Hello. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the Envista Holdings Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

Hello, everyone and thanks for joining us on the call. With us today are Amir Aghdaei, our President and Chief Executive Officer and Howard Yu, our Chief Financial Officer.I would like to point out that our earnings release, the slide presentation supplementing today’s call, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are available on the Investors section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations, and will remain archived until our next quarterly call. A replay of this call will also be available.During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2020, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets.During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will 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 as required by law.With that, I’d like to turn the call over to Amir.

Thanks, John and welcome everyone to Envista’s Q1 2020 earnings call. I hope everyone joining us today is well, safe and healthy. For those who are affected by the global pandemic, you’re in our thoughts. On behalf of Envista, I want to express our appreciation for those in the health care field who are working diligently around the globe to safeguard us all. This includes the many dental professionals who have worked tirelessly and selflessly to ensure patients continue to have access to care. I would like to thank our employees for their commitment, engagement in their communities and constant focus on keeping their families, our customers, partners and fellow employees safe. Thank you for all that you do. We are going to change the cadence of the call today given the unique nature of these circumstances. I will start by walking you through our approach to address COVID-19 before handing it off to Howard, who will share our quarterly results, and then I will walk you through what we are seeing in the world today and how we see Envista position for the new normal.When we reflect on the first quarter, we feel good about the progress we made during the first 2 months of the year, with revenue exceeding our expectations. With the emergence of the global health pandemic, our business experienced a significant adverse impact in the last 3 weeks of March. This caused us to pivot our focus and adjust to new realities we face today. Our approach to the current health crisis is focused on what’s important, the safety of our employees, supporting our customers, partners and communities and preserving our financial strength. First and foremost, our number priority is the health and safety of our employees. The actions to protect employees are driven by…

Thanks, Amir. First quarter sales declined 17.1% to $547.2 million. Sales were adversely impacted 0.9% from discontinued products and 1.8% from foreign currency. Core sales decreased 14.6%, primarily due to lower demand as a result of the global health pandemic, which we estimate impacted revenue by 16%. Through the first 2 months of the quarter, we achieved mid-single-digit core revenue growth and were above our forecast, including the negative impact of COVID-19 in China. However, revenue declined more than 50% in the last 3 weeks of the quarter ended April 3.Geographically, developed markets decreased at a low-teens rate led by Western Europe, which was the first major developed region impacted by the pandemic. In North America, we saw a slowdown towards the end of the quarter as most practices in Canada were closed and many states in the U.S. issued guidance to temporarily suspend elective procedures. We were encouraged by the continued traction made at our top 10 DSO customers with our revenue from those customers growing at a high single-digit rate in the quarter.Emerging market sales were down approximately 20%, led by China, which declined by more than 35%. Gross margins declined 410 basis points to 50.9% due primarily to unfavorable mix as a result of a larger decline in our higher-margin specialty businesses and increased capacity building for Spark Clear Aligners. Adjusted operating profit margin decreased 840 basis points to 1.8%, largely due to the factors above and incremental public company costs, partially offset by savings from our temporary and permanent spending reduction programs.Our first quarter adjusted diluted EPS, was $0.03. During the quarter, our operating cash flow was negative $62 million, and our free cash flow was negative $76 million, largely due to lower earnings, the timing of prior year incentive compensation payouts and an increase in…

Thanks, Howard. While we are not providing formal guidance given the uncertainty created by the pandemic, we want to provide you with some additional market commentary. We will also share the steps we are taking to assess and plan for the impact of COVID-19. We hope this will give you a better understanding of how the business will perform short term and how we are ensuring we set our business up to thrive as we emerge from the crisis.Let me start with our experience in China. Beginning in February and continuing through early March, we saw minimal volume as the country was effectively locked down. From mid-March through the end of the quarter, we saw a modest recovery to approximately 25% of the patient volumes. By the end of April, most clinics were open, but patient volumes were just over 50% of pre-COVID-19 levels. Over the last few weeks, we continue to see improvement in patient traffic, while our commercial teams anticipate a gradual return of volume through the remainder of the quarter. The performance we are seeing varies regionally and by country based on the infection progression and local government mandates.Asia-Pacific is further along in their recovery than other regions as they were first to experience an impact. Australia is beginning to recover, and Japan offices have remained open despite of operating at a relatively low level of patient traffic. We estimate about one-third of European dental offices are now open. Germany is showing encouraging signs with improving activity through the month of April as some offices have started to restock. Similarly, many areas of Scandinavia have had much lower impact than the rest of the continent. On the other end of the spectrum, Southern European countries and France still have very little activity as they have some of…

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

[Operator Instructions] Your first question in queue comes from Jeff Johnson with Baird.

