Good day, ladies and gentlemen, and welcome to the LivaNova Plc Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Karen King, LivaNova's Vice President of Investor Relations and Corporate Communications. Ma'am, you may begin.

Thank you, and welcome to our conference call and webcast discussing LivaNova's financial results for the second quarter of 2017. Joining me on today's call are Damien McDonald, our Chief Executive Officer; and Thad Huston, our Chief Financial Officer. This is Thad's first earnings call as LivaNova's CFO, and we're very excited to have him as part of our team and speaking on this call today. Before we begin, let me remind you that this morning's press release, slide presentation and conference call include forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, including but not limited to, may, believe, will, expect, anticipate, estimate, plan, intend and forecast, or other similar words. These statements are based on information presently available to us and assumptions that we believe to be reasonable. Investors are cautioned that all such statements involve risks and uncertainties, and should not place undue reliance on such statements. Our actual results performance or achievements may differ materially from those expressed or implied by these forward-looking statements, which are not guarantees of future performance and involve known and unknown risks and uncertainties and other factors that are, in some cases, beyond our control. For detailed discussions of the factors that may cause our actual results to differ, please refer to our most recent filing with the SEC and other regulatory filings. In today's press release, management has disclosed financial measurements that present financial information not necessarily in accordance with generally accepted accounting principles, or GAAP. Company management uses these measurements as aids in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies. Included in the press release today are non-GAAP operating results. Non-GAAP measures used by the company may be calculated differently and therefore, not be comparable to similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternative to, the operating performance measures as prescribed by GAAP. Please review the financial tables provided in the press release that reconcile such non-GAAP measures to directly comparable financial measures presented in accordance with GAAP. To enhance the call, we have 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, including the reconciliation of non-GAAP measures to the most directly comparable GAAP measures, by going to investor.livanova.com and clicking on News and Events, and then Investor Presentations. Before I turn the call over to Damien, I want to make you aware of a typographical error on our balance sheet this morning. All of the individual line items are correct, but the total assets and the total liabilities are $2,533.7 versus $2,553.7, and that should be updated on our website. And with that, I'll turn the call over to Damien.

Welcome to our second quarter conference call. We continue to make good progress during the quarter, resulting in a solid first half of the year. As Karen mentioned, I'm joined today by our new CFO, Thad. Thanks, Thad. Thad joined the company in May, and his strong background in pharma and medical devices, coupled with his financial expertise, is already proving to be a significant asset to LivaNova. I'm going to walk through some recent events and then discuss our sales results by business franchise. And after those comments, Thad will give you some more color on the financials, and I will then wrap up with closing comments before we move to Q&A. Over the past couple of months, we announced several key decisions to enhance our strategic objectives. First, Caisson. The integration of Caisson into LivaNova is on schedule and going extremely well. Our regulatory, clinical and market access experts have been working closely together to further develop and implement our strategy for clinical approvals and country-specific reimbursement. Our manufacturing organizations are aligned and are in the process of expanding capacity to handle the clinical phase. We're very excited about this unique device technology in the transcatheter mitral valve replacement, or TMVR, field. We believe we have a truly unique device with many benefits. At TVT meeting held in Chicago in June, we presented results of our early feasibility study in the U.S. called PRELUDE. And at that point in time, we enrolled 12 patients in the study and completed nine successful implants. Patient enrollment in the CE Mark trial, which will be called INTERLUDE, started last month in Canada. And this will be followed by patient enrollment in Europe and then later in the U.S. We will be spending more time discussing TMVR at our upcoming Investor Days…

