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 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.

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 a strong execution across our portfolio. Over the course of 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 1200 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 is experiencing a strong uptick.

Thanks, Amir. First quarter sales increased 29.6% to $709 million. Sales were positively impacted 3% by currency exchange rates and negatively impacted 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 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 of public hospitals is a little slower, given their focus on vaccine rollout. Outside of China, other emerging markets remained relatively weak as COVID-19 outbreak continues 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 improve margin 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 circle 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.

Hi, Elizabeth.

Hi, how are you? Thanks so much and congrats on the quarter. It was nice to see this come back, that's why. 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 what we anticipate is a 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 pandemic. We like you to think about more of a year-over-year and full year given the historical lumpiness of our distribution business. We are cautioned due to pandemic-related risk, if vaccine rollout accelerates, local outbreaks are contained, we could do better I also like us to think about 2019. Our assessment at this point is that full-year 2021 would be to grow mid-single-digit versus 2019 full year and as you recall during the pre-IPO and IPO, we always talked about building a company that it is at the mid-single digit growth. Our EBITDA margin also in the high-teen area, we are really proud of progress that we have made to improve the profitability of our business. We have streamlined our businesses. We have reduced the structural costs. We have exited low-profitability, low-growth businesses, and we are investing 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, but as we get to more of a standard level, we expect to see more of a travel, 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 the 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 that $400 million, what our guidance essentially provide score is the 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, Elizabeth. There will be a component of that. I mean we are in the ramp-up mode for Spark as well as we're N1. And so some of that $30 million or over $30 million in aggregate will come via manufacturing capacity, but I would anticipate that a good portion of that would also come via OpEx.

Yes, no doubt. That's very helpful and 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, I mean, should we think about that as mostly falling on the SG&A line or is there any sort of split into the cause 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, but 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, one, 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 is 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 as to as to 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, and 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 kind of position yourself better and 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 really good solid progress and the roll 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 and one in Europe as over 30% increase compared to Q4. We got repeat customers coming in and buying more of the product going forward, and feedback has been really very positive and specifically with those that they are kind of pioneers in this space, we are adding significant number of abutment prosthetic options in order to be able to build a broader rollout. In spite of all of that, we have had some 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, they have to watch it. So we have had some challenges in there. We are hoping that as soon as this resumption of in-person training takes phase, we're going to see accelerated growth in here. Regarding to the FDA approval process, as we have said before, we expect that to be later part of the 2021. Howard talked about investment. We are ramping up investment, both from a capacity manufacturing 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 team, a dedicated team that is focused on meeting the requirement of this segment. We think that they played a really important role in democratizing dentistry, bringing dental care to masses and we really want to make sure that they get what they need. In order for them to be able to accomplish their objectives, we go to them with a complete set of solutions. The scale matters in here. We signed long-term contracts with them. Training and education is a really important factor in here because they are trying to expand into the specialties. They're trying to monetize investment. They try to retain and expand their capabilities, and we can get aligned with them through training, through support, to be there locally, to just continue support and build these capabilities over time. We feel good about what we have done in here. Over 10% of our business now comes from DSOs, and we expect them to continuously expand in different geographies, obviously in North America and Western Europe, but we are seeing that taking momentum in different places and the direction that we have taken in the past several years is beginning to pay off and it's going to 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, maybe 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 maybe just elaborate on that and is there anything to keep in mind from like 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 surrounded around the same topic and what we've been working on, I would say, over the last 12 months or so consistently has been working on the amount of inventory in the distributor channel and so 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 and so when you talk about the phasing here between Q1 and Q2, we do typically have a larger bolus of sales in Q2 from our distributor partners, but we're working through to smooth that out and we're seeing the results of that here in the quarter and so maybe 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 so 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, I think, 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 and can you maybe talk about where you see the growth opportunities for this business. And I'd also be curious just to get your thoughts on how unit volumes and pricing could trend for this business as things get back to normal and we hopefully go back to some months of normal life.

