My name is Stephanie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Envista Holdings Corporation Second Quarter 2020 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 conference over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Thanks, Stephanie. Hello, everyone and thanks for joining us on the call. With us today are 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, 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, and will remain archived until our next quarterly call. A replay of this call will also be available. 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, all references in these remarks and supplemental materials to company's specific financial metrics relate to the second quarter of 2020 and all references to period to period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will 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 as required by law. With that, I'd like to turn the call over to Amir.

Thanks, John, and welcome everyone to Envista’s second quarter 2020 earnings call. Before we begin the call, I would like to express my gratitude for our employee’s tremendous work in the first half of the year. While it has been a challenging operating environment, I'm grateful for the efforts put forth and humbled leading such a customer centric, hardworking and committed team. Thank you for all that you do for Envista, our customers and our key stakeholders. Additionally, support of the social reform movements that are occurring globally, we affirm our commitment to create an environment for our employees to work as their authentic selves and continue making diversity and inclusion a priority for our business. We encourage the patient recovery and the goal of dental markets, which had a steady progress during the quarter. As a result of dental offices and businesses beginning to reopen, our core growth which declined over 60% in April accelerated through June and has continued to improve in July. We have experienced the most visible improvement in our orthodontic and implant businesses and continue to have record demand for our infection prevention products. When we began the second quarter, we redefined our near term priorities to focus on the safety of our employees, providing exceptional service to our customers, and preserving Envista’s financial strength. Safety is at the top of the mind every day and we are taking a thoughtful approach, focus, on our employee’s health. Our workforce has been incredibly agile, and those who are able to work remotely will continue to do so in areas of the world, where returning to an office is unsafe. While manufacturing and distribution centers continue to undergo daily sanitation procedures and employees are following appropriate protocols, which has allowed us to minimize disruption within our business.…

Thanks, Amir. Second quarter, sales declined 49.2% to $362 million. Sales were adversely impacted, 1.6% from discontinued products and 1.7% from foreign currency and were positively impacted 0.3% from acquisitions and 50 basis points from pricing. Core sales decreased approximately 46.2%, primarily due to lower demand in most major geographies due to the COVID-19 pandemic. Geographically, sales in developed markets were down approximately 50%, with both Western Europe and the U.S. declining at a similar rate. The U.S. improved through the quarter as we saw more favorable conditions within our specialty businesses. Within Western Europe, demand also improved within the quarter, but at a slower rate than the U.S., as southern Europe and the UK remained under lockdown for a longer period. Turning to emerging markets, China sales declined at a mid-single digit rate, which is an improvement from the first quarter performance, which was down more than 35%. This improvement was led by our orthodontic business, which grew at a double digit rate, and our consumables business, which grew at a mid-single digit rate. Emerging markets outside of China were most impacted from the COVID-19 related office shutdowns, with India and the Middle East sales down more than 70%. We finished breakeven on adjusted EBITDA as the cost actions we implemented in the quarter helped to partially mitigate the impact of the decline in volume. Our adjusted gross margin and adjusted operating profit margin also declined during the quarter due to these factors. And our second quarter adjusted diluted EPS was negative $0.10. Given the substantial progress on our permanent cost savings initiatives, and the improving environment, we anticipate being able to reduce some of our temporary cost measures, yet still achieve a meaningful reduction in operating expenses in Q3, inclusive of incremental public company spending. We spent $60…

