LivaNova PLC (LIVN) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LivaNova second-quarter 2016 earnings conference call. My name is Charlotte, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Karen King. Please go ahead.

Thank you, and welcome to our conference call and webcast discussing LivaNova's financial results for the second quarter of 2016. My name is Karen King, and I'm the Vice President of Investor Relations and Communications for LivaNova. Joining me today are Andre-Michel Ballester, our Chief Executive Officer; and Vivid Sehgal, our Chief Financial Officer.

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 a 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 10-K dated March 4, and other regulatory filings.

Included in the press release today are selected non-GAAP operating results. In this press release, the management has disclosed financial measurements that present financial information not necessarily in accordance with Generally Accepted Accounting Principles, or GAAP. Company management uses these measurements as 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.

To enhance the call, we have posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials, and should be used as an enhanced communication tool. You can find the presentation in the investor relations section of our website under the events and presentations tab at www.LivaNova.com.

With that, I will now turn the call over to Andre-Michel.

Welcome to our second-quarter 2016 conference call. I will begin the call by providing highlights of our key initiatives during the quarter, and then discuss our sales results by business unit. After my comments, Vivid will give you some more color on the financials, and I will then wrap up with closing comments before moving on to Q&A.

Over the past couple of months, we announced several key initiatives that are positioning LivaNova for future success. Starting with CRM, in May we announced favorable results from our RESPOND-CRT clinical trial, which was designed to investigate the safety and clinical efficacy of our SonR device in patients with advanced heart failure. SonR is a secure device for patients with CRT, or cardiac resynchronization therapy, because it provides automatic and continuous benefits, which means the device continues to optimize long after patients leave the hospital or physician's office.

The trial showed a 35% reduction in hospitalization at two years, and even 50% in some subgroups of patients with atrial fibrillation or renal dysfunction compared to echo. Echo is currently considered the gold standard in terms of reducing the number of non-responders to CRT.

At the beginning of July, we announced a new organizational structure, the introduction of new talent into the executive leadership team, and the appointment of a Chief Operating Officer. Damien McDonald has now accepted the role as COO of LivaNova starting October 3. Damien has a strong background, with close to 30 years in executive leadership roles with healthcare companies such as Danaher, Zimmer, and J&J.

Under Damien, we are transitioning the Organization to a regional focus, with regional leaders in the US, Europe, and the rest of world. Supporting the regions will be our three business franchises: Neuromodulation, Cardiac Surgery, and CRM.

The leaders running these franchises will be responsible for product R&D and marketing on a global basis. We believe a regional focus will allow a number of tangible benefits, namely ability to share resources, faster decision-making, improved market access capabilities, and greater focus on the needs of physicians, hospitals, and patients.

Last week, we announced that Andrea Saia has been elected as the non-Executive Director to our Board of Directors. With this addition, we have expanded our Board to nine members, including seven independent Directors. Andrea has significant medical device and healthcare credentials, and we look forward to the new perspective and expertise she will bring to the Board.

Finally, yesterday we announced that we received approval from our Board of Directors to enter into a share repurchase program. Vivid will provide more details during his prepared remarks.

Turning now to our net sales results for the quarter, in our press release we provide a table that shows both reported net sales growth and constant-currency growth, so that you can see the impact of foreign currency fluctuations. For discussion purposes, we are going to focus our comments on net sales results with constant-currency growth.

Net sales were up 0.7% compared to the second quarter of 2015. Strong price and volume gains in Neuromodulation were offset by lower sales in CRM.

Now, more detail by product line -- Cardiac Surgery decreased 1% for the quarter. The increase in heart valve was more than offset by a decline in cardiopulmonary.

Cardiopulmonary products reported $124 million in sales for the quarter, a decrease of 1.8%. The two largest product categories in cardiopulmonary are oxygenators and heart-lung machines.

To better understand the trends, I am going to explain each of these categories separately. Starting with oxygenators, as we mentioned on our last earnings call, our newest INSPIRE devices continued to gain share globally. As a result, we had another good quarter, with strong demand, especially in emerging markets, Japan, and Australia.

Next, heart-lung machines -- this category is actually comprised of three complementary subsegments: heart-lung equipment or machines, heater/cooler devices, and technical services. All these products and services work together to assist the patient undergoing cardiac surgery.

Heart-lung equipment sales can vary quarter to quarter based on the timing of customer purchases. For instance, in the US, equipment sales in the first half of the year have grown steadily, up significantly in the first quarter and relatively flat in the second quarter.

