瑞思邁 (RMD) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 ResMed earnings conference call.

(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 their future revenue or earnings, new product development or new markets for the Company's products.

These statements are made underneath the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995.

Risks and uncertainties exist that should cause actual 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 you may access through the Company's web site at www.resmed.com.

With that said, I would like to turn the call over to Kieran T.

Gallahue, ResMed's President and CEO.

Mr.

Gallahue, please go ahead, sir.

Thank you, Keesha.

Well, good afternoon, and welcome to ResMed's fourth quarter and year-end earnings call.

As with our previous calls, I'll begin with some summary remarks, then turn the call over Brent Sandercock, our CFO, to go through the numbers in more detail.

We will then both take your questions.

Well, as any of you that have seen the press release, you know that we had another very solid quarter and phenomenal year that once again demonstrated the power of being a well-balanced, geographically diversified Company with a well-accepted, high quality, diverse mix of products.

We are pleased to report that global revenue in the fourth quarter of 2009 grew 7%, or up 15% on a constant currency basis.

Revenue growth in the Americas grew by 20% year over year.

ROW revenue declined by 4%, but in constant currency terms grew 10%.

As expected, currency had a significant effect on ROW revenue.

For the year, we are approaching that billion dollar mark, with $921 million in global revenue.

GAAP EPS increased a remarkable 55% to $0.59.

Excluding amortization of acquired intangibles, EPS was $0.02 better at $0.61.

We projected that we would be able to grow gross margin, and are pleased to report that gross margin improved over 62% in Q4, benefiting from the depreciation of the Australian dollar from last year's highs, and increase in sales of our high margin masks, sales of high-end flow generators, as well as continued success in leveraging cost efficiencies across our global organization.

Again, we had very strong performance in operating cash flow, which came in at $70.2 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 Q4 of about $416 million.

We also experienced balance growth across product categories, with global flow generator sales up 8% or 17% in constant currency, and mask segments growing at 6% during the quarter, an 11% increase on a constant currency basis.

We saw significant growth in the most profitable segments of our flow generators.

Globally, the growth was mainly driven by strong sales of our high-end sleep devices, especially the S8 AutoSet II and the VPAP Auto 25, where we have a big advantage in both noise and in comfort.

Our Easy Breathe technology is now available across the entire sleep device platform, from CPAP to 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 the industry, and it's helping to different ResMed from our competitors with improved comfort and reduced noise.

Sales of America's flow generators were up 22% year over year in Q4, and sales in ROW improved to 13% in constant currency terms.

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

There continue to be a tremendous interest in our wireless compliance technology, Restraxx GSM.

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

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

We believe we are taking market share in both the new patient population and the installed base.

Mask sales grew 18% in the Americas, and in constant currency terms grew 4% in ROW.

Mask sales in the Americas were strong across all product lines, with our full face masks, such as the Mirage Quatro, contributing significantly, but also Mirage Activa LT, Swift LT and the Swift LT for Her doing particularly well.

With their ease of use, they are some of the best selling masks in the marketplace.

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

The Swift LT for Her product fills a gender need and space not addressed by other companies.

We listened to the voice of the customer, and we responded.

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 months, we plan to launch a series of new masks and flow generators.

In July, as promised, we introduced the ApneaLink Plus, our Type 3 home diagnostic device that will meet the existing reimbursement of physician requirements.

As we have been saying this year, we will be watching home testing carefully throughout 2009, and expect home testing to be piloted in various forms.

It was proven that HST was here to stay in 2008; and in 2009, as we expected, multiple health care providers began piloting HST in various models.

We are 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 diseases in the world, cardiovascular disease and diabetes.

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

I think that point deserves more thought and consideration.

It is well known that governments and payors across the globe are looking to reduce health care costs while improving outcomes.

Let's remember that NICE, the National Institute of Clinical Excellence, which is the UK health economic experts, just over a year ago released the results of their evaluation of sleep disorder breathing.

The net outcome, NICE concluded that it is economically advantageous to identify and treat patients suffering from sleep disorder breathing.

Given that countries around the globe are looking to develop similar health care economic analysis ARMs, many based on the model that NICE established, this bodes well for ResMed and for the sleep industry moving forward.

We also know that sleep disorder breathing can have a dramatic effect on presenteeism, as well as absenteeism, and represents a significant opportunity with occupational health and safety in the transportation business for diagnosis and treatment of sleep disorder breathing.

As a matter of fact, there was a story just recently that pilots on a Go Airlines flight from Honolulu over flew the international airport by 50 kilometers last year because the pilots fell asleep.

The US National Safety Board confirmed an initial finding a few weeks ago that the captain and first officer inadvertently fell asleep while the plane was on autopilot.

The Board said that the contributing factor was the captain's previously undiagnosed severe obstructed sleep apnea.

This focus on occupational health and safety and on the comorbidities such as diabetes and cardiovascular disease are still in their early days of impact.

The data is compelling, and yet we have not yet begin to feel the full impact on this industry.

This market remains highly underpenetrated, a fact that bodes well for future growth prospects.

Now I'll turn the call over to Brett to provide some additional detail on the financials, and then we will take your questions.

Brett?

Great.

Thanks, Kieran.

Let's briefly run through our June quarter results.

