瑞思邁 (RMD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal Q1 2010 ResMed Inc.

earnings conference call.

My name is Marcia and I will be your coordinator for today's call.

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

We will conduct a question-and-answer session toward the end of this conference.

The Company has asked me to address certain matters.

First, ResMed does not authorize the recording of any portion of this conference call for any purpose.

Second, during the conference call, ResMed may make forward-looking statements such as projections of future revenue or earnings, new product development or new markets for the Company's products.

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

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

These factors are discussed in ResMed's SEC filings such as Form 10-Q and 10-K, which can be accessed through the Company's website 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, Marcia, good afternoon and welcome to ResMed's first-quarter earnings call.

Certainly glad, we're having it today and not competing with the New York Yankees and Joe Burke and the World Series celebration tomorrow.

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

We'll then take your questions.

Well, we had another very solid quarter and we're pleased to report that global revenue in the first quarter of 2010 grew 13% or up 16% on a constant currency basis.

Revenue in the Americas grew by a very encouraging 19% year over year.

Rest of world revenue increased by 8% but in constant currency terms grew 13%.

Europe and Asia-Pac sales were quite solid this quarter.

As in previous quarters, currency has some effect on ROW revenue.

GAAP EPS increased a remarkable 53% to %0.55 per share.

Excluding amortization of acquired intangibles EPS was $0.01 better at $0.56 per share.

We projected that we'd be able to sustain gross margins in the 60% to 62% range in the face of a strengthening Australian dollar and are pleased to report that gross margin was, in fact, 60.8% in Q1, benefiting from favorable product mix due to an increase in sales of our high margin masks and high-end flow generators, as well as, continued success in leveraging manufacturing and logistics cost efficiencies across our global organization.

Again, we had a very strong performance in operating cash flow, which came in at $64.1 million demonstrating our commitment to strong operating performance in earnings and a commitment to working capital control.

Our balance sheet remains extremely solid with cash and cash equivalents balance at the end of Q1 of around $478 million.

We also experienced balance growth across product categories with global flow generator sales up 12% or up 15% in constant currency and mask segments growing at a robust 15% during the quarter, a 17% increase on a constant currency basis.

Sales of America's flow generators were up 14% year over year in Q1 and sales in ROW improved to 15% in constant currency terms.

Globally the growth was mainly driven by strong sales of our high end sleep devices, once again, led by the strong sales of our AutoSet category, where we have a big advantage on noise and comfort.

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 is helping to differentiate ResMed from our competitors with improved comfort and reduced noise.

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

We believe, we're taking market share in both the new patient population and the install base.

Mass sales were extremely strong this quarter and grew 23% in the Americas and in constant currency terms grew 8% in ROW.

Mask sales in the Americas were strong across multiple segments, including excellent progress with our Mirage Quattro Full Face Mask, our Mirage Activa LT Nasal Mask and Swift LT and Swift LT for Her nasal pillow interfaces.

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

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

And to add to our offerings of small lightweight masks, we recently launched the Swift FX Nasal Pillow Mask in Europe, our lightest mask to date.

We also just launched our first-ever gel mask with the Mirage SoftGel.

We showed the mask at Med Trades and have had a fabulous response both at the show and in our early days of the market.

And in October, we announced that we acquired Laboratories Narval.

Based in France, Narval manufactures and distributes the Narval ORM, an innovative, mandibular repositioning device that offers a solution to patients for snoring and mild, obstructive, sleep apnea.

With this acquisition, we add another therapy to complement our existing positive airway, pressure-based solutions.

In the near term, we plan to commercialize this device primarily in France, where it's presently the only device with established reimbursement.

Over time, we will evaluate other markets and expand into other geographies as it makes sense.

Last March, we indicated that we would have a very active 18 or so months of product launches.

As you can see from the past few months, we are well on track to meeting that commitment.

As noted earlier, we began taking orders for the SoftGel mask in the US during October and will commence product shipments, in fact, have commenced product shipments in November.

In addition, we launched the Swift FX in Europe during October.

We expect that each of these products will be launched on a global basis over the course of the remainder of this fiscal year.

Additionally, in July, as promised, we introduced the ApneaLink Plus, our type three, home diagnostic device that meets the existing reimbursement and physician requirements.

As we've 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 home sleep testing was here to stay in calendar year 2008.

In calendar year 2009, as we expected, multiple healthcare 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 results 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 people of all ages, weights, genders and races, it's becoming widely recognized that heart disease and diabetes, particularly, tend to go hand in hand with sleep disorder breathing, and that treatments for sleep disorder breathing could not only improve health but may also dramatically lower medical costs associated with these populations.

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

It seems almost sadly routine that we hear of airline or trucking mishaps that are linked to sleep issues.

In addition, just recently the US National Safety Board stepped up its campaign to test all drivers for sleep apnea.

