Q4 2022 LivaNova PLC Earnings Call
Speaker 1: Good day ladies and gentlemen and welcome to the Levenova PLC 4th Quarter and full year 2022 Earnings Conference call. After the prepared remarks you will have the opportunity to ask any questions by dialling start followed by one on your telephone keypad.
Speaker 1: If you need any assistance on the call, please signore conference specialist by dialing star zero. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr Matthew Dodds. Leave an overseen your Vice President of Corporate Development. Please go ahead, sir.
Speaker 2: Thank you, Emily, and welcome to our conference call and webcast discussing Li-Vonova's financial results for the fourth quarter and full year of 2022.
Speaker 2: Joining me on today's call are Jamie McDonald, our Chief Executive Officer, Alex Schwartzberg, our Chief Financial Officer, and Brianna Gotland, Director of Investor Relations.
Speaker 2: Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements.
Speaker 2: 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 has availed on our website. We do not undertake to update any forward-looking statement.
Speaker 2: 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 efficiency basis.
Speaker 2: Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website.
Speaker 2: 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 investor section of our website.
Speaker 2: under news events and presentations at investor.levanova.com.
Speaker 2: With that, I will now turn the call over to Damian.
Speaker 3: Thank you, Matt, and thank you everyone for joining us.
Speaker 3: Welcome to our conference call for the fourth quarter and full year of 2022.
Speaker 3: I'll discuss our fourth quarter and full year results, provide 2023 revenue guidance, and review our strategic portfolio initiatives.
Speaker 3: After my comments, Alex will provide additional details on our results and 2023 guidance. I'll wrap up with closing remarks before moving on to Q&A.
Speaker 3: In the quarter we achieved 6% revenue growth. This was driven by the cardiopulmonary and neuromodulation businesses across all regions.
Speaker 3: Advanced circulatory support remained unfavourably impacted by a significant decline in severe COVID cases.
Speaker 3: I'm proud of our team for continuing to move the business forward against macro challenges including inflation and supply chain complexities.
Speaker 3: Now, turning to segment results.
Speaker 3: For the Cardio Forman Resegment revenue was $137 million in the quarter, an increase of 9% versus the fourth quarter of 2021.
Speaker 3: Oxygenator revenue grew low double digit, driven by continued procedure volume recovery across all regions.
Speaker 3: Heart Lung Machine Revenue increased mid-single digits led by it grows in the rest of world region.
Speaker 3: Cardiac pulmonary revenue for the full year was $500 million and grew 11%.
Speaker 3: We expect the Cardio Formula Revenue to grow 3 to 5% for the full year 2023.
Speaker 3: Our forecast includes the stage rollout of the next generation HLM testers.
Speaker 3: In February we initiated our limited commercial release in select centres throughout Europe following successful clinical cases in two major hospitals in
Speaker 3: Looking ahead, we anticipate a gradual ramp in essence sales throughout the year.
Speaker 3: FLFC Revenue increased 7% versus the fourth quarter of 2021 with growth across all three regions.
Speaker 3: This performance was primarily driven by replacement implants in the US and double digit growth outside the US for both new and replacement implants.
Speaker 3: US epilepsy revenue increased 4% year over year.
Speaker 3: Similar to last quarter, total implant growth was driven by replacements.
Speaker 3: In the US we are continuing to advance our go-to-market commercial strategy in comprehensive epilepsy centres, which included 15 dedicated teams.
Speaker 3: These teams accounted for approximately 21% of US implants in the quarter as compared to 22% on a same account basis during the prior year.
Speaker 3: epilepsy revenue in Europe grew 18% versus prior year led by the UK and Nordics.
Speaker 3: The rest of world region achieved 18% growth led by Brazil.
Speaker 3: For the full year, epilepsy revenue increased 7%.
Speaker 3: For the 40 year 2023, we expect global epilepsy revenue to grow 3-5%.
Speaker 3: ACS revenue was $10 million in the quarter, representing a decrease of 30% from the fourth quarter of 2021.
