14 October 2019 Equity Research Americas | United States
Envista Holdings Corp NVST
Bracing for Growth; Initiate Neutral; $30 Target
Price Target price (12M, US$) 30.00 [V] Life Science Tools and Diagnostics | Initiation Neutral
■ Initiate Neutral; $30 Target Price: As a leading global manufacturer of dental, NVST is Price (11 Oct 19, US$) 27.93 levered to a seemingly stabilizing underlying dental industry backdrop, where it supports 52-week price range 29.07 - 26.59 90% of practitioners’ clinical needs. We expect earnings growth to accelerate on dedicated Market cap (US$ m) 4,431.13 innovation efforts, greater penetration in high-growth markets, and efficiency initiatives as a Enterprise value (US$ m) 5,650.91 [V] = Stock Considered Volatile (see Disclosure Appendix) more nimble standalone entity, as the recent spinoff of Danaher’s Dental segment. All in, these drivers should accelerate organic revenue growth to +low to mid-single digits over the next five years, with earnings growing at a +7% CAGR from 2019E-2023E. Research Analysts ■ Positioning for Growth via Targeted Innovation: While dental demand trends have Erin Wilson Wright been lackluster over the past few years, we view rising dental utilization stemming from 212 538 4080 favorable demographics, an emphasis on aesthetic and preventative care, along with [email protected] expanding adoption of digital dentistry should drive improving demand for dental Katie Tryhane consumables and equipment long term. For NVST, reinvigorated innovation, focused on 212 325 2713 Specialty products (i.e. N1 Implants, Spark Clear Aligners), an inherently faster growing [email protected] category (48% of sales), should spur growth, alongside efforts to fortify Dental Support Org. relationships and to expand in high-growth markets, accounting for 27% of sales by Haley Christofides 2022E (from 22% today). Diligent cost structure initiatives ($60 million in savings by 212 325 3720 [email protected] 2021E) should facilitate +286 bps of EBITDA margin expansion over the next five years. Capital deployment with potential tuck-in M&A may also supplement growth long term. Matthew Urbik ■ Valuation Reflects Investment Positives, Risks: With NVST’s shares up 32% (vs. S&P 212 325 2152 500 -1%) since its Sept. 18, 2019 IPO, its shares currently trade at 14.2x 2020E [email protected] EV/EBITDA, and we view its valuation adequately reflects aforementioned near term drivers, contributing to our Neutral view. Our $30 target price is predicated on a 14.7x 2020E EV/EBITDA multiple, a premium to Dentsply Sirona (14.0x), with line-of-sight to improving profitability near term, but a discount to its Dental Manufacturer peer group average (16.2x), as we await evidence of more meaningful contributions from new products and other internal initiatives. Upside and downside risks include fluctuations in macro conditions, dental demand, FX, and distributor stocking. Danaher’s 80% stake may also serve as an overhang. Share price performance
Financial and valuation metrics Year 12/18A 12/19E 12/20E 12/21E EPS (CS adj.) (US$) 2.04 1.67 1.70 1.88 Prev. EPS (US$) - - - - Revenue (US$ m) 2,844.5 2,793.9 2,835.9 2,920.1 EBITDA (US$ m) 465.5 394.8 413.8 449.5 P/OCF (x) 12.3 13.1 12.1 EV/EBITDA (current) 9.5 14.3 13.0 11.3 Net debt (US$ m) 0 1,220 942 637 On 11-Oct-2019 the S&P 500 INDEX closed at 2938.13Daily Sep18, 2019 - Oct11, 2019, 09/18/19 = US$27.95 ROIC (%) 6.68 5.65 6.03 6.68
Number of shares (m) 158.65 IC (current, US$ m) 4,826.40 Net debt (Next Qtr., US$ m) 1,271.6 Dividend (current, US$) - Quarterly EPS Q1 Q2 Q3 Q4 2018A 0.36 0.58 0.52 0.58 Net debt/tot eq (Next Qtr.,%) 36.6 2019E 0.30 0.47 0.40 0.50 Source: Company data, Refinitiv, Credit Suisse estimates 2020E 0.26 0.45 0.44 0.55
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
14 October 2019
Envista Holdings Corp (NVST) Analyst: Erin Wright Price (11 Oct 2019): US$27.93 Target Price: 30.00 Rating: Neutral
Income Statement 12/18A 12/19E 12/20E 12/21E Company Background Revenue (US$ m) 2,844.5 2,793.9 2,835.9 2,920.1 EBITDA (US$ m) 465 395 414 449 Envista is a leading global dental manufacturer, serving more than one Depr. & amort. (39) (42) (47) (49) EBIT (US$) 423 351 367 400 million dentists across 150 countries with more than half of revenue Net interest exp -0 (6) (16) (13) derived internationally. Its comprehensive product offering supports ~90% PBT (US$) 426 347 350 387 of practitioners’ clinical needs.
Income taxes (102) (82) (81) (89) Profit after tax 324 265 270 298 Minorities - - - - Blue/Grey Sky Scenario Net profit (US$) 324 265 270 298 Reported net income (US$) 324 265 270 298 Other NPAT adjustments 0 0 0 0 Adjusted net income 324 265 270 298 Cash Flow 12/18A 12/19E 12/20E 12/21E EBIT 423 351 367 400 Net interest -0 (6) (16) (13) Change in working capital 26 10 2 (0) Cash flow from operations 400 361 339 367 CAPEX (72) (82) (61) (62) Free cashflow to the firm 328 279 278 305 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Cash flow from investments (76) (82) (61) (62) Net share issue(/repurchase) 0 0 0 0 Dividends paid 0 0 0 0 Changes in Net Cash/Debt 0 (1,220) 278 305 Balance Sheet (US$) 12/18A 12/19E 12/20E 12/21E Assets Cash & cash equivalents 0 185 463 768 Account receivables 460 444 448 454 Other current assets 48 53 53 53 Total current assets 787 952 1,238 1,552 Total fixed assets 262 298 312 325 Our Blue Sky Scenario (US$) 36.00 Investment securities - - - - Total assets 5,842 6,130 6,343 6,588 Our $36/share (17.0x 2020E EV/EBITDA) blue sky scenario is Liabilities predicated on strengthening underlying fundamental trends across the Total current liabilities 641 658 668 677 Total liabilities 1,015 2,591 2,601 2,610 dental industry, as well as better than anticipated progress on internal Shareholder equity 4,823 3,545 3,747 3,984 initiatives, including R&D efforts, commercialization of new product Total liabilities and equity 5,842 6,130 6,343 6,588 launches, and direct sales momentum.
Net debt 0 1,220 942 637 Per share 12/18A 12/19E 12/20E 12/21E Our Grey Sky Scenario (US$) 24.00 No. of shares (wtd avg) 159 159 159 159 CS adj. EPS 2.04 1.67 1.70 1.88 Our $24/share (12.4x 2020E EV/EBITDA) grey sky scenarios is based Prev. EPS (US$) on a continually lackluster underlying dental market environment, as well Dividend (US$) 0.00 0.00 0.00 0.00 Free cash flow per share 2.07 1.76 1.75 1.92 as slower than expected progress on internal initiatives, including R&D Earnings 12/18A 12/19E 12/20E 12/21E efforts, commercialization of new product launches, and direct sales Sales growth (%) 1.2 (1.8) 1.5 3.0 progress.
EBIT growth (%) (9.7) (17.0) 4.3 9.2 Net profit growth (%) 3.9 (18.2) 1.5 10.6 Share price performance EPS growth (%) (1.4) (18.2) 1.5 10.6 EBITDA margin (%) 16.4 14.1 14.6 15.4 EBIT margin (%) 14.9 12.6 12.9 13.7 Pretax margin (%) 15.0 12.4 12.3 13.3 Net margin (%) 11.4 9.5 9.5 10.2 Valuation 12/18A 12/19E 12/20E 12/21E EV/Sales (x) 1.56 2.02 1.89 1.74 EV/EBITDA (x) 9.5 14.3 13.0 11.3 EV/EBIT (x) 10.5 16.1 14.7 12.7 P/E (x) 13.7 16.7 16.4 14.9 Price to book (x) 0.9 1.3 1.2 1.1 Asset turnover 0.5 0.5 0.4 0.4 Returns 12/18A 12/19E 12/20E 12/21E ROE stated-return on (%) 6.6 6.3 7.4 7.7 ROIC (%) 6.7 5.6 6.0 6.7 On 11-Oct-2019 the S&P 500 INDEX closed at 2938.13 Gearing 12/18A 12/19E 12/20E 12/21E Daily Sep18, 2019 - Oct11, 2019, 09/18/19 = US$27.95 Net debt/equity (%) 0.0 34.5 25.2 16.0 Interest coverage ratio (X) 62.7 22.3 30.8 Quarterly EPS Q1 Q2 Q3 Q4 2018A 0.36 0.58 0.52 0.58 2019E 0.30 0.47 0.40 0.50
2020E 0.26 0.45 0.44 0.55 Source: Company data, Refinitiv, Credit Suisse estimates
Envista Holdings Corp 2
14 October 2019
Table of Contents
Key Charts 4
Executive Summary 5
Envista Corporate Overview 7 Equipment & Consumables – 52% of Sales ...... 9 Specialty Products & Technologies – 48% of Sales ...... 15
Investment Strengths 23 Dental Industry Dynamics: Stabilization ...... 23 Embracing Innovation ...... 28 Strengthening Relationships with DSOs ...... 33 Further Penetration of High Growth Markets ...... 37 Profit Margin Leverage ...... 39 Capital Deployment ...... 42
Investment Risks 45 Downside Risks ...... 45 Upside Risks ...... 46
Earnings Outlook and Financial Resources 47 Earnings Outlook ...... 47 Financial Resources ...... 48 Valuation ...... 49 Comparable Company Analysis ...... 50 Discounted Cash Flow (DCF) Analysis ...... 51 Holt® Value-Based Analysis ...... 52
Management Team 53
Credit Suisse PEERS 60
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Key Charts
Figure 1: NVST Sales Growth Expect to Accelerate on an Figure 2: Expecting Meaningful Improvement Following Several Organic Basis to the +LSD/MSD Range Years of Margin Degradation
$3,200 $600 24% $3,150 $538 6% $535 $509 $497 $3,100 $500 $465 22% $3,031 5% $449 $414 20.2% $395 $3,000 4% $400 20% $2,920 3.9% 3.8% 3% $2,900 $300 19.0% 18% 2.0% $2,845 $2,836 3.0% $2,811 2% $2,785 $2,794 $2,800 $200 17.2% 17.0% 16% 1.5% 1% 16.4% 15.4% $2,700 $100 14% 0% 14.7% 14.6% 0.2% 0.2% -0.1% $2,600 -1% $0 12% 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Sales Organic Sales Growth Pro Forma EBITDA Pro Forma EBITDA Margin
Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse estimates; $ in MM
Figure 3: NVST Business Segment Mix (2018): Rising exposure Figure 4: NVST Revenue Mix by Geography (2018) to faster growing Specialty category
Rest of World 6%
700 bps 48% 55% Expected Mix High Growth Shift Toward Markets Specialty 23% Products & Technologies North America 48%
52% 45%
2016 2022E Western Specialty Products & Technologies Equipment & Consumables Europe 23%
Source: Company data, Credit Suisse Source: Company data, Credit Suisse
Figure 5: Summary of Dental Revenue Growth Across Key Industry Constituents – Mixed Trend YTD, Albeit Stabilizing 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Consumables +LSD +LSD +LSD -- Negative Negative -MSD -L-MSD -LDD + Slightly -MSD +LSD +LSD -LSD Envista Equipment -LSD +MSD +MSD -- Positive +LSD +LSD -MSD -HSD + Slightly -MSD ~Flat +LSD/+MSD -LSD Consumables 3.3% 0.9% -2.5% -2.8% -4.3% -3.6% -4.4% -7.4% -6.7% -5.2% -2.2% -1.9% -0.9% -0.4% Patterson Equipment -6.9% 5.4% 4.2% -1.0% -16.9% -15.1% -17.7% -10.6% -20.2% 5.4% -0.9% 5.6% 13.1% -6.6% Consumables 4.6% 1.8% 1.8% 1.9% 2.5% 0.8% 1.3% 1.9% 2.7% 4.7% 4.3% 2.5% 2.5% 1.3% HSIC N.A. Equipment 13.5% 2.7% 13.3% 2.7% -5.5% 14.8% -0.7% 18.1% 4.4% 6.2% 5.9% -4.3% 3.3% -2.9% Consumables 1.6% 4.5% 2.7% 2.5% 8.0% 1.4% 3.4% -2.6% 2.4% 3.0% 3.5% 3.4% 5.5% 2.3% HSIC Int'l Equipment 4.3% 3.1% 4.2% -3.9% 3.1% 3.6% 2.6% 7.7% 3.1% 4.7% -4.2% 1.3% -1.2% -2.0% Consumables 4.5% 3.8% -0.3% 3.5% 2.4% 2.0% 4.3% 3.9% -1.3% 3.3% -3.0% 5.4% -0.6% -4.1% Dentsply Sirona Technologies 6.8% 0.8% 0.2% 0.0% -12.7% -10.0% -1.1% 5.9% -1.6% -1.1% -9.3% -4.2% 7.9% 9.3%
3M Oral Care 5.0% 3.0% 0.0% -1.0% 5.0% 0.0% 3.0% 3.0% 0.0% 3.0% 2.0% 4.0% +LSD +LSD Coltene Consumables 1.0% 3.3% 1.8% 2.8% 4.2% 2.7% 2.0% Source: Company data, Credit Suisse
Envista Holdings Corp 4
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Executive Summary
We are initiating coverage of Envista Holdings (NVST) with a Neutral rating and $30 target price. NVST is a leading global manufacturer of dental equipment and consumables, generating $2.8 billion in sales in 2019E, growing low to mid-single digits over the longer term. It serves more than one million dentists throughout 150 countries, with more than half (56%) of revenue derived from international markets. All in, NVST’s 3,000 employees, in conjunction with its broad product offering, support an estimated 90% of practitioners’ clinical needs for diagnosing, treating, and preventing dental conditions. NVST is the byproduct of former parent Danaher’s (DHR) acquisitive nature, completing 25 acquisitions across the dental industry since 2004, creating a leading global dental manufacturer. On July 20, 2018, DHR announced it would execute a tax-free spinoff of its Dental business, similar to its prior spinoff of its Industrial segment Fortive (FTV). However, following DHR’s announcement of its pending acquisition of General Electric’s BioPharma unit (DHR: Dissecting the GE BioPharma Deal), DHR disclosed it would structure the dental transaction as an initial public offering as opposed to a spin in order to support DHR’s overall capital structure. On September 18, 2019, DHR spun off a ~20% interest in an initial public offering (26.8 million primary shares, 30.9 million including the green shoe) of its dental business into a standalone, publicly traded company. The global dental industry is worth an estimated $23 billion, growing in the +mid-single digit range, with over 600,0001 active dentists in OECD countries, including almost 200,000 in the US. While dental demand trends have been somewhat lackluster despite a healthier global macro backdrop, we view longer term structural drivers across the industry remain intact including favorable demographics, an emphasis on aesthetic and preventative care, and expanding adoption of digital dentistry. Amidst what we view as a stabilizing dental demand environment, we believe NVST should also benefit from the following drivers: Embracing Innovation: While historically NVST has had a fairly fragmented R&D function, since 2016, it has consolidated its efforts, with the aim of driving more efficient and effective resource allocation in order to produce more meaningful innovation. Moreover, NVST has ramped its overall spend on innovation, having invested more than $475 million in R&D on a cumulative basis since 2016, with R&D spend now representing 6% of sales (vs. 5% in 2016). Innovation efforts will be focused on bolstering its faster-growing Specialty offering (e.g. ortho, implants), a segment that we expect will expand to 53% by 2023 (from 48% in 2018). Specifically, we anticipate building contributions from recent and pending product launches such as its Spark Clear Aligner System as well as its N-1 implant system, offering potential near term catalysts. Strengthening Relationships with DSOs: NVST’s remains focused on strengthening relationships across faster-growing Dental Support Organizations (DSOs). While DSOs remain a smaller component of the market today (est. 8.8% of US dentists2), we are encouraged by its DSO initiatives, particularly as this segment grows faster than the underlying market and embraces innovative technology more quickly, ultimately driving greater demand for NVST’s products. Further Penetration of High-Growth Markets: NVST generates 22% of sales from what it considers high-growth geographies, growing at a healthy +high-single digit clip. We
1 Including: Australia, Canada, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Slovak Republic, Slovenia, Sweden, Turkey, and the United States 2 American Dental Association
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estimate its exposure to high-growth markets to expand to 29% by 2023. Following its demonstrated success in China, where it now represents a leading player, growing +double- digits since 2011, NVST expects to leverage similar strategies across other geographies, with particular focus on Asia and Latin America. Margin Leverage: We forecast 286 bps of EBITDA margin improvement from 2019 to 2023 as it continues to drive efficiencies with its entrenched Envista Business System (EBS) philosophy, derived from its former parent Danaher, likely generating a targeted $60 million in cost savings by 2022. We expect NVST should also benefit from favorable mix shifts with rising exposure to faster-growing and higher-margin categories (i.e. Specialty) over time. Longer term, we estimate NVST will achieve 50-75 bps of core margin expansion annually, with cost savings balanced by an element of reinvestment aimed to fuel continued growth. Capital Deployment: While NVST will prioritize some debt repayment near term with pro forma leverage of 3.0x (target: maintain investment grade), we expect it will also target small/mid-sized acquisitions longer term, with a focus on platform bolt-ons, new dental technologies, and near adjacencies. While we expect M&A will remain a capital deployment priority going forward, we do not embed incremental contributions from acquisitions in our model, offering potential upside to our estimates. Valuation: With NVST’s shares up 32% (vs. S&P 500 -1%) since its Sept. 18, 2019 IPO, its shares currently trade at 14.2x 2020E EV/EBITDA, and we view its valuation adequately reflects aforementioned near term drivers, contributing to our Neutral view. Our $30 target price is predicated on a 14.7x 2020E EV/EBITDA multiple, a premium to Dentsply Sirona (14.0x), with line-of-sight to improving profitability near term, but a discount to its Dental Manufacturer peer group average (16.2x), as we await evidence of more meaningful contributions from new products and other internal initiatives. Risk Factors: Key downside risks to our call include deterioration in the global macroeconomic environment; significant developments or uncertainties in trade policies and tariffs; competition; loss of relationship(s) in the distribution channel; lack of visibility on stocking dynamics across the distribution channel; unsuccessful development and/or commercialization of new products; regulatory matters; disruption of product manufacturing; inability to integrate future acquisitions; and foreign exchange fluctuations. Danaher’s residual 80% stake may also serve as an overhang. Upside risks to our call include an improvement in the global macroeconomic environment and better than expected development and commercialization of new products.
Figure 6: Recent (September 18) IPO Details Figure 7: NVST Share Price Performance Since IPO (+32% IPO-to-date)
Common Shares Offered in IPO: 26,768,000 (30,783,200 including green shoe) $30 $29 PF Basic Shares Outstanding: 154,636,000 (158,651,00 including green shoe) $28 $27 Offer Price: $22 (vs. proposed range of $21-24) $26 $25 Net IPO Proceeds: $559.5MM ($643.4MM including green shoe) $24 $23 +32.1% vs. Use of Proceeds: Pay Danaher as partial consideration of the spin $22 -0.9% S&P $21 Controlling Ownership: Danaher (~80.6% including green shoe) $20
Source: Company data, Credit Suisse Source: Factset, Credit Suisse
Envista Holdings Corp 6
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Envista Corporate Overview
Envista (NVST) is a leading global manufacturer of dental equipment and consumables, generating $2.8 billion in sales in 2019E, growing low-single-digits over the longer term. It serves more than one million dentists throughout 150 countries, with more than half (56%) of revenue derived from international markets. The vast majority (70%) of sales are tied to consumables and services segments. Importantly, NVST’s 3,000 employees, in conjunction with its broad product offering, support an estimated 90% of practitioners’ clinical needs for diagnosing, treating, and preventing dental conditions.
