Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Envista Holdings Corp (NVST, Financial) reported a 41% increase in free cash flow for the quarter, indicating strong cash management.
- The company has filled three critical executive roles in Q2, including a new CFO, which is expected to strengthen leadership.
- Investments in Spark manufacturing technology are aimed at improving profitability and supporting long-term growth.
- Envista Holdings Corp (NVST) has reinstated full-year guidance, expecting a return to growth in Q4.
- The company has a strong foundation with high gross margins, good cash flow, and a positive culture centered on performance, inclusion, and continuous improvement.
Negative Points
- Core growth was negative 3% and adjusted EBITDA margin was 10%, both below expectations.
- The company recorded a $1.2 billion non-cash charge from goodwill and intangible impairments due to market softening.
- Sales in the equipment and consumables segment declined by 10.1% compared to the second quarter of 2023.
- The diagnostics business contracted high single digits in the quarter, impacted by higher interest rates and moderate consumer confidence.
- The orthodontics business saw a slowdown in reported sales growth for Spark due to increased revenue deferrals.
Q & A Highlights
Q: Can you talk about the actual run rate of the business, especially considering the EBITDA guidance for the back half of the year?
A: Thanks for the question, Elizabeth. We announced reported core growth of negative 3% and reported EBITDA margins of 10%. Adjusting for one-time and non-cash impacts, underlying performance was more like positive 1% core growth and 14% EBITDA margin in the quarter. For the full year, excluding these impacts, we expect similar 1%-ish core growth and 14%-ish EBITDA margin. The impact of one-times will be larger in Q3, but we expect to return to growth in Q4, building momentum into 2025.
Q: What are the key actions for the implant business in the short-term versus long-term?
A: With implants, the premium growth has slowed, particularly for full arch procedures, while value has done better. We expect both to accelerate moving forward. Our investments in Q1 and Q2 are starting to pay off, with improved performance in both premium and value segments. We will continue these investments, which are about $6 million per quarter, to accelerate growth in implants.
Q: How are you thinking about the dental market's long-term growth rate and the market getting back to GDP-plus growth?
A: Dental is less sensitive to macro conditions than other categories. Our return to growth in Q4 is mostly due to the normalization of one-time impacts, not dependent on macro improvement. We expect 2025 to be better from a market perspective, benefiting from long-term growth drivers that remain unchanged.
Q: Can you discuss the underlying normalized growth for Spark and its competitive dynamics?
A: The clear aligner category grows high single digits, and Spark has been growing above the category. Despite the impact of increased deferred revenue, the underlying growth remains strong. The number of ordering clinicians was up strong double digits, and submitted cases grew high single digits. Spark remains highly dilutive to margins, but unit costs per aligner were down double digits in the quarter, which will eventually turn to accretive.
Q: Do you feel confident in the implant portfolio to get back to market growth, and what is the timeline?
A: Yes, the combination of Nobel and our value businesses positions us well globally. We did not invest sufficiently previously, but we are now investing about $6 million per quarter. We see green shoots of improvement, but it's too early to declare victory. We aim for sequential improvement across the second half and into 2025.
Q: What are the drivers of the increased deferral rate for Spark, and how does it impact profitability?
A: The increased deferral is due to more data on aligner usage rates and projecting future case mix. This impacts short-term profitability, but we expect to improve profitability as we lap these impacts. We will provide more details on long-term outlook at our Capital Markets Day in Q1 next year.
Q: Can you bridge the normalized EBITDA margins to the reported 10%?
A: The normalized 14% EBITDA margin accounts for three main factors: one-time costs that won't repeat, the impact of Spark revenue deferrals and dealer inventory reduction, and investments in Nobel North American implants. These factors combined explain the difference between the reported and normalized margins.
Q: Are the current investments in Nobel sufficient to achieve long-term growth, or is more R&D needed?
A: The $6 million per quarter investment covers both R&D and sales and marketing. While the portfolio is good, the market is dynamic, and we need to continue investing to keep pace. We are focusing on digitization, value implants, and prosthetics to strengthen our position.
Q: How do you view your relationships with distribution partners?
A: Two-thirds of our business is direct, but for the one-third that goes through distribution, we value our long-term partnerships. We have collaborative relationships with our distribution partners, which are mutually beneficial.
Q: What is the timeline for seeing the benefits of R&D investments in Nobel?
A: While we won't detail the timing for competitive reasons, we are focusing on digitization, value implants, and prosthetics. These areas offer significant opportunities for growth and improvement.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
