Q3 2023 LivaNova PLC Earnings Call

Yeah.

Good day, ladies and gentlemen, and welcome to the <unk> plc.

Plc third quarter of 2023 earnings conference call.

If you'd like to ask a question.

We ended the presentation that you can press star followed by one on the telephone keypad if.

If you'd like to remove your question that you May press star followed by sea.

As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's call Mr. Matthew Dodds <unk> Senior Vice President of corporate development and O I T. Please go ahead.

Thank you, Alex and welcome to our conference call and webcast discussing leaving though this 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 Schwartz Burns, our chief financial.

Officer, Stefanie Bolton President of global epilepsy, and Brianna Gotland 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 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 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 <unk> events and presentations.

Operator: Good day, ladies and gentlemen, and welcome to the LivaNova PLC third quarter of 2023 earnings conference call. If you'd like to ask a question at the end of the presentation, you can press star slide by one on the telephone keypad. If you'd like to remove your question, you may press star slide by three. As a reminder, this conference call is being recorded.

At Investor Dot <unk> Dot com.

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

Hey, Thank you, Matt and thank you everyone for joining us and welcome to <unk> 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.

Matthew Dodds: I'd now like to introduce your host with Faith Cool, Mr. Matthew Dodds, LivaNova Senior Vice President of Corporate Development and I.T. Please go ahead. 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 Kozy, our chairman of the Board of Directors and Interim Chief Executive Officer, Alex Shvartsburg, our chief financial officer, Stephanie Bolton, President of Global Level Epsi, and Brianna Gotlin, Director of Investor Relations.

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.

Matthew Dodds: 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 fileings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAP financial measures with respect to our performance, including but not limited to sales results, which will all be stated on a constant currency basis.

Our performance reflects strong execution throughout the organization.

As demonstrated by the growth in all three business units.

<unk>, 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.

Matthew Dodds: Reconciliation to the most directly comparable GAP 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 that today's call. This presentation is complimentary 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 under news events and presentations at investor.livenova.com.

Oxygenated revenue grew in the mid teens, driven globally by higher than expected demand again, and I would 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 essence installations in the U S and Europe and as five placements and the rest of the World region.

William Kozy: With that, I will now turn the call over to Bill. Hey, thank you, Matt, and thank you, everyone, for joining us.

At the end of August we received U S. FDA, five 10-K clearance and CE Mark for the essence inline blood monitor in the U S and Europe, respectively.

William Kozy: Welcome to Livenova'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's 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.

These clearances are important product milestones that enable increased customer adoption of essence.

Accordingly, our commercial rollout is now fully underway and we have been successful in both evaluation and placements, including shipments to highly prestigious hospital systems in the U S.

While we continue to anticipate increased contribution from essence 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.

William Kozy: 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.

Revised forecast incorporates the strong performance through the first nine months of the year NHL Lambs and oxygenated.

With our current oxygenated production capacity running at its limit.

As previously stated we continue to expect a modest ramp in essence revenue through year end.

Epilepsy revenue increased 6% versus the third quarter of 2022.

Epilepsy revenue increased 7% year over year, driven by higher realized price and favorable product mix.

William Kozy: Now, turning to segment results. For the Cardio Pulmonary Segment, revenue was $145 million in the quarter, an increase of 18% versus the third quarter of 2022. Oxygenator revenue grew in the midteens, driven globally by higher than expected demand, again. And I'd like to acknowledge our Cardio Pulmonary Manufacturing and Supply Chain team on their excellent performance in the quarter. Heartlong machine revenue increased more than 25% driven by essence, installations in the US and Europe, and S5 placement in the rest of the world region.

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 1827 replacement, 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.

William Kozy: At the end of August, we received US FDA 510K clearance and CE mark for the essence inline blood monitor in the US and Europe respectively. These clearances are important product milestones that enable increased customer adoption of essence. 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 US. While we continue to anticipate increased contribution from essence through year end, we should see a more meaningful benefit in 2024 and beyond.

And after let's say 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 and leaving out the organization.

This initiative represents a meaningful operating upgrade to fully digitize manufacturing quality systems.

For the full year 2023, we now expect global epilepsy revenue to grow 7% to 9%.

William Kozy: We now expect Cardio Pulmonary 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 essence revenue through year end.

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.

William Kozy: Epilepsy Revenue increased 6% versus the third quarter of 2022. US 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 UK. Epilepsy Revenue in the rest of world region decreased 3%. Primarily due to uneven distributor ordering patterns and the sanctions.

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.

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 unit polar cohort of this study has been completed.

Upon receipt of the 12 month follow up data for the 500 unit polar 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 unit polar to bipolar patients.

William Kozy: Building on our commitment to invest in our core businesses, we had a very successful goal live in Houston with our first manufacturing execution systems widely known as MES, and we now have 15 super users in the Levenova organization. This initiative represents a meaningful operating upgrade to fully digitize manufacturing qualities. For the full year 2023, we now expect global epilepsy revenue to grow 7-9%. Our revised forecast incorporates the performance during the first nine months of the year.

As a reminder, the bipolar cohort is similar to the unit polar cohort in that the randomized controlled study is designed with frequent interim analyses that assess if predictive probability of success or futility was reached or if the study should continue enrolling.

Okay.

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 and 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 will turn.

William Kozy: 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.

Turn the call over to Alex.

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.

William Kozy: 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 $6-8 million, primarily from the Recovery Study. The Recovery 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 the final analysis.

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.

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.

<unk> realized price.

Higher volume, which drove favorable fixed overhead absorption as well as lower inbound freight costs, which offset component cost inflation.

William Kozy: 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, which frequent intra-minalities that assess if predictive probability of success or futility was reached or if the study should continue enrolling.

