瑞思邁 (RMD) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the fourth-quarter 2012 ResMed Inc.

earnings conference call.

My name is Chris, and I will be your conference moderator for today.

Presently all participants are in a listen only mode.

Later we will facilitate a question-and-answer session.

(Operator Instructions).

The Company has asked me to address certain matters.

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

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

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

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

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

With that said, I would like to turn the call over to Dr. Peter Farrell, ResMed's Chairman and CEO.

Dr. Farrell, please go ahead, sir.

Thank you, Chris, and thanks everyone for joining.

I will begin as usual with some summary remarks and then turn the call over to Brett Sandercock for some more granularity on the finances, and we will then do some Q&A.

First, the financial summary.

We finished with another extremely solid quarter and fiscal year.

Global revenues in the fourth quarter of 2012 grew 9% to $372 million, up 13% on a constant currency basis.

Revenues in the Americas grew 13% year-over-year to $207 million.

And ROW revenues increased by 3% or 13% in constant currency terms to $165 million.

This represents our 70th consecutive quarter in which we have grown the topline since we went public.

I don't believe there are too many companies in that category that can boast a record like that, but we will get some more granularity on that for those that are interested.

For fiscal 2012 we reported revenues of approximately $1.4 billion, up 10% year-over-year and earnings per share of $1.71, up 19% year-over-year.

We believe that superior product quality continues to drive our growth.

Net income for the quarter increased 31% to $77 million, while GAAP EPS increased a robust 43% to a record $0.53 for this quarter.

Excluding amortization of acquired intangibles, EPS was a record $0.54.

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

All mask categories showed strong growth.

And we continue to take market share, particularly with the Mirage Nasal Mask, which has thus far proven to be a seeming game changer.

Accessories also grew strongly, as both large and small HMEs and DMEs are becoming more systematic about resupply and delivery of replenishment supplies to the patients who need them.

Our global growth and flow generators this quarter was primarily driven by the high-end devices.

Strong sales reflect the benefits of having all of our PAP devices configured on the smaller, quieter and more appealing S9 platform.

In the Americas the S9 AutoSet and the VPAP Adapt, which is an adaptive server ventilator, did particularly well.

Growth in the flow generator segment was also driven by a positive mix shift from basic CPAP to APAP, due to the ongoing growth of home sleep testing, as well as we believe physician preference to put patients on the AutoSet, which provides more flexible therapy, improves patient comfort, and appears to enhance compliance.

The new EasyCare Online compliance management system continues to be well-received, and we expect to see some solid ongoing uptake from existing as well as new accounts.

Products and programs which provide superior therapy and better compliance are what bring the most value to the patients, customers and service providers.

In other words, across the whole food chain.

Europe continues to be challenging due to difficult microeconomic -- the difficult macroeconomic environment, although sales were relatively strong in both Germany and the UK.

Despite this challenging economic climate, Bi-Levels, AutoSet CS, which is also a version of the adaptive servo-ventilator in the rest of the world, and the Stellar products all did well this quarter.

We also believe that great opportunities exist in Europe to address the connection between sleep-disordered breathing and various co-morbidities, such as heart disease, diabetes and so on, as well as occupational health and the more compelling economic case -- and the more -- and more and more compelling economic case for treating sleep apnea in general.

There is also a great deal more focus on compliance, which certainly positions us well with our high-quality products.

The Asia-Pacific region also had a solid quarter, particularly in the Japanese market, due to strong sales in sleep, as well as our Bi-Level and respiratory products portfolio, which also did very well.

Of interest, cardiologists who are adopting adaptive servo-ventilation was some bigger in Japan.

In fact, some cardiologists are actually using ASV even in the patients without frank sleep-disordered breathing, and they -- as they have noted an improvement in various chronic heart failure parameters, particularly ejection fraction.

Emerging markets like India, China and the Middle East also did very well this quarter.

Ventilation sales of Stellar 100 and 150 continue to grow, especially in Europe, Latin America and Asia, and again more particularly in Japan.

Of note the Stellar 150 includes iVAPS, which is a new automatic Bi-Level mode.

iVAPS is also included in the new S9-based VPAP ST and the ST-A products.

These are launching this quarter.

VPA and ST-A with iVAPS has FDA clearance for respiratory insufficiency.

The launch of this product on the S9 platform is significant as we have actually skipped a generation in this segment in going from the S9 platform, which is a lot more bulky, to the much smaller S9 platform.

On the home sleep testing front, commercial payers continue to introduce the requirement of preauthorization for attended PSG sleep tests.

United join the club in July, and as a result by the end of summer two-thirds -- more than two-thirds of covered lives will need preauthorization for polysomnography.

We estimate that in -- we estimated that in 2011 about 50% of all sleep tests were HST, and we expect to see at least 25% of all sleep tests being HST-derived by the end of this calendar year.

And we continue to see a steady increase in the number of sleep labs involved in HST, which is up to close to 30%.

We are also anticipating and primary care physician awareness initiatives, as HST continues to advance with PCPs becoming more involved and interested in sleep apnea diagnosis.