As Kieran mentioned, revenue for the June quarter was 252 million, which was an increase of 7% over the prior year quarter.

As expected, unfavorable currency movements reduced our fourth quarter revenues by approximately 17.3 million.

So in constant currency terms, revenue increased by 15% over the prior year quarter.

Income from operation for the quarter was 57.9 million, an increase of 57% over the prior year quarter, and net income for the quarter was 45.4 million, an increase of 53% over the prior year quarter.

Excluding amortization of acquired intangibles, diluted earnings per share for the quarter was $0.61.

Gross margin for the June quarter was 62.2%, up sequentially from Q3, reflecting a favorable currency impact and traction from our manufacturing and supply chain improvement initiative.

Our fourth quarter gross margin now reflects the full benefit associated with the depreciation of the Australian dollar relative to the U.S.

dollar.

And if you look forward, should the more recent appreciation of the Australian dollar be sustained, it will have a negative impact on our gross margin over the course of fiscal year 2010.

However, subject to further currency volatility, we still expect our gross margin to be broadly in the range of 60 to 62% over the course of fiscal year 2010.

SG&A expenses for the quarter were 77.6 million, consistent with the prior year quarter.

The flat growth in headline SG&A expenses reflects the impact of the depreciation of international currencies against the U.S.

dollar.

In constant currency terms, SG&A expenses increased by 11% over the prior year quarter.

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

Looking forward -- and again, subject currency movements -- we expect SG&A as a percentage of revenue to be in the range of 31 to 33% for fiscal year 2010.

R&D expenses for the quarter were 17 million, a decrease of 4% over the prior year quarter.

The lower R&D expenditure reflects the depreciation of the Australian dollar against the U.S.

dollar, as the majority of our R&D expenditure is denominated in Australian dollars.

In constant currency terms, R&D expenses increased by 14% over the prior year quarter.

R&D expenses as a percentage of revenue was 7%, consistent with the prior year quarter.

Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the 7% range for fiscal year 2010.

We continue to devote significant resources to product innovation and clinical study activiti3w.

Amortization of acquired intangibles was 1.8 million for the quarter, and stock based compensation expense for the quarter was 6.6 million.

During the quarter, we also donated 2.5 million to the ResMed Foundations.

Our effective tax rate for the quarter was 27.3%, and we estimate our fiscal year 2010 tax rate to be in the vicinity of 27% as well.

Turning now to revenues in more detail, overall America sales were 134.2 million, an increase of 20% over the prior year quarter.

This was driven by strong growth in both flow generators and masks, with strong contributions from our high-end CPAP and APAP devices, a new range of bi-levels and our Swift and Quatro mask ranges.

Sales outside of the Americas totaled 117.8 million, a decrease of 4% over the prior year quarter.

As expected, sales outside the Americas were impact by currency movements; and that's in particular depreciation of the Euro against the U.S.

dollar.

In constant currency terms, sales outside the Americas increased by 10% over the prior year quarter.

If you break those revenues out by product segments, Americas flow generator sales increased by 22%, while mask and other increased by 18%.

For revenue outside the Americas and in constant currency terms, flow generators increased by 13% over the prior year quarter, while masks and other increased by 4%.

On a global basis in constant currency terms, flow generator sales increased by 17%, while mask and other increased by 11%.

Cash flow from operations was 70.2 million for the quarter, reflecting strong underlying earnings and improved working capital balances.

Capital expenditures for the quarter was 25.8 million, including 9.8 million in building construction and sit out costs for our new global headquarters in San Diego.

I'm pleased to note that the building was completed on schedule and within budget, and we relocated to our new headquarters on May 11th, 2009.

There's approximately 4 million in payments remaining on the building, and this should be paid during our first quarter of fiscal year 2010.

Depreciation and amortization for the June quarter totaled 14.9 million.

We continue to buyback shares as part of our capital management program.

During the quarter, we repurchased 349,000 shares for consideration of 13 million as part of our ongoing buyback program.

For fiscal year 2009, we repurchased approximately 1.8 million shares at a cost of 65.7 million.

During the June quarter, our Board of Directors authorized a share buyback program for up to 10 million shares, and this buyback program replaces our previous program.

As of today, we have repurchased 79,000 shares out of the new total approved buyback of 10 million shares.

ResMed ended fiscal year 2009 in excellent financial shape.

Revenues for the year were a record 920.7 million, an increase of 10% over the prior year, or a 15% increase in constant currency terms.

Net income was a record 146.4 million, an increase of 33% over the prior year.

And earnings per share was $1.90, an increase of 36% over the prior year.

Our balance sheet remains strong and is conservatively geared.

At June 30th, total assets stood at 1.5 billion, and net equity was 1.1 billion.

Group external debt was 162 million, while cash and cash equivalents totaled 416 million as of 30 June.

I would now like to hand the call back to Kieran.

Thanks, Brett.

Alright, Keesha, why don't we start the questions?

Thanks.

(Operator Instructions).

Your first question comes from the line of Joshua Zable with Natixis.

Please proceed.

Hey guys, congrats on a great quarter here, great year.

Thanks for taking my questions, and thank you for officially making me afraid to get on an airplane ever again.

(Laughter).

Just a couple of quick ones.

