David Erickson - Vice President-Investor Relations Michael Mussallem - Chairman & Chief Executive Officer Scott Ullem - Chief Financial Officer & Vice President

Rick Wise - Stifel, Nicolaus & Co., Inc. David Lewis - Morgan Stanley & Co. LLC Michael Weinstein - JPMorgan Larry Biegelsen - Wells Fargo Securities LLC David Roman - Goldman Sachs & Co. Jason Mills - Canaccord Genuity, Inc. Raj Denhoy - Jefferies LLC Bruce Nudell - SunTrust Robinson Humphrey Kristen Stewart - Deutsche Bank Matt Miksic - UBS Securities LLC Danielle Antalffy - Leerink Partners LLC Glenn Novarro - RBC Capital Markets LLC

Greetings and welcome to the Edwards Lifesciences Corporation First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over Mr. David Erickson, Vice President of Investor Relations. Thank you, Mr. Erickson. You may now begin.

Welcome and thank you for joining us today. Just after the close of regular trading, we released our first quarter 2016 financial results. During today's call, we'll discuss the results included in the press release and accompanying financial schedules and then use remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO, and Scott Ullem, CFO. Before we begin, I would like to remind you that, during today's call, we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to, financial guidance and current expectations for clinical, regulatory, and commercial matters, as well as therapy trends and foreign currency movements. These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in our press release, our 2015 Annual Report on Form 10-K, and our other SEC filings, all of which are available on our website at edwards.com. Also, as a quick reminder, that when we use the terms underlying, adjusted, and excluding special items, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release and our website. Now I'll turn the call over to Mike Mussallem. Mike?

Thank you, David. Say pardon the sketchiness of my voice. I'm just getting over a cold, but if my voice gives out, I'll ask for Scott to help me out. So let’s jump into it. We are very pleased to report a strong start to 2016 with first quarter sales of $697 million, representing an underlying growth rate of 20%. Significant Transcatheter Heart Valves sales once again drove the majority of this quarter's growth, with solid performance in our core businesses, in particular Critical Care. We are also pleased to report strong bottom-line results while aggressively investing in new therapies that can have meaningful future impact. And most importantly, even more patients are benefiting from our life-saving therapies than ever before. In Transcatheter Heart Valves, global underlying sales were $366 million, up 38% over the prior year. Growth was led by continued strong therapy adoption in the U.S., globally, average selling prices remain stable. In the U.S., underlying THV sales for the quarter were $215 million and grew 64% versus the prior year. Our performance was driven primarily by procedure growth with continue - which continue to exceed our expectations. We saw this growth across both large and small TAVR sites and it was fueled by the recent U.S. launch of SAPIEN 3. We estimate modest share gain also contributed to our results. Following the end of the quarter, at the American College of Cardiology meeting, data from intermediate risk cohorts of two clinical studies were presented. The large randomized PARTNER II trial, which compared to SAPIEN XT Valve to surgery, met its primary endpoint to two years and demonstrated non-inferiority when compared to surgery. The second trial showed that SAPIEN 3 TAVR demonstrated clinical superiority to surgery at one-year on a composite endpoint, and also on individual assessments of all cause mortality and stroke. We are very proud of these robust data and believe they provide powerful evidence in favor of expanding the SAPIEN 3 technology to a broader population of patients with aortic stenosis. We remain on track to submit the final intermediate risk data sets to the FDA in the next couple of weeks. Based on the strength of these data, it’s possible for the approval for the approval to come earlier than expected, although it's difficult to predict regulatory timelines. We are now modeling an approval and launch at the beginning of the fourth quarter. As a reminder, intermediate risk patients continue to be treated with our continued access protocol of the PARTNER II trial, which has been tracking at about $10 million in sales per quarter. This would end as commercial sales begin. Enrollment in our PARTNER III trial began recently. This randomize trial will study SAPIEN 3 in more than 1200 low-risk and enrollment is expected to continue in 2017. We are pleased to receive a Pulmonic indication for SAPIEN XT this quarter. This will allow for the treatment of adult and pediatric patients in the U.S. who suffer from either a narrowed pulmonary valve or regurgitation caused by congenital heart disease. Outside the U.S., underlying THV sales grew 13% driven by ongoing therapy adoption in Europe and Japan. Also our SAPIEN 3 value was approved in the first quarter in Japan and we are currently in the process of training sites on this best-in-class value and preparation for rollout beginning next month. In Europe, we estimate the procedures continue to grow more than 20% in the first quarter compared to last year. We saw a strong growth across most countries and total procedures are becoming more disbursed throughout the region, with other countries growing faster than Germany. Edwards grew at a slower rate, and we estimate our market share decrease as competitors continue to broaden their product offerings. While difficult to estimate, we believe that more recent competitive entrance collectively realized a significant year-over-year growth rate, but account for approximately 15% or so of total procedures. As we previously mentioned, we plan to use our U.S. intermediate risk data to expand our CE Mark indication. These data will be submitted to European regulators in the next few weeks, with the expectation for approval of an expanded label in late 2016 or early 2017. Because some European countries have already been aggressive adopters of TAVR technology, overall, we expect the strong data reported at ACC to have a limited impact on European treatment rates until guidelines are updated, and where applicable, reimbursement is modified to cover the broader label. Our SAPIEN 3 Ultra System is still on track for CE Mark in the fourth quarter of this year. This new system, featuring and on-balloon delivery system and next-generation sheath technology, is expected to enhance ease-of-use, further reduce possible complications, and shorten procedure time. In summary, we continue to believe that TAVR provides an important and compelling therapy option for a large number of untreated elderly patients. Based primarily on the continuing strong therapy adoption of TAVR, we are increasing our 2016 sales guidance by $100 million, to $1.4 billion to $1.6 billion. We now expect our underlying sales growth to exceed 25%. Turning to Surgical Heart Valve Therapy product group, sales for the first quarter were $196 billion, up slightly over last year on an underlying basis. Globally, sales were lifted by an increase in surgical heart valve units, which we believe was primarily driven by greater aortic disease awareness that prompted a larger number of surgical procedures. Our growth was offset by the ongoing exit of non-strategic cannula products. Sales of our premium products contributed to solid heart valve performance across the U.S., Europe, and Japan. Worldwide surgical aortic units grew approximately 7% and global average selling prices saw a slight decline. In Japan, we recently launched our tricuspid surgical valve repair product and have seen strong interest in this therapy. We’ve been in discussion with the FDA regarding approval of our rapid deployment INTUITY Elite Valve and believe we remain on track for a mid-2016 launch in the U.S. Additionally in response to our application for a new technology add-on payment for INTUITY Elite, CMS has expressed concern that the technology may not meet certain eligibility criteria and our team is preparing a formal response. In summary, we are pleased with the strength of our premium surgical heart valve products. We continue to invest in this area and believe that surgery will continue to have a vital role for patients, even as TAVR expands. We are reiterating our 2016 underlying sales growth expectation for the total product group of 3% to 6% as we expect stronger second-half growth from INTUITY Elite launch in the U.S. and a diminishing impact from the exit of non-strategic cannula products. In the Critical Care product group, sales for the quarter were $134 million and grew 9% on an underlying basis. Overall growth for the quarter was strong in our core products and our enhanced surgical recovery program, which once again double-digit underlying sales growth across more – across most regions. Our sales this quarter benefited from the announced discontinuation of our legacy monitor that lifted replacement monitor sales. Our recent investments in U.S. sales resources also stimulated stronger adoption of our market-leading products. Overall, we are pleased with the continued adoption of enhanced surgical recovery and the strengthening of our core products and we continue to expect Critical Care underlying sales growth of 2% to 4% in 2016. Turning to our investments in structural heart initiatives, we continue to make progress on our FORMA system for reducing tricuspid regurgitation and on our CardiAQ Edwards transcatheter mitral valve platform, or TMVR, which we expect to be the first of multiple generations. In our early generation CardiAQ Edwards platform, we are already in the process of implementing several enhancements and we expect clinical updates to be presented later this year. Learnings from our experience in the U.S. early feasibility study now underway have informed our first CE Mark trial called the Relief trial, which is still on track to begin middle of this year. We remain committed to developing this therapy and, although commercialization timelines are still unclear, we continue to believe that innovative structural heart therapies will ultimately benefit patients with mitral valve disease, who aren’t well served today. And with that, let me turn the call over to Scott.

