LivaNova PLC (LIVN) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the LivaNova PLC Third Quarter 2017 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [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

Thank you, and welcome to our conference call and webcast discussing LivaNova’s financial results for the third quarter of 2017. Joining me on today’s call are Damien McDonald, our Chief Executive Officer; and Thad Huston, our Chief Financial Officer. 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 included but not limited to may, believe, will, expect, anticipate, estimate, plan, intend and forecast, or other similar words. 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. 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 the company’s control. For detailed discussions of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC and other regulatory filings. Included in the press release today are selected non-GAAP operating results. In this 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. Non-GAAP financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed by GAAP. Please refer to the financial tables provided in the press release that reconciles such non-GAAP measures to directly comparable financial measures presented in accordance with GAAP. To enhance the call, we’ve 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 in the Investor Relations section of our website under News & Events, presentations, at www.livanova.com. In just a few moments, Damien will be discussing net sales results for the quarter. In our press release, we provide a table that shows both reported net sales growth and constant currency growth so you can see the impact of foreign currency fluctuations. And for discussion purposes this morning our comments on net sales growth will be expressed in constant currency. And with that, I’ll now turn the call over to Damien.

Thanks, Karen, and good morning from Houston, everyone, and let me just say, "Go Astros." Welcome to our third quarter conference call. It was a very busy quarter at LivaNova, one in which we made good progress across many fronts. We improved top line growth, delivered solid earnings, posted 2 investor days, and announced that we are exploring strategic options for our CRM business. I’m going to walk you through some of these items and other highlights and then discuss our sales results by business. After my comments, Thad will give you some more color on the financials and I’ll then wrap up with closing comments before we move onto Q&A. First, neuromodulation. A few weeks ago on October 9, we announced that we received FDA approval for our latest VNS Therapy system which includes the SenTiva generator, a wireless wand, a new user interface and tablet. SenTiva is the smallest and lightest responsive therapy for epilepsy and offers physician-directed, customizable therapy with smart technology to reduce the number of seizion, lessen the duration of seizures and enable a faster recovery. Second, cardiac surgery. We made 2 announcements focused on our cardiopulmonary products. On September 25, we announced that we received FDA clearance for the U.S. market launch of our Optiflow Arterial Cannulae Family. Our Cannulae business is small but growing component of our disposable portfolio. Optiflow demonstrates our commitment to delivering cardiac surgery treatments that minimize patient risk at the same time as offering end-to-end solutions for physicians. Then on October 2, we announced a milestone that our autotransfusion system called XTRA treated its 1-millionth patient. This is another example of high quality devices designed to improve patient outcomes and reduce risk. Third, CRM. On September 14, we announced that we are exploring strategic options for our CRM business. This business is a strong regional player with attractive assets, robust pipeline and growth potential. We also recently announced that we obtained approval for our joint venture partner, MicroPort, and our family of Rega pacemakers from the Chinese Food and Drug Administration. The launch of the Rega pacemakers will strengthen our local presence and expand our footprint in China. We’ve been very vocal about our commitment to drive value for our various stakeholders by focusing on areas of strength and leadership. As we mentioned during our investor days, our preference is to find a buyer for the CRM business, a buyer that wants to have this asset as part of its growth plans. We’ve hired Barclays as our financial advisor to find the right home for this valuable asset and they’re working hard to advance this effort. We’ll provide additional updates once we have a definitive decision