瑞思邁 (RMD) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 ResMed Inc.

earnings conference call.

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

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

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

If at anytime during this call you require operator assistance, please press star followed by zero and I'll be happy to assist you.

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 segments such as projections of future revenue of 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 securities filings such as Form 10-Q and 10-K, which may be accessed through the company's website at www.ResMed.com.

With that said, I would now like to turn the conference over to Dr.

Peter Farrell, ResMed Chairman and CEO.

Dr.

Farrell, please go ahead, sir.

Thank you very much, Kathy.

Good afternoon, good morning.

And thank you for joining us.

I'll begin with some summary remarks, and then turn the call over to Brett Sandercock.

And Brett will go through the numbers in more detail.

And then we'll have a Q&A.

We had another solid quarter.

Our 65th record quarter.

Global revenues grew 12%, and that was also the same in constant currency.

Revenues in the Americas grew by 9.3% year-over-year, and rest of the world revenue increased by 16%, and in constant currency grew 15%.

We had a robust quarter as well in Asia-Pacific, and we were very happy with the growth in Europe.

Under the conditions of large unfavorable swings in Forex, we reported strong bottom line results.

GAAP EPS increased 10% to $0.34, and if we exclude amortization of intangibles, EPS was $0.35.

Global growth in sleep therapy devices was driven mainly by quite strong sales of our new S9 AutoSet, which was released at about this time last year.

Preference for the AutoSet is rising in the US, and continues to be a consistent source of growth in both Europe and Asia-Pacific.

The global market, we believe, is recognizing the importance of, finally, of automated algorithms to help patients achieve compliance as well as comfort.

And it's a combination, really, of comfortable breathing waveforms, our Easy Breathe system, coupled with better algorithms in our enhanced AutoSet, and we have the lowest conducted noise of any device on the market.

And sales of the S9 series have continued to do well in Europe, and we believe there is a slightly better appreciation in that market of the performance characteristics of the algorithm, as well as the quality of the devices, and this in turn leads to better compliance, and the European market tends to be more clinically and patient-focused, than we experience here.

We're also on schedule this month for the launch of the S9 AutoSet and the S9 Elite in Japan.

In fact, it's this week.

Sales of flow generators in the Americas were down year-over-year, and this is the same story as it was the previous two quarters, and that's mainly due to a steep decline in our bilevel category.

As well as very large prior-year comparables, in fact, Q3 2010 over Q3 2009, the top line was 22%, and was also 25% of the bottom line, so there were fairly large hill to climb.

With the launch just this month of the S9 bilevel series, that's the VPAP S, the VPAP Auto and the VPAP ST, we expect to regain bilevel market share and return to positive growth in flow generators in the Americas.

S9 AutoSet sales remain the sweet spot again, and grew in double-digits this quarter.

Next week, we're also pleased to announce that we are launching the adaptive server ventilator on the S9 platform in the US market.

And that's the S9 VPAP Adapt.

Another positive indication of progress in product development is the recent launch in Europe of our Stellar 100.

This is an adult and pediatric ventilator, and it's designed for both noninvasive as well as invasive use.

As a reminder, the Stellar 100 provides easy access to quality therapy for nondependent ventilation patients, across both the sub-acute and the home-care settings, and the Stellar combines Saime's ventilation knowledge and experience with our proven quality and excellence in noninvasive ventilation.

And this is a new cost-effective ventilator platform, and in fact we're delighted with it and delighted with the reception it's received thus far.

Like the bilevel category, this noninvasive ventilator is expected to positively contribute also to Company-wide gross margins.

Turning to masks, growth was 22% and 21% respectively in the US and rest of the world.

We believe we continue to take market share, due to the fact that our masks are not only easy to fit, they're extremely comfortable and actually very good value for money, because there are less callbacks and the experience that people tell us as they get more compliance.

To add to the Swift FX and the Swift FX for Her nasal pillows, we completed the trilogy of the Forex category with new full-face and new nasal masks.

The Quattro FX full-face mask is now available globally, and has received an excellent reception everywhere the product has been marketed, especially due to the absence of a forehead support, and this has created a whole new segment for us.

In new and smaller model Quattro FX provides an effective alternative to conventional full-face masks.

We also launched the Mirage FX nasal mask in Europe, and just launched the same product in the US this month.

This mask is a real breakthrough in terms of simplicity.

It is incredibly lightweight, under 75 grams, or about 2.6 ounces.

It has a slim and compact design with only four parts.

It is a leap forward in terms of ease of fit, use, and comfort.

Plus, it's very wide fit range results in 90% of patients being fitted correctly the first time.

On the home sleep-testing front, HME interest in the area continues to evolve.

We're actually reaping benefits of this in a number of ways, including strong double-digit growth in sales of our ApneaLink Plus, and although this is not usually material, it does indicate that the HST area is forging ahead.

We believe that now it accounts for just shy of 10% of sleep test volumes, and we see it as continually expanding due to patient convenience as well as commercial payers pushing for HST instead of lab PSG.