Thanks, Mike. This quarter our underlying sales were $696 million and grew 20% on an underlying basis, which exceeded our expectations for two reasons. First, strong THV sales drove performance to the top end of our guidance range, and second, strengthening foreign currencies since last quarter's guidance, contributed over $10 million. Reported sales, including the effects of foreign-exchange and the sales return reserve grew 18%, to $697 million. We have made strategic decisions about how to utilize savings from the two-year suspension of the medical device excise tax. The suspension provided us flexibility to reinvest in research and development, for example, by accelerating investments in structural heart initiatives. We also made a special $5 million contribution to the Edwards Lifesciences Foundation, in support of the Every Heartbeat Matters initiative. This initiative is focused on addressing the global burden of heart valve disease in underserved people. The $5 million contribution is reflected in the Other expense line of our income statement. Adjusted earnings per share in the quarter grew 25% versus prior-year to $0.71, primarily driven by our THV sales performance and reflects solid leverage. This growth was partially offset by the unfavorable impact of foreign-exchange, increased research and development investments, and our charitable contribution. I'll now cover the details behind our results, including guidance for the remainder of the year. For the quarter, our gross profit margin was 74.1%, compared to 77% in the same period last year. This decrease, which we expected, was driven primarily by the foreign-exchange impact from inventory sold internationally and higher spending in our global manufacturing operations, partially offset by a more profitable product mix. To accommodate our increased sales demand going forward, we are investing in manufacturing capacity, which will negatively impact our gross profit margin for the remainder of 2016. Combined with a lower than expected benefit from FX contracts, we now expect our full-year gross profit rate, excluding special items, to be between 73% and 74%. First quarter selling, general and administrative expenses increased 5% over the prior year to $213 million or 30.5% of sales. This increase was driven primarily by sales and marketing expenses related to transcatheter valves and personnel-related expenses. This was partially offset by the suspension of the medical device excise tax, as well as the favorable FX impact on our expenses outside the U.S. We continue to expect SG&A, excluding special items, to be between 30% and 32% of sales for the full-year. Research and development investments in the quarter increased 19% over the prior-year to $102 million or 14.7% of sales. This increase was primarily the result of continued investments in our transcatheter mitral and aortic valve programs and a lower than normal spend in the prior-year quarter. The suspension of the medical device excise tax provided additional flexibility to accelerate investments in structural heart initiatives this quarter. We continue to expect our research and development investments, excluding special items, to be approximately 16% of sales for the full-year. During the first quarter, we recorded $12.2 million in intellectual property-related expenses, which have been excluded from adjusted earnings per share. The expenses include the resolution of an IT matter and expenses related to ongoing litigation against Neovasc in the United States, and with Boston Scientific, where we now have multiple litigation matters in the U.S. and Europe. Our reported tax rate for the quarter was 22%, down from 24.1% in the prior year period. This decrease was driven largely by our manufacturing sourcing strategy. We now expect our full-year tax rate, excluding special items, to be between 22% and 23%. Foreign-exchange rates decreased first quarter sales by $9 million compared to the prior year. At current rates, which have been volatile, we now estimate minimal impact to full-year 2016 sales, compared to the prior year. This is $55 million less than the impact we estimated last quarter. Compared to our February guidance, foreign-exchange rates had less than a $0.01 impact on earnings per share in the first quarter. Free cash flow generated during the quarter was $79 million. We define this as cash flow from operating activities of $107 million less capital spending of $28 million. Turning to the balance sheet. At the end of the quarter, we had cash, cash and equivalents, and short-term investments of approximately $950 million. Total debt was approximately $600 million. In February 2016, we entered into accelerated share repurchase agreements for $325 million. Upon entering into the agreements, we received and retired an initial delivery of 3.2 million shares. As a result, average shares outstanding during the quarter declined to $218 million. We continue to expect average diluted shares outstanding for 2016 of $216 million to $220 million. Turning to our 2016 guidance. We now expect full-year sales to be between $2.7 billion and $3 billion, an increase from last quarter's guidance of more than $100 million at the midpoint of the range. This increase reflects an anticipated $55 million of improvements from foreign-exchange, as well as higher expectations for THV, as a result of strong momentum in the first quarter, the strength of the PARTNER II presented at ACC, and a planned earlier U.S. indication expansion for SAPIEN 3. We now expect THV sales of $1.4 billion to $1.6 billion. Our sales guidance for surgical heart valves in Critical Care remain unchanged. We continue to expect sales for surgical heart valves within the range of $780 million to $820 million and for Critical Care within the range of $510 million to $550 million. With today's increase in sales guidance, we now expect our adjusted earnings per share to be between $2.67, $2.77. We expect the earnings per share drop through of today's sales guidance increase to be lower than last quarter's, due to a lower benefit from foreign-exchange contracts, increased performance-based compensation, and increased expenses associated with the expansion of manufacturing capacity. For the second quarter of 2016 at current foreign-exchange we project sales to be between $700 million and $740 million and adjusted earnings per share to be between $0.67 and $0.73. Finally for full-year 2016, given our expected improved operating performance. We now expect free cash flow excluding special items to be between $500 million and $600 million. So with that I'll hand it back to Mike.

