瑞思邁 (RMD) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 ResMed earnings conference call.

My name is [Keisha], 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 towards the end of this conference.

(OPERATOR INSTRUCTIONS)

The Company has asked me to address certain matters.

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

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

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

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

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

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

Peter Farrell, ResMed's Chairman and CEO.

Dr.

Farrell, please go ahead, sir.

Thank you very much, Keisha.

Good afternoon, good morning.

Thank you for joining us.

I'll begin with a summary on the quarter and talk about briefly about acquisitions and the recent partnership announcement.

And I'll then turn the call over to Brett Sandercock, who as you know is our CFO, and Brett will go through the numbers in more detail.

And then we'll take questions and most members of the senior management team are also with us today.

In fact, I'll very likely call on them to get involved in some of the questions, some of the answers to your questions.

First the financial summary, we finished what he we would describe as a very solid quarter and another excellent year.

Global revenues in the fourth quarter of 2011, the final quarter, grew 17% to $342 million, or up 11% on a constant currency basis.

Revenues in the Americas grew a very solid 14% year over year to $183 million while the rest of the world revenue increased by 22%, or in constant currency terms 8%, to $159 million.

GAAP EPS increased 9% to $0.37 for the quarter, and if we exclude amortization of acquired intangibles EPS was $0.39.

In discussing product category performance, let me start with masks and accessories as the results in this category were extremely encouraging.

We've now exceeded over $0.5 billion in annual mask sale alone.

We believe we're hitting home runs on all the value propositions for the decision makers in our channel.

We have a suite of products in particular, the recent Quattro FX, or let me say the FX Series, the Quattro FX, the Mirage FX, and the Swift FX, which meet the market needs all the way from the lab to the patient.

Our masks are effective, easy to fit, comfortable, and more value for money, and they require less call backs and ensure more compliance.

In fact, on Tuesday, I was visiting a sleep physician in Oklahoma City where the temperature -- beautiful day, the temperature hit about 114 degrees, but Jonathan Schwartz's lab, he has 24 beds, and he was waxing lyrical, almost, about the Mirage FX, which he said fits virtually all patients immediately.

Turning to flow generators, our global growth in sleep therapy devices was once again driven strongly by sales of our S9 AutoSet.

Preference for this product continues to increase globally, and the AutoSet has become a consistent source of our growth.

We believe the increase in home sleep testing is and will continue to fuel sales of the AutoSet.

As expected, the addition of the Bi-Levels on the S9 platform has arrested the decline in overall device sales in the Americas, and sales of the new S9 Bi-Levels are doing very well, and I'm ramping to our expectations.

Adding to flow generator performance was the recent launch in Europe of the Stellar 100, which is an adult and pediatric ventilator designed for both non-invasive and invasive use.

Sales of Stellar have been growing progressively each month as we've launched country by country in Europe and parts of Asia.

As we've always maintained, it takes time to launch any new product, but it is certainly ramping to our expectations, and the Stellar 150 will be launched globally in fiscal Q2, that is the final quarter of this year, of calendar 2011.

This product includes what's known as [IVACs], our new automatic Bi-Level mode, which is automatic on both expiration and inspiration.

The success of the Stellar is another positive indication of our progress in product development.

In addition to our success in internal development, we are pleased with the progress we are making in building strategic partnerships or relationships.

And let me comment briefly on CareFusion, which was just announced, of course and BiancaMed'.

Just over a week ago, we announced a five-year exclusive distribution agreement with CareFusion to market our ventilation products in hospitals, long-term acute facilities, or acute care, I should say, facilities and skilled nursing facilities.

The initial focus will be on the launch of the Stellar 100 and related products, and the Stellar is an excellent fit in the CareFusion ventilation platform as it provides them with a product to sell that is differentiated features and a more competitive price point.

It also allows us to quickly enter the institutional healthcare pressure support ventilation marketplace.

According to InMedica's February 2011 report, the Americas sub-acute non invasive pressure support ventilation market is the fastest growing segment, estimated to be, albeit sub-$100 million, but it's growing at more than 6% annually.

As we announced today along with our results, we're acquired Grundler Medical GmbH from Freudenstadt in Germany.

Grundler is obviously a German-based Company developing innovative medical humidification products.

These humidifiers fit a wide range of ventilators from neonatal in pediatric, to noninvasive pressure support, to the intensive care unit.

The strategic implications of this deal are that it enables us to provide a system sale with existing and future ventilators into the home, into both the home and the hospital markets.

In short, it's a one stop shop for humidification.

It will provide incremental revenue as we enter into a new market segment, allowing us to build our expertise as well as allow us to build a competitive position in humidification, which we've never really had, and we'll be able to leverage humidification technology between both ventilation and the sleep disorder breathing space.

