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Edited Transcript of NVST.N earnings conference call or presentation 24-Oct-19 3:00pm GMT

Q3 2019 Envista Holdings Corp Earnings Call

Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Envista Holdings Corp earnings conference call or presentation Thursday, October 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amir Aghdaei

Envista Holdings Corporation - President, CEO & Director

* Howard H. Yu

Envista Holdings Corporation - Senior VP & CFO

* John Bedford;Vice President of Investor Relations

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Elizabeth Hammell Anderson

Evercore ISI Institutional Equities, Research Division - Associate

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Jonathan David Block

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Mason E. Austen

Morgan Stanley, Research Division - Research Associate

* Michael Aaron Cherny

BofA Merrill Lynch, Research Division - Director

* Nathan Allen Rich

Goldman Sachs Group Inc., Research Division - Research Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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My name is Laurie, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Envista Holding Corporation's Third Quarter 2019 Earnings Results Conference Call. (Operator Instructions)

I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

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John Bedford;Vice President of Investor Relations, [2]

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Hello, everyone, and thanks for joining us on the call. With us today are Amir Aghdaei, our Chief Executive Officer; and Howard Yu, our Chief Financial Officer.

I'd like to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations, and will remain archived until our next quarterly call. A replay of this call will also be available until November 5, 2019.

During the presentation, we will describe some of the more significant financial measures to Envista. Envista operated as part of Danaher Corporation until its separation in September 2019, and historical financial measures prior to the separation presented in this announcement were derived from Danaher's accounting records and are presented on a standalone basis.

During the presentation, we will also describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describing additional factors that impacted year-over-year performance are available on our website. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the continuing operation of the company in the third quarter of 2019, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals or are available only in certain markets.

During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements except as required by law.

With that, I'd like to turn the call over to our Chief Executive Officer, Amir.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [3]

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Thanks, John, and welcome, everyone, to Envista's first earnings call. We are pleased with the results of our first quarter as a public company. The team has made traction on several cost initiatives resulting in earnings, margins and cash flow that exceeded our expectations.

We began the process of building Envista in 2016 and have made tremendous progress since the consolidation, simplification and reinvesting in this business. In September 2019, we completed our IPO and now listed in the New York Stock Exchange. This event marked another milestone in our journey to transform Envista.

I would like to thank our 12,000 employees for their hard work over the past several months to make this happen. I would also like to thank Danaher for the opportunity to stand on our own, as well as dedication and support from the many Danaher associates who helped us along the way.

Before moving into the details, I would like to spend a few minutes describing Envista, our purpose and our priorities. Envista is a global dental company with $2.8 billion in annual revenue and leading positions in traditional equipment and consumables as well as specialty products and technologies, which include our implants and orthodontics business. Over 60% of our portfolio is composed of specialty consumables and imaging. We generally have attractive growth rates and profit margins.

At Envista, our purpose is to partner with professionals to improve lives. We know that dental professionals do more than creating healthy, beautiful smiles. They create confidence. To achieve their goals, they need a champion who will be there for them. At Envista, we're uniquely positioned to be their champion. Our combination of continuous improvement, the bias toward action, a deep respect for professionals we serve, innovative product and services embolden us to partner with dental professionals. Our comprehensive product portfolio enables general practitioners and specialists to diagnose, treat and prevent dental conditions as well as improving aesthetics of the human smile.

In addition, our priorities are focused around accelerating growth, expanding margins and strengthening our portfolio within Envista Business System, or EBS, as our guide for continuous improvement. Our EBS growth tools are helping to improve our commercial execution and accelerate the cadence of innovation in high-impact growth areas, such as orthodontic clear aligners, dental implants and digital workflows. We anticipate these innovations and our investment in high growth or emerging markets will improve our growth rate over time. We're already starting to see the impact of this work in China and in our orthodontic business.

Executing on EBS lean principles is helping us simplify and consolidate our organization, brands and facilities. These actions have yielded more than $90 million in cost savings since 2016, which we have reinvested toward innovation and commercial resources. Over the next 2 years, we are targeting a further $60 million in cost savings. We believe there remains meaningful opportunity to expand margins as growth rates in higher-margin specialty businesses accelerate and additional product productivity savings are realized.

