Q4 2020 LivaNova PLC Earnings Call
Good day, ladies and gentlemen, and welcome to the lever in Nova plc fourth quarter and full year 2020 earnings conference call. At this time all participants lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you'll need to press star one.
On your telephone as a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Mr. Matthew Dodds, leaving Nova Senior Vice President of corporate development. Please go ahead Sir.
Thank you Katherine and welcome to our conference call and webcast discussing leaving though of its financial results for the fourth quarter and full year 2020, joining me on today's call are Damien Mcdonald, our Chief Executive Officer, Alex <unk>, Our interim Chief Financial Officer, and Melissa Farina, our vice President of Investor really.
<unk>.
Before we begin I would like to remind you that the discussions during this call will include forward looking statements.
<unk> 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 is available on our website, 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 our other call materials and should be used as an enhanced communication tool.
Can find the presentation and press release in the investors section of our website under news and events and presentations at Investor day, leaving though of our dot com with that I will now turn the call over to Damien.
Thanks, Matt.
And thank you for joining us and I Hope you and your families continue to remain safe and healthy during these challenging times.
Welcome to our fourth quarter and full year 2020 conference call.
As you're aware, we have a large employee population in Houston.
All of whom were impacted by the storms last week.
I'm relieved that everyone is safe and we'd like to thank all of them for their dedication and ingenuity to keep our operations running.
Today, we will discuss our results and provide recent company updates including guidance for 'twenty 'twenty, one and the first quarter.
The COVID-19 pandemic has presented a unique operating challenges many markets around the world have operated inconsistently or shut down for varying periods of time and this dynamic has continued in the fourth quarter and thus far into 2021.
I'm going to start off by discussing some recent updates to our business and board structure.
Then moved to sales results focusing on the primary growth drivers epilepsy in Acs.
Then I will discuss our strategic portfolio initiatives D T D heart failure and OSA.
After my comments, Alex will provide you with additional details on the results and that 'twenty 'twenty, one guidance, which continues to include heart valves.
Then I will wrap up with closing comments before moving on to Q&A.
In December leaving over entered into an agreement with gyrus capital for the sale of the heart valve business.
This portfolio will benefit from the ownership of gyrus and its ability to singularly focus on building a heart valve business.
This will enable us to sharpen our focus on the primary cardiovascular and Neuromodulation platforms.
As you know divestitures are complex and we are currently discussing an amendment to the purchase agreement with gyrus related to a deferred closing of a subsidiary that he is responsible for site management services at the Solutia campus.
We continue to expect the initial closing consisting of the heart valve operations in Italy, and Canada to occur in the second quarter, followed by closings of the sales infrastructure in the second half of the year.
In December we announced a series of board leadership changes driven by the nominating and corporate governance Committee.
Included in those changes towards Shimbun was appointed to the board of directors.
Todd has 35 years of experience in global health care, including 27 years at C. R. Bard, where he held positions of increasing responsibility, which culminated with his nine year tenure as chief Financial Officer.
He currently serves on the boards of metabolism and also travelled as companies where he is the independent lead director and chair of the risk Committee.
Todd will succeed Hugh Morrison as audit chair upon his retirement at the 2021 AGM.
Additionally, we will be rotating the board and to committee chairs following the 2021 AGM.
We believe all of these changes underscore our commitment to leading corporate governance and to help further enhance the board's independent oversight.
Now I'll discuss the core growth drivers epilepsy in Acs all net sales results will be stated in constant currency basis.
Yeah.
Epilepsy sales declined 4% globally versus the fourth quarter of 2019.
This decrease is attributable to the impact of COVID-19 on both new patient and end of service or replacement implants.
Importantly, sales rose sequentially and were in line with our full year guidance range.
U S epilepsy declined in the mid single digits and implants continued to improve sequentially over the third quarter.
In the fourth quarter epilepsy sales in Europe reached nearly 90% of our prior year levels with strong performance in the Nordic region in Spain.
