瑞思邁 (RMD) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 ResMed Inc.

earnings conference call.

My name is Stacey and I will be your conference moderator 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 the conference.

(Operator instructions).

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

In addition, the Company asks 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 of 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.

At this time, 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, Stacey, and thanks, everyone, for joining us.

I'll begin, as usual, with a short summary, and then pass the call over to Brett Sandercock, ResMed's CFO; and then we'll go into a Q&A.

So, first, the financials.

We finished with a very solid quarter.

Global revenues in the second quarter of [2002 - sic] grew 9% to $333 million, which was also up 9% on a constant currency basis.

Revenues in the Americas grew by an encouraging 12% to $182.5 million.

ROW revenue increased by 5% at the headline and also in constant currency terms to $150.2 million.

GAAP EPS increased 14% to $0.42 for the quarter, and I believe consensus was $0.38, which we comfortably beat.

If we exclude amortization of acquired intangibles, EPS was a record $0.44, which we would suggest represents effective management, and operational excellence and efficiency.

With respect to product performance, masks continued to perform well across the globe, and we continue to take market share.

The three masks -- new masks in the FX trilogy -- that is the Quattro FX, the Mirage FX, and the Swift FX, as well as the [four HER] versions of these masks, continued to do extremely well.

With the success of the Mirage, we are gaining additional share in nasal masks, a category which recently had been a weak spot for us.

We just launched the Swift FX Bella mask, giving female patients the choice of how they wear the mask, since it offers hair management solutions, in brief.

We expect this to also improve patient compliance.

And in brief, the mask has a loop, which wraps around the ears without any straps on the forehead or head itself.

And as we've recently been highlighting, there's a further reason we continue to see strong growth in the mask category, other than the introduction of the new products, is that there is excellent business in the resupply or replenishment of masks to the existing patient base.

In this context, we're working with our DMA and HME customers to help them leverage this business opportunity.

Global growth in flow generators this quarter was primarily driven by ventilation and Bi-Level devices, including significant contributions from our adaptive servo-ventilation line, the VPAP Adapt, and the S9 AutoSet CS.

But in addition, also the Stellar products.

We can provide more granularity on that if people wish.

In the Americas, Bi-Levels are regaining share, as they prove to be a strong value proposition for HME's and physicians who we believe are scripting them.

Growth in the basic flow generator market is still somewhat problematic.

It continues to be a challenging environment, and actually proved to be a bit more so this quarter in Europe, due to difficult macroeconomics or the macroeconomic environment there, which people don't need very much explanation on.

The European climate is a little bit cautious and perhaps nervous and the market has slowed somewhat, looking more like growth levels in the US -- that is around the 6% to 8% mark.

But because we don't have any material business in those countries or in the countries under severe distress, we are somewhat isolated from the potential basket cases, if you like -- the so-called PIIGS.

Ventilation sales of the Stellar 100 and the 150 continue to grow progressively in Europe and parts of Asia.

The Stellar was -- the 150 Stellar was launched in Europe at the end of the calendar year.

Both products have received regulatory approval in Japan and will be launched there soon.

These vents will roll out progressively over the next few quarters.

Of note, the Stellar 150 includes iVAPS, which is an automated Bi-Level mode.

The success of the Stellar is another positive indication of our continued progress in product development, and there will be more offerings in this space over time.

Sales of Stellar 100 in the US are ramping to expectations with the CareFusion sales team.

They are also now selling our masks along with the ventilators.

The new hygrometer humidification product, the HumiCare D900, started a controlled product launch in Germany, and we are doing further CPLs a little later on in France and Sweden.

We are also working on FDA approval, and we hope to launch the 900 in the US in early 2013 or, if not before, pending FDA approval.

On the HST, or the Home Sleep Testing front in the Americas, commercial payers continue to steer toward HST, with a requirement of prior authorization for attended PSG's sleep test while encouraging the use of HST.

At this point, Aetna, United and Humana have pre-authorization initiatives for PSG to steer patients to HST.

In 2011, we estimate approximately 15% of all the tests -- or all the sleep tests were HST, and we expect to see continuing adoption of HST during 2012.

It's difficult to look into the crystal ball and know exactly what that growth will be.

I think it's going to double.

Others within ResMed are more conservative, but we'll see what it turns out to be.

To some extent this takes the pressure off of low-level CPAPs because, as people would understand, with HST, there's no setting of pressure in the sleep lab, which means that physician DMAs, HMEs, have to point towards APAP or our AutoSetting devices.

So, that's all good from our point of view.

On the clinical front, the flow of data substantiating the connection between sleep disorder breathing and chronic diseases continues to materialize.

A study conducted recently in Spain with over 1,000 women, just published in the annals of Internal Medicine, demonstrated that severe obstructive sleep apnea is associated with a significantly higher risk of cardiovascular death in women, and that adequate CPAP treatment has been shown to reduce that risk.

Also in a recent study published in the British Journal of Psychiatry, researchers have suggested that schizophrenic patients have an improved quality of life if their sleep disorders are treated.

