Envista Holdings Corporation

My name is David, and I'll be your conference call facilitator this afternoon. At this time, I'd like to welcome everyone to Invista Holdings Corporation's first quarter 2024 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star and the number one on your telephone keypad. If you'd like to withdraw your questions, You can press star and two. I'll now turn the call over to Mr. Stephen Keller, Principal Financial Officer of Invista Holdings. Mr. Keller, you may begin your conference call.

Good afternoon, and thanks for joining the call. With me today is Amir Agday, our current President and Chief Executive Officer, and Paul Keel, who will assume the position of President and CEO later this afternoon. Given that today is Paul's first day with Invista, Amir and I will be leading the call and we'll handle the Q&A at the end of the prepared remarks. Before we begin, 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 a call are all available on the investor sections of our website, www.investico.com. The audio portion of this call will be archived on the investor 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 our year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the first quarter of 2024, and references to period-to-period increases or decreases in financial metrics are year-over-year. During a 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 security 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, 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. With that, I'd like to turn the call over to Amir.

Thank you, Stephen. Good afternoon, and welcome to INVISA's first quarter 2024 earnings call. We appreciate you taking the time to join us today. Before we discuss our first quarter earnings, I would like to take this time to quickly discuss our leadership transition. In late February, the board announced that they were launching a process to find my successor to lead Invista through the next phase of our development. At the time, our board indicated that they were looking for an accomplished public company CEO who had successfully ran complex multinational and multidivisional businesses. Ideally, the board wanted to find someone who had experience in dental or medtech with a strong commitment to continuous improvement and lean operating principles. They were looking for a unique candidate who could build another legacy and further accelerate our vision of digitizing, personalizing, and democratizing dental care. We're excited to formally introduce you to Paul Keogh. who will be appointed president and chief executive officer later this afternoon. Paul joins Invista from Smith's Group, a UK-based engineering and technology company with annual revenue of around $4 billion. During his time at Smith's, Paul transformed the portfolio through disciplined M&A and organic growth investments. Prior to Smith's, Paul spent 16 years at 3M, where he had a variety of roles, including leading both medical and dental businesses. Prior to 3M, Paul spent time at GE, General Mills, and McKinsey. Paul's background, experience, and track record make him uniquely qualified to lead Invista as we move forward. Paul, welcome to Invista.

Thanks, Amir. I want to start by thanking you for all you have done for Invista and the dental community. I have known and admired Invista and its predecessor companies for many years and have been impressed with everything that you and the team have accomplished over the past decade. In addition to standing up Invista as a publicly traded company, you've advanced the portfolio, strengthened operations, and articulated a clear and compelling vision for the company's future. It is an honor and a privilege for me to now take over leadership of Invista as we move into our next phase of growth. 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 in Smiths to join an equally wonderful company here at Invista. First and foremost, I am passionate about the powerful mission of improving patients' lives that is shared by all who participate in the dental industry. my colleagues, our customers, our peers, and our partners. Innovation has been a constant pillar across my career, and Invista is a company where technology clearly matters. And above all, oral care is a patient-centric business, where a relentless focus on customers, a clear strength of Invista's, serves all stakeholders. My focus over the coming weeks will be threefold, customers, colleagues, and operations. With respect to the first, I'll hop on a plane next week for the Invista Summit in Barcelona, where I'll connect and reconnect with customers and partners. I have heard from a great many already, and I'm grateful for the warm welcome. In terms of colleagues, I couldn't be more impressed with the leaders that I have met this far, and I'm looking forward to engaging with the entire organization. We're focused on recruiting a new leader for Nobel Biocare, as well as a permanent CFO, and we're encouraged by the prospects. And as it pertains to operations, I am a lifelong believer in the compounding power of continuous improvement. I learned this firsthand at GE and 3M, and we implemented it to good effect at Smith. 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. Invista is an amazing company. with leading positions in all key oral care segments, deep and distinctive global capabilities, enviable gross margins and cash characteristics, and a world-class team. 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 voted with my feet. Much more to come in the weeks and months ahead as I begin to meet and engage with as many of you as possible. And with that, I'll turn it back over to Amir.

