ZimVie Inc.

Good afternoon, and welcome to Zimpy's third 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 Gil Martin Group for introductory disclosures.

Thank you all for joining today's call. Earlier today, Zimby released financial results for the quarter ended September 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 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, October 30th, 2024. Zimby disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I will turn the call over to Zafa Jamali, President and Chief Executive Officer of Zimby.

Good afternoon, and thank you for joining us. Our team executed another strong quarter delivering revenue of $103 million as we continue to innovate across the portfolio of implants, biomaterials, and digital solutions. During the quarter, we continue to make significant progress improving the operating profile of our business. This included improving our manufacturing efficiency, decreasing the cost of products sold on both a year-over-year and sequential basis for the quarter. In addition, we paid down $50 million in debt, leaving us with a gross debt of $220 million and a net debt balance of $153 million, when including our quarter-end cash of $67 million. We continue to think carefully about capital allocation and the interest expense planning in order to improve both the profile and the profitability of our business. Meanwhile, we continue to make thoughtful investments in our sales teams, our training programs, expanding our digital dentistry symposia to accommodate more physicians after several sold-out sessions. We're also making some incremental investments in R&D to fill the product portfolio gaps and capitalize on opportunities that we see in this market today. Before discussing updates on our product offerings, I would like to comment on the recent hurricanes that affected a large portion of the southeast of the United States, including near our headquarters in Palm Beach Gardens, Florida. Fortunately, we did not experience any material impact to our operations or financial results in the third quarter or early fourth quarter associated with these storms. More importantly, our best wishes go out to all that were affected. We're doing our best to support our local community, our employees, and the customers that were impacted. Let me now provide a portfolio update, starting with dental implants. We are seeing resilience in the U.S. dental market as we drove another quarter of modest overall year-over-year growth. In certain practices and regions, we are beginning to see improvements in the health of the North American dental market, and we are confident that should these trends develop further, we have positions in the advantageously to capitalize on improving market conditions. Following up from last quarter's US launch of our portfolio of Gentech restorative components, we've seen a remarkable adoption of these offerings as part of our expanded portfolio. Additionally, our latest implanted deductions, the TSX and T3 Prout, have continued to be positively received by providers. We believe our implant portfolio's growth is outpacing the premium market, and we are working to expand market share through innovation and quality of our products. As a reminder, dental implants are predominantly paid by patients out of pocket. Given this dynamic, we believe that a lower interest rate environment in the United States may allow patients to access more favorable financing arrangements and thus drive implant procedure growth. The market opportunity for dental implants remains underpenetrated and exciting. We look forward to continuing to deliver innovative and effective solutions for implantologists around the world. Next, shifting to biomaterials. Our biomaterials portfolio grew at a healthy rate in the quarter, reflecting what we believe is a leading indicator of future implant procedures. Patients with diseased or damaged tooth structures received these bone substitutes to provide a suitable surface for future implants insertion. As such, growth in biomaterials should serve as a leading indicator for patients to receive implants. Finally, our digital portfolio fuels growth and procedure adoption by offering solutions that greatly increase the efficiency of dental practices. Our complete digital portfolio, excluding iTero scanner sales, grew over 10% in the third quarter, fueled by the increasing adoption of our recently introduced WheelGuide 5.4 software and our Meta partnership. Our implant concierge service grew 20% in the quarter and is receiving very positive feedback from adopters, reflecting the value we provide to dentists by removing hours of labor and cost from the dental office. We're also continuing to drive further uptake of surgical guide sales, which grew over 30%, driven in large part by the adoption of our recently launched RealGuide 5.4 software. We continue to innovate on this software, and will continue launching meaningful updates. By making implant procedures faster and more effective, our digital platform aims to drive further adoption and grow the market for this under-penetrated solution. With our continued investments into our sales force, our product portfolio, and a focus on medical education and training efforts, we are positioning Zimbi for growth into the future. I will now turn the line to Rich to review our financial performance and forward outlook in greater detail.

