My name is Erica, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation's First Quarter 2021 Earnings Results Conference Call. I will now turn the call over to Mr. Stephen Keller. Mr. Keller, you may begin your conference.

Thank you, Erica. Hello and thanks for joining us on the call. With us today, we have Amir Aghdaei, our President and Chief Executive Officer, and Howard Yu, our Chief Financial Officer. I would like 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. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call.

Thanks, Stephen and welcome everyone to Envista's first quarter 2021 earnings call. 2021 is off to a good start, as we achieved our core growth of nearly 30% while delivering our third consecutive quarter with adjusted EBITDA margins of over 20%. Our broad-based performance is the result of a robust recovery in the dental industry coupled with strong execution across our portfolio. Over the course of the pandemic, the dental industry has proven to be impressively resilient. We are seeing demand for dental services in our developed markets near pre-pandemic levels with the outlook from dental offices showing sequential improvement. Having adjusted to the new operating model, including a stronger focus and infection prevention protocols, dentists are now more confident in the long-term prospects of their business. While uncertainty remains and we cannot rule out short-term disruptions from localized lockdowns, we are encouraged with the pace of recovery. Before I turn it over to Howard to provide more detail on our first quarter financial results and our segment performance, I wanted to take this opportunity to discuss our progress towards our three strategic priorities of accelerating organic growth, expanding our operating margins, and building a stronger portfolio. Customer centricity is critical to our long-term growth. In the first quarter, we held over 450 virtual and in-person training and education sessions reaching over 23,000 customers. Further, in February, we held the Annual Ormco Forum where we hosted over 1,200 doctors helping them stay on the cutting edge of orthodontic technologies, clinical excellence, and practice performance. Our core bracket on wire business continued to outperform the market as we leveraged our strong Damon franchise and continue to innovate. The new Damon Ultima system, a completely re-imagined bracket and wire system designed for faster and more precise finishing, was launched in February. We had a controlled rollout in North America and are experiencing a strong uptick.

Thanks, Amir. First quarter sales increased 29.6% to $709 million. Sales were positively impacted by 3% from currency exchange rates and negatively impacted by 3.1% due to discontinued products. Our core growth was 29.7%. As Amir discussed, our strong year-over-year sales growth reflects a robust rebound in demand across the global dental market coupled with solid execution across our portfolio. Geographically, sales in North America and Western Europe grew more than 30%, reflecting a strong recovery from the start of the pandemic lockdowns in Q1 of 2020. While patient volumes are generally improving relative to Q4 and nearing pre-pandemic levels, we have seen the impact of inconsistent rollout of vaccines and localized spikes in COVID-19 infections in several geographic areas, including Canada and parts of Western Europe. We remain optimistic for a continued recovery throughout the balance of 2021. In emerging markets, China grew more than 50% in Q1 with solid demand across the portfolio. We continued to see strong growth in our premium implant business in China and are pleased with the progress we are making in orthodontics. Q1 patient volumes have recovered to over 90% of pre-COVID levels at private clinics. Return to pre-pandemic levels in public hospitals is a little slower, given their focus on vaccine rollout. Outside of China, other emerging markets remained relatively weak as COVID-19 outbreaks continue to suppress demand, and we expect these regions to continue to be challenged until the outbreaks are contained. Our gross margins of 56% increased 510 basis points due to higher volume, favorable product mix, and productivity initiatives.

Thank you, Howard. We are encouraged by the strong start of 2021 and are optimistic about our industry, our businesses, and our progress. However, we are mindful that inconsistent vaccine rollouts around the globe, new COVID-19 variants, and localized lockdowns will continue to impact the recovery in the near term. Against this backdrop, we expect to deliver core growth in the low to mid-20% range and expected adjusted EBITDA margins to be in the high teens in 2021. We believe the transformation initiatives we undertook over the past four quarters will continue to contribute to improved margins and core growth. During the balance of the year, we are committed to developing sustainable competitive advantage by increasing our investment in our growth priorities of implants, clear aligners, infection prevention, and digital workflows. As vaccinations continue to rollout and economies continue to open further, we anticipate spending, travel, and customer-facing activities will increase. At Envista, we are well positioned to lead and transform this industry. We have category-leading brands, a full portfolio of solutions to meet customers' needs, a committed and energized team, and unparalleled commercial reach. Our culture, centered around customer centricity, innovation, respect, continuous improvement, and leadership, has been tested during the pandemic and proves that we can not only survive but thrive to build a stronger and more differentiated Envista as a result. We're proud of our progress and look forward to our continued growth journey in 2021 and beyond.

