LivaNova PLC

Ladies and gentlemen, and welcome to the Levenover PLC first quarter 2025 earnings conference call. My name is Emily and I'll be coordinating your call today. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Brianna Gotland, Levenover's Vice President of Investor Relations. Please go ahead.

Thank you and welcome to our conference call and webcast discussing LevaNova's financial results for the first quarter of 2025. Joining me on today's call are Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors, Alex Schwartzberg, our Chief Financial Officer, Amit Tozel, our Chief Innovation Officer, Stephanie Bolton, President of Global Epilepsy, and Zach Glazer, 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 statements. Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including but not limited to Revenue results, which will be stated on a constant currency and organic 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 investor section of our website under news, events, and presentations at investor.livanova.com. With that, I'll turn the call over to Vlad.

Thank you, Brianna, and thank you, everyone, for joining us today. Welcome to Livanova's conference call for the first quarter of 2025. Before turning to results in the quarter, allow me to comment on a few important updates. the 12-month data from our Osprey trial, the SNEAR ruling, and the impact of TARIS. This morning, we announced 12-month top-line data from Osprey, a randomized controlled trial for moderate to severe obstructive sleep apnea, or OSA. The study featured a differentiated neurostimulation modality called proximal hypoglossal nerve stimulation, or PD. HGNS. The Osprey trial demonstrated rapid and sustained improvement for patients who received PHGNS, including those with severe OSA, elevated body mass index, or BMI, and high risk of complete concentric collapse. At 12 months of therapy, the treatment time responder rate was 65%. The Osprey 12-month results further validate the potential of this therapy as a treatment alternative for the large and growing OSA population. With the strength of our clinical data, the expertise of our neuromodulation team, and the strategic growth opportunity ahead, we are eager to bring this innovation to patients. Ahmed will provide additional details on the trial results and our differentiated technology later in the call. Turning to the SNEA litigation, Our first quarter results include a liability of $360 million related to the Italian Supreme Court decision, which we disclosed a few weeks ago. Importantly, we believe the court's decision effectively retires a long-standing overhang on the company. Alex will provide more details on the financial implications of the ruling later in the call. Regarding tariffs, We're operating in an uncertain environment, and our top priority is to provide critical medical technologies to our customers and their patients. Based on an assessment of our geographic manufacturing footprint and supply chain, at present, we expect tariffs will be a small and manageable headwind for Livanova, which is captured within the guidance provided today. Alex will provide more details on our manufacturing footprint and financial consideration related to tariffs later in the call. For the remainder of the call, I will discuss our first quarter results and updates to our revenue guidance for the full year 2025. After my comments, Ahmed will discuss our significant clinical and regulatory achievements in OSA and progress in difficult to treat depression or DTD. Alex will then provide additional details on our results and updated 2025 guidance. I will wrap up with closing remarks before moving to Q&A. In the quarter, we achieved 10% organic revenue growth versus the prior year, driven by the continued success of the essence rollout, demand for cardiopulmonary consumables, and strong neuromodulation performance in the Europe and rest of world regions. Notably, this marks the eighth time in the past nine quarters that Limonova has delivered double-digit organic revenue growth. This top line result, coupled with operational efficiencies, contributed to meaningful operating income growth and cash generation. Now turning to segment results. For the cardiopulmonary segment, revenue was $176 million in the quarter. an increase of 15% versus the first quarter of 2024. Hardline machine revenue grew approximately 30% versus the prior year period. In the quarter, we achieved a strong increase in essence placement and sustained favorable price premiums. Oxygenated revenue grew in the high single digits driven by customer demand and price. The oxygenated business continues to see strong demand outpacing the market's ability to supply. Our operations team is working diligently to increase manufacturing capacity to meet customer demand. We now expect cardiopulmonary revenue to grow 9% to 10% for the full year of 2025, up from 7% to 8% previously. Our revised forecast incorporates continued HLM growth as we launch essence in the new market and continue to increase penetration in existing markets. Notably, in April, we received regulatory approval for Essence in China, which is our second largest market for HLMs after the US. Our forecast also reflects increased demand for consumables. Beyond 2025, we believe further oxygenated capacity expansion will continue to enable growth for the cardiopulmonary business. We're currently investing in an additional manufacturing line, which we expect to have running by mid next year. We expect that this increase in output will support our strategy of taking additional share in consumables going forward. We also anticipate sustaining double digit growth in HLM as we continue to launch Essence in new markets and further increase penetration in existing ones. Turning to epilepsy. Revenue increased 4% versus the first quarter of 2024, led by the Europe and rest of world regions, which increased the combined 13% versus the prior year period. We were pleased by the notable improvements in commercial execution across Europe during the quarter. This performance was balanced by U.S. epilepsy revenue growth, which increased 2% year over year. During the quarter, our U.S. epilepsy business experienced procedure deferrals related to a voluntary field safety notification, which we estimate had an unfavorable impact on revenue of less than $2 million. The field safety notice involved a component issue that affected 0.13% of current and past Centiva generators and required a design change. While the current version of Centiva continues to be implanted, the design change was recently approved by the FDA. We expect the updated Centiva generators to be available for distribution by mid-year in the US and most major geographies during the second half of 2025. We believe customer anticipation for the updated generators is delaying procedures in the first half of the year and will primarily impact timing rather than procedure loss. For the full year 2025, we continue to expect epilepsy revenue growth of 4% to 5%. Our forecast incorporates low single-digit growth in the U.S. versus mid-single-digit growth previously and assumes the Europe and rest of world regions will grow a combined low double digits for the year. up from high single digits previously. We continue to see momentum in our global epilepsy business across volume, price, and mix, and we feel confident in our ability to achieve mid-single-digit growth this year. Before turning the call to Amit, I would like to mention a change in our reporting. Over the last year, as Livanova's CEO, I have reviewed our communication and disclosure practices. That reflection has led us to refine what we report on a quarterly basis. While we have historically disclosed U.S. new patient and replacement implant volume growth, going forward, we will not be disclosing these metrics each quarter. However, we will continue to periodically comment on and provide insights into trends when relevant and appropriate to do so. We are making this change because we firmly believe that viewing this business through a long-term value creation framework is the best lens for investors. Our quarterly disclosure approach will focus on revenue growth, which best represents our business performance and is in line with our existing practice for the Europe and rest of world regions. Our teams around the world remain focused on narrowing the drug-resistant epilepsy treatment gap and maximizing VNS therapy access. In summary, due to the strong growth we saw in the first quarter, as well as the continued success of the essence rollout, market share gains and cardiopulmonary consumables, and pricing strategies, we are raising our overall organic growth outlook by 100 basis points to between 7% and 8%. Alex will provide additional details on our 2025 guidance later in the call. With that, I will turn the call over to Ahmed to provide an update on our recent clinical and regulatory achievements in OSA and progress in DTD.

