My name is Erika and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holding Corporation's Fourth 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 call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Thanks, Erika. 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. During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. 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 fourth 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 fourth quarter 2020 earnings call. Before discussing our result, I wanted to start by reflecting what has truly been an historic year. While this has been a challenge in 12 months in many ways, we have successfully navigated through by keeping our customers at the center of all that we do. This is one of Envista's five core values and was evident in our frontline manufacturing and distribution teams, who were the last ones to leave and first ones to return to keep production running in the middle of the pandemic. Customer centricity was alive and well among our commercial teams, who held more than 4,000 training and education sessions for over 400,000 dental professionals. We are proud of our role in the broader healthcare community where we provide critical disinfectant products to help fight the spread of COVID-19 in dental and medical offices and critical care setting in more than 80 countries. In 2020, we shipped more than 30 million units of wipes and liquids to assist in this effort. At Envista, we're committed to partnering with dental professionals to create greater access to quality oral healthcare globally. We make products and services that improve the productivity and predictability of our customers, practices and help in creating better patient outcomes. To our customers, we're committed to supporting your efforts to improve oral health. To our employees thank you again for your tremendous sacrifice and comradery in 2020. Turning back to our results, we had an outstanding finish to the year delivering 3.4% core revenue growth and 8.5% increase in free cash flow and a 23% increase in adjusted EBITDA. This was made possible by the progress we have made and our journey to accelerate growth, expand profitability, and build a better Envista.…

Thanks, Amir. Fourth quarter sales increased 1.6% to $732 million. Sales were positively impacted 0.1% from acquisitions and 1.9% from currency and unfavorably impacted 3.8% due to discontinued products. Core sales increased approximately 3.4%, a sequential improvement from the sales declines experienced in the first three quarters of 2020. Globally, most dentist offices remained open with stable patient volumes relative to the third quarter despite some government imposed lockdowns and an increase in prevalence of COVID-19. Our consumables business led the way with mid single digit growth driven by pent-up demand, new procedure volumes and strong performance in our Infection Prevention business. Geographically, sales in developed markets grew at mid single digit rate. North America increased low single digits with robust demand for our infection prevention and orthodontic products. Western Europe grew at a mid single digit rate and Japan grew at a double digit rate led by our traditional consumables and equipment businesses. This was partially due to government policies designed to incentivize the purchase of capital and disinfecting equipment. In emerging markets, China grew more than 20% with all product categories experiencing healthy performance. Our specialty business had a strong second half of 2020 and finished the year in positive territory. The success throughout the year has been due to our investment in key private accounts, which recovered more quickly than the public sector. Private sector revenues increased more than 25% in 2020. In the public sector, we have focused on increasing formulary access for our premium implants and new orthodontic products, Spark and DQ2, which will help us grow as more patients return to public care settings. Outside of China, other emerging markets remained weak and decline more than 10% as the COVID-19 outbreak suppressed demand. Our adjusted gross margin of 54.4% increased 40 basis points due…

Thanks, Howard. We are very pleased with our progress in 2020 and believe we are entering 2021 in a position of strength. For the second consecutive quarter our strategic priorities contributed more than 300 basis points to our top line growth. Additionally, our China business returned to double-digit growth for the first time since the outbreak of the pandemic. It delivered adjusted EBITDA margin above 20% for the second concentric consecutive quarter, doing large part to our execution and our $100 million permanent cost reduction and margin enhancement programs. This savings will help us accelerate future performance as we partially redeploy cash into required investment to accelerate our specialty segment growth. After the exit of lower growth and margin areas of the business, our portfolio today is much better positioned with our 85% of our revenue focused in consumables and clinical workflow products. We expect to expand upon our strong foundation inorganically as our balance sheet is in the best possible position it has ever been. Looking forward we are cautiously optimistic and the near term outlook of the dental market. We entered January with a healthy backlog and solid recovery trends continue results for the month consistent with the second half of 2020. For the first quarter, we believe our orthodontic business will maintain the strong performance driven by new case starts and that the implant placement rates will remain stable relative to the fourth quarter. In Equipment & Consumables we anticipate a strong performance in infection prevention to drive double-digit growth in consumables, while equipment is expected to remain below pre-COVID levels as certain incentives moderate. Geographically, we have seen a stable conditions continue from the fourth quarter. In North America, Western Europe, which makes up over 70% of our revenue did dental market, while the study remains…

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

[Operator Instructions] Your first question is from Jeff Johnson with Baird.

