LivaNova Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the LivaNova Plc 4th Quarter and Full Year 2023 Earnings Conference Call. My name is Emily, and I'll be moderating your call today. After the presentation, there will be the opportunity for any questions, which you can ask by pressing star followed by the number 1 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.

Operator

Matthew Dodds, LivaNova's Senior Vice President of Corporate Development and IT. Please go ahead, sir.

Speaker 1

Thank you, Emily. Welcome to our conference call and webcast discussing LivaNova's financial results for the Q4 full year of 2023. Joining me on today's call are Bill Cozzi, our Chair of the Board of Directors and Interim Chief Executive Officer Alex Schwartzberg, our Chief Financial Officer Stephanie Bolton, President of Global Epilepsy and Brianna Gottlin, 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 financial filings and documents furnished to the SEC, including today's press release that is available on our website.

Speaker 1

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 measures

Speaker 2

can be found

Speaker 1

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 other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News, Events and Presentations at investor. Livanova.com.

Speaker 1

With that, I will now turn the

Speaker 3

call over to Bill.

Speaker 4

Thank you, Matt, and thank you, everyone, for joining us. Welcome to LivaNova's conference call for the Q4 full year of 2023. Before turning to results in the Q4 full year, I'll start off with some comments on the naming of Vlad Makatsarya as CEO, our decision to wind down the Advanced Circulatory Support segment and an update on the cybersecurity incident. Earlier this month, the Board appointed Vlad as the company's CEO and a member of the Board of Directors effective March 1. Vlad most recently served as a company group Chairman at J&J Medtech, leading its global Ethicon Surgery business.

Speaker 4

He's a respected leader in the medical technology industry with a 27 year track record of delivering results, driving innovation and leading high performing teams. The Board and I have great confidence that Vlad is the right CEO to advance LivaNova's strategic plan and achieve our goals for long term growth. I will continue in my role as LivaNova Board Chair and of course look forward to supporting Vlad as our new CEO. In January, we announced the wind down of the ACS segment. As part of this decision, ACS standalone cannula and accessories will move into our cardiopulmonary segment during the Q1.

Speaker 4

This portfolio decision allows us to focus on our core cardiopulmonary and neuromodulation businesses, which are well positioned for growth and value creation. We expect the wind down to result in a positive contribution to adjusted operating income in 2024 as compared to 2023. We delivered strong performance despite the previously disclosed cybersecurity incident. Later in the call, Alex will provide comments regarding the estimated impact to our financial results during the quarter. Importantly, we were able to bring all our manufacturing operations back online as noted in our prior disclosures.

Speaker 4

I must extend sincere appreciation to our LivaNova colleagues around the world who responded with urgency and extraordinary dedication. Thank you. For the remainder of the call, I'll discuss our Q4 and full year results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and 2024 guidance. I'll wrap up with some closing remarks before moving on to Q and A.

Speaker 4

In the quarter, we achieved 12% revenue growth versus the prior year. This performance was driven by the cardiopulmonary and neuromodulation businesses with particular strength in the Europe and U. S. Regions. On a full year basis, we achieved 13% revenue growth versus the prior year marked by double digit growth across all regions.

Speaker 4

Notably, we delivered on our commitment to modest leverage, achieving 17% growth in both adjusted operating income and adjusted diluted earnings per share. Now turning to segment results. For the Cardiopulmonary segment, revenue was $162,000,000 in the quarter, an increase of 17% versus the Q4 of 2022. Heart Lung Machine revenue increased more than 40%, primarily driven by Essence sales in the Europe and U. S.

Speaker 4

Regions. We were pleased to see a meaningful sequential ramp in Essence sales during the quarter with strong placements and pricing execution. Oxygenator revenue grew in the mid single digits driven by customer demand and price. As previously noted, the oxygenator business faces capacity constraints and the team made significant efforts in the quarter to mitigate the disruption from the cybersecurity incident, including working additional shifts on weekends and holidays. Cardiopulmonary revenue for the full year was $589,000,000 and grew 18%.

Speaker 4

We expect cardiopulmonary revenue to grow 6% to 7% for full year 2024. Our forecast incorporates strong HLM growth, which will be offset by slower growth in disposables due to the current capacity constraints. Our recent efforts to expand oxygenator capacity are now expected to provide some benefit in the second half of the year. Epilepsy revenue increased 8% versus the Q4 of 2022. The U.