The NTSB has written to the US Coast Guard and Federal Motor Carrier Safety Administration recommending screening for all pilots, bus and truck drivers for sleep apnea.

The NTSB recommendation follows a string of transport accidents in which sleep apnea was identified as a factor in driver and pilot performance.

Finally, as part of our strategy to improve awareness of sleep disorder breathing in the physician community, we are embarking on a series of branded and unbranded medical education programs.

In fact, we just announced a collaboration with Philips to support the sleep community's efforts to educate primary care physicians funded with educational grants.

This is just a part of our continued commitment to raising the awareness of the dangers of sleep disorder breathing within the medical community.

In summary, Q1 once again, demonstrated the strength of our global reach and balanced business, while providing very positive signals for sustained industry growth and ResMed growth as we look forward.

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

Brett?

Right, thanks, Kieran.

I'll just briefly run through our September quarter results.

So just to recap revenue for the September quarter was $247 million, an increase of 13% over the prior year quarter and as expected, unfavorable currency movements reduced our first-quarter revenues by approximately $5.3 million.

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

Our income from operations for the quarter is $52.7 million, an increase of 44% over the prior year quarter and net income for the quarter was $42.1 million, an increase of 50% over the prior year quarter.

On a diluted earnings per share basis for the quarter it was $0.55, an increase of 53% over the prior year quarter.

Our gross margin for the September quarter was 60.8%, down sequentially from Q4 '09.

We did benefit from favorable product mix but this was offset by unfavorable currency impact and some unfavorable geographic mix.

Looking forward, the recent depreciation of the Australian dollar will have a negative impact on our gross margin.

However, assuming current exchange rates, we still expect our gross margin to be around 60% for the balance of fiscal year 2010.

SG&A expenses for the quarter were $76.8 million, an increase of 8% over the prior year quarter.

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

The increase in SG&A reflects expenses to support sales growth, as well as, activities targeted at increasing the awareness and diagnosis of sleep disorder breathing.

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

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

R&D expenses for the quarter were $17.9 million, an increase of 4% over the prior year quarter.

In constant currency terms, R&D expenses increased by 9% over the prior year quarter.

R&D as a percentage of revenue was 7% compared to 8% in 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 the balance of fiscal year 2010.

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

Amortization of acquired intangibles is $1.8 million for the quarter and stock-based compensation expense for the quarter was $6.5 million.

During the quarter, we also donated $1 million to the ResMed Foundation.

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

Turning now to revenues in more detail.

Overall, Americas sales were $134.7 million, an increase of 19% over the prior year quarter.

This was driven by strong growth in both flow generators and masks with strong contributions from our high end APAP devices, new range of bilevels and full face masks.

Sales outside of the Americas totaled $112.3 million, an increase of 8% over the prior year quarter.

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

In constant currency terms, sales outside the Americas increased by 13% over the prior year quarter.

Breaking out revenues between product segments, in the Americas flow generator sales increased by 14% over the prior year quarter, while masks and other increased by 23%.

For revenues outside the Americas and in constant currency terms, flow generators increased by 15% while masks and other increased by 8%.

On a group basis in constant currency terms, flow generators sales increased by 15% while masks and other increased by 17%.

Our cash flow from operations was $64.1 million for the quarter reflecting strong underlying earnings and working capital management.

In the next quarter, our operating cash flow will be significantly impacted by an expected Australian tax payment traditionally made in the calendar fourth quarter, but should resume to robust levels after that.

Capital expenditures for the quarter was $14.1 million, including $4.3 million in completion costs associated with our new global headquarters in San Diego.

Depreciation and amortization for the September quarter totaled $14.1 million.

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

During the quarter, we repurchased 789,000 shares for a consideration of $35.7 million as part of our ongoing buyback program.

As of today, we have repurchased 994,000 shares out of a total authorized buyback of 10 million shares.

Our balance sheet remains strong and conservatively geared.

At September 30 total assets stood at $1.6 billion and net equity was $1.2 billion.

Group external debt was $163 million, while cash and cash equivalents totaled $478 million.

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

All right.

Thanks, Brett, and Marcia, we'll now open it up to calls or questions, I should say.

(Operator Instructions).

Your first question comes from the line of David Clair from Piper Jaffray.

Please, proceed, sir.

Yes, hi guys.

Congratulations.

Thank you.

I was hoping you could give us some color on your ROW performance.

Saw a pretty nice acceleration here.

What was driving this and should we expect that to continue?

Yes.

Well, it was really a balanced performance across the ROW regions.

You have seen that the last couple of quarters, we have had some strong performance and I just think we as a team have a lot of good things going for it right now.

It's executing extremely well.

The leadership team under Stein Jacobsen and under Rob Douglas are both performing extremely well.

The product lineup is very well suited to the marketplace and stacks up well from a -- from the perspective of competitive alternatives.

