Envista Holdings Corp (NVST) 2021 Q1 法說會逐字稿

My name is Erica, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Envista Holdings Corporation's First Quarter 2021 Earnings Results Conference Call. (Operator Instructions)

I will now turn the call over to Mr. Stephen Keller. Mr. Keller, you may begin your conference.

Thank you, Erica. Hello, and thanks for joining us on the call. With us today, we have -- are Amir Aghdaei, our President and 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 & Presentations, and will remain archived until our next quarterly call.

During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2021, 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 security laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law.

With that, I'd like to turn over the call to Amir.

Thanks, Stephen, and welcome, everyone, to Envista's First Quarter 2021 Earnings Call. 2021 is off to a good start as we achieved our core growth of nearly 30% while delivering our third consecutive quarter with adjusted EBITDA margins of over 20%. Our broad-based performance is the result of a robust recovery in the dental industry coupled with a strong execution across our portfolio.

Over the course of pandemic, the dental industry has proven to be impressively resilient. We are seeing demand for dental services in our developed markets near pre-pandemic levels with the outlook from dental offices showing sequential improvement. Having adjusted to the new operating model, including a stronger focus and infection prevention protocols, dentists are now more confident in the long-term prospects of their business. While uncertainty remains and we cannot rule out short-term disruptions from localized lockdowns, we are encouraged with the pace of recovery.

Before I turn it over to Howard to provide more detail on our first quarter financial results and our segment performance, I wanted to take this opportunity to discuss our progress towards our 3 strategic priorities of accelerating organic growth, expanding our operating margins and building a stronger portfolio.

Customer centricity is critical to our long-term growth. In the first quarter, we held over 450 virtual and in-person training and education sessions reaching over 23,000 customers. Further, in February, we held the annual Ormco Forum, where we hosted over 1,200 doctors, helping them stay on the cutting edge of orthodontic technologies, clinical excellence and practice performance. Our core bracket and wire business continued to outperform the market as we leverage our strong Damon franchise and continue to innovate.

The new Damon Ultima System, a completely reimagined bracket and wire system designed for faster and more precise finishing, was launched in February. We had a controlled rollout in North America, and is experiencing a strong uptake. The Spark, our clear aligner, performance accelerated with over 50% sequential growth in sales relative to Q4 and an increase of over 30% in active doctors from the end of 2020.

Infection Prevention was another highlight in the first quarter as increased disinfection protocols remain in place globally. Our infection business -- our Infection Prevention business grew over 20% versus Q1 2020 and increased 70% versus the same quarter 2019. Leveraging Our Envista Business System lean processes, we were able to ramp up production and increase capacity by more than 70% over the past year. This allows us to continue serving the needs of the global dental market, while further expanding into much larger medical market. We expect to see double-digit growth for this business in 2021.

In premium implants, our Nobel Biocare business is seeing improved commercial execution through the rigorous application of our EBS growth tools and a heightened focus on customers. We saw a strong year-over-year growth of more than 30% versus Q1 2020 and mid-single-digit growth versus Q1 2019 with sequential improvements in our developed markets.

In 2021, Nobel Biocare celebrates 40 years of serving customer and helping treat more patients better. We trace the roots of Nobel Biocare back directly to Per-Ingvar Branemark's groundbreaking discovery of osseointegration. Today, we continue to lead the industry in innovation and are excited about our N1 implant system, and TiUltra and XEAL surfaces.

In the first quarter, the number of dental clinicians who adopted the N1 implant system in Europe grew 30% over Q4 2020. While intermittent lockdowns in Europe hinder in-person training and adoption rates, we expect the rollout of N1 to accelerate as vaccinations increase and are able to do more in-person training.

Furthermore, we're ramping up our investment for an accelerated launch in North America, which we will build on our recent success of our TiUltra and XEAL surfaces. This innovation -- these innovative services are achieving rapid adoption and growth among clinicians with 20% of all Nobel implants in the U.S. now including these best-in-class surfaces.

