Good day, and thank you for standing by. Welcome to the ZimVie Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Marissa Bych. .

Thank you all for joining today's call. Earlier today, ZimVie released financial results for the quarter ended September 30, 2023. A 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 as accurate only as of the live broadcast today, November 1, 2023. ZimVie 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. .

Good afternoon, and thank you all for joining us. In the third quarter, we continue to make progress on our innovation platform, actively reshaping our portfolio to further penetrate markets with best long-term growth potential. In parallel, we are improving our operational efficiency and driving better cash flow generation.

In dental, our sales team and DSO partners continue to have success engaging existing and new customers. We've seen strong traction for our products launched over the past year with both our legacy customers and our ever-emerging DSO channel, driving new customer acquisition across the board.

We're also very pleased with the cadence of new profit introductions. The most recent name Biotivity A/C in the year. The Biotivity A/C Plus Membrane, now part of the dental biomaterials portfolio delivers a common request we've received from the field to offer a growth factor rich bioactive barrier.

The Biotivity membrane, which is derived from human placental tissue conforms nicely for site coverage that's now being used in a variety of regenerative procedures. Turning to our Azure multi-platform product solutions. With Azure the portfolio offers a more comprehensive selection of components effectively cater to the dental lab market.

This solution set includes 13 lab-focused prosthetic and restorative solutions designed to integrate into digital workflows. In summary, I'm very pleased with our position in dental, and remain confident in our ability to perform at or above market in core product areas into the year ahead. Turning to our Spine business.

We're also driving incremental success within our spine portfolio. Our position with Mobi-C is improving also. Earlier in the quarter, we announced FDA approval for a new smaller height Mobi-C and 7 footprints. This approval allows the usage of Mobi-C to address more anatomical needs, expanding access for patients across the U.S.

I'm pleased to report that we've implanted our first device and I look forward to seeing further adoption. Continuing with Mobi-C, we received FDA approval to launch a groundbreaking at e-clinical study of cervical arthroplasty adjacent to fusion.

This study will further deepen Mobi-C is truly differentiated clinical event Biotivity and an expand suitable patient population for cervical arthroplasty. I'm also pleased to share that we recently crossed the milestone for 2,000 patients treated with The Tether device. As a reminder, The Tether is a high-impact solution for pediatric patients.

Over 50 surgeons that perform BBT using the market-leading center systems, 2 patients diagnostic with adolescent idiopathic scoliosis, and we look forward to treating more patients with this therapy into the future.

Finally, we continue to advance our Brainlab partnership has recently expanded our development cooperation agreement to include co-marketing.

We continue to work on achieving compatibility between our spinal implant and Brainlab spine and trauma navigation systems, allowing us to enhance workflow and accuracy in the operating growth while reducing their operating actually and radiation exposure.

We'll continue to engage with key surgeon customers, innovate on and around existing solutions and ultimately optimize our positions in markets where we can win. Turning to our continued operational improvements.

As I mentioned in past quarters, we've made meaningful reductions to our physical footprint and corporate overhead while working through excess inventory receivables.

Although there is still room for further optimization, I'm pleased that we're making excellent progress and have improved cash position in our balance sheet by nearly $10 million this quarter.

We're continuing to leverage our cash position to pay down the principal balance of our debt and prepaid 2024 interest payments, a topic which we will provide more detail on shortly. Finally, I am very excited to announce that we have completed all of our ERP conversions.

This concludes a heavy operational lift, completing LTSAs related to our 2022 spin-off, moving over 950 service to new data centers and transitioning over 200 applications to modern and large cloud-based platforms. I'll now turn the call over to Rich to outline our financial performance. .

Thanks, Vafa, and good afternoon, everyone. I'll begin by reviewing our third quarter 2023 results, and we'll close by providing our updated outlook for the full year of 2023. Total third-party net sales for the third quarter of 2023 were $202.9 million, a decrease of 4.9% on a reported basis and a decrease of 5.0% in constant currency.

As we mentioned towards the conclusion of our Q2 earnings call, we expected Q3 to be impacted by slightly higher than normal seasonality for our businesses in the summer months, and our sales performance exceeded these expectations. Moving on to our key segments.

