瑞思邁 (RMD) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 ResMed Incorporated, earnings conference call. My name is Marcia, and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. The Company has asked know 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 market for Company 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 the forward-looking statements.

These factors are discussed in ResMed's SEC filings such as Form 10-Q and 10-K, which you may access through the company's website at www.resmed.com. With that said, I would like to turn the call over to Mr. Kieran T Gallahue, ResMed's President and CEO. Mr. Gallahue, please go ahead, sir.

Thanks, Marcia. Welcome, everybody, to ResMed's Q4 2008 results call.

I am very pleased, very optimistic about our performance and about recent industry developments, and I look forward to reviewing those with you today.

So we set new records for performance and results during the quarter, and I will open the call up by making some introductory comments, then I'm going to turn the call over to Brett Sandercock, Chief Financial Officer to go through the financials in a bit more detail, then it will come back to me for -- me and the team, actually, for your questions.

We finished 2008 on a high note. Global revenue was 23% in the fourth quarter, coming in at a record $235 million. As we continue our focused strategy of launching new and innovative technologies into the global marketplace.

In particular, I was very pleased to note that the growth was stimulated by regions across the globe. Every region for ResMed played a critical role and contributed to our success.

It's also important to mention that the Company generated a record $56.8 million in operating cash flow during the quarter, and that was driven by solid working capital management and operating performance.

And we put those funds to good use by repurchasing almost $52 million of Company stock during the fourth quarter. The outside U.S. business continues to fire on all cylinders posting a 32% growth in revenue.

France and Germany were the main drivers in Europe and we expect to see continued success under the leadership of Lasse Beijer and his team in fiscal year '09. We were also very pleased to see that the Americas region returned to mid-teens growth with a 14% increase in revenue year-over-year.

We launched a number of new products in the Americas and in Q4 and the feedback on those product has been absolutely phenomenal. The flow generator segment grew 17% worldwide and we're pleased to see how the U.S. flow generator segment returned to growth in the high-single digits due to the introduction of the S8-II platform with our innovative, easy-breathe technology.

Particularly, the high end or auto and elite products performed exceptionally well with AutoSet leading the way as the fastest growing flow generator in category from a percentage terms. The mass segment posted another quarter with 29% global growth due to new product introductions led by the new, smaller, low-noise, nasal pillow product, the Swift LT.

This product has been received exceptionally well in the marketplace. We believe the new products have much more to run and we're confident that continued innovation and mass technologies will bring additional growth as we launch several new products in fiscal year '09.

For the year ended June 30 the Company grew revenues 17% to $835.4 million, while generating a record $143 million in the operating income and $110.3 million in net income.

We ended the year with an exceptionally strong balance sheet. We had had $321 million in cash, and we demonstrated our confidence in this industry and in our company by repurchasing 2.6 million shares this fiscal year representing a total investment in share repurchase of nearly $100 million.

As we enter fiscal year '09, I think it's useful to step back and reflect a bit on the industry's prospects for growth.

In summary, the industry has never been poised more for expansion or for growth. We need only to look at the developments within the past few months to demonstrate that this underpenetrated market remains robust and remains one of the attractive segments in the medical device industry. For example, home testing. There's been early encouraging signals related to home sleep testing. Approvals from private insurance like Anthem, the largest insurer in the nation will help open up the diagnosis for sleep-disorder breathing to many more patients. I personally believe that as we look back on home sleep testing, we'll look at this as the single biggest inflection point in this industry's future.

Competitive bidding was delayed for 12 to 18 months providing some certainty to the HMB's so they can plan expansion strategies. We formed a joint marketing agreement with Johnson & Johnson's Life Scan Division, the largest provider of glucose meters in the Americas to promote awareness and education of sleep disorder breathing in the diabetic population.

New clinical literature in medical guidelines, including the International Diabetes Federation statement on sleep apnea and type 2 Diabetes were released and an article in the ACCAHA on sleep disorder breathing and cardiovascular disease which was published in circulation just a few weeks ago .

Last week MSNBC picked up an update from Doctor Terry Youngs latest data, which showed a six-fold increase in the risk of death for severe sleep disorder breathing patients. We are clearly serving a population of patients that need our help and that are costing the healthcare systems around the globe billions of dollars. And we're doing it with the therapy that is incredibly safe. Safer than an aspirin, and yet is incredibly efficacious.

In summary, we just completed a record breaking quarter for ResMed. We experienced growth throughout the globe. We rebound in the Americas. We have a series of new products that are either in the launch process or soon to be there. e generated a record breaking 56. 8 million in cash during the quarter and we are confident about our ability to grow the market in the short and the long term and about our opportunity to grow shareholder value throughout fiscal year '09. Now over to Brett and then back for your

Thanks, Kieran. I'll briefly run through the June quarter results. Revenue for June quarter was a record 235.2 million, 23% increase over the prior year quarter. Favorable currency movements added approximately 14.1 million to our Q4 revenues. Our income from operations is 37 million for the quarter and net income for the quarter was 29.6 million.

During the quarter, we recognized an additional charge of 3.1 million for the S8 recall, seeing a true-up of our original accrual and reflecting more on costs incurred as we approach the conclusion of the recall.