Our continuous improvement mindset and process improvement tools have been instrumental in helping us rightsize the business, improve our financial structure and achieve a stronger result in the first quarter. We continue to see the benefits from the structural transformation initiatives executed in 2020 and achieved our third consecutive quarter of adjusted EBITDA margins above 20%.

Over the remainder of 2021, we plan incrementally to reinvest more than $30 million to drive the long-term growth of our innovative solutions, including Spark, N1 and our medical-grade Infection Prevention solutions. We will also further invest to support our commercial initiatives in both implants and orthodontics.

We are committed to build a stronger, differentiated and more growth-oriented Envista by exiting low-margin and low-growth businesses and refocusing our efforts in higher growth, higher margin segment of the dental industry. Where we are competitively advantaged, we are transforming our portfolio.

With over 80% of our revenue now coming from consumables and/or workflow-oriented solutions, we are aligning our portfolio with the industry's growth opportunities. Our balance sheet is in the best shape it has ever been, and we see opportunities to accelerate our progress through disciplined and targeted inorganic growth.

In addition to executing against our long-term priorities, we are also working hard to build a better Envista for all of our stakeholders. With a focus on our core value of respect, our Diversity and Inclusion Council launched Envista's first employee resource groups, Women and Friends as well as Multicultural and Friends dedicated to representing different ethnicities and lifestyles.

These resource groups are intended to create collaborative environments to support our teams and our communities. During the first quarter, these groups led Black History and Women's History months virtual events bringing together employees, customer and dental students to further educate and celebrate each other. As we build a more diverse and inclusive culture across Envista, we're confident that we will continue to recruit, develop and retain the best team.

I will now turn it over to Howard to go through our financials and segment performance in more detail.

Thanks, Amir. First quarter sales increased 29.6% to $709 million. Sales were positively impacted 3% by currency exchange rates and negatively impacted 3.1% due to discontinued products. Our core growth was 29.7%.

As Amir discussed, our strong year-over-year sales growth reflects a robust rebound in demand across the global dental market coupled with solid execution across our portfolio. Geographically, sales in North America and Western Europe grew more than 30%, reflecting a strong recovery from the start of the pandemic lockdowns in Q1 of 2020. While patient volumes are generally improving relative to Q4 and nearing pre-pandemic levels, we have seen the impact of inconsistent rollout of vaccines and localized spikes in COVID-19 infections in several geographic areas, including Canada and parts of Western Europe. We remain optimistic for a continued recovery throughout the balance of 2021.

In emerging markets, China grew more than 50% in Q1 with solid demand across the portfolio. We continue to see strong growth in our premium implant business in China and pleased with the progress we are making in orthodontics. Q1 patient volumes have recovered to over 90% of pre-COVID levels at private clinics. Return to pre-pandemic levels at public hospitals is a little slower, given their focus on vaccine rollout. Outside of China, other emerging markets remained relatively weak as COVID-19 outbreak continues to suppress demand, and we expect these regions to continue to be challenged until the outbreaks are contained.

Our gross margins of 56% increased 510 basis points due to higher volume, favorable product mix and productivity initiatives. Adjusted operating profit margin was 19.4%, a 1,760 basis point improvement largely driven by higher gross margins, structural cost savings and temporarily reduced spending. Profitability increased significantly with adjusted EBITDA of $178 million -- or I'm sorry, $148 million. Our first quarter adjusted diluted EPS of $0.54 represents a $0.51 increase year-over-year.

For the first quarter, we generated positive free cash flow of $8 million delivering $80 million more than Q1 of 2020. We ended the quarter with $441 million in cash and have continued to improve our leverage ratio, providing us more flexibility to pursue inorganic growth opportunities as they become available.

