ZimVie Inc.

Good afternoon, and welcome to ZMD's second 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 Beisch from Gilmartin Groups for introductory disclosures.

Thank you all for joining today's call. Earlier today, Zimby released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website, zimby.com, as well as on sec.gov. Before we begin, I'd like to remind you that management will make comments during this call that include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. 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 or 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, August 1, 2024. Zimbi 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. And with that, I will turn the call over to Vasa Jamali, President and Chief Executive Officer of Zimbi.

Thank you, Marisa. Good afternoon, and thank you all for joining us. I'm pleased with our execution in the second quarter, achieving revenue of $117 million as we continue to innovate across our portfolio of implants, biomaterials, and digital solutions. We have also advanced our efforts to improve the margin profile of our business, right-size corporate costs, and optimize our operational footprint. Meanwhile, we continue to invest and scale our differentiated solutions to give our patients and providers the best possible outcomes. I'll now provide an update on each of our product portfolios, starting with dental implant portfolio. We see strong commercial traction with our newest line of implants, the TSX and the T3 Pro. We believe that we continue to gain market share as we strive to expand the implant dentistry market. During the quarter, we launched a series of meaningful innovations to our implant offerings to strengthen our already comprehensive portfolio of surgical tools, abutments, and restorative components. Last week, we announced the FDA clearance of the U.S. launch of Gentech restorative components, expanding Zimbi's portfolio of end-to-end prosthetic offerings. We first launched the Gentech portfolio in Europe in 2019 and have seen tremendous success in that market to date. These components support digitally driven CAD-CAM restorations and are designed to provide the best fit and a tight seal, crucial to implant success, supporting the long-term aesthetic and functional restorations. The introduction of Gentec to the U.S. market brings a broad offering of differentiated restorative components to the Zimbi product family. We like this segment and we look forward to competing here. As of July, we have gained 510 clearance for an expanded portfolio of titanium bars for our Belotec abutments, growing its selection to include the most widely adopted full-arch restorative platforms to support some of our most complex procedures. We will continue to deliver innovation across our implant portfolio in support of gaining competitive market share while simultaneously driving the expansion of the implant industry market as a whole. Now turning to our best-in-class biomaterials portfolio. During the quarter, we drove modest growth in biomaterials offerings. Providers are recognizing the quality and efficacy of our portfolio bone graft substitutes, membranes, tissue products, and regenerative products. In this segment, our growth continues to outpace market growth. We believe this may serve as a future leading indicator for growth in our implant offerings. We look forward to continue to innovate within this portfolio throughout the back half of 2024 and beyond. Finally, we saw strong growth in our digital portfolio, which aims to provide customers with greater efficiency in their workflow. Our complete digital portfolio, including iTero scanner sales, grew high single digits in the second quarter, as a result of our commitment to driving penetration by making implants more accessible and efficient procedure for providers. The increase was driven in part by over 20% growth in our implant concierge service. Implant concierge removes hours of labor and cost by providing outsourced treatment planning, services, and guided surgery solutions, taking significant workflow out of the dental office. We believe this service represents a large unmet need where the size of the market for implant concierge could be equivalent to that of the premium implant market. Additionally, we drove over 20% growth in surgical guide sales with RealGuide software. On this note, we recently announced the release of version 5.4 of our RealGuide software. The most significant enhance in this version is a one-click nerve detection and automated bone and tooth segmentation. These features greatly increase safety and accuracy in less time. 5.4 also introduces a new cloud library updates and efficiency tools to streamline the customer's design experience. All of these features are aimed to enhance our ability to deliver quality, efficiency, and time savings in treatment planning and assortment design for both patient and the clinician. I'm also very excited to announce our newest scanner partnership with Medit. We are now distributing this powerful imaging solution alongside our existing suite of technologies, expanding our addressable market with a broader range of scanner price points and technologies. The MED-IT scanners include iOS-driven apps and integration opportunities that help us create a seamless experience with the rest of Zimbi's digital solution suite. We expect these features to enhance the adoption of downstream products based on digital imaging. We remain very excited about the growth potential of our digital solutions and believe they are a critical piece of the strategy to improve the workflow of dental offices and ultimately reduce barriers to implant adoption. Beyond product introductions and innovations, medical education and training are greatly aiding the adoption of our technologies. To date, we've trained over 1,400 providers on our products and technologies. Our programs are booked out through December 2025 as we continue our focus on expanding our presence in the market and in the field of implant dentistry as a whole. Our commercial advantage continues to stem from the value we deliver across our stakeholders, patients, clinicians, and the dental lab. Our second quarter results reflect the resilience of our portfolio and our team's continued commitment. I will now turn the line over to Rich to review our financial performance and forward outlook in greater detail.