And finally, in the area of occupational health and safety, advisers to the FMCSA, the Federal Motor Carrier Safety Administration, at a meeting last December, recommended that the Agency toughen up its approach to evaluation and treatment for sleep-disordered breathing.

The Motor Carrier Safety Advisory Committee and the Medical Review Board have formed a joint subcommittee charged with producing recommendations for an eventual rule that will set standards for sleep apnea screening, evaluation and treatment.

They plan to present this strategy next April.

Now let me turn the call over to Brett.

Brett?

Right.

Thanks, Peter.

I'll just run through the Q2 results.

Revenue for the December quarter was $332.7 million, an increase of 9% over the prior-year quarter.

In constant currency terms, revenue also increased 9%.

Income from operations for the quarter was $67.3 million, a decrease of 4% over the prior-year quarter, reflecting the impact of unfavorable currency movements.

Net income for the quarter was $62.9 million, an increase of 8% over the prior-year quarter.

Diluted earnings per share for the quarter were $0.42, an increase of 14% over the prior-year quarter.

Gross margin for the December quarter was 59.7%, up sequentially from Q1 FY '12.

On a sequential basis, our gross margin benefited from favorable product mix, and improvements in manufacturing and logistics costs.

Sequentially, currency movements had a minimal impact on our gross margin this quarter.

Looking forward for the balance of FY '12, we expect our gross margin to be in the range of 58% to 60%, assuming current exchange rates.

We continue to execute on initiatives targeted at reducing product costs through supply chain efficiencies, product design, and manufacturing improvements.

SG&A expenses for the quarter were $100.6 million, an increase of 10% over the prior-year quarter.

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

SG&A expenses, as a percentage of revenue, were 30.2% compared to the year-ago figure of 29.9%.

Looking forward, and 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 $27.2 million, an increase of 24% over the prior-year quarter.

In constant currency terms, R&D expenses increased by 21%.

R&D expenses as a percentage of revenue were 8.2% compared to the year-ago figure of 7.2%.

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

As a result of previously announced acquisitions, amortization of acquired intangibles increased to $3.7 million for the quarter, while stock-based compensation expense for the quarter was $7.4 million.

Our effective tax rate for the quarter was 24.2%, compared to the prior-year quarter effective tax rate of 25.9%.

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

Looking forward, we estimate our effective tax rates for fiscal 2012 will also be in the vicinity of 24%.

Turning now to revenue in more detail, overall sales in the Americas were (technical difficulty) -- an increase of 12% over the prior-year quarter.

Sales outside of the Americas totaled $150.2 million, an increase of 5% over the prior-year quarter.

In constant currency terms, sales outside the Americas also increased by 5% over the prior-year quarter.

Breaking out revenue between product segments, in the Americas, flow generator sells were $80.5 million, an increase of 4% over the prior-year quarter.

Masks and other sales were $102 million, an increase of 19% over the prior-year quarter, underpinned by strong contributions across our portfolio of masks, and continued growth in accessories.

For revenue outside the Americas, flow generator sales were $100.1 million, an increase of 2% over the prior-year quarter; and in constant currency terms, also an increase of 2%.

Masks and other sales were $50.1 million, an increase of 12% over the prior-year quarter; while in constant currency terms, an increase of 11%.

Globally, in constant currency terms, flow generator sales increased by 3%, while masks and other increased by 16%.

Cash flow from operations was a record $110.6 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $12.3 million.

Depreciation and amortization for the December quarter totaled $22.9 million.

Our share buyback continues to play a major role in our capital management program.

During the quarter, we repurchased 4.1 million shares for consideration of 110.5 million.

For the first half of fiscal 2012, we have repurchased 8.5 million shares for consideration of 235.2 million.

The 8.5 million shares purchased year-to-date represents approximately 5.7% of our diluted shares outstanding.

At the end of December, we had approximately [14 million] shares remaining under our authorized buyback program.

On January 25, we increased our syndicated bank credit facility from 300 million to 400 million, providing the group with additional funding flexibility.

Our balance sheet remains strong.

Net cash balances at the end of the quarter were $497 million.

At December 31, total assets stood at $2 billion and net equity was $1.6 billion.

I'll now hand the call back to the Operator for your questions.

(Operator instructions) Ben Andrew, William Blair.

So, Peter, talk a little bit more about two things, please, for my questions.

First is international volumes -- were they kind of steady through the quarter or getting worse?

I.e., are we looking at maybe a more difficult environment than you saw in fourth quarter for fiscal -- or for the balance of fiscal '12, and then into the balance of the year?

And then, second, on the product mix side, that was a pretty impressive performance on gross margin.

Is that something that was unusual in terms of the mix this quarter?

Because I know Brett gave us a pretty broad range for the year.

So maybe talk to mix and the dynamics there, please.

Yet, well, let me just address the gross margin first, Ben.

I mean, obviously, getting close to 60% was pretty encouraging.

But I think the main thing is -- and I'll let Rob chime in here, particularly regarding Europe and maybe throw the first question back to Rob.

But you'll note that we had really encouraging growth.

As you know, the adaptive server ventilator products are now on the S9 box, and we saw very good growth there.

