瑞思邁 (RMD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2009 ResMed Inc.

earnings conference call.

I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We'll be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions) 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 of earnings, new product development, or new markets for the Company's products.

These statements are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Risks and uncertainties exist that could cause results to materially differ from the forward-looking statements.

These factors are discussed in ResMed's SEC filings, such as Forms 10-Q and 10-K which may be accessed through the Company's website at www.resmed.com.

With that said, I would like to turn the call over to Kieran Gallahue, ResMed's President and CEO.

Mr.

Gallahue, please go ahead, sir.

Thanks, Tonya.

Well good afternoon, and welcome to ResMed's third quarter earnings call.

As with our previous calls, I'm going to begin with some summary remarks and then turn the call over to Brett Sandercock, our Chief Financial Officer, to go through the numbers in more detail, and then we'll take your questions.

So for those of you that have seen the press release, you know that we had another very solid quarter.

Once again, we demonstrated the power of being a well balanced geographically diversified Company, with well accepted, high quality, diverse mix of profits.

We are pleased to report that global revenue in the third quarter of 2009 grew 8%, or up 16% on a constant currency basis.

Revenue growth in the Americas accelerated to 23% year-over-year, which is the same growth we experienced in Q2 of 2009.

ROW revenue declined by 6%, but in constant currency terms, it grew 10%, which is also a sequential improvement.

As expected currency had a significant affect on ROW revenue.

GAAP EPS increased 34% to $0.51.

Excluding amortization of acquired intangibles, EPS was one penny better at $0.52.

We also experienced balanced growth across product categories with global flow generator sales up 7%, or that's 16% in constant currency, and mask segments growing at 9% during the quarter, which also translates to a 16% increase in constant currency.

We saw significant growth in all product segments of flow generators.

Globally, the growth was mainly driven by strong sales of our high-end fleet devices, especially the S8 Autoset II and the VPAP Auto.

We also had solid growth in our mid-range S8 Escape II, now with our EPR patient functionality.

Both revenue and unit volume increased across the flow generator product line in Americas an Europe.

Sales of America's flow generators were up 24% year-over-year in Q3, and similar growth to Q2 of '09.

And sales in ROW improved to 11% in constant currency terms.

As a result of changing product mix in the sleep device category towards higher-end technology, our gross margins are also improving.

The fastest growing segment in the flow generator business, in percentage terms, continues to be the auto-adjusting positive airway pressure and bi-level segments This plays well into our clinical leadership with the S8 Autoset II, VPAP Auto, as well as our new VPAP S, along with other products in these segments.

Europe showed particularly strong growth in the VPAP IV series sales.

In France and Germany, we continue to gain market share in this important high margin flow generator market segment.

Ventilation business unit sales as a whole also rebounded in Europe.

Our Easy-Breathe technology is now available across the entire sleep device platforms, from the CPAP to the APAP, and through to our VPAP ST devices.

The whisper quiet, comfortable performance of Easy-Breathe is truly being recognized as best in class.

Easy-Breathe technology has set a new standard in industry, and is helping to differentiate ResMed from our competitors, with improved comfort and reduced noise.

With CMS mandating patient compliance for ongoing payment, sales of our wireless compliance technology, Restraxx GSM, are growing significantly with more and more momentum.

We remain the only Company that provides wireless transfer of sleep apnea data to an internet system.

Customers are finding that the wireless approach can be convenient and highly effective to not only capture compliance data, but also to monitor efficacy of treatment.

We believe that physicians and DMEs will want to further drive compliance beyond Medicare patients.

This will occur as sleep disorder breathing treatment compliance monitoring is shown to lower medical costs and improve efficiencies.

At that point other payors are very likely to follow suit.

Once again, we posted double-digit growth in the mask segment globally during the quarter, and continue to increase market share.

Mask sales grew 22% in the Americas, and in constant currency terms grew 8% in ROW.

Mask sales in the Americas were strong across all product lines, with the Mirage Activa LT, the Swift LT and the Swift LT for Her doing particularly well.

They are some of the best-selling masks in the marketplace.

As a reminder, these redesigned LT masks are smaller, lighter, and more streamlined versions of the predecessors.

The Swift LT for Her product is gaining traction as a comfortable and quiet solution for our female patients, as this is the first and only gender-specific mask product on the market.

It's also an ideal solution for side sleepers, and the Activa LT is a less obtrusive mask, which gives patients superior performance, and potentially fits 90% of all patients.

With these new masks in the global marketplace, we remain focused on growing market share, with high margin, industry leading products.

Looking forward over the next 12 to 15 months, we plan to launch a series of new products and flow generators.

In addition, within the next several months, we plan to introduce the Apnea Link Plus, our Type 3 home diagnostic devices, that will meet even more of the existing reimbursement and physician requirements.

As we said last quarter, we'll be watching home testing carefully throughout 2009, and expect home testing to be piloted in various forms this calendar year.