Figure 8: Publicly Traded Dental Industry Leaders (2018 Revenue, $ in Millions)
$7,000 $6,349
$6,000
$5,000
$3,986 $4,000
$2,845 $3,000 $2,274 $1,966 $2,000 $1,353 $1,344
$1,000 $411
$0 HSIC XRAY NVST PDCO ALGN MMM* STMN ZBH**
Source: Company data, Credit Suisse *Includes 3M’s Oral Care Segment; **Includes ZBH’s Dental Segment; HSIC and PDCO are predominantly dental distributors Danaher Dental Spin Transaction Details On July 20, 2018, Danaher (DHR, Outperform) announced it would execute a tax-free spinoff of its Dental business, similar to its prior Fortive (FTV) Industrials segment spinoff. However, following DHR’s announcement of its pending acquisition of General Electric’s BioPharma unit (DHR: Dissecting the GE BioPharma Deal) for $21.4 billion, DHR disclosed it would structure the dental transaction as an Initial Public Offering as opposed to a spin in order to support the GE deal. Consequently, on September 18, 2019, DHR spun off a ~20% interest in its Dental unit via an initial public offering (26.8 million primary shares), thereby creating Envista Holdings (NVST) as a standalone publicly traded company. Meanwhile, NVST inherited debt from its parent company, entering into the public arena with $1.3 billion net debt (3.0x net debt to TTM EBITDA). Importantly, DHR completed this spinoff transaction slightly ahead of prior expectations, with DHR previously messaging (as late as April) that the spinoff would be completed in mid-to-late 2H19 (vs. actual mid-September). As an independent entity, we expect NVST will benefit from enhanced strategic and operational flexibility with investment and capital deployment opportunities that should offer upside.
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Figure 9: NVST Revenue Growth Trajectory Figure 10: Revenue by Geography (2018)
$3,200 Rest of World $3,150 6% 6% $3,100 $3,031 5% High Growth $3,000 4% Markets 23% $2,920 3.9% 3.8% 3% $2,900 2.0% $2,845 $2,836 3.0% North America $2,811 2% 48% $2,785 $2,794 $2,800 1.5% 1% $2,700 0% 0.2% 0.2% -0.1% $2,600 -1% 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Western Sales Organic Sales Growth Europe 23%
Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse NVST Comprises of Two Primary Business Segments NVST’s two primary business segments include Equipment & Consumables (E&C; 52%) and Specialty Products & Technologies (SP&T; 48%). While we expect NVST will disclose revenue and operating income metrics for these two segments going forward, we highlight NVST actually maintains three operating companies, including Kavo Kerr (E&C – Imaging, Instruments, Consumables), Nobel Biocare (SP&T – Implants), and Ormco (SP&T – Orthodontics).
Figure 11: NVST Revenue Mix (2018)
Specialty Products & Equipment & Technologies Consumables 48% 52%
Source: Company data, Credit Suisse Note: Specialty Products & Technologies includes orthodontic and implant products
■ Equipment & Consumables (52% of Sales): This segment encompasses KaVo (3D/CBCT Imaging, Intraoral X-Ray Sensors, Handpieces, Dental Practice Workflow Software) and Kerr (Composite Systems, Bonding Agents, Surface Disinfectants) products. These are traditional equipment and consumables utilized broadly across professional dental care, with NVST maintaining leading positions across several segments of the market. Key brands within the segment also include Dexis (Imaging) and i-CAT (X-ray).
■ Specialty Products & Technologies (48% of Sales): This segment comprises of Nobel Biocare (Dental Implants, Dental Prosthetics, Bone and Tissue Regeneration) and Ormco (Brackets & Wires, Spark Clear Aligner System). Specialty is typically a faster growing,
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higher margin business as technologies continue to advance, and as specialty treatments further penetrate the market.
Figure 12: Overview of NVST’s Business Segments
Envista Category Market Size Market Growth NVST's Key Brands
Imaging $2B +MSD
Instruments / Treatment Equipment & Consumables $4B +LSD units / Other equipment
Consumables $7B +LSD
Implants $5B +MSD
Orthodontics (Wires & Specialty Products & $2B +LSD Brackets) Technologies
Orthodontics (Clear $2.5B >10% aligners)
Source: Company data, Credit Suisse Equipment & Consumables – 52% of Sales
The Equipment & Consumables (E&C) segment generated $1.5 billion in sales (52% of total) in 2018, encompassing KaVo (3D/CBCT Imaging, Intraoral X-Ray Sensors, Handpieces, Dental Practice Workflow Software) and Kerr (Composite Systems, Bonding Agents, Surface Disinfectants). While historically (pre-2016) this segment consisted of more than five operating companies, NVST has since consolidated the business into one unit (KaVo Kerr). Following two years of admittedly disappointing organic growth performances (-3.5% in 2017; -2.7% in 2018), owing, in part, to channel shifts, we expect NVST’s E&C organic growth to improve sequentially over the next five years. That said, we still only expect -1.4% and ~flat organic growth in 2019 and 2020, with growth improving thereon into the +low-single-digit range as it also ramps innovation efforts.
Figure 13: E&C Revenue Growth Expected to Accelerate to +LSD Longer Term
$1,520 11% $1,500 9% $1,500 $1,490 7% $1,480 $1,475 $1,461 5% $1,460 3% $1,440 $1,436 1% $1,423 $1,422 1.8% 2.0% $1,420 1.0% -0.1% -1%
$1,400 -1.4% -3% -2.7% -3.5% $1,380 -5% 2017 2018 2019E 2020E 2021E 2022E 2023E
Equipment & Consumables
Source: Company data, Credit Suisse estimates NVST’s E&C Segment is evenly split between Consumables and Equipment products. Importantly, while Consumables represents a larger market ($7 billion) relative to Equipment ($6 billion), the Equipment market is growing slightly faster (+low-single digit to +mid-single digit) relative to Consumables (+low-single digit). We do not anticipate a major mix shift near term,
Envista Holdings Corp 9
14 October 2019 albeit while acknowledging more meaningful technological advances and adoption of digital dentistry may help accelerate Equipment growth. In terms of geographic mix, half of NVST’s E&C revenue is generated in North America, with the remainder earned abroad, including 6% in Western Europe, 22% in High Growth Markets, and 22% in Rest of World. Importantly, we expect segment revenue mix will continue to shift to High Growth Markets, particularly as North America consumables trends remain relatively anemic, as detailed on page 13.
Figure 14: E&C Revenue Mix by Product Type (2018) Figure 15: E&C Revenue Mix by Geography (2018)
Rest of World 22%
Consumables Equipment North America 50% 50% 50%
High Growth Markets 22%
Western Europe 6%
Source: Company data, Credit Suisse Source: Company data, Credit Suisse In terms of distribution, 90% of NVST’s E&C revenues are generated through traditional dental distributors, including Henry Schein (HSIC, Neutral) and Patterson Companies (PDCO, Outperform). Meanwhile, 10% of revenues are generated through direct sales efforts, where it can leverage its salesforce of 3,000. While we do not expect this mix to shift meaningfully over the next several years, with NVST continuing to emphasize the value of its dealer-partners, we note NVST has disclosed that it is focused on creating demand through enhanced direct sales efforts, as well.
Figure 16: E&C Revenue Mix by Distribution Channel
Direct 10%
Distributor 90%
Source: Company data, Credit Suisse Consumables (50% of E&C Revenue; 25% of Total Sales) NVST provides a comprehensive offering of general dental consumables to dental offices, clinics, and hospitals under a variety of brands, including Kerr, Metrex, Sybron Endo, Total Care,
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14 October 2019 and Pentron. As a reminder, NVST’s general consumables business was primarily established through Danaher’s acquisition of Sybron Dental specialties for $2 billion in 2006 in combination with products from various other acquisitions. Despite Kerr’s relatively healthy performance throughout 2016, it experienced negative growth in 2017, which continued into the beginning of 2018. While the consumables market has been notably lackluster since the recession, the 2017 experience may have pointed to potential share loss, where the broader market still seemed to point to better performance (+low-single-digit). Meanwhile, in 2018, management began to point to positive sell-out trends, which seemingly signaled potential stabilization. That said, we were disappointed by the 2Q19 performance of low-single-digit declines. All in, while we view NVST has created a comprehensive traditional consumables portfolio, we await commentary pointing to better core performance, which may be supported by focused product innovation as a more nimble, standalone company.
Figure 17: Kerr Consumables Quarterly Performance 1Q13-2Q19 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 + LSD + MSD + MSD + LSD + MSD + LSD Flat + LSD + LSD Positive Slightly + - Slightly
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 +LSD +LSD +LSD -- Negative Decline - HSD - L-MSD -LDD +Slight -MSD +LSD
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 +LSD -LSD
Source: Company data, Credit Suisse Note: 4Q16 performance is unknown NVST maintains strong brand and product recognition across most categories, including restorative, endodontics, and infection control (Total Care), as well as a presence in laboratories. In restoration, it offers products to help repair and restore damaged teeth, including its SonicFill composite system, which replaces conventional multi-state (and time-consuming) layering techniques with a single fill system. Meanwhile, through its Metrex brand, which includes CaviCide and CaviWipes, NVST has a significant market share position within infection prevention.
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Figure 18: Key Consumables Products and Brands Offered by Kerr Categories Product Lines Key Products / Brands
- Impression Materials - Cements OptiBond (Adhesives) - Tissue Management - Core Buildup SonicFill (Composite System) - Bonding Agents - Temporization Harmonize (Composite System) Restoratives - Composites - Tissue Management Demi (LED Curing Light) - Dental Curing Lights - Alloys Maxcem (Dental Cement) - Impresion Materials - Accessory Products GingiKNIT/GEL (Retraction Cord)
- Access - Clean elements IC (Powered Obturation) - Ultrasonics - Retreat Endodontics - Shape - Fill / Obturation - Diagnose
- Diamonds - Office Organization NTI (Diamonds, Abrasives) - Specialty Diamonds - Diamond Discs BluWhite (Diamonds, Specialty Carbides) - Trimming & Finishing Carbides - Universal Cutters - Operative Carbides - Abrasives Rotary - Specialty Carbides - Lab Rotary - Polishers - Specialty Products - Finishing Strips - Endodontics - Logic Sets - Bur Blocks
- Surface Disinfectants - Prophy Angles CaviCide/Wipes (Surface Disinfectants) - Hand Hygiene - Sealants & Applicators VioNexus (Hand Hygiene) - Barriers - Instrument Reprocessing Pinnacle (Barriers) TotalCare - Splash Protection - Office Organization - Digital Film Holders - Operatory Disposable - Air / Water Syringe Tips - Accessories - X-ray
- Waxes - Instruments belleWax (Waxes; Millable Wax Disc) - Sundries - Restorative Lab Materials Laboratory - Equipment - Millable Materials - Gypsum - Solutions
Source: Company data, Credit Suisse Consumables – Market Overview & Competitive Landscape For context, the overall consumables market is worth $7 billion, growing in the +low-single-digit range (est. +1-2%, according to company disclosure). Of note, recently, the bulk of consumables growth in the market has been driven by price inflation, with unit growth still lackluster, according to dental distributor Henry Schein (HSIC, Neutral). Importantly, sales associated with general dental consumables are more recurring in nature, providing a steadier and more visible stream of revenues. Key constituents in the consumables market include Envista, 3M (MMM), Coltene (CLTN), Dentsply Sirona (XRAY, Outperform), and Ivoclar Vivadent.
Figure 19: Consumables Competitive Landscape
ConsumablesLandscape Market Size / Growth Key Players
Consumables ~$7B (+LSD)
Source: Company data, Credit Suisse General dental consumables trends for the major dental companies were negative to flat in 1H19, on average, following a mixed 2018 experience. Of note, only Henry Schein, a dental distributor, reported consistently positive growth. Meanwhile, the other larger, publicly-traded Envista Holdings Corp 12
14 October 2019 dental distributor, Patterson Companies, experienced consistently negative growth for several years, which was largely driven by company-specific execution issues. While we await a more meaningful turnaround in Consumables trends, we continue to expect the broader market should grow in the +low-single-digit range going forward.
Figure 20: Consumables Revenue Growth Trends
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HSIC - NA HSIC - Int'l XRAY PDCO
Source: Company data, Credit Suisse Equipment (KaVo – 50% of E&C Revenue; 25% of Total Sales) NVST’s broad dental equipment offering, which is typically utilized in dental offices, clinics, and hospitals, was established through Danaher’s acquisition of KaVo and Gendex in 2014 and PaloDEx Group Oy in 2019, with equipment offerings from various other acquisitions also consolidated into this sub-segment. Of note, NVST’s key equipment brands include Dexis, Gendex, i-CAT, KaVo, and Pelton & Crane. In terms of KaVo’s performance, NVST has generally achieved below market growth in traditional equipment, albeit with 2017 and 2018 performance likely impacted by relationship shifts in the broader market, which we detail further in the Equipment Market Overview section.
Figure 21: KaVo Equipment Quarterly Performance 1Q13-2Q19 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 + MSD + LSD + LSD + MSD + MSD + LSD + MSD + LSD -LSD -Slight Negative +Slightly
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 -LSD +MSD +MSD -- Positive Positive + LSD -MSD -HSD +Slight -MSD Flattish
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 +LSD/+MSD -LSD
Source: Company data, Credit Suisse Note: 4Q16 is unknown NVST maintains a comprehensive equipment portfolio, including handpieces & other small equipment, treatment units, imaging solutions, CAD/CAM, laboratory equipment, and educational products, as highlighted in Figure 22. While NVST still has a leading position in imaging, we note key competitors, such as XRAY and ALGN (with its iTero scanner) remain market leaders in CAD/CAM and standalone digital impression scanners, respectively, with continuing R&D investments supporting positioning longer term. That said, NVST has demonstrated stepped-up innovation efforts recently, and we await the launch of its KaVo X Pro offering near term, a product it first introduced during the Chicago Midwinter Dental show in February, which may lead to enhanced market penetration and potential market share gains
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14 October 2019 longer term. We also highlight various other recently launched products that build upon its current portfolio, potentially spurring an upgrade cycle, with additional capabilities and/or incremental convenience, including its Othopantomograph OP 3D with Panoramic (cone beam with panoramic X-ray) and KaVo NOMAD Pro 2 (handheld intraoral X-ray).
Figure 22: Key Products and Brands Offered by KaVo Categories Product Lines Key Products / Brands
- Air-Driven (INTRAflex; MASTERtorque; EXPERTtorque; SMARTtorque) - Electrics (ELECTROmatic; MASTERmatic; EXPERTmatic; COMFORTdrive) - Low-Speed (SMARTmatic; INTRA Motor) Handpieces & Small Equipment - Hygiene (SONICflex; PROPHYflex; PROPHYwiz; DIAGNOdent) - Specialty (CORONAflex; RONDOflex) - Maintenance (QUATTROcare; KaVo Spray) - Surgical Systems (SURGtoque; EXPERTsurg; MASTERsurg; SURGmatic)
- Dental Chairs (ESTETICA E50 Life; ESTETICA E70/E80 Vision) - Dental Lights (KaVo LUX) Treatment Units - Dental Stools (KaVo PHYSIO Evo / Evo F; KaVo PHYSIO One) - Micromotors (KaVo INTRA Lux; KaVo S600 LED Surgical Motor)
- Intraoral X-ray (KaVo NOMAD Pro 2; KaVo FOCUS; SOREDEX DIGORA Optime) - Intraoral Cameras (DEXIS DEXcam 4 HD) - Imaging Software (DTX Studio Clinic; Invivo; Dexis Imaging Suite; i-CAT Studio) Imaging Solutions - Cone Beam 3D Imaging (KaVo OP 3D; KaVo OP 3D Pro; i-CAT FLX V-Series) - Digital Intraoral Sensors (DEXIS Titanium; DEXIS Platinum; Gendex GXS 700) - Caries Detection (DEXIS CariVu) - Panoramic X-ray (KaVo OP 3D with Panoramic; KaVo OP 3D Pro for 2D; KaVo OP 2D)
CAD/CAM - Scanners (KaVo X Pro; KaVo LS 3 Scanner)
Lab Equipment - Lab Handpieces (K-ERGOgrip Installation; K-POWERgrip Installation; K5 Plus Installation)
Educational Products - Dental Simulation Units (DSEplus; DSE Compact) - Patient Simulators (Patient Jaw Simulators) - Teeth & Study Models (Basic Study Models; Model Teeth)
Source: Company data, Credit Suisse Equipment Market Landscape The overall equipment market is worth $6 billion, including Imaging ($2B; +mid-single-digit growth) and Other Equipment ($4B; +low-single-digit growth), albeit with a lumpier quarterly cadence than its consumables counterpart. Key constituents in the imaging market include Envista, Dentsply Sirona, Carestream, Planmeca, and Vatech. As it relates to other equipment, Envista competes alongside Dentsply Sirona, NSK, Planmeca, and Adec.
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Figure 23: Equipment Landscape
Equipment Landscape Market Size / Growth Key Players
Imaging ~$2B (+MSD)
Other Equipment ~$4B (+LSD)
Source: Company data, Credit Suisse For context, the North America equipment market experienced significant disruption in 2017 following a major distribution relationship shift, whereby HSIC gained new access to XRAY’s equipment portfolio while PDCO lost its prior exclusivity to the product suite. With the relationship shift, XRAY’s products essentially experienced a stocking event, in which there was far more inventory in the channels than necessary. Therefore, over the course of 2017 and 2018, we have seen a channel flush, along with other new initiatives by dental distributors to increase efficiency and reduce inventory levels more broadly. Importantly, these dynamics impacted the entire market, with NVST acknowledging headwinds from distributor relationship shifts. Longer term, we would expect this market to grow in the +low-single-digit /+mid-single- digit range.
Figure 24: Equipment Revenue Growth Trends
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HSIC - NA HSIC - Int'l XRAY PDCO
Source: Company data, Credit Suisse Specialty Products & Technologies – 48% of Sales
The Specialty Products & Technologies (SP&T) segment contributed $1.4 billion (48% of total sales) in 2018, encompassing Nobel Biocare Systems (Dental Implants, Dental Prosthetics, Bone and Tissue Regeneration) and Ormco (Brackets & Wires, Spark Clear Aligner System). Specialty is typically a faster growing, higher margin business as technologies continue to advance, and as specialty treatments further penetrate the market. While SP&T continues to grow ahead of E&C, we acknowledge a relatively lackluster 2018 organic growth experience (+3.5%). Though we expect organic growth to decelerate in 2019 to +2.0%, with a slight recovery in 2020 (+3.2%), we expect a more meaningful improvement in outer years as innovation begins to more meaningfully bear fruit, including its N-1 implant and Spark Clear Aligner systems. Longer term, we would expect NVST’s organic growth to be at least in line with the market (+MSD), with further innovation contributing to potential upside.
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Figure 25: SP&T Revenue Growth Expected to Accelerate to +MSD Over Time
$1,800 7% $1,660 $1,569 $1,600 $1,484 $1,370 $1,370 $1,413 6% $1,400 $1,311 5.8% 5.8% $1,200 5% 5.0% $1,000 4% $800 4.1%
$600 3.5% 3% 3.2% $400 2% $200 2.0% $0 1% 2017 2018 2019E 2020E 2021E 2022E 2023E
Specialty Products & Technologies Sales Organic Growth
Source: Company data, Credit Suisse estimates NVST’s SP&T segment is heavily skewed toward Consumables (95%), with Equipment only representing 5% of segment sales. Importantly, NVST estimates the implants and orthodontics markets together represent a $9.5 billion market opportunity, growing in the +mid-single-digit range on an aggregate basis. In terms of geographic mix, less than half (44%) of NVST’s SP&T revenue is generated in North America, with the remainder earned abroad, including 25% in Western Europe, 24% in High Growth Markets, and 7% in Rest of World. Importantly, we expect revenue mix will continue to shift to High Growth Markets, particularly as NVST focuses educational and expansion efforts abroad.
Figure 26: SP&T Revenue Mix by Product (2018) Figure 27: SP&T Revenue Mix by Geography (2018)
Equipment Rest of World 5% 7%
High Growth Markets 24% North America 44%
Western Consumables Europe 95% 25%
Source: Company data, Credit Suisse Source: Company data, Credit Suisse Vastly different than NVST’s E&C segment, only 10% of NVST’s SP&T revenues are generated through traditional dental distributors, including Henry Schein (HSIC) and Patterson (PDCO). Meanwhile, 90% of revenues are generated through direct sales efforts, including a sales force of more than 2,000 employees, a dynamic that is consistent with other industry constituents, where specialty products are generally sold on a direct-sales method. Importantly, some of its dealer-partners also compete in these markets, including Henry Schein, which has emphasized increased investment in its implant offering over the past year.
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Figure 28: SP&T Revenue Mix by Distribution Channel (2018)
Direct 10%
Distributor 90%
Source: Company data, Credit Suisse Nobel Biocare (~69% of SP&T Sales) Nobel Biocare has a long history as a leading constituent in the implant market, starting with Per-Ingvar Branemark’s discovery of osseointegration and his subsequent creation of the first titanium implant in the in the 1950-1960s. For reference, osseointegration is the connection between living bone and an implant. Soon thereafter, Branemark founded Nobelpharma (later to be renamed Nobel Biocare) in 1981. Through 2008, Nobel Biocare remained at the forefront of the market in terms of innovation, with the development of the first zygomatic implants, ceramic CAD/CAM coping, tapered implants, tilted and immediate implant solutions, guided surgery system, and NobelActive. However, following the string of successful product launches, Nobel Biocare’s pipeline seemingly dried up, with no new innovation until several years following Danaher’s acquisition of the business, a dynamic we take a deeper look at on page 28.
