My name is Erica, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Envista Holding Corporation's Fourth Quarter 2019 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

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

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

I'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 related to any non-GAAP financial measures provided during the call are available on the Investors' section of our website, www.envistaco.com.

The audio portion of this call will be archived on the Investors section of our website later today under the heading 'Events and Presentations' and will remain archived until our next quarterly call. A replay of this call will also be available.

During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics related to the fourth 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 that they are made and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'd like to turn the call over to Amir..

Thanks, John and welcome everyone to Envista's Q4 2019 earnings call. Our team delivered another quarter of strong earnings, operating margin and cash flows, concluding a transformative year for Envista.

Now that we are a fully independent company, we have been able to add to our portfolio over the last several weeks through our first acquisition of Matricel, as well as a strategic partnerships in intraoral scanning.

Before I continue the update of our business, I want to take a moment to address the events in China, including the Coronavirus outbreak. The health and well-being of our employees is our most important priority. We are in constant contact with our leadership team based in China. And today, our employee base has experienced minimal direct impact.

The China team was quick to deliver a shipment of our infection preventions, products to local health organization before the Chinese New Year holiday to help reduce the spread of the virus. We will continue to look for opportunities to help our employees and contribute to the health of the community.

Moving back to our results, 2019 was a year of organization accomplishment. The finalization of separation from Danaher Corporation in Q4 marked a major milestone for us. The tremendous work was handled efficiently and marked a great undertaking.

Over the past several months, we added more than 90 employees to build our corporate organization and they have hit the ground running. I'm grateful to the hard work that our employees put in to make this a success and I'm proud to have each of them as part of the Envista team.

Being fully independent provide us with the flexibility and autonomy we need to execute in this dynamic market environment while instilling the Envista Business System, EBS, into our company culture. We continue to build the Envista culture with our employees' growth and development in mind. The foundation and mindset stems from our core value.

Continuous improvement is a competitive advantage. This means that our business and our employees have the adaptability, open-mindedness and humility to change for the better. As we begin our Envista journey, we are building upon our EBS routes to create a strong and unique culture that enables sustainable performance.

Creating a winning culture is a priority for me in 2020. EBS gives us visibility to our biggest challenges and opportunities and facilitates creation of the most efficient solutions. In November, we held our first annual CEO Kaizen with participation from more than 150 employees at several global locations.

This event focused on accelerating our 2020 initiatives. In Q4, we also began offering our EBS leadership orientation to a larger set of our leaders than ever before. During this orientation, our leaders learned how to apply EBS tools and are required to utilize when and what they have learned, when they return to their teams.

With such a considerable influx of new employees, we find it vital to immerse them in the fundamentals of EBS. Part of EBS is also our focus on accountability and delivering on our commitments to accelerate growth, expand margins and strengthen and transform our portfolio both organically and inorganically.

In 2019, we made progress around our growth initiatives in several key areas. Specifically, we have built capacity for further expansion of the Spark, our clear aligner product and are now positioned for a broader rollout in the U.S. market.

We also recently received regulatory approval to sell and manufacture Spark in China and shipped our first commercial case in December. We will continue to invest and expand capabilities, as we anticipate Spark demand will ramp up throughout the year and add more than 50 basis points of growth for Envista in 2020.

We are encouraged by our progress with dental service organizations or DSOs, one of the fastest-growing customer segments in the U.S. dental market.

Two years ago, we established a team solely dedicated to helping these professionals grow their businesses and practices and expand in the specialty procedures of orthodontics and implants to provide broader clinical services and capture a larger share of their customer spending.

Envista's sales growth was more than 10% at the top 10 DSOs collectively in 2019, and we believe, DSO customers will look to significantly increase their volume over the next several years. Our emerging market performance has also been noteworthy.

These regions grew mid-single digits in 2019 and they finished the year with 24% of our sales from these markets. We are particularly pleased with China's performance, which had another year of double-digit growth. More importantly, China sales within our specialty products and technologies segment grew over 20% for the year.

With our 2019 progress, we are confident Envista will deliver low single-digit core growth in 2020. Turning to operating margin. We're pleased with the traction that we have made from our productivity initiatives.

In the fourth quarter, we have reduced our operating expenses by more than $10 million through a combination of productivity improvement initiatives across the business and moderating a discretionary spending. We remain committed to executing on our savings initiatives while also reinvesting in our strategic growth priorities.

