Q1 2024 Envista Holdings Corp Earnings Call
[music]. Please standby your program is about to begin.
My name is David and I'll be your conference call facilitator. This afternoon.
David: At this time I'd like to welcome everyone to <unk> first a holding corporation's first quarter 2024 earnings results Conference call.
David: Lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session.
David: I would like to ask a question during that time, Please press star and the number one on your telephone keypad.
I'd like to withdraw your question.
David: I'll start and two.
I'll now turn the call over to Mr. Steven Keller principal financial officer of it just a whole day. Mr. Kelly you may begin your conference call.
Stephen Keller: Good afternoon, and thanks for joining the call with me today is Amir <unk>, our current President and Chief Executive Officer, and Paul Keil, who will assume the position of President and CEO later this afternoon.
David: Today's call is first day within Vista, Amira, and I will be leading the call and will handle the Q&A at the end of the prepared remarks.
Speaker Change: Before we begin I want to point out that our earnings release, the slide presentation supplement todays 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 Investor section of our website Www Dot Invista co dot com.
Speaker Change: The audio portion of this call will be archived on the investors section of our website later today under the heading is that some presentations. It will remain archived until our next quarterly call.
Speaker Change: 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 our year over year performance.
Speaker Change: Less otherwise noted references in these remarks to company specific financial metrics relate to the first quarter of 'twenty 'twenty, four and references to period to period increases or decreases in financial metrics are year over year.
Speaker Change: During the call we may describe certain products and devices that have applications submitted and pending certain regulatory approvals or 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 sub.
Speaker Change: Two a matter a number of risks and uncertainties, including those set forth in our SEC filings and actual results might differ materially from any forward looking statements that we make today. These forward looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward looking statements, except where as required by law.
Speaker Change: I'd like to turn the call over to Amir.
Amir: Thank you Steven good afternoon, and welcome to English says first quarter 'twenty 'twenty four earnings call, but.
Amir: But I appreciate you taking the time to join us today.
Amir: Before we discuss our first quarter earnings I would like to take this time to quickly discuss our leadership transition.
Amir: In late February the board announced that they are launching a process to find my successor to lead in this to the next phase of our development.
Amir: At the time.
Amir: Our board indicated that they were looking for and accomplish public company CEO, who had successfully ran complex multinational multi divisional businesses.
Amir: Ideally the board wanted to find someone who had experience in dental or med tech with a strong commitment to continuous improvement and lean operating principles.
Amir: Looking for a unique candidate who could build another legacy and sort of accelerate our vision of digitizing personalizing and democratizing dental care.
Amir: We are excited to formally introduce you to Paul Keil, who would be appointed President and Chief Executive Officer later this afternoon.
Paul Keil: All joins Invista from Smiths group, a U K based engineering and technology company.
Paul Keil: Annual revenue up around $4 billion.
Paul Keil: During his time at the Smits <unk> transformed the portfolio through disciplined M&A and organic growth investments.
Paul Keil: Prior to Smiths Paul has spent 16 years at three am but he had a variety of roles, leading including leading both medical and dental businesses.
Paul Keil: After two P M.
Paul Keil: Paul its spend time at GE General and Mckinsey.
Paul Keil: All of this background experience and track record make him uniquely qualified to lead and Vista as we move forward.
Paul Keil: Welcome to this stuff. Thanks, Amir I want to start by thanking you for all you have done for a good start in the dental community.
Paul Keil: I have known and admired invista and its predecessor companies for many years and have been impressed with everything that unity have accomplished over the past decade.
Speaker Change: In addition to standing up and this step as a publicly traded company you have advanced the portfolio strengthened operations and articulated a clear and compelling vision for the company's future.
Speaker Change: It is an honor and a privilege for me to now take over leadership within this that as we move into our next phase of growth.
Speaker Change: Before I turn the call back over to Amir and Stephen I'll take this opportunity to let you know why I chose to leave a high performing company and Smith to join an equally wonderful company here in Vista.
Speaker Change: First and foremost I'm passionate about the powerful mission of improving patients' lives that is shared by all who participate in the dental industry.
Speaker Change: My colleagues, our customers our peers and our partners.
Speaker Change: Innovation has been a constant pillar across my career and and this is a company where technology clear really matters and above all oral care is a patient patient centric business, where a relentless focus on customers a clear strength of investors serves all stakeholders.
Speaker Change: My focus over the coming weeks will be threefold customers colleagues and operations.
Speaker Change: With respect to the first I'll hop on a plane next week for the Investor Summit in Barcelona, where I'll connect and reconnect with customers and partners I've heard from a great many already and I'm grateful for the warm welcome.
Speaker Change: In terms of colleagues it couldn't be more impressed with the leaders that I have met this far and im looking forward to engaging with the entire organization. We are focused on recruiting a new leader for Nobel bio care as well as a permanent CFO and we are encouraged by the prospects.
Speaker Change: And as it pertains to operations I'm, a lifelong believer in the compounding power of continuous improvement.
Speaker Change: I learned this firsthand at GE and three M and we implemented it to good effect at Smith <unk>.
Speaker Change: No one does this better than the Danaher family of companies and I will start my own Ebs immersion. Shortly after this call building on my own experiences over the previous three plus decades.
Speaker Change: And this step is an amazing company with leading positions in all key oral care segment deep and distinctive global capabilities enviable gross margins and cash characteristics and a world class key.