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Figure 29: Context – History of Innovation at Nobel Biocare
Year Event Details
In his efforts to study anatomy, Branemark discovered bone and titanium can become 1952 Branemark Discovers Osseointegration virtually inseparable
1965 First Titanium Implant Branemark places the first osseointegrated dental implants
After extensive clinical trials, Branemark and Swedish company Bofors founded 1981 Nobelpharma Founded in Sweden Nobelpharma, which would later become Nobel Biocare
Branemark introduced zygomatic implants designed to rehabilitate the upper maxilla when 1988 First Zygomatic Implants severely resorbed
1989 First Ceramic CAD/CAM Coping Dr. Matts Andersson created the first ceramic CAD/CAM coping
1996 NobelPharma Becomes Nobel Biocare NobelPharma renamed
Replace (including Replace Select and NobelReplace) was the first tapered dental implant 1997 First Tapered Implant system, mimicking the shape of a natural tooth root
Created a concept with tilted and immediately loaded implants -- the All-on-4 treatment 1998 First Tilted and Immediate Implant Solution concept
TiUnite, a moderately rough, anodized surface for osseointegration, is one of the most 2000 TiUnite Improves Treatment Outcomes clinically researched implant surfaces globally
Immediate Function, a offering that was unique to Nobel Biocare at the time, received FDA 2005 Immediate Function Receives FDA Clearance clearance
Introduced NobelGuide, the first comprehensive concept for 3D treatment planning and 2005 First Guided Surgery System guided surgery
2008 NobelActive is Released NobelActive allows for Immediate Function in cases where it might otherwise be impossible
Innovation Gap (Nobel Biocare Acquired by Danaher in 2015 for $2.2B)
2017 X-Guide Guided surgery system with dynamic 3D navigation (Improvement upon 2005 System)
2019 Mucointegration Implants Targeted surfaces created for soft tissue attachment with Xeal and TiUltra
Source: Company data Today, Nobel offers a comprehensive portfolio of products to treat various conditions, ranging from a single missing tooth to a full-arch restoration to a highly aesthetic anterior restoration. Its product suite includes dental implant systems, guided surgery systems, biomaterials, prefabricated and custom-manufacture prosthetics, among others. Importantly, the release of the creos xenoprotect membrane in 2014 marked Nobel’s launch into a new market focused on guided bone and tissue regeneration, bolstering its position in the faster growing biomaterials market. We also highlight its DTX Studio software, which connects diagnostics and treatment for dental patients all in one platform. The open system allows practitioners to import images from any X-ray device, intraoral scanner or desktop scanner, simplifying a doctor’s overall workflow and enable improved implant and prosthetic restoration planning.
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Figure 30: Key Products and Brands Offered by Nobel Biocare Nobel Biocare Product Description Introduction
NobelActive Bone level tapered dental implant system with high primary stability for immediate placement. 2008
Customized crowns, bridges and other dental prosthetics produced using CAD/CAM Nobel Procera customized prosthetics Various Years technology.
Safe and reliable solutions for guided bone and tissue regeneration procedures (membranes, Regenerative solutions 2014 bone grafts, wound dressings).
Guided surgery system with dynamic 3D navigation. Designed to improve the precision and X-Guide 2017 accuracy of implant position, angle, and depth.
DTX Studio Implant Software enabling precise implant planning according to the desired prosthetic outcome. 2018
DTX Studio Lab Software enabling tooth or implant based prosthetic restoration planning. 2018
N1 Bone level tapered dental implant system. Designed to simplify the implant procedure. TBD
Source: Company data, Credit Suisse As it relates to its various implant brands on the market, NVST has transformed its portfolio since 2016, creating one overarching operating company (Nobel Biocare) in order to address challenging competitive dynamics across its product suite, as its value brands were previously competing with each other, and with its premium brand. Today, NVST maintains four implant brands including one premium player (Nobel Biocare) and three value brands (Implant Direct, AlphaBio, Logon). Of note, we estimate the premium market represents a $2.2 billion opportunity, of which NVST maintains roughly 38% share, while the value market is worth $1.8 billion, with NVST only capturing just over 15% share. More specifically, in the premium market, NVST has targeted “feet on the street” expansion, with salesforce productivity initiatives already underway. Importantly, its NobelActive implant system remains a leader in the premium market, providing high primary stability, which effectively allows patients to receive and use prosthetics the same day an implant is placed. While its key patent claims for NobelActive were invalidated following IP litigation with Straumann’s Instradent and Neodent in 2017, the product still remains Nobel’s top offering across the broader business unit in terms of sales and number of placements. In terms of its value brands, NVST is focusing on low share geographies and segments, including general dentists. For reference, its AlphaBio brand is primarily offered in the APAC region, while Logon is exclusively available in Germany.
Figure 31: Digging into NVST’s Offering – Premium vs. Value Implants Market Market Size Envista's Share Envista's Brands
$2.2B Premium Implants ~38% (55% of Implant Market)
$1.8B Value Implants ~17% (45% of Implant Market)
Source: Company data, Credit Suisse Since 2016, when Danaher began to more rigorously apply its Danaher Business System (DBS), NVST has decreased operating expenses across Nobel Biocare by 700 bps. It effectively reduced cost and simplified its operating structure, while also focusing on increasing its exposure to higher growth categories (e.g. Biomaterials). Today, Nobel Biocare’s operating
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14 October 2019 profit margin is greater than 20%, which is far better than our estimated overall company operating profit margin of 13.1% in 2019.
Figure 32: Nobel Biocare’s Operating Profit Margin >20%
Low Teens
2013 2019E
Source: Company data, Credit Suisse Implant Market Overview For context, the overall implant market is worth $5 billion, including Implant Systems ($4 billion; +mid-single-digit growth) and Biomaterials ($1 billion; +high-single-digit growth). This market serves a variety of customers ranging from specialty trained practitioners, including oral surgeons and implant specialists, as well as general dentists and dental laboratories. Of note, key constituents in the premium implant market include NVST’s Nobel Biocare, Straumann, Dentsply Sirona, and Zimmer Biomet. On the value side, several of NVST’s brands including Implant Direct, AlphaBio, and Logon remain key players, competing alongside Dentium and Osstem, along with many local players.
Figure 33: Implant Competitive Landscape
Implant Landscape Market Size / Growth Customers Competitors Premium Oral Surgeons / Implant Specialists Implant Systems ~$4B (+MSD)
Value
General Dentists + Many Local Players
Biomaterials ~$1B (+HSD) Dental Laboratories + all the above
Source: Company data, Credit Suisse In terms of market share in the premium segment, according to Straumann, STMN remains the market leader within the implant market with 25% share, followed by NVST with 19% share. Note, STMN’s market share estimates may vary from previously discussed market share dynamics due to varying market definitions (e.g. geography, clinical scope). Importantly, while STMN’s share has continued to increase since 2015, NVST’s share has remained stagnant, a dynamic we expect may change with the launch of several new products, including its N-1 implant system. We also note XRAY’s meaningful market position (12%), and HSIC’s continued investment in the market. On the other hand, ZBH has seemingly lost share over the past few years relative to peers.
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Figure 34: Implant Market Share Dynamics
100%
90% 26% 31% 27% 30% 80% 39% 40% 41%
70% 7% 9% 5% 8% 60% 10% 7% 6% 5% 4% 11% 6% 7% 6% 50% 7% 15% 14% 12% 12% 12% 40% 13% 13% 19% 19% 30% 19% 19% 17% 17% 17% 20% 23% 25% 10% 18% 19% 20% 22% 24% 0% 2012 2013 2014 2015 2016 2017 2018 Straumann Envista / Nobel Biocare Dentsply Biomet 3i Zimmer Dental Zimmer Biomet Henry Schein Others
Source: Straumann Annual Reports, Credit Suisse Ormco (~31% of SP&T Sales) The remainder of NVST’s SP&T segment comprises of Ormco, a leading manufacturer and provider of advanced orthodontic technology and services with more than 50 years of experience. This segment was acquired by Danaher in 2005 and primarily serves orthodontists (vs. GPs). Its product offering includes brackets & wires, clear aligners, digital orthodontic treatments, retainers, and other orthodontic laboratory products, marketed under the Ormco, Insignia, AOA and Spark brands.
Figure 35: Key Offerings in Ormco’s Product Suite Categories Product Lines Categories Product Lines
- Titanium Orthos - Damon System - Mini Diamond Twin / VS - Damon Q Twin Brackets - Mini-Twin (VS) Self-Ligation - Damon Q2 (Traditional) - Straight-Wire Appliances - Damon Clear - Orthos (AP) - Damon Clear 2
- Symetri Clear - SmartArch Twin Brackets - Alias Lingual Straightwire Archwires - Tru Arch (Aesthetic) - STb Ligh Lingual System - Copper NiTi
- Accent Mini Tubes - Spark Clear Aligners Tubes & Bands (Buccal - Snaplink - Simpli5 Aligners Tubes) - Peerless Cast Tubes - Insignia Clearguide Express - Micro Tubes
Tubes & Bands (Bands - Standard High-Retention - Insignia Advantage Digital Orthodontics & Crowns) - Washbon - Appliance Options
- Aligners - VectorTAS - Arch Development - AdvanSync 2 - Functional Appliances - Ortho Solo Laboratory Products - Sleep Apnea & Snoring Auxiliaries - Demi Plus - Distalization - Optiview - Space Maintenance - Finishing & Retention
Source: Company data, Credit Suisse More specifically, Ormco’s Damon Bracket System is a leading passive self-ligating bracket and wire system, which utilizes low force levels, while effectively enabling faster treatments. Of note, its DQ2 product launched in 2017 and offers twice the rotational control as the predecessor bracket, improving precision, predictability, and efficiency. It’s brackets and wires offering is further supported by Ormco’s Insignia digital orthodontic system, a comprehensive digital design and customized appliance treatment solution, as well as various other orthodontic products.
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Orthodontia Market Overview For context, the overall orthodontia market is worth $4.5 billion, including Wires & Brackets ($2 billion; +low-single-digit growth) and Clear Aligners ($2.5 billion; >10% growth). This market serves a variety of customers ranging from orthodontists to general dentists to consumers. Of note, key constituents in the brackets & wires market include NVST’s Ormco, Dentsply Sirona, 3M, and American Orthodontics. On the clear aligner side, NVST recently entered the doctor- directed market with its Spark Clear Aligner system, which competes against Align Technology’s Invisalign and Straumann’s ClearCorrect, as well as direct-to-consumer products, like SmileDirectClub.
Figure 36: Orthodontic Competitive Landscape
Orthodontia Landscape Market Size / Growth Customers Competitors
Orthodontists Wires & Brackets ~$2B (+LSD)
General Dentists
Clear Aligners ~$2.5B (>10% growth) Consumer
Source: Company data, Credit Suisse While NVST has recently launched a new, innovative clear aligner system (Spark) in Australia and New Zealand (North America pilot underway), the majority of sales to-date are derived from its more traditional brackets & wires offerings. According to STMN's disclosure from 2017, NVST dominates with ~one-third of the market, followed by 3M (24%) and XRAY (21%). Importantly, while share may have shifted since STMN published these market share estimates, we note innovation in the teeth-straightening segment has been more focused on the clear aligners market, with share shifts in the brackets & wires segment likely minimal.
Figure 37: Conventional Brackets & Wires Market Share
Other, 22%
Envista (Ormco), 34%
Dentsply Sirona, 21%
3M Unitek, 24%
Source: Straumann Investor Presentation (2017), Credit Suisse
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Investment Strengths Dental Industry Dynamics: Stabilization
The global dental industry is worth an estimated $23 billion, growing in the +mid-single digit range, with over 600,0003 active dentists in OECD countries, including almost 200,000 in the US. While dental traffic trends have been somewhat lackluster despite a healthier macro environment, we highlight key drivers in rising dental utilization, including favorable demographics, emphasis on aesthetic and preventative care, and stabilizing global economies. We also view favorable drivers in DSOs, greater adoption of digital dentistry, and a growing middle class in high-growth markets as potentially favorable dynamics. Favorable Demographics: An aging population should fuel dental utilization, particularly in developed markets, including the US and Western European countries. More specifically, while the total US population has grown at a compounded annual rate of only 0.6% over the past five years, the 65+ age group contributes a disproportionately larger share of growth, representing 16.0% of the US population in 2019, according to US Census estimates. Moreover, according to the US Census Bureau, the percentage of the US population over the age of 65 will expand, potentially representing nearly 20.9% of the total population by 2050 (see Figure 38). Advanced medical therapies and technologies are extending life expectations, as well, further contributing to this demographic shift dynamic, which should support strong dental utilization trends longer term.
Figure 38: Percentage of U.S. Population ages 65+ and 85+, 1900-2050E
25% 21.0% 20.9% 20.3% 20% 16.8%
15% 12.6% 12.4% 13.0% 11.3% 9.9% 9.2% 10% 8.1% 6.8% 5.4% 4.7% 4.1% 4.3% 4.5% 5% 3.7% 2.5% 1.8% 2.0% 1.0% 1.2% 1.5% 0.2% 0.1% 0.2% 0.2% 0.3% 0.4% 0.5% 0.7% 0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020E 2030E 2040E 2050E
65 and over 85 and over
Source: US Census Bureau, Credit Suisse Meanwhile, according to the American Dental Association, the supply of dentists will increase faster than the U.S. population, with the average age of retirement for practicing dentists rising to 68.9 years old in 2017 (vs. 68.1 in 2012 and 67.1 in 2007). The rising supply of dental professionals should meet rising demand, given aforementioned drivers in aging populations and increasing focus on aesthetics. Importantly, while the supply of dentists is outpacing population growth, the American Dental Association has also estimated that the average wait time in days for general practitioner dentist appointments has increased to 7.0 and 5.4 for new patients and
3 Including: Australia, Canada, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Slovak Republic, Slovenia, Sweden, Turkey, and the United States
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14 October 2019 patients of record, respectively, in 2017 (compared to 5.3 and 4.5, respectively, in 2012), a potential sign of more patients in dental offices. Moreover, the percentage of dentists in private practice reporting they are “not busy enough” has fallen meaningfully to 24.4% in 2017 (vs. 35.7% in 2012). With demand seemingly improving, we expect dental consumable sales should strengthen somewhat from current levels. We also view dental professionals will continue to seek products that support practice efficiency, including digital imaging and software solutions, in order to reduce wait times and provide better quality of care.
Figure 39: Active Dentists per 1,000 People in the U.S.
68 66 64 62 60 58 56 54 52 50 2002 2005 2007 2010 2012 2015 2017 2020 2022 2025 2027 2030 2032 2035 2037
Unadjusted Adjusted for hours worked Adjusted for patient visits
Source: ADA Health Policy Institute; ADA Survey of Dental Practice; U.S. Census Bureau, Credit Suisse Note: Projections assumes US total annual dental school graduates will increase until 2020 and then remain constant Moreover, greater adoption of more advanced practice protocols and further penetration of dental care more broadly in emerging markets should also help drive demand longer term. While developed markets represent 16% of the global population and a majority of oral care spend, emerging markets represent 84% of the global population (7.7 billion people), where oral care efforts remain immature. Of note, developing markets have grown at a +1.4% CAGR since 2000, meaningfully higher than that of developed countries (+0.4%).
Figure 40: Current and Projected World Population (in millions)
9
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7
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5
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0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 More developed regions Less developed regions
Source: United Nations Department of Social and Economic Affairs, Credit Suisse Emphasis on Preventative Care and Disease Control: Over the past several years, oral care in North America and Western Europe has shifted from basic treatment of pain, disease, and tooth decay to focusing on preventative care and more discretionary cosmetic dentistry. Envista Holdings Corp 24
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This rise of preventative care has likely been driven by increased focus on the statistically significant links between medical and dental health. Poor oral hygiene can lead to diseases that can have disproportionately severe consequences, including miscarried pregnancies, heart disease, brain infections, and even Alzheimer’s Disease.
Figure 41: Key Conditions with Links to Oral Health
Disease/Condition Links to Oral Health
Endocarditis is an infection on the inner lining of heart chamber of valves (endocardium), typically Endocarditis occuring when bacteria or other germs from another part of the body spread through the bloodstream and attach to certain areas of the heart
Some research suggests that heart disease, clogged arterires, and stroke may be linked to Cardiovascular Disease inflammation and infections that oral bacteria can cause
Pregnancy and Birth Complications Periodontitis has been linked to premature birth and low birth weight
Certain bacteria pulled into the mouth may be subsequently pulled into the lungs, causing Pneumonia pneumonia and other respiratory diseases
Gum disease appears to be more frequent and severe among people who have diabetes. Diabetes Research shows people who have gum disease have a harder time controlling their blood sugar levels
HIV/AIDS Oral problems are common in people who have HIV/AIDS
Osteoporosis, which causes bones to become weak and brittle, might be linked with periodontal Osteoporosis bone loss and tooth loss
Alzheimer's Disease Tooth loss before age 35 might be a risk factor for Alzheimer's disease
Other conditions that might be linked to oral health include eating disorders, rheumatoid arthritis, Other Conditions certain cancers, and an immune system disorder tha tcauses dry mouth (Sjogren's Syndrome)
Source: Mayo Clinic, Credit Suisse There is also a heightened desire to retain natural teeth later in life, which should also help drive strengthening demand as the population ages. According to a study by the Center of Disease Control and Prevention, only 33.6% of the population aged 40-64 years old had no loss of permanent teeth (full retention). Meanwhile, 13.0% and 25.8% of people aged 65-74 and 75+ years old, respectively, had complete tooth loss (edentulism). In order to maintain natural teeth longer, people should utilize ongoing treatment care in order to fight decay, periodontal disease, among numerous other issues. This dynamics also drives demand for aesthetic dentistry, which should support growth in certain categories, such as clear aligners, implants, and digital imaging solutions. Exposure to Consumer Spending Patterns: With nearly half of all dental expenses not covered by insurance and instead paid out-of-pocket (vs. <10% in medical care), dental demand can be meaningfully impacted by the strength of broader macroeconomic conditions. While dental spending can be volatile in recessionary periods, healthier macro trends likely drive practitioners’ decisions to invest in new high-end equipment and other offerings. While solo practice owners as a percentage of dentists have declined over the past several years, independent dentists still represent 50% of total dentists. Given these solo practitioners typically have limited scale or ability to spread financial risk as small business owners, a stronger macro environment typically increases these solo operators’ desire and ability to invest in their own practices. That said, we view a continued shift toward multi-dentist officers and larger Dental Support Organizations (DSOs, further details on page 33), should support relatively steadier investments in equipment offerings, which can be leveraged across a broader cost and earnings base. We look at a number of factors to measure the health of the broader economy, including consumer sentiment, US unemployment data, US PCE growth and US GDP growth. Consumer sentiment continues to remain at healthy levels, while the US unemployment rate remains near an 18-year low. Moreover, PCE and GDP growth still remains somewhat healthy, albeit also reflecting some pressure over the past several months, likely related to global trade dynamics.
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Figure 42: University of Michigan Consumer Sentiment Figure 43: U.S. Unemployment Rate
120 10%
110 9%
100 8%
90 7%
80 6%
70 5%
60 4%
50 3%
7/1/2001
5/1/2002
3/1/2003
1/1/2004
9/1/2005
7/1/2006
5/1/2007
3/1/2008
1/1/2009
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Source: the BLOOMBERG PROFESSIONALTM service, Credit Suisse Source: Factset, Credit Suisse
Figure 44: U.S PCE Growth Figure 45: US GDP Growth
8% 5%
4% 6% 3%
2% 4% 1%
2% 0%
-1% 0% -2%
-3% -2% -4%
-4% -5%
3/1/01
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9/1/03
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11/1/12 11/1/17
Source: Factset, Credit Suisse Source: Factset, Credit Suisse Internationally, NVST has 22% exposure to Western Europe, including 6% exposure to the German market alone. Similar to the US, European dental demand is meaningfully correlated to economic sentiment, which we track utilizing the Euro Area’s Economic Sentiment Indicator. While the indicator was trending upwards from a low in early 2013 through the middle of the 2018, peaking at levels just below the 2000 experience, we have since seen a moderate decline, likely on Brexit and other global trade dynamics. Though we acknowledge the moderate decline is not necessarily positive for dental demand, the economic sentiment still remains at relatively healthy levels, and we do not expect a meaningful change in dental demand at this early juncture.
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Figure 46: Euro Area – Economic Sentiment Indicator
120
110
100
90
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70
60
9/1/1999
4/1/2000
6/1/2001
1/1/2002
8/1/2002
3/1/2003
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2/1/2006
9/1/2006
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Source: Factset, Credit Suisse Limited Reimbursement Risk: While the rate of dental inflation is elevated relative to the overall economy in the US, it is lower than the rate realized in medical care, which is typically several points ahead of GDP. This dynamic typically provides dental care with far less scrutiny from policymakers relative to medical care, driving less risk to onerous reimbursement cuts, while also potentially deemphasizing the overall scope and magnitude of dental coverage, a key enabler of dental demand. That said, while we acknowledge Figure 47 and Figure 48 are somewhat dated, historical utilization trends have been somewhat low and seemingly range- bound, to some extent, particularly in low-income adults.