to announce. And fourth, Investor Day. On the same day we made the announcement about CRM, we hosted our Investor Day in New York. The following week we hosted a second Investor Day in the U.K. and at both events we laid out our near term objectives as well as our mid and long term growth drivers. We discussed how we could achieve mid single-digit growth with our existing organic business and how we could improve that growth to high single-digits with various strategic portfolio initiatives and M&A. We defined our strategic portfolio initiatives as development projects currently in our portfolio such as treatment-resistant depression, TMVR and heart failure. We defined M&A as tuck-in or bolt-on acquisitions to our existing platforms. And we also provided 5-year financial goals including adjusted gross margin of 70-plus percent, adjusted operating margins of 20-plus percent and an adjusted earnings per share figure in the low to mid teens. I’ll turn now to our net sales for the quarter. Total net sales were up 3.1%. All three of our business franchises showed growth in the quarter compared to the third quarter of 2016. Starting with cardiac surgery. Cardiac surgery sales were a $160 million, up 5.5% from the third quarter of 2016. This is the strongest quarter for our cardiac surgery business since the inception of LivaNova. Multiple events came together, resulting in strong performance in every key growth driver. Cardiopulmonary sales were $124 million in the quarter, an increase of 5.6% versus the third quarter of 2016. Growth in heart-lung machines when you exclude the impact of heater-coolers was favorable and up in every region. Our sales force has been extremely focused on funnel management and execution. And this accounted for growth we saw in North America and Europe. The majority of HLM sales in the quarter were the result of upgrading customers from our legacy S3 device to our current S5 device as well as competitive catches and replacement of existing S5 devices. In addition, we are making good progress in our international markets with global expansion efforts and penetrating new centers. In Europe, we recently introduced the S5 Mini. While there was no impact in the quarter, we’ve seen good initial interest in the product from customers who are looking for a new technology with a smaller footprint. We are seeing healthy demand in taking orders and we’ll be starting to roll out this product in the first quarter of 2018 in Europe and international markets. Turning to heart valves. Sales for heart valves was $36 million in the quarter, an increase of 5.1% versus the third quarter of 2016. The strength of Perceval in all regions offset declines in mechanical and traditional tissue valves. In part, this was due to adoption by several large prestigious U.S. centers as well as increased penetration in existing hospitals. We expect the impact of this to continue to fuel our growth in the fourth quarter and in 2018. It’s early days, but we’re encouraged by the change in the growth trajectory. We’re focusing our efforts on bringing greater discipline and account planning to the organization. CRM sales were $58 million during the quarter, a slight increase compared to the third quarter of 2016. This is the first quarter in 2017 where we have been slightly positive with growth. In low voltage, pacemakers were up again this quarter driven by continued demand and market share gains in Japan due to our KORA 250 pacemakers. In high voltage, while our lack of MRI compatibility is a challenge for us and impacting our sales, we saw continued growth in our PLATINIUM CRT-D products in Europe due to the recent incorporation of the IS-4 devices. Now let’s turn to neuromodulation. Sales were $91 million, up 1.3% versus the third quarter of 2016. There are a couple of timing issues that impacted sales in the quarter. First, while our facility and inventory did not experience any material damage due to the recent hurricanes, many of our employees, hospitals, clinicians and patients were impacted. As a result, there was a period of time when procedures weren’t occurring as originally scheduled. These procedures are now being coordinated and will occur over the next couple of quarters. Second, we saw a broad patient deferral in anticipation of the launch of our newest VNS Therapy system SenTiva. As we’ve discussed many times we anticipated approval of SenTiva by the end of the year, and we were pleased to announce that the FDA approved our product in early October. As a result, we remain confident in achieving our full year neuromodulation plan. But now, I’ll turn the call over to Thad for an overview of our financial results. Thad.