Technical services also performed well globally in the first half of the year, showing growth in both first and second quarter. The decline in the HLM, or heart-lung machine, segment was attributed to softness with our 3T heater/cooler device. We announced in January that we received a warning letter from the US Food and Drug Administration, or FDA, at our Munich, Germany, and Arvada, Colorado, facilities, which restricted us from importing our 3T heater/cooler devices into the US.

We also announced at that time that less than 1% of our 2016 consolidated sales would be impacted by the warning letter. We have been able to service existing customers through a medical necessity protocol. However, sales have been negatively impacted, in line with our previous estimate, and our 3T heater/cooler product experienced year-over-year declines during the quarter, which offset the positive traction we are making in the other categories I previously mentioned.

Heart valve, including tissue and mechanical heart valve, reported $37 million in sales in the quarter, an increase of 1.6%. The increase was driven by strength in Perceval, the only sutureless valve commercially available in the market, in both the US and Europe, offset by softness in our mechanical valve business, primarily in China, and our traditional tissue valves globally.

Perceval continues to gain momentum across Europe, with strong sales in countries such as the UK and Italy. We are also starting to see the results of our late first quarter launch of Perceval in the US. We have received strong positive feedback from the physician community, and we are confident in our ability to execute and deliver on our plans for Perceval.

Moving on to CRM, sales were $70 million during the quarter, a decrease of 9.9% compared to the second quarter of 2015. Growth in the high-voltage segment was more than offset by declines in the low-voltage segment, as expected.

In pacemakers, this quarter was particularly difficult due to a challenging year-over-year comparison. The second quarter of 2015 was a very strong quarter due to the timing of KORA 100 sales to our Japanese distributor. As a result, while our sales in CRM are increasing sequentially and KORA 250 continues to gain share, it was not enough to compensate for the strength in the second quarter of last year. On the high-voltage side of the market, our Platinium device, which we launched in Europe at the end of last year, continues to gain share with strong double-digit growth.

Let's now turn to Neuromodulation. Neuromodulation had another strong quarter. Sales were $90 million, an increase of 14.9% versus the second quarter of 2015 due to growth in both the US and Europe.

In the US, we continue to see the benefits of our newest device, AspireSR, in both volume and price. New patient growth continues to be in the double digits, demonstrating the impact this new device has had in increasing the population of drug-resistant epilepsy patients benefiting from VNS therapy. In the quarter, we have reinforced our investments in market development capabilities globally, in line with our portfolio prioritization.

I will now turn the call over to Vivid for an overview of our financial results. Vivid?

Thank you, Andre-Michel.

I would like to start my remarks by discussing merger-related synergies. We stated that our goal this year was $19 million. We've already been able to capture more than half of that, and we are well on our way to our annual commitment.

Now moving to other financial measures, adjusted gross margin as a percentage of net sales in the quarter was approximately 65%, up over 200 basis points from the second quarter of 2015, and a material improvement sequentially. This margin improvement was driven by a number of factors. First, we saw a positive mix impact from sales of high-margin products and countries.

Second, manufacturing synergies are on track. And third, we benefit from the suspension of the US medical device tax. For full year, we still expect gross margin to be in the 64% to 65% range.

Adjusted R&D expense in the second quarter was $30 million. R&D as a percentage of net sales was 9% compared to 11% for the second quarter of 2015. This reflects a combination of lower absolute levels of spending which are associated with the reprioritization of projects, on-track progress with our merger synergies, as well as the impact of restructuring efforts, which we announced in the first quarter. For the full year, we still expect adjusted R&D to be in the 11% to 12% range.

Adjusted SG&A expense for the second quarter was $116 million. SG&A as a percentage of net sales was 36%, in line with the second quarter of 2015 and an improvement versus the first quarter of 2016. Incremental spend in SG&A largely reflects investments in our product launches, market access capabilities, and in emerging markets. For the full year, we still expect adjusted SG&A to be in the mid-30% range.

Adjusted operating income was $63 million compared to $51 million in the second quarter of last year, an improvement of 24%, which demonstrates our commitment to leveraging the income statement. Gross margin was up substantially year over year, while operating expenses remained relatively flat. Adjusted operating margin was over 19% compared to 16% in the second quarter of last year.

Our adjusted effective tax rate in the quarter was 25.9%, an improvement from the 28.3% in the first quarter as a result of our ongoing tax efforts. We expect continued improvement through the course of the year to achieve our full-year effective tax rate projection in the range of 24% to 26%. Finally, adjusted diluted EPS for the second quarter of 2016 was $0.87.

