瑞思邁 (RMD) 2013 Q1 法說會逐字稿

Welcome to the first-quarter 2013 ResMed Incorporated earnings conference call.

My name is Christine and I will be your operator for today's conference.

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

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

Please note, today's conference is being recorded.

I will now turn the call over to Constance Bienfait, Director of Investor Relations at ResMed.

You may begin.

Thank you, Christine.

And thank you all for joining us today.

The Company has asked me to address certain matters.

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

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

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

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

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

Please limit your questions to two at any one time, so that we can accommodate as many people as possible.

If you have additional questions, please return to the queue.

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

Peter?

Go ahead.

Great.

Thanks, Connie.

I'll begin as usual with a summary, and then turn the call over to Brett to go through the numbers in a little more detail.

And then, if there's any time left, we'll take questions -- just kidding about that.

First, finances -- we finished with another very solid quarter.

Global revenue in Q1 '13 grew 8% to approximately $340 million, up 12% on a constant currency basis.

Revenue in the Americas grew an encouraging 15% year-over-year to $194.4 million.

ROW revenue at $145.4 million grew 9% in constant currency terms.

And we believe that our superior product offerings continue to drive our growth, as does awareness of the seriousness and importance of diagnosing and treating sleep apnea.

Net income for the quarter increased 41% to $71 million.

while GAAP EPS increased a robust 48% to a record $0.49 for the quarter.

And if we exclude amortization of acquired intangibles, EPS was a record $0.50.

And I should note that the net income figure of $71 million is actually 21% of revenues, which shows a pretty solid performance.

With respect to product performance, I'll start with masks.

Again, all mask categories showed strong growth across all geographies.

Accessories also grew strongly, as both large and small DMEs and HMEs are becoming more systematic and effective with resupplied patients who need them.

With the success of our most recent mask line, we are seeing the benefits of the replenishment of these masks, as patients are happy to stay with what is most comfortable and most effective.

Global growth in flow generators this quarter was primarily driven, again, by AutoSet, but also Bi-Levels and VPAP Adapt, our adaptive servo ventilation product.

We are seeing excellent acceptance also for our new high-end S9 products from physicians, especially cardiologists.

In the Americas, the S9 AutoSet and the VPAP Adapt SV did particularly well.

Growth in the flow generator segment was also driven by a continued positive mix from basic CPAP to APAP, due to the ongoing growth of home sleep testing as well as physician preference to put patients on AutoSet, since it provides flexible therapy but also improved patient comfort, as well as enhanced compliance.

The new EasyCare Online system, which helps compliance management, continues to be well-received.

And we are seeing a solid uptake from existing but also new accounts.

With new technology and superior algorithms, we believe we are taking flow generators.

And EasyCare Online is certainly one of the benefits which our customers value.

There is still uncertainty in Europe, but many countries had very good quarters, especially the UK, Germany and the Nordics.

Despite the challenging economic climate throughout all of Europe as well as the fiscal constraints therein, the focus is still on treatment that keeps patients out of hospital and keeps them healthy.

Our Stellar products did well again this quarter, and EasyCare Online is also gaining traction.

We are continuing to see attention and focus on cardiology and its connection with sleep disordered breathing.

There is also a great deal more focus on compliance, especially in France, which, of course, positions us more with our high-quality products.

In Asia Pac, we also had a solid quarter, particularly in Japan, due to sales of both Stellar and the AutoSet CS, which is equivalent to the Adapt product sold in the US.

With the increase in reimbursement in Japan for respiratory and Bi-Level, we are seeing solid growth in the high-end flow generator line.

Japan is also very focused on compliance and ensuring that the patient is using the therapy.

We're also planning to replicate the Japanese cardiology model, if possible, in other parts of the world.

Cardiologists see the quality of life improve on adaptive servo ventilation therapy, even independent of the level of sleep disordered breathing.

That is in heart failure patients.

In short, we're seeing that cardiologists in Japan are actually using adaptive servo ventilation to dry up the lungs and the pleura, independent of the extent of the sleep disordered breathing.

Emerging markets like India, China, and the Middle East also did well this quarter, with encouraging sales, in particular, of ventilation products in India.

Ventilation sales, again, of Stellar 100 and Stellar 150 continue to grow, especially in Europe, Latin America, and as I indicated, in Japan and India.