Thank you, Damien. I’m going to discuss the third quarter financials in greater detail and speak further about guidance. As Damien mentioned, sales growth in the third quarter of 3.1% improved versus the previous two quarters due to strong sales in cardiac surgery and slightly positive growth in CRM. For the nine months ended September 30, sales growth was 1.7%. And we still expect top line sales growth to be in the range of 1% to 3% for the full year. Adjusted gross margin as a percent of net sales in the quarter was 65.6%, up 110 basis points from the third quarter of 2016. The margin improvement was primarily driven by our continued focus on cost efficiencies. Year-to-date adjusted gross margin, as a percentage of net sales was 65.7%. And we still expect gross margin to be in the mid 60% range for the full year. Adjusted R&D expense in the third quarter was $29 million compared to $31 million in the third quarter of 2016. R&D as a percentage of net sales was 9.5%, down 110 basis points versus the third quarter of 2016. Due to a more focused approach on investing in high growth areas and the time maybe of clinical investment, we are expecting an uptick in clinical spend in the fourth quarter, both for TMVR and our heart failure program. Year-to-date, adjusted R&D as a percent of net sales was 9.9%, and we now expect R&D to be in the 10% to 11% range for the year. Adjusted SG&A expense for the third quarter was a $113 million compared to $104 million for the third quarter of 2016. SG&A as a percentage of net sales was 36.6% up 140 basis points versus the third quarter 2016. Due to an increase in sales and marketing spend in neuromodulation, investments in building our global capabilities including international expansion and project related expenses. Year-to-date adjusted SG&A as a percentage of net sales was 36.2% and we still expect SG&A to be in the 36% to 37% range for the full year. Adjusted operating income of $60 million compared to $55 million in the third quarter of last year, an improvement of 9.2% which exemplifies our commitment to leveraging the income statement. Adjusted operating margin was 19.5% compared to 18.7% for the third quarter last year up 80 basis points. Year-to-date, operating income as a percent of net sales was 19.6% and we still expect full year adjusted operating margin to be in the high teens. Our adjusted effective tax rate in the quarter was 22%, an improvement from 25.5% in the third quarter of 2016, as a result of ongoing tax efforts. Year-to-date, our adjusted effective tax rate was 22.5% and we now expect our full year adjusted effective tax rate to be in the 22% to 23% range. Finally, adjusted diluted EPS for the third quarter was $0.93, an increase of 19.2% versus the third quarter of 2016. Year-to-date the adjusted diluted EPS was $2.65. As a result of our strong third quarter and momentum across the business offset by increased investment in R&D, we now expect adjusted diluted earnings per share to be in the range of $3.30 to $3.45, up from our previous estimated range of $3.10 to $3.30. This assumes diluted weighted average shares of 48.5 million for the full year. Now, turning to cash flow. Our cash flow from operations for the 9 months ended September 30th was $74 million. Cash flow from operations excluding payments for onetime integration and restructuring costs was $117 million. Capital spending for the first nine months of 2017 was $24 million down slightly from the same period of 2016. Our cash balance at September 30, 2017 was $65 million, up from $40 million at December 31, 2016. Our net debt at September 30th was $60 million down from $75 million as of year-end 2016. All cash flow guidance remains the same as we provided on our second quarter earnings call on August 9th. So with that, I’ll turn the call back to Damien for some final comments.

Thanks, Thad. So in summary, despite the impact of hurricane activity in the quarter to our neuromodulation business, our growth accelerated over the previous quarters in 2017. All of our business franchises in the third quarter experienced growth with cardiac surgery having its strongest quarter since the company’s inception and CRM turning slightly positive for the first time this year. In addition, we made progress in other areas of the business. Aligned with our objective of being a focused medical innovator we announced that we are exploring strategic options for our CRM franchise. We hosted two Investor Days where we provided insights into our strategic plan, including both near term activities and mid to long-term objectives and provided five year financial goals which support the strategy we highlighted. In neuromodulation we received approval of our newest VNS Therapy system SenTiva and have seen great initial reaction to the product. With the addition of pediatric approval down to the age of four and MRI compatibility, we are now able to reach a greater patient population. With strong year-to-date results and momentum in the business, we made the decision to increase our adjusted earnings projections for the full year. We are accelerating in our core business, we are investing in our future pipeline, we have a clear roadmap for value creation, and we are well positioned to deliver on our commitment to drive shareholder value. We look forward to updating you on our continued progress in providing our 2018 guidance at our next earnings call in February 2018. And now we’ll hand over to Mariana, and we’re ready for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Raj Denhoy, Jefferies. Your line is open.

Hi, Raj.

Yes. Good morning. Sorry about that. So just a couple of questions if I could. On the VNS business in the United States in particular, I appreciate the commentary around the delays in procedures for SenTiva. But is there anything you can offer in terms of whether those procedures have already started to come back and how that’s ramping now here in the fourth quarter?

Yes, without getting quantitative on you, I will say that qualitatively we’re off to a great start in October both in the normal base portfolio as well as with SenTiva. And we’ve seen a tremendous implant rate for SenTiva comparable to what we saw with AspireSR when we launched that. And I think the other important factor too is coupled with the MRI and the pediatric indication, we’re seeing a strong implant rate in pediatrics. So the ratios for pediatric implants are looking very positive too. And the average age of a patient with an implant is coming down. So all round we feel very happy with how we got out of the gate.