Thank you, Damien. I'm very excited to join you here today and to be part of such a great leadership team and company. I'm going to discuss the second quarter financials in greater detail and speak further about guidance. First, adjusted gross margin as a percent of net trade sales in the quarter was 67%, up 150 basis points from the second quarter of 2016, and a material improvement sequentially. The margin improvement was driven by positive mix from sales of our higher-margin products such as Neuromodulation devices and HLM, favorable currency and our continued focus on cost efficiencies. For the full year, we still expect gross margin to be in the mid-60% range. Secondly, adjusted R&D expense in the second quarter was $32 million, compared to $30 million in the second quarter of 2016. R&D as a percent of net trade sales was 10%. We anticipated this ramp-up in the second half of the year as we advanced our clinical trials for TMVR. And we still expect the full year adjusted R&D to be in the 11% to 12% range. Thirdly, adjusted SG&A expense for the second quarter was $112 million compared to $116 million for the second quarter of 2016. SG&A as a percent of net sales was 35%, an improvement of 140 basis points versus the second quarter of 2016, due to favorable currency, cost efficiencies and product prioritization. For the full year, we still expect adjusted SG&A to be in the 36% to 37% range, which incorporates the integration of Caisson. Fourthly, adjusted operating income was $70 million compared to $63 million in the second quarter of last year, an improvement of 12%, which exemplifies our commitment to leveraging the income statement. Gross margin was up substantially year-over-year, coupled with an improved operating expense profile. Adjusted…

Thanks, Thad. So in summary, we made significant progress in many areas of the business during the second quarter. We added strong leaders to our executive team who bring a wealth of industry experience. We're executing on the integration of our Caisson acquisition, and we delivered solid sales, strong margins and continue to leverage our income statement. More recently, we received several approvals focused on advancements for our Neuromodulation patients. We're investing in our highest growth areas, including the addition of TMVR. And we believe we are well-positioned to deliver long-term shareholder value. We look forward to updating you on our continued progress during -- and our strategic direction at our Investor Days in New York on September 14 and London on September 20. And with that, Charlotte, we are ready for questions.

[Operator Instructions] Our first question comes from the line of Scott Bardo from Berenberg. Your line is now open.

Yeah. Thanks very much for taking my question. So first, a few bigger picture questions, please, and then delving into some of the particulars. Firstly, Damien, I wonder if you could give us some sense of what you expect to deliver at the Capital Markets Day in a month's time in terms of structure. And what we should expect with future guidance for the company? So perhaps, if you can add some comments around that just to help us understand the nature of that event. And welcome, Thad. I wonder if you'd be kind enough to share some high-level thoughts as to what you see as the biggest opportunity for LivaNova in your capacity as CFO? And then a couple of specific questions, please? On heart valves, which I think continue to underperform and underwhelm, I'd like to talk about this a little bit more. And it certainly feels like the time has come to give some additional clarity for the business ex Perceval. And if you could please quantify that both in the U.S. and Europe so we can better gauge how Perceval contributes and maybe talk a little bit more about some of the dynamics to stabilize and improve that. So there are three, and I've got a follow-up.

Okay. I like your questions, Scott. So Investor Day, we're going to do a couple of things that I hope everyone finds interesting, and we're really actually very pleased with the tremendous turnout we've had in the RSVP. So thank you to those that have accepted already. The intention is -- I'd like to talk about the company as I see it and some of the changes we've made over the last six months, but how that's going to read into the future, both in terms of the leadership and the tone and the culture of the company and what we're trying to do as an operating executive, but also, to talk about the future in terms of the portfolio and give you some color around where we're going to be spending our time and investing our money. Thad is going to talk much more about the financial performance and how we're going to continue to leverage the P&L. And I think, hopefully, what you've seen in the last two quarters is us starting to exercise those muscles. And then we're going to give you all the chance to come in and meet some of the other leadership team members and some of their team to talk about parts of the portfolio. And we're going to break this out into groups so that you can get much closer to the key products and touch and feel them and really get in depth with Q&A on the specific parts of the portfolio. So hopefully, it's combination of some high-level opportunities to discuss the company, but also some in-depth opportunities to talk about the portfolio with some specialists who may know just a little bit more about the products than I do, and hopefully, you'll find that really intriguing. Thad, why don't you talk a little bit about...