This push hasn't been broadly enforced as yet, but we can see signs of that happening in the not-too-distant future.

I'd also like to point out that in a recent chest publication, in fact this past February, the results of a randomized controlled trial involving 210 patients demonstrated -- this was at Walter Reed, and it was Lettieri et al., demonstrated that PAP compliance did not differ between those undergoing HST straight to APAP, versus full in-line PSG with in-lab titration.

In short, HST offered a more accessible, far more cost effective alternative, and therapeutic adherence was not the least bit compromised.

In other words, the compliance after several weeks of treatment was identical in both those groups.

And this was achieved of course, about one-third the price.

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, namely cardiovascular disease and type-II diabetes mellitus.

The same also applies in stroke and, of course, obesity.

And I think people heard the statistics there with the increasing obesity across the world, but in particular in this country.

Increasingly, there is evidence coming to light that early intervention in the treatment of sleep disorder breathing may slow or prevent progression of these comorbidities.

And that's big news in the sense that it's prevented.

In addition, just this week there was a publication in Stroke by the Toronto Sleep Group that PAP treatment of stroke sufferers in chronic rehab significantly improved both functional and motor outcomes.

That's also an important observation.

And it's estimated now that between 70% and 80% of patients suffering from type-II diabetes have sleep disorder breathing.

And just this year, in January, the Center for Disease Control and Prevention reported that it is now estimated that there are nearly 26 million full-blown diabetic patients in this country, but another 79 million are prediabetic, raising the risk of them getting type-II diabetes in the very near future, and of course, concomitant heart disease, stroke and kidney failure where the bulk of patients going onto dialysis come from type-II diabetes.

The number worldwide that are potentially in need of sleep disorder breathing therapy is simply huge.

And the good news is, the treatment with nasal CPAP reverses not just the hypertension invariably associated with these patients, but also the disease itself.

In other words, it treats metabolic syndrome.

Again, we are in the preventive area, which is the right place to be.

With respect to the Association of SDB and OSA and Perioperative Risk, it has been shown that there is a high prevalence of undiagnosed OSA in the surgical patient population.

We don't know what the exact prevalence is, but a good estimate, based upon the age of the patient undergoing surgery and their body habitus, is roughly 50%.

This is leading to the use of diagnosis and therapy before and after surgery to avoid surgical complications and potential death to the patients who have OSA because the anesthetic itself actually imposes central sleep apnea on the obstructive.

It has even been shown that untreated, OSA patients are particularly at risk after anesthesia, and this February, an article in Anesthesiology was published announcing the formation of the Society of Anesthesia and Sleep Medicine.

And the aim of this society is to promote discussion, education, and development of clinical standards and research related to issues common to SDB and perioperative risk, and also to recommend methods of prevention.

And obviously the prevention is, hey, get those patients diagnosed and treated.

There are also more initiatives in play in the transportation and other industries which recognize the need, for example, air traffic controllers, which recognize the need to address sleep apnea in these spaces.

We're also seeing corporations taking an active approach in contacting us in the interest of starting programs that will benefit their employees with their productivity, health and safety, as well as the safety of those with whom they come into contact.

And shortly, we'll begin a large initiative in this space, but we're not ready to talk about that.

But we see the diagnosis of sleep disorder breathing in corporate employees as a very, very potentially large area of interest.

In addition, we continue with our initiatives in educating primary care physicians, the aim here is to not just let participants learn about the symptoms of sleep apnea, but also to get them to implement screening and engage in diagnostic pathways therapy, and the latest research on morbidity and mortality associated with sleep apnea is shared with the PCPs.

We're also working with the Joslin Clinic at Harvard, and also the Harvard sleep people, to sponsor physician awareness and programs regarding the cardio-metabolic syndrome and sleep disorder breathing.

That's it for me.

Now I'll turn the call over to Brett.

And Brett will provide additional detail on the financials.

Brett?

Are you there, Brett?

Brett, are you -- are we still on the call here?

Hello?

Yes, sir, you're still on the call at this time, sir.

Oh, Okay.

I guess we better wait a moment there for Brett, although I know what he's going to say, so there's no mystery.

And maybe I can start that, and Brett can take over when he gets back on the phone.

There must be some gremlin on the line here.

Brett starts by saying thanks, Peter.

Oh, there you are, Brett.

Can you hear that now, Peter?

Yes, Brett.

I'm not sure what happened there, but we're ready to go.

All right.

You start by thanking me, and then you fire away.

I do.

Thank you.

So revenue for the March quarter was $313.3 million, an increase of 12% over the prior-year quarter.

In constant currency terms revenue also increased by 12%.

Income from operations for the quarter was $64 million, an increase of 5%, and net income for the quarter was $53.4 million, an increase of 9% over the prior-year quarter.

Diluted earnings per share for the quarter was $0.34, an increase of 10% over the prior-year quarter.

And excluding amortization required intangibles, earnings per share for the quarter was $0.35.

