瑞思邁 (RMD) 2010 Q3 法說會逐字稿

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

earnings conference call.

My name is is Jeff and I'll be your operator for today.

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

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

Second.

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 Private Securities Litigation Reform Act of 1995.

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

These factors are discussed in ResMed SEC filings such as forms 10Q and 10K which you may access through the Company's website at www.resmed.com.

Finally when asking questions please limit yourself to no more than two and if you have more, place yourself back in the queue.

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

Mr.

Gallahue, please go ahead sir.

Thanks Jeff.

Good afternoon and thank you all for joining us today.

As with our previously calls I'll begin with some summary remarks and then will turn it over to Brett Sandercock our chief financial officer to go through the numbers in more detail.

We'll then both take your questions.

Well we had another solid quarter Global revenue in the third quarter of 2010 grew 22% or up 18% on a constant currency basis.

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

ROW revenue increased by 25%, and in constant currency terms grew 16%.

GAAP EPS increased 24% to $0.63.

Excluding amortization of acquired intangible EPS was a penny better at $0.64.

Even in the face of a strengthening Australian dollar gross margin was 59.8% in Q3, benefiting from the continued success and leveraging manufacturing and logistical cost efficiency across our global organization as well as geographic and product mix offset primarily by the appreciation of the Australian dollar.

Cash flow from operations was $53.5 million.

Demonstrating our commitment to strong operating performance earnings and a commitment to working capital control.

We also experienced balance growth across product categories with global flow generator sales up 23% or up 18% in consent currency and mass segments growing 21% during the quarter and 18% increase on a constant currency basis.

Sales of America's flow generators were up 17% year over year in Q2 and sales in ROW improve significantly to 20% in constant currency terms.

Globally the growth in sleep therapy devices was mainly driven by strong sales of our high end technology led by our AutoSet VPAP auto solutions.

We continue to have a big advantage over the competition with our enhanced Easy Breathe technology which allows our sleep devices to deliver whisper quiet therapy with increased patient comfort.

We've now launched the S9 AutoSet and S9 Elite globally with the exceptions of Japan and China.

The new platform is getting significant attention from our customers.

There's a great deal of interest in the testing of the climate control with our climate line and swim line tubing accessories as well with the central sleep apnea detector capability.

(Inaudible) dealers, physicians and patients are excited about the improved comfort and sleek better and friendly design but most importantly about the potential for the S9 Series to drive greater compliance.

Additionally we now have and all in one sleep lap solution with a VPAP TX.

This product provides,remote PSG technology access to ResMed scriptable modes including EPR, AutoSet, VPAP auto and adapted (inaudible) ventilation.

The VPAP TX system is a exciting opportunity for us to take sleep pap share and ultimately to help drive prescriptions it to ResMed products.

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

Mass sales grew 23% in America and in constant currency terms 10% in ROW.

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

We now launched all the various sizes worldwide the market is telling us that they appreciate and value the comfort and the quietness of this new mask.

The Swift FX the newest member of the swift family and our lightest mask to date also launched globally in all sizes and is doing extremely well.

The feedback in the market is outstanding we're especially pleased in Europe where pillows have never been a big seller as they are in the US.

It's particularly popular in combination with S9 as the combination about the swim tubing and comfortable interface is focused on improving patient compliance.

A quick update on home sleep testing.

Home sleep testing continued to be piloted in its various forms as we said before, it was proven that HSC was here to stay in calendar 2008, in calendar 2009 just as we expected, multiple healthcare providers beginning piloted HST in various models.

In 2010 we're seeing HST ramp at a good pace and no longer seem to be a matter of if sleep labs will adopt some form of HST, but rather when they adopt it.

ResMed continues to be committed to supporting and partnering with our sleep position partners as they evolve during this transition phase.

In addition, IDTF, or independent diagnostic testing facilities, remain the primary early adopters of HST and we expect them to continue to invest in expanding this category.

The number of lives covered under HST reimbursement has more than doubled in the past two years to over 80% of covered lives.

We also expect growth results in continued improved awareness and validation of 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 as well as stroke.

Once, again, just within the past month clinical data has been pushed supporting the value of identifying and treating STD.

According to new results from a landmark study supported by the National Heart and Lung and Blood Institute of the National Institutes of Health, OSA is associated with an increase risk of stroke in middle age and older adults, especially men.

OSA doubled your risk of stroke in men and moderate to severe sleep apnea men were three times more likely to have a stroke than those without OSA or just with mild OSA.

The report also shows for the first time a link between sleep apnea and increased of risk of stroke in women.

This is a landmark and (inaudible) study that's incredibly important.

Additionally on May 5th the results of clinical study will be published in the Journal of Occupational and Environmental Medicine showing that effectively treating commercial motor drivers with OSA has economic as well as health and safety benefits, by lowering healthcare costs, disability rates and by reducing work accidents and absences.

In summary, Q3 once, again, demonstrated the strength of our global reach and balance business while providing very positive signals for sustained industry growth as we look forward.

A new product flows are robust in customer meaningful and demonstrates that our commitment to innovations is paying dividends.

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.

Thank you.

I'll briefly run through our last quarter results.

As you know the revenue for March quarter $278.7 million increase over 22% over the prior year quarter.

(Inaudible) currency movement increased our third quarter revenues by approximately $9.2 million.

Constant currency term revenue increased by 18%.

Income from operations for the quarter was $61.2 million an increase of 16%, and net income for the quarter was $48.8 million an increase of 25% over the prior year quarter.