Thank you. Good evening guys. Hopefully to hear me okay. Howard, maybe starting with you just from a balance sheet and cash flow perspective, I was wondering if you could give us an update on your liquidity thoughts from here, obviously, $350 million on the balance sheet. If revenues kind of continue to trend in the way you are expecting over the next 3 months to 6 months, how comfortable are you with current liquidity? I know in the documents you filed yesterday, you have to keep over $125 million of liquidity each month. Do you think there will be additional capital raises or need to access the additional facilities from here?

Sure, Jeff. So yes, I mean, we feel good. The first step was getting this covenant amendments executed. And so with that now behind us, we continue to focus here on the actions to go ahead and save costs. We’re looking at both temporary costs or in excess of $100 million, much of that to come in, in the second quarter as well as, as Amir mentioned, structural changes that would be an additional $100 million. And we had talked in the past about a $60 million cost takeout over 3-years. We’re looking to accelerate that and do a lot of those actions by the time we exit 2020 here. We think that between that, the cash on hand that, that positions us well to work our way through this environment and weather this crisis. In terms of priorities, we are focused on making sure that we have cash and liquidity throughout, and we’re focusing also on daily management of our cash. And so that’s looking at collections and payables. I mentioned earlier in our comments that we had $100 million of cash flow positive associated with the work that we’ve done on our collection side as well. And so we very much plan on continuing to do those efforts as well. In terms of liquidity and other options. Certainly, we will continue to monitor that. We’ll look at it. We have options such as short-term facilities, 364-day facility. We can look at convertible instruments that can even limit some of the equity dilution as well. Clearly, we value our equity interest and our stakeholders, and we’d be very conscientious about dilution as we think about our liquidity concerns going forward as well.

Alright. That’s helpful. And Amir, maybe one just higher-level question for you, you are in a unique position of having both a sizable implant and orthodontics business. We all have our opinions of what’s going to come back first, second, third in kind of the recovery phase. But how are you thinking about recovery in orthodontics, especially clear aligners versus brackets and wires? Any thoughts on how that could or could not recover over the next couple of quarters, and maybe play that off relative to expectations on a dental implant recovery? Thank you.

Yes. Thank you, Jeff. Thank you for your weekly survey. That has been really helpful to get your perspective on the market. As you can imagine, there are a lot of unknowns at this point, but we do believe that consumable will come back and specialty business will come back first, equipment next, and purely because of their higher capital demand. That’s why we took the action item to divest and – I am sorry, to shut down some of our treatment centers. On modeling and expectation are gradual increases in May and June as offices start opening by geography. The speed of recovery, to a large degree, has to do with the government guidelines and practices and reopening. We think the consumer confidence, macro factors, play an important perspective. From a procedure perspective, we think ortho and endo, purely because of the emergency nature of it, are going to come back first. This will be likely followed by procedures that require lower speed handpieces. We are monitoring several factors: disease progression, office opening consumer confidence. We are interviewing hundreds of dentists, talking to DSOs and others. We are looking at information on imaging devices. And through our interviews, we have the feeling that they have a really good handle of what is taking place in here. We have started seeing some of the Spark requests coming back not only in the U.S., but also in Australia and New Zealand; in some cases, from the European, are beginning to come in, has given us the confidence that we can start ramping some of our production capabilities moving forward. We are monitoring that on a daily and weekly basis and adjusting as we go forward.

Thank you, Jeff. Next question operator.

Our next question is from Tycho Peterson with JPMorgan.

Thanks. Amir, given the China example, can you just talk if there are structural differences between the China market, U.S., EU that would make the recovery there more or less relevant? And then how do you think about the lag between dental offices here reopening and the resumption of purchases? And you mentioned infection prevention as a tailwind. Can you maybe just talk a little bit about how you think about that opportunity?

