LivaNova PLC (LIVN) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LivaNova PLC First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn -- introduce your host for today's conference, Mr. 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 2018. Joining me on today's call are Damien McDonald, our Chief Executive Officer; and Thad Huston, our Chief Financial Officer.

This morning's press release, slide presentation and conference call include forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, 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 performances and involves 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 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 alternative to, the operating performance measures as prescribed per GAAP. Please review the financial tables provided in the press release that reconcile such non-GAAP measures to directly comparable financial measures presented in accordance with GAAP.

To enhance the call, we've posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to other call materials and should be used as an enhanced communication tool. You can find the presentation in the Investor Relations section of our website under News & Events, presentations at www.livanova.com.

In just a few moments, Damien will be discussing net sales results for the quarter. In our press release, we provide a table that shows both reported net sales growth and constant currency growth, so you can see the impact of foreign currency fluctuations. For discussion purposes, our comments on net sales growth during our opening remarks will be expressed in constant currency.

And with that, I will now turn the call over to Damien.

Thanks, Karen, and morning, and good afternoon, everyone. Welcome to our first quarter 2018 conference call. We started the year with another strong quarter, showing top line growth, improved gross margins and solid earnings. Since the beginning of the year, we announced the commitment -- commencement of 4 new clinical studies, received approval for 2 products, completed a strategic acquisition and divested our CRM business. I'm going to walk you through those items and additional highlights, and then discuss our sales results by business. After my comments, Thad will provide additional color on the financials and I'll wrap up with closing comments before moving on to Q&A.

First, we started the year by initiating numerous clinical studies. On January 4, we announced the launch and enrollment of the first patient in our Global RESTORE-LIFE Study, which evaluates the use of our VNS Therapy system in patients who have treatment-resistant depression and who fail to achieve an adequate response to standard psychiatric management.

Our plan is to enroll a minimum of 500 patients, who will be implanted at up to 80 sites, outside of the U.S. We're currently enrolling patients in Germany and will expand to other European countries during the year.

On January 11, we announced that we had started enrollment in BELIEVE. This study focuses on the overall incidents of reduced leaflet motion, identified by CT imaging in patients receiving a LivaNova aortic heart valve. We are planning to enroll approximately 230 patients at 15 sites in the U.S. and Canada.

Then on March 22, we announced that we have started enrollment in PERFECT. A Perceval valve clinical study in China. This study is being conducted to demonstrate the safety and effectiveness of Perceval in the Chinese population. We plan to enroll approximately 160 patients at 8 investigational sites.

And finally, on March 28, we announced the launch and enrollment of the first patient in a clinical study to examine the use of our VNS Therapy System using Microburst technology. This feasibility study will determine the initial safety and effectiveness of delivering VNS Therapy using high-frequency burst of stimulation in patients who have drug-resistant epilepsy. The study consist of 2 cohorts, enrolling up to 40 patients at approximately 15 sites in the U.S.

Second, we received regulatory approval for 2 products, one in Cardiac Surgery and one in Neuromodulation. On February 1, we announced that we had received CE Mark for our PureFlex line of adult arterial cannulae. We are eager to offer this advanced line of cannulae to Cardiac Surgery clinicians and patients to deliver the best care possible. While the cannulae business is still a small portion of our cardiopulmonary portfolio, it is an important and growing business for LivaNova.

On April 17, we announced that we received CE Mark for our SenTiva VNS Therapy System. This follows the approval in the U.S. by the FDA in October 2017. This recent announcement combined with the FDA approval advances VNS Therapy treatment for patients in drug-resistant epilepsy across the globe. Third, we announced the completion of a strategic acquisition and a divestiture. On April 4, we announced that we had completed the acquisition of TandemLife, a privately held company focused on advanced temporary cardiopulmonary support solutions for $200 million, with an additional $50 million to be paid based on regulatory milestones. The acquisition of TandemLife allowed us to complement our portfolio with a complete set of solutions for ExtraCorporeal Life Support and Percutaneous Mechanical Circulatory Support. Thad will provide an update shortly regarding our 2018 guidance, which now reflects the addition of TandemLife.