A few weeks ago we acquired an innovative data services technology provider known as Umbian, headquartered in Halifax, Nova Scotia.

Umbian offers a comprehensive patient compliance management solution called U-Sleep, which monitors CPAP devices and provides a suite of interactive follow-up services for health care providers.

For HME providers U-Sleep is an effective tool to reduce costs and improve business efficiency.

U-Sleep supports CPAP devices from the leading CPAP manufacturers so that usage data can be consolidated and viewed from one software platform.

This technology is able to assess a patient's compliance using a flexible set of rules that have been set up for that specific individual, and provide immediate notification of compliance outcomes via e-mail, phone, or if the provider prefers, text messages.

U-Sleep's simple yet powerful design also provides multiple reporting options tailored to the varying needs of HME providers.

One of the biggest issues facing HMEs is competitive bidding and concomitant pricing pressures.

By providing a scalable solution for the compliance outreach we are taking a significant step in supporting our HME partners to drive efficiencies and cost reduction in their businesses.

Customers use products from a range of manufacturers, and this is one of the strengths of the U-Sleep platform.

U-Sleep will continue to transfer compliance data from therapy devices manufactured by other companies.

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

Just to summarize a few of the newest findings, sleep disorders are associated with the following.

One, a higher risk of dying from cancer with the risk correlated with the severity of the disease.

Diabetic peripheral neuropathy, a debilitating disease which causes severe pain in the hands and feet.

Three, frequent co-morbidity with polycystic ovary syndrome, a hormonal disorder which affects up to 10% of women of childbearing age.

Four, poor prognosis in chronic heart failure.

But with the treatment of the sleep-disordered breathing with nocturnal ventilation the outcomes are significantly improved.

Six, untreated central sleep apnea in heart failure readmission to hospital.

This is particularly significant since it turned out that central sleep apnea was by far and away the most significant parameter which was involved with the readmission of patients with chronic heart failure to the hospital.

This suggests a wonderful opportunity for our adaptive servo-ventilator products.

And, finally, there is double the risk -- if the patient has sleep-disordered breathing there is double the risk of retinal vein occlusion.

In summary, this suggests that sleep-disordered breathing is involved with a multitude of diseases and treatment of the disorder really ought to be part of any standard of care, just like one would take blood pressure.

Finally, a study has just been published in Population Health Management on the cost savings associated with an education campaign on the diagnosis and management of sleep-disordered breathing.

The primary objective was to determine if medical expenses of members enrolled in the not-for-profit US-based Union Pacific Railway Employees Health System's health plan were reduced after implementing a low-cost patient focused education program on sleep-disordered breathing.

Based on the retrospective analysis of medical claims data the campaign was associated with a 145% increase in the uptake of PAP therapy by members with sleep-disordered breathing.

And within two years after initiating the program the use of PAP therapy was associated with almost $5 million in differential savings in overall medical costs, lowering patient hospital costs, and fewer hospital admissions than those members with sleep-disordered breathing who did not receive therapy.

These findings suggest that a sleep-disordered breathing education campaign can improve health care outcomes and result in substantial savings for the health care plan.

All of the peer-reviewed literature continues to make it abundantly clear that untreated sleep-disordered breathing is at best seriously debilitating and costly to the health care system, and at worst life-threatening.

These findings add to the continually mounting evidence connecting serious health disorders to untreated sleep-disordered breathing, and point to the necessity of making the diagnosis and treatment of SDB, as I have just said, a standard of care in all medical practice.

Now I will turn the call over to Brett to provide more granularity on the financials and then we will take your questions.

Brett.

Right, thanks Peter.

Revenue for the June quarter was $371.9 million, an increase of 9% over the prior-year quarter.

Unfavorable currency movements reduced our fourth-quarter revenues by approximately $14.6 million.

In constant currency terms revenue increased by 13%.

Income from operations for the quarter was $89.7 million, an increase of 35% over the prior-year quarter.

Net income for the quarter was $76.8 million, an increase of 31% over the prior-year quarter.

Solid earnings per share for the quarter were $0.53, an increase of 43% over the prior-year quarter.

Gross margins for the June quarter were 60.9%, up sequentially from Q3 FY12.

On a sequential basis our gross margin continued to benefit from a favorable product mix and manufacturing efficiencies.

Looking forward, we expect our gross margin to be in the range of 59% to 61%, assuming current exchange rates.

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

SG&A expenses for the quarter were $105.9 million, an increase of 3% over the prior-year quarter, or in constant currency terms, SG&A expenses increased by 9%.

SG&A expenses as a percentage of revenue improved to 28.5% 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 29% for fiscal year 2013.

R&D expenses for the quarter were $27.9 million, an increase of 3% over the prior-year quarter.

In constant currency terms R&D expenses increased by 10%.

R&D expenses as a percentage of revenue were 7.5% compared to the year-ago figure of 7.9%.

Looking forward we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2013, reflecting the strong Australian dollar and continued investment in our product pipeline.

Amortization of acquired intangibles was $2.9 million for the quarter, while stock-based compensation expense for the quarter was $8.1 million.