Global Dentals third-party net sales were $105.3 million in the third quarter, representing 20 basis points of growth as reported and a decline of 1.2% in constant currency when compared to the prior year period, driven entirely by 1 less selling day in Q3 of 2023 versus Q2 2022.

While the dental market in aggregate was relatively soft in the third quarter, we continued to execute well commercially and the market acceptance of our new premium implants contributed to effectively flat year-over-year implant sales on a global basis.

In the U.S., dental third-party net sales of $65.0 million declined by 2.5%, driven by 1 less selling day and a slightly weaker implant market, partially offset by ongoing strength in our digital solutions sales.

Outside of the U.S., dental third-party net sales of $40.3 million increased by 4.9% on a reported basis and 1.2% in constant currency, driven by growth across all 3 of our product families, implants, biomaterials and digital dentistry, partially offset by 1 less selling day in Q3 of 2023.

Our new product launches in 2022 and 2023, particularly T3 PRO and TSX continued their early and impressive trend of market acceptance during the third quarter. Third quarter global spine third-party net sales were $97.6 million, a decrease of 9.8% on a reported basis and an 8.9% decrease in constant currency when compared to the prior year period.

The decrease was primarily driven by continued competition in the spine market, our decision to exit China following volume-based procurement and 1 less selling day, partially offset by the recognition of sales that were previously attributed to Zimmer Biomet and growth in both our EMEA and Asia Pacific regions.

As Vafa commented, we are pleased with our Mobi-C and Tether performance relative to the balance of our core spine portfolio led by growth in Europe and Asia Pacific.

In the U.S., Spine third-party net sales of $78.3 million decreased by 10.2%, driven by competitive pressure in core spine and 1 less selling day and partially offset by a relative improvement in Mobi-C and The Tether.

Outside of the U.S., spine third-party net sales of $19.3 million decreased by 8.3% on a reported basis and 3.6% in constant currency. Mobi-C and Tether outside of the U.S. continue to leverage our differentiated best-in-class clinical evidence by growing 67% and 62%, respectively, during the third quarter.

Third quarter adjusted cost of products sold at 31.8% of sales compares to 27.2% of sales in the prior year period. As a reminder, in Q3 of 2022, our cost of sales benefited from the settlement of a contingent liability with our prior parent.

We are pleased with our ongoing progress to reduce cost of products sold as we look to continue to better manage inventory and inventory-related charges. Adjusted research and development expense of $10.5 million represents 5.2% as a percentage of third-party sales.

Third quarter 2023 adjusted selling, general and administrative expenses of $115.7 million or 57.0% of third-party net sales was $13.1 million lower versus the prior year period.

Lower SG&A expenses year-over-year are due to less variable expenses from lower net sales and savings from our previously announced restructuring initiatives and cost containment measures.

Adjusted EBITDA in the third quarter of 2023 was $25.8 million or 12.7% of third-party net sales, reflecting a decline of 110 basis points from 13.8% in the prior year period. The decrease in adjusted EBITDA margin is primarily due to lower net sales.

The benefit of the contingent liability with our prior parent in Q3 of 2022, partially offset by savings from restructuring and cost containment. Adjusted earnings per share in the third quarter was $0.08 on a fully diluted weighted average share count of 27.0 million shares. Regarding working capital, liquidity and debt.

In Q3, we accelerated our progress on initiatives to monetize the strength of assets on our balance sheet and the application of our disciplined financial frame work. In the quarter, we added over $9 million in cash to end at $75.4 million, including a $7 million prepayment of required principal payments on our term loan debt.

Net working capital improved by $8 million, including a $12 million reduction in inventory and a $14 million reduction in accounts receivable. Although we have further opportunity to improve our financial profile, we are pleased that our focus on the operationalization of the business is yielding continued progress.

As a reminder, a $175 million credit facility revolver remains undrawn. Looking ahead, please note that we expect our interest expense to increase by a couple of million dollars in 2024 relative to 2023, given the current rate environment and debt balance. I'll now turn to our updated full year 2023 outlook.

We are pleased with the progress we are making and are subsequently revising our full year 2023 financial outlook. Starting with revenue, we are revising our expected full year 2023 net sales to be in the range of $860 million to $870 million, narrowing our range from our previous guidance of $850 million to $870 million.