Thanks Howard. Similar to last quarter, we're not issuing formal guidance given the uncertainty created by the pandemic. I want to provide some additional commentary on current business trends and our expectations for the business as we move into the third quarter. Let me begin with what we see as the most important factors impacting the rate of market growth. And I will then move to our sales trends and outlook. The first factor we're watching closely is the increasing infection rate especially in the U.S. and the response of values federal state and local governments. Encouragingly, in areas that have seen COVID-19 infections rise in the U.S., dental practices have not been forced to close for elective procedures nor are we -- nor have we yet to see significant changes in demand. But this remains an area of concern with recovery. We're monitoring the velocity of patients returning to the offices, as well as the maximum number of patients each office can see, given the additional time needed for infection prevention protocols. While it's clear these conditions have caused a reduction in the amount of patient appointments available per day, we started to see doctors take actions to counteract this impact, including extending the hours and using color dentistry to supplement office visits. Clinicians, especially DSO customers have also been more focused on maximizing patient procedures per visit, which is a trend that may help counteract revenue recovery versus maximum number of patient visits per day in the near-term. Finally, while our results have been steadily improving to Q2 and into Q3, we are monitoring the sustainability of this recovery. We are analyzing our partner's inventory position, pent up demand as offices reopen, the long-term effect of the economic shock that occurred in the first half, and patient's willingness…

Thanks, Amir. That concludes our formal comments. Stephanie, we're now ready to take questions.

[Operator Instructions] Your first question comes from the line of Elizabeth Anderson with Evercore.

Hi, guys. Congrats on a pretty great performance in a tough environment. I just had a couple of questions in terms of the demand trend that you're seeing. If you think about like the core consumable business and equipment and consumables, how would you say that sort of like you ended the quarter? I'm just trying to sort of get a little bit more detail on that part of the business. And then on the equipment part, how are you seeing practices think about equipment purchases. Are they still sort of interested or is there something they're pushing off to 2021? Any details you can provide there would be helpful. Thanks.

Yeah. Thank you, Elizabeth. So let's start with the consumable. As you can imagine, at the end of March, we saw the trough, it just -- as you can imagine as offices started closing the demand for the day-to-day consumables dropped significantly. And our partners also like us they started managing the cash flow and working capital, and they started setting whatever need that they have through inventories that they have. So as we mentioned, our overall business in April was as low as over 60%. And I think that was a trough of our business as inventories came in line and as we saw the slow and steady gradual improvement starting with China and in other geographies demand for traditional consumables continue to increase going forward. In the traditional consumables, we normally look at it from three different perspectives, the infection, prevention, aspect of that business, as we mentioned, grew double-digit and continue to grow both in the dental as well as in medical, more on medical to begin with. But as we progressed through the quarter, we saw more and more increase on the dental side. And though, driven primarily by paying the customers who experiencing and dentist needed to provide that support, really did not, was not that impacted. Even the smaller part of our business, it maintained throughout the quarter. But restorative, which is a big part of our traditional consumable, we saw a rebound starting in May, and throughout June, which has continued through July. While inventories declined, we saw that demand continue to increase and it was driven by a whole lot of work that we did internally. We put a support arm with our partners to get dentists back to work. And we have seen the outcome of that by demand for a specific set of product increasing throughout the quarter. This recovery varies significantly from geography by geography, but I can tell you that we are optimistic, cautiously optimistic and really encouraged with what we have seen in the past two to four months.

Thank you. That's helpful. Can I also, you mentioned that obviously your cash balance has -- is in a pretty good state and the operating cash flow in the quarter was obviously pretty impressive given the macro environment. As you go through the back half of the year, how do you think about de-levering versus potentially some M&A or other capital allocation decisions you could make on that perspective?

Elizabeth, I want to make sure that I answer your question on equipment as well, because you asked about equipment piece. So, let me answer that and then Howard will answer the question about the capital allocation and M&A. We had anticipated that equipment is going to be slower ramp, and it's going to take some time for this. It will take place as we go forward. And what we saw was some of the equipment that was already the orders were in our hand and surprisingly and I can say that we are really encouraged that we saw minimum cancellation. We continued to provide these services going forward. Our equipment, specifically on our imaging, we have a large portion of our imaging that is contractual based services in an ongoing basis and we saw that to continue, not really did not get impacted as much. Imaging has been resilient and has continued that trend. As we moved through the quarter, we saw it coming back. On the other hand, the larger capital equipment, pieces, these are $50,000 and above, we're seeing a slower ramp and as you mentioned, if people do not have to make those investment, we expect it to be seeing that ramp throughout the second half and through 2021. One of the things that we did during the quarter was we really reshaped our portfolio, 85% of our portfolio today are consumables that people need every day or equipment that they are less than $5,000 that people use it, limited need for installation and maintenance. The remaining 15% are larger equipment. And we expect that to see a slower recovery as we go forward. Howard?