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.

Excluding the costs related to anthem, our R&D investment increased 4% versus the prior year.

Adjusted SG&A expense for the third quarter was $115 million.

William Kozy: Moving to OSA, the Ospreay trial continues to progress with all 25 sites actively recruiting patients. In heart failure, the close-out 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.

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 essence launched legal expenses and variable costs, such as freight and commissions associated with increased revenue.

Alex Shvartsburg: With that, I'll turn the call over to Alex. 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. Far and 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 operating income was $45 million <unk>.

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 2020.

The higher tax rate is primarily attributable to changes in geographic mix.

Alex Shvartsburg: 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. Just as R&D expense in the third quarter was $42 million online 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 drop.

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 <unk> 73.

Compared to 58 in the third quarter of 2022.

Our cash balance at September 30 was $234 million.

Up from $214 million at year end 2022.

Total debt at September 30 was $587 million up from $542 million at year end 2022.

Alex Shvartsburg: Including the costs related to Anthem are R&D investment increased 4% versus the prior year. Adjusted S&A expense for the third quarter was $115 million, compared to $98 million in the third quarter of 2022. S&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 S&S launch, legal expenses, and variable costs such as freight and commissions associated with increased revenue.

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 at September 30 was $98 million.

Adjusted free cash flow for the quarter was $26 million down from $41 million in the prior year period the.

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 essence and capital spend phasing.

Alex Shvartsburg: 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. The global tax landscape continues to evolve and will impact our effective tax rate in 2024.

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 CPE 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 nine and 11% and continued to assume approximately a 1% tailwind from exchange rates.

Alex Shvartsburg: 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 for share was 73% compared to 58% in the third quarter of 2022. Our cash balance at September 30 was $234 million, up from $214 million at year-end 2022. Total debt at September 30 was $587 million, up from $542 million at year-end 2022.

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 am encouraged by the company's execution and financial performance in the first nine months of the year.

We remained positioned to drive improved operating leverage by year end, having achieved 14% adjusted operating margin.

Alex Shvartsburg: The increase in total debt was driven by the delayed draw of the $50 million on the term-lone A facility that we put in place in July of 2022. Net debt, including restricted cash at September 30, 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 essence 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.

And 23% adjusted operating income growth for the first nine months of the year.

I am 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.

Thank you Alex.

As a company we have executed against our targets through the first nine months of 2023.

We are well positioned to deliver on our full year guidance, including operating leverage by year end as well as pipeline commitments.

Shaving these communicated goals and creating shareholder value our top priorities of the executive leadership team and our colleagues around the globe.

Alex Shvartsburg: 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 percent and continue to assume approximately a 1 percent 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.

Let me take a minute to thank our entire organization for their focus on patients innovation and value creation.

When 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.

Thank you.

Linda if you would like to ask a question E Press Star followed by one on your telephone keypad.

If you like to remove your question you May press Star two.

Please ensure you're on mute locally when asking your question.

Please also let me yourself to one question and one follow up before re entering the queue.

Keith.

Our first question today comes from Rick Wise of Stifel.

Alex Shvartsburg: Adjusted free cash flow is now expected to be in the range of $85 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 and having achieved 14 percent adjusted operating margin and 23 percent adjusted operating income growth for 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.

I understand why open. Please go ahead.

Good morning, everybody. Thanks.

<unk>.

Bill Let me first of all it's great to see the solid quarter overall quarterly a lot of good things happening.

And you can make a bunch of encouraging comments and I've said before I start off with.

The fourth.

I'll touch on the fourth quarter.

When I.

If im looking at it correctly your current guide, even though it stepped up a bit.

Implies a bit lower growth in EPS.

Thoughts and then we had modeled and just wanted to better understand.

It's just.

Paul prudent conservatism.

William Kozy: And with that, I'll turn the call back over to Bill. 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. Cheving these communicated goals and creating shareholder value are top priorities of the executive leadership team and our colleagues around the globe.

There is 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.

Sure Rick Thanks, Thanks for the question getting right at the the.

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 infrastructural a manufacturing innovation and some strategic investments.

William Kozy: Let me take a minute to thank our entire organization for their focus on patience, innovation, and value creation. We look forward to building on this level of performance through the remainder of the year and into 2024.

<unk>.

We have notably been cautious on the ladder set of choices that we've made to ensure that we put the first three quarters of the year into a strong position.

Matthew Dodds: With that, Alex, we are ready to open the call for questions. Thank you. As a reminder, if you'd like to ask a question, you can press style or flood by one on your telephone keypad. If you'd like to remove your question, you may press style or flood by two. Please ensure you're unmuted locally when asking your question. Please also let me yourself to one question and one follow-up before re-entering the queue. Thank you.

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 competitors supply situations, particularly in the CP business and very much focused on oxygenated.

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.

Rick Wise: Our first question for today comes from Rick Wise of Speedful. Rick, your line is now open. Please go ahead. 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.

Got a few ongoing inflationary pressures, we've got our our eyes on particularly on components, but.

But hopefully that will give you a little better picture of where we're sitting right now.

Gotcha.

William Kozy: And I said head 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 then we had modeled. And just wanted to better understand, is this just, you know, thoughtful, prudent conservatism? Is there something I'm not understanding?

And just.

And again, it's always medicines favorite question some of your <unk>.

You'll talk a little bit about the 2024 set up you've made some encouraging comments there at the Enbrel.

Maybe you could expand on that a little bit.

Key drivers for next year or things to the organization and you are focused on but maybe.

Most particularly.

Given the strong cardiopulmonary performance.

Hi.

How much more.

William Kozy: Is this something related to tax rate? If you could just give us a little more color there and understand. 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.