Thanks, Vatha, and good afternoon, everyone. I'll begin by reviewing our second quarter 2024 results for continuing operations, and we'll close by providing commentary on our outlook for the full year 2024. As a reminder, we finalized the sale of our spine business on April 1st, 2024. Thus, our spine segment is reflected in discontinued operations in our financial statements. Please refer to our 10-Q for financial results from discontinued operations. Beginning with sales. Total third-party net sales for the second quarter of 2024 were $116.8 million, a decrease of 1.5% in reported rates, and a very modest decline of 0.4% in constant currency. In the US, third-party net sales for the second quarter of 2024 of $69.3 million, increased by 0.1 percent. Over the past couple of quarters, we have seen pressure on capital sales, which for us is the sale of oral scanners. We continue to see that trend in the second quarter. When excluding that impact, U.S. sales grew by 0.8 percent, driven by strength in digital solutions and biomaterials, partially offset by weaker U.S. implant sales. Outside of the U.S., third-party net sales of $47.5 million decreased 3.8 percent on a reported basis and 1.2 percent in constant currency. We have seen stability in the U.S. dental market over recent quarters, and our competitive position remains strong in the core markets we serve. When we exclude the impact of capital sales outside of the U.S., the business was flat in constant currency terms. Second quarter 2024 adjusted cost of products sold was 37.0 percent, roughly flat to 37.2 percent of sales in the prior year period. We expect improvement in cost of products sold over time as we streamline the organization, cut duplicative costs, improve manufacturing efficiency, and benefit from a more favorable product mix as implant sales recover. Q2 2024 adjusted research and development expense of $6.3 million or 5.4% of sales compared to $5.6 million or 4.8% of sales in the prior year. Q2 2024 adjusted sales general administrative expense of $62.4 million compared to $61.9 million in the prior year. Other income. in Q2 24 of $3 million reflects income from transition services agreements resulting from the sale of our spine business and offsets stranded costs that remain in SG&A expense. Adjusted EBITDA attributable to continuing operations in the second quarter of 2024 was $16.1 million or a 13.8% margin. Q2 2024 adjusted earnings per share attributable to continuing operations was 13 cents per share on a fully diluted share count of 27.4 million shares. Adjusted earnings per share in the quarter was largely impacted by the timing of share-based compensation expensed in the quarter. Q2 share-based compensation was $5.7 million and we expect our full year share-based compensation expense to range between $17 million and $17.5 million. We remain on track to deliver on our adjusted EPS guidance for the year. We are pleased with the financial performance in the second quarter of 2024 as we continue to deliver on our plan to make strides to positions in V as a pure play dental company. We remain committed to achieving our financial objective of 15% plus EBITDA margins one year post-spine sale. Quickly turning to the balance sheet. As of the end of the second quarter 2024, consolidated ZIMB continuing operations cash was $78.6 million, and gross debt was approximately $235 million. yielding a net debt balance of approximately $156 million. Note, our net debt balance does not include the seller note from the sale of the spine business. In addition, we continue to maintain our $175 million revolving credit facility, which remains undrawn. Turning toward our outlook for the full year 2024, we are reaffirming our full year revenue guidance of $450 million to $460 million, reflecting an increase of 0.2% at the midpoint compared to 2023. Specifically looking at the third quarter of 2024, our third quarter is historically the slowest of the year due to seasonal impacts of the summer months. We expect our third quarter revenue to be sequentially lower versus Q2 and lower on a year-over-year basis by 3 to 4%. This trend is largely similar to the seasonal sales patterns we saw in 2022 and 2023. In conjunction with our seasonally lower revenue in the third quarter, we expect an adjusted EBITDA margin of approximately 12%. We continue to 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 mentioned before, we remain committed to our 15% plus adjusted EBITDA margin by April 1st, 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 began accruing on the seller note resulting from the sale of spine, we now expect 2024 interest expense to be approximately $13 million inclusive of the $3.1 million of interest expense in the second quarter of 2024. We expect share based compensation expense to be in the range of $17 million $17.5 million for the full year. And lastly, we are pleased to reaffirm our adjusted VPS guidance. Specifically, we expect to generate adjusted earnings per share of 55 cents to 70 cents per share on a fully diluted share count of 27.6 million shares for the year. With that, I'll now turn the call back over to Baffa.

