Q1 2023 ZimVie Inc. Earnings Call

Speaker 2: Good afternoon, and welcome to ZIMB's first quarter in 2023 earnings conference call. Currently, all participants are in 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.

Speaker 2: I would now like to turn the call over to Marissa Bish, Gilmartin Group for introductory disclosures.

Speaker 3: Thank you for joining today's call. Earlier today, Simvie released financial results for the quarter ended March 31, 2023. A copy of the press release is available on the company's website, Simvie.com, as well as on SEC.gov.

Speaker 3: Before we begin, I'd like to remind you that management will make comments during this call that include forward-looking statements.

Speaker 3: 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.

Speaker 3: 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 with supplemental slides issued today found on the investor relations section of the company's website.

Speaker 3: This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 3, 2023. 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.

Speaker 3: And with that, I will turn the call over to Vafa Jamali, President and Chief Executive Officer of VIMBY.

Speaker 4: Thank you, Marissa. Good afternoon and thank you all for joining us.

Speaker 4: I'd like to kick off our call by providing an update on the progress that the INV is making towards our most vital objectives of innovation and commercial execution.

Speaker 4: Then I'll turn the call over to Rich Huppenstahl, our Chief Financial Officer, to review our financial performance for the quarter ended March 31, 2023.

Speaker 4: Understand the immense work we have done as a standalone company and the work we still have ahead of us. I'd also like to thank our employees.

Speaker 4: I said previously with a large part of the organizational separation behind us, we'll spend the bulk of 2023 focused on commercial execution and innovation.

Speaker 4: This will ultimately position the business for growth into 2024 and beyond.

Speaker 4: Our most critical imperative in long-term success is the health of our innovation platform. In the first quarter, we continued on the path to actively reshape the portfolio, ensuring that our growth finds a future supported by differentiated products that drive better clinical outcomes and workflow benefits.

Speaker 4: In dental, we remain dedicated to an ongoing cadence of product launches.

Speaker 4: As a reminder, 2020 was the first time in 10 years we lost a new debt will implant to the market. Since then, we've had six new and next generation products.

Speaker 4: For example, this year we launched our real-guy computer-aided design and full-swee modules within our digital dentistry software platform.

Speaker 4: These offerings allow physicians to complete detail that sophisticated implant and tooth restoration procedures with seamless workflow throughout the procedure.

Speaker 4: Our software platform is now the only offering in the market with implant planning and guide design within the same module as restorative care, including crown indentured design.

Speaker 4: The software platform is now the only offering in the market with implant planning and guide design within the same module as restorative care, including crown indentured design, allowing substantially greater efficiency for our customers.

Speaker 4: More recently we launched two new products in our Bromgraft Solutions portfolio.

Speaker 4: The Regeneros CC Alligrap particulate and the Regeneros bone graph plug.

Speaker 4: The Regenerance CC Alligrap particular is a natural blend of cortical and cancelose bone particles that can be used to fill bony's voice in a variety of dental applications. And the Regenerance Bone Graph plug is an easy to use grafting solution for filling extraction sockets and periododontal effects.

Speaker 4: Dental bone grap procedures are done to repair and reconstruct the job and can provide a foundation for dental implant placement. Essentially, increasing the size of the suitable implant patient population.

Speaker 4: These launches broadens and leads presence in the dental biomaterial market and expand our comprehensive suite of bone graft offerings.

Speaker 4: Both of these launches are enhancing policy selection for our customers and providing a value alternative to our premium PUROS Allegrave particular.

Speaker 4: Speaking of a market leading purest Elegral particulate, we're pleased to see this product features in the international journal of oral and maxifacial implies.

Speaker 4: Speaking of a market leading purest Elegral particulate, we were pleased to see this product features in the international journal of oral and macsofacial implies. The journal concluded...

Speaker 4: that purists have a higher ability to support bone formation than competitive freeze dried aligraf

Speaker 4: This is important for procedure adoption, as an implying there's only a strong is a bone that supports it.

Speaker 4: We highlight these recent portfolio launches and clinical support, the exciting opening of our state of the art dental science, educational and training institute at Rapunzel Beach Gardens dental institute last week.

Speaker 4: Zimdi-Dentle Institute South, so we call it, features over 11,000 square feet of dedicated education training space, offering the latest life-like simulated patient models.

Speaker 4: a cadaver lab, and a fully integrated digital workflow with 3D printing capabilities, RealGuide, software, and inMilt.

