Good day ladies and gentlemen and welcome to the LivaNova PLC First Quarter of 2023 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development. Please go ahead, sir.

Thank you, Bailey and welcome to our conference call and webcast discussing LivaNova's financial results for the first quarter of 2023. Joining me on today's call are Bill Kozy, our Chair of the Board of Directors and Interim Chief Executive Officer; Alex Shvartsburg, our Chief Financial Officer; and Briana Gotlin, 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 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 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 an earnings update to our website that summarizes the points of today's call. This update is complementary to the other call materials and should be used as an enhanced communication tool. You can find the update and press release in the Investors section of our website under News Events & Presentations at investor.livanova.com. Now, it is my pleasure to introduce you to Bill Kozy. Bill joined LivaNova's Board of Directors in 2018. After the conclusion of his 42-year career at Becton, Dickinson, where he retired as Executive Vice President and Chief Operating Officer in 2016. At BD, he served as a member of the corporate leadership team and held various executive roles since 1988. As a result, he brings expertise in strategy execution, operations and financial discipline. With that, I will turn the call over to Bill.

Thank you, Matt and thank you, everyone, for joining us. It is my pleasure and privilege to welcome you to LivaNova's conference call for the first quarter of 2023 as LivaNova's Chair and Interim Chief Executive Officer. First and foremost, on behalf of the Board and the executive leadership team, I'd like to express our gratitude to Damien McDonald for his dedicated leadership and countless contributions to the company over the last 7 years. We wish him all the best in his future endeavors. In this interim role, my focus is firmly on patients, performance, and execution. In the coming weeks, I'll continue to engage with our global customers and colleagues, as well as the investor and analyst communities. Even though I'm new and learning, I'm already working alongside our experienced executive leadership team and the Board and I do remain confident that we'll facilitate a smooth and positive transition as we search for LivaNova's next leader. For the remainder of the call, I'll discuss our first quarter results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on the results and increases to 2023 guidance. I'll wrap up with closing remarks before moving on to Q&A. In the quarter, we achieved 13% revenue growth marked by strength in the Cardiopulmonary and Neuromodulation businesses, while advanced circulatory support remained unfavorably impacted by a decline in severe COVID cases. We were particularly pleased with the way the Rest of World and Europe regions drove results, especially in emerging markets. worth noting, these regions comprised 47% of total company revenue in the quarter, up from 43% in the prior year period. Now, turning to segment results. For the Cardiopulmonary segment, revenue was $132 million in the quarter, an increase of 18% versus the first quarter of 2022. Oxygenator revenue grew in the high teens, driven by higher demand and improving supply chain performance. Heart-lung machine revenue increased in the low double digits, driven by new installations and replacements in the Rest of World and Europe regions. As a reminder, our Essenz heart-lung machine received U.S. FDA 510(k) clearance in March and approvals from Health Canada and the Japanese PMDA also during that first quarter. Additionally, we initiated a broad commercial release in Europe. We now expect Cardiopulmonary revenue to grow 5% to 7% for full year 2023. Our revised forecast includes more clarity around the rollout of Essenz based on recent approvals. In addition, our revision now incorporates the strong first quarter performance in oxygenators. Epilepsy revenues increased 11% versus the first quarter of 2022, with strength across all 3 regions, including growth in both new and replacement implants. U.S. epilepsy revenue increased 8% year-over-year, driven by growth in total implants, higher realized price and product mix. In the U.S., we are continuing to emphasize our commercial strategy in comprehensive epilepsy centers. As many of you know, these CECs currently do the majority of surgical epilepsy procedures and our focus on engaging with KOLs at these sites remains a top priority. Epilepsy revenue in Europe grew 14% versus prior year, led by the U.K. The Rest of World region achieved 30% growth led by Brazil. For the full year 2023, we continue to expect global epilepsy revenue to grow 3% to 5% as we take a fresh look at the factors driving new patient surgical penetration. I will be spending a notable amount of time with our key customers and KOLs. And again, Alex will comment on some underlying factors that impacted that strong first quarter result in epilepsy. ACS revenue was $10 million in the quarter, representing a decrease of 16% from the first quarter of 2022. Results continue to be impacted by the year-over-year reduction in severe COVID cases and in part by product mix, partially offset by growth in non-COVID cases. Our field data suggests ACS case volumes related to COVID declined approximately 90% year-over-year as fewer hospitalized patients progressed to a severity that required ECMO therapy. However, that field data also suggests ACS non-COVID case volumes increased versus the first quarter of 2022, driven by the easing of hospital capacity constraints and account acquisition. For 2023, we continue to expect ACS to grow 4% to 6%, with the majority of the growth in the back half of the year. As a reminder, this is the last quarter this business will be significantly impacted by COVID comparisons. Turning now to the strategic portfolio initiatives. DTD revenue in the first quarter was $2 million. For 2023, we now anticipate DTD revenue of approximately $8 million, primarily from the RECOVER study. The RECOVER study continues to advance. In March, the interim analysis for the 475th patient in the unipolar cohort was completed and confirmed the study's continuation. Subsequently, we randomized the 500th unipolar patient into the trial. Upon receipt of the 12-month follow-up data for the 500 unipolar patients, we will conduct a final analysis and expect the publication of the study results by late 2024. Now that enrollment in the unipolar cohort is complete, our recruitment efforts have been refocused on the bipolar cohort. We expect to reach 150 bipolar patient implants in late third quarter or early fourth quarter. By now, I'm sure you are familiar with the RECOVER study. I recently met with 2 of the study's principal investigators, Dr. John Rush and Dr. Charles Conway. These conversations reflect the continued excitement from the KOL community. And I hope you appreciate the company's total commitment to finish this initiative. Moving now to OSA; the OSPREY trial continues to progress with 24 study sites actively recruiting patients. Similar to my comments on DTD, myself, the Board and our project team remain committed to this project as well. In heart failure, the closeout of the ANTHEM clinical study is in progress. We have fully defined most of the accelerated costs in 2023, part of which occurred in the first quarter. Therefore, our expectation is that the overall R&D spend related to heart failure this year will be approximately $24 million.