Finally, being a separate public company gives us the agility to transform our portfolio inorganically. Our strong balance sheet and cash flow provide us the flexibility to enhance our strategic position through M&A. In addition to a strong M&A team at Envista, we are particularly fortunate to have senior Danaher executives on our Board, who have extensive strategic and deal-making experiences.

Now let's turn to our performance in the third quarter. Sales declined 3% to $659 million. Core growth decreased 0.5% primarily due to lower demand in our equipment business and transformation in our value implant business. Envista's core growth is adjusted for the impact from currency, acquisitions and divestiture and discontinued products. In the third quarter, revenue growth was adversely impacted 1% from discontinued products and further 1.5% from foreign currency.

Geographically, developed market decreased at low-single-digit rate, with weaker-than-anticipated market conditions, primarily within our equipment and consumable businesses. This was particularly offset by another quarter of double-digit growth in China, which has been a success story for Envista. China has grown at double-digit rate for 4 consecutive [rates] and now has annualized revenue to excess of $225 million. We believe there is tremendous opportunity to continue to expand not only in China but also in other emerging markets, which enhance Envista's future core revenue growth rate.

Gross margin declined 40 basis points to 55.7% due to a decrease in core revenue and continued investment in capacity building. Operating profit margin decreased 10 basis points to 11.9% as our savings initiatives gained traction and our spending moderated.

Our free cash flow for the third quarter was $79 million, a 12% increase over the comparable period in 2018. Our free cash flow to net earnings conversion ratio was 128%. This significant cash flow, a priority for Envista, and our modest debt levels provide us with ample capacity to pursue our M&A strategy.

Third quarter adjusted diluted non-GAAP net EPS was $0.47, which exceeded our expectations.

Turning now to our 2 business segments. Our Specialty Products & Technologies segment includes our orthodontic business, Ormco, and our implant business, Nobel Biocare Systems. Segment revenues were flat, while core revenues increased 2.5%. Operating profit margin improved 100 basis points to 17.2%, largely due to cost reduction, margin improvement within our implant business.

Ormco continued to experience a strong demand during the quarter and has grown at mid-single-digit rate during the first 3 quarters of 2019 driven by steady cadence of new products and a strong commercial execution.

Payment system revenues increased at a double-digit rate in the quarter led by adoption of the next generation of DQ2 system, which has increased by over 20%.

We are also excited about the ability to further accelerate Ormco's growth with Spark, our full-scale aligner product. Spark can treat a range of malocclusions using an advanced software system, flexible attachments and unique material. The Spark software allows orthodontists to visualize tooth movement and easily address common problems such as crowding and spacing. The TruGEN material used to mark -- to make Spark is transparent, minimize stain and delivers advanced force retention. This combination of our proprietary manufacturing process helps provide patients with an effective, more comfortable and less noticeable clear aligner solution.

After a successful launch in Australia last year, a group of orthodontists in the U.S. are previewing Spark as part of our phased expansion plan focused on our core orthodontic customers. We anticipate that our clear aligner business will be a more meaningful contributor to revenue in 2020 as we continue to onboard new doctors and expand case capacity.

Our implant business increased slightly as growth was improved by a transformation in our value implant business, where we're in the process of consolidating brands outside the U.S. and China. We anticipate this value brand rationalization largely to be complete by the end of 2019.

The Nobel Biocare team has made tremendous progress toward innovation, challenging traditional treatment techniques and paving the way for patient and practitioner-centric solutions. During the quarter, we highlighted the N1 implant system at the European Association of Osseointegration in Lisbon. N1 is a patented system that supports the complete implant workflow from planning to prosthetic delivery. It includes new techniques, like OsseoShaper, that should allow clinicians to treat patients with 2 easier-to-use lower-speed instrument, which we believe is ultimately result in less discomfort and faster healing time for patients. We are excited about the growth opportunity N1 will provide our implant portfolio.

Our Equipment & Consumables segment, anchored around the KaVo and Kerr brands, offers a broad portfolio of products and services in imaging, dental office equipment and general consumables. Reported revenue decreased 5.5%, and core revenues were down 3%, led by our equipment business as end customer demand weakened in the developed markets. This was partially offset by low single-digit growth within our traditional consumables business.

Equipment & Consumables operating profit margin declined 110 basis points to 9.1% largely due to decrease in revenue. As part of our transformation process, we have made tremendous improvement, rightsizing our cost structure, reducing our manufacturing footprint and rationalizing our products and brands. The team remains focused on further reducing our cost portfolio to drive margin expansion as business returns to growth in 2020.