And earlier this week, on April 30, we announced that we successfully completed the divestiture of our Cardiac Rhythm Management business to the MicroPort for $190 million in cash. The cash we received from the deal will be used in the second quarter to pay down the 6-month bridge line that we obtained for our TandemLife acquisition. With the completion of the CRM sales through MicroPort, we will now focus on the next stage of our growth strategy for our Cardiac Surgery and Neuromodulation portfolios, where we have strength and market leadership.

Before I turn to our sales results, I want to provide a brief update on a couple of other items. Starting with transcatheter mitral valve replacement or TMVR. We discussed in our last earning calls in late February, we have temporarily paused enrollment in our PRELUDE feasibility study, to make a submission to the FDA on various design enhancements to the Caisson systems and the development of 2 larger valve sizes. We are very pleased to report that we received FDA approval in late March, and we began the process of enrolling patients again and are back on track to complete the PRELUDE Study in the third quarter.

Next, we are making progress in our ability to address potential aerosolization issues with a 3T Heater-Cooler devices. The FDA agreed to allow us to move forward with the Deep-Cleaning Service in the U.S. This service is being performed at no charge and we are offering a loaner device to hospitals, while the unit is being serviced. We continue to work closely with the FDA to secure clearance to implement our full device for mediation plan, which include design modifications to devices in the field.

And finally, on April 30, we distributed our proxy for our 2018 Annual General Meeting of shareholders or AGM. It posted -- we posted it on the Investor Relations section of our website. This meeting will we held on June 12, in Houston, Texas as well as virtually. The proxy discloses that Stefano Gianotti resigned from the Board on March 23, 2018. I'd like to take a moment to thanks Stefano for his support and guidance through this important transitional period for LivaNova. William Kozy, a Director Nominee, is up for election at the upcoming AGM. Mr. Kozy has spent more than 40 years in the healthcare industry, most recently as Executive Vice President and Chief Operating Officer at Becton, Dickinson and Company.

So now, turning to our net sales results for the quarter. Total net sales were up 5.3%. Both Neuromodulation and Cardiac Surgery showed growth in the quarter compared to the first quarter of 2017. Starting with Cardiac Surgery. Cardiac Surgery sales were $156 million, up 4.9% from the first quarter of 2017. Strong growth in Cardiopulmonary offset a decline in heart valves. Cardiopulmonary sales were $125 million in the quarter, an increase of 9.1% versus the first quarter of 2017. Growth in heart-lung machines was the major contributor to the faber performance in every region. Our focus on funnel management and execution is building momentum resulting in strong global sales. The majority of our heart-lung machine sales in the quarter were the result of upgrading customers from our legacy S3 device to our current S5 device, with the remaining contribution coming from competitive captures and replacement of existing S5 devices. As we said before, our funnel visibility gives us conversion opportunities for the next couple of years.

Turning to Heart Valve. Sales for heart valves were $31 million in the quarter, a decrease of 9.5% versus the first quarter of 2017. As we've discussed during our last earnings call, the majority of the decline in the quarter was due to a known change in a contract manufacturing agreement. The loss of this agreement impacted rest of world sales by approximately $2.6 million. If we isolate PERCEVAL, sales for the sutureless valve were up in every region, showing consistent double-digit growth. Sales of PERCEVAL are now greater than the combined sales of both mechanical and traditional tissue valves. We continue to make significant progress with PERCEVAL and are on track to exit the year with a run rate equivalent to $80 million in annual sales.

Now, let's turn to Neuromodulation. Sales were $94 million, up 6.2% versus the first quarter of 2017. We saw a strong demand and implant rates for SenTiva, adoption of SenTiva exceeded 35% and continues to increase. We believe SR is a superior technology and our long-term goal is to move the U.S. market almost entirely to AspireSR or SenTiva.

In addition to strong adoption with SenTiva, we are attracting physicians that haven't been recent implanters of VNS Therapy. Since the label expansion and the launch of SenTiva, we have seen average patient age decline, this is extremely important for multiple reasons. We know that the earlier we start a patient on VNS Therapy, the better the clinical outcome. In addition, we know that if a patient has implanted a second VNS Therapy device, the chances then using our third device is 90%. We were pleased to announce that we received CE Mark for SenTiva and implanted our first patient at King's College Hospital in London. We will take a phased approach to our launch in Europe, initially focusing on a handful of countries that have favorable reimbursement climates and physicians who are interested in new technology.