Turning now to cash flow, our cash flow from operations for the six months ended June 30 was $30 million. Cash flow from operations excluding payments for one-time integration and restructuring costs was $36 million. Capital spending in the first six months of 2016 was $16 million, in line with the same period of 2015. Our cash balance at June 30 was $64 million, down from $87 million on March 31 and from $113 million at December 31, 2015, reflecting planned debt reduction, progress towards elimination of factoring arrangements which were largely completed this quarter, and costs associated with ongoing restructuring activities.

Before I move to guidance, I wanted to briefly discuss the share repurchase program we announced yesterday. Our Board of Directors approved a repurchase program of up to $30 million in 2016, and up to $150 million through the end of 2018.

Moving to guidance, for the full year we are confirming all the lines of the guidance we provided on our first-quarter earnings call on May 4. This includes top-line sales guidance of 3% to 5%. For the first six months of the year, sales have grown almost 2% versus the first six months of 2015.

What makes us confident we can reach our sales projection of 3% to 5% this year? Traditionally, the fourth quarter tends to be one of our strongest sales quarters, in line with hospital spending patterns. We believe this trend will continue in 2016. And the trends we have seen in our new product launches, and the momentum that is starting to build with products like Perceval in the US, the KORA 250 in Japan gives us confidence that performance in the second half of the year would exceed our year-to-date growth.

We are also reiterating our adjusted earnings per share guidance for the full year of $2.95 to $3.15. Through the first half of the year, we have generated earnings of $1.42, which means we need to be in the range of $1.53 to $1.73 in the second half.

So what makes us confident that we can reach our earnings projections? First, we expect to see sales growth improvement. Second, we continue to progress with our synergy and restructuring activity, which will allow us to achieve our financial targets and reinvest behind our growth drivers in the second half of the year. And third, we expect our tax rate to continue to improve as the year proceeds, due to our tax planning efforts.

With that, I'll turn the call back to Andre-Michel for some final comments.

Thanks, Vivid.

The Organization is highly focused on executing against our strategic goals, and we made great progress on many fronts during the quarter. Our new products are performing well, and will continue to gain momentum as we progress through the rest of the year.

First and foremost, AspireSR will continue to drive strong growth in new patients. Second, we see continued growth in oxygenators with our newest INSPIRE device. Third, we continue to gain market share with KORA 250 in Japan, and expect to see continued momentum in the coming quarters. Fourth, Platinium, our high-voltage device, has performed consistently quarter after quarter, with strong double-digit growth in Europe.

And finally, the initial rollout of Perceval in the US has been extremely successful. Being the only sutureless valve on the market, we've had very positive feedback from physicians and patients alike.

As a new generation in aortic valve replacement, the Perceval sutureless valve helps reduce the complexity of the valve replacement procedure by optimizing the speed and efficiency of the operation, and enables a minimally invasive approach. Many patients who had an implant with Perceval are impressed with the valve's benefits, including shorter procedure times, hospital stays, and recovery time. And this is why we are confident in our ability to execute and deliver on our plans for Perceval.

We are also making progress against operating goals. We are on track with our synergies, and are managing our operating expenses. We are investing in our highest growth areas, and restructuring parts of our Business, which is resulting in increased efficiency and profitability, all of which is driving sustainable long-term growth. In addition, we remain confident in our investments, including percutaneous mitral-valve replacement.

And we have recently made some exciting announcements which are positioning the Company for future success and long-term sustainability. We are pleased to welcome Damien McDonald to LivaNova as our new Chief Operating Officer. Damien will be instrumental in driving product innovation across the Company, strengthening our position in the US, and expanding in target geographies globally.

We are also realigning the Organization to bring greater focus to our regions with support from our three business franchises: Cardiac Surgery, CRM, and Neuromodulation. We are excited about the organizational changes we are implementing, and believe we now have the right structure and leadership to take LivaNova to the next level.

With that, operator, we are ready for questions.

(Operator Instructions)

Brooks West, Piper Jaffray.

Hi, can you hear me?

Yes, we can, Brooks.

Okay, great. Thank you, and good morning. Vivid, can I start with just your FX assumptions for the second half? Are you -- it looked like you had a little bit more of a tailwind in Q2. Can you talk about the expectation for the second half of year?