Our effective tax rate for the quarter was 22% compared to the prior-year quarter effective tax rate of 24.3%.

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

For the full year our effective tax rate was 23.2%, and we currently estimate our effective tax rate for fiscal year 2013 will be in the vicinity of 22%.

Turning now to revenue in more detail.

Overall sales in the Americas were $207.4 million, an increase of 13% over the prior-year quarter.

Sales outside the Americas totaled $164.5 million, an increase of 3% over the prior-year quarter, or in constant currency terms sales outside the Americas increased by 13% over the prior-year quarter.

Breaking out revenue between product segments.

In the Americas flow generator sales were $90.2 million, an increase of 9% over the prior-year quarter, reflecting strong growth in our APAP devices.

Masks and other sales were $117.2 million, an increase of 17% over the prior-year quarter, underpinned by strong contributions across our mask product range and continued growth in accessories.

For revenue outside the Americas, flow generator sales were $110.8 million, an increase of 2% over the prior-year quarter, or in constant currency terms an increase of 12%.

Masks and other sales were $53.7 million, an increase of 6% over the prior-year quarter, or in constant currency terms an increase of 15%.

Globally in constant currency terms flow generator sales increased by 10%, while masks and other increased by 16%.

Cash flow from operations was $97 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $12.1 million.

Depreciation and amortization for the June quarter totaled $22.4 million.

Cash flow from operations for fiscal year 2012 was a record $383.2 million, an increase of 35% over the prior-year.

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

During the quarter we repurchased 2.8 million shares for consideration of $89 million.

For fiscal year 2012 we repurchased 13.6 million shares for consideration of $391.2 million.

The 13.6 million shares purchased in fiscal year 2012 represents approximately 9.3% of our diluted shares outstanding.

At the end of June we had approximately 8.8 million shares remaining under our authorized buyback program.

And in addition to our share buyback, our Board of Directors today declared a quarterly dividend of $0.17 per share, consistent with our previously advised dividend policy.

We ended the fiscal year financially and operationally in excellent shape.

Net cash balances at the end of the quarter were $559 million.

And at June 30 total assets stood at $2.1 billion, and net equity was $1.6 billion.

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

(Operator Instructions).

Dan Hurren, UBS.

I just wanted to -- actually, the first question is just -- you mentioned a new product being added to the S9 range.

I missed some of the detail there.

Could you just kind of fly through that?

Well, the VPAP ST and the VPAP STA, our Bi-Level units, are now in the S9 platform.

So initially we did the CPAPs, but now we are putting all products, including the adaptive servo-ventilation, into the S9 platform.

So it is much more appealing.

It is smaller.

It is quieter.

And we're pretty excited now that we have got everything -- and we are just launching the ST and the ST-A this quarter.

Understood.

Look, I just -- one of the other big issues that has also been going around, there has been a lot of discussion about competitive bidding, the impact on the Company.

Some of the discussion around the industry is that ResMed, in fact -- or ResMed are actually looking to partner with some of the HMEs.

There might could be some volume offsets here.

Could you give us a bit of a run through on what you think the competitive bidding impact is?

Well, let me just make a few comments and then I will throw it to Mick for some further comment.

The competitive bidding, if you look at our business, the impact is total revenues, the exposure is about 10% of the revenues.

So call it $140 million.

But the interesting thing, as I said in the previous earnings call, we have noted no significant impact on ASPs.

And bear in mind this is all -- and I think stating the obvious -- it is all CMS.

And so the private payers have already dealt with this on ASPs, and if you like, they're ahead of CMS.

But we don't see it as a significant factor at all.

And I think you, in fact, Dan, have actually written about this.

So private payers are not impacted; it is only CMS.

And we are continuing to support our customers through a variety of resources to enable them to incorporate the latest Medicare requirements.

But we don't -- it is just not -- it seems to spook people out in the marketplace for some reason, the analysts in particular, but it doesn't spook us.

Now I don't know whether, Mick, do you want to add anything to that?

No, I would just confirm three points on competitive bidding.

Number one, as you noted, it is 20% to 25% of our US business, but that is 10% to 12% of our global business.

Number two, in the first nine cities we are in a real-time experiment here.

We are in month 14 of that, and we haven't seen a material impact on us.

In fact, we have maintained or grown share with the customers who are the winners.

And the winners, third point, have scale.

They are large country companies that we either have an electronic data interchange or some ways of finding efficiencies in the system, so we are able to take costs out of a system and deliver it to the patient.

So there are the three points I would make on that.

Joanne Wuensch, BMO Capital Markets.

It is Jacob Messina in for Joanne.

Thanks for taking the questions.

I Just quickly wanted to ask a little bit about -- more about Umbian, if you could -- the U-Sleep how it fits with EasyCare, how it fits with the franchise, how it will be marketed, that kind of thing?

Well, I am going to flip that question to Don Darkin, who is President of the Strategic Business Unit for Sleep, because Don is the guy who negotiated the purchase and the earnout.

So, Don, over to you to make a comment.

