ZimVie Inc.

Good afternoon and welcome to ZMB's fourth quarter and full year 2023 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 Bysh, Gilmartin Group, for introductory disclosures.

Great. Thank you all for joining today's call. Earlier today, ZMB released financial results for the quarter and full year ended December 31, 2023. A copy of the press release is available on the company's website, zmb.com, as well as on scc.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. 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. Reconciliation of these measures to the most directly comparable GAAP financial measures are included within the earnings release issued today, which is 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, February 28, 2024. ZMB declaims 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 Vatha Jamali, President and Chief Executive Officer of ZMB.

Good afternoon and thank you for joining us. We had significant accomplishments in 2023. We invested to further differentiate our portfolio, which helped us make gains in the markets we served. As well, we improved our operating efficiency through restructuring and cost reduction initiatives. Most significantly, we executed an agreement to sell our spine business to HIG Capital, with $375 million in total consideration, and we began to advance the necessary steps to complete that sale. We believe this sale addresses two major concerns we

have heard,

the lack of synergy between dental and spine businesses and an overly leveraged capital structure during a time of elevated interest rates. We believe we have quite elegantly addressed both of these concerns in one major move and we now look very optimistically to 2024 as a pure play dental company with a comprehensive and industry-leading portfolio. I could not be more excited about the future of this company as we continue to invest in differentiated solutions for patients and providers while optimizing our structure to drive value for shareholders. Let me start with a closer look at our ongoing portfolio actions, specifically the spine sale. On December 18th, we entered into a definitive agreement to sell our spine business to HIG Capital for $375 million in total consideration. We remain confident in completing this sale within the first half of 2024. We appreciate having a great partner in HIG Capital as we both look towards an on-time transaction cost. This sale will provide the opportunity for our company to reposition itself exclusively in one of our most attractive end markets, dental solutions. While also paying down a substantial portion of our outstanding debt, we are committed to having under $200 million of net debt by one year post-sale. Beyond the sale, we have a lot of work to do in right-sizing our cost profile, particularly given our corporate overhead and stranded costs, which are currently being reflected in our continued operations profile. Therefore, we see both a need and an opportunity in taking costs out of our organization. We have already initiated the execution of concrete plans to address certain corporate expenses, and we remain committed to delivering a 15% plus adjusted EBITDA margin at one year post-sale,

with improvements annually

thereafter. As we continue through this portfolio optimization process, I would mostly like to thank all of our global spine employees for their hard work. We appreciate your contributions and immense effort to improve the position of the business in the future, and we wish you great success going forward. Flipping to dental. As we transition to the sale of spine, we are positioned to become a leaner, more focused, peer-play dental company with market leading positions in the $8 billion implant digital solutions and biomaterials markets. We are committed to offering the market's highest quality premium implants and a holistic portfolio to support every step of the implant process. This includes innovative biomaterial products, which build a strong foundation for the implant, and high efficiency, easy to use digital solutions for managing implant workflow. One of our top priorities for 2023 was to invest in this portfolio, and we are pleased to continue our strong cadence of hardware and software innovations into 2024. Most recently, we launched our next generation TSX implant in Japan, one of our largest international markets. We proceeded that milestone with the launches of bioactivity and Azure in our biomaterials and lab-focused prosthetic and restorative solutions portfolios. Look for us to further drive innovation by bringing new products to market over the next year and focusing on opportunities that improve clinical workflow and complement our impact on the dental business. For an operational update, we plan to make several changes this year to achieve our desired size and scale as a company. Fortunately, this is an area our team has extensive experience in. Over the past two years, our team has delivered several operational improvements to get the business where it is today. Many of those improvements will focus on the spine business. As we move forward, we will take that same playbook to the dental business, including a focus on manufacturing automation, supply chain optimization, and improving the efficiency of our plants. Our dental business has always enjoyed an attractive margin profile. With a wholly focused management team and increased resources, we see room to grow that margin profile even further. We recognize the importance of innovation to our business, and we realize that we have commercial momentum behind our offering. Therefore, it should be clear that our efficiency improvements will not be reflected to reduce research and development or commercial costs. Instead, we will be focused on taking significant corporate costs out of the business. Many of these costs will take several months to address, and we expect to see increased margin leverage as the year goes on. However, until the sale is complete, Zambi will bear the full corporate expense for both the continuing and discontinued operations. We will provide more detail on TSAs and ERPs associated with the sale around the time of closing. Now, before I turn the line over to Rich, I'd like to switch gears and take a moment to congratulate our team on the recent publication of our inaugural ESG report. We embrace being a responsible and accountable employer and business. Our global team is dedicated to championing initiatives across the entire ESG spectrum that further our mission of restoring daily lives while living our core values of accountability, authenticity, curiosity, and having a growth mindset. Our shared commitment spans our global sites as we work towards a common goal of establishing Zambi's reputation as a good corporate citizen, a destination workplace, and a true life sciences leader. I'll now turn the call over to Rich to outline our financial performance and guidance.