Just first a break down of revenues -- I know you gave it on constant current, but can you give us just the numbers there for flow generators and masks?

Sure.

Brett, you want to run through that?

Yes, so I'll break it down.

So for flow generators in the U.S.

were 69.7 million.

Okay.

Rest of the world was 79.6.

Okay.

And for masks, other in the U.S.

,

Okay.

And rest of the world 38.2.

Great, okay.

And then just one follow up, just on the market in general, obviously clearly you guys are taking share.

I know your competitors haven't had quite the success you have had.

And I know, Kieran, you kind of brought up some things that we have heard you talk about before, obviously seems like it's getting more awareness.

The market growth has been pretty solid and stable.

Is there sort of a sense that there's kind of a re-energy here in this market, that the market kind of maybe is reaccelerating in any way, shape or form?

Or is this really a lot of market share gains and we're just kind of steady as she goes, still growing?

Well, I think the market has remained healthy all during this time period when so many other industries have suffered incredible challenges, and that includes many parts of the health care business.

We haven't seen a dramatic change in the business.

Early in the January timeframe, we said that maybe there was a couple of points that were carved off the market or so.

We are seeing that basically flat.

We are seeing a lot more interest and talk about increasing capacity.

We're seeing a lot of excitement about the comorbidities.

And in areas, for instance, with home sleep testing we're seeing the pilots begin to play out just as we expected.

And I think that's creating a general excitement about this area and a recognition that this is the kind of market that, even in difficult times, still has the ability to be growing in double digits.

And I think that that has opened the eyes of many of the players in the marketplace, has given them comfort and given then renewed energy.

So I think there's just a lot of good things that keep happening in this marketplace.

Great, well congrats, and I'll get back in queue here.

Thanks.

And by the way, you should also feel uncomfortable on the roads, because truckers have it at even a higher rate than pilots.

Thanks.

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

Please proceed.

Thanks very much.

Just a question about -- along similar lines.

I guess with the economy being tougher and hospitals particularly investing less, we see signs that investments in sleep lab beds have slowed down.

I was just wondering if you see similar signs and whether you're seeing that impacting on market growth?

W didn't see or feel anything different this quarter than we had in the last quarter.

And from that perspective, I'd say that there's not a lot of change out there.

What you are seeing is that there's an increased emphasis on, for instance HME's part, where they recognize the ability to mind the installed base.

As things get difficult across the board, what they look for is where the growth opportunities are.

And this is the same thing happened three years ago when Oxygen and [MedNeb's] reimbursement got cut, then suddenly everybody recognized that the sleep market had been underserved.

So what you're hearing from HME's is a renewed emphasis on looking at compliant users, making sure those compliant users are appropriately followed up with, that to the extent that they deserve to have accessories and masks, to the extent that their payors will support the patients in those, that these patients would be better served.

So there's multiple ways of growing a marketplace.

Some of it is the fundamental diagnostic capacity.

Some of it is how you use the capacity -- in other words, the mix between split nights versus dual night studies.

And finally, there's the means of mining that compliant user base.

And I think that we're seeing customers in all those cases focus on getting more from what they have.

Great, thanks very much.

Just another question.

I mean, national contracts and movement there is something else that we're trying to break out.

Now I know you don't want to comment on particular contracts, but could you give us a sense as to whether there was any changes there that had an influence on this quarter?

No, I think you're right.

I don't think it's useful to break out by customer type.

We are doing very well across the board.

We have been working very hard, not only from a product perspective in bringing innovative technologies to market, but also whenever possible making it easier to do business with ResMed, because we believe that helps support the goals of the HMEs and improves their profitability, and perhaps most importantly helps them improve patient care.

Those same -- you may have different techniques from time to time, but those same underlying fundamentals work with both the independents and national.

So as a result, we're seeing wins in all categories.

Okay, great.

Thanks very much for taking my questions.

You bet.

Your next question comes from the line of Alex Smith with JPMorgan.

Please proceed.

Thanks, guys.

Just maybe a question for Brett on the gross margin outlook for 2010.

You said 60 to 62%, so if FX stays where it is, it's a headwind.

Are there offsets that you're thinking about to arrive at that number as well from the cost side?

Yes, Alex this is Brett.

Definitely, basically as we have been saying for a little while now, we're working a lot on the cost side and on the COGs of the business.

And there's many -- not just a silver bullet, but basically right across the board on our many initiatives.

And the expectation really is that those ones will start to kick in and mitigate any of the currency headwind that we will have as we move through the fiscal year.

So if you should think about Singapore manufacturing for example, we've done work on logistics, on the operation and warehousing, materials purchasing, new product cycle.

Obviously as we roll through the fiscal year, we will have an impact.

Then overlying that we have a continuous improvement program.

We have had excellent engagement down here in Sidney.

So it's a combination of all those factors that make us confident that we can -- that they will actually expand the margin, even though that currency will obviously be a negative for us.

Okay, terrific.

And maybe for Kieran, can you give us any idea of whether there will be new product launches during the next quarter?

So we're not going to get that fine in the details for obvious competitive and customer reasons; but let me just say that the next 12 months is going to be an incredibly busy 12 months, and we will be busy even before the end of this calendar year.

So this is going to be a very, very exciting year for us across both masks and flow generators.