Diluted earnings per share for the quarter was $0.63 and increase of 24% over the prior year quarter.

Gross margin for the March quarter was 59.8%, up sequentially from Q2 FY 2010 and benefiting from manufacturing efficiency favorable product mix and favorable geographic mix..

However due to largely offset by unfavorable currency impacts resulting from the combined impacts in the appreciation in the Australian dollar an depreciation of the Euro against the US dollar.

Looking forward exchange rate should moderate to a large extent of course, absent any significant movements in either the Euro or Australian dollar.

We, continue to execute on issues targeted and improving on global manufacturing and logistic cost structure.

SG&A expenses for the quarter were $84.1 million, an increase of 19% over the prior year quarter.

In constant currency terms, SG&A expenses increased by a modest 11%.

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

SG&A as a percentage of revenue improve a 30.2% compared to the year ago figure of 31.1%.

Moving forward and again subject to currency movements we expect SG&A percent of revenue to be in the 30 to 31% range for the balance of fiscal year 2010.

R&D expenses for the quarter were $18.3 million, an increase of 32% over the prior year quarter.

In constant currency terms R&D expenses increased by 4%.

R&D expenses in the percentage of revenue was 6.6%.

Compared to the year ago figure of 6.1%.

Looking forward a 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 innovations and clinical study activities.

Amortization of acquired intangibles was $2 million for the quarter and stock based compensation expense for the quarter was $8 million.

During the quarter, we also line item one million that's to the [ Resnick ] Foundation.

Our effective tax rate for the quarter was 27.8%, and we estimate our fiscal year 2010 tax rate will also be in the vicinity of 27% to 28%.

Turning now to revenues in more detail.

Overall notice was $146.8 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 Swift FX and SoftGel mask .

(inaudible) Americas totaled $131.9 million an increase of 25% over the prior year quarter.

As expected,(inaudible) outside the Americas were positively impacted by currency movement.

In constant currency, (inaudible) outside the Americas increased by 16% over the prior year quarter.

Breaking out revenues between product segments.

In the Americas, flow generator style was $71.7 million an increase of 17% over the prior year quarter.

Masks and other styles were $75.1 million an increase of 23%.

For revenues outside the Americas.

flow generator sales were $89.6 million an increase of 28% over the prior quarter or no constant currency terms an increase of 20%.

Masks and other sales were $42.3 million anan increase of 19% or in constant currency terms an increase of 10%.

Globally, in constant currency term flow generator sale increased by 18%, while masks and other also increased by 18%.

Cash flow from operations was $53.5 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $11.9 million Appreciation and amortization in the mask quarter totaled $16.3 million.

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

During the quarter we re-purchased 197,000 shares the consideration of $10.7 million, and the year to date we've repurchased approximately 1.6 million shares so consideration of $76.5 million, as part of our ongoing buy back program.

As of today, we're re-purchased approximately 1.67 million shares out of total authorized buy back of 10 million shares.

Our balance sheet remains strong and conservatively geared at March 31st, total assets were at $1.7 billion and (inaudible) was $1.3 billion.

(inaudible) external debt was $144 million while cash and cash equivalent was net of external debt totalled $377 million.

I'll now hand the call back

Great.

Thanks, Brett.

Jeff, why don't we open it up for q&a

Okay.

(Operator Instructions) Our first question comes from the line of Andrew Goodsall with UBS.

Please proceed.

Good morning, guys thanks very much and terrific quarter.

Could I perhaps just ask you to focus down a little bit more in S9 for us in just the contribution to the quarter I guess in just looking at the rest of the world growth there of 28% or 20% constant currency I know the S9 was launched in Europe first, so I guess, just trying to get some understanding of the contribution and maybe help us characterize how that might flow into the next quarter and into 2011.

Yes Sure.

I mean, the, first of all, thank and yes the S9 is been doing very well.

As you know we did launch it a couple months earlier in Europe than we did in the Americas.

It absolutely had an effect both in Europe and in the Americas on the results.

Although it wasn't only thing.

We had very good success with the our new mask products.

The SA products continue to sell well as do the bi-level, so definitely positive contributors to but not the only contributors.

And, I guess just, just in terms of performance, launch day, I mean, is there any sort of comparison against where, where we were at this stage with the S8.

Any sort of traction or -- .

Yes I don't know that we, we necessarily look at it in comparison to any given product launch just because there's always a lot of variables that influence it.

I say if you want to summarize it, it's been received extremely well in the market place, just as the S8 originally had been, people recognize it as a leap forward.

In technology, just as they did with the S8 and once, again, that comes in many forms.

The product form itself.

People are responding very well to its sleek design the way that it integrates within the bedroom.

But I think more importantly than that, they're responding to the fact of the innovations that's inside.

We've got a, an upgraded Easy Breathe motor technology.

There's recognition that by attacking now the, the conductive noise so not only the radiated noise but now we've reduces the conductive noise by over 70%, that's meaningful to patients and when it's meaningful to patients and when it helps to integrate within their lives, then it helps in adherence or compliance and that's a positive thing for our customers, the HME's.

There's a real strong and solid response to the climate live tubing.

The way that, that the S9 is integrated, humidification control, is different than anybody else in the market has attempted, and, and it's being well received, it's being understood by the marketplace as a significant leap forward, so this is, this is a technology that has a tremendous amount of innovations in it.

And, and we're quite fortunate that the market recognizes it, and that it is, approaching the tacking customer meaningful attributes.

Mick, do you have anything to add to that.