Speaker 4

S. Epilepsy revenue increased 8% year over year with growth in both new and replacement implants. We achieved 856 new patient implants in the quarter, representing 6% growth versus the prior year. We realized 1982 replacement implants, representing 10% growth versus the prior year, an unusually high growth rate. Epilepsy revenue in Europe and the rest of the world grew 7% versus prior year.

Speaker 4

For the full year, epilepsy revenue increased 10%. Notably, U. S. Epilepsy achieved 3,300 new patient implants in the full year, representing 7% growth versus the prior year. Replacement implants reached 7,000 608 for the full year, also a 7% increase, which was higher than expected.

Speaker 4

For the full year 2024, we expect global epilepsy revenue to grow 6% to 7%. Our forecast incorporates a continued mid single digit growth for U. S. New patients and more normalized low single digit growth in replacements. ACS revenue was $10,000,000 in the quarter, an increase of 5% versus the Q4 of 2022.

Speaker 4

ACS revenue for the full year was $40,000,000 and grew 3%. As previously noted, the wind down of the ACS segment is anticipated to be substantially complete by the end of 2024. Alex will comment on the financial impact of the ACS wind down later in the call. DTD revenue for the Q4 was $2,000,000 and for the full year was $7,000,000 For 2024, we anticipate DTD revenue of approximately $7,000,000 primarily from the RECOVER study. The RECOVER study does continue.

Speaker 4

As a reminder, enrollment for the unipolar cohort of the study has been completed. We anticipate the receipt of the 12 month follow-up data for the 500 unipolar patients in June of 2024, after which we will conduct a final analysis. We continue to expect the publication of this study results by late 2024. The bipolar cohort continues to enroll as expected. Moving to OSA, the OSPREY trial continues to progress with all 25 study sites recruiting patients.

Speaker 4

In heart failure, the closeout of the ANTHEM clinical study is substantially complete. Overall R and D spend related to heart failure in 2023 was $25,000,000 the majority of which occurred in the first half of the year. With that, I'll turn the call over to Alex.

Speaker 3

Thanks, Bill. During my portion of the call, I'll share a brief recap of the 4th quarter results. I'll offer additional details on the one time charges in connection with the cybersecurity incident and the wind down of the ACS business. I'll also provide commentary on the 2024 guidance. Turning to results.

Speaker 3

Revenue in the quarter was $310,000,000 an increase of 12% versus 2022. Foreign exchange in the quarter had a favorable year over year impact of approximately $3,000,000 or 1% of revenue. Adjusted gross margin as a percent of net revenue was 68% compared to 69% in the Q4 of 2022. The cybersecurity incident impacted adjusted gross margin by approximately 100 basis points due to unfavorable labor costs and fixed overhead absorption. This was partially offset by higher volume and favorable product mix.

Speaker 3

Adjusted R and D expense in the Q4 was $42,000,000 compared to $43,000,000 in the Q4 of 2022. R and D as a percent of net revenue was 14%, down from 16% in the Q4 of 2022. The year over year decrease was largely driven by lower costs associated with the closeout of the ANTHEM trial. Excluding the costs related to ANTHEM, our R and D investment increased 9% versus prior year. Adjusted SG and A expense for the Q4 was $120,000,000 compared to $100,000,000 in the Q4 of 2022.

Speaker 3

The year over year increase was driven by targeted investments supporting the Essence launch, legal expenses and variable costs such as freight and commissions associated with increased revenues. Additionally, our short term incentive plan accrual increased resulting from the business over performance. SG and A as a percent of net revenue was 39% as compared to 36% in the Q4 of 2022. Adjusted operating income was $48,000,000 compared to $47,000,000 in the Q4 of last year. Adjusted operating income margin was 16% compared to 17% in the Q4 of 2022.

Speaker 3

The cybersecurity incident negatively impacted adjusted operating income margin by approximately 100 basis points due to disruption to our cardiopulmonary manufacturing sites. Adjusted effective tax rate in the quarter was negative 3% and in line with the Q4 of 2022. The tax rate was impacted by the release of a valuation allowance. Adjusted diluted earnings per share was $0.87 compared to $0.81 in the Q4 of 2022. Our cash balance at December 31st was $267,000,000 up from $214,000,000 at year end 2022.

