LivaNova PLC (LIVN) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LivaNova PLC first quarter 2017 earnings conference call. (Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Karen King, LivaNova's Vice President of Investor Relations and Corporate Communications.

Thank you, and welcome to our conference call and webcast discussing LivaNova's financial results for the first quarter of 2017. Joining me on today's call are Damien McDonald, our Chief Executive Officer, and Vivid Sehgal, our Chief Financial Officer. As this will be Vivid's last earnings call, we want to thank him publicly for his contributions over the past 18 months and wish him the very best of luck in his future endeavors.

This morning's press release, slide presentation and conference call include forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, including but not limited to may, believe, will, expect, anticipate, estimate, plan, intend and forecast, or other similar words. Statements are based on information presently available to us and assumptions that we believe to be reasonable. Investors are cautioned that all such statements involve risks and uncertainties.

Our actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements, which are not guarantees of future performance and involve known and unknown risks and uncertainties and other factors that are in some cases beyond the company's control.

For detailed discussions of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC and other regulatory filings.

Included in the press release today are selected non-GAAP operating results. In this press release, management has disclosed financial measurements that present financial information not necessarily in accordance with generally accepted accounting principles, or GAAP. Company management uses these measurements as aids in monitoring the company's ongoing financial performance from quarter to quarter and year to year on a regular basis and for benchmarking against other medical technology companies. Non-GAAP financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed 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 News & Events, Presentations, at www.livanova.com. With that, I will now turn the call over to Damien.

Good morning and good afternoon. Welcome to our first quarter conference call. We've had a promising start to 2017. I would like to walk you through some of the events that recently happened at LivaNova and then discuss our sales results by business franchise. After my comments, Vivid will give you some more color on the financials, and then I'll wrap up with closing comments before moving to Q&A.

Over the past couple of months, we announced several key decisions in support of our efforts to advance strategic objectives. First, Caisson. We announced last night that we acquired Caisson Interventional, one of our equity investments. We have been a strategic investor in Caisson since 2012. They have a dedicated and innovative team of professionals and are working on one of the most revolutionary technologies in the transcatheter mitral valve replacement, or TMVR, field.

Our device is unique, as it is the only product designed solely for the transseptal approach and delivered through a single venous access. The device is also designed to be fully retrievable once the function of the implant is fully assessed, but prior to final release. While that system is still in early-feasibility stage, we believe that this deal makes clear strategic sense. Our Cardiac Surgery business currently sells a portfolio for surgical valve replacement and repair, and this acquisition will position us as a leader in the field. We are now positioned to accelerate clinical and regulatory efforts in TMVR and ultimately deliver important, innovative therapies to our patients.

Caisson initiated human implants in June 2016 through a 20-patient FDA early-feasibility study in the U.S. called PRELUDE. At the third annual Zurich Mitral Valve Meeting in early February, results were presented for 6 patients enrolled in the study, with 5 of them successfully implanted. In the sixth patient, the valve was successfully retrieved, which is an important clinical feature.

Patient enrollment in the CE Mark trial, which will be called INTERLUDE, will begin this year. INTERLUDE has already been approved in Canada, and we will begin patient enrollment mid-year. That will be followed by patient enrollment in Europe and the U.S. later in 2017. We are currently targeting CE Mark in late 2018 or 2019, with U.S. FDA approval coming several years later.

Today, there are an estimated 2 million people in the U.S. suffering from severe mitral regurgitation, but only about 55,000 patients are receiving mitral valve surgery annually. That's approximately 3% of the total patient pool. External estimates show the market potential as a multibillion-dollar global opportunity. We believe this market will develop comparably to the transcatheter aortic valve replacement, or TAVR, market, with the vast majority of procedures taking place through a transseptal route, which is our approach. This acquisition places LivaNova in a strong position to set the benchmark for TMVR systems and to be a leading player in the market.

Regarding some of the specifics of the transaction, the purchase price for the remaining 51% of the company is $72 million, net of $6 million of debt forgiveness. The first payment of approximately $18 million was made at closing. The remainder will be paid out over the next several years on a schedule largely driven by regulatory approvals and sales earnouts.

We expect this acquisition to be dilutive to earnings for several years as we go through clinical trials, continue R&D spend and invest in our production facilities and commercial activities. However, for all the reasons we've discussed, we believe that in the long term, this opportunity will create value for our shareholders and be positively accretive to our earnings.