So, you know, all in all, I think it's no silver bullet here.

It's not just one single item.

It's strong performance across multiple geographies and we're feeling good about their performance.

Okay.

And then just quickly on the competitive front here.

Can you give us your take on -- there was a launch by a competitor of yours.

Just wondering, if you're seeing any kind of impact in the field from that and maybe your take on how your lineup stacks up against their refreshed lineup.

Sure.

And you're speaking specifically about the launch of flow generator series by our primary competitor.

Yes.

And so to date, not hearing a whole lot.

I mean, obviously, any new product is going to get trial and there's going to be a lot of sort of conversations around the product.

I'll say that what we're mainly hearing back from customers is a feeling that it's an attempt to compete with the SA2 to try to basically play catch-up with that item -- with that product series.

There's a couple nice features that we appreciate, which is some investment in algorithms and informatics, which we think is good for the industry.

So, overall, I'd say the summary is there's some feature sets in there which will be good for raising the awareness of the industry.

It's good to have more than one player that's focusing on some of these high end algorithms, but when you look at our product lineup versus the competitive, I guess, my summary would be we remain very comfortable with our product lineup and we remain even more comfortable with our product pipeline.

Okay.

And then just a real quick one for Brett here, can you give us the foreign exchange impact on EPS?

Yes, it's Brett.

For this quarter, it's around about the 5% to 6% mark positive there.

It's worth noting, though, even if you sort of strip that out, we still had a really strong quarter.

We would have had growth on the EPS line of over 35% even without that sort of currency impact, but overall that was sort of the region of the impact.

Okay.

That's it for me.

Congratulations.

Thanks, Dave.

And your next question comes from the line of Saul Hadassin from Credit Suisse.

Please proceed.

Good morning, guys, and thanks for taking my call.

I just wanted to ask you about competitive bidding in the US.

We're seeing some updates coming out of CMS, the process [has been kicked off].

Just your thoughts on the outlook from Medicare [concerning] your business in terms of price.

Well, again, just to sort of benchmark it here, just a reminder, from a global sales perspective, we estimate it's somewhere around 10% of the global sales that are associated with US Medicare-related patients.

So that's point one.

Point two, no real surprises.

I mean, the updates that have been provided over the last year about how this thing's going roll out, the fact they moved it from ten MSAs down to nine MSAs.

Just really I got to say there's just no changes.

There's obviously a lot of activity at the HME levels.

They've been working on it for a number of months, although, not a lot of chatter at it from the customer perspective.

If I compare this to two years ago and the amount of chatter when it was the first time through, I think there was almost sort of a feeling of panic.

This time it's much more of a businessman-like sort of approach to it.

It's sort of they kind of know the drill and they're going to go through it.

Still unclear, even after the bidding, what's going to happen.

If it continues to roll through, it doesn't get impacted for what, another year, 14 months as we get into calendar year 2011 and no clear understanding about whether it will roll out after that.

So I guess my summary would be, business as usual at this point.

Sure, okay.

And then maybe just a comment on your thoughts on US healthcare reform.

And particularly with regards to the medical device industry, has there been any updates since you've spoken last week and what's your expectation once a final bill does emerge?

Yes.

That would be a one for Las Vegas I think at this point.

As you know, those bills are all over the place and my feeling on it -- our feelings is, if you just step back and you look at it and you say, what are the fundamentals they're trying to drive towards.

And to the extent that there's an attempt to try to become more efficient in healthcare to the extent that there's a desire to increase the access to bring more patients into the system, both those trends are actually -- could be very positive from our perspective.

Certainly, by increasing the number of covered lives, sleep disorder breathing is a disorder that affects people of all walks in all sorts of socioeconomic classes.

In fact, you could argue that those are some of the areas that they're not being covered today by insurance may have the highest prevalence rates.

And you also have the opportunity to look a bit more holistically at the cost of care and it's very clear that hospital systems around the planet, not just in the US, are trying to keep people out of hospitals, trying to keep them out of acute care settings and trying to manage them in a more cost effective way.

And they're also trying to deal with the rising cost of managing chronic disorders.

And you look at sleep disorder breathing, we are sitting in the middle of some of the most costly co-morbidities or chronic disorders in the planet.

We have a very cost effective way of helping to treat patients and increasing access for patients can only be a good thing.

I think the best proof statement on that is if you look at the National Institute of Clinical Excellence that supports the national health system in the UK.

I mean you can argue that the UK is one of the more frugal healthcare environments on the planet and has some very good outcomes data as well.

The National Institute of Clinical Excellence has really been sort of the grand daddy of health economic bodies around the globe and 18 months ago, they analyzed the sleep apnea space and their recommendation was that it was cost beneficial in order to identify and treat more patients with sleep disorder breathing.