And, of course, there was also the Stellar and the new Bi-Levels and the S9 box.

So, higher margin products for sure.

That's pretty encouraging.

We -- I think we were kind of delighted that we're near 60% gross margin.

And with respect to the -- what's happening in Europe, I mentioned in my remarks that we were relatively insulated from the PIIGS -- Greece, Spain, and so forth.

We do have some relevant business in Italy and -- however, that was quite good.

And, obviously, the big ones are Germany and France.

The 5% figure down a little bit from perhaps what we've observed in previous quarters.

I didn't -- there was nothing that came to me in terms of changes during the quarter.

One thing we do know is that -- and I think we've mentioned this before; maybe we haven't -- but there was a 6% reduction in France in reimbursement, and that kicked in.

And also there was a reduction in reimbursement in Germany for PSG.

But that only affected the private market, which is roughly one-third of the market; the other two-thirds being the government-based hospitals where there was no drop in reimbursement.

But maybe, Rob, you can add some more flavor, if you wish.

Sure.

I think there's no evidence of hitting a cliff in Europe at all.

We would say the market growth in Europe has probably slowed more around where the US has been over the past few years.

The uncertainty is not helping, but the business is traveling along quite nicely and looks pretty steady as she goes.

Okay.

I guess my follow-up would be -- maybe, Brett, can you give us a sense on hedge gains in the quarter?

Looks like the other line was a little bit bigger.

And where might that be over the balance of this year if rates stay where they are?

Thanks.

Yes.

So, thanks Ben.

So, if you see there through where our hedge gains are recorded through other income in the P&L, which was $8.5 million this quarter, which is predominantly FX gains there.

That you'll see from operating income, really, we were hurt by currency.

However, we had pretty significant hedging gains this quarter, really due to the Aussie strengthening both against the US, but in particular, against the euro over that sort of quarter-to-quarter was about a 9% increase.

So it was quite significant.

And marking those to market gave us both hedging gains.

If you look at it all up for the quarter, the FX was positive on the EPS by about $0.01, so it was pretty much a wash with those gains.

Looking forward, if rates stay exactly where they are or where they were at the end of December, then you would get minor gains through other income or on the hedging, because we do mark-to-market.

Demand will probably even up a little from where they were.

So there will probably be some minor gains coming through, but it would be largely benign unless we get significant movements in currencies again.

Thank you.

Michael Matson, Mizuho Securities.

So I guess just back to the commentary on gross margin.

So, Peter, do you think that the gross margin, then, is sustainable at closer to 60%?

Or do you think it's -- is there some reason that leads you to believe that it could fall back down to more of the middle of that range, the 58% to 60%?

Well, Michael, we don't have a crystal ball to be able to laser beam in on what gross margin is going to be.

As you realize, it's a function of geographic mix.

Europe was down a bit relative to the US.

That doesn't help.

But on the other hand, the higher margin products showed the biggest growth.

If that continues, we'll be -- the sales in the Bi-Levels and the adaptive servo-ventilators; obviously, masks are pretty good and remain good.

And that's been true for the past several quarters.

So, assuming the masks hold up and assuming the growth holds up in the Bi-Levels, the vents, and also the AutoSetting products, we'll be closer to 60%.

If that doesn't hold up, we might drop a little bit.

But I think Brett said we're comfortable with 59% to 60%, and that's about as precise as we want to be.

Okay.

Can you give us any timing around new platform launches on the flow generator side?

I guess, S9 II or S10?

We're working on those.

I don't know -- I'll throw that to Don Darkin.

Normally, we don't -- we'd let you know when we're launching, so making predictions there is not what we're normally into.

Just like we don't make too many predictions -- I do, but most of the others don't.

(laughter)

Don, do you want to say anything?

The platforms are well underway, but at this point, assume that's where we're at.

You can see the step-up in expenditure on R&D, and that's obviously reflective of a greater push in certain areas.

But just like we don't give guidance, we're not going to tell you when the product is going to launch.

Yes, I mean, that actually leads into my next question.

Just because we've seen R&D -- even on a constant currency basis, we've seen some pretty dramatic increases there.

I'm just wondering where you're spending all the money.

I understand -- look, you're launching new products at regular intervals, et cetera, but the number of new products, I guess, from an outsider standpoint, doesn't really seem like it's gone up all that dramatically.

But yet your R&D is going up a lot.

Is that -- is there something related to that big study, the CHF study, that you're running or something else going on there behind the scenes?

Well, the survey CHF study is sort of a fixed spend, so there's been no acceleration in that.

We're up to around 900 patients out of the 1,260 planned.

So that hasn't been reflected in the increase.

It's mostly ventilation, ventilation products.

They're not cheap to produce.

And also we've been making a push on the health informatics.

And those two areas are really the main gigs, really -- ventilation and health informatics.

I might just as well, Peter, much that the recent acquisitions, BiancaMed, Grundler, et cetera, where they've got some nice products and so on.

We're continuing with our R&D efforts there as well.

So that increases as well.

And that's effectively R&D that we've acquired, but that we're certainly very excited about and we're absolutely funding those as well.