We're working closely with our sleep physician partners to make home testing a reality that can improve patient access to appropriate therapy.

We also expect growth to result from continued and improved awareness and validation of the critical role that sleep disorder breathing plays in the very serious, most rapidly growing, and most costly disease in the world, cardiovascular disease and diabetes.

Although sleep disorder breathing affects people of all ages, weights, genders, and races, it's becoming widely recognized that heart disease and diabetes particularly tend to go hand and hand with sleep disorder breathing, and treatments for sleep disorder breathing could not only improve health, but may dramatically lower healthcare costs within these populations.

Ten months ago, we projected that we would be able to grow gross margins, and we're pleased to report that gross margin improved to 61% in Q3, benefiting from currency impact, a favorable geographic and product mix, driven by high-end flow generators and masks, as well as our margin improvement plan gaining traction.

We're confident that we can continue to maintain gross margins around this level in fiscal 2009, as we further penetrate markets with our new products and continue to leverage cost efficiencies across our global organization, with improvements in supply chain and manufacturing, while also ramping production in Singapore.

Again, we had a strong performance in operating cash flow.

We came in at $44.2 million, demonstrating our commitment to strong operating performance and a commitment to working capital control.

Our balance sheet remains extremely strong, with a cash and cash equivalent balance at the end of Q3 over $327 million.

Now over to Brett to provide some additional details on the P&L, and then we'll take your questions.

Brett?

Thanks, Kieran.

Let's briefly run through our March quarter results, and as Kieran noted, revenue for the March quarter was $227.9 million, a increase of 8% over the prior quarter.

As expected, unfavorable currency movements reduced our third quarter revenues by approximately $17.6 million.

So in constant currency terms, revenue increased by 16% over the prior year quarter.

Our income from operations for the quarter was $52.5 million, an increase of 40% over the prior year quarter, and net income for the quarter was $39.2 million, an increase of 32% over the prior year quarter.

Excluding amortization of required intangibles, our diluted earnings per share for quarter were $0.52.

Our gross margin for the quarter was 61%, which is up sequentially from Q2 FY '09 reflecting foreign currency movement, favorable product mix, and manufacturing improvements.

The product mix impact was largely attributable to the continuation of strong sales in our new bi-level range and Autoset devices, particularly in our domestic market.

Our third quarter margin now reflects the full benefit associated with the depreciation of the Australian dollar, relative to the US dollar.

Looking forward we expect this currency impact, together with our ongoing margin improvement initiatives in supply chain manufacturing and product development, you should see our gross margin continue in the range of 60% 62% for the balance of fiscal year '09.

SG&A expenses for the quarter were $70.9 million, an increase of 1% over the prior year quarter.

In constant currency terms, SG&A expenses increased by 13% over the prior year quarter.

SG&A, as a percentage of revenue, improved to 31%, compared to the year ago figure of 33%.

The modest growth in headline SG&A expenses reflects the impact of the depreciation of international currencies against the US dollar.

R&D expenses for the quarter were $13.9 million, a decrease of 7% over the prior year quarter.

However, in constant currency terms, R&D expenses increased by 22% over the prior year quarter.

R&D expenses as a percentage of revenue were 6%, compared to 7% in the prior year quarter.

And looking forward, subject of course to currency movements, we expect R&D expense as a percentage of revenue to be in the 6% range for the balance of fiscal year '09.

The low R&D spend as a percentage of revenue reflects a depreciation of the Australian dollar against the US dollar, as the majority of our R&D spend is denominated in Australian dollars.

We do continue to invest in park innovation and clinical study activities.

Amortization of acquired intangibles is $1.7 million for the quarter, and the stock-based compensation expense for the quarter was $6.7 million.

Our effective tax rate for the quarter was 26.9%, and looking forward, we expect our fiscal year 2010 tax rate to be in the vicinity of 26%.

Turning now to our revenues, just recapping some of those numbers, the overall Americas sales were $122.5 million, an increase of 23% over the prior year quarter.

This was driven by strong growth in both flow generators and masks, with strong contributions from our Autosetting devices, a new range of bi-level devices, and our Swift LT masks.

As a reminder, I'll note that Q3 is the last quarter prior to the anniversary of the introduction into the US market of our very successful S8 II flow generator range and Swift LT masks.

Sales outside of the Americas total $105.4 million, a decrease of 6% over the prior year quarter.

As expected, sales outside of the Americas were impacted by currency movements, in particular depreciation of the Euro against the US dollar.

In constant currency terms, sales outside the Americas increased by 10% over the prior year quarter, with balanced growth across our flow generator and mask categories.

Breaking out revenues between product segments, in the Americas, flow generator sales increased by 24% over the prior year quarter, while masks and other increased by 22%.

For revenues outside of the Americas, and in constant currency terms, flow generators increased by 11% over the prior year quarter, while masks and other increased by 8%.

On a group basis in constant currency terms, flow generator sales increased by 16%, while masks and other also increase the by 16%.

