瑞思邁 (RMD) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ResMed Incorporated fourth quarter 2007 and fiscal year end earnings conference call. My name is Rob, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) At this time the Company has asked me to address certain matters. First, ResMed does not authorize the recording of any portion of this conference call for any purpose. Second, during the conference call ResMed may make forward-looking statements such as: projections of future revenue or earnings, new product development or new markets for the Company's products. These statements are made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties exist that could cause actual results to materially differ from forward-looking statements. These factors are discussed in ResMed's SEC filings such as Forms 10Q and 10K which you may access through the Company's website at www.resmed.com. With that said, I would now like to turn the call over to Peter Farrell, Ph.D., ResMed's Chairman and CEO. Doctor Farrell, you may proceed.

Thank you, Rob. As in previous calls, I will quickly summarize the results, make some additional comments, and then throw the call over to Q&A session. Revenue for the quarter was $191.3 million, a 12% increase over the year ago quarter. Pro forma income from operations and net income were $42.4 million and $32.2 million. Pro forma diluted earnings per share were $0.41 compared to the year ago $0.40 a share. GAAP operating income was $36 million while GAAP net income of the year ago quarter was $27.7 million. Respectively $0.35 per diluted share compared with $0.30 per diluted share in the year ago quarter, an increase of 17%, and as noted in the press release, gross margin was maintained at 61.3%. Pro forma SG&A $61.3 million, up 21%. The SG&A expenditures was 32% of revenue compared to 30% in the year ago quarter. As noted, GAAP SG&A was $65.2 million, an increase of 21% over the year ago quarter. GAAP R&D expense was $14.2 million an increase or 7% revenue and an increase of 28%, and going forward we expect to be in the range of 6% to 7% of net revenue on R&D expenditures.

For the year ended June 30, revenue was 17 -- $716.3 million, an increase of 18% over the $607 of the previous -- $607million of the previous year. Pro forma income and pro forma net income were as shown, $174.3 million and $125.8 million or $1.59 per diluted share, an increase of -- increases of 13% and 16% respectively. On a GAAP basis income from operations was $90.2 million while net income for the year ended was $66.3 million or $0.85 per diluted share. Amortization of acquired intangibles stood at $1.8 million. Stock-based compensation was $4.5 million, $3.3 million net of tax. Inventory $157.2 million, comparable to the March 31, '07 levels of $157 million approximately. Accounts receivable or DSOs stood at 77 days, which was up four days from the March 31, '07, quarter.

In the fourth quarter of '07, America's sales increased by 10%. However, if we exclude sales from our motor division, America's sales increased 13% over the year ago quarter, and as noted, the sales growth for the Americas were impacted by two things. We had tough comparables. The year ago quarter we grew by 44%. And obviously the product recall had an impact since this was fully implemented during this quarter just finished time frame. Sales outside of the Americas totaled $92.8 million, an increase of 14% over the year ago quarter. Operating cash flow was an encouraging $27.1 million, and as noted there, we're not happy with the Q4 '07 results, but we had a pretty robust fiscal year, and we certainly remain optimistic about growth going forward. It is noted there that we've done a reorganization. I should stress this has been in the hopper for several months and is not really related to the current quarter. The strategic business units are set up to provide a little bit more focus on our business opportunities.

One of the important things is that the organization, or the reorganization, I should say streamlines management's structure, and it removes one layer of management, and we believe we're going to be far better along with market expansion opportunities particularly as they relate to cardiology, diabetes, occupational health and safety. The leaders of the business units, two of the guys: Don Darkin and Michael Farrell, will be located in the San Diego or Poway offices, while [Stan Jacobson] on the portable ventilators will be -- will remain in Europe, actually Norway, in Oslo. These three guys, Don, Michael and Stan will be responsible for product management in their respective areas working closely with the regional Chief Operating Officers, who will continue to lead our commercial themes, that is Keith Serzen in the Americas, Lasse Beijer in Europe, and Paul Eisen on in Asia Pac.