So when you look at those kinds of indicators and you say if we move anywhere in the direction towards that level of frugality, and then, there's some common sense put in place as NICE has demonstrated, there could be some very positive aspects that come out of this.

All right.

Thank you very much for that.

Thank you.

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

Please proceed.

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

Thank you.

Just a couple of housekeeping items and then, I'll get to some questions.

I know you broke out US generators en masse on a constant currency basis.

Can you just give us the numbers just for everyone's models?

Brett, you want to go through those?

Yes.

Just on the actual -- the numbers, you just want the numbers, Josh, is that what you're after?

Yes.

That would be great.

These would be the headline numbers.

Yes.

For the US the flow gen was $64.8 million, masks and other was $69.9 million, total $134.7 million.

For the rest of the world, flow gens were $75.8 million, masks and other $36.5 million for $112.3 million total.

Perfect.

And then just on the gross margin, I know you made a comment, can you just help us, I know you gave a range and you talked about 60%.

Just because I know there's a lot of stuff going on with the gross margin as far as product mix and the new products obviously higher and obviously currency.

I mean from this range, should we sort of see it dip first and then come back up?

Should it be kind of constant over the year?

Can you just give us any color how we should think about it?

I know you guys don't like to give quarterly guidance but it kind of moves it around a lot just to give us some sort of gauge?

Yes, Josh, as you said, there's a lot of things impacting on it, the geographic mix, the product mix, new product releases and so on, ASPs and then obviously currency as well.

If you look at it I suppose, we get benefit from the Euro which is appreciating at the moment.

So that's going to help us and help us on a headline basis in terms of revenue as well.

The Aussie dollar depreciating will hurt us obviously.

And that's seen coming from a low probably around six months ago of about AUD0.66 and has been steadily climbing through the quarter.

We felt some of that impact clearly that quarter.

We'll feel some more of the impact through Q2 and still be manifesting in Q3, as well.

But then, I would expect that that would then start to improve as we went around through Q4 and we're pretty much through those sort of year on year currency impacts.

So if you think of it like that, does that make sense?

Yes, that is actually very, very helpful.

Part of that is, you get sort of the temporary effect on the currency side, but the lasting effects are the things that are associated with product mix, with new product flow, with operational improvements that we've been engaging in throughout the globe and structural changes such as increasing manufacturing in our Singapore facility.

So there's sort of the temporary sort of things that are really hard to forecast and there's the longer trend items that are quite positive for us.

That's exactly right and we've been working hard on the cost initiatives, on the manufacturing and so on.

You guys know that we did move to Singapore, established a factory there to enhance the factory down here in Sydney.

So there's a lot of activity that goes on beneath the surface there that we'll continue to work on really just to sustain a reduction in that overall cost basin, and we'll continue to do that.

And new products, obviously, we'll hope as well.

Okay, great.

Thank you.

And then just Kieran, I will turn to you for a second here.

I know you commented about the competitive launch.

I know you don't want to knock the products and you made your comments already.

But I guess, I'm just wondering, have you really seen them out there yet?

I know typically when Respironics launch it's some sort of limited release and I'm just wondering -- obviously, there's still sampling in that limited release but have you really seen it out there yet to the point that, you know, your guys can come back and evaluate or, you know, it's not really out there yet, it's sort of trickling into the market?

No.

I think as you noted at Med Trade, I think, they did an excellent job, as they always do, in trying to establish awareness about the new product flow and I'm sure that transcends into the salesforce and into their call patterns.

You're absolutely right that any product launched from any competitor, or from ResMed for that matter, you go through a process where you get initial trial and then the real question mark is after that initial trial what are your reorder rates like and then how does it stack up competitively.

And at the same time, you have sort of a push-through of some of the older inventory to try to make sure that you don't get caught with any obsolescence on that.

So I would expect during this -- since the launch and we'll be feeling for a few months that there will be sort of that blend of their new product coming in and cleaning out the old inventory and what not, but the awareness is there.

There is no doubt.

I have a lot of respect for them and their communication capabilities and there's no doubt that there should be very few customers that don't know about that new product yet.

And pricing is being maintained while they've launched their new product?

Yes.

I mean they are -- I'll say that from the beginning of the integration of the Respironics team and the Philips team, we've felt they've been very good competitors.

I think we all recognize that there's a tremendous amount of value that is brought to bear and I won't limit that to Respironics.

I'll say that throughout the industry, that there's a tremendous amount of value that we bring to customers.

And I think we all know that price competition is a short term game and that we all need to be focusing on higher value opportunities and how to reduce the costs to our customers.

And you reduce the costs by simplifying your supply chain.

You reduce the costs by helping to drive more volume into the marketplace.

You reduce the costs by this focus on informatics or algorithms or what not.

So that's why we at this point feel pretty comfortable with the state of where the industry's at.

Okay, great.