So what we are doing here is pulling in a compliance software package which actually is sort of adjunct to the EasyCare Online solution that we just launched.

So what we are seeing here is that with that program, and the program we just launched, it will become a much easier solution for HMEs and providers, where we intend to take costs out and allow these guys to focus on their business while this program will manage the compliance end of the patient.

Okay, great.

And then should we assume (multiple speakers).

Should we assume that the revenue impact is immaterial and dilution is immaterial as well?

At this case -- at this time, yes, absolutely.

It is immaterial to us.

Great, and then if --.

The maxim would be $0.01 a share, and it probably won't even get to that.

Great, thank you.

And a year out it will be accretive.

And then maybe just quickly on the med tech tax, if you had any further update on how it will impact you all and how you might handle it?

Well, there hasn't been any greater clarification in that space.

And as far as we are concerned, we are making the assumption that it may well impact -- we are not sure of this -- but it might impact the dental appliance area, the Narval products.

But they are almost an immaterial part of our business at this point, so therefore it doesn't affect current numbers at all.

And maybe some of the hospital-based products.

Stellar, 100, 150 perhaps might accrue, but we are talking 2.3%.

But, again, it is not really a material amount.

Now if it affects all the products, you can do the math here.

It is 2.3%.

But there is a lot more water that is going to flow under the bridge in this space, and we are not at this point -- we are more concerned about Obama Care, which is a shambles in our view, than the tax itself.

And maybe it won't even be implemented with a bit of luck.

Michael Matson, Mizuho Securities.

So just to clarify what you said on the medical device tax there, so that is not in the guidance for SG&A that was given earlier on the call, correct?

It is Brett here.

That is correct.

It still is clear it is just uncertain for us to know what -- which within our product portfolio what products are in or out.

We certainly think we will get a clearer view of that when the final regulations come out.

I think we expect them sometime in September.

But there is even -- even within the industry and peers and so one there is even conjecture about where does the medical device tax sit?

Does it sit in COGS, SG&A, where is it going to sit?

So even that is not perfectly clear right now.

But I think as we enter September and get the final regulations, I think we will certainly have some more clarity around that for you.

But we are reasonably sure, at least our internal tax guy, who has checked with a lot of sources, we think it is -- and again, we need clarification as Brett said, but we think it is -- the impact is going to be fairly minimal, for us that is.

Okay.

And that is -- is that because the products are essentially considered to be sold at retail to patients or --?

Yes, we think if it does impact, as I said, the dental end of our business, which of course is not material at this point -- we are planning on making it material of course, but -- and also any hospital-based products.

That is as far as we are reading the tea leaves.

Okay.

And we are fairly comfortable with that.

All right, so just moving on.

You got the question on competitive bidding, but I guess the other Medicare change is this resupply policy where the HMEs now have to somehow verify that the equipment is no longer functioning before they can replace it, I guess, for masks and tubing and things like that.

So what is your expectation of the impact, if any, that it will have on your mask and accessories business?

Well, I think it is a sensible approach by the government.

If people aren't using it you shouldn't be sending masks out.

So I think the less people -- it is going to make them become more systematic and make sure the patient needs it.

But, frankly, we think this is really a storm in a teacup.

We assume less than two masks per year being used per device as it stands, and CMS allows four.

So we are not even pushing the side.

It is not a boundary condition for us, so I would say it is not something that we are the least bit concerned about.

And I think it is tightening up the system and I think it is sensible that this is being done.

But, Mick, do you want to make a comment?

Yes, it is Mick here.

I would just add two points, that firstly this is just an opportunity for us to support our customers.

It is only 20% of their business or 25% on their business that is affected, just the Medicare component.

But it gives us a chance to talk to them about resupply, which there is a lot of runway left for growth.

And, secondly, the customers that we are talking with over these last couple of months since this reasonably nebulous legislation came out is that they have swiftly added to their IDRs or their call-center scripts and their documentation steps that are necessary to show that it is nonfunctional in the replacement process.

So that is being a chance for good business conversations.

We think there is growth left.

And our customers are responding swiftly and efficiently, and we think it is probably a good thing for us long-term to start thinking this way.

Okay, I guess just one more question and I will be done.

You mentioned that the PCP is taking a bigger role, and it is something that seems -- does seem to be happening with home testing.

How do you view that?

And do you think that is a good thing or a bad thing?

And since they are sort of somewhat outside of your call point, how do you ensure that those patients are ending up with ResMed equipment when you have been calling on the sleep labs to convincing them to write out branded prescriptions, but if it is really dictated by a primary care doctor, then it may leave it more in the hands of the HME as to what type of equipment they end up with.

Look, that is a good question.

Years ago we were working with Philips, then Respironics, in order to educate PCPs about the existence of sleep-disordered breathing.

That program has now stopped.

All the primary care physicians -- not all of them, but most of them, the bulk of them understand sleep-disordered breathing.

And what they are less familiar with is the connection with signs and symptoms of the various comorbidities that they're dealing with.

