TransMedics Group, Inc.

Good afternoon, and welcome to the Transmedics fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Brian Johnston from the Gilmartin Group for a few introductory comments.

Thanks, operator. Earlier today, Transmedics released financial results for the fourth quarter and full year ended December 31st, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call, including during the question and answer portion, that include forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including without limitation, our examination of operating trends, the potential commercial opportunity for our products, and our future financial expectations, which include expectations for growth in our organization and guidance and or expectations for revenue, gross margins, and operating expenses in 2024 and beyond are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. Additional information regarding these risks and uncertainties appears under the heading Risk Factors on our Form 10-K filed with the Securities and Exchange Commission on February 27, 2023. Our subsequent Form 10-Q filings and the forward-looking statements included in today's earnings press release, all of which are available at www.sec.gov and on our website at www.transmedics.com. Transmedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 26, 2024. With that, I will now turn the call over to Waleed Hassaneen, President and Chief Executive Officer.

Thank you so much, Brian. Good afternoon, everyone, and welcome to Transmedic's fourth quarter and full year 2023 earnings call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. Our fourth quarter performance represents a new high watermark for Transmedic's business. We ended the year on a very strong note laying a solid foundation for continued growth. Also, the fourth quarter was the first quarter that we had transmedics transplant logistics services operational during the full three months of the quarter. Although transmedics logistics is in its early innings, I am thrilled to report on the early successes of the logistical services. We successfully executed on every front and overcame early operational challenges as we continue to expand our footprint and team. Let me share the summary of our results for Q4 and full year 2023. Total revenue for 4Q grew to $81.2 million, representing 159% growth from 4Q 2022. 2% sequential growth from 3Q 2023. For the full year 23, total revenue was $241.6 million, representing 159% growth over 2022. So for the second consecutive year, we delivered on and even exceeded our aspirations to double revenue year over year in the first years of OCS commercial launch. Transmedics Logistics Services revenue for 4Q was $9.2 million, up from $2.1 million in 3Q. We are proud of this success in the first full quarter of operations. Based on everything we know today, we are growing extremely confident and bullish on the significant potential positive impact of Transmedics Logistical Services to help us grow the use of NOP platforms. We fully expect our integrated NOP and logistics services to enable Transmedics to deliver an end-to-end, seamless, efficient, and safe solution to transplant programs across the US. Simply stated, providing a world-class service through a highly cost-efficient model. Our overall gross margin for 4Q was 59%, down from 66% in 4Q 2022. The full year 2023, our gross margin was 64% compared to 70% in 22. I know Stephen is going to detail this in his section of today's presentation. However, I want to take this opportunity to give you my perspectives on this important topic of Transmedics gross margins. Please remember, we are still very early in our commercial ramp and more so with our logistics services. There are several leverage points. I repeat, there are several leverage points for both product and service revenues that are not fully reflected in our models yet. Based on everything we know today, we are extremely confident that we will be able to ramp the gross margin up over the next 12 to 18 months as we achieve more leverage of scale in our operations. In the meantime, we are thrilled that we achieved a 35% gross margin for our service business faster than we had projected, exceeding our early expectations. Again, it is just the beginning. We also achieved critical profitability milestone in 4Q as we delivered our first GAAP operating profit quarter. Specifically, we delivered 2.6 million of operating profit and 4 million of net profit in the fourth quarter. This marks a critical step forward as we strive to reach and sustain positive cash flow in the very near future. Before moving on, I'd like to take a moment to recognize that these exceptional results were only possible through the hard work of the entire Transmedics team. Let me send a message to Team Transmedics. We are grateful for your world-class effort, commitment, and creativity in navigating every operational challenge of our rapidly growing business in 2023. Importantly, I want to make it crystal clear that we are now gearing up for another strong year of execution in 2024. Now let me move on to provide my perspectives on some important trends and what do they mean for our business. In line with our growth strategy, we grew our case volume across all three organ markets in 23 compared to 22. Our OCS lung case volume grew by approximately 11%, our OCS heart case volume grew by approximately 82%, and our OCS liver case volume grew by approximately 199%, almost tripling from 2022. For the full year, We have transplanted approximately 2,300 OCS transplants in the U.S. compared to approximately 1,000 transplants in 22. We plan to report our annual OCS case volume in the U.S. going forward as a benchmark towards the stated goal of performing 10,000 transplants in the U.S. by 2028. In terms of NOP contribution, as we predicted, NOP represented the lion's share of OCS transplants in the US. We ended the year with an overall NOP rate of more than 98% across all three organs. We are confident that this sustained growth and success of NOP is based solely on the operational efficiency to grow transplant volumes, highest level