ZimVie Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

There are 6 speakers on the call.

Operator

Afternoon, and welcome to Zimby's Second Quarter 2023 Earnings Conference Call. Currently, all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Marisa Bayek by Gilmartin Group for introductory disclosures.

Speaker 1

Thank you all for joining today's call. Earlier today, Zimvi released financial results for the quarter ended June 30, 2023. A copy of the press release is available on the company's website, zimvi.com as well as on sec.gov. Before we begin, I'd like to remind you that management will make comments during this call that include forward looking statements. Actual results may differ materially from those indicated by the forward looking statements due to a variety of risks and uncertainties.

Speaker 1

Please refer to the company's most recent periodic report filed with the SEC and subsequent SEC filings for a detailed discussion of these risks and uncertainties. In addition, the discussion on this call will include certain non GAAP Reconciliations of these measures to the most directly comparable GAAP financial measures are included within the earnings release and or the investor deck issued today found on the Investor Relations section of the company's website. This conference call It contains time sensitive information and is accurate only as of the live broadcast today, August 2, 2023. Zynvi disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. With that, I will turn the call over to Zafar Jamali, President and Chief Executive Officer of Zendesk.

Speaker 2

Good afternoon and thank you all for joining us. In the Q2, we continue to drive steady progress against our most vital objectives of innovation commercial execution, while taking deliberate steps to improve our operating profile. Our most critical imperative continues to be our innovation platform as we work to actively reshape our portfolio and lean further into the markets with the best long term growth potential. On this note, we continue to build traction in the Q2 with our recently launched dental solutions, including our T3PRO And TSX implants and the Encode Emergent's healing abutment. We have been actively expanding the reach of these premium portfolio additions to markets around the globe.

Speaker 2

This includes the launch of T3 Pro and TSX in the Asia Pacific region as well as the expansion of ENCODE emergence into the European market. We also continue to roll out new products with the addition of 2 new bone graft solutions, the Regeneron Cc Alligram Particulate And Regeneron's Bone Graft plug. As we shared at the time of the launch, these two bone graft solutions broadened Zimbri's presence in the dental biomaterials market and expand our comprehensive suite of offerings. Our sales team and DSO partners are having success engaging existing and new customers On the heels of this cadence of launches, and we believe that the pace of adoption of our new to market products is outpacing growth in the overall market. Turning to other areas of progress in our dental portfolio.

Speaker 2

As we announced in April, we have now opened a state of the art Dental Science, Educational and Training Institute at our Palm Beach Gardens Dental Facility. It's been a great pleasure hosting current and prospective dental customers At the institute in recent months and we have been receiving great feedback on the training we have posted thus far. As of today, we've hosted 23 different courses With over 500 clinicians in a short span of roughly 12 weeks since opening, we anticipate hosting many additional events this year and ultimately hosting over 1,000 clinicians in 2023. In summary, I am pleased with our position in dental and remain confident in our ability to perform at We are also driving incremental success within the spine portfolio with noteworthy success in our international markets. An accelerant for growth was OUS growth of Moby C.

Speaker 2

I've been showcasing the importance of clinical evidence in our spine portfolio for the past 18 months And MobiSee's truly differentiated clinical evidence dossier was rewarded here. MobiSee received French government reimbursement And the highest quality rating from the British clinical panel ODEP early in the Q2. These developments have helped drive Strong European performance, which is particularly relevant as Europe has been historically under penetrated and under adopted region for cervical disc replacements. Building on our spine presence outside the U. S, we are also excited to announce that we're continuing to expand our commercial efforts for the Tethr, our differentiated Non fusion spinal device for the treatment of idiopathic scoliosis in key countries in both Europe and in Asia Pacific.

Speaker 2

Finally, we are advancing our Brainlab partnership. As a reminder, in March, we announced a global development agreement with Brainlab for spine enabling technologies To provide our customers and patients the deepest level of integration between ZEMBI products and Brainlab's industry leading portfolio of spine imaging, planning, navigation and robotic assisted solutions. Today, we continue to work on achieving compatibility between our spinal implant And Brainlab, Spine and Trauma Navigation Systems, allowing us to enhance workflow and accuracy in the operating room while reducing intraoperative x rays and radiation exposure. We are now collaborating much more deliberately at the customer level and I look forward to sharing some customer successes in coming quarters with you. Looking forward, we will continue to engage with our key surgeon customers, innovate on and around our existing solutions and ultimately Optimize our position in markets we're positioned to win.

