Hello. My name is Chelsea and I will be your conference call facilitator this afternoon. At this time, I would like to welcome everyone to the Envista Holdings Corporation's Third Quarter 2023 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. Stephen Keller, Principal Financial Officer of Investor Holdings. Mr. Keller, you may begin your conference.

Great. Thank you. Good afternoon and thanks for joining the call. With me today is Amir Aghdaei, our President and Chief Executive Officer. I want to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G related to any non-GAAP financial measures provided during the call are 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 & Presentations. It will remain archived until our next quarterly call. During the presentation, we will describe some of the more significant factors that impact year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the third quarter of 2023 and references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we may describe certain products and devices that have applications submitted and pending certain regulatory approvals are available only in certain markets. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe anticipate or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of date that they are made and we do not assume any obligation to update any forward-looking statements except where as required by law. With that, I'd like to turn the call over to Amir.

Thank you, Stephen. Good afternoon and welcome to Envista's third quarter 2023 earnings call. We appreciate you taking the time to join us today. In the third quarter, we delivered positive core growth and an adjusted EBITDA margin of 19.6%. Driven by outperformance in our orthodontic business and continued strength in consumables, we were able to mitigate the challenges of an uncertain macro environment, while setting up our business for long-term success. As discussed in previous quarters, we are proactively adjusting the focus of our imaging business to deemphasize specific product categories in selected geographies where we have less competitive advantage. By focusing our resources in our broader and more differentiated diagnostic solution, we will be able to create sustainable competitive advantage and improve our long-term growth and margins. While long-term our global implant business is well-positioned our performance in the quarter was below expectation. This was due to both continued macro uncertainties specifically impacting higher-end full-arch restorations as well as underperformance in North America. While our results in North America were disappointing, we believe this will be temporary. We have an incredibly strong brand, a leading product portfolio, a passionate and capable team and a dedicated community of implant specialists. Starting in the third quarter, we have made targeted investments to improve our commercial execution in North America to refresh our approach to marketing, improve our training and education and further support our clinical community. We see a clear path through invigorating growth and aim to be growing with the market as we move through 2024. Before I turn it over to Stephen to discuss our third quarter results in more detail, I want to take this opportunity to provide further perspective on the current operating environment and then offer an update on our progress towards our strategic priorities.…

Thanks Amir. In the third quarter, we delivered sales of $631.3 million on a reported basis. This represents a slight increase over the third quarter of 2022. Adjusting for the impact of currency exchange rates core sales for the quarter grew 0.8%. This reflects continuing growth in our Specialty Products & Technology segment, offset by a low single-digit decline in our Equipment & Consumables segment. From a geographic perspective, Western Europe grew double-digits, while North America declined low single-digits. Our emerging markets grew low single-digits, anchored by China which grew despite a difficult year-over-year comparison as well as the impact of VBP on implant pricing. Russia declined in the quarter due to both a difficult year-over-year comparison and a lingering impact of changes to US sanctions and licensing requirements. We remain focused on obtaining the appropriate licenses to fully supply Russia and we continue to take steps to optimize our supply chain to allow us to compliantly serve our customers and their patients. In Q4, we expect both Russia and China to grow and we expect full year sales to be modestly down in these two important and dynamic markets. Our third quarter adjusted gross margin was 57.7%, which is down 150 basis points from prior year. The decline in gross margin was primarily attributable to an unfavorable product mix, VBP-driven price declines, and continued investment in our long-term growth. Our adjusted EBITDA margin was 19.6%, which represents a 60 basis points decline versus Q3 of 2022 and a 50 basis point sequential improvement from Q2 of 2023. Our adjusted diluted EPS in the quarter was $0.43 compared to $0.47 in the comparable period of the prior year. The reduction in EPS for the quarter was driven partly by an increase in interest expense from higher interest rates. In the…