Second, management changes: We announced several weeks ago that our current CFO, Vivid Sehgal, is leaving the company at the end of May to pursue other opportunities. Vivid has been an integral part of our executive leadership team and I want to thank him for his significant contributions in helping position the company for sustainable growth. We expect to announce a successor in the near future, and Vivid has agreed to support an orderly transition.

In addition, Jacques Gutedel, President of Europe, has been succeeded by Marco Dolci. Most recently, Marco was an executive of Danaher, and prior to that was CEO of Hitachi Medical Systems in Europe. He has an extensive track record in health care throughout Europe, Asia, Latin America and the Middle East. I'd like to thank Jacques for his leadership and his contributions to the company over the last 8 years.

Third, simplification: We've said numerous times that we are working on simplifying our business model. One of the areas we have focused on simplifying is our manufacturing footprint, and we have taken several steps towards advancing this goal. During the first quarter, we completed the closure of our Costa Rica manufacturing operation, where we had duplicative manufacturing of our VNS devices. We also made the decision to cease production of the oxygenator facility we were building in Suzhou, China. Market dynamics and expectations in the region have evolved, and as a result, we no longer believe that this facility is the best strategic option or use of cash for LivaNova. This decision does not in any way dilute our commitment to delivering strong emerging markets growth.

And finally, 3T Heater-Cooler devices: On our fourth quarter and year-end 2016 earnings call, we disclosed that we developed a 3T device remediation plan, which included a loaner program, a deep disinfection service and a design modification to address the issue of potential aerosolization. We said that in the design modification, we're subject to final verification and validation, and we would begin implementing the modification in the second quarter. We are pleased to announce that we have completed final verification and validation for these design modifications, which allowed us to obtain CE Mark in April. We will begin implementing the sealing and vacuum solution in the next few weeks. These changes will be performed at no cost to our customers. Implementation will start in Western Europe, followed by multiple other countries as we receive regulatory approvals. In the U.S., we continue to make progress towards approval as we work collaboratively with the FDA. As a leader in the industry, we are pleased to offer many of our customers and patients a solution that enables life-saving Cardiac Surgery.

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

Net sales were slightly up compared to the first quarter of 2016. Strong price and volume gains in neuromodulation were offset by lower sales in Cardiac Surgery and CRM. If we look at each business franchise, Cardiac Surgery sales were $139 million, a decrease of 2.1% from the first quarter of 2016. Sales for cardiopulmonary were $107 million in the quarter, a decrease of 2.5%. As we discussed in the past, cardiopulmonary includes both disposable sales, which make up approximately 75% of the total, and capital, which makes up the remaining 25%.

The highest sales product in disposable is oxygenators, and due to the solid demand for INSPIRE, we continue to see very consistent growth in the 3% to 5% range. In capital, the highest sales product is heart-lung machines, or HLM. Through the end of 2016, we saw relatively steady sales for HLM in the U.S, but had started to see softness in Europe in the second half of the year. If you recall, we discussed that this was due to customers delaying new purchases and holding onto their machines longer in anticipation of the next round of innovation. This quarter, we have started to see a comparable dynamic in the U.S. and are hearing similar comments from our U.S. customers.

I want to reiterate, we do not believe we are losing share to competitors in either region. We have 70% global market share with HLM, and while our competitors have been more vocal in their discussions with customers, we are working on innovation which we will be discussing further at our Investor Day in the third quarter.

Sales for heart valves were $32 million in the quarter, a decrease of less than 1%. Our tissue valve business increased 5% as a result of solid performance in Perceval, our sutureless valve, particularly in the U.S., and this was offset by declines in mechanical heart valves, which are starting to move more in line with market declines.

CRM sales were $58 million during the quarter, a decrease of 2.9% compared to the first quarter of 2016. In low voltage, pacemakers were up for the quarter, driven by strong demand for KORA 250 in Japan. In high voltage, we saw softness in ICDs compared to a strong quarter last year with the launch roll-out of PLATINIUM devices. This was offset by strong growth in our PLATINIUM CRT-D products due to the recent incorporation of the IS-4 standards.

Now let's turn to neuromodulation. Sales were $87 million, up 7.7% versus the first quarter of 2016, with growth in all regions. AspireSR continued to perform well from both a volume and price perspective. New patient growth was strong once again, with growth continuing in the mid- to high single digits. This is reflective of demand for the product driven by our focused investments.

