LivaNova PLC (LIVN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the LivaNova Q4 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Andre-Michel Ballester. Sir, you may begin.

Thank you Chanel, and welcome to LivaNova's fourth quarter conference call with investors. Joining me today in Houston are Vivid Sehgal, our Chief Financial Officer; and Greg Browne, our Senior Vice President of Finance.

Greg will first summarize the Safe Harbor statement and comment on the financial alignment. I will then provide an overview of the fourth quarter, discuss our sales results by business unit, review the general state of our business, the current (inaudible) environment, and outline are anticipated 2016 growth goals. Finally, Vivid will provide additional detail on the 2015 selected non-GAAP operating results included in the press release, and on our 2016 guidance.

Greg?

Thank you, Andre-Michel. This morning's press release 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. 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 discussion of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC, including our form S4 dated August 19, and other regulatory filings.

Included in the press release today are selected non-GAAP operating results for 2015. These results are unaudited and are presented on a non-GAAP basis for each quarter of 2015 and for the year as a whole. As noted on our last call, we provided results for legacy Cyberonics for periods in 2015, which closely match fiscal quarters, but are not precisely the same.

In particular, the results for the period ended December 31, include an additional three business days resulting from the transition to a calendar year. As expected, these additional selling dates have had a positive impact on the growth rate of the newer modulation business unit in the most recent quarter.

In this press release, management has disclosed financial measurements that present financial information not necessarily in accordance with generally accepted accounted principles, or GAAP. Company management uses these measurements as aides 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 per GAAP.

Finally, let me reiterate one further point from our last call. With the transition of legacy Sorin to US GAAP and US dollar reporting, the transition of legacy Cyberonics to a different fiscal year, appropriate purchase accounting, and considerable one-time costs per merger, integration and restructuring expenses, our reported numbers are somewhat complex for 2015 and may remain so in 2016. We will continue to communicate our results as clearly as possible.

With that, I will turn the call back to Andre-Michel for a business update.

Thanks, Greg. LivaNova has achieved significant progress over the last four months since our merger was completed on October 19 of last year, and the entire team is to be congratulated on their extraordinary efforts in creating an integrated global medical technology company with a solid platform for sustainable and profitable growth.

Let me begin by outlining some of the key accomplishments by the team. Significantly improved sales results for the most recent quarter, intensive integration and synergy efforts across all areas of the business, minimal disruption to our sales force and customer-focused activities, several key product approvals for Perceval, CROWN, and KORA 250, and the launch of Platinium in Europe, preparation of consolidated financial results and production of operating non-GAAP results for 2015. Integration efforts have taken many forms, but to point out just a few, retention of key employees and talent, commitment to developing one culture, proactive communication with all stakeholders, including customers, employees, investors, and suppliers and vendors, developing our branding, detailed synergy plans for 15 plus work streams, including ongoing monitoring and feedback.

I'd like to accord a special thank you to the corporate teams, finance, HR, IT, and legal, who delivered a seamless day one transition. We have now established a solid and stable platform from which to grow and I am excited to begin the first full year with our investment business firmly intact, namely strong market positions in Cardiac Surgery and Neuromodulation and a solid regional platform in CRM. More than 60% of our revenue comes from products with a number one market position. We have well worked scale and diversification and an engaged and committed workforce. And last but not least, we have strong profitability on an adjusted basis and a solid balance sheet.

I am pleased with the sales results for all three business units for the period through December 31, demonstrated substantial improvement over the prior quarter, are in line with the expectations we provided on our last call. Worldwide sales for the fourth quarter were approximately $318 million and $1.2 billion for the full year, representing full-year growth for the company of 2.7%. The growth rate on a constant currency basis for the quarter was 3.1%, which includes the expected decrease in CRM sales as discussed on the last quarterly call.

The fourth-quarter results also included another record performance from Neuromodulation, with sales of $92 million. While the Neuromodulation results reflected additional selling data as Greg mentioned earlier, the strong performance continues to be driven by ongoing momentum around AspireSR. I'd like to take this opportunity to recognize the entire Neuro sales team, whose leader, Jason Richey, was recently appointed President of the business unit. We expect the momentum around AspireSR specifically, and in Neuromodulation broadly, to continue in 2016.

Let me now review the fourth quarter and full-year performance of each of three units in greater detail. As I said last quarter, I believe we have demonstrated the value of our diversified revenue base.

As I just mentioned, from a growth perspective, the highlight of our business performance is Neuromodulation, with the team continuing the strong growth generated from previous quarters. Sales of $92 million represented a new quarterly record and growth of 26% of the prior year on a constant currency basis. We estimate that approximately 400 to 600 basis points of this occurred as a result of the changes for the new fiscal year.

Strong new patient growth in the US, the best results in over ten years, with almost 1,200 new patients implanted in the quarter, representing growth of over 13%. AspireSR penetration of approximately 70% in the US resulted in strong pricing and positively impacted product mix.

Full-year sales of $324 million represented strong growth of 14% on a constant currency basis for the prior year. We continue to be excited by the opportunities to extend the international business of Neuromodulation by leveraging the Cardiac Surgery and CRM commercial infrastructure. While pricing improvement from the favorable AspireSR mix will see some slowdown in the second half of this year, we expect that Neuromodulation will drive growth of 9% to 11% in 2016.

With that let's move on to Cardiac Surgery. Cardiac Surgery reported $165 million in sales for the quarter, a 4.2% increase on a constant currency basis from the comparable period in 2014. For the year ended December 31, net sales were at $617 million, an increase of 3.2% on a constant currency basis.