Okay, terrific.

Thanks for that.

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

Please proceed.

Great.

Kieran, maybe just following up on that last question.

Can you characterize how significant a change, kind of the next generation platforms from you, and if you can to some extent your competitors will be versus where we are?

Are we talking about a modest improvement in technology, or is there something more dramatic we can point towards?

And you're talking flow generators, or are you talking masks?

Primarily generators, but if you want to comment on masks that would be great.

Well, I think that there's opportunities across the bounds.

Now I obviously can't speak in detail for my competitors -- that would be questions that are better targeted towards them.

I will say as an industry overall, there is still a lot of innovation that could be brought to bear on this marketplace as the technology continues to progress.

And some of that has to do with the use of informatics and how these devices -- these therapeutic devices -- fit in, not only as a therapeutic device in and of itself, but also a node within a system of care.

And you have kind of got a feel for that with, for instance, the Restraxx data systems and the continued evolution that you would expect to see with those informatics systems.

I think there is continued opportunity to improve on noise levels, on algorithms that are applied to patients in order to improve comfort, or either reduce or de-skill the labor that is applied.

And I think those are important points, by the way, because if you look at health care across the globe -- and what we have seen certainly over the last decade -- is that health care systems are trying to contain costs in part by either reducing the amount of labor applied or de-skilling the labor that's applied in the care process.

And they're also trying to move people out of the expensive settings into the home settings.

Both of those play to our strengths, and there's innovation that can be brought to bear that simplifies the administration of the therapy making sure people are compliant while increasing the efficacy.

So there's a significant amount of opportunity for us to continue to innovate in multiple ways.

On the mask side of the business, it's still about how do you make it easy for the care providers to set the product up on the patient?

How do you improve the comfort -- the immediate comfort and the long-term comfort of the patient?

How do you improve the efficacy through managing leak?

And how do you wrap that whole thing into a system sell?

And then finally, when you look across both of those platforms, there's opportunity for bit of Moore's law, where we can improve the functionality while addressing the cost of goods.

And so we're going to be hitting on all those cylinders as we go through this year.

Maybe just one other question on generators.

You have talked about mix being very positive for you.

Can you characterize where we are as a percent of mix as we look at the different -- maybe three or four different broad areas?

And you have often talked about percent autosetting in the past.

Where maybe is that now?

So when you look at it from a percentage perspective -- I guess we can look at it a number of different ways -- we continue to be underpenetrated in the buy level category, and we have an incredible platform that's underpinned by the Easy Breathe motor technology that makes our devices far quieter -- in some cases up to 90% quieter -- while being more comfortable for the patient.

So the first thing is major mix shifts within that.

We have a significant opportunity for continued growth, because our products are simply market standard, and it's been an area that we have been underpenetrated in the past.

We do see continued growth on the autoset side of the business.

And even the Escape 2, where we have put in additional functionality with the EPR.

So we're seeing it across the boundaries; and we're comfortable with the growth in each of those categories, not only from what we have achieved to date, but the further penetration in the future.

As far as specific percentages on the mix of autosets, Brett, do you have the current figures on that?

Yes, I mean, it's probably in the order of 25%, somewhere around that mark.

Certainly autoset continues to be the strongest growing category.

Okay, and is Europe still of the 60-ish or has it moved higher as well?

Yes, that's always been more of an autosetting market.

It's probably around that, so the 60 to 70% mark.

Okay.

And then last question and I'll hop out.

If you think about the ten MSAs that are going to be bidding in October, have you guys looked at what percentage of the market that might represent and then what the next group MSAs that bid in eleven might represent as the market and how you might anticipate bleed through?

Yes, I think -- well, first of all, I think it's 9 MSAs now, right?

Didn't they eliminate Puerto Rico?

So I think -- and it's clearly a minority of the marketplace as far as what percent is covered directly by that.

I couldn't give you the percent, but it's a small percent of the total market.

I think more than anything else, when you talk to HME's many of them feel like the last round of competitive building was just so poorly implemented that the likelihood of this being implemented well is a challenge.

And many of them feel that, even to the extent that this delayed process -- because it has obviously been delayed again, right?

Or it was delayed several months ago -- not redelayed but delayed several month ago -- that there's a feeling that if it's not administered properly and if there is a significant push back from the community that it may make full rollout of competitive bidding very challenging as well.

So I think there's a lot of water to go under the bridge before we forecast what the impact of that will be or won't be.

Thank you.

You bet.

Your next question comes from the line Peter Bye with Jefferies and Company.

Please proceed.

Hey, thanks, guys.

Just a couple just on the home sleep testing.

I mean, you mentioned airlines and truckers, but what's the -- for some of these occupational groups to develop models for sleep testing instead of sending their members to sleep labs, are you hearing anything there?

We noticed the Aetna Care Core National deal here in New York, sort of a trial there, and I think Kaiser is playing around with it, too.

Any more color you can see about programs going on out there?

Sure.

Yes, I would look at those two things independently, right?

Although one can be supported of the other, right?

So there's the opportunity in occupational health -- which is certainly not dependent on HST coming in, by rather the entire marketplace has a dynamic that's associated with HST -- which anything that lowers the cost of diagnosis and simplifies it will not only help in the occupational health area, but it will also help in all aspects, whether it's looking at the comorbidities, or whether it's looking at your garden variety sleep disorder breathing patient.