We have further opportunities to accelerate our margin as we move forward. Finally, we started to leverage our cash flow position and the agility that we now have as a standalone company to better position the portfolio going forward.

Last week, we closed the acquisition of Matricel, a biomaterial manufacturer producing membranes used in dental implants and other oral surgery procedures. The Matricel acquisition will be a catalyst for the growth in this fast-growing category and will enable our implant businesses to increase our exposure to biomaterials over time.

Now let's turn to our performance in the fourth quarter. Sales declined 5% to $721 million, core growth decreased 3.5%, primarily due to lower demand in our equipment business and product rationalization with our value implant business. Revenue growth was adversely impacted by 1% from discontinued products and 0.5% from foreign currency.

Geographically, developed markets decreased at a mid-single-digit rate primarily due to weaker demand in equipment and consumables in our implant business. Emerging market growth was led by China, which experienced another quarter of double-digit growth.

Gross margin declined 160 basis points to 54% due to a decrease in revenue and favorable mix and continued investment in new product capacity. Adjusted operating profit margin decreased 90 basis points to 15.7%.

Adjusted operating margin, excluding the impact of incremental public company expense of approximately $9 million increased 40 basis points, as savings initiatives gained traction and our spending moderated. Our free cash flow for the full year 2019 was $321 million and our free cash flow to net earnings conversion ratio was 148%.

This strong free cash flow gives us the opportunity to invest through M&A and organically through capacity expansion and productivity investments. Fourth quarter adjusted diluted EPS was $0.52, which exceeded our expectations. Turning now to our two business segments.

Our specialty products and technologies segment, sales were down 5.5%, while core revenue declined 3.5%. Adjusted operating profit margin improved 40 basis points to 20.3%, largely due to cost reduction initiatives.

Ormco finished 2019 with mid-single-digit core revenue growth for the full year, driven primarily by strong demand for our Damon system brackets. The Ormco team has done an excellent execution job in 2019 commercially while introducing several new products.

Damon Q2, which was fully launched commercially in 2019 has been one of the most successful of these recent product launches and now has achieved revenue in excess of $50 million. During the quarter, we passed several milestones with our Spark clear aligner, including shipping our first case in China.

We also launched new Spark approver software with additional features to streamline workflows and provide greater doctor control over tooth movements. As part of this upgrade, Spark is now more seamlessly integrated with a three-shape trio intraoral scanner, giving doctors access to the scan directly in the Spark case portal.

We also qualified the Medit i500 scanner for use with the Spark clear aligners and we'll be offering a similar seamless workflow integration in the near future. We are very excited about the progress we have made through the Spark and are on track for acceleration through 2020.

Our implant core revenue decreased during the quarter, primarily as a result of a double-digit decline in our value implant business, where we are in the process of consolidating brands. We also experienced a decline in developed market, as a result of a strategic organizational changes, which were more disruptive than anticipated.

While this impacted our fourth quarter results, we have appointed experienced commercial leaders to address these challenges and better position our business for success in the future.

In addition to our organizational changes, we have several catalysts that will help improve performance going forward, including new product introductions, key customer acquisitions and our strategic partnerships. We anticipate our new implant system, N1, will begin to contribute to our European business later in 2020.

N1 will subsequently be rolled out to other regions. In U.S., we made good progress in the DSO segment, securing multi-year agreements to supply implants to the three of the largest DSOs who intend to accelerate their specialty procedures.

We believe these customers will significantly look to increase their implant placement capabilities and volume over the next several years. Our broad portfolio, training and education programs and support and service team have been an important driver of our success with these customers.

We also strengthened our offerings with the recent agreement with 3Shape to sell intraoral scanning products through our Nobel Biocare systems and Ormco equipment sales force. We will offer this product through our European sales force directly.

The addition of 3Shape scanner allows us to better service our customers while offering a complete digital dentistry solution from image acquisition to treatment planning, and treatment execution. We remain optimistic about the business's ability to improve performance in 2020.

In our equipment and consumables segment, core revenue declined 3.5% due in part to weaker demand in our equipment business in Western Europe and a difficult year-over-year comparison in North America, wherein Q4 2018 we grew mid-single digits.

Our imaging portfolio is an important category, where we have one of the industry's largest installed base of more than 150,000 units worldwide. Our OP 3D product has been a recent driver of success in this market with shipments more than doubling in 2019.