Speaker Change: I believe there is significant opportunity to create value for all stakeholders I understand the work we have ahead and I am energized by the opportunity I believe in this company and I told it with my feet.
Speaker Change: Much more to come in the weeks and months ahead does that begin to meet and engage with as many of you as possible.
Speaker Change: And with that I'll turn it back over to the mirror.
Mirror: Thanks, Paul.
Speaker Change: Turning to our results the first quarter proved challenging as we delivered modest growth, while continuing to prioritize investments to drive long term growth and profitability.
Speaker Change: In the quarter, we saw core sales growth of 0.4% and achieved an adjusted EBITDA margin of 14%.
Speaker Change: The lower margin was driven by unfavorable mix, coupled with the strategic investments intended to reignite growth in our North America business and drive margin improvements in the spot.
Speaker Change: Why do we have any yet they infect you haven't hit the inflection point, we are confident that our investments will drive long term value creation.
Speaker Change: Before I turn it over to Steven to discuss our first quarter results in more detail I want to take this opportunity to provide more color.
Stephen Keller: And the current operating environment, and then offer a quick update on our progress towards our strategic priorities.
Stephen Keller: Globally, while the macro economic environment remains largely stable, we continue to see mixed trends across the dental market overall.
Stephen Keller: Overall patient traffic remains resilient.
Stephen Keller: Ever demand appears to be skewing more towards basic hygiene and restorative treatments.
Stephen Keller: Demand for higher and especially procedures, including adult orthodontic cases in full arch implant restorations remained more muted.
Stephen Keller: Further private practice clinicians and Dsos remain cautious about near term investments in both equipment and clinic level inventories.
Stephen Keller: Despite some of the near term challenges.
Stephen Keller: Main cautiously optimistic about demand trends.
Stephen Keller: In 'twenty 'twenty four.
Stephen Keller: Long term, we are confident that patients will prioritize dental care and the clinicians will proactively invest in areas that help them digitize their practice, making them more productive and ensuring that they can provide high quality personalized care.
Stephen Keller: Focusing on <unk> progress in Q1.
Stephen Keller: Overall, our orthodontic business continues to outperform the market.
Stephen Keller: Driven by sustained performance in the spark clear liners.
Stephen Keller: During the quarter, we saw over 15% growth in the spa.
Stephen Keller: Seattle digit sequential growth in the number of active doctors.
Stephen Keller: Our growth remains widespread the robust progress both in North America, and Europe, as well as rapid growth in our emerging markets.
Stephen Keller: We believe that all cause comprehensive portfolio, including brackets and wires on the liners and I'll focus on the orthodontic, especially <unk> create a sustained competitive advantage and a more stable business with ample opportunity for long term share gains.
Stephen Keller: Our implant business declined modestly in the first quarter as very strong growth in China was offset by modest sleeve each end market demand in western Europe and continued underperformance in North America.
Stephen Keller: As we have discussed we have taken aggressive steps to address our commercial performance issues in North America.
Stephen Keller: We have overhauled our commercial leadership team.
Stephen Keller: Our upgrading our training and education capabilities, improving our marketing and adding significant commercial resources to help accelerate our growth.
Stephen Keller: Utilizing our European playbook.
Stephen Keller: We further increased the number of infill smart courses.
Stephen Keller: Aimed at developing a supporting the referral networks, how far our specialist customers.
Stephen Keller: While it's obviously too early to declare victory. We are confident that we are taking the right steps to address our performance issues and believe that our strong brands.
Stephen Keller: Leading product portfolio and dedicated community of implant specialists.
Stephen Keller: <unk> us to return to market level growth.
Stephen Keller: As we exit 2024.
Stephen Keller: While our adjusted EBITDA margin is below historical level in the quarter, we are steadily making progress against our long term goals.
Stephen Keller: As far as <unk> continues to drive improvements in long term profitability by focusing on pricing.
Stephen Keller: Portfolio management and manufacturing cost reductions in the first quarter. We successfully helped six president kaizen events in four countries targeted at driving automation digitization and productivity across boarder entry design.
Stephen Keller: And manufacturing.
Stephen Keller: We further redesign our packaging to improve the customer experience, while reducing both materials and shipping costs.
Stephen Keller: Our continuous improvement actions have resulted in significant reductions in our production cost per aligner.
Stephen Keller: The team remains focused on driving operational improvement to bring a sparks margin to our fleet average.
Stephen Keller: Outside it was spot.
Stephen Keller: We further took action to streamline our business and reduce cost across the portfolio.
Stephen Keller: We expect to see the impact of these cost savings as we move through 2024.
Stephen Keller: One of our priority remains building, a better stronger more growth oriented portfolio.
Stephen Keller: The primary component of the skull is continuing the transformation of our traditional equipment business into a comprehensive diagnostic solution business, combining best in class imaging solutions with industry, leading AI and diagnostic capabilities.
Stephen Keller: Yeah.
Stephen Keller: In Q1, the excess launch.
Stephen Keller: Dental implant ecosystem, given clinicians the ability to manage their entire implant workflow from diagnosis to delivery with one integrated toolset.
Stephen Keller: Additionally, the recently released updates towards the Axis <unk> scan flow software further expanding our AI capabilities to boost clinician productivity by automating precise data capture and simplifying chief steps in case planning.
Stephen Keller: It is tools clinicians now efficient indeed, digitize, the soft and hard tissues of the oral cavity for fixed.
Stephen Keller: Removable or implant cases.