Thanks Scott. In conclusion, our strong start to 2016 positions us well for another successful year. We’re enthusiastic about the continued expansion of transcatheter based therapies for the many structural heart patients still in need, and we are confident in our outlook for strong sales growth and we remain passionate about developing impactful therapies to help more patients around the world. And with that, I'll turn it back over to David.

Thank you, Mike. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions please reenter the queue and will answer as many as we can during the remainder of the hour. Operator, we are ready for questions please.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Rick Wise of Stifel. Please go ahead.

Good evening, Mike and congrats another terrific quarter. I guess for question one you are going to submit the final intermediate risk data soon to FDA. Are you know thinking potential approval at the start of the fourth quarter. Can you talk just a little more have you had any dialogue with the FDA and approval does come earlier as I think everybody would hope that would. How quickly could you be ready to fully rollout intermediate risk program or you be ready instantly I mean obviously products approved.

Yes. Yes, thanks Rick. Appreciate it. Yes, it's tough to predict the FDA. What we've said is for modeling purposes to assume an October 1st launch that's what's in our guidance estimates and you can take it from there; of course we're talking FDA all the time and we don't get into the specifics of that, but one of things that you should be aware of is that old out of second - one of the things to be thinking about here is that when you say they're going to give us the approval early excuse me sorry Rick I'm just I am composing myself here voice back.

Take you time.

So the approval is likely to come. I think as we suggest that it's tough to know we have regular dialogue with the FDA about it. Remember that this is a product that's already approved and in the hands of hospitals. So given that that's the case this is only an indication expansion. We will be training our team and our sites on how to handle that to make sure that they indicate the proper patients for this, but other that we expect to be ready for the launch. With big production increase of course that's a bit of a strain on our manufacturing operations but we expect to be able to handle all that. Thanks.

And just one follow-up for Scott if I could, Scott maybe a talk little more about the inventory drag, because of the OUS inventory when does it run off and when will be manufacturing investments realize and maybe gross margin expansion benefit. Thanks.

Sure. So it's actually not its inventories outside of the U.S. that have been replaced by. higher value inventories with the strengthening of the U.S. to higher value inventories with the strengthening of the U.S. dollar. So we call last year in 2015 we had protection as foreign currencies weakened and so our gross profit margin rate was higher than it would have otherwise been now that we've depleted those inventories and they’re being replaced by U.S. dollar denominated inventories, we’re now seeing that come through in our lower gross margin. And just to give you some detail on that our gross margin was about 290 basis points lower, 380 basis points of that was related to this inventory phenomenon. There was another 70 basis points reduction from operations including some manufacturing capacity expansion. And then the mix improvement helped gross margin by about 200 basis points.