We've known the founders of Grundler for several years and are looking forward to having them join the ResMed team, and I might parenthetically add that two of the senior people in Grundler are both physicians, so that will add to our medical support team.

Also just a few weeks ago we announced that we had acquired BiancaMed, a leading high technology Irish Company.

BiancaMed, we've had an association with them which goes back to 2003 when we initially invested in them, so we know them very, very well.

And again, the acquisition of BiancaMed brings in two very, very qualified engineers.

They're Conor Hanley and Conor Heneghan.

Conor Hanley has a Ph.D.

in chemical engineering from Penn, and Conor Heneghan has a Ph.D.

in electrical engineering from Columbia.

They're both very talented people, and again, we see them helping us beyond the BiancaMed acquisition.

However, BiancaMed itself has developed and is marketing an innovative convenient non-contact device to monitor sleep and breathing in the home and hospital.

BiancaMed's SleepMinder is an accurate, touch-free device that measures sleep and breathing with sophisticated biometric software also using Doppler.

The core of BiancaMed's proprietary technology is a motion sensor that can detect respiration and movement without physical contact with the body.

The Company is developing a number of other applications for this technology across a wide range of medical and consumer settings.

And we'll have more to say later about the consumer aspects of it, but we're actually quite excited about that.

BiancaMed will become a part of ResMed's newly-created ventures and initiatives unit which will now be run by Jim Hollingshead.

There may be questions on that, and we're happy to talk about it.

With each of these transactions the CareFusion, and Grundler, and BiancaMed, we're adding external expectations to strategically important areas, and although they are not yet material contributors to our short-term financial results, we are very confident they'll add value in the years to come.

On the home testing front in the Americas, interest in HST continues to evolve.

HST increased significantly, actually doubling in fiscal 2011, and we now believe it's somewhere in the vicinity of 10%, maybe a little more, of sleep test volumes and will continue to expand due to patient convenience and commercial payers pushing HST, although that push has not yet been broadly enforced.

And many of you probably saw the recent announcement by UnitedHealthcare in which United is now requiring prior authorization for attended polysomnography and encouraging the use of HST.

This is early days, and a recent external report suggested that maybe the tipping point could be 18 months to two years away.

One doesn't know about that, but we are seeing definite and increasing interest in HST.

Why?

Because it's far more effective.

It's far more efficient.

It's done immediately, and it's certainly far less expensive, probably overall about 1/3 the cost of going through PSG and pressure setting in the lab.

So we see this continuing, and we see it being driven primarily by the insurers.

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 and cerebrovascular disease and diabetes as well as obesity, which hits just about all the bases anywhere.

Increasingly, there is evidence coming to light that early intervention in the treatment of sleep disorder breathing will not only slow or prevent the progression of these co-morbidities, it actually treats the co-morbidities, and we're very, very excited about these data, although very early days, of course.

In fact, just last month, the American Heart Association published new research demonstrating that OSA can cause changes in blood vessel function in the endothelium that reduces blood supply to the heart in people who are otherwise quite healthy.

The research showed that treatment with 26 weeks of CPAP improved study participants' blood supply, but also function of the blood vessels.

This adds to other smaller studies showing blood vessel abnormalities in untreated sleep disorder treating patients.

On that note, I'm happy to report that the 800th patient has been enrolled in our SERVE-HF study which, of course, is being conducted in Europe, mainly Germany, and to a lesser extent France.

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

Brett?

Thanks, Peter.

Revenue for the June quarter, as Peter mentioned, was $341.9 million, an increase of 17% over the prior year quarter.

Favorable currency movements added approximately $17.8 million to our Q4 revenue.

So in constant currency terms, revenue increased by 11%.

Income from operations for the quarter were $66.7 million, a decrease of 3% over the prior year quarter, and net income for the quarter was $58.5 million, an increase of 10% over the prior year quarter.

Diluted earnings per share for the quarter was $0.37, an increase of 9% over the prior year quarter.

Excluding amortization of acquired intangibles, earnings per share for the quarter was $0.39.

Gross margin for the June quarter was 58.2%, broadly consistent with Q3 fiscal year '11.

On a sequential basis, our gross margin benefited from a favorable product mix offset by ISP declines and an unfavorable geographic mix.

Currency impacts on a sequential basis were relatively neutral this quarter.

Looking forward in Q1 fiscal year '12, the appreciation of the Australian dollar will negatively impact our gross margin by around 100 basis points.

However, assuming no further currency movements, we expect initiatives targeted at reducing product costs through supply chain efficiencies and manufacturing improvements, together with a favorable product mix trend, should lead to an improvement in gross margin in the second half of fiscal year '12 compared to the first half of fiscal year '12.

SG&A expenses for the quarter were $102.3 million, an increase of 22% over the prior year quarter.