Thanks, Paul. 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. In the quarter, we saw core sales growth of 0.4%, and achieved an adjusted EBITDA margin of 14%. The lower margin was driven by unfavorable mix coupled with the strategic investments intended to reignite growth in our North American implant business and drive margin improvements in SPARC. While we haven't hit the inflection point, we're confident that our investments will drive long-term value creation. Before I turn it over to Stephen to discuss our first quarter results in more detail, I want to take this opportunity to provide more color and the current operating environment and then offer a quick update on our progress toward our strategic priorities. Globally, while the macroeconomic environment remains largely stable, we continue to see mixed trends across dental markets. Overall, patient traffic remains resilient. However, demand appears to be assumed more toward basic hygiene and restorative treatments. Demand for higher-end specialty procedures, including adult orthodontic cases and full-arch implant restorations, remain more muted. Further, private practice clinicians and DSOs remain cautious about near-term investments in both equipment and clinic-level inventories. Despite some of the near-term challenges, we will remain cautiously optimistic about demand trends in 2024. 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. Focusing on investors' progress in Q1, overall, our orthodontic business continues to outperform the market, driven by sustained performance in SPAR clear aligners. During the quarter, we saw over 15% growth in SPAR, a double-digit sequential growth in the number of active doctors. Our growth remains widespread with robust progress both in North America and Europe, as well as rapid growth in our emerging markets. We believe that Armco's comprehensive portfolio, including brackets and wires and aligners, and our focus on the orthodontic specialists, creates a sustained competitive advantage and a more stable business with ample opportunity for long-term share gains. Our implant business declined modestly in the first quarter as very strong growth in China was offset by modestly weaker market demand in Western Europe and continued underperformance in North America. As we have discussed, we are taking aggressive steps to address our commercial performance issues in North America. We have overhauled our commercial leadership team are upgrading our training and education capabilities, improving our marketing, and adding significant commercial resources to help accelerate our growth. Utilizing our European playbook, we have refocused the sales scene, refined our priorities, enhanced our standard work, and rolled out proven sales tools to drive growth. In the first quarter, In North America alone, we provided training to over 3,000 clinicians and clinical staff members. We further increased the number of in-field SMART courses aimed at developing and supporting the referral networks of our specialist customers. 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, leading product portfolio, and dedicated community of implant specialists position us to return to market-level growth as we exit 2024. While our adjusted EBITDA margins were below historical level in the quarter, we are steadily making progress against our long-term goals. The Spark team continues to drive improvements in long-term profitability by focusing on pricing, portfolio management, and manufacturing cost reductions. In the first quarter, we successfully held six President Kaizen events in four countries targeted at driving automation, digitization, and productivity across order entry, design, and manufacturing. We further redesigned our packaging to improve the customer experience while reducing both material and shipping costs. Our continuous improvement actions have resulted in significant reductions in our production costs per aligner. The team remains focused on driving operational improvement to bring SPARC's margin to our fleet average. Outside of SPARC, we further took action to streamline our business and reduce costs across the portfolio. We expect to see the impact of these cost savings as we move through 2024. One of our priorities remains building a better, stronger, more growth-oriented portfolio. A primary component of this goal 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. In Q1, Dexys launched its dental implant ecosystem, giving clinicians the ability to manage their entire implant workflow from diagnosis to delivery with one integrated toolset. Additionally, we recently released updates to our DEXIS-IS ScanFlow software, further expanding our AI capabilities to boost clinicians' productivity by automating precise data capture and simplifying cheat steps in case planning. With these tools, clinicians now efficiently digitize the soft and hard tissues of the oral cavity for fixed, removable, or implant cases. As Dexis 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. While this has created some short-term headwinds, it should position us for faster growth as we move forward. We believe our improved focus is already starting to pay off as we saw our North America business deliver solid growth in G1. Despite continued softness in demand for large equipment, we expect our North American diagnosis business to deliver mid-single-digit growth for the full year 2024. Returning to full-year growth in North America signals an important turning point in the evolution of our equipment and consumable segment. I will now turn the call over to Stephen to go through our first quarter financials and provide more details on our segment performance.