Thanks, Baffa, and good afternoon, everyone. I'll begin by reviewing our third 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 third quarter of 2024 were $103.2 million. a decrease of 2% in reported rates and a decline of 2.2% in constant currency versus the prior year period. In the U.S., third-party net sales for the third quarter of 2024 of $65.4 million reflects an increase of 0.5%. When excluding the impact of oral scanner sales, which continue to remain soft, U.S. sales grew by 1.6% driven by our portfolio of restorative products, digital dentistry, and biomaterials. Outside of the U.S., third-party net sales of $37.9 million decreased 6% on a reported basis and 6.6% in constant currency. The decline was primarily driven by the timing of orders in Japan and Italy and a slower market in Spain. Third quarter 2024 adjusted cost of products sold was 34.4% and decreased 40 basis points versus 34.8% in the prior year period. More importantly, adjusted cost of products sold decreased 260 basis points sequentially from the second quarter of 2024. We have been signaling for some time now that we have been focusing on our manufacturing cost efficiencies following the sale of Spine, and we are pleased that our initiatives are paying off. Q3 2024 adjusted research and development expense of $6.6 million or 6.4% of sales compares to $5.3 million or 5% of sales in the prior year due to the timing of certain professional service arrangements related to new product innovation. Q3 2024 adjusted sales general administrative expenses of $57.8 million compared to $55.8 million in the prior year and includes increased investment in our U.S. direct sales force. Other income in Q3 of 2024 of $3.5 million primarily reflects income from transition service 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 third quarter was $13.1 million, a 12.7% adjusted EBITDA margin, compared to $12.2 million or 11.6% margin in the prior year period. Adjusted earnings per share attributable to continuing operations was $0.12 per share on a fully diluted share count of 27.6 million shares. Our solid performance in the third quarter underscores our continued commitment to the execution of our manufacturing efficiency initiatives, and the further utilization of some of these benefits to expand investment in R&D and U.S. sales to position us for long-term growth. We remain committed to achieving our financial objective of 15% plus EBITDA margin one year post-completion of the sale of Spine. Turning to the balance sheet. As of the end of the third quarter 2024, consolidated ZMV continuing operations cash was $67 million. During the third quarter, we resumed our initiative of shifting value from debt holders to equity holders by repaying $15 million of principal on our term loan debt. Gross debt at the end of the quarter was approximately $220 million, yielding a net debt of approximately $153 million, including the $67 million of cash. Note, our net debt balance does not include the seller note from the sale of the spine business. Additionally, we continue to maintain our $175 million revolving credit facility, which continues to remain undrawn. Turning toward our outlook for the full year 2024, We are narrowing our full-year revenue guidance range to $450 million to $455 million from $450 million to $460 million previously. We are also narrowing our full-year adjusted EBITDA guidance range to $60 million to $62 million, resulting in an adjusted EBITDA margin in the range of 13.3%, to 13.6% of sales for the full year 2024. As mentioned earlier, we also remain committed to a 15% plus adjusted EBITDA margin one year post-sale of spine or April 1st, 2025. We expect share-based compensation expense to be approximately $6.3 million for the full year 2024. And lastly, we are narrowing our adjusted EPS guidance. Specifically, we expect to generate adjusted earnings per share between $0.57 and $0.62 per share on a fully diluted share count of 27.6 million shares. With that, I'll now turn the call back over to Vafa.

Thank you, Rich. We've made steady progress in the third quarter on our goals in improving our profitability profile while continuing to make investments in the business to innovate and grow. We also have a great team who's continuously operated diligently. With that, I'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 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 David Saxon at Need and Pam Company.

Great. Good afternoon, Vaf and Rich. Thanks for taking my questions. Maybe I'll start briefly on guidance. I'd love to just hear how you're thinking about, The recovery specifically in the U.S., does guidance assume the market recovers? It sounds like you might be kind of cautiously optimistic. And then internationally, it sounds like the third quarter, you saw some orders pushed to the fourth quarter. Maybe can you quantify that and just confirm, like, do those orders actually come back or decrease? Do they slip and then, you know, can international grow in the fourth quarter or will overall results be driven by the U.S.?

Thanks, David. I'll start and I'll pass it on to Rich. I think that we are feeling optimistic about growth in North America returning in the fourth quarter. So that's something that we've been anxiously waiting for and feeling better and better with that. With regards to international orders, I believe Japan will resume to growth this coming quarter. Italy was a bit of timing, and then the rest of it was a little bit of macro in Europe. So I think that there is a bit of a macro pressure in Europe right now that we're feeling, and then the rest of it would – Italy and Japan would likely resume – would pick up those orders, as you asked. Rich?