The rest of World region grew 11% as a strong growth in the middle East and Australia as non emergent procedures recover.
For the full year 2021, we expect global epilepsy sales to grow 15%, 20%, including strong growth in new implants as patients returned to their physicians and we expect a tailwind and replacement implants related to the backlog created in 2020.
We are pleased with the progress of the go to market initiative and still plan on adding three new dedicated teams in the U S. During 2021.
Okay.
Ics sales were $13 million in the quarter, an increase of 50% from the fourth quarter of 2019.
Growth was driven by the adoption of livestock and an increase in acute respiratory distress related procedures.
We continue to expect Ics to growth at least 20% in 2021.
Yeah.
Turning now to DTD sales in the fourth quarter were $1 million and $7 million for the full year.
In 2021, we expect DTD sales of approximately $10 million to $15 million from a combination of the recover study and the replacement implants for CMS eligible patients.
We continue to expect to reach 250 unit poll of patients and or 150 bipolar patients implanted in their respective recover study arms by year end.
In heart failure, the anthem have Rep U S. Pivotal trial continues to progress with over 265 patients enrolled we still expect to achieve 300 patients enrolled in the first half of 2021.
We continue to make progress in OSA. The confirmatory study was submitted for IV approval during the fourth quarter. We received from additional questions and still expect to start the study in mid 2021.
Yeah.
So the cardio pulmonary business sales were $122 million in the quarter, a decline of 10% versus the fourth quarter of 2019.
Oxygenate is declined in the low double digits globally as a faster recovery than the procedure volumes in the U S and the rest of World region was offset by procedure restrictions in Europe.
Yeah.
H L. M sales declined in the high single digits due to COVID-19 impacts on hospital budgets for capital equipment, and all regions improved sequentially over the third quarter.
Moving to heart valves sales for the segment were $24 million in the quarter, a decrease of 27% versus the fourth quarter of 2019, including another double digit growth quarter in Japan, driven by Perceval.
Starting in the second quarter of 2020, and continuing through the year, we reduce costs to offset some of the decline in sales we continue to reallocate resources to fund priorities.
These actions have delivered approximately $65 million in savings in 2020.
Specifically these four key areas included the following.
First we instituted a hiring freeze participated in government sponsored work programs and adjusted employee related expenses, including lower performance based compensation and a significant reduction in executive leadership short term incentive.
Second we reduced spend related to travel marketing events and field presence and have shifted to working with our customers and stakeholders using remote methods.
Third we reduced other discretionary spend related to external consulting and temporary staffing and fourth we balanced our manufacturing output to coincide with the anticipated reduction in demand.
We remain focused on disciplined control of expenses as we move through this next phase of the pandemic, while still investing in our pipeline initiatives.
I'll now turn the call over to Alex for an overview of the financial results.
Thank you Damien I'm going to discuss the fourth quarter results in greater detail and then provide our 2021 guidance.
Sales in the quarter were $270 million and declined seven 7% compared to the fourth quarter of 2019.
Vascular sales were $160 million down 10, 1% for the fourth quarter of 2019.
Euro modulation sales were $109 million, a decline of three 8% compared to the fourth quarter of 2019.
Adjusted gross margin as a percentage of net sales in the quarter was 67, 2% down 250 basis points from the fourth quarter of 2019.
The margin decline was primarily driven by lower volume from sales and unfavorable manufacturing variances.
Adjusted R&D expense in the fourth quarter was $39 million compared to $38 million in the fourth quarter of 2019 R&D.
R&D as a percent of net sales was 14, 5% versus 13, 1% in the fourth quarter of 2019.
R&D is increasing behind continued progress of the anthem <unk> pivotal trial and the recover study.
Adjusted SG&A expense for the fourth quarter was $94 million <unk>.
Compared to a $108 million in the fourth quarter of 2019.
SG&A as a percentage of net sales was 34, 7% down from 37, 4% in the fourth quarter of 2019.