We are still awaiting regulatory approval in other geographies.

Stellar is a very competitive, noninvasive ventilation offering for the emerging markets.

And the Stellar 150, which includes iVAPS, the Intelligent Volume Assisted Pressure Support System, which is our new automatic Bi-Level mode, is being extremely well-received.

In the humidification area, the HumiCare D900 is now fully launched in Europe and is also being well-received.

And we have made our submission to the FDA on the D900 as well.

With respect to sales of Stellar products in the US, we've decided to discontinue our distribution partnership with CareFusion.

It was a mutual decision, and it will allow both of us to more closely align the activities of our field organizations with the priorities of our own businesses.

We continue to invest in the development of advanced ventilation products, and will sell both Stellar products and HumiCare D900 to institutions through our own respiratory care sales force.

And we've already begun to build that sales force.

Our strategy is to sell Stellar into institutional care settings and provide home care patients with our VPAP ST-A also with iVAPS.

And just by parenthetically there, the VPAP ST-A with iVAPS has been approved for respiratory insufficiency.

And we've launched this with the S9 platform.

Our new Narval mandibular repositioning device, which was recently launched in the US, is being well-received; but it is, of course, early days.

However, now the Narval product is well-received in Europe, where it has already been launched.

On the home sleep testing front, by next month, four out of five of the largest commercial payers will require prior authorization for attended PSG in an effort to steer providers and patients towards home sleep testing.

United goes live in all its territories, which constitutes 34 million lives on November 1, and certain regions under the WellPoint plan will have the requirement in place by November as well.

As a result, 70% of covered lives will need preauthorization for PSG, and we estimated that in 2011, about 15% of all sleep tests were HST.

We expect to see this around 25% by the end of this calendar year.

We continue to see a steady increase in the number of sleep labs involved in HST -- over 30% in the last 12 months and 41% in August.

We're also participating in primary care physician awareness, as HST continues to advance with PCP, it's becoming more involved and more important, in fact, in the diagnosis and management of the sleep apnea patient.

Self-reported data suggests 10% of PCPs are using one of the three HST models.

That is Sleep Lab HST, IDTF mail-order HST, or PCP Direct HST.

And another 40% are evaluating HST, so it will continue to grow.

In addition to the studies mentioned in the press release on how diagnosing and treating sleep disordered breathing can improve healthcare outcomes, lower hospitalization, and readmission risks, and also reduce medical expenses, CMS is rolling out two major paid-for-performance programs to cut readmission rates and improve hospital care overall.

Hospitals with high Medicare patient readmission rates for heart attack, heart failure, as well as pneumonia, will face penalties.

And those penalties are slated to grow over the next three years for hospitals that fail to drive down readmission rates.

Whether it stays in place or works out is a question, of course; but the premise is good, and the clinical data show treating sleep disordered breathing does bring down hospital readmission.

And that bodes well for us.

Finally, David Pendarvis, Glenn Richards, our Medical Director, and I attended the second meeting of the Society of Anesthesiology and Sleep Medicine, which was held two weeks ago in Washington, DC.

The conference shows continual interest by clinicians in the perioperative management of sleep disordered breathing.

In fact, data presented showed that patients with sleep apnea have a significantly higher risk of post-surgery complications ranging from longer hospital stays to even death.

Several leading institutions, particularly the Mayo Clinic and Northwestern University, have initiated protocols to screen patients going under the knife for sleep apnea, and to monitor and treat those patients after surgery.

Their protocols we found are extremely impressive, and we aim to collect some more detail from both these institutions.

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 healthcare 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 sleep disordered breathing a standard of care in all medical practice.

At this point, I'll turn over to Brett for additional detail on the financials.

Brett?

Great, thanks, Peter.

Revenue for the September quarter was $339.7 million, an increase of 8% over the prior-year quarter.

Unfavorable currency movements reduced our first-quarter revenues by approximately $12.6 million.

In constant currency terms, revenue increased by 12%.

Income from operations for the quarter was $80.5 million, an increase of 32% over the prior-year quarter.

Net income for the quarter was $71.3 million, an increase of 41% over the prior-year quarter.

Diluted earnings per share for the quarter were $0.49, an increase of 48% over the prior-year quarter.