Stephen Keller: As Texas evolves into a more differentiated solutions focused business. We have made the decision to concentrate our focus on geographies and product categories with the most competitive advantage.
Stephen Keller: While this has created some short term headwinds it should position us for faster growth as we move forward.
Stephen Keller: We believe our improved focus.
Stephen Keller: He is already starting to pay off as we saw our North America business delivered solid growth in Q1.
Stephen Keller: Despite continued softness in demand for large equipment.
Stephen Keller: Expect our north American diagnostic business to <unk>.
Stephen Keller: Deliver mid single digit growth for the full year 2024.
Stephen Keller: Returning to full year growth in North America signals, an important turning point in the evolution of our equipment and consumable segment.
Stephen Keller: I will now turn the call over to Stephen to go through our first quarter financials and provide more details on our segment performance.
Stephen Keller: Thanks, Samir in the first quarter, we delivered sales of $623 6 million on a reported basis. This represents a slight decrease over the first quarter of 2023.
Stephen Keller: Adjusting for the impact of currency exchange rates core sales for the quarter grew 0.4%. This reflects growth in our specialty products and technology segment offset by a slight decline in our equipment and consumable segment.
Stephen Keller: From a geographic perspective, our developed markets declined one 7% with North America, and Western Europe declining by a similar amount or emerging markets grew 10, 2% in the quarter with very strong growth in China offset by continued volatility in Russia as well as weaker demand in Latin America.
Stephen Keller: Our first quarter results, our first quarter adjusted gross margin was 57, 4% a decrease of 70 basis points compared to the prior year.
Stephen Keller: Decrease in gross margin was driven by an unfavorable product mix and a GDP driven price reductions.
Stephen Keller: While our gross margin declined year over year, we did see a sequential improvement driven by higher sales of consumables reduction spark manufacturing cost and our other productivity initiatives.
Stephen Keller: Our adjusted EBITDA margin for the quarter was 14%, which is 420 basis points lower than in Q1 of 2023.
Stephen Keller: The lower adjusted EBITDA margins were partially anticipated and primarily driven by lower gross margins unfavorable geographic mix and significant investments in both spark in the turnaround in North American plants.
Stephen Keller: Our first quarter adjusted diluted EPS was <unk> 26 cents compared to 38 in the comparable period of the prior year.
Stephen Keller: Core revenue in our specialty products and the technology segment increased by 0.8% compared to the first quarter of 2023.
Stephen Keller: Solid growth in Western Europe, and very strong growth in emerging markets was offset by declines in North America.
Stephen Keller: Within this segment, our orthodontic business grew low single digits with spark continuing to outperform our.
Stephen Keller: A bracket and wire business declined mid single digits as solid growth in emerging markets could not offset weaker demand in developed markets.
Stephen Keller: Despite slower growth in the quarter, we remain confident that our orthodontic business is outperforming the market with conditions continuing to value our comprehensive portfolio and our focus on the orthodontic specialist.
Stephen Keller: Our implant business declined modestly in the first quarter as strong growth in China was offset by underperformance in North America and.
Stephen Keller: Encouragingly, our value implant business grew in the quarter driven by strong growth in both Western Europe and China.
Stephen Keller: For the first quarter, our specialty products and technology segment had an adjusted operating profit of 15, 1%. This is down 650 basis points versus the same period in the prior year with the decline largely due to unfavorable mix the pricing impact of the China Pvp program and significant investments in our North American implant and spark businesses.
Stephen Keller: As discussed we are continuing to make substantial investments in our implant business to set us up for long term growth.
Stephen Keller: Investments in the quarter included adding over 60 sales and marketing resources.
Stephen Keller: Secondly, increasing our train education activities, and making one time investments in a deep analysis of our market and our customer segmentation.
Stephen Keller: Turning to our equipment and consumables segment core sales in the first quarter decreased by 0.2% compared to the first quarter of 2023.
Stephen Keller: Our diagnostic business declined mid single digits in the first quarter versus first the prior year. The decline was primarily driven by weakness outside of North America.
Stephen Keller: Encouragingly, our North American business grew as demand stabilized.
Stephen Keller: Emerging markets are large decline in the quarter driven by the combined effect.
Stephen Keller: Of the median macro conditions conditions and are deemphasizing of nonstrategic geographies and solutions.
Stephen Keller: With these efforts we continue to refine our focus and concentrate our energy in markets, where we can build and maintain a sustainable competitive advantage.
Stephen Keller: Our consumable business grew low single digits in the quarter driven by the stabilization of the North American distribution channel patient demand in North America remains resilient and we continue to strengthen our partnerships with our distributors to drive sell out.
Stephen Keller: Outside of North America weaker patient demand led to some softness in sell out.
Stephen Keller: As we move through 2024, our focus remains on partnering with our distributors to drive sell out of our solutions we.
Stephen Keller: We will continue to actively manage price and we believe we are well positioned to gain share in our focused markets.
Stephen Keller: Equipment and consumables adjusted operating profit margin was 21 seven in the first quarter of 2024 versus 21, 8% in Q1 of 2023.
Stephen Keller: As anticipated we saw a greater than 200 basis points sequential improvement in operating margins as our consumables business stabilized and we improved our overall sales mix.
Stephen Keller: As we move through 2024, we continue to streamline our operations and sharpen our focus in this segment and we believe that we are well positioned to accelerate growth and improve operating margins.
Stephen Keller: In the first quarter, we generated free cash flow of $29 $3 million, which is a significant improvement versus the first quarter of the prior year.