Gross margin for the March quarter was 58.3%, down sequentially from Q2 FY '11, and lower than the prior-year March quarter.

On a sequential basis, our gross margin was negatively impacted by unfavorable currency movements, some adjustments to flow-generated production volumes, and ISP declines.

Looking forward, we expect margins to be in the vicinity of 58%, however, we will continue to experience headwinds from the impact of the appreciation of the Australian dollar.

We continue to focus on activities targeted at reducing product costs, including product development initiatives, improving manufacturing processes, and building scale and efficiencies with our supplier and logistics cost base.

SG&A expenses for the quarter were $92.5 million, an increase of 10% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 8%.

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

SG&A, as a percentage of revenue, improved to 29.5%, compared to the year-ago figure of 30.2%.

Looking forward, and subject to currency movements, we expect SG&A, as a percentage of revenue, to be in the range of 29% to 30% for the near future, and into fiscal year 2012.

R&D expenses for the quarter were $23.3 million, an increase of 28% over the prior-year quarter.

In constant currency terms, R&D expenses increased by 18%.

R&D expenses as a percentage of revenue were 7.4%, compared to the year-ago figure of 6.6%.

Looking forward, we expect R&D expenses, as a percentage of revenue, to move toward the 8% range for fiscal year 2012, reflecting the strengthening Australian dollar and continued investment in our product pipeline.

Amortization of acquired intangibles was $2.7 million for the quarter, and stock-based compensation expense for the quarter was $6.8 million.

Our effective tax rate for the quarter was 24.9%, compared to the prior-year quarter effective tax rate of 27.8%.

The lower tax rate reflects the benefit of lower effective tax rate in our Singapore and Australian operations.

Looking forward, we estimate our effective tax rate will be in the vicinity of 25%.

Turning now to revenue in more detail.

Overall sales in the Americas were $160.5 million, an increase of 9.3% over the prior-year quarter.

Sales outside the Americas totaled $152.7 million, an increase of 16% over the prior-year quarter.

Currency movements had a slightly positive impact on revenues with sales outside the Americas, in constant currency terms, increasing by 15% over the prior-year quarter.

Breaking out revenue between product segments.

In the Americas, flow generator sales were $68.9 million, a decline of 4% over the prior-year quarter.

As expected, our growth this quarter was adversely impacted by the decline in our bilevel device sales, as we face the challenge of tough prior-year comparables and an aging bilevel platform.

We expect the recent launch of our S9 bilevel series will help reverse this trend.

Masks and other sales were $91.7 million, an increase of 22% over the prior-year quarter, underpinned by strong contributions from new products and growth and accessories.

For revenue outside the Americas, flow generator sales were $101.7 million, an increase of 13% over the prior-year quarter, or in constant currency terms an increase of 12%.

Masks and other sales were $51 million, an increase of 21% over the prior-year quarter, or in constant currency terms an increase of 19%.

Globally, in constant currency terms, flow generator sales increased by 5% while masks and others increased by 21%.

Cash flow from operations was a record $81.4 million for the quarter, reflecting strong underlying earnings and working capital management,.

Capital expenditure for the quarter was $16.2 million.

Depreciation and amortization for the March quarter totaled $18.1 million.

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

During the quarter, we repurchased 1.9 million shares for consideration of $59.5 million.

As of today, we have approximately 11.7 million shares remaining under our authorized buyback program.

Our balance sheet remains strong.

Net cash balances at the end of the quarter were $591 million, and at March 31, total assets [totalled $2 billion] and the equity was [$1.7 billion].

I will now hand the call back to the operator to take your questions.

(Operator Instructions) The first question comes from the line of Ben Andrew of William Blair.

Please proceed.

Thank you very much, and good afternoon guys.

I guess good morning, Brett.

Just a couple of questions.

You talked about production cuts in the quarter on generators in terms of relative to your plans.

Can you talk a little bit more about that, and was that just on bilevels, or was that on the other generators as well?

That was primarily -- It's me, Brett might want to chime in as well.

That was essentially -- we frankly got hammered in bilevels, and it was basically -- that's 90% of the gain.

We're up well into double digits on the S9 AutoSet.

And we see that as a continuing trend.

But that was it, and also with the adaptive servo ventilation products, we had the old S7 box, and that certainly hurt us, so now we've got a full armament there, so we're feeling pretty comfortable, but that's about it.

Brett, do you want to add anything?

Yeah, that's pretty much.

We rebalanced some of the production, we moved pretty swiftly on that, so a lot of that was really undertaken in December, but with the quarterly lag that sort of manifests in this quarterly number, so it's been -- I think the guys did a pretty good job rebalancing that, so it did hurt us a little bit on the margin, but I think going forward rebounds that, and we're looking in much better shape.

Okay.

And then, I guess, a few questions on the bilevel, how do you think about that rollout?

And we talked in med-trade about this in terms of taking some time to ramp, but is that something where we can see a material improvement in that performance, because you talked about trying to get back to positive generator growth in the fourth quarter?