Thank you.

Thank you. The next question is from David Lewis of Morgan Stanley. Please go ahead.

Good afternoon. Maybe two questions, maybe one for Mike and then give Mike a rest and give one for Scott. But Mike just thinking about revenue guidance for the remainder of the year. You know I think I guess the first question is, have you seen any appreciable change in the market sort of post ACC. And if you think about the guidance, which obviously was raised it again. It still implies some of the deceleration into the back half of the year. Is there anything, we should be thinking about other than the difficult timeline of the FDA approval. And I have a quick one for Scott.

Yes. Thanks David. I’m not sure that we could say we really saw anything change post ACC. I mean think about for a quarter we just reported it’s the 64% growth and we said the bulk of that is a growing market. So the U.S. market is growing fast and it’s tough to pick out whether it's changed very much. When we say that there is a pick up, when we added a $100 million to transcatheter heart valves, there was - there is several things in there some of that includes the earlier FDA. But also we do expect that the momentum coming out of Q1 and just a positive data out of ACC also contributed to that. So that’s all rolled into our guidance and that's helpful.

Okay, perfect. And then Scott we’ve come back to the question you've asked several times this is around SG&A. And you know the gap between SG&A and revenue growth widened again this quarter. I think it was nine points in 2015 and widened again here in the first quarter. I guess what narrows the gap in the near term? Or is it just going to be a lumpy where we see sort of a widening gap between revenue growth and SG&A. During market expansion periods and then sort of the opposite, opposite there after?

Yes, well. David we’re trying carefully to manage growth in SG&A expenses as you know. And so the longer we can do that and the longer we can maintain that difference between growth rate in sales and growth rate in SG&A the better. That said we do have some headwinds coming out in 2016 relating to SG&A and so we're trying to manage through those. But generally we think we're on the right trajectory.

Okay. Thank you very much.

Thank you. The next question is from Mike Weinstein of JPMorgan. Please go ahead. Mr. Weinstein your line is live.

Can you hear me now?

We can hear you.

Perfect, sorry I thought you could hear me the first time, I apologize. Mike sorry to hear you are not sounding so good. But hope you feel better. So, Mike the question people care about most is kind of what's going to change post PARTNER II. And in addition to the feedback that you've gotten from the clinical community. Just number one obviously to the overall results and your thoughts about the treatment of intermediate risk patients. And two the willingness to change treatment patterns or practice patterns prior to the actual FDA label change?

Yeah. Thanks for that. And thanks I actually feel better than I sound. So you know post ACC. There people are obviously feeling very good about, we’ve got an incredible amount of very positive feedback from clinicians and you know much of what they appreciate most, is that they have got this really solid large piece of high quality data that they can rely on for decision making. And I keep hearing that over and over again. I don't know what it changes on day-to-day practice. I think because there's an NCD in place, people try to stay - people try and stay pretty disciplined. But as we know there's not a bright line between high risk patients and intermediate risk patients. And we wonder if in these sort of borderline patients, if these heart teams will decide to say hey borderline patients. If these heart teams will decide to say hey, that’s a good thing I think that person is close enough to the high risk and we would deem it that way. So I would expect some of that to happen, but as I point out, the market is already grown in a pretty healthy pace here and we’ve taken guidance up more, so it tells you about our confidence in the future.

So let me ask just on the guidance update, and Mike can get a rest on this one, but at the $0.10 increase in guidance by incorporate the beat on the quarter relative to say the midpoint of your range, so let’s call out of a – we have $0.04 beat versus the mid-point, so $0.06 increase in guidance for the balance of the year. How much of that is the increase in your TAVR projections and what's the impact from FX versus your guidance after the fourth quarter call? Thanks.

Sure. So in terms of sales TAVR increase is $100 million. In terms of total sales increase, it's about $55 million dollars of FX due to the weaken of the U.S. dollar since February. So in terms of earnings, the benefit of that THV sales growth has fallen through to the bottom line, but it's offset by several different factors, some in cost of sales and some in SG&A. But principally the improvement to the bottom line Mike is due to the THV sales increase.

Okay. And then Scott just left things, so if I look at the incremental operating margin on your revenues this quarter and think about it over the balance of the year. That incremental drop through increases or decreases in your view?

So there is going to be a decrease drop through in the later part of the year, because some things have changed since our first quarter. As we've looked at the incremental boost that we see in the momentum we see in TAVR, we’ve decided to take some pretty aggressive action around increasing our manufacturing capacity. And that I’ll give you couple of specific examples. We are really actively at all of our facilities around the world now, accelerating our recruiting and our hiring, training. We are running significant over time costs and we're also investing in the infrastructure in each of our locations to meet demand. And so these are couple of reasons why we're getting less drop through now than we did in the first quarter. We've also decided to pull forward into 2016 some expenses to start a new Greenfield production facility for valves.

Thank you. And the next question is from Larry Biegelsen of Wells Fargo. Please go ahead.

Good afternoon. Thanks for taking my question and congratulations on a good quarter. Sorry, Mike I have a couple of question for you, I apologies.

Okay.