Thank you. Good morning or good afternoon guys. Congratulations on a really solid close to the year. Amir, I wanted to start with your revenue outlook, the geographic details and the product line details very helpful. You exited the year above 4Q 2019 levels on a core basis. If I roll up your comments, it sounds like maybe in line in 2021 with 2019 revenues are slightly below. Is that how we should still be thinking about your full year 2021 revenues? I know you're not guiding, but maybe all in a little bit below 2019 levels.

Thank you, Jeff. We're really pleased with where we ended in Q4. We have done, as you can imagine, a lot of work in reposition this portfolio and put ourselves in a better place. Our consumable is mid single digit, equipment is flat. Our growth priorities are adding over 300 basis point of a top-line performance. We have a double digit ortho growth and over 40% infection prevention growth. Geographically, we have really positioned ourselves in a different situation and we expect better execution as we go forward. But on the other hand, some of the government incentive as well as the outlook of what we see in pandemic remain uncertain. China obviously is doing extremely well, specific in the specialty. Developed markets have been a surprise to us, and we are seeing those expectations exceeding above the board. Currency played a role in Q4, not that big, but it was about $10 million. Putting all of that together, what we see in Q1, a continuation of what we saw in second half except this change in equipment and consumable, specific on equipment because of incentives that were given in Germany and Japan. But looking ahead is really difficult for us at this point to provide guidance in 2021. What we can tell you is we have repositioned its portfolio in a very good place exactly where we wanted it to be. And we are excited about the opportunities as COVID dynamics changes over time, and it puts us in a better place as we enter the second half of this year.

All right, that's helpful. Thank you. And then maybe as a follow-up, just Howard on the margins, its two quarters now, the second of the year anyway, you were just at 20% operating margin on a non-GAAP company-wide basis. Street is sitting at 15% operating margin, or even a bit below that for all of 2021. If I think about your $30 million in incremental investments on the specialty side, that's only a point or so. I would assume you feel fine with where the Street is at 15%. It would feel like to me there should be some upside there. Just how should we think about the full year understanding you're not guiding, but at least can you kind of toggle us between that 15% Street number in the 20% that you exited the second half of 2020? Thank you.

Sure, Jeff. Hi. Thanks for the question. Certainly, we're pleased with where we ended the year and really the second half. As Amir indicated, there is still some fluidity to the situation with we're talking about the pandemic, certain geographies, we talked a little bit about Northern China as well. But as it relates to margins, we do feel as though we will be better than the 2019 levels, certainly. And maybe given there's so much out there one of the ways to think about it is if we use 2019 as a jump off point and adjust those – the EBITDA number for corporate costs that puts us roughly in the $400 million range. And as you indicated, Jeff, with some of the cost savings as well as the investment that Amir referenced, and we have some inflationary considerations as well. So I think that that does put us in that mid teens, the higher part of the mid-teens is what we're looking at overall as we're thinking about the EBITDA, but again without putting out formal guidance, I think that that's the rough range of where we're thinking.

Understood. Thank you guys.

Sure.

Your next question is from Jon Block with Stifel.

Hi, guys. Good afternoon. And I'm actually going to pick up where Jeff left off. I'm sorry. I just think it's important for clarification. I'll take a different approach. The 2H EBITDA was I believe $280 million, obviously run rating well over $500 million. But look, there's one-time stuff in there, Howard you called that out. How do we think about what was one-time? And also in the $30 million investment in 2021 around N1 and Spark, is that all expense just to be clear or some of those investments specific to CapEx? So maybe we just put a finer point to some of those questions. Thanks.

Yes. Maybe I'm knocking off the first part or the second part of that question that $30 million is going to be running through the P&L. So it's primarily on the OpEx as well as manufacturing expense and so hopefully that helps a little bit there, Jon. I think that we do have a little bit more visibility around Q1 and earlier in the year than I would say the latter part of the year overall. And so maybe to talk a little bit relative to the 2020 numbers for Q1, as you indicated, if we take that as a jump off point, we talked about the cost savings and completing that effort. That's a gross savings of about $25 million on a quarterly basis. And then we think that we'll have a very healthy fall through in Q1 on volume of, let's say, in excess of 40%. So that helps us kind of get through what we're looking at very near-term. And then more broader term, I think, we had answered that relative to what Jeff was asking as well and his perceptions and what we think on the EBITDA side.

Okay, got it. Fair enough. And I'll pivot for the second one, wires and brackets number was just – was phenomenal again. I think you guys called out 10% growth. It's just funny, here we are all focused on Spark and Clear Aligners, but a good amount of dollar growth has really been in that wires and brackets core franchise. So maybe, Amir, if you can just spend some time what do you think market is growing? How are you growing? What seems like well, well above market? Is it from a geographic standpoint? Is it due to one of the players exiting the market? And do you think maybe high single-digit growth can be maintained going forward specific to wires and brackets? Thanks.

