瑞思邁 (RMD) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 ResMed earnings conference call.

I'll be your operator for today.

(Operator Instructions) The Company has asked me to address certain matters.

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

Second, during the conference call ResMed may make forward-looking statements such as projections of future revenue 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 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 website at www.resmed.com.

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

Mr.

Gallahue, please go ahead, sir.

Thanks, Jennifer.

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

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

We will then take your questions.

Well, we are very pleased to report today that we just achieved an important milestone at ResMed by crossing the billion dollar mark in trailing 12 month revenue and reporting our 60th consecutive quarter of revenue growth.

We had another very solid quarter and are pleased to report that global revenue in the second quarter of 2010 grew 23% or up 17% on a constant currency basis.

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

ROW revenue increased by 27% and in constant currency terms grew 14%.

In contrast to recent quarters currency movements had a positive impact on our ROW revenue this quarter.

GAAP EPS increased 36% to $0.60 excluding amortization of acquired intangibles EPS was two pennies better at $0.62 per share.

We're pleased to report that in the face of the strengthening Australian dollar gross margins were 59.7% or approximately 60% in Q2 benefiting from the continued success in leveraging manufacturing and logistics cost efficiencies across our global organization and offset primarily by the appreciation of the Aus dollar.

Cash flow from operations was $11.6 million.

Operating cash flow for the December quarter was adversely impacted by the timing of a $61.7 million income tax payment that we mentioned would be forthcoming during our last quarter conference call.

We expect cash flow to return to robust levels as we continue to demonstrate our commitment to strong operating performance in earnings and a commitment to working capital control.

Our balance sheet remains extremely solid with the cash and cash equivalent balance at the end of Q2 just over $451 million.

We also experienced balance growth across product categories with global flow generator sales up 29% or up 21% in constant currency and mass segments growing at 17% during the quarter, a 13% increase on a constant currency basis.

Sales of Americas flow generators were up 24% year over year in Q2 and sales in ROW improved to 17% in constant currency terms.

Globally the growth was mainly driven by strong sales of our high end fleet devices once again led by our autoset CS and VPAP auto where we have a large advantage in both noise and comfort.

The whisper quiet comfortable performance of the Easy-Breathe continues to be recognized and best in class and is truly helping us differentiate ResMed as best in class from our competitors.

In the mask category we believe we continue to take market share in both new patient populations and the install base.

Mask sales were quite robust this quarter growing 16% in the Americas and in constant currency terms 8% in ROW.

Our newly launched SoftGel mask is off to an encouraging start in its early days and we've had a fabulous response from both physicians and from patients.

We expect to continue launching various sizes in the Americas and broadening our launch to other geographies throughout this year.

The market is telling us that they appreciate the value and the comfort of quietness that this mask demonstrates.

The Swift FX, the newest member of the Swift family and our lightest mask to date, launched outside the Americas during Q1 and has just launched in the Americas.

So it is just now going global in all sizes, just as with the SoftGel mask, the feedback from the market has been outstanding.

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

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

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

Today we are officially announcing the release of newest generation of flow generators, the ResMed F9 series.

The initial introduction will be the F9 autoset and F9 elite products expanding to other flow generators over time.

We expect the launch to begin first in Europe and then expand to the Americas later this quarter.

We're extremely proud and excited about the unique advantages of the F9 and what they'll bring to the market.

The F9 will have a new look and feel that will integrate within the bedroom while delivering advanced and improved features such as trim line and heated circuit or hose for improved patient comfort, a simplified user interface and an enhanced autoset algorithm.

It is absolutely going to be an outstanding product.

A quick update on home sleep testing.

The home sleep testing continues to be piloted in various forms.

It was proven that HST was here to stay in calendar year 2008 and in calendar year 2009 just as we expected multiple healthcare providers began piloting HST in various models.

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

We've heard that a growing number of commercial payors are in discussions on recommending and perhaps even requiring HST as a first line diagnostic.

We also expect growth result from continued 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 recognize that heart disease and diabetes particularly tend to go hand in hand with sleep disorder breathing and that treatment for SDB could not only improve health but also dramatically lower medical costs associated with these populations.

We also know that SDB can have a substantial effect on presentism as well as absenteeism and represent a large opportunity within occupational health and safety and the transportation business for diagnosis and treatment of sleep disorder breathing.

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

As previously reported, we are involved in a collaboration with Phillips to support the sleep community's efforts to educate primary care physicians funded with educational grants.

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

So in summary, Q2 once again demonstrated the strength of our global reached and balanced business while providing very positive signals for sustained industry growth as we look forward.

Our new product flow is robust and customer meaningful and demonstrates that our commitment to innovation is paying dividends.

Before I turn over the call to Brett I just want to remind everyone or inform those of you who haven't heard, that we're ringing the closing bell at the NYSE on Monday February 8th.

We'll be hosting an investor relations meeting at the exchange beforehand.

If you'd like to attend or need details please contact Connie Bienfait, our director of investor relations.

Now I'll turn the call over to Brett to provide some additional detail.

Thanks, Kieran.

I'll briefly run through our December quarter results.

Revenue as mentioned for the December quarter was $275.1 million, an increase of 23% over the prior year quarter.

