Yahoo Finance 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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