In closing, we are pleased with the results of our first quarter as a public company. Our team has made traction in a number of cost initiatives resulting in earnings, margins and cash flow that exceeded our expectations. As we begin our journey as a separate company, our strategic priorities are centered around accelerating growth by investing in high-impact areas such as clear aligners, implant in emerging markets, improving margins and transforming our portfolio. We have made good progress over the past several years toward enhanced business performance and look forward to updating you as we move forward.

We are initiating fourth quarter GAAP diluted net EPS guidance between $0.37 and $0.41, and fourth quarter non-GAAP adjusted diluted EPS guidance between $0.47 and $0.51. This anticipates that core growth will be down low single-digit, reflecting the recent weaker equipment demand. For the full year, we anticipate diluted net EPS to be in the range of $1.62 to $1.66, and non-GAAP adjusted diluted net EPS between $1.73 and $1.76.

We're excited about our prospects at Envista. We feel ready, energized, as we begin our journey as a separate public company.

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John Bedford;Vice President of Investor Relations, [4]

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Thanks, Amir. That concludes our formal comments. Laurie, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tycho Peterson of JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Amir, I think most people are honing in on your comments on the equipment side and what looks like a little bit of a deterioration versus what you were modeling. Can you talk a little bit more about what's going on in the channel there? And what gives you confidence that we could see recovery heading into next year?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [3]

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Thank you, Tycho. Given destocking action and portfolio action that we have taken over the last several years, business is in a much better place now than it has ever been. We're impacted by slightly lower demand in equipment for Q3, and we anticipate that is going to continue in Q4. We anticipate the business to improve as we move into 2020.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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And I guess along those lines, can you also comment on what you saw in the channel on consumables? I mean given where we've been on this journey of destocking and distributor dynamics, can you just talk a little bit about what you're seeing there?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [5]

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We do not anticipate any inventory-related issues as we go forward. We think we have good insight into the sell-out and sell-in, and we have seen positive impact in our consumable business due to actions that we have taken in the past several quarters.

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [6]

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And Tycho, this is Howard. Maybe to comment as well. We are seeing stability there on the consumables side there. And also, the one thing to keep in mind is our outlook for 2020 is not changing. We still have low single-digit growth, what we previously talked about. We feel really good about the setup, largely around the NPIs and Spark, as that becomes more meaningful in 2020 as well as our emerging markets continuing to staying strong.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Okay. And then on the divestiture front, this is something you hadn't talked a lot about at the time of the IPO, but I think there was always some talk that you would go down this path. Can you talk a little bit about where we are in that process? I guess you said you'll be done on the value implant side outside the U.S. by year-end.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [8]

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Yes. So the 2 questions, one is about divestiture; the other one, if I'm not mistaken, on the value side. The value implant, we have gone through a rationalization and consolidation outside the U.S. and China. Our intention is to have a clear position, [or by] with our Nobel premium position and a geography with our value position. That transformation is undergoing. We expect that most of that to be behind us by end of the year.

On the portfolio management, we have evolved our business into more specialty, higher margin, higher-consumer business, and we anticipate to continue that over time. Breadth of our portfolio is advantaged, especially in emerging markets and DSOs. Of course, if we decide to do any moves to be more modest action, [with a clear] of improving our core growth and our margin.

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Operator [9]

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Your next question comes from the line of Jeff Johnson of Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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Sorry, can you hear me now?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [11]

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Yes, loud and clear.

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Operator [12]

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All right. There is no response from that line. Your next question comes from Elizabeth Anderson of Evercore ISI.

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Elizabeth Hammell Anderson, Evercore ISI Institutional Equities, Research Division - Associate [13]

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Congrats on the first quarter out of the gate here. I'm just wondering if you could comment a little bit on the -- obviously, you had a nice margin improvement in the quarter. And any changes as to how you're viewing that piece of margin over the next couple of quarters? If you could comment on that.

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [14]

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Yes, Elizabeth, thanks. We're clearly pleased with the traction that we've seen here in the quarter around margins. And we see that as a result of some of the moderations around the investments. That said, we continue to -- full speed ahead with regards to investing in our innovation, our NPIs. We want to make sure that we get those to the market, consistent with what we've indicated in the past.