We did have favorable currency movements that increased second quarter revenues by approximately $13.3 million.

In constant currency terms revenue increased by 17% over the prior year quarter.

Income from operations for the quarter was $57.9 million, an increase of 34% over the prior year quarter and net income for the quarter was $46 million, an increase of 36% over the prior year quarter.

Diluted earnings per share for the quarter were $0.60 an increase of 36% over the prior year quarter.

Gross margin for the December quarter was 59.7%, down sequentially from Q1, FY '10 largely attributable to an unfavorable currency impact resulting from the appreciation of the Australian dollar relative to the US dollar.

Looking forward exchange rate volatility will continue to manifest in our gross margins.

In particular, recent depreciation of the Euro against the US dollar together with the strong Australian dollar will impact our gross margin.

SG&A expenses for the quarter were $84.1 million, an increase of 20% over the prior year quarter.

In constant currency terms SG&A expenses increased by a modest 10% 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 30.6% compared to the year-ago figure of 31.4%.

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

R&D expenses for the quarter were $19.1 million, an increase of 28% over the prior year quarter.

In constant currency terms R&D expenses increased by 1% over the prior year quarter.

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

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

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

Amortization of acquired intangibles of $2.1 million for the quarter and stock-based compensation expense for the quarter was $7.3 million.

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

Our effective tax rate for the quarter was 27.1% and we estimate our fiscal year 2010 tax rate will be in the vicinity of 27%.

Turning now to revenues in more detail, overall America sales were $148 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 APAP devices, full face masks and incremental revenue from our recently launched jaw mask.

Sales outside the Americas totaled $127.1 million, an increase of 27% over the prior year quarter.

As expected, sales outside the Americas were positively impacted by currency movements.

In constant currency terms sales outside the Americas increased by 14% over the prior year quarter.

Breaking out revenues between product segments, in the Americas flow generator sales were $75.9 million, an increase of 24% over the prior year quarter.

Masks and other sales were $72.1 million, an increase of 16% over the prior year.

For revenues outside the Americas flow generator sales were $86.2 million, an increase of 32% over the prior year quarter.

Or in constant currency terms an increase of 17%.

Masks and other sales were $40.9 million, an increase of 18% or in constant currency terms an increase of 8% over the prior year.

On a group basis in constant currency terms flow generator sales increased by 21% while masks and other increased by 13%.

Cash flow from operations is $11.6 million for the quarter.

The operating cash flow was impacted by the timing of income tax payments totaling $61.7 million during the quarter.

Our underlying cash flow remains very strong.

Capital expenditures for the quarter was $14.5 million.

Depreciation and amortization for the December quarter totaled $15.6 million.

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

During the quarter we repurchased 606,000 shares for consideration of $30.1 million as part of our ongoing buyback program.

As of today, we have repurchased approximately 1.5 million shares out of a total over all buyback of 10 million shares.

Our balance sheet remains strong and conservatively geared.

December 31 total assets stood at $1.6 billion equity was $1.3 billion.

Group external bit was $145 million while cash and cash equivalent totaled $451 million.

I'll now hand the call back to Kieran.

All right.

Thanks, Brett.

Jennifer, let's open it up for questions.

(Operator Instructions) Your first question comes from the line of Joshua Zable from Nataxis.

Hey, guys, congrats on a really impressive quarter and thanks for taking my questions .

Thanks.

I have a bunch but I'm try to keep it brief here.

First market commentary, I know we always ask that just kind of what you see out there and anything picking up, slowing down or pretty status quo?

Market remains robust.

We still think the market growth is around what we've experienced over this past year.

The indications out there at this point are physician awareness, clinical awareness continues to grow and, from the Americas perspective HST continues to be piloted.

We continue to see good progress in that space.

I'd hesitate to say that it's material yet in the results.

I think that's probably more ahead of us than behind us seeing some of the impact of HST.

Great.

And then just, you know, a lot of people obviously talking about the competitive landscape with the announcement of the F9 obviously concerns will be less, but can you just kind of give us a little bit of color.

I mean this quarter constant currency growth actually accelerated.

I know it takes a while to ramp up the F9.

So I mean should we see some trialing maybe next quarter?

Kind of that would be the peak of the trialing and then coming back in your fourth quarter we see you guys kind of fighting back or are you guys just not feeling it at all?

Well, I think it's important to recognize that some of the competitive launches that have occurred here in the last couple months are in our view are attempts to catch up to what has been in the marketplace now for the last 18 months.

The S8-2 series of products that were underpinned with the Easy-Breathe motor technology and the waveforms that are associated with the Easy-Breathe waveforms have been extremely well received within the marketplace and they create a fundamental sort of base for us to compete against new products.

So, the new products that have rolled out, they're going to get trial.

We assume the competitive products get trial but I got to tell you our field sales force has felt very comfortable walking into those same accounts with the high quality ResMed products, the quiet ResMed products with the algorithms that are associated with it and we still feel very comfortable competing with the a SA2.

In our opinion you look at the S9, that's a bonus on top of that and-when you look at product and when people get in the ability to physically look at this product and then be able to experience its ease of use, to be able to look at some of the feature sets that are very patient meaningful and they're going to be customer meaningful as well because they are oriented towards improving compliance and simplifying the ability for patients to adapt to therapy.