In constant currency terms SG&A expenses increased by 13%.

SG&A expenses as a percentage of revenue were 29.9% compared to the year-ago figure of 28.8%.

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

R&D expenses for the quarter were $27 million, an increase of 35% over the prior year quarter.

In constant currency terms, R&D expenses increased by 11%.

R&D expenses as a percentage of revenue were 7.9% compared to the year-ago figure of 6.8%.

Looking forward, and again subject to currency, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2012, reflecting the strength of the Australian dollar and also the continued investment in our product pipeline.

Amortization of acquired intangibles was $2.9 million for the quarter, and stock-based compensation expense for the quarter was $7.5 million.

Our effective tax rate for the quarter was 24.3% compared to the year-ago quarter effective tax rate of 26.1%.

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

For the full year, our effective tax rate was 25.3%, while we currently estimate our effective tax rate for fiscal year 2012 will also be if the vicinity of 25%.

Turning now to revenue in more detail, overall sales in the new Americas were $182.8 million, an increase of 14% over the prior year quarter.

Sales outside the Americas totaled $159.1 million, an increase of 22% over the prior year quarter, with currency movements having a positive impact on revenues.

In constant currency terms, sales outside the Americas increased by 8% over the prior year quarter.

Breaking out revenue between product segments, in the Americas flow generator sales were $82.8 million, an increase of 3% over the prior year quarter.

As expected, our growth this quarter was positively impacted by the launch of our S9 Bi-Level platform.

Masks and other sales were $100 million, an increase of 25% over the prior year quarter, underpinned by strong contributions from our FX range of masks and continued growth in accessories.

For revenue outside the Americas flow generator sales were $108.4 million, an increase of 22% over the prior year quarter, or in constant currency terms, an increase of 7%.

Masks and other sales were $50.7 million, an increase of 22% over the prior year quarter, or in constant currency terms, an increase of 11%.

Globally in constant currency terms, flow generator sales increased by 5%, while masks and other increased by 20%.

Cash flow from operations was $74.3 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditures for the quarter were $17.4 million, while depreciation and amortization for the June quarter totaled $19.5 million.

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

During the quarter we repurchased 2.1 million shares for consideration of $64 million.

For the full year, we repurchased 4.9 million shares for consideration of $160.1 million.

As of today, we have approximately 9.3 million shares remaining under our authorized buyback program.

Our balance sheet remains strong.

Net cash balances at the end of the quarter were $635 million, and at 30 June, total assets stood at $2.1 billion, and net equity was $1.7 billion.

I will now hand the call back to the operator for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Michael Matson with Mizuho Securities.

Please proceed.

Yes.

Just a question regarding the commentary around the gross margins for fiscal 2012.

So you're at about 58% for the fourth quarter.

So you're seeing that you expect another 100 basis point decline, but that things should get better in the second half of 2012.

Does that mean we should be modeling roughly 57% range for at least the next two quarters?

Am I hearing that correctly or not?

Well, Michael, it was actually 58.2%, so that would be going to 58.1%, but as you know, it's a complicated equation with geographic mix, and in this particular instance with the very encouraging growth in the US market which was 14% where the prices tend to be a little lower, that obviously impacted the figure, but let me throw it to Brett for some more granular input.

Sure.

It's Brett.

What we want to call that is we're coming off some pretty strong headwinds on the currency, particularly of the Australian dollar, obviously.

So that's going to have quite a big impact.

But as Peter said, there's a lot of other factors that play out on the margin, put up mix -- geographic mix, manufacturing improvements we have in supply chain and so on.

So on a sequential basis in the short term, I think we've definitely got some opportunities there where we'll do better than that, but I'm far more confident we'll work through on some of the initiatives we have that that will start to impact the margin, particularly in the second half.

I'm not saying that some of those won't manifest in the first half.

I think some of them will, but certainly we think that it will be stronger in the second half.

And it's a pretty significant headwind we're facing just in terms of the Aussie dollar that, as you know, there's a lot of uncertainty out there in the world at the moment.

So that Aussie dollar could do anything at the moment.

So we're just trying to give you a little more color around that, but rest assured that we're working pretty hard on initiatives to expand that margin.

Okay, but just to make sure I'm understanding correctly, you're kind of seeing that there will be a 100 basis point hit, which would be -- that's a sort of a baseline, and you're going to try to improve things from there, right?

Correct.

Okay.

All right.

That's off of the fourth quarter level, right?

Not the full year 2011 level?

Yes.

Some sequentially from fourth quarter.

Okay.

All right, thanks.

And then I just had kind of a higher-level strategic question.

Given the management changes, given the venture group that you've established, are you trying to -- it seems like you're trying to further diversify the Company, and can I read anything into that about what you're seeing in terms of long-run growth in the sleep apnea market or sleep disorder breathing market, and in the longer run, do you intend to become sort of a broad respiratory play, more akin to what the old Respironics used to be like?

