LivaNova PLC (NASDAQ:LIVN) Q3 2023 Earnings Call Transcript

LivaNova PLC (NASDAQ:LIVN) Q3 2023 Earnings Call Transcript November 1, 2023

LivaNova PLC beats earnings expectations. Reported EPS is $0.73, expectations were $0.62.

Operator: Good day, ladies and gentlemen and welcome to the LivaNova PLC Third Quarter of 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's call, , Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development and IT. Please go ahead.

Matthew Dodds: Thank you, Alex, and welcome to our conference call and webcast discussing LivaNova's financial results for the third quarter of 2023. Joining me on today's call are Bill Cozy, our Chairman of the Board of Directors and Interim Chief Executive Officer; Alex Shvartsburg, our Chief Financial Officer; Stephanie Bolton, President of Global Epilepsy, and Briana Gotlin, Director of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website.

A medical professional using a tablet device, illustrating the power of interoperability solutions.

We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including, but not limited to, sales results, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News Events and Presentations at investor.livanova.com.

With that, I will now turn the call over to Bill.

Bill Cozy: Hey, thank you, Matt, and thank you everyone for joining us. Welcome to LivaNova’s conference call for the third quarter of 2023. Before turning to results for the quarter, allow me to provide a brief update on the CEO search. Our process remains on track, and the board and I are currently interviewing select candidates. We are encouraged by our progress and are committed to selecting the right individual to lead the company. For the remainder of the call, I'll discuss our third quarter results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our performance and updates to 2023 guidance. I'll wrap up with closing remarks before moving on to Q&A. In the quarter, we achieved 12% revenue growth versus the prior year marked by double-digit growth across all regions and improved profitability.

Our performance reflects strong execution throughout the organization as demonstrated by the growth in all three business units. Notably, we maintained our commitment to modest leverage, achieving adjusted operating income growth of 23%, contributing to value creation in the quarter. Now turning to segment results. For the Cardiopulmonary segment, revenue was $145 million in the quarter, an increase of 18% versus the third quarter of 2022. Oxygenator revenue grew in the mid-teens, driven globally by higher-than-expected demand, again. And I'd like to acknowledge our cardiopulmonary manufacturing and supply chain team on their excellent performance in the quarter. Heart-lung machine revenue increased more than 25%, driven by Essenz installations in the U.S. and Europe and S5 placement in the rest of the world region.

At the end of August, we received U.S. FDA 510(k) clearance and CE Mark for the Essenz In-Line Blood Monitor in the U.S. and Europe respectively. These clearances are important product milestones that enable increased customer adoption of Essenz. Accordingly, our commercial rollout is now fully underway, and we have been successful in both evaluations and placements, including shipments to highly prestigious hospital systems in the U.S. While we continue to anticipate increased contribution from Essenz through year-end, we should see a more meaningful benefit in 2024 and beyond. We now expect cardiopulmonary revenue to grow 12% to 14% for full-year 2023. Our revised forecast incorporates the strong performance through the first nine months of the year in HLMs and oxygenators, with our current oxygenator production capacity running at its limit.

As previously stated, we continue to expect a modest ramp in Essenz revenue through year-end. Epilepsy revenue increased 6% versus the third quarter of 2022. U.S. epilepsy revenue increased 7% year-over-year, driven by higher realized price and favorable product mix. We achieved 815 new patient implants in the quarter, representing 1% growth versus the prior year, but well aligned with our expectations after the 13% growth experienced in the second quarter. We achieved 1,827 replacements representing a decline of 1% versus the prior year, again, though, very much in line with our phasing expectations. Epilepsy revenue in Europe grew 7% versus prior year, led by the U.K., and epilepsy revenue in the rest of world region decreased 3%, primarily due to uneven distributor ordering patterns and the sanctions.

Building on our commitment to invest in our core businesses, we had a very successful Go Live in Houston with our first manufacturing execution systems, widely known as MES. And we now have 15 super users in the LivaNova organization. This initiative represents a meaningful operating upgrade to fully digitized manufacturing quality systems. For the full-year 2023, we now expect global epilepsy revenue to grow 7% to %. Our revised forecast incorporates the performance during the first nine months of the year. ACS revenue was $11 million in the quarter, an increase of 27% versus the third quarter of 2022, reflecting growth in cardiac and respiratory case volumes, partially offset by product mix. For 2023, we continue to expect ACS to be flat year-over-year.

Turning now to the strategic portfolio initiatives, DTD revenue for the third quarter was $2 million. For 2023, we continue to anticipate DTD revenue of approximately $6 million to $8 million, primarily from the RECOVER study. The RECOVER study continues to advance. As a reminder, enrollment for the unipolar cohort of the study has been completed. Upon receipt of the 12-month follow-up data for the 500 unipolar patients in June of 2024, we will conduct a final analysis. We continue to expect the publication of that study results by late 2024. The bipolar cohort continues to enroll as expected, and we're pleased with the success we had in refocusing our recruitment efforts from unipolar to bipolar patients. As a reminder, the bipolar cohort is similar to the unipolar cohort in that the randomized controlled study is designed with frequent interim analysis that assess, if predictive probability of success or futility was reached or if the study should continue enrolling.