Adjusted operating income from continuing operations was $49 million compared to $55 million in the fourth quarter of last year adjusted.
Operating income margin from continuing operations was 18% compared to 19, 2% in the fourth quarter of 2019.
The adjusted effective tax rate in the quarter was negative <unk>, 1% compared to five 3% in the fourth quarter of 2019.
The lower tax rate is primarily attributable to geographic income mix and partial valuation allowance in the U S.
Finally.
Adjusted diluted earnings per share from continuing operations in the quarter was 71 cents.
<unk> to $1 in the fourth quarter of 2019.
And was within the full year guidance range.
Moving to cash flow the cash balance at December 31, 'twenty 'twenty was $253 million up from $61 million a.
At December 31, 2019.
Net debt at quarter end was approximately $505 million up from $272 million at year end 2019. These changes reflect the impact of the financing completed in the second quarter of 2020.
Our adjusted free cash flow, excluding extraordinary items through the fourth quarter of 2020 was $17 million.
Capital spending for 2020 was $35 million, which was $10 million higher than 2019 related to initiatives to support manufacturing sterilization capabilities and to further develop our epilepsy digital innovation platform.
As a result of the heart valve divestiture, we took a charge of $202 million in the fourth quarter related to the anticipated sales of the heart valve business.
In addition, we have reserved $42 million for a provision for future obligations.
Our site management subsidiary related to hazardous substances from former operations at Saloojee, Italy campus.
Now turning to 2021 guidance.
We forecast.
2021 sales growth between eight and 13% on a constant currency basis and this includes the full year of the heart valve business.
If current exchange rates remain unchanged the company's full year revenue guidance will be positively impacted by less than 1%.
We anticipate the neuromodulation business to grow 15% to 20%.
We estimate our cardiovascular franchise to grow in the low to mid single digits with strong growth from Acs largely offset by late stage replacement cycle of HL on them.
We are projecting adjusted diluted earnings per share from continuing operations in the range of $1 40 to $1 90.
The share count is expected to be approximately $49 million.
Adjusted cash flow from operations, excluding extraordinary items is expected to be in the range of $30 million to $50 million.
While we don't provide quarterly guidance sales in the first half are assumed to be lower while expenses are generally more evenly spread out.
For the first quarter of 2021, we expect net sales could be down 3% to 7%.
The first quarter is expected to be the softest earnings quarter, and we forecast a range of 10 to 20 per share.
With that I'll turn the call back to Damien for some final comments.
Thanks, Alex.
While 2020 did not go as expected we have become stronger more agile and remain cautiously optimistic that our execution focus coupled with expectations of declining COVID-19 infections rates will lead to improving results throughout the year.
As we transition out of the pandemic, we believe customers will continue to reward both their innovation actions as valued partners with increased trust and market share.
As procedures return, we believe the work we've been doing to improve margins will become clearer.
We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value and with that Catherine we're open for questions.
Thank you if you have a question at this time. Please press the Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press the pound key.
As we enter the Q&A session. Please limit yourself to one question and one follow up question and then return to the queue. If you have any additional follow ups.
Our first question comes from Rick Wise with Stifel. Your line is open.
Thank you and good morning.
Well Damian maybe I'll start off just with.
Recent trends.
We've all been hearing in recent days and weeks about the weakness a COVID-19 driven weakness in general for everybody in late December and into January can you give us a little more color on recent trends.
Just what youre seeing have things stabilized are you seeing.
Is it getting worse or better as you know two weighted two thirds of the way through the first quarter just any additional color.
If you could.
Yeah first of all good morning, Rick how are your lovely to have you on.
Fourth quarter look fourth quarter was interesting year over year, but October was the strongest and then we faced headwinds like a lot of people you know in mid November that carried into December, especially Europe, I mean net with the noisiest.
For us when you can see that in some of the commentary. We just gave sales in the first quarter and really continued that trend with the COVID-19, hospitalizations increasing <unk>.