And then just one final question and I'll get back in queue here.

My ResMed countdown clock to your new generator launch (multiple speakers).

I think it is hitting nine months now.

Is that correct?

Are we on time with that or do I need to set that?

Hey, I really appreciate the questions.

You know, thank you for the questions.

And not to be flippant, we said beginning last March that we were going to have a very active 18 months or so of product launches and the team has done a very good job of living up to that.

We started in the first quarter with the ApneaLink Plus.

We now have the Swift FX, which was launched in Europe and before the end of this fiscal year will be global.

We've got the gel product, which has only been launched in the US and we expect before the end of the fiscal year will be launched on a global basis and certainly, we've noted that we have a flow generator platform coming but for competitive reasons and for customer reasons it's simply not appropriate for us to get specific on the timing.

Fair enough.

Thanks a lot, guys.

Congrats.

You bet.

And your next question comes from the line of Peter Bye from Jefferies & Company.

Please proceed.

Hi.

Good afternoon.

This is actually Josh Jennings in for Peter who is traveling today.

Hi, Josh.

Just first question, I guess, if you could just give a little more color in terms of the home sleep testing pilots that are ongoing in terms of maybe numbers and how they're faring and when do you expect home sleep diagnostics to become more of a meaningful impact to your sales base?

All right, Josh, thanks for the question.

So, first of all, I think there's certain home sleep testing pilots that we're involved with and there are many that are ongoing that are really led by the customers themselves in experimenting.

So as we expected throughout this year, there's going to be activity really across a wide range of customer types.

We are seeing primary care physicians try their hand at it, the independent diagnostic testing facilities or the IDTFs that are getting involved, sleep physicians, other types of specialists.

There's a number of different types of customers or healthcare providers that are getting involved in understanding what their role in home sleep testing could be or should be.

And you're almost seeing the first echo, if you will, in that process where there's been a learning and an iteration in it.

And what I mean by that, is there are certain groups that seem particularly interested in it and I would say the IDTFs working with the HMEs seem particularly interested and capable of providing support.

And very encouragingly, we see more and more sleep physicians who we certainly enjoy working with in that category who are beginning to understand the benefit of integrating home sleep testing along with their traditional diagnostic techniques.

And you see many of the sleep physicians who maybe a few months ago -- and I mean that literally, just a few months ago -- may have been quite reticent to think about the adoption are beginning to learn a bit more, experiment a bit more and to gain substantially more comfort with the idea of home sleep testing in their professional hands being able to be administered quite well and in a quite balanced way.

In addition, you're seeing more and more payors get engaged in this.

We, on a regular basis, get feedback from payors, local payors, national payors, of their interest in either supporting customers that have been working in home sleep testing or somehow encouraging the use of home sleep testing.

And much of this we get from feedback from the physicians themselves, who have been working with those payors.

So it's progressing.

I would say that the effect on results to date is not yet material.

We hadn't expected it to be material and, in fact, it is not material.

And that's sort of the way that you'd expect these things to roll out, which is to have people gain comfort, understand, the three Ps, process, payment and politics.

And the process and payment have been progressing quite well.

Then as I note, that the politics, which were probably a bit more intense six, nine months ago, are beginning to ease a bit but certainly by no means have disappeared and I wouldn't expect that to happen overnight.

So good progress and I'd say nothing has happened yet that is different than we had anticipated and articulated certainly earlier in the year.

And your next question comes from the line of Joanne Wuensch from BMO Capital.

Please proceed.

Hi.

Thank you for taking the question.

Very nice quarter.

Your Americas number is on fire.

I know you're introducing some new products there, but is there anything else that helped shift that quarter?

Yes.

The US organization under JC Kyrillos and supported by our SBU leaders, Mick Farrell and Don Darkin, have just been doing an excellent job of continually improving the experience that we have with our customers trying to make it easier to do business with ResMed.

They have an excellent product lineup and an excellent team.

So, again, I'll say just as I said with the ROW piece, it is a -- it's not one silver bullet.

It's execution across multiple areas and, they're just doing a great job.

Okay.

You have a nice amount of cash building on the balance sheet.

Other than stock repurchases, what should we think about uses for that cash?

So yes.

We do have a very strong balance sheet.

It's one that we're proud of and certainly one that has held us in very good position throughout this last year and allowed us to focus on our business and growing the business and growing awareness and continuing to fund our product pipeline, where perhaps other businesses needed to spend time worrying about their financial condition.

So, we have traditionally been a conservatively geared Company and we feel very good about continuing that process.

We will selectively look at opportunities to invest those dollars.

I think a good example of that was the Norval acquisition that we completed in this last quarter, which is our first sort of toe in the water into complementary therapy to PAP and one that we feel very good about in the execution of that French team, which, by the way, has already begun its integration.

It is an excellent team and one that we've welcomed with open arms into the ResMed team.