Yes. Of course, recall going back, we always use 19 as a starting point and we said at that point, we had about $175 million of business. In 2020, had $220 million business. So we got to about 220 last year. 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. And as I mentioned, we expect that double-digit and you're winning ballpark that double-digit over $220 million as what we expect to see happening in 2021. So now coming back to what we see in here and why are we confident that this trend is going to continue obviously, the comps are going to be different. There are three factors Nate that really gives us that confidence that what we have done in here, the investment that we have made, and the differentiation that we have is going to pay off in the long run. A 50% of that business is in a dental today, and we have over 40% share, but the majority of that is in the United States. We are now getting into different geographies; we have expanded presence in Europe and in China, so international expansion. While disinfectant procedures is becoming the norm and even after the pandemic, people have gone ahead and used that methodology. They know how to use it. They know how to be in a safe environment. So extension outside the United States is a really important part of this equation. A 50% of our business is in medical and we have less than 10% share. In the past 9 months, we have been able to really expand our medical presence. We have now a medical sales force in the United States, we are building one in Europe, and these are with long-term contract. Very specific segment or expansion in the medical is another category that gives us confidence that this business has legs under it and can stand on its own. And then, a lot of really new products. In the past 18 to 24 months, our team has done an outstanding job, ramping up capacity, building innovative product, and then registering it state by state, geography by geography. The new is an incredible product that we are getting significant amount of good positive reaction to it. So innovation, dental outside US, medical, all three of them gives us confidence to see this business to double-digit in 2021, mid-single digit positive growth going forward, and we would adjust to the new realities, the new normal. We watch, as Howard said, inventories very closely. We see incoming and outgoing to make sure that we're not getting ahead and managing this business as closely as possible.

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, what you're seeing among the current adopters, maybe Spark's use for teen cases versus that of adults is broadening out and then sort of tagging on to that we've seen this Clear Aligner market move toward, call it 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 and then 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, we now have over 1300 customers that are active Spark users. What we define an active Spark user is somebody who does four cases in the past four weeks. So when we look at how many new customers we have had, that number has gone up by over 30% quarter-to-quarter and it is just continuing. As we have described, we sign up specific number of doctors, we train them, we get them going, we establish them, and then we sign the next group. Those that they're using it have given us tremendous amount of feedback about the quality of the product. That it is now, we are repeating what they are telling us, the best in the market, giving them choices, really easy to use, the transparency of it is incredible, it's easy for the patient and quarter-over-quarter seen about over 50% growth, Q1 versus Q4 and that volume expansion, sign up of the new customer is just going to continue on. We're really optimistic about this. We have gone about very systematic expansion of both product categories, innovation, ramp up, commercial execution, and now we're in the Europe and we're beginning to see the outcome of it. So that's the Spark part. I wanted to make sure I answer that question. Our bracket on wire business is growing double-digit and that continued in Q4, is growing double-digit in Q1. And if I compare it against 2019, that's high mid-single digit growth. And when we really look at it, to say what is happening in spite of exactly what you said all the news about Clear aligner; we have an incredible franchise around Damon. Innovation in here would really make a huge difference. We're continuously putting new products out there to optimize, I mentioned, has been in North America and getting momentum. People like what they're seeing. They are given more and more control over it, so innovation plays a role. Training and education is really an important part of this bracket and wire piece geographical exposure, 70% of our revenue comes outside of the United States. And now, we are giving orthodontics a choice. We're giving them a choice between bracket on wire and a Spark. We're letting them decide what is the best answer. What we are hearing from our customers, is that they're not switching from one to another, they're using both of them to get the best outcome and they are seeing that we are being responsive. We have made significant investment in manufacturing. The turnaround time has come down and we are adding more and more support capabilities in the field. We are differentiated. As others exit value segment of this business, there is opportunity for us to continue to expand. We expect this segment to continue double-digit growth for us in the 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, sure. Thanks for the question, John. Yes, so of the - let's call it 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 that 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 and ensuring that we're going to have a successful rollout of that product, both continued progress in Europe as well as in 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 market or a subset of the market, in medical, and so those are all areas that we're going to continue to invest and then certainly digital workflows, and so we would anticipate that greater than $30 million going for the rest of this year and then we'll assess and determine how much we need to invest further going. But the one thing that we want to make sure is that certainly as Amir has described, we want a sustainable mid-single digit plus business and so we're not looking to go backwards here at all.

Fair enough. Thanks, guys.

Yes.

Your next question is from Erin Wright with Credit Suisse.

Great, thanks. And 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 or what gets you higher than that, in a normalized environment?