As it relates to 2020, we'll provide some more detailed guidance when we get to Q4 earnings. But again, we feel really good about our positioning here coming out of Q3.

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Elizabeth Hammell Anderson, Evercore ISI Institutional Equities, Research Division - Associate [15]

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Okay. Perfect. That's helpful. And just in regards to Spark, how are you viewing the transition from sort of your, like, key opinion leaders with that product to sort of a more generalist orthodontist, like, audience? Is it, there are certain factors? Is it, production is gating it? Could you sort of talk us through like what are the milestones you're sort of hitting on the path, expanding that product more broadly?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [16]

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Thank you. We have learned this from Danaher and we have experienced that in the past, probably 12 to 18 months, a lot more, obviously, that a phased approach would serve us well, serve our customers well. And that approach talks about taking a small group of people, working with them very closely, in a very intimate relationship, answering their needs, making sure that they are really productive and we are responding to their needs very quickly.

In the case of Spark, what we did with some of the leading customers that we have a very close relationship for years, we used that as an opportunity to really develop a DBS-EBS model, from training to the third-case ramp. The team went through extensive work. This is what continuous improvement comes in place to demonstrate that we can really change the office workflow. When we optimized that, when it is in place, we are adding more to that group. We are signing up the next group and the next group. Our intention is to follow that phased approach month after month, quarter after quarter. Spark would be a meaningful growth factor for us in 2020 and years after that. Our intention is to make sure every customer of ours is successful in that process. We want to make sure the team demonstrate their ability, that we are able to create something that it is sustainable and make a difference for our customers and the patients over time.

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Operator [17]

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Your next question comes from Jeff Johnson of Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Can you hear me now?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [19]

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Yes. Loud and clear, Jeff.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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All right. Yes. Sorry about that, guys. So Amir, that was helpful on Spark there, on the gating and time line. Could you maybe do the same for N1, just how should we think about U.S. approval? How does the European launch broaden out here over the next few quarters? Just any insight on N1 would be helpful.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [21]

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Thank you, Jeff. We believe N1 is a major innovation in implant procedure. [Adds versus] large barriers for implant procedures, which in our opinion, are patient fear, procedure time, total treatment time or time to teeth. This is because of different protocol that we're using: We're using 2 drills versus 6, in some cases, more than 6; low-drill spit; 50 RPMs; and the design is completely different than what we have had before. It's patented. We have had it in hands of some of our key customers that have proven and demonstrated to us that this is something that -- it is a game changer. We believe that this is a significant positive change for dental implant procedures and implant adoption.

We anticipate, as I mentioned during the remarks, we have demonstrated that during Q3, to a large number of customers -- we anticipate that the first launch in EU in 2020, where we already have CE mark approved, and other geographies to follow. We're following the standard procedure of working with FDA. We want to make sure that we built infrastructure and capacities to be ready. We will follow a very similar process as I outlined with the Spark, phased approach. Taking a small number of our key customers, make them successful, take the next phase and continue to expand it over time. Our intention is to improve the growth of our implant business year-after-year. Spark -- I'm sorry, N1 plays a really important role in that transformation.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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That's helpful. And then maybe as a follow-up, I just want to make sure, you have discontinued products that you're now kind of quantifying for us. That is separate from the rationalization efforts. Those are 2 different buckets, I think, we're talking about. I just want to confirm that.

And then I also just want to get a sense, Amir. My gut is that you have some maybe control of the timing of those rationalization efforts. Maybe you're being a little more aggressive here trying to set 2020 up to just look as clear and clean of a picture for investors as possible. Is that a fair way of thinking about what's going on here in the near term on some of those rationalization efforts?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [23]

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Yes. So Jeff, let me answer that first part of the question as it relates to the discontinuance. These are products that we are no longer marketing, and then that's a differentiation between that and rationalization. So when we talk about, let's say, the value implant rationalization, that does not feed into the discontinued conversation that we're talking about here. That rationalization is in areas outside of the U.S. and China, and specifically targeting areas where we have multi-brands of value products. And so we've decided that our go-to-market strategy there was to emphasize one value product versus multiple products. And so that's the rationalization that we're talking about. That will continue to be baked into our core.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [24]

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Jeff, to answer your question about being aggressive in here. Being part of Danaher, we had an opportunity to gain support for aggressively -- go after this brand consolidation, and we continued that through the past 12 and 18 months. The rationalization of our value implant continues by end of this year. And as you described, we are trying to be aggressive in going through that process as quickly as possible. But our expectation is, as we have said before, for 2020, a low-single-digit growth and improvement in our margin with a continuous improvement years after that.