Speaker 3

Total debt at year end 2023 was $587,000,000 up from $542,000,000 at year end 2022. The increase in total debt was driven by the delayed draw of $50,000,000 on the Term Loan A facility that we put in place in July 2022. Net debt including restricted cash at year end was $48,000,000 Adjusted free cash flow for the quarter was $60,000,000 up from $31,000,000 in the prior year period. The year over year increase was driven mostly by higher income and improvements in working capital. Capital spend was $35,000,000 in 20.23 compared to $27,000,000 in the prior year.

Speaker 3

The increase was driven by IT systems and cardiopulmonary manufacturing infrastructure investments. In connection with the cybersecurity incident, the company incurred costs of approximately $2,600,000 in the 4th quarter, which are excluded from our adjusted operational results. These costs primarily included external cybersecurity experts, legal counsel and system restoration costs. We continue to monitor developments of the ongoing investigation and may incur additional costs related to this incident. With respect to the wind down of the ACS business and transition of certain products into cardiopulmonary, we recorded a pre tax non cash impairment charge of $103,000,000 during the Q4, which is excluded from our adjusted operational results.

Speaker 3

We expect to incur additional restructuring charges in the range of approximately $15,000,000 to $20,000,000 the majority of which will be recognized and paid in 2024. Also effective in the Q1 of 2024, we are reorganizing our operating and reporting structure from 3 to 2 segments, cardiopulmonary and neuromodulation. The ATS standalone cannula and accessories will be included within the cardiopulmonary reportable segment. The remaining ATS business will be included within other. Now turning to 2024 guidance.

Speaker 3

We forecast 2024 revenue growth on a constant currency basis between 4% 5% and between 6%

Speaker 5

7% when excluding the portion of the

Speaker 3

ACS business that we will be exiting. Foreign currency is expected to be negligible based on the current exchange rates. We expect the wind down of the ACS business to result in a positive contribution to adjusted operating income in 2024 as compared to 2023 with an impact of approximately $0.10 in EPS. With the close out of the Anthem clinical study substantially complete, we expect the reduction in R and D spend related to the heart failure program to result in a positive contribution to adjusted operating income in 2024 as compared to 2023 with an impact of approximately $0.35 in EPS. The global tax landscape continues to evolve and will impact our adjusted effective tax rate in 2024.

Speaker 3

We anticipate a full year adjusted effective tax rate of approximately 21%. Applying this rate to 2023 earnings results in an unfavorable impact of approximately $0.45 in EPS. We are projecting adjusted diluted earnings per share in the range of $2.95 3.05 with adjusted diluted weighted average shares outstanding to be approximately 55,000,000 for the full year. Despite the unfavorable impact caused by the step up in our adjusted effective tax rate, the CPS range represents growth of 7% at midpoint. We recognize that there are a number of moving parts in our 2024 EPS guidance.

Speaker 3

To be clear, the step up in our effective tax rate will have an unfavorable impact on our EPS results. However, our portfolio optimization actions including the wind down of the ACS segment and the heart failure program enable us to manage this impact. Adjusted free cash flow is expected to be in the range of $95,000,000 to $115,000,000 an increase of approximately 9% at midpoint versus the prior year. This range includes a meaningful step up in capital spending, which we forecast to be approximately $60,000,000 This increase is driven by critical investments to support innovation, growth and infrastructure. In addition, our cash flow projections include the costs associated with the ACS wind down.

Speaker 3

In summary, I'm encouraged by the company's execution and financial performance in 2023, which included double digit revenue growth along with a 50 basis point of operating margin improvement. This 2023 performance was achieved while investing in critical capabilities for the company, including manufacturing infrastructure and IT modernization, as well as managing the impact of our business operation as a result of the cybersecurity incident. These actions position us well for 2024. Our guidance implies adjusted operating income growth of approximately 25%, an improvement of 300 basis points in adjusted operating income margin. Excluding both heart failure and ACS benefits, adjusted operating income growth would have been 10%.

Speaker 3

This builds upon our consistent 3 year trend of operating leverage improvement with 14% operating margin in 2022, 15% in 2023 and a commitment to achieving greater than 17% in 2024. And with that, I'll turn the call back over to Bill.