Thanks, Amir. 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. 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 segments. From a geographic perspective, our developed markets declined 1.7%, with North America and Western Europe declining by a similar amount. Our 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. Our first quarter adjusted gross margin was 57.4%, a decrease of 70 basis points compared to the prior year. The decrease in gross margin was driven by an unfavorable product mix and VBP-driven price reductions. While our gross margin declined year over year, we did see a sequential improvement driven by higher sales of consumables, reduction in spark manufacturing costs, and our other productivity initiatives. Our adjusted EBITDA margin for the quarter was 14%, which is 420 basis points lower than in Q1 of 2023. The lower adjusted EBITDA margins were partially anticipated and primarily driven by lower gross margins, unfavorable geographic mix, and significant investments in both SPARC and the turnaround in North American implants. Our first quarter adjusted diluted EPS was 26 cents compared to 38 cents in the comparable period of the prior year. Poor revenue in our specialty products and technology segment increased by 0.8% compared to the first quarter of 2023. Solid growth in Western Europe and very strong growth in emerging markets was offset by declines in North America. Within this segment, our orthodontic business grew low single digits, with Spark continuing to outperform. Our bracket and wire business declined mid-single digits, as solid growth in emerging markets could not offset weaker demand in developed markets. Despite slower growth in the quarter, we remain confident that our orthodontic business is outperforming the market, with clinicians continuing to value our comprehensive portfolio and our focus on the orthodontic specialists. Our implant business declined modestly in the first quarter as strong growth in China was offset by underperformance in North America. Encouragingly, our value implant business grew in the quarter, driven by strong growth in both Western Europe and China. For the first quarter, our specialty products and technology segment had an adjusted operating profit of 15.1%. This was 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 BBP program, and significant investments in our North American implant and spark businesses. As discussed, we are continuing to make substantial investments in our implant business to set us up for long-term growth. Investments in the quarter included adding over 60 sales and marketing resources, significantly increasing our training education activities, and making one-time investments in a deep analysis of our market and our customer segmentation. Turning to our equipment and consumables segment, core sales in the first quarter decreased by 0.2% compared to the first quarter of 2023. Our diagnostic business declined mid-single digits in the first quarter versus the prior year. The decline was primarily driven by weakness outside of North America. Encouragingly, our North American business grew as demand stabilized. Emerging markets saw a large decline in the quarter, driven by the combined effect of the muted macro conditions conditions and our de-emphasizing of non-strategic geographies and solutions. 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. Our consumer 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 sellout. Outside of North America, Weaker patient demand led to some softness in sellout. As we move through 2024, our focus remains on partnering with our distributors to drive sellout of our solutions. We will continue to actively manage price, and we believe we are well positioned to gain share in our focus markets. Equipment and consumables adjusted operating profit margin was 21.7 in the first quarter of 2024 versus 21.8% in Q1 of 2023. 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. 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. In the first quarter, we generated free cash flow of $29.3 million, which was a significant improvement versus the first quarter of the prior year. Our increased cash flow was driven primarily by improved vendor management, lower incentive compensation payments, and lower capex. 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. I'll now turn the call over to Amir to provide some closing comments.

Thanks, Stephen. We remain confident in our strategy and long-term outlook. The dental market is attractive, under-penetrated, and is supported by 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. The InVista team remains focused on three key priorities to improve our short-term execution and build a foundation for long-term value creation. First, we plan to further accelerate our orthodontic business by providing orthodontic specialists with a differentiated and integrated suite of treatment options, including brackets and wires and clear aligners. We will continue to drive sequential margin improvements in our SPARC business. Our second area of focus is driving growth of our implant business. Globally, we plan to position our premium and value implant franchises to provide full solutions across the implant workflow, including regenerative and prosthetic offerings. We will utilize our premier diagnostics and digital capabilities to create differentiation and win customers. Our top priority in this effort is to improve our commercial execution in North America. We have made targeted investments and now see a path to reinvigorating growth. Our goal is to be growing at or above the market as we exit 2024. Finally, as we move through 2024, we will further utilize the investor business system, EBS, to optimize our cost structure. We intend to reduce the structural costs by an additional $30 million annually with the full year impact being realized in 2025. Our continuous improvement culture will allow us to further consolidate operations, streamline our corporate functions, and drive out G&A spending across the organization. Our purpose is to partner with dental professionals to improve patients' lives, by digitizing, personalizing, and democratizing dental care. We remain focused on delivering long-term value for patients, our customers, our employees, and our shareholders. On a personal note, I would like to take this opportunity to thank the investor team, our customers, our partners, and our shareholders for allowing me to lead this business over the past nine years. I'm proud of what we have accomplished, and I'm committed to the long-term success of Invista. I will remain both a senior advisor and shareholder and remain excited for the future of Invista.

