Greetings, and welcome to the Artivion Fourth Quarter and Year-End 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 the Gilmartin Group. Thank you. You may begin.

Good afternoon and thank you for joining the call today. Joining me today from Artivion's management team are Pat Mackin, CEO; and Lance Berry, 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. You can also find a brief presentation with detailed highlighted on today's call on the Investor Relations section of the Artivion website. Now, I'll turn it over to Artivion's CEO, Pat Mackin.

Thanks, Laine, and good afternoon, everybody. I want to start off our call today by welcoming Lance Berry, our new Executive Vice President and Chief Financial Officer. Lance most recently served as Executive Vice President, Chief Financial Officer and Operations Officer at Wright Medical until acquisitioned by Stryker in November of 2020. We are thrilled to have Lance join our team during this exciting time. I am confident his broad expertise and proven leadership in med-tech will add significant value to Artivion as we enter the next phase of profitable growth. I'd also like to thank Ashley Lee for his many years of dedicated service to Artivion. His contributions no doubt help make Artivion the outstanding company we are today. Now, on to our fourth quarter, and full year 2023 results. 2023 was an outstanding year for our Artivion and I'm pleased to report that we achieved total company constant currency revenue growth just over 12% for the full year of 2023 compared to the full year of 2022. In addition to exceeding our top-line growth revenue target, we achieved adjusted EBITDA growth of nearly 30% year-over-year, enabling us to deliver positive free cash flow, while making strides in advancing our clinical programs and further expanding our global footprint. Our achievements throughout 2023 culminated in a particularly strong Q4 as we delivered constant currency revenue growth of 15% year-over-year, resulting in $93.7 million in revenue. Our performance was driven by improved revenue growth in our On-X business, which increased 19%, followed by tissue processing at 18%, BioGlue at 11%, and stent grafts at 8% growth. Each when compared to the fourth quarter of 2022, all on a constant currency basis. We've also benefited from the expansion of our commercial footprint through regulatory approvals across new geographies, especially in Latin America…

Thanks, Pat, and good afternoon, everyone. Before I begin, I'd like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Revenues were $93.7 million for the fourth quarter of 2023, up 15% compared to Q4 of 2022. Non-GAAP adjusted EBITDA increased approximately 40% from $11 million to $15.3 million in the fourth quarter of 2023. And after generating $5.8 million of free cash flow in the third quarter of 2023, we generated $7.4 million of free cash flow in the fourth quarter. Importantly, we were free cash flow positive for the full year 2023, representing a critical milestone achievement for Artivion. As importantly, we expect that free cash flow will continue to be positive in 2024. From a product line perspective, On-X revenues grew 19%, tissue processing revenues increased 18%, BioGlue revenues increased 11%, and stent graft revenues grew 8% in the fourth quarter of 2023. On a regional basis, revenues in both Asia-Pacific and Latin America increased 19% while North America increased 17% and EMEA increased 10%, all compared to the fourth quarter of 2022. Gross margins improved to 65% in Q4, compared to 64% in the fourth quarter of 2022. This increase was driven by price increases in product mix partially offset by inflationary impact on materials and labor. General administrative and marketing expenses in the fourth quarter were $50.3 million, compared to $38.5 million in the fourth quarter of 2022. Non-GAAP general administrative and marketing expenses were $47.7 million, compared to $41.9 million in the fourth quarter of 2022. R&D expenses for the fourth…

Hey, thanks, Lance. As you heard from Lance, we're extremely pleased with our 2023 performance and continue to deliver on our mission to build a world class aortic company. We finished strong with 50% revenue growth and 40% adjusted EBITDA growth in the fourth quarter. We continue to expand our markets and meaningfully advance our clinical pipeline, positioning us well for long-term growth. We also executed a non-dilutive capital structure, giving us a six-year runway with no financing overhang. Our strategy to deliver sustained, profitable growth is working and we look forward to continued momentum we built in 2023 through 2024 and beyond. More specifically, our growth this year will be driven by the following: number one, our continued growth in our stent graft business driven by the recent 30-day PERSEVERE data presented at STS showing a 72% reduction in mortality and a 52% reduction in major adverse events compared to the standard of care literature control. Number two, continued market share gains for On-X, driven by data recently presented in Europe of 510 patients in our aortic valve showing an 85% reduction in major bleeding. Number three, continued growth of our proprietary SynerGraft pulmonary valve driven by price increases, growth of the Ross procedure as well as our ability to capture that growth from our efforts to improve supply. And fourth, our continued growth in Asia-Pacific and Latin America from our channel investments and new regulatory approvals. So, in conclusion, we are more confident than ever in our near and long-term prospects for our business. Finally, I want to thank all of our employees around the globe for delivering an exceptional year. So with that operator, please open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Rick Wise with Stifel. Please proceed with your question.