OP 3D features scan times in as little as nine seconds and offer four flexible fields of view, making it a perfect solution for a variety of users ranging from general practitioners to orthodontists, and all the way to maxillofacial surgeons.

In the quarter, we also announced our entry into the fastest-growing segment of imaging with the release of KaVo Kerr X500 intraoral scanner at the Greater New York dental show.

The KaVo X500 is a strong point solution with a Spark integration and will soon integrate directly with our DTX workforce software enabling doctors to drive greater efficiency in their practice. We will continue to look for ways to further innovate in this area as we move forward.

Equipment and consumables adjusted operating profit margin improved 100 basis points to 16.7%, largely due to cost-reduction initiatives. The team remains focused on further improving our cost position to drive margin expansion as the business stabilizes in 2020. Overall, we are optimistic as we look forward.

The Envista business system is alive and well in our organization, helping us drive margin productivity, accelerate new product initiatives and will continue to guide our portfolio transformation. We are initiating full-year 2020 GAAP diluted EPS guidance between $1.21 and $1.31 and adjusted diluted net EPS guidance between $1.63 and $1.73.

This contemplates core growth of low-single digits. We anticipate the acceleration of core growth will be driven by incremental sales from introduction of our new products, lower impact from our value implant rationalization and continued strength in emerging markets.

In comparison with our 2019 results, our earnings guidance includes approximately $25 million or $0.12 per share of incremental public company costs and $12 million or approximately $0.06 per share incremental interest expense. Normalizing for these two items, our earnings growth is high-single digits at the high-end of our guidance range.

As a reminder, this does not include any contribution from future M&A. We anticipate our earnings will be stronger in the second half of the year in line with typical seasonality. Additionally, we expect new product growth and cost savings will ramp up as we move through the year.

In closing, we're energized about the opportunities ahead and confident in our ability to deliver improved business performance in 2020 and beyond..

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

[Operator instructions] And your first question comes from the line of Tycho Peterson with JPMorgan..

Hey, thanks. Amir, I want to start with the specialty business. Obviously, there's been some competitive launches with Straumann, with their BLX launch entering the market in the U.S. and Europe. I know you talked about commercial reorganization as the driver of the miss.

But can you maybe just talk around competitive dynamics, if you're seeing any pressure there? And why would specialty rebound in 2020? And how do you think about pricing for that segment?.

Yes. Thank you, Tycho. In specialty, we have had a good quarter with Ormco. In 2019, they grew mid-single-digit. We saw a weaker performance, as a result of two factors, specifically, on the implant side.

Part of that was value implant, about 50% of lack of growth in that area was influenced because of the transition that we did a lot faster than we had originally anticipated and planned. We also anticipated that this would be behind us as we go forward.

We saw during Q4, we had visibility to our earnings and we made a decision that this would be the right time for us to start making some of the changes around delayering territories, installing new commercial leadership, and we thought that the timing was right in order to do that before we start some of the NPIs coming in to make sure that we are in a good place.

We're optimistic about what is happening ahead, but we do not think that our premium business is impacted by competitive products. Our customers still see Active as one of the best-performing implants with significant clinical evidence.

We also have new surface capabilities that is available in EU around the names of TiUltra and Xeal that gives us the opportunity to close some of the issues that we have had in the past and give us a competitive advantage. Active continues to be one of the most placed implants globally. We feel good about 2020.

With commercial teams coming in place working through the product rationalization on the value side and new NPIs, we feel confident that our implant business will get back to growth as we move through 2020..

All right.

And then on margins, the margin guide for 2020 is about 10 basis points lower than the IPO model, I guess, can you talk to changes to cost-cutting levers and plans in the past to hit the original margin targets?.

Hey, Tycho, this is Howard. I think fundamentally, the model that we have and the guidance that we've set forth is consistent with what we talked about during the model. I know that there's probably a little bit of adjustments or kind of add-backs and takeaways just to clean things up.

But fundamentally, our margin guidance is consistent with what we said. We said low single-digit growth on top-line and we talked about our earnings and margins growing north of 25 bps in OMX. At the midpoint, I think that that's consistent with what we've said in the guidance.

And again, taking in the fact that we had some standard costs, corporate, and interest, as Amir mentioned, is about $0.18 drag and also, some productivity initiatives that cost about [indiscernible]..

