Greetings, and welcome to the Artivion Second Quarter 2023 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Laine Morgan from Gilmartin Group. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you for joining the call today. Joining me today from Artivion management team are Pat Mackin, CEO; and Ashley Lee, CFO. Before we begin, I’d like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings and in the press release that was issued earlier today. Now I’ll turn it over to Artivion’s CEO, Pat Mackin.

Thanks, Laine, and good afternoon, everybody. The second quarter of 2023 was an outstanding quarter for Artivion, both commercially and operationally. I’m pleased to report we delivered constant currency revenue growth of 11% year-over-year, resulting in a record $89.3 million in quarterly revenue. Our strong performance was led by improved revenue growth in our stent graft business, which increased 19%, followed by On-X at 11%, tissue processing at 9%, and BioGlue was up 4%. These were all compared to the second quarter of 2022 on a constant currency basis. We also received FDA approval for PerClot during the quarter and commenced shipping PerClot to Baxter. We continue to execute on our strategy to drive increased revenue with existing markets as well as new geographies through expansion of our commercial footprint with new regulatory approvals, and by expanding our adjustable markets through our clinical pipeline. Our strong top line performance led to $13.8 million in non-GAAP adjusted EBITDA in the second quarter. This is a 35% increase compared to the second quarter of last year. We expect our strong momentum in the first half of the year to continue into the remainder of the year and through 2024. We were confident coming into 2023 that our business was well-positioned for success and the years unfolding largely as expected. At our Investor Day in March of 2022, we committed to delivering compounded annual growth of double-digit constant currency revenue growth through 2024 and through driving further operating leverage, adjusted EBITDA to $75 million in 2024. We believe we remain on track to achieve both of these goals. Our commercial team is also executing extremely well. As I mentioned earlier, stent graft revenues were up 19% constant currency versus the second quarter of last year, we saw a double-digit constant currency year-over-year growth…

Thanks, Pat, and good afternoon, everyone. Total revenues were $89.3 million for the second quarter of 2023, up 11% on both a GAAP basis and constant currency basis, both compared to Q2 of 2022. Non-GAAP adjusted EBITDA increased 35% from $10.3 million in the second quarter of 2022 to $13.8 million in the second quarter of 2023. On a year-over-year basis, in the second quarter of 2023, stent graft revenues increased 19%. On-X revenues increased 10%. Tissue processing revenues increased 9% and BioGlue increased 4%. On a constant currency basis compared to the second quarter of 2022, stent graft revenues grew 19%. On-X revenues grew 11%. Tissue processing revenues increased 9% and BioGlue revenues increased 4%. On a regional basis, second quarter 2023 revenues in Asia-Pacific increased 23%. Latin America increased 21%. North America increased 8% and EMEA increased 12% all compared to the second quarter of 2022. On a constant currency basis, revenues in Asia-Pacific increased 23%, Latin America increased 24%, North America increased 8%, and EMEA increased 11%, all compared to the second quarter of 2022. Gross margins improved to 65.1% in the second quarter and increased compared to both the first quarter of 2023 and the second quarter of 2022. The increase was driven by a price increases and product mix, partially offset by inflationary impacts on materials and labor. G&A expenses in the second quarter were $57.2 million compared to $39 million in the second quarter of 2022, excluding non-recurring acquisition related business development expenses and benefits and other non-recurring charges, G&A expenses were $45.9 million for the second quarter of 2023 compared to $41.8 million in the second quarter of 2022. R&D expenses for the second quarter were $7.4 million compared to $8.6 million in the second quarter of 2022. The decrease in R&D spending…

Hey, thanks, Ashley. So as you just heard, a momentum that began in the first quarter continued into the second quarter capping off a very successful first half of the year. Our strategy is working and generally what we expected to be meaningful EBITDA growth this year. We also took guidance up for the second straight quarter and we’re confident our strong growth in 2023 will continue for the following reasons. First, continued strong performance in our stent graft business due principally to recent staffing improvements that our German manufacturing facility and other supply chain initiatives; two, continued strong On-X performance driving further market share gains; three, continued strong performance in Asia Pacific and Latin America as a result of our investments and new regulatory approvals in those regions; fourth, growth in BioGlue and PerClot due to our recent regulatory approvals; fifth, we have two U.S clinical trials, AMDS PERSEVERE and Endospan’s NEXUS TRIOMPHE that are currently enrolling. Combined, we expect to significantly expand our total adjustable market in 2025, assuming we execute on the Endospan option. We continue to expect revenue to grow double digits as compared on an annual basis, and to generate greater than $75 million of adjusted EBITDA in 2024, which will reduce our net leverage to less than 3 times despite the headwinds we face from inflation and its impact on gross margins. In conclusion, we continue to advance our goal of being a market leader in aortic repair and expect 2023 to be a standout year for the company. I want to thank all of our employees around the globe for delivering on exceptional second quarter. With that operator, we’d like to open the line for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rick Wise with Stifel. Please go ahead.