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

Thank you, Damien. I'm going to discuss the first quarter financials in greater detail and speak further about guidance.

As Damien mentioned, sales growth in the first quarter was solid at 5.3% versus first quarter of 2017, due to strong sales in all of our growth drivers. Adjusted gross margin as a percent of net sales in the quarter was 66.9%, up 170 basis points from the first quarter of 2017. The margin improvement was primarily driven by product mix, pricing discipline and our continued focus on cost efficiencies. Adjusted R&D expense in the first quarter was $29 million compared to $20 million in the first quarter of 2017. R&D as a percentage of net trade -- trade sales was 11.6% versus 8.9% in the first quarter of 2017. As we previously discussed, we expected R&D to ramp up due to the development of next-generation products, clinical trials and investments in TMVR, sleep apnea and heart failure.

Adjusted SG&A for the first quarter was $97 million compared to $82 million in the first quarter of 2017. SG&A as a percentage of net sales was 38.7%, up 260 basis points versus the first quarter of 2017, primarily due to an increase in sales and marketing, related expenses to our growth drivers in foreign currency. Adjusted operating income from continuing operations was $42 million compared to $46 million in the first quarter of last year, which reflects an improvement in gross margin, offset by expected investments in our key growth drivers and clinical activities. Adjusted operating margin from continuing operations was 16.6% compared to 20.2% in the first quarter last year. Our adjusted effective tax rate in the quarter was 15.7%, an improvement from 23.5% in the first quarter of 2017, as a result of our ongoing tax efforts and the recent changes in the U.S. and U.K. tax laws.

Finally, adjusted diluted EPS from continuing operations in the quarter was $0.68, an increase of 1.5% compared to the first quarter of 2017.

Now, moving to cash flow. Our cash flow from operations for the 3 months ended March 31, was $20 million. Cash flow from operations, excluding payments for 1x integration and restructuring cost was $36 million. Capital spending for the first 3 months of 2018 was $6 million, down from $8 million for the same period of 2017.

Our cash balance at March 31, 2018, was $65 million, down from $94 million at December 31, 2017. Our net debt at March 31, was a $121 million, up from the $50 million as of year-end 2017, which included $78 million relating to the ImThera acquisition.

Now turning to 2018 guidance. On February 28, during our last earnings call, we provided financial guidance for the full year. As a result of closing the TandemLife acquisition and changes in the tax laws, we are increasing both our sales and adjusted earnings guidance and decreasing our adjusted effective tax rate projections. We now expect sales to grow in 2018 between 6% and 8% on a constant currency basis, an increase of 200 basis points due to the sales contribution from TandemLife. Regarding foreign currency, if we use the current exchange rates and they remain unchanged, the company's full-year revenue guidance benefits by approximately 2%.

Our adjusted effective tax rate for 2018 is now expected to be in the range of 18% to 20%, a decrease of 200 basis points, primarily reflecting recent changes in the U.S. and U.K. tax laws. We are now projecting adjusted diluted earnings per share from continuing operations to be in the range of $3.50 to $3.70, which includes a $0.10 contribution from the TandemLife acquisition and the changes in the tax rate.

The earnings projection includes an impact from foreign currency of negative $0.10 to $0.15. We are reaffirming all other guidance ranges we provided during our last earnings call on February 28.

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

Thanks, Thad. As I mentioned in my initial comments, we started out the year with another good quarter, showing top line growth and solid earnings. We continue to make good progress in many areas of our business, as evidenced by the numerous activity since the beginning of the year: 4 clinical studies, 2 product approvals, the completion of the TandemLife acquisition and the CRM divestiture.

