ZimVie Inc.

Good day, and thank you for standing by. Welcome to the Zimby Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone, and you'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Marissa Beisch.

Thank you all for joining today's call. Earlier today, Zimby released financial results for the quarter ended September 30, 2023. 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. These 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 of the live broadcast today, November 1st, 2023. 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. With that, I will turn the call over to Zafa Jamali, President and Chief Executive Officer of DIMBY.

Good afternoon, and thank you all for joining us. In the third quarter, we continue to make progress on our innovation platform, actively reshaping our portfolio to further penetrate markets with best long-term growth potential. In parallel, we are improving our operational efficiency and driving better cash flow generation. In dental, our sales team and DSO partners continue to have success engaging existing and new customers. We've seen strong traction for our products launched over the past year with both our legacy customers and our ever-emerging DSO channel, driving new customer acquisition across the board. We're also very pleased with the cadence of new product introductions, the most recent being Biotivity and Azure. The Biotivity AC Plus membrane, now part of the dental biomaterials portfolio, delivers a common request we receive from the field. to offer a growth factor-rich bioactive barrier. The bioactivity membrane, which is derived from human placental tissue, conforms nicely for site coverage and is now being used in a variety of regenerative procedures. Turning to our Azure multi-platform product solutions, with Azure, the portfolio offers a more comprehensive selection of components to effectively cater to the dental lab market. This solution set includes 13 lab-focused prosthetic and restorative solutions designed to integrate into digital workflows. In summary, I'm very pleased with our position in Dexil. We're made confident in our ability to perform at or above market in core product areas into the year ahead. Turning to our spine business, we're also driving incremental success within our spine portfolio. Our position with MobiSea is improving also. Earlier in the quarter, we announced FDA approval for a new, smaller-height Mobi-C in seven footprints. This approval allows for usage of Mobi-C to address more anatomical needs, expanding access for patients across the U.S. I'm pleased to report that we've implanted our first device, and I look forward to seeing further adoption. Continuing with Mobi-C, we received FDA approval to launch groundbreaking ID clinical study of cervical arthroplasty adjacent to fusion. and differentiatedclinicalevidence.j, and aid in expanding the suitable patient population for cervical heart surgery. I'm also pleased to share that we recently crossed the milestone for 2,000 patients treated with the Tether device. As a reminder, the Tether is a high-impact solution for pediatric patients. Over 50 surgeons have performed VBT using the market-leading Tether system to treat patients diagnosed with adolescent idiopathic scoliosis. We look forward to treating more patients with this therapy into the future. Finally, we continue to advance our BrainLab partnership, having recently expanded our development cooperation agreement to include co-marketing. 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 your operative x-ray and radiation exposure. We'll continue to engage with key surgery customers, innovate on and around existing solutions, and ultimately optimize our positions in markets where we can win. Turning to our continued operational improvements, as I mentioned in past quarters, we've made meaningful reductions to our physical footprint and corporate overhead while working through excess inventory receivables. Although there's still room for further optimization, I'm pleased that we're making excellent progress and have improved cash position in our balance sheet by nearly $10 million this quarter. We're continuing to leverage our cash position to pay down the principal balance of our debt and prepaid 2024 interest payments, a topic which we'll provide more detail on shortly. Finally, I am very excited to announce that we've completed all of our ERP conversions. This concludes a heavy operational lift, completing all TSAs related to our 2022 spinoff moving over 950 servers to new data centers, and transitioning over 200 applications to modern and largely cloud-based platforms. I'll now turn the call over to Rich to outline our financial performance. Thanks, Bafa, and good afternoon, everyone. I'll begin by reviewing our third quarter of 2023 results, and we'll close by providing our updated outlook for the full year of 2023. Total third-party net sales for the third quarter of 2023 were $202.9 million, a decrease of 4.9% on a reported basis, and a decrease of 5.0% in constant currency. As we mentioned toward the conclusion of our Q2 earnings call, we expected Q3 to be impacted by slightly higher than normal seasonality for our businesses in the summer months. And our sales performance exceeded these expectations. Moving on to our two segments. Global Dental's third-party net sales were $105.3 million in the third quarter, representing 20 basis points of growth as reported and a decline of 1.2% in constant currency when compared to the prior year period, driven entirely by one less selling day in Q3 of 2023 versus Q2 2022. While the dental market in aggregate was relatively soft in the third quarter, We continue to execute well commercially, and the market acceptance of our new premium implants contributed to effectively