Now turning to our 2 business segments. Our Specialty Products & Technologies segment sales were up 34.4%, while core revenue increased 31%, driven by above-market growth in our core wire and brackets business and rapid growth from Spark. Growth in our premium implant business accelerated as our focus on improving commercial execution is delivering results in North America, Europe and China. In Q1, we grew more than 30% over 2020 and delivered mid-single-digit growth over 2019. As Amir discussed earlier, we are seeing the benefit of innovation to help drive growth.

Specialty Products & Technologies adjusted operating profit margin at 27% was significantly higher than our Q1 2020 results and showed sequential improvement over Q4 of 2020. Our strong growth, favorable mix and significant structural cost savings drove increased profitability. Through the balance of 2021, we expect to ramp up our investments in Spark, N1 and premium implants to drive long-term growth and accelerate adoption.

Our Equipment & Consumables segment sales increased 24.8%, while core sales increased 28.5%. Discontinued products adversely impacted sales by 6.3%, and we had a 2.6% favorable currency exchange impact. Our traditional consumables business benefited from the market rebound in developed markets, coupled with improved partnership with our distributors. As we focus more on supporting sell-out to our end users, we expect to see less fluctuations in our quarterly sales to our dealer partners.

As Amir talked about previously, demand for our Infection Prevention solutions remain elevated and delivered over 20% growth year-over-year. As expected, our growth rates in Infection Prevention will start to slow as we anniversary the significant increase in demand that we saw at the start of the pandemic.

Our Equipment business showed significant strength in the first quarter, delivering over 20% growth. The recovery in the dental market, coupled with the increased optimism from clinicians, targeted government support and lower interest rates combined to unlock a significant amount of demand. We believe there is room for continued growth in 2021 and beyond as we continue to drive share gains.

It is important to note, however, that part of our equipment business has been impacted by the global shortage of microchips. We are working with our suppliers to secure supply, but expect some headwinds for the second quarter and potential challenges throughout 2021.

Equipment & Consumables adjusted operating profit margin was 19.5% in the first quarter of 2021 versus a modest loss in the first quarter of 2020. We expect our margins to remain robust as we sustain our structural cost improvements while realizing the benefits of improved mix driven by the 2020 exit of our lower-margin equipment business and the increased focus on infection prevention.

I'll now turn it over to Amir for some final thoughts.

Thank you, Howard. We're encouraged by the strong start to 2021 and are optimistic about our industry, our businesses and our progress. However, we're mindful that inconsistent vaccine rollouts around the globe, new COVID-19 variants and localized lockdowns will continue to impact the recovery in the near term. Against this backdrop, we expect to deliver core growth in the low to mid-20 range and expect that adjusted EBITDA margins to be in the high teens in 2021.

We believe the transformation initiatives we undertook over the past 4 quarters will continue to contribute to improved margin and core growth. During the balance of the year, we are committed to developing sustainable competitive advantage by increasing our investment in our growth priorities of implants, clear aligners, infection prevention and digital workflows. As vaccinations continue to roll out and economies continue to open further, we anticipate spend in travel and customer-facing activities will increase.

At Envista, we are well positioned to lead and transform this industry. We have category-leading brands, a full portfolio of solutions to meet customers need, a committed and energized team, and unparalleled commercial reach. Our culture circle around customer centricity, innovation, respect, continuous improvement and leadership has been tested during the pandemic and proves that we can not only survive but thrive to build a stronger and more differentiated Envista as a result.

We're proud of our progress and look forward to our continued growth journey in 2021 and beyond.

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

(Operator Instructions) Your first question is from Elizabeth Anderson with Evercore.

Congrats on the quarter. It was nice to see this come back this way. I guess my first question, you said the core growth in the low to mid-20% range for the full year. I was wondering if you had any additional commentary that you could provide in terms of the key thing of that growth? Obviously, there's the comp benefit in the second quarter. But beyond that, just anything to keep in mind as we're going ahead with these numbers?