Thanks Stephen. Moving forward our priorities remain the same, accelerate growth, expanding operating margins, and continue to transform our portfolio through disciplined capital deployment. Our intention is to partner with dental professionals to improve lives and we believe that our diversified and comprehensive portfolio positions us as a partner of choice for clinicians globally. In our orthodontics business, we are focused on building on the strength of both our traditional bracket and wire solutions as well as our Spark clear aligner business to offer the orthodontic specialists the most comprehensive and integrated suite of treatment options available. We will support orthodontic as they build strong practices that provide personalized care and improve patients' smiles. In our implant businesses, we are focused on improving our short-term execution in North America, while continuing to drive innovation, partnership and community. There is a significant opportunity to address the under treatment of tooth plaque and ensure that implants are the treatment of choice. We are well positioned to lead the future of implantology. In our diagnostics business, we will continue to streamline our focus while accelerating the digitization of dental offices. Our goal is to provide clinicians with diagnostic confidence simplicity and productivity. We will drive penetration of IOS solutions globally. Further leveraging our strong installed base, we will provide differentiated digital workflows that are augmented by assisted intelligence and support clinicians in providing superior care and improved clinical outcomes. Finally in our consumables business, we will continue to focus on driving above-market growth in sellout by offering a comprehensive portfolio of restorative orthodontic and infection prevention solutions. By supporting clinicians with workflows that are designed to deliver simplicity high aesthetics and great clinical outcomes, we will continue to be the brand of choice for clinicians globally. Our purpose is to partner with dental professionals to improve patients' lives by digitizing personalizing and democratizing dental care. We are focused on delivering long-term value for patients, our customers, our employees and our shareholders.

Thanks Amir. That concludes our formal comments. Operator, we are now ready for questions.

[Operator Instructions] And our first question will come from Elizabeth Anderson with Evercore ISI. Your line is open

Hi, guys. Thanks so much for the questions. I have two questions. The first is on the current macro environment. We've heard broadly, how there's sort of been a step down in environment in September. I was wondering, if you could comment sort of more on those trends as you're seeing them through October -- actually it's November 1 so November. And then one other question I had just was sort of on the -- about eight weeks ago you reiterated the guidance for the full year. So, what caused you to sort of change it within the last eight weeks? Is it a function of that sort of step down, a combination of other things? If you could provide a little bit more detail on that that would be super helpful. Thank you.

Of course. Thank you, Elizabeth. Let's talk about the macro, first. We have a tremendous amount of insight, by talking to a large number of DSOs, group practices, doctors around the world. Despite the fact that they remain bullish in the long term, they're mindful of what's going on in current macroeconomics. What they're seeing, is stability in general in unrestorative care, most recently in the past probably eight to 12 weeks more weakness in higher and dental procedures. Adult orthodontic cases have declined and the full RS implant restorations, which was challenged to begin with, we have seen a further step down. Clinicians are cautious. They're very cautious about inventory management in their offices, around implant and bracket and wires. And one of the key elements of the growth was DSOs expanding the footprint around the de novos there have been more cautious recently about borrowing money, investing and expanding that business, which is directly impacting some of our equipment business in the long run. On the business side and the implant side, we are seeing stable demand. But as I mentioned, high end is really challenged. And we have a really good feel on a number of implants that they're placed worldwide specifically, in North America we are seeing some challenges that started in Q2 and continue throughout Q3 and most recently. In ortho, generally resilient for teens, adult cases has been weaker. On diagnostics, we're not seeing anything radically different than we have communicated before, major concern on higher interest rate, macro challenges and our consumable is a stable and resilient. And I can take you through geography by geography, the solid developed market, stable demand for basic procedures, high end high-end procedures lower demand for it. China, we saw a really rapid pent-up demand coming out…

Got it. Thank you very much.

You’re welcome.

Thank you. Our next question will come from Jeff Johnson with Baird. Your line is open.

Thank you. Good afternoon. Can you hear me, guys?

Yes.

All right. Great. Amir, you and I have known each other a long time, so I'm going to ask you two maybe tough questions but I think fair questions here. So on the Equipment & Consumables side, looks like it's going to be down for the year on a core growth basis. It was down last year year-over-year. And even if I go back to the three years pre-COVID, 2017, 2018 and 2019, you were negative in E&C on a core growth basis. My sense is most of those years that's a couple of few points below market, although hard to tell each of those years. So I guess my question is when the market recovers, whether we get back to a 2% to 3%, 3% to 4% kind of market growth rate in E&C for the broader market, do you think you can be at market? Or is there something structurally disadvantaged in your product categories or your positioning that's going to make it tough to even get back to market when market improves eventually?

I appreciate the question. You get to the heart of it and I'd love to be able to answer that question and tell you that we went through a radical transformation of our Equipment & Consumable business. You have been with us since 2015 in the past eight years that I've been around, the first two or three years of this journey of building the Envista as a SaaS today was a lot of transformation, moving away from product categories, geographies that really wasn't advantage moving away and selling obviously the cohort business moving from animal healthcare and many other businesses. So if I take a look at the last nine months as an example and then compare it to 2022, here's what I see, here's what we see. If I take the exits of the geographies that we have moved, we have a really good feel for what's going on in inventory on consumable and the sellout. About, I would say, two-third of our business, of our consumer and equipment is in North America. We have a tremendous amount of insight about the sellout. We are at or above sellout in the past nine months in almost every category. So I appreciate the perspective and looking back but that's the reality of what we see on the ground. We watch that very carefully. We watch inventory. We watch sell out. You may see a quarter-to-quarter ups and downs but in the past quarter-to-date our consumable at or above sellout and categories on imaging at or above sellout. But now I want to turn to the discussion forward and tell you what we expect to see. Majority of deemphasizing some of the product categories in some geographies, it's going to be behind us. We're going to manage this business get…

