hey, good afternoon, Amir and Howard. Apologies in advance for any background noise here. Maybe just to start, Amir, it’s a pretty dynamic environment right now as you alluded to in your opening remarks, but the dental consumer in the U.S. and I mean most of Europe seems to help you today I think a lot of us were fearing then others in dental might have talked more positively about demand visibility improving. Implants north or outside of China and Russia seem they are in okay spot based on your comments here today. I know it might not be perfect visibility, but you’re really close to the end market as you alluded to. I really just like to start with getting your impression if you could expand further on your prepared remarks on the health of the dental consumer in the U.S. and Europe and their willingness to spend on discretionary dental procedures?

Howard Yu: Thanks, Jason. What we have seen is the patient demand remains resilient. Through all the reviews that we have done, visits that we have, what we have seen, the bookings remain the same and on specialty businesses, there is continuity around patient traffic. The challenges and the macro perspective is to continue to see softness in China that has started in Q4 and we have seen that to continue in Q1 and volatility that we see in Russia seems to persist. In large imaging equipment is also €“ and there’s tremendous amount of pressure from investment by large DSOs opening new offices, as well as the interest rate and inflation related. We expect Q1 growth to be muted, but as we go further through the year, we’re going to see a faster growth through 2023.

In the long run, we feel confident that this industry has tremendous amount of runway. And our capabilities to manage through some of these volatilities have proven and become commodities a lot stronger as we get to a more of a stable situation.

Jason Bednar: All right. Thanks for that. Maybe then on €“ if I pivot over to the part of the guide here, I thought the EBITDA margin guide here was pretty solid guys considering you had the from VBP. Howard, would you be able to help us think through the magnitude of those VBP headwinds you’re absorbing? What EBITDA margin might have been without those pressures? And then also along that margin vein, can you speak to where we’re at with Spark in terms of its impact on EBITDA margin profile in 2023, whether you think about that in absolute terms or in terms of incremental margin? Sorry for throwing a few in there together, but thanks again for taking the questions.

Howard Yu: No problem, Jason. So, as it relates to VBP, let me go ahead and provide a little bit of quick framework here. For us, our China business on the specialty side is about 100 €“ actually a little bit over $175 million, a $100 million or over $100 million in the implant side, and over $75 million on the ortho side. Remember that most of our business we focus is on the private sector. That’s about 70% of our collective business there and that’s a faster growing segment we see that as being more opportunities to differentiate with innovation. VBP is primarily impacting the public sector. And so, of course the goal of VBP as we know is to reduce treatment costs and therefore expand access overall. DSOs will certainly be involved in it as well.