Thanks, Amir. That concludes our formal comments.

Amir and I will now be available to take your questions.

At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Again, keep in mind, you may remove yourself from the question queue at any time by pressing star and two. We'll take our first question from Elizabeth Anderson with Evercore. Please go ahead. Your line is open.

Hi. Good afternoon, guys. Thanks so much for the question. Congrats on your next endeavors, and it'll be exciting to work with you all going forward If we can talk about one thing that stood out to me in the call is there were some scattered comments about the forward demand environment for the rest of 2024, but there was no guidance reiteration or guidance update. So I was wondering if you could comment specifically on the guidance for 2024 and for the second quarter.

Thank you, Elizabeth. Given the leadership transition, I think we need to give Paul a little bit of opportunity to assess the current situation and build a viable plan that balances the year and long-term outlook. In the meantime, Envisa remains focused on our key priorities, which is further accelerate orthodontic business, continue to expand spark margins to bring it to fleet average, drive spark growth, Secondly, continue to accelerate our implant business by turning around the North American implant. We would like to get back to the market growth by end of 2024 and add more about market growth in the rest of the world as we have proven that we are able to do that. And I think further optimizing our cost structure is going to give us that freedom that we need in order to improve our structural cost by over $30 million. We're going to see the full impact of that in 2025 and continue to drive EBS, improve our execution going forward. Thank you, Elizabeth.

Got it. And maybe just as a follow-up, you know, obviously you guys talked specifically on some details about the investments made in the first quarter. I hear what you're saying about the 60 headcounts in implementation. Can you talk about sort of the level of spending that entailed 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, maybe, and if you can speak further along, that would also be helpful.

Sure, Elizabeth. Yeah, we obviously did make some significant investments in the quarter, some of which, you know, 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, some partnership programs, some are distributors, as well as some of the activities that we're doing on the SPARC side to drive margin improvement. Then we also did some one-time expenses around just kind of verifying our customer segmentation using some third-party resources. So I'd say most of the costs will repeat, but maybe 20% of it was 20%, 30% of it is one time in nature, and the rest of it will be invested in continuous in our going forward run rate. Obviously, the goal here of these investments is to get our in-plant business, specifically in North America, to grow out or above the market. It's a highly profitable business. As soon as that performance turns, those investments pay for themselves very quickly.

Got it. Thanks so much for the question.

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

Thanks, guys. Good afternoon. Maybe I'll just jump right into Spark. Amir, I thought I heard a number of up 15% year over year, which is clearly taking share to your point. But just trying to back into numbers, I think it was down a bit quarter over quarter, you know, 4Q23 to 1Q24. Angel's been out there. They're predominantly in the orthodontic channel, which is where you reside. They've been pushing harder into EMEA and US where you have been taking share. So, And maybe if you could first just talk to my numbers or maybe verify them or where they may be wrong. And number two, what you're seeing from that particular player, which sort of seems to be the new kid on the block within U.S. and EMEA. Thanks.

Yeah. Yeah. Thank you, John. So just to reiterate, year over year, Spark grew over 15%. So revenue was up 15%. But it did not grow sequentially. And a good reason for that, normally Q1 is slower. It ramps up very quickly over time. The sequential, the ability to grow the number of active doctors, that gives us the confidence that this business is going to continue to grow over time. We further see kind of sequential strong growth in the number of primary submissions. The way we look at this business is by geography, and it is what we call a smart growth model. It's where we enter how many people we train, how many people start signing up, and 30 days, 60 days, 90 days, the number of cases that they 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 a developed market, but also on emerging markets. Places that we have really entered, we are beginning to see a growth notable strength in the first quarter. We're confident in the approach that we have taken. We think we're going to continue to grow this business. Product is proven to be superior. The level of support and capabilities that we do, we've got to make sure that we balance that growth with the margin expansion as we go throughout the year. 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. I'm not sure exactly who you're referring to, a new kid in the block in various geographies, but I think from our point of view, we have been really focused on orthodontists, and that's where our focus has been, and we still have plenty of room to grow. To just give you, John, a little bit of an insight, Only less than 50% of the traditional OMCO bracket and wire specialists today are active Spark customers. So 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 haven't yet been engaged with.