We -- I have noted there we're also encouraged by the initial response to our nearly launched full face masks, the quarter -- the Quattro and the Liberty. The Quattro is selling extremely well, and the Liberty had a slightly late start because of some reimbursement issues, but the code is through and both these products are meeting and exceeding or I should say exceeding our expectations. And we see continued growth in the adaptive server ventilation area particularly as it relate to say complex sleep apnea, which is gaining significant recognition within the sleep community. In fiscal '08, which we're now into, we're expanding our market opportunity initiatives in cardiology, diabetes, and occupational health and safety, and we're also planning further launch of new masks and flow generators. And I should finally make the point that we remain very optimistic about the organic growth in the years ahead of this sleep space, particularly as traction is gained in these kind morbidities. So with that let me throw the call open to Q&A.

(OPERATOR INSTRUCTIONS) And we'll just pause a moment while questions compile. And your first question is from the line of Joshua Zable of Natexis.

Hey, guys. Thanks very much for taking my call.

Okay, Josh.

Just -- I know you guys were pretty vocal last quarter about the pricing environment and the competitive nature of the landscape out there. Can you talk a little bit about pricing out there, what you're seeing now, if it is improving and just comments?

Right. Well, the pricing terrain that we observed in the previous quarter hasn't really changed, and in terms of the impact on us, there is the -- there was the aggressive sampling as we noted in the previous conference call, aggressive sampling, particularly in the nasal area that is the nasal pillows, if that is the nasal masks, that has not abated. And although the impact on the full face masks has been relatively muted if you like. With respect to devices, our high-end products continued to sell quite robustly. That is the Auto Set Elite and the Auto Set Advantage with the automatic algorithms and auto setting devices, we had double-digit gains in fact in those areas. Where we were impacted or hurt was the lower end of the S8 line, the compact and the escape. They didn't fare as well due to the continued price pressure, so it is the low end of the segment where we're seeing competitive pricing pressure from our competitors. We'll continue to position the higher end of the CPAP line to customers and patients. We also succeeded in differentiating on that basis mainly because of our algorithms -- innovative algorithms and also the full feature sets.

You will be aware, Josh, that we launched the Tango. That was first presented midtrade in the spring, but in the midst of the recall, plus three new mask launches, the previously referred to Quattro, the Liberty and also the Swift 2 didn't get the attention it deserved. And the other aspect is Tango is mainly intended to target large national accounts, and historically the selling cycle there is much longer than with smaller DMAs. So that is really it in a nutshell except I guess I could say a word about the VPAP adaptive server ventilator Adapt SV. We're seeing really strong cells in that area and more clinicians are becoming aware of complex sleep apnea and also the capabilities of our technology in this area really is the cat's meow in that space. And just competing on the sleep meeting in June, a year ago June, that is in '06, the topic of complex sleep apnea wasn't even on physician's radar screens. And if we asked, we would get roughly 25% to 30% of U.S. sleep labs are not only aware of complex sleep apnea, they have at least one Adapt servo ventilator titration device installed in their labs. And we remain pretty optimistic about that. So I better stop there otherwise I will be -- nobody else will get a look in.

And then just one more followup. I don't know, I am sure you won't quantify, but maybe you can give us an idea, obviously the recall probably had more of an effect early on in the quarter than later in the quarter. Can you give us an idea of if your sales stepped up and maybe grew faster than market growth later on as opposed to early on?

Well, I -- we haven't drilled down into that area at all. I mean, unless somebody wants to make a comment there, maybe Keith Serzen, if you're there, or Kieran. I am not aware of any numbers that we've actually tried to piece out there. Perhaps not a bad committee but Kieran or Keith?

Peter. This is Keith. I will take the question. Josh, the recall during the first couple months of the quarter took a significant amount of focus from the salesforce as they had to explain and position what the recall meant to their customers and how we were going to handle it, and introduce them to the third party logistical company that was going to handle it. During the last month of the quarter was salesforce was able to focus on driving the business again, and reflected in the numbers in a positive way during the last month of the quarter. But Josh is right. We did have some distraction from the recall in the early part of the quarter. We believed that that is now minimized. There will certainly be some continuation over the course of the next year. We believe this recall will be with us for the better part of 2008, with some level of involvement from the salesforce, but at a much, much lower level than was for the first 60 days of the quarter.

Okay. Then just on a go-forward basis I know you guys don't provide formal guidance you generally maintain the stance that you think you can grow faster than the market. Do you still feel confident you can do this?