Well Michael I think a general feeling is that not being in the hospital market, we're sort of leaving money on the table.

So that certainly is part of the equation, and if you look at that, we spent quite a bunch of money on R&D in the ventilation spot.

Geoff Neilson may want to add some more flavor here, Geoff being the President of the Respiratory Care Strategic Business Unit, but we felt we were just leaving money on the table.

And the good news is that outside of the United States, we're actually doing not so badly in the institutional environment.

But in the US, we were nowhere.

We were literally nowhere.

And it was just happenstance with Kieran going to CareFusion and having a very good feel for the amount of effort and time we put into the ventilation space, and it just fitted nicely with a gap that they had.

So we're kind of encouraged by that.

But on the broader -- in the broader picture, those strategic initiatives we referred to, taking it in no particular order of priority, chronic obstructive pulmonary disease, or more specifically, overlap syndrome, where a patient has upper airway in stability plus needs help with ventilation, that's an area where we see huge potential, roughly 30 million patients in that space, and of that roughly one third of them having overlap syndrome.

That's 10 million people, which are not, we don't believe, being effectively addressed.

The second area is, if you like, both cardiovascular and cerebrovascular, in other words, taking into account transient ischemic attack, stroke, 75% of both TIA and stroke patients have sleep disorder breathing.

We have enough data to know that if you don't treat the sleep disorder breathing, after a patient has a TIA or a stroke, you're not going to effectively treat them.

We need, obviously, to educate neurologists in that space, and we've got plans to do so.

In the cardiovascular space, everybody is pretty much now familiar with the connection to atrial fibrillation and, of course, congestive heart failure.

I mentioned the 800th patient being added to the SERVE-HF program, and we had unbelievably good results with adaptive servo ventilation across the globe.

That is the sales of the S9 adaptive servo ventilator products.

Really, really, really encouraging growth there, and we see that continuing.

And obviously, there's also a drug resistant hypertension.

Type-II diabetes mellitus, you've heard me talk about diabetes, type-II diabetes before, were working with the Joslin Institute at Harvard.

We also had plans to not just work with them, but we've just recently had two key opinion leader dinners with international endocrinologists.

There are only about 5,000 in the US, so it's not hard to target, and we're kind of excited.

And the good news is that our current chuck wagon, we've got all the products we need, because basically that's a play with HST and the S9 AutoSet.

I mean that's really the best way to address the issue.

And recent data have shown a huge number of patients in that space, 26 million full-blown diabetes in the country, of which 90% are type-II diabetes, but more importantly, or more disturbingly, another 79 million that have metabolic syndrome.

In other words, you can't take the boxes of their full blown diabetic patients.

So that's 105 million.

So take out the 10% type-I's.

You're in the mid-90 millions of people, of which 80% have sleep disorder breathing, so we see this as a wonderful opportunity to reduce the expense of the current healthcare system.

Then we've got the perioperative care.

There's a big meeting coming up on October 14 in Chicago, the Society of Anesthesiology and Sleep Medicine.

We were important catalysts in getting that meeting set up.

And finally, of course, is occupational health and safety with truck drivers, railway drivers, pilots, and so on and so forth, air traffic controllers and what have you, and we're making really good headway in those spaces.

So it's a long winded -- really long winded answer to your question, but in those five areas, we'll be making continued investments.

And we've got a very strong balance sheet, as you know, as Brett said, $635 million net cash, and we are going to strategically use that to invest in small technology-based Companies where we can direct them into areas that we think are important, and we can take an equity position in them, not to make money on the equity --in fact, you could even look at it more as a marketing expense, but to direct them into areas that we think is important and hopefully allow us to kick the ball down the field a little more efficiently and effectively.

So sorry for the long-winded answer, but it was an important question.

No.

That's helpful.

I appreciate it.

Just final question for Brett, this should be pretty quick.

Just can you quantify what the actual EPS impact of currency was in the current quarter?

And that's my last question.

Thanks.

Yes, Michael, for Q4 is approximately $0.02.

Positive or negative?

Negative.

Okay, thanks.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Matt Prior with Merrill Lynch.

Please proceed.

Good morning, Peter.

Good morning, Brett.

Matt, how are you?

Good, thank you.

A first question on US flow gen growth.

Can you delineate or give us any kind of sense -- is the growth rate, say, in particular CPAP versus APAP?

I think previously you've talked about CPAP growing single digit, APAP growing double digit, especially with the trend in home sleep testing.

Are we seeing that deviation in growth rate get even bigger, and do you expect that to accelerate in fiscal '12?

It's just really, Matt, a continuation of what we talked about last quarter.