Speaker 4: The Institute is equipped with everything needed to train dental professionals on all aspects of the procedure, from practice and workflow management to the most complex full-mouth reconstructions. We're really excited to host our current and prospective dental customers here and our House of Police to share that the sessions in our institute spaces are now booked all the way through October . In summary, our dental business remains well positioned to grow and generate cash flow and help get through this? Integration Center in special emergency conditions.

Speaker 4: received by each other to 4 million plus members coming out of Highmark and the 280,000 lives covered by Blue Cross, we shield North Dakota.

Speaker 4: Outside of the U.S., we're pleased to see Tether Procedure Grounds in Europe and APEC.

Speaker 4: Shifting to MOBC, we are building on decades of patient impact for the reconstruction of cervical discs at both one and two levels, having recently surpassed 200,000 discs implanted.

Speaker 4: Moby-C also received French government reimbursement and the highest quality reading from the British clinical data panel ODEP within the first quarter. These developments are already aiding in greater penetration and adoption of Moby-C in Europe , I historically under penetrated, under adopted region for cervical disreplacement.

Speaker 4: Finally, we continue to make progress through our BrainLab partnership.

Speaker 4: As a reminder, in March, we announced the Global Development Agreement with BrainLab for spinal enabling technologies to provide our customers and patients with the deepest level of integration between Zimic products and BrainLab's industry-leading portfolio of spine imaging, planning, navigation, and robotic assisted solutions.

Speaker 4: We are now working to achieve compatibility to our spinal impact and brainwaves spine and trauma navigation systems, allowing us to enhance workflow and accuracy in the operating moment while reducing interoperative x-rays and radiation exposure.

Speaker 4: Looking forward, we will continue to engage with our key surgeon customers.

Speaker 4: innovate on and around our existing solutions, and ultimately optimize our position in markets where we're positioned to win.

Speaker 4: Turning to the operational improvement we are continuing to drive within the business. In recent weeks we completed an enterprise-wide project to reconstruct your activities and write signs of our global organization with the overall objective to reduce our global cost basis and streamline our organizational structure across regions, functions and levels. These actions are in accordance with the plan we laid out at the time of space.

Speaker 4: Before turning the call over to Rich's outline our financial performance, I want to highlight I am pleased with the progress we are making across our business and I look forward to sharing our progress with the coming quarters and years. With that, I'll turn the call over to Rich.

Speaker 4: Thanks, Beth. And good afternoon, everyone. I'll begin by reviewing our first quarter 2023 results, and we'll close by providing updated commentary on our outlook for the full year 2023.

Speaker 4: Total third-party net sales for the first quarter of 2023 were $225.1 million. A decrease of 4.1% on the reported basis and a decrease of 2.9% in constant currency.

Speaker 4: Please note, during the first quarter of 2023, we had one additional selling day versus the prior of your period, equating to an approximately 1.5% positive impact to consolidated growth.

Speaker 4: Shifting to our two seconds.

Speaker 4: First quarter, global dental third party net sales were $120.2 million. Effectively flat on a reported basis, an increased 1.8% in constant currency when compared to the prior period.

Speaker 4: We are pleased with the continued market acceptance of our new implant offerings. Performance in the US has been strong, and although we just launched the ESX in Europe during the first quarter, preliminary education is the product is performing well.

Speaker 4: Additionally, we continue to see strength in our digital offerings, which are growing double digits.

Speaker 4: In the US, dental third-party net sales of $69.9 million increased by 2.3% inclusive of one additional selling day versus 2022.

Speaker 4: Outside of the U.S. dental third-party net sales of $50.3 million decreased by 3.8% on a reported basis but increased 1.1% in constant currency.

Speaker 4: First quarter, global spine, third-party net sales were $104.9 million, and 8.1% decrease on a reported basis, and a 7.8% decrease in constant currency when compared to the prior of your period.

Speaker 4: The decrease was driven by a decision to exit China following volume-based procurement, which is offset by sales that were previously recognized by Zimmer Biomet last year that are now Zundee sales and continue competition in the competitive spine market.

Speaker 4: In the US, Spine's third-party net sales of $83 million decreased by 4.1% inclusive of the one additional selling date.

Speaker 4: Outside of the U.S. spying third-party net sales of $21.9 million decreased by 20.4% on a reported basis, and 19.3% in constant currency.

Speaker 4: The impact of our decision to exit China versus the prior year is estimated to be 2.4 million dollars or 2.4 percentage points of consolidated spine growth.

Speaker 4: and is offset by sales previously recognized by a Zimmer Biomed that are now in V-sales as just mentioned. First quarter, adjusted gross profit was $156 million compared to $149.3 million in the prior year period.

Speaker 4: Adjusted gross margin was 69.3% and increase of 570 basis points when compared to 63.6% in Q1 of 2022.

