ZimVie Q1 2024 Earnings Call Transcript

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May 8, 2024

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to Xindi's First Quarter 2024 Earnings Conference Call. Currently, all participants are in a 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 Marissa Beich from Gilmartin Group for introductory disclosures.

Speaker 1

Thank you all for joining today's call. Earlier today, Cindy released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company's website, zimby.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 financial measures. Reconciliations of these measures to the most directly comparable GAAP financial measures are included within the earnings release and the investor deck issued today found on the Investor Relations section of the company's website. This conference call contains time sensitive information and is accurate only as it's a live broadcast today, May 8, 2024. Zimby 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.

Speaker 1

With that, I will turn the call over to Vafa Jamali, President and Chief Executive Officer of Zimby.

Speaker 2

Good afternoon and thank you all for joining us. We've had an active 2024 thus far and I'm pleased with our progress. With the recent sale of our spine business for $375,000,000 in total consideration, including $315,000,000 in cash and a $60,000,000 promissory note, we're delivering on our promise to reshape the financial profile of our business. Immediately following the sale, we paid down $275,000,000 of debt and refocused our organization as a pure play dental company with a comprehensive and industry leading portfolio. We've already begun taking concrete actions to right size our cost profile following the sale of Spine.

Speaker 2

In addition to reducing our corporate infrastructure, we're also reducing corporate expenses such as IT costs and legal expenses, while continuing to optimize our manufacturing operations. We're confident in executing further rightsizing actions to improve our margin profile over the next year. We're also confident in our pathway for continued improvement for the years that follow. I'm very excited for the future of this company as we continue to invest in differentiated solutions for patients and providers, scale the adoption of those solutions and improve the efficiency of our business to deliver shareholder value. As we enter our 1st full quarter as a leaner, more focused dental company, we have all the components to maintain and grow our leadership position in this $8,000,000,000 implant, digital solutions and biomaterials market.

Speaker 2

Our strategy is grounded in delivering outstanding innovative products to our customers in support of gaining market share while driving the expansion of the implant dentistry market as a whole. Our best in class implant portfolio is led by our TSX and T3 Pro premium dental and also hold surgical tools, abutments and restorative components. TSX and T3 Pro are our most recent implant launches and have both demonstrated rapid and strong commercial traction. Our biomaterials portfolio includes a wide selection of bone graft substitutes, membrane tissue products and regenerative products with a history of well documented clinical results. This portfolio includes our leading Puros allograft solution.

Speaker 2

Biomaterials products are also used in implant procedures to provide a foundation for the implant and create a desirable aesthetic outcome. Our digital dentistry portfolio includes end to end digital solutions for tooth replacement procedures, including intraoral scanning solutions and guided surgery software. By using these digital solutions, our customers are recognizing greater efficiency in their workflow, benefiting from enhanced procedural accuracy and focusing more time on what they do best performing implant surgeries. Practices that adopt our digital workflow solutions typically perform many more implant cases than practices that don't. In addition, these practices are seeing excellent patient satisfaction, reduced patient chair time, great outcomes, especially in customized restorative smile operations.

Speaker 2

We estimate that only about 20% of dental implant cases today are performed using the complete digital workflow. As a result, we see an incredible opportunity to continue training providers on the benefits of our software and our guided surgery solutions, which can yield further growth and adoption. Across our portfolio, our commercial advantage stems from the value we are delivering across stakeholders, patients, clinicians and the dental lab. Medical education and training are greatly aiding in the adoption of our workflow technologies. In our industry leading training and education programs, we bring dentists to our institutes in Carlsbad, California, Palm Beach Gardens, Florida and Switzerland.

Speaker 2

We also hold regular hands on and didactic programs in the field to help educate clinicians and grow the field of implantology. We expect that our efforts to deliver efficient, high quality differentiated solutions to dentistry practices coupled with comprehensive training will form the basis for healthy long term growth in our business. With a little focus on operational progress, over the past 2 years, our team has worked immensely hard to execute material operational improvements across our business. Many of those improvements were focused within our spine business. As we move forward, we'll take much of that same playbook to our dental business, including a focus on manufacturing automation, supply chain optimization and improving the efficiency of our plants.

Speaker 2

As a result of these plans, we expect to drive the margin improvement previously mentioned. That said, our platform is driven by innovation and customer satisfaction. It should be very clear that our efficiency improvements will not be reflected to reduce research and development or reduce commercial costs. I'll now turn the line over to Rich to review our financial performance and forward outlook in greater detail.

Speaker 3

Thanks, Bapa, and good afternoon, everyone. I'll begin by reviewing our Q1 2024 results and we'll close by providing commentary on our outlook for the full year 2024. As a reminder, we finalized the sale of our spine business on April 1, 2024. Thus, our spine segment is reflected in discontinued operations in our financial statements. Like we did at the time of our Q4 2023 financial filing, we have again bifurcated our Q1 2024 financials between continuing operations, which comprises our dental business and the majority of corporate costs and discontinued operations, which includes the legacy Spine business.

