瑞思邁 (RMD) 2010 Q4 法說會逐字稿

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

My name is Jeff, and I will be your operator for today.

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

Later, we will facilitate a question and answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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.

Finally, when asking questions, please limit yourself to one question and a follow-up, and then place yourself back into the queue.

With that said, I'd like to turn the call over to Kieran T.

Gallahue, ResMed's President and CEO.

Mr.

Gallahue, please go ahead, sir.

Thank you, Jeff.

And good afternoon, everybody, and thank you for joining us today.

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

We'll then take your questions.

Well, we had another solid quarter.

Global revenue in the fourth quarter of 2010 grew 16% or up 18% on a constant currency basis.

Revenue in the Americas grew by 20% year-over-year and ROW revenue increased by 11% and in constant currency terms grew 16%.

GAAP EPS increased 15% to $0.68, and excluding amortization of acquired intangibles, EPS was $0.70.

Gross margin was 59.9% in Q4, benefiting from the continued success in leveraging manufacturing and logistical cost efficiencies across our global organization offset primarily by the depreciation of euro.

Cash flow from operations was $59 million, demonstrating our commitment to strong operating performance in earnings and a commitment to working capital control.

We also experienced growth across all product categories.

Global flow generator sales were up 14% or up 16% in constant currency, and mass segments grew 19% during the quarter, a 20% increase on a constant currency basis.

Sales of America's flow generators were up 16% year-over-year in Q4, and sales in ROW grew 17% in constant currency terms.

Globally, the growth in sleep therapy devices was mainly driven by strong sales of our new S9 AutoSet and S9 Elite.

With our enhanced Easy-Breathe motor technology that delivers whisper-quiet therapy, our new climate control technology, and the improved comfort and sleek design of the S9 series, we have the right innovations that are driving greater compliance.

We'll be launching the S9 Escape and the Escape Auto in the coming months to round out the offerings from the basic to enhanced CPAP and APAP around the globe.

Japan and China will follow based on their unique regulatory submission cycles.

In addition, our S9 wireless system launched June 1 and fits on the entire range of the S9 devices.

In the mass category, we believe we continue to take market share and develop new patient populations and the install base.

Mass sales grew 24% in the Americas, and in constant currency terms, 13% in ROW.

The Swift FX is doing very well, even better than we expected.

The feedback from the market has been outstanding, and it is particularly popular in combination with the S9, as the combination with the slim tubing and the comfortable interface is focused on improved compliance.

With respect to home sleep testing, the momentum continues to increase and should throughout calendar 2010.

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

In addition, the IDTS remain the primary early adopters of the HST, and we expect them to continue to invest in expanding this category.

Customers are also using their IDTF partners that typically screen patients for oxygen qualification to perform HST.

New market entrants are beginning to get significant traction in terms of HST volumes.

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

Some major payers are beginning to experiment with HSD mandates by requiring preauthorization on a regional level.

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

Once again, just within the past couple of months, clinical data has been published supporting the value of identifying and treating sleep disorder breathing.

In a study done by Dr.

Gottlieb et al, published in Circulation in July, the association of obstructive sleep apnea and increased risk of incident heart failure was demonstrated.

The study assessed the relation of OSA to coronary heart disease and heart failure in a general community sample of men and women.

In other words, not just in a clinical or hospital setting.

Finally, we announce a two-for-one stock split today.

Over the years, ResMed has delivered an outstanding return for our shareholders.

We believe our strong financial performance and consistent execution, as well as the growth and strength of our business, provided the Board with good reason to declare a stock split for the benefit of our shareholders.

In addition, the split is designed to improve liquidity and broaden ownership in our Company.

In summary, Q4 once again demonstrated the strength of our global reach 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.

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?

Thanks, Kieran.

Let's briefly run through our June quarter results and recap some of those.

Revenue for the June quarter was $291.6 million, an increase of 16% over the prior year quarter.

Unfavorable currency movements reduced our fourth quarter revenue by approximately $5.4 million, so in constant currency terms, revenue increased by 18%.

Income from operations for the quarter was $68.6 million, an increase of 19%, and net income for the quarter was $53.2 million, an increase of 17% over the prior year quarter.

Diluted earnings per share for the quarter were $0.68, an increase of 15% over the prior year quarter.

Gross margin for the June quarter was 59.9%, up sequentially from Q3, FY '10.

On a sequential basis, our margin benefited from manufacturing efficiencies and margin improvements from new products, particularly the S9 flow generator platform.

However, these were offset by unfavorable currency impacts resulting predominantly from the depreciation of the euro against the US dollar.

Looking forward, exchange rate impact should be mildly positive for our gross margin, given that we'll start to benefit from the lower Australian dollar in Q1 of fiscal year 2011.

Of course, this assumes that there are no further significant movements in either euro or Australian dollar.

We continue to execute on initiatives targeted at improving our global manufacturing and logistics cost structure.

SG&A expenses for the quarter were $83.9 million, an increase of 8% over the prior year quarter.

In constant currency terms, SG&A expenses increased by 9%.