Speaker 4: The increase in gross margin versus prior year is driven by a substantial reduction of inventory charges in the quarter, resulting from our operational initiatives to better manage inventory.

Speaker 4: We continue to be encouraged with the progress we have made thus far on this front. And although net inventory is marginally lower versus the end of 2022, we have seen a decrease in gross inventory levels, meaning that we are starting to carve into previously reserved inventory layers and encouraging sign.

Speaker 4: Q1 2023 adjusted research and development expenses of $12 million, or 5.3% is a percentage of third-party sales, a decrease of 60 basis points compared to the prior year period.

Speaker 4: Q123, adjusted selling, general, administrative expenses of $125.1 million or 55.6% of third-party net sales with 610 basis points higher than the prior year period.

Speaker 4: This increase was due to less than sales and timing of our corporate infrastructure as a new public company which increased subsequent to Q1 2022. Recall that this time last year, Zenvi was a newly spun company and that we were still building our infrastructure as a newly independent company.

Speaker 4: As such, we expect SGNA to continue to be higher than prior year for Q2 and Q3 2023 as well.

Speaker 4: Adjust the EBITDA in the first quarter 2023 of $32.1 million or 14.3% of third-party net sales reflected decline 10 basis points from 14.4% in the prior year period.

Speaker 4: The decrease in the adjusted evidone margin is primarily due to lower net sales and higher SGNA costs as previously discussed.

Speaker 4: offset by higher gross margins previously mentioned.

Speaker 4: Adjusted earnings for sharing first quarter was 25 cents on a fully diluted weighted average share count of 26.3 million shares.

Speaker 4: Touching on working capital liquidity and debt, in Q1, we continue to make progress on our initiatives to capitalize on the strength of assets on our balance sheet.

Speaker 4: and the application of our Disclined Financial Framework.

Speaker 4: Our efforts have resulted in a reduction in the net inventory of approximately $3 million since December 2022 and a year-over-year reduction in capital spending at $2.3 million. We ended the first quarter with $66.4 million of cash and equivalents.

Speaker 4: and continue to look for opportunities to tighten our operational cash needs with the focus of paying down additional debt.

Speaker 4: Consistent with our capital allocation priority of increasing financial flexibility and paying down debt to reduce a leverage profit profile over time, and police to announce that we continue to transfer value from debt holders to equity holders in the first quarter by pre-paying $10.5 million of debt.

Speaker 4: This represents our Q1 and Q2 of 2024 required principal payments on our term loan debt.

Speaker 4: We are now five quarters ahead of our principal amortization schedule.

Speaker 4: As a reminder, $175 million revolver remains undrawn.

Speaker 4: I'll now turn to our revised FOIL year Outlook for 2023.

Speaker 4: Starting with revenue, we are revising our expected 2023 net sales to be in the range of $835 million to $860 million. Up from our previous guidance range of $825 million to $850 million.

Speaker 4: Please note, going forward, all revenue dollars will be third-party net sales. We will no longer receive any related party sales. Our guidance reflects this.

Speaker 4: Looking at our segments, we expect dental to continue to grow in the flat till no single digits.

Speaker 4: We expect spying to decline in the team's inclusive of an approximately 3 percentage point impact to our spine business from our decision to exit the China market, and a 1 percentage point unfavorable impact of foreign exchange.

Speaker 4: Moving to adjusted EBITDA margin, we continue to expect full-year adjusted EBITDA margin to be in the range of 13.5% to 14.0% of net sales as previously guided. To provide some more color around our EBITDA margin guidance.

Speaker 4: We are pleased with our Q1 2020-3 financial performance, which reflects, in part, a benefit from initiatives we have underpoken, including a recent resizing of the workforce, as BAPA mentioned.

Speaker 4: This effort and our continued operational initiatives were contemplated in our original 2020 speech guidance.

Speaker 4: We want to emphasize that spin-offs and turn-arounds are choppy, thus we are leaving our four-year guidance range intact.

Speaker 4: For Q2, we expect sequentially lower adjusted EBIDA in the load teams.

Speaker 4: Commence with the change in revenue expectations. We are revising our adjusted earnings per share guidance range to 40 cents per share and 60 cents per share on a fully deluded share count of 28.6 million shares up from our previous guidance range of 30 cents to 50 cents per share. As a reminder, supplemental guidance is available in our investor presentation.

Speaker 4: Dr. Paul Schaing, and CEO of Atlanta, oral and facial surgery.

Speaker 4: In March, we host Dr. Joe and Dr. Schaener for an Open Dialogue on their experience of the Zen? implant offerings.

Speaker 4: and our visual-based sheet platform, as well as our training programs and support team.

