瑞思邁 (RMD) 2012 Q3 法說會逐字稿

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

earnings conference call.

My name is Angela and I will be your coordinator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

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

The Company has asked me to address certain matters.

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

Second, during the conference call, ResMed may make forward-looking statements such as projections of future revenue or earnings, new product development or new markets with 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 Form 10-Q and 10-K, which may be accessed 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, Angela.

I think we still have some time left and thanks, everyone, for joining us.

I will begin with some summary remarks and then to turn the call over to Brett Sandercock, our CFO, and Brett will provide more granularity to the numbers, and then we'll go to Q&A.

So, first the financials, a short summary.

We finished with a very solid quarter.

Global revenues were $349.1 million, up 11% headline growth or 13% constant currency.

Revenues in the Americas grew by an extremely robust 18% year over year to $189.9 million and ROW revenue increased by 4% headline or 7% in constant currency to $159.2 million.

This represents the 69th consecutive quarter in which we have grown the top line, that is quarter over quarter, since we went public in 1995 and, obviously, we are pleased with that result and we ought to be able to continue that record growth.

Net profit after tax increased 21% to $64.6 million while GAAP EPS increased by robust 29% to $0.44 for the quarter.

Excluding amortization of acquired intangibles, EPS was a record $0.46.

With respect to product performance let me first start with masks.

This category continued to perform extremely well especially in the Americas.

The three new masks in the [4X] Trilogy -- the Quattro FX, the Mirage FX and the Swift FX -- as well as the For Her versions of these masks -- continue to enjoy brisk sales.

In fact, the Mirage FX is doing particular well and we are steadily gaining additional share in this category.

In fact, our data show that the Mirage FX is currently the biggest selling nasal mask on a global basis.

And the new Swift FX Bella mask for female patients, with loops that wrap around the ears and this allows us to not have additional headgear, that is also doing very well and we expect to see continuing traction with it.

As we have been highlighting in the last few quarters, another big reason we continue to see strong growth in the mask category, other than the continued introduction of outstanding products, is that there is excellent business in the resupply replenishment to the existing patient base.

Our global growth and flow generated this quarter was primarily driven by our high-end devices, which are now all on the S9 device platform.

Strong sales reflect the benefits of having these products configured on the small, more appealing S9 platform.

In the Americas, the S9 VPAP Bi-Level range is also regaining market share because of its excellent quality algorithms and also the performance that we get with those algorithms.

The Bi-Levels are providing strong value proposition for both HMEs and physicians.

Growth in the basic Flow Generator segment is still problematic and, partially, this is driven by the positive mix shift to APAP or our auto set from basic CPAP.

This is primarily due to the ongoing growth of home sleep testing.

Europe continues to be challenging due to difficult macro economic -- or a difficult macro economic environment there although sales were relatively strong in Germany and the UK.

Although the European economic climate remains somewhat muted, Bi-Levels, AutoSets and Stellar products all continue to do well.

We also just announced the release of our new patient compliance and management solution called EasyCare Online.

This innovative new tool used by sleep labs, home medical equipment and DMEs and other healthcare providers aggregates usage and efficacy data from sleep disorder breathing [I would say] patients on CPAP therapy, with simply a single click.

Simple to use while saving time and money.

EasyCare Online employs a secure cloud-based system that provides compliance data, can differentiate our customers, and is critical in today's environment.

The S9 Flow Generators, our FX mask series plus now the new EasyCare Online bring superior compliance in patient management for quick and easy access to patient data in one centralized cloud-based location.

Unlimited providers can be associated with each patient to ensure the best possible therapy.

We are quite excited about EasyCare Online.

Ventilation sales of the Stellar 100 and the 150 continue to grow, particularly in Europe and Asia.

We launched the Stellar 150 in Europe at the end of the calendar year and we are seeing incremental acceptance.

These ventilator products will roll out progressively over the next few quarters.

Of note the Stellar 150 includes iVAPS, our new automatic Bi-Level mode.

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

We also have -- field applicances for ventilation.

The new Grundahl Humidification product, the HumiCare D900, is in a control product launch in Europe and going well.

We are working on an FDA submission to launch the 900 in the US in fiscal 2013.

This product will initially launch in the home care setting which, of course, is our strength but we are also planning to do a hospital launch.

On the HST or home sleep testing front in the Americas commercial pairs continue to steer towards HS patients towards HST with the requirement of prior authorization for attendant PSG tests of polysomnography, while encouraging -- and they are encouraging the use of HST as the first line of diagnosis.

Currently Aetna, United, and Humana have pre-authorization initiatives for PSG to steer patients towards HST.

We expect this to continue.

In 2011 we estimate 15+ percent of all tests are HST, could even be as high as 20%.

