[Abrupt Start] …and welcome to our conference call and webcast discussing LivaNova’s financial results for the second quarter of 2020. Joining me on today's call are Damien McDonald, our Chief Executive Officer; Thad Huston, our Chief Financial Officer; and Melissa Farina, our Vice President of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is available on our website. We have also 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 and press release in the Investor Relations section of our website under News and Events, Presentations at investor.livanova.com. With that, I will now turn the call over to Damien.

Thank you, Matt. And thank you for joining us and I hope you and your families continue to remain safe and healthy during these challenging times. In the second quarter of 2020, we improved our liquidity, increased our financial flexibility and took actions that allowed us to effectively navigate this new environment. Overall, we saw a steady improvement in procedure volumes as we move through the quarter with some geographies and product lines recovering faster than others. I'm going to start off by discussing some recent highlights and then results for our primary growth drivers: epilepsy and ACS. Then, I will move to our pipeline and finish with the results of our remaining businesses. After my comments, Thad will provide you with additional detail on the financials and our updated 2020 EPS guidance. And finally, I will wrap up with closing comments before moving on to Q&A. In May, the International Journal of Bipolar Disorders published data that shows combining VNS Therapy with treatment as usual, significantly improves outcomes in patients with treatment-resistant bipolar depression. Patients treated with VNS Therapy have increased charters of achieving a response in less time than the treatment as-usual group. 63% of patients achieved response compared to only 39% of the treatment as-usual group. The study also shows that these patients treated with adjunctive VNS Therapy were less likely to be suicidal. This study was complemented with a separate publication in Contemporary Clinical Trials, detailing the design of the RECOVER clinical study. These articles further support our dedication to the patients who suffer from this debilitating disease. At the AATS meeting in May, we presented new data from our PERSIST-AVR clinical study, which is the largest clinical study for surgical aortic valve replacement. The new clinical data demonstrates consistent outcomes and lower procedure times for…

Thank you, Damien. I'm going to discuss the second quarter results in greater detail and then provide an update to our 2020 guidance. Sales for the second quarter were $182 million, a decline of 33% compared to the same quarter prior year. Cardiovascular sales were $125 million, down 26% from the second quarter of 2019. Neuromodulation sales were $57 million, which is a decline of 45% versus the second quarter of 2019. Adjusted gross margin as a percent of net sales in the quarter was 61% down from 69% for the second quarter of 2019. The margin decline was primarily driven by mix from lower Neuromodulation sales and unfavorable manufacturing variances. Adjusted R&D expense in the second quarter was $35 million compared to $40 million in the second quarter of 2019. R&D as a percentage of net sales was 19.3% versus 14.3% in the second quarter of 2019. The R&D spending decline is due to planned reductions in legacy products and the impact of COVID-19 on our clinical studies. Adjusted SG&A expense for the second quarter was $80 million compared to $108 million in the second quarter of 2019. SG&A as a percentage of net sales was 43.7%, up from 39% for the second quarter of 2019. This $28 million decline in SG&A expense is the result of planned cost containment actions. Adjusted operating loss from continuing operations was $4 million compared to adjusted operating income from continuing operations of $44 million in the second quarter of last year. Adjusted operating income margin from continuing operations was a loss of 2% compared to income of 15.9% in the second quarter of 2019. Our adjusted effective tax rate in the second quarter was 2.8%, as compared to 15.4% in the second quarter of 2019. The lower tax rate is related to…

Thanks, Thad. I'd like to finish by acknowledging the selfless dedication of health care professionals around the world. Their extraordinary efforts continue and we wish health and safety for them and their families. I'd also like to extend the same wishes and my appreciation to the entire LivaNova team around the world and how they've reacted to the last quarter and the circumstances of COVID. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. And with that Catherine, we'll now throw it back to you for questions.

Thank you. [Operator Instructions] And our first question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Good morning. Thanks for taking my questions, and Damien, good morning, thanks for taking the questions. I guess for starters, I'm sure everybody on the call wants to really understand the Neuromod commentary. Expected to be down 10% to 15%, you're saying now it's more like 15% to 25%. That's 5% to 10% increase as far as the contraction that we should expect here. So what are you seeing either in certain markets in Europe that haven't recovered? What are you seeing that's new here in the U.S. that concerns you? And then what competitively from the drug launch are you also factoring in that you may have not been factoring in before? I think you had already considered that. So just help us understand the declines there and then how to think about that business as we enter 2021?