And if you look at this area, and as I said, this should be -- sleep testing should be standard of care, you couldn't produce enough sleep physicians in 100 years to deal with the patients that have sleep-disordered breathing.

We think internally the prevalence of adults is -- that is at some level of an AHI greater than 5 is close to 30%.

Susan Redline at Harvard is using a figure of 25%.

The Canadians are using a figure of 26%.

In short, it is impossible for the sleep infrastructure to handle the number of patients.

So we, in fact, have to market to the PCPs.

The question is how do you do it?

And the easiest way to do it is through social media.

And so we are working on a number of initiatives in this space.

We have worked with the Joslin Clinic at Harvard to try to educate PCPs about the fact that nearly 80% of patients with type 2 diabetes, whose first call point are the internist, PCPs, family physicians and so forth.

So it is a long-term play, if you like.

We are well and truly into it.

We are targeting them.

And it is -- the analogy is with asthma and diabetes we are not worrying about the SDB and diabetes.

If every asthmatic patient had to see a respirologist or every diabetic patient had to see an endocrinologist the system would simply freeze.

And given the prevalence of sleep-disordered breathing, which is roughly 3 times what it is for asthma and diabetes, we absolutely have to educate the PCPs.

The good news is we're finding now with the push towards preauthorization with HST going to AutoSet -- you know, I just mentioned at the end of last year it was 15% going to 25%.

I think it will be -=- this time next year it could even be 50%, because United is going to run the program out in November.

And you're going to see some -- a really big acceleration of HST to APAP.

This is a much easier route through -- you don't have to be a sleep physician to understand HST and these of AutoSet.

So we are very encouraged about the information that we have got back thus far.

A lot of work; a lot of water to [farm it]; a lot of work to do, but we think this is a perfect area to focus on.

Again, Mick, do you want to say something?

The only thing I would add is that in terms of influencing ResMed brand, I think where you are also asking, Michael, that we are working with sleep physician key opinion leaders from Harvard and Stanford, but also in regional groups around the country.

And we have very strong relationships with the sleep physicians in terms of influencing towards not only the awareness of sleep apnea, but that ResMed's products and services are ideally treated to keep the patient adherent, which is the big message.

And we are also, in addition to that, doing some e-learning approaches with both the primary care physicians and train the trainer approaches with HME sales forces.

So reaching the 250,000 primary care physicians can be done through social media, e-learning, and by leveraging key opinion leaders sources is what I would add to what you just heard there.

And without beating a dead horse here, just to add a little bit of more flavor, with the PCPs we are seeing it is almost a bifurcation.

There may be many more phenotypes as we get more information back, but you have the PCPs that are kind of interested in doing the HST, not necessarily in putting the patients on treatment.

That would be done by, as you correctly pointed out, by the -- currently by the DMEs or the HMEs, that they would end up with say $50 or something around that order.

And then there are the PCPs that actually don't want to get involved, and they are using the [IVTS].

So in other words, if they recognize the patient needs help they can just sort of say, well, here, listen, why don't you go and we will give you a list of [IDTFs] and you can pick a geographically first one or one with a national footprint.

But we are seeing roughly that.

And there will be more clarity over the next few months in that area -- maybe over the next six months.

Ben Andrew, William Blair.

I just wanted to touch base and a couple things, following up on one of the earlier questions.

Peter, I know you are under two masks per year on average for patients.

Can you talk about the typical experience in terms of when a mask actually wears out, how it does?

And is that two or three times a year for a compliant patient or is that the 1.6-ish that you all are getting at this point?

And I know that is not necessarily why people are getting the masks today, but do you think there could be a transitional issue as we go through these new requirements, and just talk about those two points if you would?

It is like asking how long is a piece of string.

What causes a mask to wear out?

Again, there are all sorts of reasons.

The dog gets it and puts a hole in it, and it leaks.

Or the patient has a particularly oily face and the material itself breaks down.

All sorts of reasons.

Some people are very, very careful.

They clean their mask, they look after it and so on and so forth.

So all sorts of things can happen out there.

Our average is of the order -- it is a little -- a shade under two.

And that is all we can really say about that.

But, Don, you might want to -- Don, you might want to make a comment there.

But it is really the DMEs and the HMEs working with the patients, and it is up to them to do -- we just don't get involved with that.

I agree with Peter.

It is a very difficult area to really understand.

It is very patient specific.

And you get quite a variability in the numbers, but generally it is sitting around that 1.5 plus.

And I think as people understand the importance of compliance and understanding the importance of getting good, comfortable effective masks, then they will start to realize that that number may creep up a little bit, but obviously it is a slow process at this point.

And I will hazard a guess here that with the switch to HST, and I really think that is going to accelerate.

You know, there are different views even within ResMed about that.

You could call me optimistic, I just think it is going to really pick up hugely.

It is going to be adopted fairly rapidly.

And with that the patients are going to be going on to AutoSets.

And the beauty of the AutoSet is you get really good solid information on mask leak and how the patient is doing.

And it gives the HMEs and the DMEs the opportunity to say, hey, listen, you seem -- your treatment seems to be suboptimal, it could be the mask.