Yes, yes, good point.

Okay.

And then just one more quick question -- did I hear correctly that the currency impact on your EPS was positive $0.01 -- positive $0.01 this quarter?

Correct.

(multiple speakers) The bottom line would have been [41] but it came in at [42].

So, you know, not really material.

All right, that's all I have.

Thank you.

Okay, thanks, Mike.

(Operator instructions) Joanne Wuensch, BMO Capital Markets.

Did you call out the Bella mask?

B-e-l-l-a?

As in beautiful or the Twilight movie?

(multiple speakers) Yes, ciao bella.

(laughter)

Okay, just checking.

(multiple speakers) Peter, not that I want to move you along, but can you talk about CEO succession planning right now?

Well, I think we sort of talked about that last -- maybe it was last call, I can't recall.

But it's -- we're using an outside recruiter because we like their template.

But there's not -- it's not something that we're rushing along.

You know, I made some comment there about my health in sort of rather -- it wasn't blamed to this.

But anyway -- no, so what it's -- things are going well and we're going through a very sort of circumspect evaluation.

And we've got 3,500 roughly, give or take, employees.

We think a few of those people are qualified to run the organization.

And we're just going through 360s, if you like, and looking at people's strengths and where there may be need for improvement.

We're using the outside recruiter to help us with that evaluation.

We also have another consultant, the next McKinsey partner, that we've worked with Clem Doherty -- I don't want to give a big advertisement for Clem's like-minded individuals consultancy, but he's a good guy and he knows us very, very well.

We've been working with him since 2004.

He knows all the senior people.

And so we've got, if you like, a person who knows us really, really well, and recruiters that are beginning to -- they're digging down, getting some granularity.

And we'll get reports back from those guys over next couple of months.

Then we'll look at those reports and then we'll decide where we go from there.

But there is no imminent announcement, Joanne.

I'm sorry, maybe it was an Australian newspaper or somebody picked up that Mick was in queue for this?

Or am I reading or remembering something wrong?

No, there was a woman from -- I think it was the Australian Financial Review, which is one of -- I don't know if there's anybody from the AFR on the line, but they indulge in gross exaggeration; where there's always takeover bids, where somebody is taking us over and this -- you know, there's a big flurry that goes out into the marketplace.

And we get calls from bankers wanting to help us out with our sale.

Again, that's just a beat-up.

There's nothing to that, as I told you.

We're going through a proper circumspect evaluation and we'll make an announcement sometime in the future.

I don't think it will be -- it will not be the near future.

All right.

On a more financial note, you have, if I remember correctly, $400 million cash on the balance sheet.

You just expanded (multiple speakers) --

A little more than that.

(multiple speakers) -- your credit agreement.

What are we doing with all of this cash?

Thank you.

Well, we, as you saw, Brett indicated that we've been doing a very aggressive buyback, 4.1 million shares for over $110 million last quarter; the quarter before that, I think Brett can correct me -- 125 million, about the same number of shares, 4.5 million.

We think that's, from what we can see, we think the stock is incredibly undervalued.

You can see with our current results.

We like this area and we continue to be excited about the future.

We're in an area which is -- it's preventative medicine; it improves patient's quality-of-life and also reduces healthcare costs.

So we're in a, if you like, a sweet spot regardless of what happens in the crazy world of sick care, also known as healthcare.

So we are in a very good space.

We believe that the best value at the moment -- we increased the borrowings, so we have the flexibility -- there's another 14 million shares approved for buyback.

We believe that the stock is cheap and we're putting our money where our mouth is.

Regarding the balance sheet, our total debt, including current and non-current together, is around $225 million and we have net cash of around $500 million.

Now, we -- most of that's offshore; we're not going to bring it back here with the ridiculous tax rates that exist in this country.

And so, we will, however, make investments leveraging the balance sheet in areas like we did or like we've done with, say, BiancaMed and so on.

But we're making some private investments where we think we can -- we're not trying to make money on equity plays.

I mean, we invest $3 million and you get 10x and you get the $30 million back, and you put it on a balance sheet with net cash of nearly $500 million, it's kind of like so what?

So we're doing these in both the marketplace to put people in a direction which we think makes sense, or where investing in technology that we think in the future will make sense.

So, that's where we're putting our resources -- the buyback and minor investments in people that we think can shoot straight and will help us expand the market.

Okay, thank you very much.

Pleasure.

Jason Mills, Canaccord.

Hi, Peter.

Thanks for taking the question.

(multiple speakers) Brett, first question is for you.

I am certainly not a foreign currency expert, but I just wanted to see if I could get a little bit more granularity there -- because you did a nice job of giving us some color around the constant currency growth in both SG&A and R&D, and saying that revenue and gross margins were not affected by currency.

So just looking at the SG&A and R&D based on constant currency growth, using your percentages, it looks like it added about $1.5 million, currency did, to the cost.

And then you said other income was $8.5 million was predominantly FX.

So I'm just -- I'm getting to a higher impact from currency just using what we've heard so far in the call.

So could you just help me out in getting me to understand a little bit better?