Speaker 3: Results continued to be impacted by the year-over-year reduction in severe COVID cases and in part by product mix, which was partially offset by growth in non-COVID cases.
Speaker 3: Our field data suggests ACS case volumes related to COVID declined more than 90% year over year as fewer hospitalised patients progressed to a severity that required ecmotherapy. However, ACS non-COVID cases increased more than 20% versus 4q21.
Speaker 3: driven by an easing of hospital capacity constraints. ACS revenue for the full year was $39 million, representing a decline of 29%.
Speaker 3: For 2023, we expect ACS to grow 4 to 6%, our forecast includes a return to growth once we anniversary the COVID impact after the first quarter.
Speaker 3: Turning now to the Strategic portfolio initiatives.
Speaker 3: DTD revenue for the fourth quarter was $3 million and for the full year was $8 million.
Speaker 3: For 2023, we anticipate DTD revenue of approximately $8 million dollars primarily from the RECAVA study.
Speaker 3: The recovery study continues to advance.
Speaker 3: The randomized controlled study is designed with frequent interim analyses that will assess if predictive probability of success has been reached or if the study should continue enrollment.
Speaker 3: Our interim analysis for the 450th patient in the Uni Policowalt was recently completed and confirmed the study's continuation.
Speaker 3: The next interim look is at 475 patients at which point we can either transition to the prospective longitudinal study or complete enrollment to 500 patients for the Uni PoloCovod.
Speaker 3: Earlier this week, Dr Conway, the principal investigator for the Recover Study, delivered a post-apresentation at the fifth International Brain STEM Conference detailing the baseline unipolar demographic data for the Recover Study participants collected so far.
Speaker 3: The majority of these patients are severely depressed and are highly treatment resistant having filed more aggressive treatments such as ECT, TMS and ketamine.
Speaker 3: In heart failure, we enrolled the 500 patient in the Anthem HEPRAP U.S. Tivitol trial last quarter, which triggered the second interim analysis.
Speaker 3: The analysis determined that the US FDA early filing conditions were not met and the DSMC recommended that enrollment continue in accordance with the current study protocol.
Speaker 3: However, our further evaluation of the study data has not revealed a sufficiently positive impact on functional or mortality endpoints.
Speaker 3: And it is unlikely that the study was demonstrate such an impact.
Speaker 3: As a result, we are stopping enrollment, beginning the process to close the clinical study, and winding down the heart failure program.
Speaker 3: It's important to note that the decision to stop enrolling was not associated with any safety concerns.
Speaker 3: We'd like to thank the patients who participated in the trial and also thank the investigators, study committees and employees for their commitment to this program.
Speaker 3: Moving to OSA, the OSPRE trial continues to progress. In January we received approval from the FDA to include an additional five sites, one of which has already been activated.
Speaker 3: We still assume FDA approval in 2024.
Speaker 3: And with that, I'll turn the call over to Alex.
Speaker 3: Thanks, Damien. During my portion of the call, I'll share a free recap of the fourth quarter results and provide commentary on 2023 guidance.
Speaker 3: Turning the results.
Speaker 3: Revenue in the quarter was $275 million, an increase of 6% versus 2021.
Speaker 3: Our exchange had an unfavorable Eurogrier impact of approximately $12 million or 4% of revenue.
Speaker 3: A just-of-gross margin as a percent of net revenue with 69 percent compared to 70 percent in the fourth quarter of 2021.
Speaker 3: A just-of-growth margin was unfavorably impacted by inflationary pressures to supply chain challenges.
Speaker 3: Just a gross margin was unfavorably impacted by inflationary pressures, supply chain challenges, and product mix.
Speaker 4: partially offset by pricing improvements.
Speaker 4: Adjusted R&D expense in the fourth quarter was $43 million, compared to $41 million in the fourth quarter of 2021.
Speaker 4: R&D is a percent of that revenue with 16% versus 15% in the fourth quarter of 2021.