Speaker 4: Both physicians commented on their ability to employ our digital resources seamlessly and effectively across their practice to save substantial time for themselves and their staff while contributing to a higher quality patient experience. Both doctors also noted that the ENCODE emergency button is saving their patients a full office trip.

Speaker 4: to receive a traditional impression. Again, we believe that our innovation around workflow solutions offers a terrific opportunity to further expand the implant market.

Speaker 4: Their commentary speaks to our commitments to customers and patients by continuing to introduce solutions that optimize efficiency for providers, contribute to improved outcomes, and address unmet patient needs in both dental and spine markets.

Speaker 4: Please stay tuned as we plan to continue our investor education series with the additional KOL conversations later this year. With that, we'll open it up to questions. Thank you. At this time, we will conduct the question and answer session.

Speaker 2: 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.

Speaker 2: To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster.

Speaker 2: Our first question comes from Robert Marcus with JP Morgan.

Speaker 5: Yeah, thanks for taking the question and congrats on a good quarter.

Speaker 5: Maybe to start on the guide you guys beat the street

by a good amount on revenues and EBITDA, but didn't seem to quite raise the guidance on either by as much as the beat. So, was wondering what's going on there and your thoughts as to what it implies for the rest of the year?

Yeah, thanks, Robbie. You're a good start to you again.

So we're really pleased with our performance in Q1, but we're still early on in the year and so we're still maintaining a conservative and potentially prudent approach for the bounce of the year. You know, as we've talked about previously.

There are often a number of exogenous factors that are beyond our control, but in fact our business sometimes. And so we're just being really prudent as we move forward.

Got it. So help me think about what that implies.

you know for cadence of sales both dental and spine for the rest of the year because it

It seems to imply in dental that cells are going to step down a decent amount from first quarter and similar on spine to get to that low teens for the year, even backing out the exit. So just sort of how I think about it and the cadence, you know, second, third, fourth quarter relative to first quarter.

Yeah, so I think, you know, the way you should think about how the balance of the year is, I think if you look at Q1, I think we believe that we had a pretty strong Q1. And so, you know, whether Q2 or Q2 are a piece of self, you know, it kind of remains to be seen. And so, you know, what are considered looking at the balance of the year?

is I think you can take the increase in the midpoint of our guide and you just kind of apply that radically towards the bounce of the quarter that should give you a reasonable depiction of threatening things.

Got it. And with SGNA, the levels you're applying, you know, definitely stepping up year over year and we see where you started in first quarter. I imagine it probably progressively gets better as a percentage of sales. Is the offset there a better gross margin more in line with what you saw in first quarter?

to end up at the EBITDA levels you're guiding to. Yeah, so if you remember this time last year, Robbie, we were a newly spun company. We were ramping up corporate expenses. And so we'll get the Euro for your parity on us. You know, the presence of revenue probably in kind of the Q3.

timeframe because it took us a couple of quarters to ramp up last year and so the balance from the F and the margin expansion that we guided to is like the coming out of the close margin is evidence.

at a 20 cent beat in first quarter and I realized the conservatism for the balance of the year, but how are you thinking about where those 10 cents may come out relative to the street if we're thinking about?

EPS for the rest of the year. Thanks a lot. Yeah, the problem. So if you take a Q1 number, right, and you take the revised revenue guidance, and you apply the 13.5% to 14% margin.

to that and you roll through EPS, you know, we're still guiding to, you know, 26% tax rate, we're still guiding to similar share based compensation expense, similar interest expense. It'll flow through, you know, an adjusted EPS also somewhere in the midpoint of that rate, so it should flow through in top of bottom, Robby.

Okay, great. Good quarter again. Thank you. Please hold for our next question. Our next question comes from Matt McIxick from Bartley. Thank you.

Okay.

Matt, your line is open. Hey, this is David on for Matt. Can you just give him about five more seconds please? Yes, sorry guys. You know, it's in trouble getting out mute here. So.

As great to see you have the sort of upside, at least upside to our estimates on spine.

And I'm wondering, you know, if that, I get the point that you want to be conservative at this stage of the year. You know, there's a lot of cross-currence, I imagine, in your organization between, you know, the distributor changes that you have been making and the, you know, some of the

cost-cutting efforts that you're describing. So, but what has been working there and sort of like, you know, I'm intrigued that this could be sort of like a stabilization point and maybe we start to see.

some sort of sequential stabilization and improvement, but I don't want to jump to conclusions. I would love to get your sense of how that's going.