Hey, Pat. Hey, Ashley. This is actually John on for Rick today. I wanted to start off on price. Last quarter, you spoke about implementing price increases in certain product areas. I was just curious how successful that implementation has been so far any kind of benefit it might have contributed in the second quarter and what your expectations are in the second half of the year.

Yes. So we talked about looking at some of our products that we’re highly proprietary with patented technology that really nobody else has that also provides a significant benefit to patients. And given the demand on some of these products I chose to raise prices there. It’s been very successful and I think, as I mentioned in my comments, we expect to see more of that as we go throughout the year. A lot of those prices were rolling through the second quarter and a lot of those will be in place fully for the third and fourth quarter. So it’s been kind of as we thought and been very well executed.

Great. Great. And then to follow-up on that, I’d like to look at it through the lens of revenue guidance for the year. If I just take the balance of the first and the second half, it implies almost a 50-50 split a little more in the second half and the first. I’m just curious, with the price increases built in, could there be potential upside to that midpoint? Like, what’s getting you to the higher end of the range? Is it price? Can you just talk us through the factors there?

Yes. I mean, I think there’s always – we have a lot of levers we can pull. We’ve got the price increases we just talked about. We’ve got the supply for our stent grafts that I mentioned in my comments that we’ve done a great job building up our inventory, which if you look back in the first quarter, our stent grafts grew in kind of the 8% or 9% range, and they’re growing 19% now. So we expect the stent graft business to continue to grow faster. We also have some new product launches in there that are going to kick in. We’ve got some stuff coming out of regulatory that’ll kick in. So a lot of it, like, like any quarter, I mean, we’ve got projections for when we think stuff’s going to get approved for when we think launches are going to roll out. And that’s really the difference. So I mean, we’re confident we can grow double digits. The question is, if we grow 11%, 12% in the range is going to depend on how those things come together.

Got it. Thank you. That’s very helpful.

Our next question comes from Suraj Kalia with Oppenheimer. Please go ahead.

Hi, Pat. Hi Ashley. This is Shaymus actually on for Suraj today. Congrats on the great quarter. Just kind of to start on our end, looking at SG&A, it kind of jumped, I’d say, a decent amount about 64%, if my math is right. Just looking for any particular reason for that, if that’s a continuation that we might see going forward. Can you just break it down a little, please?

Yes. I would actually take that one. It’s not a real SG&A jump.

Yes. The biggest contributor was the big spike that we had in contingent consideration for the AMDS acquisition. So that was a non-cash charge of about $11 million. And I’d made some comments and in our prepared remarks that excluding the amounts that I just described, that adjusted SG&A came in at around $45 million roughly compared to the previous year.

Yes. I mean, the way I look at this, I mean, that’s an accounting gyration of an acquisition that we did. If I look at the pure operations of the company, we grew the top line 11% and our operating expenses grew 5%.

Got it.

Yeah. So the true comparison is around a little over 45% to it to around 42% from the previous year.

Perfect. Thank you for that. Just kind of thinking as well, how should we kind of think of current On-X U.S. sites average utilization rate, kind of what’s the room for growth there?

Yes. So I mean, On-X is a plays in – we have obviously an aortic valve and a mitral valve. That’s about a $250 million global market that we’ve been growing double digits since we acquired the company. I’m not going to get into the specifics. You can do the math on our numbers, but we still have plenty of room for growth. We’ve had – we’ve seen some competitors exit, because we’ve taken so much share in some geographies that they’ve decided to exit kind of in other places. So we see upside really around the world for On-X and we continue to put up double-digit growth and we’ve also had the mitral publication that people are very interested in that’s even a better valve than the aortic. So I think with our global channel and our focus on the aorta, our relationships with customers and the strength of that product, we feel it’s going to continue to kind of grow at the double-digit range going forward.