We do not anticipate any incremental expenses associated with the recall in fiscal 2009. Excluding recall expenses and amortization of tangibles, our income from operations was 42.2 million, net income for the quarter 33.2 million, diluted earnings for the quarter per share was $0.42, an increase of 14% over the prior year comparable quarter.

Gross margin for the quarter was 58.3% down sequentially from Q3, reflecting product mix changes, foreign currency movement and ASP declines. The product mix impact was attributable to the strong recovery in the flow generators styles in the US this quarter, while the strength of the Australian dollar relative to the US dollar continues to negatively impact our first margin.

However, I recognize that recently the Australian dollar has declined from its highs, and sustained decline in the aussie dollar will be positive for the gross margin. Additionally and importantly, we expect initiatives currently in progress in areas such as supply chain, manufacturing, and product development to have a positive impact on margins as we look forward.

SG&A for the quarter was 77.4 million, an increase of 19% over the prior year quarter. In constant currency terms, SG&A increased by a more modest 10% over the prior year quarter. SG&A as a percentage of revenue improved to 33% compared to the year-ago figure of 34%.

R&D expense for the quarter was 17.6 million, an increase of 24% over the prior year quarter. And again, in constant currency terms R&D increased by 9% over the prior year quarter. R&D as a percentage of revenue was 7%, consistent with the year-ago figure.

With our ongoing commitment to innovation, solid product pipeline and clinical trial activity, we expect R&D expense as a percentage of revenue to continue in the 7% range for the fiscal year 2009.

Amortization of acquired intangibles was 2.1 million for the quarter and stock-based compensation expense for the quarter was 5.3 million.

Turning to revenues in more detail. Overall Americas sales were 112.2 million, an increase of 14% over the prior quarter. Outside of the Americas totaled 123 million, an increase of 32% over the prior year quarter.

Breaking out revenues between product segments. In the Americas, flow generators increased by 8% over the prior year quarter, while masks and others increased by 18%. The growth reflects continuation of strong sales in our new product introduction, including encouraging traction from the recently introduced S8-2 flow generator.

For revenues outside the United States flow generators increased by 24%, while masks and other increased by 49%, again driven by strong new products our at the (inaudible) international geographic markets. On a group basis flow generators increased by 17% while masks and others increased by 29%.

Cash flow from operations as Kieran mentioned was a record 56.8 million for the quarter reflecting strong underlying earnings and improved working capital management. Capital expenditures for the quarter was 18.2 million, and this included 7.8 million in building construction costs, predominantly associated with construction of our new headquarters in San Diego.

Depreciation and amortization for the quarter totaled 16.5 million. We continue to buy back shares as part of our capital management program. During the quarter, we repurchased 1.4 million shares for consideration of 51.7 million as part of our ongoing buyback program. The fiscal year 2008, we repurchased 2.6 million shares or approximately 3% of shares outstanding.

As of today, we have repurchased approximately five and a half million shares out of total approved buyback of 8 million shares. We ended the fiscal year financially in very good shape. Our balance sheet remains strong with total assets of 1.4 billion and net equity of 1.1 billion. Cash and cash equivalents net of external debt were 183 million at the end of June. I will now hand the call back to Kieran.

Thanks, Brett. Well, with that, why don't we open up the line for some questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Andrew Goodsall. Please proceed.

Good morning. Thanks very much. Very good result. Perhaps if I could start with a couple of housekeeping questions, I guess on FX. Perhaps get a sense of what came through from the stronger currencies out there but also in terms of costs as well.

Sure. Thanks for the question, Andrew. And, Brett, you want to take the FX piece?

Yes, Andrew, if you're looking at that on a total net basis, including some of the foreign currency hedging gains we made this quarter, around 1.2 million, if you look through on EPS, $0.01 to $0.02 actual positive impact year on year from currencies.

And could you just talk to -- the euro is obviously contributing quite strongly at the top line.

Correct. The euro -- the tail wind on the revenue obviously there (inaudible) or touch over, and the euro has contributed, obviously, offset largely by the increase or appreciation of the Australian dollar relative to the U.S. dollar.

You're saying net debt 1.2?

One to two units, including the hedging gain for this quarter.

Perhaps if you could maybe just expand out a little bit more on what the contribution of new products has been and perhaps after Kieran if you wouldn't mind characterizing how that's traded this quarter.

Absolutely. It was a great product, or I should say a great quarter for wins across the board from new products to new customer wins or penetration within current accounts.

So during the third quarter we had launched the VPAP Auto and the Mirage Micro. So we had a full quarter in the fourth quarter, and then during this past quarter, we launched the S8-2 Auto and the S8-2 Elite. Part of the way through the quarter in the US and then very late in the quarter, we launched the SA-2 Escape and then, of course, on the MAF side, the Swift LT.

The products have been received exceptionally well. I have got to tell you, this easy- breathe technology that is the underpinning of the new VPAP products, as well as, the S8 II series.

Importantly, just to remind ourselves, this easy-breathe technology is a motor technology where it's a double-ended blower. It's incredibly efficient. It allows for massive sound reduction. I mean, some of the new bi-levels we are going to be launching are 90% quieter than the competitive alternative. Yet they're more responsive than any other motor on the marketplace.