Our cash flow from operations was a solid $44.2 million for the quarter, reflecting strong underlying earnings and modest growth in working capital balances.

Capital expenditure for the quarter was $22 million, including $10.6 million in building construction costs associated with the construction of our new headquarters in San Diego.

I'm pleased to note the building is now completed, and we are scheduled to relocate to the new premises on May 11, 2009.

We'll make final payments associated with the building of approximately $21 million, spread out over the next few quarters.

Depreciation and amortization for the quarter totaled $12.5 million.

We continue to buy back shares, as part of our capital management program.

During the quarter, we repurchased 769,000 shares for consideration of $26.6 million, as part of our ongoing buyback program.

For the fiscal year to date, we've repurchased approximately 1.5 million shares, at a cost of $52.7 million.

As of today, we've repurchase approximately 6.4 million shares out of a total approved buyback of eight million shares.

ResMed ended the third quarter of fiscal year 2009 in excellent financial shape.

Our balance sheet remains very strong and is conservatively geared.

At March 31, total assets stood at $1.3 billion and net equity was $1 billion.

Group external debt was $160 million, while our cash and cash equivalents totaled $327 million.

I would now like to make some comments in relation to currency movements and their expected impact on our fourth quarter results, assuming current exchange rates.

Firstly, we'll continue to experience year-on-year currency headwinds in relation to group revenue.

I highlight that this will be a significant impact on our Q4 revenue, as reported in US dollars.

Specifically, for the last quarter of fiscal year '09, we estimated currency headwinds of between $20 million and $25 million.

Conversely, our operating expenses will continue to benefit from the depreciation of international currencies relative to the US dollar.

This benefit is reflected in our Q3 result, and therefore it provides an indicative base for our operating expense run rate over the next few quarters, subject of course to currency movements over this period, and you'll note that currency movements have been very volatile and lasted a while.

Finally, our gross margin now reflects the full benefit of the Australian dollar depreciation, and therefore on a sequential basis, we're not expecting further market expansion through the impact of favorable currency movements.

In summary, we expect currency movements to continue to have a positive impact on our net income in the fourth quarter of '09, and we expect net income to grow faster than our constant currency revenue growth.

I'd now like to hand the call back to Kieran.

Great, thanks, Brett, and thank you for reviewing those numbers again.

Certainly another strong quarter.

Tanya, why don't we open it up for questions now.

Thank you.

(Operator Instructions) And your first question will come from the line of David Clair with Piper Jaffray.

Please proceed.

Yes, hey guys.

Congratulations on a great quarter.

Thank you.

I guess first question for Brett, I was hoping you could maybe split out currency and mix from the gross margin improvement, and give us the currency impact on EPS for the quarter?

Yes, if you looked at the sequential increase, you'd say the majority would be currency driven, but there is certainly a decent amount of that, of the margin improvement, is product mix, or favorable product mix.

Some kind of small improvements, through manufacturing improvements, but I think most of those improvements will start to manifest themselves in FY 2010, but certainly we had a measurable contribution from both product mix and foreign currency movements, or more specifically, the fall in the Australian dollar.

If you look, I suppose if you wind everything through, it's pretty complex, but you're probably talking in the order of $0.05 on the bottom line on currency impact if you wash it all through.

Okay.

Great.

And then I guess for Kieran, you talked about over the next 12-15 months we should see some more product on the flow generator and mask side.

Can you give us a little bit more color?

Are these just product extensions, brand new products, how should we be thinking about that?

I know it's a bit of a teaser and there is always the desire to got a lot more detail in there.

Obviously for competitive reasons, we need to be a bit quiet on that.

I can tell you that it's a very exciting product lineup, as we [mentioned], and it is across flow generators and masks.

Some of them will be line extensions, and some of them will be very different fundamental platforms.

Okay.

And then, sorry, one last one for Brett.

I didn't catch the US and OUS flow generator and mask growth rates.

For the US for flow generators, the increase was 24%, and masks and other was 22%.

Okay.

Thank you.

All right.

Thanks, Dave.

And your next question will come from the line of Joshua Zable, with Natixis.

Please proceed.

Hey guys, congrats on a great quarter, and thanks for taking my question.

Yes, thanks J.Z.

Can you just make a couple comments about the mark in general.

I know there were concerns about the U.S., obviously the economy.

Clearly your numbers do not show that, but maybe just talk about what is going on, dynamics in the market right now?

Sure.

You know, the fundamentals here are that we remain in a market that is 80% to 90% on tap.

So depending on where you are in the world, we're still in an education phase, we're still in the phase of engaging endocrinologists, cardiologists, primary care physicians.

So fundamentally underlying this business, nothing has really changed from that perspective.

We continue to drive awareness and continue to try to grow the pie overall.

The big question that has come to us certainly over the last nine months is, what is going on in the economy, is anything happening in the marketplace.

And is there some evidence of some sleep labs have a bit of a slow down?