Stephen Keller: Increased cash flow was driven primarily by improved vendor management and lower incentive compensation payments and lower Capex we.
Stephen Keller: We continue to focus on improving our free cash flow and remain committed to our longer term goal of delivering annual free cash flow in excess of net income.
Stephen Keller: I'll now turn the call over to Amir to provide some closing comments.
Amir: Thanks Steven.
Amir: We remain confident in our strategy our long term outlook.
Amir: The dental market is that attractive underpenetrated and is supported by solid growth trends our businesses strategically differentiate it and we have a proven track record of executing in a dynamic environment.
Amir: We have conviction in our ability to create meaningful value over the long term.
Amir: The Invista team remains focused on three key priorities to improve our short term execution and build the foundation for long term value creation.
Amir: First we plan to further accelerate our orthodontic business by providing orthodontic, especially as it is differentiated in any graded sweet of treatment options, including brackets and wires and clear liners.
Amir: We will continue to drive sequential margin improvements in our spot business.
Amir: Our second area of focus is driving growth of our implant business.
Stephen Keller: I believe we plan to position, our premium and value implant franchises to provide full solutions across the implant workflow, including regenerative and prosthetic offerings.
Stephen Keller: We will utilize a premier diagnostics and digital capabilities to create differentiation and win customers.
Stephen Keller: Our top priority and this effort is to improve our commercial execution in North America.
Stephen Keller: We have made targeted investments and now see a path to reinvigorating growth.
Stephen Keller: Our goal is to be growing at or above the market as we exit 2024.
Stephen Keller: Finally, as we move through 2024.
Stephen Keller: Further utilized in Vista business system, Ebs to optimize our cost structure.
Stephen Keller: We intend to reduce our structural costs by an additional $30 million annually with the full year impact being realized in 2025.
Stephen Keller: Our continuous improvement culture will allow us to further consolidate the operations streamline our corporate functions and drive our G&A spending across the organization.
Stephen Keller: Our purpose is to partner with dental professionals to improve patients' lives.
Stephen Keller: By digitizing personalizing and democratizing dental care.
Stephen Keller: We remain focused on delivering long term value for patients our customers our employees and our shareholders.
Speaker Change: On a personal note I would like to take this opportunity to tank to invest the team.
Speaker Change: Our customers our partners and our shareholders for allowing me to lead this business over the past nine years.
Speaker Change: I am proud of what we have accomplished and I am committed the long term success of an Mr.
Speaker Change: I will remain both a senior adviser and shareholder and remain excited for the future of Invista.
Speaker Change: Thanks, Amir that concludes our formal comments.
Speaker Change: EMEA and I will now be available to take your questions.
Speaker Change: At this time I'd like to ask a question. Please press the star keys on your telephone keypad.
Speaker Change: Keep in mind with yourself further question in queue at any time by pressing star two.
Speaker Change: We will take our first question from Colin Smith Anderson with Evercore. Please go ahead. Your line is open.
Speaker Change: Hi, good afternoon, guys. Thanks, so much further question congrats <unk>.
Speaker Change: On your next endeavors.
Speaker Change: The exciting to work with you.
Speaker Change: Alright.
Speaker Change: If we talk about one thing that stood out to me in the question.
Speaker Change: Call is there were some scattered comments about the forward demand environment for the rest of 2024.
Speaker Change: But there was no guidance reiteration of guidance update.
Speaker Change: Wondering if you could comment specifically.
Speaker Change: The guidance for 2024 and for the second quarter.
Speaker Change: Thank you Elizabeth.
Speaker Change: Given the leadership transition I think we need to give Paul a little bit of opportunity to to assess the current situation and built it why both plan.
Speaker Change: The balance of the year long term outlook.
Speaker Change: In the meantime, and Mr remained focus on our key priorities, which is further accelerate or <unk> business.
Speaker Change: Can you to expand spark margins to bring it to fleet average.
Speaker Change: Bright spot growth.
Speaker Change: Secondly continue to accelerate our implant business by turnaround in North America and plan, we would like to get back to the market growth by end of 2024 and at or above market growth in rest of the world as we have one program that we.
Speaker Change: Able to do that.
Speaker Change: I see further optimizing our cost structure is going to give us that freedom that we need in order to improve our structural costs by over $13 million.
Speaker Change: We're going to see the full impact of that in 2025, and the continued to drive Ebs.
Speaker Change: Improve our execution going forward.
Speaker Change: Thank you Elizabeth.
Elizabeth: Got it and maybe just as a follow up.
Speaker Change: Obviously.
Speaker Change: You guys specifically.
Elizabeth: Specifically on some details about the investments made in the first quarter I hear what you're saying about <unk> 60.
Elizabeth: On head count.
Elizabeth: Can you talk about sort of the level of spending.
Elizabeth: And any other sort of like revenue driver investments you made in the quarter and then how to think about the cadence of that for the second quarter and maybe if you can speak further along that would also be helpful.
Elizabeth: Sure Elizabeth up yes, we obviously didn't make some significant investments in the quarter some of which.
Elizabeth: Some of which are one time and then some of which will continue on so we probably made around about a $10 million worth of investments in the quarter across the areas that we talked about so commercial resources, a little bit more on the upfront for training education.
Elizabeth: Some partnership programs some of our distributors as well as some of the activities that we're doing on the on spark side to drive margin improvement.
