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Envista Holdings Corporation (NVST) Q4 2023 Earnings Call Transcript

Envista Holdings Corporation (NVST)

Q4 2023 Earnings Conference Call

Company Participants

Amir Aghdaei - President and Chief Executive Officer

Stephen Keller - Principal Financial Officer

Conference Call Participants

Elizabeth Anderson - Evercore ISI

Jeff Johnson - Baird

Erin Wright - Morgan Stanley

Jon Block - Stifel

Nathan Rich - Goldman Sachs

Presentation

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 Fourth Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

I will 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 President and Chief Executive 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. 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 year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the fourth quarter of 2023 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. 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 Fourth Quarter 2023 Earnings Call. We appreciate you taking the time to join us today. Despite a volatile macro backdrop, we're making progress against our long-term strategic priorities. In-line with our expectations, we finished 2023 with a modest sales decline for the full-year and deliver an adjusted EBITDA margin of 18.1%. We improved our free cash flow generation in 2023 and delivered greater than $220 million while continuing to invest in our strategic priorities to accelerate our long-term growth and enhance our margin.

Before we reflect on our performance in 2023, as well as our future outlook, I think it is important to provide some context about the current operating environments as well as the underlying demand for dental solutions.

Globally, the market remains dynamic with macro uncertainty and geopolitical risks continuing to create a challenging operating environment. Conflicts in the Middle East and the Ukraine as well as cyber security attacks impacting the North America distribution channel created volatility in 2023. While our team has navigated each of these challenges will collectively, they have moderated our near-term performance.

As we move into 2024, we believe we are well-positioned to navigate potential short-term uncertainties while executing a long-term value creation model. While we continue to see resilient patient traffic throughout 2023, we did see a weakening of demand for higher-end dental procedures, including both adult orthodontic cases and full arch implant restorations. Private practice clinicians and DSOs remain thoughtful about near-term investments in both equipment and clinic level inventories.

While this has created pressure in the short-term, longer term, we are confident that patients will prioritize dental care and our clinicians will proactively invest in areas that help them digitize their practice, making them more productive, and ensuring they can provide the high-quality personalized care.

Despite the volatility seen throughout 2023, the Envista team has focused on driving our key initiatives and we continued our progress to drive long-term growth, accelerate margins and transform our portfolio. Our orthodontic business is performing well, growing double-digits for the full year. This performance significantly outpaced a global market where orthodontic case starts declined for the year. Ormco's comprehensive portfolio, including Bracket & Wires and aligners and our clear focus under orthodontic specialist creates a sustained competitive advantage and a more stable business with ample opportunity for long-term share gains.

During the year, we leveraged Envista Business System, EBS to drive our Spark growth formula and consistently added new doctors, increased case volumes with existing doctors, and grew revenue per case. The Spark business delivered over 50% year-over-year growth and we are positioned to double this business by 2026. In 2023, our implant business declined low-single-digits as challenges in North America offset at or above market growth in other geographies.

Excluding North America, our implant business collectively grew mid-single-digits for 2023. We have a strong brands, a leading product portfolio, a passionate and capable team, and a dedicated community of implant specialists around the world. Leveraging our strong foundation, we have taken aggressive steps to address our performance issues in North America.

We're making thoughtful investments in sales and marketing, training and education and community development and are leveraging a successful European leadership model and playbook, which has resulted in over 300 basis point share gains in the past three years to reinvigorate growth in North America. The North America business is expected to return to market level growth by the end of 2024.

Turning to our Equipment & Consumables segment, we declined mid-single-digits for the full year 2023. Much of the decline can be attributed to the de-emphasis of non-strategic markets and product in our diagnostics business and the cybersecurity issues that disrupted the North American distribution channel for our consumables products. Despite these isolated changes, we made progress in both businesses.

In our diagnostics business, DEXIS IOS delivered core growth of over 30% for the year. We saw a strong volume growth and a stabilizing price environment as we exited the year. Our traditional imaging solutions perform at or above the market in our focus geographies, and we successfully launched two innovative new products.

The OP 3D LX, our next generation CBCT scanner in the OP 3D platform features a larger field of view and expanded 3D diagnostic capabilities through seamless integration with our DTX Studio Clinic software. The OP 3D LX provides more flexibility and improved workflow, align doctors to augment the diagnostics, planning and treatment of patients.

On the software side, we also released the DEXassist solution to integrate AI features into the DEXIS 10 Imaging Software Suite. The DEXassist solution helps practitioners to detect six pathological findings in 2D deficiency in 2D intraoral X-rays including carries, calculus, bone loss, periapical radiolucency, root canal filing deficiency and discrepancy at margin of an existing restoration.

We now have over 50,000 computers running the DTX software globally and have processed over 200 million images on our platform. Sellout in the consumable business remained a highlight during 2023, as we perform at or above the market in most product categories and geographies. With the North American distribution channel is stabilizing, we expect this business to grow at or about the long-term market growth rate of a low-single-digits globally.

As expected, in 2023, our adjusted EBITDA margins declined due to lower sales as a result of the volatile macro conditions, our strategic investments in our Specialty and Technology segment and our rapid growth of Spark. As we have discussed, Spark margins while improving are still below fleet average.

Our 2023 performance is consistent with our intention of balancing investments for both growth and margin improvements. We believe that the focus investments we are making in both Spark and North American implants will support our margin expansion over the long-term. We continue to leverage EBS to systematically drive operational improvements, footprint rationalization, price optimization, expense controls and structural cost reductions.

Spark margins are improving sequentially as we drive down the production cost of aligners and improve our process automation. Further, we are proactively managing price across the portfolio and delivered 50 basis points of a positive price, excluding the impact of volume based pricing. Across our emerging markets, we streamlined our organization, reduced our expenses and concentrated our efforts in areas where we have the most sustainable competitive advantage.

One of our primary priorities is to build a better, stronger a more growth oriented portfolio. By providing comprehensive solutions for orthodontists an implant specialist, we continue to shift our portfolio to the most attractive segments of dental. Our diagnostic solutions business has been optimized and creates competitive advantage as we help clinicians digitize their workflows.

Our two most recent acquisitions, DEXIS IOS and Osteogenics complement our strategy and are key to our ongoing transformation. Both acquisitions saw growth accelerated throughout 2023 and are positioned well for future growth. We are committed to pursuing a disciplined approach to capital deployment. We utilize our EBS driven M&A approach to manage our robust pipeline of inorganic partnerships and investments and are constantly cultivating new opportunities.

I will now turn the call over to Stephen, to go through our fourth quarter financials and provide more details on our segment performance....

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