Speaker 4: While sequentially flat, the Euro-Year increase was driven by continued investment.
Speaker 4: in our strategic portfolio initiatives.
Speaker 4: Adjusted SG&A expense for the fourth quarter was $100 million, compared to $107 million in the fourth quarter of 2021.
Speaker 4: S-GNA, the percent of that revenue was 36 percent, down from 40 percent for the fourth quarter of 2021.
Speaker 4: Adjusted operating income was $47 million, compared to $40 million in the fourth quarter of last year.
Speaker 4: Adjusted operating income margin with 17%, compared to 15% in the fourth quarter of 2021.
Speaker 4: A justice effective tax rate in the quarter was negative 3%, compared to 14% in the fourth quarter of 2021.
Speaker 4: The lower tax rate is primarily attributable to full year changes in geographic income
Speaker 4: Adjusted diluted earnings per share was 81 cents compared to 57 cents in the fourth quarter of 2021.
Speaker 4: Adjusted diluted earnings per share for the full year was $2.39.
Speaker 4: Our cash balance at December 31, 2022 was $214 million, up from $208 million at year-end 2021.
Speaker 4: Total debt at year end 2022 was $542 million versus $240 million at year end 2021.
Speaker 4: The increase primarily relates to the $300 million turn loan facility that we execute as in July .
Speaker 4: Net that, including restricted cash at your end.
Speaker 4: Net debt, including restricted cash at your end, was $85 million.
Speaker 4: Adjusted three cash flow for the quarter was $31 million and was $75 million for the full year.
Speaker 4: Pre-cashable generation was unparably impacted by inventory bill and inflationary pressures.
Speaker 4: partially offset by improvements in working capital.
Speaker 4: The free cash flow conversion ratio was 58%.
Speaker 4: Capital investments were $27 million during 2022 compared to $26 million in the prior year.
Speaker 4: Now turning to 2023 guides.
Speaker 4: We forecast 2023 revenue growth on a constant currency basis between 3 and 5%.
Speaker 4: and assume approximately a 1% tailwind from exchange rates.
Speaker 4: We are projecting adjusted diluted earnings per share in the range of $2.45.
Speaker 4: in 2065 cents.
Speaker 4: With adjusted weighted average shares outstanding to be 54 million.
Speaker 4: for the four year.
Speaker 4: A justice free cash flow was expected to be in the range of $80-$100 million.
Speaker 4: We forecast capital spending in the range of approximately 35 to 40 million dollars. With that, I'll turn the call back over to Damien.
Speaker 5: Thank you, Ellen.
Speaker 3: Out 2022 performance was balanced by Out of Air Sport Folio.
Speaker 3: For some macro challenges, my linger, our pipeline remains robust and
Speaker 3: remain committed to delivering differentiated products and therapies to patients and physicians.
Speaker 3: In the year ahead, we will continue to use the Strategic Tribal of our Guide for Gold setting an institution.
Speaker 3: With quality of the scent that we remain focused on three key areas, growth, pipeline and profitability.
Speaker 3: We believe it's focused, underpin by the living over business system, positions us to create value for all stakeholders.
Speaker 3: And with that Emily, we're open to questions.
Speaker 1: Thank you. If you have a question at this time, please press the star, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star followed by two.
Speaker 1: As we enter 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.
Speaker 1: Our first question comes from the line of Rick Wies with Steefele. Rick, please go ahead.
Speaker 6: Thank you and good morning all. Hi Damien.
Speaker 6: Maybe there are related questions in a way, but let's start off with the guidance. Maybe help us better understand your thinking in providing the guide.
Speaker 6: both from how conservative is it actually or optimistic relative to what you're seeing. But maybe more specifically, the top line guide is well below the long term.
Speaker 6: aspirational goals you laid out back in December of 21 at the analyst day. How are you thinking about how would you have us think about it?
Speaker 6: The guide, the outlook, your long-term aspirations, and then I'll have a follow-up related to that. Thank you.