And we also have the opportunity to buy back our own stock and continue to -- as Brett noted, another $35 million was invested in this last quarter and that's on top of a substantial amount of share buybacks over the last 18 months because we feel that ResMed was a very worthy investment.

With the shift in foreign exchange environment does it make sense to change your hedging policies?

I'll let Brett answer that.

Yes.

Well, JoAnne, in spite of what's happened over the last two or three years you can detect the volatility on exchange movements that have increased significantly really.

I think you still need to continue to hedge and I think you look at what you do there within derivatives.

I mean we keep it pretty simple.

The majority is options, for example, where you're not impacted.

You're only going to lose your premium sort of thing.

We hedge the cash flows coming back to the factory.

Then, we look to naturally hedge a lot of our exposure around the group, as well, just basically leveraging our global reach, I suppose.

So we do a lot of that natural hedging as well.

And we do spend time looking at where our international revenues are and where our international expenses are and how balanced they are and they're reasonably well balanced.

So you end up [-- we are not] looking to hedge relative outperformance or underperformance of some of the major currencies such as the Euro and the Aussie.

I still think there's a place for hedging but you just have to do it in a very measured way while you are going in and really look for natural hedging and offsets wherever you can and just use that global base to your advantage.

I think so far we've done pretty well, managed a high currency environment, low currency environment and still generated great results over many years.

Terrific.

Thank you.

Thank you.

And your next question comes from the line of Mike Matson from Wells Fargo Securities.

Please, proceed, sir.

Hi.

I know that you all have talked quite a bit about the positive impact you've seen from Medicare's compliance requirements given that you're probably selling more of the Restraxx units and things like that but when I was at Med Trade, I did hear some chatter from some of the HMEs about having problems getting the patients -- Medicare patients to A, show that they're compliant and B, go back for that follow-up visit that they're required to do.

Is there any risk that that could actually turn into a negative to the degree that those folks don't end up being compliant, HME pulls that equipment back and then gives it to a new patient, thereby trimming the demand for new equipment?

Yes.

Look, I think that the key here is that the opportunity for improving compliance has always existed and what the Medicare ruling did was to focus the HMEs very strongly on the opportunity to improve compliance, all right, and that's something that we have long wanted for many, many different reasons, right?

One because it's the only way you help the patient.

That's the primary reason.

We're here to help support healthcare providers in helping patients, but it's also good business because a compliant user obviously, over time represents an annuity stream for many years of very high value products.

The idea of the Restraxx-type views of the world is to help solve the problem.

It's to be able to help those HMEs be more efficient in the way that they address the opportunities of improving compliance.

It's a management by exception tool.

So we don't expect the challenges associated with compliance to ever fully go away.

That's why HMEs play such an important role in the channel.

They're service providers and payors need to recognize the value that those HMEs are bringing to patients.

And our job is to provide technology enablement that allows them whenever possible to either lessen the labor that's involved in getting patients compliant or de-skill the labor that is being applied to it.

And many, many of the things that we do regardless of whether, by the way, it's Medicare or non-Medicare because everybody's got the same opportunity for improvement.

And so whether it's Restraxx and this fantastic management by exception tool, whether it's the Easy-Breathe waveform and designing waveforms that are more comfortable for patients.

Whether it's EPR and having the ability to make the introduction to therapy more comfortable.

Whether it's the wide range of masks that we provide, everything from nasal pillows to full face masks, from liquid silicone rubber all the way over to gel masks now.

It's all about making the experience better for the patient.

And we believe in the long run the healthcare providers, the payors, including Medicare, win in that process and the HMEs will win in that process.

So I think, we think, that the focusing that Medicare has done could always create a few bumps in road, but net net it should be a positive for this industry.

Okay.

So you see the positive factor of compliant patients replacing masks more frequently and also more sales of the Restraxx units sort of offsetting any negative factor of some patients kind of giving up their equipment and having that come back into the pool?

Look, first of all, Restraxx is an enabler, right?

So it's not a huge revenue driver or profit driver.

We provide that mostly as a service to our HMEs to help them become more efficient.

But when push comes to shove in this industry, it's about creating awareness and it's about engaging healthcare providers, including across all the various medical silos and right down to the primary care physicians.

And most importantly, it's about providing the support to those patients because when they get treated, we all know, and the data has shown, that their healthcare costs get reduced holistically, right?

The improvements in cardiovascular disease, the improvements in diabetes.

We talked about occupational health and safety and the danger of these truckers when they're not treated appropriately.

We read about these pilots that overshoot airports like in the Go Airlines case.

There are a lot of opportunities for well treated patients when they have sleep disorder breathing to be able to reduce healthcare costs overall, including, if you want to look at it on a micro basis or if you want to look at it on a macro basis.

Okay.