In addition to providing additional revenue streams for some of the customers, there's a lot of good things that are going to come out with this S9.

Now our intention is to launch it like we have sort of the classic ResMed way, if you will.

So rolling it out first in Europe.

Then we're going to be rolling it out towards the end of this quarter in the US.

You're absolutely right in your comments that it takes, several months for you to get around and start seeing that ramp and, really feel that materiality as we get into fiscal year 2011.

So, we're excited about that launch process and just as with, sort of our classic way, we're going to start with the autoset and the elite and then over time we'll fill out the CPAP area as well as move over to the bilevels.

So we're feeling good at what we're at and we'll be rolling it out through the rest of this fiscal year.

Great and then I'll let other people have a chance, but just to be clear you have not yet launched outside the US but you will be shortly and then, I guess, are we going to get to see a sample, if you will, at the investor day next week?

Thanks, guys.

All right.

Great.

So actually we've begun the early shipments in Europe but again like I'm saying these things kind of ramp up, but we're absolutely delivering product and have been for about a week or so.

I'm looking at Mick Farrell as I'm saying this but yes about the last week or so and yes, you'll absolutely be able to see a device during the investor day next week.

And your next question comes from the line of Ben Andrews from William Blair.

Please proceed.

Good afternoon.

Can you hear me?

We certainly can.

Great, thanks.

Well, wanted to follow up on a couple things briefly.

Brett, could you give us some sense of impact of currency on gross margin if you can isolate it and then how that flowed through to the bottom line once you back out hedging gains and what not?

Ben, Brett if you look at that sequentially (inaudible) the vast majority of that would have been impacted as currency related on that is basically the real driver on that.

The sequential decline in the gross margin percentage of almost over a full point was just currency?

Yes Predominantly.

As you know, there's plenty of factors that impact the geographic mix, product mix, manufacturing and so on in the mix, but if you look at it and say what's the predominant driver, it was currency and it was the appreciation of the Aussie.

Okay, great.

And then the lag effect in terms of that flowing through, are we right to think of that as maybe two or even as long as three quarters because now we've had a recovery a bit in the dollar, so wouldn't look that gross margin based on currency to recover for a couple quarters?

Yes.

Certainly not as long as three quarters.

It would be around the one half quarter mark that lag impact, so still some of that to flow through, but you're right the Aussie -- well, you know how currencies are at the moment but the Aussie has come off from 92.5 to I think under $0.87 within the last three weeks.

So clearly that coming down, it will take a little while to flow through, but we'll get that benefit down the track for sure.

Okay.

Two other quick questions.

Kieran, you mentioned you've had kind of a minimal impact or benefit from the gel masks so far.

I mean is that just like $10 million or something, we should look for even that or we should look for a substantially different dynamic in the next couple quarters?

Yes, Ben, we don't get down to sort of that line item detail when we break out revenues because it's sort of a slippery slope over time of detail, but what I intend to say is that the product has been very well received.

The way a product like this launches is that not all sizes are available day one.

So you get out the predominant sizes and then over the course of several months you fill out the rest of the SKUs.

You fill out your sampling packages, et cetera.

So the initial let's say shot over the bow came during Q2 and what you'll see throughout Q3 is exactly what I just described, filling out of the rest of the SKUs.

We expect by the end of the quarter we'll be shipping all the SKUs in that product and we'll be fully up on the samples and then we'll be full steam ahead and I got to tell you, the early feedback has been fantastic.

It's really encouraging when -- and not only on the gel, the gel and the Swift FX.

When you look at some of the customer testimonials and the patient testimonials that have been coming in, these are darn good products.

So we're looking forward to them and by the way,as you know, mask products tend to be on the side of gross margin contributors.

So we're certainly looking forward to that continued expansion as well.

And last structural question, the one thing we've noticed in the last several really probably couple years has been the mixed shift in Europe changing substantially in favor of generators and particularly this quarter you grew generators quite a bit faster than masks looks like worldwide.

That's supposedly in the face of a new competitive launch.

Now you've got all these new products.

Is that going to balance out where we'll see more balance growth from your perspective the next four quarters with all of these new launches?

I think if you go historically, you've tended to see in Europe that actually on a consistent basis you tend to see the flow generators do represent a larger percentage of the revenues in Europe and you tend to see higher growth rates in those categories, right?

So and remember also in Europe you have the ventilation line which is a flow generator heavy part of what we do and you don't have that in the US.

So, as we look forward I think we're, very much in a reasonably balanced phase of the product launches.

Certainly as we look at some of the new mask launches, that gives us continued hope to grow those categories and continue to penetrate them, but I'd say we're in a pretty classic mix.

Brett, you have anything to add to that?

Yes.

I mean I think some of that European I think you're seeing some really good consistent results coming out of Germany and, some of the mix that we had in Germany we've passed that now completely getting good growth out of that and as you know in Germany it's time care, so really flow generator driven.

Masks affect the cost of that business, so to speak.

So I think some of that driving through is waiting for those nice out performing flow generators in Europe but then thrown into the mix also we've got the S9 launch which is a new platform.