Thanks, Tafa, and good afternoon, everyone. I'll begin by reviewing our fourth quarter 2023 results, and we'll then close by providing commentary on our outlook for 2024. Before I delve into the financial details for the quarter, I wanted to reiterate that since we signed a definitive agreement to sell the spine business, our spine segment is now classified as discontinued operations in our financial statements as of the end of 2023. As a result, we will bifurcate our Q4 and fiscal year 2023 financials as continuing operations, which comprises dental and the majority of corporate, and discontinued operations, which includes the exiting spine business. Beginning with continued operations, total third-party net sales for the fourth quarter of 2023 were $113.1 million, a decrease of .4% in reported rates, and a decline of .6% in constant currency. Full year 2023 total third-party net sales of $457.2 million were essentially flat year over year, declining 50 basis points. The impact of foreign exchange on third-party net sales in 2023 was negligible, with constant currency sales declining 60 basis points versus 2022. In the US, third-party net sales for the fourth quarter of 2023 of $65.4 million decreased by 3.2%, driven by a slightly weaker implant market due to US macroeconomic challenges, partially offset by strength in our digital solutions of biomaterials portfolio. Full year 2023 third-party net sales in the US of $269.6 million represents a modest decline of 1.2%, driven by weaker implants, as previously mentioned. Outside of the US, third-party net sales of $47.7 million decreased by .2% on a reported basis and .1% in constant currency. Full year outside of the US sales of $187.6 million was higher by 40 basis points and 30 basis points in reported and constant currency, respectively. While the dental market in aggregate was soft through most of 2023, we are pleased to have exited the year roughly flat compared to 2022, a definitive sign that the strength of our dental portfolio and ability to commercially execute in a challenging environment leaves us well positioned for 2024 as market conditions begin to stabilize and improve. Fourth quarter 2023 adjusted cost of products sold of .4% compared to .8% of sales in the prior year period. Full year 2023 adjusted cost of products sold of .2% increased 40 basis points over the prior year of .8% driven by slightly lower implant volume for the year. We expect improvement in cost of products sold in 2024 as we streamline the organization, cutting out duplicative cost, improving manufacturing efficiency, and benefit from a better product market, particularly in the back half of the year. Q4 2023 adjusted research and development expense of $6.5 million compared to $5.9 million in the prior year. Q4 2023 adjusted sales, general, and administrative expenses of $57.4 million compared to $66.1 million in the prior year. Full year 2023 adjusted SG&A expense of $240.5 million is flat to 2022 SG&A of $239.3 million. Adjusted EBITDA attributable to continuing operations in the fourth quarter of 2023 of $13.9 million represents a .3% EBITDA margin. Full year 2023 adjusted EBITDA of $50.8 million reflects .1% of third party net sales. Please note our continuing operations adjusted EBITDA not only includes cost of support on market leading dental business, but also the majority of our corporate costs which was previously borne by both the dental and spine businesses. Given this classification, our continuing operations adjusted EBITDA margin for the fourth quarter and 2023 appears weighed down compared to our prior reporting framework.

Going forward

and after the sale of spine, we will be working to address our resultant cost structure. We remain confident in delivering an adjusted EBITDA margin of over 15% one year post-spine sale as previously disclosed. Q4 of 2023 adjusted earnings per share attributable to continuing operations of $0.10 per share on a fully diluted share count of 26.6 million shares. Continuing operations adjusted earnings per share for FY 2023 was $0.22 per share. Moving on to discontinued operations which includes the spine business currently held for sale. Total third party net sales for the fourth quarter of 2023 were $100.5 million, a decrease of .6% on both a reported and constant currency basis. Full year 2023 total third party net sales of $409.2 million represent a 9% decrease on a reported basis and .2% decrease in constant currency. In the US, fourth quarter 2023 third party net sales of $81.5 million decreased by .3% driven by continued competitive pressure. Full year 2023 US sales of $327.3 million declined 8.4%. Fourth quarter 2023 outside of the US third party net sales of $18.9 million decreased by .6% on a reported basis and .0% in constant currency. Full year OUS sales of $81.8 million declined by .4% in reported rates and .1% in constant currency.

Fourth

quarter 2023 adjusted cost of product sold of .3% of sales compared to .7% of sales in the prior year period. Full year 2023 adjusted cost of product sold of .2% decreased 180 basis points versus .0% in the prior year. We have been talking for a number of quarters now about our focus on driving better inventory management and reducing excess and obsolete inventory expenses and are pleased that our efforts have translated to higher gross margins. Q4 2023 adjusted research and development expense of $4.9 million compared to $5.7 million in the prior year. Adjusted selling general and administrative expenses of $58.5 million compared to $67.5 million in the prior year. Adjusted EBITDA attributable to discontinued operations in the fourth quarter of 2023 at $15.5 million represents a .4% EBITDA margin. Full year 2023 adjusted EBITDA for discontinued operations of $65.6 million with .0% of third party net sales. Q4 2023 adjusted earnings per share for discontinued operations with 11 cents per share while full year 2023 adjusted earnings per share was 48 cents per share on a fully diluted share count of 26.6 million shares. Question on liquidity and debt. Over 12 months ago, Vafa and I outlined our plans to monetize the balance sheet, generate outside cash flow, and use the excess proceeds to pay down debt. I'm pleased to announce that during the course of 2023, we reduced net inventory by over $25 million and accounts receivable by almost $30 million consistent with the objectives we laid out at the beginning of the year.