No.

I, other than to say, it's goals of addressing more comfort, more compliance, and more connectivity have been played out in these early phases of its release and as you said, we're in global markets in France, Germany, US, Canada, Australia, New Zealand.

Pretty much every where globally except Japan, China and some other countries in Asia.

It's been really exciting to the initial introduction, and we expect, we expect more in the future.

Terrific.

And can you I just, I guess a follow-on question obviously for us in term of technique Been a bit of a mentor and we're talking to a bunch of groups in the US that are pushing forward on that.

Are you able to give us a think of whether that's making any meaningful contribution to, that growth profile at the moment?

So the, you're absolutely right it's moving forward very well I'm not surprised to hear that in your checks with, with the channel, with, whether it's sleep positions whether it's HME's or others involved with it, that you're hearing about traction.

I would say that it's still at the level of immateriality as far as results are concerned.

So from a volume perspective it's still in its early days, so from a results perspective I will say yet to be baked in a truly meaningful way.

Now, on the other side, as far as, as far as the energy behind it, as far as the progress behind it, as far as all the signals that we have laid out before you and before ourselves about what we're looking for, for adoption rates, they're getting ticked off one by one so we're very comfortable with that.

Interesting enough what you're finding is that the, the conversations with the sleep physicians have changed dramatically really in, in the last, let's call it now six months and it continues to heat up it seem each few months.

We've long been trying to work with our sleep physicians, sleep lab partners to adopt home sleep testing we've got long standing relationships that we had like to help them through that evolution, and, and what you're seeing is the IDTFs.

continue to be the early adopters , but, you're fining that the sleep physicians are more an are more understanding that this is a wave that's happening, and they're looking for solutions and of course, we like to be there and help them through

So it will be fair to say that, would it be fair to say that they can't ignore it night any longer.

Yes, I think you, I think you ignorer it at your own peril whoever you are in the channel at this point, and I think importantly, the conversations are beginning to be positive oriented conversations.

There's one way of looking at it, which is, how do I protect.

There's the other way of looking at it which is how do I grow?

And so , we always try to transition that conversation, and we're getting increasing receptivity to a positive conversation about how do we

Thank you very.much .

I'll get back in

You bet.

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

Please proceed.

Hi, good afternoon guys, just a couple things maybe administratively first.

Talk about the R&D spending in the quarter and what, was it timing, in was it projects in terms of the constant dollar and you talk about kind of guidance there, but were there some moving pieces in the quarter?

Yes well the, the constant currency growth in R&D was not substantial at all, right.

Right.

It was more the currency related impact.

That's what I'm getting at.

Only 4%, was there some timing issues that --

Oh, yes Yes Brett.

Yes, it was and it was a pretty strong come from the year before on some things that were coming through the prior year probably drove that down a little bit.

If you look at a percentage of revenue it doesn't look too bad but I would expect that, that will kind of, sneak up over the next few quarters in terms of that growth it was a little bit low this quart in constant currency terms I expect that tick up a little bit as we move forward.

There was mainly the basis that was impacting that.

Okay.

And so as you think about kind of where you go from here Kieran, I mean, obviously next generations systems I'm not going to presume success with this, but let's just kind of see where we are now, but where do you go from here from a technology standpoint?

Is there another step function advantage you can make in the S10 if you will?

Do you bring from innovations onto the drive HST?

I mean, obviously the clinical work-- , how do you think about the strategic vision for product development over the next three to

Great question.

We firmly believe that there's a enormous amount of innovation yet to be brought to bear in this marketplace.

Across all the categories that we provide solutions in.

So if you take it across the major categories, when you look at flow generators, the ability to continue to integrate, seamless flow of information, the ability to be able to use that information in a way which helps care providers be able to drive compliance and adherence on the part of, of patients and, and doing so on a very cost effective manner for HME's, which basically means helping them reduce the labor inputs that are required in order to get patient compliance that gets you into healthcare and [fermatics] which clearly are another avenue of continued and increasing investment over time.

[Don Darken] and his team over in the mask or the patient interface categories continue to innovate on ways of making masks more comfortable.

Easier to use, easier to fit, as well as simply recognizing that, in so many ways masks are like shoes and what's comfortable for one individual may be uncomfortable for somebody else so you have the opportunity for different form factors, which, can evolve over time.

Then of course, we have ventilation.

I consider us still in the very early days on our growth on global ventilation business.

We still have the vast majority of our mix ventilation being sold in, in Europe.

But we have been working under the hood.

I know as we've said before on technologies that we believe can significantly add to the simplicity and the powerful nature of providing home based mechanical ventilation solutions to patients.

We feel that that marketplace is in its very early days of building quality instruments and building cost effective instruments, and using information in order to improve the predictability of care.

So we've got a lot of avenues that we believe we can, we can continue to innovate in.

It's one of the reasons we're not taking the foot off the accelerator in R&D and you shouldn't expect us to and then finally I'll just say in the clinical study side there are ways of demonstrating the benefit of bringing our technology to bear in the use of multiple coma morbidly as we all know as we look around the cost of healthcare around the globe healthcare systems are struggling to figure out how they can lower cost.

The fact that we allow care outside of the very extensive acute care centers at home, provides a whole different avenue for them to look for cost savings and, we need to enable solution not just hard physical products but solutions to allow them to realize those benefits.

Okay.

Great if I can just speak in one other number question, that was a helpful description, if you think about the product mix in the quarter, versus patient volume growth, can you give us a sense of contribution there and is there any reason to think that mix wouldn't continue to trend positively in the next, several quarters as you roll out these new products?