We expect to see a continuing adoption of HST during 2012 and onwards.

My guess in this area is that it will increase another 100% this year.

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

For example a new study in the April issue of Pediatrics by Bonuck, et al, from Albert Einstein College of Medicine in New York showed that early life sleep disordered breathing in children had a strong persistent statistical correlation to serious behavioral and social, emotional difficulties.

And by the time the children reach four years old, by the time they reach four years old, excuse me and by the time that they are age seven, the prevalence of these behavioral and emotional difficulties was between 40% to 100%.

A study published also in Circulation Heart Failure by Lipitor from the University of Birmingham showed that moderate to severe obstructive sleep apnea can cause changes in the heart's shape and function.

That is increased mass, thickening of the heart wall and reduced pumping ability.

The new study used to better define the control patient group and newer 3-D echocardiograms.

And then New York University reported results from a study that showed simply using BMI misses nearly 40% of sleep disordered breathing in obese patients and as much as 50% of sleep disordered prevalence in women.

Obviously, this is something that suggests that BMI is not what it is touted to be, and that people probably ought to be having sleep tests as a standard of care in just about all patients.

We expect that that will come in the future.

And as a brief update, as our own clinical study which is the SERVE-HF on the use of adaptive servo-ventilation to treat chronic heart failure patients with sleep disordered breathing in chronic heart failure patients, we now have 1,000 patients currently enrolled.

A quick update before I pass over to Brett, on management changes.

Karen Borg has been appointed as President of Asia Pacific and that was in January of this year.

Her career prior to joining ResMed had commercial diversity covering strategic in global marketing, M&A, sales and general management.

And during the past 20 years Karen has worked in Australia, the UK, Russia, Taiwan and the USA and recently, more recently since 2003, she was in a leadership role with Johnson & Johnson in both Australia and the US.

Anne Reiser has been appointed President, Europe and that was in March of this year.

Anne had previously served as ResMed's Chief Operating Officer in France since 2007.

Anne has demonstrated a great track record in building and leading our successful French organization, with both strong sales growth and market share increases.

Prior to joining ResMed, Anne worked in various European countries for such companies as Zimmer, American Home Products, Hollister, and the most recent one was Medtronic.

Now I'll turn the call over to Brett to provide some additional regularity on the financials.

Then we'll take any questions.

Brett?

Thanks, Peter.

Revenue for the March quarter was $349.1 million, an increase in 11% over the prior year quarter.

In constant currency terms, revenue increased by 13%.

Income from operations for the quarter was $76.5 million, an increase of 20% over the prior year quarter and net income for the quarter was $64.6 million, an increase of 21% over the prior year quarter.

Diluted earnings per share for the quarter was $0.44, an increase of 29% over the prior year quarter.

Gross margin for the March quarter was 60.3%, up sequentially from Q2 FY 2012.

On a sequential basis, our gross margin continued to benefit from favorable product mix and, to a lesser extent, favorable currency movements.

Looking forward for the balance of fiscal year 2012, we expect our gross margin to be in the range of 59% to 61% assuming current exchange rate.

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

SG&A expenses for the quarter were $101 million, an increase of 9% over the prior year quarter.

In constant currency terms, SG&A expenses increased by 10%.

SG&A expenses as a percentage of revenue improved to 28.9% compared to the year ago figure of 29.5%.

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

R&D expenses for the quarter were $28.4 million, an increase of 22% over the prior year quarter.

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

R&D expenses as a percentage of revenue were 8.1% compared to the year ago figure of 7.4%.

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

As a result of previously announced acquisitions, amortization of acquired intangibles increased at $3.6 million for the quarter while stock-based compensation expenses for the quarter was $7.9 million.

We also donated $1 million to the ResMed Foundation this quarter.

Our effective tax rates for the quarter was 23.1% compared to the prior year quarter effective tax rate of 24.9%.

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

Turning now to revenue in more detail.

Overall, sales in the Americas were $189.9 million, an increase of 18% over the prior year quarter.

Sales outside of the Americas totaled $159.2 million, an increase of 4% over the prior year quarter.

In constant currency terms, sales outside the Americas increased by 7% over the prior year quarter.

Breaking out revenue between product segments, in the Americas, Flow Generator sales were $78.6 million, an increase of 14% over the prior year quarter reflecting strong growth in our APAP and Bi-Level devices.

Masks and Other sales were $111.3 million, an increase of 21% over the prior year quarter, underpinned by strong contributions from our nasal mask segment and continued growth in accessories.

For revenue outside the Americas Flow Generator sales were $105.5 million, an increase of 4% over the prior year quarter and, in constant currency terms, an increase of 7%.

Masks and Other sales were $53.7 million, an increase of 5% over the prior year quarter or, in constant currency terms, an increase of 8%.