We ended 2023

with a consolidated ZIMB cash balance of $87.8 million and $508.8 million of gross debt, yielding a net debt balance of $421.0 million. In 2023, we've prepaid over $24 million as principal ahead of our required amortization schedule, keeping us 12 months ahead of our required debt repayment schedule. As Vafa mentioned, we intend to use the proceeds from the sale of our spine business to further reduce debt with an objective of having under $200 million in net debt by the end of 2024. Moving on to our outlook for 2024. Since we're in the process of finalizing the sale of our spine business, which is expected to close during the first half of 2024, we are going to provide some one-time specificity to our outlook for Q1 of 2024. We do not intend to provide quarterly guidance on a go-forward basis. We expect sales from continuing operations to be in the range of $115 million to $118 million. We are very pleased with our strategic position despite a challenging macro environment, and we expect that a comprehensive portfolio of premium implants, biomaterials, and digital technology, dentistry, and workflow solutions will continue to perform at or above market growth. We expect Q1 sales from discontinued operations to be in the range of $89 million to $91 million. Turning to our first quarter margin profile, as Vafa and I alluded to earlier, continuing operations includes both the cost to support our dental business, but also a majority of cost that has historically supported spine. To this end, when we look at continuing operations by itself, it will carry with it a lower overall margin profile until we finalize the sale of the spine business and exit the associated costs. We expect Q1 continuing operations adjusted EBITDA margin to be in the range of 8 to 10% of sales as a result. To reiterate, costs currently in continuing operations will be removed following the sale of spine, allowing us to make market progress toward our desired margin profile. With regard to adjusted earnings per share, we expect Q1 to be depressed as a result of lower margin profile and increased relative burden of interest expense until the sale of following the completion of the sale.

Now

turning our expectations to the business for year one post-spine sale close. We are raising our expectations for annualized sales at one year post-spine to over $455 million. The sale of our spine business HIG is progressing as planned, and we continue to expect the sale to be finalized in the first half of 2024. And we are reaffirming our commitment to achieve 15% plus adjusted EBITDA margin profile at one year post-spine sale and expect to see substantial costs come out in the back half of 2024 following the completion of the transaction. With that, I'll now turn the call back over to Vatha.

Thank you, Rich. I'm excited about the prospects ahead of us, and as always, I look forward to updating you on the progress throughout the year. Our team is immensely experienced in carving out and setting up new businesses as well as improving the operational efficiency of businesses in transformation. And we are excited to employ these skills to position Zimby for our next chapter. With that, we'll open it up to questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Saxon of Needham & Company. Your line is now open.

Oh, great. Good afternoon, Vatha and Rich. Thanks for taking my questions. I wanted to start on the couple on the dental business, and then, Rich, I might have one for you. So Vatha, you know, the number two in the implants market, they're facing some challenges in their domestic business. So I wanted to hear how you're thinking about that opportunity to either hire reps or capture share, and then broadly, how are you thinking about the implant part of the dental portfolio? I think it's about 50% or so. Do you think it can grow in what looks like a somewhat softer market from a patient-filing perspective?

Hey, David, thank you for the questions. Yeah, we have benefited from some of the competitive dynamics in the market, and frankly, we've picked up some share there in a relatively slower market than we've experienced years prior. So I do think that that has been positive for us. I think that the strength of our implant portfolio is that we, first of all, we don't have to trade down, so we aren't trading down to a lower-priced implant, which I believe that the competitors that have that option have often moved down market. We haven't had to do that. And the reason we've been able to hold it, the premium category, is primarily from two new implants that have been really, really effective, very, very sticky in the marketplace, coupled with a digital workflow, a guided solution workflow that is growing significantly faster than other digital platforms and faster than the rest of our business. Now, albeit it's a smaller base right now, but our entire thesis is predicated on that pulling through implants. And if you think about what is the opportunity in implants, it's that it's only about 25% penetrated, and part of that is the cost of the workup, and the second part is the durability, the ability to give an implant at a very consistent rate, whether you're a new physician or an old one, or a much more experienced one. So, I think we've done a lot to make the workflow coupled with the implant work really well, so I think we'll continue to make strides there. We definitely have more customers than we had last year, and where we see this slowdown is some of the specialists are just doing a little bit less than they were before, but we're confident that when the market returns, we're going to be in a really, really good place to grow faster. So, hopefully that answers your question.

Yeah, super hopeful, Bafa. I wanted to ask one on the digital part of the portfolio. So, the agreement with the line for ITERO, does that cover their new Lumina scanner? And if so, I guess when do you expect to start selling that? And if at all it's factored into the first quarter guide, and I'll just have one follow up.

Sure. So, we do have that relationship, and it will continue with their new scanner. I believe we are somewhat delayed for regulatory purposes, so we won't have it until the fourth quarter of this year. I would say overall, ITERO sales for us is a bit depressed, but that is not a cause for major concern for us, because that is a low margin. It really, really satisfies our digital offering, but we are excited about what we can do in the Q4 when the new scanner is available to us.

Hey, David. This is Rich. Just one additional comment to what Bafa mentioned. Before we get access to the new scanner from ITERO, in like Bafa said, the anticipated Q4 timeframe, we have a program with our customers, and if they buy the existing scanner, that they will be able to upgrade to the new one when the new one is released. So, we've got a plan there to transition that

new introduction.

Okay. Super helpful. Thanks for that. And then just sticking with you, Rich, super helpful color. I haven't quite gotten through to the model yet, but if you could just kind of help us with quantifying the stranded costs you're bearing currently and kind of where they sit, COGS versus OPEX. Thanks so much.