Elizabeth: Then we also did some onetime expenses around just kind of verifying our customer segmentation using some third party research says, let's say most of the costs will repeat but a couple of maybe 20% of it was 23% as onetime in nature and the rest of it we will.
Elizabeth: Or kind of will be invested in continuous.
Elizabeth: Going forward run rate obviously the goal here of these investments is to get our implant business, specifically in North America to grow at or above the market the highly profitable business as soon as that.
Elizabeth: Is that performance turns those investments pay for themselves very quickly.
Speaker Change: Thanks, so much for the question.
Speaker Change: We will take our next question from Jon Block with Stifel. Please go ahead. Your line is open.
Jonathan David Block: Thanks, guys good afternoon.
Jonathan David Block: Maybe I'll just jump right into spark I'm here I thought I heard a number of up 15.
Jonathan David Block: Percent year over year, which is clearly taking share to your point.
Jonathan David Block: But just trying to back into numbers I think it was down.
Jonathan David Block: A bit quarter over quarter for $2 23 to $1 24.
Jonathan David Block: Angela has been out there they are predominantly in the orthodontic channel, which is where you reside they've been pushing harder into EMEA and U S where you're you have been taking share. So maybe if you could first talk to my numbers or maybe verify them and where they may be wrong and number two what youre seeing from that particular player when it sort of seems to be the new kid on the block.
Speaker Change: Within U S and EMEA. Thanks, Yeah.
Speaker Change: Yes, Thank you John.
Speaker Change: So just to reiterate year over year spot grew.
Speaker Change: Over 14, our 15% so rare.
Speaker Change: Revenue was up 15%.
Speaker Change: But it did not grow sequentially and a good reason for that normally Q1 is a slower it ramps up pretty quickly over time, the sequential double digit growth in number of active doctors that gives us the confidence that this business is going to continue to grow over time.
Speaker Change: We sort of see kind of sequential as strong growth in the number of primary submission. There maybe look at this business is by geography and it is what we call. It smart growth model is fair we enter how many people we trained how many people it start signing up and 30 day.
Speaker Change: A 60 day 90 day, the number of cases that they.
Speaker Change: Place and this continues to be the model that we have followed and now we are beginning to see a widespread expansion not only on and developed market, but also in emerging market places that we haven't really entered we are beginning to see a growth notable strength in the first quarter.
Speaker Change: Confident in the approach that we've taken we think we're going to continue to grow this business product has proven to be superior the level of support and capabilities that we do we got to make sure that we balance that growth with the margin expansion as we go through the throughout the year as.
Speaker Change: The team is pretty excited about possibilities ahead, and we feel really confident about the work that we have done in the past five years or so.
Speaker Change: I'm not sure exactly who you're referring to a new kid in the block in that in the various geographies, but I think.
Speaker Change: From our point of view, we have been really focused on an orthodontist and that's where our focus has been and we still have plenty of room to grow to just give you a little bit of an insight only less than 50% of the traditional one call bracket and wire specialists today are active and spa customers. So.
Speaker Change: There is plenty of opportunity in that space and there are a whole lot of other opportunities to go after the other portion that we haven't yet entered or we havent, yet havent been engaged with.
Speaker Change: Great. Thanks for that color Amira and maybe just a second question.
Speaker Change: Elizabeth asked about the SG&A, Steven quite honestly I might've been a little bit confused on what component was what one time I'll follow up offline there, but let me maybe just focus on the gross margins I thought that was the highlight for the quarter. It was up solidly Q over Q you do have that higher cost base as you reinvest in the business.
Speaker Change: So can you give us a little bit more color on the trajectory of gross margins from here do we use that <unk> 24, as sort of the new starting point do you think those move higher throughout the year I'm just trying to balance you know fasteners are growth in lower margin division, but also improving those particular <unk>.
Speaker Change: Margin. So yes, I guess, if you can help us out with the trajectory from here on Gms for the balance of the year. Thanks guys.
Speaker Change: Yes, Sharon obviously is a little bit of seasonality in our gross margins, but generally speaking you would expect it to continue.
Speaker Change: Margins to improve.
Speaker Change: Gross margins to improve as we go through the rest of the year again with some normal seasonality patterns.
Speaker Change: Fundamentally.
Speaker Change: What youre going to see is continued improvement in spark margins being a big driver of this and then to the extent that we start growing our north to get North American plants back to kind of market level growth that will also be an improvement in the margins, obviously Q4 margins were.
Speaker Change: Very depressed that was significantly related to the lower sales of consumables that tests in that quarter again, partly because of the cyber security issue that hit in the in the North American distribution channel. So you should see positive margin progression throughout the year.
Speaker Change: And sorry, if I was a little bit confused it sorry about it on the SG&A piece just to be clear.
Speaker Change: $10 million of of SG&A.
Speaker Change: Investments that we made and you could say about.
Speaker Change: 70% of those are kind of investments that will be ongoing and about 30% of that was kind of onetime in nature, hopefully that clarifies it a little bit more.
Speaker Change: Certainly does thank you.
Speaker Change: We will take our next question from Jeff Johnson with Baird. Please go ahead. Your line is open.
Jeffrey D. Johnson: Thank you good evening guys Paul welcome Amir Thanks further conversations over the years.
Jeffrey D. Johnson: I appreciated all your insights in the dental space that's for sure.
Jeffrey D. Johnson: Steven Let me just ask a question on that $10 million SG&A investment.