Thanks, Bill. During my portion of the call, I'll share a brief recap of the first quarter results and provide commentary on 2023 guidance. Turning to results; revenue in the quarter was $263 million, an increase of 13% versus 2022. In the quarter, we saw strong oxygenator demand, better-than-expected replacement implants and some accelerated orders. Additionally, we were able to continue to drive strong realized price from actions taken in the second half of 2022. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $7 million or 3% of revenue. Adjusted gross margin as a percent of net revenue was 69% compared to 71% in the first quarter of 2022. Adjusted gross margin was unfavorably impacted by inflationary pressures, geographic and product mix, partially offset by pricing improvements. Adjusted R&D expense in the first quarter was $46 million compared to $40 million in the first quarter of 2022. R&D as a percent of net revenue was 18% versus 17% in the first quarter of 2022. The year-over-year increase was driven by continued investments in strategic portfolio initiatives and the costs associated with closing out the ANTHEM trial. Adjusted SG&A expense for the first quarter was $108 million compared to $102 million in the first quarter of 2022. SG&A as a percent of net revenue was 41%, down from 43% in the first quarter of 2022. The year-over-year increase on a dollar basis was driven by higher sales and marketing expenses. These include Essenz launch expenses and variable costs associated with increased revenues. Adjusted operating income was $27 million compared to $28 million in the first quarter of last year. Adjusted operating income margin was 10% compared to 12% in the first quarter of 2022. Adjusted operating income was negatively impacted by: one, product and geographic mix; two, incremental investments in the OSA and DTD programs, as well as accelerated spend related to the closeout of the heart failure program; and three, commercial investments focused on the Essenz launch. These key elements negatively impacted adjusted operating income margin by 300 basis points versus the prior year. Adjusted effective tax rate in the quarter was 6% versus 7% in the first quarter of 2022. Adjusted diluted earnings per share was $0.43 compared to $0.48 in the first quarter of 2022. Our cash balance at March 31 was $214 million, in line with $214 million at year-end 2022. Total debt at March 31 was $542 million, in line with $542 million at year-end 2022. Net debt, including restricted cash at March 31 was $72 million. Adjusted free cash flow for the quarter was $20 million, up from $17 million in the prior year. Free cash flow generation was improved by working capital management. Capital investments were $8 million in the first quarter compared to $5 million in the prior year quarter. Now, turning to our revised 2023 guidance. As Bill mentioned, based on our performance during the first quarter, we are increasing our full year 2023 revenue and earnings per share guidance. We now expect 2023 revenue growth on a constant currency basis between 4% and 6% and continue to assume approximately a 1% tailwind from exchange rates. We now expect adjusted diluted earnings per share in the range of $2.50 and $2.70 with adjusted diluted weighted average shares outstanding to be $54 million for the full year. Adjusted free cash flow is still expected to be in the range of $80 million to $100 million. In summary, I'm encouraged by the first quarter top line performance and we remain positioned to drive operating leverage by year-end.