Speaker 2

Turning to our continued operational improvement. I'm excited to announce that we have now completed all TSAs related to the separation from our former parent, Zura Biomet. In these transition agreements with the parent, we refreshed our core IT systems moving over 9 50 servers to data centers and transitioning over 200 applications to modern and largely cloud based platforms. We are also finalizing the ERP conversions with our last conversion in Barcelona Set to finalize this fall. In addition, we've made meaningful reductions to our physical footprint, receivables and corporate overhead.

Speaker 2

We have more work to do surrounding optimizing inventory levels and optimizing manufacturing output. These actions are in accordance with plan we laid out at the time of the spin and I'll now turn the call over to Rich to outline our financial performance.

Speaker 3

Thanks, Bapa, and good afternoon, everyone. I'll begin by reviewing our Q2 of 2023 results and we'll close by providing our updated outlook for the full year 2023. Total third party net sales for the Q2 of 2023 were 200 and $24,900,000 a decrease of 3.6% on a reported basis and a decrease of 3.4% in constant currency. Moving on to our 2 segments. Global Dental's 3rd party net sales were $118,700,000 in the 2nd quarter, representing 40 basis points of growth in both reported and constant currency when compared to the prior year period.

Speaker 3

Although the dental market as a whole was relatively soft in the Q2, solid commercial execution and the continued market acceptance of our new implants Position us very well for the longer term. Additionally, we continue to see strength in our digital offerings, which grew high single digits in Q2 versus the prior year period. In the U. S, dental third party net sales of $69,300,000 Declined slightly by 1.3%, driven by slightly weaker implant market, offset by strength in our digital solutions sales. Outside of the U.

Speaker 3

S, Dental third party net sales of $49,400,000 increased By 2.9% on a reported basis and 2.8% in constant currency, driven by growth Across all three of our product families implants, biomaterials and digital. In particular, We are pleased to see strong market acceptance of our T3PRO and TSX implant watches. 2nd quarter Global Spine third party net sales were $106,200,000 a decrease of 7.8% on a reported basis and a 7.2% decrease in constant currency when compared to the prior year period. The decrease was primarily driven by continued competition in the Spine market And our decision to exit China following volume based procurement offset by sales that were previously attributed to Zimmer Biomed. As Vassa intimated, we are pleased with our Moby C and TAVR performance relative to the balance of our core spine portfolio led by growth in Europe.

Speaker 3

In the U. S, Spine's 3rd party net sales of $84,500,000 decreased by 9% Driven by competitive pressure in Core Spine, partially offset by a relative improvement in WobeeSee and Tethr. Outside of the U. S, Spine third party net sales of $21,700,000 decreased by 2.9% on a reported basis, but grew 10 basis points in constant currency. The impact of our decision to exit China is estimated to be $2,700,000 versus prior year and is offset by $3,800,000 of sales previously recognized by Zimmer Biomet that are now Zynb sales.

Speaker 3

2nd quarter adjusted gross profit of $151,400,000 compared to $153,400,000 In the prior year period, adjusted gross margin of 67.3 percent reflects an increase of 160 basis points when compared to 5.7 percent in Q2 of 2022. The increase in gross margin versus prior year is driven by a further reduction in inventory charges in our Spine segment resulting from our operational initiatives to better manage inventory, partially offset by higher cost of products sold in our Dental segment due to product mix. Adjusted research and development expense $11,500,000 was 5.1% as a percentage of third party net sales. 2nd quarter 2023 adjusted selling, general and administrative expenses of $125,600,000 or 55.8 percent The 3rd party net sales was 250 basis points higher than the prior year period. This increase was due to lower net sales, Higher marketing and medical education related expenses and year over year differences in our corporate expense structure.

Speaker 3

Note that this time last year, Zimbu was a newly spun company and we were still building our infrastructure as a newly independent company. Adjusted EBITDA in the Q2 of 2023 was $29,700,000 or 13.2 percent of third party net sales and reflects a modest decline of 20 basis points from 13.4% in the prior year period. Decrease in adjusted EBITDA margin is primarily due to lower net sales and higher selling, general and administrative costs as previously discussed, offset by higher gross margin. Adjusted earnings per share in the 2nd quarter was $0.17 on a fully diluted weighted average share count of 26,300,000 shares. Touching on working capital, liquidity and debt, In Q2, we continue to make progress on our initiatives to capitalize on the strength of assets on our balance sheet and the application of our disciplined financial framework.