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.

Yes, okay. 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 oxygen <unk> 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.

William Kozy: 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 competitors 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.

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.

Popped back.

Hi, actually.

I have been asking a lot of the same questions youre asking about the upcoming year, we can't project that and we won't.

William Kozy: We've got a few ongoing inflationary pressures we've got our eyes on, particularly on components, but hopefully that'll give you a little bit of picture where we're sitting right now. Gotcha. Again, it's always management's favorite question in the summer of year.

As it relates to 2024, we really are looking forward to covering that in much greater detail.

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.

William Kozy: Maybe you'll talk a little bit about the 2024 setup, you made some encouraging comments there at the end. You know, maybe you could expand on that a little bit, just key drivers for next year or things like the organization and you are focused on, but maybe most particularly given the strong career pulmonary performance, you know, how much more, how long should we anticipate that running, that benefit lasting, what ending are we in there as we look ahead to the year ahead.

Let us.

Just defer that discussion until we get to the fourth quarter results.

Thanks, very much bill.

And Rick Thanks.

Thank you Alex.

Next question comes from Mark Polak of Wolfe Research. Your line is now open. Please go ahead.

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.

William Kozy: Thank you very much. Yeah, okay, thank you. Let me take the latter part of that question first. Just to be clear, our manufacturing organization on the cardio pulmonary 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, you know, we mentioned to you guys last quarter that we were pretty sure they were going to be back.

Very conservative the question is on the oxygen Nader disruptions that competitors can.

Can you remind us on the timing.

Timing of that over the last year or 18 months was that a.

Primarily at 2023 phenomenon or are there some tough comps in the back half of 2022 that we're coming up upon.

Hey, Mike Yeah. Thanks, Thanks for the question you're on to a really important topic.

And by the way. This is 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 'twenty, two 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.

William Kozy: 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 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. Thanks, Mr. Smithville. Hey, Rick, thanks. Thank you.

Please excuse me I am not trying to be repetitive here, but but we're just running flat out in the in the plants.

And our organization can't produce any more oxides. 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 into the fourth quarter of 'twenty three against that tougher comp.

And as we look forward on oxy.

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 Theres just no magic wand, where we can in a very short term.

Michael Polark: Our next question comes from Mike Polark, a full free search. The line is now open. Please go ahead.

A notable recovery scenario.

Michael Polark: Good morning. Thank you for the question. One more on cardio pulmonary, and I'm specifically looking at the implied fourth quarter guidance. If I'm doing the math, right. Bigger 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?

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 with everything thats going out of that facility is that the quality levels. We expect.

By the way I'm not in any way complaining about all of that I'm just sharing that we are doing the absolute best that we can in the situation that we have.

Yeah.

Helpful for my follow up I'll ask on the CEO search I appreciate the comments.

William Kozy: Hey, Mike. Thanks. 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 in the plant.

I guess as I look at all even though.

My question is.

Is it difficult to find the right fit before you know what.

What happens with depression sleep as examples those are potential.

Potentially transformative opportunities.

So I'll have to clear.

Clinical data risk and.

Is it.

I roll this forward Bill and kind of wonder if you know a.

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 for.

William Kozy: I can't in our organization can't produce anymore 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 into 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.

<unk> prospects.

Any color on this would be great. Thank you so much.

Yes, thanks for the for the question actually we have been pleasantly encouraged by.

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 in people coming to the company.

As I mentioned in my earlier remarks are the board and myself are in and have been in some active interviewing now since since late August early September all our attention is on finding the right person we said initially.

William Kozy: But you guys know well, we've got molding assembly, packaging and sterilization here. There's just no magic wand 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.

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 at <unk>.

And we're not flexing on our spec.

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 we're just staying connected to that.

William Kozy: Hopefully for my follow up, I'll ask on the CEO sir to appreciate the comments. I guess as I look at leaving over, you know, 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 have to clear clinical data risk and I just is it. I rolled this forward bill and kind of wonder if you know a better timing for somebody knew would be middle or back half of next year when you maybe know a little bit more.

Thank you.

Sure and thank you for the question.

Thank you. Our next question comes from Adam, but major of Piper Sandler.

Your line is now open. Please go ahead.

Hi, Good morning, guys. Thank you for taking the questions and congrats on the nice quarter.

I wanted to start thanks, good morning, good morning.

I wanted to start out specifically.

CP and heart lung machines, and I think you said that.

Segment grew 25% <unk> in Q3.

I'm curious if you can just talk a little bit more about the essence rolled out.

William Kozy: I'm sure about these pipeline programs and how the data is going to turn out and therefore the potential commercial prospects any any color on this would be great. Thank you so much. Yeah, 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 that you have asked we have been getting asked in our process but I I see no hint that it's dampened candidate interest and people coming to the company.

What was the contribution in the quarter from Athens, how many systems did you place kind of how you foresee that evolving going forward and then also just remind us on the pricing strategy relative to S. Five and then I had a follow up thanks.

Sure. Thanks for the question.

We did move as I mentioned in my earlier comments to kind of full launch.

And for sure our HL M revenue growth was driven primarily by essence installations in the U S and Europe with just some S. Five placements in rest of world.

William Kozy: As I mentioned in my early remarks are the board and myself are in and have been in some active interviewing now since 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 will continue to do two things keep the process at the level of quality that we have it.

All of our essence orders to date are achieving the expected price target we have talked in the past that we were expecting too.

Because of the quality advancements in technology in essence, we were hoping to get around about a 30% price premium above traditional S. Five at this very early stage.

All of that expectation is being achieved.

We're not yet at a point.

We're going to start talking about units placed.