Well, it's in the lap of the gods, if you like. I think we've -- in the last two quarters as we noted and I noted in this call we're coming off very tough comparables, and in the Americas, heck, we're up 44%. The other holdover is the ResMed motor technology division, RMT. For example, in Q4 '06 the motor division sales external to RMT were 2.5 -- a shade over $2.5 million. This quarter we did as I noted a couple quarters ago we've stopped doing external sales because they're low margin and not critical to us going forward. We want to use the motors for our own products. That was $100,000. So there was a gap of $2.4 million. Now if we look going forward, we've got another couple of quarters of RMT external sales. I don't have the numbers right in front of me, but I know Q1 '07, it was to the order of $2.1 million, Brett, if that's correct.

Yes, Peter. If you look at Q1 going forward or this quarter FY '08, Q1 is rammed up $2.1 million and a bit in Q2 and started to drop off. So we'll still have that impact in Q1 and Q2 for example, and even the comps running through Q1, Q2 is we're still growing much quicker than the market last year, so I expect over the course of the year --

And I guess, yes, sorry, Brett, I think to summarize, this quarter, the next quarter, reasonably challenging. The comparables whilst nothing like what we experience in Q3, Q4, are still there, and there is the holdovers as Brett's just indicated of a couple of million this quarter and a shade over $1 million between $1 million and $2 million for Q2 '08, but we remain confident with particularly with the reorganization, the streamlining of our marketing activities. This is a very, very healthy business, and as we already noted, there is the recall issue which Keith just referred to. I think the impact of that, the measure impact of that is behind us. Obviously, it doesn't go away immediately, but we're feeling pretty confident about that, Stericycle's sell doing a good job. In the U.S. we've handled roughly through or DMEs and that's been a distraction about two-thirds of the product come through us in the DMEs and one third through Stericycle. You get better at these things and the distraction level is less. We remain confident about the growth of this market, and we'll be there.

Great. I will let someone else get some questions in?

Okay, Josh.

Your next question is from the line of Ben Andrew of William Blair.

Good afternoon, Peter.

Ben, how are you?

Very well, thank you.

Good.

Looking at the gross margin side, is that really a function or maybe Brett can answer this, to break down the impact of currency because the Aussie dollar's have been weak, but is that mainly just the low-end generators and your need to respond on the nasal pillow side or is there something else going on there?

You mean the size of the gross margin -- the 61.3%? I think we're reasonably happy with that. I think what it shows, Ben, primarily is that we're not -- we're walking away from some business. It is just the way it is. We just don't think it is healthy, and as I indicated, it was mainly in the compact escape end of the S8 lane as opposed to the Auto Set and the Elite. Clearly we went some of the way along there, you can see with the DSOs increasing by three or four days. We sort of focused on some credit terms, but we certainly won't take -- weren't taking a hair cut on pricing. So if you're asking about gross margin going forward, I guess we would be comfortable in the 60% to 62% range, and I am not sure I can answer any better than that.

Ben, it's Brett. We're pretty comfortable and pretty happy with the margin where it is. I think it is a pretty good margin for the group. In terms of currency, you're right, we do have a negative impact from the Aussie dollar depreciating. Obviously, we've got labor and overhead which is denominated in Aussie dollars, so the impact there. And keep in mind with the strengthening Euro against the U.S., that that will actually benefit us even at the margin level, so that to a large extent will necessity negate the Aussie impact. But there is, if you look at -- there's a small negative against us on the margin, but it is not neither can at least the currency at the level clearly the os sigh continuing on there about a different story, but at these levels. Clear the Aussie continuing on, it would be a different story, but at these levels it is manageable.

Okay. And Peter, qualitatively, as you think about the generator market going forward, we've assumed that we would see perhaps significant price pressure at the low end and maybe you walk away from more of that business. Do you see the market shifting towards the mid and high-end where obviously you're more competitive with your product offerings and is that something that you're counting on then to sustain your volume growth?