Yes. So look a whole series of great questions there Matt. First of all, just let me talk to the whole team here that I'm just so proud of their efforts in the quarter and their extraordinary response to the circumstances we faced and how we achieved the goals we laid out in April for the quarter. And I think that's been important to how we've thought about the full year. Similar to other public commentary in Neuromod, we expect sequential improvement in the third quarter compared to the second quarter. So that I think is important. We don't expect the performance to be linear COVID flare ups ebbs and flows. But the early signs for the quarter have been encouraging. Nevertheless, we just don't see a linear change here. So what we're seeing is that the impact from drugs, particularly Epidiolex were the same in Q2 over Q1. So we don't see any particular change there. We already took into account the other drug launches in our earlier guidance and that's included in this. Again, we haven't seen a particular response to those new drugs. Our efforts here really are focused on how we change our business model to partner with these comprehensive epilepsy centers and focusing more on where DRE patients are. So over the previous couple of quarters, we've changed our story to much more focus on how VNS is accretive to any drug cocktail. We've improved our key account management focus. We've added medical science liaisons. We've added patient -- nurse educators, so that the conversations are different with patients. We've worked on a lot of remote processes to be able to continue our support there. And so, we're really taking a look at the whole system in the U.S., but importantly also making sure we drive non-U.S. business as well.

Okay. But just to maybe put a little bit finer point on that Damien. I appreciate the feedback. My math is you're down about $30 million maybe $40 million versus what we kind of had been expecting. That's primarily U.S.-based. Are you saying that 10%-ish of your U.S. business is potentially at risk here with more COVID flare-ups here in the back half of the year? Is that how we should frame it up?

Hey, Matt, it's Matt. A couple of things on this. So when you ask about the regions, I would say in our international business, some of the countries that are stronger for us, if you look at Brazil, China, Japan and Middle East they haven't come back as quickly in Neuromod as maybe some other markets. And then also in the U.S., as you're seeing from third-party reporting, some of our other competitors reporting, Neuromod just had a little tougher go in the second quarter than some other procedures. So part of that was factored into our estimate as well.

Got it. And I'll just -- real quick on LifeSPARC. Any way to kind of quantify the -- I know you said full year 30% growth which is great, quantify the level of delayed purchase in Q2 and then what you're seeing early days here in July as you're rolling that out? Thanks.

Yes. I would say the early stages have been very encouraging. As I said, we saw delayed orders into the Q3 because of the anticipation of LifeSPARC. The LifeSPARC limited commercial release was very successful. We had over 4,000 hours of utilization, as we revved into the launch. And I'm really pleased with the information we got back from that and how it informed what we do in this quarter. So as I said in the commentary that's why we're saying we're still committing to at least 30% in the full year.

Got it. Thank you.

You're welcome.

Thank you. Our next question comes from Rick Wise with Stifel. Your line is open.

All right. Good morning, Damien. Maybe…

Good morning, Rick.

Maybe you could touch on -- just update us on the TRD trial. Maybe, it's early and I missed it, but I don't think you spoke about it. Can you give us any update on where you are with enrollment, or are things going on smoothly? How do we think about the next six, 12 months as things return to normal clinically? Any color would be welcome. Thank you.

Sure. Look I think the team here has focused all their efforts on what they can do in the absence of being able to implant patients. So what are those things? One is site activation, which we've managed to continue even with remote behaviors. So I think that's an important step for us as well as being very focused on how do we stack the funnel of patients at the start of the whole inclusion/exclusion criteria. What we want to make sure we do is when procedures do start opening up again that we can start putting patients through that screening process quickly. So the two things were about site activation and patient stacking. Very importantly, we're continuing to focus on what we have to do to get to the transition to registry, which as I said in the commentary was late 2022 early 2023 and that will be dependent on CMS' review timing and the continued impact of COVID. But again, I remain very encouraged by the way this team has continued to focus their efforts and engage with the key opinion leaders, right through this whole last quarter.