Cardiopulmonary products, including heart-lung machines, oxygenators, and also transfusion systems, reported $130 million in sales for the quarter, an increase of 6% on a constant currency basis performing ongoing market share gains. For the 12 month period, sales were $476 million, an increase of 4.8% on a constant currency basis. The recently completed quarters had strong results from the US and continued strength in the underdeveloped countries.

Sales of heart-lung machines continue to grow at over 10%, with US sales particularly strong during the recent quarters. Heart valves, including tissue and mechanical valves, reported $35 million in sales for the quarter, a decrease of 1.6% on a constant currency basis. The quarter saw substantial growth in personal sales in Europe of over 40%, underscoring the importance of the recent FDA approval of this product.

Prior to the fourth quarter, we saw an accelerated decline of the mechanical valve business, particularly coming from softness in China, which was not fully compensated by revenue growth in the tissue valve segment. With US approval of Perceval, the commercial launch is now underway, although it will likely be Q2 before we experience material sales volume. In addition, in the second half of 2016, we expect to launch Perceval in Japan and the newly approved CROWN PRT tissue valve in the US.

I'd like to take a moment to provide an update on the FDA warning letter we received and disclosed early in 2016. Our Cardiac Surgery team is making progress in addressing the issues detailed within the letter. I previously stated we have had constructive talks with the FDA since the beginning of the year and intend to submit appropriate plans to the agency prior to the end of the first quarter.

We believe that the potential impact on sales will be limited to no more than 1% of the consolidated sales. As Vivid will discuss later, our 2016 guidance reflects this particular impact.

Moving on to our CRM business, CRM sales were $62 million for the three months ending December 31, 2015, with a substantial increase of 20% over the third quarter, although the results continue to be impacted by the transition to KORA 250 in Japan and the restructuring of our US operations. Therefore, while these results represent a substantial sequential increase year-over-year, the sales results represent a decline of 19% on a constant currency basis.

Excluding Japan and the US, sales have increased by approximately 1% in the fourth quarter. Shipments to Japan of KORA 250 have commenced in the current quarter and the impact from the US restructuring should diminish as 2016 progresses.

On our last call, we stated that customers in Europe were awaiting the launch of the new Platinium high-voltage platform. That launch occurred in November and sales in most major European markets improved markedly as a result in line with our previously communicated expectations.

For our full year, CRM sales were $261 million, a decrease of approximately 8.4%. The launch of KORA 250 in Japan and growth in Platinium are expected to help generate a modest increase in sales in 2016.

As previously discussed, in the second quarter of 2016, we expect to report the results of the SonR Respond trial, which is a multi-center study with more than 1,000 patients in that, comparing sonar-enhanced CRT optimization with echoed (inaudible) therapy. Our CRM platform includes strong technology and the recent launch of Platinium, and approval of KORA 250, provide management with confidence that, although market conditions remain challenging, the modest growth expected in 2016 is achievable.

With that, let me now review our 2016 anticipated growth catalysts, which are Perceval launch in the US in Q1 and towards the end of the year in Japan, KORA 250 launch in Japan, CROWN PRT launch in the US, continued growth for new products, such as with AspireSR, Platinium, and Aspire, increase penetration in the emerging markets. In addition, we are expecting several important milestones from our investment portfolio, like the expected [ID] trial results from [Resti] CARDia in Q2 of this year, as well as, the clinical progress (inaudible) from our equity investments.

Looking a little further ahead, we are encouraged by the progress of our project in China and we are now preparing for registration expected in 2017 of the locally manufactured CRM products and we will be launching new products developed in China by the joint venture. In addition, the Cardiac Surgery manufactured in China is now operational and registration is expected in 2017.

We remain excited about the future potential of our sleep apnea and Neuromodulation for heart failure program. On the latter, we are confident that this therapy will prove to be an important part of the treatment for high therapy patients. With that said, we decided to scale back some longer-term development work and prioritize our currency of proved products. With a solid fourth quarter behind us and a number of key catalysts ahead, we look forward to 2016 with confidence.

I will now turn the call over to Vivid Sehgal, who will discuss our 2016 results, as well as financial guidance for 2016. Vivid?

Good morning, and also good afternoon to all of our shareholders in Europe. We are pleased that our expectations for sales in the fourth quarter, as communicated on the last call, were in line with actual results. As Andre-Michel mentioned, all business units performed strongly to finish the year and underlying growth rates were in line with our expectations.

Firstly, let me comment on the combined non-GAAP financial results for 2015, included in our press release today. These results are designed to provide investors with adjusted non-GAAP information from which to assess the company's performance in the future. We believe that this information provides a firm basis for the guidance issued today.

Now moving on to the guidance for 2016, I've outlined in the press release earlier today, we are providing guidance for the 2016 on a non-GAAP basis in a number of areas. Please note that all sales numbers reflect growth on a constant currency basis. Net sales are expected to grow in the range of 3% to 5%, with stronger growth expected in the second half of the year following the positive impact of the launch of both Perceval and KORA 250, and the delays in the first half sales growth associated with a heater-cooler issue.

Now turning to each business unit. We expect Cardiac Surgery to grow in the 3% to 5% range, the CRM in the 1% to 2% range, and Neuromodulation in the 9% to 11% range. Just to further point on Neuromodulation, the growth rate for the full year will be lower than in the recent two quarters for two reasons. We will have three fewer selling days in 2016 and we will experience a leveling out of the pricing premium associated with the AspireSR launch in the second half of the year.