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 28.8% compared to the year-ago figure of 30.8%.

Looking forward, we expect SG&A as a percentage of revenue to be in the range of 30% to 31% for the fiscal year 2011.

R&D expenses for the quarter were $20 million, an increase of 18% over the prior year quarter.

In constant currency terms, R&D expenses increased by 9%.

R&D expenses as a percentage of revenue was 6.8% compared to the year-ago figure of 6.7%.

Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the 7% range for fiscal year 2011.

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

Amortization of acquired intangibles was $2.1 million for the quarter, and stock-based compensation for the quarter was $7.9 million.

Our effective tax rate for the quarter was 26.1%, and the full-year tax rate was 27.1%.

We estimate our fiscal year 2011 tax rate will also be in the vicinity of around 27%.

Turning now to revenue in more detail.

Overall, sales in the Americas were $160.9 million, an increase of 20% over the prior year quarter.

This was driven by strong growth in both flow generators and masks, strong contributions from our new product releases, notably the S9 flow generator and the Swift FX and SoftGel masks.

Sales outside the Americas totaled $130.7 million, an increase of 11% over the prior year quarter.

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

In constant currency terms, sales outside the Americas increased by 16% over the prior year quarter.

Breaking out revenue between product segments.

In the Americas, flow generator sales were $80.6 million, an increase of 16% over the prior year quarter.

Masks and other sales were $80.3 million, an increase of 24%.

For revenue outside the Americas, flow generator sales were $89 million, an increase of 12% over the prior year quarter, or in constant currency terms, an increase of 17%.

Masks and other sales were $41.7 million, an increase of 9%, or in constant currency terms, an increase of 13%.

Globally, in constant currency terms, flow generator sales increased by 16%, while masks and other increased by 20%.

Cash flow from operations was $59 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $16.3, million while depreciation and amortization for the June quarter totaled $15.5 million.

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

During the quarter, we repurchased 928,000 shares for consideration of $59.3 million, and for the fiscal year 2010, we repurchased approximately 2.5 million shares at consideration of $135.8 million as part of our ongoing buyback program.

As of today, we've repurchased approximately 2.6 million shares out of a total authorized buyback of 10 million shares.

Our balance sheet remains strong and conservatively geared.

At June 30, total assets stood at $1.6 billion, and net equity was $1.3 billion.

Group external debt was $122 million, while cash and cash equivalents totaled $489 million.

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

Great.

Well, thanks, Brett.

And time to move on to the questions.

Jeff?

(Operator Instructions).

Our first question comes from the line of Josh Jennings with Jefferies & Company.

Please proceed.

Good afternoon.

Thanks for taking the questions.

You bet.

I guess just first, just on home sleep testing and covered lives doubling over the last two years.

Can you talk about any expectations for a potential mandate from CMS or commercial payers to step up home sleep testing for the first diagnostic test and the algorithm for the workup of sleep apnea?

Sure, I think -- let's start with the split of Medicare versus private payers in this marketplace.

It's important to remember that in the US market, we estimate something on the order of 20% of the patients who move into the system are Medicare based, and the other 80% are private pay based.

That's the balancing act in there.

And so, you have two different separate drivers that can affect us.

As we've said in the past, we think that HST has progressed quite well and it's progressed along a schedule that we had anticipated a couple of years ago.

Maybe just to review that, we said a couple years ago that that first calendar year was about determining whether or not HST was here to stay, and in fact it was determined.

Last year was about working out the three Ps in the piloting phase, which was process, payment, and the most difficult one being politics.

And, in fact, there was quite a few pilots that were established last year.

And you saw some players who were very excited about HST and those who felt there was others that were better prepared to do HST.

But in net, they were getting paid for it, getting paid around $200 per test.

And you saw some well-funded and well established companies gain significant interest in playing a role of HST.

As we go through this year, what we've been saying is we continue to believe is that it is a process of moving from a you-can to a you-must do HST, which will be important.

And our expectation is that you'll see some -- let's call it more quickly adopting payers that will be experimenting with different models about that you must do HST.

And in fact, again, that's exactly what's happened.

We've seen a couple of the majors doing it the way that they normally do it, which is to take a region of the country and then test different types of models.

So, for example, one of the big payers is testing an area where the way that they're getting to the you-must is by requiring a preauthorization for PSG, but not requiring preauthorization for HST.

And so, it lets the market move towards that without being too prescriptive.

You have other parts of the country that are actually looking to use HST and actually experiment with going after drug resistant hypertensives.

If those hypertensives haven't been tested, then we want to get them tested for sleep disorder breathing and using HST.

So, those models are beginning to play out, and it wouldn't surprise us if it's on the private payer side, which is 80% of the market in any case, that you'll see more of that early adoption.

And it wouldn't surprise us if you see Medicare continuing to support it, but supporting it in the way that it has supported it.

So, I will say that we're very comfortable with the rollout to date.

It has been progressing as we anticipated, and we remain very optimistic that, as we look into the future, that sleep positions will adopt at an ever greater rate, and it will be a strong driver for market growth and adoption as we move forward.