So if we segment those two different things, there are a number of companies -- HME's or startups -- that have tried to focus on the occupational health category.

And there's no doubt that the introduction of HST has them even more excited looking at different models, because particularly those categories of transport workers where they are moving to a different location every night, the idea of a mobile screener, if you will, or a mobile diagnostic tool, certainly makes diagnosis even more simple.

And so there's a number of startups that we have heard about out there where other HME's are looking to get engaged in that process.

And that's good.

The more noise there is, the more opportunity to address the big players in transport, the more likely that we will get to a tipping point sooner.

With HST overall, just sort of a general update on that.

We have long said that the last calendar year was the year that really it was established whether or not home sleep testing was here to stay or not.

And clearly from the fact that CMS and the largest payors have jumped on board with it, it's very clear that home sleep testing is here to stay, and it's just a matter of how it rolls out and the speed.

This year, as we have said, is the year of the pilot.

And it's really working out the three P's, right?

It's looking at the pricing -- so what are people going to get paid from their different payors?

What are the processes?

So how do different health care providers integrate home sleep testing into the way that they do business, and what are the various flows associated with that?

And the last one is politics, which is what's the interaction among the channels, among the different physicians.

And that's always the hardest one to predict the timing of when that's going to play out.

We have heard of, we have seen a number of pilots, that in fact have started as we have anticipated, and they range from HME's to sleep physicians to primary care physicians to independent diagnostic testing facilities.

So you have a number of different players that are testing the three P's, if you will, of home sleep testing, and they're using a variety of devices.

Certainly many are finding the simplicity of ease and the cost effectiveness of ApneaLink and ApneaLink Plus is very convenient for them -- and there are other solutions out there, which is fine, because what this is all about is opening access to the markets.

So our intention as we go through this is to continue to support our sleep physician partners in the sleep community and our longstanding relationships, and be able to do the best we can to help them provide quality patient care and open up access to more patients.

So it's moving, and it's moving right along the pace that we had anticipated.

Okay.

Then just a couple more.

Just on Washington, what are you hearing from your (inaudible) customers in the sense of compliance mandates for follow up with a physician, risks of not getting that and not getting paid from Medicare?

How much panic is there among some of the guys, or the smaller guys, on accreditations going into effect October 1st, if at all?

And then any thoughts about any interim cuts in 2010 until we get competitive bidding starting in 2011?

Yes, so the major buzz is in a couple of categories.

One is with compliance monitoring; and as you note, that ruling which came out almost a year ago now, that's really when the starting gun went off and that's we started to see a huge uptick in interest for the Restraxx GSM and in some of the higher-end systems that work particularly well with the Restraxx GSM and also help support patient compliance.

So I think the community has reacted -- or at least I'll call it the first wave of reaction to that; and what they realize is that with all the data that they now need to manage and with the importance of gaining compliance, I think there is a renewed emphasis on compliance.

And that's good for the patients, that's good for the industry, that's certainly good for ResMed, because of the nature of our products.

And because this is a chronic disorder where people are treated for decades, every patient that can be captured, that can be -- that we can keep complaint in those early days represents a long-term annuity stream and good health care.

So this renewed emphasis, I think the HME's have sort of taken it on board.

They're taking the actions.

It's leading to very good conversations at the field level, and we are able to act as consultants in the selling process, and we have the technologies that can help make them more successful.

Other buzz from the Washington side is that there's just a lot of interest on HME's really around oxygen.

That's where the primary emphasis is.

There's a desire to keep oxygen out of the competitive bidding, to remove the 36 month cap.

So there's a lot of action.

Their focus tends to be more on the 02 side; and I think there's a greater level of comfort and security on the sleep side, because they know that it's a highly underpenetrated market that in any case represents significant growth opportunities.

Okay.

And just one last.

The VS 3 ventilator, sort of the first full quarter, I think, on the full supply that you have.

How -- any leverage to the h1 n1, stuff going on, especially overseas eventually?

So VS 3 is a great product and it's doing quite well.

As far as bump up from the flu; no, we're not seeing at this point.

We're hearing a lot of discussion around it, obviously.

As you know, it's mainly southern hemisphere at the current time, and there's the expectation there could be quite a spread in the northern hemisphere.

At this point, we're not seeing anything like the bumps we got out of the bird flu and that sort of thing.

Not yet.

Okay, thanks, guys.

You bet.

Your next question comes from the line Andrew Goodsall with UBS.

Please proceed.

Thanks for taking my call, guys.

I was just going to ask just in terms of Singapore, what sort of percentage of volume do you think that is going to start contributing in the 2010 year?

Andrew, it's Brett.

If you look through, say, FY '09, it's probably in the order of 10 to 15% up there.

And I think as we move through fiscal 2010, it will probably be more like the order of 20 to 25% of total.

So it certainly will progressively ramp up through the fiscal year.

And there's a meaningful amount there now, and that will build, and obviously that will help us on the manufacturing or cost front.

The other thing it does is also diversifies as a little bit of the [Aussie] dollar, so to the extent the (inaudible) there isn't seeing dollars, we're in a little more position now with the Aussie being stronger in terms of our cost base.