Regarding new innovation, we recently submitted our application to the FDA for SenTiva. SenTiva will be our newest VNS Therapy device and will incorporate the same technology as AspireSR but will be smaller in size, and we anticipate approval of the device in the latter part of the year.

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

Thank you, Damien. Adjusted gross margin as a percentage of net sales in the quarter was 65%, up 40 basis points from the first quarter of 2016, resulting from favorable mix and continued focus on cost efficiencies. The full year, we still expect gross margin to be in the mid-60% range.

Adjusted R&D expense in the first quarter was $29 million. R&D as a percentage of net sales was 10.3%, an improvement of 60 basis points from the first quarter of 2016. For the full year, we now estimate R&D as a percentage of sales to be in the range of 11% to 12% as a result of our incremental spend related to investments in TMVR.

Adjusted SG&A expense for the first quarter was $107 million. SG&A as a percentage of net sales was 37.5%, an improvement of 90 basis points from the first quarter of 2016. For the full year, we now estimate adjusted SG&A as a percentage of sales to be in the range of 36% to 37% as a result of incremental operating expenses related to the Caisson acquisition.

Adjusted operating income was $49 million in the first quarter. Operating margin was 17%, an improvement compared to 15% in the first quarter of last year. Our adjusted effective tax rate in the quarter was 23%, an improvement from the 28% in the first quarter of 2016, as a result of our ongoing tax efforts. Finally, adjusted diluted EPS for the first quarter of 2017 was $0.71, 32% higher than the first quarter of 2016.

Turning now to cash flow: Our cash flow from operations for the 3 months ended March 31 was [$33 million] (corrected by company after the call). Cash flow from operations excluding payments for one-time integration, restructuring, was [$47 million] (corrected by company after the call). Capital spending for the first 3 months was $8 million, in line with the same period of 2016. Our cash balance at March 31 was $63 million, up from $40 million as of December 31, 2016. Our net debt at March 31 was $52 million, down from $75 million as of the end of 2016, in part due to our continued focus on working capital.

With the acquisition of Caisson, we have updated our full-year guidance, starting with the income statement. With the exception of adjusted R&D, SG&A and earnings per share, all other full-year guidance ranges we provided on March 31 remain the same. Key guidance ranges are included in our first quarter performance presentation, available in the Investor Relations section of our website. While changes to adjusted R&D and SG&A have been discussed, we are now estimating adjusted diluted earnings per share to be in the range of $3.10 to $3.30, with our share count to be approximately 49 million.

In terms of EPS calendarization, we now anticipate earnings in the second half of the year to be approximately 10% greater than in the first half of the year, primarily due to momentum in emerging markets and continued growth in neuromodulation over the course of the year.

Moving to cash flow: Our adjusted cash flow from operations for 2017, excluding integration, restructuring and 3T remediation payments, is now expected to be in the range of $170 million to $190 million. The integration, restructuring and 3T remediation payments are expected to remain in the range of $55 million to $60 million.

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

Thanks, Vivid. Karen said something at the start, and just let me reiterate that. I want to thank you for everything you've done for the company, and especially how much I've enjoyed working with you these last few months, and all I can say is I wish you and your family all the very best.

I appreciate it. Thank you.

So in summary, we started out 2017 delivering solid sales, leveraging our income statement and driving strong cash generation. Many of our growth drivers -- AspireSR, Perceval, INSPIRE and KORA 250 -- continued to perform well. We are on track with our submission for SenTiva to the FDA and are looking forward to approvals towards the end of the year.

We also made significant progress with the acquisition of Caisson and we want to extend a warm welcome to the Caisson team. We're excited to bring their talent, innovation and passion to LivaNova. This team is our planned entry into the TMVR space, which has the potential to be an important growth platform for us in the future. This is a large market with an unmet need. We believe that we have a unique technology that can offer patients the most advanced, minimally invasive mitral valve replacement option.

We've also made great strides with our 3T device remediation plan and are pleased to be able to offer our many customers a solution in the near future.

We are on track and working diligently to achieve our annual commitments. The organization is focused on strengthening our position as an innovative medical device company and in delivering long-term shareholder value. We look forward to updating you on our continued progress next quarter.

And with that, Charlotte, we're ready for questions.