Adjusted gross margin is expected to be approximately 64% to 65%. This will be higher than reflected in recent quarters due to the completion of the product transitions in both CRM and Neuromodulation, as well as the net positive impacts of the medical device exchanges in the US, partially offset by the Italian device rebate and other pricing pressures. Adjusted operating income, excluding one-time charges for merger restructuring and equity compensation, is expected to be in the range of $205 million to $230 million, with higher quarterly numbers expected in the second half with the impact of synergies flow through to the bottom line.

We continue to expect that as outlined in our investor day on November 30, our adjusted effective tax rate will be between 24% and 26%. We believe that our tax rate is sustainable in the evolving tax environment. Adjusted EPS, which will exclude non-cash equity compensation expense, is expected to be in the range of $2.95 to $3.15. This guidance is based on the assumption that the average dollar to euro FX rate remain approximately at $1.10.

With that, let me now turn to the cash position. Our net debt at December 31, 2015, was approximately $80 million. Adjusted EBITDA is expected to total between $235 million and $260 million in 2016, a normalized margin of approximately 20%.

After CapEx needs of $50 million to $60 million, ongoing investments in existing growth opportunities and sleep apnea and Mitral, payments for merger restructuring costs, some debt service, and tax payments, we expect net debt at the year-end 2016 to be minimal. Clearly this assumes no major strategic initiatives.

The recent suspension of the medical device taxes in the US is certainly welcome news and allows LivaNova to increase investments and growth opportunities, as well as continue to improve the quality of our products. At the same time, however, recent Italian legislation has established a similar tax. While the full extent of this new law is uncertain, we believe that we have adequately accounted for its expected impact in our 2015 financial results and in 2016 guidance.

Moving on to synergies. From the commencement of the merger process almost 12 months ago, management has been focused on synergy and restructuring opportunities to help guide earnings. The 2016 guidance communicated today reflects this ongoing work.

Operating expenses are being held materially unchanged for 2016. We continue to be focused on the target of $80 million in annualized synergies by 2018 and we are confident we will achieve this goal.

Regarding capital deployment, we continue to be focused on appropriate uses of capital in order to increase returns to shareholders. Further, we will continue to evaluate other opportunities for expansion at the integration reaching a solid point in which to potentially add business lines.

Let me make several points regarding our overall financial priorities. We continue to be focused on earnings leverage with respect to our income statement, not only in 2016, but also in the following years. Our worldwide span of operations and are domicile in the UK provides considerable further opportunities for tax benefits that we intend to leverage.

We will now open up the call for questions. Operator, first question please.

(Operator Instructions)

Brooks West, Piper Jaffray.

Hi. Good morning. Thanks for taking the questions.

Hey Brooks. We can hear you Brooks, go ahead.

Great. So maybe if we could start with the guidance. It is looking like overall revenue guidance, I think you had been talking about 4% to 6%. Now we are 3% to 5%. I just want to understand the moving pieces there.

It sounds like Neuromodulation is going to be a little bit better. Cardiac Surgery maybe a little bit worse than you had initially thought about. Can you give us the moving pieces within that and am I correct in my analysis there?

Yes, Brooks. I think the first guidance we give as a company and the 3% to 5% is really based on the best understanding we have of the environment we are operating in right now. There were a few changes in the last few months since our November analyst day where we presented some goals for short-term and long-term. The changes are I would say there are three major changes to the situation from that time on.

One is, as you mentioned, better performance of our Neuro business than we anticipated and actually the guidance we have now is slightly over the objectives we had set to our sales and the goals we had for the business unit and we are confident that the Neuromodulation business is going to achieve this target.

We have a second moving piece which is moving in the other direction, which is the Italian rebate that Vivid just mentioned during his talk, which actually is recorded as a reduction of sales. That will have an impact on our top line. It's unclear still how this legislation is going to be implemented. There is still a number of moving parts here, but we thought it was prudent to include the potential impact of this rebate in our guidance.

The last piece that has changed over the last two months is the Cardiac Surgery, where we want to be prudent, given the fact that we are working with the FDA toward the resolution of our warning letter on the Heater Cooler. We believe it might have an impact on our sales, particularly on the ability we have to commercialize the Heater Cooler in the US.

So we want to be prudent here and make sure we take this into account in giving guidance. Although solid guidance, not very, very significant changes as you can see, some upsides in Neuromodulation and a little bit of headwind from the Italian rebate and the Heater Cooler, but overall confident.

Very helpful. And then two more questions from me. Same question on EPS, obviously a $0.15 improvement over what we hear from you at investor day. Just wondering what the key influencers there are.

And then you mentioned on the pipeline maybe Respicardia data in Q2 and I think we're going to see some first amend Mitral late spring as well. Could we see Respicardia at ACC or are you thinking Euro PCR? Could you comment on the forums that we might see some of that data? Thanks.

I will take the first Respicardia and the Mitral. The only thing we have under our control, because it is within the company's respond results that should happen, our target is that these results are presented at HRS in May.

The other two are really in the hands of the companies in which we have an equity investment. I can't really tell you exactly when they intend to present and at which event.

In terms of Respicardia, these are important results because they actually are the results of the ID trial and this will have an impact, hopefully positive, on our ability to commercialize the product in Europe, where we are really doing some pilot efforts to commercialize the product.

On the Mitral programs, we will let the companies communicate as they move along with their clinical experience. Obviously, it is early stage but we are very confident that during 2016 we will have some update on this clinical experience.