William Kozy: 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 calls you know those things that are really important to us in terms of getting the right candidate and we're just we're just staying connected to that.

What we actually are enthused about is the quality of our pipeline and funnel.

And the customer interest that we're seeing in both U S and Europe.

So what we'd hope to do is.

Prove ourselves even to the next level. If you would in the fourth quarter and then we can circle back some more on essence performance as 24 starts to rollout.

Unnamed Speaker: Thank you. Sure, thank you for the question. Thank you.

William Kozy: Our next question comes from Adam made it up. Your line is now open please go ahead. Hi, good morning guys. Thank you for taking the questions and congrats on this quarter. I wanted to start out. Good morning. I wanted to start out specifically CT and heart lung machines and I think you said that segment who 25% HLM did in Q3. I'm curious if you can just talk a little bit more about the essence rolled out.

That's that's great color Bill Thank you for that and for the follow up.

Realize you are not.

A little bit limited in terms of what you can see in 'twenty four but I did want to ask about the heart failure program closure.

I think thats $24 million of spend this year.

Any updated thoughts even just broad strokes on how you think about.

That spend as it relates to next year letting that flow through to investors versus reinvestment in the business and then I guess I'll test. My luck can also ask about associated bandwidth.

William Kozy: What was the contribution in the quarter from essence how many systems did you place kind of how do you foresee that evolving going forward. And then also just remind us on the pricing strategy relative to S5 and then I'd follow up. Thanks. Sure, thanks for the question. We did move as I mentioned in my earlier comments to a kind of a full launch. And for sure our HLM revenue growth was driven primarily by essence installation in US and Europe with just some S5 placements in and rest of world.

Depression in OSA next year as well thank you.

Because youre, let me I'm going to I'm going to have Alex comment on our heart failure. He's got his a real tight handle on our game plan there.

Hi, Adam.

Look our heart failure program.

We continued down the path of closing that out by the end of the year, we expect some residual cost into next year.

William Kozy: All of our essence orders to date are achieving the expected price target. We have talked in the past that we were expecting to because of the quality advancements and technology in essence. We were hoping to get around about a 30% price premium above traditional S5 at this very early stage. All of that expectation is being achieved. We're not yet at a point where we're going to start talking about units placed. What we actually are enthused about is the quality of our pipeline and funnel and the customer interest that we're seeing in both US and Europe.

We're looking at.

Our capital deployment as part of our budgeting process.

Process.

We'll update you guys.

As we end Q4.

On all of our expectations for performance in in next year.

And to close out on year DTD OSA questions.

What we did as you would expect in our business planning is the best we can do given the little bit of uncertainty that resides particularly on DTD is do scenario planning we have completed.

Scenario planning for a.

Possible launch of that product, obviously, not until we get into 'twenty five, but we would have to start to prepare our homework for late 2024 commercial activity. That's what we'll talk about when we get into our fourth quarter review and we will actually be.

William Kozy: So what we'd hoped to do is prove ourselves even to the next level if you would in the fourth quarter and then we can circle back some more on essence performance as 24 starts to roll out. That's great color Bill. Thank you for that. And for the follow up, you know, realize you're not you're a little bit limited in terms of what you can stand 24, but I did want to ask about the the heart failure program.

Care to give you quite a bit of insight I think in both of what we're going to try and do why we're going to do it and what that spend will be as you would have to guess.

More than a few moving parts there and so we're going to take the benefit of the next couple of months to really button that down, but we have a really good kickoff on that planning effort and of course, the scenario has to operate under the financial premise that.

William Kozy: You know, I think that's 24 million a spend this year, you know, any updated thoughts, even just broad strokes on how you think about, you know, that spent spend as it relates to next year, letting that flow through to investors versus reinvestment of the business. And then I guess I'll test my luck and also ask about associated spend with depression and in OSA next year as well. Thank you. Because you're let me, I'm going to have Alex come in on our heart failure.

Depression has a chance to be a goal.

More details to follow.

Alright, we will stay tuned thanks again.

Hey, Thank you.

William Kozy: He's got his real tight handle on our game plan there. I Adam, so look at our heart failure program. We continue down the path of closing that out by the end of the year. We expect some residual cost into next year. We're, you know, we're looking at, you know, our capital deployment as part of our budgeting process. We'll update you guys, you know, as we end Q4 and on all of our expectations for performance in next year.

Thank you. Our next question comes from Matt Taylor of Jefferies.

Your line is now open. Please go ahead.

Alright, Thank you for taking my question.

I guess I was wondering if you could talk a little bit more about the epilepsy dynamic.

Under the Hood and give us some color on.

And in new patient starts.

The replacement.

So the things that you've been doing with your sales force, how the landscape than with the centers opening and maybe carry that forward.

Least at a high level about what to expect with those dynamics next year.

William Kozy: And to close out on your DTDO essay questions, what we did is you would expect in our business planning is the best we can do given the little bit of uncertainty that resides, particularly on DTD is due scenario planning. We have completed scenario planning for a possible launch of that product, obviously not until we get into 25, but we would have to start to prepare our homework for late 2024 commercial activity.

Hey, Matt. Thanks, we've got the benefit of having step here and she has been spending.

The amount of time on these two topics so I'm going to just turn that question right over to Stephanie Thanks, Scott.

So as mentioned during the law.

Call that we had we've really been focusing on producing consistent performance, having a consistent execution I.

Continue to be encouraged by what that looks like with the teams, particularly in the U S. So we keep leaning into our consistent operating mechanism and focusing on the fundamentals at the collaboration between the different groups.