Gross margin for the September quarter was 61.4%, up sequentially from Q4 FY '12.

On a sequential basis, our gross margin benefited from manufacturing efficiencies and a lower Australian dollar.

Looking forward, we expect our gross margin for fiscal year 2013 to be in the range of 60% to 62%, 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 $98.3 million, an increase of 4% over the prior-year quarter.

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

SG&A expenses as a percentage of revenue improved to 28.9% 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 28% to 29% for fiscal year 2013.

R&D expenses for the quarter were $27.3 million, an increase of 4% over the prior-year quarter.

In constant currency terms, R&D expenses increased by 6%.

R&D expenses as a percentage of revenue were 8% compared to the year-ago figure of 8.3%.

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 $2.6 million for the quarter, while stock-based compensation expense for the quarter was $7.9 million.

Our effective tax rate for the quarter was 21.6%, compared to the prior-year quarter effective tax rate of 24%.

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

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 $194.4 million, an increase of 15% over the prior-year quarter.

Sales outside the Americas totaled $145.4 million, consistent with the prior year.

However, in constant currency terms, sales outside the Americas increased by 9% over the prior-year quarter.

Breaking out revenue between product segments.

In the Americas, flow generator sales were $84.8 million, an increase of 17% over the prior-year quarter, reflecting strong growth in our APAP devices.

Masks and other sales were $109.6 million, an increase of 13% 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 $96.7 million, a decrease of 2% over the prior-year quarter, but in constant currency terms, an increase of 7%.

Masks and other sales were $48.6 million, an increase of 4% over the prior-year quarter, were in constant currency terms an increase of 13%.

Globally, in constant currency terms, flow generator sales increased by 11%, while masks and other increased by 13%.

Cash flow from operations was $78.3 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $13.8 million, while depreciation and amortization for the September quarter totaled $18.7 million.

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

During the quarter, we repurchased 216,000 shares for consideration of $8.1 million.

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

At the end of September, we had approximately 8.6 million shares remaining under our authorized buyback program.

And during fiscal year 2013, we intend to purchase at least 2 million shares under our share buyback program.

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.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $625 million.

And at September 30, total assets stood at $2.2 billion, and net equity was $1.7 billion.

I'd now like to hand the call back to the operator to take your questions.

(Operator Instructions) Matthew Prior, Bank of America.

Thanks for taking my question.

Just a question for Mick, if I may -- Peter, sorry to circumvent you there.

(multiple speakers)

That's all right, Matt.

Doesn't offend me at all.

I just have one question and a follow-up.

Mick, just in regards to the round one, and obviously the concerns of competitive bidding, another quarter now.

Have you seen any effect from the round one bidding process?

And certainly in terms of competitive behavior, have you seen any changes from your competitive return to pricing behavior in the lead-up to the announcement of course of round two?

Yes, thanks, Matt.

I'd make two points on competitive bidding.

We've had a what I would call a real-time pilot in the first nine cities.

The first nine, as CMS calls them, Metropolitan statistical areas.

Nine cities.

We've had a number of quarters there.

The two points are, firstly, that ASP declines in those nine cities compared to the rest of the US are in line.

The second point is that growth for those nine cities was in line with the rest of the market over the same period.

Obviously, it was better with the winners than the non-winners within those cities, but it was a wash overall.

That's the message we gave 90 days ago.

And Matt, that hasn't changed in the last 90 days.

It's still consistent with that.

Right, sorry, still on that -- did you see any change -- or have you seen any change and compared to behavior around ASP outside of those [90] days in the lead up to the round two decision?

No.

The behavior has been consistent both inside and outside.

And it's consistent with what we've said, which is, you know, depending on which SKU you look at, you've generally got a 3% to 5% annualized reduction that can go slightly above that in some SKU's, and slightly below that in some SKU's.

It depends on the geography as we look at it.

But it's sort of that mid-single digits number and it hasn't changed significantly from within or outside the MSAs.

Excellent.

Great, thanks.

And Peter, just back to you, just one follow-up question.

You often give us the industry growth rates and made comments around that before.

Do you mind just giving us your latest views on what you think the industry is growing at, and whether you saw an uptick in the US last quarter?

Yes.

No, we are not aware of any upticks.