I will now let Vivid answer that EPS question.

Hey, Brooks, I think really we can, keeping within our goals, we were still looking at our base expenses and looking at the position of the company as we were looking forward. I would say that really there are three main areas that we were really talking about in terms of moving our EPS site.

The first one is certainly we have an improvement in gross margin right now. Certainly we have analyzed our efficiencies on that side, but also we do get a benefit from the US medical tax device. The suspension of that side, which is slightly offset by the Italian rebate, but yes there is definitely an upside opportunity there.

We've also looked at our expense base, operating expenses both SG&A and the R&D line and we've certainly looked very hard at that and being able to look at further opportunities to hold cost flat on that side.

I know we have seen a very small also additional increase on our tax line as we've looked and analyzed, we optimize the UK domicile side of our business. We feel that we now have a very good handle on our tax rate right now and going forward. So they are the main drivers of the EPS accretion that you've seen.

That's helpful, guys. I will let others jump in. Thank you.

Scott Bardo, Berenberg.

Thank you very much for taking my questions. The first question just relates to the FDA warning letter and the Heater Cooler impact. You previously announced this potentially 1% just for an impact to the top line and I fully understand why you reflected that within your growth guidance into 2016.

But could you give us some feeling for is this a worst-case impact or an annualized impact? Is there any prospects for this product to return to the US in a sooner fashion? More generally actually, are you confident that you have the quality control and compliant systems that this isn't an ongoing issue for any other facilities, certainly surrounding Munich? That's question number one please.

And question number two, I'm very pleased to see the approval of Perceval, KORA 250, and CROWN so early in the quarter. Can you help us understand a little bit in terms of expectations for the commercial ramp-up, what you need to do as an organization to make those a commercial success and how quickly could those products commercialize in the US and Japan respectively? Thank you.

Last question just relates to earnings and to again pulling a little bit from Brooks question here. If I'm right, you broadly maintained the expectations for R&D ratio. I think you're now saying 11% to 12%, previously said 10% to 12%. I think you're broadly maintaining the gross margin expectations. I think you said mid-60s before, now $64 to $65.

So am I right in assuming that the main operational driver is actually a slightly better SG&A starting point. I think you said mid-30s ratio previously, which is benefiting, if you like, the bottom line more significantly than the other operating guidance. Thank you very much. Those are my three questions and if I can sneak a follow in, I will.

Let me handle first the prior questions and I will let Vivid go into the EPS clarification here. In terms of the Heater Cooler ongoing discussion in resolution with a warning letter with the FDA, I think we are making good progress. Obviously the calendar is not only ours. We intend to very, very quickly respond to the FDA request and file in our response as soon as possible and hopefully within the first quarter.

Then there is obviously some time for discussion with the FDA and its further enforced to assume that this will take most of the year. If it comes earlier, we will be very happy, but it probably will come sometime in 2016 is our objective. This impacts the Heater Cooler only. It doesn't impact any other products manufactured out of the Munich, Germany at this stage.

We've obviously are taking this extremely seriously because patient safety is utmost concern and we are working very hard to resolve the issue. As we said, there is a potential impact of up to 1% of our sales. We believe that's a prudent kind of scenario. We hopefully will do better than that. But that's where we think we need to guide you at this stage based on our knowledge of the matter.

On the Perceval and CROWN, I think this is great news for us because these came at, I would say a line or row of approvals that included the KORA 250 in Japan. Basically, that means all of the products we need to achieve our targets in 2016 and onwards are now approved by the various regulatory authorities.

The big news for us was obviously the approval of Perceval, recognition that the clinical trial and the file that we put in front of the FDA was accepted, was obviously a great pride for the team and accepted a little earlier than we initially anticipated. So that's great.

We are preparing for the launch of Perceval and it takes time to make sure that we have all of our ducks in a row. It was probably the best ever launch that we are going to do. I am pretty proud of it as far as the launch over the last six months. But probably for 2016, we're going to try to beat that into an even better job of Perceval in the US.

CROWN will be launched later in the year in order not to defocus the team from Perceval. We believe that as we said before that our goal for 2018 is to achieve approximately $80 million to $100 million in sales in Perceval. We always said that a key milestone to achieve that was the approval in the US. We got the approval in the US. We have all reasons to believe now that the objective is within reach.

Let me now turn to Vivid for more color on the EPS. Vivid?

Thanks, Scott. I think what is important to understand is that when we gave the goals, we gave the range like we would normally expect in our ranges were pretty broad at the time. What we have done right now is to sort of tighten the ranges into a more concise manner to actually give a better feel and more guidance than a goal on that side. Having said that, I think we are seeing improvements across the board based on the goals that we gave.

But I think your comment around leveraging the operating expense base is certainly the focus of the business right now in making sure that we have the ability to keep it relatively flat versus the first 2016 relatively flat and I think what you will see going forward is a focus on 2017 as well, in terms of our confidence in trying to keep that relatively flat as well. So I think you're going to see an ongoing focus from us in terms of the expense base and the leverage we're getting from that.

If I may just have a very quick follow-up. Thank you. Am I right in then suggesting that this might have slightly upgraded your bottom-line expectations this year? There still is an ambition to grow from this upwardly revised base over 20% for both 2017 and 2018 or is it just that you're achieving some of these benefits a little earlier than you would expect?

I think what's important is that we still are maintaining that ambition. I think the 20% EPS growth is certainly something we are gearing the company to deliver. We are setting the base. We set the base with 2015. We're setting the base with aggressive but achievable synergy targets in 2016.