All right. Well, that's great to hear. And let me ask the second question then on your North American implant business. And obviously, you have the Nobel Biocare business here. You have the implant direct business. It seems like a bit of a gap at least in my view a gap in kind of that premium minus category maybe the $350 to $400 price point something like that. And I think as practice profitability has come under pressure here in the past 12 to 18 months at a lot of these offices. That's $100 $150 savings off the premium price points, maybe starting to appeal to some implant docs out there. So my question is you're putting more channel support out there. You're putting more investments in the North American business, training, education, things like that. Is that enough do you need to fill that product gap in that premium minus? And if you do how do you do it?

Yes. Great question, Jeff. What we did? What we have done in the past probably six to nine months, we went back and said let's take a look at 2016 to 2019. Let's assume that's norm. That's what the world before COVID would look like. We look at the number of implants, we look at the prices, we look at premium versus value. And we say okay, erase 2020 look at 2021, 2022, 2023 I'd like to see what that looked like in order for us to be able to look at what the new world order look like in 2024 to 2026. What we see in here the pricing in implant, we're purely talking implant on the premium side it hasn't dropped as radically as anticipated. Value prices have dropped a lot quicker, a lot faster. Volume if you look at the volume, volume on the value side has increased a lot quicker, a lot faster. But that shift that people anticipate is going to happen on everything going to value it's not happening. But now if you take the volume aside and say I look at the dollar, the dollar spend, which include prosthetic, regenerative all that, premium continues to be an important part of this equation. The dollar spent both on the patient side as well as on practitioner stay on the premium side and has really -- it hasn't changed that radically. I'll mention one more point and then I answer your question of Nobel. If you go back take a look at price of replacing one single implant from 2016 to today. Despite of all the changes in the market and price reduction, the prices have gone up. So people are charging more now that they charge before. So this business remains a very healthy…

Appreciate that. Thank you.

Thank you. Our next question will come from Jon Block with Stifel. Your line is open.

Thanks, guys. Good evening. Maybe the first one it sounds like the expectations for modest growth for revenue and EBITDA expansion in 2024 Stephen if I heard you correctly. So what do we think about the LRP EBITDA margin of 22.5% for 2026? And that implies greater than 100 bps off the new 18.5% this year. And next year doesn't seem like that's teed up for 100 bps. So it would be wildly back-end weighted. So let me maybe start there. Do we take that off the table which arguably was on the table only nine or 10 months ago? And then I'll ask the follow-up.

Yes. Happy to answer that Jon. We put a guidance out there and said that in the long run we want to get to about high single digit in 2026 to 22.5%. So what assumptions were we made when we make those what has changed? We just meant we just communicated that our intention is to double the size of our Spark business. That plays such an important role in reaching that core milestone in the long run. To do that calculation you'll find out in the next three years we have significant opportunity for expansion or growth in that area one. Two, the margin on our Spark is below fleet average. And what we have -- if we look at it in the last seven quarters, specifically in the last quarters, every quarter we have better margin than the previous one. While we continue to make investment, we'll continue to do automation, EBS network try to improve the margin in order to get this to be fleet average as we get in outer years such. As significant investment and growth and portion of our portfolio getting to more fleet average really make that equation work. So that's the first element of this. Second, our implant business has been operating been performing below market proxies. The plan that -- we have to go execute it. But the plan that is in place to get that to the market proxies over the next couple of years start improving that in 2024. It's such a high-margin business. That by itself is going to make a huge difference. The third piece of this equation is around diagnostics. We course correct and deemphasize some of the product categories region, that's going to be behind us. We're going to see a better performance. You have seen that in the past three quarters our Equipment & Consumable has better margins and continued to deliver. Now imagine getting to market proxies to single-digit market improvement higher margin in that area. That is going to add to the proxy add to that long-term view. We're not counting on any radical changes. We do that math. We execute the program that we have in place we deliver on what we have in our long-term view without any acquisition we think that long-term goal is achievable. We need to go on and execute it in the short-term. We have to make some trade-off between growth and margin in order to build the foundation for the long run. This organization has proven that they have tracked record of confidence in building credibility and operational excellence. 450 basis point of operating margin improvement we have done that. We can do that again moving forward.