And we are -- most of the people -- when you go to mid-trade and talk to various DMEs and HMEs and others, the 6% to 8% seems to be the figure.

And that's -- so that's for the US.

And our best guess, and obviously it's much more complicated to get exact figures outside the US because of the different geographies, but again, that looks to be consistent with a 6% to 8% growth.

If you want a bit more granularity, you might say, well, it could be more like 5% to 7% in Europe and maybe a little higher -- 7% to 9%, 8% to 10% in Asia-Pacific.

But overall, ROW also fits the bill of the 6% to 8%.

David Clair, Piper Jaffray.

First question from me, just on the sales force for ventilation, how big do you think that will have to be?

We're going to start slowly, obviously, but I'm going to throw that one to Geoff Neilson, who's the President of Respiratory Care.

But I think in the first year, we'll end up somewhere around nine respiratory account managers.

But Geoff, what are your plans?

And don't make them too vigorous if you like?

So we'll grow the respir-care sales force in line with growing revenue and respir-care in the US.

At the moment, that's obviously small and -- but we plan to grow it to having one respir current manager per region over time.

And depending on how our sales pick up, we'll grow to vertically.

Okay, great.

Thank you.

And then one quick one for Brett.

What was the net impact of currency on EPS?

And any update on the medical device tax?

Yes, David.

For EPS impact on FX year-on-year was slightly negative but really less than a penny this quarter.

So, quite negligible.

Medical device's tax we still -- I think we're still waiting on the updated guidelines to come out.

I mean they're due out any time, but we think now it will probably come out after the election.

So, really waiting to get some clarity from that before we give the market more clarity on it from how it's going to impact us.

Okay, great.

And internally, David, we assume that it would not impact masks.

So roughly half the business would not be touched, and we also don't know about the devices.

There's -- again, we'll have to wait for the fine print, but we're even sort of contemplating that we may not even be stuck with a tax on the devices.

But we don't know for sure yet.

Thank you.

Michael Matson, Mizuho Securities.

So based on the masks that you put up in the US, it looked like it may have slowed down a tad.

But I was just wondering if you -- now that we're more than a quarter into this change to Medicare's resupply policy, if you think that had any impact on your mask growth at all?

You know, it is early days but we are seeing no impact whatsoever.

Now, we think the reason for that is that most people have been playing ball.

I mean I don't think that this CMS directive had much impact at all.

I'll get Mick to comment on it.

But you know it's -- if you look at the average, CMS will pay for four systems a year.

And in fact, the average is under two.

So we see it as a potential -- a significant potential area for growth.

But, Mick, do you want to comment?

Yes, Mike, I'd make three points on this area of CMS documentation.

The first point is, this is just Medicare, so it's 25% of the US market, which is about 10% to 12% of the global market -- or under 12% of the global market.

Number two, they made change as to documentation, but no changes to frequency or the reimbursement rates.

So it's just changes to the documentation.

And number three, those changes to documentation, after some further clarification which took two or three months because it's the government, after that clarification came out, customers were pretty quick to change their systems, whether it's an IVR where you press one to say that the system is dysfunctional, or it's a call script that requires that question and documents it, or it's a formal written signoff process where the patient signs off on nonfunctional use.

So those three things I think have played out and sort of minimized the effect, if any, really, of this in terms of the long-term.

All right, thanks.

And then my second question is on a new technology.

I've been at TCT this week and there's a lot of excitement around renal innervation.

And obviously, it's targeting hypertension initially, but there's talk of a lot of other potential indications, including OSA and complex sleep apnea -- or sorry, central sleep apnea.

So I was just wondering if you had taken a look at this therapy, and whether or not it's something that you would view as a potential threat to CPAP therapy down the road?

Admittedly, this is years off -- years and years off into the future before it would potentially even be approved, but --?

Yes.

No, it's hard for me to envisage -- well, first, let me make the point that JNC7, the Joint National Commission on the Diagnosis, Management and Treatment of Hypertension, has suggested or made the statement that the number one cause out of non-identifiable factors for hypertension is untreated sleep disordered breathing, of which obviously, obstructive sleep apnea is the main manifestation.

Now the renal nerve innervation or the use of the barbecuing of the artery, it's hard to see how that connects.

It appears to work in, you know, drug-resistant hypertension.