We're improving our gross margin through price discipline, product mix and efficiencies, while also investing in our future. Expanding our pipeline, innovating in next-generation products and funding clinical trials for our growth drivers and strategic portfolio initiatives, which includes TMVR, treatment-resistant depression, obstructive sleep apnea and heart failure. This is an exciting year for both our Cardiac Surgery and Neuromodulation business. In Cardiac Surgery, high single-digit growth in our heart-lung machines is breaking records and vastly surpassing low single-digit market growth. PERCEVAL continues to show strong double-digit growth quarter after quarter and is becoming a much more significant portion of our valve portfolio. We are integrating TandemLife into our Cardiac Surgery business and focusing initially on growing extracorporeal life support and right heart support in U.S. to increase patient care options and access. In Neuromodulation, we are stringing for our SenTiva VNS Therapy system in the U.S. And we are excited to receive CE Mark approval and to now offer SenTiva VNS Therapy systems to patients around the world.

We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. And with that, Sharon, we are ready for questions.

(Operator Instructions) Your first question comes from Raj Denhoy with Jefferies.

Wonder if I could may be start on 2 areas, it's kind of 2 numbers that stood out in the quarter. First on VNS, the U.S. growth, in particular, at 5.9% was a step-down from last quarter. And I think, given where you are in the launch of SenTiva, maybe a little surprising that it wasn't a bit stronger. So maybe you could give us a little more detail around that.

And the second question is around SG&A, a big step-up in SG&A, quite a bit beyond where you're guiding for the full year. So I'm curious about whether there's -- you described it as kind of investing in the business, but is there any, sort of, one timers in that or should we look at this as kind of a new level of spending as the year progresses?

Look, let me go in order there, Raj. So on Neuromod -- look, we are very pleased with how Neuromod going, especially with the progress of SenTiva. I mean, we're in early stages of the launch, both in U.S. and now globally. And at 35% adoption of SenTiva out of the gate, I think is really strong. And I think importantly, this new account acquisition is an important driver for us in the future. We just received the CE Mark and we're really looking forward to rolling that out in the EU. And I think the big marker for us about the future too is we are encouraged by this reduction in the patient age. We know that earlier intervention improves the clinical outcome. And I'm convinced that the SenTiva launch plus the label expansion is really driving the change in behavior there. So we're really encouraged by what we're seeing with Neuro. On SG&A, look, currently this all about phasing. We just reaffirmed guidance for SG&A in our guidance range, with respect to the increase in the quarter, 50%? With FX?

50% related with currency -- currency-related items. As well as, we mentioned that we're investing in DTC and Neuromod as well as our international expansion. We are very comfortable with our full-year guidance, that's why we reaffirmed.

Okay. Maybe just one follow-up, if I could on Neuromodulation. So you mentioned 35% SenTiva, if I'm not mistaken that does have a price premium on it. And I think you do take a price premium early in the year as well. So how does price factor in to this -- the growth you're seeing in the United States?

Yes, on SenTiva, we're still seeing a roughly 5% upgrade for the SenTiva device versus the others. And again, that's why I think this conversion for us is so important and we're looking to continue to drive that. So more to come, I think what this device, as more accounts get the news about the advantages. And as I said, I think coupled with the changes in the indications, we're really encouraged by what we're seeing.

The next question comes from Scott Bardo with Berenberg.

First question, just following on -- from Neuromodulation. I appreciate that the growth is in the straight line here, but you mentioned 35% up your initial system, oldest being SenTiva. My recollection is that somewhat lower than what you saw with AspireSR, which I think was 40%, 45% of new -- of new product shift when it launched. So is the slightly weak growth we see in the quarter here, a reflection of less than desirable launch trajectory for this product? Or put another way, should we expect to see accelerated growth throughout the remainder of the year for Neuromodulation? Perhaps if you can be give some additional color there, please.

Also, on heart valves, obviously, we've seen some -- several years of relatively negative growth here, some encouraging source the last few quarters, but now back into a negative, I appreciate you had quite a large one-off contract manufacturing revenue. So is all of that contract manufacturing revenue now gone and out? And should we expect better performance in heart valves going forward? Perhaps if could give us a feeling for where you towards your $80 million PERCEVAL target for year end, please. Lastly -- should I leave it there and come back for follow-up?