Of course. Thank you, Tycho. It is not necessarily a perfect match and a read-through to other geographies, given that there is a much more government control. But we think individuals it’s a good indicative of the gradual recovery. In China, we started off really strong in January, and it was – the results were better than expected. From Lunar New Year to early March, virtually, there were no office activities. We saw a gradual improvement in patient volume once the office is open. From end of March, the 3-weeks in March, we saw a steady recovery to about 15% to 25% activities. At the end of April, we have seen about recovery to almost about 50%, and it is improving. As I said before, ortho, emergency cases, general hygiene, cleaning, the first to recover, but some other procedures are purely driven by government standards and guidance. So we use China as a good proxy, but we are trying to understand the limitation that China has had in order to replicate that in other developed markets. Our hygiene business, infection prevention business, has been a really important factor in here. We donated to the Wuhan government and have been able to put a series of recovery go-back-to-work program, how to disinfect offices. And we have had significant ramp and walked away at the end of Q1 with some past due in order to really expand its business. In order to look at geographies, we normally look at three different segments. 15% of our business is in APAC, in Japan, China, Australia and New Zealand. I think majority of those offices are open now. The next group are South and Nordic, about 10% of our business in those geographies and the remaining 75% in North America, Western Europe and rest of the world. China and APAC are further along on the recovery curve and we are seeing significant impact that recovering very quickly. South and Nordic are starting to see some recovery. Major offices are beginning to open now. And in Category 3, that North America, Western Europe, are largely under locked down through April, but seen some encouraging sign. As I said, in April, we saw a 60% decline, and we think that was the bottom. And from then on, we are beginning to see a step-by-step improvement by geography.

And then if I could ask one follow-up on implants. It’s early days for N1, but does the current environment change your view on value versus premium? We’re in a recessionary environment does the mix shift skew more toward value? And does that change your outlook for N1 at all?

Well, we are excited about the approval that we got. This was a major milestone. And to be honest, it was ahead of what we had anticipated. We’d be thoughtful on, given pandemic, to make sure that we are onboarding correctly, so a really good program with the Spark onboarding. We want to do the same thing in here to get infrastructure built to make sure an an end-to-end solution is provided, to make sure that first group are truly successful before we create the next phase as we go forward. We think the largest problem for patient and doctor for implant procedures are fear, procedure time, total treatment time. And N1 improves all of this. It’s easier to use clinically, specifically for DSOs, 2 versus 4 or 5 drills, easier to train new dentists. It covers all indication. And in Europe, as we talked about, we intend to start, maybe as early as June, start expanding that and growing that overtime. But we haven’t seen any specific information that says value will recover faster than premium. We are watching that very carefully. What we saw in the month – in the last three weeks of March and April, that being through the trough and now all indications, number of calls, number of visits and other things that we are seeing slowly ramping up, but we don’t have any specific information that I can share, talk about that balance between premium and value at this point.

Okay, thank you.

Your next question is from Elizabeth Anderson with Evercore.

Hi, guys. Thanks for the commentary I have a question. In terms of the cost cutting, I understand what you are saying regarding the 2Q cost cutting. But could you provide a few more details in terms of the longer-term cost cutting? Like what areas are you really focused on? And how do you see that progressing over the course of the year? Thanks.

Yes. Sure, Elizabeth. This is Howard. Thanks for the question. Yes, when we talk about the $100 million that are more structural in nature, we are looking at exit a less differentiated, the low-growth, low-margin product lines that we have – that we will be structurally challenged in. Amir talked about the company Crane in North America. And we think that there is some – potentially some smaller capital businesses, likely about a percent of our revenue that would also fall into that class. We’re looking at reducing footprint by shuttering several facilities, reducing complexity of the overall organization. Span of control would be something that we’d look at as well. And then really on the workforce restructuring side, we would target more than 10% of our workforce to go ahead and get those structural savings as well. I mean, I think – go ahead.

Sorry, go ahead.

No, I was just going to say that between those activities and then the temporary ones that we talked about of an additional $100 million that will be mostly in Q2, I will say that, in April, we have seen significant acceleration on cost savings, both in those temporary as it relates to the furloughs, the compensation reductions, the discretionary spend around travel and events. Those will be year-over-year in the quarter, will likely be down 25%. And we’re seeing a lot of that accelerated cost savings take hold here in April as well as some of these more structural things that we just talked about.

Got it. That’s very helpful. As part of these cost-cutting or sort of changes in your thinking because of this, will you – have you given some thought or made any changes to your thinking about how you guys work with distributors?