So I think, Brooks, obviously, there's some volatility in market today but like any global company, we are subject to FX volatility, and we do give our guidance to constant currency right now. So we do expect further currency fluctuations at this point, but just to make the point that we do have a very selective hedging program, which allow us to mitigate certain risks on the bottom line. So we're monitoring it carefully, but obviously FX will move in line with other global companies at this stage.

Sure, but based on where rates are right now, whereabouts do you see the impact in the second half?

Right now, we see potentially some small pressure in the FX for the second half of this year, but within the range that we have for the full-year guidance.

Okay, perfect. Then really appreciate your comments on your confidence in the second-half guidance. May I ask a question just on the AspireSR launch? You're going to facing some increasingly tough comps there. How should we think about the growth rate attributable to that business? Is that something you can maintain in the range it's been in first half of year, or should we think about the growth rate there slowing a bit in the second half?

Thanks for the question, Brooks. As we are getting closer to the anniversary of the launch -- we actually passed it. It was in June of last year. When the products like this is announced, there are multiple things that happened which are generally not repeatable, like initial hospital orders. They typically take two units when they only want one. For the first implant, they like to have a backup unit.

And then there is the small stocking level when they start implanting. So means that the comparison that we have the back half of the year becomes obviously more difficult. So when you look at the full-year projection we have for neuromodulation, which is to be between 9% and 11% growth range, that means the second-half growth mathematically is going to be lower than the first half.

What we believe is really important as well is to look at the new patient growth, and we're really pleased that we have seen again in the second quarter a double-digit patient growth, particularly in the US. This is really for us the most important metric for long-term growth of the business. We have seen a very high level of adoption of AspireSR, around 80% again in the US. So basically we are confident that although mathematically the growth rate will be lower in the second half, we are confident that AspireSR is giving us very, very good prospects from a mid to long-term perspective.

Okay, perfect. I guess one more for me if I could.

It sounds like the Perceval continues to be a product success for you. Can you give us some sense of the scale of that device versus your surgical tissue and mechanical valves? And your thoughts around Edwards planned entry into the US market, which I believe they said would be in the second half of this year?

Thanks so much.

To be honest with you, the plans of our competitors, I think we don't have much comment to make. The only comment I would make, if you look at what I would call the new technology valves, the only true sutureless valve that is commercially available in the market today in Europe, in many countries, and in the US is actually Perceval. So having more new technology valves in the market can help in actually moving from what I would call the older technology valves, or the traditional valves to the new technology valve of which we believe Perceval is the best product.

In terms of what Perceval does, it's early days in the US, but we are really, really pleased with the feedback we're getting from physicians. And also, we are pleased with the strategy that we are developing in the US, which is more of a focused strategy, really very disciplined launch with wave one, with a limited number of hospitals in which we provide the right support and proctor-ship to get them started.

And we see that these hospitals are starting to use Perceval as the valve of choice for all their aortic patients, and that's exactly what we are looking forward to doing on a wider scale moving forward in the US. And you have to expect that basically, we now have 32 centers that are trained and effective in the US.

At the end of the second quarter, we are going to have much more or many more of these centers moving forward, but again we are going to focus on going deep rather than going wide with Perceval. The last thing I want to say is that again, early days in the US but we have a long-term goal for Perceval which is to achieve $80 million to $100 million in sales for Perceval on a global basis. And we said that a significant portion of that will come from the US and based on the last few months, and again, early stage for launch of the product, we remain confident we can achieve that goal.

Great, thank you for the comments.

Jason Mills, Canaccord Genuity.

Thank you, Andre-Michel. Can you hear me okay?

Yes, Jason. We can hear you fine. Thank you.

Thank you. Congratulations on a fantastic quarter.

I wanted to follow up on Brooks' question just with respect to the aortic valve market globally. Can you give us any color, your perspective, if you will, on the dynamics in both the European as well as the US market as it relates to TAVI and what you have seen in terms of surgical aortic valve volumes in Europe and how that might be a precursor for what we will see here in the United States?

There are some that believe that TAVI will result in a cannibalization of surgical aortic valve volumes. We don't tend to share that view, but I would love your perspective on that and then does anything with respect to pricing and any pressures on pricing that you have seen or expect to see going forward or if maybe you have some pricing power. Just generally about the aortic valve market globally.

Thanks.

Jason, probably the best way to answer, I can give you two levels. One is the numeric answer. We believe that the aortic surgical market will continue to grow at low-single digit in the foreseeable future. That's based on our analysis of the market, the analysis of what happened in Europe, which I believe you are right.