In other words, we're seeing a significant growth slowing in the lower-priced units, and the good news is, of course, the cogs are basically the same, but a switch to the AutoSet is definitely occurring.

We believe -- we'll get more data as we go forward, obviously.

We've been saying this is the third quarter that we've seen this and to -- back to that visit I made to Jonathan Schwartz out in Oklahoma City.

Jonathan has a huge sleep program, and he's an exclusive S9 AutoSet user, and he was telling me that he's -- it's made him a better physician.

He's moved away from the fixed AutoSet completely.

And if he's representative, and we believe he is, of what's happening, there's going to be less sales, we believe, in the noncompliant CPAP.

The figure he gave me was that with the S8 products, and the good news is he's been an exclusive ResMed user, and he's a big user for quite a while, so we have really, really tight statistics in terms of compliance.

By the way, he said he's compliance, and I'll give more granularity here, but his compliance was 90% using the S9 AutoSet.

That's an astounding figure.

We'd say anything above 75% is magic, so he's getting very, very good compliance, but what he said was that using the S9 AutoSet where we are -- where we tweaked the algorithm even beyond the S8.

The S8 was a great product, but this is a magic product, and he was telling us how good the algorithm was, and his usage of Bi-Level, that is the noncompliant CPAP percentage, has gone from 15% to 5%, and we are seeing this as well.

We're seeing very good growth in the ST, STA, and the adaptive server ventilation space.

In fact, the ASV is just mind boggling excellent.

I don't want to share what those numbers are, but they brought tears to our eyes.

And we're seeing a slowing down of the VPAP and a slowing down of the low level CPAP units, but they're all moving to higher priced devices, and that trend, we see that continuing, particularly with the growth of HST.

Great.

Thanks.

I guess just a follow-up question maybe for Brett.

Brett, with this positive mix to APAP over CPAP and, of course, within the mix of Bi-Level and then, of course, the launch of the Stellar series in the US, which should, again, be margin accretive, as I understand, are these the kind of things which should naturally mitigate the gross margin expansion in the second half of fiscal '12 as sales of the Stellar lift with CareFusion and Bi-Level recovers more so?

Yes.

I think that's right.

We've got -- I think you look through on the product mix, and that has been stable for us for a little while now.

We see that continuing with some of those trends that Peter articulated, and just sort of moving up the complexity chain, I suppose, and the more sophisticated products, and with that generally a better margin as well.

And I think there's no reason to believe that trend won't continue.

Matt, a word of caution there.

We're not releasing the Stellar 150 until fourth quarter calendar year and, new product launches, as we said earlier, it's not like binary thing, zero to one.

It takes a while for people to test them out and see how good they are.

There's no question it's going to help, but the rate at which it's going to help, of course, is in the lap of the Gods.

Sure.

My question was more basically this current trend, it's not like you have to chase extra cost-out initiatives to offset the FX squeeze.

Right, right.

It's healthy.

Is that correct?

Yes, that's right, Matt.

We've got -- look, we're working on that all the time in terms of cost add initiatives as well.

We're not standing still.

So we'll continue with those programs as well.

All right.

Thanks, guys.

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

Please proceed.

Hi.

Good afternoon, everybody.

David.

Yes.

I was just hoping, Peter, to maybe dive a little bit deeper into the CareFusion agreement.

When do you think we should see this make the contribution to results in the Americas here, and if you can give us an update on sales force training and just how the whole agreement is going so far.

Yes.

I'm going to throw that to Geoff, but just make a comment, It is a five-year agreement, and it just involves, at the moment, Stellar 100 and the Stellar 150, and of course, they have FDA approval, but we have to train their people.

And the good news for us is that we are relatively happy with the volumes that they've told us they can do.

It's not going to change our lives, but it's a reasonably comforting figure, and we're happy with the margins and the pricing, and as I said, it's a five year agreement, but it is going to take a while to ramp up.

Obviously, we've got to train their people, and they are going through their own internal changes as well.

But over to Geoff because Geoff was the guy who negotiated -- primarily negotiated the agreement.

So Geoff, would you like to add some comment?

Yes.

We signed the agreement a couple weeks ago.

Training with their sales force is scheduled for September, and we imagine that we're going to be launching that in our Q2.

There's going to be a period of sampling and so on, so I don't think we'll see immediate results.

The market size is around about $85 million for non-invasive institutional ventilation.

CareFusion are obviously a strong player in that market, but there is a very strong established player with non-invasive ventilation in these markets, so it's not going to change overnight.

Okay, great.

Thanks.

And maybe a quick one for Brett here.

The 3% growth that we saw in the Americas, is there any way you could tease out, say, volume versus price versus mix?

Was volume still positive overall, or how are things shaping up there?

Well, I don't want to get too granular what we're looking there.

