Q1 2022 ZimVie Inc Earnings Call
Operator: Good afternoon and welcome to ZimVie's first quarter 2022 earnings conference call.
Operator: Currently all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone key pad.
Operator: We will be facilitating a question-and-answer session towards the end of today's call.
Operator: As a reminder, this call is being recorded for replay purposes.
Operator: I would now like to turn the call over to Marissa from Gilmartin Group Investor Relations for a few introductory comments.
Speaker 2: Please, go ahead.
Marissa Bych: Thank you all for joining today's call. Joining me are Vafa Jamali, President and Chief Executive Officer, and Richard Heppenstall, Chief Financial Officer of ZimVie. Earlier today, ZimVie released financial results for the quarter ending March 31st 2022. The copy of the press release is available on the company's website, zimvie.com, as well as on FBC.co.
Marissa Bych: 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.
Marissa Bych: Please refer to the company`s 2021 form 10-K and subsequent SEC filings for a detailed discussion of these risks and uncertainties.
Marissa Bych: Additionally the discussion on this call will include certain non-GAAP financial measures.
Marissa Bych: 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 on the Investor Relations section of the company's website, zimvie.com.
Marissa Bych: This conference call contains time-sensitive information that accurate only as of the lives broadcast today, May 5 2022. ZimVie disclaims any intention or obligation, except as required by law, to update or revise any financial projection or forward-looking statements.
Marissa Bych: Whether because of new information, future events or otherwise. And with that I will turn the call over to Vafa Jamali, President and Chief Executive officer of ZimVie.
Vafa Jamali: Thank you, Marissa.
Vafa Jamali: Good afternoon, and thank you all for joining us for our first earnings call as an independent public company. My name is Vafa Jamali and I'm honoured to serve as a president and CEO of ZimVie.
Vafa Jamali: I want to call today with Richard Heppenstall, our Chief Financial Officer and I believe I speak on behalf of our entire leadership team, in saying that we are very excited to be here as standalone business, following our spinoff Zimmer Biomet on March 1st 2022.
Vafa Jamali: I'd like to kick off our call by introducing who we are as ZimVie, including our dental and spine businesses and the opportunities, and then reviewing our recent financial performance.
Vafa Jamali: Before I dive in, I want to thank all of our employees for their efforts made towards our spin-off to become an independent company. Despite covid-related macro trends that both disrupted our employees, our end users and create a very difficult hiring period, our team is able to stand up as this new organization and begin our turnaround.
Vafa Jamali: As a reminder, ZimVie is a global medical technology leader dedicated to enhancing the quality of life of dental and spine patients, and we participate in a $20 billion global market opportunity across these markets.
Vafa Jamali: We are the number five largest player in the worldwide dental market and the number six in spine. We have over 20 brands trusted by clinicians and surges worldwide. We operate in 70+ countries and we have approximately 2007 team members.
Vafa Jamali: Our vision is that everyone deserves to feel better, healthier and stronger.
Vafa Jamali: Our mission is to advance clinical technology foundation, restoring daily lives, and we are offer dental and spine solutions that do exactly that.
Vafa Jamali: Enabling our patients to better enjoy and experience life. Our team shares a growth mindset that gives us the energy and the inspiration we need to do more for those patients.
Vafa Jamali: As I mentioned earlier, we have the fortune to be a leading player in two substantial and growing markets.
Vafa Jamali: Our product platforms address a broad set of critical patient needs across those markets and are substantially differentiated from competitive solutions in several cases.
Vafa Jamali: Our dental business is very well positioned in the growing global dental implant and biomaterials markets.
Vafa Jamali: Within this segment, we operate in three key categories.
Vafa Jamali: Dental implant solutions, which is our largest contributor.
Vafa Jamali: Biomaterials, which supports the durability and sustainability of the implant, and digital dentistry, which is an emerging technology that provide significant workflow to support to the commission across our office and derivatively, both improves the quality of the implant while reducing the time that a patient spend in the chair.