Speaker 4

Thank you, Alex. In 2023, we exceeded full year guidance on the top and bottom line and did generate operating leverage. We realized these results while maintaining full investment in our pipeline initiatives, investing in critical capabilities for the company as mentioned and taking actions related to portfolio optimization. I certainly want to take the chance to thank our entire organization for their hard work and dedication demonstrated in 2023. Under interim leadership, the organization embraced some change and sees performance opportunity as reflected in these results and that has been very much appreciated.

Speaker 4

Looking ahead, our core businesses are focused on targeted innovation, sustained growth and value creation. Additionally, our SPIs are fully funded with data milestones approaching. With Vlad as CEO, I have great confidence in his leadership and that LivaNova will maintain momentum, achieving our commitments to serving patients while creating shareholder value. With that, Emily, we're now ready to open the call for questions.

Operator

Thank Our first question today comes from Rick Wise with Stifel. Please go ahead.

Speaker 6

Good morning, everybody. Hi, Bill, and welcome, Vlad. Maybe it's hard to resist starting off since it's the first time I'm having the pleasure of speaking to you. Maybe you could talk us through at a high level your priorities as you step into the role as broadly or deeply as you'd like on in terms of operational goals or innovation, the strategic pipeline? I mean, who are you?

Speaker 6

And what should we expect from your leadership? Thank you so much.

Speaker 1

Hey, Rick, it's Matt. When I gave you initial intros, Vlad was not on there. He starts March 1, so he's not on the call. But Bill could comment on

Speaker 3

It's okay.

Speaker 1

But Bill can comment briefly on initially some thoughts on Vlad.

Speaker 4

Sure. Let me jump in and we talked to you over several months about the spec that the Board had and the standard that they had created for this hire. As I mentioned a little bit, we've got somebody, Vlad, coming in to lead the company with 27 years of experience, including significant time living and working around the world internationally, a career that moved Moscow to Singapore to London to New York in a major healthcare company. He not only checked all the boxes on the spec, he's been accountable for a multi $1,000,000,000 global business with more than 15,000 employees, overseeing all commercial R and D, operational and supply chain activities. His proven interest in vision strategy, innovation, talent, market access and execution, closely aligned with the requirements that we had set in place for the role.

Speaker 4

As you know, Rick, we took a lot of questions about the timing of the hire. We just wanted to emphasize that we intentionally tried to stick to our specification. And speaking on behalf of the Board, I know that the entire Board is extremely pleased with Vlad's decision to join LivaNova.

Speaker 6

That's great. That's great to review. And Bill, I should have started with congratulations on all you've done in taking LivaNova to this point. It's really impressive. Just as a follow-up question, maybe take us through the current competitive situation on the oxygenator side.

Speaker 6

And again, help us think through your capacity expansion. Where are you where can it be? I think you said, if I heard correctly, we're going to say expansion in the second half. But do you have any sense that competitors are coming back just level set us in that whole business? Thank you so much.

Speaker 4

Yes. Thanks, Rick. That's a good question and one on it's front and center here. First of all, at this point in time, nothing has really changed on the competitive side. We still as we've mentioned to you before, we had one smaller competitor whose position it continues to dissipate.

Speaker 4

We have a major competitor who has not yet, returned to the market. We don't have a timeframe on that. All of our best efforts in the field to determine that remain just still uncertain. Part of the capacity thing, we told you we were going to work and we've identified several process improvements within the manufacturing operations to increase capacity. And we're right now taking actions to implement those.

Speaker 4

We're not ready yet to predict the level of improvement that we'll get, but we are confident that in the second half of the year, these benefits will start to have some positive impact to upscale our ability to supply.

Speaker 6

Great. Thank you.

Speaker 4

Thanks, Rick.

Operator

The next question comes from Anthony Petrone with Mizuho. Please go ahead.

Speaker 5

Thanks and congratulations Bill on the role as interim and Vlad coming in here shortly as of March 1. Maybe just a follow-up on Thank you. You're welcome. First question would be a follow-up on oxygenators just as we look over the next few years. And again, wondering how much share actually has the company gained and how sticky can that be if and when competitors do come back?

Speaker 5

And then I'll have a couple of follow ups on guidance.