Yes. Thank you, Elizabeth. As you mentioned, we talked about the core growth of low to mid-20s, and we're really encouraged with what we saw in Q1. And we've seen improved trends as well. Our guidance, what we anticipate is a continuous improvement as we go forward. However, we want to be balanced in here. I want to recognize that we're still in the middle of pandemic.

We like you to think about more of a year-over-year and full year, given the historic lumpiness of our distribution business. We're cautioned due to pandemic-related risk. If vaccine rollout accelerates, local outbreaks are contained, we could do better. I also like us to think about 2019. Our assessment at this point is that full year 2021 would be to grow mid-single-digit versus 2019 full year. And as you recall, during the pre-IPO and IPO, we always talked about building a company that is at the mid-single-digit growth.

Our EBITDA margin is also in the high-teen area, we're really proud of progress that we have made. To improve the profitability of our business, we have streamlined our businesses, we reduced the structural costs, we have exited low profitability, low growth businesses, and we are investing. We are investing significantly in long-term strategic priorities. And we are beginning to see the outcome of it. The commercial execution has been an important part of this. We are seeing the recent margin improvement as reduced spending. But as we get to more of a standard level, we expect to see more of a travel, more customer-facing activities. We feel good about where we are. And we think, as economies stabilize, we have opportunity to do better over time.

Yes. Maybe, Elizabeth, just to jump in here as it relates to the profitability and EBITDA, Amir and I, we do look at things from a full year perspective. But to give you a sense here, if you look at 2019 and the EBITDA that we had, I think our adjusted EBITDA was around $420 million. If you factor in the full public company cost, that gets you to an adjusted EBITDA just shy of that $400 million. What our guidance essentially provides for is the 300 to 400 basis point improvement on that number. And as well, if you look at the absolute dollar amount, it really is a 25% growth from 2019 to full year 2021. So hopefully, that provides a little more context.

Yes. No, that's very helpful. And then just in terms of the $30 million that you guys are reinvesting, I mean, I think you said it was to support some of the growth opportunities in specialty and infection control. Should we think about that as mostly falling on the SG&A line? Or is there any sort of split into gross -- sorry, the COGS as well?

Yes. Elizabeth, there will be a component of that. I mean we're in the ramp-up mode for Spark as well as for N1. And so some of that $30 million or over $30 million in aggregate will come via manufacturing capacity, but I would anticipate that a good portion of that would also come via OpEx.

Your next question is from Jeff Johnson with Baird.

So 2 things. One, Howard, if you can just help me with the math here, when I take your EBITDA guidance and your core growth guidance, I think I'm shaking out a little north of $2 from an EPS perspective. But I've got your interest expense coming down quite a bit here over the next few quarters, as some of those waivers come off, I think, from last year. So EPS wise, am I kind of in the ballpark? Or how should we be thinking about EPS for this year?

Yes. I think, Jeff, we've been talking about the context of adjusted EBITDA as kind of our profit, and we continue to think along those lines. And so that's where our guide is as well. I will say that on the interest expense, our cash interest for Q1 was about $13.5 million. And given some of the paydown on the debt, we would anticipate a per quarter interest of about $9 million for the duration here. And so hopefully, that will inform you a little bit more as to that calculation.

All right. Fair enough. And then, Amir, just hoping you could give us maybe an update on timing of N1 potential approval in the U.S. And we've seen now a couple press releases. It seems like you're getting a little closer to Heartland here. You've got the European DSO news from the last week or 2. Just what are you doing to really kind of position yourself better and better in that DSO channel? And what are the DSOs seeing out of Envista that's making you a more attractive partner?

Yes. Of course. Thanks, Jeff. We're seeing really good solid progress on the rollout of N1 in Europe. I will answer the question in America next. Just to give you some context around it, we now have over 450 active customers that they are actively placing N1 in Europe. That's over 30% increase compared to Q4. We got repeat customers coming in and buying more of the product going forward. And feedback has been really very positive, specifically with those that they are kind of pioneers in this space.