And we know that 83%, well into the 80s, of drug-resistant hypertension patients do have sleep disordered breathing.

But if you have sleep disordered breathing and your hypertension is ameliorated by the renal innervation, then you still need to have the sleep disordered breathing treated.

Because it doesn't stop the other -- the sympathetic neural activity that's associated with the catecholamine.

So I just found there's such a long bow I can't even imagine that this would be a treatment for any form of sleep disordered breathing.

And if it were, it would only be in the central area.

Because looking at what sleep disordered breathing is, it's really a mechanical issue.

And it's due to the -- as your diaphragm moves, you create negative pressure.

The air flows into the lungs, and of course, that causes a negative pressure in the upper airways.

So if you have a floppy upper airway, wherever it may be in the pharynx, the velo/oropharynx, it's a mechanical issue.

So, I think it's a very, very long bow.

Now maybe, maybe there's some impact on central sleep apnea, but I'd like to see a hell of a lot of compelling data to show that it would impact it.

But obviously with central sleep apnea, where you have an open airway, it's not the same -- it's not a mechanical issue, it's a neurologic issue.

And because it's neurologic, it's -- you could say, well, okay, maybe it's -- it could be impacted by anything that interferes with the neural system.

But I'd like to see some compelling data before I was sold on it.

Okay, that's helpful.

Thanks a lot.

That's all I have.

Ian Abbott, Goldman Sachs.

My first question is on manufacturing.

Just wondering how sort of far through you are your migration to Singapore?

And how much more capacity there is to shoot the production there?

Yes, we -- currently, it's roughly -- for masks, interfaces and devices, it's roughly 54% of our total production.

Given how easy it is to work with the Singaporean government as opposed to more socialist governments, we will be probably moving more manufacturing into Singapore.

It's got an extraordinarily favorable tax rate, and you can sit down with the Singaporean government.

And when they talk about academic business and government -- governments working together, it's one of the weirdest things in the world.

They actually mean it.

So you actually sit down with people that actually want to help you and not hinder you with more regulations and more workplace relations issues and so forth.

You know, Australia frankly is a nightmare of industrial relations.

But having said that, we will be continuing to invest in Singapore for ease of doing business, meaning regulations and working relationships, and an extraordinarily favorable tax rate, which is well under 10%.

So if I had to guess, we'll just keep expanding in Singapore, and I wouldn't be surprised -- and this -- I haven't looked at the actual numbers, but I wouldn't be surprised if we're more like 75% this year.

But, Rob, do you want to make a comment on that since you're closer to it?

Yes, Ian, we're really happy with the way Singapore is going.

It's a long-term plan within progressively increasing capacity, including production up there.

We've been really happy with the capacity that's there of a pretty small footprint.

We see a lot more efficiency going.

So that trend will keep going.

We're not going to jump off any cliffs.

It will be progressive and orderly as things move up.

We're also pretty happy with our Malaysian factory, which is up and running doing headgear.

And down the track, we might see more options in that area as well.

Thank you.

My second question, just looking at pricing and price declines.

One thing some feedback from the industry is pretty consistent that over the last five years, most of the price declines being seen in low-end flow gens, whereas March pricing has been relatively stable.

Just wondering firstly if that's true?

And secondly, have you seen any changes to that sort of in recent times?

Well, Ian, pricing is something that you deal with, you know, every day.

And as far as pricing pressures go, I think we've been fairly consistent.

We've expected somewhere around the 4% to 5% annual decrease in prices.

And obviously, we need to keep ahead of the curve, and with manufacturing efficiencies, we've been able to do that.

We don't see the terrain.

Look, it's challenging.

And the irony of this market is that most of the pricing pressure is actually driven by competitors, as opposed to the customers.

And it's just one of those weird markets where, as you can see from our numbers, given the growth rates being around 6% to 8%, and our growth rates in constant currency being around 12%.

But if you look at the net income to revenues, I mean, obviously, that's a reflection of a number of things.

But improvements in the bi-level growth, improvements with the S9 platform and, obviously, the movement from basic CPAP to APAP.

Pretty encouraging.

But I'll throw that question -- I mean, Mick, Don, maybe Don Darkin can talk about masks and you can talk about devices a little.

But there's nothing scary that we're seeing and that's just the way of the world.

People want to buy cheaper (multiple speakers) --.