Okay, that’s helpful, and maybe just a kind of broader question. The other number that kind of stood out in the quarter was the overall growth in kind of rest of the world or the markets outside of U.S. and Europe. And I’m curious if there’s anything behind that, was there distributor ads or anything in particular that could’ve explained that really strong growth in those other markets?

Well, yes, I think this comes back to the team. I’m really pleased with how the team performed right across the Board. And what we’re seeing in Europe, early days of the new commercial leadership there, but there’s a real focus on funnel management in Europe particularly on the heart-lung machines and Perceval. And in the international markets, we talk around the edges of the new team there and their focus on distributor relationships and driving account penetration. And so I’m really pleased to see the early stages of that starting to read through.

That’s helpful. Thank you and congratulations on progress.

Thanks, Raj.

Your next question comes from Scott Bardo of Berenberg Bank. Your line is open.

Hello there. It’s Jakob Berry speaking on behalf of Scott Bardo. Three questions, firstly in neuromodulation, just wondering if you’re able to provide any further quantification of the impact of the hurricane. And any sort of picture of underlying demand outside of that. And then maybe when you think you can return to your aspirational strong growth in that business? Is this a Q4 event or the first half of 2018? Secondly, it’s pleasing to see the cardiac surgery growth bounce back, but the U.S. business in heart valve still seems quite soft. So again just wondering what the dynamics are there and when you expect that to inflect? The last question is just on the fact that you committed to a U.S. treatment-resistant depression study. Is this a signal that the CMS is nearing reversing its non-coverage decision and we could do this without the CMS, or not?

Hi, Jakob. Thanks for calling in.

Yes, for neuromod, clearly we did have an impact as Damien said related to the amount of procedural volume as well as some disruption in the market. It was roughly around $3 million for the quarter. We remain very confident that procedures will pick up in the fourth quarter and actually growth will return.

On cardiac surgery, again I was really pleased here with how that group performed right across the board. I think in the cardiopulmonary business, seeing 5.6% growth in that portfolio was a really powerful statement and I think a real testament to the team in the U.S. and Europe in particular who are doing a great job with the funnel management and replacement cycle. And then as I alluded to with the Raj question on overall growth, internationally I think this team has really started leaning into this portfolio and seeing traction there. So I think cardiac surgery overall was positive, I think the cardiopulmonary business even with the 3T Heater-Cooler, is still showing some real signs and compared to where we were coming out of the fourth quarter earnings call saying that people were going to wait for a whole new technology cycle, I think we’ve shown that with discipline and focus, we can in fact convert customers. In terms of heart valves, again I think we saw strong double-digit growth in that portfolio in all regions. We were talking in Investor Day about how the tissue valve portfolio wouldn’t return to growth until next year and we saw growth in the quarter. So again I’m very pleased with how the team is focusing here. Of course there are puts and takes geographically, but overall I would say we’re very pleased with how our activities are starting to read through. Lastly, on the TRD study, it’s actually not a U.S. study that, the announcement on the clinicaltrials.gov site was related to a piece of work that we’ve been doing in international markets and international and outside of U.S. markets and this is a study to create a registry to look at TRD, it’s a 500 patients in 80 centers with 3-to 5-year follow up and a number of our accounts as I was going through their ethics system decided that to post this on the clinicaltrials.gov which tend to be, it’s probably a gold standard tracking tool, it was where they were going to put that up. So I know it created a bit of confusion and all of a sudden, people thought this was a signal about the U.S., it’s not. It’s our work to make sure we’re getting the right access to patients in our U.S. markets.

Your next question comes from Matt O’Brien, Piper Jaffray. Matt O’Brien: Thanks for taking the questions, just, sorry to belabor this a little bit, but on the Neuromod side, you gave the hurricane impact of about $3 million, what was the SenTiva deferral impact if you wouldn’t mind, if you have that?

Pretty minimal. It really was weeks and somewhere around maybe $1 million to $1.5 million in the quarter, but again as Thad said we’re very confident about the rate of implants in the quarter coming out of that issue, and we’re really positive about achieving our full-year plan here.