Well, counting on is -- I think it is safe to say we're optimistic, and we're seeing some changes in the market. What we've been pushing, and it is not just the last couple of quarters, we've been pushing for the last couple years, and that's compliance and trying to get the market to get comfortable with looking at the whole area as an annuity stream. In other words, everybody loses if we don't get compliance. And as we tease through the numbers and look at what we're seeing with reordering, the numbers are pretty encouraging. I mean, it's -- in other words, patients already establish odd treatment, once you get compliance, you do see this annuity kicking in, and we're -- our numbers show in that particular space if we tease it up, we're up 100% or so in this reordering of patients already on treatment. And so I think as the bigger guys, even the small DMEs see this, we're going to see why save -- why look at saving $50 or even $100 on the initial order of a device with a mask, a complete set up system if it got an annuity stream going forward with better compliance. Now, that's part of the sales guys efforts to do this, and I guess I can throw it to maybe have Keith Serzen make a comment there, but we're seeing some really encouraging growth in reordering patterns. Keith, is that a fair comment?

Yes, Peter, that's a very fair comment. Many of our customers have recognized the opportunity with the annuity stream. They've put in call centers and are and are driving compliance and picking up a message as you said we've been driving for the last couple years, and in fact now getting ahead of that message. We're very, very pleased with the reordering patterns.

I guess what I am getting at is, Peter, you say you're walking away from business at a certain price. What chunk of the market do you think that may represent? And is that a dynamic you expect to continue going forward?

Well, we've -- I made a comment about the Tango, and clearly that was meant to, if you like, come as a blocking strategy, and the launch of the Tango was not as encouraging as we initially expected. I didn't refer to the long sales cycle. Ben, I think it is early days on the Tango. What we saw was the numbers were not as encouraging as we initially hoped they would be. It is really a great product. The performance of the device is excellent. We initially found challenges. That has changed a little bit. We're seeing a bit of an uptick in sales there. I refer to the longer sales cycle again, and I think why don't I just drag Keith back in and let him comment, because this was something that I was looking at fairly carefully. In fact, Kieran and I were both looking at it fairly carefully, and we were disappointed initially, and then we've seen some more encouraging signs. So early days, but we remain cautiously optimistic about that, and, Keith, maybe you can add more flavor to that.

So, Peter, I guess what I would add to that is we have always been a high-end technology driven company, a high-end technology driven salesforce, and that's where we will continue to drive our efforts. The Tango was an opportunity for to us get into the value segment of the market, and it is consistent. It's business has been that we have walked away from in the past, and I think that's the linkage you want to make with Peter's comments. We've had a pattern of walking away from the low end of the business, so there is really nothing new here. The Tango provides us an opportunity to gain market share where we didn't have an opportunity to play before. And as we come to stride with that product, which we're beginning to do now, that will open up portions of the market that we hadn't had a chance to play in before. And we're excited about that, but we continue to drive the market, towards the higher end towards the higher profit, towards the higher revenue generating ends of our technology spectrum.

Last question. I am sorry, Peter.

Well, Ben, you asked about what the percentage was, and I am just taking a stab at this, but the low end probably constitutes two thirds to 70% leaving the market leading the higher end around 30%, 35% and I don't know if you have a better number on that, Keith.

Peter, I think in all of our presentations we talk about the low end, what we call the value seem of the market being in the 20% to 25% kind of range, and then the --

Yes. Well, that's the CMS. I am just taking it out to into hybrids and so forth, and in other words into the compact escape, etc., not just the CMS business, and maybe I am at the higher end. But as a rough number, 50/50 maybe is if you look at the whole broad market.

Okay. And then last question maybe for Brett, what happened in SG&A and R&D this quarter is a bit higher than we were expecting? Were there any exceptional items there or some other change?

No. Ben, it is Brett. It is probably running a little bit hotter with some of the translation impact of the currencies, the Australian dollar and the Euro appreciating has probably added some in. If you look at SG&A, for example, the currency impact is around $3 million for the quarter. So if you strip that out, you would have SG&A running at roughly the 15% mark, which is not unusual for us to be running around those levels. So we have had some impact there with currencies running through those numbers. Clearly at the top line you get some of that power wind as well, but obviously it is a head wind for you down in the SG&A and the R&D level as well, where most of that is did he nominated in Aussie dollars, so we have had headwinds in currency on suppose spend categories.

Okay. Thank you.

And your next question comes from the line of Tim Lee of Caris & Company.

Hey. Good afternoon.

Hi, Tim.