Yeah. So, we do have obviously stranded cost, largely in the corporate infrastructure that we use to support businesses. So, the way that we've generally operated is kind of like a holding structure where the businesses can operate largely autonomously from each other, and then we've got a corporate overlay. So, as we think about corporate stranded costs on a go-forward basis, they're largely in SG&A in the corporate sector. The way that we're thinking about the transaction is, as we mentioned in the prepared remarks, that we'll carry some cost until the closure of the deal. Then, of course, a number of headcounts are conveyed, which will give us some uplift in margin. And then we'll have a period where there's TSAs, and then once TSAs fall off, then there's another inflection point is how we're thinking about it in the longer term. But the way that we're also thinking about it, obviously, is we've set out the 15% plus adjusted EBITDA margin one year post-sale. There's obviously a lot of puts and takes in numbers right now, obviously, but we're still committed to achieving that one year post-sale.

Great. Thank you.

Okay. One moment for our next question. Our next question comes from the line of Matt Mickic of Barclays. Your line is now open.

Hey, good evening. Thanks for taking the question. Hey, Matt. So a couple of follow-ups. You mentioned the sort of target of getting under $200 million in net debt. You're taking in $375 or a bunch of that in cash in a little bit. That it looked like, and you've got the simple math that says you could get lower. Can you talk a little bit about how you're thinking about the balance of getting your internet debt lower or holding onto some cash and why? And then a couple of quick follow-ups, if I could.

Sure. So, hey, Matt, the $200 that we mentioned does not include the $60 million seller note. So obviously, that's a pick that we just don't include there. But if you included that, it'd obviously be better than $140. So that's what we're looking at it there. And that's probably the discrepancy between the price that we got for this fine business and what we're reporting on debt. Rich, anything else to offer there?

Yeah. Just in addition to that, Matt, the less than $200 billion in net debt number that we did mention is one thing about the transaction with HIG is actually a relatively complex transaction relative to our size. And so it's basically a carve out within the organization and separating and setting up legal entities and the like. And so we're still incurring some costs to separate the business outside of what you would normally see in a transaction, like a normal transaction. And we're bearing those costs real time. So we're going to be focused on maximizing the cash inflow and the debt repayment that we do have, but we feel comfortable with the less than $200 million that we outlined. And as things progress and become clearer, as we get closer to transaction close, we'll provide more detail around that.

Okay. And so we think we'll break it into this. So you've got $60 million and the $315 million in cash, and then you've got some outlays. I mean, you generated, what was it? I don't know how much you generated last year in cash total, but I'm assuming there'll be some positive operating cash flows. So I guess, can you give us any sense of how much is that a five or 10 or 20 or 30 million dollar outlay for sort of transitional costs that you're describing or any color on that?

Yeah. The way that I have you think about it is, as I mentioned on the call, Q1 is generally a little bit of a softer quarter for us due to seasonality. But if you just simply take, if you just simply take when we announced the deal, which was before the end of the year, and we said $200 million, or less than $200 million of net debt, and then you actually take out where we ended, we ended actually in a much stronger cash position with almost $88 million and we prepaid additional debt. That should be a little bit of upside that you could probably take into that net debt number. But as I said, we're still spending money and we'll continue to evolve and provide more information. But we did end the year in a really good position from a working capital perspective, as I mentioned on the call, which should be a little bit of upside to the $200 million that we previously disclosed.

Okay. And then just to be crystal clear, so we understand this, if I'm thinking that you have $350 million that's coming in to your balance sheet in cash, that there is something putting aside operating cash flows from what you did in 23 and what you could do in 24, but there's some fixed cash layout charges against that that we should, so we shouldn't be thinking, wow, $350 million is coming in. It'll be something less than that when you're done with, like you described the unique nature of the deal. Is that right?

Yeah, absolutely. We have carve out costs that we're spending. Obviously, there's legal fees, banker fees, all of those types of things, as you would expect. And then the other piece that you didn't mention, Matt, is that we've got some costs that we're going to be incurring to right-size the organization to new remain-coast steady state as we approach that 15% plus EBITDA margin. And so some of that is going to be cash, some of that is going to be non-cash, and we're working through that right now, which is why we're still kind of with that less than $200 million number and we'll provide more information as we continue to work through those plans.

Right. And then if I could, another, sorry to sort of not get into these little weedy things, but a year from now, you say 15 plus EBITDA profile one year forward, is that in the year following, like in other words, like we say the clock starts, you know, April 1 or something, because if you do the deal in March or if you're picking just the time that in, you know, in the quarter following that, in the year following that, how to think about what does that 15 plus mean? Is it a run rate? How to think about those, the two metrics actually, it was 15 plus and, I'm sorry, there was another one year forward. I guess it was the net debt number. But yeah.

Yeah. And the revenue. So the 15 plus, 50% plus we've talked about it is on a run rate basis, right, an annualized run rate basis one year post-close. But the one thing that I will say is, you know, you've known Beth and I long enough to know that, you know, we will work to, work to take out as much of that cost as quickly as possible. So, you know, but that's basically how we're thinking about it right now is it be on a annualized basis when you're post-closed. And then as things continue to materialize and move forward, right, we'll provide some additional information as things become clearer. But as you might expect, there's a lot of moving pieces to it right now.