It might be used as a precursor for what might happen in the US, but the problem with Europe, as you know is that there's not one Europe and I'm not referring to Brexit, but there are many countries in Europe with very different behaviors. If I take from a surgical perspective, let's say the worst-case scenario which is Germany, and Germany has publicly available data on cardiac surgery which are published by the German Society of Cardiothoracic Surgery. And if you look at this data and you look at the surgical market compared to the TAVI market, you see the surgical market has been basically flat as soon as the introduction of TAVI.

But the number of procedures -- aortic procedures has almost doubled, so probably what happened in Germany is that the TAVI have taken all of the growth from the surgical procedures but they have not pushed the surgical procedures down. So that's just one data point, but based on what we see today and also based on new technology valves like Perceval that are reducing significantly complications, length of hospital stays, and therefore they become a pretty significant economic benefit for the hospital. We believe that there is still an opportunity for us and particularly in the US to penetrate aggressively with Perceval the surgical aortic market and drive growth from our perspective by getting share against the older technology valves that we see in the market.

Lastly -- on the pricing we've been very disciplined with our pricing strategy on Perceval. We believe that this is the valve that has -- that brings significant financial benefit and economic benefits to the hospital, therefore the premium we are asking for Perceval is a premium that -- on which we have a very disciplined approach and we will continue to maintain the significant premium from Perceval over traditional surgical valves, and so far I must say it has not slowed us down. Again, it's early days but it has not slowed us down in our ability to penetrate the US market.

That's very helpful. Thank you, Andre-Michel.

Onto the next question, just generally about the cardiac rhythm management business. Could you help us understand your medium and long-term philosophy on that business and how you are managing it? Managing it to as a mature business or managing it for growth. Do you see -- could you talk about what the dynamics will be in your business relative to the competition in a market that's flat to down?

How you see this business playing out, not necessarily in the next couple of quarters but over the next couple of years with some of the products that you are seeing some success with, especially the one you mentioned this morning in Japan. Could you talk about how you are managing that business and modeling that business over the next couple of years?

The short answer is, we see just like you see. The market is being very, very challenging, just looking at the results that were reported by some of our competitors recently. It's a tough market out there, and there is absolutely no doubt that this market will remain tough for the foreseeable future.

Our expectation in this market is to be able to grow low single-digit. 1% to 2% is our current indication for the midterm growth of this business. Why are we confident we can do that? Well, because we have strongholds in this business, in Europe and in Japan, and we've demonstrated in the recent past, for instance, with the launch of Platinium in Europe that we are able to grow double-digit in a market that basically is flat or sometimes even slightly declining. But we believe still that there is an opportunity for us to grow low-single digit in this business moving forward, again, focusing on our strength which are Europe and Japan.

In the US, we have reduced our presence significantly. We might have an opportunity moving forward to look at it again, particularly with the new organization we have now with the regions, but we believe that this is a business that we are not managing for growth, but we're managing for profits. And what you have seen in the last two months when we announced the restructuring of this business is really just an indication of how committed we are at driving profit out of this business, and we believe that the times when CRM could be considered as a growth market are not around anymore, maybe they will come back but we don't plan for this. We're really focusing on improving profitability of the business.

Thank you.

One final one I'd like to slip in and I will get back in queue. On the P&L, maybe, Vivid, talk about the guidance for your tax rate, very clear guidance for the second half of year, but how that might flow through over the next couple of years. Wondered if you could give us an update on what you are seeing on that front, and I'll jump back in queue. Thanks.

Thanks for the question. From a tax perspective, we are exactly where we wanted to be at this stage, so in terms of expectations, certainly no surprises. We have certainly taken our time to ensure that all the changes that have occurred on a macroeconomic front have been considered and taken into our views.

I think our -- we have reiterated guidance at 24% to 26%. We will take our time but at this stage, we certainly see some further opportunity on the tax line beyond what we are guiding at this stage. But I think a lot of it will depend on the macroeconomic factors that will play out. But at the moment, we do have a long-term strategy which we believe is sustainable, and nothing has changed since discusssed that last time.

Okay, thanks.

Scott Bardo, Berenberg.

Yes, thanks very much for taking my questions.

First question, please, just relates to the changes in organization. I just wonder if you could talk a little bit more about why you decided to implement those changes, what were the key driving aspects, and why the group thought it useful or important to have a COO structure with Damien joining. Perhaps just a little bit more information as to that process and when that process started actually would be helpful.