Hey, Pat. Hey, Lance. This is John on for Rick today. Just want to start off with AMDS. You had some really positive, strong data readout at STS recently and I just wanted you to maybe remind us about just how clinically meaningful this is in the eyes of doctors, how the technology is performing in Europe today, and how we should be thinking about the U.S. opportunity as we look ahead to 2025.

Yes, I'll take that one. So, clearly, this is a very exciting technology. I've been in the field in cardiac devices for 30 years associated with a lot of breakthrough technologies. I've never seen one that actually has the patient benefit that we've seen in this device. And I'll give you just kind of a background right so, an acute Type A dissection is a very extreme disease state where patients are mavacamten typically in the middle of the night. And this trial was done in patients with malperfusion, which means they have kind of blood not flowing to the brain, to the kidneys, to the legs. This device, in an FDA trial of 93 patients, which is the largest series ever done in acute Type A dissection patients showed a statistically significant reduction of 72% in mortality as death, right? So 72% more patients were alive. It also showed reduction in the major adverse events of strokes. People had required kidney dialysis and myocardial infarctions. So we saw a 52% reduction in those four major adverse events. So I think this is really a life -- it's truly a lifesaving technology. And we're very excited, our investigators are very excited about this. It's about $150 million market opportunity in the U.S. Obviously, we'll have to go through all the steps you have to go through in the adoption of a new technology. But we're all alone in the market. There's no other competitor. The competitor is a hemiarch, which is a surgical graft that's been done for 50 years. There's been no innovation. This is a highly patented protected product. So we feel like this is a market that Artivion will own for a very long time. And we're super excited about getting it out to patients.

Thanks. That's helpful. And then just to follow-up on the guidance, I understand the logic on adjusted EBITDA reinvesting in the business. Just curious, one, exactly what particular areas of focus are you reinvesting in, innovating in, and then on the revenue side, I noticed that in the fourth quarter, stents grafts on an organic basis were more like high-single-digits. And then the preservation tissue business was high-teens. So just as we think about that into 2024, should we expect similar growth rates from those two? Or maybe find somewhere in the middle?

Yes, let me take the first one. I'll let Lance take the second one. So, as far as the investments, as we've said all along, we're building an aortic company, right? So you've seen a significant investment in AMDS, in the U.S. FDA trial PERSEVERE, which you just heard about. We're literally starting as that one's getting ready to get to market. We're literally starting our next-generation device to replace the entire aortic arch called ARCEVO. We've been developing it for several years. It's a breakthrough technology as identified by the FDA. We will start that clinical trial this year here in the U.S. and Europe, and then we've got some technologies behind it. But as Lance said in his comments, we can do this in our P&L and not really hold -- increase our percentage of R&D as a percentage of revenue because we're growing the top-line as well. So we're being very pragmatic about being financially disciplined, growing the top-line, mid-point of our range 10%, bottom line 30%, and still being able to invest in innovation. So I think this is something that shareholders should like, because we can deliver top-line, bottom line, cash flow and a pipeline. So Lance, maybe you could take that second question.

Sure. So I think the question was about stent graft growth and tissue processing growth and how those flow into 2024. So first, on stent grafts, I think the Q4 I would call that just kind of normal level of quarterly fluctuation on growth rates for the full year, stent grafts grew in the mid-teens. And that's really how we think about that business going into for full year 2024, again, you may see some variation quarter-to-quarter. On the tissue processing, we are benefiting from the price increase we took in second quarter of 2023 on our SynerGraft technology. So we're benefiting from that. And we began to see a little bit of the improved supply as well in the fourth quarter that helped that. So we may see the tissue processing revenues be a little higher in the beginning of 2024 for the full year, we think about that more kind of a double-digit grower as we kind of talked about in the recent past.