Speaker 3

We have much work to do in these areas, but have seen a reduction in inventory related charges in the first half of the year This have manifested themselves in higher gross margin and we have reduced net inventory by $6,300,000 since December of 2022. In addition, well funded assets on our balance sheet have allowed us to further reduce capital spending by $7,100,000 year over year. We ended the 2nd quarter with $66,200,000 of cash and equivalents, roughly flat to Q1. As a reminder, our $175,000,000 credit facility revolver remains unbrought. I'll now turn to our revised full year 2023 outlook.

Speaker 3

We are pleased with our progress we are making and are subsequently revising our full year 2023 financial outlook. Starting with revenue. We are revising our expected full year 2023 net sales to be in the range of $850,000,000 to $870,000,000 up from our previous guidance range of $835,000,000 to 860,000,000 Looking at our segments, we continue to expect 2023 Dental net sales to be flat or to grow in the low single digits versus 2022. We now expect 2023 Spine net sales to decline in the High single digits to low double digits relative to 2022, inclusive of an approximately 3% point negative impact from our decision to exit China market. To provide some additional transparency into our Q3 revenue expectations, We are expecting a more pronounced impact from seasonality during the summer months versus historical periods.

Speaker 3

As of today, we expect net sales to be sequentially lower in the 3rd quarter, down low double digits versus our 2nd quarter with dental roughly flat year over year Reflecting this historical seasonality. Moving to adjusted EBITDA margin. We expect full year adjusted EBITDA margin to be in the range of 13.5% to 14% of net sales, the same as previously guided. We are pleased with our year to date 2023 financial performance and we'll continue to uncover and execute on opportunities To optimize our income statement and balance sheet, for Q3, we expect EBITDA margins to be sequentially down versus Q2, Commensurate with the impact of seasonality on our Q3 revenue as just mentioned. Consistent with our raising of revenue expectations and Year to date earnings per share performance, we are revising our adjusted earnings per share guidance range to $0.50 per share And $0.70 per share on a fully diluted share count of 26,500,000 shares, increasing the bottom and top end of our previous guidance range of $0.40 to $0.60 per share.

Speaker 3

With that, I'll now turn the call back over to Vapna.

Speaker 2

Thank you, Rich. I'm pleased with our progress in 2023 to date as well as our execution on streamlining objectives. Although we've had additional work ahead to return our business to durable growth, I'm confident in the strength of the assets in our portfolio and our presence in underserved end markets, which ultimately bring great value to patients. As we continue to improve the efficiency of our teams, All of our product platforms and execute commercially, we look forward to showcasing the results of this work we'll deliver in the back half of the year and beyond. With that, we will open it up to questions.

Operator

Thank you. We will now conduct the question and answer session. Today's first question comes from the line of Robert Marcus from JPMorgan. Please proceed.

Speaker 4

Great. Thanks for taking the questions and congrats on a nice quarter. Maybe to start, it looks like a lot of the outperformance, at least versus my forecast, came from outside the U. S. Dental and particularly outside the U.

Speaker 4

S. Or I mean outside the U. S. Dental and outside the U. S.

Speaker 4

Spine, Rather than the U. S, which was roughly in line. So maybe speak to some of the trends you're seeing outside the U. S. What's driving the outsized Growth there versus estimates and how should we think about those two line items as we move through the rest of the year and into next year?

Speaker 3

Yes. Hey, Ravi. Good afternoon to talk to you again. This is Rich Heffinsal. So I'll start with dental and then I'll kind of round it out with spine on from an OUS And so on the dental side, we actually saw pretty good growth in our EMEA region.

Speaker 3

I think it was pretty strong growth versus kind of our internal expectations. And we grew actually all three of our major product categories very nice In that particular region, including our Biomaterials offerings, our digital solutions and then also implants group. So We saw some fundamental recovery in Europe across many of our geographies that we serve in Europe on the dental side. So we're pleased with that performance. On the spine side of things, there was a pardon me, there was an announcement that was made a few weeks ago regarding The French reimbursement of Moby C in that particular country and we're the only cervical disc device in France that is actually reimbursed by the government.