Thanks, Amir. That concludes our formal comments. Erica, we're now ready for questions.

Your first question is from Elizabeth Anderson with Evercore.

Hi, guys. Congrats on the quarter. It was nice to see this come back. I guess my first question, you said core growth to know, low to mid-28% range for the full year. I was wondering if you had any additional commentary that you could provide in terms of the pacing of that growth, obviously, there is the comp benefit in the second quarter, but beyond that, just anything to keep in mind as we're going ahead with these numbers.

Thank you, Elizabeth. As you mentioned, we talked about the core growth of low to mid-20s, and we're really encouraged with what we saw in Q1 and you've seen improved trends as well. Our guidance of what we anticipate is continuous improvement as we go forward. However, we want to be balanced in here, and I want to recognize that we are still in the middle of the pandemic. We would like you to think about more of a year-over-year perspective and full-year given the historical lumpiness of our distribution business. We are cautious due to pandemic-related risks; if vaccine rollouts accelerate and local outbreaks are contained, we could do better. I would also like us to think about 2019. Our assessment at this point is that full-year 2021 would include mid-single-digit growth versus 2019 full year and as you recall during the pre-IPO and IPO, we always talked about building a company that is at mid-single-digit growth. Our EBITDA margin is also in the high-teen area, and we are really proud of the progress we have made to improve the profitability of our business. We have streamlined our business, reduced structural costs, exited low-profitability, low-growth businesses, and invested significantly in long-term strategic priorities and we are beginning to see the outcome of it. The commercial execution has been an important part of this. We have seen the recent margin improvement as reduced spending; however, as we get to more of a standard level, we expect to see an increase in travel and more customer-facing activities. We feel good about where we are and we think as economies stabilize, we have an opportunity to do better over time.

Yes, maybe, Elizabeth, just to jump in here as it relates to profitability and EBITDA. Amir and I, we do look at things from a full-year perspective, but to give you a sense here, if you look at 2019 and the EBITDA that we had, I think adjusted EBITDA was around $420 million. If you factor in the full public company costs, that gets you to adjusted EBITDA just shy of $400 million. What our guidance essentially provides is a 300 to 200 basis point improvement on that number, and as well, if you look at the absolute dollar amount, it really is a 25% growth from 2019 to full year 2021. So hopefully, that provides a little more context.

Yes, no doubt. That's very helpful. Then just in terms of the $30 million that you guys are reinvesting, I mean, I think you said it was to support some of the growth opportunities in specialty and infection control. Should we think about that as mostly falling on the SG&A line or is there some sort of split into the cost as well?

Yes, Elizabeth, there will be a component of that. I mean, we are in the ramp-up mode for Spark as well as for N1, and so some of that $30 million or over $30 million in aggregate will come via manufacturing capacity; however, I would anticipate that a good portion of that would also come via OpEx.

Okay, perfect. Thank you very much.

Your next question is from Jeff Johnson with Baird.

Hey guys, how are you? So two things. Howard, if you can just help me with the math here, when I take your EBITDA guidance and your core growth guidance, I think I'm shaken out a little north of $2 from an EPS perspective. But I've got your interest expense coming down quite a bit here over the next few quarters as some of those waivers come off. I think from last year. So EPS wise, am I kind of in the ballpark or how should we be thinking about EPS for this year?

Yes, I think, Jeff, we've been talking about the context of adjusted EBITDA as kind of our profit and we continue to think along those lines and so that's where our guide is as well. I will say that on the interest expense, our cash interest for Q1 was about $13.5 million, and given some of the pay-down on the debt, we would anticipate a per quarter interest of about $9 million for the duration here and so hopefully, that will inform you a little bit more on that calculation.

All right, fair enough. And then Amir, just hoping you could give us maybe an update on timing of N1 potential approval in the US. We've seen now a couple of press releases; it seems like you're getting a little closer to Heartland here. You've got the European DSO news from the last week or two. Just what are you doing to really position yourself better in that DSO channel and what are the DSOs seeing out of Envista that's making you a more attractive partner? Thanks.