Great. And maybe turning to heart valves, which were down so sharply. Can you give us a little more color on what's happening there both as a whole and geographically? And what impact are you expecting, or what should we dial into our thinking about the Perceval Plus launch the impact on the second half?

Yes. So, again, I think, in line with the broad commentary, we expected Q2 to be the trough quarter, with Q3 and Q4 sequentially better. Our business for our heart valves is skewed towards countries that had a bigger impact from COVID than perhaps the overall SAVR market. So markets like Italy, which were the first into the COVID crisis in Europe, Brazil, Middle East, Eastern Europe were countries that have been disproportionately more impacted than others. So that's why we're seeing the heart valve response that we had. Again, what we expect to do is, bounce out of that as patients and clinics open. Perceval Plus, particularly in Europe, is a key part of that narrative. It's an improvement in the technology that we think -- and again, the early signs from the limited commercial release we did last year really point to a better patient outcome. So, we're encouraged by what that can do, particularly in Europe.

Yes. And just last for me. As we think about your capital position now. Obviously, you've stabilized the balance sheet and have plenty of cash. But maybe help us think through how you're focusing on profitability, given the additional debt, new cost reduction initiatives? And maybe how long do you feel like the cash takes you in terms of -- obviously, the significant spending still ahead on your clinical programs? Thanks so much.

Yes. That's a great question. Look, I think, just in terms of capital overall, our focus is on capital preservation. And until we get more clarity on the timing and impact of COVID-19, preserving cash, retaining a strong balance sheet is really key to us. COVID has caused everyone, I think, to rethink their business model and we're no different. So our intention is to make sure we focus on the fundamentals, which are about epilepsy and ACS, right? We've ring-fenced that and what we have to do to get those growing. We've ring-fenced the strategic portfolio initiatives, particularly DTD and heart failure. That's got all sorts of effort that we need to continue. And then, we're working hard to improve our cash flow generation and you'll see that some of those results read through in this quarter. So we haven't changed those focus areas. What we have thought more aggressively about is, the model, including how to manage costs tightly. There are going to be disruptions to demand, but being very aggressive about the positioning the company for long-term growth is key to us. And looking at end-to-end of our business model is how we've approached that.

Thank you.

Thank you. Our next question comes from Scott Bardo with Berenberg. Your line is open.

Yes. Thanks so much for taking my questions. Great. Three questions, please. So, yes, just first of all, I wonder if you could explain why you see gross margins a little bit softer than your initial expectation. Is that aligned with your comments of weaker-than-expected Neuromod than you saw in April 29? I think on SG&A, it's pleasing to see that you've exerted some more cost controls, but that seems to have been entirely pumped back into R&D, with more spending in R&D than you initially outlined. So I haven't seen any new projects announced today and your revenue guidance is the same. So why is there not the same discipline on the R&D line this year? Why is that stepping up? So that's the first question set please. The second question, just really wonder if you could give us a bit more clarity as to the rationale for your refinancing, particularly with respect to your senior credit facility, which appears to be quite expensive financing cost. Can you spell out to us, please, what will be your net finance expense and cash costs this year for the company? And do you have ability to work that down next year by absolute reductions of debt? And last question, please. Obviously, this experience with COVID has been a shock to everyone in the med-tech industry. And I'm pleased to see LivaNova is keeping its focus and delivering improvements and progressing its pipeline. But, obviously, this situation has created quite some pressures for the group, also from a balance sheet and liquidity perspective. The nature of the question is, is there increased drive for the executive management team and the supervisory Board to start exerting the sort of cost discipline that can get you back to a reasonable margin as a company, or are you happy to just continue high investment levels and have a more gradual improvement? So I just want to understand whether this experience and pressures that you've seen has changed your appetite to improve profitability?