Okay. That was great. That was very helpful. I mean, the second question might just be a little bit more straightforward, and I apologize in advance for it. But I just really don't understand the implant commentary. So it seems like you've been the main share donor in the industry of late. You're poorly weighted in terms of call it premium versus value. How do you expect to get back to market growth as early as 2024? Maybe if you can detail how you do that so quickly. And then I feel like getting back to market growth in 2024 is actually an odd with modest revenue growth because it's such a big chunk of your portfolio, Amir. 40% of your biz is going to grow mid single-digit and Spark is still doing really well it's hard not to land at mid single-digit growth for you guys when you sort of weight everything out. So I find them at odds maybe if you can talk to that. And then that's a really quick turn to get back to market growth considering your starting point with mix against you? Any details would be great. Thanks guys.

Thank you so much for your confidence, Jon. I really appreciate it. But let me tell you what is -- let me break this down for. You said 40% absolutely correct. 50% of that is this 20% of business the operating and market proxies. So this is not a wholesale transformation. It's about 50% of business, which is North America operating below market proxies as it stands today. And we can sit down and do all the math about what the market proxies in the last nine months in each one of the segments look like we think about 80% of our business today is operating on market proxies. 20% of the business which is North America impact is below what those proxies are in North America. And again, you have a very good view of all the announcement that's coming up to what is taking place in North America. We know we are operating below market proxies. No question about it. Anyway we take a step back, and say, what is causing that? What is -- what's the purpose? And is that something that's short-term you can do immediately while you look at the long-term? We're not committing that we're going to start taking share in the lab. We are committed to a quarter-to-quarter improvement. We're putting -- we stopped the bleeding in some of the specific areas getting new customers, building the training and education, doing a better job with the customer experience over time. These are the things that we have done. Jon we did this in Europe with our implant business. We started that in 2021 and we saw the result of that in 2022. In 2023, we are operating that proxy and in some geographies we're even better than proxies. So it is not unheard of. It is not something that we haven't done. What we are saying is -- and we didn't -- we haven't committed to a 2024 guidance. We're working through that. By the time we get together in February with investors, we would give you a better view of that. When we deliver Q4, we will give you the guidance for 2024. But we think actions that we are taking that we have started is going to start paying off as we go through 2024.

Okay. That's great color. Thanks, Amir. Appreciate it.

Of course.

Our next question will come from Nathan Rich with Goldman Sachs. Your line is open.

Hi. Good afternoon. Thanks very much for the questions. I maybe wanted to start with the fourth quarter guidance. It looks like it implies a low single-digit decline in core growth. Could you maybe help us think about the impact by segment? You called out macro weakness. It seems like that would be more targeted on the specialty segment with implants and aligners. The distribution challenges I'd imagine impact E&C. So could you just maybe help us think through the relative performance of the two segments in Q4? And a couple of specific ones related to that. Obviously, Henry Schein has been impacted by disruption to their order management. Has that had an impact on your fourth quarter business? And as it relates to Israel I guess it wasn't clear is there a specific headwind embedded in the Q4 guidance? Or were you just highlighting that as an additional swing factor? Thanks very much. And sorry for the long questions.

Of course, Nathan three questions. I'll answer the first two and I'll have Stephen talk to Q4. Let's just start with Henry Schein. This is my year eight being in this industry. Stanley Bergman has been a friend, a mentor to me and somebody that I have tremendous amount of respect for. We have reached out to them. We have offered our support. We have told them that we are here to help any way that we can is an unfortunate situation. We have a very close relationship with them. And we are trying to figure out how we can mitigate some of this negative impact. But Henry Schein is our largest distributor in North America. But as I mentioned two-third of our Equipment & Consumable businesses in North America. And given that dynamic as something that we cannot forecast and really see how that's going to impact us. We're working with customers. We're working with all the distribution, but visibility is really very, very difficult to make for us to be able to say when that recovery is going to take place. They can't take order. They have some other challenges. It's directly impacting us. Let me talk about ABT a little bit. ABT is Israeli company that Nobel bought prior to our acquisition. We have an incredible manufacturing side in Modlin outside Tel Aviv. Our people have come to work and they're working but environment is really difficult. We have about a $20 million business as a whole in Israel. Obviously, we're not expecting to see anything in Q4, but also it's a huge manufacturing side for us for our ABT business which is present in Latin America, in Europe, in China. We're trying to build inventory trying to kind of manage through that but it's realities that we are dealing with. That conflict has caused uncertainty that we didn't face eight weeks ago. Now let's talk about a little bit Q4 and the gap that we see there.