Yes, of course. Thanks, Jeff. We are seeing solid progress in the rollout for N1 in Europe. I'll answer the question on America next. Just to give you some context around it, we now have over 450 active customers that they are actively placing N1 in Europe, with over a 30% increase compared to Q4. We got repeat customers coming in and buying more of the product going forward, and feedback has been very positive, specifically with those who are kind of pioneers in this space. We are adding a significant number of abutment prosthetic options in order to build a broader rollout. In spite of all of that, we have had challenges; specifically, this is a completely different and new protocol, so you have to do it in person. People have to see it, they have to be mentored, and they have to watch it. So we have had some challenges in that area. We are hoping that as soon as the resumption of in-person training takes place, we will see accelerated growth there. Regarding the FDA approval process, as we have said before, we expect that to be later in the part of 2021. Howard talked about investment. We are ramping up investment, both from a capacity manufacturing aspect as well as the commercial activity, so we can't really put that in place as quickly as we can. Talking a little bit about the DSOs, Jeff, as you know, we started this process back in 2018. We built a DSO-specific dedicated team focused on meeting the requirements of this segment. We think they play a really important role in democratizing dentistry, bringing dental care to the masses, and we want to ensure that they get what they need. In order for them to achieve their objectives, we go to them with a complete set of solutions. The scale matters here. We signed long-term contracts with them. Training and education are really important factors; they are trying to expand into specialties, monetize investments, and retain and expand their capabilities. We align with them through training, support, and local presence, to continue to support and build these capabilities over time. We feel confident about what we have done here. Over 10% of our business now comes from DSOs, and we expect them to continue expanding in different geographies, especially in North America and Western Europe; we are seeing momentum in different places, and the direction that we have taken in the past several years is beginning to pay off and will continue to pay off in the long run.

Thank you.

Your next question is from Nathan Rich with Goldman Sachs.

Hi, good afternoon. If I could maybe start with a follow-up on the top line guidance. As we think about the second quarter, would you expect to see sort of the normal seasonality or step-up that you typically see in the business in the second quarter? And then, Howard, I think you had mentioned exciting loss fluctuations in quarterly sales through dealer partners; could you elaborate on that and is there anything to keep in mind from a timing standpoint that either impacted the first quarter or will impact the second quarter as we think about revenue?

Yes, sure, Nate. So thanks for the question. I do think probably both of those questions are around the same topic, and what we've been working on, I would say, over the last 12 months or so consistently has been trying to balance the amount of inventory in the distributor channel. We've talked to you folks about how we're trying to marry up more closely sell-out with sell-in, and so that is a change. When you talk about the phasing here between Q1 and Q2, we typically have a larger bolus of sales in Q2 from our distributor partners; however, we're working to smooth that out and are seeing the results of that in the quarter. To provide a little bit around Q2, we would anticipate our revenue in Q2 to be relatively at the same rate as where we're seeing revenue in Q1 and that does contemplate more of the smoothing effect that we've worked through and are seeing in our sales numbers here.

Great, thank you. That's helpful. If I could ask a follow-up on the infection control business, Amir, you had said that you expect double-digit growth for the year. I think that would put sales around $250 million for the year plus or minus. Is that fair? Can you maybe talk about where you see the growth opportunities for this business? I'm also curious just to get your thoughts on how unit volumes and pricing could trend for this business as things get back to normal.

Yes, of course. Recall going back, we always use 2019 as a starting point and mentioned that we had about $175 million of business. In 2020, we had a $220 million business. So we got to about $220 million last year. We grew 20% in Q1, and at this point, as we stand today, we have over $20 million backlog and orders continue to come in. That momentum is continuing through Q2. As I mentioned, we expect that double-digit growth, and you are in the ballpark of that double-digit growth over $220 million for what we expect to see happening in 2021. Now coming back to what we see in here and why we are confident that this trend is going to continue, there are three factors that give us that confidence. The investment we've made and the differentiation we have is going to pay off in the long run. 50% of that business is in dental today, and we have over 40% share, but the majority of that is in the United States. We are now expanding internationally in Europe and China. So international expansion is a vital part of this equation. 50% of our business is in medical and we have less than 10% share. In the past nine months, we've been able to expand our medical presence significantly. We now have a medical sales force in the United States and are building one in Europe. These are with long-term contracts and specific segments. Expansion in medical is another category that gives us confidence that this business can stand on its own. We've launched many new innovative products in the past 18 to 24 months, ramping up capacity, building innovative products, and registering them geography by geography. The new product line is generating a significant positive response. Innovation, dental outside the US, and medical; all three of them give us confidence to see this business achieve double-digit growth in 2021 and mid-single-digit positive growth going forward as we adjust to the new realities. We carefully monitor inventory, observing how we manage incoming and outgoing to ensure we're not getting ahead.