We are adding significant number of abutment, prosthetic options in order to be able to build a broader rollout. In spite of all of that, we have had some challenges specifically. This is a completely different and new protocols. You have to do it in-person. People have -- they have to see it. They have to be mentored. They have to watch it. So we have had some challenges in there.

We're hoping that as soon as this resumption of in-person training take place, we're going to see accelerated growth in here. We're going through the FDA approval process. As we have said before, we expect that to be later part of the 2021. Howard talked about investment. We are ramping up investment, both from a capacity manufacturing as well as the commercial activity, so we can't really put that in place as quickly as we can.

Talking a little bit about the DSOs. Jeff, as you know, we started this process back in 2018. We built a DSO, a specific team, dedicated team that is focused on meeting the requirement of this segment. We think that they played a really important role in democratizing dentistry, bringing dental care to masses, and we really want to make sure that they get what they need in order for them to be able to accomplish their objectives.

We go to them with a complete set of solutions. The skill matters in here. We signed long-term contracts with them. Training and education is a really important factor in here because they are trying to expand into the specialties. They're trying to monetize investment. They try to retain and expand their capabilities, and we can get aligned with them through training, through support to be there locally to just continue to support and build these capabilities over time.

We feel good about what we have done in here. Over 10% of our business now comes from DSOs, and we expect them to continually expand in different geographies, obviously, North America, Western Europe, but we are seeing that taking momentum in different places. And the direction that we have taken in the past several years is beginning to pay off, and is going to continue to pay off in the long run.

Your next question is from Nathan Rich with Goldman Sachs.

If I could maybe start with a follow-up on the top line guidance. Maybe as we think about the second quarter, would you expect to see sort of the normal seasonality or step-up that you typically see in the business in the second quarter? And then, Howard, I think you had said -- you had mentioned expecting loss fluctuations in quarterly sales through dealer partners. Could you maybe just elaborate on that? And is there anything to keep in mind from like a timing standpoint that it impacted the first quarter, will impact the second quarter as we think about revenue?

Yes. Sure, Nate. So thanks for the question. I do think probably both of those questions are surrounded around the same topic. And what we've been working on, I would say, over the last 12 months or so consistently has been working on the amount of inventory in the distributor channel. And so we've talked to you folks about how we're trying to marry up more closely sell-out with sell-in. And so that is a change.

And so when you talk about the phasing here between Q1 and Q2, we do typically have a larger bolus of sales in Q2 from our distributor partners, but we're working through to smooth that out. And we're seeing the results of that here in the quarter. And so maybe to provide a little bit around Q2, we would anticipate our revenue in Q2 to be relatively at the same rate as where we're seeing revenue in Q1. And so that does contemplate more of the smoothing effect that we've seen, that we've worked through and are seeing in our sales numbers here.

Great. That's helpful. And if I could ask a follow-up on the Infection Control business. I think, Amir, you had said that you expect double-digit growth for the year. I think that would put sales around $250 million for the year, plus or minus. Is that fair? And can you maybe talk about where you see the growth opportunities for this business? And I'd also be curious just to get your thoughts on how unit volumes and pricing could trend for this business as things get back to normal, and we hopefully go back to some semblance of normal life.

Yes, yes, of course. Recall, going back, we always use '19 as a starting point. And we said at that point, we had about $170 million, $175 million of business. In 2020, we had $220 million business. So we got to about $220 million last year. We grew 20% in Q1, and at this point, as we stand today, we have over $20 million backlog and orders continue to come in. That momentum is continuing through Q2. And as I mentioned, we expect that double digit, and you're within ballpark at double digit over the $220 million. That's what we expect to see happening in 2021.

So now coming back to what we're seeing here and why are we confident that this trend is going to continue. Obviously, the comps are going to be different. There are 3 factors, Nate, that really gives us that confidence that what we have done in here, the investment that we have made and the differentiation that we have is going to pay off in the long run. 50% of that business is in dental today, and we have over 40% share, but majority of that is in United States.