Let me get those 2 and I'll come back and -- with some follow-ups. But the launch trajectory, look, AspireSR was candidly a real breakthrough with the change in the technology there. The seizure response technology was really a step change. And that I think it's what drove a really rapid uptake.

Now, there's some real advantages to SenTiva with the order titration and now also with the pad and the Bluetooth communication with the wand and the whole new software reboot. I think those things are important. But I think the launch trajectory for AspireSR, because it was such a change from the previous generations, really is what drove that -- I don't view this conversion rate as anything but positive and we're continuing, as I said, to have really great discussions with a number of accounts that either had stopped being VNS accounts or had just never implanted VNS in the first place. And I think that's what's really encouraging us. So I think you should be very positive about VNS Therapy and what we're doing. And especially, as we started into the back half of the year, getting into more of the DTC view of the world, I think that's going to help us change behavior.

Heart valves, look, I think you better take out this OEM relationship and it's going to be a full year issue. And I think we tried to signal that in the last quarter. So the results for us were really positive. I mean the PERCEVAL results in quarter were fantastic, and really strong double-digit growth. And the fact that it's now significantly more than the other 2 previous legacy parts of the portfolio, I think, is a really important sign. And we're really encouraged. And we expect to be on an $80 million run rate by the fourth quarter. So I think that's reading through really well.

I'm going to give a little off-piece antidote. There was a country where this week in 1 account, we had 5 PERCEVAL implanted in 1 day and -- which is really phenomenal up -- acceptance of the technology in this 1 account. So we're really, really pleased to see what's going through there. Now, for the follow-ups.

Yes, we'll just follow up on those two points then. $80 million run rate by Q4 is not an $80 million for the full year. So probably slightly below what you're expecting initially, if I understood that correctly.

And just lastly, on the Neuromod. I think at you're Capital Market's Day, you expressed quite a lot of confidence that you can sustain high single-digit, double-digit growth rates in this business. Is that still the expectation? Is that still what you see for this division going forward?

Yes. Yes, we do. We -- like I said, I think, we're really encouraged by what we're seeing in Neuromod. And I think the expansion now internationally with SenTiva is going to be really important. The EU approval, literally, just came through. And I know that Marco and the team are excited about being able to show what they can do there. And we've got lots more work to do in the U.S. So I'm really encouraged by Neuromod and happy to be on the track that we talk about Investor Day.

Got it. And just lastly then, with the progress of the pipeline, which is exciting and good to hear had some progress on the mitral trial, PRELUDE. Is it your expectation? I know there's a large conference coming up in September here that this data will be showcased there. Also, if you can give some feelings of how you're chats with CMS are going for treatment-resistant depression?

We try to have PRELUDE present at all the major interventional cardiology meetings. It's not up to us, it's up to the organizers and the committees that steer the presentations. But we're working hard to be visible at all of those. And we hope that we'll the able to get live at that, but -- we'll let you know, we'll post these things as we get accepted at the various conferences. CMS, again, as we've said before, it's not a statutory requirement to have timelines. What I will say is, I think, we continue to be encouraged by the discussions that we're having with them on treatment-resistant depression. And I think there is a lot of change in the tone, as I've said before, because we are really taking a databased approach to it. So I think also, you'll see our commitment and belief that this is the right technology by opening up the RESTORE-LIFE trial. We wouldn't have made that commitment, unless we really do believe this is making a meaningful difference in patients with TRD. And we're trying to signal to these regulators and payers around the world that we have a strong belief in this technology.

(Operator Instructions) Your next question comes from Matt O'Brien with Piper Jaffray.

Just to the clarification point, either Damien or Thad. The contract manufacturing impact, $2.6 million, did that cost you about 110 basis points on the top line, so you would have been more like 6.4% top line growth, excluding that -- I know you'd expected it, but was that the amount that you'd expected to come out?

Yes, it is -- our growth excluding the OEM impact was roughly 6.7%.

Okay. And then, the same, kind of, clarification question on FX, because I think you mentioned this, but did it cost you about 13% in -- sorry, $0.13 in SG&A in the quarter? And how much of that headwind is going to linger throughout the rest of the year, on the SG&A side specifically?