Our next question comes from the line of Mike Matson with Needham. Please proceed with your question.

Yes. Thanks. So I guess I'll just start with the financing, the new credit facility. So can you tell us kind of where you'll be with regard to your leverage ratio following that transaction and where you kind of ended at the year last year in terms of EBITDA?

Yes. Go ahead, Lance.

Yes. So I don't know it right off top of my head, but we did $53.8 million of EBITDA at the end of -- in 2023. And post-transaction, you're really thinking about net debt of about $260 million. So I guess do the math on that real quick.

Five point something, roughly, yes.

Yes, 4.8 is where it is right now. And we think we'll get it the mid-point of the range and some cash flow. We'll kind of get that approaching 3.5 to 3 by the end of 2024 so some really good progress there. I would point out that there are covenants in the new debt, but they are well above that that level. And we actually have a favorable definition of EBITDA in the credit agreement. So per the actual credit agreement that net leverage ratio is even less than what it is on an as adjusted basis.

Okay. Thanks. That helps. And then just on AMDS I mean, obviously the data looks really good. Do you expect to have the FDA require a panel for that or do you think they'll just approve without a panel?

We haven't gotten to that level of detail yet. I mean, I'm not going to opine on what the FDA is going to do, but obviously I think the data speaks for itself, right? I mean, this is a super sick population with phenomenal results. So we're obviously going to work with them to get the technology out as soon as we possibly can. So panel or not, I don't -- I can't really comment.

Okay. And then as far as our ARCEVO goes, just the timing. I mean, would that be -- is that really more 2027 at this point or could it be earlier than that?

Yes. Yes. I think that's above, right, probably late 2027. So we expect to get the IDE approved this year and hopefully can get some patients enrolled. But again, there's a lot of bureaucracy in the startup of a trial. So I think that's right. We feel like just the centers we have in this and a kind of the lot of these top centers were involved in the development of this technology and they're super excited about it. So I expect our enrollment to go pretty well. But there is a one year follow-up and then you got to go through an FDA, PMA cycle. So there's some time of kind of the late 2027 is probably a good timing for that.

Thank you. Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Pat, Lance, can you hear me all right?

Yes, we hear you fine.

Pat, let me start out with the congratulations. I mean, you guys have consistently even through COVID, probably one of the few that has consistently beat numbers every quarter so congrats once again. I know, Pat on AMDS, number of questions have been asked, Pat, just for the audience, again, the size of the U.S. market, how do you define the low hanging fruit?

Yes. So basically if you look at, there's a number of different ways to kind of slice up the market. So we come up with a number of $150 million. The ASP on that device is going to be about $25,000. So there's about 6,000 acute Type A dissections done in the U.S. So that's really kind of the back of a napkin is the math. 6,000 cases, $25,000 a device, multiply two together and you get $150 million. We've done market research with a number of physicians and you could talk some of the physicians that were in the trial. This is a very substantial technology. Again, as I said from an earlier question, I've not seen, you see these heart failure trials where you're trying to get somebody to walk 12 more feet. You're talking about a 72% reduction in mortality. The mortality in the standard of care control group was 35% at 30 days. We were at 9.7. So that is a significant technology. And these are extremely sick patients that are mavacamten. It's an emergency and this is lifesaving technology. So we're very excited and we've got a salesforce. BioGlue is used in aortic dissections. Our sales team sells the On-X valves in aortic repair. Our ARCEVO device is used in replacing the arch. So we are an aortic company and this is kind of the first significant innovation in acute Type A dissections in 50 years. So I mean I'm super excited about it and think this is really going to change a lot of lives.

Fair enough. Pat, Lance, I'll just throw a bunch of questions away and hop back in queue. Lance, for you, let ASB impact in the quarter, and for Q1, how should we think about the sequential growth. Pat, for you, in terms of On-X mitral label, and you -- just in terms of On-X mitral, I know the FDA process is behind us, but just kind of give us next steps and the status also [indiscernible] at this stage, at this point in time, do you think the portfolio is optimizing, if not, what else needs to be done. Gentlemen, thank you for taking my questions and congrats again.