Well, so let me start with that one at the end, Scott, and then we'll come back on -- because it feeds into some of these other commentaries. So, firstly, what I said just a minute ago, COVID's caused everyone to rethink their business model and we're no different. So you saw SG&A sequentially down 25% in the quarter. And to execute that inside a quarter, I think, is a big effort. And those changes are important to us, in terms of how we reset and think about the company. We've made big decisions around that. We've looked at, not just SG&A. We looked at R&D, which, by the way, sequentially also down in percentage terms, there's an uptick. But if you look at the puts and takes in the whole P&L, there are puts and takes that the change that we're making is to the EPS related to the refinancing only. So, I think, you've seen us take decisions in the quarter. And as I said what we're ring-fencing is epilepsy and ACS. What we're ring-fencing is depression and ANTHEM. What we're working aggressively on is how other aspects of the business model need to change to ensure we improve cash flow and margins. And as I said, that is a significant part of how we've been rethinking the model in the last quarter, as COVID really takes effect. With respect to debt, Thad, I'll continue on that and then you can jump on in. We looked and had plans in place prior to COVID. They obviously had to be completely rethought, as COVID started to expand. And not just the debt restructuring, but an entire look at how we improve our financial flexibility and increase our stability. So we evaluated a whole bunch of options. And we saw, what I think was a balance of coupon rates and term lengths, shareholder dilution, covenant structure, simplifying our strategic relationships. So that what we've got and what we feel strongly about is that we have a combination and blend of private debt with these exchangeable securities. That really is the best option for LivaNova and for shareholders. So, I think, again, we've made conscious decisions here to improve our financial position. With the P&L --

Yes. I would just add a couple of comments, Scott. Obviously, having the biggest impact in Q2, due to COVID, had a fairly material impact on our gross margin and the financial profile of the company. And so if you look at our gross margin, it was significantly impacted, because of the mix effect of Neuromodulation. But we also had unfavorable impact of fixed manufacturing overhead, that occurred in the quarter, which we don't anticipate occur in the future. And so as the sales mix improves in Neuromod. And ultimately the gross margin improves, profitability and cash generation will improve, in Q3, and then sequentially in Q4. And as Damien said, we took this as an opportunity to really focus on the fundamentals, and obviously improving both our expense base. And we took a lot of actions around managing labor costs implementing headcount freezes bringing down expenses and all discretionary spending, and ultimately looking at any and all opportunities to reset the cost base. The R&D did come down sequentially. And we're still trying to continue the investments in the critical programs. We're not adding new programs, but just delivering on the milestones that we have in front of us. And then again, I think that, the financing that Damien mentioned was something that, we were planning to do and address, but ultimately positions us well and provides improved liquidity, financial flexibility and allows us to navigate this new situation.

Yeah. Thanks for guidelines. And sorry, I did ask quite a lot of questions at once. But can you be a bit more specific please? What is your net financial expense going to be this year? And is there an ability to lower that next year, if you improve margins recover earnings and pay down absolute debt? I'm wondering, are we at a maximum point of dilution? If you could just comment there that would be helpful.

Yeah. So this year I mentioned in my commentary the incremental impact was $0.28 of EPS, due to the financing. And that is really the only adjustment, we're making to our EPS guidance. We've changed some things in the middle. But ultimately, that's the only reason that we're re-guiding EPS. And so that's the impact. We are able to repay after two years the debt facility with Ares Cap.

Understood -- sorry to come back to this, so basically your incremental net income -- net interest expenses going up what $15 million, can you just give those numbers?

We could follow-up exactly the number, but its equivalent to $0.28 of EPS.

Okay. And last question please. And just following on from your first comment Damien Is it fair to say now, given these circumstances that LivaNova's previous expectation to be a 20%-plus margin business in 2022 is no longer attainable, or is that something you think that, you can still shoot for?

I think what we're going to do is work really hard to achieve the targets we laid out, all sorts of things that are different than we laid out in 2017 notwithstanding, the biggest one of that being COVID. And our mission is to as I said, drive growth improve cash flow and cash conversion and better cash generation. So we've got to make sure we're making the best decisions around the whole portfolio to do that. Again, all sorts of things have changed but our goal is to keep moving towards what we laid out in 2017.

And the expense actions that we demonstrated in Q2 really show that we can manage in a different kind of cost structure going forward. And I think, help us improve margin over time.

Thanks guys.

Thank you, Scott.

Thank you. Our next question comes from Raj Denhoy with Jefferies. Your line is open.