Speaker 3

Please refer to our 10 Q for financial results from discontinued operations. Turning to continued operations. 3rd party net sales for the Q1 of 2024 were $118,200,000 a decrease of 1.6% in reported rates and a decline of 1.4% in constant currency. In the U. S, 3rd party net sales for the Q1 of 2024 of $67,700,000 decreased by 3.1%, driven by a weaker implant market and lower iTero capital sales, partially offset by strength in our digital solutions and biomaterials portfolios.

Speaker 3

Outside of the U. S, 3rd party net sales of $50,400,000 increased 0.4% on a reported basis and up 1.1% in constant currency. We have seen stability in the OUS dental market over recent quarters and our competitive position remains strong in the core markets we serve. Q1 2024 adjusted cost of products sold was 37.2% compared to 35.4% of sales in the prior year period due to unfavorable product mix and lower manufacturing absorption. We expect improvement in cost of products sold over time as we streamline the organization, cut duplicate of cost, improve manufacturing efficiency and benefit from a more favorable product mix as implant sales recover.

Speaker 3

Q1 twenty expense of $6,300,000 or 5.3 percent of sales compared to $5,900,000 or 4.9 percent of sales in the prior year. Q1 2024 adjusted sales, general and administrative expenses of $60,300,000 compared to $66,300,000 in the prior year, driven largely by reductions in IT and legal expenses. Adjusted EBITDA attributable to continuing operations in the Q1 of 2024 was $12,500,000 or a 10.5 percent EBITDA margin. Q1 2024 adjusted earnings per share attributable to continuing operations was $0.08 a share on a fully diluted share count of 27,100,000 shares. We are very pleased with our financial performance in the Q1 of 2024 as we are delivering on our plan to resize and reposition Zynvi as a pure play dental company.

Speaker 3

We remain committed to achieving our financial objective of 15% plus EBITDA margins 1 year post Spine sale. As Baffin mentioned earlier in the call, we are very pleased with the position of our balance sheet following the repayment of $275,000,000 of debt on April 1. As of April 2, 2024, we had a consolidated Zendy cash balance of approximately $66,000,000 and a gross debt balance of approximately $234,000,000 yielding a net debt balance of approximately $168,000,000 In addition, we are maintaining our $175,000,000 revolving credit facility, which remains undrawn. As we think about capital allocation on a go forward basis, we will continue to fund the business and our priority will be to deploy excess cash flow to further reduce debt. That being said, we will continue to operate the business as a meritocracy deploying resources to the highest return initiatives.

Speaker 3

Turning now toward our outlook for the full year 2024. We are expecting revenue for fiscal year 2024 to be in the range of $450,000,000 to $460,000,000 reflecting an increase of 0.2% at the midpoint compared to 2023. We believe that our guidance appropriately accounts for the modest year over year decline we experienced in Q1 and some ongoing softness in our end markets, particularly implants in the U. S. We are confident that our differentiated product portfolio and our executional strength positions us very well for when our end markets stabilize and improve.

Speaker 3

Specifically looking at the Q2 of 2024, given current trends in the U. S. Implant market, we expect our Q2 revenue to be sequentially lower by 1% to 3%, largely similar to the seasonal sales patterns in 20222023. We expect fiscal year 2024 adjusted EBITDA to be in the range of $60,000,000 to $65,000,000 resulting in an adjusted EBITDA margin in the range of 13.3% to 14.1 percent of sales. As our guidance implies, we are pleased with our performance to date and we expect to generate increasing adjusted EBITDA in Q2 now that we have sold the spine business.

Speaker 3

As mentioned earlier, we remain committed to a 15% plus adjusted EBITDA margin by April 1, 2025. Turning to our interest expense profile, considering our recent actions to pay down substantial portion of our debt and the payment in kind interest we will be giving accruing on the seller note with HIG, we now expect 2024 interest expense to be approximately $12,500,000 to $13,000,000 inclusive of $4,400,000 of interest expense for the Q1 of 2024. Share based compensation expense is expected to be in the range of $16,000,000 to $16,500,000 for the full year. We expect to generate adjusted earnings per share of $0.55 to $0.70 per share on a fully diluted share count of 28,500,000 shares. With that, I'll now turn the call back over to Bapa.

Speaker 2

Thank you, Rich. I'm excited about the prospects ahead of us. And as always, I look forward to updating you on our progress throughout the year. I'm pleased with the success we've had over the past year and we've completely reshaped ZEMVI as an organization while delivering significant shareholder value. I'm equally energized by the opportunity ahead of us as a pure play dental company.