Okay. And so that might not be like, you know, as it closes, like the first quarter after that year, you're not necessarily saying, you know, we print that first quarter expect 15 plus. I mean, maybe that might be your goal. But what you're promising is, is that in the four quarters that follow that, that's where you're going to be aggregating to. Is that fair?

Yeah. Yeah. Because and the reason for that is, and I mentioned this to David a little bit on the call is, is once the deal closes, there'll be costs that immediately, you know, depart the organization that go with the deal. Then there's a period because, you know, HIG doesn't have all of the systems and everything and will not have all of the systems and everything set up, are closed where we're going to be in TSAs, where we're still going to bear costs as an organization that, you know, is going to be, you know, for the most part, reimbursed by HIG, but not entirely 100%, right? So when that, those TSAs fall off, right, then our job is going to be to take out that remaining costs, which gets you to that 15% plus we talked about.

Okay. Super helpful. Thanks, guys. Of course. Thanks, Matt.

I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Thank you. Thanks for your time.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

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Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. in one of our most attractive end markets, Dental Solutions, while also paying down a substantial portion of our outstanding debt. We are committed to having under $200 million of net debt by one year post-sale. Beyond the sale, we have a lot of work to do in right-sizing our cost profile, particularly given our corporate overhead and stranded costs, which are currently being reflected in our continuing operations profile. Therefore, we see both a need and an opportunity in taking costs out of our organization. We have already initiated the execution of concrete plans to address certain corporate expenses, and we remain committed to delivering a 15% plus adjusted EBITDA margin at one year post-sale,

with improvements

annually thereafter. As we continue through this portfolio optimization process, I would mostly like to thank all of our spine employees for their hard work. We appreciate your contributions and immense effort to improve the position of the business from the future, and wish you great success going forward. Flipping to dental, as we transition through the sale of spine, we are positioned to become a leaner, more focused, pure play dental company with market leading positions in the $8 billion implant digital solutions and biomaterials markets. We are committed to offering the market's highest quality premium implants and a holistic portfolio to support every step of the implant process. This includes innovative biomaterial products, which build a strong foundation for the implant, and high efficiency, easy to use digital solutions for managing implant workflow. One of our top priorities for 2023 was to invest in this portfolio, and we are pleased to continue our strong cadence of hardware and software innovations into 2024. Most recently, we launched our next generation TSX implant in Japan, one of our largest international markets. We proceeded that milestone with the launch of the bioactivity and azure in our biomaterials and lab focused prosthetic and restorative solutions portfolios. Look for us to further drive innovation by bringing new products to market over the next year and focusing on opportunities that improve clinical workflow and complement our impact. For an operational update, we plan to make several changes this year to achieve our desired size and scale as a company. Fortunately, this is an area our team has extensive experience in. Over the past two years, our team has delivered several operational improvements to get the spine business. As we move forward, we will take that same playbook to the dental business, including a focus on manufacturing automation, supply chain optimization, and improving the efficiency of our plants. Our dental business has always enjoyed an attractive margin profile. With a wholly focused management team and increased resources, we see room to grow that margin profile even further. We recognize the importance of innovation to our business, and we realize that we have commercial momentum behind our offering. Therefore, it should be clear that our efficiency improvements will not be reflected to reduce research and development or commercial costs. Instead, we'll be focused on taking significant corporate costs out of the business. Many of these costs will take several months to address, and we expect to see increased margin leverage as the year goes on. However, until the sale is complete, Zinvi will bear the full corporate expense for both the continuing and discontinued operations. We will provide more detail on TSAs and ERPs associated with the sale around the time of closing. Now, before I turn the line over to Rich, I'd like to switch gears and take a moment to congratulate our team on the recent publication of our inaugural ESG report. We embrace being a responsible and accountable employer and business. Our global team is dedicated to championing initiatives across the entire ESG spectrum that further our mission of restoring daily lives while living our core values of accountability, authenticity, curiosity, and having a growth mindset. Our shared commitment spans our global sites as we work towards a common goal of Zinvi's reputation as a good corporate citizen, a destination workplace, and a true life sciences leader. I'll now turn the call over to Rich to outline our financial performance and guidance.