Yeah.

The S9, of course, of course it's early days, we came up with the S, the VPAP S, and a few weeks later the ST, and, in fact, next Monday, we're launching the ST and the ASV.

That's the VPAP Adapt SV in the US.

You know, obviously it's -- we've got two months out of three, but we are very -- they are fabulous products, and the CPL, the controlled product launch, there was just extremely good acceptance and, in fact, we had -- this is sort of n-equals-one, but there's a woman that we generally have a lot of issues with, I won't mention her name, but she's in the Pacific Northwest, and she said that she's been on bilevel for 20 years, and she's never -- in fact, she had a couple uneasy nights because the machine was so quiet, she couldn't believe it was on.

So the CPL, if you can go by the anecdotal evidence there, we are very, very confident about this products, Ben.

Okay.

And then Brett, changing gears to currency impacts, can you isolate for us in the gross margin the movements, either sequentially or year-over-year, so we can sort of understand that and how to model a -- number going forward, and I got one more follow-up and I'll jump off.

Sure.

In terms of the margin, it was a pretty -- on a sequential basis quite, well both, but talking sequentially, quite a big impact.

Certainly it contributed over half that margin decline.

So it was the biggest impact.

And the balance was sort of mix and price?

Because obviously if you've got less S9 -- excuse me, bilevel in there, it's going to really hurt gross margin, I would think.

Yeah.

And there's a combination of other factors there that make up the balance of the margin decline, if you like.

The bilevels, it's kind of -- it's multilayered.

It hurts you on your revenue, it hurts you on your margins as well.

So it's something that with a new product coming through, we want to address them, and I think that will certainly help us on many levels.

Okay.

And then finally, the bottom line impact of currency this quarter, you were $0.35, kind of how the history looks at it, the consensus was $0.36?

Yeah.

In the order of two cents, around that.

So if you look at the bottom line, it's kind of, you know, if the currencies weren't there we would've almost grounded twice the rate that we did.

So the underlying business is certainly robust, and you can kind of see that reflected in cash flows and so on, which has been pretty consistent through the quarters.

But certainly currency has, and particularly the Aussie dollar, has had a pretty significant impact on our results this quarter.

You know, Ben, in quantitative terms you're talking about well in excess of 100 basis points, and between 100 and 200 basis points, just currency.

Just forex.

Great.

Thank you.

Next question comes from the line of Andrew Goodsall of UBS (Operator Instructions)

Thanks very much, guys.

Perhaps as a follow on from Ben's question, just if you could break out that FX impact with any hedge gains, and obviously the net effect was negative $0.02 cents per share to the EPS, just confirming that.

Yeah.

That's what it was.

That's confirmed, Andrew, and the hedge gains were -- we had some small hedge gains this quarter, but as you know, we mark-to-market on our hedging on our derivative structures, so -- and the Aussie closing quarter, December to closing quarter, March is just up a little bit below, the average rates were up quite significantly, so we had small hedging gains this quarter, if you like.

Talking $1 million or $2 million there or...?

Sub-million on that.

Okay.

Pretty modest, Andrew.

Okay.

Sounds like it.

And just on the product rollout, could you just take us through how you see this ventilator, this S9 VPAP's rollout, I guess, in terms of Europe and in the US?

And then just in terms of the Stella rollout, when that's coming to the US?

Well, okay, let me take the last one first.

The Stella 100 might be coming to the US, but we have approval, it will be the Stella 150, which we launch here, because we don't get the right level of reimbursement with the Stella 100.

So we're going to go with the 150, and the timing on that is probably -- it's not during this quarter, and hopefully it'll be somewhere around Q1.

Sometime later this year.

Okay.

And you said you got approval for that, so that's FDA approved now?

As I understand it, yeah.

Yeah.

Now, we've only just released the S9 version of the ST and the ASV, adaptive server ventilator, the VPAP Adapt SV, and that's happening actually on Monday.

The S has been out, and it's going extremely well, the Stella 100 in Europe is going extremely well.

All I can say is, I mean, the numbers, we just don't have -- we're basically selling all we make.

Put it that way, Andrew.

And it's early days, but we are very confident of these new products.

Based on the CPLs, the controlled product releases.

They've gone extremely well.

That was my next question.

So it's full release.

And is it staggered Europe, USA, or is it pretty much global rollout, like, the VPAP Adapt?

It's pretty much global rollout.

It started in Europe -- oh, the VPAP Adapt?

That's pretty much global rollout.

Okay.

Terrific .

Thanks very much,

Okay, Andrew.

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

Please proceed.

Hi, good afternoon, everybody, and good morning, Brett.

Yeah, I was hoping maybe we could just to dive a little bit deeper into the US flow generators.

Would you be willing to give us some color on how CPAP and APAP did in the quarter, and any kind of color on the magnitude for bilevel, the decline?

Well, David, with the newer products, that is the S9 PAP generators, I mean, we couldn't have been more pleased.