It's the volume is what positive and the volume like it's traditionally done run a few points ahead of revenues.

So that trend is still there as well.

So David, we normally figure a 5% decrement ASPs, and it was of that order, in some cases a little higher, but about where we expected it to be.

To Brett's point yes, the volumes were higher than the revenues.

Okay.

And then just one more quick one here, can you tell us about the leadership change at ResMed Ventures?

Yes.

J.C.

was, as you know, running sales and marketing in the Americas, and the result of discussions at the board was that he should be offered the ResMed Ventures and Initiatives, and this happened fairly quickly.

I was on vacation last week and came in Monday morning, and I was planning to have a discussion with J.C.

about those three areas I mentioned, the cardiac and cerebrovascular and cardiovascular and perioperative care/risk and the type-II diabetes, and he said well, before we do that I'd just like to mention that I've accepted another position.

And as we talked it through, look, one of the things that concerned us initially was when you looked at what Jim Hollingshead was doing in the strategy part of our business and what J.C.

was planning to do, you had about a 75% or 80% overlap, and it looked a little crazy on paper.

I wasn't worried about it because the idea of ResMed Ventures and Initiatives is that that's going to become a P&L responsibility, and that would leave the strategy group just focusing on the future, and the near-term future would be the P&Ls.

And all the adaptive servo ventilation business was going to go through there.

Narval was going to report through J.C.

That's the mandibular repositioning device, and also BiancaMed was going to report in.

However, it turned out that all the negotiations with BiancaMed were done by Jim Hollingshead anyway, and Jim is right across the Narval business, and people internally were concerned about a little bit of overlap.

I mean not just a little bit.

It was 75% to 80% and therefore, we -- but I said look, don't worry because this is very, very quickly, and that's the goal I want J.C.

to work on is turn more of those areas into P&L activities.

And J.C.

said look, I've come from a P&L environment with 400 or so people, and here I've got to build from ground zero, and he said as I thought about it, I just wasn't comfortable.

So he actually approached CareFusion.

So it wasn't like Kieran saying gee, I'll take all the boys that I can.

It wasn't that at all.

J.C.

approached him, and I think he's got an absolutely fabulous job, and it took like a nanosecond to say, wow, that's good for him and Jim is all across the ResMed Ventures and Initiatives.

So he's the perfect guy to run that group, and I think it's a good outcome all around and certainly no hard feelings.

I mean J.C.

is a great guy.

He did a terrific job.

He came in with a huge challenge three and a half years ago.

We only increased year over year 5%, and then he brought it up to double digits and did a great job, and we wished him well, and I think he's going to do a great job.

All right.

Thank you.

Your next question come from the line of Ben Andrew with William Blair.

Please proceed.

Good afternoon, Peter.

Ben, how are you?

I'm well, thank you.

Was curious if you have a thought in terms of volume trajectory from here.

Do you see things kind of steady as we look at OSA volume growth in '12 in the US and in Europe?

Trying to isolate that from some of the other dynamics, or do you see things kind of decelerating with the economy looking a little strange?

You know, it's difficult looking into a crystal ball to know what the heck's happening.

Just about everything you hear about the US economy is highly negative.

I think the debt ceiling deal was partially a joke.

Increase the debt ceiling, and you'll get a team together and take a look at what you're going to chop out.

There needs to be complete structural change in the US, but obviously we're not in a position to drive that.

So we just got to take what we get.

The pundits are suggesting, the last figure I've seen in terms of growth in the US market for devices is 5%.

Phillips is looking more like 8%.

So you could say 5% to 8%.

We would say that it's probably high single digits, maybe a 7%, something like that, 7% or 8%.

So given our growth, we feel that we're taking market share.

Just what the real number for growth is we don't know.

I think it's going to get -- there's going to be a bit of a fill-up from HST.

We're confident that's going to happen.

Sleep labs still growing, albeit slowly, maybe a 5% figure would be the lowest.

Probably closer to 7%, maybe as high as 8%, but that's our expectation, and that's what we're going with.

If it's different, it will be different, but that's what we think it's going to be.

Thank you, Peter.

My second question is if generator growth in the quarter was about 3%, Bi-Levels were flat versus down over 20, do you see yourself in an accelerating share taking move as the next quarter comes in?

Because it always took them a couple quarters to fully launch a new generator.

So are things going to improve over the course of '12 relative to the market, or are you sort of at your stride and you'll maybe hold that share gain position where it is?

Thanks.

You know, that's a good question, and we tend to be a little conservative, and flattish would be a good call we think.

If there's an -- we certainly have stopped the leaky sieve.

There's no question about that.

Some very, very encouraging numbers.

It's a great product.

It's being received according to what our expectations were accident, which is a good thing.

So what we thought was going to happen did happen, and we think it's going to continue, but we don't feel that there's going to be an acceleration.