All right. And one last quick one on Spark, where are you on manufacturing turnaround time? Feedback from some dentists has been the long turnaround time, five to six weeks is a little bit of a hindrance to adoption.

So, can you just talk on manufacturing for Spark, where you are?.

Yes, of course. Our on-time delivery has never been more than two to three weeks at the peak. In the past several weeks, we have come back to exactly what we have made promises. And at this point, our delivery is exactly as we have told our customer base, between five to seven working days, that's where we are.

From a capacity-building perspective, we have all the capacity that we need for our 2020 commitment and we continue to make investments in order to make sure that we can ramp up this business quickly as demand continues to extend..

Okay. Thank you..

Your next question is from Vijay Kumar with Evercore ISI..

Hi, it's actually Elizabeth Anderson.

Can you talk about, on the Spark continuing conversation, how has the Spark uptake been so far? Can you talk about how that gives you visibility into the runway in 2020?.

Yes. So thank you, Elizabeth. So as we have talked before, we have a very thoughtful implementation and execution that goes through phases. So, we sign up small number of doctors, we walk them through our workflow and we follow a standard EBS process by training them, by ramping them up.

So, as we make sure that those doctors are up to speed, we sign up the next group. We have visibility on a daily basis and the number of cases that comes through.

And as we described before, we want to make sure that we give them that premium experience that they expect by making sure that the customer intimate model that we have in Ormco is maintained, while we continue to expand this market.

As we speak, we have added more capacity, more customers are being signed up, in the United States, very consistent with what we have talked about for a broader rollout as we go forward. We feel really good about what we are hearing from our customer base.

They are excited about the Spark as a product itself and they are seeing cases that they have put out there with better result through a combination of a bracket and wire in Spark and continuing to be able to offer a broader set of offering to their customers -- to their patients..

That's very helpful. And just on because I know it's been an investor concern today. Can you talk at all about any incorporation of what happened in China with the Coronavirus into your guidance and how you would think about that as we move through? Obviously, it's a fluctuating situation..

Yes. Happy to do it. And to begin with, our number one focus is the safety of our employees. This situation is evolving and we are in contact on the ground on a daily basis. Our team has put a WeChat group and they are communicating on an ongoing basis on anything that they see on the ground.

As the outbreak has occurred leading up to the New Year holiday, the business itself hasn't yet seen any impact. This really is still too early to tell. In addition, shutdown, limited, would be a minor impact, and we are not seeing a major disruption at this point. On the other hand, we are watching this very carefully.

We are trying to make sure that we are offering any type of help that we can locally through some of our infection prevention products and capabilities. And as we go through this process, we would be able to assess the situation on the ground and provide additional information. It is really too early to make any kind of judgment at this point.

We're following what the government is advising, the local provinces and we make sure that we, as I said before, safety of our employees are secured as we move forward..

Elizabeth, this is Howard. As it relates to the guidance, our guidance does not factor in any impact associated with this at this stage given the fluidity of the situation..

Okay. That makes sense. And then lastly, just on the Matricel acquisition, you said you did last week.

Can you talk about the potential contribution of that business in 2020?.

Yes. Elizabeth, this is Howard again. I think on Matricel, it's a very small acquisition. We're excited about what it brings for us on the biomaterial space. But I think that it's going to be slightly accretive from an EBITDA standpoint, and then, maybe a couple of pennies over the next two to three years..

Okay. Thank you..

I think, Elizabeth, if I may add, the purpose of this acquisition was to give us a center of gravity and allow us to build a center of expertise in order to really accelerate our position in this market and make sure that our implant businesses, they understand the importance of it because there is a relationship out there with every implant, about 50% of those cases, they do have a need for biomaterial and membranes, and this gives us an opportunity to just kind of expand and get into that market and continue to build as we go forward..

Makes sense. Thank you..

Your next question is from Jeff Johnson, Baird..

Thank you. Good afternoon, guys. Amir, I was hoping maybe we could talk about pacing of revenue throughout the year. I know it's a back-end loaded year with some of the new product launches.

But just looking at the fourth quarter performance, I guess, one, I would love to confirm, if possible, is fourth quarter probably going to be the trough of core growth? But kind of hard to believe, we go from Q4 into Q1 and see a swing back to even flat growth.

So, just to level-set everyone, should we still be thinking negative core growth in the first quarter and then kind of build to that low single-digit range for the full year?.