So what you have is benefits on noise allowing you to reduce the size of the instrument, but also improved performance, all of which yield benefits on the compliance side. That's what we're trying to drive, compliance, because flow generators lead to compliant patients which means they use more masks, which is the highest profitability segment we have over time.

So it's a very sort of good trend that we see from that perspective. So as far as this quarter, the S8-II Elite and Auto contributed well. We saw particularly in the auto setting side of continues in the Americas that whether it's a consequence of home sleep testing or other developments in the market, we just saw a very, very significant up tick on those types of products.

We really haven't seen the impact yet of the Escape II. That will probably come in this year, or I should say this quarter because it was launched late in the quarter. The Swift LT came out like a shot. It is a really differentiated product. It's smaller, quieter. We got part of a quarter impact on that , probably two-thirds of the quarter. We're looking forward to that rolling out the rest of the year. So from a product perspective, what we've launched has been received very well in the marketplace.

We have a couple new products that are launching as I speak in the bi-level category, and we've got some new masks in the pipeline throughout this year. So very good from the product perspective. From the customer perspective, we continued on wins. We make progress at the large camps. Obviously, I'm not going to drill too much into detail on any given customer in respect for their privacy. But -- but we have done well done well with some of these new competitive wins, and I -- we, quite frankly, haven't gotten all that I expect to get from them. So we're still in the early cycle, I'd say is on some of these competitive wins and gaining sure. And I expect to continue to do so throughout

([inaudible])

One of us has been drinking. I couldn't really understand that. Could you say that again, Andrew?

I'm sorry. (Inaudible).

Apria has always been a large account for us. Obviously, it's going to get larger and it has been getting larger given that we are now playing on a level playing field. I'm not going to speak directly to the numbers other than to say, there was an increase that was due them but it was certainly not the majority of the increase of experience. We had experience and wins across the board at multiple accounts and the account that we're in because of the product that we release.

So that's published.

Absolutely.

I'll get back in the queue.

Our next question comes from the line of Jason Mills. Please proceed.

Thanks, Kieran. Congrats on a good quarter.

Thanks.

So U.S. business bounced back perhaps a little bit better and sooner than we expected and perhaps you could comment to Andrew's question following on as to really how much impact we saw in the quarter from sort of unit growth in the U.S. relative to what pricing did, and then was curious, with respect to the gross margins, clearly the elephant in the room here, when I talk to investors is what gross margins are going to do. So I'd like to understand better how currency impacted gross margins specifically and what otherwise is a great quarter across the board, we saw gross margins come down a little bit. I feel like some of the really great things in the quarter could get lost unless we understand sort of where that could trough going forward, and if, in fact, Kieran, we could start to see that with a little bit more of a stable currency ticked back up sequentially here in the first quarter of fiscal 2009.

Great question, Jason. We had the results that you saw come out of the Americas, we were very pleased with. We were very proud of. They came back very strongly and the answer was across the board. It was driven by new product, driven by execution, driven by new customer wins. There were a number of factors that came into play all of which were very important.

But let me see it specifically to hit the gross margin question that you have. So yes, we see a tick down 58.3% and I think there is a number of things that you want to keep in mind with that. For those of you following regiment for a number of year, what you are seeing that we normally take a tick-down in Q4. It's sort of a historical trend that we normally experience during the fourth quarter.

As you know, Americas came back strong, very strongly. We jumped from up to 14% growth from where we were at, which was 5% in the prior quarter and our flow generators went from negative 5% all the way up to plus 8% on the back of some fantastic product releases.

And in addition to the currency, and the currency did absolutely play a role in it, we've long known that geographic mix in the U.S. and product mix to flow generators has some impact on the gross margin percent. It is very good for cash flow. It is very good for gross margin dollars and it puts a little bit of pressure on the percentage, the gross margin percentage. But if I drill down a little bit more, let's talk about what we're doing about margin expansion as we're moving forward. What are we doing with the fundamentals. Not only for this continued growth that we have seen but also to look another the margin line. There's a couple different things that we are engaged in right now that I think are going to start paying dividends.

Let's go through them. One is the pricing. We feel that product pricing is (inaudible) We made some adjustments over the past couple of quarter to get us back in line with market pricing and we now feel that we're priced correctly for the market. Products. We have a stellar year of product launches ahead of us and importantly, a number of products that we have that are in the launch cycle yield strong margins.

That is not an accident. Several years ago, we substantially increased our R&D focus on products such as masks and such as bi-lows.

And we're just now in the middle, for instance, of those bi-level launches that I mentioned before, the VPAP ST and the VPAP Auto 25. Both of them use this easy-breathe technology. They are 90% quieter than the competitive alternatives. Their in smaller boxes and they have ResMed quality. We've got the swift LT out. Which we only sell a partial quarter last quarter. We're going to see a full quarter this quarter. W'eve got a year that we're going to be rolling out additional masks throughout the year. So between the bi-levels and the masks, we have a good product flow ahead of us.