Globally in constant currency terms, Flow Generator sales increased by 10% while Masks and Other increased by 16%.

Cash flow from operations was $86 million for the quarter reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $9.9 million, while depreciation and amortization for the March quarter totaled $20 million.

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

During the quarter, we repurchased 2.3 million shares for consideration of $67 million.

For the first nine months of fiscal 2012, we have repurchased 10.8 million shares for consideration of $302.2 million.

The 10.8 million shares purchased year to date represents approximately 7.3% of our diluted shares outstanding.

At the end of March, we had approximately 11.6 million shares remaining under our authorized buyback program.

Our balance sheet remains strong.

Net cash balances at the end of the quarter were $540 million, and at 31 March, total assets were at $2.1 billion and net equity was $1.6 billion.

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

(Operator Instructions).

David Low with Deutsche Bank.

Thanks so much.

I'd say we could start with the Bi-Level results.

I mean I was trying to get a sense as to where that after the difficulty you had a year ago whether you think sales are back to normal or whether you think that remains a driver for the next quarter or so?

Well, as you are aware in the old S8 box, in fact the adaptive servo-ventilator, the ACS products were in the S7 box which was really outdated.

So I think the switch to having the Bi-Levels and all the auto setting products, including the ASV products and the S9 platform, as I said, has just really attracted people.

Now whether we are back to, you can always do better, we were very encouraged obviously by the fact that people did gravitate back to our Bi-Level products.

The algorithms were all pretty solid.

Maybe I'll ask Geoff to comment on that but I -- and Don maybe -- but I think we've still got some more runway ahead of us with Bi-Levels.

We would like the whole market but that's a bit unrealistic but we are very satisfied with where we are.

You want to add anything?

I think there is a bit of runway way ahead of us as well.

But we are quite happy with where we are at the moment.

(multiple speakers) whether the dollars are sort of empowered where they were 12 -- or whether they were prior to the [decline]?

You mean in terms of percentages?

Well, percentages or dollars -- just a sense as to whether you are back or whether you are 75% back.

You know that's -- we would just be giving qualitative -- we don't get to that sort of granularity.

As I said, let's leave it that we still have some runway to go.

Okay.

The other topic I wanted to touch on was the rest of world style.

We have now been through a few quarters that was sort of the single digits.

I was wondering if you could comment on what you had seen, and I am sort of particularly interested in breaking between European styles and what you saw in the Asia-Pacific region.

Well, as have always said the Asia Pac area tends to be a bit lumpy.

We saw actually quite encouraging growth in India and China.

But, obviously, that is from a small base.

The big markets there are Australia and Japan, and Japan tends to be extremely lumpy and it's -- you see these swings in the quarter.

But you are only looking at, say, in the vicinity of 10%, 9%, 10% of our total revenues in Asia Pac.

Europe, as we said on the last call and as we still believe, the market there is 6% to 8% looking at their constant currency growth that is exactly where it was right bang smack in the middle -- 7%.

I had mentioned that Germany was encouraging and that the UK was encouraging.

France was less encouraging and the reason is this is still if you like the post headache from the reimbursement changes in last October where there was a 6% reduction, we see France coming back into the fold.

And that was probably the major reason given, that our biggest market obviously is the Americas which is around 54% and then, you've got the next two biggest markets are Germany and France.

So a little bit of weakness in either of those is obviously going to impact the numbers.

But I think actually we were reasonably encouraged with the European figures, given that there is a bit of a -- as you know -- a malaise in the world economy.

Okay, great.

Thanks very much.

Ben Andrew, William Blair.

Good afternoon.

I wanted to follow up with a question for you and maybe a question for Brett if I might.

For you, Peter, talk about your view on the durability of the mix dynamics and I get the sense it is a major contributor to your revenue growth.

But also in supporting unit growth, particularly to the overall growth number.

And how many quarters or years do you think we have as a tail from Bi-Level and the conversion to Auto?

Well, it is sort of a gradual thing, Ben, although we are seeing an acceleration of AutoSets and that is driven, we think, primarily by the HST push.

And there is a lot of runway there, if you like.

Basically what we are talking about here is its faster, better and cheaper, if you like.

And I think the insurers are now tweaking to that fact.

The sleep labs will continue in their role.

I think there are 90 different sleep disorders but one of them shouldn't be plugging up the labs particularly since a 5-year-old child, a reasonably smart 5-year-old child would be able to diagnose sleep disordered breathing given the HST products that are around, not just ours.

So the patient gets given the HST device immediately goes home that night and within a day or so is on treatment, whereas with a sleep lab you -- obviously you have got the delay, you've got to wait till you can get into the labs and it might be a couple of weeks up to a couple of months.

What we've seen is that our data of showing that or data that we paid to collect have shown that roughly 30% of patients who have been given a script to go to a sleep lab don't show up.