Vafa Jamali: As we scale our digital dentistry solutions, we are also driving strong pull-through of our implant business. Our spine business comprises of a broad portfolio addressing all areas of the market. Within spine, our largest category as Cervix complex solutions, followed by bone healing.
Vafa Jamali: We also have exposure in 2 exciting emerging categories: minimal invasive surgery, which simply require some sort of an enabling technology to be effective, and in an area we intend to grow into, and motion preservation devices, an area we're actively leading and remain very excited about. This category includes the Mobi-C market, leading cervical disreplacement, as well as the tether, a novel treatment for paediatric scoliosis.
Vafa Jamali: The opportunity here is to transition more patients from fusion to one of these two modalities. These are great market development opportunities requiring substantial clinical selling which we believe we can leverage to our advantage. The breadth of our portfolio and our strong market positioning are the functioning of our rich history. Looking forward, we intend to maintain our breadth to address a broad diversity of patient conditions, while optimizing our exposusure to the highest growth segments, and continue to evolve our solutions to best meet patient and provider needs.
Vafa Jamali: As part of that, we're committed to ongoing innovation in both these segments. We have approximately 300 in-house RD employees across dental and spine. Much of this team has contributed to some of the best innovations in the past and we are excited to have this to continue their journey with ZimVie, as we look to bring new technologies to market for the benefit of patients going forward.
Vafa Jamali: Turning to our strategic objectives as a stand-alone entity.
Vafa Jamali: At this stage of our independence, it's important to share the progress we're making towards our long-term priorities to define and accelerate our growth drivers while expanding our operating margin.
Vafa Jamali: We have developed a strategic framework that will shape our priorities and direct our approach towards investment supporting sustainable growth and value creation for ZimVie.
Vafa Jamali: The intention of our margin expansion plans are to provide the fuel necessary to drive our growth aspirations. We are focused on three strategic factors.
Vafa Jamali: Stability and separation from Zimmer Biomet.
Vafa Jamali: Operational excellence.
Vafa Jamali: And portfolio optimization.
Vafa Jamali: Stabilizing the business and separating from the remaining arrangements within Zimmer Biomet remains a critical short-term priority.
Vafa Jamali: Our team has been hired, with no major vacancies remaining.
Vafa Jamali: The team is now staffed with the right people, with the right attitudes and the right jobs.
Vafa Jamali: We're continuing to make progress separating our OUS, our outside of US spine business.
Vafa Jamali: And setting up our regional infrastructure, largely utilizing the existing outside of US dental back-office infrastructure.
Vafa Jamali: Our major short-term priority here is consolidated, upgrading our ERP platform and distribution centres across the globe.
Vafa Jamali: These transitions have been completed in the US and Canada, and underway in Asia Pacific and Europe .
Vafa Jamali: These transitions are critical to building an efficient and connected global business infrastructure to execute on our operational objectives going forward. Completion of these projects will also resolve a majority of our transition service agreements with Zimmer Biomet.
Vafa Jamali: Operational excellence is our second critical vector. I'm also pleased to share that we've kicked off our operational excisions plan, designed to improve our overall profitability through the next several years. We are aggressively examining our cost structure in terms of how we do business, both from manufacturing and operations, as well as commercial and corporate infrastructure. Initially, we exited unprofitable geographies and implement our band [inaudible] program. These efforts will have a small negative impact on spine revenues for 2022, but no impact on profit, and will improve our focus, our profit and our future prospects.
Vafa Jamali: I'm confident that we have multiple opportunities to take cost out of our business without impacting patient care, nor impacting our growth ambitions. Finally, with respect to portfolio optimization, we have implemented disciplined portfolio management. Here we run a deep analysis of our portfolio initiatives. We then streamline our focus of top projects that are in the best markets, while eliminating time-consuming and low-return projects.
Vafa Jamali: As a result, we will allocate investments based on the ability to drive innovation. Specific to spine, we started aligning our US channel to our most important business parties and adjusted financial incentives accordingly.
Vafa Jamali: We have clearly communicated what's expected and are now moving into more directional performance management.