Scott, as you know, I'm really excited to be part of LivaNova for a number of reasons. I think, one, it's a fantastic leadership team, but I also think there's a tremendous opportunity for us to drive innovation. I think that our positions, both in Cardiac Surgery as well as Neuromodulation, really put us in a position to accelerate the growth of the company, but also to bring really important innovations for patients. And I think the Caisson acquisition is one great example as well as some recent launches that will happen, things like SenTiva for Neuromod. So I just think there's a great opportunity for us to reach more patients and drive the growth of the company.

So -- and look, if you can give me a little bit more time to speak with that some more. And in terms of heart valves, look, a few more things, mechanical valves have continued to decline but at a much slower rate than in the past, and we talked about this a bit last quarter, how the rate of decline is slowing. So I'm pretty pleased with some of the efforts we've made there, especially in emerging markets. Tissue valves were slightly down in the quarter. We had a huge comp with Perceval coming off 2016. But I will say, I'm very pleased with some of the progress we've made around key metrics that were in place now around account acquisition and account penetration. Clearly, the issue for us is to continue to drive this product. It's a unique technology, and I'm thrilled that CMS sort of valuing that by coming through with the NTAP. So I think that gives us an opportunity to revisit with a lot of accounts. And a big part of this is leadership and driving growth. Our President of the U.S. was out on the road last week, specifically with Perceval in line, five states in five days. And I'm really encouraged with our continued focus on account acquisition and account penetration. And with a new leader in Europe, who we talked about last quarter, Marco is bringing a lot of discipline to that, and we really see Europe as a key opportunity for us to invest to make sure we're driving growth. So I'd say, overall, we've made some really solid progress in the quarter. Still work to do, and we're still focused on the prize here, which is driving growth with a unique technology.

And just to clarify on that point then. With the pending Japanese approval and with this new more focal reinvestment framework in the U.S, is the $80 million, $100 million target for Perceval, that's been long-cited, still in target in your mind? If you could can have some comments there. And lastly, for Thad, and apologies that your predecessor set you up a little bit for this in so far as commenting that EPS in the second half of the year is normally 10% greater than the first half, and yet I think with all of your financial statements that you qualify some material increases in costs, deteriorating tax environment. And so I just want to understand why this change in phasing for the business compare to history in recent communications?

So short answer on the $80 million is yes. We're still targeting that. I will tell you that, that was a pretty aggressive number that was put out there by the previous leadership, 15, 18 months ago, but we're committed to working that. And as I said, I'm encouraged by what I'm seeing about the account acquisition and the application of some tools around driving average daily units. And we're going to be really focused on hitting that number. Thad, why don't you --

So I want to thank Vivid, my predecessor, for all the great work he's done. And certainly, I think the guidance that was given in the past, I think we are holding to for the full year. I think the phasing is a bit different for a couple of reasons. I mean, one, we did see some currency benefit in the first half of the year that with the Caisson investments, the investments in R&D, as well as even tax. I think there was some timing. Tax tends to fluctuate. We feel confident that we'll hit the overall number in the guidance for the year, -- but the first half, second half phasing is a little bit different.

All right. Thanks guys. I will jump back in queue.

All right. Cheers Scott.

[Operator Instructions] Our next question comes from the line of Jason Mills from Canaccord. Your line is now open.

Super. Thank you. Damien, can you hear me, okay?

We can, Jason. Good to hear you.

Thank you. I'm sorry I'm on a cell phone, so hopefully we don't cut out here. Congratulations on a solid quarter, Damien. I wanted to follow up, perhaps, a bit on the guidance for the second half of the year. And maybe, if you could, tease out for us the incremental spending that you're putting into the model for Caisson development, and then, I guess, more broadly speaking, your gross margins. Thad, welcome, and thank you for the commentary on the gross profitability in the quarter and what you're expecting, but it seems like perhaps you're being a bit conservative given the gross margin number you put up in the second quarter. I'm wondering if you could give us a bit more color on how you see gross margins flowing for the remainder of the year, and I guess, maybe an initial qualitative assessment on how you see gross margins trending next year, if you're willing to do that.