Jeffrey D. Johnson: I think last quarter, we heard from you or the team that there were some added investments that could be leveraged necessarily in <unk>.
Jeffrey D. Johnson: But then you would leverage them going forward. So it sounds like there were added investments on top of the <unk> investment.
Jeffrey D. Johnson: The $10 million base, you are talking about <unk> I guess, maybe even could you give us kind of a six months how much is it didn't invest in maybe over the last six months or something and how much of that continues again without guidance here I think we're all just trying to figure out.
Jeffrey D. Johnson: Plus or minus off with 14% EBITDA number in the first quarter were to go over the next few quarters. Thanks.
Speaker Change: Yeah sure. So look some of the investments that we made in the fourth quarter, where people who work there were added throughout the quarter and then in this quarter, we had a full year impact of or the full quarter impact of those people. So I think we probably made.
Jeffrey D. Johnson: A little bit less of less than 10 million in the first Q4 investments, but probably between five to 10 in Q4, So cumulatively, we probably made up around $15 million to $20 million of investments.
Jeffrey D. Johnson: And again.
Jeffrey D. Johnson: At that level same thing about.
Jeffrey D. Johnson: About 70% of it it should be in the run rate going forward at about 30% of it was probably one time in nature.
Speaker Change: Yes fair enough and then.
Speaker Change: I'm going to push an issue that I pushed the last couple of quarters, and you and I tend to but I'm not sure at least disagree on it.
Speaker Change: What I'm hearing and Mike Jackson, and those checks at least in the North American implant market would suggest some pretty sizable price concessions on some mobile active implants, maybe it only select accounts primarily in the fall large multi case multi unplanned bundling in that.
Speaker Change: But I have started hearing that especially just over the last three or four weeks. Your <unk> gross margin did hold in I agree with John better than I thought, especially in the context of what ive been hearing on the pricing side.
Speaker Change: Michele Stevens comment was that maybe gross margins could improve a little bit from here. My fear is <unk> would take a step down given some of the pricing things I'm hearing.
Speaker Change: Kind of maybe put all that together tell me why I'm dead wrong on that or are kind of set me straight again, if you will.
Speaker Change: But again I know what I'm hearing so I'm just trying to figure out kind of the gross margin progression on pricing in the North American implant business. Thanks.
Speaker Change: Yes.
Speaker Change: Of course, I'm, not let's say your debt drawn cute sparing knowledge value due to a homework Johann worth all the time.
Speaker Change: What we saw in Q1 was about 20 basis points of price erosion.
Speaker Change: This is primarily in China and as EVP.
Speaker Change: If you look at what happened to China in Q1 of last year.
Speaker Change: Very limited business.
Speaker Change: A lot of growth in Q1 of this year.
Speaker Change: So that has had an impact in our overall EBITDA and impacting our March.
Speaker Change: And we saw some also some price erosion equipment business, but your question is primarily around North America.
Speaker Change: And impact.
Speaker Change: We have not seen it yet.
Speaker Change: Seen that we haven't seen it in Q1, we didn't see the Q4.
Speaker Change: We have some performance issues they are trying to improve our trajectory on growth but.
Speaker Change: The price has not been an issue for us here is specific and Nobel side on the price we have a very disciplined approach to pricing and we continue to see.
Speaker Change: Erosion not necessarily because of price because of this full arch because of that the specialized type of procedures that cost 25 to $30000.
Speaker Change: The market has been a little bit muted in this is I don't think this is only on US we are underperforming, but the market has been challenged as well but to answer. Your question. We haven't seen it we have not seen a price erosion on the premium implant.
Speaker Change: I'd Love to hear where you have who you are getting that information, but across the board. We have a large constituencies is especially as it.
Speaker Change: For our network and we have visibility to is constantly monitoring it we have not seen a price erosion.
Speaker Change: Fair enough. Thank you.
Speaker Change: Of course.
Speaker Change: We'll take our next question from Kevin Caliendo with UBS. Please go ahead. Your line is open.
Kevin Caliendo: Thanks, and thanks for taking my question I wanted to talk about implants, a little bit too, but maybe in a different context.
Kevin Caliendo: When you talk about getting back to market growth what.
Kevin Caliendo: What is market growth like what do you think the market is growing now.
Speaker Change: It seems if we canvas.
Speaker Change: We're publicly traded dental dental providers, they're all talking about increasing their share in implants, and growing faster and implants in the second half of the year and into next year.
Speaker Change: I guess, just what im trying to understand is where are we now what do we expect the growth rate in that industry to be again I know, it's depressed currently but when you talk about getting back to industry growth. What exactly are you aiming for targeting and is it simply a matter of.
Speaker Change: The second half of that is once we understand what those numbers are is it simply a matter of better education more more people in the field do you think that your portfolio is what it needs to be to get there as it's currently constructed.
Speaker Change: Sure.
Speaker Change: Thank you, Kevin and really good question, but.
Speaker Change: Just look back a little bit and then I'll answer the question.
Speaker Change: So the transition if you go back we've got five to seven year Horizon. What you will find is and we are talking what volume of impact that premium implant only four companies constitute a major part of that has been growing.
Speaker Change: Mid single digit.
Speaker Change: Low single digits, 3% to 5%.
Speaker Change: So that has been the audience growth on the other side of that equation, which is more of a what we call value or.
Speaker Change: The new commerce and data space that has been growing 7% to 8% volume, but the prices have been coming down significantly. So the size of the premium and the value from a dollar perspective is almost the same. So that's traditionally take a look at the tribe has shrunk now let me tell you what's going on in the last two.