Double-digit growth with the AutoSet.

And the pity is that we just haven't -- we said it in Q2, we said it in Q1, we had tired bilevel flow generators, and we got hurt by that.

Particularly when you've got your major competitor coming out with a new line of units, and ours looking even tireder because of that.

I guess the only good news with it is that when we launched the S8 series, it took us over 2-and-a-half years, for whatever reason, before we got the bilevels out.

This time we were less than half that, so we were around a little over 12 months.

You know, we released the S9 PAP series February of last year, and we're just releasing now, so it was just a year later.

So it may not seem as though we've improved out of sight, so we're pretty delighted with the initial response to the products, and we think you'll see that in the results as we go forward.

Okay.

Great.

And any kind of update you can give us on pricing and overall market growth?

I think during the last call, it sounded like the US market might've slowed a little bit.

Is that still kind of, you know, steady-state with what we saw last quarter, or you know --

We're not seeing any, you know, dramatic changes from what it was the previous two quarters.

It's sub-10%.

If we had to zero in it and take a vote on a number, it's probably on the order of 8%.

But that's as best as we can crystal-ball it.

But there's no evidence, in fact if anything, there's evidence that there's going to be a pickup, we believe, in growth, mainly, we believe, through HST.

The IDTFs, the independent testing facilities, we were at the recent med-trade meeting and met with a couple of those guys, IDS, VirtuOX, and so forth, they are talking very confidently, and we see further movement of sleep labs adopting HST, a model we thought would make sense 10 years ago, but anyway, I guess it just takes time.

And perhaps equally, or maybe even more importantly, you've got some of the big payers now that are requesting preauthorization before patients have PSG.

They weren't enforcing this in the manner that maybe they could've, but we're seeing now that because of the obvious savings, and now there's nowhere to hide, when there -- I can think of three publications, I mentioned Lettieri earlier on, the Walter Reed study, but there are studies showing that in fact, there is no compromise whatsoever in the quality of treatment and the best measure there is compliance.

So we see that there a number of moving fronts here, and it's all relatively positive.

And just two real quick ones here for Brett.

What level of the Aussie dollar do you think we would have to see kind of at a, you know, a sustained rate to break that 58% gross margin to go below it?

And then, what percent of manufacturing is taking place in Singapore?

Yeah.

I mean, David, on the current season the margin, there's so many variables.

I don't want to speculate too much on what that would be because there's currency and then whole other sectors playing on as well.

I mean, clearly, the Aussies' at 109 or whatever it is this morning, and I don't think it's been there since 1982, so you're talking quite unprecedented levels.

In terms of how high it's going to go and what that impact might be, it's really purely speculation on that, but you've seen the impact that's come through from Q3, that Peter mentioned, is certainly North of 100 basis points.

So, historically, that gives you some sort of concept on how the impacts come to be.

So that's a comment on that.

Brett, let me add one thing to that, and I've already said it, but let me emphasize again, we have some confidence because of the bilevel releases and the ASV, although that's not going to be as material as the S and the ST, but much better margins with those products, and so that leads us to crystal-ball a 58, even 58-plus.

I mean, if the Aussie goes to a buck-50, that's a different ballgame.

Not that we're predicting that, but $1.09 could go to $1.20.

It's pretty unprecedented and pretty volatile, and the dollar could be back down as well, so it's really unpredictable.

And, Dave, just on your -- on Singapore production, we're around the 30% mark now of production in Singapore, so we continue to diversify a little bit into that Singapore production.

Mind you, in terms of currencies, really it's a story of US weakness across-the-board, so even the Singapore dollar is going up, and it's not dissimilar to what the Aussie dollar is going up against the US.

Really across-the-board.

The biggest plus about Singapore, and we are emphasizing more and more manufacturing into that space, is the tax rate.

And the favorable tax rate is the bigger draw there.

Yeah.

Okay.

Great .

Thank

Pleasure.

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

Thank you very much for taking my question.

I think this question was asked, but I'm not sure I heard the answer.

What were the bilevel sales down in the US?

We didn't actually give -- you're right, Joanne, you didn't miss anything.

We didn't give the number, but overall, you can sort of surmise it.

I mean, we were well up into double digits with the S9 AutoSet, and, you know, under negative growth year-over-year, so you can surmise what the impact is.

It was pretty significant, but not that different from the previous quarter and the quarter before, so we were very badly hurt by bilevels and a tired product.

Let me ask a different question, how fast do you think the uptake will be now that you have this product out into the market?

What has history shown you?

Well, we're not production-limited in that space, and Rob, you're on the call.

Rob Douglas?

Yes.

> We're in pretty good shape there, I think, Joanne.

But Rob, you might want to make a comment.

Rob is in charge of Operations.

With the common platform on the whole S9 family, we've got plenty of capacity, Peter.

Okay.

But I mean in terms of -- are there stocking orders that will now happen?

Are there people who weaned down on their previous inventory in anticipation that this product would be coming out?