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

Thank you very much. So a few questions, please: the first set of questions on business fundamentals before we come on to Caisson. So I just wondered if you could give us a little bit more disclosure on your current valve performance. You're highlighting strong dynamics with Perceval, but I think there's been a whole series of quarters where that failed to shine through. Can you talk a little bit about the base business for non-Perceval structural valves and what you're doing there to stabilize that situation? And when would be a realistic time point to start to see some of the Perceval related growth more visible through the P&L? That's question #1, please.

Good afternoon, Scott.

Hey Damien.

How's London this morning?

It's something.

Hey, great question. Thanks for joining us. Let's talk about tissue valves. Look, I think we're continuing to made headway here. I'll focus on the two positives for a second. Perceval continues to have strong double-digit growth, and particularly in the U.S. And the decline in mechanical heart valves, which was high double digits for a long time, is starting to get down into the mid- to high single-digit range. So we're getting back mechanical heart valves towards what we call the market decline rate, which is something we've talked about in the past. The continuing disappointment for us is the traditional tissue valves. Again, we're working on that. I'd consider this one of the big challenges for the organization. The whole portfolio was under-invested in and under-focused on for a long time, and I think we're continuing to see some of the fallout from Mitroflow. But this is a focus area for us as a management team, and while we continue to focus on Perceval, which we believe as a sutureless valve is differentiated in the market, getting the tissue valve stabilized probably in the second half is an important focus for us.

Thank you. And just following up, I think you now highlighted a couple of manufacturing facility consolidations, one in Costa Rica and one in China. Can you talk a little bit more about that? Because my understanding was that manufacturing consolidation was not part, initially, of the 80 pre-tax synergy plan, so is this sort of incremental to your plan? And strategically speaking, a little bit confused as to why not having domestic or regional manufacturing for those growth territories is not still a core priority for the company.

Hi Scott, its Vivid here.

Hi Vivid.

Hi there. So I think the key thing to think about is, first of all, these plans have been in the pipeline for some time. We've been reviewing, over time, our entire manufacturing footprint. And you're right, when we looked at it, these were important decisions that we have taken. In terms of our commitment, I think particularly on the China one, I think what's really good, I think, as a leadership team as Damien has come in, is that we've assessed everything from the bottom-up activity. And I think the situation in China that you've seen, whether that's through some of the mechanical heart valve economic conditions where we had to destock for a period of time, conditions have changed over time dramatically in China. We just think right now, as a management team, for the best use of our cash and the best use of our resources is to actually focus on driving business like Perceval, investing in Caisson. So I don't think this is a major activity for us, and we believe we can be very successful in China. I think if you look at some of the competitors out there, we believe that China's moved on from the original assumptions that we had, and we actually believe imported product has a very important place in the market today. So I think this is about market research and about market conditions.

But having said that [multiple speakers], we'll continue to look at the footprint. You've heard me talk about improving gross margin, and where we are, in the mid-60s, I think there's an important driver here for us in terms of being able to fund investments. And looking at this footprint is a key part of that. And we'll continue to, I think, make good decisions to improve gross margin, and consolidation is a big part of that.

And I do think, if you look at our position, we ended 2015 sort of close in the 63% gross-margin range. We're finishing the quarter now close on just under 65%. We've made some pretty good trajectory in terms of gross margin, and I think just in terms of what we're doing, we are looking at opportunities right now in terms of focusing the business to drive better gross margins and better operating margins across the entire business. And I think this is just part of the journey there.

We should think of this as providing some additional comfort in the $80 million synergies, or potentially incremental to the initial plan?

I think you should look at it as an opportunity to reinvest back in the business, Scott. I think right now our best opportunity is to put more money behind neuromodulation and more money behind Perceval. So yes, I think it's freeing up our opportunity to reinvest right now.

Okay, thank you. And then perhaps if we can come on to that, congratulations on the bold move with Caisson. Yes, I just wondered if you could share thoughts as to why now? Why would LivaNova make this step now? What was the triggering factor? I know you've highlighted some promising early observations. Have you seen any additional data which really clinched the deal for you, or was there other factors?