Yes, I think, the impact on SG&A was about 120 basis points. So the growth rate would have actually been closer to 37%, excluding FX.

Got it. Okay. Super helpful. So there are 2 questions that I do have. The earnings guide going up by about a $0.10, there's a bunch of moving parts here and I was hoping you could just kind of tease out. The gross margin improvement was very good to see in the quarter, how much of the earnings guide increase with gross margin, the extra spend on SG&A plus FX in there and then the tax rate coming down? Just the components will be helpful.

Yes, I mean we very clearly highlighted that we're improving the sales growth because of TandemLife that the fact is that we're pleased that, basically, all other items are coming in within our ranges on gross margin. We were really pleased to see nearly 67% in the quarter. There were some even currency headwinds that we were even delivering against and still getting that results. So we feel good about the guidance we gave on our gross margin. SG&A was higher. But again, if you back out the currency impact, it was a little bit outside the range, but we know that our spending is relatively front-end loaded because of some of the things we're doing with DTC and international expansion, whereas, we're assuming growth will come in higher in the back quarter. So I feel really good about the overall guidance, the tax rate we felt it, given where we landed on tax for the quarter, a 15.7%, we thought that we should bring down the guidance by 200 basis points.

Okay. Yes, that's helpful. Last one for me on the Tandem integration, just any updates on how things are going so far in terms of retaining people and starting to move that technology through your broader distribution network?

We're really encouraged by what's going on. We have one of our key guys there, leading the integration. So Alex has moved to Pittsburgh to work with the team, to bring them on board, and Travis who was Chief Operating Officer has stayed on as the GM of that business. And we're working through to integrate that into our cardiac business. We've had a number of meetings that what you'd expect around the executive leadership there, but also between their sales force and our sales force. And one of the early kickoff meetings in week 1 was with the 2 sales forces, learning about territory planning and how we'll do lead generation.

And I think, we're really off to a good start. I think that people see a lot of opportunity by collaborating. And so we're really excited about this. And we're continuing to focus not only on the growth in the U.S., but also their pipeline development and getting the next-gen product out. So all around, I'm really happy with how this is going.

Your next question comes from Jason Mills with Canaccord Genuity.

So we just want to follow up on a few questions asked earlier, Damien. Starting with Caisson, congratulations on getting that back into the clinic, it's terrific. Perhaps, if you can give us a bit of a medium-term view on what comes next after PRELUDE, both from a European and U.S. perspective, as you look at clinical trial strategies in both geographies?

Yes, so look -- I'd love that the team were able to execute on what they promised here and get back into recruiting. Literally, the day after we received the approval, we were back in all of the IRBs, with submissions. So I think the team really did a great job in getting live there. And we're recruiting again.

So our PRELUDE is 20 patients, we're expecting some time in Q3 to be done be with that. We started on the INTERLUDE trial. We're going to really start focusing our efforts now on cranking the INTERLUDE and pushing that for CE. And then, after that is the [ENSEMBLE]trial, which is U.S. FDA pivotal. We believe that number of patients there is rounded up 400. And so, look, I think all around, the team, they are continuing to execute well. I think the single biggest thing now is to finish all of these IBR approvals and get more patients done.

Let me follow up on that with respect to the CE Mark and U.S. trials, specifically, INTERLUDE trial. Are the parameters exclusion, inclusion criteria, et cetera stepping stone at this point? Or are there -- is there a potential for the continuing negotiation with respect to a number of patients and inclusion, exclusion endpoints et cetera? I'm just wondering, if that's locked as a trial design or if there is potential movement in that?

INTERLUDE is done, because we're already recruiting for that. The [ENSEMBLE] is not. That's still a discussion.

Sorry, I got the names wrong. [ENSEMBLE] is what I meant.

Yes, I guess, a little hard names for all of these things. Yes, so [ENSEMBLE] is not locked, but INTERLUDE is.

Okay, so when will you will expect to have some details on [ENSEMBLE]Boris?

Yes, Look, I -- well, I think, once we get the PRELUDE done and we're through the feasibility, then we'll really open up the discussions about the what next with the FDA.