Figure 47: Percentage of Adults Ages 19-64 with a Dental Visit Figure 48: Percentage of Population Who Visited a General in the Year by FPL Status, 2000-2014 Dentist in the Past 12 Months – By Poverty Level
60% 60% 56%
50% 49%
40% 39%
30% 22% 19% 20%
10%
Below More Than Below More Than Below More Than 0% Poverty Line 4x Poverty Poverty Line 4x Poverty Poverty Line 4x Poverty FPL<100% FPL 100-200% FPL 200-400% FPL 400% + Line Line Line 2000 2002 2004 2006 2008 2010 2012 2013 2014 Children Adults Seniors
Source: Medical Expenditure Panel Survey, AHRQ, Credit Suisse Source: American Dental Association (2015), Credit Suisse According to the National Association of Dental Plans, 27% of the US population lacked dental coverage in 2016 vs. 9% that lacked medical coverage. Moreover, only half of dental PPOs, the predominant dental coverage product in the market, have a maximum annual benefit above $1,500, with deductibles typically ranging from $50-$100. Of note, despite seemingly low annual maximum benefits, only 2-6% of Americans with dental benefits hit their annual maximums. Reimbursement for Medicaid patients varies by state, but is often inadequate, with only 35% of adults covered by Medicaid dental benefits. Moreover, only 16 states offer full dental benefits while most others only have limited or emergency-only coverage. Of note, Medicare does not include dental benefits, implying a meaningful number of seniors do not have
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14 October 2019 dental coverage. Moreover, according to the American Dental Association, in 2015, 10.3% of children (ages 2-18) had no dental coverage, although we’ve seen slight incremental improvement since 2008. Embracing Innovation
While historically NVST has had a fairly fragmented research & development function, with seven R&D centers in imaging alone, since 2016, it has consolidated its R&D efforts, with the aim of driving more efficient and effective resource allocation in order to generate more meaningful innovation. In addition to these more consolidated efforts, NVST has increased its overall focus and spend on innovation, having invested more than $475 million in R&D on a cumulative basis since 2016, with R&D spend now representing 6% of sales (vs. 5% in 2016). Over that same time period, NVST has increased its R&D headcount by more than 150 employees and its software engineer headcount by 2x.
Figure 49: NVST’s R&D Spend from 2014-2023E
$200 $188 8% $180 $180 $172 $172 $171 $172 $174
$160 7% $143 $140 $134
$120 6% 6.1% 6.0% 6.1% 6.1% $100 6.0% 6.0% 6.0% $82 $80 5% 5.1% $60 4.9%
$40 4%
$20 3.8% $0 3% 2014 2015 2016 $2,017 2018 2019E 2020E 2021E 2022E 2023E
R&D Spend ($) R&D Spend (as % of Sales)
Source: Company data, Credit Suisse estimates; $ in MM For reference, we look at innovation spend across the dental category. NVST spent the most on R&D in 2018 on an absolute dollar basis ($172 million), just above its closest competitor Dentsply Sirona ($161 million). While ALGN spent more on R&D as a percentage of revenue, it spent $40 million less on an absolute basis. As a caveat, ALGN maintains a niche focus, with all innovation spend targeted at the clear aligner category, while NVST develops products across a broader range of categories, including orthodontia and implants, among others. Most notably, STMN only spends 5% of sales on R&D, which, on an absolute dollar basis, represents less than half of NVST’s spend. While STMN has been consistently taking share across the implant arena, with also valiant efforts in the doctor-directed clear aligner market, we expect NVST’s increased R&D spend will produce meaningful innovation, stemming market share loss and potentially driving market share gains longer term.
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Figure 50: R&D Spend Across Relevant Industry Constituents (2018)
$180 $172 7% $161 $160 6.6% 6% $140 6.0% $129 5% $120 5.0% $100 4% 4.0% $80 $69 3% $60 2% $40 1% $20
$0 0% NVST XRAY ALGN STMN
R&D Spend ($) R&D Spend (as % of Sales)
Source: Company data, Credit Suisse; $ in MM Note: CS Est. STMN’s R&D $ Spend based on Annual Report disclosure that R&D represents 5% of sales Longer term, we expect more efficient R&D efforts in conjunction with increased spend will drive more meaningful innovation, supporting top-line growth. Importantly, new innovation dollars will be skewed toward its faster-growing Specialty offering, a segment that we expect will expand to 52% of total revenue by 2022 (from 48% in 2018). In terms of current and recent innovation projects, NVST is focused on the pending launch of its Spark Clear Aligner System (currently available in Australia) and N-1 implant system, each of which should drive growth in the Specialty segment. We also note pending product launches in the Consumables & Equipment segment, including its X Pro Intraoral scanner and DTX Software ecosystem. Of note, NVST expects to begin to see a meaningful benefit from these launches in 2020. We highlight each of these products and their respective opportunities in the following. N-1 Implant System While NVST’s Nobel Biocare operating company has historically been a leader in the implant market, with consistent cutting-edge product launches, it has not released a new implant system over the last 7-8 years. This innovation lag, compounded by STMN’s innovation fly- wheel in the implant category, has driven NVST to lose share in the market. However, recently, NVST has announced the pending launch of its N-1 implant system, a new premium implant offering under its core Nobel Biocare brand. We expect this product to launch later this year, albeit with contributions likely only becoming material in 2020. The N-1 implant system should allow the practitioner to place the implant immediately in almost all anatomical conditions, with a reported 98% success rate to-date. Requiring only two tools, which compares to conventional systems that require 5-6 drills, practitioners are able to gently shape the bone rather than create invasive cuts. In addition to fewer, less invasive tools, NVST found that by using a lower speed and no irrigation, its implant system creates less trauma to the bone, enabling earlier osseointegration, while also reducing the corresponding healing time by 66%. Moreover, the lower speed drill (50 rpm vs. conventional >1,000 rpm), which generates a lower level of vibrations and noise, creates less patient discomfort and fear, where NVST aims to reduce the negative perception of the implant process longer term. Also of note, given the less invasive nature of this system and its fewer associated steps, the learning curve and training time is shorter. Longer term, NVST wants to help shift the implant market from predominantly expert driven to a somewhat balanced GP approach. Importantly, NVST has filed over 100 patents to protect its IP for the N-1 implant system. For context, implants generally require several appointments and can take up to a year to be completed. First, a dentist must place the implant into the patient’s jawbone, a surgical process that may create some swelling or tenderness. Once the implant is placed, some dentists may
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14 October 2019 wait for the implant to be fully osseointegrated before placing the permanent replacement tooth, which can take several months. However, some procedures or offerings allow the implant and temporary tooth to be placed all in one visit, driving a shorter and more efficient treatment cycle. Notably, recent dental implant system launches have centered on immediate placement. While STMN was first to market with an immediate placement focused approach with its BLX implant system, NVST is also planning an imminent release, and we highlight key differentiating factors in Figure 51.
Figure 51: Comparison of Recent Implant System Product Launches – N-1 vs. BLX Implant Immediate Drills Company Irrigation? Details System Placement Required
Simplifies the implant process, requiring only 2-3 tools (vs. 5-6 drills in conventional process), with the aim of reducing trauma to Envista (NVST) N-1 Yes No 2-3 tools the bone in order to promote earlier oseointegration and higher success rates; Supports Immediate Placement
Designed specifically for immediate placement with improved usability in immediate protocols and simplified surgical Straumann and prosthetic workflows; Utilizes Roxolid BLX Yes Yes 5 tools (STMN) material, which helps reduce invasiveness with smaller implants; Its XLActive surface is reduces healting time to 3-4 weeks with better success rates
Source: Company data, Credit Suisse While we view continued R&D efforts across the implant market can stem market share losses to competitors, we also note that innovation can help support broader implant penetration across the market. Of four billion people who are missing teeth, only 200 million patients seek treatment annually, with less than 15 million actually receiving an implant annually. Moreover, implant treatment penetration varies vastly across different geographies, with the US relatively underpenetrated relative to Western European countries (e.g. Italy, Spain, Germany), albeit still well ahead of China, one of its high growth markets.
Figure 52: Only a Small Fraction of Missing Teeth Get Replaced Figure 53: Highlighting Underpenetration by Geography – With Dental Implants Implant Penetration per 10K People Across Select Countries
4500 250 ~4B 4000 210 205 3500 200
3000
150 2500 132
2000 100 1500 75 1000 50 37 500 200M <15M 9 0 People w/ tooth loss Seek treatment Receive implant 0 (annually) (annually) Italy Spain Germany US Japan China
Source: Company data, Credit Suisse Source: Company data, Credit Suisse
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Spark Clear Aligners System While NVST has historically maintained a leading market position in the orthodontic market, producing brackets & wires under its Ormco brand, it has recently announced the pending broad scale launch of its Spark Clear Aligners System, which treats mild to complex malocclusions (65-70% of addressable market). Although more conventional brackets & wires treatment still accounts for 90% of the teeth straightening market, with a clear aligner system, NVST can position itself as the most comprehensive provider to orthodontists, providing practitioners the choice on how to treat their patients. Importantly, in terms of cannibalization to its core brackets & wires business, we highlight that while ALGN has been in the market for more than 20 years, the traditional teeth straightening solution has continued to grow in the flat to +LSD range, in line with historical trends.
Figure 54: Doctor-Directed Teeth Straightening Treatment Market (12 Million)
Clear Aligners 10%
Brackets & Wires 90%
Source: Company data, Credit Suisse To provide further detail on the product, Spark clear aligners utilize NVST’s proprietary TruGEN material, which has been designed to be clearer than that of Invisalign, with better overall force retention. These clear aligners are also designed to enhance patient comfort relative to current offerings on the market, with smoother scalloped edges. Patients are recommended to wear the aligners for 22-23 hours daily, with doctor protocols dictating whether a patient wears a given aligner set for one or two weeks. Similar to other doctor-directed offerings on the market, like Invisalign, Spark utilizes attachments to better distribute force across a given tooth. Also of note, Spark is compatible with all leading scanners. As for its go-to-market approach, NVST first launched its Spark clear aligner system in Australia (in June 2018) in order to better understand the practitioner reception of the product, which proved overwhelmingly positive. In 3Q, NVST announced it had launched a pilot in the US, with a potential broader scale launch later this year. Importantly, we look favorably upon NVST’s relatively measured launch in the US market, where it continues to learn from its pilot. Importantly, now in the third iteration of its clinical case study, NVST has achieved a reduction in adoption time by 40%, illustrating NVST’s ability to develop a robust commercial playbook for new product launches. Also of note, while the pricing in the US has not been finalized, NVST emphasized that it aims to drive adoption with a differentiated product and preferred clinical outcomes rather than a lower price. With several new clear aligner offerings launched into the market over the past year following the expiration of various ALGN patents, competition has increased meaningfully. Several embedded and well-known dental constituents are now angling to gain market share in the fast growing market, including Henry Schein, 3M and Dentsply Sirona. Importantly, a key differentiator revolves around the offering’s scope of treatment, where several ortho focused
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14 October 2019 clear aligner offerings remain hybrid treatments, which utilize brackets & wires in the initial stages and clear aligners in the final stages.
Figure 55: Clear Aligner Competitive Landscape Summary Doctor-Directed Ortho vs. GP Channel Focus Hybrid* vs. Standlone Available in Parent Company Product Name Announcement Date Ortho GP Hybrid* Stand-alone the US?
Henry Schein Reveal Clear Aligners Feb-19 X X Yes
Ormco (Envista) Spark Jun-18 X X Pilot
3M Clarity Aligners May-18 (AAO) X X X Yes
Dentsply Sirona SureSmile May-18 (AAO) X X X Yes
Henry Schein SLX Clear Aligners May 2018 (AAO) X X Yes
Straumann ClearCorrect Acquired Aug -17 X X Yes
Ormco (Envista) Simpli5 Oct-06 X X Yes
Align Technology Invisalign 2000 X X X Yes
Source: Company data, Credit Suisse All in, while the market is clearly competitive, if NVST is able to capture even a sliver of the market, it will experience meaningful growth across its orthodontic platform. As illustrated in Figure 56, out of the 500 million people who could have treatment globally, within NVST’s geographic scope, less than 3% of cases are actually treated (12 million case starts), implying ample runway to grow in this highly underpenetrated market.
Figure 56: Clear Aligner Market Opportunity
8.0
7.0 3.5 7.0 Out of the 500M potential orthodontics cases, <3% are 6.0 actually treated (~12M case starts annually) 5.0
4.0 1.0
3.0 2.0
2.0
1.0 0.5
- World Population Geographies out of Ideal occlusions Not seeing dentists Could have treatment scope (Too young / Too old)
Source: Company data, Credit Suisse; Population in MM KaVo X Pro With no intraoral scanner offering currently on the market to compete with XRAY’s Primescan and ALGN’s iTero, among other competitors in the space, we look forward to the launch of NVST’s KaVo X Pro, albeit acknowledging it has yet to set a deadline for its US release. Importantly, we do not expect meaningful market share gains once the product is launched, but rather view the scanner will fill a hole in NVST’s equipment portfolio, enabling the company to offer a more comprehensive solution set to its customers longer term. The scanner has a 14mm tip with rounded edges, with the aim of enhancing patient comfort, and is lightweight, supporting ease of use.
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For reference, Align Technology broadly dominates the intraoral scanner market with its iTero scanners, with 70% and 40% share in the ortho and GP markets, respectively. While NVST would be a new competitor in an already crowded market, we highlight that the digitization of dentistry continues to remain a longer term tailwind more broadly, with Patterson Companies, a dental distributor, noting that 80% of dentists (2017) still do not currently own digital scanning or CAD/CAM equipment.
Figure 57: Intraoral Scanner Market Share by Industry Figure 58: Intraoral Scanner Market Share by Industry Constituent in the Orthodontic Market Constituent in the GP Market Trios Trios 5% 10% Carestream Carestream 5% 20%
iTero 40%
Sirona Sirona 20% 2% 3M Tru Def 3%
iTero 70%
3M Tru Def 25%
Source: Align Technology Investor Presentation, Credit Suisse Source: Align Technology Investor Presentation, Credit Suisse DTX Software Studio Its DTX Software Studio, which combines all imaging modalities into one system, including 3D, IOS, and 2D, is currently in beta testing. NVST aims to provide an easy and efficient means of collaboration for practitioners, enabled to support multiple specialties (e.g. surgical, prosthetics). Moreover, the DTX Studio will allow NVST to track usage data (e.g. equipment productivity), which could also help practitioners more effectively manage their practices. Importantly, while NVST is currently offering its DTX studio for free while its in beta testing, longer term, it expects DTX to be a standalone offering. Strengthening Relationships with DSOs
NVST’s dedicated strategy to establish strong relationships across faster-growing Dental Support Organizations (DSOs) should ultimately enhance its market positioning longer term. While DSOs remain a smaller component of the market today, we are positively disposed toward NVST’s early positioning as a DSO partner of choice, particularly as this segment generally grows faster than the underlying market and embraces innovative technology more quickly. DSO relationships should also drive meaningful growth in more complex procedures, which require more advanced technology, and should ultimately support NVST’s growth across both its core segments longer term. For reference, a Dental Support Organization (DSO) contracts with dental practices in order to provide critical business management and support, including non-clinical operations, allowing doctors to more fully focus on the clinical elements of the practice. DSOs generally provide business support in areas including, but not limited to, human resources, marketing & branding, recruiting, IT services, payroll, capital & financing, tax services, accounting, risk management, and practice support. By shouldering these non-clinical components of running a practice, DSOs allow dentists to more fully focus on their patients and dental care delivery.
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In 2019, DSOs account for 8.8% of overall dentists in the US, a notable increase from 7.0% in 2017, driven by 130 bps and 140 bps increases in General Practitioners and All Specialties as a percentage of dentists, respectively, as illustrated in Figure 59. These metrics clearly show that DSOs continue to become a more prominent part of the overall dental practitioner community, albeit shifting at a seemingly measured paced over the past couple of years.
Figure 59: Percentage of Dentists in DSOs by Specialty
10% 8.8% 9.0% 8.8% 9% 8.5% 8.1% 7.7% 7.8% 7.7% 8% 7.4% 7.3% 7.0% 6.9% 7% 6.4% 6.3% 5.9% 5.8% 6% 5.5% 5.0% 5% 4.1% 4% 3.6% 3% 2% 1% 0% Overall General All Specialties Orthodontics Pediatric Oral Surgery Endodontics Periodontics Prosthodontics Public Health Practice Dentistry
2019 2017
Source: American Dental Association, Credit Suisse The shift to a more corporate dynamic within dental practices is largely driven by younger constituents, whereby nearly one in four dental graduates joins a DSO today, according to the American Dental Association. Notably, 17.9% of dentists aged 21-34 are affiliated with a DSO, a meaningfully higher metric than seen in older age brackets (e.g. 3.4% of 65+ year old dentists). Meanwhile, concurrent with the shift to DSOs, we have also seen an even more significant decline in solo practices, albeit still representing a majority of the market (51% in 2017 vs. 65% in 1999). In light of these dynamics, focusing on larger, more consolidated entities likely represents an important reallocation of resources, albeit also acknowledging that NVST must still continue outreach to these smaller practices that continue to represent a meaningful segment of the market today. Of note, while DSOs also exist abroad, we highlight that they have made a more material presence in the North American dental market to-date.
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Figure 60: Percentage of Dentists in DSOs by Age Figure 61: Percentage of Dentists in Solo Practices
20% 70% 17.9% 18% 16.3% 16% 65% 67% 65% 14% 63% 63% 60% 12% 11.3% 61% 9.8% 10% 59% 55% 8% 55% 54% 6% 4.5% 50% 52% 4% 3.4% 3.4% 51% 2.5% 2% 45% 0% 21-34 35-49 50-64 65+ 40%
2019
Source: American Dental Association, Credit Suisse Source: American Dental Association, Credit Suisse In order to better understand the evolving dental practitioner landscape, we asked our respondents in a proprietary survey about their affiliation with DSOs given their rising presence in the market. Of our respondents, 59% are not currently affiliated with a DSO, while 11% of respondents are currently affiliated with a DSO in one form or another. Meanwhile, 16% of our respondents have been approached by DSOs who want to acquire their practices, with only 5% interested in selling out or becoming affiliated. We also note that 51% of our respondents view the presence of DSOs is expanding moderately, with 24% of respondents viewing the presence of DSOs is accelerating rapidly.
Figure 62: CS Proprietary Survey: How Would You Characterize Figure 63: CS Proprietary Survey: To What Extent Are you Your Affiliation with a DSO? Seeing Dental Support Organizations (DSOs) Expanding? No change, DSO Have been 21% affiliated with presence declining, 1% a DSO for Have been I do not see less than 12 affiliated with DSOs in the months, 3% a DSO for marketplace, longer than 12 3% months, 8% I’ve been approached by a DSO and plan to sell my practice / become affiliated, 5% DSO I’ve been presence is approached DSO accelerating Not affiliated, by a DSO and presence is rapidly, 24% 69% do not plan to expanding Prior sell my moderately, assocation practice / 51% Other (please with a DSO, become specify):, 1% 3% affiliated, 11%
Source: Credit Suisse; n=75 dentists Source: Credit Suisse; n=75 dentists From a dollar market share perspective, we highlight that DSOs actually represent ~15% of the total US dental market (vs. 8.8% of dental practitioners), demonstrating the value these entities bring to the market, whereby practitioners can more fully focus on delivering care to patients. While DSOs typically bring more pricing and negotiating power to the market with scale, a potential negative for manufacturers and distributors alike, they also generally adopt new and advanced technology at an accelerated pace relative to smaller practices, with a focus on driving Envista Holdings Corp 35
14 October 2019 efficiency while also improving care, which may actually benefit manufacturers longer term. Moreover, while gross margins will remain pressured by DSO relationships given the aforementioned dynamics, NVST realizes neutral to positive overall margins with lower required SG&A providing an offset (e.g. one touchpoint to access consolidated operations across 50 offices vs. 50 touchpoints to access 50 standalone offices).
Figure 64: DSO $ Share of Total Dental Market (US)
35%
30% 30%
25%
20%
15% 15%
10%
5%
0% 2018 Future
Source: Company data, Credit Suisse All in, we view NVST’s focus on establishing strong relationships should ultimately enhance its market positioning longer term. NVST offers a compelling partner to these DSOs, where it maintains a comprehensive product offering, with the ability to tailor offerings to DSO-specific needs. It employs dedicated account managers across its key brands, including Nobel Biocare (premium implants), Implant Direct (value implants), Ormco (orthodontia), and KaVo Kerr (traditional consumables & equipment). Moreover, it supports DSOs with a scalable training and education program. These programs not only allow dentists to more fully and efficiently utilize NVST’s offerings, which should benefit NVST from a top line perspective as it sells through more of its offerings, but also strengthen the company's relationship with its DSO partner.