Comparisons start getting easier in March, but Q1 has been noisy to say the least.
Hi.
Noisy meaning.
Can you give it any more color are you feeling.
You know a bit more optimistic many companies have talked about you know recovery or somewhat cited some.
Signs of light at the end of the tunnel kind of thing anything else you can share.
Hey, Rick it's Matt So I would say what we're seeing is similar to what you've heard from a lot of other companies. It wasn't as bad in Jan Fab as maybe it was last year in late April may the hospitals were just better situated especially in the U S. It has been a little tougher in Europe Europe didn't rebound as much we have seen international.
We remain in pretty good shape from what he came off other than the last at the end of last quarter.
And I would say there were some slightly improving trends in February but last week and the week before with weather and what happened in Houston, you that that looks like a temporary setback. So I'd say you know the next two weeks, we'll know a lot more.
Okay.
And turning to the recover trial enrollment timelines and milestones if I heard you correctly Damien.
Please correct me if I'm correct me if I'm wrong.
250 unit poor.
Or 150, 550, rather or 55 did you say bipolar.
By the end of 'twenty one.
It sounds like enrollment if I'm hearing you correctly. It is very much on track.
You know sort of with expectations or guidance or comments, we've heard in recent months it am I understanding that correctly.
You know to what extent are we seeing headwinds there or are you concerned about these timelines.
Yes, you are hearing that right yeah, so at 250, and the unipolar or 150 in the bipolar all bus.
We actually thought that the the bipolar was not going to recruit as fast because it's just harder to deal with those patients and track them.
But it turns out that that has been a faster recruiting time line than we anticipated so it's tracking well.
The implants are progressing well the consent into the trial have been really progressing well again, you know the limiting factor is just clinics being opened to implant, which as you know from some of the studies, you're new neurology psychiatry visit two clinics aloha, whereas a lot of the tele health.
<unk> is progressing very very well so I like the progression there the consensus definitely are tracking extremely well and I'm pleased with how the teams doing that study and following up on the existing patients that we've already.
Implant that we've not missed a titration will follow up yet.
That's great.
Wanted to follow up I'll stop there. Thank you.
Thank you. Our next question comes from Thanks, Randy <unk> with Jefferies. Your line is open.
Great. Thank you and good morning, everyone Hope everyone's healthy maybe just a couple on on guidance the negative 18 negative 8% to 13% all baked in.
What is actually baked in there for for heart valves, just trying to get some math as we exclude that.
And then in terms of the.
The neuro market outlook 15 to 20, just trying to get a sense of.
How much COVID-19 recoveries reflected in that versus new patient starts and then even a re implants from the 100000 existing base how much how many how do you reflect re implants in that as well.
First of all let me just say welcome Anthony Great to have you are tracking us and Oh passes to Alex Yeah. So from a from a from a sales perspective.
Heart valves, and it's a 2020 at roughly call it $90 million in sales.
We expect a recovery from heart valves.
Sort of.
Low to mid double digits I would say.
So that's kind of a good way to forecast the heart valve business.
And right now we have it in for the full year, but as we as we said we expect to close the transaction sometime in the second quarter and its Matt for neuro Mod that the 15 to 20.
They look a little bit of that is <unk>.
DTD.
Year over year, if you look at epilepsy, what we've been saying is at least 5% underlying is our is our plan hopefully a little better.
Higher O U S. Because that's a global number and then don't forget the U S is 75%. So it's mostly driven by the U S. So if you take those pieces you can kind of see what the differences in terms of what we consider to be the snap back in <unk>.
Right now as more of that's going to come from the replacement or under serviced in the NPI.
That's helpful. Thanks, I'm happy to be on board I'll hop back in queue.
I mean have you.
Thank you. Our next question comes from Adam Maeder with Piper Sandler Your line is open.
Hey, guys. Thanks for taking the questions here I wanted to start with just a couple housekeeping questions.
Just first it sounds like you gave any incremental update on the pending heart valve divestiture, but I want to make sure I better understand that so.