Great.

Can I get a follow-up question in?

I'll bet the innovation has been driving some market share gains for you guys, and the S9 seems to be allowing you to gain more share.

Can you just talk about share gains in the quarter, actually throughout the past two quarters since the S9 launch?

And then secondarily, in terms of your innovation, with the proposed changes for the 510k pathway, how that could potentially impact you guys in the future once those are instituted?

Thanks for taking the questions.

You bet.

Thanks, Josh.

So, you're absolutely right.

ResMed has been built on a foundation of innovation and internationalization.

We continue to invest significantly in innovation, as you can see from our investment in R&D.

Because we believe there is a tremendous amount of innovation to be brought to this marketplace.

But we have long to find innovation is something that is important to the customer, not something that is important to us.

And the S9 and several of the masks that have launched recently, including the Swift FX, are good examples of where innovation pays dividends in the form of customer acceptance and of market share gains.

So, we feel very comfortable with the launch of those products.

The team did an excellent job.

We're very proud of the team that was involved in the specifying and the development and now the manufacturing of those products.

And we feel very comfortable with the pipeline as we look forward over the next couple of years.

As far as the recent suggested changes from the FDA and the regulatory pathway, as anything in government, there's plenty of water to flow under the bridge there.

We are a Company that is driven by quality.

We are very, very comfortable with the processes that we've established, with the data that we gather in the process, and quite frankly, we feel that whatever changes come, we'll be able to manage them.

And who knows, they may help raise the barriers to entry and companies like ResMed that are so dedicated to quality and so driven by appropriate processes can find benefit in it.

So, we'll adapt to what we see.

And as I said, we feel comfortable with the product pipeline in front of us.

Next question.

Our next question comes from the line of Saul Hadassin with Credit Suisse.

Please proceed.

Good morning, guys.

Thanks for taking my call.

Just a quick question either for Kieran or for Brett on the buyback.

It was quite obvious that you accelerated that in the last quarter.

I'm just wondering what your thoughts are now with the stock split, if that changes at all, if we'll continue to see that acceleration going forward?

Thank you.

Well, we've been, I think, rather consistent in our buybacks over the last several years.

I believe in total we've spent over $350 million or so in the last several years in the buyback phase.

So, it's been consistent.

I don't anticipate at this point that the stock split will have any impact plus or minus on it.

We will continue investing and buying back as we see appropriate and as the Board deems appropriate.

Brett, to you have anything to add to that?

No, I think that the stock split won't impact us in terms of the buyback, and I think, as you said, we bought back quite a few over the years.

I think it's around 9 million shares we've bought back over that period of time.

We have plenty left in the authorized buyback from the Board if we choose to continue to buy back.

Maybe just a follow-up, then.

The 4Q, the amount of shares bought back in 4Q was simply a lot larger than 3Q.

I guess the question is going forward, is that going to fluctuate?

Or does 4Q set any line in the sand, if you'd like?

Look, I wouldn't read too much into it.

If you look quarter to quarter over the last several years, there's been some fluctuation in the amounts we buy back in one quarter versus another.

But I would just take it as, once again, a symbol in our confidence in the ability of this team to execute.

Okay.

Thanks so much.

You bet.

Our next question comes from the line of Andrew Goodsall with UBS.

Please proceed.

Thanks very much, guys.

Could I just ask about leverage?

I guess two questions there just with the gross margins.

Obviously, that's around 60%.

Just where you think that could go with the S9?

And also just with SG&A, just curious.

Your guidance is 30% to 31% for FY '11.

If you could just characterize what your plans are with the sales force?

Sure.

So, on the gross margin front, we've been saying here for the last number of quarters, we think we can be around 60% or so on the gross margin line, and that's about where we're at.

And we continue to work on supply chain efficiencies.

We continue to launch products, and as part of our development exercises, look for innovation not only in improving potential for compliance in patients and simplifying the lives of patients and of care providers, but also looking for cost efficiencies when we can and launching those new products.

And we also have pricing in the marketplace as we say, always have some level of downward pressure.

And those things tend to offset.

So, I think we've been able to deliver on what we've promised over the last couple of years, and we intend to continue to do our best to do so as we move forward.

On the SG&A front, yes, it looks this market is still 85% untapped.

There is an enormous amount of opportunity for us to continue to build awareness about sleep disorder breathing.

There's opportunity for us to continue to get the word out about connecting the medical silos, particularly those that involve cardiovascular disease, heart failure, diabetes, stroke.

Connecting these medical silos because we are very strategically placed.

We are in the middle of the metabolic syndrome.

You have healthcare systems around the globe that are struggling to deal with the costs associated with the management of chronic disorders, and in particular cardiovascular disease, heart failure, diabetes, obesity.

And we're in the middle of it.

So, we're well placed, and we are certainly have no intention of taking our foot off the accelerator as far as developing the market.

Can I just expand on just with gross margin.

My understanding is the S9 gives you a lot of advantages in terms of gross margin.