Thanks, Vlad. As Vlad mentioned, and as was announced in a standalone press release this morning, Livanova achieved two critical milestones in the OSA program. First, we're excited to share the strong 12-month top-line data from our Osprey clinical study for moderate to severe OSA. At 12 months of therapy, the treatment arm responder rate was 65%, with responders defined as those who realized at least 50% improvement from the baseline apnea hypopnea index, or AHI, and an AHI value below 20. Responder rates in the treatment group were strong throughout the first year, with one in four patients responding on day one. 50% responding by month three, and 65% responding by the 12-month mark, demonstrating rapid therapeutic onset and durable benefit over time. As a reminder, OSFRI is the first and only randomized controlled trial for hypoglossal nerve stimulation therapy to support US regulatory approval to date. The study features a differentiated nerve stimulation modality called proximal hypoglossal nerve stimulation or PHGNS, which utilizes six electrodes placed on the proximal trunk of the hypoglossal nerve. It offers broad access to the muscles controlling the airway and provides customized titration. The study enrolled a patient population representative of the general OSA population, including patients with greater OSA severity and higher BMI, relative to other large-scale trials in support of US FDA approval. Notably, Osprey was also designed to include patients with complete concentric collapse or CCC. Importantly, response rates and AHA reductions at month 12 for patients in Osprey with predicted risk of CCC were consistent with the results of the full study population, demonstrating the robustness of the therapeutic response. In addition, We're excited about the median implant procedure time of 72 minutes, exhibiting speed and efficiency of implantation. We are pleased to announce that we recently completed our PMA submission to the FDA based on meeting the primary safety and efficacy endpoints. We have provided the agency with the interim 12-month results from the study and intend to share the complete 12-month data set in support of its inclusion on the product label. We look forward to continuing to work with the agency on their review. With respect to our product plans, we're pleased with the progress we have made in the development of our MRI compatible device as we work toward a full commercial launch. As we look ahead, we are working to ensure a competitive and differentiated product portfolio through our proximal hypoglossal nerve stimulation platform. For example, One area of exploration is fully utilizing all six electrodes of our PHENs technology to further improve the already strong treatment effect. Since each electrode can be operated independently, Proximal HGNS offers the potential to further customize therapy for challenging patients. We will provide additional details on our product roadmap and launch plans during the investor day later this year. Turning to difficult-to-treat depression, we are pleased to share that two additional critical publications have been released, bringing the total to four. The fifth and final critical publication is expected to be published in the second quarter. Collectively, the articles highlight the significant unmet need of this markedly ill population with treatment-resistant depression, or TRD. The recovered data demonstrates that VNS therapy improves symptoms function, and quality of life in TRD patients over time. These are outcome measures identified as clinically relevant by CMS. Depressive symptoms, daily function, and quality of life taken together as a novel composite metric present a more complete picture of the treatment effectiveness than symptoms alone. The fifth and final critical publication currently under review utilizes this composite metric and demonstrates favorable response to VNS therapy in TRD patients who had previously failed multiple treatments, including interventional therapies. Researchers found that patients with previous electroconvulsive therapy or transcranial magnetic stimulation treatment had statistically significant and clinically meaningful benefit with VNS therapy. Notably, VNS therapy is the only treatment that has demonstrated therapeutic effects in patients that previously failed electroconvulsive therapy. As a reminder, all pre-specified recovery endpoints favored active VNS therapy, and the totality of evidence supports our pursuit of Medicare coverage for VNS therapy for TRD patients with high unmet treatment needs. As we have done throughout the RECOVER program, we continue to partner with CMS through the Coverage with Evidence Development Program, working toward a request for national coverage. We will initiate the reconsideration submission process following publication of the fifth and final critical manuscript. In summary, we're encouraged by the significant regulatory and clinical milestones achieved in OSA and our progress in a difficult-to-treat depression program. We look forward to sharing future updates. With that, I will turn the call over to Alex.