Yes, I think we've seen that probably over the last six months, that some are doing extremely well, and some are being hit a bit, and they're seeing some slowing down of patient volumes, but it doesn't appear to be dramatically impacting the market in any way.

Our view is it still appears that the market has certainly grown in double digits, and historically, we've said it's been about that 15% plus or minus a few; it's probably still around that, maybe 14% plus or minus a two, but it's still quite strong and the fundamentals remain very much intact.

Great,and then just internationally I know a lot of other people are having trouble in France and Germany.

You guys mentioned that those seem to be all right.

You grew constant currency 10%, so again, things are okay.

But can you just comment on the environment there, is anything changing over there that affects you guys?

No, I mean look, markets are always dynamic and you're always trying to stay ahead of them, and each of those countries has their own special dynamics that's going on in any given quarter.

The fundamentals really haven't change in any of those areas.

We said we thought we would see some improvement this quarter.

In fact, we did see the improvement we expected this quarter.

Underlying it, no dramatic shifts in the way that governments are looking at sleep.

And again, I'll say it's very much similar to the US in the sense that it's about education, it's about getting into the comorbidities, and it's about engaging more healthcare practitioners.

And so I think fundamentally, there are more similarities than differences.

And then just a quick one for Brett and I'll get back in queue here.

Basically, can you just break out the actual revenue numbers for US generator flow generator, masks, OUS; I know you gave growth rates.

Can you just break that out?

Yes.

Normally we're just giving the growth rate, but in Americas the flow generator is actually pretty balanced, around the $61.4 million mark and in masks and accessories, $61.1 million.

Great.

Thanks very much.

Congrats, guys.

Thanks.

And your next question will come from the line of Ben Andrew with William Blair.

Please proceed.

Good afternoon.

Thanks.

Just wanted to follow-up a little bit on Germany.

Obviously the performance overall looks like it improved a bit here in international markets.

Can you narrow in on Germany, and maybe tell us what growth rates are doing there, and how your outlook looks over the next several quarters?

Sure.

As you know we do not get into growth rates individually by countries, but I can say from a sort of a flavor, both France and Germany have been doing quite well.

The fundamentals in those marketplaces really remain strong.

As you know, we're both a home care dealer and also we have a wholesale distribution business there, so they have their own dynamics around when you see improvements in leading indicators versus when you see the improvements in revenue.

And quite frankly, we've seen improvements in both.

So I think the team in Germany is executing quite well.

There's been some changes in some of the ways that inventory is handled in Germany over the last several months.

It's not a massive change to the way we do business, it's just sort of the ongoing changes that you see in Germany.

And it seems every year there is some little tweak to system.

So I mean the business looks good there.

The team is really doing a great job in both Germany and France, and we remain optimistic.

And with that change in inventory, would you expect any impact this quarter, or should we anticipate just directionally, not percentage wise, directionally, that that business continues to improve?

I think what you're going to continue to see in that business, is we'll continue to see improvement in execution.

I don't think there is going to be any fundamental change, because of what is going on in the inventory perspective.

It's really not that big of a deal to the marketplace.

Okay.

And then thinking bigger picture as you work on the referral channel, we always struggle to figure out what percentage of patients were coming in through the cardiologist and things like that, but what other steps can the Company take, relatively cost effectively, to try to push that?

Obviously you can't put a sales force in place, but are there things you can do above and beyond Liberty and some of the other historical initiatives, to try to accelerate that, and are you going down that path?

Yes.

Look, we spent a lot of our time and energy in trying to determine how we can, and executing on a plan to grow the marketplace, and a large part of that has to do with creating the push and the pull within the cycle.

When you look fundamentally at what is going on in the marketplace, you have a few things that are coming together.

One is you have excellent clinical data that continues to be available and continues to be published in the voice of the comorbidities.

So these are articles, these are papers that are in journals that are meaningful to endocrinologists or cardiologists.

I noted that there was a paper out today or this month in chests, that's talking about cardiac surgery, and if you use CPAP following cardiac surgery, that you can expect improved out comes.

That's just news that crossed the path today.

Those are very important leading elements in educating that population.

Now internally, we have groups that are specifically focused on how we can get the word out to those various healthcare providers, and how we can do it in a way that helps them cost effectively treat their patients.

A good example of that is the group that we have in home sleep testing.

We're working very closely with our sleep physician partners in trying to help them understand how they can leverage home sleep testing in the United States.

At the same time, we are being approached by, just as our competitors are being approached by, many other types of players in the healthcare channel, be they primary care physicians, be they independent diagnostic testing facilities, et cetera, that are piloting at this point home sleep testing.

And they're providing enablers for these healthcare providers to get engaged in the process of identifying and diagnosing these patients.

We have efforts in continuing education and medical education units, where we are either working with partners to help provide them content so that they can pay for these, as well as funding some on our own.

Many of those things are not oriented towards ResMed alone, they're growing the pie, but when you have as much of the market as we do, it's very cost effective and the right thing to do.

We continue to drive our public relations efforts in order to keep sleep disorder breathing in the news.