Whereas if the sleep lab offers both HST and PSG, it tends to be more like 2%.

So it is even in the interest of the sleep labs to offer HST independently of the fact that the Aetnas and the Uniteds and the Humanas and so forth are now requesting pre-authorization.

So it is kind of a long-winded answer to your question but we see that continuing.

I said I think it will probably go up -- it could be something like this time next year something like 40% of all tests.

All going well, if we had our wishes it would be cardiologists, endocrinologists, and anesthesiologists all doing sleep tests and referring only the tough ones to sleep labs or sleep physicians.

And I think we see that happening.

It may not be the cardiologist and the endocrinologist themselves doing it but maybe their nurses or nurse practitioners, and it's certainly much better for the patients.

Given the prevalence in those spaces that is in type 2 diabetes and cardiology, in general -- in fact I heard from a cardiologist the other day he said that 40% of his patients have sleep disorder breathing and in our figure, the figure that we use is about 50%.

And these aren't patients with heart failure.

These are just the regular patients with afib or whatever else is wrong with their heart.

Sure.

So I guess, Peter, coming back to -- and that is a helpful description, but coming back to the durability on that mix dynamic, it sounds like it is not four quarters.

This is in your mind two or three years plus, so that helps to offset the weakness that you are seeing obviously in the low end as well as give you much better pricing power versus trying to compete at that low end against whatever else is going on out there.

Is that a fair way to think about it?

Yes, I think that is a fair assessment.

We see continual weakness in the low end and, as HST kicks in, you don't have the option of going to the sleep lab.

So you actually have to go to an APAP -- hopefully, it is an AutoSet -- and we see that continuing to happen.

That doesn't mean -- I mean sleep labs aren't going to go away and it's -- but you are right.

It's not, this is not two or three quarters.

This is two or three years of this switch occurring.

But you know it might happen more quickly.

I mean it may be that people just tweak to it and say you know what?

We have got to push this.

And it's not as though you don't -- it's not as though -- I mean for the IDTS stuff, for example, I mean they are getting something like $20 for doing oxygen tests.

I mean an oxygen level in a patient SP02s and they get $200 to $250 for a sleep test.

I mean that is the pretty -- it's pretty attractive.

So the independent testing facilities.

Okay and then, Brett, for you.

You gave us a little bit of a directional help on gross margin, the effect of currency.

Can you walk us through the P&L of how currency affected your top through the earnings and just give a sense of what was in the other line this quarter?

Because I know that does move around a fair bit.

And then also (multiple speakers) and then I just wondered was hoping you could give us where you think the effective share count will be for the fourth quarter.

Thanks.

Yes, okay.

In terms of the overall P&L, on the top line year on year, the impact on accounting was around $4 million negative.

If you work through all accounts through to the bottom line it was an adverse impact of $0.02 for us this quarter.

So that was on the currency front.

On the share front, the weighted average share I think where we finished the quarter was probably around 146.5 so probably a number a little south of that would probably be where we where I would estimate Q4 at.

Great.

Thank you very much.

Matthew Prior, Merrill Lynch.

Good morning.

Just a two-part question.

Firstly just, Peter, if I could can I just check the US industry growth rate is still that 6 to 8% you have been talking the last couple of quarters.

I know you mentioned that you in regard to Europe but just checking it with the US.

And just in terms of the whole home sleep testing contribution to industry growth and the doubling comment that you made, are you starting to see sleep labs traditional PSG guys getting involved in the HST game at all?

Your first question, Matt, on the growth where we still think it is 6% to 8%.

We are obviously extraordinarily happy with the growth in the US.

18% is not something that we would've predicted but we were coming off fairly weak comparables from Q3 of 2011.

So that certainly explains a lot of the growth there.

So, 6 to 8, yes, that is what we are still using as the expected growth in the US market.

As far as sleep labs are concerned, yes, we are seeing more adoption of HST, and it's hard to know how fast that will go.

I mean, if you are the sleep lab and you are getting $1,200 give or take four of PSG versus $250 saved for the HST obviously there is an incentive financially to do as much of the PSG stuff as you can.

But there will be continual pressures there, and I think if the lab realizes that they are actually missing out on patients because of the inconvenience.

I mean patients have to bring a duffel bag in, stay overnight, get all wired up, et cetera, et cetera.

And generally it is a few weeks before you can get into the lab and so on and so forth.

So I think that there will be more and more of the labs adopting HST, at least offering one or the other, and how quickly that you have got is like anything conservative.

Labs who think it is bad practice or they just don't want to get involved and other labs who are more entrepreneurial see the writing on the wall, and it is on the wall.

They will be the early adopters with the entrepreneurial ones.

But so we see that continuing.