So I think over time you'll get back to historical levels where masks will grow stronger than flow gens but with so many new product launches some of that mix might change a little over the short term.

Okay, thank you.

And your next question comes from the line of David Clair from Piper Jaffray.

Please proceed.

Hi.

Good afternoon, everybody.

Good afternoon.

I guess the first question here just a quick one on the SoftGel, when do you think we should expect that OUS?

SoftGel OU S, outside of the US?

ROW, sorry.

Talking to Dann Darkin.

We're expected to launch in France in early March and we'll progressively roll out over the next four to eight weeks on country by country.

Okay, great.

And then, Brett, I mean just kind of with where foreign exchange rates are, where they've been over the last couple months here, what do you think we should expect from a gross margin perspective say in the next quarter here?

Should be it, will we be above the 59% or how should we think about it?

Just on the exchange rates for the volatility at the moment, but the quarter to quarter it's just not making sense at the moment to be able to give a lot of color on that.

I mean you know what exchange rate are doing as well as I do and you know that they'll be short term.

There's probably some headwinds with the Euro, the lag on the Aussie but that will help us, , the next few quarter after that, but I think what I would say is we can't -- the force we can't really control but I'm really confident and comfortable with our able to expand the JM through strong product flow, for example, limiting our cost structure we've been doing, managing COGS and continuing improvement programs.

We're working hard to do all that and we're looking at so high margin product obviously, as well and part of the innovation in the product flow is designed to do that.

So I think we're doing everything we can and working pretty hard to expand the margin, but in short term we'll be subject to some of the volatility around those currencies.

We'll just have to deal that doing what we need to do.

The only other thing I'd say is we have been working pretty hard over the last few years to diversify our cost base away from the Aussie dollar and we have been relatively successful.

We've done that through materials purchasing, Singapore manufacturing, for example, and just trying to contain those operational costs.

So we'll continue to do that as well and it doesn't mean to say we won't be impacted because we will but it's not as bad as it was, for example, two years ago but don't want to dismiss the currency impact it's there, but it's short term.

It's volatile and the underlying sustainable margin improvements we're absolutely

Okay.

And then -- that was a good lead-in for my next question, just an update on Singapore.

Where are we in terms of manufacturing?

Singapore has been a very successful venture for us.

The plant has-- came up to speed quite rapidly.

We've now celebrated what, our 13th or 14 months of operation.

We're already producing about 20% of our volume out of Singapore.

So we've been just very pleased with the quality of the workforce, with their ability to integrate our products into a quality system to be able to mirror the success that we've seen in Sydney and at the same time be able to provide some of the cost and tax advantages that are associated with Singapore.

So we're very pleased with where we're at.

We continue to build capabilities there.

The initial phases were really about let's call it assembly-type work.

Over the course of this year we're going to continue to build out some of the capabilities and, for instance, manufacturing of motors so that we can not only produce in the L.A.

area, but we can also have a secondary source within the Company and Singapore.

We look at building some capabilities on the LSR, so the molding capabilities, et cetera.

So we've got a very strong foundation.

It ramped up quickly and we're feeling very comfortable with the ability to continue to ramp that.

We're not giving specific estimates of what we want to produce there, but I can tell you we feel very comfortable with our ability to ramp.

Okay, great.

Congratulations on a great quarter.

Thank you.

And your next question comes from the line of Andrew Goodsall from UBS.

Please proceed.

Thanks, guys for taking my call.

Could I perhaps just ask you to detail the features of the S9 a little bit more and in particular some of the smarts you've added this time around that are really to differentiate you from your competitors.

Yes Let me throw the ball over to Mick Farrell.

who runs the SBU

Thank you.

Andrew, there are many benefits that would take the length of this conference call that would cover but obviously we don't want to go to that level of detail on investor relations event like this.

To summarize the three major benefits I'd focus on the three Cs that it brings, comfort, compliance and connectivity.

There's more including cost effectiveness and others but the comfort that you can get from this product from the new climate line system that provides a heated wire circuits with closed loop control of temperature and humidity, incredible, the enhanced Easy-Breathe motor which brings even lower inertia and more comfort and low worker breathing for the patient which all leads to greater compliance which is what the patient wants, it's what the provider wants and it's what the insurance company wants as well, but we've also added increased expansion of connectivity.

So we've taken our S9 wireless capability that we've really worked on the last five years to the S7 and S8 range to the next level and we've added other ways to get connectivity.

So don't want to go into too many more details on it other than to say that the initial reception from our internal sales team, the French national sales team early this quarter got it and they launched it at the national pneumology conference this last weekend in France.

Amazing reception from the physicians and from customers.

So early days we're seeing great response in Europe and looking to before the end of the quarter showing it to the rest of the world.

It is a fantastic product series.

This is going to be just as S8-2 and the Easy-Breathe motor technology established a new level in the marketplace, this certainly has the potential to do the same and, again we haven't released it yet in the US.

So we're, waiting for that event to occur later in the quarter and then the availability and the access to everyone is going to be quite easy.

We were hearing one of the features was, I guess, feedback to the patient that they could, I guess measure how good a night of sleep they're getting.