Speaker 4

Sure. We there's kind of tried to benchmark us, Anthony, at 30%, maybe about 15 to 18 months ago, our best guess and let me underline the words best guess is we might be sitting right now in the mid-30s somewhere. We know that about half of our high volume business is tender based. And so we know that we've got a good, steady position there. Our challenge will, of course, be to sustain our current revenue position in the non tender oxygenator business.

Speaker 4

And our sales force is highly aware of that and has got significant focus on that. You'll get nothing but a best effort to sustain that business. And we are particularly well organized in those growth markets I talked about before to do that.

Speaker 5

That's helpful. Maybe Alex, just a little bit on guidance. When we look at the earnings bridge for 2024, you have additional tax inflation in there, but you are seeing some benefits still residual from heart failure. And then ACS. I think you called $0.10 out for ACS.

Speaker 5

Just maybe to look at that relative to where that business has been running from a cost standpoint, is that the early benefits? And should we expect sort of a bigger step up once that's fully annualized again because the timing here is suggesting that the operations won't be fully wound down until the end of the year. So just a little bit on the earnings bridge and the moving pieces. Thank you.

Speaker 3

That's right, Anthony. So the ACS wind down is this is I'll call it a transition year. In 2023, the business incurred approximately $14,000,000 of losses. So we're essentially as part of the wind out, we expect to see significant improvements in that year over year and then next year realize the full benefit of that.

Speaker 5

That's helpful. And then just one quick one, I'll get back in queue. Just the phasing of that, is it gradual or are there certain sort of features of that wind down that can happen sooner or should we just be thinking this is all back end loaded just in terms of phasing it out through calendar 2024? Thanks again.

Speaker 3

It's going to be it's not fully back end loaded, but it's going to happen in the last three quarters of the year.

Speaker 5

Thanks again.

Speaker 4

Sure.

Operator

Our next question comes from Michael Pollack with Wolfe. Please go ahead.

Speaker 3

Hey, good morning. Question on

Speaker 7

the cardiopulmonary guidance for 2024, 6% to 7% growth. Can you confirm, Alex, is that that's apples to apples, it has no benefit from the cannula and accessories from ACS?

Speaker 3

That's correct, Mike. The cannula business, we will recast all the results at the end of Q1. So we'll have apples to apples comparisons. This guide is assuming an apples to apples comparison. The growth profile of that line of products is roughly the same as the broader cardiopulmonary portfolio.

Speaker 3

So from a growth perspective, it's apples to apples.

Speaker 7

And ACS is $40,000,000 last year. If I look at how you guided this year, it kind of implies $20,000,000 of ACS is being exited, the 2% give or take. Does that mean this annual in accessories in total on a full year basis last year was about 20,000,000

Speaker 3

dollars It's I'll give you the exact number. It's $15,000,000

Speaker 7

Okay. Okay. I think that was my first topic. The second is just this step up in CapEx. I heard critical investments in innovation, growth, infrastructure, those are fairly generic terms.

Speaker 7

What exactly does it mean? It sounds like oxygenator capacity, definitely. Is there anything else that I'm thinking specifically about depression and or sleep readiness investments? Thanks for taking the questions.

Speaker 4

Hey, Mike, it's Bill. Let me grab that one. You hit the first one perfectly. Yes, it's Oxy capacity and significant planning going on right now and particularly in the main facility in Mirandola to address that. Additionally, we already had some commitment to improve our IT infrastructure.

Speaker 4

The event, the cyber event really encouraged us in a very serious way, okay, to look even more broadly at our systems. So you will see an uptick in our IT investment. As a percent of sales for LivaNova, you'll see us moving a couple of basis points north of where we've always operated as we, number 1, strengthen our security position and number 2, modernize a number of targeted systems, which were natural entry points for other threat actors. Those are high priorities for us.

Speaker 3

Yes. I would just add to that, Mike, in that we're really focused on modernizing our ERP systems as well. We had that in kind of our long range 3 year plan. We're also accelerating those efforts into 2024.

Speaker 7

Thank you. Thanks Mike.

Operator

The next question comes from Matt Taylor with Jefferies. Please go ahead.

Speaker 8

Hi, thanks for taking the question. So I just wanted to clarify on your comments on the depression study. You mentioned that you'll get the results in June. Are we still going to see the results in June? Or might we have to wait till July?