So it doesn't sound as if it is a main contributor yet at 15% or even 20% in some cases.

Do you think that the PSG guys really yet to weigh into this which could be another factor to HST take up.

Well I'll throw that to Mick but who is President of the Americas but -- what would you say to that?

So, Matt, I would say that 25% to 30% of sleep labs are actually now experimenting in home sleep testing.

So of that trailing 12 months we are looking at 15% to 20% of the test being home sleep test.

You know a large portion of that will be the IDTS and the entrepreurnial home sleep testing companies that are out there.

But a growing portion of that is sleep labs that are starting to recognize not only as we talk about that it can reduce the leakage rate when you offer the choice of home sleep testing versus PSG.

But also that sleep labs are realizing there's just under 20% of the covered lives in this country now have pre-authorization requirements for PSG and that is up from 15% just 90 days ago.

So they are watching this trend and they are saying I want to get involved in this and get ahead of this curve, so that I can appropriately and properly treat my patients.

So they are definitely getting involved.

But to your point, Matt, I do think there's runway ahead as they get more involved over the coming quarters and fiscal years.

Great, thanks.

And Mick just so I've got you, my second question was just in regards to round one of competitive bidding.

You know, we hear a lot of anecdotals around the impact around one not so much in terms of, obviously, the price reductions and the 34% but more in regards to the slowdown in volumes that have occurred in those in those nine MSAs.

Can't you just talk to whether or not you have seen now our give us any kind of anecdotals around that the impact in round one on volumes?

Yeah, so Matt, it's a great question.

So we are running a real time experiment in those nine metropolitan statistical areas, those nine MSAs.

And we are just entering the fourth quarter of running them.

We are able to compare the three quarters that we have seen over the three quarters prior in those nine cities and we found that the growth rates within those nine MSAs that were into round one are equivalent to the general market growth rates across the US market.

So we have not seen a slowdown in revenue.

We did see sort of split of two categories of customers within those where you had the winners and the losers.

The winners was in those nine cities clearly grew at a much faster rate and the losers started to decline in their purchases from us, which is logical.

But the total volume when you look at the mix between the winners and the losers was a consistent revenue story.

What you also saw is some of the winners were more sophisticated customers with larger economies of scale, larger abilities to go after installed patient base and to market and sell replenishment programs to get patients who maybe were not as adherent and compliant to their devices and to regular use of masks and filters and tubing on a rigor basis.

So all in all, in those nine cities it has been awash with some winners and some losers but we see good potential and partnering with the types of companies that have been winning in those areas.

Excellent.

Thanks, guys.

Joanne Wuensch with BMO Capital Markets.

Some of my questions have been answered.

Your long-term debt increased in the quarter.

Is that associated with share repurchases?

Primarily, yes.

Or Brett, do you want to --?

Yes.

That's is exactly what I was going to say, Peter.

Yes.

Joanne, that pretty much will (multiple speakers).

Yes.

Associated with the buyback, yes.

CareFusion.

How are they doing in the hospital environment with your new ventilator products?

It is still early on in the sales cycle.

Obviously selling to the hospital is a longer sales cycle.

They are actively out there pitching the product to hospital customers and we are seeing some interest.

They have a pipeline of interests that we have been reviewing with them.

But it is still too early to say.

The conversation that we have been having about home sleep testing.

Are those -- is it -- the shift appears to be not that it is bringing more people into the pool but that it is a shift from Mr.

Jones doesn't go to the lab, he goes into the home.

Is that the right way to think about it?

Yes I think so.

We -- it's too early to draw any other conclusions I think.

However, I think we are going to see as the word gets out to the primary care physicians and so forth what we have seen over the years is if you go back, say, five or more years PCs in general were bamboozled by sleep disordered breathing.

They virtually weren't looking for it.

Now they are aware of it and the big -- they are ignorant of the existence of it.

Now the ignorance tends to be more along the lines of the signs and symptoms.

Like, they don't think of referring patients for sleep test as often as they should but some of that resistance we believe, and we need more data on this, we believe is oh, my God if I send the patient to write a script for a sleep lab it is going to be one to two months and then it's just I know they won't do it or blah, blah, blah.

If they themselves either get involved in HST which they easily can and we are trying to work out some strategy, whereby we make it easier -- easier than to do this or hook them up with IDTFs, VirtuOx or IDS, or Midmark or one of the others.

But without -- we, I think we'll see some movement there and we'll see a pickup in, I think, diagnosis, the use of HST beyond the sleep people themselves.

And --

And is there -- I'm sorry, are you done?

Yes.

That will do.

Okay, thanks.

I didn't want to interrupt.

Is there an economic benefit to you of the home sleep testing and can we quantify that?

Well, yes.