And ask them to check their mask or even bring the stuff in and they will take a look at it.

So I think we're going to see that number creeping up.

I will just add one more thing there.

I think as patients become more aware of the disease, and more aware of the importance of compliance for themselves, they will take control of that mask number as well, and I believe that will drive it even higher.

And so it will be consumer-driven.

Exactly.

Ian Abbott, Goldman Sachs.

I was wondering if you could talk about the buyback?

I think this year was a record year for shares bought back.

I am wondering how you're thinking about that looking forward?

I will throw that one to Brett.

As you know, we have got an active program.

We are 3.6 million shares into it.

There is another 8.8 million shares approved.

Basically we think it is based on our feelings -- more than feelings, based on our projections, we think it is just damned good value.

Brett, do you want to add some more flavor to that?

It is Brett.

We will continue with the buyback.

I think at this stage we expect to buy back a minimum of stock to at least offset dilution from employee equity grants.

So if you looked at last year that would be roughly 2 million shares.

So I suppose that would be the starting point.

But as Peter said, that would be a starting point and it is likely to be more than that.

But we have now the dividend as well that we will be paying on a quarterly basis.

But I don't think it is an either or, I think we will both do the dividend and continue with the share buyback as well.

But is it -- so it is unlikely to be as strong as it was this year at around 13 million shares?

It was pretty significant this year.

I mean, that is getting to quite a significant proportion of our shares that we did buy back.

So I think with the context of the dividend now being paid, you would probably expect we wouldn't be quite as aggressive as what we had done this year.

But fair to assume the share count might fall again?

Yes, I think so.

I think you [could project] that.

Definitely.

You can pick a number.

I mean --.

Right.

Thank you.

David Low, Deutsche Bank.

This is Nick Cameron going for David Low.

Brett, perhaps just a couple of quick questions for you, and then one for Dr. Farrell.

Firstly, Brett, Singapore manufacturing, just roughly what percentage does that represent now, and how much more have you got to go there?

Yes, the Singapore manufacturing it is probably roughly at the 50 -- because they are 50% of production in Singapore now.

And we have always said that -- what is happening there is incremental production continues to flow up to Singapore.

We have also started heavy manufacturing in Malaysia as well now.

So we have a small operation in Malaysia to really supplement that Singapore operation now.

So it is 50%, and you expect over time that percentage will climb.

Okay, great.

And as quickly on the payout ratio implied by this result, can we expect that going forward or is it a flat $0.17?

Well, the Board will determine the dividend policy.

At this stage let me say it is $0.17 a quarter.

Okay, no problem.

And then for Dr. Farrell, if you may, I just want to get your feeling on how you are seeing compliance in the eyes of the payers at the moment, some of the private side.

I just wanted to see what your thoughts are on that, and what it is you think they are looking for and will ultimately come up with in the end?

Well, I think people are recognizing that compliance is the ace in the hole.

If you don't get compliance everybody loses.

In other words, a machine that is bought and gets stuck in a cupboard you don't get replenishment and so on.

So that is all obvious.

But I would put it more strategically.

What we do know is that patients have significantly improved quality of life.

We also know, and the data is referring to it in my initial comments.

You have got the co-morbidities are not just heart disease and diabetes, it is peripheral neuropathy, it is cancer, and so on and so forth.

And it actually treatment -- compliant treatment prevents disease progression.

And we also have a significant amount of data internally, and there was a recent report about a year ago from McKinsey, which is on the Harvard website -- the Harvard Sleep Medicine website, showing that there is a return on investment in the first year for treating patients, and that is with a reduction in inpatient and outpatient services.

So it is kind of like the Holy Grail, improved quality of life, reduce costs and stopping progression of disease.

People are becoming more and more aware of that aspect.

And so compliance is the Holy Grail in itself for the patients.

It is a Holy Grail if you are compliant for the reasons I just mentioned.

I think that word is getting out and it is -- CMS actually did -- the government did something sensible.

It is sort of hard to believe.

It is not often you say that.

But by requiring this 90 days with 30 days continuous use -- that is the CMS, this is forcing the DMEs and the HMEs to look very, very seriously at compliance, because they don't get paid if the patient isn't compliant.

So we have seen in some of the bigger customers compliance sub-50 going to mid-70s.

So we are seeing -- and maybe that is reflected also in the incredible growth that we are seeing in our replenishment program.

It is getting better and better.

And of course the other side of the coin is that our products are better and better.

You have got much -- like 75 gram masks.

Machines that are about a kilogram, 24 decibels.

They are quiet, they are small, They're appealing.

And they are so much, so much easier to use.

So everything is moving in the right direction -- the technology is, the knowledge of both the consumer and the physician, the improvements in technology and so forth.

So we are seeing -- now I couldn't give you specific numbers, but I would say -- well, I can give you a specific number, but it is not based on hard-nosed data.

But it is somewhere around the mid-70s at one year.

And once the patient is on after the first month we are seeing -- even in the first couple of weeks we are saying that is the way it tends to continue.

Right, thanks very much.

Anthony Petrone, Jefferies.