I think, Nate really what you're seeing here is look in Q4 we're going to expect continued strong growth in Spark as we've delivered consistently, but that growth is ultimately going to be tempered by some of the macro weakness that Amir's alluded to as well as look we're not expecting our North American implant business to turn around in the fourth quarter. We expect continued kind of underperformance in the fourth quarter as we set up for better performance next year. And then again really -- and then on top of that on the E&C side you have the planned exits or the deemphasis of specific geographies and products that will be a modest growth headwind to growth. And then again as Amir talked about you have the uncertainty around the North American distribution channel and specifically the lumpiness around potential sales in -- on a consumable side. So that comes together for a low single-digit growth decline. And obviously on the margin side we'll continue to make investments on both Spark and implants which do temper the margin profile that we're talking about.

Great. Thank you.

Thank you. Our next question comes from Jason Bednar with Piper Sandler. Your line is open.

Hey, good afternoon. Thanks for taking the questions. I want to start here on EBITDA margin for the year. And apologies, I know, we've covered this in a few different ways already maybe but just trying to understand the message and really consider where we're at versus where we've been all year long. The last nine months the message has been for Envista we've got EBS. We're lean. We're restructuring the business in certain geographies these are paying off. We're going to deliver an improvement in EBITDA margins in the second half of this year. It's back-half weighted but we know that. But today's message seems like a pivot where you're meeting a tougher operating environment with higher spending in business reinvestments. So look I understand it's a tough question and there are things that are outside of your control like we're just talking about with Henry Schein, but can you help with the cadence of decisions in messaging here around EBITDA margins?

Yes. Happy to do it. So the mix play a very important role in here. Spark growing a lot faster and we are doubling down opening a new factory expanding that while we grow fleet average that plays an important role in here. Implant as Stephen talked about we're not expecting any radical shift we're expecting continuous improvement quarter after quarter after quarter moving forward. Uncertainty that we talked about around North America distribution plays an important role. These are high-margin products that if we are not able to with certainty put that in the channel deliver to customers it's going to have an implication. Combination of all of that it is not about continuous improvement on our part we're doing everything possible to make sure that gross margin in areas such as on -- specifically Spark continued to improve quarter after quarter. Our imaging business getting more and more profitable going forward. Our consumable is in the best possible format from on-time delivery quality margin structure. The headwind we are seeing on those areas is really having a drastic impact. We have to rethink what we are able to do with certainty through Q4. And then we want to build this business for the long run. Yes we have commitment. And we want to deliver those, guidance that we have. But we also want to make sure that we do a balance of investment versus margin expansion. Investment that we are making today on Spark, North America Nobel commercial activities is going to have a long-term impact. And we're going to see the outcome of that in 2024, 2025 and driving to achievement of what we said in 2026. Those are tough decisions that we needed to make and looking back on what we have done in the past. We think this is the time for us to make those balanced decisions, to get ourselves in a better place, to put ourselves in a better position for the long run.

Okay. Amir, are you able to quantify maybe how much the distribution disruption is impacting profitability as that seems like the biggest delta versus where we were at three months ago? And then I did want to piggyback off Jon Block's question. Are you saying that your LRP for 2026 is intact? Or are the goalposts moving here where your LRP is now the definition long-term rather than aligning the sand like 2026?

Yeah. So we are -- we don't provide guidance by a specific segment. We're just anticipating what the challenges is going to look like in North America specifically to distribution as well as what we talked about on the LRP, some of the additional risk that we have other places. That's how we kind of revise our forecast figure. What we have -- what we communicated on 2026, those milestones are there and we have a path to get there. There are a series of activities that we have to do to get there. Assuming the macro environment doesn't deteriorate faster or worse than what it is the mathematics that they are in place the activities that we have put in place, the innovation and investment should get us to that 2026 guidance that we have provided. We have a lot more work to do, a lot more opportunities to have that discussion when we meet in February and after Q4 results. Right now we are focused on trying to do the best that we can to take care of our customers to make sure that our team sees the future of what we can do as a company making a huge difference. We have come a long way in the past four years. We're not stopping in here. And we think what we see in the short-term is a blip in what we need to do to build the future of this industry and the future of Envista. Thank you so much.

Thank you.

Thank you. With that, we're going to conclude the call. I really appreciate everyone's time. We look forward to talking to you in the coming weeks.

Thank you. Ladies and gentlemen, this concludes the Envista Holdings Corporation's Third Quarter 2023 Earnings Results Conference Call. You may now disconnect.