Thank you, Rich. I'm very proud of our team's execution in the first half of 2024 and believe that we have a great opportunity ahead of us. 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'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 the Q&A roster. Our first question comes from the line of David Saxton with Needham and Company. Your line is now open.

Oh, great. Good afternoon, Vaf and Rich. Thanks so much for taking my questions. Maybe I'll start with a higher level philosophical question just about your positioning within dental. So, I mean, you have a very focused portfolio relative to competitors. So when you think about kind of reaching your desired scale, is that continuing to build out this implants portfolio with digital capabilities organically? Or are there certain product categories that kind of if wrapped around your portfolio would be complementary?

Great question, David. Just on that one. Yeah, I think what right now what we've done so far is especially post the sales plan is really, really focused on how unique our assets are and where we're unique. And that puts us square in the in the premium dental implant market. And what we've been able to do, which is, again, a bit more unique, is really we have excellent gross profit margins and we've been able to hold price really well. What's working well in conjunction with this is a rapidly growing and highly differentiated digital offering, which we believe can give us a unique position to expand the market. I also mentioned that I think implant concierge can be a significant contributor. So as we're adding, you know, things like GenTech, which is a restorative, and we're adding more power behind implant concierge, we think that we can expand this market. I think selectively we may look at other markets that are interesting, maybe pressured a little bit for price. One of the areas that I like is the full arch segment, which may require us to have a slightly different implant, but add a lot of technology to it so that we make the same advances we made with implants here, but make it in that group. We've got some work that we're doing there. So I think you can look at us to segment by procedure by procedure, go after the markets that we think are somehow either underserved or could use some tech to really accelerate them. So those are the key areas. We're happy with the With the announcement for the addition of the MED-IT scanner, I think that gives us a better margin profile to compete there. It gives us a different price point to compete alongside the DL line to continue to distribute. I think there's some pieces here and there, but I don't want to be making bigger moves outside of these key matters. I hope that you can see a little more color on what I'm

Okay, great. Thanks so much. You broke up a little, so hopefully you can hear me. But just maybe my next question on iTero. So Lumina's restorative launch was delayed about a quarter or so. Did that have any impact on how you're thinking about 2024 at all? If so, what made up that delta? And then can you talk about the Med-IT partnership? I mean, is that going to be maybe more of a value offering? And how does that kind of help your strategy?

Okay. So, sorry if I broke up there. If you look at the digital offering and you look at the scanners, without the scanners, our business did pretty well. With the scanners, year over year, it's a worse profile. So, equipment hasn't been great this year. And maybe some of it is because of the Illumina that is to come sometime next year. So all of our myths in digital is from missing scanners. So we do think that that is an issue that will resolve itself when the new product comes out. But in the interim, we've got this new relationship with MED-IT, which we actually don't believe that we're sacrificing on technology. quite a rich offering, but it does have different positions. It does have different lines in terms of features and functions. But it's quite well equipped, so it'll satisfy what we need to do in terms of advancing customers to a digital platform, which, as we've mentioned before, rapidly accelerates the number of implants used and, frankly, the quality of the implant that comes out of it, the more digital they are. So that is where we're at. You didn't ask for your financial details on that, did you, Dave?

I mean, if you want to share them, go for it.

Rich, any color you'd want to add on this?

