LivaNova PLC (NASDAQ:LIVN) Q1 2024 Earnings Call Transcript May 1, 2024
LivaNova PLC misses on earnings expectations. Reported EPS is $-0.77593 EPS, expectations were $0.45. LIVN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the LivaNova PLC First Quarter 2024 Earnings Conference Call. As a reminder this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Matthew Dodds LivaNova’s Senior Vice President of Corporate Development and IT. Please go ahead, sir.
Matthew Dodds: Thank you, Candace, and welcome to our conference call and webcast discussing LivaNova’s financial results for the first quarter of 2024. Joining me on today’s call are Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors; Alex Shvartsburg, our Chief Financial Officer; Stephanie Bolton, President of Global Epilepsy; and Briana Gatlin, 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.
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 revenue results, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today’s call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News Events and Presentations at investor.livanova.com.
I would like to welcome Vlad to his first earnings call as LivaNova’s CEO after starting March 1st. Prior to joining LivaNova, Vlad most recently served as company Group Chairman at Johnson & Johnson Medtech, leading its Global Ethicon Surgery business. He’s a respected leader in the medical technology industry with a 27-year track record of delivering results, driving innovation and leading high-performance teams. With that, I will turn the call over to Vlad.
Vladimir Makatsaria: Thank you, Matt, and thank you everyone for joining us. It’s my pleasure and privilege to welcome you to LivaNova’s conference call for the first quarter of 2024 as LivaNova’s Chief Executive Officer. First and foremost on behalf of the Board and the executive leadership team, I would like to express our gratitude to Bill Kozy, Chair of the Board of LivaNova for a tremendous job leading the company on an interim basis. I would also like to thank the entire Board of Directors for the opportunity to serve as CEO and express my sincere gratitude and excitement for the future of LivaNova. During my first two months, I interacted with customers, met investors and engage with my colleagues around the world. I can confidently say that the patient-first mentality thrives across every function and geography at LivaNova.
It is in order to work with the global organization that focuses on solving significant unmet patient needs into very high-impact medical fields, neurological and cardiac health. I’m humbled to be in this role and grateful to our teams for their exceptional work and dedication to serving our patients and customers. Over the coming months, I will continue to listen learn and complete a comprehensive review of business. In doing so, I’m focused on three key areas; execution, innovation and talent. Let me provide additional color on each. First, execution and performance. My view of success in this area is achieving sustainable above-market growth, while improving profitability and cash flow and most importantly delivering on commitments to our customers.
The first quarter marked our fifth consecutive quarter of double-digit revenue growth. In cardiopulmonary, we maintained above-market growth driven by the strong launch of the Essenz heart-lung machine and our ability to fulfill the high demand for consumables. In epilepsy, we saw continued growth in both new and replacement implants driven by disciplined commercial execution. Second, innovation and portfolio. Over the last year, the company has made progress in refining the business strategy and portfolio, including the wind down of the Advanced Circulatory Support segment and the heart failure program. These portfolio actions position us well for the future and enable us to have appropriate resources focus and investment to drive growth in the business.
This includes reinvigorating our cadence of core innovation to meet our customers’ most prevalent unmet needs. In both difficult-to-treat depression and obstructive sleep apnea, we anticipate results in RECOVER and OSPREY studies later this year. Looking ahead, we will evaluate those opportunities alongside a holistic view of all possibilities for innovation. At LivaNova, our commitment to pioneering innovation remains unwavering. And to this end, I’m very pleased to welcome Ahmet Tezel as LivaNova’s Chief Innovation Officer which we announced yesterday. Ahmet has a remarkable track record leading teams and developing a wide range of market-leading technologies. Ahmet will drop on his extensive experience to guide innovation at LivaNova. And finally, the third area of focus is people and culture.