Thanks, Taffa, and good afternoon, everyone. I'll begin by reviewing our fourth quarter 2023 results, and we'll then close by providing commentary on our Outbook for 2024. Before I delve into the financial details for the quarter, I wanted to reiterate that since we signed the definitive agreement to sell the spine business, our spine segment is now classified as discontinued operations in our financial statements as of the end of 2023. As a result, we will bifurcate our Q4 and fiscal year 2023 financials as continuing operations, which comprises dental and the majority of corporate and discontinued operations, which includes the exiting spine business. Beginning with continued operations, portal third-party net sales for the fourth quarter of 2023 were $113.1 million, a decrease of .4% in reported rates, and a decline of .6% in constant currency. Full year 2023 total third-party net sales of $457.2 million were essentially flat year over year, declining 50 basis points. The impact of foreign exchange on third-party net sales in 2023 was negligible, with constant currency sales declining 60 basis points versus 2022. In the U.S., third-party net sales for the fourth quarter of 2023 of $65.4 million decreased by 3.2%, driven by a slightly weaker implant market due to U.S. macroeconomic challenges, partially offset by strength in our digital solutions of biomaterials portfolio. Full year 2023 third-party net sales in the U.S. of $269.6 million represents a modest decline of .2% driven by weaker implants as previously mentioned. Outside of the U.S., third-party net sales of $47.7 million decreased by .2% on a recorded basis and .1% in constant currency. Full year outside of the U.S. sales of $187.6 million was higher by 40 basis points and 30 basis points in reported and constant currency, respectively. While the dental market in aggregate was soft through most of 2023, we are pleased to have exited the year roughly flat compared to 2022, a definitive sign that the strength of our dental portfolio and ability to commercially execute in a challenging environment leaves us well positioned for 2024 as market conditions begin to stabilize and improve. Fourth quarter 2023 adjusted cost of products sold of .4% compared to .8% of sales in the prior year period. Full year 2023 adjusted cost of products sold of .2% increased 40 basis points over the prior year of .8% driven by slightly lower implant volume for the year. We expect improvement in cost of products sold in 2024 as we streamline the organization, cutting out duplicative cost, improving manufacturing efficiency and benefit from a better product mix, particularly in the back half of the year. Q4 2023 adjusted research and development expense of $6.5 million compared to $5.9 million in the prior year. Q4 2023 adjusted sales, general and administrative expenses of $57.4 million compared to $66.1 million in the prior year. Full year 2023 adjusted SG&A expense of $240.5 million is flat to 2022 SG&A of $239.3 million. Adjusted EBITDA attributable to continuing operations in the fourth quarter of 2023 of $13.9 million represents a .3% EBITDA margin. Full year 2023 adjusted EBITDA of $50.8 million reflects .1% of third party net sales. Please note our continuing operations adjusted EBITDA not only includes cost of support on market dental business but also the majority of corporate costs which was previously born by both the dental and spine businesses. Given the classification, our continuing operations adjusted EBITDA margin for the fourth quarter and 2023 appears weighed down compared to our prior reporting framework.

Going

forward and after the sale of spine, we will be working to address our resultant cost we remain confident in delivering an adjusted EBITDA margin of over 15% one year post spine sale was previously disclosed. Q4 2023 adjusted earnings per share attributable to continuing operations of $0.10 per share on a fully diluted share count of $26.6 million shares. Continuing operations adjusted earnings per share for FY 2023 was $0.22 per share. Moving on to discontinued operations which includes the spine business currently held for sale. Total third party net sales for the fourth quarter 2023 were $100.5 million a decrease of .6% on both a reported and constant currency basis. Full year 2023 total third party net sales of $409.2 million represent a 9% decrease on a reported basis and .2% decrease in constant currency. In the U.S. fourth quarter 2023 third party net sales of $81.5 million decreased by .3% driven by continued competitive pressure. Full year 2023 U.S. sales of $327.3 million declined 8.4%. Fourth quarter 2023 outside of the U.S. third party net sales of $18.9 million decreased by .6% on a reported basis and .0% in constant currency. Full year OUS sales of $81.8 million declined by .4% in reported rates and .1% in constant currency. Fourth quarter 2023 adjusted cost of product sold of .3% of sales compared to .7% of sales in the prior year period. Full year 2023 adjusted cost of product sold of .2% decreased 180 basis versus .0% in the prior year. We have been talking for a number of quarters now about our focus on driving better inventory management and reducing excess and obsolete inventory expenses and are pleased that our efforts have translated to higher gross margins. Q4 2023 adjusted research and development expense of $4.9 million compared

to

$5.7 million in the prior year. Q5 adjusted selling general and administrative expenses of $58.5 million compared to $67.5 million in the prior year. A adjusted EBITDA attributable to discontinued operations in the fourth quarter of 2023 of $15.5 million represents a .4% EBITDA margin. Full year 2023 adjusted EBITDA discontinued operations of $65.6 million with .0% of third party net sales. Q4 2023 adjusted earnings per share for discontinued operations was 11 cents per share while full year 2023 adjusted earnings per share was 48 cents per share on a fully diluted share of $26.6 million. Touching on liquidity and debt. Over 12 months ago, Vafa and I outlined our plans to monetize the balance sheet, generate outside cash flow, and use the excess proceeds to pay down debt. I'm pleased to announce that during the course of 2023, we reduced net inventory by over $25 million and accounts receivable by almost $30 million consistent with the objectives we laid out at the beginning of the year.

We

ended 2023 with a consolidated Zimby cash balance of $87.8 million and $508.8 million of gross debt, yielding a net debt balance of $421.0 million. In 2023, we prepaid over $24 million of principal ahead of our required amortization schedule, keeping us 12 months ahead of our required debt repayment schedule. As Vafa mentioned, we intend to use the proceeds from the sale of our spine business to further reduce debt with an objective of having under $200 million in net debt by the end of 2024. Moving on to our outlook for 2024. Since we're in the process of finalizing the sale of our spine business, which is expected to close during the first half of 2024, we are going to provide some one-time specificity to our outlook for Q1 of 2024. We do not intend to provide quarterly guidance on a go-forward basis. We expect sales from continuing operations to be in the range of $115 million to $118 million. We are very pleased with our strategic position despite a challenging macro environment, and we expect that our comprehensive portfolio of premium implants, biomaterials, and digital dentistry and workflow solutions will continue to perform at or above market growth. We expect Q1 sales from discontinued operations to be in the range of $89 million to $91 million. Turning to our first quarter margin profile, as Vafa and I alluded to earlier, continuing operations includes both the cost to support our dental business, but also a majority of corporate costs that has historically supported spine. To this end, when we look at continuing operations by itself, it will carry with it a lower overall margin profile until we finalize sale of the spine business and exit the associated cost. We expect Q1 continuing operations adjusted EBITDA margin to be in the range of 8 to 10 percent of sales as a result. To reiterate, costs currently in continuing operations will be removed following the sale of spine, allowing us to make market progress toward our desired margin profile. With regard to adjusted earnings per share, we expect Q1 to be depressed as a result of lower margin profile and increased relative burden of interest expense until the sale of spine is complete. We will provide more adjusted earnings for shared guidance following the completion of the sale.