One -- a few number of questions for Brett, and then a few for Dr. Farrell and the rest of the team.

So, Brett, just on the FX overall given the rising shift of manufacturing to Singapore and later down to Malaysia, do we still have a six-month lag as it relates to shifts in the Australian dollar versus the US dollar?

Yes, we still -- still a decent chunk of those costs are in A dollars there on the manufacturing front.

So we're still -- yes, it would be probably just over a quarter.

You could rule of thumb probably a one quarter delay now.

If you look at inventory turnover for us now it has improved quite a bit over the last few years.

So I think a rule of thumb would be on about a quarter's lag on impact from the Aussie dollar.

And then just to stay on that, is about 30% of R&D still local in Australia?

And does that still play the one quarter lag as well further down the P&L?

Yes, so the majority -- so much more than that -- the majority of the R&D is undertaken here in Australia.

But that impact we field straight away through normal translation.

So you will see that -- whatever the average rate is for the quarter that will be reflected in our R&D spend.

Great.

And Dr. Farrell, one product question.

In late July CareFusion actually announced a Class I recall of its EnVe ventilator.

And about a year ago, I guess, ResMed and CareFusion now have a distribution relationship with the Stellar 100 and 150.

So I'm wondering if due to that recall do you see an incremental opportunity for Stellar 100 and 150?

I'm going to give that one to Geoff Neilson.

I don't know what Geoff is about to say, but I think it is almost no impact as far as from where I see it.

But Geoff.

They are playing in different segments in the hospital, so really it is not going to have any impact.

All right, perfect.

And the last one for me and I will get back in, is just to go back to competitive bidding.

Fully understanding your comments that you're not seeing any impact, but as we look into the beginning of 2013 when the program actually gets extended, not so much that there will be a permanent impact on the part of DMEs to sort of reposition how they negotiate with manufacturers, but do you envision any initial knee-jerk reaction as you move into and get up to [90] MSAs?

And to that respect should we expect maybe a moderation from low-double-digit growth into the back end of 2013?

Thanks.

Sort of reiterating what I have said there, the first [9] MSAs, we saw, if anything, it was a slightly -- and it sounds bizarre, slightly positive impact on ASPs.

And we are not quite sure why that is.

But let's say it virtually had no impact.

We don't see -- and we have looked at this pretty carefully because people seem to be spooked by it.

But our data show that it is not really having any impact at all.

Now that could change, but I don't see it.

We just don't see it.

And, again, it is 10 -- it is of the order of 10% of our total global revenues, but we don't even see it impacting that 10%.

Other people do apparently, but we just don't.

And we are talking about real data, not guesses.

David Stanton, Nomura.

I wonder if you could give us an update on growth rates in the US for Bi-Levels and APAP compared to the overall machine growth rate?

That is my first question.

Thanks.

We don't give that sort of granularity.

What we have said is that we are incredibly encouraged by -- since the Bi-Levels have been put into the S9 platform, we are seeing some very encouraging growth -- very encouraging.

And as I have just said, we are releasing the VPAP ST and the VPAP ST-A also in the S9 platform, and we expect to see that being received positively.

The other thing I mentioned is the HST-driven switch -- largely HST-driven switch to AutoSet.

And we expect that to continue and we are expecting, in fact, another 100% increase in HST.

And the obvious way to go is to put patients on auto-setting devices.

So we expect to see modest to very poor growth in the low-end CPAPs, and quite good growth in the high-end CPAP.

And Bi-Levels and AutoSets we see continuing to grow.

Great.

And could you give us -- as my final question, give us an update on what you think market growth rates are at present in the US and EU?

Are you guys gaining share I guess is my ultimate question.

Well, you would say -- we haven't changed our view on where we are with growth rates.

It is 6% to 8% and pretty much worldwide.

Maybe it is a little higher in Asia-Pac, because it is starting from a lower base, so you might be able to say 8% to 10% in Asia-Pac, possibly a little higher in China and India.

But it is not reach the point where it is hugely material for us just yet.

But 6% to 8% for the bulk of our business -- that is Europe and the US.

And as you saw, our constant currency growth was 13%.

So that would be suggestive of marketshare gains.

And the rate of growth for both devices, 9% in the US for the devices and 13% for masks, that would suggest that we are doing nicely.

Thanks a lot.

[Luis Ido].

It is actually Matt Prior.

I had difficulty dialing in.

But, Peter, if I could ask -- I know you have got hands on the line or if you want to put this one to Brett.

But with the rest of world growth being so strong, and we had anticipated that Japan would kick back in this quarter, can you talk to a little bit about Europe versus Japan?

And specifically I guess is the margin better in Asia or -- sorry, Europe versus Asia I should say -- is the margin better actually than it is versus Europe?

And that is that one of the reasons why we saw a slightly better GM that I think the market was looking for this quarter?

Well, Asia-Pac had been soft for a couple of quarters.

And it has come back full steam.

Whether it was the tsunami, some of that was in there -- psychological issues, if you like.

Asia-Pac has now good growth, back on stream.