Thanks, Amit. During my portion of the call, I'll share a brief recap of the first quarter results and provide commentary on our updated full year 2025 guidance, which reflects improving business performance and incorporates the impact of SNEA and tariffs. Turning to results, revenue in the quarter was $317 million, an increase of 9% on a constant currency basis and 10% on an organic basis versus the prior year. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $4 million or 1%. Adjusted gross margin as a percent of net revenue was 70% compared to 71% in the first quarter of 2024. This year-over-year decrease was driven by unfavorable product mix and inflationary headwinds partially offset by favorable pricing across segments and geographies. Adjusted R&D expense in the first quarter was $38 million compared to $43 million in the first quarter of 2024. R&D as a percent of net revenue was 12% down from 15% in the first quarter of 2024. The year-over-year decrease was primarily driven by investment optimization in the DTD program as we continue to pursue CMS coverage and the wind down of the ACS segment. Adjusted SG&A expense for the first quarter was $120 million compared to $113 million in the first quarter of 2024. SG&A as a percent of net revenue was 38%. and in line with the first quarter of 2024. The year-over-year increase on a dollar basis was driven by commercial investments to support growth as well as systems infrastructure to drive efficiencies and scalability. Adjusted operating income was $65 million compared to $53 million in the first quarter of 2024. Adjusted operating income margin was 20% compared to 18% in the first quarter of 2024. This increase was primarily driven by higher revenue, optimization of DTD program spend, and the wind down of the ACS segment. Adjusted effective tax rate in the quarter was 24% compared to 21% in the first quarter of 2024. The increase was related to changes in geographic mix and a roll off of tax attributes that have contributed to our historically low effective tax rate. Adjusted diluted earnings per share was 88 cents compared to 73 cents in the first quarter of 2024. The increase was primarily driven by adjusted operating income growth and partially offset by higher effective tax rates, which negatively impacted EPS by 3 cents. Our cash balance at March 31st was $738 million, up from $429 million at year end 2024. The increase primarily reflects the reclassification of $295 million of restricted cash due to the termination of the collateral cash deposit associated with the SNEA litigation guarantee. Total debt at March 31st was $629 million, compared to $628 million at year-end 2024. Adjusted free cash flow for the quarter was $20 million, up from $11 million in the prior year period. The year-over-year increase was primarily driven by stronger operating results and continued working capital improvements. I'd like to point out, this year we accelerated Levanova's short-term incentive bonus payouts in the first quarter. which have historically been paid in the second quarter. This will also create a tailwind for our free cash flow in the second quarter on a year-over-year basis. Capital spend was $11 million in the first quarter compared to $6 million in the prior year period. The year-over-year increase was driven by IT investments and cardiopulmonary capacity expansion initiatives. Now turning to our updated 2025 guidance. We now forecast 2025 revenue growth between 6 and 7% on a constant currency basis and between 7 and 8% on an organic basis. The impact of foreign currency is now expected to be a headwind between 0 and 1%. We continue to forecast a full year adjusted effective tax rate of approximately 24%, representing an increase of 300 basis points versus 2024. And now, I'll provide an update on the SNEA environmental litigation matter. In connection with the Italian Supreme Court decision on March 14th that Levanova can be held liable for the established liabilities of SNEA, the company recorded a liability of $360 million in the first quarter. The court also ruled that Levanova should not be held responsible for certain payments as previously decided by the Court of Appeal of Milan in the amount of approximately $170 million. Considering the Supreme Court's ruling and our strong cash position, on May 2nd, we repaid $200 million of term facilities, which had a principal balance of $313 million as of March 31st. The remaining term facilities balance is now considered a permanent part of the company's capital structure. As a result, beginning in the second quarter, the related net interest expense will no longer be excluded from operational financial results. The adjusted diluted earnings per share impact for the balance of 2025 is approximately 20 cents. Importantly, We believe the court's decision effectively retires a longstanding overhang on the company. To incorporate the SNEA impact and reflect the stronger operational performance in our business, we're updating our 2025 adjusted diluted earnings per share range to $3.60 to $3.70 with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year. If we were to exclude this NIA headwind, as we did in the fourth quarter, our previous guidance range would have increased by approximately $0.15 to $3.85 at midpoint. Adjusted free cash flow is still expected to be in the range of $135 to $155 million due to working capital improvements. This range includes approximately $90 million of capital spend driven by critical investments in IT infrastructure, innovation, and growth, including the cardiopulmonary capacity expansion initiatives. I'd also like to call out that the guidance ranges shared today incorporate our best estimate of the potential impact of currently applicable tariffs. We have initiated a tariff mitigation plan that includes both a holistic assessment of our supply chain, as well as potential pricing actions. Based on the assessment, Leva Nova is well positioned to manage the impact of tariffs. Tariff impacts on our supply chain and component costs are currently estimated to be negligible. With respect to our manufacturing footprint, our neuromodulation products are manufactured in the U.S., and approximately 80% of the corresponding revenue is generated in the U.S. Our HLMs And the bulk of our cardiopulmonary disposables are manufactured in Germany and Italy, respectively. And approximately two-thirds of our cardiopulmonary revenue is generated outside of the U.S. In total, we estimate a tariff impact of less than $5 million on adjusted operating income for the balance of the year. The 2025 guidance ranges shared today fully incorporate the impact from currently applicable tariffs. though we acknowledge the environment remains uncertain. In summary, we had another quarter of strong execution marked by double-digit organic revenue growth. This drove over 200 basis points of operating income expansion, a 21% increase in adjusted diluted earnings per share, and meaningful improvement in cash generation. Our updated 2025 guidance reflects both the strength of our underlying performance and continued investment in our core businesses and innovation pipeline. We look forward to providing a more comprehensive update on our capital allocation plans at our investor day. With that, I'll turn the call back over to Vlad.