Could you perhaps expand on that, if that's one of the features?

Yes, sure, Andrew.

I'll talk about that feature.

You seem to know quite a lot about this.

I do my homework.

I love to talk about it and it ties into my second theme there which is compliance.

Having that sort of biofeedback mechanism where a patient can -- the day after their therapy at the discretion of their provider and physician, mind you, have access to the hours of use that they had that night and the mask given to the patient by a smiley face or a frowny face depending on their mask leak is over and above that 0.4 liters a second sort of gradient accepted standard for acceptable mask leak as well as potentially again at the discretion of the provider or the physician an efficacy measure such as AHI and the patient can have access to those.

What we've seen in our clinical trials of this device and in the early market acceptance in our control product launches is that patients who have access to data get more engaged in therapy and that speaking of the therapy in those first seven days leads to months and years and years of trailing revenues for the provider in masks and accessories and for the home care provider and the HME (inaudible) but also ongoing compliance and reduction of chronic healthcare disease problems such as Type 2 diabetes and cardiovascular and others that can be improved by ongoing care.

So it's a great combination again for the patient, the physician, the provider and ResMed as well as we contribute to that.

That's a really nice feature.

Maybe just in the interest of time could I perhaps just ask a final question just on just in terms of your growth outlook.

You sort of maybe I guess just help me understand what you're seeing in terms of hope sleep testing.

I know you talk to the insurers maybe sort of requiring those the first line and then perhaps you also mentioned in the release just transport safety.

Maybe if I could just ask sort of on both those counts where things are progressing.

Sure.

So the home sleep testing is progressing right along the schedule that we predicted a couple years ago.

It was first year it was out there, first calendar year it was really about is it here to stay or not and clearly it is.

Last year was about the initiation of pilots and different types of providers,some HMEs, some primary care physicians, some independent diagnostic testing facilities and certainly sleep physicians then and there was a number of pilots that were aware of that have used by the way various types of diagnostic devices and have tried different, processes to accomplish it and as you might expect, some of the business models flushed out and others are doing quite well.

So that's progressing well and what's very interesting and encouraging actually is in the last, oh, gosh, probably about 14 weeks or so we've heard a very different voice even among the sleep physicians where, the understanding and the acceptance that home sleep testing is here to stay and it makes most sense to understand how to integrate that within your practice.

The number of questions, the interest in getting involved in pilots and acquiring home sleep testing devices has increased substantially.

So I think that's a good signal for the market to say look, this is the pilots are working and it's time to move forward with greater acceptance.

Now it was the three Ps we've always talked about.

It was process, it was payment and it was politics.

The process and the payment were really figured out.

People are getting paid for it and the process was what I just mentioned.

The politics is really driven by the payors moving from a you can do HST to a you must do HST and that's what we refer to.

There's some insurance companies in certain parts of the country that are piloting with that, but, it's a little bit harder to predict exactly when they're going to flip to that you must phase, although we do know that some large insurers are considering it.

They have put together teams to look at it and it certainly wouldn't be surprising if before the end of this calendar year, again hard to predict, but it wouldn't be surprising if one of the large one moves and starts requiring that and then that just opens up the gates towards further enhancement.

So this is a good process for the industry to follow.

You don't want it happening all at once because things fall apart then.

This process of the gentle boil of working out the pilots, of getting it integrated and showing that it actually promotes good care and it's not going to promote some overuse or over utilization has been very positive.

That does roll into occupational health and safety.

The interest within the transportation sector both the -- or not both but the trucking community, the airline pilots, boat riders and what not.

There's a number of companies that have strung up to try to serve those and there's some large companies that are already in the HME business as an example or in the sleep diagnosis business which are trying to integrate that into their practice.

So I'd say that that foundation continues to be built.

It always takes a little longer than you think it's going to take, but all the signals are positive

That's terrific.

Thank you very much, great quarter.

I'll get back in the queue.

Great.

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

Please proceed.

Morning guys, just had two questions, the first is just on the balance sheet .

Your cash balance is starting to look quite large, just wondered if there are any comments you can give particularly on the buyback and on whether you might look to accelerate that or on any other type of capital management.

The second question is maybe for Kieran.

You moved into with the Narval purchase into treatments outside of CPAP, just wondered if you could expand your thoughts on or give us some commentary on how you're looking at the mild to moderate sleep apnea market going

Great.

So on the capital management side yes, we do have a very strong balance sheet.

We mentioned the cash balance and, of course, we've got about 140, $150 million in debt that offsets that.

We're very comfortable with the position we've taken to date, that we again acquired about $30 million of our own stock back during this last quarter and that's in addition to what we've done over the prior two years.

So we feel comfortable continuing to participate in those stock buybacks at an appropriate basis and as Brett mentioned, we still have about 8.5 million shares left in that authorization for the buyback program and, we're always, looking at other appropriate uses for cash, but we're very careful not to let it burn a hole in our pocket and to,look to do, for instance, M&A that's not appropriate or that's-- we think is not going to add value to the business or that we think doesn't leverage the strength of the ResMed team.

So we feel comfortable with what we've done to date.

As it relates to Narval, that acquisition is now complete.

The team is in the midst of integration.