Thanks.

You bet.

Brett, do you want to take the percentage mix change?

Yes It depends, if you look at sort of the, the flow generator and the masks (inaudible) separately, but on the flow generator we are getting, we are still seeing that move up to the higher end process, if you like to IPAPS for example is a stronger mix and so maybe it's the, the volume growth might be a couple points higher than revenue if you look at masks the volume growth will probably be, it will be more than that, probably mid single digits really on the volume side versus the revenue, so but certainly in, in the flow generators at the moment we are seeing that continued trend toward those higher ends products.

Yes, I'll just close by saying that from a looking forward perspective, all the industry trends continues in the same general direction, which is the importance of compliance among pairs has risen, which means better technology and technology that will allows for data to be provided to help in the adherence process continues to be valuable.

So there's no reason to believe that we will see a reversal in that trend.

Thanks.

You bet.

Our next question comes from the line of Saul Hadassin from Credit Suisse, please proceed.

Thank very much.

And good morning.

Two questions.

First question, Kieran, you spoke on market share shift previously, can you give us any indication or more insight as to where you think that's coming from, and also, just any expectations then on, on pricing as some of your larger competitors potentially attempt to call that share back

Yes, thanks for the questions, Saul.

So from a market share, we really see it happening across all the major categories.

Certainly within, within the flow generators within the masks the general categories we feel that we continue to make solid progress,certainly in part aided by the fact that we've had significant product launches across those major categories, right, so we haven't been a one hit wonder on the innovations side, but rather, we've been hitting on multiple cylinders across the product portfolio and that helps.

I think on the, the commercial execution level, we've seen in various markets across the globe that the commercial team are executing well.

That they are focused on patient care they're focus the on helping customers through the various transitions that they're experiencing in the different markets.

So, I like to think it's a balanced effort by the team members across the globe and across both product categories and commercial units.

And I think we're seeing that in the numbers.

As far as your second question, which had to do with, what's going on, maybe competitive response large customers, pricing that sort of thing, I'd say it's, for the most part par for the course.

We've always said that there's a certain amount of price degradation in this marketplace, estimate about 5%, per annum as we've said for years and I think, not unusual or, or, we shouldn't expect that to change here as we move forward.

It's, continues in that stream.

Okay.

Great.

Thank you very much.

You bet

Our next question comes from the line of David Clair, with Piper Jaffray.

Please proceed.

Hey, everybody, congratulations on another great quarter.

Just, I guess to start, maybe Brett, can you, can you give us a sense of how, how foreign exchange impacted EPS?

Yes.

It's Brett.

If you, if (inaudible) It comes down to arrange, around about the $0.08 mark.

Maybe for us

Okay.

And then you kind of eluded to this in your comment in were current Ausy dollars, US dollars do you think we can potentially see a little bit of gross margin expansion?

Yes, I mean, I'm looking at predict.

What I can say on that is we certainly have a lot of initiatives in place we're really focus on COGS and what we can do basically leverage , cost out on the squad chain and so on so we'll continue do that, and you can sort of see as it at the flown over the last, year or so and we started working on that a while back, and that will continue happen.

In the background, again, of course, you've got normal ISP declines you've mixed issues in terms of product, geographic and of course, the other wild card is the currency.

So we're going to you now, currency impacts have moderate particularly the US Ausy most of that is flying through in COGS now.

Of course, that's predicated on the Ausy staying pretty consistent where it is.

Which is a big assumption I suppose in today's world.

The other is on the Euro impact.

To the extent that's up or down, that will also have a impact.

There's a bit of uncertainty now, in Europe as you are well aware, with Greece, and Spain and Portugal and whoever else is over there, that may have a short impact on the Euro.

The Euro may be a little weak over the shorter term that would have an impact on us, if we look at currency rates right now, I would say most of it already flown through on our margin and it won't be hurting us as it has in the last, two or

Okay.

Great.

Just one last one.

Can you give us an update on Singapore?

Yes Singapore continues to progress quite well.

We produce well over 20% of our volume out of Singapore at this point.

We've been extremely pleased with the quality of the workforce there.

You'll know David that we're very much driven by quality.

And the training and the, the skill set, the education of the individuals that are, that we've been able to, to hire in that facility has been just outstanding, so we're very pleased with the progression there, and, and we continue to feel comfortable about our decision to move there.

Just to go back and just a little more color on, on Brett's comment on gross margin as well.

I do want to highlight that the work we've been doing over the last couple of years continues and we feel very comfortable about the actions we've taken in that area, and about the, the results that they're driving.

Whether it's product development, whether it's innovating new feature, whether it's designing cost out.

Whether it's adding new manufacturing capabilities such as in Singapore whether it's product mix shift, we've been driving performance that allows for this market to continue to grow and for us to grab share as we grow through it so that's been a very positive story for us.

Great.

Thank you

Our next question comes from the line of Joshua Zable with Natixis, please proceed.

Hey guys congrats on a great quarter thank for taking my question here.

Thanks.

Most of my questions have been answered.

Just sort of a follow-up I know people are trying to get at this.

There were a lot of different dynamics going on this quarter, Obviously you guys put up some impressive numbers.

I know healthcare reform in US there was a certain uncertainty in the HEM community and with the launch of new products people waiting for them and maybe want being to use the old ones and all those things combined, so I guess on one side of the sales side, can you just give us a little bit of color how you guys managed that transition and is it more share shift?