And I know the divestiture isn't contemplated in the guide, but how do we think about any potential impact there in terms of dilution.
Once that's final and then the second housekeeping question is just any update or more color you can share on the CFO search and where that stands today and then I had one follow up thanks.
Hey, Adam it's it's Alex on the heart valve divestiture as we stated previously we expect the full year impact.
To be about 10 to 15.
Dilutive.
So that's that's the way obviously, given the timeline I would I would model it in that fashion.
Prorated as as you see it.
And with respect to the CFO search.
Two things first of all you know the end of year is an interesting time to be recruiting for senior executives because its.
Bonus reporting.
<unk> accused for most companies so that that role has a stickiness that I think it is interesting when you're recruiting having said that our partner, which is a large global human resources partnership have on us a really intriguing pack of candidates many of whom we've met over the last.
Several months, having said that I will say unfortunate and I think we're fortunate as a company to have Alex being able to step into the role and he's making a tangible and palpable difference to the function and so as we continue the search I'm convinced that we have the right person to be filling the seats.
Yeah.
Thanks, guys. That's very helpful and then for the follow up just one on.
The 'twenty one guidance. The EPS guide can be was I guess a bit below I expect than I expected and perhaps that's some mis modeling on my behalf, but you know the guidance range is pretty wide. So it would be helpful to kind of better understand kind of how you arrived at the top and the bottom end of the EPS outlook and.
And then you know.
Maybe just talked about you know the the.
Cost initiatives that you had in 2020 the savings there what's going to carryover into 2021, and then just talk a little bit about kind of employee.
Morale and turnover. Thanks, so much guys.
Okay, Adam so from from a margin profile perspective.
The gross margin.
Is is actually increasing.
In 2021, and then once heart valve heart valves are out of our P&L.
We expect about 200 basis points of accretion.
Relative to 2020.
Gross margin is increasing on the basis of improved mix from.
BNS.
Increased volumes in.
<unk> TP.
R&D as a percentage of sales.
Going to increase in 2021.
This is largely due to the recover and the anthem trials.
Also just to remind you in 2020, we we.
We had sort of a depressed spur.
Spending base so.
There's a little bit of an increase there as well.
SG&A as a percentage of sales.
It's going to decrease in 2021 versus 2020.
It's just pure economies of scale.
Sales increased and we see we see some leverage there.
And I guess interest expense, we continue to to look at $45 million to $50 million and.
And the tax rate in the range of 10% to 15%.
I'd say versus consensus it's a little tricky because a couple of you have heart valves out, but what we really try to look at apples to apples I'd say the major differences to Alex's point, its R&D and SG&A, that's where we see our numbers a little bit ahead of the street as a percentage of sales.
Yeah.
Just on employee morale so great question.
So first of all let me talk about data sequentially, we saw an improvement in their voluntary turnover right quarter on quarter, So I and I'm pleased that we're heading in the right direction there.
Secondly, we conducted a virtual growth and leadership conference.
<unk> brings together a 150 of our senior leadership over three days in December and January.
And reading the chat line of this virtual conference I'm convinced we have a highly motivated senior leadership team.
More broadly I'd say the organization has faced into the challenges of 2020 and even the start of 2021 with the weather and continued COVID-19 with extreme positivity and again I just look at how people reacted with engineered either to the freezing weather in Houston.
And I'm convinced that we've got a team that is highly motivated and really linked to our mission of patients first.
That's really helpful guys. Thanks for taking all the questions and appreciate the fulsome response. Thank you.
Thanks, Adam.
Our next question comes from Michael <unk> with Baird. Your line is open.
Good morning, good afternoon, I have several follow ups to some other prior questions.
Yeah.
Just a clarification I heard on in the slide the slide deck says for cardiovascular revenue up mid to high single digits in 2021, and then Alex I think in your prepared comment you said low to mid <unk>. My sense is the variance there is.
With and without heart valves or perhaps I.