William Kozy: That's what we'll talk about when we get into our fourth quarter review and we'll actually be prepared to give you quite a bit of insight. I think in both of what we're going to try and do, why we're going to do it and what that spend will be as you would already have. Yes, there are more than a few moving parts there. And so we're going to take the benefit of the next couple of months to really button that down, but we have a really good kickoff on that planning effort.

Our Q3 was another set of consistent execution quarter.

And I'll.

Entirely in line with our expectations given how we exited Q2, so I'm really pleased.

We will continue to anticipate that normal run rate as we move through towards the end of the year.

William Kozy: And of course, the scenario has to operate under the financial premise that depression has a chance to be a goal and more details to follow. All right, we'll stay tuned. Thanks again. Hey, thank you. Thank you.

In terms of the sales teams they are very much focused on our customers.

Has the most amount of opportunity to treat <unk> population.

We continue with our CEC strategy without comes into sales. So everything is moving in a very nice direction.

Stephanie Bolton: Next question comes from my tailor of Jeffries. Your line is now open. Please go ahead. Thank you for taking a question. I guess I was wondering if you could talk a little bit more about the epilepsy dynamic, you know, under the hood and give us some color on. Trends and new patient starts, you know, the replacements, also the things that you've been doing with your Salesforce, you know, how the landscapes and with the centers opening and maybe carry that forward and talk at least at a high level about what to expect for those dynamics next year.

And we continue to work on a consistent execution.

Anything notable to call out in terms of changing dynamics next year in the business.

Everything.

No no notable changes as it stands now we have full.

Coverage in the U S and that they remain our <unk> priority meeting foolish.

Okay, great. Thank you very much.

Keith and thank you Matt.

Thank you.

Our next question comes from Mike Matson of Needham <unk> Company.

Stephanie Bolton: Hey, Matt, thanks. We've got the benefit of having staff here and she has been spending ordnance amounts of time on these two topics, so I'm going to just turn that question right over to Stephanie Bolton. Thanks, Matt. So, as mentioned during the last call that we have, we've really been focusing on producing consistent performance and having a consistent execution, and I continue to be encouraged by what that looks like with the team, particularly in the US.

It's now open. Please go ahead.

Yes. Thanks.

I guess just good to see the strong growth in Acs so.

Is that do you think thats back to kind of steady strong double digit growth now.

Well, we continue to keep our eyes on that when we had.

Let me give you just a little bit of color on the ACS side I mentioned, just briefly that we had some case volume benefit in fairness, we had a couple of other smaller tailwind events that happened in the quarter.

Stephanie Bolton: So, we keep leaning into our consistent operating mechanism and focusing on the fundamentals of the collaboration between the different groups. Our Q3 was another sort of consistent execution quarter and our NPI entirely in line with our expectations given how we exited Q2. So, I'm really pleased that we'll continue to anticipate that normal run rate as we move through towards the end of the year. So, in terms of the sales teams, they are very much focused on our customers that have the most amount of opportunity to treat our DRE population, and we continue with our CEC strategy with our cams in the field.

That related to some backorder clearance.

A few minor catch ups and purchases in Europe, and a onetime adjustment in service revenue and so it was the combination of those three things that kind of elevated that year on year growth for Acs.

We're maintaining kind of our full year guidance continuing.

Continuing to work closely with our ACS leadership team to look at how we can further grow and improve profitability in the year ahead, but.

But our guidance remains pretty much the we mentioned to you last time.

Sure.

Okay. Thanks, and then just as far as Australia goes.

Good to hear that you have.

Stephanie Bolton: So, everything's improving in a very nice direction and we continue to work on our consistent execution. There you go, anything notable to call out in terms of changing dynamics next year in the business? Everything comes. No notable changes as it stands now. We have full and appropriate coverage in the US of our CECs, and they remain our firm priority moving forward. Okay, great. Thank you very much.

Got all the sites up and running.

You can do with any sort of update on the where enrollment is and what your expectation is in terms of when the.

The data could be released as a possible we could see in 'twenty four or is it really going to be more 25.

Unnamed Speaker: Thank you.

Yeah, I'm going to flip that one right the math sure. Thanks, Mike So ospreys as Bill said was on track we've talked about.

Getting the enrollment completed in 2000 and for six months follow up to your point it.

Looks right now like kind of a late 'twenty four early 25, we'd get the data a little bit of time to analyze it and that's why we've talked about a filing in 2005.

Michael Watson: Our next question comes from Mike Watson of Needham and Company. Your line is now open. Please go ahead. Yeah, thanks. I guess just, you know, good to see the strong growth in ACS. So, you know, is that, do you think that's back to kind of steady strong double-jit growth now? Well, we continue to keep our eyes on that.

Okay got it thank you.

Yeah.

Yes.

Yeah.

Thank you next.

Our next question comes from Anthony Petrone of Mizuho group.

Now open. Please go ahead.

Yes.

Thanks.

Maybe one on on epilepsy, and then I'll ask a little bit about margins, maybe just a little bit more on an end of service I know the company is actually tracking those patients.

William Kozy: When we had, let me give you just a little bit of color on the ACS side. I mentioned just briefly that, you know, we had some case volume benefit. In fairness, we had a couple of other smaller tailwind events that happened in the quarter. And that related to some back-order clearance, a few minor catch-ups and purchases in Europe, and a one-time adjustment in service revenue. And so, it was the combination of those through things that kind of elevated that year-on-year growth for ACS.

Just wondering where you guys are in terms of how many patients are still in the queue for end of service.

And we would assume that most of those would would be if they choose to.

Upgrade they would upgrade at <unk>.

And then I'll have a follow up on margins.

Hey, Thanks, Anthony I'm going to flip that one over to staff.

Hi, Anthony.

<unk>.

So each quarter, we have a nose in view of our identification space.