Supply chain. So this is -- third area that we're focused on. We are actively engaged in this for margin expansion in the supply chain, leveraging the volume growth that we've seen over the last couple years. As we grow volume, we grow opportunity and we have done as we have gone outside of the Company and we have looked for that answer. We looked at the automotive industry and said, "Hey, how can we do things better."

We've hired in some of that talent. We are actively engaged in that now and I fully expect that to be shown dividends. Finally, manufacture. In addition to our very strong and comfortable presence in Australia, we are going to be adding capacity in a lower cost region, where we can still maintain our high expectations for quality.

We will not drop on the quality side but we do see opportunities for many of our current manufacturing strategy with lower cost locations. We expect to be doing that in the six months or so. So in summary. I totally agree with you. I think that for 4X absolutely had some impact on it. We have natural sort of cycle in Q4 as well, and we had a very strong result in the Americas. And as I look forward, be it from the the supply chain, be it from the product introductions that we're in the midst of rolling out, be it the stabilization and market pricing to the manufacturing. I see very good opportunities on the marketing side as we move forward.

Thanks, Kieran. That was very verbose and very helpful. It sounded like --

Jason, you're going to get me in trouble, being verbose.

Well, it was quite good, let's just put it that way. And you were obviously well prepared for that question, expecting perhaps to receive a question about gross margin.

So you may be perhaps, hopefully, you would have answer this question, which would be could you give us some comfort that Resmed may show us sequentially up gross margins, assuming we are at sort of the currency that we saw exiting the quarter. Can you at least go that far as to say that this could be, as we look two quarters back, you know, two quarters ahead looking back, the trough in gross margins given all that you said about the improvements you expect to make in those four to five areas. geographic mix and product mix and everything else.

I would never get into that short in term of discussion when it comes to the complexities of geographic mix and product mix and everything else. I'm going to continue to stay away from very short-term discussions on gross margins. I will continue to stay away from that but I will reiterate that we feel very comfortable with the action plan ahead of us and we do feel very comfortable from product introduction schedules right on through the market situation on pricing.

But generally over a longer period of time, you would be -- you would expect to see gross margins at a higher level, sort of over a longer period of time, than where you exited the 2008 fiscal year.

Absolutely. We are targeted on that.

Last question, and I'll get back in queue. As it relates to the Americas region, your flow generator sales certainly improved dramatically but it is lower than where I think market growth is generally. Would you expect a full launch of the Escape here this quarter to have an impact on taking your flow generator sales back into that low to mid teens level like you showed for the total of the Americas business this quarter.

We are feeling good where we are in our product cycle. The S8 II has been a very good contributor and lets not forget outside the US and the growth that we see over the last several quarters not only from execution but also because we launched a product the SA too early outside the US. I fully expect that the bi-levels that we're launching over the course of this quarter will be received well. So I think that we're at a good place in our product launch cycle.

Thank you very much, Kieran. Great quarter.

Your next question comes from the line of -- hold on a moment. Your next question comes from the line of David Claire. Please proceed.

Hey, guys, can you hear me?

We can, David.

First of all, congratulations on a great quarter. Wow, that's very impressive results. I just was wondering if you could maybe discuss the pipeline that you had. It sounds like fiscal '09 is going to be a pretty good year from a product launch perspective.

What should we be looking for, and is it more, you know, kind of a back half '09 weighting, or is it kind of steady throughout the year?

We've got various products that are launching throughout the year. I will talk specifically to the products we're in the midst of launching now, and for competitive reasons I'll stay away from specifics on some of the other products and very specific timing. But we are -- you think about this quarter. This will be the first quarter that we will have full Swift LT, full S8 Elite, full S8 Auto, full S8 II in the Americas. In the bi-level side we have the VPAP ST and the VPAP Auto 25. Both are literally in the midst of launching as we speak now. I think that product lineup is a very exciting product lineup from the flow generator side as well as with the Swift LT. From the mask perspective, you could expect several masks that will come out at various times throughout the year, so it's not all loaded to one part of the year or the other. So I think it's a good mixed bag across the product line.

Okay, great. And if we could just talk, you actually kind of hit this a little built earlier, but you said that you think that the pricing has stabilized at this point.

I mean, what's kind of your estimate of price pressure in the quarter in North America? Is it still -- is it low single dig nights we're looking at, or, you know, if you could just talk to that real quick that would be great.

I think when you look at a lot of the Genesis of some of the price movements it really is about a year ago or, so maybe actually a little bit more than that. Probably 15 months ago or so that this -- that this started. And, of course, our belief as market leaders is that we should be slow to respond on the pricing side. We like to maintain a premium pricing strategy. We think it's healthy for the industry over the long haul, and we think we deserve it, because we believe we have the best technologies and most efficacious for patients and best for customers from a quality perspective.

What we have seen is over the last couple quarters that we did need to adjust some pricing to get back in line with market pricing, we made those adjustments. We have not seen significant movement at all from the competition since Phillips that come into the marketplace and acquired, and we're very hopeful that that discipline will maintain going forward.

I think we have a couple of large competitors that are quite reasonable that compete on quality, that compete on innovation, that compete on market growth, and that's certainly where we're focused, and we feel that right now, we've made the adjustments that have been necessary.