So there is no silver bullets here.

It's about executing every day, it's about having a strategy that you focus on, not just in the short-term, but in the long-term, and you hammer at if, you hammer at it, you hammer at it, and we continue to do that.

Okay, thanks Kieran.

And your next question will come from the line of Andrew Goodsall with UBS.

Please proceed.

Thanks very much, guys.

Great result.

Actually, just I guess following on from the question about the US market, could you perhaps just characterize what you're seeing happening with market share, perhaps what success you're having with some of the large distributors, and maybe if I could just throw in anything you're seeing on home diagnosis as well?

Sure.

The US market continues, as I mentioned before, to have a number of very positive things that are affecting it.

Obviously we do have some levels impacting the economy, but because we're so under-penetrated, it's very clear that we continue to have some very positive momentum in that marketplace.

I'm sure glad we're in this business and not trying to sell big iron to hospitals, I can tell you that.

From a market share perspective, we released the Easy-Breathe technology just about a year ago.

It was basically this quarter last year.

And it's been a very successful product introduction, technology introduction, that has allowed us to gain share over the past year.

The team has been executing very well.

We have had a series of new masks.

It was basically a year ago this month that we released the Swift LT, as an example.

So we've had some stellar products that have come on to the market, that have helped us along with execution and gaining market share.

That being said, we have very worthy competitors, and the competitors I think have also done a good job.

I think we've been very fortunate to be able to chip away at that market share, and we certainly appreciate the business that we have been awarded, because of those good products and our hard work at the customer level.

I was just going to ask, maybe just with that (inaudible), for instance, is that still growing, perhaps above what your underlying market growth would be?

I'd say certainly the US number, we grew about 23% this quarter, that certainly would be above market growth this quarter.

We certainly gained share.

Yes.

And is a large part of that coming through from just, I guess maybe another way to say it is Aprea contract still maturing for you?

As you know, as we say every quarter, we do not talk specifically about any given customer, but certainly, large customers, such as Aprea, we continue to have very strong relationships with, and we are doing quite well with them, and I think they appreciate what we provide, and we certainly appreciate their loyalty.

So we continue to make strides, and good strides, with those large customers.

And Kieran, just in home diagnosis, just any updates, any stepping stones you're seeing there?

On the home sleep testing.

One of the things that we we've been saying is that last year was sort of the year of clarity, that we'd said that home sleep testing is here to stay.

And there was lots of back and forth on the NCDs, and then clarification on the LCDs, and going out to other insurance providers, and this year is the year of piloting.

And it quite frankly has been rolling out exactly as we would expect it to.

There are pilots that some of our sleep physician partners have engaged in, we're seeing independent diagnostic testing facilities in particular, which, the guys that have made a living on for instance doing O2 saturation testing and doing logistics for that, they get paid what, $15.00 to $24.00, they've built their business on it.

Now there is an opportunity to where maybe you can make $150.00 to $250.00 on a sleep test, so as you might imagine, they're extremely excited about it, and they're testing out their models of implementation.

We've seen HME's that have begun to get engaged in this.

We've seen other type of docs.

And so this year is playing out as we expected it.

This is the year of piloting home sleep testing, and we'd expect that to continue throughout this calendar year.

And then 2010, start to see more rollout?

Yes I think you'll see a ramp over time.

The inflection point, nobody has a crystal ball, so you don't know exactly when the inflection point is going to hit, but every quarter that we continue to see this expansion of piloting says that this is moving beyond early adopters, and it's getting the statement that's required for the masses, and that's good.

And that's very good.

Thanks very much, great result.

I'll get back in the queue.

Great.

Thanks Andrew.

You're next question will come from the line of Jason Mills with Canaccord Adams.

Please proceed.

Hey, good afternoon.

This is Jamar [Ishmael] for Jason.

Hi, Jim.

It's Jamar.

You're coming up against a tough comp in the US from the SA launch last year, and I know you do not want to give specific product launch guidance, but over the next 16 months, the products that you see, are there going to be any significant new US products?

So, yes, you're right we are annualizing some of those product launches and yes, we will be seeing over the next 12 to15 months, products that are global.

So US and across the globe that will be, as I said, across both the masks and the flow generator lines, some will be line extensions and some will be total platform changes.

So it's the whole gamut.

And I do appreciate and realize that those are teaser,s and you would always like more information, but really for competitive reasons, we feel uncomfortable going beyond that.

Okay.

My next question is, thinking about the mix shift that going on in the US and thinking about more high-end devices being sold, what do you think is driving that in the United States?

I think there is a couple things that are involved here.

One is some of the larger customers in particular I think, have recognized the strength of using appropriate technology in the treatment of these patients, and the fact that when you use Autosetting technology, that it, in many cases, will help support compliance of the patients, and they do not get paid unless they have compliant patients, and it helps to maintain compliance over time, because it adapts as the patient adapts.