Okay, great. And just a few additional (inaudible) to get back in queue. With respect to U.S. Neuromodulation, sort of following up on a couple of questions earlier. You mentioned 35% conversion at a 5% premium, 5% growth rate in the quarter. So am I right to estimate that about 2% out of the 5% of the growth for the U.S. business was priced? And then, with respect to the unit growth, I'm wondering if you could tease out replacement growth and new implant growth for us?

Yes, why don't we take that us a follow-up with you. And we'll pass that out a little bit.

Okay, no problem. And then lastly, HLM is really cranking, and you've been telling us that, that's going to happen, so congratulations on that. I'm just wondering sort of if you use the baseball analogy, what inning are you in with respect to the new product cycle and the momentum we have there?

I've lived in America for 15 years, now. I actually understand that. Look, I'd say -- well, we're probably in like the fifth inning on -- Thad is giving me the thumbs up, because he understands more about baseball. So I'd say, we're about the fifth with that. I think -- look, we got really great visibility for another couple of years on the conversions. And that's also why we're focusing so much on the next-gen HLM, and getting Polaris developed in and out. So I think we will continue to see growth. And a lot of this is subject to phasing. It's a capital equipment. There's tenders. There's contracting, but we are continuing to see a really strong demand for this. And I will say, I give a lot of credit to the sales teams around the world who've really leaned into this idea of funnel management. It was a new methodology, but it's really reading through. And next is to start using that confidence and skill set to start applying it through oxygenators.

Yes, I think it's a really fantastic example of really driving accountability, driving the focus on the funnel and delivering results that we brought to the team. And I think, we're seeing in HLM, that's going to continue. I think with PERCEVAL, we are seeing great momentum. So again, really driving great account penetration and sales.

(Operator Instructions) Your next question comes from Mike Matson with Needham.

I guess, I just wanted to start with the recent news that Medtronic's deep brain stimulator got an FDA approval for epilepsy. So how big of a competitive threat is that to your VNS technology?

Yes. So look, great question, Mike. Here's the thing from my point of view. First of all I think anything that raises the awareness of treatment-resistant epilepsy is a good thing. We've been battling this area and trying to get people to understand that more drugs isn't necessarily the answer and having Medtronic valid basis, this is a relevant market is tremendous in my opinion.

Having said that, we believe VNS is a much more elegant and significantly less invasive option. I think that's something that's very important to us. The comparison between trials are always hard. We believe VNS is more efficacious. The gold standard here is response rate. VNS is 65% at 5 years. Honestly, it's hard to compare with the DBS pathway here is, because I didn't publish that result. So that's something that I hope that they get to visible with. So the DBS is very invasive with bilateral surgery. It's got a short battery life. It's not responsive. The side effects are pretty well known here, including infection. So we like the fact that we have a more elegant solution. And we like the fact that people are going to be talking about this.

Okay. And then just with regards to the drag in the Heart valve's business from this contract manufacturing headwinds. So how long is that going to last, I mean, the $2.6 million that we saw this quarter, should we expect that to continue at that kind of range over the next few quarters?

Yes, it's -- it would be a very similar amount by quarter. And it's just for this year. We have highlighted... correct, and we have highlighted the impact on first half growth of Heart valves as being negatively impacted -- sorry, as PERCEVAL continues to grow, we think back half, we'll be back to a growth position, despite this impact.

Okay. And then, just with regards to TandemLife, now that you've closed the deal, how do you -- or how are you going to integrate their sales team with your existing, I guess, cardiopulmonary sales team or teams? I mean is it going to be a single team selling all the products? Are you going to have a separate team for the TandemLife products?

Yes, great question. One of the important things in our preacquisition discussions. What we're going to do have their specialists sales force tuck in to our regional sales structure. So you are a TandemLife rep, with a sales manager that comes from LivaNova and you have partners in that sales team who work from the cardiac group. So it's a regional structure and we think that this really builds the bonds and in terms of approaching account as a key account. And it's a much more customer intimate model than keeping a separate sales force. And we intend to add the TandemLife -- add to the TandemLife pool as we get to know this more and figure out where the real opportunities are.