Moving to OSA. The OSPREY trial continues to progress with all 25 sites actively recruiting patients. In heart failure, the closeout of the ANTHEM clinical study is progressing. We continue to expand the overall R&D spend related to heart failure this year to be approximately $24 million, the majority of which occurred in the first-half of the year. With that, I'll turn the call over to Alex.

Alex Shvartsburg: Thanks, Bill. During my portion of the call, I'll share a brief recap of the third quarter results and provide commentary on 2023 guidance. Turning to results, revenue in the quarter was $286 million, an increase of 12% versus 2022. Foreign exchange in the quarter had a favorable year-over-year impact of approximately $3 million, or 1% of revenue. Adjusted gross margin as a percent of net revenue was 71%, compared to 70% in the third quarter of 2022. Adjusted gross margin was impacted favorably by realized price, higher volume, which drove favorable fixed overhead absorption, as well as lower inbound freight costs, which offset component cost inflation. Adjusted R&D expense in the third quarter was $42 million in line with third quarter of 2022.

R&D as a percent of net revenue was 15%, down from 16% in the third quarter of 2022. While flat on a dollar basis versus the prior year, R&D expense declined sequentially, largely driven by lower costs associated with closing out the ANTHEM Trial. [Including] (ph) the cost related to ANTHEM, our R&D investment increased 4% versus the prior year. Adjusted SG&A expense for the third quarter was $115 million, compared to $98 million in the third quarter of 2022. SG&A as a percent of net revenue was 40%, as compared to 39% in the third quarter of 2022. The year-over-year increase was driven by targeted investments supporting the Essenz launch, legal expenses, and variable costs such as freight and commissions associated with increased revenue. Adjusted operating income was $45 million, compared to $37 million in the third quarter of last year.

Adjusted operating income margin was 16%, compared to 15% in the third quarter of 2022. Adjusted operating income was driven by improved gross margin and operating expense leverage. Adjusted effective tax rate in the quarter was 10% versus 8% in the third quarter of 2022. The higher tax rate is primarily attributable to changes in geographic mix. Global tax landscape continues to evolve and will impact our effective tax rate in 2024. We will share more details as they become available, but we anticipate the rate to be consistent with our previous long-range plan as described during our 2021 Investor Day. Adjusted diluted earnings per share was $0.73, compared to $0.58 in the third quarter of 2022. Our cash balance at September 30th was $234 million, up from $214 million at year-end 2022.

Total debt at September 30th was $587 million, up from $542 million at year-end 2022. The increase in total debt was driven by the delayed draw of the $50 million on the Term Loan A facility that we put in place in July of 2022. Net debt, including restricted cash on September 30th, was $98 million. Adjusted free cash flow for the quarter was $26 million, down from $41 million in the prior year period. The year-over-year decrease was driven by higher working capital, which was a function of higher revenue, as well as investments in inventory supporting the launch of Essenz and capital spend phasing. Capital spend was $22 million in the first nine months of the year, compared to $17 million in the prior year. The increase was driven by T.P. Manufacturing Infrastructure Investments.

Now turning to our revised 2023 guidance. As Bill mentioned, based on our performance through the third quarter, we're increasing our full-year 2023 revenue and adjusted diluted earnings per share guidance, while narrowing the range on the adjusted free cash flow. We now expect 2023 revenue growth on a constant currency basis between 9% and 11% and continue to assume approximately a 1% tailwind from exchange rates. We now expect adjusted diluted earnings per share in the range of $2.60 to $2.80 with adjusted diluted weighted average shares outstanding to be $54 million for the full-year. Adjusted free cash flow is now expected to be in the range of $85 million to $95 million. In summary, I'm encouraged by the company's execution and financial performance in the first nine months of the year.

We remain positioned to drive improved operating leverage by year-end, having achieved 14% adjusted operating margin and 23% adjusted operating income growth through the first nine months of the year. I'm pleased that we have achieved this, while investing in critical capabilities for the company, including innovation, manufacturing infrastructure, and IT modernization. And with that, I'll turn the call back over to Bill.

Bill Cozy: Hey, thank you, Alex. As a company, we have executed against our targets through the first nine months of 2023. We're well positioned to deliver on our full-year guidance, including operating leverage by year-end, as well as pipeline commitments. Achieving these communicated goals and creating shareholder value are top priorities of the executive leadership team and our colleagues around the globe. Let me take a minute to thank our entire organization for their focus on patients, innovation, and value creation. We look forward to building on this level of performance through the remainder of the year and into 2024. With that, Alex, we are ready to open the call for questions.

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