If we see, as Brett mentioned, the currency with the A dollar lag effect, I guess, into your first quarter 2011, is there potential upside to that 60% gross margin?

Sure.

There's absolutely potential upside.

Okay.

Thanks very much.

I'll get back in the queue.

Sorry.

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

Please proceed.

Yes.

Hey, guys, congratulations on the quarter.

Thank you.

I was just hoping could you give us an update on Europe and your thoughts of any potential impact from austerity programs over there?

Yes.

So, as you well know, Europe is not Europe, right.

It is a collection of different countries and different healthcare systems.

We have three different business models in different parts of Europe, right.

We're a wholesaler in some market, we're a home medical equipment provider in others, and we work with the distribution systems in others.

So, each of those have their own dynamics.

What I will say is that most every developed nation around the world is clearly looking at healthcare expenditures, and they're looking at ways that they can improve it.

We continue to preach that the only way of really addressing these costs are to look at the fundamentals.

When you look at what we do, we treat patients for the most part.

We treat patients at the home away from the hospital settings that are very expensive.

So, we're a much more cost-effective way of addressing these patient populations.

We treat them effectively.

We treat them safely.

And we're treating the most costly patients on the planet, people again that are involved with cardiovascular disease, heart failure, obesity, et cetera.

So, we continue to get the word out about the cost-effectiveness of what we do and the advantage to payers.

Certainly governments and payment systems are going to be looking for cost savings in different areas.

Part of our job is to try to educate them on the benefits of using home care in that savings process.

Okay.

Great.

And then maybe a quick one for Brett, here.

Can you give us the foreign exchange impact on EPS for the quarter?

Yes.

If you looked at the EPS sales for Q4, if you looked at it, again, same time last year when exchange rates, particularly the Aussie was quite low, impact for this quarter was in the high teens.

So, $0.18, $0.19 negative impact for us.

But keep in mind that currencies last year were particularly low.

It's probably if you looked at that, look at it in the context of full year.

So, if you looked at FY 2010, we estimate it's probably a negative impact on EPS of around, say, $0.13.

And then if you go back to FY 2009, we benefited by about $0.18.

So, the impacts are there, but if you look at it in percentage terms to our reported EPS, it's 5% to 8% over those years.

So, I suppose what I'm saying is you get some volatility through quarters, but as you look through full fiscal years, they tend to level out a little bit.

We do have currency impacts, but if you look through them for the full year, they're probably not quite as large as people would think.

Okay.

Great.

Thank you.

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

Please proceed.

Good afternoon.

Kieran, can you give us some sense in your view of what's going on with underlying patient volume growth, particularly here in the Americas?

Sure.

So, again, this market remains highly underpenetrated.

For us, it's always hard to get at the exact numbers of patients coming through the system.

As you know, there's intermediaries in between us, both the sleep labs or other diagnostic providers and HMEs.

So, it's always difficult to get real specific on those numbers.

That being said, we're seeing a continued level of optimism in the ability to attract and educate patients and put them into the system.

And I think there's some good signal about different players that have entered this market and the way that they are communicating.

For instance, you're seeing more examples of direct consumer advertising in some of the resupply, which by its nature also educates the market.

So, we're seeing -- I'd say it's too early for us to say that HST is a material number, but the good news is that you have a variety of solution providers that are going in some cases direct to the primary care physicians, trying to raise their awareness and understanding and create engagement on the part of those very critical part of the referral process.

In fact, we in combination with Phillips and with Cephalon, as a matter of fact, have co-founded some primary care physician education efforts from providing unbranded CME education, which the early feedback on that is that they're very successful with the physicians that get educated.

So, while I can't get you a sense of exactly the number because it's very difficult to get under, I think that there's a lot of positive signals on that flow.

One other note on HST is that rolls out over the coming period.

30% of the people who get a referral to a sleep lab historically have not shown up to the sleep lab.

And two of the top three reasons they normally mention are that it either there's an expense associated with the diagnostic process, or that it's the inconvenience or discomfort associated with going to the hospital.

Or going away from the family for the night, having a -- being wired up and whatnot.

So, HST will help address both of those.

Just by the fact of being able to address some of the historic and common no-shows that this industry has always suffered from, I think, is a good way of continuing to drive patient volume increases.

Let's just try this another way then maybe, Kieran.

Is it high single digits or is it low double digits, number one, in the US in terms of new patient growth?

Because obviously if your flow generators are up 16%, you masks are up 25%, there's a fair bit of share taking going in there.

And then looking at Europe, your mask number remains a little bit weaker than I might like to see, given you had a somewhat easy comp on a constant currency basis last year.

So, is there anything going on there?

Are there new product launches coming that can help address that over there?

Thanks.

Sure.

So, I guess what you're asking for is the number we often talk about with growth in the sleep market in the Americas.

And I think we said the last several quarters we thought it was somewhere around that 11% to 12% growth range on the volume side.

And I'd say that there's no reason to believe that that's gone up or down.

I think it's pretty consistent with what we've seen in the past.

But as always, I want to caveat that and say that getting to the absolute numbers is very difficult.