It is a -- it was a low risk way of putting a toe in the water of complementary technologies for the treatment of mild sleep disorder breathing and particularly of obstructive sleep apnea.

It is just to remind those on the phone, it is a Company that's based in Leone, France which is great because it's right next to where our commercial headquarters is in France and, in fact, we're going to be combining those facilities shortly.

We've already begun integrating the teams.

It is one of two players, only two players in market within France that have reimbursement for these MRD devices and they already had a running start.

They have a reputation within the industry and maybe most importantly for us, we saw a pathway to profitability by participating in this category.

They have -- they use CAD cam technology for much of their manufacturing and we saw that as a technology that allows scalability and allows the device manufacturer to actually make a return on these and we can leverage our experience, our history, our relationships within the sleep community and be able to appropriately promote these technologies again for the appropriate uses.

So it's an experiment at this point that's going well and, as appropriate we're going to investigate other countries to expand into and, we'll look at everything you'd expect us to look at.

We're going to look at the distribution that's required in those marketplaces.

We're going to look at the price points in those marketplaces and we're going to look at our strength in those marketplaces and then market by market we'll make a business decision about expansion.

So early days but we're very pleased with that acquisition.

Okay.

Thanks very much, guys.

You bet.

And your next question comes from the line of Matthew Pryor from Merrill Lynch.

Please proceed.

Yes, good afternoon, guys, just a quick question on the S9, if I can.

You talked a lot about management by exception in the last quarter focusing on compliance and compliance certainly seems to become an increasing issue for the industry.

Can you talk about Restraxx at all and weather that features within the S9 or whether you're persisting with it or increasing the emphasis with the S9.

You bet.

Mick, why don't you take that?

Yes Matthew.

We will l have the ability to do management by exception with the S9 system and there will be an S9 wireless module that will connect on the back of the S9 devices that takes the data from the device to the cloud and allows providers, the home care providers, HMEs, and physicians to have access on a protected basis to that information and so they can go in, manage their patients and choose how, where and when to get back to their patients to encourage them to increase their therapy or participate more in their therapy or address mask leak or look at say a central apnea index going up and maybe the patient doesn't need just the basic CPAP and APAP.

Maybe they need an upgrade to a VPAP adapt or maybe some other adapt sort of ventilation technology need to get back into sleep (inaudible) channel on that front.

So we will have the capability on the S9 platform.

It's actually a great advantage for us.

No one else, no other industry player on the SA2 platform had that and we look forward to continuing that on the S9.

And just to add a little color as well, you did mention the management by exception and one of the things that Mick had highlighted early were a number of features that are designed for improved comfort and improved compliance.

So, our true objective here first of all is to reduce the exceptions, right, to make it easier for people to get compliant and then certainly using our leadership position in that wireless monitoring to be able to make those few exceptions that do exist then or for those exceptions that do exist to certainly be able to treat them in the most cost effective way.

Thanks.

And one just quick follow-up question.

Obviously you have access to that data.

Does that assist you with product development given the data would be quite powerful saying what age, what profile, what combination of equipment is leading to compliance?

We're very careful about the use of patient data.

That's proprietary to the physicians and to the care providers and so, we're very careful about that.

We have other ways of gathering that data.

We have very strong relationships in the sleep community and, our innovation team is very successful.

We don't need to look at those avenues for data.

It's a good question, but that's not where we want to use the data.

All right.

Thanks, guys.

You bet.

And your next question comes from the line of David Low from Deutsche Bank.

Please proceed.

Thanks very much.

Kieran, just a question on market.

I know the question was asked before, but just if you could talk about the fact that you've clearly taken some market share.

What do you think the underlying market growth is?

And I guess my question really is stinted on the fact from what we understand or the feedback we're getting is that volume of patients going through sleep centers, it doesn't seem to be as strong as it has been in the past and with home testing by your own sort of commentary still probably a story for next year.

I mean do you see any concern that the underlying market is declining and I'm trying to understand where your market share has been going in that environment.

Yes These are the same questions that have really been coming up for the last year, year and a half and, I'm pleased that we can say that it's been consistent, that, we remain very positive that you have double-digit growth.

The Americas we had said about a year ago we thought it had come off maybe a couple of points but it was still up around the 12% or so range.

I think we continue to feel comfortable that that's about right, perhaps a few points ahead of that on volume, but that would be on the revenue basis and in Europe in the high single digits and so for a blended growth rate in the double-digit ranges.

So I think we still feel the underlying strength in that market.

I think you have to be careful when you're looking at these proxies.

Part of what you're missing sometimes when you look at just one indicator of potential growth, let's say number of beds, is first of all, there is still bed growth and second of all, sometimes you have better bed utilization.

So, for instance, you have people that we're doing two night studies that will go to a split night study.

So instead of doing a study one night and the next night a titration they'll get the patient in all in one night or they're looking at how to reduce their no show lists et cetera.

So, there's a lot of different avenues that contribute to growth on that side then in addition you continue to have HMEs which are working at maintaining compliance.

The stick, if you will, that CMS put out there a year and a half ago could very well be the best thing that happened for patient care because what it said is you, the HME, need to spend more time making sure these patients are compliant, else you don't get paid in the short run and we that know once you get those patients compliant not only the short run, but they represent very significant opportunity in the longer run, all right, with continued accessory sales, continued mask sales and eventually continued CPAP sales.