Sure. I'll take the first -- I'll take the last two. I'll let Lance work on the number piece while I'm talking. So as far as the pro act mitral, as we talked about last, I guess it was end of Q3. We ended up withdrawing the PMA because we missed our statistical endpoint, which is really, I don't want to get into the details around the statistics of the trial. The fact of the matter is it's the largest body of evidence ever with a mechanical mitral valve. We just had a recent presentation at STS in January. There's nothing close from a significance in level of data. And the fact of the matter is the mitral business grew 20% in 2023, right? So people are recognizing the value of that. We're not off label promoting it, but people are recognized that you can actually lower that INR if that's the physician's choice. So maybe over to Lance, you can grab a couple of the other ones.

Yes. So on AST I think, without giving you an exact number on the total company, which kind of tough with different products, different mix in different countries. I think the things to highlight is obviously our tissue business benefited meaningfully from price, which we've talked about. We took a significant price increase in Q2 of this year. And so in Q1, we will still benefit from that and we'll annualize that in Q2. And then we have had some favorable pricing on On-X in particular, I would call out that we will have for portion of the year as well. Other than that, we're taking price increases, but not anything outside of the kind of normal running the business type price increases.

Yes. And then the other question you had, Suraj was on the portfolio, I mean we -- one of the things we said is we did three acquisitions and one kind of distribution agreement with an option acquired with Endospan with the NEXUS device, fairly quickly over the four or five-year period. We feel like our portfolio is in excellent shape. And as I mentioned from an earlier question, you can see us going from the AMDS U.S. FDA trial to the ARCEVO FDA trial, and then we got more stacked up behind that. So we really -- we do not need to acquire anything. We're very well set up from a portfolio standpoint. The only other point I would make on the pricing, and I've said this to a number of times, we did get some significant price increases on SynerGraft pulmonary valves in 2023. And as that kind of asthma totes on itself at the end of the first quarter, 2023 was a year of the price for SynerGraft and 2024 is the year of the volume, because we've had some significant yield improvements in our processing, where we're going to potentially double our availability of those valves, and we sell every single one of them because of the significant growth of the Ross procedure. So again, we feel very confident in that tissue business continue to grow pretty significantly.

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi, Pat, Lance, how are you?

Good. How are you?

I'm good. Thanks, Suraj for segue right into my first question, which is 59% on tissue forms. That's an all-time high for the company. Is that sustainable? Or how should we think about that opening up in the tissue business for 2024?

Well, as I just mentioned, Jeff, and I think so Lance commented on the pricing, we obviously had some significant increases on SynerGraft in 2023, which will still get some benefit in the first quarter. During that year, by working with some of our top surgeons, we've also seen significant yield improvements in our processing area. So we think that that growth will continue, because, we -- like I said, we've almost doubled the availability of our pulmonary valves, and because of this rapid growth of the Ross procedure, we're literally selling everyone that kind of comes out off the line. So the answer to your question is yes, it's going to continue.

Wonderful. And I guess, secondly for us, could you comment a little bit on some of the geographies out there? I know you call out Asia and LATAM at that 19% rate, but any specific geographies? And how does that tie into specific product lines by geography or geographies?

Yes. Every region grew double digits. Obviously, Asia-Pacific and Latin America are smaller, just in size. They're growing 20%. So, again, we're seeing double-digits across all four of our regions.

Okay. Got it. And then lastly for us, can you talk about gain a little bit as far as the prevention of a tear in the structure? And are clinicians and hospitals looking at that as a cost associated or it's just death period?

I'm not sure if I caught that, Jeff.

As far as DANE and its measurement and how it's being viewed by --

Viewed by teams.

Yes.