But yes, I think it's been a very consistent market expansion.

And overseas in terms of the masks?

Yes.

And then as far as the mask, we were actually pleased with the performance that we've seen throughout the globe.

There's different reimbursement models in different parts of the world.

You tend to see that mask growth tends to be a little bit lower normally in ROW than it is in the US.

But that being said, masks and accessories in ROW on a constant currency basis grew 20%.

So, that's a pretty darned good number.

And then just one last question, if I might.

In terms of competitive bidding since the round one rebid came out, have you gotten any new inputs or particular pushbacks from customers at this point?

No.

The whole, I think the HME community as a whole is trying to digest that whole process, and of course there won't be a public announcement of the winners now for a number of months.

Because we're not directly involved in it, we're not aware of who won and who didn't win.

So, the conversations really haven't changed at all in the month or so since the announcement because it's been part of the conversation for a couple of years now.

Okay.

Thank you.

You bet.

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

Hello, guys.

Congrats on a great quarter, and thanks for taking my questions.

You bet.

Most of them have been answered.

I just wanted to just go on the R&D front.

Obviously, I know you guys -- Brett, you gave us guidance for next year on the spend level.

Fourth quarter stepped up.

Obviously, I know you gave it as a percentage of sales, and obviously going up on an absolute basis, even if it's stayed in constant on a percentage of sales.

I guess, Kieran, the question is you guys have been really great about coming out with new products and coming out with them quicker than we're historically used to.

I'm wondering, not giving a specific timeframe or specific product, but is it more the norm to expect more product launches quicker, or is it just the organization's bigger and the leaps are just cost more money?

Well, I think there's an enormous amount of innovation still to be brought to bear in this marketplace.

And the definition of product over time, of course, has expanded.

And that's, I think, to the benefit of the customers and the benefit of the payers and quite frankly it's to the benefit of ResMed.

When you launch products, you tend to launch informatics systems, you tend to launch systems around the products themselves, and you tend to launch a number of SKUs in a given product range.

I think the product pipeline is quite strong.

I think the development of the SPU structure within ResMed has helped solidify that product pipeline and helped continue to bring efficiencies to the product development cycle.

We feel very comfortable with the progress that we've made on that.

We've increased the cycle of innovation, and the timelines have shortened in the time it takes to bring out new products.

I think we have exercised a reasonable amount of intelligence around how those products roll out.

I think the generation of S8 to S8 II to S9 is a good example of how we kept new product flow.

We were able to add innovation, patient-meaningful and customer innovation in each of those cycles, and we were able to introduce products on a very regular basis.

So, we feel very comfortable with the investment that we're making, not only in sleep products, but also in the mask products and in the ventilation space.

And we expect to continue not only to invest, but more importantly to see output of the investment over the coming years.

Mick, do you have anything to add to that?

No.

I think you said it.

The only thing we did mention in the call earlier is that we will be coming out with the S9 Escape and the S9 Escape Auto over the coming months.

And that then fully rounds out from basic CPAP through to enhanced CPAP and APAP, a full line of OSA treatment products in the sleep therapy line.

So, there's some good stuff we're talking about here and more good stuff in the pipeline over the coming year.

Good.

Great.

And then just my follow-up.

Just on S9 Escape and Escape Auto, I know you said the next couple months, and I don't want to hold you to a specific date here.

But I guess -- is that a Q1 event, Q2 event?

Is there any sense around that, just so we can keep our eyes out?

For competitive reasons, we don't tend to get too granular in our launch timing, but it'll be in the next few months.

And I wouldn't expect certainly any material impact in Q1.

Great.

Thanks, guys.

Congrats again.

You bet, thanks.

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

Please proceed.

Just a first question for me in terms of cost out manufacturing.

I think there's been some questions and comments around gross margin so far.

I know that Singapore's been an important step for you in terms of taking costs out of the production line.

Just wondering how far along that curve are we in terms of shifting manufacturing in Singapore?

Yes.

Singapore has been a fantastic investment and focus for the organization.

And Rob Douglas and Anthony Claridge and that whole team have done a fantastic job in getting that plant up and running and building capabilities.

A big part of establishing the Singapore manufacturing facility was access and control over our Asian supply chain on one side.

And the other was, for business continuity reasons, the ability to take what we're manufacturing in Sydney while continuing to invest in Sydney and continue to support that organization.

Because there's no plans of doing anything but support that organization, but basically take the volume as we increase and build capacity elsewhere.

And also, the same thing for our motor production in Los Angeles.

So, over the last 18 months or so, we've established our capabilities.

We're manufacturing S9s there and other flow generators.

We're assembling masks there.

We're now making motors in that facility.

And as we look out over the next year, we'll be building capabilities for molding of masks as well.

So, we continue to build the capabilities of that organization.

We didn't do it for some dramatic reduction and the costs of goods.

It's not like we went to some low labor, low quality part of the world.

This is -- we wanted to maintain our quality levels, because that's what drives this marketplace and certainly that's what drives ResMed.