Looking at our segments, we continue to expect 2023 dental net sales to be flat or to grow in the low single digits versus 2022, and we continue to expect 2023 Spine net sales to decline in the high single digits to low double digits versus 2022. Moving to adjusted EBITDA margin.

We expect full year adjusted EBITDA margin to be in the range of 13.5% to 14.0% of net sales, the same as previously guided.

With regard to adjusted earnings per share, we are revising our adjusted earnings per share guidance range to $0.60 per share and $0.70 per share on a fully diluted share count of 26.6 million shares, narrowing the range of our previous guidance range of $0.50 to $0.70 per share. With that, I'll now turn the call back over to Vafa. .

Thank you, Rich. I'm pleased with our progress in 2023 to date as well as our execution on streamlining objectives. Although we have additional work ahead to return our business to durable growth, I am confident in the strength of the assets in the portfolio and our presence in underserved end markets, which ultimately bring great value to patients.

As we continue to improve the evidence of our company in all of our product platforms and execute commercially, we look forward to showcasing the results that were hard to deliver. With that, we will open it up to questions. .

[Operator Instructions] Our first question comes from the line of Robbie Marcus with JPMorgan. .

This is actually Lilly on for Robbie. A lot of the upside, at least relative to our own expectations came from Spine.

So can you talk about any progress in the trends you're seeing there, particularly in terms of competition? And what signals are you seeing that could potentially indicate a stabilization moving forward?.

Right. Thanks for the question, Vafa here. We are seeing international growth contribute the most to the Spine recovery. We still believe that we've got some work to do in the U.S., and we have plans on points that can get us there. But the primary drivers for the recovery are Mobi-C sales internationally, both in EMEA and APAC and Tether sales in EMEA.

Those are the primary drivers for the improved supply performance. .

Yes. This is Rich here. Thanks again for the question. Just to kind of add to that comment that Vafa made. If you look at our international, our international decline actually impact was only down about 3.6%, and that included the impact of exiting China for the year.

But when you look at the international market, specifically, particularly around our flagship products, Mobi-C and Tether in our EMEA region, we've mentioned before that Mobi-C is the only cervical disc replacement in France is approved for reimbursement. And that business in our EMEA region grew by almost 40% year-over-year in the quarter.

And then Tether, we've also had great uptick in Tether. And in Europe, in EMEA, our Tether business also grew by about 29%. So to Vafa's point, we're really starting to see some stability in the U.S. -- for U.S. environment. So those green shoots continue to take root. .

Got it. That's good to hear. And then maybe on the flip side, dental was a little bit softer compared to our numbers. So -- and you called out a weaker dental market this quarter.

So what are the drivers of that? And how do you see that trending into the back half of the year?.

Right. So what we feel that we're doing well relative to the competition, but we do see a slower dental implant market in the United States. So that is where we're seeing the softest part, it's primarily macro driven. It's not class customer. We're actually doing well on that front.

We're doing well on new customers, but we do see softer existing user sale in dental in the U.S.

Rich, internationally?.

Yes. So dental is largely driven by first and foremost, year-over-year, we had one less selling day. And it's largely macroeconomic pressure in the U.S. But to Vafa's point, we actually use the dental business, we're actually pleased with our performance year-over-year. And we've seen similar strength, particularly in Europe on the dental side.

Our dental business in EMEA grew almost 12% and year-over-year in reported and about 4% in constant currency. And so we're really pleased with our digital portfolio. It continues to grow double digits for us. Our biomaterials offerings continue to do well.

And on a year-over-year basis, our flagship implants are basically flat year-over-year, which, despite the macroeconomic pressures, we think that we're outpacing some of our other competitors in the market. .

Yes. We think we're positioned really well within that dental portfolio. So when the market share return, we should be in a very, very good place competitively with respect to our portfolio, our price and our customers. .

Next question comes from the line of Matt Miksic from Barclays. .