Great. Thanks for that color, Amir. And maybe just a second question. You know, Elizabeth asked about the SG&A. Stephen, quite honestly, I might have 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 know, you do have that higher cost base as you reinvest in the business. So can you give us a little bit more color on the trajectory of gross margins from here? Do we use that 1Q24 as sort of the new starting point and Do you think those move higher throughout the year? I'm just trying to balance faster spark growth and lower margin division, but also improving those particular margins. So yeah, I guess if you can help us out with the trajectory from here on GMs for the balance of the year. Thanks, guys.

Yeah, sure. And obviously, there's a little bit of seasonality in the gross margins. But generally speaking, you would expect our margins to improve our gross margins to improve as we go through the rest of the year again with some normal seasonality patterns. Fundamentally, you know, what you're 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 American implants back to kind of market level growth, that will also be an improvement in the margins. Obviously, Q4 margins were very depressed. That was significantly related to the lower sales of consumables that hit us in that quarter, again, partly because of the cybersecurity issue that hit in the North American distribution channel. So you should see positive margin progression throughout the year. And sorry if I was a little bit confusing. Sorry about it on the SG&A piece. Just to be clear, about $10 million of investments that we made And you could say about 70% of those are kind of investments that will be ongoing, and about 30% of that was kind of one time in nature. Hopefully that clarifies it a little bit more.

It certainly does. Thank you.

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

Thank you. Good evening, guys. Paul, welcome. Amir, thanks for the conversations over the years. I've appreciated all your insights in the dental space, that's for sure. Steven, let me just ask a question on that 10 million SG&A investment. I think last quarter we heard from you or the team that there were some added investments that wouldn't be leveraged necessarily in one queue, but then you would leverage them going forward. So it sounds like there were added investments on top of the four queue investments. So You know, the $10 million base you're talking about, 1Q, I guess maybe even could you give us kind of a six months? How much has it been invested 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, you know, plus or minus off this 14% EBITDA number in the first quarter, where to go over the next few quarters. Thanks.

Yeah, sure. So look, some of the investments that we made in the fourth quarter were people who weren't, who were added throughout the quarter. And then in this quarter we had the full year impact of, or the full quarter impact of those people. So I think, you know, we probably made, you know, a little bit less of less than 10 million in the first Q4 investments, but, you know, probably between five to 10 in Q4. So cumulatively we probably made around 15 to 20 million in investments. And again, At that level, same thing about, you know, about 70% of it should be in the run going forward and about, you know, 30% of it was probably one time in nature.

Yeah, fair enough. Amir, I'm going to push an issue that I've pushed the last couple of quarters and you and I tend to butt heads on this or at least disagree on it. But I know what I'm hearing in my checks and, you know, those checks, at least in the North American implant market, would suggest some pretty sizable price concessions on some noble active implants. Maybe it only select accounts primarily in the full arch, multi-case, multi-implant bundling and that. But I have started hearing that, especially just over the last three or four weeks, your 1Q gross margins did hold in. I agree with John better than I thought, especially in the context of what I've been hearing on the pricing side. So, you know, Stephen's comment was that maybe gross margins could improve a little bit from here. My fear is 2Q would take a step down given some of the pricing things I'm hearing. So just kind of maybe put all that together. Tell me why I'm dead wrong on that or kind of set me straight again, if you will. But again, I know what I'm hearing. So I'm just trying to figure out kind of the gross margin progression and pricing in the North American implant business. Thanks.

Yeah, of course, I'm not going to say you're dead wrong. You do your homework all the time. What we saw in Q1 was about 20 basis point of a price erosion. This is primarily in China as VBP. If you look at what happened to China in Q1 of last year, we had a very limited business and a lot of growth in Q1 of this year. So that has had an impact in our overall EBITDA and impact in our margin. And we saw also some price erosion on equipment business. But your question is primarily around North America and impact. We're not seeing it yet. We're not seeing that. We haven't seen it in Q1. We didn't see it in Q4. We have some performance issues. We're trying to improve our trajectory on growth, but the price has not been an issue for us in here, specifically on the Nobel side on the price. We have a very disciplined approach to pricing, and we continue to see erosion, not necessarily because of the price, because of this full arch, because of that specialized type of procedure that costs $25,000 to $30,000. that the market has been a little bit muted. And this is, I don't think this is only 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. I'd love to hear where you have, who you are getting that information. But across the board, we have a large constituencies with the specialists, referral network, and we have visibility to it, constantly monitoring it. We have not seen a price erosion.