Joanne, it's very hard to pinpoint, looking at the individual customers and so forth.

All we can say is that the launch was extremely successful, and there's been no evidence of any slowdown of production.

We're getting them out the door as fast as we can make them.

And my final question is, did the crisis in Japan impact your OUS sales in any way?

Thank you.

You know, funnily enough, it's early days, but no.

We didn't -- happily, there was no impact on any of the ResMed personnel, the Fukuda Denshi distributors there, we've been in very close contact with them, and, in fact, one of the interesting things is that there was a little bit of stocking, a few stocking orders because of concerns that the devices might have to be replaced.

But it's very early days.

But we were concerned about everything across the board, supplies and so forth.

I think Rob has been the closest person in touch with Kazuhiko Matsushita, our President of Japan.

What we've heard is that the disruption, which could have been huge, is actually quite minimal.

Would you like to comment more on that, Rob?

Yeah.

Obviously, our customers in Japan have really had to get in touch with many patients in the affected areas, but they have really strong systems for that.

And they are in quite good control of that.

So we don't think there'll be a big impact on the Japan business at this stage.

In terms of the overall supply chain impact, we've have seen issues around, particularly affecting some electronics industries.

We are watching this very carefully, and trekking through the supply chain on a daily basis and making sure there are alternatives through that.

And so we have to watch it carefully, but we don't think there'll be any impact on the supply chain.

Thank you.

Our next question comes from the line of Ian Abbott of Goldman Sachs.

Please proceed.

Yes.

Good afternoon or good morning.

I just had a question about unemployment in the US.

You mentioned bilevels as being a big factor of flow generator sales being down, but how do you see unemployment also impacting that, and do you think you need to see unemployment rates fall before growth resumes?

Obviously, that's a factor, Ian.

It's difficult to know just how much that affects -- I mean, clearly people who lose their jobs lose their cobra.

Their health insurance.

There's pressure on co-pays.

I mean, if you've got an elective procedure, and since you don't know how you're going to feel until you get treated, sometimes that's -- obviously if people are watching every single nickel and dime, then that, you would think, would have an impact.

Very hard for us to know just how much that impacts us, to be honest.

I think there's just a malaise in the US economy, and it hits every industry.

I would say, funnily enough, we've probably been less impacted than a lot of others.

But, I mean, a good question that I wish we could be more specific with, but very hard to be specific.

Yeah.

Fair enough.

The other question I had was around slightly related, just on upgrades.

I know you're one step removed from it and since you sell into the distributors and they then on-sell, but do you get a sense of how much of your sales each period is currently going to people?

You mentioned that lady in the Northwest region.

How many people are actually rolling over there generators rather than just being a new person to the system?

Again, , this is a difficult mix, because of some of the DMEs -- and you're quite right, I mean, getting clean data is almost impossible because 95% of our business here is through DMEs and HMEs.

Some of them are actually reusing, refurbishing their CPAP devices.

We don't know how much of that is going on.

Whenever there's an economic downturn, I mean, people always look to see where they can save a few shekels here and there.

We think the S9 has been so well received that we might even get surprised.

I mean, it's too early to know, the we might get surprised by people switching from their current bilevels, their VPAP products, into the new S9 bilevels.

We'd like to see that.

But very difficult to get a handle on that one as

All right.

And I'm going to sneak one last question in.

Just like old times, Peter, with you on the call, and just wondering, you know, obviously, what timeframe do you think, you know, we'll have a new CEO sorted out?

If any?

So, there's a board committee which has been appointed, obviously I'm on that.

And I'm kind of like D'Artagnan and the other Three Musketeers, if you like.

And as I pointed out to the other Three Musketeers, they're like visiting seagulls.

The come in here every three months, leave a deposit and fly out.

So I think I have a bit more awareness about what's going on within the Company than they do.

But having said that, the likely scenario is that, I think most of us would like to have an internal candidate, so what we're doing is we're getting an external person who is very, very familiar with us, a long-term consultant, he's an engineer, statistician, Stanford MBA.

He's going to do a deep dive, just to provide some information, talk to the senior people, that will take place over the next month or so.

And I think the Three Musketeers are saying we probably ought to go and get an outside person in addition, so we are drawing up a request for proposal.

I personally have written the job spec.

That's been sent round these guys.

We've had one meeting, so it's not like this is going to happen overnight.

I think you'll be hearing from me for a while, to be fair.

So we're not -- we're taking our time on this.

It's going to be a pretty circumspect kind of way of going about things.

There's certainly no rush.

None of us is jumping around, and I checked this morning, no blood in the urine, and the stools weren't black, so I'm feeling okay.

So we're going to take our time.

Okay.

Thanks.

Our next question comes from the line of David Stanton of Nomura.

Please proceed.

Yes, good morning and good afternoon, all Just -- you've got an impressive amount of cash and continue to generate large amounts of it, can we get an update on what you see the uses of that cash are going forward?

Thanks.

Well, I'll let Brett chime in here as well, David.