Just wanted to follow up on the SG&A question here. If there was an FX impact, we should assume a higher level here for the next couple of quarters, and how do we think about your comments regarding the expanding your market development efforts into cardiology, diabetes and occupational health? Should we see a different cost layered on top of that to fund those programs, or if you can just kind of provide me a frame on that front, please?

Well, let me take your last question first. We've -- it is a bit early to comment on that, Tim, because we've just finished a fairly extensive task force where we've looked at the whole area of sleep disorder breathing and how we as a company can take it there. We've had an external person chair that task force with some internal people on it, and the whole focus is market development, and we've asked the task force to take a good hard look at cardiology, diabetes, occupational health and safety and anesthesiology and also portable ventilation or home-based ventilation. That report hasn't come in. We've had some head's up, if you like. We don't know what the recommendation is going to be in terms of expenditure to really accelerate and get traction in those areas. So I guess from our point of view at the moment it is -- we've certainly talked internally about how we can accelerate some of this activity. In fact, we spent quite a bit of time on that, but we're not really in a position to talk about solid numbers and whether it -- but if that were to happen, certainly we would be talking about it within the next time frame of the earnings call. And the SG&A, I guess over to you, Brett.

Yes. At the moment if you look at it on a pure GAAP basis, SG&A is running around 34% of revenue, and our expectation would be, given currency moves that happened over the last little while, it would likely to be around that range, at least through the first half of FY '08. The expectation is that will move down as we get through the year, but just at the moment I think it would probably be around that level. In terms of some of the marketing focus that we're doing on the strategic business units and so on, we expect overall that would be largely cost neutral and be a matter of refocusing the expenses into those areas, into those markets, expansion opportunities that Peter spoke about. And we certainly won't be under investing in those areas, and we'll continue to invest for the long-term any strategic areas. So we're not going to cut back in those areas, but we'll continue to focus as we do on expenditures and whether we're spending it effectively and efficiently, and we'll continue to do that, so we're certainly not going to underinvest. There's a ton of opportunities out there, and we want to gather those.

Thank you. Just a followup, then. Peter, I said you earlier said you're happy with gross margins in that 60% to 62% range. Given those parameters, how do you -- what is your operating margin goal in terms what type of SG&A and R&D numbers are you trying to strive to get -- what would profitability level are you trying to hit in the long run?

Well, looking out into the wild blue yonder, I think we don't expect expenditures on R&D to go much beyond the 7% level, and we believe we can maintain it there. We are looking at some significant initiatives, one in particular in cardiology. We believe so far discussions internally have suggested we can maintain the R&D levels at 7%. Brett's referred to the SG&A. Look we're not going to take our foot off the accelerator in terms of -- we're not going to cut off our nose to spite our face, if you like. We're going to continue to invest in SG&A. You will see for us anyway traditionally at the high are end, which is around 34% level, and if we can accelerate the top line, that's obviously going to flow right down to the bottom line. A couple of million bucks, that does have an impact on the bottom line there, and that's all sort of flowing through, because we've got an infrastructure which is -- which you can see from the numbers is based on the expectation of higher revenues, where our aim is to get back into the space, and I don't know if I can say it any better than that.

And just one last one if I may, given kind of the tough comparisons you saw in the back half of '07, which led to subpar growth in the backpack of '07, should we see a similar type trajectory in '08, the first half becoming more normalized in the back half with the easy comparisons should you see hypergrowth. Should we think about it in that framework?

I guess that's the way we're looking at the world. We see the first two quarters of '08 being challenging for the reasons, you have the RMT, the ResMed technology overhang, and also the overhang of some pretty strong quarters with the launch of the -- and acceptance of the S8, etc. So towards the end of the year we're going to have some newer products coming out, better comparables if you like, certainly with respect to the motor area, and also in general with interfaces and devices. So I think that you summarized it pretty well. I couldn't add to what you've suggested.

Okay. Thank you. I will get back in line.

All right, Tim.

And next we have Christopher Warren from Suntrust.

Thanks so much for taking the question. I know you've spoken a bit about how currency impacted some of the cost items. Could you just briefly detail how it impacted the revenue line?

Yes. The -- obviously the U.S. is as it is, and the U.S. was 51% or the Americas, I should say was 51% of revenues, so the other 49% was impacted by a shade over $5 million as the tail wind.

Okay. Thank you for that.

Okay.