Thank you, Alex. Let me close by reinforcing what makes Livanova unique. We hold leadership positions in both cardiopulmonary and epilepsy. where we are continuing to drive growth and margin expansion while investing in innovation. Cardiopulmonary grew double digits in the first quarter with increasing adoption of Essence, strong demand for consumables, and clear line of sight to additional growth as we continue the Essence rollout and expand manufacturing capacity. In epilepsy, our full year trajectory remains unchanged, as we focus on maximizing VNS therapy access in the underpenetrated drug-resistant epilepsy patient population. Beyond the core, we are successfully executing against clinical and regulatory milestones in OSA. In particular, the strong 12-month data from the OSPREY trial validates the potential of our differentiated proximal HGNS therapy and positions OSA as a significant long-term growth opportunity for Livanova. We are also making important progress towards CMS reimbursement reconsideration in difficult to treat depression. This program represents a meaningful opportunity to expand our portfolio and serve a large patient population with high unmet needs. Finally, we believe the Italian Supreme Court's decision regarding the SNEA matter effectively retires a longstanding overhang for Livanova and enables us to allocate capital with greater flexibility in line with our focus on long-term value creation. We look forward to providing more detail on our pipeline, growth opportunities, and capital allocation strategy at our Invest Today. With that, we are ready to open the call for questions.

Thank you. If you have a question at this time, please press the star, then the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star and then two. As we enter the Q&A session, please limit yourself to one question and one follow up question and then return to the queue if you have additional follow ups. Our first question comes from the line of Rick Wise with Stifel. Please go ahead.