And we -- I referred to the challenging economic climate in Europe, however, despite that Germany was extremely encouraging.

The UK almost hit it out of the ballpark.

But you have got obviously huge challenges in Spain, Italy, and France where there is ASP pressures.

But we grew constant currency 13% in Europe, which was pretty damned good and significantly higher than that in Asia-Pac.

With respect to margins, we don't really get down to talking about -- well, I will say slightly better margins in Asia-Pac.

But it is not -- it is not something that is of great import to us.

I don't know whether -- Rhett, do you want to add to that or Rob?

Yes, thanks.

The only thing I would say on that is geographic mix wasn't really a driver of the margin, so that is probably pretty much answers it.

(multiple speakers) Rob is going to add some.

I would just add the markets in Asia-Pac generally are higher in product, so they are -- that supports the margins a little bit.

And also some of the smaller Northern European countries did very well as well, so it is a mixed bag where, but netted out really good.

Okay, great.

Thanks guys.

Just one follow-up question.

And given I know Geoff is on the call, Geoff, if I can torture you on ventilation, given there was reference to mix in that positive US flow gen number.

I think you have already talked to some extent about the CareFusion relationship on the call, but certainly for the 9% number we saw for US flow gen, do you see, I guess, the Stellar and ventilation contributing to that yet at somewhat of a meaningful level, or are we still waiting for the ventilation market to resonate in the US to take flight?

And I guess a final point to that is do you see competitive bidding, the medical device tax, Obama Care slowing down any of the kind of hospital purchase decisions around ventilation products over the next one or two quarters before it really gets a head of steam?

First of all, on Stellar globally it has been going very well.

In the US it is still in early days with CareFusion.

We are seeing growth, but it is off a small base.

As far as the other macroeconomic things, ResMed's presence in the hospital is small and not material at the moment.

We obviously have plans to grow that, so these issues aren't material at the moment.

Okay, great.

I am sorry, if I can just ask one last one.

Lincare -- the acquisition of Lincare, that was a fairly big event for the sector given that we are in the midst of, as we have talked about, competitive bidding concerns.

Does that reinforce, I guess, your view that clearly Linde doesn't see big concerns around competitive bidding if they are making the acquisition like they have with Lincare?

You have taken the words out of my mouth.

It was a very decent premium that Lincare got, so $41 a share or whatever.

It is a very decent premium.

So clearly Linde is seeing competitive bidding as being I would say a nonissue.

They have paid big bucks.

And as far as the impact upon us, we can only go on what is written in the press releases and so forth.

We haven't had any in-depth discussion with either Linde or Lincare management on this, but the press releases say that they are going to be run separately.

And John Byrnes, the CEO of Lincare, is still in the saddle and so we treat it -- they are both big customers, but we treat it as business as usual.

So good luck to Lincare and the boys.

And you have said it yourself, competitive bidding doesn't seem to have had much of an impact on what could be considered a very, very generous premium.

Right.

Thanks so much guys.

Saul Hadassin, Credit Suisse.

Just a question on Europe.

A question on Europe, just wondering if you can provide any granularity or detail around the contribution on ventilation growth versus your CPAP growth just in that specific market?

We have always done reasonably well in the ventilation space in Europe.

France was, as I said, was a little soft.

There are price pressures occurring there.

There is nothing really that stands out.

Geoff, do you want to comment on --?

I think particularly in the noninvasive ventilation area we are seeing strong growth, both with our ST devices and with Stellar devices.

Our life-support products are holding their own, but mostly growth is in the NIV area, which is where the growth in ventilation is actually occurring.

Right, thanks.

And just one last question, back to the US.

Just it shifted from lower-end CPAP to APAP.

It is something you guys have been talking about for quite a long time.

I am just wondering how much room there still is for that mix shift effect within your portfolio as a percentage of -- I guess, not having the data on percentage split between the two, but over how long do you think this trend will continue to play out for your specific business?

Thanks.

We think it -- the potential is there for it to accelerate.

And the reason being the push to HSP is building up an incredible storm, if you like.

It may be slightly less than a storm, but it is happening.

And it is growing at 50% per annum.

This is going to be reflected in more switching to AutoSet -- it is happening.

And how long will continue, I would see it continuing for several years.

This is Mick here.

One problem with that is the fact that we are 15% switched to home sleep testing from PSG.

And we expect that to continue.

So there 85% of the runway left in terms of the potential switch from PSG to HST.

But that could be a proxy metric you could look at for that as a suggestion.

At the end of this year we expect that to be 75%, but that is still a fair --.

Still a lot --.

Chunk of it.

Fair -- yes, a lot of runway.

Thank you very much.

We have no further questions at this time.

I would now like to turn the call back over to Dr. Farrell for any closing remarks.

Thank you, Chris.

I think we have said enough and we will let people go, those that are still on the --.

And I guess the final thing I would like to say is to just thank all the ResMed employees for doing another outstanding job.

We have a great team of people and I just want to publicly thank all our employees.

So thanks guys.

See you next time, as they say.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for your participation.

You may now disconnect.

Have a great day.