Speaker 3: Yeah, first of all, good morning Rick. Hi, thanks for joining us. Yeah, I think at the investor day we laid out 5 to 8% and we thought we'd ramp over time. I will say I think 2022 was a stronger year than we anticipated in our ramp and there are lots of reasons for that and we could cover that.
Speaker 3: I think 22 was right in the middle of that range. For 23, we're just looking at things like the transition year for the end of service to NPI, driver, the essence transition. And let's be honest, the ICS.
Speaker 3: plan is behind after the COVID disruption, but we're confident that that's going to get back to a growth trajectory. So the CP market, we think, is stabilized and back to 20 pre-COVID levels. And I think that normally that market grows 3-5%.
Speaker 3: and when we're expecting to be in that range with this portfolio as we transition to the essence.
Speaker 3: So I like the way we're approaching this year. Do we think there's upside? Yes, we do. If oxygenators and the rest of World HLMs.
Speaker 3: continue to run like they have been. If the NiroMod NPI's ramp, if the non-COVID case ramp in ACS, takes off as we ultimately hope it will. But we think this is prudent guidance and gives us the chance to deliver on our promises.
Speaker 6: Good. And separate but also related, can you talk about the heart failure trial shutdown, the anthem have shut down? What could the R&D savings be from winding it down and the cash implications?
Speaker 6: What's that contributing, that savings contributing to the EPS Outlook Damian?
Speaker 3: There's a great question. As you might suspect, we're disappointed that we're ending this program and after a long commitment.
Speaker 3: But as we saw that the 500 patient interim analysis didn't give us the signal for the early FDA filing and while the DSMC, their protocol following the analysis is to recommend one or three options and they recommend it continuing to enroll.
Speaker 3: We just took a look under the hood and the further analysis was not revealing a sufficiently strong positive impact on the functional or the primary composite end point. And it was pretty unlikely that the full study would demonstrate that impact. We're really early in the cycle of this close down. And so...
Speaker 3: We're going to assume that it takes us some time to work through the process. We're going to work with the FDA and the investigators to ensure that we have the right process for patients. In terms of math, on average, we spent about $30 million a year on this program. As we work through the process, we'll establish how much of that is.
Speaker 6: in which bucket? OK, no early color. It may be even looking out a year about what annual savings could be.
Speaker 4: Yeah, Rick, this is Alex. As Damien said, our burn rate was approximately $30 million a year. We could see by 2024 we should start to recoup. And perhaps even earlier this year, sometimes this year, as we.
Speaker 4: figure out how to wind down the program.
Speaker 6: Gotcha. I'll try to be respectful of your two question rule, even though I have a lot more questions. Thanks so much. All right.
Speaker 1: The next question comes from Michael Polak with Wall-Free Search. Michael, please go ahead.
Speaker 4: Hi, good morning. Thank you for taking the questions. First one, gross margin in 23, you know, some sequential and...
Speaker 4: year on year weakness in the fourth quarter, not...
Speaker 4: Something we've clearly seen from others as a text deal with inflation and pi chain snapples and currency and whatnot. I guess what's the baseline for that adjusted Chris Margin metric in your 2023 outlook?
Speaker 4: I might. Yeah, I think you're right. It's relatively flat. The improvements that we're seeing is in terms of productivity and price still being impacted by the inflationary pressures that we've seen over the last 18 months.
Speaker 4: Again, so we're anticipating that to continue. 69% seem like a good input for now.
Speaker 4: Yes. The follow-up.
Speaker 4: Intrigued by the the the mention of the Conway Dr. Conway poster presentation. I guess
Speaker 4: intrigued by the the the mention of the Conway Dr. Conway poster presentation. I guess I have not seen that data.
Speaker 4: Is there anything in there that's new to you that kind of...
Speaker 4: Tells you about how
Speaker 4: The recovery unit pull or cohort may be shaping up here. I'm late in the enrollment process.