Vafa Jamali: Now, how are we doing [inaudible]? First, I'd like to reiterate that remains very early days for ZimVie. Nonetheless, I'm pleased to announce that we recognize $234.7 million in total revenue for the quarter, declining modestly year-over-year, but offering a baseline against and we`re confident we can grow over time.
Vafa Jamali: Rich, our Chief Financial Officer, will provide greater detail on our first quarter financial performance shortly. But before I turn it over to Rich, Iet me briefly detail the impact of the pandemic on our recent forms of financial outlook.
Vafa Jamali: In the first quarter our dental business was largely immune to pandemic related disruption on the clinician side of care, and we saw strong, high single-digit constant currency growth, as Rich will detail shortly.
Vafa Jamali: However, our spine business has periodically been affected by COVID-related hospital slowdowns, most recently in China.
Vafa Jamali: Spine procedure volumes across the market did improve over the course of the first quarter, and we have continued to see moderate improvement through to our call today, although some challenges and inpatients procedures, such as staffing shortages, remain.
Vafa Jamali: Into the remainder of the year as we transition from pandemic-endemic, we are hopeful that the US healthcare system will remain resilient against further variance and business conditions, particularly for our spine business, will continue to improve.
Vafa Jamali: Perhaps, more importantly, we have a chance to identify several operating model improvements during the lessons we learn from pandemic. Internally, we have learned how to operate remotely and more efficiently when needed.
Vafa Jamali: Externally, we have learned how and where customers have flexibility, to adapt where they still have and the way they still face substantial needs. For example, we saw our dental customers adjust quite quickly to pandemic restraints, by increasing their use of PPEs, adapting their office setups to keep seeing patients.
Vafa Jamali: We saw similar trends within spine, albeit later in the pandemic, but providing takeaways for us on how we can continue to evolve and meet the greatest needs of providers and patients, to our people and our platforms.
Vafa Jamali: I'll now hand the line over to Richard Heppenstall, our Chief Financial Officer, to review more details of the first quarter performance outlook.
Richard Heppenstall: Thanks Vafa, and good afternoon everyone. I'll begin by reviewing our first quarter 2022 results, and we'll then close by providing some additional thoughts on our outlook for the full year 2022.
Richard Heppenstall: Beginning with sales.
Richard Heppenstall: Total third party net sales for the first quarter of 2022 were $234.7 million, a decrease of 4.6% on a reported basis and 2.7% in constant currency when compared to the prior year period.
Richard Heppenstall: Please note our total first quarter net sales were impacted by one less selling day than the first quarter of 2021, worth approximately 1.6% to growth.
Richard Heppenstall: Shifting to our segments.
Richard Heppenstall: Global dental's third party net sales were $120.6 million, representing a 6.4% increase on a reported basis and a 9.2% increase in constant currency when compared to the prior year period. This includes the 160 basis point headwind from one less selling day in Q1 of 2022.
Richard Heppenstall: We continue to gain traction on our strategy of leveraging a strong foundation in medical education and our digital dentistry and biomaterials offerings to pull-through impact sales.
Richard Heppenstall: Geographically, within dental, US third-party net sales of $68.3 million, increased by 8.2%, and outside of the US sales of $52.2 million, increased by 4% and 10.5% on an as reported and constant currency basis respectively.
Richard Heppenstall: Moving on to spine. Global spine's third party net sales were $114.1 million in the first quarter of 2022, a 13.9% decrease on a reported basis and a 12.9% decrease in constant currency, when compared to the prior year period. The decrease in spine sales is driven by the exit of certain unprofitable markets in late 2021, the discontinuation of products as part of our brand rationalization program and distributor bulk orders in the first quarter of 2021 that did not recur.
Richard Heppenstall: When adjusting for these items and taking into account one less selling day, spine sales decreased by 9.5% and 8.4% on a reported and constant currency basis respectively. Our underlying performance in spine was impacted by ongoing competition and challenges associated with COVID-19.
Richard Heppenstall: Turning now to profitability. Adjusted gross profit was $149.3 million, compared to $165.9 million in the prior year period.