Good morning, everybody. Hi, Vlad. It's a lot to unpack here in a clearly directionally positive, very constructive performance. Good to see it. And just, gosh, I could start in 10 places. I'll start with the OSPRI data. Maybe just at a high level, can you help us understand, can you help us frame where you feel the data put you on a market dynamic, a market competitive basis against the existing competitors? And maybe just give us some color on timelines and how you're thinking about developing the commercial potential as you move forward.

This is Amit. Good to hear you. So we're very happy with the strength of the clinical data. And just to recap, In our pivotal, which was the first RCT in this field for FDA approval, we enrolled more severe patients compared to the other pivotal trials. So, we started with higher AHI, higher BMI. The other really important differentiation is that we did not exclude triple C patients. Actually, in our trial, about a third of the patients were high risk for triple C, and in the general population, it's about 25%. So, we enrolled in slightly higher patients than the general population in terms of triple C risk. Now, despite this, more severe patients in baseline and not excluding triple C patients, we were able to achieve a rapid onset of therapy, you know, One in four patients responded in day one. About 50% of the patients responded by day 90, and as we released, 65% at 12 months. So, despite the severity and no exclusion of CCC, the therapeutic response was very strong. So, we're very excited about it. Now, moving forward, while these results are already very strong, we believe there's further optimization we can do of this technology because of that differentiated six electrode architecture where you put the electrodes on the proximal end of the nerve, at the trunk of the nerve. And that allows you to control broader muscle groups that control the airway. And what that means is that in the future, we can further improve these results by doing personalized titration, by using different electrodes with different frequencies, turning them on and off at different time points. And we're going to achieve that by using some automated algorithms. So the existing technology is very strong, but where this could go is even stronger. So we're very excited about it. And I think you asked about a little bit of timelines. You know, I don't want to comment on, FDA timelines, but this is a modular PMA, so we already submitted multiple modules working closely with the agency, and our last module was the clinical module, and as we mentioned, we submitted that as well. So, we're hoping for a relatively quick review, and the fact that it's a modular PMA also helps that as well. And in terms of the commercial piece, I'll turn it over to Vlad.

Rick, good morning. Thank you for the question. And so from a strategy point of view, this aligns very well with our direction to expand our portfolio into the areas of high unmet clinical need, high growth, and the areas where we have the right to win with our capabilities in neuromodulation. And we believe that this differentiation, you know, first in the approach with the proximal hypoglossal nerve stimulation, secondly with the technology with six electrodes, And then finally, with an addressable market with more severe patients with high BMI with triple C, that we also anticipate a differentiated commercial strategy. And while we're confident in our ability to commercialize this portfolio ourselves, we are also in discussions with a number of potential partners to do that. And now that we have 12 months data, you know, we're able to continue those discussions moving forward. And, you know, by the investor day, we will frame our full strategy, including commercial execution moving forward.

Great. And just my follow up question. I was hoping you could unpack the outlook for the HLM business in a little more detail. Obviously, for Essence, you got some new geographic approvals, et cetera. And just help us understand where are we in the Essence placement rollout lifecycle. And on the Oxygenator side, you're expanding capacity. But is there anything new, any new perspectives on competitive return to market? Or, you know, what's your line of sight there? Thank you so much.

Thank you again. So let me start with Oxygenator. You know, over the last two years, we've gained share. We estimate that we've progressed our share from low to mid-30s. And getting the exit from surgical perfusion business gives us additional opportunity for share gain moving forward in the areas of HLM, heater, cooler, and then bypass disposables. On the oxygenator, we continue to see strong demand and the demand continues to outpace the market's ability to supply. We continue to see our share gain momentum. Just to remind you that in 2024, we increased our capacity and output by 10%. In 2025, we are on track to have another 10% increase. And we have invested in additional manufacturing line, which we expect to go live in the middle of next year. And that will give us a step change in terms of capacity increase. So on the disposable business, we're pleased with the performance in terms of share gain, and we see a path for longer term growth and market share gain given our expansion and our capacity. So that's on oxygenated front. On the HLM front, just to remind you that Essence was represented 40% of all the HLM placements in 2024. And this year we are on path to get to 60%. And so then if we look forward, we will go from 60 to 80 and then to 100%. A major milestone for us is China. where we got regulatory approval for essence ahead of expected timeline. So in April, we received the approval in China. China is our second largest market worldwide after the US in terms of HLMs. The other thing that we're pleased with is we were able so far to maintain the price premium versus the previous generation. And that obviously is a significant growth driver for us. I think on HLM, we're very pleased with the performance in the first quarter. We're on path to get to 60% placement penetration and to maintain price premium.

Thank you so much.

Thank you. The next question comes from David Roman with Goldman Sachs. Please go ahead, David.