flat year-over-year implant sales on a global basis. In the U.S., dental third-party net sales of $65.0 million declined by 2.5%, driven by one less selling day and a slightly weaker implant market, partially offset by ongoing strength in our digital solutions sales. Outside of the US, dental third-party net sales of $40.3 million increased by 4.9% on a reported basis and 1.2% in constant currency, driven by growth across all three of our product families, implants, biomaterials, and digital dentistry, partially offset by one less selling day in Q3 of 2023. Our new product launches in 2022 and 2023 particularly T3 Pro and TSX, continued their early and impressive trend of market acceptance during the third quarter. Third quarter global spine third party net sales were $97.6 million, a decrease of 9.8% on a reported basis, and an 8.9% decrease in constant currency when compared to the prior year period. The decrease was primarily driven by continued competition in the spine market, our decision to exit China following volume-based procurement, and one less selling day, partially offset by the recognition of sales that were previously attributed to Zimmer Biomet and growth in both our EMEA and Asia-Pacific regions. As Vapa commented, we are pleased with our MobiSea and Tether performance relative to the balance of our core spine portfolio led by growth in Europe and Asia Pacific. In the U.S., spine third-party net sales of $78.3 million decreased by 10.2%, driven by competitive pressure in core spine and one less selling day, and partially offset by a relative improvement in MobiSea and the tether. Outside of the U.S., spine third-party net sales of $19.3 million decreased by 8.3% on a reported basis, and 3.6% in constant currency. MoVC and Tether outside of the U.S. continue to leverage our differentiated best-in-class clinical evidence by going 67% and 62% respectively during the third quarter. Third quarter adjusted cost of products sold of 31.8% of sales compares to 27.2% of sales in the prior year period. As a reminder, in Q3 of 2022, our cost of sales benefited from the settlement of a contingent liability with our prior parents. We are pleased with our ongoing progress to reduce cost of products sold as we look to continue to better manage inventory and inventory related charges. Adjusted research and development expense of $10.5 million represents 5.2% as a percentage of third party sales. Third quarter 2023 adjusted selling general and administrative expenses of $115.7 million for 57.0% of third party net sales was $13.1 million lower versus the prior year period. Lower SG&A expenses year over year are due to less variable expenses from lower net sales and savings from our previously announced restructuring initiatives and cost containment measures. Adjusted EBITDA in the third quarter of 2023 was $25.8 million, or 12.7% of third-party net sales, reflecting a decline of 110 basis points from 13.8% in the prior year period. The decrease in adjusted EBITDA margin is primarily due to lower net sales, the benefit of the contingent liability with our prior parent in Q3 of 2022 partially offset by savings from restructuring and cost containment. Adjusted earnings per share in the third quarter was $0.08 on a fully diluted weighted average share count of 27.0 million shares. Regarding working capital, liquidity, and debt, in Q3, we accelerated our progress on initiatives to monetize the strength of assets on our balance sheet and the application of our disciplined financial framework. In the quarter, we added over $9 million in cash to end at $75.4 million. including a $7 million prepayment of required principal payments on our term loan debt. Networking capital improved by $8 million, including a $12 million reduction in inventory and a $14 million reduction in accounts receivable. Although we have further opportunity to improve our financial profile, we are pleased that our focus on the operationalization of the business is yielding continued progress. As a reminder, our $175 million credit facility revolver remains undrawn. Looking ahead, please note that we expect our interest expense to increase by a couple million dollars in 2024 relative to 2023, given the current rate environment and debt balance. I'll now turn to our updated full year 2023 outlook. We are pleased with the 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 $860 million to $870 million, narrowing our range from our previous guidance of $850 million to $870 million. 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, and we continue to expect 2023 spine net sales to decline in the high single digits to low double digits versus 2022. Moving to adjusted EBITDA margin, we expect full-year adjusted EBITDA margin to be in the range of 13.5% to 14.0% of net sales, the same as previously guided. With regard to adjusted earnings per share, we are revising our adjusted earnings per share guidance range to 60 cents per share and 70 cents per share on a fully diluted share count of 26.6 million shares, narrowing the range of our previous guidance range of 50 cents to 70 cents a share. With that, I'll now turn the call back over to VAPA. Thank you, Rich. I'm pleased with our progress in 2023 to date, as well as our execution on streamlining objectives. Although we have additional work ahead to return our business to durable growth, I am confident in the strength of the assets in the portfolio and our presence in underserved ad markets, which ultimately bring great value to patients. As we continue to improve the efficiency of our company, evolve our product platforms, and execute commercially, we look forward to showcasing the results that will work to deliver. With that, we will open it up to questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster.