Now, that being said, there's certainly from a net profitability side -- there's substantial advantages because there's quite a bit of savings from the tax line that are associated with that.

And you've seen us enjoy the benefit of that over the last 18 months or so.

So, we'll continue to invest.

We probably make about 25% or so of our volume there.

You'll see that creep up over time, although stage one is really about building capabilities, not necessarily building volume.

And we will see benefit of that over time.

Brett, do you have anything to add to that?

No, that's perfect.

The only thing I'd say is really looking at the running Sydney-Singapore integrated, we've been able to leverage some of the infrastructure in Sydney while we set up Singapore as well.

So, in terms of balancing volume, in terms of utilizing MLP and planning and so on, the guys have done a great job doing that.

So, as the volumes go up across the group, I think we'll get some efficiencies out of those volume increases by having both of those factories working together.

And certainly Singapore's been doing really well for us.

Great.

Thanks.

And just one follow-up question, if I may.

Just in terms of the balance sheet and moving beyond a buyback to maybe M&A prospects.

Given the global backdrop, can you still comment.

I guess, it's -- there's still other complementary areas outside the OSA that are of appeal.

And you've obviously referenced the launch of the ApneaLink for the S9, and we're moving into different areas, all the OSA with [daughter] and alike, all complementary areas.

Just any comment can you give in terms of M&A prospects outside of OSA

Sure.

You make a good point, which is we certainly have a very solid balance sheet.

It's one we work very hard to maintain that level of conservative, very well funded organizations.

Because I think it's very important to do so.

We certainly have quite a bit of powder that should we decide to make appropriate investments, we can and we will.

But at the same time, we are very cognizant that doing M&A for M&A's sake is very distracting and frequently fails.

And so, what we're not going do is let the money burn a hole in our pocket.

Historically, we've made investments in a number of categories.

We've frequently done investments in the supply chain.

As an example, if we see a strategic supplier that we think we'd like to control or we think we can add continued benefit to, we certainly in the past.

Such as our motor manufacturing, I think was a good example of that, where we took a supplier and turned it into a competitive advantage by acquiring and integrating it.

We've acquired distribution on a forward basis where it makes sense.

And of course, we've gotten into fully integrated product categories such as ventilation when we acquired Saime.

So, we absolutely scan the environment.

We absolutely look at adjacencies where we believe there's an overlap and extend, where we feel that we can bring value and we can integrate some level of knowledge.

And so we look at that on a consistent basis and valuations are only one part of the whole equation.

And we'll continue to do so.

And where we feel it's appropriate, we'll take those steps and we'll feel comfortable doing so.

We're not going to simply rush into anything because we don't need to.

We've got a fantastic market ahead of us.

We're -- 85% of our market is on tap.

We have tremendous amount of opportunity to reach more patients.

So, we've got plenty to do and plenty of growth ahead of us as we look at the core markets.

But you can absolutely be sure that we keep a close eye on the environment.

All right.

Thank you.

You bet.

Our next question comes from the line of Natalie Kelly with CBA.

Please proceed.

Thanks for taking my question.

I was just wondering if you could provide some color on the pricing dynamics in the market at the moment, particularly on the back of the three major players releasing new platforms and some of those appearing more successful than others?

Sure.

So, this marketplace is one where there's always some level of price discounting that occurs.

We've always said on a consistent basis you should expect that there's somewhere around 5% price decline on an annual basis.

And part of what we do, of course, is overcome that with continuing to innovate and to increasing the volume within the marketplaces through education.

That's why we spend so much of our time and attention on that.

There are certainly two big platforms coming, and one is regionally launched and has had a couple of false starts here in the US and some other markets.

I think the feedback we're certainly getting from customers is that the S9 platform is a winner, that it has many advantages for the patients.

It has many advantages for the HMEs, and we believe over time it's going to be demonstrated that it has many advantages for the payer as these patients get treated appropriately.

There are certainly cases, as there always is.

We'll have competitors reaching for price when we feel there's nothing left on the bag.

And we've experienced some price competition, but that's not new news, right?

That's something that you have to expect and it's a consistent -- I won't say threat, but it's a consistent characteristic of this marketplace.

So, our job is to continue to gain a premium.

We continue to price at a premium.

We think we earn that premium because of the quality in our products and because of the benefits that we bring to that marketplace.

We respond with price when we need to, but we sell value.

I think that's the right way to handle this market.

Right.

And just one follow-up question.

Just wondered if you could comment how important bundling has been for you?

Can you define bundling for me?

Just the tying together of the S9 and the Swift FX.

So, those two products do sell very well together, and when -- if you want to use the term bundling, I would say it's a system sell is the way that we approach it.

Which is, you have flow generator, which not only significantly reduces radiated noise, but also now with this new Easy-Breathe motor technology, it reduces conductive noise as well.

Then you take on top of that the Swift FX, which is light.

It's simple.

It's very easy for the HME or the sleep lab to administer it, and it's quiet as well.

It gives us a fantastic system sell perspective about the benefits of achieving compliance with patients, because we're addressing the core interests of those patients and the core interest of the HMEs.