Just one other followup on the server ventilation technology, encouraged to see that you're getting traction there. Do you see any other potential sort of inflection points there, where that growth could accelerate particularly sharply in the next six to 12 months?

Well, I think the sell cycle on adaptive server ventilation, it's a matter of getting the product into the sleep labs, getting them familiar with it, getting the sleep labs that haven't looked at complex sleep apnea or dealt with [change respiration] to the extent that we believe it exists, it is very much an educational sell. We're looking at how we can become more efficient, more efficacious in that area. There are some ideas popping up. I think the way to look at it is an evolutionary adoption rather than, oh, my god, here it is, let's get into this. Occasionally you see those sorts of things happening with big acceleration and immediate traction. We've had this product around for awhile. We're encouraged when people use it for the first time and put the first couple of patient on and come back and are scraping their head and saying this is unbelievable, and that, or maybe that it is what's affecting Freddie over there. We've been struggling with him with putting him on oxygen and bi-level and nothing seems to work and put him on this and it is amazing. It changed his life and made life better for us.

I think it is going to be evolutionary, Chris. Keith, maybe you can talk a little bit more about that? We have a pretty strong team of people, technologically speaking in this space. We're seeing some wonderful acceptance, but, Keith, I don't think we talk about it in the sense of this taking off like a rocket. We'd like it, but I think it is evolution, but, Keith, maybe you can add something to that.

Peter, I would agree with that. We were very encouraged by the attention that the whole complex sleep apnea space and the adaptive -- the Adapt SV got at the sleep meeting. It was probably the most talked about topic on the floor of the show for the three days of that show. And we believe that with the framework and the base work that we have laid we're going to see more and more adoption of that, and we're actually encouraged there is now a competitive product in the marketplace that will help people understand the issues, the diagnoses and the therapy associated with that, which we think is going to be a continued incentive to continue to grow this marketplace. So we're very encouraged by what we see with it, and we're very encouraged with where our place is in the market.

Yes. And if you want to look on the bright side of things, the people that really get is at the high-end academic institutions, say like the Mayo Clinic. Se sold several hundred of these devices to the Mayo Clinic, but there is a case where these are right at the leading edge of periodic breathing. They get it. Tim [Morganthal], Peter Gay, these guys are right at the leading edge. The good news is that people listen to them as well. So if you really wanted to look on the bright side and people started to get it, people like the Mayo Clinic, and it is not just the Mayo Clinic, but that's a good example of people who are leading edge that understand what needs to be done here, and they have been researching in the area, so to them adaptive server ventilation was a godsend. We need to make sure that other people out there understand what the guys at the Mayo Clinic understand, and we're sort of -- that's something that hasn't escaped our attention.

Okay. Thank you very much. That's encouraging.

Okay.

And next you have Andrew Goodsall of UBS.

Yes. Good afternoon, or good morning, Peter. Just a couple of admin question, if I could just ask you to give us that normal breakdown of growth by mask, machine, U.S. rest of world?

Right. Well, focusing on the Americas, masks and accessories -- well, flow generators first, they're up 14%, and masks and accessories were up 7%, but if we take out the motor division, the ResMed motor technologies, the overall growth was 13%, which was 14% by flow generators, 12% by masks and accessories for an overall growth rate of 13%. That's in the U.S. Outside the U.S. flow generators were up 9%, and masks and accessories were up 25%, and the overall growth was 14%. I don't think you want the yearly totals, but I will give them to you anyway. Flow generators were up 17%, and masks and accessories for the year were up 19%, and the overall growth year-over-year was 18% for all products.

Okay. Terrific. And just focusing down on Europe a little bit, just sort of understanding how that -- what the FX contribution was there, and perhaps just how you characterize the rebound there or the the growth there and maybe comments on Saime?

Yes. We've put in a lot of time and effort into Saime, or the portable ventilator area where we're feeling a lot better about that. We have Lasse Beijer is now in the saddle of Chief Operating Officer for Europe, and I don't know whether Lasse feels comfortable making any comments there, but we've had, Don Darkin, Roland [Mullins] and Greg Lange, senior people overlooking Saime. We're feeling more comfortable with what's happening there, and I think we are getting on top of that. We -- this quarter in fact we saw really strong growth in just about all European markets with the exception of Germany, and that's something we're really looking at very carefully.