Through the combination of synergies and ongoing restructuring activities and looking at our cost base, where moving expenses and investments, those growth areas that we believe will actually drive growth in 2016. We also believe, as I said earlier, we believe that we will have an accelerated growth in the second half of the year versus the first half of the year and we have a lot of momentum from our launches hitting us in the second half of the year and we believe that will continue into 2017 as well. So I think the reinvestment behind growth drive is momentum in the second half of the year and our focus on leveraging the cost base I think should give everyone some comfort that is what this Company is focused on.

Thank you. Thanks very much, guys.

Jason Mills, Canaccord Genuity.

Hi. Thanks for taking the question. Can you hear me okay?

Very good, Jason. Thanks.

I apologize if I missed this. Just following up on the last question with respect to the longer-term expectations for your leverage on earnings guidance, could you give us a sense for, clearly SG&A and the leverage there is what is driving a good chunk of the earnings growth that you are expecting over the next couple of years. Could you walk us through your expectations broadly from a top line growth perspective, as well as from a gross margin perspective?

And also, juxtaposed to, I think you made in your prepared remarks with respect to your pipeline in investments there, it sounded like you are going to prioritize some higher and some a little bit lower. Maybe you could talk about your R&D expectations over that three or four year time period and why that comment.

I'm going to tag team with Vivid on this. Let me start with probably the business side and Vivid will complement my answer.

First of all, we believe that we have a strong base to build from. The business base we have today with 60% of our business in global leadership positions, the strong performance of our Neuromodulation business, the strong performance of our Cardiac Surgery business, and the encouraging signs we see at CRM make us believe we have a strong base in 2016 and 2017 and we have visibility on the products because the products we need to achieve our target are approved and I think that's a very important thing.

Second thing, in terms of prioritization of R&D, I think we are extremely committed to spend money in R&D because we believe innovation is still key for success in this industry. However, we also have realized that we need to reprioritize R&D toward areas of growth and we basically are making the efforts today and it is a very thorough and I would say, deep review of R&D projects to make sure that we really allocate our R&D money where growth is and that's something we're going to be doing during 2016 and this will have an impact in 2016 and 2017.

On this I will let Vivid give you some more comment on the rest of the P&L and the indications we are giving on longer-term targets for the business.

Hi there, Jason. I think one of the things we have certainly done as part of the guidance is to ensure the guidance we are giving in 2016 reflects very clearly our longer-term strategy, as well as delivering 20% EPS. Let me give you a high level I think of where the sort of levers and drivers of growth coming from.

I think if you look at 2016, we obviously have a stronger sales growth than 2015 right now. We had a step up in margin due to a number of factors and we're holding our expenses relatively flat.

We are also getting obvious benefits from our tax optimization being on the UK domicile side as well. So I think all of these are leading to some strong EPS growth in 2016. Going out into 2017, you are going to see an acceleration of sales growth due to our investment profile.

We will still, as we maintained in our goals that we set in November, we still will see a benefit of 60 basis points to 80 basis points on gross margin. We will maintain our operating expenses relatively flat compared to 2016, which is relatively flat versus 2015 as well.

And we will continue to see hopefully, and we believe that is the case right now, further improvement in the tax rate. We did call out 100 basis points of tax accretion in the after-year and we still believe that is the case right now. Hopefully that's giving you some indication of why management feels right now that the 20% EPS is certainly within our reach at this point.

That's helpful. That is a helpful follow-up that you provided on your analyst day few months ago so I appreciate that. As a follow up, just drilling down in more specificity, there's a couple businesses specifically on the structural part side with Perceval is obviously fantastic news.

I wanted to get your assessment though as you look forward in light of what is going on entirely, specifically in light of the intermediate risks data we would expect out of (inaudible) specifically at the ACC. Over the next couple of years, can you talk about what your expectations are if those data show superiority in the (inaudible) population, what you think that does broadly speaking to surgical valves (inaudible) and surgical space.

And then sticking also with structural heart, I've been at several conferences recently on the Mitral side and while there's significant excitement from clinicians about the potential to provide better patient outcomes longer term with both repair and replacement of transcatheter devices, clearly a lot of wood to chop both from a development standpoint and a regulatory standpoint. So would love your latest thought on the Mitral space and what you are looking at there.

Okay on the Perceval versus Tavi, obviously I don't know what the results are going to be. I think we should be, as usual, careful about looking at the results that are pretty short term. I think valve surgery has demonstrated extremely reliable results over more than 20 years of follow-up on some of our products and some of the competitor products. I think I will refrain commenting obviously on data that I haven't seen and on mid-stage relatively short-term data.

I think there is a great opportunity for Perceval to basically replace every other surgical valve out there and be used as the viable choice for cardiac surgeries around the world. We believe it will still be at least in the next five years and we can't speak for the very, very long term. I don't think anybody can, but in the next five years, we still see modest growth in cardiac surgery procedures, aortic valve cardiac surgery procedures around the globe and we think that the market share opportunity that we have, or the market share gain opportunity we have with Perceval is absolutely unique and that's what we are going to focus on.

We actually started a clinical trial, which will compare over time as traditional surgical valves to sutureless valves and Perceval today is the only sutureless valve in the market and we believe that the results will confirmed the previous results we have, which is both clinically and economically, Perceval is the better deal for both the patient, the physician, and the healthcare system.

Again we realize that there is a lot of pressure coming on the Tavi side, but we are confident we will be able to achieve our objectives with Perceval, particularly in terms of gaining share toward traditional surgical valves.