Speaker 2: Hey Mike, it's Matt. So you had a poster. It came out again earlier this week and you know, we can make it available. It was the first look at the unipolar kind of called the demographics underlying patient.
Speaker 2: So you can see things like the Modular Score, Average Age, you know, other therapies they were on. And what we think is interesting about it is, you know, the Average Age is older, there's a lot more, what we call, even called, aggressive therapies like ECT, TMS, even ketamine, you know, patients have failed in this.
Speaker 2: that has been undertaken to date.
Speaker 7: Okay, thank you so much.
Speaker 7: Thanks, Mike.
Speaker 1: Our next question comes from Matt Taylor with Jeffries. Please go ahead Matt.
Speaker 8: Hi, I think you're taking the question. So I had a follow up on depression. I guess maybe I'll just start with, could you take that thought? Just one step further and help us understand, you know, based on the unique composition of some of the patients in this trial. Do you think that will have any implications for?
Speaker 8: the likelihood of success or the strength of the treatment impact or what do you think that means for the ultimate result?
Speaker 2: So I would say overall the impression we've got is that this is not unexpected in terms of what the age was, the major score was the, you know, people on these aggressive therapies, the number of pharmaceuticals that they've been on over lifetime. What I think it helps with is...
Speaker 2: If you look at time and response, which is a relatively begin point, when we talk about overall response rates, the initial design shows lower percentages than, I think a lot of people have come to expect in some of these prior depression studies. And this is an example of why...
Speaker 2: They're overall potentially lower, but still can be incredibly powerful just because this patient population has never had a therapy that fits where they are in their depressive state.
Speaker 9: Gotcha, okay.
Speaker 8: And then one follow up on depression. Obviously last interim looked at not.
Speaker 8: transition into registry or show early stoppage success. I guess the question I think a lot of investors have, and now that we have more data points, more water under the bridge.
Speaker 8: and versus your initial electrification at 350 that you could show early stoppage. Does this have any implications for the overall strength of the treatment effect?
Speaker 8: in the
Speaker 8: in the active arm, meaning, you know, so we see a weaker treatment effect because of the lack of early stoppage or is that reading too much? And so what's going on here?
Speaker 2: It's probably reading too much and what's going on because again, you know, it's all blinded. It could mean that, it could mean that the control arm is doing better, but you know, the therapy arm is also doing better. You know, what we are confident in is there is a futility curve on the bottom of this, and that continues to go up every look.
Speaker 2: So we know we are seeing some benefit. We just haven't gotten to that level that would allow us to stop early. But the other thing, I'd say Matt, is data can actually improve over time, especially when you go out some months, seven, eight, nine, ten, eleven, twelve, where we believe that the therapy arm will have a more pronounced effect than the control arm.
Speaker 3: So you could not hit an early stoppage, but actually see data improved over time before you get to the final number. So that's why we're still really confident overall. Which is what happened in the parents and patients. This whole study is predicated on six prior studies, 14 hundred patients, but particularly the parents and papers showed that it...
Speaker 3: At month six you started to see the separation and it continued to separate and improve over time. So I think the point that making is quite valid that the longer this runs, I mean the trial was set up to run to 500 patients. So we continue to be...
Speaker 3: believers in this showing a significant response to treat these patients.
Speaker 1: Got it. Thanks very much, guys. Thanks, Matt. The next question comes from Adam Maydor with Piper Sandler. Please go ahead.
Speaker 2: Hi, good morning. Thank you for taking the questions. I wanted to start with a two-part question on neuromodulation, I guess really epilepsy. So first, I was hoping you could give a little bit more color on the epilepsy performance in Q4 and breakout performance by NPI's and replacements.
Speaker 10: wondering if NPI had growth either year-by-year sequentially. And then as we look at the guidance.
Speaker 10: The General Mod Guidance for 2023, the 3-5% range, maybe just kind of walk through the different assumptions there on the NPI and replacement side as well as by geography and then I'd follow up. Thanks.