The customers are more and more recognizing that the value of a patient is not just in that initial setup, but rather it is getting the patient compliant, and having an annuity stream over literally, in some cases it could be decades, because these people that are being diagnosed are frequently in their 30s and 40s, and we do not cure sleep disorder breathing, we treat it, and they recognize the revenue streams from that.

So adaptive therapy changes with the patient and they see that.

But really what is fascinating is this whole move by CMS to key on compliance, to say that there is a stick that comes along with not maintaining compliance on this patient, as well as the obvious carrot of having an annuity stream, and that's getting a lot of players to look more closely at what it requires to get those patients compliant.

A large part of it is masks, is one of the reasons why our masks, which are market leading, very simple to use, and very, very comfortable, continue to do very well, but it also says that on the flow generators, if they can reduce labor, simplify the process of getting people to be compliant, an then actually adapt with them, so that over time you can maintain compliance, this is the way to build a business, and it's very encouraging to see the evolution of thought.

All right.

Thanks a lot.

You bet.

Your next question will come from the line of Joanne Wuensch with BMO Securities.

Please proceed.

Thank you very much for taking my question.

Could you give us an update on competitive bidding?

Sure.

What has been released so far is that, in fact, competitive bidding will go through.

No real surprise there.

That it's been reduced by one MSA, and that we would expect I guess, towards the end of the year, October time frame, that we should start finding out how it rolls out.

So not a lot of surprises there.

What is interesting from a field perspective, in fact I was just with a number of our senior sales team just yesterday, and was just getting an update on what is going on, what is the buzz in the field around competitive bidding, and it's just very dissimilar from what we saw a year ago.

A year ago there was just a lot of angst around it, what are we going to do, how are we going to do it, on the part of the customers; this this year there is a calmness about it at this point in the marketplace, because people have been through it, and I think they recognize that there was already 9.5% taken out of the pricing in the beginning of the year, so there is going to be a bit more rationality I think in the marketplace.

So it's a very different feel than it was last year.

Helpful.

And could you comment on your uses of cash?

So far you've been using it for share repurchases.

Anything else you might have in mind?

Sure.

As you know over the last 18 months, we've used about $135 million to buy back our shares.

We continue to think that that's a good investment.

And so as we know, we still have some approval of shares that are remaining.

We'll be finishing up the building, and in this kind of environment, we keep our eyes open for potential M&A or investment in technology kind of opportunities.

So we are very actively keeping our eyes open.

But I will say, we're going to also be very careful not to let cash burn a hole in our pocket.

We will do what we've always done, which is we will be very cautious, but very open-minded when we look at opportunities in the marketplace.

Okay.

And then finally, can you comment on price?

It's interesting to me that it wasn't that long ago that we were talking about the market moving more and more towards lower priced products, and with the introduction of better products from you guys, market is shifting back towards higher priced products.

Yes, you're absolutely right.

But this just shows you that all crystal balls have a little bit of fuzziness to them.

But this is a case where I think that it's some of the fundamentals have really been being recognized by the market as I was mentioning before.

This whole focus on compliance that CMS is driving is really wonderful, because when push comes to shove, that's what we're all here for.

We are here for patients, we are here to help them manage their disorder, and nobody gets help unless their compliant.

And the more parts of the channel that get rewarded by being the highest compliance-oriented firms, and that includes HMEs in the industry, then we all win because most importantly, the patient wins and payors recognize that.

Overall, pricing in the marketplace, I think its sort of in that normalized range, now.

We always say there's that 3% to 5% decline on an annual basis; you always see some high-end features that has a bit of Moore's Law in it.

I'd expect, we're sort of in the steady state zone right now, and it's a good place to be.

Sounds great.

Thank you.

And your next question will come from the line of Alex Smith with JPMorgan.

Please proceed.

Hi Kieran.

If you could just tell us, has there been any progress on the insurance front with respect to home sleep testing, extending coverage and so forth.

Yes, we continue to see movement, particularly on regional basis and in piloting.

So just as you see several different types of business models, I mentioned IDTFs, I mentioned certain HMEs, and of course most importantly, there are certain sleep docs which have been piloting opportunities in home sleep testing, you also see some of the insurance providers, on one side having come out with coverage decisions, most all of which favor some form of use of home sleep testing, some type of Type IV devices, some Type III, etc., most of them are less restrictive, for instance, even in CMS.

But you also see them regionally trying to figure out how to drive more activity to home sleep testing.

It is not yet broad scale; it is truly piloting.

For example, you see on a regional basis, one firm I'm thinking of, is sending letters to many of its physicians that are very engaged in having recommendations for sleep tests, saying I would like you to consider home sleep testing as part of the mix.

So there are cases where they're actually getting actively engaged.

I think what they're going to have to do, this is why this is the year of the pilots, even the insurance companies are going to want to figure out the best way of implementing it, and they're going to test their way through it which is great, because as they do that, they can roll it out and they can roll out the most efficient programs across the nation.