Any great organization starts with great people. And in my first two months at LivaNova, I have met many of our colleagues from Houston to Arvada from Munich to Mirandola. As previously mentioned, I’m most impressed by the environment of the patient’s first value. I was also struck by the deep expertise in the areas which we operate. It is no wonder we are category leaders in heart-lung machines and epilepsy surgery. We will build on this foundation and continue to attract top talent to LivaNova. Focus on execution innovation and talent will lead to success as an organization. We’re confident that by delivering in each of these areas, we will improve patient outcomes and create shareholder value. For the remainder of the call, I will focus on the first quarter results and then turn to our strategic portfolio initiatives.
After my comments, Alex will provide additional details on our results and update 2024 guidance. I will wrap up in closing remarks, before moving to Q&A. So in the first quarter, we achieved 12% revenue growth versus prior year. Excluding the impact of ACS segment wind down, revenue increased 14% versus 2023. This performance included double-digit revenue growth in both cardiopulmonary and Neuromodulation segments. We’re encouraged by our team’s continued strong execution as demonstrated by our performance in the quarter. Now turning to segment results. For the cardiopulmonary segment revenue was $156 million in the quarter. That’s an increase of 16% versus the first quarter of 2023. Heart-lung machine revenue increased more than 20% driven by Essenz.
We are pleased to see continued the Essenz placements and strong price/mix in the quarter. Oxygenator revenue grew in low-teens, driven by customer demand and price. As previously noted, the oxygenator business continues to see strong demand and our efforts to increase capacity remain on track. We now expect cardiopulmonary revenue to grow 8% to 9% for the full year 2024. Our revised forecast incorporates strong HLM growth and continued strong demand for consumables. Epilepsy revenue increased 11% versus the first quarter of 2023. The US epilepsy revenue increased 13% year-over-year with growth in both new and replacement implants. We achieved 826 new patient implants in the quarter representing 4% growth versus the prior year. We realized 1,941 replacement implants representing 5% growth versus the prior year.
Epilepsy revenue in Europe and the rest of the world grew 7% versus prior year. For the full year 2024, we continue to expect global epilepsy revenue to grow 6% to 7%. Our forecast incorporates a continued mid-single-digit growth rate in the U.S. new patients and more normalized low single-digit growth rate in replacements. We now expect international revenue to grow in high single-digits. Difficult to treat depression revenue in the first quarter was $2 million and for the full year, we continue to anticipate approximately $7 million revenue, primarily coming from the RECOVER study. The RECOVER study continues to advance and the Bipolar cohort continues to enroll as expected. As a reminder enrollment for the Unipolar cohort of the study is now complete.
We anticipate the 12-month follow-up data for the 500 Unipolar patients in the second quarter. At that time, we will conduct an analysis and continue to expect publication of the full study results by late 2024. Now, moving to obstructive sleep apnea. The OSPREY clinical study achieved a positive predictive outcome and concluded enrollment in March that this means that there is a very high probability that there will be a statistically significant result in the primary endpoint, which is seven months AHI response rate. In accordance with the study protocol, once the last implanted patient completes the last follow-up visit, we will conduct a final analysis for the study. We are pleased to have achieved this positive milestone for the OSPREY study and we will continue to work actively with clinical science to manage the study patients.
With that let me turn the call over to Alex.
Alex Shvartsburg: Thanks Vlad. During my portion of the call, I’ll share a brief recap of the first quarter results and provide commentary on 2024 guidance. Turning to results, revenue in the quarter was $295 million, an increase of 12% versus 2023. Excluding the impact of the ATS segment wind down, revenue increased 14% versus 2023. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $1 million or less than 1% of revenue. Adjusted gross margin as a percent of net revenue was 71% compared to 69% in the first quarter of 2023. The year-over-year increase was driven by favorable product mix and pricing. Adjusted R&D expense in the first quarter was $43 million compared to $46 million in the first quarter of 2023.