I misheard. So can you just clarify those two tidbits for me.
Yes so.
Cardiovascular we expect to grow low to mid single digits kind of in line with our with the normal.
Growth that you'd see from from the marketplace.
As I mentioned before.
We expect the heart valve business to have a larger snapback so.
Expect somewhere between I would say.
Low to mid double digits.
Snapback on heart valves.
That's kind of how we adjust for it.
Okay.
Slide deck page 21, so its cardiovascular up mid to high single digits. So just.
One [laughter].
The Genesis of the question I'm hearing differently from you than I see in the slides, but maybe we can we can take that offline and I think I get the components I just.
Several moving pieces I don't want to make sure we're anchored appropriately.
The on heart valves.
The.
Earnings.
10 to 15 cents of run rate dilution, let's assume that does.
Divest middle of this year as you indicated.
Does your and I know, it's in your revenue guidance today, but does your earnings guidance absorb.
You know that dilution when it.
Finally hits.
No its not okay.
Okay.
In the slide deck on the free cash flow slide slide 20 theirs.
For the 2021 forecast, there's a there's a dotted line to gray box and I wanted to understand what is that.
It seems to be an extraordinary item and I want to I want to understand what that what that is and what the number is.
Just just a range really that's that's all it is.
Yeah.
Oh got it okay.
It's showing the 30 to 50 range yes.
Okay, Okay, Okay understood.
Yeah.
On the.
On R&D I mean, it's I appreciate that comment clearly street was and myself under modeling the spend in 2021 peak peak period for both of those important.
Studies can you put a finer point on what is the what is the dollar investment expected or what is what are your R&D dollars in your model.
In 2021, because I would imagine.
And 'twenty, two and beyond that.
Back off.
If this is indeed peak spend year for anthem and.
And recover so just trying to.
A little bit of a pop in that number and then more will fade I would imagine in the out years. So if you could put a finer point on that I think that would be helpful.
All our quota range of.
16% to 17% of sales okay.
Yeah.
All right last one.
It sounds like the.
Recover.
Recruitment is on track and hear the comments cleared does that keep you on.
Does that keep you on pace for the prior.
Timing of the late 2022 early 2023 flip to registry might my guess is yes, but I want to ask the question.
Yes, yeah. So the short answer is yes, okay.
Alright, Thank you very much.
Nor is marketed.
Thank you. Our next question comes from Scott Bardo with Bamberg. Your line is open.
Yeah got it I'm not sure yet.
Hey, not true.
Thanks, Damien thanks for taking the questions.
Yeah, No I think you used to provide some EBIT margin range implicit within your guidance I know, you've just Alex given some parts of the pieces, but.
The nature of my question is your sales guidance looks to be I think quite encouraging car launching a return to more normalized activities. Yeah. If I understand correctly your earnings guidance implies something like a 13% to 16% margin guidance I wanted to firstly can you.
Clarify whether that makes sense.
Blowing up from that.
You know one of your key strategic priorities I think he is to optimize operating costs and it seems a little perverse to me.
While you will top line recovers.
Why are you expecting margins to be materially below.
2019.
Even without the divestiture of heart valves, which I think is margin accretive. So I just wanted to talk about these parts and I think it is important because I mean, you've highlighted the many many times and aspiration tissue towards a 20% margin bandwidth.
Which seems achievable given your gross margin of course is great uncertainty as to a time line around that so if you could please help us with those pieces I think that's important.
One moment.
Yeah.
Okay.
Yeah.
Yeah.
Yeah.
Speakers. Please go ahead.
Alright and Hawaii.
Sorry, we lost Scott there.
Okay can you hear me okay.
Yes cash.
We've got you.
So Scott sorry, we lost you there.
Oh, I'm sorry for that okay.
Summarize the question again your guidance implies good top line dynamic and bit of a recovery of the top line.
But it seems to me that your earnings guidance suggests that your margins are going to be below 2019 quite materially below 2019, and that seems a bit of a disconnect. Given your statements about trying to maximize operational profit.