Thank you, Jeff. Specialty and traditional consumer market continues to be relatively stable. We really feel good about what we have seen in Ormco, what we are seeing in China. This weakness was really isolated.

It was isolated in the developed market, in equipment business, and part of it was self-induced with the value implant and implant oral changes. We have factored in macro backdrop and this value brand rationalization, and we are counting on stabilization of implant, as we look forward, as we go through 2020.

Overall, performance in Q4 largely was consistent with Q3, if you look at a two-year stack, at a minus 1%. In Q1, we anticipate modest underlying improvement and better sequential performance, relative growth rate and it's driven by three factors. We've got three more selling days.

Implant is going to continue to stabilize as we go forward, as we have layered in new organization, stabilizing some of the capabilities that we have and we're going to have a much easier comp on our equipment and consumables business.

We think Q1, more likely at core is going to be more of a flattish and our expectation is that emerging markets continue to grow. We're not seeing any substantial changes in market condition in equipment and consumables. But we do have an easier comp and our expectation is that Ormco continues to deliver what they have done in 2019.

And hopefully, Spark is not going to be a major factor in Q1, but it's going to be an ongoing expansion throughout the year. We expect to see implant better performance in developed market. And then, as I mentioned, the value implant, kind of stabilized and continues to be a drag.

But as we go through the year, we expect it to become -- behind us and put us in a better place..

Right. That's helpful, Amir. Thank you. And not to accuse you of burying the lead there, but three extra selling days can swing a growth rate for a dental company quite a bit. So, if we assume that's maybe four or five points of tailwind in the 1Q, I just want to understand, when you say flat core growth that would be inclusive of those three days.

And then, maybe, Howard, you could help us understand, did those three days given up? Or do we give those back up later in the year? Or how does the whole year play out from a selling-day standpoint? Thank you..

Yes. Sure, Jeff. This is Howard. I think the three selling days that Amir has referenced is included in our core growth. And I think if you divide the days, it's roughly about 2% impact. Remember that those selling days are more impactful on our direct businesses, so, around specialty and technologies.

On the distributor side, the equipment and consumables, it's not nearly going to have as big of an impact overall. As it relates to the days, I think that we do give back a day, I think in Q2 and couple more days in Q4. And so overall, it is going to be a timing impact..

Thank you..

Your next question is from Jon Block with Stifel..

Great. Thanks, guys. Good afternoon. Maybe I'll just start on the specialty side, and more specifically Spark. Amir, I think you mentioned Spark sort of contributing 50 basis points of growth in 2020 that's about $15 million in incremental revenue or call it 100 bps to specialty.

And where I'm sort of going here is, it seems you expect specialty to accelerate materially in 2020 versus sort of that jump-off point in 4Q '19. So, maybe if you could just talk to the balance of the pickup.

Is that really just lapping the rationalization of the value implants since N1 is more of a 2021 event? I'm just trying to get more comfortable on that acceleration specific to specialty since, again, Spark seems to be somewhat constrained to the 100 bps. Thanks..

Yes. I understand. Thank you, Jon. What we expect happening throughout the year, as we mentioned, that core growth of a low-single-digit is three factors in here that is going to help make that 2% reality. One is about new products. We mentioned Spark. We've got other new products coming in throughout the year, about 50 to 100 basis points.

We think iOS agreement that we have put in place and products that we introduced in Greater New York, as well as, what we communicated to our direct sales force in Europe would have a similar impact in our growth as we go forward. So new product, 50 to 100 basis points of growth in here.

Our value implant we talked about, it has been a drag and brought us really down specifically in Q3 and in Q4. I think that will be behind us as we go through the year. But still, some of the impact will be visible in first half, but we're hoping that most of that would be behind us in second half.

Our emerging market, China, obviously, has continued to grow, but the rest of our emerging markets, we have made significant investment in the past several years.

We expect those to start paying off about a 50-basis point of incremental growth from emerging markets that will get us from a low-single-digit to about a mid-single-digit, specifically on those geographies, 24% of our business has started operating, performing better as we go.

And then, discontinued products are going to be a continued drag for us, about 50, at most 100 basis points. We put all of that together, we feel really good about the low-single-digit that we have communicated in the past and we think that there is a road map for us to be able to make that transition.