Our first question comes from the line of Robbie Marcus with JP Morgan.

Your line is open.

Hi, this is actually Lily on for Robbie. Thanks for taking the question. A lot of the upside, at least relative to our own expectations, came from spine. So can you talk about any progress in the trends you're seeing there, particularly in terms of competition? And what signals are you seeing that could potentially indicate a stabilization moving forward?

Right. Thanks for the question, Daphne. We are seeing international growth contribute the most to the spine recovery. We still believe that we've got some work to do in the U.S., and we have plans in place that can get us there. But the primary drivers for the recovery are MOVC sales internationally, both in the MAIA and APAC, and tether sales in the MAIA. Those are the primary drivers for the improved spine performance. Yeah, this is Rich. You know, thanks again for the question. Just to kind of, you know, add to that, you know, comment that Beth made, if you look at our international decline, actually, you know, impact was only down about 3.6%, and that included the impact of exiting China for the year. But when you look at the international market specifically, particularly around our flagship products, you know, MobiSea and Tether, you know, in our EMEA region, you know, we've mentioned before that MobiSea is the only cervical disc replacement in France that's approved for reimbursement. And that business in our EMEA region grew by almost 40% year over year in the quarter. And then Tether, we've also had great uptick in Tether. And in Europe, you know, in EMEA, our Tether business also grew by about 29%. So to BAPA's point, we're really starting to see some stability in the U.S. or U.S. environment. So those green shoots continue to take root.

Got it. That's good to hear. And then maybe on the flip side, you know, dental was a little bit softer compared to our numbers. So, and you called out a weaker dental market this quarter. So, what are the drivers of that and how do you see that trending into the back half of the year? Thank you.

Right. So, we feel that we're doing well relative to the competition, but we do see a slower dental implant market in the United States. So that is where we're seeing the softest parts. It's primarily macro-driven. It's not gloss customer. We're actually doing well on that front. We're doing well on new customers, but we do see softer existing user sale in dental in the U.S. Rich, internationally? Yeah, so dental is largely driven by, first and foremost, year over year, we have one less selling day. And it's largely macroeconomic pressure in the U.S. But to BAPA's point, you know, we actually, the dental business, we're actually pleased with our performance year over year. And we've seen similar strength, particularly in Europe. On the dental side, our dental business in EMEA grew almost 12%, you know, year over year in reported and about 4% in constant currency. And so, you know, we're really pleased with Our digital portfolio, it continues to grow double digits for us. Our biomaterials offerings continue to do well. And on a year-over-year basis, our flagship implants are basically flat year-over-year, which despite the macroeconomic pressures, we think that we're outpacing some of our other competitors in the market. Yeah, we think we're positioned really well within that dental portfolio. So when the market should return, we should be in a very, very good place competitively. with respect to our portfolio, our price, and our customers.

Great.

Thank you.

Thank you. One moment for our next question. This question comes from the line of Matt of Barclays.

Your line is now open.

Hey, thanks for taking the question. So I appreciate all the color. You know, I wanted to get a sense of following up on the question on spine. You know, it seemed like when you described at NAS the opportunity to sort of get after a more significant part of the cervical disc replacement market with the new sizes that you've rolled out. in the U.S., you know, based on, I think it was like 30% of the European market was addressed by these new sizes. Can you, you know, would you actually describe the current competitive environment in the U.S. like you've been at a disadvantage because these other, you know, these patients, say a third roughly of the U.S. population is possibly, you know, been unaccessible to you? and this is going to open that up, or would you say this is kind of a market expansion opportunity for folks who are maybe looking at a patient and saying, you know what, we have to fuse this because we just don't have the size for this patient. I'd love to get a sense for how big of an inflection you think this is for the U.S. market, and I have one follow-up.

