Q1 2024 ZimVie Inc Earnings Call

Participants

Marissa Bych; Investor Relations; Gilmartin Group LLC

Vafa Jamali; President, Chief Executive Officer, Director; ZimVie Inc

Rich Heppenstall; EVP, CFO; ZimVie Inc

Matt Miksic; Analyst; Barclays Investment Bank

Presentation

Operator

Good afternoon and welcome to ZimVie's first-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to Marissa Bych from Gilmartin Group for introductory disclosures.

Marissa Bych

Thank you all for joining today's call. Earlier today, the released financial results for the quarter ended March 31, 2024. Copy of the press release is available on the company's website, zimvie.com, as well as on sec.gov.
Before we begin, I'd like to remind you that management will make comments during this call that include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties, please refer to the Company's most recent periodic report filed with the SEC and subsequent SEC filings for a detailed discussion of these risks and uncertainties.
In addition, the discussion on this call will include certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP financial measures are included within the earnings release and the investor deck issued today found on the Investor Relations section of the Company's website this conference call contains time-sensitive information and is accurate only as of the live broadcast today, May eighth, 2024. It can be disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.
With that, I will turn the call over to Vafa Jamali, President and Chief Executive Officer of ZimVie.

Vafa Jamali

Good afternoon, and thank you all for joining us. We've had an active 2024 thus far, and I'm pleased with our progress with the recent sale of our spine business for 300, $75 million in total consideration, including $350 million in cash and $60 million promissory note promissory note, we're delivering on our promise to reshape the financial profile of our business immediately following the sale, we paid down 275 million of debt and refocused our organization as a pure play dental company with a comprehensive and industry-leading portfolio, we've already begun taking concrete actions to rightsize our cost profile following the sale of spine. In addition, to reducing our corporate infrastructure. We were also reducing corporate expenses such as IT costs and legal expenses while continuing to optimize our manufacturing operations. We're confident in executing further rightsizing actions to improve our margin profile over the next year, and we're also confident in our pathway for continued improvement for the years to follow. I'm very excited for the future of this Company as we continue to invest in differentiated solutions for patients and providers, scale the adoption of those solutions and improve the efficiency of our business, deliver shareholder value as we enter our first full quarter as a leaner, more focused dental company. We have all the components to maintain and grow our leadership position in this 8 billion implants, digital solutions and biomaterials market. Our strategy is grounded in delivering outstanding innovative products to our customers in support of gaining market share while driving the expansion of the implant dentistry market as a whole are best in class. The implant portfolio is led by RTSX. and T. three pro premium dental implants and also whole surgical tools, abutments and restoring components. TSX. and T. 3PAR most recent and planned launches of both demonstrated rapid and strong commercial traction. Our biomaterials portfolio includes a wide selection of bone graft substitutes, membrane tissue products and regenerative products with a history of well documented clinical results. This portfolio includes our leading PROs allograft solution. Our biomaterial products are also used in implant procedures to provide a foundation for the implant and create a desirable aesthetic outcome.
Our digital dentistry portfolio includes and digital solutions for tooth replacement procedures, including intraoral scanning solutions and <unk> that is surgery software. By using these digital solutions. Our customers are recognizing greater efficiency in their workflow, benefiting from enhanced procedural accuracy and focusing more time on what they do best performing implant surgeries practices that adopt our digital workflow solutions typically perform many more implant cases and practices that don't. In addition, these practices are seeing excellent patient satisfaction, reduce patient chair time, great outcomes, especially customized restorative smile operations. We estimate that only about 20% of dental implant cases today are performed using a complete digital workflow. As a result, we see incredible opportunity to continue training providers on the benefits of our software and our guided surgery solutions, which can yield further growth and adoption across our portfolio. Our commercial advantage stems from the value we are delivering across stakeholders patients, clinicians and the dental lab, medical education and training are greatly aiding in the adoption of our workflow technology in our industry, leading training and education programs, we bring dentists to art institutes in Carlsbad, California, Palm Beach Gardens, Florida and Switzerland. We also hold regular hands-on and died active programs in the field to help educate clinicians and grow the field and implantology. We expect that our efforts to deliver efficient high quality differentiated solutions to industry practices, coupled with comprehensive training, will form the basis for healthy long-term growth in our business with a little focus on operational progress over the past two years, our team has worked immensely hard to execute material operational improvements across our business. Many of those improvements are focused with our spine business. As we move forward, we'll take much of that same playbook to our dental business, including a focus on manufacturing automation, supply chain optimization and improve the improving efficiency of our plants. As a result of these plans, we expect to drive margin improvement. Previously mentioned. That said, our platform is driven by innovation. Customer satisfaction should be very clear that our efficiency improvements will not be reflected through reduced research and development or reduce commercial costs.
I'll now turn the line over to Rich to review our financial performance and forward outlook in greater detail.