Yes.

The big one there would have been the COGS impact year-on-year, Jason.

So, as you know or are a lot aware that we have basically a quarterly lag with the COGS until we ultimately sell that inventory.

So if you step back and look at that lag impact, the Aussie dollar actually appreciated quite a lot over that period.

And that's what hurt us through the margin.

And year-on-year certainly was quite a big impact; it would have been probably a little over 200 basis points on the margin.

That's where we were getting hurt at the operating income line.

And of course we had offsetting hedges coming through this quarter, which more than offset that.

So we ended up with having that $0.01 benefit coming through.

Okay.

So that kind of leads to my next question on gross margin.

Sort of what the constant currency gross margin would have been.

You said initially that you saw minimal impact from FX, gut now you're saying it seems like you had actually a significant impact.

Are you saying that pro forma, we're looking at margins that would have been, on last year's currency levels, around 61.5%?

They certainly would have been higher.

So, two things on this, Jason.

The first one is my comments were generally on sequential movements in the gross margin, which people tend to focus on, given how volatile currencies are and so one.

So that's one aspect.

The other aspect is a year-on-year margin, which, if you looked at it, came down -- I think it was 60.8% last year, 59.7% this quarter.

So that's definitely come down and the big driver of that is basically currency on that.

So if you basically -- you stripped that out on a constant currency basis, suffice to say that margins would have been higher than they are, than they were last year even.

Okay, that's helpful, thanks.

(multiple speakers)

Unfortunately, we live in the world where currency is really volatile at the moment, so we get a lot of these movements happening.

You can see the weaker euro even now is going to play a part as well, and end up being a bit of a headwind for us.

So there's a whole bunch of factors playing in on that margin, making it a pretty difficult fit to predict.

Is it possible that you have the mirror reverse in the currency markets happen at some point in time?

In terms of potentially weakening Aussie and so on?

Yes.

And then you would have gross margins that would show up in the 200 basis points lower and is a negative impact?

Is that possible or do you feel --?

It could -- yes, if you looked trending over the last two or three years, where the Aussie has been basically on the rise almost inevitably and remorselessly -- if that turned around for some reason, then a lot of those headwinds we've had over the last or three years would end up reversing, and we'd see the benefit of that.

It all really stems from a large part of our cost base is here in Australia.

Got it.

Got it, okay.

So, denominated Aussie dollars.

Okay.

And Peter, on the product mix, the flow versus masks, you've consistently proven your mask growth is sustainably strong.

What can you do to couple over time your flow generator growth with that strong mask growth?

I presume you don't have any inclination of that coupling with mask growth coming down, so I presume that you're gearing up for flow generators to come up and exist at a higher level sort of just similar to your mask.

I'm just wondering what sort of initiatives or plan strategies you have in place for that?

Well, the one possibility that we're looking at, given the replenishment area, and given the growth in masks, as you pointed out, it's been strong, traditionally strong.

We've seen a weakening in the flow generator space.

And now with HST coming in, we see -- I mentioned that, the positive impact on APAP or our AutoSetting products.

And also the growth in application of adaptive server ventilation.

On the last call, I mentioned some of the good things that were happening in Japan, where adaptive servo-ventilation was being used on heart failure patients, even though they didn't have frank sleep disorder breathing.

The cardiologists there -- and we're involved in a continuing study there -- the cardiologists there believe that because of the impact on fluid in the lungs and fluid in the plura, that adaptive server ventilation should be used for all heart failure patients.

That's pretty encouraging.

We'd like to see that spread.

But one thing we are looking at -- and Don can talk to this if he wants to add some flavor to it -- but the replenishment area is showing very, very encouraging growth.

And we've been saying to ourselves, well, gee, you know what?

What about flow generators in that space?

So there's a huge number of very old flow generators.

It's kind of like the old Volvo ads.

Years -- and we've been driving this thing for years and years and years, well, guess what?

Horsepower has changed, acceleration has changed in the newer ones.

Wouldn't you like to buy a newer one?

And, hey, why don't you trade in your old one?

So we've seen -- and quite frequently, patients that will come in with a flow generator, a CPAP device that's over 10 years old, with hundreds and hundreds and hundreds of hours on it.

Well, gee, you know, it seems like noise, impedance, the algorithms -- I mean everything has evolved.

We've got -- obviously, we make pretty good products, because they last a long time.

But there have been significant improvements, particularly people that have -- and we sort of suggest a lifetime of five years.

So, there's a lot of devices out there that are well over five years old.

And I -- look, I can't give you any numbers, but it's in the millions of devices that are out there.

How many are older than five years?

We can provide some estimate, but let's say half of them.

So there's no reason why we couldn't alert people to the fact that they might benefit from a newer device with better compliance, and certainly, we would think better quality of life.

So, that's something we're looking at.

Thank you, Peter.

Pleasure, Jason.

Matthew Pryor, BofA Merrill Lynch.

Good morning guys.

Can you hear me?

Matthew, yes, we can.

Loud and clear.

Thanks, Peter.

So I'll just ask Rob a quick one in regards to the European mix of flow gen business.