So, absolutely, we do quite a bit of system selling.

It was successful back in the days of the S8 and the Swift launch, and it's successful today with the S9 and Swift FX launch.

Thanks for that.

You bet.

Our next question is a follow-up question that comes from the line of Ben Andrew of William Blair.

Please proceed.

Just a short one for you, Kieran.

I didn't want to be too much of a time hog before, but on the sleep lab side, have you seen an increase or a change in their interest in taking on the DME function?

Are they getting out of that business with some of the trends here?

Or is there still something in the high 20's participation rate of that function?

Good question.

That trend started a few years ago, where you saw more (inaudible) that were beginning to be involved in dispensing DME.

It was really when they got to the point where they thought there was clarity from a legal perspective over their ability to do so.

And you saw a bump up and then a gradual increase.

With HST, although I can understand the logic behind it, and I would agree with the logic behind it, I can't say that we are seeing any significant increase in the development of hybrids in the process.

What you do see is some of those hybrids -- and I will not say all of them, but some of them are very interested in shifting their business model not only to include HST but maybe to have it dominated by HST.

And just as with the rest of the sleep community have other hybrids, which somewhat surprisingly remain in the evaluation stage of HST as opposed to the adoption.

In general, regardless of whether they're hybrids or not hybrids, it seems that the market overall, the sleep physicians overall, are beginning to understand that they need to adopt HST, because if they don't, there is a concern that other business models and other care providers will adopt it.

That conversation has really changed dramatically in the last nine months and I think the realization is setting in.

From our viewpoint, we want to support the sleep positions, whether they are hybrids or nonhybrids.

We want to support them in making whatever decision they think is appropriate for them, and so we simply -- we try to provide them the tools.

We provide the services and the networking to allow them to make the best decisions.

Specifically on question, the hybrids -- no, we haven't seen a change in the business model because of HST.

Since we have Mick with us today, maybe a question for him on both the Escape and Escape Auto.

Can you talk to us about how big a segment of the overall flow generative market that would represent as an incremental opportunity with the S9 line?

Thanks.

The basic and pressure release based CPAP segments of the market are certainly there.

And over time, though, we've seen the trend more and more -- there's been a mix shift towards more pressure-related technologies with data capabilities.

So more to the Elite and AutoSet type products.

And that's why we launched the S9 AutoSet and S9 Elite first, because those seqments are the ones that support home-sleep testing, support healthcare infonetics and its capability to get good compliance and efficacy data to the cloud and to physicians and potentially in the future to patients and payers and others in the channel.

It's really important launch for us to bring this in S9 Escape and Escape Auto to the market, but it's no longer as it may have been five years ago, the dominant segment with only the basic CPAP and entry level CPAP.

It's a very important one.

In some markets, different parts of the world, different payers in different geographies and different countries -- there are payers that have paypoints that require those types of products.

We have a good segment from the Escape and the Escape Auto, basic CPAP and basic APAP through to the Elite and the AutoSet.

So it's a high end CPAP and high end APAP we have across the board.

The trend is pretty much globally is moving towards the higher end ones.

And it plays to our advantage.

It's where we play the best, and we think this therapy will go long term, and we're encouraging that and supporting it.

Great.

Thank you.

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

Please proceed.

Thanks.

I guess first of all, I just wanted to go back to your commentary on the expense lines -- the guidance you're giving for fiscal 2011.

If my math is correct, it seems like if I plugged all of that into my model at the midpoint, there really would be no leverage at the operating margin line in fiscal 2011.

I guess I just want to push back a little bit because I -- given that you have the S9, which I think is selling at the higher price given that you've moved some production of Singapore, seems like your gross margins could potentially go up.

The currency's no longer a headwind.

And if the top line's growing in the mid to high teens, maybe even better -- I can't see how you can't really get -- you're growing your SG&A and R&D in the high single digits, 10% range, how you're not going to get leverage in 2011.

You know that historically, we've been a Company that doesn't dwell on guidance moving forward.

You look at any one of those given line items, gross margin as an example.

I said before, it's such a complicated line item for us.

You have geographic mix, you have product mix, you have pricing, you have COGS, you have currency.

So, from an operating perspective, we at the Company focus on driving the increase in size of the market, driving the delivery of market leading innovations in order to gain market share through that process.

So growing volume to two different mechanisms and increasing the value.

Have we experienced leverage over the last couple years?

You bet.

Is it possible we'll be getting additional leverage throughout this year?

You bet.

Is that the primary focus of what we're doing?

No.

The primary focus of this team is to make sure this market continues to expand, connecting those medical silos, connecting into the cardiovascular area, the diabetes area, and occupational health and safety, and ventilation, and continuing to grow this opportunity and reach the market.

That's where we're focused.

And you have seen us over the past as we've been focused on that to be able to deliver an above average rate on the financials of that business.

So we'll continue to operate the business using the appropriate priorities and being considerate and conservative in our viewpoints.

All right.

And then, given that this is a med tech company's conference call, I guess I'll throw the token Europe question in.

You guys do have more exposure than at least some of my other companies.

