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.

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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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Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question for today comes from Rick Wise of Stiefel. Rick, your line is now open. Please go ahead.

Rick Wise: Good morning, everybody. Thanks. Bill, let me — first of all, it’s great to see the solid quarter overall, clearly a lot of good things happening. And you make a bunch of encouraging comments. And I said that before I start off with the fourth, I just want to touch on the fourth quarter. When I — if I’m looking at it correctly, your current guide, even though it’s stepped up a bit, implies a bit lower growth in EPS than I might have thought and that we had modeled. And just wanted to better understand, is this just thoughtful, prudent conservatism? Is there something I’m not understanding? Is this something related to tax rate? If you could just give us a little more color there and understand?

Bill Cozy: Sure, Rick. Thanks for the question. Getting right at the EPS range. We have been all throughout the year really paying close attention to not only sales and profitability performance, but also this balance of supporting some well-known needs we have infrastructurally, manufacturing, innovation, and some strategic investments. We have notably been cautious on the latter set of choices that we’ve made to ensure that we put the first three quarters of the year into a strong position. We do have some targeted investments in the core business around growth and profitability, and we’re going to support some of those investments in the fourth quarter. Additionally, we can’t predict this ongoing competitor supply situation, particularly in the CP business and very much focused on oxygenators and the impact it’s going to have on volume and our ability to achieve the same amount of sales and the corresponding EPS benefit.

We get from that. We got a few ongoing inflationary pressures we’ve got our eyes on, particularly on components. But hopefully, I’ll give you a little better picture of where we’re sitting right now.

Rick Wise: Got it. And just, and again, it’s always management’s favorite question the time of year. Maybe you’ll talk a little bit about the 2024 setup. You made some encouraging comments there at the end, Bill. Maybe you could expand on that a little bit, just key drivers for next year or things the organization and you are focused on? But maybe most particularly, given the strong cardiopulmonary performance, how much more — how long should we anticipate that running, that benefit lasting? What inning are we in there as we look ahead to the year ahead? Thank you very much.

Bill Cozy: Yes, Rick, thank you. Let me take the latter part of that question first. Just to be clear, our manufacturing organization on the cardiopulmonary side focused on oxygenators are running flat out right now. We don’t have any more available capacity. Everything that we make, we sell. We were surprised that our competitors have not yet seemingly put much greater volume back into the marketplace. And so I have given up trying to predict, if and when that’s going to happen, because we just don’t know. We mentioned to you guys last quarter that we were pretty sure they were going to be back. Clearly the numbers we just showed you, they’ve not popped back. I actually have been asking a lot of the same questions you’re asking about the upcoming year.

We can’t project that and we won’t. As it relates to 2024, we really are looking forward to covering that in much greater detail, Rick, with you and all others when we do our fourth quarter call. We had an encouraging and successful board meeting in October where we took our strategic business plan for the coming year, and let us just defer that discussion until we get to the fourth quarter results.

Rick Wise: Thanks very much, Bill.

Bill Cozy: Hey, Rick, thanks.

Operator: Thank you. Our next question comes from Mike Polark of Wolfe Research. The line is now open. Please go ahead.

Mike Polark: Hey, good morning. Thank you for the question. One more on cardiopulmonary, and I’m specifically looking at the implied fourth quarter guidance. If I’m doing the math right, segment revenue down sequentially and year-on-year, it just strikes me as very conservative. The question is on the oxygenator disruptions at competitors, can you remind us on the timing of that over the last year or 18-months? Was that primarily a 2023 phenomenon or are there some tough comps in the back half of 2022 that we’re coming up upon?

Bill Cozy: Hey, Mike. Yes, thanks for the question. You’re on to a really important topic. And by the way, this is our math and our math only, but we did start to see the first escalation in the oxygenator revenue uptake in the fourth quarter of ‘22. So number one, we know that we’re up against a little bit of a tougher comp as we go into that quarter. Number two, and please excuse me, I’m not trying to be repetitive here, but we’re just running flat out in the plants. I can’t and our organization can’t produce any more oxys. So when we do our projections based on those two critical factors, we’re having a really hard time seeing how we could sustain the double-digit growth. So once we’re in the fourth quarter of ‘23 against that tougher comp and as we look forward on oxys, we can’t see the sustainability.

Now, of course, we’re looking at everything we can do in the short-term to optimize our production capabilities. But you guys know well, we’ve got molding, assembly, packaging, and sterilization here. There’s just no magic want where we can, in a very short-term, create a notable recovery scenario. And by the way, we are operating well within all the quality boundaries of our quality management system to make sure that we’re not just optimizing volume, but everything that’s going out of that facility is at the quality levels we expect. So by the way, I’m not in any way complaining about all that. I’m just sharing that we’re doing the absolute best that we can in the situation that we have.

Mike Polark: Helpful. For my follow-up, I’ll ask on the CEO search, appreciate the comments. I guess as I look at LivaNova, you know, I — my question is, is it difficult to find the right fit before you know, you know, what happens with depression and sleep as examples? Those are potentially transformative opportunities to clear clinical data risk? And I just, is it — I roll this forward, Bill, and kind of wonder if a better timing for somebody new would be middle or back half of next year when you maybe know a little bit more about these pipeline programs and how the data is going to turn out and therefore the potential commercial prospects? Any color on this would be great. Thank you so much.

Bill Cozy: Yes. Thanks for the question. Actually we have been pleasantly encouraged by the number of people, who want to be a CEO. The same questions that you have asked, we have been getting asked in our process. But I see no hint that it’s dampened candidate interest and people coming to the company. As I mentioned in my early remarks, our — the board and myself are in and have been in some active interviewing now since late August, early September. All our attention is on finding the right person. We said initially it would more likely take six to nine months. We kind of moved a little past the six month window, but we’ll continue to do two things. Keep the process at the level of quality that we have it and we’re not flexing on our spec. When we say we’re going to find the right person, we’ve described over the last couple of calls those things that are really important to us in terms of getting the right candidate and we’re just staying connected to that.