And therefore, it has the most opportunity for success, and therefore, for long-term impact on the business.

I think you said last time that about half of the US was probably covered for home sleep testing.

So that hasn't moved with the insurance doing their pilots and so forth?

Yes.

(inaudible - multiple speakers)[you've had] that number go up over the next 12 months?

Yes.

There is well over half of the lives in the United States now can be covered, or they could use a home sleep testing.

Again, depending on which insurance you have, there are different requirements.

Some want a Type III, some want a Type IV device.

Some want you to go to a sleep doc, and some you can go to any treating physician.

So it really varies, but I think that's very natural in the beginning of this transition, and I suspect over time that we'll see those things converge.

So yes, I mean my net is I think it's where we expect it to be, and it's very positive.

And maybe a question for Brett.

You gave us the rest of the world split out for flow generation and masks in constant currency.

Can you give it to us in what the actual growth rates were?

Yes.

The [headline international], the flow gens was minus five, and for masks and accessories it's minus 8.

And SG&A was basically flat from last quarter.

Is that entirely related to favorable foreign currency movement,s or is there some additional savings going on in the cost basis?

No.

I mean the flat result on a headline basis was pretty much the currency, and if you strip that out and you look at it in constant currency terms the SG&A increased by 13%.

Okay.

And just last, if I may, the 9.5% price cut that went through for Medicare, how much of that has ended up being born by yourselves and how much by the DME?

First of all it's the DME's who clear get all of the impact.

And it's just a matter of your negotiations with them, how much they do pass on or don't pass on.

Remember when you go back a year ago, we were sort of at the tail end of some activity in the industry, where there was quite a bit of price taken out of the industry from the supplier perspective, from our perspective.

So there was really a lot of price movement ahead of that.

And I think that's part of the reason why at this point, we're still sort of in that more normalized environment of the 3% to 5% on an annualized basis.

Okay.

Thanks, guys.

You bet.

Your next question will come from the line of Michael Matson with Wachovia Securities.

Please proceed.

Hi, guys, this is actually Vincent on for Michael.

First question for you guys, in terms of your R&D spend, I think this is the third consecutive quarter where you guys had your constant currency - -

Hello are you still on?

Tonya, it seems like we might have lost him.

Okay.

Your next question will come from the line of David Low with Deutsche Bank.

Please proceed.

Thanks very much.

Brett, just a question for you.

The gross margin guidance that you've given, we've clearly seen the Aussie dollar move up quite significantly in the last little while, and I just want to understand what assumptions you've made in giving that guidance range?

Yes, I mean on the forecast we've looked at the currency being a little bit higher than, if you look at the average for the Q3, it was around that sort of $0.66, $0.67 mark, and as you know, the Aussie now is trading closer to mid-70s.

So we [have] really taken that into account, but but saying that, really, you're looking at a lag impact anyway.

Remember we spoke about that two or three quarters ago.

The benefit is lagged by inventory that has to roll through manufacture and warehouses, and they ultimately sell it.

So there will be some lag impact there anyway, so whatever the currency was four, five, six months ago, will be what it is flowing through into Q4 for example.

A sustained level of the Aussie like that, we would be pretty comfortable in the 70s, to be frank.

But that would have an impact that would be a few several quarters down the track.

Okay.

So giving the guidance range of 60 to 62 in 2009, you would be comfortable with where the dollar is now, that you're still going to be in the range.

Is that what I'm to understand?

Yes, I mean we do not want to give guidance out a long way down the track.

There is a lot of volatility and there's a lot of things that change.

But if you look at the initiative we're undertaking in supply chain and manufacturing in, for example Singapore, in terms of product development pipeline, a lot of these will impact meaningfully in FY 2010.

So while we won't necessarily have a currency impact, I'm confident we're definitely working on initiatives that we can improve the margin without currency.

No, that's really helpful.

Thanks.

And Kieran, just a question on the [Saime].

Can we get an update, I know had the product the delay in the launch last time around, but also if you could touch on that, and also touch on the big picture opportunity, where you expect, or when you expect to bring those products into other markets.

So the question is on the ventilation of course, on the volume ventilation.

We continue to make progress with what's called the [Saime] business, the ResMed parish business.

I couple of quarters I think you're referring to we had a launch of the VS3, which we had announced a few months early and took our licks a little bit in Q2.

We have been shipping that product now.

The product is doing quite well in the marketplace.

It's received well.

So we're feeling that we continue to make progress in that product range.

And we look forward to continuing to make progress in it.

As far as when do we expand, and I think in particular, people are interested in when do we expand into the United States marketplace, that really hasn't changes here in the preceding months.

We do not plan on taking the current product series into the United States.

We do plan on, when we come out with a totally new platform, that is a couple of years hence, so we're not giving any specific dates on that, but when that comes, that would be what we would expect to be the product introduced into the marketplace in the US.

So in the foreseeable future, looking over the next 12 months, I wouldn't be building in any entry into the US.

All right.

Thanks very much.