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Operator [25]

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Your next question comes from the line of Nathan Rich of Goldman Sachs.

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Nathan Allen Rich, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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Great. Amir, you had mentioned the inorganic opportunities you see. How quickly do you think the organization can kind of go after those and deploy capital towards M&A?

And can you kind of just describe, from your vantage point, what you feel like the pipeline looks like at this point?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [27]

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Very good. Thank you, Nathan. To begin with, our bias is towards deploying free cash flow towards M&A to improve growth and margins. You have seen in our Q3 performance that our intention of freeing up capital gives us an opportunity to reaccelerate that approach is exactly what we want to do. With our Board coming onboard, having tremendous amount of experience in our Board, I expect that they can help us in order to accelerate our approach in that front.

We will likely have a very modest dividend, but it's still to be determined with the full Board. We have mentioned in the past that $100 million to [$115 million] new revenue at 3% to 5% of our inorganic growth. We have evolved the business to be a lot more into specialty, higher margin, higher-consumable business, and we anticipate that that will continue over time.

We have, as far as Danaher, have a standard process in place for M&A. We do cultivation. We have continued to do cultivation in the past 3, 4 years. We have a [rigor] in place on a monthly basis to take a look at the top priorities. The head of our business development, myself, the head of businesses are actively involved in this process. We continue to look for opportunities for collaboration and partnership, and we feel really good now, being independent, have the agility, have access to the cash, have a Board that is supporting us to really improve that moving forward. Our intention is to build a better Envista over time. M&A will help us to accelerate that model.

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Nathan Allen Rich, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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I appreciate those comments. Howard, I wanted to follow up on just the -- on margins and just the guidance for 4Q. It seems to imply margins are maybe kind of flat to down slightly on a sequential basis. Is that a fair way to look at it? And can you maybe just kind of talk through the dynamics there as we look kind of the 3Q to 4Q margins?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [29]

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Yes. Sure. Thanks, Nate. We're actually encouraged by the better-than-anticipated traction that we got here in the quarter in Q3. And actually, I think that our sequential improvement slightly on the margin side. But we are committed, as we indicated earlier, to our investment in our business and making sure that we get those NPIs launched consistent with what we've said in the past. And so we will continue to focus there on the R&D side.

The one thing to keep in mind as well, Nate, is that there are some corporate costs that get layered in here in the quarter so that, that might be impacting some of that calculation as well. But we think that the actions that we've taken overall, we're confident and we're going to see those expanding our margins and we'll see that read through in 2020 as well.

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Operator [30]

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Your next question comes from the line of Brandon Couillard of Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [31]

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Amir, back on the equipment business. Curious if you could share any color with us in terms of whether there was any differentiation across the portfolio between imaging treatment centers, handpieces? And specifically curious if you've seen perhaps the pricing environment and imaging deteriorate a little bit, or whether this is just more a function of unit demand?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [32]

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Yes. Hi, Brandon, I'll let Howard to comment on the pricing. But let me answer the question between various segments. Our imaging business is in a really good shape. We started the transformation of Envista by focusing on imaging. As you know and we have communicated at one point, we have over 7 different brands in imaging. We started the consolidation back in 2016, mid-2016, '17, and step-by-step is our consolidating brand, R&D center, software capabilities and putting products out there that has been very well received. Our OP 3D system is a scalable system, addressing the need of practitioners, and they can scale that up as they need to and has been a very positive outlook and impact in the market. We continue to be excited about the imaging possibilities. We see imaging as an important part of our overall digital workflow with clear connection to our implant as well as the ortho business.

We have also spent a significant amount of resources and energy around software. DTX is an important part of our differentiation and growth strategy as we go forward. We have been able to demonstrate that by releasing very similar to what we talked on Spark and N1 in a small group of people. Demonstrating the capabilities, we're in daily contact with them, we take their input, revise the process moving forward. Our intention is to have an open infrastructure, but all of our products, step-by-step, have DTX integrated into them as we go forward.