We are now getting to different geographies. We have expanded presence in Europe, in China. So international expansion, while disinfectant procedures is becoming norm and even after pandemic, people have gone and used that methodology. They know how to use it. They know how to be in a safe environment. So extension outside the United States is a really important part of this equation.

50% of our business is in medical, and we have less than 10% share. In the past 9 months, we have been able to really expand our medical presence. We have now a medical sales force in the United States. We're building one in Europe, and these are with the long-term contracts, very specific segment. So expansion in the medical is another category that gives us confidence that this business has legs under it, and can stand on its own.

And then a lot of really new products. We -- in the past 18 to 24 months, our team has done an outstanding job ramping up capacity, building innovative products and then registering them, step by step, geography by geography. The new CaviWipes 2.0 is an incredible product that we are getting significant amount of good positive reaction to it.

So innovation, dental outside U.S., medical, all 3 of them give us confidence to see this business double digit in 2021, mid-single-digit positive growth going forward. And we would adjust to the new realities, the new normal. We have watch, as Howard said, inventories very closely, we see incoming, outgoing to make sure that there are -- we're not getting ahead of ourselves and managing this business as closely as possible.

Your next question is from Jon Block with Stifel.

Maybe I'll start with Spark. And if you can just talk to what you're seeing among the current adopters, maybe Spark's used for teen cases versus out of adult. Is it broadening out? And then sort of tacking on to that, we've seen this clear aligner market move toward, call it, faster growth, lower acuity cases, be it direct-to-consumer or maybe more like an express lab case. Amir, if you can share with us Envista's thoughts on this part of the market and how to play a bigger role there. And then I've just got a follow-up.

Okay. So let's just start with the Spark piece, and let me try to answer that, and then we will get to the bracket and wire piece. Spark, we now have 1,300 customers -- over 1,300 customers that they are active Spark user. What we define an active Spark user is somebody, who does 4 cases in the past 4 weeks.

So when we look at how many new customers we have had, that number has gone up by over 30% quarter-to-quarter. And it's just continued. We just -- as we have described, we sign up a specific number of doctors. We train them, we get them going, we establish them, and then we sign the next group.

Those that they're using it are giving us tremendous amount of feedback about the quality of the product, that it is -- we're repeating what they are telling us, the best in the market, giving them choices, really easy to use. The transparency of it is incredible. It's easy for the patient. And quarter-over-quarter, we had about over 50% growth Q1 versus Q4, and that volume expansion, sign-up of the new customer is just going to continue on.

We're really optimistic about this. We have gone about very systematic expansion of both product categories, innovation, ramp-up, commercial execution. And now we're in the Europe, and we're beginning to see the outcome of it. So that's the Spark part, I wanted to make sure I answer that question.

Our bracket and wire business is growing double digit, and it had -- that continued in Q4. It's growing double digit in Q1. And if I compare it against 2019, that's high mid-single-digit growth. And when we ask, when we really look at it to say, what is happening in spite of exactly what you said, all the news about clear aligner, we have an incredible franchise around Damon. Innovation in here has really made a huge difference. We're continuously putting new products out there. TiUltima as I mentioned, has been in North America and getting momentum. People like what they're seeing. They've given them more and more control over it. So innovation plays a role.

Training and education is really an important part of this bracket and wire piece; geographical exposure, 70% of our revenue comes outside the United States. And now we've given orthodontics a choice. We're giving them a choice between bracket and wire and Spark. We're letting them decide what is the best answer. What we are hearing from our customers, they are not switching from one to other. They're using both of them to get the best outcome.

And they are seeing that we have been responsive, we have made significant investment in manufacturing. The turnaround time has come down, and we are adding more and more support capabilities in the field. We are differentiated. As others exit various segments of this business, there is an opportunity for us to continue to expand. We expect this segment to continue double-digit growth for us in the ongoing basis.