Thank you. Good morning, everybody. I wanted to start on the OUS neuromodulation business, which very much trended as you had communicated earlier this year. But could you just go through a little bit more detail as you think about the progression of what transpired between Q4 and Q1 and help us think about the sustainability of some of the changes you've made and the updated guidance you provided for that segment? Sure.

Well, hi, David. It's Steph here. Thanks for the question. So our first quarter results for Europe certainly demonstrate the improved commercial execution outside the US that we described on quarter four call. We're really pleased with the progress that the team has made, focusing on the fundamentals, strengthening our talent, improving our customer segmentation, and focusing on our organic patient demand. We have started the year in a very healthy position and our performance is indicative of organic patient demand. We've made some talent changes and the impact of those are starting to read through. We've got experienced leaders supporting the field in the team. the team in the field rather, and we believe that the performance OUS will continue and we've incorporated that in the improved expectations for Europe for the guide. So the other thing I would say is that we still know there's significant opportunity in the EU region. The DRE population is even less penetrated outside the US and with our footprint and market leadership position, we're able to drive penetration. Thanks for the question.

And then maybe as a follow-up on, I know, Alex, you've given the earnings walk here on slide 18, but as you kind of put the pieces together here, the 21 cents of revenue and margin improvement, is that, should we think about the takeaway as you're utilizing, is that revenue and gross profit? that are helping cover the incremental investments in OSA and SNEA, or are there other kind of optics adjustments included in there as well?

Hi, David. Yes, it's largely revenue and gross margin upside. You know, we continue to optimize our spend across the P&L, but it's largely the top line and the associated gross margin.

Got it. Thank you.

Thank you. Our next question comes from Adam Maeder with Piper Sandler. Please go ahead.

Hi. Good morning, all, and thank you for taking the questions. Congrats on the nice start to the year. From my vantage point, I wanted to start on tariffs. Alex, if I heard the commentary correctly, it sounds pretty manageable. I think you said $5 million impact to adjusted operating income this year. Hopefully I heard that right. Can you just double click on some of the assumptions and the tariff math that's built into the guidance? I think that came in better than expected. And then in terms of the tariff mitigation strategy and kind of what's baked into the guidance, does that assume you're taking price? or passing along price, or is that not contemplated as an offset at this time? And then I have a follow-up. Thanks.

Hi, Adam. Yeah, so let me just start off. I think it's important to note that we are very well positioned in terms of the tariff situation. Our plan, so at first we assessed our overall supply chain, and You know, looking at the components coming in to our manufacturing sites, we largely assess that as negligible. So, you know, from that perspective, we're in good shape. I want to just, again, reemphasize our manufacturing footprint. So our neuromod products, right, are manufactured in the U.S. Eighty percent of our revenue comes from the U.S. Our HLM business and the bulk of our CP consumables are manufactured in Germany and Italy, right? And then two-thirds of that revenue base comes from outside the U.S. So you take that sort of as a whole. I think we have a largely manageable situation based on what we know today. And again, the tariffs are indeed captured in our guidance that we provided today. And that's less than $5 million impact on our adjusted operating income for the balance of the year.

Understood. Thanks, Alex, for the color there. You know, maybe I'll just ask one on the guidance front as well. You know, you raised the guidance 7% to 8% organic. You know, on the top line, just maybe walk us through, you know, quarterly sequencing. And I show the street sitting at Q2 revenue, I think 331 million or so, 97 cents for adjusted EPS. Just any reaction to those figures and any comments as you kind of think about the rest of your playing out. Thank you.

I think from a top line perspective, you know, the street is probably in the right zip code. I think our investments begin to kind of ramp. Usually our Q1 is kind of on the lower end of the spectrum as it relates to OPEX. So we start to ramp our operating expenses kind of in the neighborhood of $160 to $165 million per quarter. So I think that's That's largely in line. Then, of course, in Q2, we start, you know, we start to see the impact of the interest, the net interest expense related to the balance of the term loan aid facilities. So, that's now incorporated into the operational performance metrics. So, that's kind of the key adjustment there.

Thank you.

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

Good morning. This is Mike Sarcona for Matt Taylor. Thanks for taking the question. Just a quick clarification on Adam's first question. That $5 million tariff impact, does that include the offsets from the mitigation strategies, or is that just you know, gross tariff impact, and then any mitigation strategy would reduce that impact.

Yeah, so, and I apologize to Adam for missing that part of this question. Yeah, so we had assumed that there might be some, call it marginal price, pricing actions to offset the, you know, the costs related to the tariffs.