Sure, sure. So, let me go ahead and answer, you’re right Elizabeth. We did have a strong free cash flow, really better than anticipated at a decline less than $5 million. And largely this is a function of strong working capital management and cost actions that we took really to preserve liquidity. As I mentioned earlier, our cash management was one of the focal points for us coming into the quarter. And then those cost actions, more than a $100 million that Amir had talked about in the quarter also exceeded the plan and helped mitigate some of the impact on the revenue decline. As it relates to leveraging, I think near-term our priorities continue to be centered around executing on these cost actions. We're about 70% of the way there, and we'll finish the remaining portion here in the second half of the year. And so, we'll see that readout for the full year next year. And then, initially we're focused on reducing leverage driven by those cost actions. And we'll take the -- we'll look as the recovery continues on our underlying business. And then more intermediate and long term, M&A is still a major part of our strategy. And we'll certainly look to go ahead and take advantage of any dislocations coming out of this current environment as well.

Okay, great, thank you guys.

Yep.

Your next question comes from the line of Jeff Johnson with Baird.

Hey, Jeff.

Hey, good afternoon, guys. How are you? I wanted to ask a question, I guess first starting on just gating throughout the quarter. And you both gave a lot of detail. I appreciate that. But for a simple guy like me, is it as simple to think about kind of the numbers in April, May, June kind of down 65, 45, 25. Is that at least ballpark accurate? And Amir, I know we heard you don’t say July momentum is continuing. Do you think we continue to improve off that July or that June exit rate. A lot of us are kind of a little concerned that we might hit a structural headwind and you talked about it for some of the operatory turnover reasons and what have you. But should we continue to see improvement at this point you think in kind of July, August, September time period? Just any high level thoughts would be helpful?

Yeah. Thanks, Jeff. Yeah, you're right, we were minus 60%, a little bit more than minus 60% down in April. And we saw gradual improvement geography by geography, product category by product category through the month -- through the month of May and then, it got better and better in June. I mean we were watching very carefully to see if this is purely driven by pent up demand and we continue to watch that very carefully. But we have seen gradual improvement made better than April, June better than May. And so far what we have seen in July, we have seen better performance in July than June. Our visibility is fully limited. And that's the reason we have been cautious not to provide expect -- it’s not to set expectation to provide a forecast until we have better visibility going forward. What we are seeing today our transitional consumable beginning to recover in June and continue to move up. As we mentioned orthodontic as well as implant piece has improved a lot better than we expected. And we are cautiously optimistic and what we've seen both in July and as far as we can see in Q3. We're watching a few things very carefully. We're watching the pent up demand versus recurring, one-time buy versus a continuation. We're watching the inventory disallocation and we have seen inventories have gone down, we want to make sure that this is not a one-time buy to rebuild inventory. So our inventories have been down, I would say since 2017 by over 50%. So, I've never seen inventories to be at that level down. And last but not least, we are watching very carefully the number of patients, the number of appointments and since over 50% of our business is direct, we have a really good feel for what is taking place in that area. Sum it all up, we are cautiously optimistic and I have to say that we have been surprised. And we are hoping that this trend to continue and we’re watching every aspect of this and not backing off neither in our short-term nor on our long-term priorities.

Understood, thank you. And maybe just on Spark, it seems like to me now you're expecting somewhere in the neighborhood of $20 million to $25 million for the year. I'd love to hear kind of how that compares to maybe your pre-COVID expectations. I think that's about in line. So I'm a little surprised by that in a good way. But maybe kind of how you're thinking about building off that $20 million to $25 million base in 2020 and maybe implications going into 2021?

