My name is David, and I’ll be your conference call facilitator this afternoon. At this time, I’d like to welcome everyone to Envista Holdings Corporation’s Fourth 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 Envista Holdings, Mr. Keller, you may begin your conference call.

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 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. It 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. 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 fourth 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 the date that they are made, and we do not assume any obligation to update any forward-looking statements except where is 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 Fourth Quarter 2023 Earnings Call. We appreciate you taking the time to join us today. Despite a volatile macro backdrop, we're making progress against our long-term strategic priorities. In-line with our expectations, we finished 2023 with a modest sales decline for the full-year and deliver an adjusted EBITDA margin of 18.1%. We improved our free cash flow generation in 2023 and delivered greater than $220 million while continuing to invest in our strategic priorities to accelerate our long-term growth and enhance our margin. Before we reflect on our performance in 2023, as well as our future outlook, I think it is important to provide some context about the current operating environments as well as the underlying demand for dental solutions. Globally, the market remains dynamic with macro uncertainty and geopolitical risks continuing to create a challenging operating environment. Conflicts in the Middle East and the Ukraine as well as cyber security attacks impacting the North America distribution channel created volatility in 2023. While our team has navigated each of these challenges will collectively, they have moderated our near-term performance. As we move into 2024, we believe we are well-positioned to navigate potential short-term uncertainties while executing a long-term value creation model. While we continue to see resilient patient traffic throughout 2023, we did see a weakening of demand for higher-end dental procedures, including both adult orthodontic cases and full arch implant restorations. Private practice clinicians and DSOs remain thoughtful about near-term investments in both equipment and clinic level inventories. While this has created pressure in the short-term, longer term, we are confident that patients will prioritize dental care and our clinicians will proactively invest in areas that help them digitize their practice, making them more productive, and ensuring they can provide…

Thanks, Amir. Before reviewing our fourth quarter results in detail, I would like to quickly comment on the $258.3 million non-cash impairment charge related to goodwill and intangible assets that we recorded in Q4. This impairment was primarily the result of an increase in the discount rate driven by sustained higher interest rates and the impact of a more volatile macro environment. On a reported basis, fourth quarter sales declined 2.3% to $645.6 million. Sales in the quarter declined by 0.3% due to the impact of foreign currency exchange rates, and our core sales were down 2% compared to the fourth quarter of 2022. While our year-over-year growth was supported by solid mid-single-digit growth in our Specialty Products & Technologies segment, this was more than offset by a double-digit decline in our Equipment & Consumables segment. Geographically our developed markets declined by 4.8% with strong growth in Western Europe, offset by a double-digit decline in North America. Our emerging markets grew to greater than 9% in the fourth quarter. Our fourth quarter adjusted gross margin was 52.4%, a decrease of 380 basis points compared to the prior year. The decrease in gross margin was the result of lower volumes and unfavorable product mix, VBP driven price reductions and currency headwinds. Our adjusted EBITDA margin for the quarter was 15.6%, which is 530 basis points lower than Q4 2022. The lower adjusted EBITDA margins were anticipated and driven by lower gross margins, unfavorable geographic mix and investments in both Spark and the turnaround North American implants. Our fourth quarter adjusted diluted EPS was $0.29 compared to $0.52 in the comparable period of the prior year. Core revenue in our Specialty Products & Technologies segment increased by 4.8% compared to the fourth quarter of 2022. Strong growth in Western Europe and emerging…

Thanks, Stephen. We remain confident in our strategy and long-term outlook. The dental market is attractive, under penetrated and has solid growth trends. Our business is strategically differentiated and we have a proven track record of executing in a dynamic environment. We have conviction in our ability to create meaningful value over the long-term. While we remain confident in the future of the dental industry, the current backdrop causes us to be more cautious in the near-term. For 2024, we expect demand for higher-end dental procedures, including full RS restorations and adult orthodontic cases to remain somewhat restrained. We further expect private practices and DSOs to remain cautious before making large investments in new clinics. For the full year 2024, we expect core sales to grow low-single-digits and deliver adjusted EBITDA margins of between 16% to 17%. We further anticipate that our margins will accelerate as we move through 2024. Our guidance takes into consideration both our investments for the long-term and the continued uncertainty in the macro environment. In 2024, we're focused on three main priorities to improve our short-term execution and build a foundation for long-term value creation. First, we will further accelerate our orthodontic business by providing orthodontic specialist with a differentiated and integrated suite of treatment options, including Bracket & Wires and Clear Aligners. We anticipate gathering our Spark business by 2026, while simultaneously driving sequential margin improvements. A second area of focus is on reaccelerating the growth of our implant business. Globally, we will leverage both our premium and value implant franchises to provide full solutions across the implant workflow, including regenerative and prosthetic offerings. We will continue to utilize our premier diagnostics and digital capabilities to create differentiation and win customers. In North America, we are making targeted investments to improve our commercial execution,…