And then can you just quantify what the impact of currency was to your bottom line, to your EPS number this quarter?

It sounded like it was pretty minimal, but --

I think Brett went through it.

Brett, you want to go through that?

Yes.

On the EPS around $0.05 or $0.06, including there some hedging gains as well.

All right.

And as Brett noted, even if you back that out, I think the EPS was still up, what, over 35%, Brett?

Yes, exactly.

Okay.

And then it looked like your international mask growth even on a constant currency basis was a little on the weak side.

Just wondering have you really started to see the impact from the Swift FX or did that kind of come later in the quarter so it didn't really -- or even after the quarter, I guess, so it didn't really have an effect.

No.

Swift FX really was not material in those results.

And just as the question that came up before about the impact of new products whether it's us or others, you don't tend to see the full impact in that first quarter.

It tends to grow over time.

But just in general it's not unusual for two things to be in the ROW mask line, and I know you've tracked this for a while, which is A, in general it tends to grow slower in general than the US line items, and there tends to be a little bit more lumpiness on the ROW line items than you'll see in the Americas.

Okay.

That's all I've got.

Thank you.

Great.

Thanks, Mike.

And your next question comes from the line of Natalie Kelly from CBA.

Please proceed.

Thanks for taking my question.

Looking in the past, you seem to have made several vertical acquisitions picking up quite a few independent distribution companies, whereas the Norval acquisition seemed to be a little bit of a shift for you.

Just wondering whether you are seeing many opportunities sort in this space of complimentary therapy?

Thanks, Natalie.

So you're right.

We've actually done both.

We've done acquisitions within the channel.

The latest one was our Indian distributor, as an example.

And we've also done acquisitions of technology, where we believe it's strategic.

A few examples would be the motor business that now underpins so much of the innovation that we're capable of.

Other examples would be our ventilation business in France and now, of course, this -- as you're noting, Norval.

So to answer your question more broadly about complementary technologies.

We are very open-minded when we look at opportunities in the marketplace.

We strongly believe that we're here to serve patients and patient care and that it's not unlikely over time that more than one solution can be appropriate.

With that said, I will say we have never seen anything that is as efficacious and as safe as positive airway pressure, CPAP and APAP but the whole PAP therapy.

And that remains we believe the gold standard and we believe to be the core of the opportunity in treating sleep disorder breathing patients.

But we absolutely keep our eyes open for our opportunities, but we're data driven.

We look at these solutions and we want to see opportunities where's it is demonstrated that it helps patients.

We want to see opportunities to see that it's good medicine.

That it is something that's acceptable by the medical community and acceptable by our standards for patient care.

And we also need to see a pathway to profitability with those and we need to see where ResMed can benefit from investing our time and attention in that.

So those are some pretty high hurdles, but every now and again there's a company or a technology that makes sense and quite fortunately, we have the resources to be able to take advantage of those when we see them.

Thanks for that.

Yes.

And our next question comes from the line of David Stanton from RBS.

Please proceed.

Hi, good morning or good afternoon and thanks very much for taking my call.

Just following up on a previous question.

Can you give us an update on home diagnosis and whether you think volume of diagnosis particularly in the US is increasing due to this?

Yes.

So at this point the net/net answer is we do not believe there's a material impact yet from home sleep testing.

That is totally consistent where we thought this would be at this point.

This is really the year of piloting.

It's the year where the three Ps are being worked out, the payment, the process and the political situation that surrounds home sleep testing.

There has been substantial movement forward as various healthcare providers that range from IDTFs to sleep physicians to HMEs to primary care physicians have -- each of those areas has had certain players that have experimented or are experimenting with home sleep testing.

And over time we'd expect the smoke to clear and there to be certainly more than one solution that will be in the marketplace that's associated with home sleep testing.

So it is progressing quite well.

I think, as we look out over the future, we still believe that home sleep testing has the potential to have a very major effect on this marketplace over time.

And as we've been saying and we continue to believe, we don't believe that's a one night or an overnight kind of process.

It's the kind of thing that gets introduced and grows over time and signals very positively for the long term health of this industry.

Thanks.

And I guess my follow-up would be have you got any feedback from home sleep doctors in particular that they can make good money out of home sleep testing at the moment compared to further investment in the sleep labs that perhaps they own?

Thanks.

Yes.

Very interesting.

Over the last couple of months there's been a reasonably significant shift in many of the conversations where sleep physicians are approaching us and whereas, they may have been a bit concerned or more concerned maybe nine months ago, particularly, with either the economics or the politics associated with it.

They seem to be getting to a point where many more of them are getting more comfortable with the idea of integrating home sleep testing.

Some of them are a bit more advanced than others.

Those -- we certainly have some of our customers, which have said they've been able to grow their business by using home sleep testing.

And the way that they're viewing it is -- and again, it varies by the individual -- but is looking at many of the patients who for whatever reason may not show up at the lab.