Speaker 3: Sure. So let's take from the top with US implants grew in low single digits and they were above the 2019 levels I think which was important for us to see that signal. Unit sales were flat and we were up in a mid single digits with a combination.
Speaker 3: For us, we looked at this from multiple different angles. We looked at the macro. We looked at that storm in December . We looked at the share. And the bottom line is, we just didn't execute. The team, I think, had some work to do. December really just didn't drive NTIs like we anticipated.
Speaker 3: The team has to really dig into their performance management and commercial execution. We've increased oversight of their funnel processes.
Speaker 3: Remove the bottom 10% of the performance. We've looked at the...
Speaker 3: growth profile of the various businesses that we have that we're covering in the CECs. So you know, we're expecting a change in that performance. So for 2023, this in a 3 to 5 is really looking at a...
Speaker 3: decline in end of service as we previously discussed as we anniversary into this the backlog of the COVID delayed cases and then we're expecting sequential improvement in the NPI throughout the year.
Speaker 2: Oh, and they just put it in the international again. It's a small piece, but double digit growth in international. So that should give you enough variables to get there.
Speaker 10: I appreciate that, Damien Matt, thank you. And that's for the follow-up, it's a similar guidance question, but switching over to...
Speaker 10: to Cardio Polmonary, you know, CP grew double digits in 2022. The guidance for 23 is 3 to 5%.
Speaker 10: You know, the last time that you launched a new heart long machine, you got a nice lift to grow. And I think, you know, you reference the CP market kind of growing in that 3-5% range. So I guess when I take that all together, why is 3-5% guidance for the CP business in 23? Why is that the right range?
Speaker 10: at this juncture. Thanks.
Speaker 10: you know at this juncture thanks and it's out so for cp
Speaker 4: And we typically the way we think about the market is in the developed markets is probably a low-to-mid-single-digit growth business. Two-thirds of our businesses and consumables, obviously 2022, the growth was fantastic.
Speaker 4: It was based on a lot of the recovery from the...
Speaker 4: the surgical procedures coming out of COVID. So, we still believe that we're going to grow at a market rate from a consumable perspective. And from a capital perspective, this is kind of a transition year.
Speaker 4: the way we're forecasting this business.
Speaker 11: Thank you.
Speaker 11: Thank you.
Speaker 1: Our next question comes from Mike Mattson with Needham & Company. Please go ahead.
Speaker 8: Yeah, thanks. So I have one on your covenants. I think the covenant requires the interest coverage ratio of three to one. I was curious if that includes or exclude the interest on the. This neon and then you know, are you comfortable? You can stay within that compliance with that during 2023. Yeah, we're we're fine on our.
Speaker 8: compliance with our covenants, so we press your test to them and we're in good shape. Okay, all right. And then, you know, just as far as the OSPRI trial goes, I hear you on the potential approval in 2024. But you know, when do you think we could see data from the trial? It's a possible we could say late this year is going to be really more 2024.
Speaker 3: Thanks, I'll take that one. It's 2024. You know, we've got the pivotal FDA ID. So we need to complete the study, file the data, and then seek the public or podium So it won't be until 2024.
Speaker 12: Okay, got it. Thank you.
Speaker 12: Thank you. Thanks, Mark.
Speaker 1: Our next question comes from Matt Mixick with Barclays. Please go ahead.
Speaker 1: Matt, your line is open. Please proceed with your question.
Speaker 1: Hi there Matt, unfortunately we're not doing any media for the deadline. Could you please check that you're not muted?
Speaker 7: It might have lost your memory.
Speaker 1: Perfect. So at the moment we have no further questions, Registration. I'll turn the call back to Damien that Donald for closing remarks.
Speaker 3: Thanks Emily. And thank you everyone for joining us on the call today and on behalf of the entire team, we appreciate your support and continued interest in living over and we'll talk to you on the first quarter call. Thanks very much.
Speaker 1: Thank you, everyone, for joining us today. This concludes our call and you may now disconnect your lines.