Thanks again and great quarter.

Thank you.

And your next question comes from the line of Joshua Zable. You may proceed.

Congratulations on a great quarter. Thanks for taking my questions.

I will be quick because I'm sure there's a long line but Kieran talking about U.S. market growth, I know you talked about pricing being stable .Can you just sort of, obviously there's some push-back, people talk about the law of numbers in this market, and I know you've talked about the positive dynamics out there, whether it be no (inaudible) or whatnot.

Obviously there's been some confusion in the marketplace over the past year. Can you give us some sort of sense of volumes, if you believe volumes out there are healthy, right now or going forward, kind of what you're seeing?

We've seen a lot of good signals, I think, for market expansion over the last three months, six months. Seems like every month something comes up, either from the clinical side, from the awareness side, et cetera, that should be very positive on the long-term growth. We've long said this market should be growing 10 to 15% ex U.S., in the U.S. 15 to 20%, so sort of blending around that 15%. So our feeling has been that is a sustainable figure. Different drivers over different times but a sustainable figure. Our objective has always been to grow at and above market rate.

If you look at where the market has grown now in the Americas, per your question, I think we're about at market growth. I think the revenue growth rate is probably around that 13, 14% or so, volume growth was probably a few points above that, probably around, let's call it 15% or so. So it remains a good robust marketplace. When you look at some of the drivers that have come out recently, they bode well for the future and they bode for recognition. At this market remains hugely hugely underpenetrated. Let's just give a few examples.

International Diabetes Federation statement. I don't think there's enough time and attention that is paid or understood about this because this is where you had leaders in the diabetes community coming together with pulmonologists, or respirologist. Coming together with cardiologist. Looking at the clinical literature saying there is absolutely a huge overlap between these two disorders. Some of the figures are up to 70% of type 2 diabetics have the disorder.

And it appears that -- well, not appears. The data shows that the primary issue that diabetics suffer from, that they die, from cardiovascular complications are exactly where the treatment of sleep disorder breathing can help.

Lowering of blood pressure, the treatment being used in heart failure, just as we're doing a clinical study in Europe. These things all tie together and say that it is good medical practice, and this is what the recommendation was. It is good medical practice for type 2 diabetics to be screened for sleep disorder breathing. That's never happened before.

This opens up a massive market opportunity in front of us to bring people into the pipeline. There was just a review article that was co-published in circulation looking at that time vast amount of clinical literature on cardiovascular disease and sleep disorder breathing. Now these things move the balls down the court. Terry Young's data that was picked up by MSNBC showing a sixfold increase in risk in mortality if you've got severe sleep disorder breathing. This is a massive issue that is costing healthcare systems around the globe billions of dollars and it remains underpenetrated.

Even the home sleep test with all the different pieces that move with home sleep testing during the quarter. There is now way to look at home sleep testing other than to say positive, positive, positive. Because any way you look at it, it opens up the doors to more people being diagnosed to simplifying the diagnostic process. It is a positive step forward for this industry and will continue to be as we move forward.

So we remain very very optimistic about it. I think all of these things, it's like having multiple shots on goal. Not all of them have to hit all at once. Each of them can hit over time, and that's what feeds into this continued regular growth that we've seen in the industry. It's what happens in the past and it bodes very well for what we believe is going to happen in the future.

You touched upon it. That was sort of my follow-up. Home diagnostics. A lot of people have looked at these LCDs it is a a negative.

I totally agree that having home testing is better than not having it any way you cut it but you made the point to say that you seem to see it in the market already of having some sort of impact. Given that maybe its Medicare is obviously a small part of it so that is why the LCDs don't really matter. Can you just talk a little bit -- I know it's early, I know the LCDs just came out, but what you're seeing on the home testing. You alluded to the fact it's helping but can you give us a little more color there on the specifics?

Sure. You make a good point, JZ, which it is important for us to remind ourselves in the Americas the Medicare population is only 20% of the population being addressed. That being said, I was very encouraged to see that Anthem, right, the country's largest insurer, jumped on board with home sleep testing.

Of course there is a lot of movement in the early days with the LCDs. Even as these things are coming out, some of them still point back to the old national coverage decision. So there's -- whenever you get these government bureaucracies there's always a little confusion in the early days.

But any way you look at it, what it is doing is validating that home sleep testing is a valid way, in addition to P S G, and in combination with the sleep community, because we still remain firmly partnered with the sleep community and we see some very innovative sleep physicians who are beginning the early days of home sleep testing. Whether they're reaching out to some other physicians in their community, many are quite frankly more private payer oriented. I think early days on these changes, always a little bit bouncy.

The thing is to take a step back, look at it, and say is the ball moving down the court or not, and the answer is firmly yes, the ball is moving firmly down the court and we believe it's going to continue to move that way.

Great. Congrats and thanks again.

Thanks.

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

Good afternoon. Just wanted to follow up. I'm sorry?

I said, hey, Ben.

Hey. I was trying to follow up with a couple things about sort of -- kind of tieing into things. The DME activity, are you seeing any shift in behavior versus the last six months as a result of some resolution on the local coverage decisions, or the home testing, et cetera, that are moving the needle here? I think you talked about volume growth picking up a bit.