You know, as we discussed, we brought back just shy of 2 million shares at $60 million during the quarter.

We've got dry powder for doing that sort of thing.

We've also got a fairly active M&A group.

We're continually looking at that, but when you look out into the wild blue yonder, you're really looking for a business that's culturally compatible, if you like, but also the growth has to be north of 15, top and bottom line.

You know, we do have plenty of dry powder.

That's been the case for a long while, and right now it's, you know, it's just shy of $600 million.

It's nice to have that there.

We were a social pariah for a number of years for all the cash we had, and then we were heroes because everybody else was indebted when the GFC hit.

We just, sort of, if you like, sailed through it.

We don't feel as though there's a burning need to blow through that cash.

It would be nice if we could use it and bring it back.

A lot of it is offshore.

It would be nice if there's still some talk about, you know, a much lower tax rate to bring it back.

Right now, if we'd bring it back we just get killed.

Almost $0.40 on the dollar, $0.35 from the US government, which has one of the most noncompetitive tax rates in the world.

There's talk of that potentially coming down.

I don't see that happening with the current person in the White House.

Which is not helping business very much.

But it's there.

It's not burning a hole in our pocket, but I can say we are actively looking around for ways to use that money other than just a sheer buyback.

Brett, do you want to comment?

No, Pete, I think you covered it pretty well.

Obviously, we can expect to continue with the buyback, and also we want to maintain flexibility for some M&A activity and things we're looking at as well, and I think that will continue.

So it will be a combination of those, I feel.

Thanks.

And my final question, just we've been talking about the EU, and the issues there in terms of growth rates, etc.

Could you give us an update on where you see the EU and the rest of the world in terms of growth rates?

Should we still be thinking that that's growing in the order of 10% to 15%?

I think you hit the nail on the head.

Our best estimate is 10% to 15%.

It may be closer to the 15% in Asia-Pac, and certainly well north of 10% in Europe.

Surprisingly, the European markets, even though you hear about all the carnage, particularly with Greece, Portugal and so forth, but our major markets are, of course, Germany and France, and then Scandinavia, UK, and it seems to be pretty stable.

I mean, it's happening, and we're certainly not -- there's nothing that we're seeing that would give us cause for concern, put it that way.

And you're right, it's 10% to 15%, and probably more in the midrange, if you throw in Asia-Pac.

Thanks very much.

Our next question comes from the line of Nathalie Kelley of CBA.

Please proceed.

Thanks for taking my question.

With all three major players now having released their new platforms, and maybe some of those not doing quite as well as they'd hoped, are you starting to see a bit more price competition in the market, maybe, sort of, above that kind of 3%, 4% standard decline that we've seen historically?

Good question, Nathalie.

What we've seen -- you know, there's nothing really untoward -- I mean, what we've found is that we'll never be price leaders in this market.

I've said that for years.

And we've stuck to our guns there.

We will, in some circumstances, have to take a good look at how we price things, and we do that.

But that's not our first reaction, is to drop price.

We've found that with our competitors, that's something that they do do much sooner than we would like.

But it is what it is.

There' s nothing new there.

There's nothing new coming from the Philips Healthcare Group.

What we have seen, however, is in the F&P area, they have dropped the price on the ICON.

When they originally launched it, they had it at a higher price than their 200 series.

It didn't get the traction they wanted, and we've seen them drop price, that's only a recent phenomenon.

It hasn't been long enough for us to assess -- but they're only about 8%, 7% or 8% of the market, so the guy that really counts is Philips Healthcare Group, and there's nothing unexpected there.

We expect them to be very, very competitive on price, and that tends to be the way it is.

Great.

And also with the release of the Stella 150 into the US, how will that be distributed?

In the US?

That is another fairly good question.

We are in the throes of talking to two other parties.

As you're well aware, we're not in the hospital market.

We are in fact talking to three possible people.

Two are more likely than the third, but this is very much a work in progress.

The good news is we have time up our sleeves to ink those --ink any agreement.

It is likely to be exclusive for any given territory, at least for a fixed period of time, but before the launch of the Stella 150, we've got time to finish those negotiations.

But positive, very positive, negotiations right now.

Great.

Thanks for that.

Thank you.

> We're almost at the top of the hour.

We'll take a couple more questions.

The next question comes from the line of Josh Jennings of Jefferies & Co.

Please proceed.

Hi, good evening.

Thanks for taking the questions.

I just wanted to start off, if you could give us an update on the SERVE-HF trail, maybe some enrollment updates, and then just remind us when we can expect data, and then just any recent feedback you've had from the heart failure clinical community about their outlook for -- or utilization and referrals for CPAP and testing?

And then I have a follow-up from there.

Right.

Will the SERVE-HF, I don't have the exact patient numbers, we're aiming for 1,260, minimum 1,200.

The last figures I saw were around 750.

So we are progressing, and in fact, I'm told that even though this seems to be taking forever, because I tend to be a little impatient, apparently, according to what the CROs tell us, we are doing extremely well for dealing with heart failure patients.