We're seeing good signs on NPIs, the team is really excited about what is ahead of them. And with EBS at the heart of our organization, we're building the rigor that is needed to actually execute some of the programs that we anticipate..

Very helpful. And maybe just to shift gears, you're entering one of the hardest parts of dental equipment, being DI and you've got several different players in your own strategy through KaVo X Pro.

So, how are you approaching that market? Are you bundling with some other parts of your portfolio maybe just share early feedback that you've seen over the past couple of months specific to DI uptake. Thanks, guys..

Yes, of course. We normally see this. We have recognized that this segment of the market is basically multiple segments. At the low-end of this or more of a point solution, people are primarily looking for productivity gains. Productivity gains and it comes with a product that it is cost-performance positioned.

And we think that KaVo X500, as well as, the Medit solution is really a smack in the middle of addressing that segment. We're going to have a dual-channel strategy in here where we can sell that through our Ormco and Nobel directly and we are offering that under the brand KaVo X500 through our distribution partners in the United States.

In Europe and at the high-end of this segment, we are seeing a full-grown solution that is fully integrated into the workflow. And it starts from image capture to planning, to execution, end-to-end solution that really simplifies the workflow.

This is where we think our relationship with 3Shape and having our team, both Ormco and Nobel in Europe to be able to offer that as part of the end-to-end digital solution that's going to make a huge difference. We are basically leveling the playing field in here.

Some of our competitors have used the iOS to better position their core businesses, they have bundled it and depending on the situation, case-by-case, they are offering products and capabilities that really make a differentiation. As I mentioned, we are trying to level the playing field through our sales organization.

We have an outstanding product and this gives us an opportunity to really extend the market, both under digital impression, but also extend our core business as we go forward. With the Spark and with the upcoming N1, having this end-to-end software solution would be a competitive advantage for us as we go forward..

Thank you..

Your next question is from Nathan Rich with Goldman Sachs..

Hi, good afternoon. Thanks for taking the questions. Just following up on the implant discussion.

Amir, could you maybe just talk about why the decision was made to make changes to the implant sales organization at this point? And can you kind of go into a little bit more detail in terms of what those changes were and why you kind of think that kind of positions you better ahead of the launch of N1 that we have kind of upcoming later this year?.

Yes, of course. We want to focus on doing the right thing long-term for the business. We're ready to make the changes, as needed in order to move forward. As we enter Q4 and as we were going through the quarter, we feel really good about the position that we have from an earnings perspective. So, we made a decision to accelerate those org changes.

Also, it was important to do it in front of major product launches. We wanted to make sure that we have the right org in place to be successful and don't have any disruption at the pivotal time. But the rationale for making the changes outside what I explained was we wanted to get a lot more intimate with our customers.

We basically delayered the sales commercial organization in order to make sure that our management have direct access to customers. Information flows both ways, up and down, to get this coverage in territories really improved as we go forward. And we wanted to really apply EBS to get better commercial execution as we go forward.

These are the main reasons that we made a proactive decision to make changes and we are hoping and confident that these changes are going to pay off as we go forward. N1 timing has not changed at all. Internally, we are prepared and we're going through the process with the European approval processes, as well as, in the United States.

As we have said before, we think that this is going to be impactful later in the year in Europe and subsequently in 2021 in North America and other geographies..

Great. That makes a lot of sense. I also wanted to ask you on gross margins. They came in a little bit lighter than what we were expecting. I'd imagine the weakness in the specialty segment in the quarter maybe contributed to that.

Howard, would you maybe just be willing to kind of talk through what kind of drove the gross margin performance in the quarter? And then, as we think about gross margins in 2020, can you help us think about what you guys are kind of modeling in the context of the overall operating margin expansion?.

Yes. Sure, Nathan. And so overall in the quarter, we did see some gross margin impact. A lot of that has to do with sales mix. And so, as we indicated, we had less volume on the implant side, which clearly has some better gross margins than on the equipment and consumables. So, that probably contributed about half of that impact there.

And then, we've decided to continue to invest in our Spark product and what happens over time is we go from investment, specifically in R&D and OpEx, into production capabilities and capacity. And so of course, that's moving up the P&L a little bit. And so, we're seeing some of that as well. And then lastly, we've had some currency impact as well.

That was probably a little less than a quarter of that impact. I think going forward, we think that the headwinds will be much more moderate. We think that it's going to be a slight impact, but we do think that overall that we'll see that improving in 2020..