Yes. In some ways it's a little hard to segment out because at the same time all these changes were occurring we're launching the S8-II platform with Easy-Breathe, and so we've seen a very significant uptick, particularly in the auto setting part of that business. Part of that is clearly attributable to people preparing themselves for home sleep testing.

That's part of the feedback that we get, and part of is it clearly attributable to the fact that we're gaining share in that category.

Can you tell what's what? Or you just can't?

You know, I think it would be really hard for us to guesstimate at that.

But clearly there's been a significant shift in your volumes.

There's clearly been -- we are clearly growing more quickly at that high end, and that leads to a mix shift, yes.

Are you seeing growth in the low end of the product line? Is that stabilizing where units are back up and even lower mid single digits now?

We're seeing more stabilization in that category, and I will also say in that category we haven't yet seen the impact. Q4 we did not see the impact of the Escape II. It was launched towards the end of the quarter, end of the fiscal year, so the reality is the sales force is not going to spend a lot of attention on it. I expect we'll see that moving forward.

Volume growth overall, unit growth, rather, is turned distinctly positive versus where it was.

Absolutely. Yes.

Then the underlying kind of concepts of the competitive bidding dynamic and now they're going to delay the implementation and implement whatever it is, 9% or so cut in at least the demonstration areas and that goes national have you seen the impact of that already in the business or is that something that we've got to stare down later in the year?

Couple points on that. First, I think what we heard from the industry was a collective sigh of relief when that compromise was met, and the reason is, it takes a lot of uncertainty out of what the HME's were feeling. They weren't sure what to prep for. There was many of the HMEs that won the bids didn't have a presence in the communities where they had had won the bid.

There was a confusion around how are they going to care for those patients, is patient care going to be maintained. The first step was there was really a collective sigh of relief, all right this is a good compromise. I think the second part of it is, the thing to remember is CMS was the high priced player in the market place. So most of private insurers were also already priced well below where we had seen the CMS side of the business. And the final piece is just to remind us that 9.5% cut, as I understand that's not implemented until January 1st, so it gives people the time to work through their strategies for growth and what not. I will say is one side note.

If we look back, about three years ago, significant oxygen and mednet cuts in the industry, I remember distinctly having conversations around what's that going to mean, and the reality is it preceded significant growth. The HMEs need to look for avenues of growth. What they saw, you know what, there's an area we can grow, and it's in sleep, and where they tended to really grow was in the compliant user side, and getting more efficient about the supply of mass. The patient as they realized that they had under penetrated that market. That they had under served that market place.

The consequence was very different than was anticipated. I think it's always instructive to look back on history to see how some of these things have played out.

Certainly clarity goes a long way. The other side of this, I guess is the gross margin, because other than that issue, in the quarter, this is a strong result.

If you think about your opportunities that you laid out previously, are we talking hundreds of basis points? Are we talking stabilization in 12 months?

We've got different line items that are going to contribute different levels in that. And they're going to come in at various times. That's the good part. It's not a single shot on goal.

We've got multiple ways of addressing the opportunity for margin expansion. I think it's going to be a continuum.

It's going to be improvements that we're going to see over the months and over a series of time. So some of those things are going to happen quickly like the bi-level products. We're right in the middle of launching those now. Swift LT being out a full quarter.

That stuff is the shorter term. Other products that we have in the pipeline, we will be hitting during the year. The manufacturing in Asia, that will be coming more towards the back end of the year where we see the improvements. Supply chain, we've already begun that process a number of months ago so we're already starting to see some of the dividends. So it's going to play itself out over time.

If we look out 12 months, you probably don't want to give specifics about the impact of going into a lower cost environment but are those going to be offset overall by continued price declines, or are we looking at absolute improvements in gross margin from the 58 or the 58% level -- 60% level.

I think when we look over that 12-month horizon, we should be able to see improvements.

Versus the 58 or the 60?

Certainly, versus the 58% and 60% possible.

We've all got crystal balls, but you've got a little bit more information, so that's very helpful.

No, no, I guess my summary on this, we feel very confident with the actions we're taking, with the product pipeline and with the very specific actions that we're taking on margin expansion.

Thank you.

Thanks.

Your next question comes from the line of Paul Choi from Merrill Lynch. Please proceed.

Thanks, guys. Can you hear me?

Yes.

Okay, great. Maybe I can just start with some shop keeping questions. Kieran, I think you gave us the US growth rate for flow generators but I may have missed the number for masks and the OUS numbers.

I'll let Brett tell you that he went through all the details. for the Americas flow generators increased by 8% and masks and other was 18%.

For the Americas, flow generators increased by 8% and masks and other was 18%. Great.

Then for outside the Americas, the flow generator was up 24%, and masks and other was up 49%.

49%. Great. And then I think you said by your net income excluding amortization and the recall charge was at 33.2 million, which, if my math is right, gives you a tax rate of about 29.1% which was about 140 basis point drop versus the previous quarter. Does that reckon with what you guys have?

