This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: And welcome to Zenvi'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 Byche from Gilmartin Group for introductory disclosures.
spk00: Thank you all for joining today's call.
spk02: Earlier today, ZMD released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company's website, ZMD.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. 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 of the live broadcast today, May 8, 2024. ZMV 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 Vassa Jamali, President and Chief Executive Officer of ZMV.
spk04: 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 million in total consideration, including $350 million in cash and a $60 million promissory note, we're delivering on our promise to reshape the financial profile of our business. Immediately following the sale, we paid down $275 million of debt and refocused our organization is 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. 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 right-sizing 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 first full quarter as a leaner, more focused dental company, we have all the components to maintain and grow our leadership position in this $8 billion implant, digital solutions, and biomaterials market. 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 implants and also holds 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, membranes, and tissue products and regenerative products with a history of well-documented clinical results. This portfolio includes our leading PIROS allograft solution. Our 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 intramural 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, and great outcomes, especially in customized restorative smile operations. We estimate that only about 20% of dental implant cases today are performed using a 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. 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 two 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. 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. Thanks, Pappa, and good afternoon, everyone. I'll begin by reviewing our first quarter 2024 results and we'll close by providing commentary on our outlook for the full year of 2024. As a reminder, we finalized the sale of our spine business on April 1st, 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. Please refer to our 10-Q for financial results from discontinued operations. Turning to continued operations, third-party net sales for the first quarter of 2024 were $118.2 million, a decrease of 1.6% in reported rates, and a decline of 1.4% in constant currency. In the U.S., third-party net sales for the first quarter of 2024 of $67.7 million 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. Outside of the U.S., third-party net sales of $50.4 million increased 0.4 percent on a reported basis and up 1.1 percent 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. First quarter 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 duplicative cost, improve manufacturing efficiency, and benefit from a more favorable product mix as implant sales recover. Q1 2024 adjusted research and development expense of $6.3 million or 5.3% of sales compared to $5.9 million or 4.9% of sales in the prior year. Q1 2024 adjusted sales general administrative expenses of $60.3 million compared to $66.3 million in the prior year, driven largely by reductions in IT and legal expenses. Adjusted EBITDA attributable to continuing operations in the first quarter of 2024 was $12.5 million, or a 10.5% EBITDA margin. Q1 2024 adjusted earnings per share attributable to continuing operations was $0.08 a share on a fully diluted share count of 27.1 million shares. We are very pleased with our financial performance in the first quarter of 2024 as we are delivering on our plan to resize and reposition Zinvi as a pure play dental company. We remain committed to achieving our financial objective of 15% plus EBITDA margins one year post-fine sale. As Baffa mentioned earlier in the call, we are very pleased with the position of our balance sheet following the repayment of $275 million of debt on April 1st. As of April 2nd, 2024, we had a consolidated ZMV cash balance of approximately $66 million and a gross debt balance of approximately $234 million, yielding a net debt balance of approximately $168 million. In addition, we are maintaining our $175 million 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. 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 million to $460 million. 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. Specifically looking at the second quarter of 2024, given current trends in the U.S. implant market, we expect our Q2 revenue to be sequentially lower by 1 to 3 percent, largely similar to the seasonal sales patterns in 2022 and 2023. We expect fiscal year 2024 adjusted EBITDA to be in the range of $60 million to $65 million, resulting in an adjusted EBITDA margin in the range of 13.3% to 14.1% 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. 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 action to pay down a substantial portion of our debt and the payment in kind interest we will be getting accruing on the seller note with HIG, we now expect 2024 interest expense to be approximately $12.5 million to $13 million, inclusive of $4.4 million of interest expense for the first quarter of 2024. Share-based compensation expense is expected to be in the range of $16 million to $16.5 million for the full year. We expect to generate adjusted earnings per share of 55 cents to 70 cents per share on a fully diluted share count of 28.5 million shares. With that, I'll now turn the call back over to Bapa. 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're completely reshaped Zimby as an organization while delivering significant shareholder value. I'm equally energized by the opportunity ahead of us as a pure play dental company. With that, we'll open it up to questions.
spk00: One moment while we compile the Q&A roster.
spk03: The first question comes from the line of Matt Mixick of Barclays. Matt, please go ahead.
spk01: Hey, guys. Thanks for taking the questions.
spk04: Hey, Matt.
spk01: Hey, Matt. So maybe, Rafa, if I could follow up on your comment about mix and maybe just a little more color on, you know, what the shifts in mix have been so far this year, as you were describing, and sort of what, you know, 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.
spk04: Sure. So we are seeing mix have an impact on us. It's both geographical and the portfolio, I think, is where we're feeling it the most. Rich, perhaps you could give us a little bit of color on where we're seeing this specifically. Yeah. Hey, Matt. Our revenue story for Q1 actually boils down to two items. You know, the first one of which is we're experiencing some pressure on the capital sales side. And so the ITRO that we distribute, which is lower margin for us, was lower in the quarter versus prior year. 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 implants. And we're also, you know, as you noticed from the press release, we're also seeing strength in the U.S. I mean, our European organization, you know, grew over 4%, you know, in the quarter, for example, inclusive of that, you know, 1% plus constant currency growth for the quarter. But it both largely boils down to ITERO sales and USM plans. You know, with that, Matt, also pricing has been actually pretty stable for us. 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.
spk01: That's great. And then on the path to 15% EBITDA, which you're talking about now, I guess, as of buying April 1st. Am I right to read that as first quarter next year? you know, that's what we should expect you to be printing or, you know, again, just understanding the timing of your full year next year.
spk04: 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.
spk01: Okay. And some of the things you just mentioned, mix, obviously, you know, having an impact this year, I'm sure, as you map out that path to 15%. Maybe if you could talk a little bit more detail about sort of operationally, either internally or, you know, execution commercially that you think will be the sort of like the key drivers of helping get there, you know, on time or faster. Sure.
spk04: 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 it, it's going to be 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. And then the next pieces that you look at are legal costs and IT costs, which are probably the next two biggest buckets. And we are taking those ones out. So those are mostly fees paid, services purchased from, for example, the IT. It's 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. Rich, anything else that I missed on that one? Yeah, 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 product, like in particular around digital, are really sticky, you know, with our customers. And so, you know, we don't really talk about it too often, but on like a same store sales basis, you know, we're just seeing a decline in same store sales, but we're not necessarily seeing, you know, customers like leaving the organization. And so, you know, the industry is talking about, you know, 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.
spk01: Okay. So some rationalization, some kind of internal cost programs, and maybe it sounds like, is it fair to characterize the digital revenue lines as a bit more subscription and less sort of episodic procedure, you know, at the whim of the puts and takes of procedure flows? So maybe just a little softer than we might see in sort of maybe implants. Is that a fair way?
spk04: Yeah. Undoubtedly, if procedures slow down, those, you know, purchases will be somewhat reduced, but we're seeing You know close to 50% growth of the guided surgery line and that's you know 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 once the 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.
spk01: Great. Thanks so much for the call.
spk04: Thanks, Matt. Talk to you soon.
spk03: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Disclaimer