Our consumable business has seen a modest growth over time and has stabilized, as Howard talked about. Inventory challenges that we had to deal with in '17 and '18 to a large degree is behind us. I feel good about the team's progress on consumable side through promotional activities, working closely with our partners, creating demand and meeting the requirement of the market. There's ample opportunities on the consumable side in emerging markets.

And we are really excited about what we see happening in China specifically, both on the imaging as well as on the consumable side. We have been spending energy in building product in China to meet the demand of the local customers, and we're beginning to outcome -- to see the outcome of those made in China for China now.

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [33]

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I think Brandon, maybe just to answer your question a little bit on the pricing. Consistent with what we've seen over the last few quarters, pricing is down modestly, let's call it, about 100 bps. I will note, though, that on the premium side of our implants, we saw a very modest uptick on the pricing here in the quarter. And really goes to emphasize the importance for us, in this environment, to really have a solid cadence on NPIs and then also being selective, obviously, around our promotions to maximize growth.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [34]

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And then just one question on high-growth markets. It looked like those were up about, about low single digits, I think, in the period. Was there a tough comp there, perhaps in some of those non-Chinese markets? And what are you penciling in for those areas in the fourth quarter?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [35]

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We saw a little bit of weakness on the equipment market specific in Latin America, and we expect that would continue throughout Q4. But our specialty businesses, not only in China, in other geographies, continue to make progress. We have made significant investment in the past several years: build the infrastructure, build the capabilities, registration, training and education, try to replicate the China model in other geographies. We think high-growth market, emerging market, is going to be an important part of our growth story as we go forward. And we're excited about it.

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [36]

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Yes. And Brandon, just as it relates to high-growth markets going forward. We do anticipate that to continue to grow on a more consistent basis at the mid-single digits to even high single digits. Of course, as you mentioned, China leading the way with another solid double-digit performance.

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Operator [37]

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Your next question comes from the line of Erin Wright of Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [38]

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Great. A follow-up on the equipment question before. I guess can you parse out exactly what you're seeing in the North America market, in particular, just given some of the sensitivity in that market of late? And then also, I guess, on that front, also on the consumable side as well, if you could comment on the North American trends specifically, that would be great.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [39]

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Thank you, Erin. Despite the headline and macro uncertainties, fundamentals really haven't that -- changed that much. We're not seeing a broad-based sign of weakness in the consumable specialty businesses. We've seen some slowing in developed market, basically in our equipment -- basic equipment business. Value implant rationalization is not a macro event. It's something that we have internally have taken on, and we're going through that transformation. Geographically, we continue to see growth in emerging markets, but in a much slower pace in U.S. and Western Europe. Developed markets, weaker in equipment business, a little bit sluggish, but a stable consumable business.

We think the underlying trend in the specialty market remains solid. Our ortho business had another quarter of mid-single-digit growth, and implant -- ex value implant rationalization is in a really good place. And we think we can transition, as we have done, continue that transformation over time to deliver what we expect in 2020 in the low single-digit and better margin performance as we go forward.

Our expectations are not -- are modest around our equipment -- traditional equipment and consumable business. We do not expect a radical shift over time that built our model assuming that that will continue, and we will see improvement in our growth and margin in spite of that challenges that may be ahead.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [40]

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Okay. Great. And then is there any update on the X Pro intraoral scanner and when you think that launch could be? How should we think about the competitive positioning of that product? And should we also anticipate you will showcase new product launches kind of at Greater New York in the upcoming months?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [41]

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Thank you, Erin. IOS, intraoral scanner, is an important part of our digital ecosystem and a category that we are committed to having an offering. We started this, and we believe that it is really important to have a workflow integration. We believe DTX-IOS imaging integrated together would be a key differentiation over time. It allows practitioners to have a simple workflow from diagnostic to planning, to execution, and see the productivity element of it as well as the clinical outcome that they're looking for.

As with other major products that we talked about already, we have found the most effective way of launching a products is a phased rollout. We're going to continue to update you. Pro today is a hands -- is in hands of a small group of customers. They have given us feedback, they're improving the product, and we're going to continue to expand that as we go forward.

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Operator [42]

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Your next question comes from the line of David Lewis of Morgan Stanley.

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Mason E. Austen, Morgan Stanley, Research Division - Research Associate [43]

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This is Mason on for David today. I wanted to follow-up quickly on margins. I was wondering if you could parse out or provide a little bit more color on some of the components of the expansion here in the third quarter. For example, how much of that was driven by sales mix, cost initiatives, price, et cetera.