Thanks for the questions.

Sure.

Your next question is from Jon Block with Stifel.

Great, thanks guys. Hey, good afternoon. Maybe, I'll start with Spark, if you can just share what you're seeing among the current adopters, maybe Spark's use for teen cases versus that of adults is broadening out. Then, sort of tagging on to that, we've seen this Clear Aligner market move towards faster growth, lower acuity cases via direct-to-consumer or maybe more like an Express lab case. Amir, if you can share with us investors' thoughts on this part of the market and how to play a bigger role there. I've just got a follow-up.

Okay. So let's just start with the Spark piece and let me try to answer that and then we will get to the bracket and wire piece. Spark now has over 1,300 active customers. What we define as an active Spark user is someone who does four cases in the past four weeks. When we look at how many new customers we have had, that number has increased by over 30% quarter-to-quarter and it continues to grow. As we have described, we sign up a specific number of doctors, we train them, we establish them, and then we sign the next group. Those who are using it have given us tremendous feedback about the quality of the product. It is now viewed as the best in the market; it’s providing them choices and is easy to use, with incredible transparency for the patient. We are seeing over 50% growth quarter-over-quarter, with Q1 versus Q4, and that volume expansion and new customer sign-ups will continue. We are optimistic about this. We have systematically expanded product categories, innovation, ramp up, and commercial execution, and now we are in Europe and beginning to see outcomes. Regarding our bracket and wire business, it is also growing double-digit and continued in Q4, is growing double-digit in Q1. If I compare it against 2019, that means high mid-single-digit growth. We are witnessing incredible success despite all the news about Clear Aligners; we have a strong franchise around Damon. Innovation in this area is making a significant difference. We're continuously putting out new products to optimize, including the system launched in North America, which is getting momentum. Customers appreciate what they're seeing; they're gaining more control, with significant investments in manufacturing leading to reduced turnaround times and increased support capabilities in the field. We are differentiated. As others exit the value segment of this business, there is an opportunity for us to continue to expand. We expect this segment to continue double-digit growth for us on an ongoing basis.

Okay, that's very helpful. And then, Howard, just for you. You mentioned the hygiene EBITDA margins for 2021. After back-to-back-to-back 20% plus, you're putting dollars back to work for the pipeline. How do we think about those investments? In other words, are there elevated investments that largely conclude at the end of 2021, or do we think about a longer tail to support those franchises into 2022 and beyond? Thanks, guys.

Sure, thanks for the question, Jon. Of the over $30 million that we're anticipating in investments for the duration of the year, a lot of that continues because we're seeing the traction. Amir described the traction we’re seeing in Spark, and so we're essentially doubling down on those investments, largely around manufacturing capacity and increasing that as well. We talked about N1, ensuring that we're successful in the rollout of that product in both Europe and North America when we’re ready to go there as well. So those are two examples. We talked about infection prevention and expanding those markets internationally and into a different segment or subset of the market in medical. We'll continue to invest in those areas, certainly digital workflows, and we would anticipate that greater than $30 million will go for the rest of this year, then we’ll assess and determine how much we need to invest further going forward. The one thing that we want to ensure is that as Amir said, we want a sustainable mid-single digit plus business, and we are not looking to go backward at all.

Fair enough. Thanks, guys.

Yes.

Your next question is from Erin Wright with Credit Suisse.

Great, thanks. Just following up on that. I heard you say mid-single-digit plus, and as we think about the mix of your business shifting, whether it's increasing greater exposure to implants, ortho, infection control products, do you think you have line of sight or visibility into potentially longer-term growth at the higher end or above the current longer-term target of mid-single-digit growth? What would get you higher than that in a normalized environment?