Yes, it does. Around 29% for the quarter pretty close to that. Then if you looked at a full year rate, it was a little over the 30% mark. Going forward around that 30% mark probably realistic.

30%. Can you just help us understand what the owe any particular items were perhaps here in the fourth quarter that helped you guys on the bottom line with the tax rate just to provide a little clarity in terms of what's driving that tax rate here in the quarter, please?

Yes. So for the quarter, some of that relates to some of the R&D concessions. We get down here in Australia, we had a particularly strong quarter, and that will manifest itself in the effective tax rate because of some of the tax concessions we get, and a continuation of the German tax rate, which came down at the beginning of the year. They have dropped down around 10%.

Germany is doing well, and those profits are coming through at lower tax race. There's a myriad of them, but they would be the two major ones.

One down in (inaudible) then the German tax rate being the two big drivers here in the quarter.

The German one would have been with us for the full year but we continue to get that impact quarter on quarter.

Great. Kieran, you guys have given some pretty good details on some what you think the drivers can be on the growth on the gross margin line. I was wondering if you could speak a little bit to operating expenses.

You've given some guidance to us on the R&D line. But with respect to the SG&A line, can you maybe comment a little bit on how you're feeling about the need to invest over the upcoming fiscal year, fiscal '09, with the sales force in terms of market development activities for either the home testing opportunity to help out your DME customers, or alternatively, some of the areas you feel like you need to perhaps bone up on when it comes to getting some more feet on the street to help with the new products that you have coming out here?

Yes. So, you know, first of all, I've been very pleased with performance of the global team in controlling operating expense growth. Particularly, during the time when, as you know, foreign currency impact has been a challenge in controlling that headline but when you look at it on a constant currency basis there's been very good cost control. Part of that is activities that we're engaged in throughout the globe.

As an example, we've established an office of continuous improvement down in Australia. We are doing the same thing in the Americas here using lean techniques in order to reduce efficiencies -- I should say increase efficencies -- reduce elements that are interfering with our efficiencies.

So a good standard operating procedure that gives me comfort that as we move forward that the dollars that we spend will be spent in the right place, which is market expansion, which is feet on the street, which ask the ability to grow market share.

So I think that we're doing the right things and have been doing the right things about focusing on efficiencies and focusing on market expansion opportunities. I think that when you look at the operating costs as a percentage of revenues, you see we gained a little bit of leverage here in the last quarter, and I expect to continue that. But we're spending about the right level. We're not going to take our foot off the accelerator. There are too many good things happening in this industry.

There's too much opportunity to try to reduce that to some level that would starve critical initiatives. I think we're going to continue the balanced approach picking up efficiency and leverage as we move forward but making sure that we invest appropriately in expanding this highly underserved marketplace.

Thank you for that, Kieran. Something that's been off the radar for a little bit is -- can you perhaps give us an update as to where those sales stand perhaps in terms of the OUS markets and when we can potentially look forward to these products from the acquisition looking -- coming into the US market here?

So we continue to make good strides with the ventilation product line. The organization there is -- just seems to improve by the day. We continue to invest in them, and they continue to respond to that investment. They've got a very good product pipeline.

Part of what we've done is gone in and done some significant product pipeline re-engineering, which is going to, we think going to significantly uptick or increase our ability for market penetration over time.

It also delays it a little bit, so our thought there is if we're going to swing, we're going for the fences. We are going to swing for the big impact, as opposed to simply trying to make incremental changes or improvements. So we're doing well. That business is doing quite well ex-US . It is not yet time to bring it into the US and we are not giving any specific timelines on that. But I can tell you we're very pleased with

Maybe if you can give us a sense of where that business is going in terms of sales for the run rates.

We historically have not broken out to that level of detail, so I feel a little uncomfortable getting too much detail but just to say that it's positive and it's doing well, and we're pleased with the performance.

Great. I'll take a ballpark shot at that. And last one, just in terms of the U.S. sales force, you said you've laid out very clear strategy here in terms of that -- putting the feet on the street. In terms of -- and obviously had very nice results here in the U.S. Is that the sort of result that you want to expect, and given the nice product cycle you have, and that we can potentially expect going forward over the next couple quarters here with the US growth rate is this something you feel like will start to generate returns more in the near term, or is it just to help us understand the timing of these investments and spending coming through? Thank you, and I'll jump back into queue.

If I understand the question correctly, Paul, about the prospects in the near term. I think there are a number of factors which are signals of encouragement, from my perspective in the Americas. Certainly the products flow, as you know, have been very strong. We've hit the mark. People care about compliance.

And, in fact, some of the legislative changes moving forward probably are just going to increase the emphasis on compliance. And with flow generators, if you've got the right algorithms, and we absolutely have the market leading algorithms, when you can reduce noise, and on some products up to 90%, think about that up to 90% in the market at this point.

They're important for the individual and they're important for the bed partner, and they help the client. Other things that make me feel very comfortable we have a stellar US sales person that is executing very well. I feel that every month I feel like they're executing even better. They're well trained. So I think we've got a lot of opportunities for success in the Americas. Marcia?

Yes. Your next question comes from the line of Michael Matson of Wachovia Capital Partners.