Second question relates to the share buyback. Very pleased to see you announce a share buyback yesterday. Just really a question surrounding the timing of that share buyback. It obviously announced yesterday, but I think the group is yet to announce a capital structure that you are comfortable with. So including the share buyback, where do you think that's going to take you in terms of leverage next year and how much headroom do you think you can comfortably have?

Third question from me, please, relates to again the heater-cooler business. I appreciate the import restrictions at the moment. I understand we had an FDA panel discussing this topic, which appeared to us to be relatively benign, but I wonder if you could comment a little bit as to the progress and what you need to do to have those import restrictions relieved and the warning letter retracted. So, three, and I have a follow-up after that.

Thank you.

Thanks, Scott.

Let me start with the changes in the organization. So while first of all, we are excited to welcome Damien to the team, and he has a great background in great companies, so he is going be a great addition to the executive leadership team overall. As you probably know, we have regional leaders now that are going to run our regions in US, Europe, and rest of the world, and the regions will be supported by the franchises in charge of research and development and global marketing.

We believe that the regional focus will be for us a way to be more efficient in sharing resources and in also sharing knowledge around the countries. We believe the lines of decision will be faster because they will be more focused on the reality of the day-to-day life in each of the regions.

We also believe that we will be able to leverage better our market access capabilities. We have very strong market access capabilities in some countries that we will better leverage by sharing them across the various franchises rather than just having them focus on a by-franchise basis.

Last but not least, we are seeing a changing environment in the market where we have more stakeholders now to deal with than we historically had, so it is not only although we are a specialty device company, it's not only enough to deal with the physicians or with the clinicians, it's also important to deal with the customer as a whole, with the customer as the hospital, as an economic entity. It's also important that we deal with the reimbursement authorities in the various countries and regions, so this organization makes a lot of sense.

In terms of splitting the responsibilities, obviously Damien will be in charge of the day-to-day operations of the Company, driving the innovation throughout the Company and global expansion. And I will focus more on the overall strategy also spending more time outside of the Company talking to specific clients, the partners, to customers, and also talking a lot more to investors, and also focusing my time on growth opportunities, and some of them we just mentioned during the call we are very, very excited about.

We are strengthening our management team. We are bringing new talent, and some of them are coming from within the Company and our going up through the Company. Some others are coming from outside of the Company like we just recently announced a chief accounting officer who joined us here in Houston. So we really are pleased with both the organization we have in place now and the talent pool that we have to drive this organization forward.

I will let Vivid talk on the share buyback and I will come back on the heater-cooler.

Thanks, Scott. I appreciate your comments on the share buyback program.

Just on the share buyback program, we believe very much in the future opportunities of this Company and our future performance, and genuinely we believe that our stock was currently undervalued, and it made good sense and the use of our strong balance sheet in buying back shares at this stage. I think in terms of when we start, we are planning to start the share buyback in late Q3, and that will -- the details of which will follow but that's our current start plan.

In terms of the capital structure, I think it's been certainly a structured approach from us in relation to making sure that all our plans, all our synergies, our restructuring, our operating margins were heading in the right place, and our cash generation we felt confident that we were on track and we are. So I think what's important is that I will be announcing the capital structure in the near future, and I think we will come out with more details of what that looks like. But I will say this that we are close to that and it won't take too long for us to provide further detail.

Scott, I will get back to the heater-coolers.

There was indeed a panel organized by the FDA to talk about the issues of heater- coolers. What transpired from this meeting, which was a very well organized and very positive meeting to our views, is that it's clearly an industry issue. But it's clearly not a LivaNova core issue but it's definitely an issue that needs to be embraced by the entire industry.

But it appeared as well that we, LivaNova, had a very science-based approach to this particular issue. It's not a simple issue, but it's one that requires a very scientific-based approach. We are regularly communicating with the FDA. We are working closely with the FDA to make sure that we provide the best product to physicians and clinicians in the US and around the world as soon as possible.

So there are some technical solutions that have to be validated and then reviewed by the FDA, and also working independently with the FDA on the resolution of the warning letter. What we said before and we will say it again, that we believe the warning letter will not have a material long-term impact on the business unit, but it is definitely on top of our priority list here today and we continue to work very diligently to address the concerns that were set forth in the warning letter, and we are in close contact with the FDA on all these issues.

But again, the two things is, one is it's an industry issue and I think that was well established during the panel that we referred to. And second, only a scienced-based approach will basically help resolve this difficult issue for the benefits of patients in the US and around the world.