Yes. Thank you, Jon. To start this process, our wire and bracket business has been growing mid single digit prior to pandemic. If you look at that segment, that $2 billion segment, it was growing at the low single digit to flat, and we were continuing on that mid single digit growth before the pandemic. Our team has done a really incredible job in taking share in many places in China, Russia, Western Europe is second half and you look at the second half growth, we had a high single digit growth and double digit growth in Q4. We have started really performing very well in the U.S. So figure out where is this coming from? This performance is a combination of a pent-up demand that we saw a little bit. What I call is zoom effect, people being having a little bit more time, have a bit more money to spend in here. Our bracket and wire business is really differentiated. It's differentiated because it has significant number of new innovation coming into the space on the Damon bracket area. It's differentiated because of a lot of training and education that we continue to do as 70% of this business is outside U.S., really exposed to what is happening in China and Russia in other geographies. That combination really puts us in an outstanding position to continue this momentum as we go forward. We are committed to this business. We think there is a large part of the segment meet this requirement by going after the bracket and wire. And we are going to continue to invest in it and make sure that people understand the value that we provide.

Thanks guys. I appreciate the color.

Thank you.

Your next question is from Steve Beuchaw with Wolfe Research.

Hi. Good afternoon and thanks for the time here. There are a couple of things that have come up on the call that I'd love to get a little quantification on if we can. One, just because I don't trust my own math, Howard, could you talk a little bit about the implication of the decline in interest rates that you flagged in February? What's the impact on interest expense for the balance of the year? And is there any delta between that? And what we would think of in terms of cash flow? And then the second thing I was hoping to get some quantification on is the programs that you referenced that were impactful in the second half of 2020 in Germany, in Japan, any specifics on what those did in terms of growth of dollars would be super helpful. Thank you.

Sure. So as it relates to the interest, Steve, this is related to the payback of our $752 million of debt. And so, we think that the interest will be stepping down. I think it's about $12 million for Q1, and then will be about $8 million for each quarter subsequent to that. And this will be effective here in February. And so hopefully that provides you some thoughts as it relates to that on a cash basis.

As far as – Steve, as far as the program that they were put in place in – specifically in the latter part of last year, we saw a serious program in Japan and specifically in Germany, around VAT reduction on capital equipment as well as amortization that they put different kind of a program in place. And both of those really help investment in this space and the equipment side. Also we saw better demand for smaller equipment, a lot of hand pieces, specifically electrical, electrical hand pieces, which is more hygienic, works a lot better. And I saw also improvement in our imaging and imaging pieces, where a lot of things that we talked a little bit about our commitment to customers, 60 day no risk guarantee. We are really encouraged by work that we have done in repositioning the portfolio. Our team has done a really great job executing and becoming a lot more customer centric in this space. And as I mentioned some of those program that we saw in latter half of last year.

Okay. Thank you very much for the color, just one follow-up. Amir, you talked in different places, here in the Q&A and in your prepared remarks, about pent-up demand. And you've talked about working through some of that. But in some areas you've also talked about there being remaining pent-up demand, maybe higher acuity demand. So I think it's different in different categories, right?

Right.

Can you try – I know it's hard. I know it's hard, but could you try to synthesize it and give us a sense do you think any sort of demand backlog, right? Is it a net tailwind or net headwind for 2021? Or does it just kind of washout? And then I'll get back in queue. Thank you very much.

Yes. Yes, happy to do it. And maybe I've been looking at this continuously, Steve. So let me just start with the equipment and consumable. Our inventory from January 1st of 2020 to end of the year is down by 40%. So that's just important factor to think about that inventories were down, so there is no extra inventory sitting out there. So what we talk about – when we talk about pent-up demand, that plays a really important role when inventories are level off that sell-in and sell-out kind of a match each other. And then the other element of this is around that infection prevention backlog. We have done – as we mentioned, we have added capacity. We have our infection prevention in Q4; we've grown over 40%. And that momentum hasn't stopped. We're walking into Q1 with the same set of setup. We have over $30 million of a backlog in here, our ortho business, we saw a little bit of a pent-up demand in Q3. By the time we got to Q4, we think that really had worked its way out, and it is not as much of an issue as you go forward. So you pull it together our base business. We don't think pent-up demand is as much of an issue walking in 2021. Now, let's go to a standard dentist visit to go for a hygiene. Normally a lot of new cases get identified when you go through your standard hygiene checkup. That offers opportunity for additional specialty businesses as we see a little bit of normalities hopefully in second half of this year. So hopefully that gives you a little bit of a fear for what we saw in second half, what we've seen in the first half and what we expect to see in second half of 2021.