Yeah, thank you, Jeff. You're absolutely correct. We started the year, January, February was really strong, and it did and we have set expectation that this should be about 50 basis points of growth for us compared to the 2019. That $15 million to $20 million was what we have communicated. Obviously, we have an internal plan that we should do better than that internal plan. We're really pleased with what we're seeing, both from doctors and patient, this clarity, stain resistant improvement and comfort that the patient see. So when we did, we have done enough, we have built enough capacity for 2020. What we did in the past three or four months, we added to significantly added capacity. We now have more than 500 active doctors and trained more than 300 in Q2. And what we have seen in here we think that we can -- we're confident that we can deliver at 100 basis point of the growth, perform in Spark and the reason for it is, demand is there, number of cases are coming. Right now, we're getting more cases than we did back in January and more customers have been trained and they are in the queue. We think can double the size of our customer base by the end of the year. So the numbers that you quoted, it's in the ballpark. And our goal is to get to over a $100 million product line over the next few years. We're building the capacity, we’re building the infrastructure to accomplish that objective.

Thank you.

Your next question is from the line of Tycho Peterson with JPMorgan.

Hi, thanks. This is a Elena on for Tycho. Thanks for taking our questions. I wanted to start with the infection prevention business. You noted that it grew double-digits in the first half of the year. And I recall in the first quarter, you said more than 35%. So just wondering if it decelerated in 2Q or how it's been trending and then, whether you could see upside to the 200 basis points tailwind in the back half of the year given the added capacity?

Yes, absolutely. So last year, infection prevention business was over a $150 million, and we make products like disinfect -- disinfecting liquids and wipes and they generally kills most viruses. We saw a substantial growth in the first half, a double-digit growth. And right now, as we’ve started Q2 we have over $25 million backlog. We're adding capacity, we think out of, 25% capacity will be online in Q3. One of the important factor in here is the mix of this business. About 40% is medical, and 60% is dental. So we saw a ramp at the beginning of the quarter, a lot of medical. And as we got to the half way through the quarter, end of the quarter and now dental is ramping up. So to answer your question, the 200 hundred basis points is something that we feel very comfortable for second half, or we think that this business could be up to about $275 million in the next year or so. And because the demand is there, capacity is there and product, as we mentioned, has got really good traction. And the new EPA approval gives us additional confidence that we can continue to expand and is making a difference, making a difference in office opening, making customers, patient, dentists safer, safer environment to operate.

Great, that's very helpful. And then, one question on the velocity of patients returning to offices you mentioned gradual improvement through the quarter. But thinking in light of the increasing infection rate in the U.S. whether there has been a change in pace in July?

Yeah, really good question, on one hand we watch every the statistics, we watch what ADA chairs and various services, various surveys that they're taking place, we are doing that in an ongoing basis. The internal data that we have are not showing any significant negative impact today. But we are watching that very closely on the regional level to make sure that we really understand what is taking place at the regional level. Outside China, we experienced a similar dynamic as U.S. As you recall, there were some geographies that they put it back new controls in place. And these are the areas that we are watching carefully, the areas of uncertainty that we are watching and managing moving forward. But thankfully, we haven't seen anything that indicates that rise in the number of COVID cases correlated with what we have seen from a demand perspective.

Great, thank you.

Your next question comes from the line of Jon Block with Stifel.

Thanks, guys. Good afternoon. Amir, you mentioned pent up demand. What are your thoughts on the industry's backlog and I would think that backlog yielded results in the second quarter. I'm guessing it's likely going to aim results in the third quarter. But what do you think about the rate of improvement for the market, is that sustainable into the fourth quarter of the backlog tailwind, call it is depleted at that point? Sort of love your thoughts there. And then I just got a follow up.