So for example, the Sing dollars over the last three months was up about 3%.

If you compare that to the Aussie, which is close to 15, you can see it's quite a bit of difference there.

So that decision to diversify risk mitigate, et cetera, is also going to support us on the cost base as well.

Absolutely.

Like I say, we have been very, very pleased with the ramp up of the Singapore facility, and also want to note that we remain very committed to our facilities down in Australia.

We have got fantastic employees down there.

We are in the very fortunate position with the growth in this market and the growth in volume that we can remain committed to a given geographic region, and at the same time have the ability to expand elsewhere.

Can I just also -- just looking at rest of world masks, they were sort of 4%.

Could I just ask you to characterize how we should be thinking about those?

Yes, look, the RW masks tend to grow at a slower rate than you will see in the U.S., and it tends to be a little bit lumpier.

In this case, we had some pretty challenging base year comp.

So I'd just think of it as sort of a timing issue.

Okay.

There's nothing -- no particular regulatory exchanges in any European countries or anything?

No, there's zero fundamental changes.

Yes, just to put the top (inaudible) in perspective, I think we grew 30% the year before in that category.

Yes.

As Kieran said, it tends to be a little bit lumpy.

Okay, terrific.

Thank you very much, I'll get back in the queue.

You bet.

Your next question comes from the line of Jason Mills with Canaccord Adams.

Please proceed.

Thanks, guys.

Congrats on a good quarter.

Thanks.

Kieran, I'll start with going back just to your commentary about the U.S.

market.

Sorry if I missed it -- I'm in between calls.

Just wondering what you saw in the first of half of this calendar year, the last half of your fiscal year as it relates to U.S.

market growth?

And it's hard to tell what Respironics is doing specifically I suppose, but obviously you guys gained share.

And I'm just wondering what you're looking for going forward in terms of market growth here in the United States?

Yes.

By all indications, the U.S.

market continued to grow in double digits.

We saw, probably in the January timeframe as we discussed earlier, there might have been a bit of a tick down -- maybe a couple of points.

But we haven't seen that regress any further than that.

This last quarter felt very similar to the quarter before that.

So that was a very comforting feeling that we're in good shape in the marketplace.

I think you're right, I think we're gaining share.

I will say, we still have very worthy competitors.

I think Phillips is a very strong competitor and one we respect and think that they are good for the industry.

We have been doing well, both at large customers and smaller customers, and I think we're benefiting from a couple things.

I think from both very significant differentiation in our technologies, both on the mask and the flow generator side, and that's something I think we will see continuing through the new product launches that we have in the next 12 months; and I think just fundamental execution at the field level.

Got it.

So as you look forward over the next two or three quarters, you're looking for market growth in the U.S.

in that double digit range.

You guys also are going to be comparing against some really nice quarters in the second half of last calendar year.

At the same time, you're planning to launch some new products, which I'm sure you're hopeful will sustain your growth.

So could you maybe discuss the (inaudible) position of the difficult comps with the new products launching relative to where you're sort of expecting the market to grow?

And I guess the bottom line is, do you continue to expect to gain share or hold your share during the time you're comping against some really good quarters last year?

Yes, you know that we never talk in single quarters, because one of the things that we're very adamant about is not managing a business quarter to quarter, because I think that very gets dysfunctional over time.

So let's talk about the way that we always talk about things, which is we look over the next 12 months, we look over the next 18 months, et cetera.

Do I think that we have the ability to continue to gain market share?

You bet.

Do I think that we are in a market that's going to continue to grow in the double digits?

You bet.

I think that we're in very good positions.

No doubt you're right, we have got certainly tougher comps coming up than we had in the past, and I think that's recognized.

And that's a good thing.

You know, keeps the sales force focused, and we continue to enjoy the benefits of those wins that we have had in the past.

That's very helpful.

Thank you very much.

A couple of just follow-up questions.

I'm wondering what your thoughts are and update as it relation to comorbidities, and specifically what you're doing or thinking about in terms of partnerships to explore further comorbidities with sleep disorder breathing?

The blessing and curse of being involved and being a leader in the sleep disorder breathing marketplace is that it seems we overlap with every costly comorbidity on the planet, whether you're talking about heart failure, whether you're talking about diabetes, whether you're talking about drug resistant hypertension, whether you're talking about obesity.

In our ventilation business we're square in the middle of COPD.

So the opportunity is enormous.

But life is about execution, and execution is about focus.

And so are -- we try to be relatively disciplined about how we approach each of these comorbidities, and they're at various stages of development.

Some of them, where the knowledge -- let's say in hypertension as an example, it's well known and understood ever since the [JNC-7] guidelines that sleep disorder breathing is a major cause of hypertension, and treating the sleep disorder breathing can bring down blood pressure.

Now we still have education to do, and I think you will see a much greater focus on primary care physicians in the coming year as we help them understand sleep disorder breathing and we work as an industry to help them understand sleep disorder breathing and the role that CPAP can play in treating that.

You have other comorbidities where we're at a little bit earlier stage.

The data is fantastic, but we probably have even more opportunities for education.

So we try to balance the investment.

We try not to try to blow over the ocean all at once; but we try to focus, use partnerships where it's appropriate, use internal business development resources when it's appropriate; and when we get to a critical mass stage, we spread it out to the sales force to try to leverage the strength and relationships with their contacts.