The economic benefit is the patients have to go on to an auto setting device in that, we get an uptick in revenue for that reason.

In other words you don't have the option of going to -- you don't do HST and then send the patient to a sleep lab to have the device pressure set.

The fact is that there is now a substantial amount of literature showing that in fact, if anything, compliance is better with auto setting products.

It is certainly no worse.

We can say that.

And there are data that's come from Europe, from Canada and from the US which supports that.

So I don't think physicians now are concerned about a compliance issue, and of course it benefits us with a slight uptick in revenues.

My final question is a lot of companies had an extra selling day in the month of February and they have been able to quantify the impact to revenue.

Did you have that occur?

Yes.

(multiple speakers)

It's Brett.

Yes, we did have that extra day and I suppose if you average that out, it would be probably in the order of $5 million or something around that sort of number.

That might be on the high side.

It might be more like $3 million to $4 million maybe.

Okay.

Helpful.

Thank you.

(Operator Instructions).

David Clair from Piper Jaffray.

Good afternoon.

Congrats on a great quarter.

I'm just wondering, can you talk about the Medicare prepayment reviews that are going on for CPAP and do you expect those to have any kind of impact on your business?

Well, I will throw that to Mick.

So, you know, there are always Medicaid getting involved with select customers and one of the biggest issues with our customers right at the moment for Medicare is the number of audits going through from versus just the prepayment is just another issue they deal with.

You know, we think that there are many opportunities in the growth area within the market for customers within their Medicare as well as their private pay customers.

Medicare constitutes just around 20% to 30% of the market and for some customers it is sort of 5% to 10%.

So there are challenges with Medicare as a payer but they're also a big chunk of the pay market.

So there's some opportunities there as well.

Okay great.

I appreciate the color on HumiCare that we should see that in fiscal 2013.

Anything else in the pipeline you would like to highlight?

Well, I will throw that to Geoff.

Do you want to comment there?

Well, obviously, we are doing a control product launch of HumiCare.

We in Europe we expect to be launching that in fiscal 13 and we are currently putting together the 510(k) submission which will go in shortly.

So we can expect to launch that when that comes through with the FDA approval.

We obviously have a pipeline that we are working with [Grundler] on in terms of our humidification portfolio.

But obviously the -- what we are looking at now is doing a proper job at launching this first product looking to Home Care and then to the hospital.

Okay.

Thanks.

Congrats.

Thanks, Dave.

Saul Hadassin, Credit Suisse.

Thanks very much.

I had a quick question.

You mentioned some further plans for the ventilation business.

Just wondering if you can elaborate a bit further on what that might entail?

Well, we just -- well not just, at the end of the calendar year, released the Stellar 150 with iVAPS and, basically, we have a commitment to this space now where -- I mean, Geoff has been building up the strategic business unit in respiratory care and we are going to continue with product evolution, and we think in one case we might have -- it's probably not, you wouldn't describe it as a revolution but we are working on some interesting future products.

Put it that way.

Okay and then maybe a question for Brett.

The constant currency growth in R&D seemed to have picked up in the last few quarters.

Is that kind of a new run rate that we should be thinking about?

And is that (technical difficulty) into increasing investment in the vent -- on the ventilation site of the business?

There's probably -- I think the acquisitions we undertook earlier in the year would probably, that would take that up a little by a couple percent, Saul, as well.

So we probably, our run rate would be a little probably sort of midteen type run rate.

We -- I mean, at the end of day we really want to put R&D dollars into the products we want to deliver into the market.

So that sort of drives the R&D spend.

Through the course of this year it has run a little higher, but it doesn't mean to say it won't necessarily trend down a little bit once we go through fiscal 2013, for example.

So it's really depending on where we are driving in terms of product development and what stage we are at on some of the projects.

Yes and throw out a bit more there.

There was an uptick with the health informatics, of course.

We got -- I mean, Don Darkin and his team did a terrific job getting EasyCare Online item and that was a monster challenge.

And we had to do it.

So a lot of resources were put into that and they were newer resources.

And of course there is Brett making acquisitions, BiancaMed.

David Stanton, Nomura.

Good morning.

Thanks for taking my call.

Look, just two things.

Firstly, can you -- Peter, perhaps for you -- give us a bit of an update on the timeline for the results of the SERVE-HF trial, and for Brett, lower than expected tax rate than we were expecting.

Should we be thinking that kind of tax rate ongoing?

Thanks very much.

On the SERVE-HF, I had mentioned that we hit 1,000 patients.

The plan is 1,260.

This is not something that is going to be over quickly and, however, what we are doing is we are doing little side studies.

I mean, the endpoints here are mortality and morbidity and they are pretty hard-nosed endpoints.

But what we are also funding some out of the ResMed Foundation and some direct from the Company a smaller study where we are looking at ejection fraction and AK cardiography and so on and so forth.