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

[Operator Instructions] We will take our first question from Elizabeth Anderson with Evercore ISI. Please go ahead. Your line is open.

Hi, guys. Thanks for the question. Maybe to start-off with the operating margin guidance for 2024. I mean, that came in pretty disappointing in our view. And, if we look at this recently as 3Q, you guys were talking about operating margin expansion. So, can you talk a bit more about what happened between that point where you're sort of thinking about expansion and then what is the current guidance that you guys are giving us tonight?

Of course. Thank you, Elizabeth. Thanks for asking the question. As we move through Q4 and as we close the quarter, it became really apparent to us several key factors. To be specific, one is around the macro environment. We do not expect 2024 to be any different than what we have seen in the past several quarters. Uncertain economic environment interest rate, inflation, consumer sentiment, we see that demand for our high-end dental procedures is going to be below long run growth expectation, and we are cautioned about capital spending. Specifically on DSOs and some clinicians and inventory management, on top of the geopolitical uncertainties, we do not think that, that would change over time. So with that backdrop, that has impact in our mix. So, if you take a look at it, that backdrop of macro really impact some of our highest most profitable businesses in different geographies. In addition, the growth that we are seeing today in our Spark that accelerate that mix change over time. As an outcome of that, we did a series of scenario planning. We look at opportunities and risk. We also take a look at what we need to do to put the organization in the format that we can create long-term value, realign investment it's been margin expansion and the Spark and growth. Go back to the North America implant now that we have a really good feel for what it takes to invigorate the growth in there as well as the G&A spending. And we thought we need to be more caution in here, provide a guidance that considers all that background. Of course, if the environment improves as we go forward, we have an opportunity to perform better. And we think throughout the year, we'll see acceleration of our margin as well as our growth throughout the year every quarter. That's basically our assessment and assumption on how we put that guidance in place.

Got it. That's helpful. So, how do we think about the long-term guide? I know you're sort of ensures that the longer-term margin expansion possibility with this new step down in 2024.

Yes. And we have been fairly consistent, as you know about creating long-term value by expanding growth, by expanding margin, by shifting our portfolio, we don't think that really has radically changed. That framework that we have created in the past four, four and a half years has stayed intact. The realities of what we're dealing within here is one, we have a new leadership information. As CFO, hopefully soon to be named, we are placing the Nobel, our implant president over time, and we wanted to make sure that we have a solid leadership team in place. We also wanted to show progression on those three key priorities that we talked about, Spark growth and margin, Nobel back to growth as well as resizing our infrastructure. We wanted to show tangible result and show the progression in there, and then come back and have a discussion about long-term guidance that we have provided. We think that over time, our view around growth, margin and portfolio is still valid, and we need to talk about the capital structure as well. That's why we decided to postpone that conversation, and here we are in a better place to provide better insight. We're not canceling it, we are postponing it, and it should be ready when the team is in place, when we have momentum to come back and have that conversation.

Got it. And one last one for me. You just said you have a potential CFO announcement shortly. Would you like to put any time parameters around that?

We're working on it. We have been working on it, as I mentioned. Continuously, we have some very strong candidates, and our goal is to have that name as quickly as possible in the near future.

Got it. Thank you.

We'll take our next question from Jeff Johnson with Baird. Please go ahead. Your line is open.