Thank you, Erin. When looking at these two markets, the specifics as you mentioned, the specialty businesses have incredible opportunities. The Clear Aligner market is advantageous as it brings many new customers into the market, offering tremendous opportunities for expansion of penetration. When we assess the number of cases that started in ortho in 2019-2020 and consider how many people can truly leverage that treatment, penetration is low, presenting possibilities for anyone who innovates or takes care of customers, enhancing productivity and predictability. We feel good about the investments made, and we believe the growth opportunities will continue over time through innovation and customer support. The same sentiment applies to the implants side. As you are aware, we have faced some challenges around commercial execution in various areas; it is not due to market conditions, which remains under penetrated with vast expansion opportunities. DSOs are excited about this, and numerous individuals outside developed markets are interested in it. We need to provide them with the necessary tools and capabilities through innovation for them to treat more patients. That’s where Envista comes in. Digitization in this industry democratizes and offers the chances to treat many more patients effectively. We feel optimistic about our premium segment and consistently have room for growth in our value segment. We see mid to high-single digit growth as an ongoing goal for our specialty business, and we will continue to enhance our efforts to accelerate that growth over time. Our equipment and consumables, as discussed earlier, have transitioned away from low-growth, low-margin businesses and are now positioned with 85% of the portfolio being consumable. We continue to invest significantly in operations, ensuring quality, visibility on inventory, on-time delivery, which collectively lead to the predictions we made regarding our business growth.

Obviously, we're not going to comment on specific fields here, but if you look at it, there are three or four areas where I believe this industry has significant opportunities. The digital workflow is crucial because it allows patients to receive better treatment and lets doctors be much more effective. The technology includes software, AI, and capabilities that integrate various treatment components, from diagnostics to planning to execution. We have an incredible portfolio, but there's room for us to explore additional avenues. We are under-indexed in the value implant category, and there are opportunities to invest in various geographies. Value implant is a local endeavor; we must ensure that we have local brands and a presence in different areas, and there are other opportunities we can examine as we move forward. Our balance sheet provides us a strategic tool in this exploration.

Certainly, just to add to that in terms of firepower. The cash we generated over the last three years has exceeded $900 million, and where our debt stands now, we are back to net debt below $1 billion, and we'll be at two times by the end of this year regarding debt ratios. We feel strong about that. That said, we are not looking to execute a deal merely for the sake of it; rather, we want to ensure we target the market's most attractive segments, as Amir mentioned, assess strategic fit, and consider the valuation perspective to secure double-digit cash returns in the foreseeable future while expecting greater long-term returns as well.

Okay, great, thank you.

Sure.

Your next question is from Brandon Couillard with Jefferies.

Hey, thanks, good afternoon. Amir, just a two-part question on infection prevention, if you could quantify the impact to organic growth in the first quarter from growth in that segment, and then how much of infection prevention is actually PPE sort of the mix?

Thanks, hi, Brandon. We have wipes that we use along with liquids for disinfection in various forms, shapes, and sizes; those are the two primary product categories we have for infection prevention. We don't have other categories adding to broader PPE needs. If I'm not mistaken, Howard, about 100 basis points of the growth in Q1 was attributed to infection prevention, with the remainder coming from Spark and N1, which contributed another 100 basis points. So, where we have invested our energy, we're beginning to see payoffs. About 20% of the infection prevention segment alone grew 20% year-over-year in Q1, and when you compare that to Q1 of 2019, it was nearly 70%. That momentum is something we aim to maintain moving forward.

It's been a while since we last discussed your efforts around developing your own CAD-CAM scanner. Is that still a priority? As you think about your broader strategy to build this digital workflow ecosystem?

Yes, it is. But we've made it clear; we are following a very standard process. Our priority is to build a stronger company, accelerate growth, and increase margins, ensuring we are well positioned. Those efforts are paramount. Sacrifices and partnerships made have propelled us to our current state. We now have a full diagnostic portfolio, and we have a robust relationship bolstered by X500. The remainder of the portfolio continues to strengthen, and we'll keep seeking opportunities to develop this workflow for implants and ortho, while connecting with the lab. Long-term, we want to meet market requirements. If we can achieve this and accelerate our integration through partnerships, as seen with ADAC, we aim to move forward successfully.

Super, thank you.

And that does end our allotted time for questions. I will turn the call back over to management for closing remarks.

All right, thank you everyone for your time and really appreciate you joining the call. I guess we'll talk to you again in a couple of months at the next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.