So it's a matter of having the opportunities, but focusing specifically where we think the best payback is.

That's helpful as well.

Last question for me, Kieran.

Trends in the market as it relates to -- you mentioned your customers are focusing on mining their customers.

And I'm wondering if you have seen any change in trend as it relates to patients using masks?

I think the last time we asked, it was still hovering around one mask per patient per year, notwithstanding the reimbursement for more than that.

Wondering what you guys are doing to drive that higher and whether or not we have seen some benefits from anything you're doing to do that?

Yes, so I can answer that mostly from an anecdotal basis than I can from a specific number, which as you know is always very difficult to get at anyway, just because of the ability to segment replacement from new use masks.

But in our dialogue with our customers in their requests for things like drop shift directly to patients, in their requests to support their resupply, to learn about how to set up resupply initiatives, what we feel very comfortable in saying is that the HME's continue to increase their focus on that very valuable segment of compliant users.

And you're also seeing new players get into the mix who may have, let's say, previously focused on other disease states that see the opportunity in sleep and may have particular skill sets in direct to consumer marking, as an example, that are trying to stimulate greater use.

I think we talked about on the last conference call, in the last six months, you have started to see direct consumer advertising on TV for compliant users.

I mean, that is just an indication of what's going on in this industry.

And when you have one player that's doing that, I can assure you that the other leaders in the industry look at that and try to understand how they either defend against that or leverage that -- those kinds of activities to stimulate their own growth.

So it's a good sort of dominos affecting dominos process, where the HME's recognize the attractiveness of serving the compliant users.

Great.

Great quarter, guys.

All right ,

Your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Please proceed.

Hi, may I also say great quarter.

A couple of little things.

Capital expenditures in 2010 now that you've completed the new facility in San Diego, what might that be?

Joanne, it's Brett.

With the Aussie dollar appreciation in (inaudible), it will probably be around, when I look forward, about 12 to 15 million a quarter on CapEx; and it will be predominantly operational CapEx, because we have, as you know, finished our building cycle.

Okay.

Is there any way to quantify of the 62% gross margins in the quarter how many basis points came from foreign exchange?

Start trying to peel away the onion a little bit to understand it.

If you look at that, I mean, there's a lot of factors that impact on the margin -- geographic mix, product mix, ASP, FX, manufacturing efficiencies, et cetera..

if I look at sequentially, manufacturing efficiencies or improvements in logistics and so on, and FX, and had a similar impact.

And they were the key drivers.

Okay.

So just sort of take the improvement sequentially, divide it in half.

Is that the right way to think about it, or is that -- ?

Yes, well, they're the key drivers.

We had slightly better product mix, slightly worse geographic mix, and your ASPs were always there.

But the big two drivers were the FX and then the manufacturing efficiencies or improvements.

Okay, helpful.

Thank you.

Respironics has recently had a recall.

Is there anything you can comment on that and what it may mean for your position in the market, or did you see anything from that in the quarter?

We have heard buzz, but one of the things we ask our sales force to be disciplined and be focused on positive selling, and focus on the benefits that our products can bring to market.

It's not something that we talk about a lot and it's not something that we promote within our commercial organization.

Okay.

Will we be some of your new products at MedTrade this fall?

Maybe.

That was a great try, great try.

Okie dokie.

Thank you very much.

You bet.

Your next question comes from the line of Michael Matson with Wells Fargo Securities.

Please proceed.

Hi, just sort of related to Joanne's question.

I think last quarter you all said that you saw a net $0.05 positive impact on your EPS from currency.

I was wondering if you could qualify what the overall impact from currency was this quarter?

Yes, Michael, it was pretty strong this quarter.

I estimate in the order of $0.10.

Okay.

And then with regards to the increased compliance documentation requirements from Medicare, are you seeing that from other private payors as well?

And then sort of as a follow-up to that, what happens with the CPAP units when patients are not compliant or they don't go back to check in with their doctor after they have been using it and the HME isn't able to collect all the reimbursement?

Are they able to pull those products back and put them back into service?

So with regards to the first question, we're seeing some interest, but I'm not hearing about it -- any broad scale adoption of changes in the compliance monitoring world.

With regards to what are they doing with the units, they have always had a certain amount of units that have come back.

And they usually -- different players use them differently.

Some of them put them in loaner pools so that they can have -- use them with the initial patients, and then once they're compliant they will put out new units on them.

So some of them sort of have these loaner pools they use during the introductory phase.

Some of them donate it to charity.

There's a lot of different uses.

I think the key emphasis on this, though, what the HME's are really driving towards, is improving compliance.

So I think that this regulation, although certainly none of the HME's would necessarily ask for it, I think what they're finding is that there's a significant unintended benefit -- or maybe it's intended benefit, let's give it the benefit of the doubt -- that there is more emphasis on compliance and that it appears that there may be an improvement in compliance, which means you will have less units coming back anyway, and you will have better long-term prospects with these compliant users.

Okay.

And then, your cash is now more than 10% of your market cap.

And I guess just doing some rough math, the 10 million shares that you have been authorized to repurchase would eat up pretty much all the cash you have right now.