Yes, with the SenTiva launch, clearly, and having the hurricanes behind us, the fourth quarter growth rate should pick up. Matt O’Brien: Right, can you talk a little bit more about SenTiva specifically as far as what you’re seeing from your existing clinicians in terms of excitement around that product or maybe even opening new accounts or reengagement from clinicians that maybe had kind of stepped away from some implanting of your other technology in the adult population, just broader strokes kind of what is that doing for you guys?

Yes, I think there’s a very broad excitement with our clinician base, and candidly with clinicians who haven’t previously used the product. Normally our cycle time to attract a new physician to implanting is quite long, it’s a very long set of discussions and training them. What we’ve seen with SenTiva already is a number of non-implanting clinicians come onboard, and that, I think, augurs well for what we hope is going to be a really strong product launch. I think what people are excited about -- the new generator is terrific, having the smaller size, I think plays right into the whole pediatric patient population. By having the AspireSR algorithm in a smaller footprint is exciting, but I think having a wireless wand is tremendous. And we’ve talked about Bluetooth technology and how this evolves with the portfolio. So this would be the first step of applying that wireless technology, having a new user interface is exciting, the design and usability is tremendous. And it’s a terrific technology all coupled and packaged with a new tablet. And I think -- I got to say I’m really proud of what the R&D team did in a very compact period of time. We talked about 18 to 24-month cycles I think to come out with this four-pronged approach to a new technology in that 18 to 24 month window was a really powerful statement of what this team can do. So hopefully, Matt, that gives you some color. Matt O’Brien: That’s helpful. Last one for me, just on the CRM divestiture process, a couple of things, has there been any acceleration in the conversations that you’ve been having with potential strategic or other parties, as far as, selling that asset. And then, could you just give us some sense for timing. You don’t have to be too specific, but is this, we’re going to make a definitive decision one way or another in Q1 of next year first half of next year, just any sense there will be helpful.

I don’t mean to be glib, but I’m just not going to be specific at all. And I’m sorry, Matt, I’d really love to. Let me just say this, we are making good progress, Barclays has been a tremendous partner here, and we’re very pleased with how that team has worked with us. And as soon as we have something definitive that we can announce we’ll come out with that. But let me just say it’s progressing well. Matt O’Brien: Understood. Thank you.

[Operator Instructions] Your next question comes from Jason Mills, Canaccord. Your line is open.

Hi, Damien and Thad. Can you hear me okay?

Yes.

Congratulations on a good quarter here, I wanted to go back to the question that Raj had about rest of the world, was this sort of a performance rest of the world expected? And I guess, the second part of that question, is it sustainable, as we think about competing against this in the third quarter of next year should we expect that as we approach that, that comp that we’ll be thinking about – you’ll be talking about this as a difficult one. I’m just trying to get my arms around that the rest of the world contribution to the overall business, because without it, obviously, the performance wouldn’t have been nearly as good this quarter?

Yeah, look, I think it was a really fantastic performance for rest of the world across all parts of the portfolio. So, we are very much pleased with that, I mean it’s not typical you see 16.5% growth in one quarter, so it’s hard to comp say that that’s going to continue at that rate. But clearly, we see tremendous opportunity for rest of the world. I think that both the business in places like China and Japan there’s just tremendous opportunity. And of course, we aspire to have really strong growth coming out of that part of the world. So, I wouldn’t model 16.5% going forward, but I would say that clearly we want to have that be a major growth driver for us.

Yeah. I think this is again a sign of the new team finding their legs. Roy has done a tremendous job building a team, I think they’ve got a very clear strategy. I think we talked about this at the Investor Day the idea of narrowing down the number of distributors and having more strategic partnerships and better account planning and a greater ability to partner with those accounts. So I think, we’ve seen the early signs of this team coming together, and we’re going to continue to push them pretty hard. But, I think that’s got -- question and answer here on -- this is probably a good way to model it.