Speaker 3

And we're Getting a lot of traction from Moby C growth, particularly in France and it's starting to permeate through The rest of Europe and so our Moby C growth in Europe is actually accelerating. And then secondarily, Tether It's also, as we geographically expand to multiple geographies, it's also growing really nicely in Europe. And We're seeing some foundational strength, particularly in our core products in EMEA that's really an uplift on the spine side.

Speaker 4

Great. Really helpful. And then again, good EBITDA in the quarter Showing upward improvement. You talked about some of the trends there, but as we as some of these improvements you're planning to make on inventory and continued improvement in sales. How should we think about your target for EBITDA expansion as we move forward.

Speaker 4

And I know you're not guiding for 2024 now, but how should we think about your near to midterm ability to Expand EBITDA margins and your confidence in that ability. Thanks a lot.

Speaker 3

Yes. Yes, no problem. So At the end of our last earnings call in Q1, we did announce a restructuring. And so we announced a benefit In 2023, that will also carry itself forward into 2024. And we expect to start to see The real benefits of that restructuring announcement, probably in the latter few months of this year, a lot of it is kind of back end loaded, Particularly where we made some of the changes in some of the particular geographies.

Speaker 3

And so on the first hand, we think there's an annualized benefit Relative to that restructuring that will carry forward into 2024. Secondarily, you'll see in Q2 that we actually Expanded margin again in Q2, despite a little bit of a headwind around product mix within the dental business. And the reason for that We have implemented purchasing controls on the spine side that is really limiting the amount of excess and The lead inventory charges that we're taking and so we expect to be able to continue that effort and be able to continue to expand margins despite kind of what's going On the top line, but obviously, we're encouraged by the strength of Moby C and Tether OUS Our dental business through U. S. Is a baseline as we exit the year.

Speaker 4

Great. I appreciate it. Thanks for taking the questions.

Operator

Thank you. One moment please. Our next question comes from the line of Matt Mitas from Mark Clay's. Please proceed.

Speaker 5

Hi. Thanks so much for taking the question. And I just wanted to follow-up on some of the trends that you talked about, Wafaa, And in particular, the competitive competitive in kind of market trends that you talked about in spine. Can you maybe give some color as to what are driving the pressure points For you, if that's the right way to describe it in terms of competition and what types of Things that you're seeing in the organization that might give us some sense that things could stabilize In a quarter, in 2 quarters, in 3 quarters, just on the spine side. And then I have one quick follow-up.

Speaker 2

Sure. Hey, Matt. So really on the spine side, we really decided that we had to invest More seriously, more heavily in our platforms. And this is both the core spine, which is arguably the most competitive part of spine And also, not forgetting MobiSee and Tether, which is our most differentiated assets. So overall, as we looked at where were the areas where we get the That's the places where we spent the energy, the resources.

Speaker 2

And I do think that that space is very, very competitive, But I do think that we are addressing the areas of concern. One was, enabling technologies and how you compete there against Others that have enabling technologies and with Brainlab, I think we're really secure in a good place there with a very, very State of the art technology platform added to our devices, which I think are going to be a really, really great match. So that's an area that we address there. With MobySea, we of course, we've had some success In Europe launching it with Tethr, we've had success in Europe and Asia Pac with great new users and really successful procedures. But we've also reinvigorated those portfolios.

Speaker 2

So look at us Continuing to build on that and what do we bring out to the market to reenergize the U. S. Market, which is obviously the biggest market there. We're doing a lot of reimbursement work and a lot of R and D work that's going to really satisfy and fortify those technologies. So It's a competitive space.

Speaker 2

I think we've got a really, really good opportunity to continue to differentiate and get back some business. We had some gaps in the core area that we're filling right now, which are really, really critical. And I also look at using some of the disruption in the spine world To our benefit as well, frankly, for the balance of this year and into next. So those are the areas that I'd be focused on for Spine to get it So ultimately to growth.

Speaker 5

Great. That's helpful. And then just on the Kennel side, and I apologize if this was covered as kind of hopping back and forth between Some other calls that a lot of folks saw, I think, this evening. Just One of the concerns is you are and everyone's aware that there may be some Pending pressure, consumer driven pressure on the dental side of the business. And ironically, When recession peers were higher, things seem to be kind of moving better and it seems like maybe things are slowing a little bit.