Speaker Change: 12 months and I answer your question.
Speaker Change: At the end of each quarter there a publication that shows the number of implants placed in each shot.
Speaker Change: So we know in 2023 $4 $4 million impact workplace in North America.
Speaker Change: We know the first half of the year.
Speaker Change: We're talking premium income.
Speaker Change: We know the first half of the year.
Speaker Change: It was low single digit 2% to 3% growth second half of the year flat.
Speaker Change: The number of implants that were placed in second half of the year compared to 22 I too was almost flat we don't yet have the Q1 information, but what we are seeing is more of a muted market from a number of the volume of inbound.
Speaker Change: And you think about a single implant interior versus exterior a full arch multi.
Speaker Change: A large number of implant goes to the multi unit as well as full arch. So when the full arch of a $25 $30000 is not happening driven by interest rate driven by uncertainties in the market. That's what you're going to see the number is not growing as fast as what we have seen in <unk>.
Speaker Change: The past so what.
Speaker Change: What do we expect will be actually when we say we want to be at the market growth. We expect that gap that we have seen in the past four to six quarter in North America to close by end of this year, we know that we have either performing at market or above it all site North and Mac. We also note that we have been performing.
Speaker Change: <unk> below market growth in North America, and our go to close that gap by end of this year.
Speaker Change: Did I answer your question.
Speaker Change: Yes, yes, no clear I think that yes, I think that's been Super Super helpful. I guess the incremental question is do you think that the trend of value versus premium continues like how much of that do you think is purely economic consumer driven.
Speaker Change: Or is that here to stay for a longer period of time. It felt like there was an inflection point there.
Speaker Change: You said in the second half of the year does that recover.
Speaker Change: Do you think that can recover.
Speaker Change: Kevin we got into the value implant a lot earlier than premium you bought implant Iraq.
Speaker Change: 12, if I'm not mistaken.
Speaker Change: 2010, and our hypothesis at the time was that value implant is going to take significant amount of share at a premium.
Speaker Change: Five years through that process, we recognize that is not the case both segments are growing and we have been added since 2010. So if you look at 14 years that gives us plenty of opportunity to take a look the value implant is growing because the segment the group that they're using that are very different.
Speaker Change: Then the group that they use in this premier people, who charging $5 to $6000 for single impact people charging 25 to $30000 per full arch is it different segment that uses and values that premium ball.
Speaker Change: We think this market has significant opportunity for growth.
Speaker Change: Less than 10% of people, who can use implant today are using it.
Speaker Change: Over 100 million three unit bridges are being place every year over 30 million dentures. These are all targeted really good candidates for impact the more people that they can use it and see the value of what we think the market has plenty of opportunities both on the premium side.
Speaker Change: Well, it's a value set but we haven't seen an erosion of the premium because of the value.
Speaker Change: We have not seen you've seen both of them growing value is growing a lot faster prices are dropping premium is growing not as fast but prices are hanging in there.
Speaker Change: Super Super helpful. That's great color. Thank you so much for that.
Speaker Change: Of course.
Speaker Change: We'll take our next question from Brandon Vazquez with William Blair. Please go ahead. Your line is open.
Brandon Vazquez: Hi, everyone. Thanks for taking my question I, just wanted to ask kind of first like a high level question over the past. Several years you guys have done a great job of removing costs from from the business to kind of deliver on some margin expansion now we're at a point, where arguably we need to add a little bit of cost back for example in the implant side.
Speaker Change: Of the business.
Speaker Change: The question being.
Speaker Change: Do you think in order to get back to market growth rates you have to add back much of the costs that we took out of the business was underinvestment by tweaking. Some of these costs out part of the issue and what that means for the margin potential as you Reaccelerate the top line.
Speaker Change: Brian Thanks for the thanks for the question I think you have to separate this in two different things I think from a we did.
Brian: We've talked about on past calls when when it's specific to Nobel Nobel North America, we probably did coming out of Covid, we probably thought we were a little bit more efficient and we've probably got some false signals around that and we probably cut a little bit too deep on some of our commercial resources and we are adding those back in and Thats, what youre seeing now in terms of the overall.
Speaker Change: Al.
Speaker Change: Cost level I think we do see opportunities to continue to streamline over long term. That's why one of our goals is to take out $30 million of incremental costs here structural costs here going forward. So it's a little bit tale of two things we need to make some short term investments to reinvigorate growth and North American plant in particular, and then long term, we need to look at opportunities to.
Speaker Change: <unk> reduced costs, and we do see opportunities to reduce costs and be more efficient, we just need to be careful about where we're being efficient.
Speaker Change: We are very efficient at SG&A, sorry, G&A and B, and then B, making sure we're making the right sales and marketing investments.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And then maybe for my follow up switching gears, a little bit to China. It looks like that was a nice growth area for you guys. In implants can you just talk a little about where youre seeing growth there how sustainable that is and implants and then.
Speaker Change: Personally I think we were talking last quarter about or so being going under GBP in China in the second half of 'twenty four is that still your expectation and if so can you talk about what the financial impact could be there. Thank you.
Speaker Change: Yes of course.
Speaker Change: In Q1, we saw our sales increase in China by over 50%.
Speaker Change: What is really what we're looking at is the number of implant place what we have seen is a.
Speaker Change: It was an easier comp in Q1, but what we see.
Speaker Change: Our ramp up of implant towards China, and the reason for us are threefold.