Now

turning our expectations to the business for year one post-spine sale close. We are raising our expectations for annualized sales at one year post-spine to over $455 million. The sale of our spine business HIG is progressing as planned and we continue to expect the sale to finalize in the first half of 2024. And we are reaffirming our commitment to achieve 15 percent plus adjusted EBITDA margin profile at one year post-spine sale and expect to see substantial costs come out in the back half of 2024 following the completion of the transaction. With that, I'll now turn the call back over to Vatha.

Thank you, Rich. I'm excited about the prospects ahead of us and as always I look forward to updating you on the progress throughout the year. Our team is immensely experienced in carving out and setting up new businesses as well as improving the operational efficiency of businesses in transformation. And we are excited to employ these skills to the positions in the for our next chapter. With that, we'll open it up to questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Saxon of Neidam & Company. Your line is now open.

Oh great. Good afternoon, Vatha and Rich. Thanks for taking my questions. I wanted to start on the couple on the dental business and then Rich, I might have one for you. So Vatha, you know, the number two in the implants market, they're facing some challenges in their domestic business. So I wanted to hear how you're thinking about that opportunity to either hire reps or capture share. And then broadly, how are you thinking about the implant part of the dental portfolio? I think it's about 60% or so. Do you think it can grow in what looks like a somewhat software market from a patient volume perspective?

Hey David, thank you for the questions. Yeah, we have benefited from some of the competitive dynamics in the market. And frankly, we've picked up some share there in a relatively slower market than we've experienced years prior. So I do think that that has been positive for us. I think that the strength of our implant portfolio is that we, first of all, we don't have to trade down. So we aren't trading down to a lower price implant, which I believe that the competitors that have that option have often moved down market. We haven't had to do that. And the reason we've been able to hold it, the premium category, is primarily from two new implants that have been really, really effective. Very, very sticky in the marketplace, coupled with a digital workflow, a guided solution workflow that is growing significantly faster than other digital platforms and faster than the rest of our business. Now, albeit it's a smaller base right now, but our entire thesis is predicated on that pulling through implants. And if you think about what is the opportunity in implants, it's that it's only about 25% penetrated. And part of that is the cost of the workup. And the second part is the ability to give an implant at a very consistent rate, whether you're a new physician or an old one, or a much more experienced one. So I think we've done a lot to make the workflow coupled with the implant work really well. So I think we'll continue to make strides there. We definitely have more customers than we had last year. And where we see this slowdown is some of the specials are just doing a little bit less than they were before. But we're confident that when the market returns, we're going to be a really, really good place to grow faster. So hopefully that answers your question.

Yeah, super hopeful. I wanted to ask one on the digital part of the portfolio. So the agreement with the line for ITERO, does that cover their new Lumina scanner? And if so, I guess, when do you expect to start selling that? And if at all, is it factored into the first quarter guide? And I'll just have one follow up.

Sure. So we do have that relationship, and it will continue with their new scanner. I believe we are somewhat delayed for regulatory purposes, so we won't have it until the fourth quarter of this year. I would say overall, ITERO sales for us is a bit depressed, but that is not a cause for major concern for us because that is a low margin. It really, really satisfies our digital offering. But we are excited about what we can do in the Q4 when the new scanner is available to us.

Hey, David, this is Rich. Just one additional comment to what Batha mentioned. Before we get access to the new scanner from ITERO, and like Batha said, the anticipated Q4 timeframe, we have a program with our customers that if they buy the existing scanner, that they will be able to upgrade to the new one when the new one is released. So we've got a plan there to transition that

new introduction.

Okay. Super helpful. Thanks for that. And then just sticking with you, Rich, super helpful color. I haven't quite gotten through to the model yet, but if you could just kind of help us with quantifying the stranded costs, your bearing currently and kind of where they sit, COGS versus OPEX, thanks so much.

Yeah. So we do have obviously stranded cost, largely in the corporate infrastructure that we use to support businesses. So the way that we've generally operated is kind of like a holding structure where the businesses can operate largely autonomously from each other. And then we've got a corporate overlay. So as we think about corporate stranded costs on a go-forward basis, they're the way that we're thinking about the transaction is, as we mentioned in the prepared remarks, that will carry some cost until the closure of the deal. Then of course, there'll be a number of headcount and obviously it's conveyed. And then we'll have, which will give us some uplift in margin. And then we'll have a period where there's TSAs. And then once TSAs fall off, then there's another inflection point is how we're thinking about it in the longer term. But the way that we're also thinking about it obviously is we've set out the 15% plus adjusted EBITDA margin one year post sale. There's obviously a lot of puts and takes in numbers right now, obviously, but we're still committed to achieving that one year post sale.