Richard Heppenstall: Adjusted gross margin was 63.6%, a decrease of 380 basis points when compared to 67.4% in the prior year period. The year-over-year decline is due to reduced volume and higher excess and obsolete inventory expenses in spine.
Richard Heppenstall: Adjusted research and development expenses as a percentage of third-party sales were 5.9% versus 5.3% in the prior year period, in line with our expectations.
Richard Heppenstall: Adjusted selling general and administrative expenses of $116.2 million, or 49.5% of third-party sales.
Richard Heppenstall: Reflects a reduction of $10.3 million or 190 basis points when compared to the prior year period, due to lower variable selling expenses and timbering delays of cost to incur stand-up activities. resistance as an independent public company.
Richard Heppenstall: Adjusted EBITDA of $33.8 million, or 14.4% of third-party sales, reflects a decrease of 180 basis points from 16.2% in the prior year period. The year-over-year decline was due to lower sales and higher excess and obsolete inventory expenses in the spine segment, partially offset by higher dental segment sales and timing delays of cost to continue to stand up Zimvie as an independent public company.
Richard Heppenstall: Adjusted earnings per share was 50 cents on a fully diluted weighted average share count of 26.1 million shares.
Richard Heppenstall: Quickly touching on liquidity. We ended the first quarter with approximately $104 million of cash and equivalents, including approximately $22 million of cash, earmark to settle certain post-spine-related transactions and to fund ERP implementations, to decouple from our prior parent company.
Richard Heppenstall: Netting those earmark funds, we ended the quarter with a healthy cash balance of approximately $82 million.
Richard Heppenstall: I will now provide some additional color on our full year 2022 outlook. We are reaffirming our full year 2022 guidance of $1 billion in third-party sales, adjusted EBITDA margin of 13.1% to 13.6% and adjusted earnings per share of $2.10 to $2.30 per share.
Richard Heppenstall: However, we now expect our Dental segment to grow in the mid to high single digits, compared to the mid-single digit growth previously guided, and we also expect the spine segment to contract in the mid to high single digits, compared to contracting in the mid-single digits as previously guided.
Richard Heppenstall: Our adjusted earnings per share guidance remains unchanged at $2.10 to $2.30 per share. With that, I'll turn the call back over to Vafa.
Speaker 7: With that, I'll turn the call back over to Vafa.
Vafa Jamali: Thank you, Rich. We`ve seen incredible opportunity to revitalize exciting aspects of our portfolio with the greatest clinical impact for providers and patients in the dental and spine markets. Overall, I am very encouraged by our progress made towards free cash flow generation and our margin expansion programs at this early stage.
Vafa Jamali: We're in the very early innings of an exciting opportunity. With that, I want to thank you for your time and open it up for any questions.
Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the key.
Operator: If at any time, your question has been addressed and you would like to withdraw your question, please press star, then two. At this time we will pause to assemble our roster.
Operator: First question comes from the line of Matt Miksic with Credit Suisse. Please, go ahead, sir.
Speaker 2: mixic with credit.
Matthew Stephan Miksic: Hi. Thanks for taking the questions and congrats on a pretty strong quarter, your Q1. So, I wanted to ask, just one question, may be following up on the on the comments. You were just making around sort of spine trends and I had one follow up.
Matthew Stephan Miksic: You said things kind of, as you know I'm sure sort of, recovered a little bit faster in Q1 in terms of volumes and staffing and all the things we've heard about throughout Q1 earnings for the group. Your numbers were a little bit light and again, and you've taken down your full year expectations a little bit and I'm just wondering how much of that is dynamic in respected geographies or end markets that you're in and how much of that are shifting expectations for some of the key growth drivers that you've laid out, namely around tether and around Mobi-c?
Speaker 8: are shifting expectations for some of the key growth drivers that you've laid out, namely around tether and around Mobi-c.