Figure 65: Highlighting Key DSO Constituents
Founded # of States # of Practices Private Equity Affiliated
Heartland 1997 37 900+ Yes -- Majority Owned by KKR
AspenDental 1998 36 750+ Yes -- Ares Management; Leonard Gree & Partners
Pacific Dental Services 1993 20 700+ No
Western Dental 1903 5 316 Yes -- New Mountain Capital
Smile Brands 1998 16 425+ Yes -- Gryphon Investors
Source: Company data, Credit Suisse
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Further Penetration of High Growth Markets
Growing in the +high-single-digits, high-growth geographies should support growth across both of its core segments, expanding from almost one-quarter of revenue in 2018 (22%; $650 million of sales) to 29% by 2023. Following its demonstrated success in China, where it has achieved +double-digit growth across the region since 2011, now representing a leading player in the market, NVST expects to leverage its “China model” across other geographies, with particular focus on Asia and Latin America. In 2018, China represented ~$200 million in sales (7% of total company sales), illustrating NVST’s success in the geography. Meanwhile, its next largest HGM (High Growth Markets), Eastern Europe represents only $100 million. All in, the HGM opportunity remains meaningfully underpenetrated, with increasing demand from an expanding middle class and strong economic growth. Of note, while gross margins are generally lower in HGMs relative to more mature markets, we expect this dynamic to improve as NVST captures greater scale and operating leverage longer term across these higher growth geographies.
Figure 66: 2018 High Growth Market Sales by Geography
$250
$200 $200
$150
$95 $100 $100 $90 $65 $50 $50
$0 APAC Middle East, Latin America Russia East Europe China Africa
Source: Company data, Credit Suisse; $ in MM As mentioned previously, NVST has built a leading market position of ~$200 million in annual sales in China with +double-digit growth on an organic basis, as well. Since 2011, NVST’s China business has evolved meaningfully, allowing it to move from a Top 10 player to a leader across the market. For reference, in 2011, NVST only offered limited access to its equipment and ortho portfolios and maintained only two small sales offices with ~40 associates, with focus primarily centered on coastal cities. Moreover, it did not have any local R&D or manufacturing presence. Today, NVST offers its complete portfolio to the market, with sales efforts supported by more than 900 associates across 10 offices, focused on all Tier 1 & 2 cities. It also employs more than 30 engineers in China to support local R&D efforts, where it may choose to tailor certain offerings to market-specific needs. Additionally, it maintains two manufacturing sites in China. All in, while representing its largest high-growth market today, we view NVST continues to have meaningful runway to grow in China, particularly following its improved market positioning and continued internal focus on the market.
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Figure 67: Demonstrated Success in China Sales with +DD Growth from 2011-2018
$250
>$200 $200
$150
$100 $80
$50 <$30
$0 2011 2015 2018
Source: Company data, Credit Suisse; $ in MM We highlight NVST’s “China Model” in Figure 68 in order to provide a better understanding of how it will approach other high growth markets, as we remain bullish on NVST’s ability to better penetrate these markets. After first establishing a dealer-partner relationship, essentially enabling NVST to distribute its goods in a given market, it then utilizes its Envista Business System (described further on page 41) to drive a more efficient and productive relationship. Next, NVST will implement localized sales and marketing efforts, including “feet on the street” (local sales representatives) and advertising, familiarizing customers in a given market with its branding and value proposition. With its local sales effort, it will also begin to sell to customers directly, enabling a dual distribution strategy (dealer/direct). In phase three of its HGM strategy, NVST begins to invoice customers in the local currency, warehouse its offerings in the market, and provide local customer service. In the final stage, NVST implements a fully direct distribution effort in order to fully own its customer relationships, albeit with some dealer involvement in certain scenarios. Importantly, NVST remains in early innings across the HGM arena, with only China having reached phase four of the strategy. NVST has also made meaningful progress in Russia, which currently has local marketing, invoicing, warehousing, and customer services (phase 3). That said, NVST still has a long way to go in the APAC, LATAM, Eastern Europe, and Middle East & Africa regions, and we await further progress on how its “China Strategy” progresses in each of these markets.
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Figure 68: High Growth Market Strategy
Phase 0 Phase 1 Phase 2 Phase 3 Phase 4 Distribute Distribute Distribute Distribute M&A / Go Direct (Dealer) (Dealer) (Dealer/Direct) (Dealer/Direct) Fully Own Localize Local Currency Customer EBS @ Dealer Marketing Invoicing Relationship (Envista) Local Warehouse Selective Dealer Add Feet on Customer Service Involvement Street (Envista)
LatAM / E-EU / APAC Russia China MEA
Source: Company data, Credit Suisse All in, as NVST implements its demonstrated strategy across other high growth markets, we expect its exposure to grow over time, potentially representing more than $905 million of sales by 2023 (29% of total sales), implying a +8% CAGR since 2016. Importantly, the growth is predominantly driven by its Specialty Products & Technologies Segment (+11% 5-year CAGR), partially offset by slower growth from its Consumables & Equipment Segment (+2% 5-year CAGR).
Figure 69: Forecasted High Growth Market Sales
$1,000 40% $905 $900 $807 35% $800 $759 $713 $682 30% $700 $655 $610 28.7% 25% $600 $540 26.0% 26.6% 24.4% 25.2% $500 23.0% 20% 21.7% $400 19.4% 15% $300 10% $200 5% $100
$0 0% 2016 2017 2018 2019 2020 2021 2022 2023
Specialty Products & Technologies Equipment & Consumables Total HGM as % of Sales
Source: Company data, Credit Suisse estimates; $ in MM Profit Margin Leverage
We estimate NVST will achieve 286 bps of EBITDA margin improvement from 2019 to 2023 as it continues to drive efficiencies with its entrenched Envista Business System (EBS), which is predicated on its former parent company’s proven Danaher Business System playbook (DBS). NVST’s margin profile should also benefit from a mix shift to Specialty over time, an inherently higher margin business. Importantly, the benefit of these dynamics will likely be partially offset by investment back into the business. Net/net, longer term, we estimate +50-75 bps of core EBITDA margin expansion annually, with cost savings balanced with reinvestment aimed to fuel continued revenue growth.
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Figure 70: Profit Turnaround: More Meaningful Profit Margin Improvement
$600 24% $538 $535 $509 $497 $500 $465 22% $449 20.2% $414 $395 $400 20%
$300 19.0% 18%
17.2% $200 17.0% 16% 16.4% 15.4% $100 14.7% 14.6% 14%
$0 12% 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Pro Forma EBITDA Pro Forma EBITDA Margin
Source: Company data, Credit Suisse estimates; $ in MM Understanding Recent Margin Pressures Before diving deeper into potential drivers of EBITDA margin improvement in 2019 and beyond, we acknowledge the meaningful margin deterioration from 2016 to 2018, whereby its margin fell from 19% of sales to 16%. This margin deterioration was driven in large part by efforts to reposition NVST for future growth. Over this time period, NVST invested $30 million in R&D spend. These efforts have begun to bear fruit, with NVST recently announcing several new products, including its N1 implant system and Spark Clear Aligner System. It also invested $28 million in selling & marketing efforts, bolstering its salesforce footprint, particularly to support its premium implant offering, with increased focus on high-growth markets. While admittedly the recent EBTIDA margin degradation is uninspiring, we are encouraged by re-positioning efforts, with NVST likely able to achieve improved revenue growth longer term following this turnaround period.
Figure 71: NVST Invested Significantly from 2016-2018
$560
$538 ~($34) $540
$520 ~($32)
$500 ~($5) $480 $476
$460
$440
$420
$400 2016A EBITDA R&D Investments S&M Investments Other Cost Increases; 2018A EBITDA Less Gross Profit Changes One-Time Costs
Source: Company data, Credit Suisse estimates; $ in MM NVST’s Margin Improvement Drivers As illustrated in Figure 72, drivers of EBITDA margin expansion going forward will likely consist of revenue growth and diligent cost savings initiatives, partially offset by reinvestment. We expect NVST’s Specialty business to grow faster than its Consumables & Equipment business, particularly as new products begin to contribute meaningfully (e.g. N1 implant system, Spark
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14 October 2019 clear aligner system), likely more of a 2020 dynamic. Over time, we expect specialty to represent an estimated 52% of total sales by 2022 (vs. 48% in 2018). The aforementioned mix shift should support margin expansion, as an inherently higher margin unit. Moreover, as revenue growth accelerates, NVST should be able to benefit from operating leverage on a relatively high fixed cost base. In terms of cost savings, NVST expects to achieve $60 million in annualized savings by 2021, including $30 million (50%) from productivity initiatives, $15 million from material productivity, and $15 million from indirect costs. These margin tailwinds will be partially offset by incremental investments, inflation, and other costs. That said, while NVST has reinvested all cost savings up through 2018, it now expects the benefits of these initiatives begin to fall through to the bottom line (40% ex. incremental corporate costs). Also of note, we highlight that NVST’s EBITDA bridge helps exemplify its Envista Business System (EBS), which is predicated on its parent company’s Danaher Business System (DBS). NVST utilizes its system to create a lean business that continues to invest in growth and is led by a strong, capable management team. In short, EBS is a system of continuous improvement, from both a top- and bottom-line perspective.
Figure 72: EBITDA Bridge from 2019E to 2022E Figure 73: NVST’s Cost Savings Target by 2021
$700
+$60 ($87) Indirect Costs, $600 $15M +$113 $497 $500 $410 $400
$60M $300 Productivity Initiatives, Annualized $30M Savings $200
$100 14% 16% Margin Margin Material $0 Productivity, 2019E Revenue Savings Investment / 2022E $15M EBITDA Growth Inflation / EBITDA Other
Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse Closest US Manufacturer Competitor Provides Potential Margin Comp Longer Term We highlight that NVST’s closest publicly-traded, manufacturer competitor Dentsply Sirona maintains a meaningfully higher margin profile than NVST. We forecast XRAY will achieve 22% EBITDA margins in 2020, with improvement thereon through 2023 to almost 27%. Meanwhile, while the inherent mix of business is different with NVST’s more limited exposure to more sophisticated high-tech equipment, after taking into consideration the aforementioned margin expansion dynamics, we only expect NVST to achieve 14% EBITDA margins in 2019, with improvement thereon through 2023 to 17%, still almost 1,000 bps below XRAY. While this lower margin profile is currently driven by high levels of internal investment and historical underinvestment in its product portfolio, we view longer term, NVST should be able to catch up on the innovation front and normalize investment levels, supporting further margin expansion opportunities on likely conservative forecasts, as it potentially closes the gap relative to XRAY over time.
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Figure 74: EBITDA Margin Comparison – NVST vs. XRAY
$1,600 26.8% 25.9% 28% 25.0% 24.9% $1,400 23.2% 23.4% 22.0% $1,215 23% $1,200 $1,134 18.7% $1,055 $921 $917 $958 $1,000 $869 17.0% 19.3% 16.4% 18% 18.1% $739 15.4% $800 14.1% 14.6% 16.4% 13% $600 $538 $509 $497 $535 $465 $449 $395 $414 $400 8% $200
$0 3% 2016 2017 2018 2019 2020 2021 2022 2023
NVST EBITDA ($) XRAY EBITDA ($) NVST EBITDA (%) XRAY EBITDA (%)
Source: Company data, Credit Suisse estimates; $ in MM Capital Deployment
NVST will likely prioritize some debt repayment and small/mid-sized M&A, with a focus on platform bolt-ons, new dental technologies, and near adjacencies. While we expect M&A will remain a capital deployment focus going forward, we do not embed M&A contributions beyond deals that have already been announced or completed in our modeling assumptions, offering potential upside to our estimates longer term. As a reminder, since 2004, DHR's dental business has acquired more than 25 companies, several of which we highlight in Figure 75. Then, in 2016, NVST began to more proactively consolidate and fully integrate the platform, transforming its portfolio into a more efficient, lean business under its integration playbook (Danaher/Envista Business System). Going forward, NVST expects to remain focused on strategic transactions, noting that M&A remains a component of its DNA. Similar to past practices, when looking at potential deals, NVST will maintain a disciplined approach. From a market perspective, NVST takes a deeper look at secular growth drivers, the fragmentation or concentration of the supplier/customer base, and barriers to entry. On a more company specific level, NVST looks for competitive market positioning, strong brands, consistent sales visibility, an accretive margin profile, and appropriate cultural fit. Finally, on valuation, NVST carefully evaluates the EBS opportunity, sustainability, potential synergies with its current operating companies, and estimated ROIC.
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Figure 75: Key Precedent M&A Transactions
Transaction EV/Sales Year Company Segment Product Group Details Value (M) Multiple
Equipment & 2004 GENDEX Equipment $103 1.0x Imaging Consumables
Equipment & 2004 KaVo Dental Equipment $425 0.9x Instruments, Treatment Units Consumables
Equipment & 2005 DEXIS Equipment - - Imaging Consumables
Equipment & 2005 Pelton & Crane Equipment $85 1.1x Treatment Units Consumables
Equipment & 2006 Sybron Dental Consumables $2,000 3.1x Includes Ormco, Kerr, Metrex, Sybron Endo Consumables
Equipment & 2007 i-CAT Equipment - - Imaging Consumables
Equipment & 2008 PENTRON Consumables - - Restorative Consumables Consumables
Equipment & 2009 Axis Consumables - - Rotary Burs Consumables
Equipment & 2009 PaloDEx Equipment - - Imaging -- Instrumentarium; Soredex Consumables
2010 Implant Direct Specialty Implants - - Value Implants (75% interest)
Equipment & 2012 NOMAD Equipment - - Imaging Consumables
Equipment & 2014 DUX Dental Consumables - - Restorative Consumables; Infection Control Consumables
2014 Nobel Biocare Specialty Implants $2,200 2.9x Premium Implants
2017 Implant Direct Specialty Implants - - Value Implants (Remaining 25% interest)
Source: Company data, Credit Suisse More specifically, while NVST does not see many large deals in the market, it is looking at its M&A funnel more broadly, considering partnerships, JVs, and acquisitions, with future deals likely in the $100-$200 million range. It is interested in platform bolt-ons, which may allow it to double down in its most attractive segments (e.g. implants, clear aligners, imaging) and geographies (e.g. APAC, LATAM, Eastern Europe), bolstering its market share position. NVST is also looking at technology acquisitions and investments that enable it to gain access to new technologies impacting dentistry. Of note, it specifically expressed interest in partnerships and JVs in this area , and we highlight Henry Schein formed a JV last year with Internet Brands to create Henry Schein ONE to bolster its practice management offering for dentists. Lastly, NVST is carefully evaluating potential M&A targets in near adjacencies. Relatively healthy free cash flow conversion should support future M&A efforts. NVST generated $328 million in FCF in 2018, representing >100% net income conversion, a trend we expect will continue going forward. As a reminder, NVST entered the public markets with 3.0x net debt to EBTIDA and an investment grade rating. We expect NVST will retain this investment grade rating going forward, using a disciplined M&A strategy and debt pay down to appropriately manage debt levels.
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Figure 76: NVST’s Free Cash Flow
$400 130% $347 $350 $328 $310 $305 120% $300 $279 $278
$250 110%
$200 105.1% 103.6% 100% $150 103.2% 102.3% 101.1% 99.3% $100 90% $50
$0 80% 2017 2018 2019 2020 2021 2022
Free Cash Flow ($) FCF as % of Net Income
Source: Company data, Credit Suisse estimates; $ in MM
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Investment Risks Downside Risks
Deterioration in Global Economic Health: NVST, its distributors, customers and suppliers may be adversely impacted by slower economic growth, actual or anticipated default on sovereign debt, volatility in the current credit markets, high levels of unemployment or underemployment, reduced levels of capital expenditures, changes or anticipation of potential changes in government trade, fiscal, tax and monetary policies, changes in capital requirements for financial institutions, government deficit reduction and budget negotiation dynamics, sequestration, austerity measures, and other challenges that affect the global economy. Moreover, given dental reimbursement is largely out of pocket for the consumer in many markets, utilization rates can correlate meaningfully with economic growth. Significant Developments or Uncertainties in Trade Policies and Tariffs: NVST’s business operations and financial statements could be adversely affected by potential changes or uncertainties in US social, political, regulatory, and economic conditions or policies governing foreign trade, the healthcare system, manufacturing, and development and investment in international markets. More specifically, we acknowledge inherent risks with potentially fluctuating global trade dynamics, particularly as it relates to China, where we highlight NVST generated $188 million of revenues in 2018, representing 7% of sales. Of note, NVST operates two factories in China, as well as maintains some local R&D efforts, potentially mitigating China trade risk to some extent. Competition: NVST competes in an increasingly competitive dental market that has been subject to increasing consolidation on the manufacturer front. If it fails to (1) retain longstanding relationships with major customers, (2) establish relationships with new customers, (3) continually develop new products and services, (4) expand its brand recognition and leadership position in various product and service categories, and (5) penetrate new markets (e.g. high growth markets), NVST may not be able to compete effectively, which may adversely affect its financial statements. Moreover, its expansion into new markets may effectively drive greater- than-expected risks, liabilities, and expenses. Moreover, competitors and/or customers, including dealer-partners, may introduce private label, generic, or low-cost products that compete with NVST’s products. Distribution Relationships: NVST is dependent upon a limited number of distributors and the loss of such a relationship could adversely impact sales. Of note, its master distribution agreement with Henry Schein, NVST’s largest dealer-partner, representing 14% of sales in 2018, is set to expire on December 31, 2019. If NVST does not renew the agreement with Henry Schein, or if Henry Schein and/or other distributors otherwise reduce the volume of products purchased, NVST will experience an adverse impact. Also of note, some distributors and other channel partners sell competitors’ products or compete with NVST directly, and if dealer-partners ultimately favor or more heavily market a competing product, NVST may be negatively impacted. Lack of Visibility on Stocking Dynamics Across the Distribution Channel: With 50% of its products sold through distributor channels, NVST relies heavily on its dealer-partners. Fluctuations in distributor channel inventory levels may result in projections of future results being different than otherwise forecasted. These fluctuations may be driven, at least in part, by changing relationships with the distributors and customers, economic conditions, and end-user preferences for certain products. Unsuccessful Development and/or Commercialization of New Products: NVST competes in the dental industry, which is broadly characterized by rapid technological changes, new product introductions, and evolving industry standards. If NVST does not develop new, innovative products and services on a timely basis, its offerings may become obsolete over time, and its competitive positioning will deteriorate concurrently. That said, if it invests heavily in research and development of products and services that do not lead to corresponding sales (i.e.
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14 October 2019 failure to predict future customer needs and preferences), NVST may experience a material adverse effect to its profitability. Failure to Comply with Extensive Regulation: Given most of its products are designated as medical devices, NVST would be adversely impacted if it failed to comply with regulation established by the FDA, by other federal agencies and state governmental agencies, by comparable agencies of other markets and regions, by certain accrediting bodies and by regulations governing hazardous materials. Of note, the global regulatory landscape has become increasingly strict and unpredictable, with several countries establishing new or expanded requirements. Regulations typically encompass development, testing, manufacturing, labeling, marketing, distribution, and post-market surveillance of new products. Failure to comply with regulations can result in fines, expenses, injunctions, civil penalties, recalls, seizures of products, total or partial suspension of production, refusal of the government to grant 510(k) clearance of devices, withdrawal of marketing approvals, criminal prosecutions, and other adverse effects. Disruption of Product Manufacturing: NVST utilizes highly exacting and complex processes to manufacture products, due in part to strict regulatory requirements. Its manufacturing may be disrupted for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters, and environmental factors. Given the time required to obtain licenses for other manufacturing facilities and build the capabilities for the highly complex processes, NVST may not be able to replace production capacity on a timely basis, which may result in significant costs, liability, lost sales, loss of market share, negative publicity, and damage to its reputation. Inability to Integrate Future Acquisitions: NVST may not be able to integrate mergers and acquisitions successfully into its existing business. Notably, if it does not successfully integrate acquisitions, or if the process takes longer than anticipated, it may affect NVST’s ability to realize anticipated cost savings and additional sales opportunities in a timely manner. Moreover, integration efforts may require in certain instances substantial management resources, which may distract management’s attention away from day-to-day business operations. Foreign Exchange: With roughly 56% of net sales in 2018 generated from operations outside the United States, NVST is exposed to exchange rate fluctuations, including the Canadian Dollar, British Pound, Euro, Australian Dollar, Chinese Renminbi, among other emerging market currencies. Importantly, fluctuations in FX rates could adversely affect its net sales, profits, and cash flow. Upside Risks
Improvement in Global Economic Health: NVST, its distributors, customers, and suppliers may be positively impacted by better economic growth, lower levels of unemployment, and higher levels of capital expenditures, and other positive dynamics that may affect the global economy. Moreover, given dental reimbursement is largely out of pocket for the consumer in many markets, utilization rates can correlate meaningfully with economic growth. Successful Development and/or Commercialization of New Products: Over the past several years, NVST has significantly increased its focus as it relates to new product development, particularly around products in high-growth segments, including implants and clear aligners. If NVST experiencing faster than expected adoption and demonstrates superior products relative to current offerings on the market, it may experience better product sales than we currently forecast. Moreover, NVST may have several other potentially meaningful products in its pipeline that are unknown to us at this time that may provide substantial upside to current estimates. Better than Expected Cost Savings Capture: Utilizing its Envista Business System (EBS) philosophy, NVST may achieve cost savings head of current expectations ($60 million by 2021), driving potential upside to our estimates. Moreover, NVST may achieve cost savings well above out current forecasts, which also offers upside risk to our estimates.