Speaker 8

That's the first question. And then, I guess just thinking about the different scenarios, can you talk about what you might do in kind of middle of the road or less good scenarios? We know what you'll do if the trial is successful and build behind that. But what are you going to do if you have kind of a mixed result or a poor result? Can we see savings like we've seen with heart failure and ACS?

Speaker 8

Or what's the middle of the road scenario mean for

Speaker 1

spending? So yes, so let me start, Matt. It's Matt. So for the timing, as Bill said, we'll get the data in June. Our plan is to release the top line data, but we still have to get confirmation from other critical parties, including who's publishing it, CMS, before we can confirm that.

Speaker 1

So worst case, again, as we've said, you'll see it when the publication comes out likely at the end of the year, but the hope is we can release it in a timely manner. In terms of the way to think about the trial, there's a lot of data points, right. So we talked about the primary endpoint time and response. There's multiple other endpoints, multiple other things we're looking at. CMS cares about several other endpoints.

Speaker 1

So it's really hard to say right now how we can what we would do with the data until we see it. I don't know, Bill, if you want to comment on if the data doesn't read out in a favorable way at all, if there's a different path.

Speaker 4

Yes. The only thing we'd add to that, this as everybody knows the whole way that this was a high bar set by CMS. And the number of endpoints in a randomized clinical trial of this type, again, confirms the high expectations that were there. We've already had Jonathan and his team taking the time to just take a look at scenarios that might depict the data outcome. And of course, you could say, well, we're going to hit every endpoint.

Speaker 4

And by the way, that's a possible scenario, but let's wait and see. You may not hit a couple of those and then you're into that ambiguity situation, which I think you were starting to get at. That's the work that we still got to do. But without the data, and without some specific direction from CMS, it's really hard for us to say exactly what's going to happen because it's we want to do the work once we've seen the data too. We are blinded.

Speaker 4

We've told everybody a number of times that this is the part where it gets a little more frustrating to wait.

Speaker 1

We're getting closer.

Speaker 4

We're getting there.

Speaker 2

Thanks for the talk guys.

Operator

The next question comes from Adam Maeder with Piper Sandler. Please go ahead.

Speaker 9

Hi guys. Congrats on the finish to the year and thank you for taking the questions. I wanted to pick up on that same topic, depression and SPIs and maybe I'll ask it a little bit differently. But just trying to understand what is the level of SPI spend for depression in OSA that's baked into the guidance for 2024? And specifically wondering if the guidance accounts for some of the preparatory costs to push forward assuming a positive trial in depression?

Speaker 9

And then I had a follow-up or 2. Thanks.

Speaker 3

Hey, Adam, it's Alex. So we spent roughly $32,000,000 in 2023. We are anticipating a modest increase on that spend in 2024. The level of spend really depends on just how compelling the data is. And once we know as to how the trial is trending and the results in June, we'll make a definitive decision around the level of investment.

Speaker 4

And the market there was an interest there was a sub question there is there anything hidden?

Speaker 3

There's a small amount of market development spend incorporated into the guide. And OSA? OSA. Yes. And as far as OSA goes, we spent roughly $27,000,000 in 2023.

Speaker 3

We expect a modest step up in investment in that program as well as we continue to enroll and follow patients through the end of the trial.

Speaker 9

That's great color. Thank you for the clarification there. And if I for my second question, wanted to flip over to CP and the outlook for 2024, the 6% to 7% growth. I heard some of the prepared remarks, but I was hoping you could put a little bit of a finer point on what's assumed in that guidance for HLM growth versus oxys? What are you assuming for the oxygenator competitor issues?

Speaker 9

And then just one clarification on a cybersecurity incident in Q4 of last year. What was the revenue impact and reasonable to assume that was more on the CP side of the business? Thanks for taking the questions.

Speaker 3

All right. Let's take this one at a time. So as far as the guide goes, we expect double digit growth in the heart lung segment in our guide. The guide also assumes that due to the capacity constraints and our expected benefits, as Bill mentioned in the second half, a modest sort of low to mid single digit growth rate on the consumables.

Speaker 9

That's helpful Alex. Any

Speaker 7

yes, go ahead. Sorry.

Speaker 3

What was the second part

Speaker 2

of the question? Just wanted

Speaker 9

to clarify the cyber security impact in Q4, from a revenue standpoint, what did that look like? And I think that was on the CP side of the business, but wanted to confirm that. Thanks.