I know there's some price in there.

If there's any color?

So that's the first question.

The second question, just getting back it to gross margin here, obviously you guys have done a great job of manufacturing with the currency headwinds, again when you sort of typically ramp a product, a new product and you ramp down an old one it's typically not the best from a manufacturing standpoint, so I guess I'm just trying to understand, because it seems like you guys staved it off pretty well the currency maybe talk a little bit of color there sort of how we should think about it going toward should we see a short-term Q4 sort of throw down if you will on those fronts and then improving next year or are we sort of kind of up, up kind of slowly from here.

Thanks.

Yes great questions.

See, you're right the product launches, major product launches, platform launches are always an interesting time period.

You always have little product lunches when you good through they major transition points they're ones that you want to have an experience management team that are looking carefully at that and trying to make the best decisions in order to provide supply on one side and on the other side being able to the cost and redundancies that can occur.

We're very fortunate we've got a very strong and experienced management team that's gone through a number of product launches.

You look at, at, the gentleman who's in charge of most of our manufacturing supply chain, et cetera, in Rob Douglas he's been with us over seven years, over eight years I guess and very experienced and very talented individual in being able to manage these transition points.

There's some, there's challenges and there's some up sides that come during, though time periods.

You mentioned that there's an overlap in the manufacturing on one side.

Yes.

You always have the potential of having some, some inventory overhand during that time period.

To make sure that you don't go into back order in the other side you're working the factory pretty hard so you're factory recovery is good.

I can say you can work both sides of that, they tend to offset for the most part if, if you're able to manage them appropriately in the market demand is appropriate.

We, we're in a market that, that the customers don't hold a heck of a lot of inventory across most of what we provide.

Sometimes ventilation tends to be a little bit more on the loaner pull if you will marketplace so they'll hold, which is sort of a different dynamic in and of itself but the other guys they don't tend to want to hold all that much inventory so as a result periodically you can get a little bit of delayed ordering, but when you launch on schedule and particularly when you're launching on schedule here in the middle of a quarter that doesn't necessarily have as big of an impact .

So, I think the way and the timing of the way this was launched and the manner, I don't think that we saw a huge surge of demand in Q3 that was a holdover from Q2.

In fact, if you remember the results from Q2 we had a very strong Q2, which would indicate that there wasn't a massive amount of hold off.

So I think what we're seeing here is just fundamentally a good product flow that, we've managed through our transition, and, there's always little bumps in the rode with a new platform coming out we've got bumps just like anybody would are bumps but the team is executing well and the net net is it's been a very positive and

I guess I'm trying to get, is it sort of a smooth sort of launch in transition should we sort of see that bump that typically happens in Q4 before we pick up from there?

You mean bump in revenues in Q4.

No.

Just, just in general like in term of margin, revenues, just sort of the hiccups if you will, or whatever --

No.

I don't think you should see any major hiccups from that.

Where you sometimes may see a little bit of pressure is if you have some inventory that you're trying to, push through the channel in order to, just clean out the inventory.

But, I think, what you're going to see in those categories is, I'll call it just natural behavior.

So I wouldn't expect anything massively unusual as we go forward.

Great.

And then just one follow-up here is just on the cardiovascular trial just any update that you guys can provide.

Thanks a lot guys.

Yes, you bet.

The survey, Jeff, which is our, the trial in center in Europe, predominantly Germany, France, Scandinavia, UK, et cetera.

Continues to progress well.

It's again just to remind people, it's really the largest study of its kind of designed and implemented within this industry.

It is for the use of adaptive serve a ventilation in patients with class two three and four heart failure patients so we continue to recruit for that, and we continue to fund it.

And we are certainly expecting and very hopeful of good results but there will be quite some time before we see results out of that study.

Great guys.

Congrats.

Thank a lot.

Thank you.

Our next question comes from the line of Matthew [Prior] with Merrill Lynch.

Please proceed.

Good morning Kieran, good morning guys just a question on M&A.

Kiernan I appreciate the cash flow generation of (inaudible) is extremely high you talk a little bit about ventilation and your interest there and of course, R&D and technology are you still on the hunt for M&A, if so there are other areas of segment outside your technology and ventilation that you're interested.

Matthew, we are always on the look for appropriate additions to our technology portfolio product portfolio, to our business in general.

And, and we've got a business development group and we have the, the SBUs, lead by George Nielsen and Mick Farrell and Don Darken that are focused -- Jeff.

As soon as I said I knew I said something wrong.

Sorry Jeff.

That are focused on looking for M&A activity.

But we're also very, very careful about not letting money burn a hole in our pocket.

One of areas that companies frequently get into trouble with is that simply because they're in a position to be able to do M&A, they force themselves to, because they think they have to do something immediately with the cash.

I have every level of comfort that we will scan the universe and when appropriate we use those funds appropriately in order to add value to this Company but we're going to have the discipline to do it in a way that we believe will lead to successful outcomes.

So we absolutely are very comfortable with the way that our, our balance sheet is structured today.

It's very conservative.

We appreciate the questions on that.

And we will continue to scan for opportunities, but we'll not rush when, when not appropriate.

Okay.

Thanks and also you mentioned ismatics And asked questions of rest tracks a focus of mine, will you continuing to sell that is that something in combination of S9 you'll push.

Push the frontier.

(Inaudible)

Compliance or adherence continues to be a major effort, a major area of focus for ResMed and for the industry, and in particular how do we increase the adherence or compliance patients, and how do we reduce the costs of getting people compliant or adherent.