I have to say if there were two areas we're focusing on in Europe, it is getting the ventilator products to where we want them to be, and we've been talking about this for the last three quarters. I can take we're a lot more optimistic about the ventilation space than we were. In Germany, we still have some work to do but we're get there, and Germany, we also have work to do there, but the rest of the markets there were extremely encouraging. If I asked Lasse what he was going to be spending his time on, I am sure he would say ventilation, working with Stan Jacobson, of course who is the new Strategic Business Unit Director, or Senior Vice President, and the second area would be German -- the German sales and marketing organization. But, Lasse, maybe you want to make a comment there?

Well, Peter, I think you covered everything pretty well. What I would like to add is also that I find out after 60 days in my new role here is I found European very good management team and people here, and that's very encouraging.

Yes. We can deal without good people, and I think with a bit of water to flow under the bridge here, but I think we're pretty encouraged, particularly having ventilation, which is ROW, rest of the world, where ventilation is going to hit its straps, and obviously the biggest factor there is Europe, but also we can't ignore Asia Pac. And we see some real opportunities there, and we haven't really put the foot on the accelerator simply because we haven't been satisfied to the level that we want to be with product quality. But as I said, we are getting there.

And just in terms of the new product rollout, to what extent would those products sort of be available in Europe at this point? You're talking about ventilators?

I guess probably more so just the Swift 2, the other new masks, Tango and VPAP Adapt. Yes. Well, VPAP as you know is the [Auto SC II] has been available in Europe for some time. There is no question that Lesse understands that that's a huge opportunity. What we've found is that we need to do a little bit more clinically driven selling if you like. We are currently in the throws of setting up a filling major show and tell, but also a type protocol so that we can use the data and get peer reviewed papers, etc. We're not relying on peer reviewed papers to do the selling, but we're doing a multi-European trial on adaptive servo ventilation basically. Now, that we haven't pulled the trigger on that, but we are -- we've got the centers -- we've been working on this for quite a few months, and we're ready to pull the trigger there. So we would hope to see some better traction with adaptive servo ventilation in Europe for that reason. With respect to the interfaces, yes, I mean the Quattro, the Liberty and the Swift 2 are great products, and it is again early days, but we're pretty encouraged here.

Kieran, I don't know whether you or Lesse wants to make -- want to make any further comments to what I just said, but, yes, adaptive servo ventilation, we're really quite enthusiastic about the opportunities there. Again we've been there for a lot longer, but it is still early days. There is still a lot of work to do there in terms of getting people comfortable with them. The ventilator products, it's mainly been our problem rather than a market problem, in other words, getting the products at the quality level we want. I think it is fair to say the need is there. We have the right technology. The challenge is getting out there and making our presence felt. And that's across the board.

So, Andrew, this is Kieran, on the question about launching in Europe, we tend to launch most products throughout the globe with very few exceptions, and sometimes we'll launch in Europe a few months ahead of U.S. Sometimes we'll launch in U.S. It really depends on the product and some other factors that contribute to it. So with the exception of the ventilation products, most all of our other products are -- will be global. And just if I can make one more comment on the ventilator range. One of the things that we internally announced recently was the shift of production of the VS product line to our manufacturing plant in Sydney. So we've seen a tremendous amount of improvement in the product range, and that has allowed us to move the production of that into our -- call it our mother ship down in Sydney and allow that team in Paris to focus on the Elisee range, so very encouraging news on both sides of the equation there.

Great. Perhaps just one final one, just on the ventilation. Obviously, progress being made. In terms of just I guess hitting the streets and getting the product out is there, is this next quarter meaningful for that progress?

We would like to believe so. Kieran referred to the VS. That's in full production in Sydney as we speak, allowing more focus on the 150, 250, 350 in Paris. However, really the ball game is the 150 because the 250 and the 350, and we are going through a fairly intense evaluation or reevaluation of where we want to be in the ventilation space with respect to the Elisee products, and we see our strengths at the 150, the portable ventilator, home-based ventilation as opposed to the hospital based ventilation with the 250, 350. And we're not walking away from those products, but we certainly reorienting our focus onto the 150, which is the home-based portable ventilation. We think that's where the market is, we think that's where our skill set is. We're seeing some encouraging activity there. It is early days, but that's the way we're going to take it.