Elizabeth, our relationship distributors have not changed at all. We value the relationship and the partnership that we have. We think that they provide value by being available, providing support to dentists, and we intend to continue to work with them as we go forward. One thing that we’ve noticed, what we have seen is, due to some of the challenges in Q1, inventories have been the lowest that we have ever seen from the data we started tracking this. We think that provides opportunity on the recovery aspect process. That gives us an opportunity to manage that a lot better than what we have done. As you all know, we have been at it for the past several years. But the simple answer is, we continue to be dependent and work with them, and we have every intention of to continue to work with that.

Great, thank you very much.

Your next question is from Nathan Rich with Goldman Sachs.

Hey, Nathan.

Hi good afternoon. Maybe just following up on Elizabeth’s question on the cost savings, Howard, I just wanted to be clear, does the $100 million assume additional product rationalization beyond what you talked about with Pelton & Crane? And are there products or categories where you feel maybe it’s a drag on kind of profitability right now that could be potentially beneficial to exit in this current environment?

Yes. So Nathan, sure. I think that, that – the $100 million that we talked about structurally, that includes some of the recent announced actions, including Pelton & Crane. I think that we would look at other capital areas. I mean some places in Latin America, potentially, I think that would be also an area that we’d be looking at and analyzing as well as the potential opportunity. The big thing for us is looking at where do we have products that are highly capital-intensive, lower margins, lower growth, and making sure that those are the areas that we scrutinize.

Okay, great. Makes sense. And then, Amir, maybe just a follow-up on the implant business, could you talk about the performance of that business kind of since you took the restructuring actions in 4Q and kind of what you’ve seen kind of 3 months into that? And as we look forward from here, just can you kind of talk us through what the priorities for – are for that business as we move forward?

Of course. Thank you, Nathan. So as you know, we started making some changes in North America and Western Europe, the sales organization de-layering getting a lot closer to our customers. The first 2 months, January and February, North America and Western Europe sales were at high single-digit in our premium business. So we saw that traction started in late January – I’m sorry, late December and started seeing it in January and February. We had a lot of good feedback from our customers, from the sales force. And as this momentum started taking place, we started seeing a little bit of a degradation beginning of April. And the last 3 weeks of April really changed the trajectory of this business. We think that the changes we have done, it’s going to put us in a very different place as we go forward. These changes are going to set us up for the long-term performance of this business. Let me just go back and answer the question on what the priorities. I just want to clarify one thing. January, February is mid-single-digit growth on the premium in North America and Western Europe. So we have three key priorities in that business. We have products, as it stands today they are the best-in-class. And feedback that we are getting from our customers continued to say that the products are really meeting their expectation, so commercial execution, getting a lot closer to our customers, providing better customer experience. That’s the number one priority. Number two priority for us, to make sure that the investment that we have made in Nobel specifically in the past 4 or 5 years give us an opportunity to get the new generation of a product around N1, around the new surface, launch properly, expand it properly and see the benefit of that. So a customer can see the benefit of it as we go forward. The third priority for us, as you know, we have had – we have talked about portfolio. We have some gap in our portfolio around regenerative value to make sure that we can complete our portfolio gaps. Those priorities have not changed. We started with the commercial activities in Q3 and Q4. N1, we gave you a status update, and continue to be an important part of the innovation moving forward. And as, hopefully, to come out of this crisis to be in a far better place to accelerate a portfolio management, adding to our portfolio to make sure that we can meet the requirement of our customers worldwide.

Great, thank you.

Your next question is from Jon Block with Stifel.

Yes good afternoon guys. Amir, in terms of the trajectory of the market coming back, I’m just curious what you’re hearing in your conversations regarding hygiene. But that’s seemingly lagging due to the concerns of aerosols that you hear out there. And so what are you hearing? What does that mean for restorative procedures down the road as hygiene usually acts as the leading indicator for restorative? Could that actually sort of being maybe a pocket once we get into the fall time frame if hygiene doesn’t resume shortly? And then I’ve got a follow-up. Thanks.

Yes. Thank you, Jon. What we are hearing is that the high speed as well as procedures that have – create more of a damage for lack of a better description, to the tissues and bone are the ones that have a little bit more of a concern. That’s why there is, in some categories, there are lower risk, lower transmission risk to restorative, to hygiene, to endo. And there are additional clinical benefits as well that could be used as a replacement. So for example, lower risk versus other procedure using a high-speed handpiece or ultrasonic scaler, lower speed drill, 1,000 or 2,000 RPM versus 200,000 RPM that’s normally used in resto. Normally, when you look at the implant, as an example, in most cases, you go to an environment that it is really sterilized, advanced sterilization, surgical suits, that already existed before any of these. So we think some of those would have a really impact in some procedures coming back a lot faster than others. Jon, upon saying that, we have been busy looking at product categories that have a better performance, better trajectory, and we are lining up very quickly, very fast around those categories to make sure that we are prepared as the market comes back, that we can see the benefit of that.