So the OUS TAVR sales I think were about $150 million up about I think you said 13%. What is the guidance assume for the rest of the year for international TAVR growth and does the intermediate risk data, the Ultra launch later this year I believe and CENTERA launches, CENTERA launches that later next year accelerate that in 2017. So basically my question is how should we think about your OUS TAVR growth going forward and I had a follow-up. Thanks.

Okay, thanks. Larry, we’ve anticipated probability that those OUS growth rates stay relatively consistent for the rest of the year. I mean the good news is here Europe is still growing in our estimation more than 20%, we are seeing nice expansion in Japan, but we don't think that you're going to see a lot of people aggressively treating intermediate risk patients. We've had some people that are already aggressive adopters like in Germany, that probably have already gone to the place where they ignore euro score, focus more on heart team judgment and consider age as a factor when they assess risk. But in the other countries, we believe that they're going to probably wait for the indication expansion for the changing of guidelines and particularly in places where reimbursement exists. That will be a factor because unless reimbursement expands it will limit the expansion. So we're a little conservative about that having any really quick uptake OUS.

But Mike I’m trying to just understand more broadly, your OUS growth has slowed a little bit. And so is where – if we look even beyond 2016 do you think you can accelerate sales again or is it just we get into the lot of big numbers here, where it might be – it's good growth, but it might just kind of saw big numbers here where it might be its good growth but it might just kind of taper off over time.

I think what happened Larry is it probably does flatten to some extent, but where it gets the left is when there is an indication expansion. So for example we get formally got intermediate risk we think that will be a pickup in the growth rate OUS and a matter of fact you know later on when we think when we get lower risk patients that will be another kick-up, but we think that those will happen in kind of steps if you will and that where - we're at a point now where we've had high risk approved for a number of years OUS.

So Mike I am really apologize so I am going to another question, but I hope you understand the spirit of the question but one of the most common questions - the stocks have about 40% year-to-date. After a few good years of performance it’s well appreciated now I think that the intermediate risk data was strong and the opportunities large. So probably the most common question, I get nowadays is why should I buy on the stock now after such a great run. So my question for you is Mike what do you say to investors who don't own the stock today and say you know I missed it all the good news is priced in? Thanks.

Yes, well you know we've indicated Larry that we thank the transcatheter aortic valve market first and foremost. It is more than $5 billion opportunity once you get out. Just a few years from where we are right now. We think that there is more and more evidence to believe that that is real. And we're on a pathway to we think clearly get intermediate risk. Before the end of this year and then just a few years out we'd like to think that we're going to be successful for our low risk trial. I think broadly and this is been consistent over the years. There's been an underestimation of the number of people that don't have their aortic stenosis treated. And those people will continue to come off the sidelines as you have are really effective and safe procedure for them and that's first and foremost. Beyond that we love our core businesses and Surgical Heart Valves and Critical Care we think they're going to grow nicely at above market rates and we've got quite a pipeline filled with really exciting new opportunities that's all be it will have risk, but also have very big market opportunities all of these opportunities to be able to treat structural heart disease with catheter-based technologies. And those are significant each by themselves and will get a chance to play that out. So we're very bullish about our future and even though. We've had a great run. I don't think that we're close to having. All of the potential good things that could happen being reflected in our value.

Larry I’ll add one additional perspective from a financial point of view which is even despite all of the investments we're making to expand the market, expand therapy, development, grow, require capacity to meet demand. We're still getting good P&L leverage and so we expect that the earnings power of this company will continue to improve and we're generating significant cash flow.

Thanks for taking my questions guys.

Thank you. The next question is from David Roman of Goldman Sachs. Please go ahead.

Thank you. Good afternoon. I just want to clarify one of the responses you gave to Larry's dilutive questions on international. When you said growth rates flat now you referring to the rate of growth are you actually expecting your international tabby business to grow to actually to flatten out. Before you see reacceleration from a new indication.

Well, I guess all I was indicating is its already flattening compared to what we had seen in the past. When we tried to be consistent here we've been talking about Europe that’s growing plus 20% so that's pretty substantial growth right. And that's flattened from where it was not long ago that's all it was indicating David.

Okay. So just sort of the rate of growth. And then maybe just a follow-up on your comments around the U.S. market I think as we look back to the February call that is or your view around the strength of the U.S. market maybe turned out to be more related to your own performance to the respect market your game by the time Medtronic report it sounds like your commentary here is similar to what you provided in February? Can you maybe just help us understand now that you have the benefit of looking back over the past several months. How much of this do you think is market share again versus what would appear to be acceleration in market growth from what was reported in the fourth calendar quarter?

You know David we believe that the vast majority of the growth that we enjoy that was procedure your growth. So, broadly that the vast majority of the growth that we enjoy that was procedure growth. So broadly across the market, we say there is some modest share gain in the U.S. But that's really not the principle story.

Okay. And then lastly just on the margin side for Scott I mean understanding that you're pulling forward some of these investments in manufacturing to build out capacity. When do we kind of reach a conclusion on that because the dynamic around favorable product mix would seem like your gross margin should be able to get out of that range it seems stuck in but we just haven't seen that on a reported basis now.

That's a good question. We expect that we get more leverage in cost of sales as some of these remediation investments that we made last year started to roll off. And we are almost through all those remediation activities that were shorter term in nature. But now with this significantly increased expectations around sales and volume requirements we're really having to invest heavily in facilities, capacity and all of the expenses I mentioned earlier around labor. So I'd like to say that that this is all going to go away but I think for the foreseeable future we're going to continue to invest in order to support the top line growth.