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [44]

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Yes. Hold on just a sec here. Yes. I think that a significant portion of the margin improvement comes by way of the cost savings.

We talked about that in the past, talking and targeting the $90 million historically and going forward, really, the $60 million. And so we see that coming in 3 buckets. One of them would be around productivity. And we're seeing some of that come through, largely around the manufacturing, consolidation as well. And we're seeing some of that yield forward as well. And then we see some indirect rationalization. We talked about that historically. We have over 20,000 suppliers. And so we're working through that process. And obviously, some just straight spend control as well. And we're also seeing some material savings. So I'd say about 1/4 of that savings was coming by way of purchasing price variance as well as value engineering on the cost side. I mean overall, we're seeing some of that coming by way of just the growth in specialty, and then clearly, the equipment and consumables being down a little bit as well.

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Mason E. Austen, Morgan Stanley, Research Division - Research Associate [45]

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Great. That's very helpful. And then just as a quick follow-up on price. Our understanding is that your price in your guidance is modeled at status quo. And if you look at the past several quarters, price has gotten slightly worse, from 50 bps to 100 bps. I guess do you see this as the new status quo at 100 bps per quarter? And as a follow-up, do you see this as a risk at all to 2020 guidance?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [46]

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Now we don't see this as a risk to 2020 guidance. I think we've baked in our price assumptions as well. Nathan (sic) [Mason], we do see that pricing here is about 100 bps down, maybe a little bit higher on the equipment and consumables business. But as I indicated, on the premium side of our implant, we had a slightly higher pricing. And again, the importance in this environment is clearly having a solid cadence around NPIs, and we believe that that is in our game plan.

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Operator [47]

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Your next question comes from the line of Jon Block of Stifel.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [48]

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Maybe I'll just start off on the traditional consumable number. Amir, I think you said up low single digits. It seems like a pretty good number. I'm just curious, how do you think this is faring relative to industry? Is that actually, call it, a share gaining number if you isolate the traditional consumables? And then is there anything to sort of call out for general trends across the industry guys as the quarter progressed? And then I've just got a quick follow-up.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [49]

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Yes. Thank you, Jon. We think on the categories that we participate on traditional consumable, we're keeping pace with the market. As you well know, $7 billion market, many categories are on restorative, endo, infection prevention and so on and so forth. On those categories that we are present, we have put energy around innovation, improving our operational capabilities, improving our commercial capabilities. We're keeping track with the market. We don't anticipate a significant change in the upcoming quarter or next year.

We don't expect that to become a major up or down factor here. We think that it is stabilized. And that's what we have anticipated, and we have planned for. Upon saying that, it is an important category, and we want to do everything possible in order to make sure the cadence of a new product introduction out there, our commercial execution is up to the expectation and expand our footprint in high-growth market, emerging market in an ongoing basis.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [50]

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Okay. Very helpful. And then just to pivot over to, call it, specialty. I'm just curious how you view the clear aligner market. Call it over the next couple of years, so there's a bunch of new competitors, you guys have a very solid product with Spark. Do you view this as predominantly taking share, call it, from the big incumbent? Or do you think that everyone pushing clear aligners actually accelerates the market as it seems a clear aligner Spark case for you guys arguably is revenue and gross profit dollar accretive for Envista versus a wires and brackets case? I would just love your thoughts there.

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [51]

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Yes. Thank you, Jon. Just to begin with, our wire and bracket business, as I mentioned, has been -- has been mid-single-digit grower, continuously in the past 3 quarters. I'm really pleased with the outcome of the work that we have seen in here. New product introduction, commercial execution, training and education has had such a huge impact in expanding our business outside the developed market. We are committed to that market. We're going to continue to invest and continue to grow that.

I want to come back to the clear aligner. From our point of view, clear aligner has 3 distinct segments. There is a direct-to-consumer segment, which we do not participate in, and obviously, players in that space is targeting a really different demographic. A [simpler case] is expanding the market versus cannibalizing the ortho. It's not a replacement for aligner use in more complex ortho cases. The next category is [GP] market. Important category, important segment, but that hasn't been our focus. Our Ormco business is built based on relationship, based on participation of orthodontists, and we have had that relationship for decades. We have an outstanding customer relationship with our Ormco customer. Our intention is to give them a wide range of choices.