Perfect. Perfect. Thank you for taking our questions.

[Operator Instructions] Our next question comes from Frank Takkinen with Lake Street Capital Markets. Please go ahead.

Great. Thanks for taking the questions. Congrats on the quarter. Wanted to start with one on stents. Pat, you alluded to it in your prepared remarks, but manufacturing has been a challenge clearly that came back really solidly this quarter. Was hoping you could take us a little bit deeper into the status of that. Is there still work to be done? Are you feeling pretty confident with your current capacity and how should we be thinking about that line item through the back half of the year?

Yes. So if you go back over the last couple quarters, right, this is one that we highlighted that Q1, our – really our only kind of like light performance was on our stent grafts, even though we hit the top line and the bottom line and we talked about the reason for that is kind of in this inflationary period last year, we were having a hard time hiring people in our big facility in Germany, which is where we produce all of our stent grafts. We put a big initiative in place in the fourth quarter of last year, hired like 60, 70 people. Those – they were all hired in the fourth quarter and then we told you last quarter that they had to get trained in the first quarter which they’ve done, and we basically hit our production plan for the first half of the year. The team did a great job. We’re very well-positioned. We’ve got the people in place. They’re producing and we’re set up well for the second half and going into 2024 with the team that we’ve got there. So I think that is largely behind us and the teams executed extremely well.

Okay. That’s helpful. And maybe one, on On-X, I heard the comments on taking share, was hoping you can maybe bring us a little bit deeper on if that – if there’s another factor in there of the market just returning to normal. And there’s more market growth in that as well, but I was hoping you could kind of parse out the growth there between share taking as well as any market dynamics that are occurring.

Yes. So I think one thing that, I mean, if you saw, one of the TAVR companies reported that their surgical business grew faster than their TAVR business, which is interesting. So I do think that there is a kind of a growth overall in the market and we don’t have great market data on that. I do know that we continue to perform well in all of our regions. All of our regions have been growing double digits. I think the other thing is, whether or not that market grows, we’ve got more data coming out on our On-X valve. We’ve got a 500 patient post-approval trial that’ll be presented here shortly with excellent data. So it’s just a continuation of just pining the drum on it’s the best aortic valve in the world and we just keep taking share and we got a great sales team and they keep doing their job and as we expand internationally, we’re getting that message out as well. So again, I think there’s a lots of room for us to continue to grow that business.

Great. And then maybe the last one for Ashley just was hoping you could kind of parse through cash generation in the quarter, clearly a couple factors that are non-operational or not within the regular P&L related to the cash infusion as well as the cash outflow to Endospan and some cash generation in the business, but was hoping you could kind of bridge us from the $31 million last quarter to the $49 million this quarter and then help us think about cash generation through the end of the year.

Yes. So you’re right, Frank, there was a lot of noise in the second quarter. We had the payment to Endospan. We received the PMA milestone payment from Baxter. So there was a fair amount of noise in there. And we – when you back all of that out, we actually generated free cash flow of $5 million in the second quarter of this year. So we’ve been talking a lot about our focus on not only driving adjusted EBITDA higher, but a focus on generating cash as well. So we’re really pleased with where we ended up in the second quarter. I don’t think that we’re quite at the point yet where we’re ready to commit to being able to generate a positive free cash flow on an individual quarter basis and a trailing 12-month basis. But with the trends that we’ve been seeing over the last couple of quarters we’re very encouraged about where we are and we think that we’re getting very close to the point where we will be generating free cash flow both on a quarterly basis and a trailing 12-month basis going forward.

Perfect. I’ll stop there. Thanks for taking the questions.

[Operator Instructions] There are no further questions at this time. So that concludes our question-and-answer session. I would now like to turn the floor over to Pat Mackin, President and CEO for closing remarks.

Well, listen, thanks for joining the call this afternoon. And as you can see, we had a great quarter. We have a lot of confidence in our second half and think we’re very well-positioned going into 2024 to deliver on our double-digit growth in the top line and $75 million of adjusted EBITDA. So stay tuned and we will be back next quarter. Thanks for joining.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.