Understood. Thank you very much.

Thank you. The next question is from Jason Mills of Canaccord Genuity. Please go ahead.

Thanks, guys for taking the question. I apologize for the background noise. I am traveling. Scott, sticking with the operating leverage question back of the envelope but I’m probably off a little bit here it looks like you are spending taking the opportunity to spend away perhaps as much as 100 to 120 basis points of operating margin this year. That you maybe could have captured vis-à-vis the TAVI upside that are spending in these investments that you’ve talked about it. As you think about moving forward I understand you're not going to give guidance for 2017. Do you start to capture some of that leverage that you're sort of taking away from the business this year vis-à-vis the investments next year or does it take longer than that?

Well, I think we're already capturing it, which is why you're seeing a significant drop through from sales growth into our earnings per share and obviously we want to make that wider and really leverage our scale around these investments that we're making in both gross margin and SG&A. So I won't say that those investments are going to stop and all the sudden we are going to have a materially different P&L. But I will say that we are continuing to get leverage out of these investments and really trying to control growth in expenses as we grow revenue.

Got it. But is it fair to say that you are making investments that otherwise your gross – your operating margin at the top end of the guidance right now looks to be somewhere around 28% would be a 100 and 120 basis points higher. Is that match in the ballpark?

I think maybe I can answer it this way. I think overall operating margins from 2015 to 2016 should go up by around a 100 basis point and so without trying to break it down quarter-by-quarter or by line item SG&A versus R&D that may be one way to get at your question.

Okay. Thank you. And then Mike maybe just as a follow up for you. What did you see in terms of new centers that commenced SAPIEN practices during the quarter whether you want to talk about U.S. or globally and could you also maybe preview for us some things to come at your PCR? Thanks for taking the questions guys. Congrats on a great quarter.

Yes, thanks Jason. Yes, I think what we said before is that we expect around 400 sites, we expect that to increase maybe 10% or 40 sites during 2016. I think we are out of path to do that. So I don't know the precise number for Q1. But I think it's pretty consistent with that sort of a ramp. In terms of PCR I don't know that you're going to see anything like you saw at ACC, where you are going to see those kind of large trials. I'm sure they're going to be a lot of transcatheter heart valve papers and news. But I’m not expecting anything that's major that really is going to cause - really change in terms of behavior at least not in my mind.

Thank you.

Thank you. The next question is from Raj Denhoy of Jefferies. Please go ahead.

Hi, good afternoon. I wonder if I could maybe ask a bit about mitral you gave a little bit of an update in terms of still beginning the trial this year. But also that you're looking to make some changes to the valves of CardiAQ Valve and I'm just curious in the last few months, if your thoughts have changed really on the timing or how long it will take to get a viable valve to market?

Yeah, thanks Raj. I have to say going into this year I would consider it a major victory, if we could stay on path to begin a CE Mark trial by midyear and I was always pleased to report that we're actually doing that. There's an awful lot that goes on behind the scenes as we try to indicate. We're implementing a number of enhancements to that CardiAQ platform is really one of our earliest versions of this transcatheter valve. But we still have a lot to learn, so we're going to be jumping in this trial, we are enthusiastic about getting into the trial, but we have to admit we're on a steep learning curve and we're putting a priority. I’m getting that clinical experience because as we get that it gives us so much more guidance in terms of how we ought to be running the program. So as we try to say a lot of uncertainty and timelines at this point because of – because how early it is with these programs, but we're pleased with where we are right now.

Okay. Maybe I could just ask one about Europe as well, you did mention competition remains so easy even getting worse there in pricing, seems like it's getting worse as well. Maybe you could just offer a bit about how you are doing in that environment for a while when [indiscernible] commanded a premium or still is able to hold a premium price in a lot of European markets. Is that still the case, do you expect you're going to have to start to concede a bit on price in order to hold share there. Maybe some thoughts about the European market would be helpful?

Yes. Well thanks for that. Yes. What I tried to indicate in the prepared remarks Raj was we indicated that the newer entrants, we estimated that and it's really hard to estimate because there is not any really good external source, so we pieced together a lot of things, but we estimate that somewhere in the neighborhood of 15% of that European share that these competitors would have. I think when we reported that number in Q1 of last year, so year-over-year it was around 10%. So there was about a 5% movement there. That's what I was trying to reflect in my remarks. In terms of how we're behaving, we're really not changing our pricing practices. We have – our pricing has been very stable. We do have some very small downward drift, but that's purely based on volume discounts and it's been consistent with what we've been doing. And we continue to have a substantial price premium versus competitors. I don't know where it is, but it's – our estimate is in the 10% to 20% range.

Great. Thank you.

Thank you. The next question is from Bruce Nudell of SunTrust. Please go ahead.

Good afternoon. Thanks for taking the call. Scott a question for you and then a follow-up to Mike. We did some math today and looked at what you guys have spent on structural heart since the PVT acquisition. It looks like 1.5 billion to 2 billion bucks through 2015, and just could you – just kind of give us how you think about that in the context of ramping up on mitral and tricuspid program and what that means and how you will gate it with regards to either keeping R&D is a constant percent of revenue or keeping the absolute dollar amount in check?