William Kozy: We're maintaining kind of our four-year guidance, continuing to work closely with our ACS leadership team to look at how we can further grow and improve profitability in the year ahead. But our guidance remains pretty much what we mentioned to you in the last talk.

And NPI and I continue to be encouraged by what that looks like and for sure you're absolutely right and you said these patients that we have coming through now opting to needs to AST and keep a platform.

So again, we see incremental improvement in that.

That you see around the mix and the change that we then just patient.

Matthew Dodds: Okay, thanks. And then just as far as Osprey goes, you know, good to hear that you got all the sights up and running. You can use any sort of update on the where enrollment is and what your expectation is in terms of when the data could be released in the possible. We could see in 24, is there really going to be more 25? Yeah, I'm going to flip that one right to Matt.

Patients opting to move to our latest platform.

And again.

In terms of the tailwind I mean can that last all the way through 2024% to 25 or.

Ending the end of the queue there.

On end of service and then just quickly on margins.

Matthew Dodds: Sure. Thanks, Mike. So Osprey's as Bill said was on track. You know, we've talked about getting the enrollment completed in 24, six months follow up to your point. You know, it looks right now like kind of late 24, early 25, we'd get the data, you know, a little bit of time to analyze it.

To recap on the amount of R&D spend on recover.

And then under a scenario where.

You don't get an ideal readout, there I'm wondering where those R&D dollars be redeployed elsewhere in the business or would you let those fall to the bottom line.

Matthew Dodds: And that's why we've talked about a filing in 25. Okay.

Again, congrats on a good quarter here.

Unnamed Speaker: Got it. Thank you.

I think what I'd like to say in terms of and this we keep gating our models every single quarter.

Anthony Petrone: Next question comes from Anthony Petrone, Ultima Zeeva Group. It's now open. Please go ahead. Thanks. Maybe you got one on epilepsy and then I'll ask a little bit about margins. Maybe just a little bit more on on end of service. Another company is actually tracking those patients. Just wondering where you guys are in terms of how many patients are still in the queue for end of service. And would assume that that that most of those would would be if they choose to upgrade, they would upgrade its sentiva.

So we should have more information on that towards the beginning part of next year.

Due to the fact that a number of our patients are opting Teva and we launched in 2017. So we're starting to see defense replacement to say, we will continue to see a slightly higher and just identification because of that reason.

But we'll keep you updated with that.

Anthony on depression, the recover study burn is approximately call it $30 million on an annual basis.

And so to answer your question.

Anthony Petrone: And then I'll have a follow up on margins. Thanks, Anthony. I'm going to put that one over the step. Sure. Hi, Anthony. Nice to speak to you. So each quarter, we have an overview of our identification for both end of service and MPI. And I continue to be encouraged by what that looks like. And for sure, you're absolutely right. The end of service patients that we have coming through now are opting to move to our sentiva platform.

About how do we think about capital deployment for next year again as I said.

We'll update you guys.

Early in 2024 about how we're thinking about our budget and guidance for next year. Obviously, there is multiple scenarios as they relate to depression.

Anthony Petrone: So again, we're seeing incremental improvement. And that's the piece that you see around the mix and the change. So that's with end of service patients opting to move to our latest platform. And again, in terms of the tailwind, I mean, is cannot last all the way through 2024 into 25 or are you ending the end of the queue there on end of service. And then just quickly on margins, just to recap on the amount of R&D spend on recover.

But that compression will be fully funded throughout 'twenty four.

Unless we get some kind of.

Unexpected news in June of 2024, correct.

Thank you.

Hey, Thanks for the question.

Thank you.

Next question comes from Matt.

<unk> of Barclays. Your.

Your line is now open. Please go ahead.

Thanks, So much can you hear me okay.

We can good morning.

Terrific good morning, Thanks and.

And congrats on the quarter.

Hey, thanks.

Yes.

One question following up on some of the work that Youre doing with <unk>.

Anthony Petrone: And then under scenario where you don't get an ideal read out there, I'm wondering, were those R&D dollars be redeployed elsewhere in the business, or would you let those fall to the bottom line. Thanks again, congrats on a good quarter here. I think what I'd like to say in terms of end of service, we keep updating our models every single quarter. So we should have more information on that towards the beginning part of next year.

The influenza business and I guess, maybe Stephanie routine.

Is this something that.

Given that.

New implants in the quarter.

Seemed like the maybe dipped a bit.

You said it was in line with your expectation.

Just to give us a sense of the cadence for the year and how we should think about Q4 and now you're entering 2004 is that something we should expect to kind of sequentially improve or is there another quarter or two.

Anthony Petrone: Due to the fact that a number of our patients are opting to sentiva, we launched in 2017, so we're starting to see the first replacement to those. We'll continue to see a slightly higher end of service identification because of that reason. But we'll keep you updated with that. And Anthony, on depression, the recover study burn is approximately called 30 million dollars on an annual basis. And so, you know, to answer your question about how do we think about capital deployment for next year.

And soon internalizing some of the new the new programs.

Our pipeline concept.

With the improvement in trends into 2004, and then I had one phone.

Yes, Hi, Matt.

So if I look specifically at Q3 and the reason why I say on continue I continue to be encouraged by that to the consistent execution. When we look back towards Q2, we had a 13% increase in our NPI to that quarter.

Anthony Petrone: Again, as I said. You know, we'll update you guys, you know, early in 2024 about how we're thinking about our budget and guidance for next year. Obviously, there's multiple scenarios as they relate to depression. But that depression will be fully funded throughout 24 unless we get some kind of unexpected news in June of 2024. Thank you. Thanks for the question.

Unnamed Speaker: Thank you.