Okay, thank you. That's very helpful. I had one on U.S. epilepsy. What type of visibility do you have into the channel? And I'm really trying to get at your level of confidence that the U.S. epilepsy business won't be impacted in the near term more severely than you're baking into guidance.

Sure. Hi, Mike. It's Steph. So we continue to be confident in the long-term trajectory of the business, which we believe is the mid-single-digit range. The epilepsy market is large, it's growing, and we are the market leader in neuromodulation. From a shorter-term perspective, we're pleased, as I've already alluded to, with the performance and the execution that we've seen in Europe and the rest of the world, which is reflected in this guide. connected to our strategy, which is to maximize VNS therapy access and to address this large unmet need in DRE. You know, when you think about it, there are 40,000 patients in the U.S. that are diagnosed each year, and less than 25% of them are treated with a surgical intervention. So that's very much our mission, to ensure that patients get access to advanced therapy.

Got it. Thank you very much.

Thank you. Our next question comes from Mike Mattson with Needham & Co. Please go ahead.

Yeah, thanks for taking my questions. You know, just with all the moving parts on the balance sheet with the, you know, the potential payment of, you know, the cash out for SNEA and then the debt repayment that you did, can you just give us an estimate of where your leverage ratio is going to be, you know, once all that's kind of done?

And our leverage ratio today is extremely healthy, so I'll provide the, you know, sort of the exact numbers on some of our follow-up calls, Mike. I don't have that off the top of my head, but I assure you that our leverage ratio is very healthy at this point.

Yeah, yeah, no, I'm not worried about it. I just was curious, you know, how much, you know, flexibility you have to do things like share repurchases or M&A now that you've kind of resolved that overhang or uncertainty around how much you would have to pay Italy for SNEA? Yeah.

So, look, we've accounted for the SNEA liability. We obviously recorded our best estimate of approximately $360 million in liability in the quarter. You know, we had a very healthy and strong cash balance to deal with that. We took the opportunity to repay $200 million of the term facility. You know, in terms of our capital allocation strategy, you know, say, you know, our priority is to continue to build on the strong foundation and continue to invest in the core to build on our market leadership there with innovation in epilepsy and CP. As we talk about the CP manufacturing investments, our second priority is around OSA. And because that presents a significant growth opportunity, obviously we've made great progress on that so far from a clinical and regulatory perspective. And then we're open to inorganic options for growth, right? And really focused on attractive markets, high unmet needs and our right to win. And that will be done in a very disciplined approach. So overall, I'm very comfortable with our capital structure as it stands today. We do have additional borrowing capacity if necessary.

Okay, got it. And then just one quick one on the tariff. So you're saying that the $5 million is based on current tariff. So I'm assuming that if the tariff rates were to increase when we hit that 90-day mark post-April 2nd, that that number would likely increase.

I mean, obviously, who knows what's going to actually happen, but... Yeah, look, you know, we're operating in an uncertain and kind of evolving environment. You know, when the 90-day timeframe expires, you know, we'll reassess, right? Our teams are focused on on the fundamentals and, you know, making sure that we have continuity of supply to our customers and serving our patients. So, you know, as the 90-day clock expires, we'll take a look at our mitigation strategies should the tariff situation change again.

Okay. Got it.

Thank you. Thank you. The next question comes from David Rescott with Baird. Please go ahead, David.

Oh, great. Thanks for taking the questions. I wanted to ask on this, you know, the bridge to the updated EPS outlook that you provided in the um investor doc you know when i think what you called out is um you know had the snea environmental liability uh payout associated debt reduction uh not been there you would have raised by 15 cents can see the math again in the slide you know our initial look at some of the back of the envelope math was you had the the 12 cent beat in the quarter maybe seven or eight cents of a headwind um from from tariffs and Our math at the time was about a 20 cent FX kind of net change benefit. So it would imply that maybe the raise could have been higher than the 15 cents. So just want to get an understanding what the effective kind of communication is here on the raise. And then maybe any quantification that you have on what that tariff or sorry, the FX change would have impacted or is baked into the guide at this point.

Hi, David. So, look, our FX impact is largely reflected in the top line. Given our sort of geographic footprint and our geography of our OPEX, RP&L is kind of naturally hedged, right? So, you know, when the dollar gets stronger, top line is impacted negatively, but we get the benefit of... you know, the OpEx gains there. So, we don't really have a massive impact on our bottom line from an OpEx perspective. It's kind of a naturally hedged, if you will.