And so in that vein, all of our products are oriented toward driving toward that simplicity of gaining adherence.

The infermatic solutions that you receive to such as rest tracks are designed exactly for that purpose they have been very well received within the industry.

They're clearly the industry leader when it comes to wireless monitoring.

And had evolved over the last several years to be a very robust and a very useful tool for our customers.

So, so yes it continues to be a very strong part of the portfolio.

The S9 is going to have capabilities of that as well as modems and smart cards however people want to gain the data, and, and we'll continue to focus and invest in those areas for continual expansion.

Thanks.

Just one last question.

You talked about SG&A and giving guidance to a percentage of revenue that you'd expect that spend for the rest of year also moving in fiscal 2011 is that something that could potentially expand as you further push the S9 or are we really seeing the bulk of the launch within fiscal 2010.

We're very comfortable with the range we're in on SG&A we're sort in that 30, low 30s range and, which is, which is a significant leverage off of where we've been historically.

Historically we're probably closer to 34% or so of sales but we're not looking to try to drive that down to 27% of SG&A on, on one side.

We're also, we'll always look for opportunities that if we think that there's a, a payback to it, a significant payback, and it means some temporary expansion we'll certainly do that.

At this point, I'd say that, we're, we're comfortable about the range that we're, we're in.

And, and I should highlight that, a lot that SG&A is just not with the new products coming out.

They're about market expansion.

When we wake up in the morning our first thought is how do we continue to expand this marketplace?

How do we beat down the walls of ignorance?

How do we engage more healthcare providers, such as cardiologist and endocrinologists as well as primary care physicians in the process of identifying, diagnosing and finally treating patients with sleep disorder breathing.

We've got some significant efforts we've begun to invest in will continue to invest.

A good example of that is primary care physician education.

PCPs are at a critical point in the process of identifying and,diagnosing patients for sleep disorder breathing We've begun a program of unbranded as well as branded medical education units and those that are unbranded we've reached across the aisle to Philips and the two companies have work quite together quite successfully our hopes is to continue to work together in those efforts when there's opportunities to do in a branded effort, we'll could that as well.

That's just one example there are many more that we invest ahead of the curve to try to continue the expanse of this market.

Continue to grow at a very rapid rate we've seen in the past and we're very comfortable that those investment are paying off and will continue to payoff so our intention is to continue to invest.

All right.

Thanks, guys.

You bet.

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

Please proceed

Good afternoon.

And thank you for taking my question.

It seems to me that you probably have a little bit of room on your tax line, can you discuss any tax planning purposes on a go forward basis for getting that number down?

Brett, do you want it take that.

Yes.

In terms of tax and planning and so on, I think we're always aiming to reduce our tax wherever we can and in the appropriate and legal fashion and that remains a focus for the tax team.

As we move forward, the intention would be to reduce that over time.

But at this stage I think we're comfortable around that 27 to 28%.

But as you look forward and said through surge tax planning and through some of the structuring and so on, then you could say that we would look to, to reduce that, but I don't think we'd be up there in targeting that dramatically drop but I this I over time there's some scope for it to decline.

Okay.

And the other income, the, the 2387 is that all FX hedging.

Yes.

The majority of that is Joanne, yes.

Okay.

And a final question is, is that you made an interesting comment that talked about particularly with the ZPAP product opportunity to take share and to shift the current patients onto this device, Can you just give a little bit of qualitative information of when you go out there,what happens in the sale process between, you don't want to use somebody else's product now you want to use ours.

Versus moving somebody up so what I assume is a higher ASP a higher margin product for you.

Thank you.

You bet.

I think there's two parts of that question, Joanne, one is, one is market expansion basically, and the other is market share expansion.

Where it's using our device versus competitive device, and and we being actively engaged in both sides of that equation.

So as an example, on the market share, we clearly demonstrate with products such as a VPAP auto, and other ranges of the VPAP line that the integration of the Easy Breathe motor technology just as it has in the CPAP range, adds tremendous value in the ability for this, this technology to be responsive, to customer needs, the ability to substantially reduce noise, it's over 70% quieter than competitive alternatives, which again leads toward improvement and compliance.

It's in the very, the very attractive and very customer friendly SA design, so there's a lot of reasons why we believe that from the a market share, from a competitive perspective, we have a superior alternative to our competitors and we've been growing in that space and we have a lot of head room in that space, it's a space historically where we, we did not have, what we would consider our fair share of that market so there's opportunity to gain market share, we believe as we look forward.

On the other side, we look for opportunities for appropriate increases in use of bi-level technologies one example I'll give is what we call the bi-level rescue program, which is where our clinical staff who will work with HME's to help them understand how in certain circumstances it may be appropriate to shift a patient from a CPAP device if they're not adhere because of comfort reasons and use a buy level device that may be more appropriate for them in circumstance.

So we help provide them information so they can make more informed decisions over time.

Thank you.

You bet.

Our next question comes from the line of Mike Matson with Wells Fargo.

Please proceed.

I his just wanting to back to the currency impact.

I guess you said a negative $0.08 impact in this quarter.

Looking into the fiscal fourth quarter, it sound like you don't really expect much of an impact but just looking at our currency models and so forth, it seems like there still should be some products that we're, are produced in inventory that will be sold in the future that were, had adverse currency going on, can you just comment on that, and have you maybe increased your hedging or something to minimize exposure?