Is entirely in line with my expectations that we saw what we did in Q3 in fact, because all of us.

I continue to be encouraged you to the fact that we didn't see that.

Now when we look towards the fourth quarter.

I'll refer you back to the original full year guidance that we gave in terms of mid single digit for MPI.

And in the service so we anticipate normal run rate for the fourth quarter.

Okay.

Matthew Miksic: Our next question comes from Matt Miksic of Barclays. You're on it. It's now open. Please go ahead. Thanks so much. Can you hear me okay? We can. Good morning. Great. Terrific. Good morning. Thanks. And thank you. Glad to have you on the quarter. Hey, back.

Thanks for that and then just to follow up on.

Sort of cash.

Cash flows and maybe.

And the ability to sort of reinvest year, maybe priorities for reinvesting.

Some of them some of the R&D spend.

Stephanie Bolton: So yeah, just one question following up on some of the work that you're doing with Anthony at Bolognese Business. I guess maybe it's Stephanie or for the team. You know, is this something that you know, given that new implants in a quarter, you know, seemed like they maybe dipped a bit. You said it was in a line with your expectation.

And you are unwinding.

Of this year.

If you could provide any any color on your most recent thoughts I understand the strat plan.

Way in Brazil.

<unk> CEO.

Potentially coming on board soon.

We want to get ahead of that.

Your latest thoughts on that.

How to think about that and back to the P&L.

Alright.

Stephanie Bolton: Now, just to get us a sense of the cadence for the year and how we should think about, you know, Q4 and now you're entering 24, is that something we should expect to kind of sequentially improve or is there another quarter or two of answering, analyzing some of the new, the new programs and a pipeline concept that would put the improvements in transit into 24 when I had one file. Yeah. Hi, Matt.

What kinds of investments.

Matt This is Alex I'll take the.

Free cash flow.

We are our target for this year is 85% to $95 million of adjusted free cash flow.

Our our goal is to continue to drive cash conversion. That's that's what the organization is focused on.

That is assuming an expectation that we will continue to see improvements in.

Stephanie Bolton: So as I look specifically at Q3 and the reason why I say I'm continued, I continue to be encouraged by that sort of consistent execution is when we look back towards Q2, we had a 13% increase in our MPI for that quarter. So it is entirely in line with my expectation that we saw what we did in Q3. In fact, because I was, you know, I continue to be encouraged due to the fact that we didn't see a dip.

And profitability and working capital management.

As far as.

Capital deployment for next year, we're not ready to talk about that at this point, obviously there are multiple scenarios in terms of.

Success with depression and.

Getting us ready for a potential launch there we'll update you guys as we get into 2024 early in <unk>.

Stephanie Bolton: Now, when we look towards the fourth quarter, I'll refer you back to the original four year guidance that we gave in terms of mid-single digit for MPI and end of service. So we anticipate a normal and rate for the fourth quarter. Okay. Thanks for that.

The first quarter.

Okay fair enough. Thanks.

Okay. Thank you.

Thank you.

Next question comes from David <unk>.

David Your line is now open. Please go ahead.

Alex Shvartsburg: And then just to follow up on, on sort of, you know, cash flows and maybe the ability to sort of reinvest here and your maybe priorities for reinvesting. Some of the R&D spend that's that you're unwinding, you know, into the end of this year. You know, you could provide any color on your most recent thought. And I understand there's a strat plan in your way and there's a new CEO potentially coming on board soon.

Hey, guys. Thanks for.

Taking the question.

I wanted to start on athletes and kind of the margin contribution from from that segment I. Appreciate the comments around the pricing premium I know, it's really in the early days here still are just getting underway, but just wondering how we should think about maybe the contribution of our leverage from that product as that ramps and as.

As you move into 2024 and beyond just relative to the rest of the portfolio.

So.

This is.

As far as essence margins are concerned we expect sort of.

Alex Shvartsburg: And you want to get ahead of that, but you know, your latest thoughts on how to think about that and back to the analogy being redeployed, you know, for what kinds of investments. Thanks. Matt, this is Alex. I'll take the free cash flow. We, you know, our target for this year is $85 to $95 million of adjusted free cash flow. Our goal is to continue to drive cash conversion. That's what the organization is focused on. Um, um, that, that is, is assuming an expectation that we will continue to see improvements in profitability and working capital management.

Some margin improvement as we as we scale the volumes there.

The cost basis.

Slightly higher.

And we obviously compensate for that with our price premium.

This point essence.

Essence is it continues to ramp into 2024, we will have.

Mark margin improvement.

For the cardiopulmonary business.

Our capital business has a higher margin base.

Then our consumable business.

So slightly different perhaps from other companies but.

That's the way, we think about the business the essence, we will have a.

Alex Shvartsburg: As far as capital deployment for next year, we're not ready to talk about that at this point. Obviously, there are multiple scenarios in terms of success with depression and getting us ready for a potential launch there. What will update you guys as we get into 2024 early in the first quarter? Okay, Fair enough.

<unk>.

A strong.

Contribution to.

Our gross margin improvement in 2024.

David Rescott: Thanks. Thank you.

Okay. That's helpful. And then just to two quick follow ups I think some prior comments that you made actually at our conference.

Just wondering why I think the prior expectation maybe you had been to have a CEO replacement.

In place by January of 2024, So I'm wondering if that's still the expected timeline and then second I think we had asked in the past just about whether or not any of this concern or anything youre seeing around DLP ones are impacting the enrollment of the osprey trial. So just wonder if there's any updated thoughts on both of those thank you.