of clinical care of donor organs, and the overall cost efficiency experienced by transplant programs across the United States. Importantly, we are planning to present several data analyses during the upcoming transplant conferences in 2024 to unequivocally demonstrate the improved clinical outcomes achieved using OCS-NOP in the US. Again, I want to stress a key point. The success of OCS-NOP program is based on better clinical, economic, and operational outcomes experienced by the transplant centers and not based on anything else. In Q4, we buttressed the NOP clinical staffing by adding 37 new clinical specialists and four procurement surgeons. Now, let me share the impact of our OCS technology and NOP on the overall national transplant volume in the U.S. For the first time in nearly eight-plus years, both liver and heart transplant volumes grew by 12% nationally in the U.S. Based on our OCS case number and donor mix, we are confident that our OCS technology and NOP services were primary drivers for this annual transplant volume growth. The overall national growth came from both increased use of DCD donors driven by OCS use, as well as a modest increase in DBD donor utilization. This is a great first step to prove the ability of the OCS and NOP to grow the overall U.S. transplant market. We are looking forward to continuing this trend in 2024. and hopefully seeing similar growth in lung driven by OCS and NOP over the next few years. Now let's discuss the percentage penetration of the OCS use in each organ market segment nationally in the U.S. We ended 23 with the OCS case volume representing approximately 17% share of the national liver transplant volume, approximately 16% share of the heart national transplant volume and approximately 4% share of the lung national transplant volume in the U.S. For anyone who may be assuming that Transmedics has maxed out on our growth potential, these data provided crystal clear evidence that we have a long way to go to continue to grow our market share in the U.S. This will be fueled further by our unique ability to also expand the overall national growth of transplant volumes in the US to help patients who are desperately in need for a life-saving transplant procedure. Our vision is that by the time we reach the 10,000 US OCS transplants, that this number, 10,000, would represent a portion of the overall US transplant market and not the total addressable US market. Now, let me turn to a more detailed discussion on our transplant logistics service strategy and review its early performance in late 2023. I want to start by highlighting our strategy and value proposition. Please allow me to share some important facts and background on this important topic. Historically, for cold preservation and organ transport, Transplant Center relied exclusively on charter flight brokers and local small operators. I repeat, Transplant Center relied on charter flight brokers and or local small charter operators. These brokers typically have used what they promote as an asset-light model, meaning they don't own or operate any aircrafts. The role is simply to contract a charter flight and a crew from a local or regional operator when a donor mission is needed. When Transmedics first deployed the NOP program, you all remember we too relied on the same network of charter brokers. Unfortunately, we quickly learned through firsthand experience that the brokered charter flight model had significant limitations to help grow the transplant volume in the U.S. and was becoming a huge bottleneck for our NOP program. This regional charter brokerage approach was very operationally inefficient and added significant costs to the transplant centers due to, one, fragmented local and regional operators using older aircrafts that were not capable of covering the new longer-range donor missions now afforded by the new U.S. national organ allocation laws and the use of OCS technology and NOP's capability to go longer distances to increase utilization of donor organs for transplant. Two, significant shortage of chartered plane availability for 24-7 to cover the growing demand for transplant mission This resulted in the loss of approximately 20 to 30% of donor retrieval missions for NOP in 22 and early 23. Three, the lack of control over the planes and pilots by most charter brokers, often resulting in the use of more than one plane and multiple crews to complete a single mission, which sometimes doubled the transportation bill paid by the transplant center. Four, Lack of control over the starting location of the aircrafts led to use of highly inefficient routes, which added even more costs in order to reposition the aircraft. Five, lack of control over air safety standards of these contracted local or regional operators flying 20-, 30-year-old aircrafts. In fact, our own NOP clinical and surgical teams experienced a few near catastrophic events on brokered aircrafts in 22 and 23. Six, an inefficient round trip cost model, even if the donor organ is not procured for transplant or if a DCD donor never progressed to become a donor. Finally, a very complex cost structure with multiple middlemen that paid with associated profit margins for the owner of the aircraft, the operator of the aircraft, and the broker of the chartered flight. All these added significant and unnecessary cost burden to the transplant centers. So while this asset model might be light for the broker, it is clearly a very heavy financial burden to the transplant centers and payers who ended up paying multiple middlemen. Importantly, it also severely limits the ability to grow transplant volumes due to shortage of dedicated aircrafts, and we saw it as a roadblock to our stated goal and commitment to growing the U.S. transplant volume. To address these significant inefficiencies, safety issues, and capacity constraints in the historical model above, Transmedics created a new, more scalable model that meets the current and future needs for growth of the transplant markets in the U.S. while providing significant operational and cost efficiencies to the transplant centers. Let me share with you our