Thank you, Alex. LivaNova's first quarter performance demonstrated continued progress across the portfolio and positions the company well to deliver on its pipeline and its full year guidance. We're eager to build upon the first quarter results with a firm focus on patients, performance and execution throughout the remainder of 2023. In closing, we're committed to our DTD and OSA programs. And let me be equally clear, we're also focused on accelerating new patient penetration in U.S. epilepsy, continuing strong performance in the Rest of World and Europe regions and, of course, driving the successful launch of Essenz. Our employees remain dedicated to helping patients worldwide and are focused on long-term innovation and shareholder value creation. And by the way, I thank them for the welcome they have extended to me over the last couple of weeks. With that, Bailey, we're ready to open the call for questions.

The first question today comes from the line of Rick Wise from Stifel.

Good morning, everyone. Good morning, Bill. It's nice to hear your voice again. I appreciated the clarity with which you shared your priorities: patients, performance, execution, and I also valued the summary at the end. For those who may not know you as well as I do, could you elaborate on your priorities during this interim period and how you plan to drive these initiatives? What role do you expect to play? Additionally, regarding the NPI build, your focus on the Rest of the World, and the Essenz launch, how will your hands-on and detailed approach help advance these efforts?

Rick, thank you for the question. I've talked a lot with all of the colleagues here at LivaNova and the interim role, as you already know, is something to be thought through. But the way I've thought through it goes as follows. As I mentioned earlier, attention on patients, performance, and execution. And that's from my personal perspective, that's head down and all in. So I would challenge myself to operate in this interim role, just the same as I was used to operating in my prior roles. The Board had requested this as we made this transition. The organization has been just terrific in the way that we're starting to collaborate. But I'd reiterate the 4 initial takeaways from the first couple of weeks. And the way I just closed, we're really committed to the SPI. We're really going to look closely at epilepsy and what can we further do to improve our performance in surgical penetration. We're going to look at how can we take best advantage of this already strong performance that we're seeing in the region. My comment about 47% of revenues in those areas, it's notable. And it's a really good signal about how the company is progressing when you think about the year-on-year success. And then Essenz, also at the top of the list, as I mentioned. Just to circle back, I want to make sure I've left it clear with you that interim refers to the timeframe that I will be here. It in no way refers to my commitment to the business or doing everything I can to work with this executive team and to effectively make better the performance of the company as we seek the next leader.

That's a great answer, Bill. I have a couple of follow-up questions. First, regarding the guidance, how conservative is the 2023 forecast compared to previous years? Is it particularly cautious considering the transition period? Additionally, could you share your thoughts on how the Board is approaching the search for the next leader, both from within and outside the company? What are your priorities and the characteristics you are looking for in this search?