Thank you. Good afternoon, guys. Amir, I wanted to follow-up on the margin question Elizabeth asked. Primarily around your answer kind of included some things that you've really been dealing with for the last few quarters now. None of the stuff you talked about sounded overly new relative at least in the past couple of few quarters. But this quarter really dragged down those gross margins that flowed through to both Specialty and the E&C operating margins. With that drop drew on the gross margin and you've mentioned targeted investments in the North American dental implant business several times in your prepared remarks. It all sounds to me like there could be some pricing rethought going on here, some change in maybe your pricing strategy on the premium implant side, is any of that going on? And how do we think about the flow through the gross versus operating margin for that if it is happening over the next few quarters? Thanks.

Thanks, Jeff. Very good question. But let me answer that margin first, then we'll talk about the pricing in specifically. So mix, as I mentioned, plays such an important role in here. When we put the plan together in 2022 and also the long-term plan that we put in place, there is a set of assumption about the mix that we are putting in place. As you correctly pointed out, mix has shifted over time. The China challenges, Russia challenges, and these are the businesses that have the most impact in our margin. If you take a look at it, in our Bracket & Wires business, which one of the most profitable business that we have. One third of that business is outside United States. And where it has been impacted the most are those geographies that they are in the middle of these geopolitical challenges. So, you take a look at that and we consider that would not change, not in near-term going forward. We have considered the impact of volume based purchases in China. 35% to 40% price reduction in our implant business, despite the fact that we have responded to that and we have seen significant growth, it had direct impact in our margin structure. And last but not least, the shift in Spark, the higher, the faster that this growth, it is below average, and it has a significant impact in our margin structure. If I take the VBP out, we actually got price. We were able to get good momentum on various pieces of our business. I should have mentioned one more thing, and that's the IOS. Despite the fact that that grew almost 30% last year, the prices were declining very quickly. I'm talking about Q4 that is stabilized. But now we have a stable situation. We know what that'll look like. With that, we made assumption that, let's assume nothing radically changes in here. Let's not hope that the macro will change radically. Let's not assume the geopolitical will get a lot better going forward. But coming back to your question about impact, we have not seen a degradation or price reduction on our premium impact. That has not been the case. It is had the discussion in here specifically on North America has not been about price. It has been around customer experience. It has been around training and education. It has been around the community and clinical community. And in comparison, this is exactly what we saw in 2019. We corrected it in Europe. We saw 14 quarters of growth. We took 300 basis points of share. We're replicating that model in North America. Price was not a factor in Europe, and we do not think it's going to be a major factor on the premium side of our business.

All right. That's fair. I guess, if I take your comments there about when you did go back above market several years ago, that was right when ultra deal had come out, you were getting some mixed benefits there. N1 hasn't scaled here at this point. You're really, I think relying primarily on NobleActive, which is an older product in the market. So, how do you reengage these doctors with an older product, should we think about getting back to market growth because there's a newer product coming out, there's new feature sets coming out that will help drive that. Is this just purely going to be heavy lifting of going out and reengaging the doctors and trying to get them to come back and use NobleActive? Just what's the path to that back to market growth by the end of 2024 in the North American market? Thanks.

I will answer that, but I want to just define one that specific. About 50% of our business is North America, 50% outside North America. That 50% that is outside North America has been going mid-single-digit with the same product. In the past, five months specifically, we have done a detailed analysis interviewing 100 of doctors I've done a competitive study of our product, our pricing, our coverage, and what we have seen, product is not the most important thing in how we have really not performed as well as we should have performed in here. If I may, I give you a little bit of more detail in here, I think it would be helpful. The 200,000 dentists in North America, 70% of our implant are placed by less than 5% of those dentists. There are two group in that category of a 10,000. Let's say 50% of them are specialists. These specialists depend on a referral network. That is 50% are GPs that they provide one stop solution. The diagnose, the plant, the placing plant and the work with labs or they have in house lab to provide that prosthetics. Both this group, which is a target for our premium impact, have three major requirements. Okay. Customer experience. And customer experience has a very wide definition about coverage, about order management, about return. Clinical training, training that has really hit the mark. And the model has changed over time. You got to provide a wide range of training online through social media, through clinical advisory team and at the local level. And last but not least, a lot of it is for advocacy. If you have individuals that they advocate and show result and teach it to other people, and that would have an impact. And that's the…

Very helpful. Thank you.

Of course.

We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead. Your line is open.