Your next question will come from the line of Dan [Huron] with UBS.

Please proceed.

Good morning, gentlemen.

Just wanted to ask about the up take of auto machines in the US, and sort of the magnitude of change over time.

I know that [going back] a couple of years, autos weren't popular as they are now.

So as a rough percent of styles, what do autos represent in the market.

So in the US, Nick, what would you say, [Nick Farrell], you run that business, what would you say the US rough percentage of flow generators?

Of the order of 20%, plus or minus.

It has been growing significantly this quarter year-over-year on.

And I think the whole segment is growing, and somewhat our share taking there as well, given some the changes Kieran talked about.

So that's up from where we were a few years ago, at 12%.

Obviously we don't have the ventilators and whatnot in that mix.

So that keeps it strong.

So that's a good movement over time.

And to put you on the spot, can that continue to grow at that rate, over the next 12 months, or will it back off?

Look, we certainly do not try to predict on that sort of line item level; I think it's always hard to.

But what I think we can do is go back and talk about the fundamentals that are driving it.

The fundamentals driving it are a desire for the adaptive therapy, also the fact that these kinds of products are the ones that we interface with our Restrax data center, both the elite products as well as this product, we do have in fact even the Escape II.

So we do have a number of products which can interface, but this in particular is a very convenient product, and it's one that supports driving of patient compliance at a time when the HME's are very sensitive to the fact that compliance means getting paid.

And so I think fundamentally, while that continues, and there is no suggestion of that backing off, quite the opposite, we may see other insurance companies which put in similar requirements over time, I think that the fundamentals that drive these higher data oriented machines, as well as ones that support patient comfort and therefore help compliance, are going to naturally play a more important role.

So we're not at the level where I think we want to predict exactly what percentage of flow generator sales, but the fundamentals remain strong, and I don't see that changing.

So in other words, we're not talking percentages, the drive is [of the] auto switch are far from over.

Exactly.

Okay.

Thank you.

You bet.

Your next question will come from the line of Brian Kennedy with Jeffrey.

Please proceed.

Hi.

This is Brian here for Peter.

I wanted to ask about the clinical data, specifically, you can talk a bit about the European ASV study and what the timing of the data release is, and what are some of your goals when you have the data, assuming it's positive?

Sure.

So your question regards to the heart failure study that we're engaged in.

It's a multinational, multi-site heart failure study we call SERVE-HF, and it's the use of adaptive servo-ventilation in Class II, III, and IV heart failure patients, and the primary end points are mortality and hospitalizations, and there is a whole series of secondary end points.

Adaptive servo-ventilation is a very unique product, and it is very dependent on how you apply specific algorithms, and our algorithm which has been designed and tested over multiple years, over thousands of patients, is extremely robust.

The study itself began last year.

We continue to recruit like most clinical studies.

You always want these things to good off like a shotgun and be deluged on the recruitment side, and like normal you go through all of your bumps in the beginning.

But we actually have seen a nice improvement in recruitment rates over the last X number of months.

And we're hearing of some very positive results both in those studies, but also in some patients in let's call it sister studies, that also used adaptive servo-ventilation, where we've seen, as an example, Class IV heart failure patients which have been released from the hospital and have seen their health significantly improve.

In fact they've been downgraded from Class IV down to Class III heart failure.

It's really dramatic improvements in some of these cases.

So these are multi-year studies.

You shouldn't expect to see data from it, certainly not in this calendar year, and it may be a bit of time after that, in fact, before you'll even see some interim reports.

That's the nature of these studies.

But we're pleased with the progress to date.

In particular, we're just pleased at the use and the understanding and the acceptance of use of the ACS2 product, which is what we call it there, in heart failure.

In fact, if you look at Japan as an example, where we have two distributors there selling the product under different brand names, and you look over the last year, one of the most impressive growth categories for us, very significant, has been the use of these adaptive servo-ventilation products by cardiologists, and in fact it's been the cardiologists who have directly engaged with the patients in these cases.

So very different model over there but indicative of the potential of this area.

So we remain extremely excited about the benefits that we can bring to that very costly comorbidity and the role that adaptive servo-ventilation can play in that.

Thanks.

I appreciate the response.

You bet.

And there are no further questions at this time.

I would now like to turn the call back over to Mr.

Kieran Gallahue for his final remarks.

Great.

Well thanks, Tanya.

Thank you all for joining us today.

And as always I want to thank our ResMed employees all over the globe in various functions, for what has clearly been their stellar efforts to drive ResMed's performance.

We are the sum of our people, and we're very proud of that team throughout the globe.

We remain excited about our future.

We have high margin, exciting new products rolling out over the next 12 to 15 months.

We have a stellar balance sheet, which in today's environment, is something to be both proud of and very comfortable with.

We have significant operating cash flow, and as I mentioned, an absolutely first rate team with strong execution.

So we have a lot of good things going on in the industry, and a lot of good things going on with the Company, and I look forward to updating you again next quarter.

Thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.