Fair enough. Thank you.

Of course.

We'll take our next question from Kevin Caliendo with UBS. Please go ahead. Your line is open.

Thanks, and thanks for taking my question. I want to talk about implants a little bit too, but maybe in a different context. When you talk about getting back to market growth, What is market growth? Like, what do you think the market's growing now? And it seems if we canvass the publicly traded dental providers, they're all talking about increasing their share in implants and growing faster in implants in the second half of the year and into next year. And I guess just what I'm 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 or targeting? And is it simply a matter of, I guess the second half of that is, once we understand what those numbers are, is it simply a matter of better education, 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?

Thanks.

Thank you, Kevin. Really good question. But let's just look back a little bit and then I'll answer the question. So the tradition, if you go back, we've got five to seven year horizon. What you will find is, and we are talking volume, volume of implant. The premium implant, which only four companies constitute a major part of that, has been growing mid-single digit, low single digit, three to five percent. So that has been the volume growth. On the other side of that equation, which is more of what we call value or newcomers in that 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 traditionally. Now let me tell you what's going on in the last 12 months, and I'll answer your question. At the end of each quarter, there are publications that show the number of implants placed in each yard. So we know in 2023, 4.4 million implants were placed in North America. We know the first half of the year, we're talking premium implants. We know the first half of the year, it was low single digits. 2% to 3% growth, second half of the year, flat. The number of implants that were placed in second half of the year compared to 2022 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 implants. And you think about a single implant, interior versus exterior, a full arch or multi-implant. A large number of implants goes to the multi-unit as well as full arch. So when the full arch of a $25,000, $30,000 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 the past. So what do we expect? 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 outside North America. We also know that we have been performing below market growth in North America and our goal to close that gap by end of this year. Did I answer your question?

Yeah, 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? How much of that do you think is purely economic, consumer-driven, or is that here to stay for a longer period of time? It felt like there was an inflection point there, as you said, in the second half of the year. Does that recover? Do you think that can recover?

Kevin, we got into the value implant a lot earlier than premium. We bought implant direct 2012, if I'm not mistaken. 2010. And our hypothesis at the time was that value implant is going to take significant amount of share out of the premium. Five years through that process, we recognized that is not the case. Both segments are growing, and we have been at it since 2010. 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 than the group that they use in this premium. People who are charging $5,000 to $6,000 for a single implant, people who are charging $25,000 to $30,000 for a full arch, it's a different segment that uses and values that premium product. We think this market has significant opportunity for growth. Less than 10% of people who can use implant today are using it. Over 100 million three-unit bridges are being placed every year, over 30 million dentures. These are all targeted, really good candidates for implant. The more people that they can use it and see the value of it, we think the market has plenty of opportunities both on the premium side as well as the value side. But we haven't seen an erosion of the premium because of the value. That we have not seen. We have 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. Super, super helpful. That's great color. Thank you so much for that. Of course.

We'll take our next question from Brandon Vasquez with William Blair. Please go ahead. Your line is open.

Hi, everyone. Thanks for taking the question. I just wanted to ask kind of first like a high-level question. You know, over the past several years, you guys have done a great job of removing costs 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, on the implant side of the business. I guess the question being, You know, 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 taking some of these costs out part of the issue and what that kind of means for the margin potential as you reaccelerate the top line?

Brian, thanks for the question. I think you have to separate this into two different things. I think from a, we did, we've talked about on past calls when When it's specific to Nobel and Nobel North America, we probably did, coming out of COVID, we probably thought we were a little bit more efficient and we 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 that's what you're seeing now. In terms of the overall cost level, I think we do see opportunities to continue to streamline over the long term. That's why one of our goals is to take out $30 million of incremental costs. structural costs here going forward. So it's a little bit of a tale of two things. We need to make some short-term investments to reinvigorate growth in North American implants in particular. And then long-term, we need to look at opportunities to reduce 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. Be very efficient in SG&A, or sorry, G&A, and then be making sure we're making the right sales and marketing investments.

Okay. And then maybe for my follow-up, switching gears a little bit to China, looked like that was a nice growth area for you guys in implants. Can you just talk a little about where you're seeing growth there, how sustainable that is in implants? And then conversely, I think we were talking last quarter about Ortho going under VBP in China in the second half of 24. Is that still your expectation? And if so, can you talk about what the financial impact could be there? Thank you.