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Earnings Outlook and Financial Resources
2017 Review: In 2017, NVST’s consolidated revenue rose 0.9% to $2,810 million, including - 0.1% internal growth and 103 bps FX impact. Specialty Products & Technologies, representing 46.6% of sales, grew +5.1%, including +4.1% internal sales growth and 100 bps FX benefit. The year-over-year growth was driven by increased demand in high-growth markets, primarily China and Russia, as well as North America. Implant demand was driven by North America and high-growth markets, while orthodontic products growth was driven by increased demand in China, partially offset by weaker demand in North America. Of note, price increases did not have a meaningful impact on the Specialty segment. Meanwhile, Equipment & Consumables, representing 52.4% of total sales, fell 2.5%, including -3.5% internal growth and 100 bps benefit from FX. Importantly, pricing negatively impacted sales growth by 0.5%. Equipment sales were essentially flat during 2017, with demand in high-growth markets offsetting declines in the United States and Western Europe, while demand for traditional consumables declined in North America and Western Europe, reflecting inventory destocking across the distribution channel. 2018 Review: In 2018, NVST’s consolidated revenue rose 1.2% to $2,844 million, including +0.2% internal growth and 73 bps FX impact. Specialty Products & Technologies, representing 48.2% of sales, grew +4.5%, including +3.5% internal sales growth and 100 bps FX benefit. The year-over-year growth was led by high-growth markets, primarily China, as well as North America. Implant growth was driven by demand in North America and high-growth markets, while core growth in orthodontics was driven by China and Russia, partially offset by weaker demand in North America. Of note, price negatively impacted sales growth by 0.5% in 2018. Meanwhile, Equipment & Consumables, representing 51.8% of total sales, fell 1.7%, including -2.7% internal growth, +0.5% M&A contributions, and 50 bps benefit from FX. Core sales declined on lower demand in North America and Western Europe, partially offset by growth in high-growth markets. Equipment sales declined due to weakness in North America on the realignment of distributor/manufacturer relationships, while demand for traditional consumables declined in North America and Western Europe on distributor destocking dynamics. Importantly, pricing negatively impacted sales growth by 0.5%. NVST reported pro forma (including estimated public company costs) adjusted EBITDA of $465.5 million and EBITDA margin deterioration of 173 bps. The margin degradation was largely predicated on a gross margin contraction of 133 bps, driven by pricing pressure across both segments and sales contraction in its Consumables & Equipment segment. Meanwhile, SG&A as a percentage of sales increased 58 bps on productivity improvement initiatives. All in, with a 23.9% tax rate and assumed share base of 158.7 million, we estimate it would have reported adjusted pro forma EPS growth of +3.9% to $2.04 in 2018. Earnings Outlook
2019 Outlook: In 2019, we estimate revenues to fall 1.8% to $2,794 million, predicated on +0.2% internal growth and 200 bps FX headwind. In Specialty Products & Technologies, we expect sales to generate $1,370 million on ~flat growth (49% of total sales), predicated on +2.0% internal growth and 200 bps FX headwind. We do not incorporate material contributions from new product launches in this segment, such as its N1 Implant System (Nobel Biocare) and its Spark Clear Aligner System (Ormco). Meanwhile, we expect its Equipment & Consumables segment to decline 3.5% to $1,423 million (51% of total sales), predicated on -1.4% internal growth and 200 bps FX headwind. While we continue to expect internal sales to fall on a year- over-year basis, we highlight the sequential improvement (vs. -2.7% internal growth in 2018) as the market begins to stabilize. We forecast NVST will generate $394.8 million pro forma adjusted EBITDA with a 14.1% EBITDA margin, implying a 258 bps margin degradation year-over-year on 126 bps gross margin deterioration and an 88 bps increase in SG&A as a percentage of sales. Gross margin likely will fall on lower overall sales price, incremental year-over-year costs associated with various new product development efforts, FX, and product mix. Meanwhile, SG&A should rise
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14 October 2019 on incremental sales, service, and marketing growth investments and the impact of FX, partially offset by incremental year-over-year cost savings. All in, with a 23.2% tax rate and share base of 158.7 million, we expect EPS to fall 18.2% to $1.67 in 2019. Longer-Term Outlook: On a longer-term basis, we expect NVST will achieve +low-single-digit to +mid-single-digit top-line growth over time, ramping over the next five years, supported by innovation focus and direct sales efforts. In terms of profitability, we expect NVST will reach a 17% adjusted EBITDA margin by 2023, implying 286 bps margin expansion from 2019-2023, on operating leverage, mix shift to specialty, and cost savings of $60 million by 2022 driven by internal initiatives, partially offset by continuing investments in R&D and internal sales efforts. We expect NVST will be able to achieve 50-75 bps core margin expansion thereon on continuing efficiency initiatives as it leverages its Envista Business System (EBS) playbook, further mix shift to specialty, and likely building operating leverage. We also expect upside to our current forecasts from M&A activity, as we forecast NVST will generate >$1 billion of free cash flow from 2019-2022.
Figure 77: Forecasted Revenue Growth Trend Figure 78: Forecasted EBITDA Margin Trajectory
$3,200 $600 24% $3,150 $538 6% $535 $509 $497 $3,100 $500 $465 22% $3,031 5% $449 $414 20.2% $395 $3,000 4% $400 20% $2,920 3.9% 3.8% 3% $2,900 $300 19.0% 18% 2.0% $2,845 $2,836 3.0% $2,811 2% $2,785 $2,794 $2,800 $200 17.2% 17.0% 16% 1.5% 1% 16.4% 15.4% $2,700 $100 14% 0% 14.7% 14.6% 0.2% 0.2% -0.1% $2,600 -1% $0 12% 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Sales Organic Sales Growth Pro Forma EBITDA Pro Forma EBITDA Margin
Source: Company data, Credit Suisse estimates; $ in MM Source: Company data, Credit Suisse estimates; $ in MM Financial Resources
NVST has $84 million in cash reserves and $1.4 billion in debt, with capital deployment efforts focused in part on deleveraging near term, with focus also likely on tuck in acquisitions. Of note, we expect NVST will aim to maintain its investment grade rating despite disclosed M&A aspirations. We estimate NVST will generate $361 million and $339 million in cash flow from operations in 2019 and 2020, respectively. Its cash conversion cycle of 85.5 days as of June 30, 2019 declined from 96.6 as of March 31, 2019 and vs. 72.0 days on average in the year ended December 31, 2018. As of June 30, 2019, Days Sales Outstanding was 60.4 days (vs. 63.2 as of March 31, 2019), Days Inventory was 80.5 (vs. 88.2), and Days Payable Outstanding was 55.4 days (vs. 54.8), with improvement across the board. We expect this improvement to continue as NVST leverages its Envista Business System (EBS) philosophy to drive increasingly lean and efficient operations.
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Figure 79: NVST Cash Conversion Cycle ($ in Millions) Trailing Twelve Months Date Revenues COGS Inventory Receivables Payables Current DIO Current DSO Current DPO Current CCC
30-Jun-20E $718.6 $323.4 $260.60 $420.67 $221.24 73.5 53.4 62.4 64.5 31-Mar-20E $658.0 $297.5 $240.56 $387.01 $202.72 73.8 53.7 62.2 65.3 31-Dec-19E $751.0 $333.6 $270.61 $443.78 $226.36 74.0 53.9 61.9 66.0 30-Sep-19E $671.0 $302.3 $251.88 $411.16 $198.52 76.0 55.9 59.9 72.0 30-Jun-19 $712.1 $317.0 $279.70 $471.50 $192.50 80.5 60.4 55.4 85.5 31-Mar-19 $659.7 $295.0 $285.30 $456.60 $177.10 88.2 63.2 54.8 96.6 31-Dec-18 $759.0 $334.5 $278.70 $459.80 $217.40 76.0 55.3 59.3 72.0 31-Dec-17 $758.8 $319.3 $275.7 $463.1 $222.4 315.1 222.8 254.2 283.7
Source: Company data, Credit Suisse estimates; $ in MM Valuation
NVST’s IPO priced at $22 per share on September 18, 2019, 11.4x our 2020 EV/EBITDA, at the lower end of its $21-$24 range based on 154 million common shares (not including green shoe). On its first day of trading, NVST’s share price increased 27%, closing the day at $27.95 per share. To-date, NVST’s stock price has increased 32.1% (vs. S&P 500 -0.9%), contributing to our Neutral view. Importantly, NVST currently trades at forward P/E and EV/EBITDA multiples of 16.9x and 14.2x, respectively, a discount to our broader peer group, which includes various dental constituents. Our $30 target price is predicated on a 14.7x 2020 EV/EBITDA multiple, a premium to Dentsply Sirona (14.0x), with line-of-sight to improving profitability near term, but a discount to its Dental Manufacturer peer group average (16.2x), as we await evidence of more meaningful contributions from new products and other internal initiatives. Our $36/share (17.0x 2020E EV/EBITDA) blue sky scenario is predicated on strengthening underlying fundamental trends across the dental industry, as well as better-than-anticipated progress on internal initiatives, including R&D efforts, commercialization of new product launches, and direct sales momentum. Our $24/share (12.4x 2020E EV/EBITDA) grey sky scenario is based on a continually lackluster underlying dental market environment, as well as slower-than-expected progress on internal initiatives, including R&D efforts, commercialization of new product launches, and direct sales progress.
Figure 80: NVST’s Stock Price Performance Following IPO: +32.1%
$30 $29 $28 $27 $26 $25 $24 +32.1% vs. $23 -0.9% S&P $22 $21 $20
Source: Factset, Credit Suisse For perspective, dental valuations have historically traded at a 4.9x premium to the SPX on a forward P/E basis, with dental companies consistently outperforming, supported by ALGN’s, STMN’s, and DHR’s (through September 17, 2019) robust valuations. Importantly, dental valuations are currently trading at 21.1x, 1.4x above its historical average, a trend we expect to
Envista Holdings Corp 49
14 October 2019 continue as robust growth continues across certain pockets of the market, including clear aligners (e.g. ALGN) and implants (STMN). Of note, excluding ALGN, STMN, and DHR, the dental group is currently trading at 16.0x, a slight discount to the current SPX (16.5x).
Figure 81: FY+2 P/E – Dental Index vs. S&P 500
30x Current Dental Average: 21.1x Dental Historical Average: 19.7x 25x
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Dental Index P/E FY+2 SPX P/E FY+2 SPX Avg. Dental Index Avg.
Source: Factset; Priced on 10/11 at 1PM ET Dental Index includes: Align Technologies, Henry Schein, Patterson Companies, Danaher (through 9/18/19), Dentsply Sirona, Coltene, Straumann, Sirona Comparable Company Analysis
When looking at comparable companies, we primarily focus on dental manufacturers, including Dentsply Sirona, a diversified company, likely representing the most relevant comparison to NVST. We also take into account Align Technology, the leading doctor-directed clear aligner manufacturer, and Straumann Holding, a leading implant manufacturer. Lastly, we include 3M and Zimmer Biomet Holdings in our comp group, albeit acknowledging that their dental focused businesses represent a relatively smaller part of their overall businesses. This dental manufacturer peer group trades at 16.2x and 23.0x 2020 EV/EBITDA and P/E multiples, on average, respectively. While we view dental manufacturers as representing the most relevant comparable companies for NVST, we also include dental distributors, such as Henry Schein and Patterson Companies, in our analysis given their exposure to similar underlying trends across the dental market. Moreover, we include certain medical device companies in order to reflect NVST’s exposure to certain fast growing, albeit highly regulated, categories. All in, our overall peer group trades at 20.0x and 31.1x 2020 EV/EBITDA and P/E multiples, on average, respectively.
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Figure 82: Comparable Company Analysis Price Market 52-Week Avg. daily P/E EV/EBITDA EV/Sales Dental Manufacturers Ticker Rating Target 10/11 % to PT cap ($mil) High Low vol (000) 2019 2020 2019 2020 2019 2020 Yld. DENTSPLY SIRONA, Inc. XRAY Outperform $63 $54.34 16% $12,152 $59.40 - $33.93 1,664 22.7x 20.2x 15.4x 14.0x 3.4x 3.2x 1.4% Align Technology, Inc. ALGN Outperform $320 $201.56 59% $16,099 $339.95 - $169.84 1,247 38.7x 30.1x 24.6x 18.8x 6.4x 5.3x 0.0% SmileDirectClub SDC Outperform $18 $11.50 57% $4,484 $21.10 - $9.82 9,598 - - - 72.8x 5.5x 3.5x 0.0% Straumann Holding AG STMN-CH Outperform SFr900 $844.40 $13,408 $896.20 - $587.00 60 39.2x 32.6x 28.1x 23.7x 8.5x 7.4x 0.1% 3M Company MMM Outperform $178 $156.90 $90,258 $219.75 - $150.58 2,676 16.9x 15.7x 12.0x 11.2x 3.2x 3.1x 2.4% Zimmer Biomet Holdings, Inc. ZBH Underperform $120 $136.29 $27,982 $143.57 - $96.99 1,006 17.4x 16.4x 13.7x 13.4x 4.6x 4.5x 0.5% Average 44% 27.0x 23.0x 18.8x 16.2x 5.3x 4.5x 0.7% Dental Distributors Henry Schein HSIC Neutral $66 $62.97 $9,336 $91.35 - $56.58 1,005 18.2x 16.6x 11.5x 10.9x 1.0x 1.0x 0.0% Patterson Companies PDCO Outperform $25 $17.19 $1,643 $26.60 - $15.73 1,151 12.5x 11.7x 8.8x 8.3x 0.4x 0.4x 36.7% Average 15.3x 14.2x 10.2x 9.6x 0.7x 0.7x Medical Device Companies NuVasive, Inc. NUVA Outperform $75 $64.00 $3,331 $69.51 - $43.51 457 27.6x 25.0x 11.3x 10.5x 2.9x 2.7x 0.0% Cooper Companies, Inc. COO $295.92 $14,670 $344.32 - $228.65 375 23.8x 22.5x 17.3x 15.7x 5.5x 5.1x 0.0% Dexcom DXCM $156.22 $14,245 $178.45 - $105.05 755 170.1x 111.6x 104.9x 60.5x 10.4x 8.8x 0.0% ABIOMED, Inc. ABMD $170.79 $7,750 $427.70 - $155.02 574 33.0x 32.8x 27.3x 23.1x 9.0x 7.7x 0.0% Edwards Lifesciences CorporationEW Outperform $226 $228.87 $47,598 $230.19 - $136.44 1,026 42.8x 38.2x 34.6x 30.5x 11.2x 10.1x 0.0% Average 59.4x 46.0x 39.1x 28.1x 7.8x 6.9x Overall Average 38.6x 31.1x 25.8x 20.0x 5.5x 4.8x
S&P 500 Index SPX $2,977.88 $3,027.98 $2,346.58 17.9x Source: Company data, Credit Suisse estimates, Factset; Priced on 10/11 at 1PM ET Note: NUVA, EW, ZBH covered by US Medical Devices Team; MMM covered by US Electrical Equipment & Multi-Industry Team; STMN covered by EU Medical Supplies & Devices Team Discounted Cash Flow (DCF) Analysis
Our discounted cash flow model is predicated on SDC’s top-line growing at a 2.6% 10-year CAGR with 37 bps profit margin expansion on average annually over the same time period. We project capital expenditures of $82 million in 2019, $61 million in 2020, with expenditures growing +2.5% thereon. The 6.2% WACC we use reflects its $1.4 billion outstanding debt balance and an equity risk premium (6.7%). All in, our $30 target price is supported by our DCF-driven valuation shown in Figure 83.
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Figure 83: Discounted Cash Flow (DCF) Analysis CASH FLOWS 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Net sales $2,845 $2,794 $2,836 $2,920 $3,031 $3,150 $3,260 $3,374 $3,476 $3,580 $3,687 Year-over-year change 1.2% -1.8% 1.5% 3.0% 3.8% 3.9% 3.5% 3.5% 3.0% 3.0% 3.0%
NOPAT $274 $282 $282 $308 $343 $371 $394 $418 $442 $466 $491 Year-over-year change -21.6% 2.9% 0.0% 9.2% 11.3% 8.2% 6.2% 6.1% 5.6% 5.5% 5.4%
EBITDA $428 $408 $414 $449 $497 $535 $565 $597 $627 $658 $691
Investment in future growth Chg in working capital $20 -$14 -$1 $2 $4 $5 $4 $4 $3 $3 $3 Chg in fixed assets -$134 $173 $62 $60 $60 $61 $64 $65 $68 $69 $71 Chg in other assets $0 -$77 $0 $0 $0 $0 $0 $0 $0 $0 $0 Incremental Investment -$114 $82 $61 $63 $64 $66 $67 $69 $71 $73 $74
Free Cash Flow $389 $200 $221 $246 $279 $306 $327 $349 $371 $393 $417
Discounted cash flow PV of FCF $389 $189 $196 $205 $220 $227 $228 $230 $230 $230 $229 Cumulative PV of FCF $389 $189 $385 $590 $810 $1,037 $1,265 $1,495 $1,725 $1,955 $2,184
Residual Value $8,112 $4,582 $5,003 $5,569 $6,025 $6,399 $6,792 $7,169 $7,563 $7,974 $8,322 PV of Residual Value $8,112 $4,317 $4,439 $4,655 $4,744 $4,746 $4,744 $4,718 $4,688 $4,656 $4,577
Corporate Value $8,501 $4,505 $4,824 $5,245 $5,554 $5,782 $6,009 $6,212 $6,413 $6,611 $6,761 Total Debt and Preferred Stock $165 $165 $165 $165 $165 $165 $165 $165 $165 $165 $165 Shareholder value $8,336 $4,340 $4,659 $5,080 $5,389 $5,617 $5,845 $6,048 $6,248 $6,446 $6,596 Shares outstanding 159 159 159 159 159 159 159 159 159 159 159
Value per share $52.55 $27.36 $29.37 $32.02 $33.97 $35.41 $36.84 $38.12 $39.38 $40.63 $41.58
Years into future 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Source: Company data, Credit Suisse estimates Holt® Value-Based Analysis Based on our HOLT analysis, there is a relatively strong documented correlation between ROIC and valuation for dental manufacturers and distributors, suggesting investors are focused more on true economic returns. Applying our regression of market valuation vs. CFROI® (using 2020 estimates) for our companies indicate that 93% of the variation in valuation is determined by ROIC. Consequently, the HOLT CFROI correlation indicates that the market is willing to pay more for companies generating higher returns on their invested capital, not simply for stronger EPS growth.
Figure 84: HOLT Analysis Further Supports our Neutral Thesis
Source: Holt
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14 October 2019
Management Team
NVST’s management team is comprised of Danaher veterans, which should help embed some of the attractive values and characteristics of NVST’s former parent company, with also extensive dental experience. NVST’s CEO Amir Aghdaei has served in his current role for over four years (since May 2015), albeit with the role previously defined as President & Group Executive, Dental Platform at Danaher Corporation. Aghdaei has helped transform NVST over the past several years into a more consolidated, lean, and innovative company, while also bringing extensive international experience, having served in a variety of international leadership roles with Hewlett-Packard Company, Agilent Technologies, and Credence Systems Corporation. Meanwhile, CFO Howard Yu also has extensive, relevant experience in the dental arena, having previously served as CFO of Nobel Biocare from September 2017 to January 2019 and as CFO of Ormco from September 2014 to September 2017. Moreover, NVST’s three operating business SVPs each have meaningful, relevant experience, with each having served in leadership positions at NVST (formerly Danaher Dental Business) for at least the past four years.
Figure 85: NVST Management Team
Name Position Age Biography
Mr. Aghdaei has held multiple leadership roles since joining Danaher in 2008, mostly recently as Vice President - Group Executive for Danaher’s Dental business. Prior to Danaher, Mr. Aghdaei served in a variety of international leadership roles Amir Aghdaei President, CEO & Director 61 with Hewlett-Packard Company, Agilent Technologies Inc. and Credence Systems Corporation. Mr. Aghdaei brings in- depth knowledge of Danaher’s Dental business and extensive international experience.