Yes, great question. Look, I've been in markets where unique opportunities come along, and I really believe this is one of them. We spoke last quarter about our capital allocation strategy, organic first, then equity investments. We've been partnering with C.J. and Todd and the team since 2012, and we wanted this to be about getting a great product to market fast. And we didn't want this to be about working to find the next funding milestone. And we really believe that putting our resources with the team, especially clinical and regulatory and market access, is a great decision to help accelerate this. It's a strong team. They have a unique technology that's differentiated. We think that it's de-risked, to some extent, because it's already in clinicals and has a clinical pathway, especially around CE Mark. So based on our assessment -- and we have a pretty high hurdle rate for IRR, and we've looked at a number of deals recently where we've walked away because they haven't met our hurdle. Looking at Caisson, we believe this is really compelling, and we believe that it was the best use of our capital and management energy.

All right, great. And perhaps the last question before I jump in the queue: So you've highlighted some additional investment through the P&L, which is understandable, but you mentioned the dilutive nature, if you like, for some years to come. Can you share some thoughts on that, and do you see this as being, if you like, diminishing in earnings dilution over time, or is there any bump-up, if you like, in cost required to secure successful commercialization? I just want to understand how to think about this in the longer term or over the next few years. And following on from that, please, obviously you're taking a bit of earnings dilution. You have a very strong balance sheet. Why are we not announcing today a step-up in share buyback to mitigate the near-term dilution? Thank you.

Scott hi, it's Vivid again. I think the way to look at this is, obviously, we have mentioned that this deal will be dilutive in terms of EPS. This year, we've taken the top and the bottom end of the guidance solely due to Caisson down by about $0.15. What we are going to talk about is 2018 right now, where we actually believe at a minimum level the same type of EPS dilution, you can expect the same thing to happen again. I think beyond that, this really is about the investment in the clinical trials and how they go. But I would say that we do believe this will be dilutive. But now, I think 2018 is where we're going to sort of draw a line in terms of where we expect this to be. It will be at a minimum to similar levels to what it is today. In terms of the share buyback position, that still remains a strong option for the company at this stage. We obviously, as Damien has said, we've been looking around, we've been seeing other opportunities that we have. We have, as he said, had a pretty active review of our strategic options from our capital allocation strategy and we have been looking not just at Caisson, at other things as well. So I wouldn't discount anything right now, and I think as a company, the good news is that we still have $100 million of our original share buyback program available to us. We have spent $50 million of that. So it's more a point of actually just timing of what we're going to do. Damien?

That's correct.

Thanks, I'll hop back in the queue. Thanks guys.

All right, cheers Scott.

Thank you. Our next question comes from the line of Jason Mills from Canaccord. Your line is now open.

Hi, good morning. This is actually Cecilia Furlong, on for Jason. And if I could just briefly turn back to Caisson, can you provide a little more color around your current thoughts on your product development and clinical strategy, specifically in the U.S.? Kind of how we should think about R&D impact over the next few years, and really, your eventual go-to-market strategy. And how do you view this product within -- fitting into your overall portfolio? And would you kind of look to build a new sales force around the platform eventually?

Hi Cecilia, great questions. That's like the whole business plan for Caisson. I really think a few things: Firstly, I think C.J. and Todd and the team have done a tremendous job. Their results, I think, speak for themselves. The early, early patients are showing tremendous recovery. They're showing great results in terms of mitral-regurgitation score. Clinically important features like the retrievability have been validated, and I think, in terms of having a product in early feasibility, this is a really great differentiated product. Again, we said that part of the reason that we took the decision now is because we wanted to help the team accelerate and focus on bringing this to market in a commercially accelerated way. We think that some of our capabilities in terms of clinical quality and regulatory can help that along, as well as our manufacturing capability. We already have two sites that make tissue valve and produce, also, OEM for other companies, so we have manufacturing capabilities. So in terms of our R&D and manufacturing ramp, we think we can really help Caisson to the market. In terms of the go-to-market, look we're still early days, but clearly having a strong health economics value proposition is going to be important. And we're going to make sure we cover that as we go through the trial, the INTERLUDE trial and the subsequent FDA trial. But we have, again, I think, good insight into that with our team that we have in place at LivaNova. We already have a strong relationship with a number of sites and surgeons, and also an evolving set of relationships with cardiologists where perhaps this will ultimately play out with -- as it did with TAVR. And I think that you could see us using a hybrid of not only an existing commercial structure in the geographies, but also building that out with specific and specialized interventional cardiology reps to deal with this product, which is not going to be a simple sale, but we think will move along the lines of TAVR. So in terms of go-to-market, we'll use our footprint but augment that with specialists.