Great. Thank you..

Your next question is from John Kreger with William Blair..

Hi, thanks very much. Amir, on this call and on the third quarter call, you mentioned you saw some basic equipment weakness. Can you just elaborate on where you're seeing that? And from your perspective, is that softer, kind of end-market demand or maybe just some competitive pricing pressure? Thanks..

Yes. Thank you, John. In our equipment business, specifically on the treatment unit, we have always been positioned as a premium solution both in KaVo, as well as, in the Pelton offering. We started this process -- it started with a little bit of destocking and then, continued throughout the 2018 and 2019.

But primarily, we are seeing that in the developed market and that has continued. We saw it in Q3. We have seen it in Q4. This business is radically changing. We had anticipated that.

As we talked about cost reduction, redirection of resources and capabilities, we have positioned this business to continue to deliver on commitments that we have out there, but slowly and thoughtfully, focus it on margin expansion opportunity, and kind of narrow the offering in here to make sure that we are meeting the expectation of the market.

Some of the largest opportunities in this space are with DSOs. And you look at three, four years ago versus where we are today, we are adjusting the business, both from a cost structure, R&D and capabilities to respond to the realities on the ground. We are seeing some additional changes in here that we have started a few years ago.

In emerging market, normally, they start with a smaller footprint, a smaller setup and then extend over time. And we wanted to make sure that we have products and capabilities to meet the requirement of this segment. Moving forward, John, we are not expecting this business to be a growth business for us.

We think equipment business would be flat maybe even negative low-single-digit. We are trying to position it properly and as I mentioned, redirect capabilities. On the other hand, I want to make sure that when we touch on equipment, we separate the imaging part. We think imaging is an important part of our overall offering.

It's integrated into our specialty businesses. We think that the core imaging products, with the combination of a DTX software plus some of the capabilities that we are putting in place, will give us an opportunity to create differentiation in here. Products such as 3D sensors and iOS are an important part of our move-forward capabilities..

Great. Thank you. And then I just wanted to clarify one other thing, the value implant rationalization that you talked about.

Is that done at this point? So, it's just a question of lapping the changes you've made or are there more changes you need to make as we think about the first and second quarters of the year?.

So, we started this process beginning of second half of 2019. And I think we have explained it, but worth mentioning it, that we have competing product, competing channel in the specific geographies.

So, we made this strategy and we started moving geography-by-geography from one brand to the other by shifting our capabilities, by communicating to customers.

As you can imagine, that process is taking longer and the people who have used one product for a long period of time will have to go through education process, we got to change some of these go-to-market capabilities. We have done a big part of that and we're hoping that by end of first half, majority of that would be behind us..

Great. Thank you..

Your next question is from Brandon Couillard with Jefferies..

Hey, good afternoon. Howard, just some more housekeeping items for you.

As far as the fourth quarter goes, did the premium implant business actually post growth in the fourth quarter? And then, could you split out consumables and equipment for us?.

Sure, Brandon. I think that the premium piece in Q4, given some of the organizational changes, did not expand or did not grow in Q4. And then, as it relates to the equipment and consumables overall, I think that it was down low to mid-single-digits depending on the product category and specific regions.

I think the biggest drag was, of course, in the U.S., as well as, in Western Europe, as Amir indicated earlier..

But as a portfolio, do you think consumables was down in the fourth quarter?.

It was down, I think, low-single-digits in the fourth quarter..

Got you. And then, what do you pencil in for ASPs, net ASPs, in '20? Thank you..

We've seen about 100 bps of impact associated with some of the pricing. We think that going forward, that realistically, we still think that there will be a bit of pricing impact. Say, maybe around 50 bps to 100 bps moving forward. Again, really important for us to drive innovation here and get new products.

We think that the N1, for example, will be a premium-priced product. And also, in areas where we're seeing some of this pricing impact, I think Amir mentioned the DSOs. Just more broadly, that is the case that we're seeing some impact on pricing. However, we're expanding our business and the volumes are increasing substantially in our DSOs.

And particular to that piece of the business, I think they're expanding into the specialty side of the business, which obviously has better margins overall..

Very good. Thank you..

Your next question is from David Lewis with Morgan Stanley..

Hi, this is Mason on for David today. Thanks for taking the question. Just on Spark, I was wondering if you could touch on the rollout strategy a little bit further. I'm assuming this is going to really kick off after the Ormco forum in mid-February.