With respect to data, we are hopeful, and there's no certainty here, we are hopeful of getting an early call on this.

Now, what's an early call?

It could be a year, maybe even a little longer.

But let's say of the order of a year, where we might be able to stop the trial early, if the results are as encouraging as we believe they could be.

We've got some inkling there.

There's a group in Norway, in Oslo, it's only 40 patients, but that's not a bad number, and where it's sort of nudge-nudge, wink-wink.

But we know that the results are positive there.

That is going to be published.

Maybe that will have an impact on what we would hope is an impact on his SERVE-HF trial where the numbers would accelerate.

In other words, we will certainly circulate the results and make sure that all the investigators in the SERVE-HF are apprised of the results, and I hope there would be -- our medical director for Europe, can use that to bludgeon the guys into adding patients more quickly.

You know, it's one of these areas that's -- different things are happening throughout the world.

I think I mentioned before, or we've mentioned before on the call, in Japan, the cardiologists are actually putting patients on adaptive servo ventilation independent of the sleep docs.

In other words, they are doing the sleep studies, and there was a recent release of 25 abstracts, and it would be wonderful if we can use the Japanese data.

And they're all positive, I mean, they're all incredibly positive.

In fact, they're even using the adaptive servo ventilation in patients that don't have sleep disorder breathing, because the results are so compelling.

Whether or not that can be translated into traction in the US and Europe remains to be seen.

We've collected those abstracts.

They're not exactly peer-reviewed papers, of course, but if you add them all up and do a meta-analysis on those, this says, how can you afford not to use adaptive servo ventilation?

So look, lots of positive soundings around the planet, particularly Norway and Japan.

You know, and maybe we can stop the trial early.

And also on top of that, we've got the new S9, the adaptive servo ventilation in the S9 box, so I guess watch this space, but we'll have more next conference call.

Excellent.

And I was just hoping to circle back around to the pricing environment you guys are witnessing.

I mean, since competitive bidding was once in the nine MSAs earlier in the year, are your discussions with TME changing all?

Is the pricing headwinds getting stiffer?

And maybe you can just give us an idea of what type of headwind pricing presented in the quarter in terms of the GM pressure, and then what do have baked-in terms of pricing with the GM guidance of 58% going forward?

That' s a lot.

Yeah.

Josh, you know, pricing, the competitive bidding, I would say if anything, the foot is a little bit off that accelerator.

There's been a further delay within the CNS.

But I guess the big news, if it is big news, is that there's a bill, HR 1041, where the home healthcare team, are getting together with that change in Congress.

As you're well aware, it's a Republican House.

And HR 1041 is working its way through the House, and this is to completely throw competitive bidding under the bus.

Now, that is likely to get vetoed, but there's such a delay here, I mean, with a further delay coming out of CNS, this thing could -- will definitely go well past the next election, and we could see the competitive bidding just doesn't happen at all.

There are some of the DMEs and HMEs who are saying, my gosh, look at this competitive bidding.

We need better pricing.

But there's nothing new under the sun.

These guys are always asking for better pricing.

So what we tend to do is say, look, let's sit down and let us understand your business model, that is, let us look at what it costs you to run your business.

And then we look at all the unreimbursed costs.

And so instead of saying, what's your price on an S9 order, or a Mirage FX, Quattro FX, et cetera, we say, listen, let's take pricing off the table.

We'll come back to it.

We're happy to talk about price, but let us understand your business model, and we try to focus on areas where we can help them save money on their unreimbursed costs.

And we're having some success there.

We're doing a bit of market segmentation, which we don't want to talk about publicly now, but we're trying to understand customers a little better, and we've actually got five segments, and in one or two of those segments, we can see that there is a good place to market with these unreimbursed costs.

So we're trying to get a bit more granularity there, and we expect to have some success there.

But, just to summarize, we're not seeing anything particularly untoward that we haven't seen in the last three or four quarters with respect to the issue of competitive bidding, and, if anything, it's looking a bit more favorable with what's happening in Congress.

Ladies and gentlemen, this concludes the portion of today's Q&A.

I would now like to turn the conference call back over to you, Dr.

Farrell, for closing remarks.

Please proceed.

Well, thank you, Kathy.

Once again, thanks everybody for joining.

We continue to be very confident.

I've mentioned the new product rollout.

We're especially excited about the new masks.

Some of it is going extremely well, the FX trilogy that I talked about, the S9 platform, the market for SDB is still highly underpenetrated, it's still at least 85%, you know, an area that we are yet to penetrate.

Our balance sheet is robust, our cash flow, I mean we had record cash flow of $81 million, and we also have an absolutely first-rate team.

Our execution has been, if not faultless, pretty close to it.

I'd like to thank any of the staff that are listening for their commitment and their loyalty.

So, great things are happening in the sleep business, and within ResMed itself, and we look forward to keeping you posted on our progress.

Thanks again.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

Now disconnect, and have a great day.