Yeah. Yeah. So, contemplated in our guide, David, is the lower equipment sales. And as Vapa mentioned, right, the delay of Lumina, you know, we kind of already have that kind of baked in our numbers, and so it's already contemplated in the full-year guide. You know, and one of the prepared remarks that we made relative to itero capital sales for us in the U.S. was when you exclude actually the year-over-year impact of itero in the U.S., the U.S. business actually grew by 80 basis points for us. So, you know, it's something that we've been watching quite a while. The U.S. market, as you know, has been pressured, and so we're really pleased with our performance in the second quarter, particularly in the U.S.

Mm-hmm. Okay, that kind of gets into my next question, if I could. So, you know, third quarter down, I think it was 3% to 4% year over year. I mean, I guess, you know, last year that should theoretically kind of already bake in the season knowledge. So, I mean, are you seeing anything in the market that's kind of, you know, causing – you know, this decline or is it conservatism? I mean, and then also, you know, what does guidance assume in terms of patient demand and traffic? Is it more stability or, you know, do things get worse or is there even a recovery in the back half? And then I'll just have one more, sorry for all the questions.

Yeah, sure. Thanks, Beth. Yeah. So the, um, So our Q3, David, even though we're pleased with our performance in the second quarter, the market and the space in general is not well on the road to recovery based on what we're hearing in the market. And so what we classify as performance and good performance in the second quarter is largely related to, I think, you know, the differentiation of our portfolio, you know, as Vafa kind of alluded to earlier on in the call, and then also execution, right? And so, you know, we're being prudent about Q3 because the market, you know, the underlying, you know, market challenges, you know, have not completely subsided. As you know, and so we're just being prudent in Q3, like we historically have been in prior quarters, so that we can continue to execute to our plans.

Okay, great. And then lastly for me, I'll stick with you, Rich. So the cadence on the EBITDA, so I think I heard 12% in the third quarter. If I'm doing the math right, and apologies, it's on the fly, so it might not be, but I think that implies a fourth quarter EBITDA margin closer to 16%. So is, I mean, is that, am I thinking about that right? Or, um, and, and then I guess if I am like, how should we think about the, the exit rate as, as it relates to 2025 margins? I know you're probably not going to give guidance here.

Yeah. Yeah. We're, we will. Yeah. The, the way, the way that you're thinking about it, generally speaking is correct. Right. Um, We've historically said that, you know, 55 cents on the dollar drops to the bottom line, you know, whether that's an upswing in revenue or a downswing in revenue because of our fixed cost infrastructure. And so, you know, Q3 being, you know, over $10 million lighter than Q2 of 2024, we're going to see an impact to adjust the EBITDA as a result. And so, a lot of that is really around kind of fixed cost absorption in the P&L. That, when you kind of step forward to the fourth quarter, that of course comes back the other way. And then, you know, we also have a number of operating initiatives internal within the business that, you know, to further take costs out of the organization, even though we're still doing TSAs with, you know, the purchaser of our spine business. And so, you know, there's also a little bit of a benefit there in the fourth quarter as we continue to take costs out of the business. And then like you properly mentioned, yeah, we think that Q4 will exit us at a good rate and position us for 2025, but we're not there yet to quite give any more specifics about it.

Okay, great. Thanks so much for taking my questions.

Of course.

Thank you. Our next question comes from the line of Matt Misik with Barclays. Your line is now open.

Hey, uh, good evening. Can you hear me? Okay. Hi, great. Um, thanks for taking the questions. Um, maybe, uh, you know, a couple of followups here, um, and appreciate all the color, um, maybe on the sort of, uh, guide the planning business where you have sort of a broader exposure across a number of partners.

Sorry, I think we didn't catch you at the beginning. The audio wasn't functioning. Could you do that for us? I'm really sorry.

Sorry about that. Yeah, can you hear me okay now?

Yeah, perfectly fine.

Maybe just any insights that you're picking up from your – you had sort of a wide, I guess, access to a lot of different platforms that are using or planning for software. And I'm just wondering from that, are you able to sort of surmise any intelligence that tells you like your general market trends or that sort of thing?

