Q4 2023 Earnings Summary
- Increased market share in the oxygenator business, with estimates rising from 30% to mid-30%, and efforts to sustain revenue despite competitors not yet returning to the market. Capacity expansions are planned to further capitalize on demand in the second half of the year. ,
- The launch of Essenz is expected to improve gross margins by approximately 100 basis points year-over-year, due to its price premium and favorable product mix. Essenz plays a major role in the company's gross margin improvement plan.
- The wind down of the Advanced Circulatory Support (ACS) segment, which incurred approximately $14 million of losses in 2023, is expected to lead to significant improvements in profitability in 2024, with full benefits realized next year.
- The neuromodulation segment's growth may decelerate in 2024, as the company expects U.S. replacement implants to return to a more normalized low single-digit growth rate after higher than expected growth in 2023, potentially impacting overall revenue growth in this key segment.
- The company's oxygenator business may face challenges in retaining market share if competitors re-enter the market. Management acknowledged uncertainty about competitors' return and the difficulty of sustaining revenue in the non-tender oxygenator business. Additionally, capacity constraints may limit the company's ability to meet demand, affecting future revenues.
- Ongoing legal proceedings related to the SNIA litigation in Italy introduce financial uncertainty. A potential negative judgment could require significant payments, impacting the company's financial flexibility. The company expects a binding decision in 2024 or 2025 and has ring-fenced funds to cover a potential liability, but has not yet booked a liability.
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Depression Study Update
Q: Will we see depression study results in June?
A: Management expects to receive the depression study data in June and plans to release the top-line results, but confirmation is needed from critical parties, including CMS. If all goes as hoped, the results will be released in a timely manner; otherwise, publication may occur by the end of the year. The company acknowledges that the trial had a high bar set by CMS with multiple endpoints, and decisions on investment levels will depend on the data outcomes. -
CEO Transition and Strategic Priorities
Q: What are Vlad's priorities as the new CEO?
A: Vlad, who starts as CEO on March 1, brings 27 years of global healthcare experience. He has overseen multibillion-dollar businesses with over 15,000 employees, focusing on vision, strategy, innovation, talent, market access, and execution. The Board is extremely pleased with his decision to join LivaNova, and while he appears comfortable with the current state of the company, he will be fully encouraged to bring his ideas forward, especially during the strategic planning process in early summer. -
Oxygenator Market Share and Capacity
Q: How is the oxygenator market and capacity expansion?
A: The competitive situation remains unchanged, with one smaller competitor's position dissipating and a major competitor not yet returning to the market. LivaNova estimates its market share has increased from around 30% to the mid-30s over the past 15 to 18 months. Approximately half of their high-volume business is tender-based. The company is implementing process improvements to increase oxygenator capacity, expecting benefits to positively impact supply in the second half of the year. -
CapEx Increase and Investments
Q: What's driving the increase in CapEx?
A: The company is investing in oxygenator capacity expansion and accelerating IT infrastructure improvements, including modernizing ERP systems. The recent cyber event prompted them to enhance their security position and modernize targeted systems. These critical investments are expected to increase IT spending by a couple of basis points as a percentage of sales in 2024. -
ACS Wind-Down and Earnings Impact
Q: How will the ACS wind-down affect earnings?
A: The ACS business incurred approximately $14 million of losses in 2023. As part of the wind-down, significant year-over-year improvements are expected, with the full benefit realized next year. The wind-down will occur over the last three quarters of the year, contributing approximately $0.10 to earnings in 2024. -
Tax Rate Increase to 21%
Q: Why is the tax rate increasing to 21%?
A: The tax rate is a function of jurisdictional profitability. As projections for 2024 became clearer, the company estimates a tax rate of 21%, reflecting the mix of profitability across jurisdictions. This is an increase from the previously discussed range of 15% to 20%. -
Neuromodulation Segment Growth
Q: Is Neuromodulation growth sustainable?
A: The company forecasts mid-single-digit growth in U.S. new patients and a return to normalized low single-digit growth in U.S. replacements. Internationally, growth is expected to continue in the low double digits. Consistent execution and deeper partnerships with physicians are driving performance, and the strategy includes expanding collaboration with the physician base through initiatives like the new scientific advisory board. -
Gross Margin Improvement from Essenz
Q: Will Essenz improve gross margins in 2024?
A: Essenz is expected to play a major role in supporting gross margin improvement. The company anticipates a modest overall gross margin improvement of about 100 basis points year-over-year in 2024. -
SNIA Litigation Update
Q: What's the status of the Italian SNIA litigation?
A: The company is awaiting a binding decision from the European Court of Justice, expected in 2024. The case will then proceed to the Italian Supreme Court, possibly extending into 2025. LivaNova has secured funding through a Term Loan A to cover any potential liability but has not booked a liability from an accounting perspective, as there is no indication of being liable at this time. -
Cybersecurity Incident Impact
Q: What was the revenue impact of the cybersecurity incident?
A: The incident impacted oxygenator production, causing about a week of lost production. While it is hard to quantify the exact revenue impact due to inventory flow dynamics, the effect was not substantial and primarily affected the cardiopulmonary side of the business.