Yeah, just had a couple of additional data points to Vapa's commentary. So first and foremost, the U.S. business for us is 60% of our overall revenue profile. So obviously, we're really pleased with the fact that we generated, when you exclude the impact of itero sales, as we mentioned on the call, David, that the U.S. actually grew 1.6% in the third quarter. And so we're really pleased with that result and encouraged for the fourth quarter where we expect to continue to grow in the U.S. But we also believe that we're executing in the U.S. business toward the top end of our peer group as a result. So we're really pleased with how well we're positioned in the U.S. and And as also mentioned during the call, you know, we continue to invest in our U.S. sales force to continue that path going forward. On the OUS side, you know, Vap was right. There was the timing of orders. We had a bonus of orders in Japan in Q3 of last year that obviously impact the year over year compared this year. As Vap also correctly mentioned, we expect Japan to return to growth in the fourth quarter. And then in Europe, you know, that was timing of distributor orders in Italy, which can be a little bit choppy. And then Spain, you know, was softer for us. There was a lost DSO that we had, and that impact is probably about $3 million for us. But, you know, we also are looking to the European business, female business or US business rather to grow in the fourth quarter tier based on the guidance that we've put forward.

Okay, that was helpful. Thanks for all that. And then, so just on the restorative side, I mean, you talked about this whole dynamic. I believe you started talking about it last quarter where, you know, you believe it's a leading indicator So maybe, you know, I'd love to hear, have you started seeing those patients return to the funnel and actually get the implants, or is it too early for that? Any way to kind of size that patient backlog?

We haven't been able to size it accurately, so I'd probably be just ingenuous if I gave you a number, but we do think that especially biomaterials is a good leading indicator of of work and we are seeing particular pockets in the US that is coming back. Remember, the US is our most profitable market. So as we perform there, it funds a lot of activity for us. So we haven't quite seen it. I haven't quite quantified it, but we are actively trying to parse those numbers and see where they come back. But I still do think that it is a leading indicator. I just don't know exactly how to put the numbers in the funnel.

Okay. All right. And then just lastly for Rich on the P&L, so gross margin was higher. It sounds like you're working on some efficiency initiatives. SG&A was also higher. This is relative to my estimates at least. So, you know, can you sustain this kind of call it mid-60 gross margin going forward? Is that kind of normal for you? And then on the SG&A side, kind of talk about, you know, puts and takes there and how we should think about that going forward. Thanks so much.

Yeah, no problem. So firstly on gross margin, you know, we're obviously really pleased with the performance in the quarter, right? A 260 basis point sequential improvement quarter of quarter, you know, adds a lot of additional financial flexibility to P&L and was the main driver of of the increase in EBITDA, you know, year over year, you know, of over 100 basis points. And as we mentioned on the call, David, we've been, toward the end of last year, you know, we had some underabsorption in the manufacturing facilities. You know, we'd also talked about how we did an organizational resizing in our plant in Valencia. And I've also started moving production of our high runner products to Valencia, which has about a 20% benefit in cost of production than our Palm Beach Gardens location. And so all of those initiatives really kind of manifested themselves in the third quarter. And we're running TSX production in Valencia right now. you know, a full bore, you know, the organization has been resized, and then the manufacturing variances that were sitting on the balance sheet have all been flushed through. And so, you know, we're expecting gross margin to stay in the similar range that it was, you know, in the third quarter, you know, frankly, into the fourth quarter. And then, you know, we haven't talked about 2025, but, you know, our plan would be for that to continue. And VAPA and I, going further down to the P&L side of things, VAPA and I, I'm going to give you a lot of detail on this one, is VAPA and I have talked about being a meritocracy. And we've been in a position historically where we've had to do some of these things to get the business to where it is. And we feel really good about where the business currently is positioned. A balance sheet is in really good shape. A gross margin is higher. And sales is particularly stabilizing in the U.S. And so what we're doing is we're taking some of those proceeds from the gross margin and we're continuing to invest in innovation, which has been a really successful driver for us over the last 18 months on some of the sales initiatives that we have in place. And then also the U.S. sales force. And so, you know, we invested, you know, kind of quietly in the sales force in the third quarter. And, you know, we expect that, you know, we're going to continue to look at making sure that we can drive long-term sustainable growth as a result. And so we'll make sure that we balance the income statement across all of those areas to make sure that we're getting the best value out of the business in the long term.