Yes. Actually, it's a again, it's probably not a topic many people understand. I mean, I certainly didn't know what DANE was until we got into this specific area. So think about it this way. In the current standard hemiarch, where they actually -- I tried to make a plumbing analogy, right? You have tear in the pipe. You got to fix that little piece of pipe. So you take the bad piece out, you put a new piece in, and you connect it to the old kind of connector, the old piece of the pipe, so now you've got a fully functioning pipe. That's what they do with a hemiarch. Up to 70% of the times, the connection you make ends up having a leak, which requires a reoperation and can lead to higher mortality. It's a real problem, and it can happen. Like, again, it depends on where you're doing it. But 35% to 70% of the time, they get a leak in the connection, which is a gain. We don't see it at all with AMDS. Three years in the 50 patient DARTS trial and 93 patients in the PERSEVERE trial, zero. So we're running the health economics on that. But re-ops and mortality for these patients, I mean, this is obviously a significant thing. And the FDA has been extremely interested in DANE and actually had us added as a primary efficacy endpoint.

Got it. Okay. That's super helpful. Again, thanks for the questions and fantastic readout on the year.

Thanks, Jeff.

Thank you. Our next question comes from the line of Frank Takkinen with Lake Street Capital. Please proceed with your question.

Hey, this is Nelson Cox on for Frank. I'll just start maybe internationally as well. Can you refresh us on the current size of the sales force there and maybe thinking about the team size there throughout the year? Obviously, you've seen some nice growth there, but maybe just walk through your thinking there.

Yes. We've talked about Asia and Latin America. When I started as a company, we had one person in Asia, nobody in Latin America. We're now probably about 30 people in Asia, probably 15 in Latin America. We feel like Latin America is kind of where it needs to be. We may have a kind of onesie twosies here and there. Asia obviously is a significant opportunity and we'll continue to add to those regions, but we treat it somewhat like a venture capitalist, right? I mean, as we get product approved -- products approved, for example, we've had some big approvals in Australia. Then we'll add feet on the street. We've got approvals in Hong Kong, we're direct there. We've had approvals in Thailand, we're direct there. We've had approvals in Taiwan, we're adding people there. So as we get the product approved, which is really just the incremental cost of the regulatory approval. If we see the size of that market make sense and we just run an NPV and then we'll add people. So it's really a gated self-fulfilling -- self-funding process that we go through. But Asia is the area that we can pull that back. We can titrate that depending on our EBITDA requirements and commitments and what we see coming from an approval standpoint. Hopefully that helps you.

Yes, no, that does. Then obviously I'll switch over to On-X. Obviously a strong quarter there. Can you maybe just talk a bit more about the competitive landscape? Maybe just what you're seeing from the other competitors there, you can clearly continue to take share, but just curious what you're hearing out there from maybe their investments or lack thereof.

Yes. So I'll talk about what customers are saying. We just -- as I mentioned in November, or I guess October last year, we presented a 510 patient study, the kind of the FDA post-approval trial on the low INR, which is a typical requirement. They want to see that your valve performs in the community as it performed in the kind of rigorous FDA trial so 60 centers, 510 valves. We saw an 85% reduction in major bleeding. So we went and did some market research, talked to 100 cardiac surgeons, by the way, it's very unique research, that -- and I've done a lot of this over my career. We did research in competitive accounts, what we call competitive accounts, which have On-X share like less than 25%. And it shows that we continue to take share over the next three years and basically double our share. So this is a very meaningful new data set. We're excited about and our customers are excited about it and we're going to be going after it.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Yes. Obviously, we appreciate everybody's time here. I mean I'll be quick in my wrap up. We're super excited about 2024. We had this great PERSEVERE readout on AMDS with 72% reduction in mortality, 52% reduction in major adverse events. So we're going to be working with the FDA to get this technology here in the U.S., but we're also approved around in multiple countries in Europe, Canada and Asia where we're going to use that data to continue to take care of patients and drive growth. I just got done talking about the On-X post-approval trial of 510 patients showing an 85% reduction in major bleeding, and we're going after share there. I talked a couple of times about our price increases on SynerGraft as well as our efforts to improve supply, and we'll continue to see growth there and we talked about Asia-Pacific, Latin America. We're also advancing our pipeline. We're going to be starting the third-generation Frozen Elephant total arch repair system called ARCEVO LSA later the this year. So we continue to build an aortic company and are excited about delivering for you again in 2024. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.