That 1.5 share seemed like two, but let me clarify. Alex did a great job explaining the factors behind the 13% growth in that quarter. I believe it is wise, especially at the beginning of the year, to ensure we understand the underlying factors. There are definitely a few points to consider; even the new team member noticed some favorable aspects in the P&L. For instance, I think we shouldn't depend on Russia every quarter as just one example. Alex is well aware of these issues, and I will have him add some details shortly. I want to emphasize that we are taking a careful approach, particularly at this time of the year. Regarding your second question, the Board has been thorough in defining what they are looking for in the next CEO. I will spare you the detailed job specifications, but at a high level, the ability to strategize effectively is crucial and will be a priority. Additionally, we expect the new leader to connect long-term vision with strong operational skills to achieve continuously better financial results. Although it may seem obvious, that's what we consider vital. Factors such as cost management and operational excellence will be just as important as finding someone who can foresee future opportunities, especially concerning our platforms, like SPI. Those two elements are essential for the company's success when those SPIs arise. I hope this gives you a clearer understanding.

Appreciate it.

As you said, Bill, we're looking at the underlying market dynamics and how that really translates into growth for the remainder of the year. As I mentioned, we saw a strong oxygenator demand. We saw a better-than-expected replacement implants in epilepsy. And we also saw some accelerated orders into the quarter, so kind of a phasing thing. And we just want to make sure that all of these parts are sustainable and that was the rationale for our guide.

The next question today comes from the line of Michael Polark from Wolfe Research.

Hi, good morning. I have two questions, one regarding the leadership transition and the other about depression. Bill, I would like to hear your thoughts on this. We often receive this question during transitions like Damien's. Why is this change happening now? A few weeks ago, it seemed like an easy question to answer based on the preannounced revenue. It wasn’t about the quarter. What is your perspective on this? Is there any reason for concern from the Street, or should we just focus on executing as you mentioned? Any insights you can provide would be appreciated.

Thank you for the question. As we mentioned earlier, Damien resigned and we appreciate his leadership and contributions to the company. There was no new position announced and no personal issues involved. He has committed to assisting the company during the transition period throughout May. Everything is proceeding as planned. So that's our understanding of the situation, and it's quite straightforward. I don't have anything else to add.

Understood. Regarding depression, I want to remind you that for the unipolar cohort, the 500 patient study is ongoing, and we are monitoring it for a full 12 months before we evaluate the outcomes. Can you remind us about the 475 patient interim analysis? These ongoing interim assessments were designed to check for early futility and early success. There are certain criteria to consider regarding what types of futility or early success might have been observed at the 475 patient mark, specifically in terms of the separation between VNS and control. Would you be able to outline those parameters, indicating where results might fall on a scale from above to below expectations? Additionally, what is needed at the 500 patient endpoint for it to be considered statistically significant in terms of separation? Any insights on this would be appreciated.

Yes. Thanks for the question. Here I am in day 19. So I'm going to flip this right over to Matt, okay, who really is a much better source of information.

Hi, Mike. So for your questions, at 475, the potential to stop enrolling early, the upper bound that was around 80%. And the futility, it got only up to 45%. So it's somewhere in between there. There is no look at 500, so we are going full 12-month enrollment with all patients which that goes out to mid-2024. Again, the study was always designed for 500 patients in both arms unipolar and bipolar. And to your specific question, primary endpoint is time to response. It's somewhere in the low 60% range to hit the p-value of statistical significance.

The next question today comes from the line of Matt Taylor from Jefferies.

Hey, good morning. I was hoping that you could talk a little bit more about the epilepsy trends, both the overperformance and replacements, where did that come from? And then the focus on new patients. And I know in speaking with Matt, maybe a month ago or so, he was telling me about some interesting things you're doing with the incentives and the sales force, I'd love if you could touch on that.

Yes. Let me ask Matt to go first but then I do want to add some comments.

All right. So for EOS, we still believe we're largely through the COVID-related backlog. Again, not perfect math but that's our thinking. Also remember that first quarter was the lowest comp of the year in 2022. So we did have an easier comp this quarter. Now all that said, we did put some programs in place late last year to help identify patients lost to follow-up. And we think we might be seeing some early success there. But again, it's early. So that's what really drove the EOS. I'll turn it over to Bill for some comments on NPI, then I'll talk a little bit about some of the things we've been looking at on the sales force.