Improved efficiencies so I guess the nature of the question is can you help us understand what margin is implied within your guidance.
And when you're in your view, we take the path towards back to a 20% margin, which is your current midterm guidance for 2022. Thank you.
Got it. Thanks for your question so are our adjusted margin.
We're expecting somewhere between.
13% to 14%.
That's that's kind of where we're where we're coming in again.
D.
The major investments in R&D are kind of driving the other.
I guess you could call it the diluted effect of <unk>.
These investments.
We're making we're making good progress in terms of reallocating costs. It's.
It's going to take us a little bit of time to work through some of the key.
Cost containment initiatives that we've highlighted in the past.
So that's that's kind of the plan at this point, yes, Scott its Matt I mean, our plan is to improve obviously from 'twenty, one going forward each year.
We're tentatively planning our capital markets day in the back half of this year and we're going to give you a lot more color on you know the margin over a longer term horizon, and then specifically that 20% number will be very clear in the year, we expect to get back to that.
Thank you, but following on from one of the questions before then.
Is it fair to say, we all then peak R&D on an absolute basis.
That should normalize going forward.
Is that fair statement.
Yes, exactly Scott.
Alright, and maybe just one last question on <unk>.
Free cash flow please.
Right.
I think that we've.
We see encouraging of course to see D C expecting some progression in free cash flow.
Free cash flow numbers being guided is still 25% of adjusted free cash flow guidance that would have been given this time last year. So why is free cash flow side pool, and when do we actually see a convergence towards your historic free cash flow guidance.
Scott.
Just want to remind you.
In the third quarter, we changed the definition of free cash flow.
Our free cash flow.
Measure has.
Essentially.
We stopped we stopped taking out a number of adjustments and really streamline it to a point where its operating operating cash flows less investing activities and only adjusting for extraordinary items like the <unk> settlements.
Largely in response to a number of discussions we had with people in.
Clarifying and not sort of exceptional line thing and I think this is a much more robust definition and year on year it create.
Some martinez, but I think we are at a price now where cash flow is much more robust and I think what you could calculate.
Directly from GAAP.
Okay. Good sorry quickly then I guess the underlying nature of that question more clearly than youll still seeing some material adjustments this year.
When do we get a clean this free cash flow I mean do you expect.
Some of these adjustments to significantly abate next year can you give us some sense of that.
I think I think for the most part.
We've seen.
Sure.
A lot of these adjustments coming out even in the latter part of 2020. So again I think if we look at that table on the chart you can see there that there's significant differences and in a number of the metrics there.
And I think that again I hope it provides a lot of clarity to people is that we're modeling what we were taking out and also going forward.
Think you can expect low a merger.
Integration costs, those sorts of things that have been.
Pretty high for a number of years.
Alright, Thanks, guys I'll jump back in the queue.
Thanks Scott.
Thank you. Our next question comes from Matt Taylor with UBS. Your line is open.
Good morning, Thanks for taking the question.
So I wanted to follow up on an earlier question about <unk>.
Assumptions behind the guidance and just see if you could give us some flavor or color on how conservative you think the guidance is with regards to recovery assumptions through.
Through the year and some of the different businesses have you baked in some haircut.
And what does it assume in terms of overall utilization recovery.
So I mean in terms of in terms of the overall forecast we think it's it's appropriate given the current COVID-19 situation. We still there's still a lot of uncertainty we're seeing that continue to read through in the first quarter. So.
Sure.
We're thinking about the sales forecast in terms of <unk>.
Glimpses of recovery in the second half.
So we were still.
We're still modeling.
A essentially a depressed market.
So yes, so Q1 is that as the toughest comp and then we gradually see progression throughout the year I think I used the word cautiously optimistic.
As procedures growth.
<unk> rollout continues and patients feel willing to go back a number of our disease states require willingness of patients to reenter the clinic like epilepsy, with which skews pediatric right. So it is 30% of our patients are pediatric and you need the camera and the child to go into the clinic.