Yeah, of course. Thank you. It's really difficult to put a number on it. We think pent up demand definitely has played a role. On doctor sides, many offices closed abruptly without restocking. We know that, as I mentioned over 50% of our business is direct, they have a really good feel for what is taking place. We have a good feel for what's going on, on the inventory side of our partners. And so that was the first thing we saw on a doctor side. On the customer side, what we are seeing a lot of these pulled in March, April and May, and they all need implants, orthos to see patient, they needed to see patient in person. They're using teledentistry to compensate for it, but we have been very positively encouraged and surprised by the traditional bracket and wire, the ramp that we are seeing. We have talked to our own customers, and they’re telling us that the rate that they're seeing is what they expect moving forward. Restoration and other procedures were put up temporarily. But it seems that is ramping back up. We're monitoring our expectation for the third quarter for a measured improvement from our exit rate in June. And so far what we have seen in July, it's been really encouraging, cautiously optimistic. I think pent up demand play a role in here in June and July, but hard to put a number on it. Repeat buys, as well as continuation of number of patients, or something that will give us a feel in order to be able to answer that question is it sustainable to the Q3 and Q4.

I think, Jon, this is Howard, just to maybe jump in here as well. I think that, a lot of the actions around cost that we've taken really make us feel comfortable, regardless of the environment going forward that we’ll be positioned well. And so that's something else that we feel good about.

Got it. Thanks, helpful color as well there. I'll shift gears, so I think maybe with a second question, you guys have a sizable position within DSOs. Any high level color on how those entities are growing versus the more fragmented mom and pops and could your positioning within the DSOs be a long term benefit if we see accelerated consolidation coming out of COVID-19? Thanks for your time guys.

Yeah, so as we mentioned before, it's a really important part of our move forward plan. Absolutely an area we expect to grow above the fleet average and we are seeing a recovery in June, recovering to levels seen in, it’s just completely different the ramp of recovery from March to June. We feel really good about some of the bigger RFPs that we've won over the last six to eight months, particularly with implant and it's starting to see momentum. We put a lot of energy around training the DSOs during the quarter, and in June Nobel revenue with a DSOs were sort of double digit. It puts us in a really position of a strand to keep for DSOs to look to keep more procedures in house. One of the things that we have seen, we watch very carefully the top 10 years in United States, the ramp, the recovery ramp by geography. And as we mentioned, that encouraging sign that we're seeing is something that is repeated by them as well. As far as further consolidation, I really cannot comment on it. That’s something that DSOs are watching very carefully. But what we have seen at some point, beginning of March, they really put all of their addition either the Nobel or so acquisition, they put it on hold. But what we are hearing in June in July, they are ramping that back up again. They are asking us they're working with us and our partner to start considering some of the Nobel was that they put on hold at the beginning of the quarter. Try to ramp that back up.

Thanks guys.

Your next question comes from the line of John Krieger with William Blair.

Thanks very much. Amir, I wanted to come back to the topic of inventories. It sounds like you're watching this very closely in the channel. What is your sense about where you stand? Have they stabilized, likely to go back up? Or could we see some more downward pressure as some of your partners also try to manage their cash flow?

Yes, yes, very good. Thanks John. Inventory position have been in the best place since we have been tracking. But inventory is one aspect of it, the other part of that is share and sell out data. We have a really good feel for key large partners. We're looking at the share. We're looking at the inventory. We look at our position and sell through. As I mentioned, inventories has declined over 50% from three years ago. Year-to-date that inventory correction impact on our equipment and consumable sales is over 7%, so 7% additional growth because of that inventory correction. If I look at what impacted us most is capacity in infection prevention. It's we're working through a $25 million backlog that we can really work through that and help partners, help customers get back to work. Now getting to that question of inventories, I think from our point of view, we expect that to have level off. We are seeing this matchup is sell in and sell out. And what we saw in July over is that they're coming through in July is a good indication that in some product categories, and some specific partners, that inventory has reached a level, a point that now the orders are coming through in order to respond to the demand out there. I want to put some numbers around that 50% down. That's over $95 million since 2017.

Wonderful. That's great. Thanks. And one follow-up and this relates to Spark and one N1. As you get more experience with these new products. How comfortable are you that the sales generation will be incremental, as opposed to migration with some of your existing customers from older brands, be it Ormco or Nobel?