Mike, it's Brett, the, if you look at it over that period of time, the Ausy dollar in the December, December quarter was around an average of $0.91 and this March quarter just gone, just a bit over $0.90 which is kind of six months worth there, it's been fairly steady the Ausy dollar over that period of time.

So if you look on a sequential basis and most of the impact would have washed through now, particularly when you move into Q4, most of that would have washed through, because the Ausy would have averaged around that $0.90 level for around the last six months or so.

If you looked on it year on year, you would still, you would have some of that impact because if you went back to June last year, the Ausy was around that mid 70s level, so I think year on year you will see an impact but on sequential basis you won't see that impact.

Okay.

Fair enough.

And then on just, are there, has there been any changes with [Aprea] is that contract coming up for review anytime soon.

So we, as we say on every one of these call we don't speak specifically about any given account for both competitive reasons and for the, for the confidentiality of that given customer.

I'll just say, that we continue to have very strong relationship with, with Aprea, they and many other large accounts, have contracts that renew periodically.

Sometimes they do sort of off cycle negotiations or off cycle discussions and so as with any large customer, we and everybody else are in continual discussions with them.

Okay.

Thanks.

And then I think Medicare increased some of their requirements around moving patients from a standard two PAP to a bi-level, do you think that will have any impact, I know Medicare is a smaller part of your mix, but is there any chance that you could see a private payer sort of follow that.

Right, I mean, private payers can always, change as they see fit.

We're not seeing any significant difference in the marketplace given any Medicare changes and we're not expecting any significant impacts for the bi-level marketplace based on payer changes at this point.

Okay.

And then with the home testing pilot projects, models, they're developing out there in the market, how many of those rely on using AutoSetting flow generators and do you expect the transition to home testing to drive increase the mix shift of AutoSetting units.

Yes.

So it depends on which pilot we're talking about.

So a number of them absolutely have either began with or evolved to the use of AutoSetting technology.

Either as a permanent solution or as a mechanism to tie trait for use of CPAP.

And do we expect that will increase over time?

Yes, at this point I would say that the signals would suggest that over time the payers in order to gain the maximum amount of, of cost benefit that they're looking for, that the likelihood that they will allow a full night titration in a lab after doing a home sleep test while it may, it may occur with certain payers during a transition period, the feedback that we're getting from the payers is that it would, be unlikely that that would be the long-term solution.

Which would certainly bode well for AutoSetting devices.

All right.

Thanks a lot.

You bet.

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

Please proceed.

Hi, this is Jamar, in for Jason thank for taking my question.

First question is, as you know, in term of expanding the market, given this early stages of, of home sleep testing adoption, are you seeing any change in like the conversion rate of patients that are told to get a sleep test like the difference between going into a lab and using the home sleep test?

Yes, good question.

At this point, I think it's just too early for that.

I think most of the volume that we're seeing today are patients that would have otherwise been driven to a PSG.

So it's not that, that, I think at this point I don't think that it's, for the most part accessing new patients, but this is what I think, we should expect, that stage one we believe will be with home sleep test is that, let me take a step back.

30% of the patients who receive a referral to a sleep lab don't show up and they don't show up for a number of different reasons which certainly include the expense because their co-pay could be upwards of $400 or they don't show up because of the inconvenience associated with it.

Or it may be a mixture of the above and some other factors.

So the first stage opportunities is for those people that may have been recommended to go, but have not gone, they'll switch and we'll start to see some increase on that.

The longer term, let's call it next phase is where we expect that, that borderline cases, so people that, that may be a primary care physician would not have sent prior to that, for whatever reason, either because they economically were borderline or they didn't think the person could afford the test or was going to be too much of an inconvenience, or their symptoms would suggest they want going to send them that today they don't get tested or put into the cycle for testing, tomorrow with HST we do believe they will, So I think,at that point there may be, we don't know, but there may be some difference in the conversion rate between those diagnosed and, and those on treatment for those that are positive.

But at this point we have no evidence whatsoever to suggest that that conversion rate will be anything different, and every reason to believe that the volume will increase in a direct relationship to the, to the volume increase of HST.

.

Okay.

Thanks.

One, last quick one.

Can you give us your estimate of overall market growth rate and then US growth?

Yes so as we say every quarter, there is a hard number to, to get at.

But I'd say it's pretty darn similar to what we've seen in the last couple of quarters.

Although we've had some, let's call it some positive vibes from the industry, some, some suggestions of, of volumes starting to pick up even more than they had been.

So our belief is still that the market is probably going around that 12% or so rate.

Probably 15% on the volume.

12% or so on, on the revenue side in the Americas and somewhere around that 9%, 10% or so ex US sort of blended rate in the double digits, which is very consistent with what we've seen in the last several quarters.

But again it's, it's been, what we're starting to hear some, some, very positive sorts of comments come being out of the field about weightless starting to pick up again and volume and some of the sleep labs starting to pick up again and that's an advance of, of, as I mentioned before, HST having any immaterial impact on the business.

As we look forward over the next year, next two years, three years we remain very confident and very comfortable with the progression of this industry.

And with our position in it.

All right.

Thanks a lot.

You bet.

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

Please proceed.

Thanks, guys and hey Kieran, good afternoon.

Good afternoon.

Talk about two focus I guess on investment.

It's been a couple quarters in a row where for R&D and SG&A growth has been sort of meaningfully below constant currency growth rate, and I guess, are you just that efficient or, on that front or have you just thought about, hiring more people to go out and drive on a PCP front not to I say 17, 18% growth is certainly nothing to sneeze at, just in terms of-- .

you can't manage the growth faster than that in term of putting the bodies on the street to excel rate.