So that's been a positive contributor as well that as people maintain their focus on compliance, it's a good situation for the industry and it helps the focus on trailing annulets.

Are you able to measure internally as of what level of repeat sales or how much of your revenue base is coming from sales to existing patients versus new patients?

It's very difficult to get to that level of granularity, right?

So you have -- HMEs are very protective of their data and, it's the same SKU, if you will, that goes to a new patient versus an existing patient.

So we have some proxies where we have certain customers that do their compliant user replenishment through certain locations.

So we get a sense for their focus, but I think more importantly, it's in our customer relationship where's we get feedback from the sales force and know that patients are instituting these replenishment programs.

So, I can't break it down to the figures and I certainly couldn't do it on a short term basis, but I think we do feel comfortable that that focus on generating compliance and then minding the compliant users continues to expand.

Okay.

Just one final question on that.

So the growth rates or the market growth that you've talked about this year-end and last, if we talk about home testing starting to become material over the next few years, is that on top of that growth rate, do you think?

Is this a boost coming in the next couple of years?

Yes I think there's no reason that home sleep tests can't improve the volume of patients going through this market.

Again, you can never get into the sort of quarter to quarter stuff, but if you look at it over the median term, if you look at over the longer term and you look at what home sleep testing brings, it stops or it eliminates some forms of leakage.

Let's just talk about two of them as an example.

30% of the patients who get a referral to a sleep lab never show up, all right?

And why don't they show up?

They don't show up maybe because it's a several hundred dollar copay.

They don't show up because they've got to be away from their family for a night.

They don't show up because they don't want to be wired up like Gulliver's travels with a camera on them all night.

It's not very comfortable when you think about it.

Now lots of people still do it which tells you how important this disorder is and how important treating this disorder is but still 30% don't show up.

If HST does nothing other than take that 30% number to 15%, you're talking about a 20% increase in the flow of patients that get diagnosed at that point, right?

Then there's a secondary form of leakage which is now again put yourself in the place of a primary care physician and you are looking at a patient and trying to determine whether to send them to a sleep lab or have a sleep test.

If they have an expensive test that is very inconvenient, your index of suspicion has to be pretty darn high before you send them to that test.

Now you have a test that's simple to use that it can be used in their own home but is still highly accurate that borderline case that maybe you weren't going to send for a sleep test before, now you're going to be willing to send.

So, if you just strip away everything else and just let's focus on sort of the facts and the common sense piece of it, the ability for this to contribute to growth I think's quite significant and I think as a Company we're very comfortable with that.

Right.

That's very helpful.

Thanks very much.

You bet.

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

Please proceed.

Hey, thanks, guys.

Just a couple ones on a lot of the concern on pricing in the market over the years and we noticed Invacare just raised their oxygen concentrator prices to the home care dealers 4 or 5%.

I know that's a different market but does that say anything to you about the reception out there, what's coming in competitive bidding or any sort of take-aways to the sleep market?

Well, I don't know about a direct corollary with that action, but I will say in general, the market remains healthy.

We got into this with the questions before on gross margin and, I think as Brett very well articulated we feel just real comfortable with our product flow.

We feel very comfortable with our ability to reduce our cost per feature set that we're delivering and we feel comfortable with the ability to continue to provide premium products with new feature sets that can allow us to have customers trade up within the marketplace just as we've seen with the autosetting devices because of the data capabilities and because of the Easy-Breathe motor technology and as we've seen if the bilevel category which historically we've been very underpenetrated and we've been able to with what we believe is a superior product, 75% plus quieter than the competition, very responsive, we're able to move in there and trade them up.

So we see the market.

Certainly price pressures won't go away tomorrow.

The ability to raise prices I think would be difficult to forecast that but I think product mix on one side if you're delivering, feature sets that are meaningful, can drive compliance, can reduce cost to delivering the product to the customer, we have I think a very strong value proposition.

Just on the bill in Washington HR7390 to essentially get rid of competitive bidding I think they're having a lobbying event in your neck of the Woods in California pretty soon.

Do you have any thoughts on one, do you get involved in lobbying for this?

Do you care -- I mean you care but do you feel it's worth your time to lobby for potentially adding more sponsors to this bill?

I think they're up around 140 in term of sponsors, just any thoughts on that?

We feel it's important to support industry efforts that are geared towards recognizing the value that HMEs provide, the service that they provide to the industry and to recognize the advantages that home care brings to the healthcare system.

I mean when we think about what healthcare systems around the globe are struggling with, they're trying to keep people out of these expensive hospital settings but they're at the same time trying to manage chronic disorders and they're trying to get more predictive in care.

Categories like the treatment of sleep disorder breathing or the use of adaptive ventilation in treating heart failure that is being -- we have a large study that's ongoing right now in Europe and we're very optimistic about the results that we expect to see in a couple years in that category.

Those things we think are important for people to know about.

Now we don't do a lot of direct lobbying, but we certainly support several industry groups that are engaged and are involved in getting the word out.

Great.

Just two more follow-ups.