By way of background, some of you may remember that in previous calls, we discussed the critical efforts to ensure our sales organization is well-targeted, adequately resourced, and equipped to effectively engage with key opinion leaders and comprehensive epilepsy centers. This effort is ongoing and progressing well, although the volume is quite high, we are approaching our customers in a positive manner. As a senior management team, we have all had discussions over the past few weeks about this as a top strategic priority for us. I will be out next week for the first time in a while, and I am committed to getting out there. I will spend a couple of days visiting, and I will ensure we maintain a deeper understanding of our customer base, surgical penetration expectations, and, most importantly, what additional information and resources we can provide to empower our sales representatives.

And then as your follow-up, we did mention last quarter that we did make some changes to the U.S. epilepsy sales force late last year and then early into this year, a lot of involuntary change. In general, we had about 20 people change positions. And what we were highlighting was the quality has been very high for the replacements we've had of the 20, 12 have direct neuromodulation experience. Others are in areas like diabetes and neurosurgery. So very encouraging and early days, some of these new hires have made already a nice contribution to the overall performance.

The next question today comes from the line of Adam Maeder from Piper Sandler.

Hi, good morning, everyone. And congrats on this start to the year. I wanted to start on the CP business and just get a little bit more color there. It looks like the performance was really driven OUS while U.S. was a little bit softer. Are you able to just kind of flesh out those trends by region for us? It’s perhaps just simply driven by Essenz in timing there but any thoughts would be helpful. And then, can you also just remind us how you're pricing Essenz? I think it's being priced at a premium but would love to get some color there as well? And then I had a follow-up or two.

Yes. Alex and I have had this almost identical conversation. I'm just going to flip it over to him because he's really got his arms around it.

We experienced strong demand for oxygenators and heart-lung machines, and we've seen good replacement volumes outside the U.S. We anticipate that revenue from Essenz will make a significant contribution in the second half of the year. While the U.S. performance was not as strong this quarter, it is due to customers delaying orders. With the recent clearance in the U.S., we expect volumes to increase in the latter half of the year. Additionally, our consumables business has benefited as some of our competitors are facing supply chain issues, while our team has managed the supply chain effectively and secured additional placements. Overall, we are very pleased with our performance in the first quarter and are optimistic about the rest of the year.

That's helpful color, Alex.

Yes, regarding the pricing of Essenz, we are offering it at a premium. The features and benefits of Essenz are exceptional, and while the unit's cost is higher, we believe the pricing will still be seen as reasonable and appreciated by customers.

Great. Thank you for the fulsome response. Maybe switching gears to sleep apnea. I guess, first, I was hoping to ask how you're thinking about timelines for that program, I think before you were anticipating FDA approval by year-end 2024. I wanted to see if that's still the case? And then second, the data from the THN3 trial were recently published in a medical journal. Just any color or thoughts on that publication. And then, just one question that I get sometimes from investors is just talk about kind of the learnings and any changes to either the trial design or the device design with OSPREY relative to that previous study?

Sure, Adam. It's Matt. I'll go through all those. So for OSA, we are still making progress on recruitments, implants. We have increased the study sites from 20; we're now at 24. So that's going well. We've incrementally invested on several fronts to drive the recruitment funnel. But remember, this is a randomized trial. Other trials have not been randomized. So there is some drop-off in the funnel. We've had a strong funnel of patients but there is some drop-off. So we do expect to complete enrollment now in 2024 and looking at FDA approval now in 2025. And then, related to the JAMA publication, our take here is that generally quite positive. It highlighted a lot of what you've already seen in THN3, especially in the areas of the primary endpoints and how the author felt we did on that. So I think that's the full takeaway from the JAMA publication.

Okay, that's helpful, Matt. Can you provide any updates on changes to the device or the trial design? Also, I have one more follow-up question for you.