Because the market is still not growing like it did three-year the overall market is seem to be taking a ton of shares I'm wondering about thoughts about resources and filing more into it as opposed to letting it drop to the

Absolutely.

I think, I think it's a great questions because it refers when and how much leverage you get.

What you've seen over the last year is we had a focused effort on, taking a look back at ourselves and looking for opportunities across the business on where we can gain efficiencies, where we can streamline where we can lean out processes to gain, to maintain and gain efficiencies particularly as we grow and that gives you a very solid and fundamental basis to expand.

So we saw some opportunities where we could gain some efficiencies and we grabbed them.

That being said, we did at the same time where we took dollars that had previously been spent in the backroom, let's say in non-customer facing areas and we've grown those areas that are customer facing in some cases above where even (inaudible) So the total number belies really what's occurring within the organization about where and how dollars are being invested and spent.

I mentioned a couple of those example before, before this last year, we hadn't invested at all in medical education for primary care physicians and now we've got a very active program and our expectation is to continue to grow that.

Our focus on helping to support pilots within the home sleep testing arena.

gave us the opportunity to grow some infrastructure around that.

Our focus on helping enable those that are, that are addressing type two diabetes marketplace, help educate and provide tools for them and help support clinical studies in that area, gave us opportunities to invest in, while at the same time we saw backroom operation that we can leverage.

Good example as of 18 months ago we started up an IT shop in Kuala Lumpur, Malaysia, and that allowed us to get off of a, a cost curve which said every dollar, that you grow on revenue you've got to grow another dollar plus in, in IT expenditures, we figured out a way to become more efficient we took down those costs while improving our service capabilities.

That's why I say you shouldn't expect us to be looking to continue a trend of trying to get SG&A down to 27% of sales.

Quite the opposite we're going to continue to invest in an innovations, we're going to continue to invest in market expansion.

If we see some opportunities that suggest for, a period of time, we need to bump up to, 31 or 32% of sale, we'll do it.

If we think that's the right thing to do, we're going to invest in market expansion.

All that being said, we're very comfortable at the level we're at now.

We'll continue to manage our resources in an efficient way, but we will absolutely keep the foot-- the pedal to the metal if you will on making sure that we're investing in market expansion.

Okay.

Great and just one follow-up on M&A you got asked a lot.

But just looking at your ROIC, ROE and ROA, and ROAX cash it's a pretty high level, there aren't that many businesses certainly that we've seen out there that can get this kind of return when you think about it, from center strategic stand point if it's tactical or anything, what are the hurdles in terms of your returns and what type of time frame are you looking at in terms of,to achieve those returns.

We don't discuss some of those things in great detail let me talk more strategically about what we look at.

When we look at opportunities for, for M&A activity for deployment of the cash, we'll look at a couple different areas.

We're look in our supply chain.

A good example would be the acquisition that we made of the motor technologies group a number of years ago where we decided that it made sense to step backwards in a supply change and integrate a certain technology because we thought if we acquired it, it wasn't about gaining cost saving rather we thought there be a strategic advantage in uniting the development group of the motor technologies with the development group of the flow generators and in doing so we could create systems that were quieter, that were more cost effective and that we could speed, or lower the time to market, speed to time to market.

And, in fact, I think that's exactly what's occurred over time.

If we look, forward in strategic areas and opportunities, sometimes we'll look, you know at avenues we want to dip our toe in the water, good example would be with MRD company in (inaudible) we acquired.

But you know what, it was lousy to learn and sends the signal to the organization that we're a sleep disorder breathing Company and a repertory Company if it means we have to look at some alternative technologies we will, and it allows us to explore some of those areas.

We've acquired a ventilation business because we saw an overlap in both the technology and the applications, so we look at these, we look first from a strategic perspective.

What are we trying to achieve.

Can we accelerate market expansion?

Can we play a bigger role and protect our market share within that, within our industries?

Can we improve our margin or our profitability over time by acquiring that technology?

That's the first and the most important thing.

Second and as part of that you have to look at the cultures that you're buying is this going to be a good fit?

Is it a business that we can integrate, is this something that would fit with the culture of ResMed or we believe that we can manage in a way that will fit with the culture of ResMed.

Those are the things that make M&A successful The secondary part of that is what do you pay for it and how do you look at that from a return on capital.

Our fundamental belief is if you look at it appropriately, we're certainly frugal so we're not going to over pay for things.

But, if it makes the right strategic fit then the numbers will work out.

If it doesn't make strategic fit doesn't matter what you got it for, what you paid for it, it.

wasn't worth the investment.

Okay.

Perfect.

Thanks, guys.

All right.

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

Great Jeff and I want to thank all those on the call today very much appreciate your questions and your attention.

And as always I also like to thank our employees all over the globe, the various functions for their stellar efforts that dry ResMed performance even I can say and I'm sure you can hear it from, from Brett and myself as well as the rest of team that we're extremely excited about the future of ResMed..

We've got exciting new products rolling out over the year and especially excited about our just recently launched masks and flow generators.

The market for sleep disorder breathing is still highly penetrated the new policy surrounding home sleep testing bode well for the growth of the marketplace, we've got a strong balance sheet, significant operating cash flow and an absolutely first rate team to execute on.

So a lot of good things are happening around the Company, a lot of good things are happening around the industry.

We appreciate your time and attention, we look forward to keeping you updated

Ladies and gentlemen that conclude today's conference thank you for participation, you may now disconnect.

Have a great day.