Thank you, Erin. So, I mean just going to take a look at these two markets, the specifics as you mentioned, the specialty businesses, the penetration I mean we love what we are hearing around the Clear Aligner because what it does, it has a halo effect. It's bringing in a lot of new customers into the market and that would offer tremendous opportunity for expansion of the penetration. When we look at the number of cases that started in ortho in 2019-2020 and how many people can really take advantage of that treatment, that penetration is solo and there is so much opportunity in here for anybody who innovates or anybody who is taking care of the customers and making clinicians to be more productive and more predictable. We feel good about the investment that we have made. We feel good about all core heritage being a mimetic professional company adding to that and continue to expand that over time, so we think there are plenty of opportunities for us to continue to expand our business in the ortho segment through innovation, through customer support, and geographies. The same is also true on the implant's side. As you all know, we have had some challenges around commercial execution in various places, it hasn't been because of the market. The market is similar to over-sized, under penetrated, there is plenty of opportunity in here to expand. DSOs are excited about it. A lot of people outside develop markets. They want to be able to do that. You've got to be able to give them tools and capabilities through innovation to make it easier so they can treat more patients. That's where Envana comes in place. That's where innovation plays an important role, on top of that, training and education and last but not least, digitization. Digitization of this industry democratizes and gives opportunity to treat a lot more patients faster, more predictable. We feel good about where we are on our premium side and we have room to grow on our value side. We see mid to high single-digit growth as an ongoing basis for our specialty business is a reality, and we are going to continue to do everything possible to make sure that rate accelerates over time. And our equipment and consumable as we have talked before, we have exited low-growth, low-margin business and now we have really positioned ourselves, 85% of the portfolio to be consumable, continue to make investment very differentiated to a lot of operational capabilities that we needed, use of EBS and can ensure that we have visibility on inventory, make sure the on-time delivery, quality is there and combination of these two is going to give us that original plan that we had built in the business that is growing faster, has higher margin, it's differentiated and with better cash flow, now we have another lever in our hand to be able to put that to work to get better outcome over time.

Okay, thanks. And then, on that topic I guess capital deployment priorities in the near term, I guess what potential deals that make sense for you, the full time, their new technology or near adjacencies that make more sense?

Obviously, we're not going to comment on the specific fields in here, but if you look at it, there are three or four areas that I think this industry as a whole has significant opportunities. The digital workflow, we talk about it. Why is it so important because it allows the patient to get better treatment, it allows doctors to become a lot more effective and where is that is true, software, AI as well as capabilities that connects various pieces of the treatment together from diagnostic to planning to execution? We have an incredible portfolio, but there is opportunity for us to be more looking outside, looking at the future, and try to add in. We are under index in the value implant and there is opportunity for us to invest in various geographies. Value Implant is a local play. We need to make sure that we have local brands, local presence in different geographies and there are other opportunities for us that we can explore as we go forward. With the balance sheet that we have today, it's a track record that we have built now; we have another tool in our hands that we can use to build a better company over time.

Yes. Clearly, just to add to that in terms of firepower. I mean, just the cash that we generated over the last three years have been in excess of $900 million and so and where our debt is now, we're back to net debt below $1 billion as well, and we'll be at two times by the end of this year as it relates to debt ratios. And so we feel really good about that. I think that all being said, we're not looking to do a deal just to do a deal, we're going to go ahead and make sure that we're looking at the most attractive areas in the market as Amir said in the segments there and then assessing the strategic fit for us and that's critical as well and then we kind of move into the valuation perspective and ensuring that we get double-digit cash on cash returns in the foreseeable future, the near future, and expecting greater returns long term 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 the infection prevention, it is just 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. So, we have wipes that we use and liquid, basically those are the two product categories that we use for disinfection and a variety of forms or shapes and different sizes, but those are the 2 categories that we have on infection prevention. We don't have other categories that adds this to broader PPE and sort of needs in there. If I'm not mistaken Howard, about 100 basis point of the growth brand in Q1 was dedicated to infection prevention and Spark and N1 and other 100 basis point of the growth in Q1. So, where we have invested where we have put energy, we are beginning to see the outcome of it. About 20% of the infection prevention alone in Q1 had a 20% growth year-over-year and as we mentioned, when you compare that to 2019 in Q1, that was almost 70% and that kind of a momentum is something that we are counting on to maintain as we go forward.

And then, it's been a while since I believe, we talked about your efforts around developing your own CAD-CAM scanner. Is that still a priority? As you think about sort of your broader strategy to sort of build this digital workflow ecosystem. Thanks.

Yes, it is. But we made it very clear; we are following a very standard process. So what we wanted to do. We wanted to build a stronger company. We wanted to accelerate the growth. We want to accelerate the margin, want to make sure that we are in good position. Those are the things that we wanted to do in a broad sense. I'm glad to look back, sacrifices that our team have made; partnership that we have developed has gotten us exactly the place that we want to be. We now have a full portfolio on the diagnostic side and we have a really good relationship. It has reshaped, X500 is there. Rest of the portfolio is building and we're going to continue to look at opportunities internally and externally to do this workflow implant, around ortho as well as connection with the lab. Long-term, we want to be able to do. Our intention is to address the needs of the market. And if we can do that and accelerate its format through partnership, as you have seen the partnership that we have built with ADAC, we're going to continue to do that going forward.

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 in the next quarter. Thank you.

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