vision and our goals that we've actually achieved to date. We set out to maximize donor organ utilization for transplants by building and operating a modern fleet of jets that can go longer distances. This fleet is dedicated to transplant missions and not charter flights. Using newer model aircraft allows us to use less fuel so we can be environmentally responsible, reduce maintenance costs and reduce downtime to maximize availability to conduct transplant missions. Two, Our goal was to maximize operational efficiency, which will reduce costs on the transplant centers. Three, our goal is to maintain the highest level of air safety for our staff, our clinical users, and the precious donor organs we are caring for. Four, maximize logistics availability to ensure that we reduce the waste of donor organs that do not get used due to lack of plane availability. And finally, leveraging the unique NOP network and proprietary modern dispatching algorithm with a digital command and control center structure to significantly reduce cost burden of DCD donors that don't progress to become a donor. The NOP network infrastructure created by Transmedics has given us a unique ability to share our cost efficiencies with our transplant center users. Now, with the above background, let me share with you some important early performance metrics for transmedics transplant logistics service, which encompasses aviation and ground logistics for NOP missions. As mentioned earlier, revenue from transplant logistics service alone was $9.2 million in 4Q, compared to $2.1 million in 3Q, as we are only operational for approximately four to five weeks in 3Q. The average number of active transmedics aviation planes were approximately seven planes in 4Q compared to approximately 3.5 in 3Q. We ended the year with a total of 11 owned aircrafts that will become fully operational in early 2024. Approximately 98 transplant programs in the U.S. use transmedics logistics service in 4Q compared to approximately 36 programs in 3Q. This is an important metric to unequivocally show that operational availability, cost efficiency, and high safety standards enabled us to disrupt the inefficient historical model and take market share relatively quickly. We were able to cover only approximately 35% of our NOP flights needs in 4Q using Transmedics Aviation Planes compared to 13% in 3Q. At scale, we are hoping to cover 80% of the NOPE cases using our Transmedics Logistics Service for both air and ground transport. We will use carefully selected, highly reliable and safe operators for supplemental lifts to support our missions. So far, we are humbled and proud by these early results. We are continuing to expand our air fleet and crew to operate the aircrafts. We are hoping to have 15 to 20 aircrafts operational by end of 24 or early 25. We opened the digital command and control, I'm sorry, command and dispatch center in Andover at the end of December, and we are now fully operational 24-7-365 from this state-of-the-art facility. This dispatch center is designed to maximize operational availability and efficient routing of our NOP resources to minimize plane repositioning cost on the transplant programs. Again, based on everything we know today, we are extremely confident and bullish on the potential positive impact of transplant logistics services on the growth of our NOP case volume and a more efficient utilization of our clinical resources. Before I leave the Transmedics Logistics section, I want to share some perspective on a matter that recently entered the public domain. Many of you may be aware that a letter was emailed to Transmedics from a member of the U.S. Congress on February 21st, writing in his capacity as an individual member of Congress regarding Transmedics business practices. Prior to receiving this letter, we had never communicated with this Congressman nor with any member of his staff. This letter contains serious accusations which are grossly inaccurate, unfounded, and based on wrong information. Let me repeat again. This letter contains serious accusations which are grossly inaccurate, unfounded, and based on wrong information. Rest assured. Transmedics has responded to this letter with the same level of seriousness with factual evidence to set the record straight. Our formal response is posted publicly on the investor section of our website. It is clear that what Transmedics is doing in the area of transplant logistics is disrupting this antiquated charter brokerage model for organ transplantation. This is creating some competitive dynamic in this area by some of the historical brokers that are struggling to compare or to compete with our operationally efficient and cost-effective logistical capabilities. Finally, let me give you a bird's eye view of our growth strategy in 2024 and hope to detail these initiatives in our 1Q 2024 call in May. Our goal in 24 is to continue to invest in building out our transmedics transplant logistical services throughout 24 to give us more operational leverage and efficiencies. We will focus on growing our NOP case volume in all three market segments by driving both growth in the overall transplant volume and take share of existing volumes. We will initiate a new clinical program to try to reinvigorate the lung transplant activities in the United States. Finally, we are investing in our next gen OCS technology platform that will be more optimized for NOP workflow and streamline the support process on our clinical staff to maintain the highest clinical management quality and achieve better product leverage. We are humbled by our success in 23. However, we are not standing still. We are laser focused on our execution plan for 24 to help drive growth in the overall transplant volumes in the US and for transmedics business. That being said, we need to balance our bullish plans with potential scalability and competitive challenges. We are providing an annual revenue guidance between $360 million to $370 million, which represent 49% to 53% growth over 2023. With that, let me turn the call to Stephen Gordon to cover the detailed financial results for the quarter.