So they get a referral into the sleep lab and a good 30% of those patients historically have never showed up.

And clearly, some of those people are either not showing up either because of the expense or because of the inconvenience associated with the overnight sleep test.

70% do show up, but 30% is a big number and so you have some of those sleep physicians who are looking at that and saying hey, this is not a matter of replacing somebody who would have been in a bed anyway.

This is a matter of getting somebody who would not have been -- we would not have been able to reach.

So it's truly a new patient or an incremental patient that you wouldn't have been able to reach.

And in addition what they're finding is, that some of those patients, once they test them with a home sleep testing device still require, either because they're borderline or because there's something very unusual about them, they still require a full PSG.

So those are the ones that are getting more comfortable more quickly.

And obviously, you'll have some of those faster movers in the marketplace and you'll have some that will lag behind that and may take a bit longer to feel comfortable and may need to see the sleep physician across town and see how they've adopted it before they feel comfortable in the adoption phase.

So it's a very interesting process that they're going through, but the more data they get, it seems the more comfortable they get.

Thanks a lot.

You bet.

And your next question comes from the line of Jason Mills from Canaccord Adams.

Please proceed.

Hi.

This is Jamar for Jason.

Hi, Jim.

It is Jamar Ismail.

Jamar, I'm sorry.

I was looking at something else.

Me and my -- I can't hear.

All right, Jamar.

First of all, good quarter.

I have a couple questions first on the EPS effect for foreign exchange.

What are you guys thinking about in the upcoming quarters?

I mean $0.05 to $0.6 is fairly high this quarter.

Going forward, talking about different hedging strategies do you see the same effect next quarter or a little bit lower?

Now, Jamar, it's Brett.

If you look at this quarter, we're in the Q1, we had a positive impact there.

As the currency swings around, particularly Aussie, and works its way through inventory into our cost of sales, I'd expect for next quarter, for example, you're probably looking around that, $0.04 or $0.05 negative impact on EPS, all things being equal.

All right.

Changing gears to the US market, I know at Med Trade you talked a little bit about the US market being -- or overall market being a little bit lower than you had seen in the past.

What are you thinking now?

I'm sorry, can you repeat that?

Just thinking about market growth rates.

Yes.

What are you thinking about market growth compared to, you know, historical growth rates?

Okay, yes.

Can you talk about --

We haven't really seen a significant change in the last nine months.

So you go back to the beginning of the year and as we said at the time, we thought that maybe there was a couple points that were shaved off, but it was still double-digit growth on the revenue side and the volume side was still close to that range of around the 15% or so.

And we continue to feel that the market has grown at quite a healthy clip.

And then, when we look at the fundamentals of awareness building, of diagnostic simplification, about -- just in general look at the various very positive signals in this marketplace, it still looks very, very good.

So we remain very, very comfortable about the marketplace.

We continue to invest both in the short term and the long term because you don't take market growth for granted.

So these efforts on the industry side to raise awareness and educate primary care physicians are very important.

The advent of home sleep testing is very important.

This flood of data that continues on the link between sleep disorder breathing and heart failure and cardiovascular disease and diabetes is just very, very encouraging as we look out over the medium and the long term in market expansion.

All right.

Thanks a lot.

Thank you.

Good quarter.

And your next question comes from the line of Dan Herron from UBS.

Please proceed.

Good morning.

I just wanted to ask -- the trend that you've seen with the mix shift toward the higher end devices and the flow generators, is that a trend that's slowing or stable or accelerating?

No.

We see a continued trend.

It's certainly not slowing and there was a period there it was accelerating it.

It continues to grow above market rate.

So it's -- let's just call it a stable continuing positive shift mix that we've seen in this industry.

And again, I think that bodes well for this industry, right, because many of these higher end feature sets are oriented towards patient comfort, which can improve compliance, and they're oriented towards the reduction of labor that's required by the HME or the sleep physician in helping patients get acclimated to their therapy.

So good solid positive trends and they continue.

Thank you.

We are now at the one hour mark.

So I will turn the call back over to Kieran Gallahue for his final remarks.

Please proceed.

That's great.

Thank you, Marcia.

And thank you, everybody, for your participation in this call.

And as always, I want to thank our employees all over the globe in their various functions because once again, these results are the result of their passion and their hard work and their efforts.

So fantastic job by the ResMed team across the globe.

And I can tell you that we, on the back of a fantastic Q1, that we remain excited about our future.

We've got high margin exciting new products that are rolling out over the year.

The market for sleep disorder breathing is still highly underpenetrated.

We've got new policies that are simplifying the diagnostic process.

We've got a stellar balance sheet, significant operating cash flow, and as I noted, we have an absolutely stellar team.

So thank you very much for your attention and we look forward to continuing to update you as we move through the fiscal year.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.