Sure. Hey, Matt. So I think the underlying concern that we had with our portfolio was we hadn't innovated since the acquisition of LDR, and we needed to continue to innovate the portfolio specifically to MobiSea. So there's a couple things we're doing there. The size just adds to our portfolio, so it adds more, you know, suitable patients to that portfolio and puts us competitively at parity with a newer launch that's come out. That's important to be able to at least offer everything that's happening there. At the same time, the biggest opportunity is still to expand the market in terms of who is eligible for a disk versus fusion. The combination of the sizes, that we are offering now, along with the newly announced hybrid study, which will allow a surgeon to put a fusion next to a cervical disc, these are really, really important drivers of new market growth. So we haven't put a hard number on either one of those, but look at it as a way for us to become more and more competitive within the cervical disc market, but never lose sight of the fact that really the greatest option with cervical disc is improving the users and the patient populations that get disc versus fusion versus going after competitive share.

Got it. That's super helpful. And just one more on spine, you know, there's a lot of what's being categorized as sort of disruption or dislocation because of some major spine deals and actions, as you're aware of, I'm sure. Is there, has there been any effect on your ability to, or, you know, to either recruit, you know, reps or distributors or your, you know, the pressure on you to, you know, sort of other folks trying to pick off some of your better What's that dynamic like? And then I have just one more follow up on dental.

Yeah, so on that particular situation, that's a situation we were on the wrong side of that when we announced the spin. And right now, I feel like there is a lot of very, very excellent talent out there, particularly in the United States, where we hope to be the recipient of a lot of that talent. to uh to improve our sales channel or to go into areas where we have uh less penetration so we're feeling like we will be a net beneficiary of that disruption uh and i look forward to um to sharing that news with you over the next while it won't be something we do suddenly all these things take a little bit of time but uh never fast enough but uh nevertheless i think we'll be the beneficiary of some positive news there that's that's great and then just finally on dental um

You know, any sense of, you know, how much, and maybe I apologize if you answered this in your last, in the question around dental, but just elements of seasonality, you know, that either came into play in Q3 or may come into play in Q4, and any sense of whether, you know, that's a market that's, you know, stabilizing or, you know, potential for improving, just some thoughts Some color as to which way the winds of growth are blowing in the dental market in the moment.

Sure. So particular to us, just I'll start and then Rich will have some further color on it. We are happy with the new customer acquisition that we have. So we're doing really well with DSOs and we're doing really well with newer non-implant customers that are starting to do implants. So that's very, very positive for us. I would say that we did experience seasonality in Q3, and there is a softness in the U.S. market that is not evident in Asia Pacific nor in EMEA, but we do feel that, which is probably adding a little bit of conservatism to how we see Q4 working out. Yeah. Hey, Matt. This is Rich. Good to talk to you again. Yeah, just to expand on what Beth said, you know, we've Q3 in the dental business is always our weakest quarter, and a lot of it is because of summer vacations, you know, and obviously a large portion of our business, you know, almost half of it actually is OUS and And of course, Europe has their vacations. And so that being said, we did call out at the end of our second quarter call that we did see a little bit higher seasonality than normal. The dental business put up 105.3, I believe, for the quarter, which was actually a little bit better than what our expectations were, maybe a million dollars or so given seasonality. better than our expectations. And so, you know, we have seen seasonality, but the positioning of the dental business, you know, and our commercial execution, frankly, continues to perform well, particularly at OUS, which is where we thought the seasonality was going to come from. And so, we actually kind of combated that seasonality without performance in those regions.

Well, that's great. Congrats on that. And I look forward to hearing more about how things progress to the end of the year. But thanks for taking the questions.

Thank you, Matt.

Thank you. I'm showing no further questions at this time. So this does conclude the question and answer session. Thank you, everyone, for your participation. Thank you very much. OK. You may now disconnect.