Yes. I mean, I think we'll give more guidance at the Investor Day in terms of where we see gross margin longer term. It's clearly an area of focus of Damien and I, I think both in terms of getting more operational efficiency out of gross margin and our manufacturing plants. We're very pleased on where we are in the first half, but it was influenced by currency. And so that impact is a little bit higher, and that's why we're not guiding to increase, although we were saying kind of mid-60s. And I think we feel comfortable in that range. I think in terms of investments, clearly, we're very excited about Caisson. We want to make sure that we invest behind that business, really support it appropriately. And so R&D is going to increase from around what was 9% to roughly 11%, so kind of mainly related to Caisson.

Okay, super. And then just sort of broadly speaking, Damien, with respect to your acquisition divestiture strategy. You talked in the past about building a portfolio and also looking at your current product portfolio strategically. I'm wondering if, at this point in time, you have anything more to say about, on the acquisition side, what sort of plans you might have or thoughts you might have around building portfolio around Caisson or broadly -- more broadly speaking, in transcatheter structural heart. And then, perhaps just on the existing portfolio, I know you've been asked in the past about the strategic nature, or perhaps lack thereof, of the CRM business over the longer term, do you have anything more to talk about on that front?

Great questions, Jason. Look, first on acquisitions , think what I've said in the last couple of quarters is we're looking to do things that bolt-on around our disease states or core points. I'm not looking to all of a sudden go out and build an entirely new franchise. And so the sorts of things we have looked at -- in fact, we've walked away from a couple of really interesting deals because the IRR didn't hit our targets, but we look aggressively and have a very active funnel around things that bolt-on to our existing disease states or call points. So I'm really encouraged by some of the work we've done. And I think the teams have done a great job coming up with a funnel that's very active, but nothing new that's met our IRR hurdle yet. On divesting strategy, look, I will tell you that I think the single biggest decision and discussion point for us around capital allocation is how we create shareholder value with the CRM portfolio. It's top of mind for the leadership team, and we're continuing to work on that. It's not a simple question as you might suspect. It's a quarter of our business with a global footprint and a lot of complexities. But I really believe that the team is committed to pursuing our growth strategies in a number of regions and also improving the performance of the asset as a whole. So apart from that, nothing new to add.

Okay. And then one final follow-up, if you don't mind, I'll get back in the queue. Just on the Neuromodulation business, pretty decent quarter in that business as well. I'm wondering if you could talk about new implant growth versus replacement, and then sort of how you see that growth trending once we see sort of the new product launch in the second half of the year here and into 2018. Should we see a continuation of this level of growth? Or will the new launch augment that growth, perhaps?

Yes. That's a great question. I'm really encouraged by what I see, both in terms of innovation here and execution. And if you think about our business here is sort of core and price and innovation is the three drivers here. The core, I think, will continue to that mid-single-digit range with patient acquisition. We've continued to see our rolling 12-month average here is very solidly in that mid-single digit. Price, I think the team, I think, have done a good job of working price here selectively and at the same time, innovation is continuing to lead through with AspireSR continuing at 80% of our sales. While we're really encouraged by SenTiva, I don't think we're going to see the same bounce as we saw with AspireSR with SenTiva. But I think people will recognize the innovation, not only in the device, but also with the products that surround that. And the pad, the program in the one -- that the user interface, sorry, is going to be a real differentiator here. So I consider that innovation will continue to be an important driver. End-of-life continues in that 3% to 4% range, and that's, again, a big focus for us. We believe that, not only for the financial health of the company, that's good, but it makes good sense from a patient point of view, and we are very focused on that transition as well, because we think patients can benefit from the upgrades. So overall, I think that we have a really strong franchise here, and both the innovation teams and the commercial teams, I think, are really strong.