Okay, perfect. That makes sense. On, you know, the updated guide for the cardiopalm segment this year, You know, you talked about China, recent approvals there, wondering if maybe it could size up the opportunity there. You know, the 30%, I think it was 30% HLM growth in the quarter, I think was pretty impressive, you know, relative to where you were. I'm exiting last year and even given the comps that you had last year, I don't think those comps even really get that much tougher in the second half or in Q2 or the rest of 2025. So can you help us think about how you arrived at this, you know, new cardiopulmon growth outlook, especially with, again, what seems to be pretty strong friends, not as strong kind of comps even on the HLM side next year or in the back half of this year and then China coming on as well. Thank you.

Yeah, so as we said in our initial guide, we expect HLM to grow at double-digit rates. We obviously assumed, you know, our regulatory approval in China came a bit earlier than we expected, but really not a major impact in terms of our guide. You know, we still expect strong growth with HLM. Q1, I just want to remind everybody, you know, the capital equipment sales are not linear, right? So Q1, we had a very strong quarter with 30% growth. We don't expect that to continue throughout the year, but we still have assumed a strong ramp, you know, in the last three quarters of the year. So, you know, that's baked into our adjusted guide for CP, which is now, you know, expected to be 9 to 10%, you know, relative to 7 to 8% that we projected in, you know, at the end of Q4.

And David, this is Vlad. And we're very pleased with our execution in CP both on HLM and oxygenated front. And obviously very pleased with our first quarter performance. It's early in the year, so we are working very hard to maintain this momentum. And, you know, when the time is right, we will, you know, keep informing you on our progress on growth. All right.

Great. Thanks.

Thank you. The next question comes from Michael Pollack with Wolf Research. Please go ahead, Michael.

Hey, good morning. I have a question on depression. In the slide deck, I see that depression revenue and the guidance is $12 million at the midpoint. I didn't see that in the fourth quarter deck. So is all that incremental or was there a placeholder in before? And then the driver, it says driven by program optimization efforts. And I'm curious what that means because $12 million is is the best number I've seen out of depression. It's even better than peak recover enrollment years. So I'm curious what's driving the uptick.

Hey, Mike. It's Alex. So yeah, we upped our revenue assumption in DTD. I think you've heard us talk about this in the past. We have a small commercial infrastructure in place. The team was during the recover enrollment periods, they were largely focused on driving the patient funnel for recover. What we've done now is we're awaiting our re-engagement with CMS. We basically restarted our process that we've had over time to look at basically driving the new patient funnel for patients who are interested in the device, right? And so that goes through a very long appeals process with payers, which is not very efficient, and that is the reason we're so keen on getting reimbursement with CMS. So that is the rationale for increasing our revenue in DTD.

Was there something in the guidance before? It wasn't in the old deck, so I'm curious what the old input was.

Yeah, it was largely the same. It was a marginal increase, you know, relative to the previous guide, yeah.

Okay. For my follow-up, I want to ask on sleep apnea, small two-parter, 72 minutes average case time in Osprey. What's your perspective on what that could be in the real world as you train surgeons and get them comfortable with your device? And how do you think that compares to what the competitors delivered in their pivotal trials? And then the second part is on pricing. Any preliminary view of how you might approach price as you develop a commercial strategy at the market level of hypoglossal nerve stem or perhaps a discount to differentiate. Thank you so much.

Yeah, I'll start with more of the clinical questions, and I'll ask Alex to comment on the pricing piece. So one of the key points of our design is that you put the electrode cuff at the proximal end so that really limits or minimizes dissection in the tissue when you're placing the cuff therefore you win a lot of time that is one reason we're 72 minutes in you know other trials uh for example, Inspire, they had a longer time period. But one reason for that was that they had a secondary sensor that they had to implant, so there was three incisions instead of two. So it's a little bit of apples to oranges comparison, but 72 minutes is low. We're very excited about it because it's an easy implant to the proximal end. And the last comment I'll make is that What we hear from our surgeons is that if you have done INSPIRE, it's very easy to move and implant an Osprey device. You do not need to learn new skills. It's actually because of the proximal end piece, it's actually something very straightforward then to transfer into. So with that, I'll ask Alex to comment on the commercial piece.

Yeah, and I think as part of our go-to-market commercial strategy, and we'll talk a little bit more about that later in the year during Investor Day, our team, I don't want to, you know, do a big rollout of our pricing strategy, but our team is, you know, continuing to work on an appropriate coding for this therapy.

Thank you. Those are all the questions we have time for today, and so I'll turn the call back to Vladimir Makasaria for closing remarks.

Thank you, Emily, for facilitating the call, and thank you, everyone, for joining the call today. And on behalf of our entire team, we really appreciate your support and interest in Livanova, and have a great day.

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