Speaker 5

Do you think any color as to whether that has anything to do with like the consumer market generally or is this Just a comp issue or any color that you're picking up on the field related to the demand for implants and the sustainability of growth in that key segment.

Speaker 2

Right. So right now, we believe we're outperforming the market For premium implants, so that is definitely the case. So we are gaining more customers and we're filling our training Programs and we are in servicing around the clock. So I do believe that we have new users coming on board. Regarding the market as a whole, I think it's for sure softer than it was a few quarters ago, But I do believe that that's very temporary.

Speaker 2

And as long as we can hold up here and not lose customers and continue to kind of bring on new customers, I think we're in pretty good shape. So as far as the market is concerned, I think ZEMBI's premium implants are doing quite well, on the back of both the innovation that we've done, which has had really good up take in the market and on the back of just a really solid digital dentistry platform that allows users to On board pretty quickly and to become implantologists with relative certainty that they could perform the tasks at hand. So Overall, I'm feeling okay. We've been watching for a slowdown. And so far, again, our numbers would say it's the volume per unit is per user is probably Not anywhere near the peak, but so far we're doing okay relative to our competitors.

Speaker 3

Yes. And Matt, just to ask, this is Rich. Just to quickly comment, one of our kind of fundamental strength I think has really been around kind of our Commercial execution and focus. And as you mentioned, Q2 last year was a relatively tough compare for the dental business. And We grew 40 basis points and implants did not go backwards, so which we think is outpacing the market generally speaking.

Speaker 5

That's helpful. And just maybe just the same topic, just one quick follow-up to that topic is obviously There was a number of consumer segments, right, that sort of benefited from Cash in people's pockets and so on coming out of the pandemic. And I don't know if this was one of them, but Is that your perception and last year this quarter was a tough comp? Is it just a matter of working is Part of it, working some of that out of the market, sort of whatever that was buying ahead, strong demand, say, a year, year and a half Getting on the other side of that is that I understand you're executing well against the market, which is great, but just as a market dynamic, do you think that's one of the factors or Is that not really so much something to think about for preparing plans? Yes.

Speaker 2

I think that bolus came Q1 Of last year, in Q2 of last year, where we really saw robust demand, we really saw that. So That was terrific. And I think that was kind of the fundamentally what you're referring to. But what should make us really confident is that we beat both of those quarters This year. So that on itself lends me to believe that we've built a platform and we haven't gone backwards on it.

Speaker 2

So I think that probably indicates some share pickup on our part. So I do think that those were boomer quarters, Probably because of some cash in pocket, but we haven't gone backwards from those.

Speaker 5

That's great. Appreciate the color.

Speaker 2

Thanks for the questions.

Operator

Thank you. That now concludes the Q and A portion. I will now hand the line back over to Vafaa Jamali

Speaker 2

Thank you very much. Again, we look forward to continuously improving

Operator

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

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Key Takeaways

  • In Q2, Zimby launched premium dental solutions like T3PRO and TSX implants and the Encode Emergence healing abutment, expanding into Asia Pacific and Europe and reporting digital offerings up high single digits, with adoption outpacing the market.
  • The spine segment saw international traction with MobiC securing French government reimbursement and a top ODEP rating, plus expansion of the non‐fusion Tether device in Europe and Asia Pacific, and deeper integration through the Brainlab partnership.
  • Operationally, Zimby completed all transition service agreements post-spin, migrated 950 servers and 200+ applications to modern cloud platforms, advanced ERP conversions, and reduced its physical footprint and overhead, with ongoing inventory and manufacturing optimizations.
  • Total Q2 third-party net sales were $224.9 million (down 3.6% yoy), with dental sales up 0.4% and spine sales down 7.8%, while adjusted gross margin rose 160 bps to 67.3% and adjusted EBITDA was $29.7 million (13.2% margin), producing $0.17 in EPS.
  • For full-year 2023, Zimby raised its net sales guidance to $850–870 million (from $835–860 million) and adjusted EPS to $0.50–0.70 (from $0.40–0.60), while maintaining its 13.5–14% adjusted EBITDA margin target.
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