There should be some quick early results out of that.

But I think to move the needle it will be the SERVE-HF and we are talking a couple of years more before we have anything that we can really talk about saddling.

But it's expensive but that is just what you have got to do.

Thank you.

David, on the tax front, I am comfortable with that 23% level at the moment in the shorter term.

Basically as we sort of ramp up or increase production in Singapore, there is probably some opportunity there the tax rate may be just a little low on that into the future but at this point in time comfortable around that level.

Steve Wheen, JPMorgan.

Just a question with regards to pricing.

You've obviously mentioned in previous quarters that AS[ decline is sort of (inaudible) spend.

So I just wonder if you are seeing the same sort of dynamic at the moment particularly when some channels we speak to are highlighting that.

On the APAP side, there have been price increases from you guys.

No, we're --.

Put it this way that's news to me and I think to the people around the table and gee, it is a lovely thought.

But I think we are seeing something like a 2 to 3 -- 5 is thankfully at the high end of what we are seeing.

I mean, hard to predict but I mean obviously any time the DMEs and the HMEs have an opportunity to bring in some bad news, which they have all result in price reductions will do so.

So this is not a new game.

This is a very old game.

So but we are not seeing anything untoward with ASPs and we are certainly not seeing any increases with our devices.

We think they're worth more, but it is hard to get people to pay for what they are really worth.

So, given the dynamic that is going on in APAP, would you say that particular category remains -- pricing remains flat and therefore not subject to price decline?

I will let Mick take a shot at that.

Yes, maybe what you're seeing is the blended ASP.

There are some effects where it could be neutral but certainly within a category we are seeing that, and I think on previous calls we have said a 5% to 7% per annum price reduction is what we see.

You know we are saying on this call it is around 5% which is about where we are at.

But if you move from a CPAP to an APAP category and you move your mix in that, your blended ASP can be a neutral for customers.

But within the category of AutoSet, there has been no increase in prices in this macroeconomic environment.

I don't see it going forward either and that sort of 5% go forward ASP reduction and we have to get ahead of it now, cost reduction and supply-chain improvements, to keep the gross margins where they are is sort of where we're at.

I mean, obviously, internal.

If we see much slower growth in the low end and higher growth in the higher end, well, our ASP is going to go up as an average.

Yes.

Okay and then just, finally, with regards to masks and your accessories in the US.

You previously indicated that the DMEs haven't been, well, historically haven't been refreshing the masks for their customers as regulated.

Is that sort of -- are people trending now to replace mass in line with their reimbursement programs now?

Is that what is underpinning that growth?

Well, there's a lot of potential runway there.

Clearly, when we look at the average number of masks all per device, per annum, we just see it as a huge opportunity for both us and for the DMEs and HMEs.

And I don't know, Don, whether you want to add anything to that.

But this is an area which -- you have got millions of patients that are out there now and it's close to 6 million in the US.

You know.

we see it is less than 50% of what the revenues could be in that space.

Less than 50.

Yes.

I think as we are starting to push on as adherence compliance process we are seeing more people coming on board with these programs and, again, there's quite a bit of room here for us to adjust in a positive sense.

Right.

Thanks very much.

Ben Haynor with Feltl and Company.

Good afternoon.

Thanks for taking my questions.

Just as a reminder, how much of manufacturing is currently or has currently moved to Singapore?

It's -- Rob, you can take that but we are getting close to [50].

Continual incremental and it's been quite a shift in the last year of additional increments and it is not quite 50 but it is getting there on product mix [spaces].

And is 50 kind of a goal or would you go beyond that?

Well, certainly, in terms of the longer term strategy we have been looking now at other sites and we actually have a facility in Malaysia as well that's started up out of some of the headgear stuff that we've done and will be looking at that and other options as to where we go in the future.

But the Singaporean environment, as you know, they have well-trained people and they are willing to work with you on the tax front and quality people with reasonable charges.

You know, it is attractive.

Yes and capacity utilization is obviously one of the other key factors in keeping it efficient.

So we like Singapore.

Sure.

And then if I could follow up with one more.

Last quarter you talked about initiative to notify long-time CPAP patients with benefits of newer devices.

Could you just comment on how that is coming along?

Yes, well, the warranty on devices, in our manuals it's a five-year life, if you like.

Now that's, I mean, we get patients that have been using devices happily for over 10 years and when you pull them apart, you sometimes get a bit of a surprise.

But we are trying to get the word out to people particularly since, over the years, the algorithms have improved significantly.

The noise levels have come down.

The performance, overall, is just so much better.

We think the patients would be better off by switching their units out.

And we do have a program to do that and, Rob, maybe you can talk.