So I think we're in a very cautious on Q1 with a gradual.
Improvement throughout the rest of the year.
And the last thing I would say Matt is on narrow body epilepsy in general that's the one that gets a lot of attention.
We're forecasting as it for NPI. The funnel has been delayed not backlog. So it's just been kind of a lag on that but for replacement or vendor service. We do think that there's going to be in or backlog. So we're gonna recapture patients in 2021, but we've even modeled some of them end up in 2020.
Two.
Yeah.
Okay. Thanks, Thanks, Matt David So one follow up on on epilepsy.
Everything you've said about the impacts here. The last couple of quarters has really been around Covid. I was curious are you seeing any.
Drug headwinds or impact from recalls or anything else that is hampering that business.
No. We included in our modeling the impact of drugs. We've continued to monitor that very closely we're not seeing specific headwinds in any specific geography.
For any drug impact.
Okay, and sorry, just one more follow up I wanted to be really explicit about this because I got a little confused by the comment.
When you are giving this EPS guidance mid points 165, so that includes heart valve. This year. So basically you are saying if you divested in the second quarter, we should take out a prorated amount of 10 to 15. So basically your underlying guidance mid point is below the $1 65.
Yes.
That is correct, okay Super Thank you very much.
Thanks, Matt.
Thank you. Our next question comes from Mike Matson with Needham Your line is open.
Yes. Thanks. Good morning, everyone. This is David on for Mike Thanks for taking our questions.
Hey, David just a question, Yeah, Hey, guys.
You listed some cost containment measures, you're taking on a hiring freeze.
Decorative comp et cetera did you make any cuts to the sales force across any of the businesses.
And with these measures continue into 2021, what gives you confidence that it's not going to impact.
The growth profile over call. It the next 12 to 18 months.
Yeah. Good question now we didn't cut the sales force, that's not where we're head count praises have occurred.
And going into 2021 were actually increasing head count slightly in those areas.
Ics for example, we've talked about hiring 20 additional people into the Ics team in the U S. We've already started that in Q4 net will continue through through the next couple of quarters and.
And similarly in epilepsy.
Pod teams, we committed to hiring at least another three of those in the year end.
Started recruiting for that so.
The sales organization has not been impacted by this.
Yeah.
Okay. Thank you and then just a quick question on the balance sheet. I think you said you had just over 500 million net debt.
And you'll get some cash from the sale of heart valves. So how.
How are you thinking about the balance sheet and then if I could sneak one more in you talked about a backlog of BNS replacement. It seems like you guys could probably have some visibility into that so could you quantify.
Backlog.
Thanks, so much.
So from a balance sheet perspective.
That's correct we ended.
2020 with $250 million roughly in cash.
We were obviously we've stated this before kind of in a cash preservation mode. At this point in time. So there's no plans for any major capital deployment initiatives other than the normal investments behind our base business and Capex.
And then for the <unk> backlog, it's not perfect math, but we're estimating that today, there's about a thousand to 500 patients in the U S who should have already come back for the replacement and again as we've talked about before we have a pretty high capture rate on replacement so nothing's changed.
<unk> to suggest they're not coming back it's more a matter of timing and as we've said you can wait at least six months, maybe even a little longer to have your battery replace but we're seeing some of the people that held off in.
In 2020 in the first half of the year kind of April May June were coming back so we feel pretty confident in that number.
Great. Thank you.
Thanks, David.
Thank you.
No further questions in the queue I would like to turn the call back to Damien for any closing remarks.
Well, thanks, Katherine and thank you everyone for joining us we look forward to updating you.
On our Q1 call in a couple of months and I just wanted to thank all of the team globally for their continued passion for our business and thank you for your interest in that company.
But.
Ladies and gentlemen that concludes our conference call for today. Thank you for participating and you may now disconnect everyone have a great day.
[music].
Yes.
Yes.
Yes.