Mr. Yu served as Chief Financial Officer of the Nobel Biocare business from September 2017 to January 2019 and Chief Financial Officer of the Ormco business from September 2014 to September 2017. Since joining Danaher in 2011, Mr. Yu Howard H. Yu SVP & CFO 47 has held a variety of positions, including as Vice President, Financial Planning & Analysis of Beckman Coulter, Inc., a Danaher subsidiary, from January 2012 to September 2014.
Mr. Eriksson has served in various leadership roles for Danaher’s Dental business since October 2012, including as Patrik Eriksson SVP, KaVo Kerr 51 President of the KaVo and Kerr businesses since January 2018 and President of the Ormco business from January 2014 to December 2017.
Mr. Geiselhöringer has served in various leadership roles for Danaher’s Dental business since Danaher’s acquisition of Hans Geiselhöringer SVP, Nobel Biocare 50 Nobel Biocare in 2014, including as President of the Nobel Biocare business since January 2016.
Mr. Kappler has served in various leadership roles for Danaher’s Dental business since January 2015, including as President of the Ormco business since October 2018. Since joining Danaher in 2007, Mr. Kappler has held a variety of Jeffrey S. Kappler SVP, Ormco 40 positions, including as Business Unit Manager of Veeder-Root, then a subsidiary of Danaher, from March 2012 to December 2015.
Mr. Reis has served as Vice President, Business Development & Strategy of Danaher’s Dental business since October Mischa M. Reis SVP, Strategy & Corporate Development 47 2012.
Mr. Bludworth has served as Vice President-Human Resources for Danaher’s Dental business since January 2015, after Curt W. Bludworth SVP & Chief Human Resources Officer 52 serving as Vice President-Human Resources of Tektronix, then a subsidiary of Danaher, from September 2011 to December 2014.
Mr. Nance served as the Chief Legal Officer of INSYS Therapeutics, Inc. from October 2018 to September 2019 and Special Advisor to FIPRA International, Ltd. from July 2017 to September 2019. Prior to joining INSYS Therapeutics, Inc., Mr. Nance served as the Senior Vice President and Global General Counsel of Mylan N.V., GE Healthcare Medical Mark E. Nance SVP, General Counsel and Secretary 51 Diagnostics and GE Healthcare Life Sciences and the Vice President, Corporate Development of Integrated Nano- Technologies, LLC. In addition Mr. Nance has held various other leadership roles in other companies, including Pathfire, Inc. and VerticalOne Corporation.
Source: Company data
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14October 2019
Holdings Envista Corp Figure 86: Quarterly EPS ($ in Millions, Except per Share Amounts) Historicals Projections 2018 2019E 2020E 30-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total
Sales $672.6 $733.4 $679.5 $759.0 $2,844.5 $659.7 $712.1 $671.0 $751.0 $2,793.9 $658.0 $718.6 $687.4 $771.9 $2,835.9 Cost of Sales $294.0 $309.3 $297.0 $334.5 $1,234.8 $295.0 $317.0 $302.3 $333.6 $1,247.9 $297.5 $323.4 $312.1 $342.9 $1,276.0
Gross profit $378.6 $424.1 $382.5 $424.6 $1,609.8 $364.7 $395.2 $368.6 $417.5 $1,546.0 $360.5 $395.2 $375.3 $429.0 $1,559.9 Research & development $41.7 $44.4 $42.4 $43.6 $172.0 $43.3 $39.7 $40.7 $46.9 $170.5 $43.5 $40.1 $42.5 $45.5 $171.6
Pro Forma Selling, general & adminstrative $251.8 $249.7 $224.9 $248.6 $975.0 $249.3 $249.1 $231.5 $252.2 $982.1 $246.7 $246.9 $226.7 $254.2 $974.4
Pro Forma EBITDA (incl. public company costs) $85.4 $130.2 $116.7 $133.2 $465.5 $72.2 $107.7 $96.5 $118.4 $394.8 $70.3 $108.2 $106.0 $129.3 $413.8 Amortization $22.9 $22.6 $22.5 $22.6 $90.6 $22.5 $22.5 $22.5 $22.5 $90.0 $21.8 $21.8 $21.8 $21.8 $87.0 Depreciation $9.9 $9.8 $9.4 $10.3 $39.4 $9.8 $10.0 $11.0 $11.0 $41.9 $11.8 $11.8 $11.8 $11.8 $47.2 Pro Forma Operating Income $75.2 $120.2 $105.9 $122.1 $423.4 $62.4 $96.3 $85.4 $107.4 $351.5 $58.5 $96.4 $94.3 $117.5 $366.7 Interest Expense $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1.5 $4.3 $5.8 $4.3 $4.3 $4.3 $4.3 $17.0 Interest Income $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.6 Nonoperating expense/(income), net ($0.2) ($0.2) ($1.5) ($0.8) ($2.7) ($0.1) ($1.3) $0.0 $0.0 ($1.4) $0.0 $0.0 $0.0 $0.0 $0.0 Pro Forma Pretax income $75.4 $120.4 $107.4 $122.9 $426.1 $62.5 $97.6 $83.9 $103.3 $347.3 $54.4 $92.3 $90.1 $113.4 $350.2 Pro Forma Tax Expense $17.9 $27.9 $24.3 $31.6 $101.7 $14.5 $23.1 $20.4 $23.8 $81.8 $12.5 $21.2 $20.8 $26.1 $80.6 Pro Forma Net income $57.5 $92.5 $83.0 $91.3 $324.4 $47.9 $74.5 $63.5 $79.5 $265.5 $41.8 $71.0 $69.4 $87.3 $269.6
Average basic shares outstanding 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 Average diluted shares outstanding 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7
EPS, basic $0.36 $0.58 $0.52 $0.58 $2.04 $0.30 $0.47 $0.40 $0.50 $1.67 $0.26 $0.45 $0.44 $0.55 $1.70 EPS, diluted $0.36 $0.58 $0.52 $0.58 $2.04 $0.30 $0.47 $0.40 $0.50 $1.67 $0.26 $0.45 $0.44 $0.55 $1.70
Tax rate 23.8% 23.1% 22.7% 25.7% 23.9% 23.2% 23.6% 23.0% 23.0% 23.2% 23.0% 23.0% 23.0% 23.0% 23.0%
Margin analysis Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales 43.7% 42.2% 43.7% 44.1% 43.4% 44.7% 44.5% 45.1% 44.4% 44.7% 45.2% 45.0% 45.4% 44.4% 45.0% Gross profit 56.3% 57.8% 56.3% 55.9% 56.6% 55.3% 55.5% 54.9% 55.6% 55.3% 54.8% 55.0% 54.6% 55.6% 55.0% Research and development 6.2% 6.1% 6.2% 5.7% 6.0% 6.6% 5.6% 6.1% 6.2% 6.1% 6.6% 5.6% 6.2% 5.9% 6.1% Pro Forma Selling, general, & administrative 37.4% 34.0% 33.1% 32.7% 34.3% 37.8% 35.0% 34.5% 33.6% 35.2% 37.5% 34.4% 33.0% 32.9% 34.4% Pro Forma EBITDA 12.7% 17.7% 17.2% 17.5% 16.4% 10.9% 15.1% 14.4% 15.8% 14.1% 10.7% 15.1% 15.4% 16.8% 14.6% Pro Forma Operating income 11.2% 16.4% 15.6% 16.1% 14.9% 9.5% 13.5% 12.7% 14.3% 12.6% 8.9% 13.4% 13.7% 15.2% 12.9% Pro Forma Pretax income 11.2% 16.4% 15.8% 16.2% 15.0% 9.5% 13.7% 12.5% 13.7% 12.4% 8.3% 12.8% 13.1% 14.7% 12.3% Pro Forma Tax Expense 2.7% 3.8% 3.6% 4.2% 3.6% 2.2% 3.2% 3.0% 3.2% 2.9% 1.9% 3.0% 3.0% 3.4% 2.8% Pro Forma Net Income 8.6% 12.6% 12.2% 12.0% 11.4% 7.3% 10.5% 9.5% 10.6% 9.5% 6.4% 9.9% 10.1% 11.3% 9.5%
Growth analysis Total revenue 2.6% 4.4% -2.1% 0.0% 1.2% -1.9% -2.9% -1.3% -1.1% -1.8% -0.3% 0.9% 2.5% 2.8% 1.5% Cost of Sales 6.6% 4.6% 1.7% 4.7% 4.4% 0.3% 2.5% 1.8% -0.3% 1.1% 0.9% 2.0% 3.2% 2.8% 2.3% Gross profit -0.3% 4.2% -4.8% -3.4% -1.1% -3.7% -6.8% -3.6% -1.7% -4.0% -1.2% 0.0% 1.8% 2.8% 0.9% Research and development 3.7% 3.0% -0.4% -6.3% -0.2% 3.9% -10.6% -4.0% 7.6% -0.9% 0.5% 1.1% 4.6% -3.0% 0.6% Pro Forma Selling, General & Administrative 13.8% 5.5% -3.9% -2.6% 2.9% -1.0% -0.2% 2.9% 1.4% 0.7% -1.0% -0.9% -2.1% 0.8% -0.8% Pro Forma EBITDA -27.8% 2.4% -7.0% -3.3% -8.5% -15.4% -17.3% -17.3% -11.1% -15.2% -2.7% 0.5% 9.9% 9.2% 4.8% Pro Forma Operating Income -30.5% 2.6% -8.4% -4.5% -9.7% -17.1% -19.9% -19.3% -12.1% -17.0% -6.2% 0.1% 10.3% 9.5% 4.3% Pro Forma Pretax Income -30.3% 2.7% -7.1% -3.9% -9.1% -17.2% -18.9% -21.8% -16.0% -18.5% -13.0% -5.5% 7.4% 9.9% 0.8% Pro Forma Tax Expense -50.5% -28.9% -36.9% -26.1% -35.1% -19.0% -17.2% -16.1% -24.7% -19.6% -13.8% -7.9% 1.6% 9.9% -1.4% Pro Forma Net Income -20.2% 18.6% 7.9% 7.3% 3.9% -16.6% -19.4% -23.5% -13.0% -18.2% -12.7% -4.7% 9.3% 9.8% 1.5% EPS, diluted -24.6% 12.6% 2.4% 2.3% -1.4% -16.6% -19.4% -23.5% -13.0% -18.2% -12.7% -4.7% 9.3% 9.8% 1.5%
Source: Company data, Credit Suisse estimates
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14October 2019
Holdings Envista Corp Figure 87: Quarterly Revenue ($ in Millions) Historicals Projections 2018 2019E 2020E 30-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Mar 30-Jun 30-Sep 31-Dec Total Total Revenues Specialty Products & Technologies $354.5 $349.8 $318.3 $347.2 $1,369.8 $348.8 $347.2 $322.1 $352.2 $1,370.3 $356.0 $355.3 $334.2 $368.0 $1,413.5 Equipment & Consumables $318.1 $383.5 $361.2 $411.8 $1,474.7 $310.9 $364.8 $348.9 $398.9 $1,423.5 $302.0 $363.3 $353.2 $403.9 $1,422.4
Total Revenues $672.6 $733.3 $679.5 $759.0 $2,844.5 $659.7 $712.0 $671.0 $751.0 $2,793.8 $658.0 $718.6 $687.4 $771.9 $2,835.9
Mix Specialty Products & Technologies 52.7% 47.7% 46.8% 45.7% 48.2% 52.9% 48.8% 48.0% 46.9% 49.0% 54.1% 49.4% 48.6% 47.7% 49.8% Equipment & Consumables 47.3% 52.3% 53.2% 54.3% 51.8% 47.1% 51.2% 52.0% 53.1% 51.0% 45.9% 50.6% 51.4% 52.3% 50.2% Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Growth Specialty Products & Technologies 9.5% 6.5% 2.5% 0.0% 4.5% (1.6%) (0.7%) 1.2% 1.4% 0.0% 2.1% 2.3% 3.8% 4.5% 3.2% Equipment & Consumables (4.0%) 2.5% (6.0%) 0.0% (1.7%) (2.3%) (4.9%) (3.4%) (3.1%) (3.5%) (2.9%) (0.4%) 1.3% 1.3% (0.1%) Total Revenues 2.5% 4.5% (2.0%) 0.0% 1.2% (1.9%) (2.9%) (1.3%) (1.1%) (1.8%) (0.3%) 0.9% 2.5% 2.8% 1.5%
Specialty Products & Technologies Reported growth 9.5% 6.5% 2.5% 0.0% 4.5% -1.5% -0.7% 1.2% 1.4% 0.0% 2.1% 2.3% 3.8% 4.5% 3.2% FX impact 6.0% 2.5% (1.5%) (2.5%) 1.0% (4.0%) (2.7%) (0.8%) (0.2%) -2.0% (0.3%) 0.1% 0.0% 0.0% -0.1% CC growth 3.5% 4.0% 4.0% 2.5% 3.5% 2.5% 2.0% 2.0% 1.7% 2.0% 2.4% 2.3% 3.8% 4.5% 3.2% Acquisitions & divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Impact of discontinued products 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Internal growth 3.5% 4.0% 4.0% 2.5% 3.5% 2.5% 2.0% 2.0% 1.7% 2.0% 2.4% 2.3% 3.8% 4.5% 3.2%
Equipment & Consumables Reported growth (4.0%) 2.5% (6.0%) 0.0% (1.7%) (2.5%) (4.9%) (3.4%) (3.1%) (3.5%) (2.9%) (0.4%) 1.3% 1.3% (0.1%) FX impact 5.0% 1.5% (1.5%) (2.5%) 0.5% (5.0%) (2.9%) (0.7%) (0.1%) -2.0% (0.2%) 0.1% 0.0% 0.0% 0.0% CC growth (9.0%) 1.0% (4.5%) 2.5% (2.2%) 2.5% (2.0%) (2.8%) (3.0%) (1.4%) (2.7%) (0.5%) 1.3% 1.3% (0.1%) Acquisitions & divestitures 0.0% 0.5% 0.5% 0.0% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Impact of discontinued products 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Internal growth (9.0%) 0.5% (5.0%) 2.5% (2.7%) 2.5% (2.0%) (2.8%) (3.0%) -1.4% (2.7%) (0.5%) 1.3% 1.3% -0.1%
Total Reported growth 2.5% 4.5% -2.0% 0.0% 1.2% -2.0% -2.9% -1.3% -1.1% -1.8% -0.3% 0.9% 2.5% 2.8% 1.5% FX impact 5.5% 2.5% (1.5%) (2.5%) 0.7% (4.5%) (2.8%) (0.7%) (0.2%) (2.0%) (0.3%) 0.1% 0.0% 0.0% (0.0%) CC growth (3.0%) 2.0% (0.5%) 2.5% 0.5% 2.5% (0.1%) (0.5%) (0.9%) 0.2% (0.0%) 0.8% 2.5% 2.8% 1.5% Acquisitions & divestitures 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Impact of discontinued products 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Internal growth (3.0%) 2.0% (0.5%) 2.5% 0.2% 2.5% (0.1%) (0.5%) (0.9%) 0.2% (0.0%) 0.8% 2.5% 2.8% 1.5%
Total Operating Profit (Reported) Specialty Products & Technologies $70.6 $64.6 $51.5 $54.6 $241.3 $66.0 $54.6 $45.8 $49.1 $215.6 $63.7 $56.2 $50.6 $55.7 $226.1 Equipment & Consumables ($16.0) $42.9 $37.0 $56.5 $120.5 ($12.2) $29.2 $33.6 $51.8 $102.4 ($12.6) $30.1 $37.1 $54.8 $109.4 Corporate ($6.0) ($6.7) ($2.9) ($47.8) ($63.4) ($9.0) ($7.8) ($14.0) ($16.2) ($47.0) ($15.2) ($14.4) ($16.0) ($15.8) ($61.3) Adjustments $32.9 $25.6 $26.5 $65.0 $150.1 $23.8 $26.6 $0.0 $0.1 $50.5 $0.9 $2.7 $0.8 $1.2 $5.5 Total Operating Profit $81.5 $126.4 $112.1 $128.4 $448.4 $68.6 $102.6 $65.4 $84.9 $321.5 $58.5 $96.4 $94.3 $117.5 $366.7
Operating Profit as % of Revenues (Reported) Specialty Products & Technologies 19.9% 18.5% 16.2% 15.7% 17.6% 18.9% 15.7% 14.2% 14.0% 15.7% 17.9% 15.8% 15.1% 15.1% 16.0% Equipment & Consumables (5.0%) 11.2% 10.2% 13.7% 8.2% (3.9%) 8.0% 9.6% 13.0% 7.2% (4.2%) 8.3% 10.5% 13.6% 7.7% Total Operating Profit 12.1% 17.2% 16.5% 16.9% 15.8% 10.4% 14.4% 9.8% 11.3% 11.5% 8.9% 13.4% 13.7% 15.2% 12.9%
Operating Profit Growth Specialty Products & Technologies -1.9% -6.4% -15.5% -11.0% -10.0% -10.6% -3.6% 2.9% 10.4% 13.3% 4.9% Equipment & Consumables -21.2% -23.6% -31.9% -9.2% -8.4% -15.0% 3.7% 3.2% 10.5% 5.7% 6.8% Total Operating Profit -9.2% -15.8% -18.9% -41.6% -33.9% -28.3% -14.8% -6.0% 44.0% 38.5% 14.1%
Source: Company data, Credit Suisse estimates
55
14October 2019
En vista Holdings vista Corp Figure 88: Annual EPS ($ in Millions, Except per Share Amounts) Historicals Projections 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Unadjusted metrics 2014-2015 Sales $2,193.0 $2,736.3 $2,785.4 $2,811.0 $2,844.5 $2,793.9 $2,835.9 $2,920.1 $3,030.6 $3,150.0
Cost of Sales $1,079.5 $1,214.4 $1,170.9 $1,182.9 $1,234.8 $1,247.9 $1,276.0 $1,300.7 $1,327.2 $1,368.5 Gross profit $1,113.5 $1,521.9 $1,614.4 $1,628.1 $1,609.8 $1,546.0 $1,559.9 $1,619.3 $1,703.3 $1,781.5
Research & development $82.4 $133.8 $142.8 $172.4 $172.0 $170.5 $171.6 $173.8 $180.4 $187.5 Pro Forma Selling, general & administrative $932.2 $947.3 $975.0 $982.1 $974.4 $996.1 $1,026.2 $1,058.7 Pro Forma EBITDA $538.3 $508.6 $465.5 $394.8 $413.8 $449.5 $496.8 $535.3 Amortization $83.4 $81.7 $90.6 $90.0 $87.0 $82.0 $82.0 $82.0 Depreciation $43.8 $39.7 $39.4 $41.9 $47.2 $49.2 $51.2 $53.2 Pro Forma Operating income $495.6 $468.8 $423.4 $351.48 $366.7 $400.3 $445.6 $482.1 Interest Expense $0.0 $0.0 $0.0 $0.0 $0.0 $5.75 $17.0 $17.0 $17.0 $17.0 Interest Income $0.0 $0.0 $0.0 $0.0 $0.0 $0.14 $0.6 $4.0 $6.0 $6.0 Nonoperating expense/(income), net $1.3 ($0.5) $1.1 ($0.1) ($2.7) ($1.40) $0.0 $0.0 $0.0 $0.0 Pro Forma Pretax income $494.5 $468.9 $426.1 $347.3 $350.2 $387.3 $434.6 $471.1 Pro Forma Tax expense $168.2 $156.6 $101.7 $81.8 $80.6 $89.2 $100.1 $108.5 Pro Forma Net income $203.8 $275.5 $326.3 $312.3 $324.4 $265.5 $269.6 $298.1 $334.5 $362.6
Average basic shares outstanding 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 Average diluted shares outstanding 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7 158.7
EPS, basic $1.28 $1.74 $2.06 $1.97 $2.04 $1.67 $1.70 $1.88 $2.11 $2.29 EPS, diluted $1.28 $1.74 $2.06 $1.97 $2.04 $1.67 $1.70 $1.88 $2.11 $2.29
Tax rate 32.0% 21.4% 34.0% 33.4% 23.9% 23.2% 23.0% 23.0% 23.0% 23.0%
Margin analysis Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales 49.2% 44.4% 42.0% 42.1% 43.4% 44.7% 45.0% 44.5% 43.8% 43.4% Gross profit 50.8% 55.6% 58.0% 57.9% 56.6% 55.3% 55.0% 55.5% 56.2% 56.6% Research and development 3.8% 4.9% 5.1% 6.1% 6.0% 6.1% 6.1% 6.0% 6.0% 6.0% Pro Forma Selling, general & administrative 33.5% 33.7% 34.3% 35.2% 34.4% 34.1% 33.9% 33.6% Pro Forma EBITDA 19.3% 18.1% 16.4% 14.1% 14.6% 15.4% 16.4% 17.0% Pro Forma Operating income 17.8% 16.7% 14.9% 12.6% 12.9% 13.7% 14.7% 15.3% Pro Forma Pretax income 17.8% 16.7% 15.0% 12.4% 12.3% 13.3% 14.3% 15.0% Pro Forma Tax expense 6.0% 5.6% 3.6% 2.9% 2.8% 3.1% 3.3% 3.4% Pro Forma Net income 11.7% 11.1% 11.4% 9.5% 9.5% 10.2% 11.0% 11.5%
Growth analysis Total revenue 24.8% 1.8% 0.9% 1.2% -1.8% 1.5% 3.0% 3.8% 3.9% Cost of Sales 12.5% -3.6% 1.0% 4.4% 1.1% 2.3% 1.9% 2.0% 3.1% Gross profit 36.7% 6.1% 0.8% -1.1% -4.0% 0.9% 3.8% 5.2% 4.6% Research and development 62.4% 6.7% 20.7% -0.2% -0.9% 0.6% 1.3% 3.8% 3.9% Pro Forma Selling, general & administrative 1.6% 2.9% 0.7% -0.8% 2.2% 3.0% 3.2% Pro Forma EBITDA -5.5% -8.5% -15.2% 4.8% 8.6% 10.5% 7.7% Pro Forma Operating income -5.4% -9.7% -17.0% 4.3% 9.2% 11.3% 8.2% Pro Forma Pretax income -5.2% -9.1% -18.5% 0.8% 10.6% 12.2% 8.4% Pro Forma Tax expense -6.9% -35.1% -19.6% -1.4% 10.6% 12.2% 8.4% Pro Forma Net income -4.3% 3.9% -18.2% 1.5% 10.6% 12.2% 8.4% EPS, diluted 35.2% 18.4% -4.3% 3.9% -18.2% 1.5% 10.6% 12.2% 8.4%