Yes, and Cecilia, I just want to answer the question around the R&D that you mentioned. What I think is really important to understand is that we don't see the Caisson deal in diluting our commitment to any other part of our R&D portfolio. I think we obviously have some great opportunities, both -- Damien mentioned in innovation, that we'll talk about at the Investor Day, but also if you look at what we have been doing on neuromodulation is investing a lot. And we've taken opportunities to restructure R&D line with some of the work that we did on CRM. So really, I think -- and if you think about the dilution that we're talking about, the $0.15, the vast majority of the spend that we have this year and going into the next few years will be in the R&D and clinical phase, so of -- the vast majority of the spend. So I think you're going to see, 2016 was a year where we sort of established a portfolio choice on R&D, and I think you're seeing in 2017 exactly what we said before, which is back to focus on R&D, but we're not going to dilute our efforts on any of our focus brands right now.

Ok, thank you so much for all the color. And then just kind of sticking with transcatheter mitral field in general, kind of the toolbox approach gets thrown around a lot, and I believe you previously mentioned equity investments in multiple repair platforms as well, and just following yesterday's acquisition, how are you looking at building out a mitral portfolio?

I think that's a really great question, and I think those that I've talked to in the recent past, you've heard me talk about surrounding a call point or surrounding a disease state. I think that that's a really important aspect of how we're going to be successful. We already sell products in the mitral repair and mitral replacement space for surgical repair and replacement. I mentioned earlier with Scott's question about, we under-invested in those traditional valve repair and replacement areas. I think we've got an opportunity to refocus some of our effort there. And as Vivid said, we have plenty of firepower to do M&A. So we think that this is an evolving part of our portfolio. Certainly Caisson puts us in a really strong position, we believe, in TMVR, but we're going to look to see how the whole disease state can be surrounded.

Great, thank you for taking our questions.

(Operator Instructions). Our next question comes from the line of Michele Baldelli from Exane BNP Paribas. Your line is now open.

Hi, thanks for taking my questions. I have two questions on the Caisson. Just to understand when we can have some data or update, is the EuroPCR event meaningful, or what is the next event where we can expect some data about it? The second question, still on Caisson, is about the reason of the choice about Caisson instead of, let's say, HighLife, or other investments. Was there any kind of financial consideration put into place, like you needed [inaudible] you expected to do [a share count] increase to sustain the R&D budget of this company, and therefore the agreement was to take out all the company, or was it purely only based on clinical data that you kind of observed?

Good morning, good afternoon Michele. So, a couple of things. Data for Caisson. The most recent data was in Zurich a few weeks ago, and that's the latest update. We're going to work with the Caisson team to be present at the major meetings as a) data becomes available, or b) there's slots on the agenda. PCR might be a possibility; it depends a lot on how the organizers arrange the agenda. So -- but our intention is to be present at the major events. In terms of Caisson versus HighLife, look honestly, we really made this decision based on a portfolio decision, and looking at what I referred to earlier as the IRR for the various options we have. We've looked at this as a whole portfolio approach. We really liked the -- not only the financial evaluation of Caisson, but also the position that they are in terms of their development. We continue to really like HighLife. The guys there have done a really good job. They have interesting technology, and we're still a financial investor in that company. And there are options there that are going to be explored as well.

And I think, Michele, I think we are, again, balancing. I think what you're seeing from the business right now, you see what we've done in terms of the manufacturing, some of the work there, taking on Caisson. We're actually trying to balance out our own workload and priorities to make sure that we can handle things in an effective way. So this is certainly not the end of what we're going to plan to do, but I think we have to do it in an organized and structured way. And that's part of the strategy I think you're going to see going forward.

Ok, thank you very much.

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

Thanks very much. Just some followup questions, first couple on Caisson, please. I know we're still in a relatively early development stage, but can you share some thoughts about the commercial infrastructure required to make this a success? Do you think you need heavy sales force investment here, or do you genuinely believe there's lots of synergies with your existing infrastructure? And just extending upon that, do you -- does LivaNova need to be in TAVI to be a winner in mitral? Thank you.