I guess a lot of that's in Germany, where you're actually vertically integrated and collecting reimbursement directly.

Just wondering if you see any risk around the reimbursement in Europe in general, in Germany in particular given the austerity measures being taken over there?

I really don't have a lot to add to what we commented on earlier in the call.

We have three different business models in Europe.

We have the direct model, which is the HME business.

We have the wholesaler business and we have the distributor business.

Each of those business models have their own dynamics associated with them.

And each country, of course, is different.

There's the Euro zone, which has some commonality, as we all know.

But each of those payment systems and the regulations that are associated with those payment systems and the politics associated with those governments and the strength of one government versus not another, and what that means as far as what they can pass and not pass and where that changes.

All those things differ greatly.

I would say from our perspective that's a good thing.

It's not all -- the tide doesn't move all one way or more the other way.

We fundamentally believe that ResMed is located at one of the most strategic -- positive strategic areas that we can be, when looking at healthcare in general.

What's happening in Europe is no different than what we're thinking about in the US, which is no different than we're thinking in any of the developed economies, which is -- everybody sees the tsunami wave of chronic disorders they need to manage.

You have health economic bodies like NICE, the National Institute of Clinical Excellence in the UK, which is the granddaddy of health economic bodies that said, "Look, if you are going to look at sleep disorder breathing, it is economically advantageous to identify and treat more people with sleep disorder breathing as opposed to less." Fundamentally, we feel we are very well placed to save health care systems money while at the same time improving the lives of patients and addressing the most costly and debilitating chronic disorders on the planet.

Okay.

Let's see.

Then just product related question, maybe for Mick.

The S9 Escape Auto, I guess that seems like it's a new product category like a low-end auto.

Is that what that is and how does that fit into the product lineup?

Actually, it's not a new category.

We introduced it on the S8 II line.

It was called the Escape ll Auto, and it came out north of 12 to 18 months ago and has been sold beside the Auto Set in at least the America's market, for at least that time, the 12 to 18 months, and really it is a segmentation along the same lines as you see between the Escape and the Elite.

The Escape Auto has the capabilities to increase or decrease pressure based upon apneus hypotenuse flow [mutation] to the patient over time and tracks all of the necessary data like compliance data that are needed for payers and so on.

It doesn't track some of the more advanced information that the Auto Set that would have such details such as apnea hypotnia indices and further information such as that.

It's really based upon the different segments of the market, the different price points, the different needs of the payers and the price point that those payers offer our customers, the HME.

So that they can offer AutoSet-type technologies to a broader price point and allow us to segment those two different areas.

Not a new segment, but certainly new for the S9.

It's got all of the features of climate control, low noise, and slim-line tubing that the S9 has.

And the accessories work all the way from basic CPAP to advanced APAP like our S9 as Kieran outlined at the start of the call.

Thanks.

That's helpful.

I didn't realize that you'd had that on that S8 II, that version of the product.

That's all I have.

Thank you.

Great.

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

This is Jim [Marius] calling in for Jason.

A quick one.

In regards to home sleep testing what are you seeing in terms of titration practices by providers?

Have you seen any notable directional movement in labs doing at-home titration, and in terms of that, are you seeing uptick in the mix of auto in general?

The models are still mixed at this point.

I think that's because you have different players.

You have sleep labs that are involved.

You have IDTF's that are involved with HME partners.

You have other service providers that are involved.

Each of them has sort of a mixture of models within it.

So I would say that many of the sleep labs, but not all of them, but many of them have tried to maintain a titration night, whereas many of the other models have frequently been integrating the uses of autosetting devices as the more permanent solution for those patients.

Again, within the sleep community it varies.

Some are maintaining the titration nights.

Some of them are going autotitrating.

How do we think it's going to play out?

We think that home sleep testing will be positive for the mix shift to autotitrating devices over time.

It is -- some of what we're hearing from various customers is that some of the payers are asking questions about the need for the titration night.

That will with be something that the sleep community and the payers will need to resolve with each other.

We'll continue to support them either way.

I'd say in general, today it hasn't been a material element but over time, we do think that there'll be a positive mix for autotitrating devices.

Ladies and gentlemen, we are now at the one hour mark, so I'll turn the call back over to Kieran Gallahue for his final remarks.

Thanks everybody for joining us today.

As always, I want to thank our employees all over the globe in their various functions for their stellar efforts, because they are ResMed and they are what drives ResMed's performance.

I can say that we remain excited about our future.

We've got exciting new products rolling out over the year and especially excited about our just recently launched new masks and (inaudible) platform.

The market for sleep disorder breathing is still highly underpenetrated.

Home sleep testing is ramping up and coming along just as we had anticipated.

We had a stellar balance sheet, significant operating cash flow, and as I mentioned, an absolutely first rate team to assure a strong execution.

So a lot of great things happening at the Company and within the sleep industry.

We certainly look forward to updating you in future quarters.

Thanks again for joining us.

Ladies and gentlemen, that concludes today's conference.

You may now disconnect.

Have a wonderful day.