Source: Company data, Credit Suisse estimates
56
14October 2019
Holdings Envista Corp Figure 89: Annual Revenues ($ in Millions) Historicals Projections 2016 2017 2018 2019 2020 2021 2022 2023
Total Revenues Specialty Products & Technologies $1,247.0 $1,310.6 $1,369.8 $1,370.3 $1,413.5 $1,484.1 $1,569.5 $1,659.7 Equipment & Consumables $1,538.4 $1,500.3 $1,474.7 $1,423.5 $1,422.4 $1,435.9 $1,461.1 $1,490.3
Total Revenues $2,785.4 $2,810.9 $2,844.5 $2,793.8 $2,835.9 $2,920.1 $3,030.6 $3,150.0
Mix Specialty Products & Technologies 44.8% 46.6% 48.2% 49.0% 49.8% 50.8% 51.8% 52.7% Equipment & Consumables 55.2% 53.4% 51.8% 51.0% 50.2% 49.2% 48.2% 47.3% Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Growth Specialty Products & Technologies 5.1% 4.5% 0.0% 3.2% 5.0% 5.8% 5.8% Equipment & Consumables (2.5%) (1.7%) (3.5%) (0.1%) 1.0% 1.8% 2.0% Total Revenues 0.9% 1.2% (1.8%) 1.5% 3.0% 3.8% 3.9%
Specialty Products & Technologies Reported growth 5.1% 4.5% 0.0% 3.2% 5.0% 5.8% 5.8% FX impact 1.0% 1.0% (2.0%) (0.1%) 0.0% 0.0% 0.0% CC growth 4.1% 3.5% 2.0% 3.2% 5.0% 5.8% 5.8% Acquisitions & divestitures 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Impact of discontinued products 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Internal growth 4.1% 3.5% 2.0% 3.2% 5.0% 5.8% 5.8%
Equipment & Consumables Reported growth -2.5% -1.7% -3.5% -0.1% 1.0% 1.8% 2.0% FX impact 1.0% 0.5% (2.0%) (0.0%) 0.0% 0.0% 0.0% CC growth -3.5% -2.2% -1.4% -0.1% 1.0% 1.8% 2.0% Acquisitions & divestitures 0.0% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% Impact of discontinued products 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Internal growth (3.5%) (2.7%) (1.4%) (0.1%) 1.0% 1.8% 2.0%
Total Reported growth 1.7% 0.9% 1.2% -1.8% 1.5% 3.0% 3.8% 3.9% FX impact (0.5%) 1.0% 0.7% (2.0%) (0.0%) 0.0% 0.0% 0.0% CC growth 2.2% (0.1%) 0.5% 0.2% 1.5% 3.0% 3.8% 3.9% Acquisitions & divestitures 0.2% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% Impact of discontinued products 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Internal growth 2.0% (0.1%) 0.2% 0.2% 1.5% 3.0% 3.8% 3.9%
Total Operating Profit (Reported) Specialty Products & Technologies $226.0 $246.0 $241.3 $215.6 $226.1 $244.0 $274.7 $298.0 Equipment & Consumables $201.2 $152.9 $120.5 $102.4 $109.4 $128.7 $146.1 $157.1 Corporate ($24.4) ($12.3) ($63.4) ($47.0) ($61.3) ($61.2) ($62.3) ($63.4) Adjustments $117.8 $107.1 $150.1 $95.5 $92.5 $88.8 $87.1 $90.4 Total Operating Profit $520.6 $493.8 $448.4 $366.5 $366.7 $400.3 $445.6 $482.1
Operating Profit as % of Revenues (Reported) Specialty Products & Technologies 18.1% 18.8% 17.6% 15.7% 16.0% 16.4% 17.5% 18.0% Equipment & Consumables 13.1% 10.2% 8.2% 7.2% 7.7% 9.0% 10.0% 10.5% Total Operating Profit 4.2% 3.8% 5.3% 3.4% 3.3% 3.0% 2.9% 2.9%
Operating Profit Growth Specialty Products & Technologies 8.8% (1.9%) (10.6%) 4.9% 7.9% 12.6% 8.5% Equipment & Consumables (24.0%) (21.2%) (15.0%) 6.8% 17.6% 13.5% 7.5% Total Operating Profit (9.1%) 40.1% (36.4%) (3.1%) (4.0%) (1.9%) 3.9%
Total Operating Profit (Adj. for Amortization) Specialty Products & Technologies $278.8 $298.4 $300.3 $273.6 $284.1 $302.0 $332.7 $356.0 Equipment & Consumables $231.8 $182.2 $152.0 $134.2 $141.2 $160.5 $177.9 $188.9 Corporate ($24.4) ($12.3) ($63.4) ($46.9) ($64.1) ($68.9) ($70.0) ($71.2) Adjustments $34.4 $25.4 $59.5 $5.5 $5.5 $6.8 $5.1 $8.4 Total Operating Profit $520.6 $493.8 $448.4 $366.5 $366.7 $400.3 $445.6 $482.1
Operating Profit as % of Revenues (Adjusted) Specialty Products & Technologies 22.4% 22.8% 21.9% 20.0% 20.1% 20.3% 21.2% 21.4% Equipment & Consumables 15.1% 12.1% 10.3% 9.4% 9.9% 11.2% 12.2% 12.7% Total Operating Profit 18.7% 17.6% 15.8% 13.1% 12.9% 13.7% 14.7% 15.3%
57 Source: Company data, Credit Suisse estimates
14October 2019
Holdings Envista Corp Figure 90: Balance Sheet ($ in Millions) 2017 2018 2019E 2020E 2021E 2022E Total Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Dec 31-Dec 31-Dec Balance Sheet Cash $0.0 $0.0 $0.0 $0.0 $133.0 $184.8 $184.8 $463.0 $768.0 $1,114.6
Accounts receivable, net $463.1 $459.8 $456.6 $471.5 $411.2 $443.8 $443.8 $447.6 $454.2 $458.9
Finished goods $166.8 $177.2 $172.4 $144.6 $163.3 $163.3 $167.1 $169.6 $171.6
Work in progress $34.3 $33.9 $33.4 $33.4 $33.4 $33.4 $33.4 $33.4 $33.4
Raw materials $77.6 $74.2 $73.9 $73.9 $73.9 $73.9 $73.9 $73.9 $73.9 Inventories $275.7 $278.7 $285.3 $279.7 $251.9 $270.6 $270.6 $274.4 $276.9 $278.9 Prepaid expenses and other current assets $55.7 $48.3 $56.9 $53.0 $53.0 $53.0 $53.0 $53.0 $53.0 $53.0 Total current assets $794.5 $786.8 $798.8 $804.2 $849.0 $952.2 $952.2 $1,238.0 $1,552.1 $1,905.4
Property, plant and equipment, net $231.2 $261.6 $263.2 $280.3 $289.3 $298.2 $298.2 $312.1 $324.9 $335.7 Other long-term assets $81.2 $77.4 $266.9 $258.0 $258.0 $258.0 $258.0 $258.0 $258.0 $258.0 Goodwill $3,370.0 $3,325.5 $3,301.0 $3,321.9 $3,321.9 $3,321.9 $3,321.9 $3,321.9 $3,321.9 $3,321.9 Other intangible assets, net $1,515.9 $1,390.3 $1,351.7 $1,344.6 $1,322.1 $1,299.6 $1,299.6 $1,212.6 $1,130.6 $1,048.6 Total assets $5,992.8 $5,841.6 $5,981.6 $6,009.0 $6,040.3 $6,129.9 $6,129.9 $6,342.6 $6,587.5 $6,869.7
Accounts payable $222.4 $217.4 $177.1 $192.5 $198.5 $226.4 $226.4 $236.4 $245.3 $253.9 Accrued expenses and other liabilities $405.8 $423.6 $423.2 $431.4 $431.4 $431.4 $431.4 $431.4 $431.4 $431.4 Total current liabilities $628.2 $641.0 $600.3 $623.9 $629.9 $657.8 $657.8 $667.8 $676.7 $685.3
Other long-term liabilities $370.0 $374.2 $526.4 $528.8 $528.8 $528.8 $528.8 $528.8 $528.8 $528.8 Long Term Debt $0.0 $0.0 $0.0 $0.0 $1,404.6 $1,404.6 $1,404.6 $1,404.6 $1,404.6 $1,404.6 Total liabilities $998.2 $1,015.2 $1,126.7 $1,152.7 $2,563.3 $2,591.2 $2,591.2 $2,601.2 $2,610.1 $2,618.7
Net Parent investment $4,989.9 $4,901.3 $4,967.6 $4,938.8 $3,519.6 $3,519.6 $3,519.6 $3,519.6 $3,519.6 $3,519.6 Common Stock $0.0 $0.0 $0.0 $0.0 $4.8 $9.6 $9.6 $29.6 $49.6 $70.6 Retained Earnings $0.0 $0.0 $0.0 $0.0 $44.1 $101.1 $101.1 $283.6 $499.8 $752.3 Accumulated other comprehensive (loss)/income $0.6 ($78.2) ($115.9) ($85.4) ($85.4) ($85.4) ($85.4) ($85.4) ($85.4) ($85.4) Total Parent's equity $4,990.5 $4,823.1 $4,851.7 $4,853.4 $3,483.1 $3,544.9 $3,544.9 $3,747.4 $3,983.6 $4,257.1
Non-controlling interests $4.1 $3.3 $3.2 $2.9 ($6.1) ($6.1) ($6.1) ($6.1) ($6.1) ($6.1) Total equity $4,994.6 $4,826.4 $4,854.9 $4,856.3 $3,477.0 $3,538.8 $3,538.8 $3,741.3 $3,977.5 $4,251.0
Total liabilities and equity $5,992.8 $5,841.6 $5,981.6 $6,009.0 $6,040.3 $6,129.9 $6,129.9 $6,342.6 $6,587.5 $6,869.7
Source: Company data, Credit Suisse estimates
58
14October 2019
Holdings Envista Corp Figure 91: Statement of Cash Flows ($ in Millions) Historicals Projections 2017 2018 2019E 2020E 2021E 2022E Total Total 31-Mar 30-Jun 30-Sep 31-Dec Total 31-Dec 31-Dec 31-Dec Statement of Cash Flow
Net income $301.1 $252.9 $30.2 $56.8 $44.1 $57.0 $188.1 $182.6 $216.1 $252.5
Depreciation $39.7 $39.4 $9.8 $10.0 $11.0 $11.0 $41.9 $47.2 $49.2 $51.2
Amortization $81.7 $90.6 $22.5 $22.5 $22.5 $22.5 $90.0 $87.0 $82.0 $82.0 Share based compensation $12.3 $13.3 $4.1 $4.8 $4.8 $4.8 $18.5 $20.0 $20.0 $21.0 Other $6.8 $0.4 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Non-GAAP NI adjustments and other $0.0 ($22.2) $7.7 $4.7 $0.0 $0.0 $12.4 $0.0 $0.0 $0.0 Total $441.6 $374.4 $74.3 $98.8 $82.4 $95.3 $350.9 $336.7 $367.3 $406.7
Change in deferred income taxes ($58.2) $1.7 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Change in accounts receivable, net ($18.9) ($3.8) $1.2 ($14.2) $60.3 ($32.6) $14.7 ($3.9) ($6.6) ($4.7) Change in inventories ($30.5) ($8.9) ($7.7) $6.0 $27.8 ($18.7) $7.4 ($3.8) ($2.5) ($2.0) Changes in accounts payable ($0.5) ($3.8) ($39.4) $15.0 $6.0 $27.8 $9.5 $10.1 $8.8 $8.6 Change in prepaid expenses and other assets $17.3 $13.8 ($14.9) $3.0 $0.0 $0.0 ($11.9) $0.0 $0.0 $0.0 Change in accrued expenses and other liabilities $8.3 $26.7 ($22.5) $13.1 $0.0 $0.0 ($9.4) $0.0 $0.0 $0.0 Net cash from operating activities $359.1 $400.1 ($9.0) $121.7 $176.6 $71.8 $361.1 $339.2 $367.0 $408.6
Purchases of PP&E ($48.9) ($72.2) ($15.6) ($26.5) ($20.0) ($20.0) ($82.1) ($61.0) ($62.0) ($62.0) Cash paid for acquisitions $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Proceeds from sales of PP&E $0.1 $0.0 $0.3 $0.1 $0.0 $0.0 $0.4 $0.0 $0.0 $0.0 All other investing activities ($6.1) ($3.3) $0.0 ($0.2) $0.0 $0.0 ($0.2) $0.0 $0.0 $0.0 Net cash used in investing activities ($54.9) ($75.5) ($15.3) ($26.6) ($20.0) ($20.0) ($81.9) ($61.0) ($62.0) ($62.0)
Net transfers to Parent ($215.2) ($324.6) $24.3 ($95.1) ($1,419.2) $0.0 ($1,490.0) $0.0 $0.0 $0.0 Proceeds from issuance $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Proceeds from debt $0.0 $0.0 $0.0 $0.0 $1,404.6 $0.0 $1,404.6 $0.0 $0.0 $0.0 Repayment of debt $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Payment for purchase of noncontrolling interest and Other ($89.0) $0.0 $0.0 $0.0 ($9.0) $0.0 ($9.0) $0.0 $0.0 $0.0 Net cash used in financing activities ($304.2) ($324.6) $24.3 ($95.1) ($23.6) $0.0 ($94.4) $0.0 $0.0 $0.0
Net change in cash $0.0 $0.0 $0.0 $0.0 $133.0 $51.8 $184.8 $278.2 $305.0 $346.6 Beginning balance $0.0 $0.0 $0.0 $0.0 $0.0 $133.0 $0.0 $184.8 $463.0 $768.0 Ending balance $0.0 $0.0 $0.0 $0.0 $133.0 $184.8 $184.8 $463.0 $768.0 $1,114.6
Free Cash Flow Cash flow from operations $359.1 $400.1 ($9.0) $121.7 $176.6 $71.8 $361.1 $339.2 $367.0 $408.6 CapEx ($48.9) ($72.2) ($15.6) ($26.5) ($20.0) ($20.0) ($82.1) ($61.0) ($62.0) ($62.0) Free Cash Flow $310.2 $327.9 ($24.6) $95.2 $156.6 $51.8 $279.0 $278.2 $305.0 $346.6
% of adj. net income 103.0% 129.7% (81.4%) 167.6% 355.3% 90.9% 148.3% 152.4% 141.1% 137.2% % of EBITDA 58.1% 66.9% (31.3%) 83.6% 158.2% 43.8% 68.1% 113.6% 102.8% 100.1% Source: Company data, Credit Suisse estimates
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Credit Suisse PEERS
PEERS is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers, and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage. For more information, see our November 2016 PEERs report, titled, A Chain Reaction: Supply Chain Strategies.
Figure 92: NVST PEERs Map
Source: Company data, Credit Suisse
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Companies Mentioned (Price as of 11-Oct-2019) 3M (MMM.N, $158.1) Abiomed (ABMD.OQ, $169.64) Align Technology, Inc. (ALGN.OQ, $200.16) Coltene (CLTN.S, SFr77.8) Cooper Companies (COO.N, $293.89) DENTSPLY-SIRONA (XRAY.OQ, $54.11) Danaher Corporation (DHR.N, $138.72) DexCom, Inc. (DXCM.OQ, $155.35) Edwards Lifesciences Corp. (EW.N, $227.11) Envista Holdings Corp (NVST.N, $27.93, NEUTRAL[V], TP $30.0) Fortive (FTV.N, $67.95) General Electric (GE.N, $8.8) Henry Schein (HSIC.OQ, $62.94) NuVasive, Inc. (NUVA.OQ, $63.71) Patterson Companies (PDCO.OQ, $17.09) SmileDirectClub (SDC.OQ, $11.13) Straumann (STMN.S, SFr844.4) Zimmer Biomet Holdings, Inc (ZBH.N, $136.44)
Disclosure Appendix Analyst Certification I, Erin Wilson Wright, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Envista Holdings Corp (NVST.N)
NVST.N Closing Price Target Price Date (US$) (US$) Rating 22-Sep-19 28.77 R * Asterisk signifies initiation or assumption of coverage.
REST RICT ED
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the re levant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia st ocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the rele vant country or regional benchmark (India
- S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Envista Holdings Corp (NVST.N) Method: Our Neutral rating and $30 target price are predicated on a 14.7x 2020E EV/EBITDA multiple, a premium to Dentsply Sirona (13.8x), with line-of-sight to improving profitability near term, but a discount to its Dental Manufacturer peer group average (15.7x), as we await evidence of more meaningful contributions from new products and other internal initiatives.
Risk: Risk to our Neutral rating and $30 target price include deterioration in the global macroeconomic environment; significant developments or uncertainties in trade policies and tariffs; competition; loss of relationship(s) in the distribution channel; lack of visibility on stocking dynamics across the distribution channel; unsuccessful development and/or commercialization of new products; regulatory matters; disruption of product manufacturing; inability to integrate future acquisitions; and foreign exchange fluctuations. Danaher’s residual 80% stake may also serve as an overhang.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): NVST.N, ALGN.OQ, SDC.OQ, DHR.N, MMM.N, ZBH.N, GE.N, FTV.N Credit Suisse provided investment banking services to the subject company (NVST.N, ALGN.OQ, SDC.OQ, DHR.N, MMM.N, ZBH.N, GE.N, FTV.N) within the past 12 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): DHR.N, MMM.N, ZBH.N, GE.N
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14 October 2019 142019 October Credit Suisse has managed or co-managed a public offering of securities for the subject company (NVST.N, SDC.OQ, DHR.N, MMM.N, GE.N, FTV.N) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): NVST.N, ALGN.OQ, SDC.OQ, DHR.N, MMM.N, ZBH.N, GE.N, FTV.N Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NVST.N, STMN.S, HSIC.OQ, DHR.N, MMM.N, ZBH.N, GE.N, FTV.N) within the next 3 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non- investment-banking, securities-related: DHR.N, GE.N Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non- investment-banking, non securities-related: MMM.N, ZBH.N, GE.N Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): MMM.N, ALGN.OQ, CLTN.S, COO.N, XRAY.OQ, DHR.N, DXCM.OQ, EW.N, NVST.N, FTV.N, GE.N, HSIC.OQ, NUVA.OQ, PDCO.OQ, SDC.OQ, STMN.S, ZBH.N A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (NVST.N, ALGN.OQ, SDC.OQ, DHR.N, MMM.N, ZBH.N, GE.N, FTV.N) within the past 12 months. As of the date of this report, Credit Suisse beneficially own 1% or more of a class of common equity securities of (STMN.S, CLTN.S, DXCM.OQ). Credit Suisse acted as financial advisor to 3M Co in their acquisition of Acelity, Inc. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=462683&v=- 236ckj2ivkhe1xebmxm17cs3s . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. This research report is authored by: Credit Suisse Securities (USA) LLC ...... Erin Wilson Wright ; Katie Tryhane ; Haley Christofides ; Matthew Urbik Important Credit Suisse HOLT Disclosures The HOLT methodology does not assign ratings or a target price to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variables may also be adjusted to produce alternative warranted prices, any of which could occur. The warranted price is an algorithmic output applied systematically across all companies based on historical levels and volatility of returns. Additional information about the HOLT methodology is available on request. CFROI, CFROE, HOLT, HOLT Lens, HOLTfolio, "Clarity is Confidence" and "Powered by HOLT" are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
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