Speaker 3

That's right. So the incident impacted the oxygenator production. We lost about a week of production. Kind of hard to track exactly the impact on revenue because it really depends on how the inventory flows and when you expect to see the sort of the capacity constraint or the inventory constraint that would result in lost revenue. It wasn't material.

Speaker 9

Got it. Thanks, Alex.

Operator

The next question comes from Mike Mattsman with Needham. Please go ahead.

Speaker 10

Yes, good morning or good afternoon. So just in terms of the tax rate, I think before you talked about kind of 15% to 20%, now you're looking at like 21%. So I guess why did it end up being higher than you expected? And is this mainly due to Pillar 2 or is there something else going on? And then have you I'm assuming you haven't baked anything in for the stock based compensation benefit into that 21% guidance?

Speaker 3

So the when we're looking at the range at a point in time, Mike, it was really difficult to predict because the tax rate is a function of jurisdictional profitability. So as we got closer to exiting 2023 looking at projections for 2024, we got a better sense for how the mix of profitability will work out. 21% is our best estimate at this point in time. And yes, I'm not sure I understand your question around the stock based compensation.

Speaker 10

I just thought that typically there's some kind of tax benefit from stock based comp, but companies generally don't factor that into their guidance for tax rate, it's kind of unpredictable.

Speaker 3

Yes, let us come back to you and I will follow-up on that if that's okay with you.

Speaker 10

Yes, sure. And then just wondering what you've assumed in the guidance for gross margin benefit from Essence, just given the price premium there, is it going to help your gross margin in 2024? And how much do you think that will help?

Speaker 3

Yes. It absolutely supports a gross margin improvement. We're expecting a modest gross margin improvement of about, call it, 100 basis points year over year overall as a company. So Essence plays a major role in that.

Speaker 10

Okay, got it. Thank you.

Speaker 2

You're welcome.

Operator

Our next question comes from David Rescott with Baird. Please go ahead.

Speaker 2

Hey guys, thanks for taking the questions. I wanted to start on the neuromod segment. I think the guide that you called out maybe was this mid single digit new patient growth and low single digit replacements, but ultimately getting to I think the 6% to 7% guide for the segment as a whole. So just I think if you do the math, you're getting to something at or below that 6% to 7%. So wondering if pricing is a piece there, if I'm understanding the way in which you laid out guidance for neuromod specifically.

Speaker 2

And then I think the segment itself done better in 2023. And you've talked about the inability for that kind of higher level of growth to be sustainable. So just wondering where we stand from that point. Are we at a point at which neuromod is seeing some structural changes to the replacement cycle or to the new implant cycle where we can start to think about better growth in neuromod, just any color there would be helpful.

Speaker 7

Take that one. Steph

Speaker 4

will take that.

Speaker 11

Hi David, I'll take that. So in regards to the epilepsy business for U. S. MPI, so we're continuing to forecast that would be mid single digit. You're right when you talk about the U.

Speaker 11

S. Sort of end of service elements. So we expect to return to a more normalized low single digit rate, But we still expect to see the international region continuing to grow low double digits. So that's why you've got the sort of 6% to 7% there. We do continue to model end of service, and every quarter we do a bit of a refresh on some of our expectations there.

Speaker 11

And as I say, our latest data tells us that we'll be experiencing more normalized end of service in 2024. As a reminder, 2022 was a really favorable comparison to 2023 and our performance in 2023 has been very positive. So we do expect to see the growth rate become much more normalized as we move through 2024.

Speaker 2

Okay. And then just to follow-up, I know it's been a while since we talked about the Italian reserves. So just wondering where we stand and can you give us an update around what the timeline is there? And then maybe what you're potentially thinking about longer term around the flexibility, the balance that that could open up if and when that kind of moves to the rear view? Thank you.

Speaker 3

Hey, David, it's Alex. So with regard to the Smea litigation, we're awaiting a binding decision from the European Court of Justice. We actually expect that readout in 2024. That will then funnel its way into the Italian Supreme Court. And so we expect the Italian Supreme Court to incorporate an issue of decision in response to all the appeals of LivaNova and the counter appeals.