Sure. Well, yeah, the guided software and the implant concierge, each of them are growing over 20%. So there is a a movement towards guided surgery and a little bit more outsourcing of lab work. It should be an indicator of overall demand in the market that's kind of stabilizing. I wouldn't say, you know, like Rich said, I wouldn't say it's great by any stretch, but it is stabilizing. And then another leading indicator you might look at is biomaterials, which is the bone substitute used prior to an implant. And what we are hearing from a lot of our practitioners is that they're using the bone substitute as a waiting period until the patient comes back. So if, for example, the procedure is going to get delayed for financial reasons, they would do this as an inexpensive in-between and get themselves ready to come back for the procedure when they're ready. And that just sort of preserves that. the jaw and the bone so that it doesn't degenerate to a point where the surgery becomes difficult. That, to me, is a bit of a leading indicator as well. So those would be the two areas where I would say we feel stability in the markets. The market is certainly not gone. And again,

That is great. I must say you are breaking up a touch. I hope you can hear me okay, Vapa. So my next question, I've been juggling back and forth between a couple of calls, as a lot of people are, but I'm not sure how much you commented or maybe said you can comment on some of the discussions you're having with potential strategic interests around the company. But just sort of, you know, Theoretically, I guess. I'd love to hear how, as much as RealGuide and the platform that you have is of great value, as is the implant line, I'm wondering if there is a way to think about if we take a platform that's being used across a broader number of implant competitors and you know, to use to put in the implant systems of a bunch of different companies, and then you get pulled into, say, another strategic that, you know, is your thinking down the road, would your thinking ever be that you just kind of remain open? Or is there a part of this where Switzerland becomes more closed? Or how to think about that? Sure. My question.

Okay. So, you know, I think in MedTech... there's always going to be speculation around assets like ours based on the size and even more so that it's now it's a pure play dental implant business, which wasn't the case when we had Spine. So what we what we need to do is run the company like we're going to run it for 10 years. Right. But we also know that we have a very unique asset that is very differentiated in the dental market. So the more that we retain our differentiation, we've been able to hold price We've been able to participate in the premium segment. Many of our competitors have left that segment, and we're doing well, and we're holding price. We also have this great, great digital platform, which allows us to help both competitive and our own. I think that if I understood the Switzerland comment around open versus closed, right now our software is open. I would only close that if I had significant, very significant market share. Otherwise, being open is probably good for us strategically. It's also a really, really resource. That'll be a decision for later on when we get to that point. But as a public company, we don't plan for that. But you've got to run it like you're running it for the next 10 years. And if something happens in the middle, you have to look at it with an open mind. So I don't know if I can say much more than that in terms of what my approach is. I don't know, Rich, if you've got a different perspective on that.

Yeah. No, no, that's just actually a very helpful framework to think about, and I understand this is all, you know, I understand running the company, you know, without all these considerations as if you're going to be running it for another five or ten years. Maybe just lastly on some of the, you know, two topics that have come up a fair amount have been capacity and Asia. And I think you touched on Asia and China a little bit in your prepared remarks, but maybe, you know, any wisps or hints that you're picking up that there's a shift in capacity or on the other side of it, any sense that some of the sluggishness in China is temporary or the beginning of a longer slog would be super helpful. Thanks so much.

I'll start, Rich. You can add some color, but we've really reduced our exposure to China. So China's really immaterial to us, and I think it's going to continue to have ups and downs based on the year that it compares to. So we've really mostly exited that market with the exception of a of a very private section that we've kept. But Rich, any other comments on that?

Yeah, yeah, Matt, that is correct. Yeah, our exposure in China is minimal. And so we don't get wrapped up with kind of the volatility that you're referencing in China. What I would say about Asia Pacific, actually, when you kind of segment our Asia Pacific business, we're actually performing, you know, pretty well, actually, in that particular market. And so for us, A headline number for Asia Pacific is in reported currency, we declined in the quarter about 6.9%. But the yen had a pretty drastic change in the quarter. And so when you adjust and you actually look at our Asia Pacific business in constant currency, that business actually grew 1.1%. And just a reminder, our biggest businesses in Asia Pacific is Japan, is number one, but what we're seeing is we have a really fast-growing business in India and a good, solid business that is also growing in Australia. And so we feel in Asia Pacific, outside of China, we're actually positioned in the right markets and have a right to win there, and we're, as a result, growing in Asia Pacific in constant currency.

All right, thank you. There are no further questions at this time. This concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.