That's excellent. Thanks, Amir. Have a great day.

Your next question is from Erin Wright with Credit Suisse.

We have a follow up on the infection prevention. I guess can you describe or speak to how we should be thinking about the durability and quarterly progression of infection prevention contribution here? What purchases kind of within that segment are more recurring in nature? And you mentioned some multi-year contracts as well. How should we think about that, and if the contributions in 2021 and beyond as well as the margin profile for that business? Thanks.

Yes. Happy to do. Hi, Erin. So this business in 2020 was $220 million. So we have talked about adding $100 million to it at the very beginning. So we made a significant step forward in 2020, build significant amount of capacity. In Q4 as I mentioned to see grew 40%, that momentum is continuing. We've got over $30 million backlog. So now let me break it down for you from two different dimensions. 50% of this business is dental and we have over 40% share in that segment, and as you can imagine at the beginning of the year there was not a whole lot of demand, but that demand has ramped up, and a lot of that business, over 80% of it is in the United States. The other 50% is medical and the medical space, the market is 6 times larger than the dental, and we have less than 10% share. So when I take a step back and say, is it sustainable? Disinfectant procedure is becoming a standard globally. Everybody's using it. Even after the pandemic, it's going to be a standard procedure. 80% of business has been in U.S. We all have significant runway outside U.S. and we build in capacity outside U.S. commercial capacity capabilities. Medical market gives us an opportunity to be a much bigger player because of the product capabilities that we have. We have also added resources on the commercial side. So this business is going to be a double-digit growth for us, at least in 2021, until we get to a more of a level setting in here. Has above fleet average margin, so more of a consumable margin and I think it's going to be an important part of our overall portfolio as we go forward with what I talked about those three different dimension gives us opportunity for runway in the long run.

I think, Erin, maybe just – this is Howard, just to clarify here a little bit. We would think that the expectation on the first half would probably be a bit higher given that in the second half, we're going to have some of these comps as we roll into the third quarter of this year as well.

Okay, great. That's helpful. And how should we think about the ramp of N1 and implants overall, given that there's more of that face to face sales process. Do you anticipate that will really ramp when things normalize and how – what's your response to the traction so far? I think you said 40% of your doctor are doing repeat business. Presumably that would be kind of better in a normalized environment, but how is that relative to your kind of initial expectations there?

Yes. So as you can imagine, this is a surgical procedure that you really want to have a group of people in a surgical room, show him, teach him that how it's done, and that has been a little bit of a challenge in here given the environment that we're in. Upon saying that, we have trained over 1,000 doctors introducing 10 different countries and we continue to do that. 300 of those 1,000, more than 300, they have placed order and 40% of them, they have placed repeat orders. It is going better than what we have expected given what is taking place. The reality is that is underground. How this is going to ramp-up, a lot of it has to do with the training. Our experts need to become really comfortable, and then they're going to teach other people how to use it. What we are hearing from our experts is this is an incredible change in what has taken place in this industry. I want to take us back to over 20 years ago; immediate loading protocols really changed the industry when Nobel introduced it. N1 is a paradigm shift in implant procedure. It will become a standard. It is going to be a new way of doing things. We are excited about it, hopefully as the pandemic moves forward, as we get it in the U.S., this is going to be an important part of our growth and getting implant to continue to execute as we go forward.

Okay, great. Thank you.

Your next question is from Brandon Couillard with Jefferies.

Thanks. Good afternoon. Howard, I think the fourth quarter had three less selling days. Could you quantify the impact to core growth in the quarter end? If you look at the core consumables business, can you strip down kind of what core consumables growth would have looked like adjusting for the selling days and kind of backing out the infection prevention or contribution?

Yes. So, Brandon, sure, I mean, I think that in light of the ebb and flows of the pandemic and things of that nature, we did see the number of days did not play as big of an impact as it relates to the equipment sales, which stayed strong. We think that the incentives that the government had put in place probably outweigh some of the days within the respective month or quarter, and so we certainly saw that overall. I think from a consumable standpoint, we felt really good about the growth there. As Amir indicated on the specialty side, both the orthodontic business growing at the double-digit rate as well as the improved performance in the implant business and some of the growth that we saw in larger customers like DSOs and in China coming back really strong as well.

Thanks. Maybe one for me, back on N1; just give us an update in terms of the timing of a broader commercial rollout for that product in Europe as well as update as far as the U.S. introduction goes? Thanks.