Hi. First of all, I know you talked a little about the cut that's facing your customers on -- due to the competitive bidding delay.

Just wondering how much, if any, of that 9.5% cut you think you will end up having to bear.

It's always hard to say. This is a marketplace where every year people are coming with cup-in-hand kind of thing. I don't expect that to change this year than any other year, but I think one of the positive things that's happened is we've absorbed a lot of price compression. There was pretty significant movement. I think that has taken some pressure off the HMEs.

We're hearing from the HMEs at this point, look, they're looking for quality products, at a competitive price that we've been able to make the adjustments necessary to be in that competitive price range. And they're also looking for features that are going to make their life easier, because many of them are recognizing that this is about the costs, not just about the price, that they buy something with.

It's about quality. And we, by far, have the market leading quality products in this industry. And that has a big effect on their ability to search. One of the funny things about rising oil prices is these guys run a lot of trucks.

If they've got to go out to patients' homes, and they have to go for multiple calls because of quality issues it's going to cost them money and they don't want to deal with. That they think the same way on the mask side.

So I think that we have been on one side very fortunate, but on the other side it's been part of our very specific strategy that people are recognizing the cost advantages, the cost savings associated with quality products.

Okay. And then I was wondering if you've noticed or heard of any anecdotal reports of an economic impact on the demand for sleep studies and or CPAP equipment.

There's really no news on. That I think the last couple quarters have been to real significant developments. We're not hearing a lot about it.

And then given that you're going to be -- or you've launched the Escape II -- sorry, S8 II Escape, is there any risk that that's going to drive a negative mix shift, now that you're pushing some features down on to the lower end units?

I think what we're doing is we've taken a lower cost platform, and we've been able to take the EPR, the pressure release function, and be able to put it on that lower cost platform by doing some, I think, very innovative things. One of the things that we refused to compromise on was quality of care.

In that pressure relief category, the different solutions are different, and we feel very comfortable, as do our customers, that the EPR feature offers the most efficacious treatment for that category of pressure release. The secret sauce was the ability to take that mode of care of therapy and be able to put it over to a platform that cost less for us to make and allows us to be more price efficient in the marketplace.

Okay. And then just a question on your stock-based compensation.

Can you give us, out of that 5.3 million, how much of that was in -- went into the SG&A category and how much of that went into the R&D category?

Brett, you want to handle that?

Yes. Most of it was in the SG&A. It's around half million, three-quarters of a million, and the balance is in SG&A. A tiny bit in cost of sales.

Okay. And the 5.3 million number I assume is before tax.

Correct.

Can you give me what that number would be net of tax?

Yes, the tax rate around there is roughly the 30% mark, a touch under.

That's all I've got. Thank you.

thanks very much. Marcia, I think we have time for another question.

And our last question comes from the line of Joanne Wuensch from BMO.

Thank you very much for taking my question. I'm sort of a pattern girl, and you broke two patterns in this quarter, and it's been a topic of most of the questions but I want to spend another second or two on it.

We went from 16% revenue growth to 23% revenue growth. We went from 60% gross margins to 58.4% gross margins.

How do I think about, without giving guidance, where do we go from here? Is this the new starting point? Do I think about revenue growth again in the 20% plus range for ResMed and recovering gross margins? How do I think about this?

Joanne, you're absolutely right, with you don't give specific guidance on that so I'll go back to our -- the statement we made earlier. Which is to say that we feel that from a market perspective, outside the US, we feel comfortable with long-term sustainable growth of 10 to 15%.

In the US and Americas, we feel comfortable with 15 to 20%. Market growth sustainable in the mid teens and we feel we can grow at and above.

So I'd say what our prospects moving forward are, we feel very comfortable that we can get back to, and are back to that level of growth. There's a lot of things that impact both of those line items, and a single quarter doesn't make a trend certainly in any way. But we're feeling very comfortable with where we're at in our lifecycle.

Okay. Any change in the competitive landscape with Resonics being part of Phillips?

Now, I think, not a lot. We are very hopeful that Phillips has a reputation for competing in marketplaces by focusing on innovation and market expansion. That's the way we like to compete, and we think that's healthy for the long-term growth. There's nothing that gives us pause at this point.

Is there a reason you're taking the 3.1 million charge for the S8 recall now in the fourth quarter?

We felt at this point that it was predictable.

I will remind everybody it's within 5% of our original estimate and we felt it was time and appropriate to do the true-up.

Okay. Are you anticipating future true-ups?

At this point, as Brett had had mentioned earlier, we feel that this should be it.

Okay. Thank you very much.

Thank you for your questions.

I will now turn the call back over to Mr. Kieran Gallahue for his final remarks. Please proceed, sir.

Great. Thanks, Marcia. Thank you all for your time and attention.

I think that as many of you had had noted, this was a very strong quarter for ResMed from the top-line growth that was we think quite exceptional to the strong results that came out of Americas across the board, right on down to the record-breaking cash flow.

So we were very pleased with the performance. I'm very proud of our employees throughout the globe and through all functions in the company who have all contributed to that, and I look forward to updating you on the next conference call.

Thank you for your participation in today's conference. This concludes you the presentation. You may now disconnect. Good day.