Hi thanks. Good morning. Maybe just a couple of follow-up on some …

Hi Raj, how are you?

…Pretty good thanks. Just a couple of follow-up on some earlier questions, so on the last one. So the $0.28 dilution this year from the financing that's for half year. So next year we should assume closer to $0.56 or so for dilution, on the new financing?

Yeah, about $0.55.

Okay. And I guess the earlier question on VNS, the epilepsy business. I guess what's perhaps a bit surprising is we had thought that, given that replacements are such a large percentage of that business, it might prove a bit more resilient. So have you seen softness on the replacement side as well as de novo? Maybe you can give us a little bit more detail around that?

Yeah. I think NPI is an end of service performed about the same, in the second quarter. And it's roughly 60% end of service 40% NPI. I think for us, end of service is much less elective than a new implant. So I guess that's why you expect a bounce there. The countervailing factor is that, before you get that implant for the replacement, you need one more final device interrogation to be scheduled before the surgery. And so patients and caregivers need to be available to go into a physician office to do that. So that's probably the counter to the need for an end of service. And we're working on ways and have seen ways to continue that. As I said, end of service still performed, in the quarter. But what we need to do is, make sure we figure out how to ensure patients and caregivers can return to physicians' office for that one last screen.

Okay, helpful. And then just on the pipeline, a little bit. So on ANTHEM, I think you said you'd be at 300 patients, by the second quarter of next year. Maybe you could you just remind us on what the path forward is at that point. There are a couple of different paths you can take. So what have you -- or what are you thinking about, in terms of timing once you get to that 300 patient milestone next year?

Sure Raj. It's Matt. So for that to look at the functional end points so the first part of a two-step process, we essentially need nine months follow-ups. So once we get to the midyear enrolment at that point we'd have to get to the full follow-up of all the patients. So assume at that point, we would review the data. And then how long you think it might take to get through the FDA, whether we need a panel or not, one competitor that just went through didn't have a panel. So there's probably some slack there. But if you kind of work through all that you'll see when -- potentially we could get FDA approval if in fact we decide to file for those functional endpoints, before we go through the whole study.

And I guess will it take you seeing the data to decide, which path you will go down, whether you'll try to get approval on the …

Yeah.

… the smaller subset with the functional endpoints?

Exactly, looking at that data will be important not just for the U.S., but also in the CE marked countries. We have CE Mark for this product already. And that data will be an important decision point for, what we do OUS. Again, there's a potential to commercially release VITARIA into those CE Mark countries, at that point as well.

Great. And sorry just one very last one, I might have missed this, but did you give an update on the number of implants for depression at this point?

No, we didn't. And we said we weren't going to update quarterly on that until we get to milestones like the outline that we gave I think back in the Q4 results, right. So for us we're not going to update quarterly. So we're just going to work towards these milestones of when we shift the registry.

Understood. Thank you.

Great. Thanks, Raj.

Thank you. Our next question comes from Matt Taylor with UBS. Your line is open.

Hi, good morning. Thank you for taking the question.

Hi, Matt.

Hi, Good morning. First question I want to ask is a follow-up on the Neuromodulation business. So you see a little bit more deferment here I guess than you might have expected. And I just wanted to understand, do you think that's temporary? And do you see a lot of these procedures get done in 2021? Could you have a bolus then, or do you think that you're losing patients through the funnel? Maybe you could characterize that a little bit.

Sorry you're in epilepsy Matt?

Yes.

Yeah. No I think again what we're working here is on both NPIs and end-of-service as best we can to continue the funnel. As we said, this is a highly fluid environment. The ebbs and flows of COVID are really important here to track. We're doing that at the account level. And that's why; we didn't change the range of the overall sales guidance for the company globally. But what we're committing to do there as we said in the previous guidance, minus 7% to minus 17% globally. And the puts and takes are very much based on how markets respond to various opportunities to open up how patients come back to clinics, how surgeries begin to open up. So that's the way we're viewing it. That's account-by-account, geography-by-geography.