Yes. Happy to do Brandon. In Europe country by country we are adding it and the moment we have an opportunity to show up in any office, any places, and we have been doing a lot of remote training out of our Zurich office and broadcasting it, but we really got to be onsite to be able to do that. So we are aware we have an opportunity city by city, geography by geography we are doing that in Europe, across Europe. In the U.S. we are going through the approval process, the 510(K), we are working with the FDA. We are filing all that information and a lot of that has to do with kind of the feedback we get and what kind of question we get. We are counting on a second half, later half of this year to that become an important part of our growth vectors in the U.S. at the same time a lot of new product that we have put in place both in Europe and on surface is making a difference. They are in U.S and they're going to be continuing introduction of various product categories, abutment, prosthetic, that they're going to be a part of a broader rollout. So we think this is going to be an factor for a second half of 2021, and in 2022 get us to mid-single digit growth, high-single digit growth over time our implant business.

Great. Thank you.

Your next question is from Elizabeth Anderson with Evercore.

Hey, guys. Thanks so much for the question. Can you guys remind us if there's any selling day's impact on the first quarter at all?

Yes. Elizabeth, I think it's fairly diminimous, it's maybe a day, and so certainly don't factor that in, as it relates to our expectations here on Q1.

Okay, perfect. And that's helpful. And then as we think about, as sort of volumes are continuing to re-ramp at dentist offices, can you talk about how you sort of see the drop through and if there's any, the incremental drop through, and is there any particular categories that, that might have a more pronounced impact on versus others?

So we think that the patient volume is going to continue to ramp up hopefully second half of next year. As we have talked about, within our specialty businesses they have a much better margin profile. And as we talked about the combination of infection prevention, N1, Spark, those combination that should give us about a 300 basis point of growth throughout the year. That mix shift that we have done Elizabeth over 85% of our business now being more consumer piece, that really would have a direct impact into our margin as we go forward, combination what we did with cost saving, changing the portfolio, changing the mix that said you're going to see us having better performance and growth mid-single digit over time, better margin and then put the portfolio in a better place as we come out of pandemic.

Thanks. That's helpful.

Your next question is from Nathan Rich with Goldman Sachs.

Hi, good afternoon. Thanks for the question. Amir, I appreciate all the details that you've given on the call so far. Just trying to kind of summarize your comments on 1Q and the outlook, I guess, is it kind of fair to say that kind of putting everything together you've seen, you're pretty consistent end market demand so far in the first quarter kind of relative to what your experiences was in 4Q? And then obviously you kind of worth watching some of the variability around China that you called out as well as the equipment incentive programs. I guess, just kind of wanted at a high level, is that kind of a fair way to pull together how you're thinking about the first quarter?

Yes. Nathan, you have it absolutely right, exactly. We're not seeing so far. We haven't seen anything that tells us there's a radical shift. We think that Q1 is going to be very similar to second half. Second half was overall was kind of flat up slightly, patient volume as still pre COVID levels but the mix was more positive. Specialty, you saw a level of moderation and basically in China and that's the one that we are watching, equipment and consumable, we think it was high-single digit, double-digit, but the thing that it is a little bit different in here is the equipment or those incentives that we thought talked about. We think that after we get to a – more of a longer term, getting our situation – we can get – we can see ourselves to be in a mid-single digit grow territory around that area as we go forward. But Q1, given these changes in China and equipment we are not expecting any radical changes versus what we have seen; and so far that continuation of the performance been consistent.

Got it. Okay. And then I wanted to ask a follow-up on Spark; Amir, could you maybe talk about how Spark performed outside the U.S. in the markets that you're in relative to maybe what you've seen in the U.S.? And then are you planning to expand to any additional countries in 2021?

Yes, absolutely. We have it in China now, Nathan. It was approved both clinically from a manufacturing perspective. So China is ramping up and in Europe we are signing up more and more dentist almost in a weekly basis. So geography by geography throughout Europe, and then we have a really nice rollout plan over as the capacity expands. We are going through country by country, and we have said before that we want to be in the position to make this in about $100 million business over the next couple of years. And we are on our way. We have capacity now. I mentioned 3x capacity we had in 2019, and we're going to double that capacity again in 2021, as Howard said that the investment that we're making and those investment is a combination of a front end case approval process, manufacturing, as well as the regional expansion of putting feet on the feet, training program. So, so far what we are hearing from our customers are very positive and we continue to wrap this up over time.

And that is all the time that we have for questions. Management, closing remarks please.

Yes. Thanks, Erica. We'll speak to everyone soon. Have a great day,

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.