Rich Heppenstall

Thanks, Beth, and good afternoon, everyone. I'll begin by reviewing our first quarter 2024 results, and we'll close by providing commentary on our outlook for the full year 2024. As a reminder, we finalized the sale of our spine business on April first, 2024. Thus, our spine segment is reflected in discontinued operations in our financial statements like we did at the time of our Q4 2023 financial filing, we have again bifurcated our Q1 2020 for financials between continuing operations, which comprises our dental business and the majority of corporate costs and discontinued operations, which includes the legacy spine business. Please refer to our 10 Q for financial results from discontinued operations.
Turning to continuing operations. Third party net sales for the first quarter of 2024 were 118.2 million, a decrease of 1.6% in reported rates and a decline of 1.4% in constant currency in the U.S. third party net sales for the first quarter of 2024 of $67.7 million decreased by 3.1%, driven by a weaker implant market and lower material capital sales, partially offset by strength in our digital solutions and biomaterials portfolios outside of the US third party net sales of 50.4 million increased 0.4% on a reported basis and up 1.1% in constant currency. We have seen stability in the US dental market over recent quarters, and our competitive position remains strong in the core markets we serve. First Quarter 2020 for adjusted cost of products sold was 37.2% compared to 35.4% of sales in the prior year period due to unfavorable product mix and lower manufacturing absorption. We expect improvement in cost of products sold over time as we streamline the organization, cut duplicative costs, improved manufacturing efficiency and benefit from a more favorable product mix and implant sales recover. Q4 one 2024 Adjusted research and development expense of 6.3 million at 5.3% of sales compared to $5.9 million or 4.9% of sales in the prior year Q1 2020 for adjusted sales, general and administrative expenses of 60.3 million compared to $66.3 million in the prior year, driven largely by reductions in IT and legal expenses.
Adjusted EBITDA attributable to continuing operations in the first quarter of 2024 was $12.5 million or a 10.5% EBITDA margin. Q1 2020 for adjusted earnings per share of trade attributable to continuing operations was $0.08 a share on a fully diluted share count of 27.1 million shares. We are very pleased with our financial performance in the first quarter of 2024 as we are delivering on our plan to resize and repositions in the as a pure-play dental company, we remain committed to achieving our financial objective of 15% plus EBITDA margins one year post spine sales. As Beth mentioned earlier in the call, we are very pleased with the position of our balance sheet following the repayment of 275 million of debt on April first as of April second, 2024 we had a consolidated cash balance of approximately 66 million and a gross debt balance of approximately $234 million, yielding a net debt balance of approximately 168 million. In addition, we are maintaining our CAD175 million revolving credit facility, which remains undrawn as we think about capital allocation on a go-forward basis, we will continue to fund the business and our priority will be to deploy excess cash flow to further reduce debt. That being said, we will continue to operate the business as a meritocracy deploying resources to the highest return initiatives.
Turning now to our outlook for the full year 2024, we are expecting revenue for fiscal year 2024 to be in the range of 450 million to 460 million, reflecting an increase of 0.2% at the midpoint compared to 2023. We believe third guidance appropriately accounts for the modest year-over-year decline we experienced in Q1 and some ongoing softness in our end markets, particularly implants in the US. We are confident that our differentiated product portfolio and our executional strength positions us very well for when our end markets stabilize and improve.
Specifically, looking at the second quarter 2024 given current trends in the US implant market, we expect our Q2 revenue to be sequentially lower by 1% to 3%, largely similar to the seasonal sales patterns in 2022 and 2023. We expect fiscal year 2024 adjusted EBITDA to be in the range of 60 million to 65 million, resulting in an adjusted EBITDA margin in the range of 13.3% to 14.1% of sales. As our guidance implies, we are pleased with our performance to date and we expect to generate increasing adjusted EBITDA in Q2 now that we have sold the spine business, as mentioned earlier, we remain committed to a 15% plus adjusted EBITDA margin by April first, 2025.
Turning to our interest expense profile, considering our recent actions to pay down a substantial portion of our debt and the payment in kind interest, we will be giving an accruing on the seller note with HIG, we now expect 2020 for interest expense to be approximately 12.5 million to 13 million, inclusive of 4.4 million of interest expense for the first quarter of 2024. Share-based compensation expense is expected to be in the range of 16 million to 16.5 million. For the full year. We expect to generate adjusted earnings per share of $0.55 to $0.7 per share on a fully diluted share count of 28.5 million shares.
With that, I'll now turn the call back over to Beth.

Marissa Bych

Thank you, Rich. I'm excited about the prospects ahead of us and as always, I look forward to updating you on our progress throughout the year. I'm pleased with the success we've had over the past year, and we're completely reshaped Zambia as an organization while delivering significant shareholder value. I'm equally energized by the opportunity ahead of us as a pure-play dental company.
With that, we'll open it up to questions.