Okay. Well, I guess I'm just trying to understand the Neuromod results, the epilepsy results this quarter were down more than we would have expected. And I was trying to get behind the patient factors or the facility factors that you think are impacting that the most. Is it because those patients are afraid to go in, or they're losing coverage or facilities are not open? Why is it more impacted than some other areas that we've seen?

Hi, Matt, it's Matt Dodds. So you're right. I mean, my take is that Neuromodulation as an industry not just epilepsy, it saw a much bigger hit in the second quarter than a lot of other areas especially in April. I would say we tracked very consistently with the market overall where tough April got better in May, got better in June. Some of it you're correct. Some of it was the physicians just weren't available for the actual follow-up. And then in a lot of cases whether it was the patient or for epilepsy, I think a lot of times it's the caregiver they just weren't ready to go back to the hospital. So we definitely had some dislocation on that front. And then, I guess to your point we do assume as we said earlier sequentially, we'll see more in the third quarter than the fourth quarter. We're just not ready yet to say there's going to be any pent-up demand, or a recapture rate in the fourth quarter or even early next year yet. We just want to see how this really moves as we get through the third quarter.

Okay, okay. Thanks for that. And then just one follow-up on that point. So when you're looking at the sequential improvement that you're talking about, I'm assuming that that comment applies to all your businesses that have been down basically. Can you just comment on them differentially? Do you think one is going to come back more or less than the other? And what are the main factors to consider there?

Well, I think that the first factor is really epilepsy right? I think, that's the big driver timing of patients returning to their physicians. I think, the other procedures are going to really heavily depend on how they bounce in terms of procedure cancellations versus procedures opening. The timing and regional impact of elective surgeries, I think is important. I think we expect ACS to be up sequentially faster than the other groups. Again the focus there on ECMO is, I think a big tailwind for us. And in terms of heart-lung machines I think clearing up this capital budget uncertainty is probably going to be the driver on that. So first group epilepsy; second, the other procedures heavily dependent on clinics opening; third, ACS and the tailwinds for ECMO, and of course very heavily linked to the LifeSPARC launch. And then fourth, HLMs around capital budgets. That's how I categorized the buckets.

Great. Thanks, Matt. Thanks, Damien.

Sure, Matt.

Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is open.

Yeah. Thanks. So I just wanted to follow-up on Matt's questions about Neuromodulation and the slower growth outlook there. Just curious about the impact of the economy, so COVID is one thing but it seems like even once we get a vaccine and hopefully get past the pandemic, the economy could continue to be weak. So I was just curious if you had any sense for what you've seen in the past with recessions and the impact on Neuromodulation either people using insurance or just not as willing to maybe pay the out-of-pocket co-pay deductible whatever to get the procedures?

Yeah. We don't see that as being a big impact. I think our macro impact here is COVID. And that bouncing out of COVID is going to be key. But as I said about patients also helping patients be able to get reads being able to do things remotely, I think is going to be important. So even within the COVID framework are there things we can do differently? And we're definitely exploring those and we've been working on that for the last quarter. But in terms of other macro things like recession, we don't believe that's an impact for us.

And then also Mike I would tell you within Neuromodulation and epilepsy of the three major buckets; Medicare, Medicaid and Commercial, Commercial is the smallest.

Yeah. Probably the only area that we would anticipate or even forecast some impact on the economy having an impact on our business is really related to capital purchases. And so we've tempered a bit of our forecast on HLM.

Okay. Thanks. And then good to see that the cash balance is up significantly given the refinancing. Can you just remind us on the heater, cooler issue? Have you paid everything out now, or are there any additional payments you have to make there?

Yeah. We paid the majority out already both last year and Q1. There's a remaining reserve of $49 million. And roughly that's what the payments that are expected to go out. We're trying to, obviously, resolve as many of those this year. But again the core dates tend to move during the situation.

We've continued to make good progress there though. And I'm really pleased with how the team is dealing with that. And there are no trials scheduled until September. And again as Thad said they could move.

Okay, got it. Thank you.

Thank you. And there are no other questions in the queue. I'd like to turn the call over to Damien McDonald for any closing remarks.

Thank you, Catherine. Again thank you to everyone. Thank you to the team and thank you for your continued engagement on LivaNova's progress and our transformation and we look forward to updating you next time. Cheers.