Great. Thanks. And you said you remain cautious on the underlying demand environment, which is obvious, but what did you see on a monthly basis throughout the quarter or year-to-date? And how are there any signs of stabilization in certain pockets of the market that you're looking at or anything to call out on that front in terms of areas where there's disproportionate either deterioration or stabilization? Thanks.

Yes. Thank you. Thank you, Erin. So, it's worth mentioning a couple of things. In China, as you know, Q4 of 2022 as well as the Q1 of 2023, we really didn't have a whole lot of business. First, it was COVID and then VBP, and then we had this, for lack of better word, we had this zoom boom that we saw in U.S. inside G2 of 2023 in China, and we have seen more of a stabilization, the stabilization of the patient volume, and that's what we are counting on. And that assumption that what we saw in Q3, Q4 is carrying itself forward throughout at least the first months of this year. Outside of that, what we are seeing is a stabilization of a patient volume. We have a really good relationship with a large number of DSOs. That's what they tell us. That’s what we see, spending per patient has been challenging for a lot of these DSOs in the past several months. And that's what we see. And how is that impacted is because of these high-end procedures. Adult orthodontic cases, full RS restorations, $25,000 to $30,000 that can get postpone. So far, during the year, what we have seen is a consistent with what we saw in Q4, not a radical change one way or another.

Okay. Thank you.

Of course.

We'll take our next question from Jon Block with Stifel. Please go ahead. Your line is open.

Yes. Thanks, guys. Good afternoon. I guess the first one will be the longer one. It sort of follows up a little bit where Elizabeth and Jeff were going. But, in February ‘23, so at the Analyst Day, right, 12 months ago, I think we all had about 21% EBITDA margins for 2024. And now we're all going to be about 500 basis points lower as of tomorrow morning. And I know dental has softened, but everyone's dealing with that. And I know you got VBP and IOS pricing, but, again, everyone's dealing with that. It doesn't sound like the trajectory of the gross margin ramp has really changed or at least I haven't picked up on that. And none of the other dental companies have 2024 EBITDA margins that are anywhere close to compressing like yours are being revised down to that magnitude. So what I'm just getting jammed up on and maybe you can help is, what is this specific to in regards to Envista? Is it all about implants? Is it the consumables that's being worked down arguably because the decremental seems so extreme specific to Envista when a lot of those challenges are more dental industry. Thank you.

Yeah. Of course. I definitely understand where you're coming from, and This is a challenge that we are trying to make sure that we are thoughtful about this, and we put a guidance in place that considers the realities of what we see in price, we are well aware of where we started in 2021, 2022, where we have ended up in 2023. So I want to give take us back to about Q4. Steven talked about that, where we ended up in Q4. Those dynamics that you talked about, John, is exactly what we are faced. The Spark is rapidly growing. It's growing and becoming such a bigger part of our equation. And if you go back, we're a year ahead of what we have considered where we not needed to be. That one year ahead has significant impact in that mix equation, one. Two, I mentioned that repeatedly because it's worth mentioning it again. The Bracket & Wires business is not a business that is going rapidly, but we have been taking share. And the reason we have been taking share because one-third of our business is sitting outside developed market. This business is that being growing high single digit, double digit with the high margin. That is not in the picture. It wasn't in the picture. It is not coming back as rapidly as we expect. And not only that, we're faced with the VBP in China, which is really uncertain when it's going to happen. We are assuming second half of this year. We want to be thoughtful again, not to be surprised. This volume that is impacting us on the high margin and areas like Russia and China, it is really radically changing that mix. The North America Nobel, we know we're going to turn this around. There is So there's no question in my mind because we know exactly where the problem and the challenges are, but it's going to take some time. We have to layer some investment, in order to be able to get it to that market growth over time, you combine all of that. You put in place to say, I'm not going to make any assumption on macro. The realities are what the realities are. If it changes, absolutely. We'd be the first one to come back and communicate that. But what we see today, what we saw in the past several months is the realities that we are dealing with, and we wanted to make sure that we are thoughtful about this. We put a guidance in place that we can deliver on it. We put the right set of measures and growth and margin in place to be able to deliver on what we promised.