On the Mitral side, we always said it was going to be a tough race with probably a lot of challenges and bumps in the road and that's exactly what we see. I think we will refrain from obviously making comments on the other products that we see out there. We are focusing with our partners on making sure we get into this clinical phase, which is really the phase at which time you can say whether you have a product that may be a winner long-term. That's exactly where we are.

We are start-up partners, are actively engaging into the clinical phase right now. We expect that during the year 2016, we will have a better understanding of the clinical results of this company. We will remain very confident that we have chosen the right technologies and we have not seeing anything that would make us doubt that in the recent months.

We also believe that the best therapy for this patient to replace surgical repair and surgical replacement on the module side is probably going to be a [protinious] procedure in that we have one of our projects that is a [protinious] procedure from the start. So looking forward with confidence through 2016 and the first clinical result of our venture.

Thank you very much. I'll get back in queue.

(Operator Instructions)

Steve Brozak, WBB.

Good morning, gentlemen. Good afternoon, gentlemen. Most of the questions I had have been asked and answered, but there is one. It's greatly appreciated that you are offering guidance on earnings, revenue, and everything else.

But one of the items I looked at was on the constant dollar side. Can you tell us now that obviously you are a truly multinational global operation, what are your thoughts in terms of Forex, Forex, exposure, Forex hedging and obviously all of the issues involved, even if you are just looking at something as unfortunately drastic as the departure of the UK from the EU? Can you start on that? I've got one follow-up after that please.

Sure. I will refrain from getting into the discussion and I will let Vivid give you some color on our foreign-exchange situation.

I think from a foreign-exchange, being a globally diversified and geographically diversified company, we take positives and we take hits on foreign-exchange obviously. If I can sort of summarize it at a high level, in the US, we obviously have a large portion of our sales with expenses so the US dollar focused company, no exposure on that side.

On the European side, on the euro side, we have a national hedge right now. We obviously have the manufacturing plants and infrastructure within the European side, so effectively we have great sales, but we have obviously a large infrastructure base in the euro denomination right now as well. So there is a natural hedge on that side.

Going forward, we are exposed in other countries, namely the pound, the Russian ruble, the Canadian dollar, and the Aussie dollar on that side. We've taken a basic view right now, and I'm sorry the Japanese yen as well. We've taken a view that we are doing selective hedging at this point in time. We've taken some of the major currencies. We have decided to hedge at an EBITDA level and we feel that we've hedged appropriately on some of the major currencies right now.

I believe what you're going to see from our side, we will certainly have sales exposure outside of that. We feel though that at an EBITDA level, we are hedged appropriately and the euro we feel we have a natural hedge on that side.

So I can give you confidence that I think we've done the right thing in terms of strategy and I feel that we are appropriately hedged at this point in time with EBITDA protection, although you will see natural sales swings that you would expect to see in a geographically diversified company.

I hope that answers your question.

Yes, does. I mean obviously it is your best judgment and your assessment of the markets and your exposure there.

Switching one question, it's not as hard in terms of looking at it but you now are for all intents and purposes with the combination, with the merger that's taking place, you now have a new corporate entity to a large degree. What type of feedback have you gotten from both the US European counterparts in terms of what the new perception is for LivaNova from obviously the clinicians, from the sales folks, what are you seeing as far as their feedback to you and I will hop back in the queue. Thank you.

Great question, Steve. If we take the stakeholders that we mentioned during our prepared remarks, let me start with shareholders. Shareholders I think are recognizing that we are a global company, we have a strong European base of shareholders. We obviously want to make sure that we continue to focus on them, but obviously we are making a special effort to address the needs of our US shareholders, which represent a large majority of our total shareholders. We are truly global. We are truly diversified in the shareholder base within Europe and the US. We just need to move on and make sure we communicate with all stakeholders wherever they are in the world.

In terms of the customers, I think the customers have been pleased to see that overall the company will be able to give them a better service on a worldwide basis. So they are seeing the company is more global than the two companies separated, has more resources, also has more areas in which we can collaborate.

So overall, the feedback we've been having from physicians is very positive, not to mention some of the physicians that both companies were working with, like, for instance, in the heart failure sector, and they are very, very pleased to see in front of them now a united front with more resources and commitment to these products.

The last part and the very important part is the stakeholders who are inside the company. While it's a work in progress, we're making a lot of efforts to make sure we create a culture of this Company that takes the best of the culture of the two legacy organizations, it is work in progress, but we are making a lot of progress.

We're making a lot of progress in building the management team. We're making a lot of progress building all of the processes and the standard operating procedures that we need across the Company. I think the level of commitment, the level of engagement, the level of, let's say, work that has been done by the whole company, by everyone in this Company over the last 12 to 18 months to get to where we are today is absolutely second to none and I am really proud to be the CEO of such a team.

That is the 30 seconds answer to probably a question that would require a longer answer.

Well it's either 30 seconds or 30 minutes and I don't want to continue asking questions, but your guidance really is a big help, so I greatly appreciate it and I look forward to your meeting the guidance on the next call. Thank you.

[Michel Badelia], Exane BNP Paribas.

Hello to everybody. I have two questions. In particular, I would like to understand about the equity compensation given that in the past, this is something more recurrent, but at the same time in 2016 should see (inaudible) this some of these. What is the amount that you foresee in 2016, please?

Can we split the one-off costs that are related to restructuring and then to the M&A size of these adjustments that you have on a non-GAAP figures? Another point I wanted to know, the most specific point on the P&L (inaudible) on Perceval . In 2015, the level of sales, what it was, and on the net debt, if you can give us sort of flavor on what do you see for 2016 and what is the starting point at the end of 2015?