Sure, hi, I'm at. So really, you know, last year was just a collection of...

of really difficult situations for us to manage through whether they be external factors or internal with some of the ERP changes. And just the general disruption that we naturally caused with the separation is primarily impacted our spine business. I had always said that it would take us, about two years to get through fully.

much more fresh this year. This year I think we're much more focused commercially speaking and I think that's a big big relief for our our our sales reps and for us frankly I far more rather talk about innovation than than fixing or system changes so I do feel that we're there I don't think we're completely very at that so I think um

You know, we had enough events happen last year that we're being, you know, careful in terms of calling the bottom and turning it. But I do feel like we are in a much, much better cadence commercially. I think dental's doing really, really well with how they market, what they market, how they price and how they grow that business. It's really fluid. And I think we're making really, really good news with Spine. I think the Brain Lab.

Partnership is going to help us big time with big accounts. I think we're making good moves commercially speaking, and we're focusing the team. I also see us getting much more involved with KOLs, which is an important part of Spine and frankly, something that we were unable to get to as we were really, really focused on operational issues. So.

Overall, I think we're making the corner, we're making the turn. I would, again, our guidance implies that we're still cautious in terms of how we go, but I really truly look forward to giving positive news for the next three quarters. So that's the way I see it right now. Okay. All right. So we won't jump to, we won't get ahead of you on that front, but that is the...

in the context of.

you know, what you think that market was doing in the first quarter and maybe you know, frame your performance against some of your, some of your competitors to the extent that you know, this means you're sort of taking share, you're driving next, you're, you know, Eddie Field, but that nominal figure of kind of a low single digit growth rate.

you know, putting it, you know, contrasting it with what we see in devices, which as I mentioned, have been kind of off the charts, but that's, that device is not dental and had all sorts of other prior issues that maybe weren't, were infecting dental. Sure. So, Q1 of last year was a really big, big quarter for dental.

So that was kind of a post-COVID sort of a splurge that happened and I think it benefited all all players

We were concerned about that going into this court of what actually we did okay relative to peers I think we we met or beat on the implants and again our business is premium implants and the businesses that we have around The premium implant are really supportive of that growth We focused on You know we focus how

to the dentist chair.

while doing an implant really, really enables greater adoption and more growth. So that's really how we've differentiated largely in our market and we feel really, really good about it. So I would say that we will perform at or better than market for pre-medental implants.

And I attribute a large part of that success to a commercial team that's really managed the digital platform around the dental implant. And then what we've also done is we've just filled a lot of gaps. So there's no real reason to go shop outside of our portfolio when you're a envy customer.

I think that's kind of where we're at. I think, yeah, I think other than that, I think we also felt like it was a pretty resilient market. There was some concern whether or not the there would be some sort of recessionary impact, but it's been quite a quite a resilient market around around.

around the premium implied to anyway. Right. Yeah, I wasn't going to ask about that, but you know, we don't know. Nobody really knows 100% what's in store for the next six, 12 months or those some folks that certainly are making a call there. So we'll stay tuned and come back to you. I guess maybe after next quarter on that front. But one last question. If I could just don't call on the.

this sequential down progression or any of the time I think Robbie might have hit on some of this but you know is there you know is there a is there a

And opportunity to sort of, I guess, what turns the tide in that direction of EBITDA to your down in the second quarter based on your projections? Is it the cost-cutting, restructuring program? Is it momentum in the back half? Maybe, well, you know, through, if you haven't already, and if you did, I apologize for this to be the...

the sort of dynamic that gets you sort of moving in the right direction again whether it's in the third quarter or the fourth quarter on EBITDA.

Yeah, so happy to kind of expand on that. So like I mentioned to Robbie, we're pleased with our Q1 performance, obviously, and so a lot of the gross margin uplift was based on lower inventory charges.

your year and that of course leads to growth margin. Now of course, inventory charges are somewhat episodic, right, and kind of formulate. So they're not necessarily consistent. And so what we really want to see on a go-forward basis is kind of long-term sustainable operationalization and inventory management. And so we're consciously optimistic that we're making progress there, but we want to kind of see it sustainable. And so that's...

That's kind of the first part. The second part is that the restructuring that I mentioned had a very, very minor benefit in the quarter, but I think we'll start to ramp up towards the back half of the year, which is where you start to see some of the margin sustainability. So I think in the call, I think when we got it, we gave a little bit of color around Q2, we'll put an EBITDA margin perspective. And so...

We probably expect that to be squintially down. I think we said no low teams, but then you kind of get it back in the back half of the year.

Thank you very much for all of you who attended the call. We look forward to further ones like this and we appreciate your engagement and your questions. Again, we look forward to talking again three months. Thanks. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thank you very much.

And.

I have you.

Thanks for watching!