Vafa Jamali: Thanks for the question Matt. Vafa here. So we have a mix there. So we do have some impact from exiting some geographies that undoubtedly affects the 2022. We have some brand rationalization as well, but within spine-ing, we really do think that we need to give the portfolio some time for some commercial fixes that we think are fixable within 2022. But, unlike dental, where we got the head start in terms of turning that one, within spine we still think there's some commercial fixes for us to do. It doesn't push back or change any of our thesis with the regards to our growth drivers, but it does require us to take a little bit more active management of some of the commercial decisions we made and some of the execution that we've done in Q1 and for the rest of 2022.
Matthew Stephan Miksic: Okay, that's helpful. And just a follow-up on margins and other key big themes. We've heard a lot about this this quarter, as I'm sure you know, is rising input costs. You mentioned a little bit about that in your prepared remarks. You're holding full year sales guidance expectations and EBITDA margin. Just wondering if you could help us understand kind of the EBS and flows or puts and takes, to know how you're handling some of the, if you're seeing and how're handling some of the same rising costs or expected rising costs throughout this year in wages, and energy, et cetera?
Speaker 5: Sure which, when you take on good's again. Yes, So regard to cost increases, we have seen some, some marginal cost increases, in particular, like you mentioned, in labor. Many of those cost increases that we actually saw, we actually saw it toward the back part of 2021, and so those were kind of embedded in our underlying guidance. You know, we're obviously seeing some, So acts to freight, relative to largely to dental, and then some other minimal impact of raw material price increases. The good news is, on those material price increases, most of our products are outsourced manufacturing on the spine side, and so we're pushing back the suppliers in negotiating cost increases accordingly. And then most of our manufacturing on the dental side is is largely in sources, as you know, and one of the things that we've got a really distinct advantage on the dental side.
Vafa Jamali: Sure. Rich, why don`t you take that one?
Richard Heppenstall: Hey, Matt. Good to talk to you again. Yes, so, with regards to cost increases, we have seen some marginal cost increases, in particular, like you mentioned, in labor. Many of those cost increases that we actually saw, we actually saw it toward the back part of 2021, and so those were kind of embedded in our underlying guidance. You know, we're obviously seeing some impacts to freight, relative largely to dental, and then some other minimal impact of raw material price increases. The good news is, on those material price increases, most of our products are outsourced manufacturing, on the spine side, and so, we're pushing back the suppliers in negotiating cost increases accordingly. And then, most of our manufacturing on the dental side is largely insourced, as you know, and one of the things that we've got a really distinct advantage on the dental side is, much of our raw material pricing is in fixed contracts that do not permit price increases through, I think it's 2023, and to a certain degree we're insulated from any material cost increases on the dental side. The way that we're thinking about gross margin to total at this point is, we feel that we have enough opportunity to optimize our cost structure and take cost out of manufacturing process that will offset more than offset any further prices increases that we're seeing, or inflationary increases we're seeing from supply chain.
Speaker 7: much of our raw material pricing is in fixed contracts that do not permit price increases through, I think it's 2023, and to a certain degree we're insulated from any material cost increases on the dental side. The way that we're thinking about gross margin to total at this point is, we feel, is that we have enough opportunity to optimize our cost structure and take cost out of manufacturing process that will offset more than offset any further prices increases that we're seeing, or inflationary increases we're seeing from supply chain.
Matthew Stephan Miksic: That`s great. Thanks so much.
Operator: Thank you. At this time we do not have any more question. This concludes the question-and-answer session.
Operator: I would like to turn the conference back over to Vafa Jamali, CEO, for any closing remarks.
Vafa Jamali: Thank you very much again. It's very, very early stages of our turnaround. We undoubtedly look forward to more of these, with even more exciting news of our progress. So, thanks very much for tuning in and we look forward to updating you on our future progress. Thanks, everyone.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker 1: Good afternoon and welcome to zimb's first quarter 20: 22 on conference callcurrently all participants are in a listen-only modeshould. You need assistance. Pre signal a conference specialist by pressing Star, then zero on your telephone key padwe will be solicitating a question and answer session towards the end of today's callas. A reminder, this call is being recorded for replay purposes.