Great. Thank you.

One moment for our next question. Our next question comes from the line of Matt Mickic of Barclays. Your line is now open.

Hey, good evening. Thanks for taking the question.

Hey, Matt.

So a couple of follow-ups. You mentioned the sort of target of getting under $200 million in net debt. You're taking in $375 or a bunch of that in cash and a little bit of debt it looked like. And you've got, so the simple math would say you could get lower. Can you talk a little bit about how you're thinking about the balance of getting your net debt lower or holding onto some cash and why? And a couple of quick follow-ups if I could.

Sure. So, hey, Matt. The $200 that we mentioned does not include the $60 million dollar seller note. So obviously that's a pick that we just don't include there. But if you included that, it obviously would be better than $140. So that's what we're looking at there. And that's probably the discrepancy between the price that we got for the spine business and what we're reporting on Rich. Anything else to offer there?

Yeah. Just in addition to that, Matt, the less than $200 billion in net debt number that we did mention is one thing about the transaction with HIG is actually a relatively complex transaction relative to our size. And so there's a, it's basically a carve out within the organization and separating and setting up legal entities and the like. And so we're still incurring some costs to separate the business outside of what you would normally see in a transaction, like a normal transaction. And we're bearing those costs real time. So we're going to be focused on maximizing the cash inflow and the debt repayment that we do have, but we feel comfortable with the less than $200 million that we outlined. And as things progress and become clearer, as we get closer to transaction close, we'll provide more rough detail around that.

Okay. And so like, if we think of, we'll break that into the, so you've got $60 million and the $315 million in cash, and then you've got some outlays. I mean, you generated, what was it? I don't know how much you generated last year in cash total, but I'm assuming there'll be some positive operating cash flows. So I guess, can you give us any sense of how much, is that a five or 10 or 20 or $30 million outlay for transitional costs that you're describing or any color on that?

Yeah. The way that I have you think about it is, as I mentioned on the call, Q1 is generally a little bit of a softer quarter for us due to seasonality. But if you just simply take, when we announced the deal, which was before the end of the year, and we said less than $200 million of net debt, and then you actually take out where we ended, we ended actually in a much stronger cash position with almost $88 million and we prepaid additional debt, that should be a little bit of upside that you could probably take into that number. But as I said, we're still spending money and we'll continue to evolve and provide more information. But we did end the year in a really good position from a working capital perspective, as I mentioned on the call, which should be a little bit of upside to the $200 million that we previously disclosed.

Okay. And then just to be critical clear, so we understand this, if I'm thinking that you have $350 million that's coming in to your balance sheet in cash, that there is something, putting aside operating cash flows, what you did in 23 and what you could do in 24, but there's some fixed cash layout charges against that that we should, so we shouldn't be thinking, wow, $350 million is coming in, it'll be something less than that when you're done with, like you described the unique nature of the deal. Is that right?

Yeah, absolutely. We have carve out costs that we're spending, obviously there's legal fees, banker fees, all of those types of things as you would expect. And then the other piece that you have some costs that we're going to be incurring to right size the organization to new remainco steady state as we approach that 15% plus EBITDA margin. And so some of that is going to be cash, some of that is going to be non-cash and we're working through that right now, which is why we're still kind of with that less than $200 million number and we'll provide more information as we continue to work through those plans.

Right. And then if I could, another sort of, not again into these little weedy things, but a year from noon you say, you know, 15, 15 plus use that profile one year forward, is that, is that in the year following, like in other words, like we say the clock starts, you know, April one or something, because if you do the deal in March or picking it, picking just a time that that in, you know, in the quarter following that and the year following that, how to think about what does that 15 plus mean? Is it a run rate? How to think about those, the two metrics actually, it was 15 plus and I'm sorry, there was another one year forward. Yeah. It was the, it was the net debt number, but yeah.

Yeah. And the revenue. So, so the 15 plus, 15% plus we've talked about it is on a run rate basis, right? An annualized run rate basis one year post post-close. But the one thing that I will say is, you've known Baff and I long enough to know that, you know, we will work to, you know, look to take out as much of that cost as quickly as possible. So, you know, but that's basically how we're thinking about it right now is it be on a annualized basis one year post-close. And then as things continue to materialize and move forward, right, we'll provide some additional information as things become clearer. But as you might expect, there's a lot of moving pieces to it right now.

Okay. And so that might not be like, you know, as it closes like the first quarter after that year, you're not necessarily saying, you know, we'll print that first quarter expect 15 plus. I mean, maybe that might be your goal, but what you're promising is, is that in the four quarters that follow that, that's where you're going to be aggregating to. Is that fair?

Yeah. Yeah. Because, and the reason for that is, and I mentioned this to David a little bit on the is once the deal closes, there'll be costs that immediately, you know, depart the organization that go with the deal. Then there's a period because, you know, HIG doesn't have all of the systems and everything and will not have all of the systems and everything set up or closed where we're going to be in TSAs where we're still going to bear costs as an organization that, you know, is going to be, you know, for the most part reimbursed by HIG, but not entirely 100%. Right. And so when that those TSAs fall off, right, then our job is going to be to take out that remaining costs, which gets you to that 15% plus we talked about.

Okay. That's super helpful. Thanks, guys.

Of course.

Thanks, Matt.

I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.