Speaker 3

So that may make its way into 2025. With regards to the capital structure around this, as you know, we took on the Term Loan A in 2022. That was the funding that we kind of ring fenced to serve a potential liability. At this point in time from an accounting perspective, we haven't booked a liability because we've not have any indication that we will be liable. But we have the appropriate funding and cash to support a negative judgment against us.

Speaker 10

Okay. Thank you.

Operator

The next question comes from Matt Miksic with Barclays. Please go ahead.

Speaker 12

Hey, good morning. Thanks for taking the questions. And congrats on a great finish to 2023. I had one follow-up on the neuromodulation business and epilepsy. I'm just wondering if you could give any sense on following up in the comments on market trends and sort of market sort of stabilization, I guess, normalization in 2024.

Speaker 12

Where are we or how are you feeling about the changes that you've made the sales organization, to the selling process, to the way in which you're focusing your focus on different centers around epilepsy in the U. S. And the benefits that you're seeing there, how sustainable they are? And then I have one follow-up.

Speaker 11

Sure. Thanks for that Matt. I continue to be really pleased around the consistent execution and our financial performance certainly reflects that. And I think when we look towards how we're structured, it's, I've dug in a lot over the past 9 months since being in this role. And where we are fully staffed and disciplined in our execution, we do see consistent growth over the base business with our key accounts and how we've structured ourselves over the past couple of years.

Speaker 11

So I'm really pleased to see that group continuing to perform well and perform over the base. But one point I would like to make is our strategy is sort of broader than the sales force structure. And in combination with our territory design, we've been making big efforts around expanding our partnership with our physician base. In fact, we have our 1st scientific advisory board coming together for the first time over this coming weekend. And you'd be highly impressed by the caliber of those members.

Speaker 11

So more to come. So consistent execution is the way forward for us in the epilepsy side of the business, but also more to come in regards to our partnership with our physician base as well.

Speaker 12

Thanks for that. And I've been hopping back and forth here between a couple of calls. So I apologize, Bill and Alex, if you've already kind of talked about it. But would love to get a sense of where things stand with the strap plan as Vlad gets ready to step into his new role. Is that a Q1 call kind of communication for us?

Speaker 12

Or is that a Q2? Any kind of update? And again, apologies if you've already gone through that, Phil.

Speaker 4

No, no, Matt. Glad to take that call. At this point with Jim, we're just a little over a week away from Vlad starting. All the orientation discussions we've had, he seems pretty comfortable with the current state of the company, but he will of course be fully encouraged by the board and personally by me to bring any and all ideas forward. The company would traditionally go a little deeper on its strategic planning effort as the early summer approaches.

Speaker 4

So the timing for him is great. He gets here in May. He's got a couple of months to get grounded. That process starts up pretty active in June, July. And to be clear, he has full CEO responsibility, including strategy.

Speaker 4

And so the process and the approach that he wants to bring on March 1st is going to get full support from the Board.

Speaker 12

Got it. I look forward to that. Thanks so much.

Speaker 4

Sure. Thanks.

Operator

We have no further questions. I'll turn the call back to Bill Cozzi for closing remarks.

Speaker 4

Thank you. We thank everyone for joining us on today's call. On behalf of the entire team, we appreciate your support, your interest in LivaNova. Thanks again.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

Powered by Quartr

Key Takeaways

  • The Board appointed Vlad Makatsarya as CEO effective March 1, bringing 27 years of global MedTech leadership to drive LivaNova’s strategic plan and long-term growth.
  • LivaNova will wind down its Advanced Circulatory Support segment by end-2024, migrating cannula and accessories into cardiopulmonary, and expects this to boost 2024 adjusted operating income versus 2023.
  • Despite a cybersecurity incident that cost ~$2.6 million in Q4 and briefly disrupted oxygenator production, LivaNova fully restored manufacturing and installed mitigation shifts to minimize impact.
  • For FY 2023, the company delivered 13% revenue growth (12% in Q4) with double-digit gains in cardiopulmonary and neuromodulation, achieving 17% growth in both adjusted operating income and diluted EPS.
  • 2024 guidance calls for 4%–5% revenue growth (6%–7% excluding ACS), adjusted EPS of $2.95–$3.05, a ~21% tax rate headwind, and $95–115 million in free cash flow with elevated investments in IT and manufacturing capacity.
A.I. generated. May contain errors.
Earnings Conference Call
LivaNova Q4 2023
00:00 / 00:00