Can you talk about whether the European mix is similar to the US in terms of low-end CPAP AutoSet in Bio-Levels, given the current low-end CPAPs, where you're feeling the pressure?

It's quite a different mix.

Generally, Europe's much more high-end mix on the CPAPs.

Typically, the AutoSets are a lot stronger.

And the US has a model where patients who don't live well with a CPAP end up on a Bi-Level device.

And that's not a model in most European countries.

So the mix is very different.

Okay, thanks.

And just one follow-up question for Peter.

Peter, you talked about, obviously, home set testing and we've still got this issue of PSG labs not yet participating in HST.

When do you see that coming?

Is it now that we've got preauthorization that you will get that potential transference of PSG labs participating in HST?

And ultimately, what's the conservative argument?

You mentioned that some in ResMed are more conservative than yourself.

I'm just curious if you can flush out any of those kind of (multiple speakers) negative arguments for us?

(multiple speakers) Well, let me -- okay, Matt, let me take your last question there.

You can say that I'm optimistic, but in looking at the terrain, I think we're going to see a doubling in HST, which means a potential doubling in the Americas in AutoSetting devices.

So that's just my hunch.

We're seeing -- there's some anecdotal evidence coming back from the marketplace that the payers are getting a little more antsy.

They're seeing material expenditure on PSG and they're not -- this is preauthorization is building up a whole head of steam.

Why?

Because it's going to save them money.

And you're looking at rough figures, $1,200-plus for PSG versus $200 to $250 for HST.

But there are other dynamics that are playing here as well.

And we're trying to inform the sleep labs -- and I'll pass it over to Mick in a second here for him to make a comment.

But the sleep labs, we did a survey and found out that 30% of patients that have a script written to attend a sleep lab for a PSG, 30% of the patients don't show up.

So if you've got 30% of no-shows, that's a big number.

And we've also found that if the sleep lab also offers HST -- and if you think about HST versus PSG, PSG, you get on a six to eight-week waitlist, and you've got to bring your duffle bag with all your gear.

And then they wire you up -- and this is for something that a five-year-old child could diagnose.

I mean, this is something that's very, very simple to do, particularly if you have a history in a physical by a physician who knows what he or she is doing.

So you could almost argue -- you go straight from a history and a physical, in a lot of cases, straight to AutoSetting treatment.

Because the AutoSet will tell you whether you need treatment or not.

But that means obviously buying a device.

But a physician would -- physicians that have been in this game for a while know 80% of the time which patient needs treatment and will benefit from it.

Anyway, stepping back from that, so you've got labs.

Now if they offer both, then it's a 2% no-show, which is quite different.

Now if you think of HST, it's immediate.

You take the HST, the ApneaLink, in our case, home with you.

You bring it back the next morning; in two minutes, you've got a full diagnosis and you're immediately satisfied with the CPAP -- rather than waiting six to eight weeks, perhaps 10 weeks, before you're put on treatment.

It's hugely -- it's very inefficient, PSG; it's very expensive by comparison with HST; and it's much, much more inconvenient.

So you're going to see a consumer move there; you're seeing the payers pushing people in that direction.

And I think the labs that don't offer HST are actually dinosaurs.

The fact is that the whole market is moving in that direction.

There's no stopping it, and those that resist it are going to lose out.

So -- and I think, given the fact that most of them don't want to end up on the dole or accepting welfare payments, I think they'll move.

And how quickly that will happen, I'm seeing it doubling.

It could even go higher, but I don't think it's going to be any worse than 30% of all sleep tests being HST.

Others conservatively within ResMed are saying more like 25%.

But that's still pretty significant, 80% growth versus 100%.

But Matthew, to your question there about sleep labs are not participating in HST, they actually already are.

And they're participating at the double-digit percentage rate.

And it varies by geography around the Americas.

But if you look in the Northeast and the Southeast particularly, where there is very high density of sleep labs, you're talking 20% to 40% of them already sleep centers participating in home sleep testing.

And some of them actively offering it, because they're seeing that the no-show rate for just PSG is about 30%, and the no-show rate when you offer both PSG and HST give people choice.

It's south of 5%; it could be in that 2% to 3% range in some early data.

So, that no-show rate goes way down.

They're seeing that.

And the forward-looking sleep centers are already doing this.

Even the American Academy of Sleep Medicine, which is the sort of the group that helps govern this group, has put together an accreditation program for home sleep testing.

So it's now sort of sanctioned within the sleep center community -- and they're all talking about how do we tie into patient-centered medical homes, to accountable care organizations, and all these evolution of the payer environment within the US market.

And how do we make sure sleep changes for utilization management at those payers, to care management or disease management.

So that we show that there's an ROI to the insurance company of diagnosing and treating and managing the patients on CPAP, APAP and DPAP products.

So that message is there.

And both across sleep centers and across the sleep medical community as well as the HMEs and manufacturers like ResMed, we're partnering up to put that story together and drive home sleep testing as part of that.

Great.

Thanks, guys.

David Clair, Piper Jaffray.

Hi, good afternoon, everybody.