Okay. That's very helpful. And maybe just a quicker follow-up. Stephen, this one might be for you, but just a lot of moving parts with the 4Q GM compressing notably, so if we say EBITDA margins are down 160 basis points year-over-year sort of going from the 18, 1 to the midpoint of next year, Any way to think about that, just like sort of the breakdown between GM and OpEx, because obviously you're still going to be sort of investing in the business, so any color between those would be helpful. Thank you.

Yes. So I think you can assume given where our guidance, I think you can assume that our gross margins for the year, year-over-year will be down a little bit. That would be our expectation. Obviously, Q4 with margin and gross margins were quite a bit lower. That's a little bit more related to some specific issues that we had in Q4. I think for the year, it's a better comparison for the full year with margins down a little bit due to mix.

Thank you.

We'll take our next question from Nathan Rich with Goldman Sachs. Please go ahead, your line is open.

Hi, good afternoon. Thanks for taking the questions. I guess, first, just we think about the margin progression over the year. You talked about seeing improvement through the year and by 4Q, I guess, if you could maybe help us think about the magnitude or range that we should think about where the company is targeting to end the year relative to where you're starting.

Yes. Thank you. Thanks, Nate. So let's just work through that a little bit and see if we can build a kind of a bridge in here. So every quarter, the spot margin has improved every quarter. It is coming up every quarter, and we expect that trend to continue. As it ramps up we've doubled the business over three years. Our goal is to get it to the fleet average. So for that to take place, we got to see this progression every quarter. And the other part of that equation is Nobel. Nobel is one of our most profitable businesses. We expect that to get to market proxies by end of the year. So if you start where we were for the whole year in Q4 and start making progress every quarter, we're going to see this margin progression throughout the year. We think Q1 is going to be nominally better than Q4, and we expect as we go through the year, we want to see that progression every quarter. We see better performance on margin until we get to end of Q4. And that's what we put that guidance in place to take a look at. It range that we can manage with the opportunity if macro improves we respond to it as necessary.

Okay, great. And if I could just ask a quick follow-up. I wanted to just get a bit more details on your outlook for China. You had good performance in the quarter. I kind of understand it was against an easier comp, it sounds like you have one more quarter like that in the Q1 of the year. But I guess beyond that, could you maybe just talk about how you feel about the demand environment in China overall and what type of growth you'd expect as the comparison is normalized. And I just wanted to also clarify, I think you said you may be expecting a VBP related to Wires & Brackets in the second half of the year, I just wanted to make sure I caught that right.

Of course, sir. So what we saw in Q4, China sales increased by almost 15%. And that's as you mentioned, that's a good indication of cost played a really important role in it. But if I take a look at the entire year, China was flat. And, normally, about 10% of our business have had been going double digit for years. And so in 2024, what we see in here, Q1, because of easier comp, we expect a strong growth. As we go through Q2 to Q4, we're going to have a more difficult comp in here. VBP of implant comes in place, so we know exactly what that look like, but it's more of a moderate thing. Our assumption is that the ortho VBP is going to be in place in second half, and that's how we have planned for. If it doesn't happen, then, okay, we will have a different model to discuss. We expect some volatility in China and the reason for it is purely because of the consumer spending and sentiment. What we hear from our team, what you hear, I'm sure, the housing crisis, the slower growth and government intervention in some of the areas, we are considering all of that to be an issue and that we need to deal with, but we have not taken our eyes out of China. We think China is going to be a growth driver for Envista. It's underpenetrated. We've got a great reputation in brass. Our specialty business is really well positioned. We just need to deal with these short term issues and find the new model, transform our business as we did with our implant, do that on ortho, get ourself in a better place on equipment and consumable, and we expect this to stabilize as we go forward. The patient demand in China, based on the latest information that we have, seems to be resilient as it stabilized. We're not getting any major feedback that we are seeing a major change as you can imagine. February 9, Chinese New Year 2016, we're going to have a little bit of a breaking year. Our hope is after they come back, we're going to see that momentum to continue.

Thanks so much for the comments.

And I'll now turn the call back to our speakers for any closing comments.

Thank you very much for Thank you for your time with us today. We really appreciate it. We look forward to, talking look forward to delivering our 2024 key priorities and we'll talk to you next quarter. Thank you very much.

This does conclude today's program. Thank you for your participation and you may now disconnect.