Okay, great. And then my final question, which is with regards to ImThera. We've seen their competitor, Inspire Medical, filed an S-1 now. So for more visibility in the kind of what they're doing in revenue, et cetera, so have you -- when you look at that S-1 -- assuming that you've looked at it, I mean -- Was there anything in there that surprised you about that business relative to what you had thought about that market opportunity and so forth?

There's a few things that surprised me, but I won't talk about them publicly. We -- look, here's the thing, we continue to really believe that this is a great therapeutic area. We liked the fact that this market being validated in a public market. We just acquired ImThera, so we are still getting to work through the supply chain and the clinical and the commercial capabilities. But we think this is a great therapeutic area.

Next question comes from Scott Bardo with Berenberg.

Yes. Great to see the tax rate -- underlying tax rate come down. Just wondered if you could comment on the sustainability of that, is that something you expect over the full cost period? And because it appears to be cash relevant, I'm somewhat surprised that your cash flow guidance hasn't changed at all. So maybe you can just give us some feeling, actually, as to why that doesn't trickle all the way down to your operating cash guidance.

Also, just like to comment a little bit on oxygenators, if possible. I think again, at your Capital Market's, there's a lot of discussion about expanding your market position, leveraging your installed base, and that seems to be doing quite well on the installed base side. But what is the dynamic with oxygenators? Is there any sort of light at the end of the tunnel to accelerate growth in that important and more predictable side of the business?

Yes, so on the -- I'll take the tax and cash flow comments. Clearly, we do think it is sustainable. We certainly -- that's one of the key reasons why we bought the guidance down on the tax rate. There are a number of factors why we didn't take it exactly the 16% in terms of being the kind of level of international profitability that fluctuates. There's always some uncertainty in terms of the impact on tax reform. But we feel really good about the 18% to 20% guidance that we provided.

To your point on cash flow, clearly, it's early in the year, we did discuss whether we adjust the cash flow guidance. The tax impact in some of the real benefits on the cash flow come next year as we paid out the 2018 tax. So that's one of the reasons why we didn't adjust at this point in time. Cash flow is really important to me, and clearly, it's something that we're focusing on and working capital. So I'm hopeful that as we go through the year that we'll provide updates on improvements in cash flow. But at this point in the year, we chose not to adjust the ranges on guidance.

And oxygenators, here's the thing. I'm a big believer of understanding stretch versus strain with organization and how much change you throw at them in one go. Candidly, I think the cardiac team has really done well to get on board with the funnel management methodology for heart-lung machines. The other -- the counterparts in PERCEVAL team have really done a great job getting into this PERCEVAL account planning, methodology and going after what we've talked to you about before. which is average daily unit.

So the discussion around oxygenators that we had is really what's next. And that's starting to ramp. I mean if I look at the account wins in the U.S. in the last 3 months we're are really pleased with how's that starting to ramp, and we're tracking wins and losses. And I'm pleased now that we are starting to be able to lean into that, but for me it's just a capacity for change. And that's the next thing that we're going to really work on.

Maybe just one last one please. I saw that CMS discontinuing the NTAP, sort of, more favorable pricing environment for PERCEVAL as of February 2019. Is that a headache for your plans for adoption in North America or perhaps you can share some thoughts there?

Honestly, from our point of view, it's a little annoying that, they changed the time line, but it really doesn't change our commitments and belief that PERCEVAL will continue to grow like it is. When we talk to customers, not many were really taking advantage of NTAP. And so in terms of our view, we don't think it changes the trajectory. But it's a shame to introduce something and then to have it be pulled away like that. I think that inconsistency. It makes it hard for companies to plan and that's been a long ranging discussions with some of the governments around the world about, if you want people to innovate and be consistent, you have to be consistent.

And so that's the message, certainly, I'll be giving at the annual meeting in a few week’s time that this sort of thing isn't what drives innovation. But from our point of view, we don't see any change.

And at this time, I will turn the call over to the presenters.

Okay, well, look -- thank you very much. And we look forward to updating you on our next call. And continuing progression on our plans.

Thank you. We're going to disconnect now. Thank you.

This concludes today's conference call. You may now disconnect.