On the third point, which is the Perceval, I'm not sure I heard your question clearly. Could you just repeat the Perceval part?

I wanted to know the amount of sales that you recorded in 2015 for Perceval.

Let me take that one first and then I will give Vivid the microphone for the other part on equity compensation, the one-off cost and the net debt.

On Perceval, we've achieved our goals in 2015 on the way to the $100 million target in 2018, so we are very confident that this 2015 is a good milestone towards the achievement of that target. We don't disclose the sales by product for competitive reasons, but we've gained share in Europe in the tissue valves business, including Perceval, and we are very pleased that now Perceval being approved in the US, we are going to start doing the same thing in the US.

That's obviously a tough enterprise but we are very, very confident in the team and the products to actually do that and we are very, very well prepared for the launch of this product in the US. Again I can only tell you that we are more confident now that we have 2015 behind us. We have the approval in the US to target the $80 million to $100 million by 2018.

I will let Vivid talk about the equity compensation and the one-off costs and the net debt. Vivid?

Thanks for the question. I think what's important to understand is right from the beginning we have excluded equity comp when the actual announcement of the merger was happened, it was in the financial targets that were issued in the goals, it always excluded equity comp at that time. So this is consistent with exactly what we've historically done. I just want to make that clear.

I think the equity comp side of it is really made up of a number of items and I think if you look at the legacy equity side that's from historic companies right now, the range is in about in about $5 million to $6 million. What's happened subsequently to that is there's been some grants issued to the Board, the executive leadership team, and to the CEO. All of those have been issued and right now, the compensation committee may approve further equity grants at this point in time.

In terms of the cost for 2016, we are still working through those numbers as we get approval from our Board and our equity compensation committee as to what they are. But the legacy grants are in the $5 million to $6 million at this point in time.

I think the question around the one-off costs, all of these numbers are given in the press release that we gave today, they're included. But let me give you some of the high level numbers that are in that side. Certainly there is a number of costs for 2016 in there, so were you looking at 2015 or 2016?

2015. Do you have the reported numbers on it.

The numbers are actually available in the press release. The details are split out on that side.

I think the key thing to mention at this point in time is there's a number of items, there's merger-related, integrations that is in excess of $100 million. But we have restructuring special charges and the amortization of the intangibles.

I would ask you to look at the data that we sent out today and if you have any follow-up questions, please come back to me on that side. But it is all there.

Okay. Just a follow-up on this because many times we wonder how many the total amount of the restructuring costs to get to the synergies target that you have promised. Do you have now a sort of precise figure to let us think about what is in 2016, 2017, 2018 in terms of restructuring costs, in addition to the one that you had already?

I think internally we have certainly done that. I think right now, our numbers that we are looking at from a sort of merger and restructuring costs in total. I think there was obviously a separation between the merger and the restructuring. But certainly the merger related costs are in the $15 million to $20 million range in 2016.

And on top of that, we will have ongoing restructuring. So what you'll find is that the vast majority of the merger-related costs have already been taken in 2015 as we turn our attention to more operational restructuring activities in 2016. The figure is in the $15 million to $20 million range on that side.

Can I add one thing on this, not a financial piece of data, but more an operational piece of data. As we look at the new company as it is today, we have a different view than what we had when we were merging with two companies. We saw opportunities at that time. We actually see more opportunities today.

There will be an ongoing work that we will do in 2016 and probably going on 2017, to make sure we build a very lean and very efficient organization using the full extent of the synergies. Some of them been identified already in the pre-merger work. Some that we are identifying now as we work together as a team and really very excited about these opportunities to build a very lean organization and to maintain operating expenses basically flat 2016 and 2017. (multiple speakers)

Just on the net debt question. I think that is obviously an area that we have focused a lot on. So a very high walk through of that. I mean all the data has been presented, but effectively we did call out that we had finished the year 2015 with around about $80 million of net debt.

We also called out EBITDA number of $235 million to $260 million on EBITDA and the CapEx number of somewhere close to $50 million to $60 million of ongoing CapEx at that time. If you take the tax structure, the restructuring and merger activities that I have hinted at that point in time, an ongoing BD within our equity investments at this point in time, you will get to a number that is pretty much in a net debt sort of position that we called out earlier.

Okay. Can we get a feeling of what you expect for 2016 in terms of net debt, just to understand because probably you have also some one-offs that you're recording in 2015 that are non-cash and therefore will impact further in 2016 cash generation?

I called out already that we believe we will have minimum debt in 2016 by the end of the year

Minimal meaning that it is part of a natural fluctuation. It will be a small positive or small negative. That is what we expect at this stage. I hope that answers your question?

Yes. Just a final point. How much of these one-off costs do you expect to be cashed out in 2016?

We don't have this information that is readily available now. Vivid will (multiple speakers)

I think, all of these questions, let me follow up on them one-to-one. I think we have everything.

No worries. Thank you very much anyway. Have a good day. Bye-bye.

Next question.

Scott Bardo, Berenberg.

Thanks very much for taking my follow-up, guys. You have been very explicit, very helpful about pricing, naturally pricing and premium pricing as far as I just wonder where we could see the degree of transparency on Perceval now that you have been launched into the US market. Are you expecting a significant price premium? Perhaps you could discuss a little bit about your positioning of that product.

And second question for me, please. Again a little bit of a follow-on on some of these one-off things. I think you have already highlighted that there will be a few one-offs and things in 2016.