Perfect. That's very helpful. And then, Howard, just for you, you mentioned the high-teen EBITDA margins for 2021 after back to back to back 20% plus, you're putting dollars back to work for the pipeline. How do we think about those investments? In other words, are they elevated investments that largely conclude at the end of '21? Or do we think about a longer tail to support those franchises into '22 and beyond?

Sure. Sure. Thanks for the question, Jon. Yes. So of the, let's call it, over $30 million that we're anticipating in investments for the duration of the year, a lot of that continues because we're seeing the traction. Amir described the traction that we're seeing in Spark. And so we're essentially doubling down on those investments largely around manufacturing capacity and increasing that as well. We talked about N1, ensuring that we're going to have a successful rollout of that product, both continued progress in Europe as well as in North America when we're ready to go there as well. So those are 2 examples.

We talked about infection prevention, and expanding those markets internationally and into a different market or a subset of the market and medical. And so those are all areas that we're going to continue to invest and then certainly digital workflows. And so we would anticipate that greater $30 million going for the rest of this year. And then we'll assess and determine how much we need to invest further going. But the one thing that we want to make sure is that, certainly, as Amir has described, we want a sustainable mid-single-digit, mid-single-digit plus business. And so we're not looking to go backwards here at all.

Your next question is from Erin Wright with Crédit Suisse.

And just following up on that, I heard you say mid-single-digit plus. And as we think about the mix of your business shifting, whether it's increasing greater exposure to implants, ortho, infection control products, do you think you have line of sight or visibility into potentially longer-term growth at the higher end or above the current longer-term targets of mid-single-digit growth? Or what gets you higher than that in a normalized environment?

Thank you, Erin. So I'm just kind of take a look at these 2 markets, specifically, as you mentioned, the specialty businesses. The penetration, I mean, we love what we are hearing around the clear aligner because what it does, it has a halo effect. It's bringing a lot of new customers into the market. And that would offer tremendous opportunity for expansion of the penetration.

When we look at the number of cases that started in ortho in 2019, 2020, and how many people can really take advantage of that treatment, that penetration is so low. And there is so much opportunity in here for anybody who innovates, for anybody who's taking care of the customers and making clinicians to be more productive and more predictable.

We feel good about the investment that we have made. We feel good about Ormco heritage, being a medtech professional company, adding to that and continue to expand that over time. So we think there are plenty of opportunity for us to continue to expand our business in the ortho segment through innovation, through customer support, through geographies.

The same is also true on the implant side. As you all know, we have had some challenges around commercial execution in various places. It hasn't been because of the market. The market is similar to the ortho, it's underpenetrated. There is plenty of opportunity in here to expand. DSOs are excited about it. A lot of people outside developed markets, they want to be able to do that. You've got to be able to give them tools and capabilities through innovation to make it easier so they can treat more patients.

That's where N1 comes in place. That's where innovation plays an important role. On top of that, training and education. And last but not least, digitization. Digitization of this industry democratizes and gives opportunity to treat a lot more patients faster, more predictable. We feel good about where we are on our premium side, and we have room to grow on our value side.

We think mid- to high single-digit growth in an ongoing basis for our specialty business is a reality, and we are going to continue to do everything possible to make sure that rate accelerates over time.

In our Equipment & Consumables, as we have talked before, we have exited low-growth, low-margin business. And now we've really positioned ourselves, 85% of the portfolio to be consumable, continue to make investment with various differentiators, do a lot of operational capabilities that we needed, use of EBS, making sure that we have visibility on inventory, make sure the on-time delivery quality is there. And combination of these 2 is going to give us that original plan that we have built in a business that is growing faster, has higher margin, is differentiated. And with better cash flow, now we have other lever in our hand to be able to put that to work to get better outcome over time.