(multiple speakers) Yes, I wasn't suggesting any scare, I was just more meaning was there any differential in the price declines between masks and flow gens?

Don, do you want to go first?

Yes, Ian, I don't think there's anything that's out of line with our expectations.

And quite frankly, we're tracking pretty much as we expected across this year's fiscal.

So there's no real difference at all and not from what we're seeing.

I mean, Ian, all I'd add is that the conversation with customers and really payers in this space is starting to turn from a discussion around price to one about value, where we're moving away from just a discussion around utilization management, which is, can you do competitive bidding and move from X to .9X on a unit price to are you saving money for my healthcare system by keeping these patients out of hospital?

So the discussions are moving to a higher level, and we're having them with customers and with their customers' payer groups to change that conversation from more utilization management, which focuses on price, to one on care management, which focuses on sort of the return on investment that a payer gets by putting a heart failure patient on the VPAP Adapt, and keeping them out of the ICU and CCU.

And similarly for an LSA patient on CPAP or even better on AutoSet.

So that's sort of where the discussions are going, Ian.

But no big differential to your question between masks and flow gens on that pressure.

Well, having said that, and I agree, but moving from utilization management to care management is a lot easier to say than do.

And there's a lot of work that we have to put in -- we're putting a lot of time and effort into healthy economics by gathering data, showing people that, in fact, this is, as we said in the press release, it is the Holy Grail.

I mean, we've given up collecting testimonials on the quality of life because it's just real.

I mean, it's there.

And so, it's not something we're surprised at.

The second thing is, we're seeing more and more data on savings of inpatient and outpatient costs, particularly with these readmission rates.

I mean, it is going to become standard of care, because simply, unless you treat the sleep disordered breathing.

If you have 25% to 30% of the adult population with sleep disordered breathing at some level, I should stress, that's an AHI greater than 5, do they all need treatment?

Well, they do if they've got a comorbidity such as hypertension, diabetes, reflux, nocturial depression and on and on.

But we are seeing this moving very favorably.

And the third thing is what we are seeing, and a lot more encouragingly, is that we're seeing not only is the disease process in these comorbidities being slowed, it's actually, in some cases, being reversed.

So if you've got quality of care on your side, you've got reduced costs on your side, and you've got reduced disease progression, all this translates into a very favorable environment going forward.

Now, there will be challenges, but we're very comfortable in the space we're in.

Thank you very much.

Pleasure.

Ben Andrew, William Blair.

(multiple speakers) I just have a couple of questions for you, please.

The -- can you break out for us what's going on with the international generator business?

How big a chunk is Stellar today, and what the growth rates are in underlying blowers for CPAP within that broader number?

Well, as you know, we don't get very granular, Ben.

But I will say that Stellar -- the Stellar 100 and the Stellar 150 is selling extraordinarily well.

And if you look at, you know, percentages of devices, it's a higher percentage -- a much higher percentage -- well, considerably higher percentage ROW compared to the US.

But you know, with the push into institutional sales and it's going to be built up gradually, and where as I said in my remarks, we're targeting the Stellar for NIV, non-invasive ventilation institutional sales, and the Homecare would be the VPAP ST-A with iVAPS.

The reimbursement favors that kind of push.

But do you want to add any more, Geoff or Mick?

No.

I think you've said it all.

Yes, good.

So just to finish that point though, Peter, the growth rate of underlying international CPAP blowers is consistent with the total for that segment, if nothing else?

The growth rate ROW is less with the blowers for sure.

It's, you know, in terms of granularity, hard to know, but it's a little -- as I said before, it's a little less in Europe and a little higher in Asia-Pac.

But it comes out -- Ben, it comes out at about the same.

We think the markets growing at about 6% to 8%.

It's a little lighter in Europe and a little higher in Asia-Pac.

Okay.

And then just my second question, if I may.

Thinking about gross margin and the move into -- the further move into Singapore as well as the mix, as you go through the next couple of quarters, Peter, you start to annualize the launch of the S9 Bi-Level, I think that's in the June quarter.

So your comps will get a bit tougher.

Are you confident you can continue to see strong generator growth kind of in the middle to back half of next year on generators, with that dynamic?

And then second, can you continue to seek gross margin trending up with currency staying stable?