Can I infer from that that you're not going to really be looking at acquisitions?

Or are you active kind of in the business development area?

And are there things out there that you could actually buy that would fit with your business model?

So I wouldn't directly associate either our gross or our net cash position with the -- entirety in the buyback.

I mean, that's certainly one use of cash, and obviously we have -- gosh, if you look over the last 18 months, we have used about $140 million in cash buying back shares.

So it's certainly one of the uses of cash.

Are we looking at potential acquisition targets or investments in various forms?

Absolutely.

We always do that.

And one of the things that we changed organizationally a year ago is we went to a strategic business unit structure that allows us to look at the way that we develop and acquire technologies in a different way.

And that certainly opens up the avenue for us to be a bit more proactive in our sort of appearance or the way that we look at different opportunities.

I'll say this though, we remain disciplined.

And one of the strengths, I think, of ResMed over time has been the fact that cash does not burn a hole in our pocket, that we do not go out and try to chase the next deal.

We are in a very, very attractive underpenetrated market.

We're a market leader within that segment; and so our threshold for looking at acquisitions is quite high.

We want to make sure that it either helps us in our core business or it represents a significant upside growth opportunity, and we're rather disciplined when we look at those things.

So it's not going to burn a hole in our pocket.

We feel that we are in very strong financial condition, it holds us in great stead during the times when other companies may feel challenged, and we feel good about that.

Okay.

And then just one quick question on the guidance ranges that were given on your operating expenses.

Do those include your stock based compensation expense -- the SG&A in particular, the 31 to 33%, I think, is what was the guidance.

Yes, they do.

Okay.

Thanks.

You bet.

Your next question comes from the line of David [Stinson] with RBS.

Please proceed.

Morning guys, thanks for taking my call.

Look, I just want your impressions of the potential for U.S.

health care reform, and then the impact of that on ResMed going forward?

Sure.

Well, I mean, I think it's anybody's guess at this point what kind of health care reform takes place.

I mean, it will be hard to believe that there will be no legislation in the area, and the question is just how far reaching it is and what the -- both the intended and unintended consequences of that are.

I will say that I think we feel ourselves well-positioned whether or not health care reform comes through.

And the reason is, when you look at the fundamentals of what we do, we are sitting in the middle of the metabolic syndrome, and sleep disorder breathing touches on the most costly, chronic disorders on the planet.

And so whether you're talking about diabetes, whether you're talking about heart failure, whether you're talking about COPD with our ventilation business, we have the ability of providing very cost effective care.

And what are they trying to do?

As we discussed earlier today, health care systems across the globe have been trying to either eliminator de-skill labor in order to take costs down, and they're trying to take people out of costly care setting such as the hospitals, and put them in lower cost settings.

And guess where that is?

That's at home.

That's the most cost effective way of providing care.

So we are, I think, very, very strategically positioned, regardless of what side things come down on.

And I mentioned before the National Institute of Clinical Excellence, right?

And nobody would disagree, I believe, that the NHS is probably one of the most frugal health care systems in the planet.

And they were certainly ahead of the curve in the establishment of the National Institute of Clinical Excellence to look at the health economic situation and to make sure that there is an economic balance in the care process.

And I think it's very important to note.

They came out with a study after looking at the data and said it is cost advantageous to identify and treat more people with sleep disorder breathing.

So to the extent that comparative effectiveness comes out, let's say, and to the extent that that's based on the NICE standards, which you would imagine at least in part it would be, to me that bodes well.

So we're not so concerned about the whole changes that are forecasted here.

Could it put more people into the system?

You bet.

Is that a benefit to us?

Yes.

Could it be more focused on cost control?

You bet.

Do we position ourselves very well as a category that helps control costs in the health care systems?

You bet.

I think we are at a very unique and a very well-positioned part of the industry.

Thanks for that.

And just as a follow-up, just like a bit of color, I guess, in terms of rest of world, the relative performance of Asia versus EU quarter?

Yes.

So for us, Asia Pac represents under 10% of our business and it tends to be a very lumpy business.

So quarter to quarter trends are really hard to pick out.

If you look at over the last year, not talking about any given quarter, it was very, very good strong growth.

And we tend to still be dominated first by Japan and second by Australia and New Zealand.

And the other markets, though they certainly represent significant long-term upside opportunity, remain on the smaller side.

Okay, thanks guys, very much.

You bet.

I would now like to turn the call back other to Kieran Gallahue for closing remarks.

You may proceed.

Well, thank you, Keesha, and thank you all for joining us, as always.

And as always, I also want to thank all of our employees across the globe in their various functions, because ResMed is a collection of its individuals acting as a team, and we have fantastic team members in all the functions and across the globe, and these results -- these stellar results -- are really a result of their efforts and their dedication to patient care.

I can say that we're excited about our future.

We have got high margin exciting new products rolling out over the course of the next year.

The market for sleep disorder breathing is still highly underpenetrated.

New policies approving the use of home testing are going to reduce the barriers for accessing patient care.

We have got a stellar balance sheet, significant operating cash flow; and as I mentioned, an absolutely first rate team to ensure and focus on execution.

So thank you very much, and I look forward -- and we look forward -- to updating you as the fiscal year 2010 progresses.

Thanks, Keesha.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.