LivaNova PLC

Thank you, Catherine, and welcome to our conference call and webcast discussing LevaNova's financial results for the fourth quarter and full year 2020. Joining me on today's call are Damian McDonald, our Chief Executive Officer, Alex Schwarzberg, our Interim Chief Financial Officer, and Melissa Farina, our Vice President 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 a presentation to our website that summarizes the points of today's call. This presentation is complementary to our 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 and Events and Presentations at investor.livanova.com. With that, I will now turn the call over to Damian.

Thanks, Matt. And thank you for joining us. And I hope you and your families continue to remain safe and healthy during these challenging times. Welcome to our fourth quarter and full year 2020 conference call. As you're aware, we have a large employee population in Houston, all of whom were impacted by the storms last week. I'm relieved that everyone is safe and would like to thank all of them for their dedication and ingenuity to keep our operations running. Today, we will discuss our results and provide recent company updates, including guidance for 2021 and the first quarter. The COVID-19 pandemic has presented unique operating challenges. Many markets around the world have operated inconsistently or shut down for varying periods of time, and this dynamic has continued in the fourth quarter and thus far into 2021. I'm going to start off by discussing some recent updates to our business and board structure, then move to sales results, focusing on the primary growth drivers, epilepsy and ACS. Then I will discuss our strategic portfolio initiatives, DTD, heart failure and OSA. After my comments, Alex will provide you with additional details on the results and our 2021 guidance, which continues to include heart valves. Then I will wrap up with closing comments before moving on to Q&A. In December, Livanova entered into an agreement with Gyrus Capital for the sale of the heart valve business. This portfolio will benefit from the ownership of Gyrus and its ability to singularly focus on building a heart valve business. This will enable us to sharpen our focus on the primary cardiovascular and neuromodulation platforms. As you know, divestitures are complex, and we are currently discussing an amendment to the purchase agreement with JIRAS related to a deferred closing of a subsidiary that is responsible for site management services at the Solutia campus. We continue to expect the initial closing, consisting of the heart valve operations in Italy and Canada, to occur in the second quarter, followed by closings of the sales infrastructure in the second half of the year. In December, we announced a series of board leadership changes driven by the Nominating and Corporate Governance Committee. Included in those changes, Todd Schemmerhorn was appointed to the Board of Directors. Todd has 35 years of experience in global healthcare, including 27 years at CR Bard, where he held positions of increasing responsibility, which culminated with his nine-year tenure as Chief Financial Officer. He currently serves on the boards of Metabolon and also Traveller's Companies, where he is the independent lead director and chairs its risk committee. Todd will succeed Hugh Morrison as audit chair upon his retirement at the 2021 AGM. Additionally, we will be rotating the board and two committee chairs following the 2021 AGM. We believe all these changes underscore a commitment to leading corporate governance and to help further enhance the board's independent oversight. Now I'll discuss the core growth drivers, epilepsy and ACS. All net sales results will be stated on a constant currency basis. Epilepsy sales declined 4% globally versus the fourth quarter of 2019. This decrease is attributable to the impact of COVID-19 on both new patient and end-of-service or replacement implants. Importantly, sales rose sequentially and were in line with our full-year guidance range. US epilepsy declined in the mid-single digits and implants continued to improve sequentially over the third quarter. In the fourth quarter, epilepsy sales in Europe reached nearly 90% of our prior year levels with strong performance in the Nordic region and Spain. The rest of world region grew 11% as a strong growth in the Middle East and Australia as non-emergent procedures recovered. For the full year 2021, We expect global epilepsy sales to grow 15% to 20%, including strong growth in new implants as patients return to their positions. And we expect a tailwind in replacement implants related to the backlog created in 2020. We are pleased with the progress of the go-to-market initiative and still plan on adding three new dedicated teams in the US during 2021. ACS sales were $13 million in the quarter, an increase of 50% from the fourth quarter of 2019. Growth was driven by the adoption of LifeSpark and an increase in acute respiratory distress-related procedures. We continue to expect ACS to grow at least 20% in 2021. Turning now to DTD, sales in the fourth quarter were $1 million and $7 million for the full year. In 2021, We expect DTD sales of approximately $10 to $15 million from a combination of the RECOVER study and the replacement implants for CMS-eligible patients. We continue to expect to reach 250 unipolar patients and or 150 bipolar patients implanted in their respective RECOVER study arms by year-end. In heart failure, the Anthem HEP-REF US Pivotal Trial continues to progress with over 265 patients enrolled. We still expect to achieve 300 patients enrolled in the first half of 2021. We continue to make progress in OSA. The confirmatory study was submitted for IDE approval during the fourth quarter. We received some additional questions and still expect to start the study in mid-2021. For the cardiopulmonary business, sales were $122 million in the quarter, a decline of 10% versus the fourth quarter of 2019. Oxygenators declined in low double digits globally as a faster recovery in the procedure volumes in the US and the rest of world region was offset by procedure restrictions in Europe. HLM sales declined in the high single digits due to COVID-19 impacts on hospital budgets for capital equipment and all regions improved sequentially over the third quarter. Moving to heart valves, Sales for the segment were $24 million in the quarter, a decrease of 27% versus the fourth quarter of 2019, including another double-digit growth quarter in Japan, driven by Percival. Starting in the second quarter of 2020 and continuing through the year, we reduced costs to offset some of the decline in sales. We continue to reallocate resources to fund priorities. These actions have delivered approximately $65 million in savings in 2020. Specifically, these four key areas included the following. First, we instituted a hiring freeze, participated in government-sponsored work programs and adjusted employee-related expenses, including lower performance-based compensation and a significant reduction in executive leadership short-term incentive. Second, we reduced spend related to travel, marketing events and field presence and have shifted to working with our customers and stakeholders using remote methods. Third, we reduced other discretionary spend related to external consulting and temporary staffing. And fourth, we balanced our manufacturing output to coincide with the anticipated reduction in demand. We remain focused on disciplined control of expenses as we move through this next phase of the pandemic, while still investing in our pipeline initiatives. I'll now turn the call over to Alex for an overview of the financial results.