Okay. Thank you very much. I will get back in the queue.

Thanks, Andrew.

Up next we've got Michael Matson from JPMC.

Hi. It is actually Wachovia.

Wachovia. I thought, wow, you changed jobs, Mike.

So let's see. The Tango kind of sounds like that hasn't gained a huge amount of a traction yet and is that due to lack of focus among the sales people, maybe since the lower priced product, the the commissions and things likes that wouldn't be as high, or do you think that there is issues with the product relative to the products it is completing against? In other words, the fact that it is larger and maybe doesn't have as many features and things like that?

Mike, that's too tough a question for me. I will throw that to Keith Serzen. Keith.

So, Mike, I would say once again focus of the sales force when we launched the the Tango was at the end of Q3. So salesforce weren't out with the product whatsoever at this point. Q4 we had the distractions from the recall when the the salesforce did focus on selling they were focusing on their core business rather than development of a market that we don't have a lot of exposure to. Moving forward the product is getting significant levels of focus and is picking up speed, but we also have to be realistic about how this product is positioned against the competition. Certainly its size, compared to our own S8 or compared to other competitors' products. The product is physically larger. That's going to hold it back. We need to pick our spots, and we need to focus on what this really is very very good at which is core operation, fabulous simplicity and excellent response with humidity at a value price, and we really haven't had an opportunity to roll it out just yet, and that's what we'll be focusing on. But if I were a competitor bringing this product into the marketplace and I thought about taking it with this form factor in its feature set and thought about running up against either ResMed's product line or Respironics' main product line, it certainly wouldn't be able to do justice. You've got to pick your spots and pick your competitors and pick your openings. And that's what we'll be establishing with this product.

Okay. That's useful. And then can you give us the the impact of currency on R&D in the quarter? I think you said it was $3 million on the SG&A line, negative $3 million. Or increased expenses by $3 million.

Right. Michael, it is Brett. It is in the order around $100 million on the R&D line for the quarter?

Okay. Thanks. And then the number of sleep centers out there with your VPAP Adapt product in place, I think you said 25% to 30%. Is that correct?

That's correct.

And that's based on roughly 3,000 sleep labs?

Correct.

And then can you give us an update how you're doing in Japan?

Yes. We can throw that to Paul. We just had a board meeting in Japan in June we're fairly bullish about Japan Tagen have renewed their efforts. We met with the senior management of Tagen in June, sorry about that clock in the background there, and they've told us that they're going to get really, really serious about the sleep and ventilation market. Fukuda Denshi, we also met with them. But if you look at the overall numbers, you have got the U.K., Australia and Japan around the same in terms of revenue base in the 3% to 4%. It varies. One will be 4% and the other will be 3.5%, etc., etc., but I -- even if it doubled which would be nice, obviously but the impact would be material. You're going from like a 4%, 3.8% to 7.6% or whatever, that's with doubling. So, yes, the growth will be outside the U.S. and Germany we saw very good growth, we're in fact for Asia Pac were above budget numbers. So we don't expect that to go south.

Peter and Michael, it is Paul Eisen here.

Oh, sorry, Paul. Yes.

Peter covered pretty much everything. I think two important factors there. Our partner for Fukuda had a strong year in the ventilation area with the VS product, Saime product, but also just in the last couple days had wonderful news. We've received approval or [yacuji] for the ACS2 or the Adapt SV for approved or regulatory and then there's a small step to take it to market. So in the next two quarters we'll be start to go ramp up that product throughout Japan as well. So I guess the message in Japan is we have all three areas rolling along strongly, namely ventilation, now the ACS2, and of course the sleep business as well, Michael.

Well, I am glad you asked that question, Michael, because that's news to me. This must be late breaking news. I am delighted.

Absolutely very late breaking news.

I've got to say, I am delighted. That's the best thing I heard on the call.

All right. Well, thanks, and I just wanted to clarify that that 3% to 4% number that you were tossing out there, that's the percent of sales Japan makes up currently?

Correct, correct.

Thanks.

That's all the time we have for today. I would like to turn the call back over to management for closing remarks.

Well, I think we've covered the terrain there, Rob. So thanks for your help and support.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's event. You may now disconnect, and have a great day.