Yeah, of course. In Q1, we saw our sales increase in China by over 50%. So, of course, as we mentioned earlier, Q1 was really muted because of COVID and because of the VBP piece. But what we're looking at is the number of implant plays. What we are seeing is it was an easier comp in Q1, but what we are seeing is a ramp up of implant throughout China. And the reason for it are threefold. One, the price gap between the premium and that value part has been closed because of EVP. So it's not that huge of a difference between the prices. Second part is about the price of a patient implant now versus a three-unit bridge is almost the same. So a lot of people now, they see the value of doing a 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 placing an implant, as well as clinicians being able to do that. So we're really bullish about the China potential at implant in the long run. Not only on the premium side, but for the first time, our value brand, ABT, is now accepted as part of the VVP in five of the major universities and institutions. And that is growing as well. It's an underpenetrated market with tremendous amount of potential. So it gives us a little bit of a feel for what we expect to see on the in-plant business in China. Our expectation right now, 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 VVP for Orto is going to be sometimes during the second half. But the approach that they took on the in-plant side really gave them tremendous amount of insight on how to manage this in a structured format. We expect to see that in second half. We have contemplated. It is in our plan. 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.

We'll take our next question from Nathan Rich with Goldman Sachs.

Please go ahead.

Hey, good afternoon, and thanks for the question. And, Amir, thanks for all the help over the years. And, Paul, welcome to you. Look forward to working with you. I wanted to ask on the consumables business. I think outside the U.S., you talked about maybe some weaker demand that you're seeing. Could you maybe elaborate on what you saw in the quarter? Were there specific geographies that you would highlight? I think you also talked about actively managing price in some of those markets. Could you maybe just expand there? Are you seeing dentists trade down? Is that something where you feel like you have to adjust pricing? Any color you can show there would be great.

Thank you, Nate. Let me start from the pricing perspective. Normally, because of the relationship and partnership that we have with our partners and distributors, normally prices don't happen radically. We give them notice 30 to 90 days in advance, so It's a little bit of a different lay of the land in here compared to like Implan and Ortho. So we continue to see good price position. We have a great relationship with our partners. As Stephen talked about, we have made some investment in the key supplier program. But what we saw in Q4, because of the cybersecurity issues, there was a little bit of a delay that we saw in Q1. Our infection prevention grew mid-single digit in Q1, and a lot of it was because of the medical channel. We saw a significant increase not only on growth but also on the pricing part. Our restorative endo business was more flat, and after a decline in double digit in Q4, we saw a flat approach, and given the fact that we are able to really perform and deliver Well, in here, inventories continue to be really well managed by our partners across the board. We continue to see really good sellout information. And our solution, where we have that information, we are all performing the market. But on the geography side, we have been very focused. A good portion of our business comes in North America, and we continue to see momentum in there. In Europe, a couple of issues in Europe, you know, we had a day and a half, two days less working day in Q1 because we're Easter fall in Q1. So we had a little bit of a challenge in there, but not necessarily because of the sellout. It was because of the timing of it. We'll continue to be pretty bullish about our rest of end of business. We think that we got good performance, great product, great relationship with our distributors. And we think this is going to bounce back up as we go throughout the world. And we think that all performance that we have seen in most market around the world is going to continue as we go through 2024.

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 roles? Is that something that's underway now that Paul's joined, or have these kind of been in process? I know it's probably hard to say specifically, but anything you can add there would be great.

Of course, Nick. We have a really active search underway, and given the transition of the CEO position You know, there was a little bit of a delay in here because, as you can imagine, CFOs really like to know who they work with, who they partner with. But we have a number of strong candidates in here. Paul and the board have been actively involved. Now that we have a permanent CEO in place, I think we can accelerate that really quickly. Paul's appointment is going to really help with the top talent and candidates to come forward, both on the CFO search as well as on the Nobel side. We have an active search underway for the position in the Nobel. Nobel is an incredible brand. We're seeing a lot of people, 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 continue to build on the momentum that we have in here and continue to build this legacy for years to come.

Thank you.

This does conclude our Q&A session. I'll turn the program back to Stephen Keller for any closing comments.

Thanks, everyone. Really appreciate the time today. Look, obviously, 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.

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