Got it. Okay, great. And then just a pivot for the second question, Spark, I know it’s early, but you did mention it contributed 50 bps to revenue growth. So where are those sales coming from? I assume they’re Ormco, orthos. Has their underlying wires and brackets growth remained intact so you can tell if those sales are truly incremental and how are they using it, on the adult, on the teens? Any early feedback would be great?

Yes, great. Of course, Jon. The first two months of the year, Ormco traditional bracket and wire continued to operate in the same format as it has done in the past, mid-single digit. During 2019, we saw exactly the same thing. So our traditional bracket and wire business continues to operate at a mid-single-digit growth while the market is 0% to 1%. So while we have introduced Spark that really hasn’t taken anything away from our traditional bracket and wire. We introduced Spark, as we have talked about before, to our traditional Ormco business customers. Those customers, they know us, they have a good relationship with us. And what they have done is basically offer different set of alternatives that they can use either bracket and wire Spark or a combination of both. They are using it in many of the cases. The number of customers that they’re using today, we have – is finite. They know exactly who they are. They’re providing input to us. And they have told us that they can treat almost all indications in all cases using Spark. Where they came from, exactly as what we had expected. China started ramping up pretty quickly in January. U.S. continued to be the next phase, got signed up. And then we had a very early introduction in Europe. And Australia and New Zealand continue to get – send us cases. What we expected in Q1 is exactly what we received despite the fact that we had some challenges in March. And what we are beginning to see is similar trajectory as we saw in January and February. Areas that we have introduced the product, where we have gone through this phased, disciplined approach of training, education, customer support, change of the processes, are we begin to see that coming back. And we are ramping up, as we said before, production, to be able to make sure that we are in a good place answering the demand this year.

Great. Very helpful. Thank you.

Your next question is from Brandon Couillard with Jefferies.

Amir, just back on N1, what’s the distinction of – you described the CE Mark being the first portfolio launch. Just curious what the distinction is there. And do you have an updated time line for U.S. submission to the FDA?

Right. So N1 is a complete system, Brandon. So it’s a system of the drill unit, the implant itself, the conical connection that goes on top of it, the surgical units, the packaging. All of that, step by step by step, is coming through. So right now, the most important part, which was basically having that implant being approved, it has been approved. So we’re going to start selling that implant. And we have been building inventory in order for us to be able to go to those countries that they can – that don’t require any additional registration. I think about 12 to 14 countries in Europe, we can start selling that immediately. And the others that require registration is a very short registration process. So really pleased with what is taking place. N1 is a series of innovation that comes one after another. Phase 2 would be coming after that, and we continue to expand on it as we go forward. So FDA discussion is underway. We’re in back and forth on pre-submission dialogue and getting advice from consultants and people who really know the industry very well to make sure that we are in a good place as we go forward. I cannot provide any specific time line. I’ll go all along. As we had indicated in the past, Europe ended this year and United States in 2021, later in 2021. The European approval, obviously, bring that forward, but I don’t think that has – if we have any additional information on that we can share at this point about the U.S. FDA approval.

Thanks. And just one question, a follow-up for Howard, maybe in terms of the $100 million of structural cost savings. Can you break that down in terms of where in the P&L that will manifest? And to what extent the sales force might be impacted in certain parts of the business from the headcount reduction?

Yes. So Brandon, I don’t think that the structural changes – we’ve done some of those in the sales force around the Nobel piece last year in December, as we spoke about. We don’t anticipate a lot of impact as it relates to the sales organizations and feet on the street for us. What we do anticipate is that we’ll have more structural changes around facilities, back office as well, shared service functions, as well as looking at these things like Pelton & Crane, which we just announced, which will obviously have some manufacturing footprint changes as well. So I think it’s going to be throughout the P&L, largely in the G&A components versus the selling component, and we will also have some impact on the cost of sales or the manufacturing lines as well.

Very good. Thank you.

And that ends our allotted time for questions and answers. Management, I’ll turn the call back over for any closing remarks.

Thank you, Erica, and everybody. We’ll be around for follow-ups today, tomorrow, rest of the week. Thank you, everyone, for joining us.

Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.