Thank you very much. I will get back in line.

[Operator Instructions]. Our next question comes from the line of Michele Baldelli from BNP Paribas. Your line is now open.

Good morning to everybody and thanks for taking my question. I've got two questions. The first one is, if you can give some details about the possible opportunity for the expansion of the FDA labeling for the epilepsy devices for the young population. If you can give us some data about what kind of proportion of the total epilepsy patients' pool is in these segments of the market. And the second question relates then to the adjustment for the Caisson acquisition on their R&D line. It should be around $12 million. If you can just elaborate on its nature, if it's just temporary and what is it about.

Why don't I -- I'll take Neuromod and you take the Caisson question.

Yes, sure.

Look, I -- a couple of things. I think if you think about it like this, the U.S. pediatric population is 30% to 40% of the patient pool, and outside the U.S., it's slightly higher. It's more like 60%. I think we have a real opportunity here to expand that patient pool in the U.S. As I've said, we've not had that restriction in Europe, and it's an increasing focus for us. I think I've talked in the past that one of the great opportunities I believe we have is expanding our Neuromodulation investment outside the U.S., and we've made great progress there in the last six months. Inside the U.S., I think this is going to be a great opportunity for us. I'm not going to talk about specific numbers, but I really believe that from a patient standpoint, this is a really tremendous opportunity for young children and families at a really pivotal point in their cognitive development to be able to be supported by a tremendous product. So we're going to be working with our key opinion leaders to make sure we get this message out and expand our opportunity here. So U.S., I think this is going to be great for us long term, and OUS, as we continue to expand our footprint, I think we'll make progress here. Thad, why don't you talk about Caisson.

Yes. On Caisson -- I mean, Caisson, I think, is just a fantastic deal that we're able to bring in to the portfolio. And if you look at the $12 million that we have invested between R&D and other expense, essentially, it's continued liability milestone payments associated with the acquisition.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Scott Bardo from Berenberg. Your line is now open.

Yeah, thanks very much for taking some follow-up questions. So on cardiopulmonary, I'm pleased to see slightly better growth coming from that business, but below what we've seen in the past. Can you talk a little bit about how consumable side of that business, which I think you said is 70% or so of that business, how that's performed this quarter and confirm whether the gains, if you like, in the heart-lung machine have offset declines in heater-cooler. Following up from that, can you give us a bit of an update as to how your remedy effort in heater-cooler systems in Europe is progressing, and also, what the expectation is to return those products into the U.S.? And also I'd like to understand a little bit, again, the very good Neuromodulation performance. Internationally, you seem to be picking up here, which is encouraging. What's driving that? And more generally speaking, given the goal in growth and some innovation and expanded indication, what needs to happen to return to double digit sort of growth profile for this business, which has been enjoyed in the past? So I'll stop there.

Great questions. So let me dive into some of these things. So cardiopulmonary disposable, yes -- look, good memory there. It's roughly 70% of the portfolio, and it was a solid quarter, but not a great quarter. We were a little softer, mostly due to a really strong comp from last year on oxygenators, but we're still going to stick with our low to mid-single digit growth rate for the full year. And that, I really believe, is based on some great customer insight and very solid discussions at account level. So I'm pretty confident about where we are with the disposables. HLMs, look, I put this down to leadership. And we've spoken in the last couple of quarters about the new discipline we wanted to bring in. I talked about funnel management and the processes there that I think are key to moving a product like that through the selling cycle. And there's been a tremendous focus on that in a number of places in each of the three regions. And I think that what you're saying is that reading through. And I really expect to continue to make progress there. And all three regional leaders are committed to driving that part of the portfolio. We continue to believe we have the best product in the market. Even the age of, yes, five years in customers, I see they recognize that the quality of our product, and we'll continue to drive that. And lastly, with heater-cooler, they're less than 1% of total global sales. We're not going to be bringing back that product into the U.S. First, we have to resolve the issues with the FDA. We're continuing to work with them. Outside the U.S. and I think you've seen our announcement that we've made progress there, and we've started the upgrade cycle for the retro-fix and that's continuing to progress. So we've got the modification that we're implementing. We've got the big disinfection program that we had in place and the loaner program and all three of those are continuing well outside the U.S. And in the U.S., the loaner program is really supporting our customers and allowing patients to continue to receive surgery while we work through the issue with the FDA.