Speaker 2

With that, we'll open it up to questions.

Operator

The first question comes from the line of Matt Miksic of Barclays. Matt, please go ahead.

Speaker 4

Hey, guys. Thanks for taking the questions.

Speaker 3

Hey Matt. Hey Matt.

Speaker 4

So maybe Rafa, if I could follow-up on your comment about mix and maybe just a little more color on what the shifts in mix have been so far this year as you were describing and sort of what kinds of catalysts or actions you can take to help sort of drive improving mix throughout the rest of the year? And then I had one follow-up.

Speaker 2

Sure. So we are seeing mix have an impact on us. It's both geographical and Yes. Hey, Matt. Our revenue story for Q1 actually

Speaker 3

Yes. Hey, Matt. Our revenue story for Q1 actually boils down to 2 items. The first one of which is we're experiencing some pressure on the capital sales side. And so the Itero that we distribute, right, which is lower margin for us was lower in the quarter versus prior year.

Speaker 3

The other area is around implants, but specifically around the U. S. And so we're seeing continued challenge market in U. S. Implants, but we're seeing strength across the rest of the portfolio, including in biomaterials and digital.

Speaker 3

And we're also, as you noticed from the press release, we're also seeing strength in the U. S. I mean, our European organization grew over 4% in the quarter, for example, inclusive of that 1% plus constant currency growth for the quarter. But it both largely boils down to iTero sales and U. S.

Speaker 3

Implants.

Speaker 2

With that, Matt, also pricing has been actually pretty stable for So unlike what we've heard from others, pricing has been relatively stable. We're down about 1%, which is I think, different from what we've been reading.

Speaker 4

That's great. And then on the path to 15% EBITDA, which you're talking about now, I guess, as of buying April 1, is that am I right to read that as Q1 next year, that's what we should expect you to be printing or again just understanding the timing of your full year next year?

Speaker 2

Correct. We're saying at the end of that period, we will be at 15%. And like always, we'll be doing everything we can to kind of get to that quicker and to continue to make improvements to it.

Speaker 4

Okay. And some of the things you just mentioned, mix, obviously, having an impact this year. I'm sure as you map that path to 15%. Maybe if you could talk a little bit more detail about sort of operationally, either internally or execution commercially that you think will be the sort of like the key drivers helping get there on time or faster?

Speaker 2

Right. So, if you look at if you break down our costs, I mean, largely we have a corporate infrastructure that was bigger. Imagine we were running at Zimby more like a holding company with a couple of divisions where we had to have a central group and then we're really collapsing that. So there's an element of cost there. We've taken a large portion of that already out.

Speaker 2

And then the next pieces that you look at are legal costs and IT costs, which are probably the next 2 biggest buckets. And we are taking those ones out. So those are mostly fees paid, services purchased from, for example, the IT is basically subscription services and licenses that we will renew at a much lower rate. And we've got a plan on those basically laid out where we know exactly when the price when the cost will come out. And then on top of that, we do also have transition service agreements, which are also funded by HIG's acquisition of Spine, which also helped kind of buffer some of that as well.

Speaker 2

Rich, anything that I missed on that one?

Speaker 3

Yes. Just quickly to your commercial execution comment, right? I mean, even though there's some macro challenges that I think are pretty well known within the dental market. But I think from a commercial perspective and commercial execution perspective, one of the things that we're finding is the strength of parts of our products, like in particular around digital are really sticky with our customers. And so we don't really talk about it too often, but on like a same store sales basis, we're just seeing a decline in same store sales, but we're not necessarily seeing customers like lead the organization.

Speaker 3

And so the industry is talking about stabilizing toward the back part of the year. And so we feel as though our commercial execution and the strength of our portfolio is going to position us really well for the back half.

Speaker 4

Okay. So some rationalization, some kind of internal cost programs and maybe it sounds like is it fair to characterize the digital revenue line as a bit more subscription and less sort of episodic procedure at the whim of the puts and takes of procedure flows. So maybe just a little softer time that we might see in sort of maybe implants. Is that fair way?

Speaker 2

Yes. Undoubtedly, if procedures slow down, those purchases will be somewhat reduced, but we're seeing close to 50% growth of the guided surgery line and that's no capital allocation for the customer. They're buying as they go. So we're seeing great, great adoption there and we're getting a very, very high renewal rate for that subscription. So we think that all of the elements point to a pretty good recovery for us.

Speaker 2

Once the end market returns, I think we're going to have more customers. And like I said, we're pulling through our implants on that. So I'm feeling pretty confident that we've got the right portfolio.

Speaker 4

Great. Thanks so much for the color.

Speaker 2

Thanks, Matt. Sure. Talk to

Speaker 3

you soon.

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ZimVie Q1 2024
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