We think there will be an uptick, and it's just like watch this space.

You know, we've stopped the hemorrhaging in the (inaudible) for sure, but the trends towards -- away from lower-priced CPAP toward us that we believe is going to continue.

We think we're going to see a slowing of the noncompliance CPAP, that is the Bi-Level S's, the VPAP S and we see good growth still occurring with the ST, the STA, and certainly adaptive servo ventilation.

Thank you.

Your next question come from the line of Ian Abbott with Goldman Sachs.

Please proceed.

Hi, Peter.

Ian.

We can't hear you.

Are you there, Ian?

Hi, Peter.

Hi.

If I could keep on with the devices, if we look to Europe, just wondering with your growth there how significant was the contribution from ventilation sales in the quarter?

You know, we only just launched them, and the Stellar 100, look, it's going to -- according to our expectations, but we haven't seen the huge acceleration in Bi-Levels, in ROW as yet, and maybe I'll throw that to Geoff.

I mean Geoff's been looking very, very carefully at the market.

So Geoff, do you want to make a comment about growth in ventilation and expectations?

Sure.

So I think if you look at our VS range, they have a strong position in home care in Europe.

We just launched Stellar in the -- what, one quarter ago, and so we've got one quarter results.

It's been growing month over month.

That's no significant contributor in terms of it's getting up to revenues that were approaching some of the other products that we've got in the ventilation space in Europe, but there's a way to go yet, and I think the thing to know with ventilation is it takes longer than the sleep products in order to establish.

So I think the growth we'd see is lower.

And we still got to relatively low market shares in the institutions in Europe, and so that's some of the work we've got ahead of us.

Great.

I mean I suppose what I was trying to get at is you sort of said that devices were growing about 7% in constant currency in rest of world.

Is RSA growing faster or slower than that?

We think that's about what it's growing at, I would say.

We have no more granular understanding of that area.

I'd say 7% -- you know, I'd be confident it's not going to go below that, and if you asked me what I think is going to happen as we go forward, I'd say it's probably going to go towards 10%.

So we're comfortable with the things are going okay in Europe and Asia-Pacific.

Good.

For my second question could I ask about the mask business obviously growing very strongly.

Could you just comment, how much of that is you winning market share and how much of that do you think is people trying to sort of get their numbers of masks per annum up?

Well, the way I would answer that is we are seeing just wonderful acceptance for the 4X platform.

We are the king of the castle in full facemasks, and the Quattro FX which Don Darkin and his team developed is just really a great product.

It's a fabulous product.

The Mirage FX, we were getting, frankly -- our tail was getting kicked in the nasal mask category.

We were gradually losing market share there, and we were well below 50% of the market.

This is such a great product.

We like the COGS.

We like the way it fits 90% plus the first time fit, and we are the biggest jump that we made in the mask has been with the nasal Mirage FX, and it's just very encouraging.

We love the product, and in fact, Jonathan Schwartz whom I mentioned and I spent the day with him and talked to a dozen patients who were on treatment, the bulk of them were on the Mirage FX, and he said this is the best product you guys have ever put out.

I think he's exaggerating.

We think we have lots and lots of good products, but he was absolutely over the moon.

He said it is at least 100% better than any other nasal mask that you guys have put out.

Be that as it may, that's where our most significant growth has come from.

And of course, we're the king of the castle also with nasal pillows.

So you've got the full facemask, and you've got the nasal pillows where we've traditionally been in the very high, very, very high percentages, and we were in the very low percentage area, around 30%, in the nasal category, and we've seen a big, big jump up there, and that I think is the major change.

So you haven't seen any change from what you can get from channel feedback on the number of masks that patients are using per annum?

You know, it's a very, very -- oh, per annum?

We're still seeing figures of north of one but below two, and that's a big area where we see we can make some inroads.

And the data I think -- do you want to say anything about that Mick?

So it's sub-two, it's above one.

Call it 1.5, and that's -- we know even the worst insurers will allow you to have three masks a year, CMS four, and that's obviously an area -- replenishment is an area which has a lot of potential for growth.

But just to give you an idea, we would sell five times as many masks as we do devices.

So it's very hard to work out just where they're going.

It's replacement.

It's being used on other guys' devices.

It's our devices.

And since we're not selling in most cases direct to customers, it's almost impossible to work out when you've got a ratio of 5-1 just where the masks are ending up.

Great.

Thank you.

Pleasure.

Your next question comes from line of David Low with Deutsche Bank.

Please proceed.

Thanks very much.

Just a question on the rest of world growth, if I could get you to talk about geographically was there any particular countries that were better or worse than you've seen in trend terms?

You know there was nothing that spooked us there at all.

Constant currency was 8%.

Asia-Pac tends to be a little lumpy.