William Kozy: Our next question comes from David Rescott of Bad. David, your lunch is now open. Please go ahead. Hey guys, thanks for taking the question. I wanted to start on essence and kind of the margin of contribution from that side. When I appreciate the other comments around the pricing premium, I know it's really in the early days here still up just getting underway, but just wondering how we should think about maybe the contribution or leverage from that product as that ramps and as you move into 2024 and beyond just relative to the rest of the portfolio.

Hey, Thanks, I'll take the first one youre exactly right. We had talked back in in April at the time of my arrival about a six to nine month window and of course that nine month window, what would take us into the January time frame we're not.

As you would guess, we're not operating under any add deadline, we're going to find the right person.

We'll know that right person when we when we see them every effort has been made to get that person in sooner I would I want to make sure that that commitment is clear.

William Kozy: As far as essence, margins are concerned. We expect some margin improvement as we scale the volumes there. The cost base is slightly higher and we obviously compensate for that with our price premium at this point. Essence, as it continues to ramp into 2024, will have a margin improvement for the cardiopulmonary business. Our capital business has a higher margin base than our consumable business. It's slightly different from other companies, but that's the way we think about the business. Essence will have a strong contribution to our gross margin improvement in 2024.

At the same time, we'll find that right person.

And we won't be pushed by any time frames or calendars or anything so the board very sincerely committed to the spec as I mentioned, just a few minutes ago and I don't think were going to see us waiver from that now Matt would you comment on the <unk> one per share on the <unk> ones. We don't believe were seeing any.

Packed on the enrollment of Osprey and also you know the trial is relatively small 125 to 150 patients is our expectation so.

We're not we're not seeing anything.

Okay.

Okay, great. Thanks.

Hey, Thank you.

Thank you. Our next question is a follow up question from Michael Pullout of Wolfe Research your.

Your line is now open. Please go ahead.

Thank you for taking the follow up just one Alex.

William Kozy: Okay, that's helpful. And then just two quick follow-up on some prior comments that you may have actually at our conference. Just wondering, one, I think the prior expectation maybe had been to have a CEO replacement in place by January of 2024, so wondering if that's still the expected timeline. And then second, I think we had asked in the past just about whether or not I get this concern or anything you're seeing around GLP ones are impacting the enrollment of the SPRILES.

In your prepared remark, you said something about the tax rate.

Did you say, what's a good input in 'twenty four 'twenty five.

Yes, Thanks, Mike recall from our Investor day in December of 2021.

Kind of foreshadowed an increased tax rate at that time, we were saying that over the course of 2022% to 124, we'd expect Tac.

Tax rate to be in the range of 15% to 20%.

William Kozy: I just wonder if there's any updated thoughts on both of those. Thank you. Hey, thank you. I'll take the first one. You're exactly right. We had talked back in in April at the time of my arrival about a six to nine month window. And of course you would guess, you know, we're not operating under any deadline. We're going to find the right person. We'll know that right person when we see them.

We're going to see that happen in 2024.

So that's that's what I would recommend that you guys start modeling.

So I just wanted to be clear that this is.

For your adjusted reporting.

The adjusted tax rate goes from something like 10% this year to 15 or 20% next year and that's true.

Whats driving it I mean, what are what are the changes.

William Kozy: Every effort is being made to get that person in sooner. I want to make sure that that commitment is clear. At the same time, we'll find that right, and we won't be pushed by any time frames or calendars or anything so the board's very sincerely committed to the spec as I mentioned just a few minutes ago and I don't think we're going to see his waiver from that.

Yes.

That is correct. The changes are we were enjoying.

A very low tax rate today.

It's very different versus if you look at some of our competitors and.

We expect that.

Kind of normalizes.

Some of our tax planning.

Lose the benefits of some of the tax planning that we've enjoyed over the last few years.

Matthew Dodds: Now Matt would you comment on the GLP one please? Sure on the GLP ones we don't believe we're seeing any impact on the enrollment of Osprey and also the trial is relatively small 125 to 150 patients as our expectations so we're not we're not seeing anything. Okay great thanks. Hey thank you. Thank you.

Yeah.

Okay.

Bill.

Yes, it feels like a big step up so okay. I appreciate the comments. Thank you.

Thank you.

Thank you at this time, we currently have no further questions. So I'll hand, it back to Bill Cosby for any further remarks.

Thank you everyone for joining us on today's call on behalf of the entire team. We appreciate your support your interest and leave it out.

Michael Polark: Our next question is a fellow question from Michael Polark of Woolf Research. Your line is now open please go ahead. Okay thank you for taking the follow just one Alex I thought in your prepared remarks you said something about the tax rate. What did you say? What's a good input in 24 or 25? Yeah thanks Mike. Recall from our investor day in December of 2021 we we kind of foreshadowed an increased tax rate at that time we were saying that over the course of 2022 to 2024 we'd expect tax rate to be in the range of 15 to 20% where we're going to see that happen in 2024 so that's that's what I would recommend that you guys start modeling.

You.

Thank you for joining us.

Michael Polark: So I just want to be clear to this is for your adjusted reporting the adjusted tax rate goes from something like 10% this year to 15 or 20% next year and if that's true what what's driving it I mean what are what are the changes? Yeah that's that is correct the changes are we we're enjoying a very low tax rate today it's it's a very different versus if you look at some more competitors and you know we expect that kind of normalize as some of our tax planning we lose the benefits of some of the tax planning that we've enjoyed over the last few years. Okay it's just that feels yeah feels like a big step up so okay I appreciate the comments thank you.

William Kozy: Hey thank you thank you at this time we can only have no further questions so I'll head back to Bill cozy for any further remarks.

William Kozy: Thank you everyone for joining us on today's call on behalf of the entire team we appreciate you support your interest in leaving over thank you.

Unnamed Speaker: Thank you for joining today.