Hi, Dave.

You've spoken to Connie, haven't you, recently?

I have, yes.

Good, good.

And the message was clear?

It was clear, Peter.

Thanks very much.

Okay, thanks, Dave.

(laughter)

Any comments you can give us on the launch of Stellar 100?

And then, Peter, you mentioned we have some more ventilation products in the pipeline.

How should we think about ventilation going forward for you guys?

Okay.

Well, I think Geoff Neilson, if he's still awake, he's in Europe.

Geoff, you're the guy on the ground there.

Stellar has been released in Europe, both the 100 and the 150.

Would you like to comment on that, please, Geoff?

Can you hear me?

Yes, I can hear you.

Okay, great.

So Stellar 150 has been in the market now for a while.

It's launched throughout Europe.

We've also got that with CareFusion distributing into the hospital in the US.

They launched that towards the end of the last quarter.

Stellar 150, we've launched in Europe and that has our automatic therapy called iVAPS, which is being well-received so far.

Well, Stellar 100 and 150 are approved in Japan and we look forward to launching that in the next quarter.

The growth rate is to our expectation.

CareFusion, have been doing a lot of sampling and their sales force is excited, and we're getting some interest from the hospitals they're showing that.

But obviously, the sales cycle in the hospital is a bit longer than in home care.

So that's the story with Stellar 100 and 150.

Looking forward, we are investing in new platforms to replace our existing platforms that are available in Europe.

And the timing of that, we wouldn't say at the moment, but we're actively investing in that and you can see that by some of our R&D expenditure.

And then we're also looking at humidification with Grundler, and we're doing a CPL or a Controlled Product Launch, in Europe at the moment.

And we'd be looking forward to launching their new humidifier over in about a quarter's time, before the end of the financial year.

So we're excited about what we're doing.

The business is growing.

It's growing quickly in the US with some of the HST products.

And obviously, we're looking forward to new products as they come online.

Okay, thanks for the color.

Then a quick one here for Brett -- how should we think about the medical device tax impact in 2013?

Yes, I mean, Dave, that's -- it's probably going to be an interesting one for all medical companies there on that tax that comes through.

At the moment, we've -- I mean, we have a -- we've got a team together at the moment that's looking at it, on the assumption that it's going to come through and who knows what might happen.

But at the moment, with the planning that's going to come through, what -- feeling the guys might have some color on whether it gets there or not.

But at this stage, we're planning for it.

And then it's just a question of, yes, who's -- how you do that, who pays for it, who doesn't, and that kind of thing.

I think all that's got to be worked through.

I mean, we're expecting the worst on that but hoping for the best.

I mean, there's a lot of water to flow under the bridge there, David, and hopefully, it ends up being positive for the whole of the medical device industry.

Okay, thanks a lot.

Dan Heron, UBS.

I just wanted to ask, Peter, your comments at the last quarterly result in relation to stopping discounts for the low-end CPAPs in the US became such a huge issue after the quarter.

Could you just give us (multiple speakers) a vein on that?

(multiple speakers) Hey, I never would have mentioned it, Dan, if I'd known it was going to create such havoc.

Well, Peter, could you perhaps just -- I mean, at the time you're talking about some of that volume might come back would have fallen for the next quarter.

You didn't know how many of the price-sensitive or how many of the buys were truly price-sensitive.

Can you just talk about how this played out over the second quarter?

Well, I think -- you know, I was talking about that we were doing a bit of market segmentation, et cetera.

But look, I'm going to throw that to Mick to make comment.

But basically, we had a period where there was this sort of hockey stick thing going on, where -- I mean, I'm going back a few years now -- and we decided that we wanted to have a more -- you know, a saner way of satisfying customers, more of a -- you know, if you can get to a third, a third, a third, I mean that's kind of dreaming a little bit.

But you don't want to have 60% of your sales in the last month -- I'm just throwing that in the -- pulling that figure out of the air.

I'm not saying that's a real number.

But too much of the business was being pushed towards the end of the quarter, and this -- it creates logistical issues.

And once you -- if you start offering better prices, appearing as though you're desperate at the end of the quarter to make sales, then that's going to push everything in the direction of a hockey stick at the end of the quarter.

We decided that we didn't want to offer bargain basement prices and we didn't want to have this logistical nightmare towards the end of the quarter.

And we've taken steps to get around that.

So, Mick, why don't you -- do you have anything to add to that?

well, I mean, the only thing I would say to Dan is that we haven't changed really anything in how we operate from Q1 to Q2.

We operate our business for the long-term, looking at long-term operational efficiency and supply chain management for us -- our manufacturing facilities, our inventory facilities, and for our customers' inventory facilities and delivery to their patients.

What changed from Q1, where we were minus 2% in America's flow generators to Q2, where we were plus 4% in America's flow generators, wasn't any fundamental shift in how we do that.

We're doing the same things that we did in Q1 and Q2.