Great, thank you for your comments and perhaps just one follow-up then, please. It seems that there's been quite a bit of clinical data that's been presented by the group over the last few months. I think you've gone somewhat unnoticed, and I just would be pleased to get some feedback or some views on now that we have the RESPOND trial out, now that we've had some Respicardia data and what that means in your mind in terms of FDA approval commercial strategy for those two areas.

And should we expect any further clinical data, particularly from some of the new venture programs, perhaps mitral this year? If you could help highlight any additional data that one might expect for the remainder of the year.

Thank you.

We are pleased with the clinical data that we've been able to publish directly so that's the RESPOND clinical trial. I'm not going to repeat myself, but the results are really spectacular when you think about the reduction, particularly in hospitalization at two years on sub-groups of patients with atrial fibrillation or renal dysfunction. 50% reduction is really huge. So we are leveraging this, obviously, to get the FDA approval of the product. But that's also -- these are great data to leverage the continuous effort we are making in Europe and across the world to penetrate the high-voltage segment with Platinium and SonR is one very important element of our high-voltage strategy.

So we believe these results are extremely encouraging and very positive, and they also demonstrate something that we wanted to demonstrate is that LivaNova is able to conduct a large clinical trial, which is a landmark trial, published in the best scientific newspapers and with -- or journals with great kind of KPU leader support, so that was important to us.

On the Respicardia trials that were published by the Company; we have seen the results. They are very encouraging. They show a significant reduction in the symptoms of central sleep apnea. As you know, the challenge for this device now is there has been a negative trial by a competing technology that has reported an increased level of mortality to our patients in the treatment group. So that leans the bar for us: to pass is going to be higher for us meaning LivaNova and Respicardia. But we are really looking forward also to some of the sub-group analysis that Respicardia should publish the coming months or we expect that to happen. So it's very encouraging, too early obviously to drive conclusions but very encouraging.

Lastly on the mitral valve, you know we have three investments in mitral valve, two in replacement and one in repair. Basically, HighLife and Caisson that are developing the treatment; the replacement solutions are really encouraging, very interesting technologies. HighLife is more of a transapical, and Caisson is a single access transfemoral delivery.

They have started clinical work as we previously said. 2016 will be a pivotal year for these two investments. Very encouraged by their progress. We will basically follow the communication of these companies when they are ready to communicate. We are again very excited about the space. We believe the mitral valve replacement space particularly is going to be an exciting space.

We believe that based on what we see, we are amongst the pioneers and we have some very, very differentiated technologies there, so excited by this field. Early days, but we believe as we said before, before the end of 2016 we will be able to probably -- these companies will be able to share early clinical results and we'll then be able to continue to monitor to their progress and make decisions on future investments.

Michele Baldelli, Exane.

Good morning, everybody.

Yes, I have a few questions. First of all, can you elaborate about your ForEx hedging strategy in terms in particular of the Japanese yen, if you can give us any detail about the level that was hedged before this year, and what has been it for next year if there has been already any hedging?

Second point is about the gross margin improvement. If you can elaborate a little bit and give more color about what is the contribution of ForEx, mix of sales, or anyway. Which kind of division improved more the gross margin? And lastly for the time being, if you can also give us a feeling of how much could be deemed from the inventory statement for the full year, which is impacting the gross margin.

Thank you.

Good morning. I'll let Vivid answer these questions. Vivid?

Yes. Thanks, Michele.

Let me start if I can with the question on the FX and the hedging. We have overall -- I haven't given guidance or details on the individual aspects of our hedging strategy, but what I have said because it is an ongoing process that we continue to look at on a monthly basis. So right now, we have a very selective hedging program. We actively hedge certain currencies based on our own and partners' forecast. But we also have very natural hedges that sit with us due to our sales and where our costs fit.

So right now, what we have said is for this year that we expect some FX volatility and that may come from various currencies and we'll continue to monitor that. But on a bottom-line basis, we do believe right now that we have adequate coverage to mitigate a lot of the risks that are potentially out there in the macroeconomic environment.

In relation to the gross margin, really there are three elements to this one. Obviously, the largest element in that is mix element. We also have some benefit of equal amounts, both the medical device tax and the synergies and cost improvements. But from an FX perspective, there is very little if any FX upside that is being driven on the gross margin at this stage.

Much of our cost of goods are valued at dollars and we're a dollar denominated currency. So really right now, there is very little if any FX that's driving that is number. In terms of the inventory statement, again, in terms of our gross margin, we are in a position where we gave the adjusted gross margin.