And also we touched upon Neuromodulation as well in international markets, and perhaps you could talk a little bit about that and how you see, if you like, potential to return this business to even more favorable growth that we've seen in the past?

Yes. Again, I don't want to be glib, but I really do believe a lot of this is leadership. And I think the previous organization made tremendous headway and investments in growth in the U.S. I think one of the things we've been able to do as a new company is focus outside of the U.S., and we have a number of new leaders in both Europe and the emerging markets, we're now calling international, who are very focused on driving this product, both for drug-resistant epilepsy, and as I've mentioned in the past, exploring treatment-resistant depression, particularly in Europe. So I think this is, again, around creating patient funnels and understanding how that supports patients as they move through the treatment pathway. A lot of the skills and talent that we have in the U.S., we've taken internationally to train both our internal teams and key opinion leaders and staff outside our organization. And I think that's starting to read through. And I think if we couple that back to what I was saying about core price innovation, I think if we focus on the core, which we are now, but continue with innovation like SenTiva, you'll see continued strong growth from this. And I'm not going to commit to when or if double-digit, but I really fully expect this to be a major growth driver for us.

Yes, I'd like to add on that, because one of the greatest opportunities for us is LivaNova really expanding globally and to use our global footprint to reach more patients. And that's what I was referring to earlier with Scott's question, but I think the international market is a great example of that, particularly in Neuromod.

Very good. Perhaps, just one last one for me, if I can sneak one in. With respect to the progress with mitral, I think when you acquired Caisson, you highlighted prospects to potentially achieve European approval or CE Mark approval by the end of '18, beginning of '19 or going well. I'm just wondering whether -- now that you've got the team on board, whether discussions in charges are on and this helped -- that helped solidify that view. And also, perhaps, you could touch a little bit on HighLife that you are -- I understand you're risking down or had to write-down this quarter to that exact market and that you're no longer interested in progressing that asset as part of your portfolio.

Yes. Good questions, again, Scott. So just on Caisson. Look, I think it's more '19 than '18. We -- it's just an early feasibility trial, so I think we learn very quickly and adapt. So I think more like '19 for this. We have had some tremendous discussions with DEKRA, a notified body, and the FDA, and I think we've got that pretty solid structure around trial design for the CE Mark. It looks like something like 75 patients in 15 centers. And as I've mentioned, we've already started the enrollment in that trial already with one patient in Canada. So we're often writing with CE Mark, and we have a reasonably good early structure on what we think we'll need for the U.S., which will be about 400 patients in maybe 30 to 40 centers. So again, I think great work by the team there getting to those sorts of structural designs so that -- for the trial. In terms of HighLife, look, after the Caisson acquisition, one of the things that I pushed the team to do is look at our whole portfolio and say, where are we investing and what are we going to continue to be active in. And really, the HighLife write-down is entirely related to a shift in strategy to move from active to passive. And as we did that, it triggered an accounting rule or view and we're taking a look at what that would mean. And that fair value market assessment met a $13 million write-down, I think, of $0.27, right?

Correct. That's right.

So that's really related entirely to our strategy, not HighLife, who had a tremendous product and a great team. But for us, Caisson is where we're focusing our investment.

Okay. Thanks very much guys.

Thank you. At this time, I'm not showing any further questions. Would you like to proceed with any further remarks?

No, I just want to thank everybody for being on the call today. We appreciate you taking the time to be with us, and have a wonderful day.

Thanks very much. See you at the Investor Day.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.