Yes, it's a little bit of both. We are very deliberate and how we stage and sequence investments in these new growth platforms and opportunities. So similar to the development of the SAPIEN platform in the family of valves and we invested significantly on the way in developing clinical evidence, while also investing in actual new product design and we are intended to do the same thing when you look at things like our transcatheter mitral valve program and even form on the tricuspid side. And so our strategy is really unchanged, it's been very disciplined, but also to be long-term oriented in the way we invest in new product technologies and then commercialize those and really generate topline growth that turns into earnings.

I’m just going to just pile out a little bit to your question, when I think about the $1.5 billion I mean part of what encourages us to make that investment as we saw a lot of green lights along the way. And when you see an opportunity that’s significant, then it's what encourages to do that spending. If we didn't see that, obviously we're not obligated to have that kind of sense. So this was sort of incremental spend each step of the way.

Oh sure. And but just looking forward Mike to Europe once again everybody's focused on it. Do you feel that CENTERA or some other product innovation or maybe just the strength of your clinical data and warning able you to kind of whole share in your clinical data we will enable you to kind of the whole share in Europe which is you know pretty robust market still.

Yes, as you point out Bruce, since it's very competitive marketplace there's at least, five or six competitors and we have by far of the strong share leadership we're very proud of that and we expect that to endure over time. And as you say part of the way that we're going to do that is with our new product introductions. So SAPIEN 3 has been fantastic but we're certainly not going to stop there behind that is ultra and then more yet and as you properly point out CENTERA. So we don't intend to stop improving this therapy we think there's still a long way for it to go and we think that's going to separate us. I think it's going to challenge our competitors to be able to keep pace.

Thanks so much.

Thank you. The next question is from Kristen Stewart of Deutsche Bank. Please go ahead.

Hi, thanks for taking my question. If you could just focus on the surgical valve business. or surgical heart valve therapy business and if you could just break out what the impact of discontinued was?

I'll take that Kristen. So recall last year we had guided to $10 to $20 million in total discontinued sales and by the end of last year we had achieved about $15 million of that there's probably another $5 million or so to come in 2016 or more to the tail end of it. It will probably show up most in the first half less in the second half. But that's how the discontinued operations are proceeding.

Just like to $2 million of quarter or so not that significant.

Yes, it's not significant and again it's more first half weighted than second half weighted for the remaining $5 million or so to be discontinued.

Okay. And then more broadly key just maybe speak to different dynamics in the U.S. versus Europe and if you've seen any change in surgical heart valve patterns whether it be in Germany or not just you know growth rates as a transcatheter valve had rolled out waiting you’ve seen thus far in accounts?

Maybe I could make a quick comment here Kristen. So overall I think as we correctly as you pointed out aortic units we're grew great once again this quarter I think was up around 7% and they were up in a combination of U.S., Europe and Japan. So the big geographies are still growing. I think of probably most impacted in Germany but even in Germany the surgical valve business remained robust for us and we feel like the addition of product like INTUITY which we have there help us continue to maintain the growth rate.

Okay. So the reason why that line excess is only growing modestly is that more pricing them should think about it in that contracts?

What's growing modestly I'm sorry.

I'll take it the actual valve business grew about 7% in the first quarter. It was offset by this discontinuation of the non-strategic cannula products. So that the core valve business continues to grow nicely.

In sales dollars?

In sales dollars, yes.

And units, okay.

And you have both its sales and units you know the pricing and surgical valves is generally over the years been stable. So we're seeing still attractive unit volume growth.

Okay perfect. Thank you.

Thank you. The next question is from Matt Miksic of UBS. Please go ahead.

Matt, we are not hearing you.

Can you hear me, okay.

Yes.

Yes, I don't know what happened here to my headset sorry about that. So I had a couple of longer-term questions. Mike if you could just maybe help sketch out how they have their opportunities are folding and what some of these other opportunities might be longer-term. So the first on these category segments of patients that we've talked a lot about high risk intermediate low and how I think most folks yourself included is get out in December talked about. Yes maybe less than 25% high risk and maybe a third is intermediate maybe half as low one. As we get into this you also mentioned that high risk is you know as we're discovering, maybe a bit bigger than we thought - patients coming in or patients are sicker you know they are mid single-digit STS. But they're actually quite sicker – after sicker, they are mid single-digit STS but they're actually quite sicker. Do you see any of that happening here as we get into intermediate risk and could we start seeing kind of a larger front half of the market if you will and maybe an easing back half if you want to think about it that way. And then I had one follow up.

Yes, you know I don't know that this is going to unfold over a matter of months. But if we’ve watched it unfold over a matter of years, I wouldn't be surprised if there is much more life to this Matt. You know we defined people with their [indiscernible] by looking at people that received open heart surgery to have their valve replaced. And now that we have this catheter based option, we learn that there is many more patients out there and we're still learning that it's a disease that is under diagnosed and in many cases even when it is diagnosed it’s under treated. And so we're still on a steep learning curve there. We think that that could go on for a while and we're still continuing to find up sides if you will that could be very meaningful. I think the key is for us to have a very safe procedure, you know when we talk about this you know the past notions were you had to have severe aortic stenosis and symptoms. I think everything will be challenged in the future when you have a procedure that's you know under 1% mortality and 1% stroke at 30 days it starts getting interesting to say what should be my course of treatment.