Obviously, when you've got a distributor, Japan, is obviously a big part of Asia-Pac, and there was a bit of a hiccup, as you know, with the tsunami and so forth.

Japan tends to be lumpy anyway, but when you have such a big customer like (inaudible), obviously, that's going to continue to be lumpy.

Germany is going -- it's our biggest market outside the US.

Germany is going along pretty well.

France is going along very well.

And then you've got a smattering of Norway, Sweden and so forth, middle east and the UK and so forth.

No, there's been nothing there that spooked us in terms of growth rates in either Germany or France, our two biggest markets, and the lumpiness that we expect from Asia-Pac still continues.

So the --

But nothing -- sorry, David?

The lower constant currency growth out of ROW numbers you'd be comfortable going back to around the 10% level on average?

Yes, yes.

I must say I was even a little surprised at the 8%.

I would have expected 10%, but, you know, in talking to Stein, I had a chat to him this morning.

Stein Jacobsen who runs our European operations, and nothing that's spooking him.

I meant with Europe in particular there's going to be funding pressure.

My sense is we haven't really seen much impact from that.

I was just weary as to whether that was an explanation in this quarter.

David, it's Brett.

Europe still remains pretty solid particularly across our major markets, and really, if you look at that CC growth rate, Asia-Pac was -- that region was actually a drag on that this quarter.

So they experienced lower growth there.

That was predominantly with Japan, and you now how some of the issues they've had with some of the earthquakes and so on, and as Peter said, it is traditionally lumpy.

I don't think there's anything to read in this particular quarter on that.

Europe remains pretty solid and Asia-Pac lumpy as ever, but Japan probably working through some of their issues as well in terms of their own country issues around the earthquake and so on.

So overall, we still remain pretty pleased with the rest of the world growth.

David, let me make one other comment there which David Pendarvis just reminded me of, and it is a big thing.

We launched the S9 in France and Germany this time last year, and it went gang busters.

So we had just dreadful comparables, if you like, with the new product that everybody loved.

Bingo.

We had huge growth the previous year.

So we had a huge mountain to climb.

So that's the reason that it was softer than what one might expect.

Yes.

That's a very fair point.

Just one other question, then, just on the acquisition.

So we're seeing a couple of small acquisitions.

Can I get you to talk about what sort of level of spending or what the cost is there or what you expect to spend there over the next 12 months?

You know, it's in fact we said BiancaMed -- look, Grundler is making money.

In terms of the revenues, we're talking about a few million and we don't have FDA approval for Grundler products in the United States.

So you know, how long is that going to take?

How long is a piece of string sort of thing.

We will be seeking FDA approval, obviously.

We need to do it.

We will do it.

But they are making money, so there's not going to be a hit from the Grundler acquisition, and as we said when we bought BiancaMed, it's roughly $0.04 for the year with BiancaMed, and I don't think it's going to be any different.

Maybe, Brett, you might want to add some more to that, but --

I guess I was trying to understand how much you're spending.

So $635 million of cash on the balance sheet is something we've always looked at with great interest as to what the plans are.

We're seeing these acquisitions.

I'm just trying to get a sense as to whether we're going to see $100 million go into acquisitions or is it going to be something --

We don't have anything immediately on the plate that we're looking at, to be candid, but that doesn't mean there won't be.

You know, $100 million acquisition could happen, could happen, but there's nothing that we're -- we were very familiar with Grundler.

We're very familiar with BiancaMed.

There are no other similar type companies that we've been working with for a long time that we're about to make an offer on.

On the other hand --

(Inaudible) the buyback, the cash level continues to go up presumably?

Yes, yes.

Outside the -- yes, yes, but let me tell you that we are looking very carefully as to how we should deploy it.

So having -- I could say now we're not sort of putting the ruler over a number of other companies, but we intend to.

That's for sure.

And Jim Hollingshead, who is currently in India, when he gets back, will be taking a good hard look at the terrain and seeing what's there that might help us move the ball down the field.

Excellent.

Thank you very much.

Okay.

We are now at the one-hour mark, so I will turn the call back over to Doctor Peter Farrell for his final remarks.

Well, thank you all for joining, and let me just say that we continue to be excited by -- as we look out into the future.

Innovative products rolling out over the year, we're especially excited about the FX masks and the new S9 platform.

The market for sleep disorder breathing is still highly underpenetrated.

We have a robust balance sheet which we just talked about.

We're certainly generating cash in the vicinity of $0.25 billion a year.

And finally, we have an absolutely first rate team of people to ensure continuing strong execution, and I want to thank all the staff, particularly those that are listening, for their commitment and loyalty.

And we see great things happening in the sleep industry and also within the Company, and we look forward to keeping you posted on our progress.

So thanks again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect your lines.

Good day.