Yes, great questions, Scott. So, commercial investment: I think there's two layers to this. One is, we believe we can leverage our sales force structure that we've recently set up with the regional heads, as well as the country managers and country sales leaders. So in terms of requiring an entirely new infrastructure, we don't think that's the case. What we will need to do is build out a specialist sales force for this procedure type and the call point. Again, we believe that's imminently doable. We already have relationships and talent in the cardiac space that we believe will be transferable, and again, we also believe that the technology is going to be compelling enough to attract some really great talent. There are always people in the cardiac and interventional space that I think are looking for the next game-changing technology, and we believe that we're going to have that, and it'll provide an opportunity to attract some tremendous talent. In terms of TAVI, look, I think that's a great question. We don't believe it's the case. There's a case to be made that you need the both. We believe that clinicians will want to work with the most compelling clinical proposition, and we believe that TMVR will be able to stand alone, and we think that the Caisson product is going to be compelling enough for people to want to work with us. So we don't see it as a roadblock to us being successful.

Thanks Damien. And just a housekeeping question on Caisson: So you've highlighted some additional, if you like, R&D and SG&A costs. Vivid, you're still booking quite a lot of minority losses, if you like, from the equity method. I think you've commented now on making certain portfolio decisions. From the current, if you like, $12 million to $13 million that you're booking, where does that go now with this acquisition? And on leverage, I think in November '15 you highlighted SG&A ratio likely to come down into the low 30s. I appreciate you just stepped up to an investment of 36%, 37%, but do you still see good opportunities for leverage over the SG&A ratio, substantially so on the one that you just guided? Thank you.

I think, Scott, yes. I think on the first question on the minority interest, you will see, definitely, a reduction on the minority interests. So basically what we are doing is switching out from minority interests more into the R&D line. As you can imagine, there's a 49% previous shareholder within Caisson. We were booking 49% of their cost into our minority line. So I think if you look at the minority interest line, you can probably look at it as, perhaps, halving in terms of nature compared to where it has been historically. But that's included within the numbers and the guidance that we've given, and I think just on the minority interests, as Damien said, is the cost of that one will depend on where our other ones are in terms of their clinicals and where their investments are. But yes, if you look at it as sort of halving, it's about where it will stand. In terms of the leverage, we do have great opportunities. I think, as you saw, a 90-basis-point improvement in SG&A versus last year and some further investments that we've done, and Damien's put some effort into the depression within Europe, and we've done some further investments in neuromodulation. So we've been investing at the same time that we have actually been bringing our ratios down. So again, I think we're going to wait until the Investor Day to give you more color on the long-term SG&A and R&D ratios, but I think the one thing that's absolutely clear, is there further leverage that's possible, the answer is yes. I think we are -- we've got a great track, our synergies are on track, and we're committed to monitoring them and getting there.

Well we're just being more disciplined.

Absolutely. Absolutely. And we're looking for opportunities, as you've seen, whether it's the CRM project that we had last year or the manufacturing footprints that we've had this year. We will look for opportunities to improve our operating leverage.

Okay, great. And perhaps just one last, potentially provocative question for Damien. So, Damien, there's been quite a lot of management turnover at LivaNova over the last 12 to 18 months, and there is, if you like, a perception in the equity market that the wheels are falling off the bus so everyone's running for the door. It would be helpful if you could just provide some update, if you like, as to, are there sufficient talent levels within the organization, particularly on the Sorin side of the business, which is the larger, to execute? And if not, how do you go about that? And can you perhaps talk a little bit about the perception, if you like, that things are awry at LivaNova given all the management move?

Yes, good question, and I would just say, candidly, I think the perception is wrong. I'm a new CEO, and I think part of what people should expect me to do is evaluate the talent and ensure that we have the best talent and the focused talent to drive the organization. And I've been very lucky to, in the first few months here, to come across some really talented individuals, and I hope and expect that a lot of them are going to stay. Nevertheless, I am asking people to work with a different model with more discipline, and candidly, not everyone likes that. And I'd rather they make the choice sooner rather than later. And I think I've also been able to attract some really tremendous talent. And Marco Dolci, who we declared in the opening commentary, is an extremely talented commercial leader in Europe and Latin American and Middle East/Africa. There are a number of others that have recently joined. We talked a little bit about the search for the new CFO that we hope to be able to speak about soon. And so I think, at the same time as some people have opted out, we've also been able to attract some tremendous talent and people that I've worked with in the past who I know are known commercial leaders or functional leaders with a track record. So it's the premise I perhaps disagree with, and I hope what people see over time is we have a really strong team.

Okay, thanks very much indeed. And good luck, Vivid.

Appreciate it. Thank you, Scott.

I'm not showing any further questions at this time. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may all disconnect.