But from there, is it going to be a slow-controlled rollout among a handful of orthodontists or how should we think about the strategy in the early parts of launch?.

Excellent. We are looking at this as a premium product that it is primarily focused on our core customers, Ormco customers, as we had said before. We want to start there and we want to continue to give them that premium customer experience.

And that is the relationship on the ground with our sales force, case approval processes that they are local and manufacturing capabilities that are within acceptable timeframe and what we commit to. In order to make that reality, we want to make sure that we stay with that phased approach.

Touched on, we sign another group, we take them through the training, we go to their offices, we ramp them up, we get them to the third case. When we feel that they are really independent and they can operate and their relationship is built, we sign up the next group. As we speak, we have been signing up other groups in North America.

In Ormco forum, what you can expect is a good portion of those group of people that have signed up already and have a significant number of cases, to share their experiences with their peers and colleagues. We have people that have shown interest and we are creating this phased approach as we go through the year.

That premium experience is something that we want to maintain as we go forward. In the United States and as we go to other geographies, we like to execute and implement that. Our approach in here is sustainable steady growth with opportunities to ramp this up as we go to 2021 and 2022..

Great. That's helpful. And then on margins, you referenced last quarter; you're starting to see some realizations from cost programs a little bit earlier than planned. I guess, can you tease out some of the key margin drivers for 2020, whether it's more due to mix-driven margin expansion or is it more skewed to the cost programs? Thanks very much..

Yes. I think that we are seeing both in 2020. Certainly, as our specialty business grows and outpaces the equipment and consumables side from a growth standpoint, that will yield some favorable mix and an uplift on margins.

The other part of this margin expansion is we continue to be committed to the $60 million of cost takeout over the next three years and that will take on the form of productivity initiatives, as well as, material costs, and then certainly, a focus on indirect. And we're seeing some of that traction even now.

I would say that in the quarter, we saw some impact coming from some of the consolidation around, for example, our auto fleet and limiting our number of vendors, as well as, selection choices. We're seeing some of that readout as well in the quarter.

So, we're excited, we're happy with the progress that we've made to date and we continue to be committed to that margin expansion moving forward..

Great. Thanks, both..

We'll take our final question from Erin Wright with Credit Suisse..

Great. Thanks. You mentioned negative consumables experience here.

What are you seeing in the North America business, in particular, in terms of consumables' underlying demand trends? Are there any sort of metrics you can give us in terms of dental office visits that would be indicative of those sort of demand trends? And do you think you have visibility on some sort of stabilization across the end market in North America?.

Thank you, Erin. We had this hypothesis when we started 2019 and that has been proven continuously that developed markets specifically is sluggish, but is stable when it comes to the consumables. And why do we have that point of view? It's about inventory position and the sellout. They have good visibility on what is taking place in there.

In emerging markets, there are opportunities for extending the consumables business and these are some of the activities that we have taken in order to rebalance our commercial capabilities and go-to-market.

A whole lot of investment that we have made in emerging markets is toward the direction in order to balance our business to take advantage of opportunities in those geographies. But our expectation as we go forward around traditional consumables would be low-single-digit, flat, low-single-digit.

And with the price pressure that is coming in, it is stable but we are not counting on this to be a major grower for us as we go forward. Our focus continues to be on our specialty businesses and our emerging markets in order to shift our business both from a margin and growth perspective..

Okay. Great. And then on Spark, how should we think about the Spark traction and opportunity in China, in particular? I think you said you shipped your first case there and more broadly, across your entire China business.

I just want to confirm that you do still anticipate, I guess embedded in your guidance, the continuation of double-digit growth in 2020 at this juncture in China..

Absolutely. We expect that China continues to grow. And as I mentioned before, we think that what we have seen, our specialty businesses in China is actually growing over 20%. So, we're going to see that opportunity to continue to expand. We are encouraged that we do have the CFDA approval.

We are encouraged that we have the capabilities from a manufacturing perspective. We think that our position that we have in China through Envista and KaVo is going to be a huge competitive advantage for us. But we are not counting on a significant impact in our growth, either in our China growth from Spark.

We think this would be impactful as we go through 2021 and 2022, not only in China but worldwide..

Okay. Thank you..

Thank you, everybody and Erica. And we'll be around the rest of today and tomorrow for follow-up calls..

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