Okay. And then on that topic, I guess, capital deployment priorities in the near term, I guess, what potential deals then make sense for you? Is it bolt-ons or new technology or near adjacencies that make more sense?

Obviously, we're not going to comment on the specific deals in here. But if you look at it, there are 3 or 4 areas that I think this industry as a whole has significant opportunities. The digital workflow, we talk about it. Why is it so important? Because it allows patient to get better treatment, it allows doctors to become a lot more effective. And where is that? It's through software, AI as well as capabilities that connects various pieces of the treatment together, from diagnostic to planning, to execution. We have an incredible portfolio, but there is opportunity for us to be more looking outside, looking at the future and try to add in there.

We are under-indexed in the value implant and there is opportunity for us to invest in various geographies. Value implant is a local play. We need to make sure that we have local brands, local presence in different geographies. And there are other opportunities for us that we can explore as we go forward. With the balance sheet that we have today, and to track that core that we have built, now we have another tool in our hand that we can use to build a better company over time.

Clearly, just to add to that in terms of firepower, I mean, just the cash that we generated over the last 3 years have been in excess of $900 million. And so -- and where our debt is now, we're back to net debt below $1 billion as well, and we'll be at 2x by the end of this year as it relates to debt ratios. And so we feel really good about that.

I think that all being said, we're not looking to do a deal just to do a deal. We're going to go ahead and make sure that we're looking at the most attractive areas in the market, as Amir said, in the segments there and then assessing the strategic fit for us, and that's critical as well. And then we kind of move into the valuation perspective and ensuring that we get double-digit cash-on-cash returns in the foreseeable future or the near future and expecting greater returns long term as well.

Your next question is from Brandon Couillard with Jefferies.

Amir, just a 2-part question on Infection Prevention, in terms you could quantify the impact to organic growth in the first quarter from growth in that segment? And then how much of Infection Prevention is actually PPE in terms of the mix?

So we have wipes that we use and liquid. Basically, those are the 2 product categories that we use for disinfection in variety of form or shape, in different sizes, but those are the 2 categories that we have on infection prevention. We don't have other categories that addresses the broader PPE sort of needs in there. If I'm not mistaken, Howard, about 100 basis points of growth in...

That's about right.

About 100 basis point of growth, Brandon, in Q1 was dedicated to Infection Prevention and Spark and N1, another 100 basis point of growth in Q1. So where we have invested, where we have put energy, we're beginning to see the outcome of it. About 20% of the Infection Prevention alone in Q1 had a 20% growth year-over-year. And as we mentioned, that was -- when you compare that to 2019 in Q1, that was almost 70%. And that kind of momentum is something that we are counting on to maintain as we go forward.

Great. And then it's been a while since I feel like we talked about your efforts around sort of developing your own CAD/CAM scanner. Is that still a priority as you think about sort of your broader strategy to sort of build this digital workflow ecosystem?

Yes, it is. But we made it very clear, we have -- following a very standard process of what we wanted to do, we wanted to build a stronger company. We wanted to accelerate the growth. We wanted to accelerate the margin. We want to make sure that we're in good position. Those are the things that we wanted to do in a broad sense. I'm glad to look back sacrifices that our team have made, partnership that we have developed has gotten us exactly in a place that we want to be. We now have a full portfolio on the diagnostic side, and we have a really good relationship with 3Shape, X500 is there, rest of the portfolio is building.

And we're going to continue to look at opportunities internally and externally to do this workflow integration around implant, around ortho as well as connection with the lab. Long term, we want to be able to do those products internally or through collaboration. Our intention is to address the needs of the market. And if we can do that in an accelerated format through partnership, as you have seen, the partnership that we have built with ADA, we're going to continue to do that going forward.

And that does end our allotted time for questions. I will turn the call back over to management for closing remarks.

All right. Thank you, everyone, for your time. We really appreciate you joining the call. I guess we'll talk to you again in a couple of months here next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.