Can you give us some feeling, you've given us a very helpful EBITDA expectation for the year. Can you give us a feeling of what sort of cash conversion you would expect off that EBITDA operating cash conversion or what would be a normalized operating cash conversion? I'm just trying to get a feeling on how you manage working capital and how we think about and put into context some of these one-offs? Thank you.

On the (inaudible) side, the team has been extremely disciplined to create an opportunity for us to generate a significant price premium over the previous generation. I think it is due normally to the quality of our team but also to the quality of the product. I think the product is truly a new generation product in the treatment of drug resistant epileptic patients. I think we tend to focus on the issues, but I think when you look at the last two quarters that the Neuromodulation team delivered since the launch of AspireSR, (inaudible) pricing is actually also volume with a record number of new patients in the US in Q4 for instance.

But really good discipline based on a very differentiated result. We (inaudible) going to deploy the exact same strategy for Perceval. In other words, Perceval is a new generation product. It is a unique product in its kind. No other products like that has been approved in the US so far. It is the only product available globally that is truly sutureless. Therefore, we believe that this product not only provides good clinical results, it provides also good economic results.

Therefore, by reducing the cost of the procedure, we can justify a premium. The target is to have a premium that would be basically doubling the price of a traditional valve because we think it deserves it. You would end up probably in the $8,000 to $10,000 range for price of Perceval. This is still early days. So we are just launching the product as we speak. But we are very disciplined on the pricing and we believe that there is an opportunity for us to generate not only volume, but also pricing.

Scott, did that answer your question? Let me move on to the cash conversion ratio. I think obviously what we are doing right now is we are still reviewing the longer-term business profile right now and we feel very positive about that.

We will continue to look, as I said, at our equity investments going forward and those options we have will also continue with the tax optimization strategy. So let me answer that question and say that in 2016, we obviously talk about the net debt coming from an $80 million to minimal debt by the end of the year. We believe really around about 40% to 50% of that is potentially a one-time type of opportunity, in terms of the restructuring activities that are going on there.

So this is a continuing focus for us right now. But of that number, you can take that kind of guide, 40%, 50% slightly higher in terms of that one-time cash position of the merger and restructuring and the other related activities around it.

Very helpful. Thanks very much.

We will take one last question, Chanel.

Maja Pataki, Kepler Cheuvreux.

Thanks for taking my last question. I was wondering if you could give us a bit of a color on the heart valve business. You have elaborated that you have seen a sharp decline in mechanical valves partly remaining due to China.

If we look at the moving parts within heart valves, we have China declining in mechanical valves, we had Europe on the tissue valve seeing strong growth. Could you give us some color on the tissue valve situation in the US and to maybe also some other comments you believe will help us understand the moving parts going into 2016?

And then with regards to you guidance, you are stating 3% to 5% for the cardiopulmonary, what is your assumption for the hard valve business, not in numbers, but are you expecting the mechanical valves business to see a decline or to stabilize going forward? Thank you.

Thanks Maja. The heart valve business, we have seen some accelerated decline of our mechanical valves and I would say this is the main reason why we have the quarter slightly decreasing from the same quarter last year. This is really the culprit.

Outside the mechanical valves I can't say that any region is really having a stellar performance. Basically the major impact is coming from China. It is not necessarily changing our views on the opportunity in the Chinese market. It's probably more of a temporary slowdown in China. We're still optimistic and we have a number one position in the Chinese market in mechanical valves, but that has an impact on Q4.

It has been a roller coaster for this business. As we make good progress in Perceval, as we stabilize our traditional tissue valve business, we really see that we have some kind of headwind with the mechanical valves.

Now, moving forward, we still see the same trends maybe with the further deterioration of mechanical valves moving forward. We're probably in the mid-single digit decline now. But we see great progress in the tissue valve and in particular, a great opportunity for tissue valves in the US.

We are encouraged also by the performance in Europe where we have stabilized our share first and then started to gain with Perceval. So moving forward, if you look at the guidance that we have, it is including a performance of valves that's in the mid-single digit growth. So based on everything that we know today, based on the opportunity we have in the US, we believe we will turn the corner in 2016 and that's included in the guidance of [325] we have for Cardiac Surgery.

Thank you. Just a follow-up.

Thank you. Go ahead. Just one last, okay.

One last, just quickly. US tissue valves in 2015, have you seen growth there?

We've seen encouraging signs of stabilization in our traditional business over the last few months and we are encouraged by that. We believe that with the addition of Perceval, we are going to have a great year in the US in 2016. The team is very, very committed. We see lots of upsides, very detailed plan, a very aggressive plan to launch the product in the US. We are very confident in our ability to do great here in the US in the valve business in 2016.

Thanks.

I will use the last few minutes to close this meeting and just remind you that basically we believe the fourth quarter of LivaNova and the results and the 2016 guidance reflect the value of the company's diversified revenue model and we also believe it provides a solid foundation for growth. The sales momentum that was generated by new products like AspireSR, Platinium, the launch of Perceval, and KORA 250 are really expected to support improved growth in 2016.

At LivaNova, we're focused on driving shareholder value by growing sales, improving operating leverage, realizing synergies, and completing a successful integration. We remain highly confident in our ability to accomplish each of these objectives.

Lastly, I'd like to think our employees all over the world for their extraordinary effort over the past year. In addition, I'd also like to thank our shareholders for their support during a year of significant change. I appreciate your attention and thank you all for your interest in LivaNova.

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