Okay. That’s helpful. And in the United States market which is obviously your biggest -- still your biggest market by a little bit, if we add back the $3 million, you did show some positive growth this quarter, but incremental positive growth besides SenTiva, perhaps talk about the rest of your portfolio both, I guess on the heart valve side and cardiopulmonary. And what you might expect out of the U.S. market let’s say over the next 12 months to 18 months, understanding that SenTiva should be a helpful driver for the neuromodulation in U.S. business just outside of that what sort of growth rate you expect domestically over that time period?

Yeah. Look again without getting into specifics of that growth rate, I think -- first of all, I think the fact that all three parts of the portfolio performed in the quarter, I hope is a signal to everyone that we’re very focused about driving growth, changing the trajectory and starting to look for consistent growth from the whole portfolio. Secondly, I think the fact that we could still grow as we did even without neuromodulation being double-digit is, I hope again a sign to everyone that we’re building up strength and not just relying on one growth lever in each quarter and that’s an important step. So, back to the besides SenTiva, I think that you could see that our focus here is starting to read through. Heart valves, look I think we’ve got some tremendous upside here. We see Perceval as a real growth driver, one of the four core growth drivers. Perceval was up in the quarter, I mentioned to you at the Investor Day about going a bit old school and tracking average daily units. And to see that read through because of our focus on account acquisition and account penetration, was I think a really powerful statement. And I’m pleased for the U.S. team that those results are coming through because they’ve taken a fairly big leap to work on the strategy. And to see it start to pay off, I think, is tremendous for them. And then lastly, in the cardiopulmonary portfolio, we still see runway with our funnel here of the heart lung machine upgrades and we’re pushing hard to get a new generation of heart lung machine out of the pipeline. But in the meantime, the work there and the account focus, again account penetration, account acquisition is a really powerful tool. And using our funnel management processes, we’re starting to see that read through. So I hope what people are saying is, we’re not a one-trick pony, we relied very heavily on neuromodulation in the past, and we’re continuing to drive a more balanced portfolio approach.

Thanks for that color, And just a few additional follow-ups, one which I want just to your leverage which is just tremendous and give you a chance to sort of talk about that and give us some expectation or thoughts on that going forward but just to go back and push you a little bit Damien on the U.S. So the U.S. market was down excluding neuromodulation notwithstanding the $3 million from storm related impact. So it’s your biggest business, I’m just trying to get a sense for how you’re thinking about the domestic marketplace on a go forward basis, because it was down in cardiopulmonary heart valves, cardiac surgery, obviously CRM, you’re divesting so you don’t pay too much attention to that anymore. Could you just comment on that? And then I guess I’ll just thrown in the second one that the leverage is tremendous and usually your fourth quarter earnings, it’s one of your strongest quarters but yet your guidance which you raised into your credit raised would suggest that fourth quarter will be down versus third quarter. Thad, I know you said R&D spending was going to tick up, but it seems like maybe that’s a bit of a conservative guide notwithstanding that it’s gone up and maybe you can just comment about some of the puts and takes to get us to an earnings number that comes down in the fourth quarter versus the third.

And I’ll comment on both for a second. Clearly, when you look at the performance of the U.S., we do have some headwinds still as you know, with the with heater-coolers year-on-year, mechanical valves, as well as, traditional tissue valves. We do, as Damien said, see really underlying positive signs with Perceval performance. And so you’re right, I mean when you look at it kind of at a macro level you do see the U.S. performing a bit lower. We’ve been relying in the past on Neuromod to really drive U.S. growth, I think what you see in this quarter is that even though Neuromod was down because of the hurricanes and the SenTiva impact, other parts of the business are much stronger. And so the portfolio, I think, is much more balanced as well as the global performance is also stronger than what we’ve seen in previous quarters as well. So I think it’s an overall very good result. I think that the momentum that we have in the U.S., and as some of the headwinds kind of wash out as comps versus previous quarters, I think U.S. performance will continue to be much stronger as well as Neuromod performance. Your point on the quarters, we’re really pleased on how the P&Ls are progressing. As you said the leverage that we’re seeing, yes, we’re very, very focused on improving our gross profit as we talked about as well as SG&A leverage in being really thoughtful in how we managed the P&L. Even within R&D, you saw that R&D was down a little bit versus prior year, we’re making very thoughtful decisions on how we invest our R&D dollars, as well as the timing of some of our R&D investments. During the Investor Day we highlighted that we are going to spend more on our strategic portfolio initiatives things like TMVR, things like heart failure really driving that. And so the fourth quarter guidance is including some increased investments in R&D primarily to help us accelerate our growth as we go forward. But again, we were very pleased and confident that we could deliver our full year guidance and so that’s why we increased the overall target for EPS.