But more specifically, we are trying to, if you like, focus on the S8, the previous line of products and switch them out, S8, and even the S7, I guess.

And there are a lot of those still out there and the S7s are well and truly over the five-year mark and the S8s have now I think we are probably, I would imagine there are only a few hundred thousand now that are not at the five-year mark.

So we see that as an opportunity and we are sort of trying to make a full-court press to make it attractive for patients to upgrade.

Rob, do you want to add --?

We just think the S9 is going to be providing better therapy and it makes good sense for people to move on to it.

And we recommend at the end of five years that you have a maintenance, anyway, and why spend the money on maintenance, if we have an attractive price for an upgrade like the trade-in as opposed to a maintenance?

And we are recommending that after five years you really do need to have your device looked at.

So instead of spending money out of your pocket on an old device, why not upgrade?

That's the pitch.

Great.

Well, thank you very much.

Michael Matson, Mizuho Securities.

Thanks.

I guess I just wanted to follow up on what Mick was saying about the analysis you guys had done on the nine MSAs.

I understand those are comments on volume but I guess I'm just wondering what you saw with regard to pricing, especially given the bifurcation you mentioned between the winners and losers?

It seems like some of those winners would end up buying CPAPs in larger quantities.

So would they then be getting better prices on those units and masks and flow generators that they are buying or not?

So did you see any impact on your pricing in those cities?

Yes, good question.

My comments were actually about revenue so that we saw that the winners, that their revenue -- and obviously their volumes -- but their revenue grew and that the losers, that their revenue declined with us.

But on wash on a revenue basis it was a neutral element for us.

So we were actually able to see that across those nine cities we were revenue-neutral.

So my comments were all around revenue, not just volume.

Okay.

Got it.

That's helpful.

And then the -- I guess there's been some interest in the potential requirement of truckers getting tested for sleep apnea and I guess there was sort of a league of the Federal Motor Safety -- sorry, Federal Motor Carrier Safety Administration proposal this week or maybe it was last week.

I'm just wondering if that was consistent with what you expected it to be.

I think they were saying a BMI over 35, they have to be tested.

And then I'm just wondering what percentage of the population you think would fall into that range.

Well, none of that was a surprise.

It was a surprise to us that it was issued, the directive was issued, and then later that day it was retracted.

And that was last week.

It was sort of bizarre.

I mean Secretary Hood comes in and says -- oh, it was a clerical error and it shouldn't have gone out.

But I mean we don't see any changes to that.

We think it is going to come down from 35 to 30 BMI and, as I indicated in my remarks, BMI is a very, very loose way to decide on who needs a sleep test.

Because 50% of people in fact with STB, LSA are not obese.

And it is due to other problems like retrognathia and Marfan's Syndrome and a whole bunch of other things.

Obesity, obviously, impacts.

There are nine million commercial drivers in this country.

We see it as a big opportunity and, frankly, we are just puzzled.

We have been heavily involved in working with the National Transportation Safety Board and the Federal Motor Carrier Associates administration.

In fact our people have been, as I say, in at the start really in terms of drawing the issue to people's attentions.

We work with, as you know, Schneider Trucking.

We are also facilitating some publication of a study which was done with JB Hunt commercial drivers as well.

And that will be coming out in the next few months.

Again, suggesting that it is a very wise thing to have these people tested for sleep disorder breathing.

As far as the prevalence, there's a wide range that the data that we think are pretty robust and it is roughly 30% of all drivers have it at a level which is significant enough that they really do need to be sleep tested and treated.

So it's big, and if you translate 30% of all those commercial drivers, I mean that's 2.5 million to 3 million drivers and it could even be higher as the data come in.

The more we dig in these areas the bigger the numbers or the bigger the prevalence tends to be.

So, yes, we think it is an incredibly exciting area and it is exciting because it is preventive of accidents, improves quality of life and reduces the cost for the carriers because there's less turnover by the drivers.

They fell better, they work better and we have got all the data.

And it is like the Holy Grail.

If you prevent accidents you improve people's quality of life and you save the companies money.

And we think the FMC essay is being a little too prescriptive.

But sending out that, you know, publishing they are going to do it and then the same day retracting it just is bizarre.

But maybe it is not a surprise.

It is the government.

Okay and then just a really quick final question for Brett on EPS impact of currency in the quarter.

What was that?

Yes.

That -- for us it was a negative impact of $0.02 on the bottom line this quarter.

Okay.

That's all I have.

Thanks a lot.

We are now at the one-hour mark.

So I will turn the call back over to Dr.

Peter Farrell for his final comments.

Well, thank you Angela and thanks, everybody, for listening.

We will stop it right there.

Ladies and gentlemen, we thank you for your participation in today's conference.

This does conclude the presentation and you may now disconnect.

Have a wonderful day.