Speaker Change: One the price gap between the premium and that value part has been cost.
Speaker Change: Because of <unk>. So it's not that huge of a difference between the prices second part is about the.
Speaker Change: The price of a placement in Pan now versus a three unit rich is almost the same so a lot of people know that see the value of <unk>.
Speaker Change: During our lifetime permanent solution versus a five to seven year and last but not least more and more people are beginning to see the value of our placing an implant as well as clinician being able to do that so we're really.
Speaker Change: Bullish about the China potential impact in the long run not only on the premium side, but the first time our value brand ABTS now accepted as part of the EEP and five of the major universities and institutions and that is growing as well as the underpenetrated market with tremendous amount of <unk>.
Speaker Change: Potential so it gives us a little bit of a feel for what the what we expect to see on the implant business in China, our expectation right now if we don't have any detail that we can share with you, but we were in China not long ago, we talked to a lot of customers. Their expectation is the EVP for ortho is gonna be sometimes during the second.
Speaker Change: Half, but the approach that they took on the implant side really gave us tremendous amount of insight on how to manage this in a structured format. We expect to see that in second half we have we have.
Speaker Change: Contemplated it is in our plan and but we think in the long term China continues to be a growth driver for invista because of that under penetration because of the capabilities and brand recognition that we have in China.
Speaker Change: We'll take our next question from Nathan Rich Please with Goldman Sachs. Please go ahead.
Nathan Allen Rich: Hey, good afternoon, and thanks for the question Amir Thanks for all the help over the years and Paul Welcome to you look forward to working with you.
Nathan Allen Rich: I wanted to ask on the consumables business I think outside the U S. You talked about a bit maybe some weaker.
Nathan Allen Rich: Demand that Youre seeing can you maybe elaborate on what you saw in the quarter or were there specific geographies that you would highlight.
Nathan Allen Rich: And then I think you also talked about kind of actively managing price in some of those markets could you. Maybe just expand there are you seeing you know Dennis trade down is that something where you feel like you have to adjust pricing in Cowen any color you can share there would be great.
Speaker Change: Yes. Thank you Nathan let me start from the pricing perspective.
Speaker Change: It's normally because of the relationship and partnership that we have with our partners and distributors normally prices don't happen radically we've given notice 30 to 90 days in advance so it's.
Nathan Allen Rich: A little bit of a different the lay of the land in here compared to like implant and ortho. So we continue to see good price position, we have a great relationship with our partners.
Speaker Change: As Steven talked about we have made some investment in the key supplier program, but what we saw in Q4 because of the cyber security issues.
Speaker Change: It's a little bit of a delay that we saw in Q1.
Speaker Change: Our infection prevention grew mid single digits in Q1, a lot of it was because of the medical channel.
Speaker Change: Saw a significant increase not only on growth, but also on the pricing Paul a restorative endo business was more flat and after is declining double digit in Q4, we saw a flat approach.
Speaker Change: And.
Speaker Change: <unk>.
Speaker Change: Given the fact that we are able to really format deliver.
Speaker Change: All in here inventories continue to be really well managed by our partners across the board we continue to see.
Speaker Change: Really good sell out information and our solution, where we have that information we are all performing the market, but on the geography side.
Speaker Change: We have been very focused a good portion of our business comes in North America, and we continue to see momentum in the in Europe, a couple of issues in Europe.
Speaker Change: <unk> two days less working day in Q1, because of where Easter falls in fall in Q1, So we had a little bit of a challenging there, but not necessarily because of the sell out it was because of the timing of it will continue to be pretty bullish about our restful Endo business, we think that we got a good performer.
Speaker Change: Thats great products, great relationship with our distributors and we think this is going to bounce back up as we go throughout the award and we are we think that our performance that we have seen in most market around the war is going to continue as we go through 2024.
Speaker Change: Great. That's helpful. Maybe just as a quick follow up are you able to give us sort of a rough sense of the timeline. We should expect for the searches that you have underway for CFO and the Nobel rule Rolls is that something that got US underway now that Paul has joined or have these kind of been in product process.
Speaker Change: No, it's probably hard to say, specifically, but anything you can add there would be great.
Speaker Change: Of course.
Speaker Change: We have we have a really active search underway and given the transition.
Speaker Change: So there was a little bit of a delay in here because as you can imagine and CFO is really nice to know who they work with who they partner with but we have a number of strong candidates and clear Paul and the board has been actively involved now that we have a permanent and.
Speaker Change: See you all in place I think we can accelerate that really quickly.
Speaker Change: Part of his appointment is going to really help with the top talent that candidate to come for both on the CFO search as well as on the Nobel site.
Speaker Change: Active search underway for the physician in the Nobel Noble is a incredible brand. We're seeing a lot of people have top talent coming forward and I'll leave it to Paul and the management team to communicate as they go forward to make sure that we are continuing to build on the momentum that we have in here and continue to build this legacy.
Speaker Change: For years to come.
Speaker Change: Thank you.
Speaker Change: This does conclude our Q&A session I will turn the program back to Steve Keller for any closing comments.
Stephen Keller: Thanks, Thanks, everyone really appreciate the time today look obviously, we are we will be setting up time for investors with Paul at a later date once he's had a chance to fully get involved in the business looking forward to working with you all in the coming quarters and years. Thank you so much.
Speaker Change: Okay.
Speaker Change: This does conclude today's program. Thank you for your participation and you may now disconnect.
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