Okay, thanks. And I’ll get back in queue.

[Operator Instructions] Your next question comes from Mike Matson, Needham & Company. Your line is open.

Hi. This is David Saxon, on for Mike. Just another one about the margins. At the Analyst Day, you were saying operating margin target of 20% plus and were at 19.5% I was wondering are you going to update that or get a little more specific there?

Yes, I think we’ve said high teens for this year, we’re 19.5%, I believe. So it’s obviously a good result. I think we clearly want to make sure that we provide guidance that’s achievable. I clearly think our goals here which we laid out was to get 70% gross margin and certainly improve our margin over time as part of the plan.

Okay. Thank you, and then you briefly mentioned the S3 to S5 upgrade, but I’m curious how long you think that conversion cycle has left to run?

Look I see, David, this as being a really important lever for us for the next 12 to 18 months. We’re working hard on developing a new heart-lung machine and I’m very pleased with the progress we’re making there. But globally we see a solid runway with that conversion for some period to come.

Okay, so maybe through first half of ‘18?

Yes, even beyond.

Okay, excellent, and then just quickly can you comment on any SenTiva Price premium you’re seeing?

Yes, look again, I think, when we talked about driving the neuromodulation portfolio. That the new technology introductions have always been an important driver for us here in terms of margin. With AspireSR we’ve got quite a big jump. With SenTiva we’re seeing a small premium 5% to 10% it’s early days. But again we’re pleased with the read through here on the new technology and what this means for patients.

Okay, great. Well thanks very much. And thanks for taking my questions.

You’re welcome. Thanks.

Your next question comes from Michele Baldelli, Exane BNP. Your line is open

Hi. Good morning to everybody. I’ve just a question about the cash generation expected for this year. If you can update us on what is the kind of level of net debt net financial position that you foresee for the end of the year?

Yes. So, we’ve been making really great progress there, and I’m really pleased with our net cash position. As I said we’ve increased our cash reduced our debt, and so we want to continue to see that through the end of the year. I don’t think we specifically guide a yearend debt level, but we’re getting close to kind of breakeven, yes.

I think the team, Michele, is doing a tremendous job here, very focused on our cash generation efforts, and, again, it’s part of the new discipline that I think we’ve brought to the team here, just focus on that important driver.

And there’s still opportunities also in working capital, I think we’re going to continue to improve that as we go.

Yes.

So very much focused on positive cash management. We’re also seeing better cash conversion this quarter than we’ve seen; roughly around 95%.

Your next question comes from Mike Matson, Needham & Company.

Hi, can you guys hear me okay?

Yes.

Yes, we can.

Okay, so I just want to hop on, because I wanted to ask one question on Caisson. One of your competitors, Medtronic, announced that they’re starting their IDE trial for their intrepid valve, so I was just wondering if you had any thoughts on that? And they seem to be moving the IDE really quickly so is there any chance you guys could do something similar and accelerate your program and get to that pivotal trial, because seems like they’re maybe in a position to be first in the U.S. market?

Yes, great question, and I hope the conference was good, I was talking to Paul, he said all those sessions on TMVR were really well attended. Look, here’s the thing. I think this is where the difference in the approaches is really important. The Medtronic device has a transapical approach and that’s what they’ve gone to this trial with. We continue to believe, and our clinicians continue to believe that the transapical approach is what will be the one that prevailed. So we’re really focused on our PRELUDE feasibility trial and getting that completed. And as we’ve said we’ve started enrolling in the INTERLUDE CE Mark. We’re pushing really hard to get to this pivotal as quickly as we can, but again we believe that focusing on our transapical is the approach; putting back all our effort into that is the really important step here.

There are no further questions at this time. We will now conclude today’s conference call. Thank you for joining and you may now disconnect.

Thanks, Mariana, and thanks everyone for joining.