Sure. So no changes to OSPREY, the same. In terms of the device, nothing new to report there on the current device. We basically just tightened up a few things on the existing device to make it a bit more reliable.

Okay, got it. And then, just one last one clarification on the cost savings from the heart failure program. I guess it was a little bit unclear to me in the prepared remarks. What is the expectation for any cost savings this year? Is anything reflected in the updated guidance?

Yes, Alex has got this one, Alex, would you, please?

Yes. So as we mentioned, the total cost we estimate to be around $24 million for the year. Look, our #1 priority here is patient safety. So it's a complex implanted device and I want to make sure that we take patients into account and patient safety into account. So last year, we spent roughly, call it, $27 million. So the savings this year are minimal but we expect to drive significant savings in 2024.

The next question today comes from the line of Mike Matson from Needham & Company.

So Bill, I think you mentioned that you were planning to exit Russia. So correct me if that's wrong but can you just tell us how much of your revenue is coming from Russia?

That was one of the things that caught my eye. You can understand what was said. In the first quarter, I would estimate it was a couple of million. It was notable. I don't have the exact number here in front of me. Alex, do you?

Yes, I do. It's roughly 1% of our revenue, right, historically. So it wasn't a significant amount but we're not planning and we're not incorporating those revenues into our guidance. So, the ability to serve those customers in the quarter, just not necessarily counting on a repeat order pattern throughout the remainder of the year.

Yes, we got no reason to treat it anything other than a one-time event at this particular moment.

Okay, understood. Regarding the trial spending, you mentioned heart failure in the previous questions. Can you clarify how the $24 million in costs this year will be distributed? Is it planned to be evenly spread across the four quarters, or will it be more concentrated in the first half of the year?

It's going to be phased. We actually accelerated the spending in the first quarter as we obviously seeing patients come in for their visits and really closing out the components of the sites. So I think that we'll see an uptick in spending in the first half and then it should start to ramp down by the end of the year.

Okay. And then just as far as RECOVER goes, I mean, now that you've hit the 500 patient mark, I know you're focused on the bipolar now but I mean is it reasonable to assume the spending levels there would be lower for the follow-up period or...

No, it's not. Because we call our focus now shifts to the bipolar cohort. So recruitment of the bipolar patients, obviously continuing to monitor the unipolar patients. So our spend really does not go down at all this year.

The next question today comes from the line of Matt Miksic from Barclays.

Hi, this is Sarah on for Matt. Just a quick follow-up on the RECOVER study. I believe you said you received final analysis and results by late-2024 instead of maybe earlier was mid-24, is coverage decision by year-end '24 is still the right way to think about this?

Yes. Sure, Sarah. So we're still expecting the data around mid '24. We're now in the 12-month follow-up. There's going to be a couple of months of analysis but we should have it mid-24 and we still expect a publication around year-end of 2024.

Okay. And then another is a theme for this quarter, we've seen is there seems to be a significant ramp in utilization and volumes across many of our end markets. Can you talk about how your businesses participated in this ramp? And if they still remain below historical utilization levels? Any color on that would be helpful.

I can comment on that, Sarah. We've seen a market recovery, particularly in volumes. When considering our sources of growth for the quarter, we're observing positive developments in emerging markets like China, which experienced challenges from the omicron COVID impact at this time last year. We are indeed seeing that recovery, contributing to the substantial growth in the quarter. While we mentioned it was an easier comparison, we are encouraged by the customer demand we are experiencing.

And then in epilepsy, we still track on a quarterly basis the epilepsy monitoring unit or EMU trends, they're still not back to pre-COVID levels. We estimate they're around 85%, 86% capacity and that covers all surgery, not just E&S. But then internationally, our business there is well above pre-COVID levels. So that has rebounded quite nicely.

There were no additional questions at this time. So, I'd like to turn the conference over to Bill Kozy for any closing remarks.

Well, thank you, everyone, for joining today's call. On behalf of the entire team, we appreciate your support and your interest in the company and we look forward to speaking with you soon. Thank you.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.