And then the - that's helpful. And a follow-up is on this question of durability. Another kind of long term question for the market. And clinicians we have spoken to seems that are increasingly be you know bringing up the idea of valve and valve as the potential answer to long-term durability in much the way it's the answer for surgical tissue valves over time. And just wondering if that's something, we’ll hear more about in terms of your clinical programs or product designs or how you think about that. You know the idea of sort of replacement tab or over the long term being part of this market.

Yes, thanks for that Matt. You know I think as it has been demonstrated valve and valve really is a good option down the road for a number of patients but that's not the way we're really approaching this. We'd really like to demonstrate that transcatheter heart valves and hopefully as we continue to introduce valves, we're able to do this that have them last a long time. We're fortunate to say that now and tens of thousands of patients have been in studies, we really haven’t seen a signal that indicates that structural valve deterioration is an issue. So we're encouraged by that, but we still have a ways for it to play out, but no I don't think that the primary answer is going to be valve and valve. I think that we should be able to develop valves that have some pretty reasonable durability.

Okay. Thank you.

Thank you. The next question is from Danielle Antalffy of Leerink. Please go ahead.

Hey, good afternoon guys. Thanks so much for taking the question and congrats on another great quarter. Mike I was wondering if you could talk a little bit about reimbursement intermediate risk and how you just think about timing for that, what needs to happen on the reimbursement side once we get the FDA approval and whether that might be a barrier to adoption here in the near and medium term?

Thanks Danielle. So the way that the NCD is written with a label change automatically comes a reimbursement. So it's really coverage to label the way the NCD is designed, so if that continues as this we would expect with intermediate risk that accounts can very simply continue to do what they've done in the past. Now in Europe and other regions guidelines are probably have to change first and then remember reimbursement is really managed on a country by country basis. So each country will have to go through that process and that will be what it is. We've been able to manage through that in the past, but we think that to take some time.

Okay. And what about the requirement for you need a surgeon, you need multiple nurses I believe I don’t have any exact numbers, but within the NCD and whether that just from a capacity perspective could be a limiting factor and what you're seeing hospitals do to maybe work around that to increase volumes and take in the increasing number of patients that inevitably will occur with intermediate risk?

That remains the same, we are still operating under the NCD, so if your question will the NCD change that's a different question, we've not request reopening of the NCD. So we'll continue to operate under the same requirements as the current one.

Okay and last question for you on the surgical valve side of things obviously with intermediate risk eventually hopefully a low risk. How do you look at the long-term outlook for the surgical valve business I mean you know we’re talking to some doctors saying 80% of intermediate risk patients will be getting a TAVR within 12 months now that those are high volume docs, but what is the outlook long-term for surgical valves in the context of a growing TAVR market. Thanks so much.

Thanks for that. We think that that will indeed happen that patients with isolated aortic stenosis more and more going to be treated with TAVR instead of surgery. But this is there's still going to be - this will be a slow process low risk is still going to be treated by surgery. And that over time there are a number of things that are underlying trends that cause us to believe that surgical valves will continue to grow. There is an aging global demographics. There is a lot of patients internationally that don't get access to technology today. There are some really exciting surgical innovations coming like INTUITY and more they are still patients getting mechanical valves if you can believe it but I imagine what sources of tissue over time. So there's a number of factors and we're going to help try and fill that. So we're optimistic that we're still going to have a positive growth rate even though there is going to be a very significant move up TAVR into intermediate risk patients.

Thanks so much.

Thank you. The next questions is from Glenn Novarro of RBC Capital Markets. Please go ahead.

Hi, good afternoon guys. Two questions. First has to do with the ability of the U.S. TAVR centers to absorb the influx of intermediate patients. Since ACC we've done a lot of checks in it. It seems like U.S. TAVR centers have been anticipating the intermediate label and have been making plans to expand their capacity, but Mike I just wanted to hear from you have you been hearing consistent type of feedback as you’ve been traveling since ACC and I guess I'm asking just because I want to make sure that you know once the intermediate label is added in the United States we don't start to see bottlenecks it U.S. centers that’s question one. And then question two is you're going to be. We're going to seen any new mitral data at PCR from Edwards. Thank you.

Thanks Glenn. Like you as you know each side has their own unique issue, but we've been really impressed with the ability to hospitals to add capacity and we expect that they're going to continue to do it. Even with the expansion of guidance that we provided for 2016. The capacity increase for an average hospital in the U.S. is relatively small probably less than 10%. So we really don't think that the capacity increase for hospitals are probably a constraint in the near-term and we don't get a lot of signals back from our hospital customers that they're overly concerned about it. They seem to have something in the works in most places. As it relates to mitral valve we don't expect any major clinical updates at Europe PCR and I would guess they'll be some incremental information share, but remember we're in an early feasibility trial. So there's really no major clinical updates to share at this time. I would have thought I cared later in the year.

Okay. Thank you. End of Q&A

Okay well, thanks for your continued interest in Edwards. Scott, David and I welcome any additional questions by telephone. And with that back to you David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call which include underlying growth rates, sales results, excluding currency impacts and amounts adjusted for special items, are included in today's press release and can also be found in the Investor Relations section of our website at edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or area 201-612-7415 and use conference number 13633520. I'll repeat those numbers, 877-660-6853 or 201-612-7415, and the conference number is 13627415 and the conference number is 13633520. Additionally, an audio replay will be available on the Investor Relations section of our website. Thank you.

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