Question and Answer Session

Operator

One moment while we compile the Q&A roster.
Matt Miksic, Barclays.

Matt Miksic

Hey, guys, thanks for taking the questions at that time. So maybe, Bob, if I could follow up on your comment about mix and maybe just a little more color on what the shifts in mix have been so far this year as you were describing and sort of what the what kinds of catalysts or actions you can take to help sort of drive improving mix throughout the rest of the year? And then I will one follow-up.

Vafa Jamali

Sure. So yes, we are seeing mixed mix have an impact on us at some. It's both geographical and portfolio. I think that's where we're feeling it the most.
Rich, perhaps you could give us a little bit of color on on where we're seeing this specifically?

Rich Heppenstall

Yes, Matt, our our our revenue story for Q1 actually boils down to two items. The first one of which is we were experienced some pressure on the capital sales side. And so you know, the material that we distribute, right, which was lower margin for us, was lower in the quarter versus prior year. The other area is around implants, but specifically around the US. And so we're seeing continued challenged market in US implants, but we're seeing strength across the rest of the portfolio, including biomaterials and digital and we're also, you know, as you as you noticed from the press release, we're also seeing strength in US and European organization grew 4%. And you know, in the quarter for example, inclusive of that 1% plus constant currency growth for the quarter, but it both largely boils down to zero sales in US implants.
With that, Matt, also on pricing has been actually pretty stable for us. So unlike what we've heard from some others, some pricing has been relatively stable. We're down about 1%, which is, um, I think different from what looked out will be reading.

Matt Miksic

It's great. And then on the path to 15% EBITDA, what are you talking about now? I guess as a buying offers to that am I right to read that as first quarter next year, that's what we should expect here to be printing or again, just to understanding the timing of your the full year next year, correct.

Rich Heppenstall

We're saying at at the end of that period, we will be at 15%. And like always, we'll be we'll be doing everything we can to kind of get to that quicker and to to continue to make improvements to it.

Matt Miksic

And some of the things you mentioned mix, obviously having an impact on this year, I'm sure as you as you map that out that path to 15%, maybe you could talk a little bit more detail about operationally either internally or execution commercially that that you think come will be the sort of like the key drivers of helping get there on time or faster?

Vafa Jamali

Right. So if you look at if you break down our costs, I mean, largely we have a corporate infrastructure that was bigger and imagine we were running it is going to be more like a holding company with a couple of divisions where we had to have a central group. And in the rails, we're really collapsing that. So there's an element of cost, and we've taken a large portion of that already out.
And then the next pieces that you'll look at our legal costs and IT costs, which are probably next two biggest buckets and we are taking those ones out. So those are mostly fees paid on services purchased from, for example, BIT.s, basically subscription services and licenses that we will renew at a much lower rate. And we've got a plan on those basically laid out where where we know exactly when the price when the cost will come out.
And then on top of that, we do also have transition service agreements which which some which are also funded by HIG.'s acquisition of spine, which which also helped kind of buffer some of that as well.
Rich, anything that I missed on that we are just quickly to your to your commercial execution comment, right. I mean, even though there's some there's some macro challenges that I think are pretty well known within the dental market. But I think you know, from a commercial perspective and commercial execution perspective, one of the things that we're finding is the strength of parts of our products, like in particular around digital are really sticky on with our customers. And so, you know, we don't really talk about too often. But unlike a same-store sales basis, we're just seeing a decline in same-store sales, but we're not necessarily seeing customers like local in the organization. And so the industry is talking about, you know, and stabilizing toward the back part of the year. And so we feel, as though our commercial execution and the strength of our portfolio is going to position us really well for the back half.

Matt Miksic

Okay. So some some rationalization, some kind of internal cost programs and maybe it sounds like is it fair to characterize digital revenue line is a bit more subscription and less sort of episodic procedure at the whim of the puts and takes of procedure flows. So maybe just a little softer than we might see into maybe implants. Is that clearly it?

Marissa Bych

Yes, undoubtedly, if procedures slow down, those purchases will be somewhat reduced. But we're seeing close to 50% growth of the Guided Surgery line. And that's, um, you know, capital allocation for the customer. They're buying as they go. So we're seeing great, great adoption there, and we're getting a very, very high renewal rates for that subscription. So we think that all of the elements point to a pretty good recovery for us once the once the end market returns, I think we're going to have more customers. And and like I said, we're more pulling through our influence on that. So I'm feeling pretty confident that we've got the right portfolio.

Matt Miksic

Great. Thanks so much for the color.

Rich Heppenstall

Thanks, Mr. Ducato.

Operator

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