For the year if you look at the press releases and the GAAP numbers, we have included for the first half of this year, we called out a $35 million inventory step-up. We believe that most of that now has actually been taken by the P&L in relation to the step-up, and we don't expect much more if any step-up to be hitting the P&L in the second half of this year.

Okay, thank you very much. And just a final point on the business of the neuromodulation. If you can give us some details about the [patient] of the AspireSR in the last quarter or how much of the volumes were already substituted by these new products. And then about what was the volume growth in neuromodulation.

Right, so in terms of the AspireSR, about 80% of our sales in the US are made of AspireSR, so which is probably the fastest conversion we have ever seen in this business, and that speaks volumes about the value that the patients and physicians feel about this device. So in terms of let's say volume growth, we need to think inside Canada there are two moving parts here: one which is the new patient growth and the other part is the replacement business.

In terms of the new patient growth, again the second quarter was double digit and we see this as a strong trend for the business. It is very difficult to predict going forward, but we believe it is a result of the AspireSR additional benefits to patients, and we see more and more patients that are drug-resistant that come and have an AspireSR implanted.

The second part which is the replacement market. So at the end of the battery life, we see this is as obviously a slower growth element, but we see trends that are back to our historical trends of replacement growth in particularly in the US. Again, we are confident in our ability to hit the 9% to 11% sales growth this year with really the most important for us factor being the new patient growth that is really the one driving mid to long-term growth for this business.

Okay, thank you very much.

Maja Pataki, Kepler Cheuvreux.

Thank you very much.

Actually, most of my questions have been answered. Maybe just some questions -- some answers that could help me understand a bit growth going forward. In the past, you used to give us a breakdown of the different kind product categories like the tissue valves and mechanical valves.

Now, I understand it's getting more complex to do so, but since we're seeing relatively negative growth in some of the product categories, could you help us understand how much Perceval represents [aortic] tissue valves or of the overall heart valves business? And then second of all, if we look at Japan and the progress you are seeing that you are making with KORA 250, could you help us understand how much of the market share that you used to have in Japan and then you started to lose, how much of the market share has been actually already recovered, and how long do you think it's going to take you to fully recovery if it hasn't been recovered yet?

Thanks.

Thanks, Maja. Because we are a larger Company now than both companies were before, we are not maybe splitting some of the subcategories into the details that we used to have as separated companies. But what's important to see is that we believe the trends that we see in mechanical valves are long-term trends in which we don't see necessarily a turning point for mechanical valves. The market we've said before is declining, and it's a global phenomenon. So we don't expect the turnaround point for mechanical valves anytime soon.

And second, we see that the traditional surgical valves -- ours, but also when we look at some of our competitors' recently announced results, we see that this is a challenging market because the future is probably for new technology valves, particularly for sutureless valves like Perceval. It's probably too early to say that when Perceval will become basically the only valve that we'll sell, but it's really not an unlikely scenario in the long run to see that all aortic valves surgeries will be done with Perceval-like valves, and we expect that this will continue. As the valve itself will see improvements in the years to come, we believe that this will become the valve of choice for physicians and basically will represent the vast majority of the valve sales that we have in the Company.

Just a quick follow-up on the [reshape], would it be fair to assume that Perceval is still representing less than 50% of your tissue valves business?

We don't give those numbers out, Maja, but if you look at our long-term goal which is $80 million to $100 million by 2018, and you do the math and if I remember correctly, we sold $37 million of valves this quarter. Your math is probably right still. But it is the fastest-growing, by far, the fastest-growing product we have in the valve business. And again, if you look at our long-term guidance of $80 million to $100 million, I think that gives you a good idea of where Perceval will sit in the next two years.

Okay, thanks. And in Japan?

In Japan, the KORA 250 -- look, what we said very, very directionally, we said that we had around 20% market share prior to starting to lose share because of the MRI compatibility, or the lack of MRI comparable product, for us in Japan. And we believe we've lost about half of the share that we used to have, so again, indicatively, you can think about us at the low point having 10%. KORA 100 has helped us get a few percentage points back, and we believe that KORA 250 will help us get the rest back. Let's say, indicatively today we are half the way through. But we believe that in the next 12 to 18 months, we'll be able to get back to our historical position in Japan with the support of our local partner there and the quality of KORA 250, which is the smallest and only automatic MRI mode product in the market.

Okay, thank you. That's very helpful.

Thank you.

I just want to thank everybody for being on the call today and appreciate, I know we ran over a little bit so we appreciate you being with us and have a great day.

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