R&D as a percent of net revenue was 15% down from 18% in the first quarter of 2023. The year-over-year decrease was largely driven by the closeout of the ANTHEM trial. Excluding the costs related to ANTHEM, our R&D investments increased 15% versus the prior year. Adjusted SG&A expense for the first quarter was $113 million compared to $108 million in the first quarter of 2023. The year-over-year increase was driven by targeted investments supporting Essenz, legal expenses, and variable costs such as freight and commissions associated with increased revenues, offset by the reduction in ACS. SG&A, as a percent of net revenue, was 38% compared to 41% in the first quarter of 2023. Adjusted operating income was $53 million compared to $27 million in the first quarter of last year.
Adjusted operating income margin was 18% compared to 10% in the first quarter of 2023. This increase was driven by improved gross margin and operating expense leverage, primarily related to the wind down of the heart failure program and the ACS segment. Adjusted effective tax rate in the quarter was 21% compared to 6% in the first quarter of 2023. The year-over-year increase is related to developments in the global tax landscape and is in line with our expectations. Adjusted diluted earnings per share was $0.73 compared to $0.43 in the first quarter of 2023. Our cash balance at March 31st was $309 million, up from $267 million at year-end 2023. Total debt at March 31, was $624 million, up from $587 million at year-end 2023. This increase in total debt was driven by the closing of a $345 million private offering of convertible senior notes maturing in 2029 and repurchase of $230 million of convertible senior notes.
Net debt, including restricted cash at March 31, was $120 million. Adjusted free cash flow for the quarter was $11 million, down from $20 million in the prior year period. The year-over-year decrease was driven by higher working capital needs and ACS restructuring costs. Capital spend in the quarter was $6 million compared to $8 million in the prior year. The year-over-year decrease was driven by timing of key investments. Now, turning to our revised 2024 guidance. As Vlad mentioned, based on our performance in the first quarter, we’re increasing our full year 2024 revenue and adjusted diluted earnings per share guidance while maintaining the range on our adjusted free cash flow. We now expect 2024 revenue growth on a constant currency basis between 6% and 7%, and between 8% and 9% when excluding the portion of the ACS business that we are exiting.
In the first quarter, we observed favorable comparisons, which will continue in the second quarter. While we do not provide quarterly guidance, we expect revenue growth to be lower in the second half of 2024 compared to the first half of this year. Foreign currency is now expected to be a 1% headwind based on current exchange rates. We continue to expect a full year adjusted effective tax rate of approximately 21%. We now project adjusted diluted earnings per share in the range of $3.05 to $3.15, and with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year. Adjusted free cash flow is still expected to be in the range of $95 million to $115 million, 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 million. As a reminder, our cash flow projections include costs associated with the ACS wind down in the range of approximately $15 million to $20 million, the majority of which occurs in 2024. From a phasing perspective, free cash flow generation in the first half of the year is lower than the second half. And as a reminder, LivaNova pays its prior year short-term incentive bonuses in the second quarter. In summary, I’m encouraged by the company’s execution and financial performance in the first quarter. Looking to the rest of the year, we will continue to invest in critical capabilities to support innovation, growth, and infrastructure.
We remain well positioned to drive above-market growth and more than 300 basis points of operating leverage in 2024. With that, I’ll turn the call back over to Vlad.
Vladimir Makatsaria: Thank you, Alex. And so to conclude, our first quarter results were marked by double-digit revenue and operating income growth in both the cardiopulmonary and Neuromodulation segments. Our performance in the quarter positions us well to build on this competitive momentum. Looking ahead, we will focus on execution, innovation and talent. With this framework in mind, we expected we’re excited for the remainder of the year. Again, we will build on the strength of our core cardiopulmonary and epilepsy businesses making investments to drive sustainable above-market growth. We will also gain clarity on the results from the RECOVER and OSPREY studies, which will allow us to strategically target our most compelling opportunities.
Finally, we will continue to explore areas of high clinical unmet need in markets with high-growth potential to create long-term shareholder value. In closing, I would like to thank my colleagues across the organization for the warm welcome to LivaNova. Their hard work and passion underpin our success as an organization. I’m grateful for their continued dedication to serving customers and patients. And together, we will continue to advance our mission of improving outcomes for patients with neurological and cardiac health conditions around the world. So with that, Candace, I think we’re ready for questions.
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