Yeah, so let me answer this Spark first, and I'll come back to N1. We are keeping a really close eye on our current customers. As we have mentioned before, our target -- initial target for Spark is current Ormco Customers. The ramp that we're seeing in our bracket and wire, as well as our clear aligner match, so we’re seeing the same sort of ramp in our bracket and wire coming out as well. And it tells us and through the survey with our current customer, we're confident that there is no switching taking place. Both are improving, aligner is obviously improving a lot faster as we go forward. Our N1, essentially is that A, is going to be some level of cannibalization then we get to that ramp. But our goal is to get incremental business that far exceeds that cannibalization in 2021 and 2022. We think it’s going to be a meaningful impact in our growth and our implant growth, specifically at Nobel in 2021 and 2020.

Very helpful. Thank you.

[Operator Instructions] Your next question is from Nathan Rich with Goldman Sachs.

Hi, Nathan.

Hi, good afternoon. Hi John good afternoon, Amir and Howard. If I could start with looking out to the kind of 2021 in here with the comments you made around, new products kind of making a meaningful contribution. It seems obviously like the uptake of Spark is going pretty well. For M1, what type of contribution should we expect next year and what would that assume with respect to the U.S. approval and launch? Do you feel like just kind of based on the traction that you're seeing kind of early in Europe that that could be a kind of meaningful contributor to the top-line next year, regardless of kind of what the ramp up in the U.S. look like?

Yeah, very good. Thanks Nathan. So N1 is approved in Europe, we have to see marketing and we have started registering that in different geographies in Europe. We think that that would be, as we mentioned, N1 and Spark combination about 100 basis points of growth for the second half of this year. We are in the process of going to regulatory procedures both from our skin, the surface as well as N1 in the U.S., I really cannot comment when that would be completed. We were pleasantly surprised how quickly got approved in Europe. And we are hoping that that would get approved and the impact of that in U.S. would be really meaningful, later part of 2021 and 2022. But N1 in the rest of the world, I think it would be a significant growth factor for us for the coming years. You expect that to be an important part of curve trajectory combination of what we have done with the sale Growth trajectory a combination what we have done with the sales force plus new product, I think Nobel really now encourage with what we are seeing with Nobel in North America, Europe as well as China and I think N1 would be another element in here to get this business back on the growth trajectory.

Great. And then, Howard, if I could ask a follow up on margin, you mentioned the company being in a good position, kind of regardless of how that kind of revenue comes back. Could you maybe as you start to see revenues improve, how we should think about margin progression back half of the year? And then kind of bigger picture as we look out, it seems like you're on track to achieve the $100 million as a permanent cost saving. What would you kind of see as sort of the level of margins that would be targeting on a more normalized type of revenue run rate?

So, Nathan, I'm not 100% I heard the entire question just because the quality of the sound. But I think the first question that was with regards to just overall margins and the cost actions that we've taken. We do feel really good about the cost actions, both the temporary that exceeded a $100 million. And we plan on easing off of that as we go forward here, some of these furloughs and the like, given that the underlying business is improving. But with regard to the structural cost changes, again, in excess of a $100 million, we feel like we're well on our way through that about 70%. And we'll finish that here in the second half. The portion that we completed to-date is largely around headcount as we move forward will be around footprint, back office as well. And so we will be able to share and demonstrate a $100 million of savings starting in the first quarter of 2021. And then as it relates to near-term, maybe the decrementals here, we did have better than 30% decrementals here in Q2. As we do ease off of some of these temporary actions, as well as we continue to invest in some of these key initiatives that Amir has outlined, largely around the Spark as well as N1, infection prevention in the light DTX. We think that the decremental is going into Q3 and Q4 will likely be a little bit less than the 30%. It will be probably closer in the 35% to 40% range.

Great. Thank you.

I'd now like to turn the conference back over to management.

Thanks, Stephanie. Thanks, everybody. Appreciate the time today. And we'll be around for the rest of the week to answer questions. Thank you.

Thank you very much.

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

Thanks, Stephanie.

Thank you.