So I appreciate all the color. I wanted to get a sense of following up on the question on spine. It seemed like when you described at NAV, the opportunity to sort of get after a more significant part of the cervical disc replacement market with the new sizes that you've rolled out in the U.S.

based on -- I think it was like 30% of the European market was addressed by these new sizes. Can you -- would you actually describe the current competitive environment in the U.S. like you've been at a disadvantage because these other -- these patients say 1/3 roughly of the U.S.

population is possibly been unaccessible to you, and this is going to open that up? Or would you say this is kind of a market expansion opportunity for folks who are maybe looking at a patient and saying, "You know what, we have to fuse this because we just don't have the size for this patient".

I'd love to get a sense for how big of an inflection you think this is for the U.S. market? And I have one follow-up. .

Sure. Matt. So I think the underlying concern that we had with our portfolio was we haven't innovated since the acquisition of LDR, and we needed to continue to innovate the portfolio specifically to Mobi-C. So there's a couple of things we're doing there. The size it just adds to our portfolio.

So it adds more suitable patients to that portfolio, and puts it competitively at parity with the newer launch that's come out. So that's important to be able to at least offer everything that's happening there.

At the same time, we think that we can -- we have -- the biggest opportunity is still to expand the market in terms of who is eligible for a disc versus fusion.

And so the combination of the sizes that we are offering now along with the newly announced hybrid study, which will allow a surgeon to put a fusion next to cervical disc these are really, really important drivers of new market growth.

So we haven't put a hard number on either one of those, but look at it as a way for us to become more and more competitive within the cervical disc market but never lose sight of the fact that really the greatest opportunity we serve the biscuit is improving the users and the patient population that get versus fusion versus going after competitive share.

.

Got it. That's super helpful. And just one more on spine, there's a lot of what's being categorized as sort of disruption or dislocation because of some major spine deals and actions as you're aware of, I'm sure.

Is there -- has there been any effect on your ability to or to either recruit reps or distributors or your the pressure on you to sort of other folks trying to pick off some of your better distributors. What's that dynamic like? And then I have just one more follow-up on dental. .

Yes. So on that particular situation, that's a situation we were on the wrong side of that when we announced the span.

And right now, I feel like there is a lot of very, very excellent talent out there, particularly in the United States where we hope to be the recipient of a lot of that talent to improve our sales channel or to go into areas where we have less penetration.

So we're feeling like we will be a net beneficiary of that disruption, and I look forward to sharing that news with you over next a while. It won't be something we do suddenly. All these things take a little bit of time, but if we're fast enough, but nevertheless, I think we'll be the beneficiary of some positive news there. .

That's great. And then just finally on dental.

Any sense of how much -- maybe -- I apologize if you answered this in your last -- in the question around dental, but just elements of seasonality that either came into play in Q3 or may come into play in Q4 and any sense of whether that's a market that's stabilizing or potential for improving just some color as to which way the wins of growth are blowing in the dental market in a moment.

.

Sure. So particular to us, just -- I'll start and Rich will have some further color on it. We are happy with the new customer acquisition that we have. So we're doing really well with DSOs, and we're doing really well with newer non-implant customers that are starting to do implants. So that's very, very positive for us.

I would say that we did experience seasonality in Q3, and there is a softness in the U.S. market that is not evident in Asia Pacific or in EMEA. But we do feel that which is probably adding a little bit of conservatism to how we see Q4 working out. .

Yes. Matt, this is Rich. Good to talk to you again. Yes, just to expand on what Vafa said, we've -- Q3 in the dental business is always our weakest quarter, and a lot of it is because of summer vacations. And obviously, a large portion of our business, almost half of it actually is U.S. and of course, Europe has their vacations.

And so that being said, we did call out at the end of our second quarter call that we did see a little bit higher seasonality than normal. The dental business put up 105.3%, I believe, for the quarter, which was actually a little bit better than what our expectations were, maybe $1 million or so given better than our expectations.

And so we have seen seasonality, but the positioning of the dental business and our commercial execution, frankly, continues to perform well, particularly OUS, which is where we thought the seasonality was going to come from. And so we actually kind of combat that seasonality without performance in those regions. .

Well, that's great. Congrats on that, and I look forward to hearing more about how things progress through the end of the year. .

Thank you, Matt. .

Yes. Thanks, Matt. .

I'm showing no further questions at this time. So this does conclude the question-and-answer session. Thank you, everyone, for your participation. .

Thank you very much. .

Okay. You may now disconnect..