Thank you, Damian. I'm going to discuss the fourth quarter results in greater detail and then provide our 2021 guidance. Sales in the quarter were $270 million and declined 7.7% compared to the fourth quarter of 2019. Cardiovascular sales were $160 million, down 10.1% for the fourth quarter of 2019. Neuromodulation sales decreased were $109 million, a decline of 3.8 percent compared to the fourth quarter of 2019. Adjusted gross margin as a percent of net sales in the quarter was 67.2 percent, down 250 basis points from the fourth quarter of 2019. The margin decline was primarily driven by lower volume from sales and unfavorable manufacturing variances. Adjusted R&D expense in the fourth quarter was $39 million compared to $38 million in the fourth quarter of 2019. R&D as a percent of net sales was 14.5% versus 13.1% in the fourth quarter of 2019. R&D is increasing behind continued progress of the Anthem HEP-REF pivotal trial and the RECOVER study. Adjusted SG&A expense for the fourth quarter was $94 million, compared to $108 million in the fourth quarter of 2019. SG&A as a percentage of net sales was 34.7%, down from 37.4% in the fourth quarter of 2019. Adjusted operating income from continuing operations was $49 million, compared to $55 million in the fourth quarter of last year. Adjusted operating income margin from continuing operations was 18% compared to 19.2% in the fourth quarter of 2019. The adjusted effective tax rate in the quarter was negative 0.1% compared to 5.3% in the fourth quarter of 2019. The lower tax rate is primarily attributable to geographic income mix and partial valuation allowance in the U.S. Finally, adjusted diluted earnings per share from continuing operations in the quarter was 71 cents compared to $1 in the fourth quarter of 2019 and was within the full year guidance range. Moving to cash flow, The cash balance at December 31st, 2020 was $253 million, up from $61 million at December 31st, 2019. Net debt at quarter end was approximately $505 million, up from $272 million at year end 2019. These changes reflect the impact of the financing completed in the second quarter of 2020. Our adjusted free cash flow, excluding extraordinary items, through the fourth quarter of 2020 was $17 million. Capital spending for 2020 was $35 million, which was $10 million higher than 2019 related to initiatives to support manufacturing sterilization capabilities and to further develop our epilepsy digital innovation platform. As a result of the heart valve divestiture, we took a charge of $202 million in the fourth quarter related to the anticipated sale of the heart valve business. In addition, we have reserved $42 million for a provision for future obligation of our site management subsidiary related to hazardous substances from former operations at Seleucia, Italy campus. Now turning to 2021 guidance. We forecast 2021 sales growth between 8% and 13% on a constant currency basis, and this includes the full year of the hard valve business. If current exchange rates remain unchanged, the company's full year revenue guidance will be positively impacted by less than 1%. We anticipate the neuromodulation business to grow 15% to 20%. We estimate our cardiovascular franchise to grow in the low to mid-single digits, with strong growth from ATS largely offset by late-stage replacement cycle of HLM. We are projecting adjusted diluted earnings per share from continuing operations in the range of $1.40 to $1.90, the share count is expected to be approximately $49 million. Adjusted cash flow from operations excluding extraordinary items is expected to be in the range of $30 to $50 million. While we don't provide quarterly guidance, sales in the first half are assumed to be lower while expenses are generally more evenly spread out. For the first quarter of 2021, we expect net sales to be down 3% to 7%. The first quarter is expected to be the softest earnings quarter, and we forecast a range of $0.10 to $0.20 per share. With that, I'll turn the call back to Damian for some final comments.