Any thoughts on the upcoming audit on prepayment rates as concerns the CPAP that's coming out of jurisdiction B?

I think they're focused a little bit on the documentations requirements on, sort of post the four month range and I know you've got the compliance software on that front, but it's also going back and documenting they saw a doctor.

Have you heard any -- is that a concern at all?

Certainly not material, but let me throw on over to Dave Pendarvis.

Peter, we're aware of it.

We rely on these areas mostly on our HME partners.

Obviously they're ones that have supply the appropriate documentation.

This is the Medicare issue.

It's not the overall issue but it's our expectation that our customers who have been following the proper paperwork.

They've been getting the right forms now in any situation when you're kind of putting in a new requirement, there are always some slips and downs, but it's our expectations that by and large this won't have an impact on the operations.

There might be some minor distraction to a particular customer who gets under an audit but it's our expectation that the HMEs are compliant with all the requirements and there shouldn't be any long term issues.

Thanks.

Maybe just one last one.

Any comments on (inaudible) data on sleep apnea?

It's coming up for obesity approval.

Obviously it could have some off label usage and is that, just on what their data set compares torque the gold standard here on CPAP and is it maybe an opportunity to co-promote if these guys are maybe just going after mild candidates to, just identify more sleep apnea patients?

Yes I look -- we obviously track,developments in the pharmaceutical industry just as we track developments on the surgical area and device areas looking at, potentially if there's any substitutes or something that can impact our markets in a positive or negative way.

As you know, there tends to be a lot more sizzle and noise than there tends to be depth when these early data come out.

So, as we look at this now, the idea that, you there's going to be a single drug that's going to cure obesity, I guess you can make your own bet on that.

I'm not sure, that's a bet that I'd be comfortable making in the short term, but that's the basic focus that these guys are driving towards.

We don't see at this point a risk and at this point we don't see a material opportunity for partnership.

That being said, things do evolve and if we feel that it is appropriate just as we've demonstrated with our alliances with LifeScan and alliances with Guidant when we were first entering the heart failure space, alliances,with (inaudible) Phillips even when we're talking about public relations or we're talking about education, we're very comfortable with reaching out and finding mutual WIIFMs, you know-- what's in it for me in these cases and if we see it, we'll do it but at this point I think we're comfortable and sort of a watch in brief.

All right.

Thanks a lot guys.

You bet.

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

Please proceed.

Thanks.

I was just wondering if you could give some color on any (inaudible) treatments that you're getting from your two recently released masks and also that you expect to get from the new S9 series.

Yes, great question.

So as you know, when we enter an area that we're already in.

I think a good example would be the Swift FX or the S9, right, which are basically replacements for existing products and it's true with other products as well but I think it's always easier to sort of calculate that delta on the things that exist.

Our belief and our direction to the R&D team and it's a very, very capable team is to design products that can improve the feature sets, so can improve the efficacy or improve the aesthetics or have some meaningful benefit to patients and to customers, but to do it a lower cost basis and that's particularly enabled when you go through generational leaps.

You go through, the normal learning curve, you certainly have some substantial benefits you can provide, but when you do generational leaps and I think a good example would be the S9 it gives you the ability to take advantage of developments that have occurred within the electronics industrial as an example or within the computing industry or in the communications industry and we can apply some of those improvements to new platforms.

So absolutely.

We look at, examples within the mask category.

We look at examples within the flow generators and I mentioned just two right off the top of my head.

Both of those would represent opportunities for not only enhancement of performance, but also offer cost of goods reductions.

Great.

And just one more question.

Just wondering what feedback you're getting from the DMEs in terms of compliance levels.

Are we starting to see compliance levels in the US, sort of increase to European levels as the market shifts across to the APAPs and the bipaps those higher end products just kind of consuming those trends?

It's always hard to give you accurate figures or specific figures on compliance and the reason is any HME you talk to is between 85 and 95% compliant.

They're always the best at it and it's the guy down the street that has the problem, but I will say that we feel comfortable that because of the change in the technology that is being used and because of the dramatic capabilities of those devices, Mick mentioned before that customers and patients who have access to data and they engage in the use of that data, that it demonstrates a focus that improves compliance.

And the nature of what we are delivering today and the increase in the number of autoset devices as an example, the use of Restraxx as an example and maybe even forgetting all those and just say the focus of the HME understanding and knowing the importance of compliance and reinforcing of that, all of that leads to greater touch points with patients which will inevitably lead to higher compliance.

So I think we can feel comfortable saying directionally it is moving in the right direction.

I think it will be a little bit harder to get more specific on the numbers in the short term.

Thanks for that.

You bet.

We are now at the one hour mark, so I will turn the call back over to Kieran Gallahue for his final remarks.

Well, great, thank you, everybody, for your time and attention.

As always, we would like to thank our employees all over the globe in the various functions for their stellar efforts that drive ResMed's performance.

I think you can see that in not only the results of this quarter, but you can see it in the product flow that we have begun launching throughout this year and the pipeline that we have to follow.

So it's a very exciting time for ResMed.

We're very pleased with the efforts and the results of the team throughout the globe and we look forward to updating you as we move into the next quarter.

Thanks, everybody.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.