What happened was that we've seen a positive impact over time of the going out and talking to sleep physician by sleep physician, sleep lab by sleep lab, HME by HME, about the benefits of the S9 Bi-Levels; the benefits of the VPAP Adapt, which is now on the S9 platform; the benefit of the VPAP ST; and driving the value of those products, and leveraging the positive mix shift from S9 Escape up to S9 AutoSet that is linked into HST, which was tied into the last question.

So those positive mix shifts have resulted in that 6 point turnaround from minus 2 to plus 4.

It's nothing to do with any sort of change in long-term behavior.

We've got the same operational efficiency and time with our large customers that we had before, and we plan to stick with that going forward.

Yes, understood.

So I guess just in a word, you're saying that the segmentation is progressing as planned and is proving to be successful?

Correct.

Yes, we're doing the Wayne Gretzky skate to where the puck will be; not where it was.

And that's what we've been doing and it seemed to work here in Q2, and we plan to continue to do that.

Great.

Yes, but do you understand the Wayne Gretzky?

Or the rugby ball or the soccer ball.

(multiple speakers)

Or the rugby, yes.

Where you think the ball is going to end up, basically.

If you're not an ice hockey fan, Dan, we can send you a bit more detail, but we'll take it off-line.

I'll check it out on YouTube.

Thank you, gents.

(laughter) All right, Dan.

David Low, Deutsche Bank.

Thanks very much.

If we could just go back to the same sort of topic, the Stellar sales during the period.

I mean, Mick, you just commented that you had the turnaround, the 6% turnaround.

Just how much was ventilation sales a contributor to that?

Well, we don't give granularity on that, David.

That -- because once you start, it's going to be every quarter getting down to granularity that we don't think makes a heck of a lot of sense.

I think Geoff put it correctly -- we're very satisfied with where we are in the sales, both with CareFusion and with our Asia-Pac and European sales.

So, good growth and we expect to see that continue.

Okay.

And just again on the Bi-Levels and I guess that was an issue going back a few quarters.

If you could talk a minute -- Mick, you mentioned the marketing of those products and now in the S9 platform.

Especially if you could talk about where sales of the Bi-Level devices are now, this is where they were 12 months ago, given we went through that dip with the product launch.

No, David.

We're not going to -- like we're not going to split out the category between detail and VPAP HST versus Stellar.

We're not going to go into the details split between CPAP, APAP and Bi-Level, other than to say that it was a positive material impact of the S9 Bi-Levels -- particularly the VPAP Adapt and the ST, which is nice.

They're sort of high-margin, high-value for the customer; high-value for the insurance provider, our products.

And we're focusing our attention, our marketing and our sales people out -- our feet on the street, with selling the value proposition of ResMed's high-end flow generators and ventilators, as well as our AutoSet algorithm, and how it's essential, as part of HST.

So, a combination of many factors have contributed to that sort of positive mix shift that you saw in flow generators in that period.

Sure.

Okay.

Look, I'm not expecting you to break it out.

I just wanted to get a sense as to whether we were sort of back to the same run rate or whether Bi-Levels as a category are offering the same opportunity that they were 12 or 24 months ago.

Look, I think we've got a good opportunity to take share over time in the Bi-Level category and in the ventilation category.

And Geoff can talk more about the global ventilation opportunity.

But within the Americas in Bi-Levels, we are -- you know, we've got a lot of runway.

And we're going to move at it and keep the value proposition selling on an ongoing basis.

Having said that, I think last quarter but certainly the quarter before, we talked about the noncompliant LSAs.

So in the, if you like, the lower margin Bi-Levels, the S products, we're seeing that the S9 AutoSet has such a good algorithm -- you know, I mean, I know one sleep physician who's switched exclusively to using the S9 AutoSet, and he said he's gone from the low 20s in terms of noncompliant LSA going on to Bi-Level, down to more like 5%.

So that's at the low end and we don't see any big changes there.

In other words, it's going to go from the 20% down to perhaps the 5% for noncompliant LSA going on to Bi-Level S.

Okay, great.

And just one follow-up.

The pricing environment -- I guess it's a pretty standard question on these quarterly calls -- but could you talk about what you've seen with your ASP, and perhaps touch on what the competitive environment has been as well?

You know, we've -- happily, we've seen no unexpected, put it that way, unexpected changes in ASP, which is a good thing.

It seems that the other guys are not doing anything silly and we certainly have no plans to do anything silly.

I mean, but typically, we're not the price-setter.

And we intend to keep that philosophy going forward.

But no more comment on that, really.

It's -- the environment wasn't particularly surprising.

Is that in the 3% to 5% price decline per quarter that you've talked about in the past (multiple speakers) -- I mean I --

Well, that's annualized figure (multiple speakers) --

Sure.

Sure.

-- the 3% to 5%.

Okay, great.

Thanks very much.

Okay.

We are now at the hour mark, so I will turn the call back over to Dr.

Peter Farrell for his final remarks.

All right.

Well, thanks once again for joining us today.

And I'll just reiterate that we continue to be excited about the future prospects for us in the sleep-disordered breathing space.

We're in the right space -- it's preventive, improves quality of life, and also reduces healthcare costs.

And we look forward to continuing contributions in this space.

So thanks, guys.

We thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect and have a great day.