They are the ones that they're telling us that Spark answer needs that they have had. It's giving them the clinical treatment options for many complex cases. That's where we are focused on. That group of customers already using clear aligners. And as we expand, we think that there is opportunity for them as the market grows for us to participate in that growth. We do not see that as a cannibalization of bracket and wire. We see it as an add-on to a market that already exists, with the customers that we already have relationship, with a product that meet their requirement. We have only started this process. As you well know, this is a market that has a significant upside, and we think that we can make a difference in here for our customers and for our patients.

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Operator [52]

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Your next question comes from the line of John Kreger of William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [53]

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Howard, question. In the third quarter, I think the discontinued product headwind was 1.5% and in specialty; and 1% in equipment and consumables. What do you expect that to be in Q4 and then in '20?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [54]

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Yes. I think that it would be fairly consistent in Q4, John, as we think about the 1.5% in specialty and the 1% on equipment and consumables. And going forward in 2020, maybe we'd hold off until we provide some guidance and more direction there at the end of Q4 there.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [55]

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Okay. And then the other thing I wanted to clarify, you touched on pricing a few times in the call. Can you just clarify where you're seeing price across your portfolio improve versus deteriorate versus stay the same?

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Howard H. Yu, Envista Holdings Corporation - Senior VP & CFO [56]

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I think that broadly, we are seeing some modest price deterioration. I would say that the area where we have seen a little bit of price accretion would be on the premium side of the dental implants. I think when you think about the equipment and consumables overall, that 100 bps, down 50 to 100 bps, depending on the product line, is pretty consistent with what we've seen. Really, with the market dynamics around private label, DSOs and e-commerce, we're going to see that annual pressure on price. And again, our emphasis to combat that is really to develop a solid cadence around NPI and also being selective about some of the promotions to help maximize growth.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [57]

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Great. And then one final one. The slowing that you noted in the U.S. and Western Europe, was that -- did you see it at all in consumables or just in the basic equipment?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [58]

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Mostly on the basic equipment, John. That's where we saw the majority of that implication and impact.

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Operator [59]

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Your next question comes from the line of Michael Cherny of Bank of America Merrill Lynch.

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Michael Aaron Cherny, BofA Merrill Lynch, Research Division - Director [60]

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I guess one kind of last cleanup, thinking about basic equipment and diving, I guess, a little bit deep. But can you talk a little bit about what's been going on at the chairs business? I know there's been some fluctuations in terms of the type of products you've offered. As you think about heading into next year, are there any moving pieces related to that area of the business? And if not, is there any other kind of, it's John's question about discontinued products, anything else that's like onetime or in nature aside from the new product ramp that we should think about in terms of getting back to that low single-digit growth rate you're targeting?

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Amir Aghdaei, Envista Holdings Corporation - President, CEO & Director [61]

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So we constantly, John (sic) [Michael], look at our portfolio and try to figure out where the synergies, where we can answer our customer needs in the best possible format. We have continued to do that. We have started that process of transformation by looking at overlap between our products. And we found out that we have products that they were offering the same set of capabilities under different brand, different channel. So we started that transformation in the past several years. What you see on some of those discontinued products is an outcome of exactly what we have done in the past several years. In the case of chair, we used to have 4 different brands only a couple of years ago. We have consolidated, have simplified our portfolio. We're going to continue to do that to make sure that we meet the needs of our customer base.

In the case of -- we mentioned in the case of emerging market, DSOs, having a complete portfolio is really important. We want to make sure that we are able to meet the needs of our customer and demand in the long term. At the same time, we're trying to make this portfolio to be higher growth, higher margin, more consumable, more specialty, more emerging market over time. Doing that gives us an opportunity to review our offering and make sure that we are really best positioned. M&A gives us another angle in order to be able to accelerate that transformation. I'm excited about what we have today and the opportunity ahead of us. Thank you.

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Operator [62]

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Thank you. We have reached the allotted time for questions. I'll now return the call back to Amir for any closing remarks.

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John Bedford;Vice President of Investor Relations, [63]

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Thanks, everybody. We're around all-day for follow ups.

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Operator [64]

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Thank you for participating in today's conference call. You may now disconnect your lines, and have a wonderful day.