Just to add to that, too, I think, you know, David, mix is a big driver for margin, too, so is the implant mix. You should also see improvement there.

Okay. Yeah, that makes sense. Great. Thanks so much, everyone.

Thanks.

Thank you. Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Our next question comes from Matt Miksik at Barclays.

Hey, guys, thanks for taking the questions and I apologize for some of the background noise here. I just wanted to, you know, first congrats on the quarter and wanted to just maybe get a sense of, you know, what the confidence is and some of the volumes and, you know, in Q4, and maybe if you haven't covered it already, and I apologize, I'm just jumping a few different calls here. But maybe, you know, any color you can give us on how you're feeling like you're going to be exiting the year and entering next year. And I have one quick follow-up.

Yeah, we changed the guidance, right? So, we're comfortable about the way the year is ending. And like I said, the North American market is the most it's the largest for us and the most profitable. And we are seeing that return to health and to growth. So in many respects, this is one of the more confident moments for us relative to the past 12 months. Rich?

Yeah, no, Matt was right, Matt. You know, we, you know, I think this, we grew in the U.S., you know, sequentially better than I think we did for the second quarter. So that's that's positive for us. And then, and then, like I said, some of the US, you know, issues that we had in the quarter, you know, are kind of one timers. And so we also expect that the US business to grow, you know, and so we're, we're narrowing the guy, we had a pretty broad range before. And so we're narrowing that to the 450 to 455 on a four year basis, you know, and then next year, I mean, we're obviously not going to guide for next year on this particular call, and we will at a later date, but you know, just kind of qualitatively speaking, you know, I think if you look at the landscape for Zim V, you know, I think it puts us in a pretty good place, right? I think the business is stabilizing, our gross margin is up, you know, as the GNA is being invested in prudently where we see fit. We're paying down debt, the cash balance is healthy, interest rates are starting to drop, you know, and, you know, the sale is fine and the TSAs that are that we have with, you know, with HIG are, you know, are proceeding well. And so, you know, we feel like we're in a really good position going into next year, but we're not, you know, obviously going to guide that on this particular call. You know, there's still some roads to run before we get to that.

Yeah, of course. That's helpful, though. Appreciate the color. And, again, apologies if you've already covered this, but just some sense of how the sort of digital side of the business real guide and sort of in-scale utilization metrics that you, you know, if you haven't already shared them, I'd love to hear how that's progressing and how you feel about it and where you think it can go. Thanks so much.

Digital has been a real highlight for us. We think that because this market is still very much under-penetrated in most markets that we serve, the digital is a real enabler for growth, and we see that uptake pretty significantly. So, you know, Rich, I know we had growth in both real-time and in-plan concierge. Both of them, you know, are essentially constitute a major portion of the digital business.

Yeah, yeah. So just further to that comment, right, you know, our – our digital, what we classify as digital, you know, and we'll exclude iTero from that, right, because it's been a sales drag. You know, we're up, you know, a healthy 10%, you know, on a global basis, and international actually grew at a faster rate than the U.S. did in the quarter. But then kind of carving back from that specifically, you know, the software piece of the business, which is RealGuide, was up over 30% on a year-over-year basis. So, you know, that business is, you know, highly differentiated and pretty sticky. And so we're pretty pleased with that continued progress.

Thank you. Okay, operators. Matt, are you

Hello, Matt?

Oh, yes, I'm sorry. No, that was my last follow-up. I'm sorry.

No problem. Thank you. This concludes the question and answer session. I would now like to turn it back to Vassa for closing remarks.

Thanks very much. Like I said before, we're feeling good about the progress we're making, the improvements to the overall company, and we feel that the market is starting to turn. So we're feeling quite a bit better about where we are right now and have confidence in the next quarter. So appreciate everybody being on the call and wish you a great rest of the day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.