Well, you know, our best guess, as Brett said, is that the gross margin will remain in the 60% to 62% range.

You know, we're seeing -- we're considerably helped, Ben, as you would obviously know, the change with the HST to AutoSet.

That's extremely helpful.

The price pressures are greater at the low end CPAP, and -- but the growth is much lower there.

And there's this switch with the requirements of preauthorization, et cetera.

So I think we see that area -- I mean, this is just me talking now, but I think this time next year, we're going to see, of all the tests, I think it's going to be closer to 50%.

It could even be higher, depending upon how aggressive the payers are with the PSG authorization area.

It could even be -- might go crazy, it could be 75%.

But I mean, that's just sort of in the lap of the gods.

But (multiple speakers) -- so, we know, like you know -- storm clouds.

I don't see, we don't see any -- sorry, what's that?

(multiple speakers) I was just saying that even in the face of more difficult comparisons on Bi-Level, as you analyze the launch, the CPAP AutoPAP trends remain strong?

Yes, they do.

(multiple speakers) And we're actually very optimistic with the Stellar products.

I mean, they are -- the Stellar 150 with iVAPS is being extraordinarily well-received.

Do you want to say a word about that -- or Brett did you have a comment?

And maybe Geoff after Brett.

Just on -- I mean, we have the product mix has been favorable for us and we've got -- I mean, there's CPAP to APAP shift there.

Obviously, the Bi-Level coming into the S9 box and they've done particularly well.

So those factors are there, and if you're going to be realistic about that, it's quite a nice uptick from that.

I do think that mix will still be favorable for us going forward, Ben, but maybe not to the extent that we've seen.

But I still think we'll see some favorable mix coming through, which will help us.

Okay.

Thank you.

And Geoff, do you want to say --?

So all I would add is that with iVAPS being very well-received globally, particularly in Japan, more recently, I know that we've got iVAPS on the S9 platform, obviously, that's going to give us a very good margin product.

And we expect to see that growing quickly over the coming quarters.

I guess, in short, Ben, we're cautiously optimistic that we can stay ahead of the curve.

Great, thank you, Peter.

Thanks, Ben.

David Low, Deutsche Bank.

Just a question on rest-of-world.

I was very impressed with your rest-of-world's constant currency growth.

And in particular, I listened to the comments last quarter about Japan being a bit lumpy and it having been a good quarter.

It would seem that it's happened again in this quarter.

Just wondering if we should think about Japan as being something of a step-up that will continue on for the rest of this -- at least the rest of this year?

Well, David, the one thing that I noted in my comments was that as opposed to reimbursement cuts, which everybody expects, there was in fact a reimbursement uptick.

And also, there's favorable, very favorable environment for cardiologists to adapt -- or adapt to take on adaptive servo ventilation.

And we are actually planning on taking some physicians -- heart failure, one particularly influential heart failure expert from the US to Japan, to talk to some of the cardiologists there, the heart failure cardiologists, to see if we can leverage some of their results.

And I mean, it's a critical mass of cardiologists in Japan who are now have -- are doing not only adaptive servo ventilation, they're not involving sleep physicians at all.

They're just doing it themselves.

So, we -- yes, we -- I think we need a little bit more information, a little bit more data.

I mean, we're anxious to see what we can -- sort of what lessons we can learn, and then apply to other markets, in particular, the US, which of course, is by our, by far and away our biggest market.

But you know I would say yes, we are pretty encouraged about Japan and not just with adaptive servo ventilation but also with Stellar.

With Teijin -- and Geoff knows that he needs to improve these numbers -- but with Teijin and Fukuda Denshi, both of our Japanese distributors are really impressed with the Stellar product.

And I would say I'm very happy with the numbers there, Peter.

Oh, okay.

Good.

But they need to be even better.

But is it fair to say that the growth that we've seen in Asia-Pac where you've mentioned a bit stronger than Europe, is Japan a very important part of that stronger growth?

Yes, yes.

(multiple speakers) You know, but also India and China.

So, India -- obviously, the base is -- the growth rates are bigger in India and China but the base is smaller.

But we are very optimistic about India -- about both India and China -- and Japan, you know, we've been in there for 15 or so years.

I mean, that's always been a good market and we don't see that changing.

Okay.

Thanks.

I just wanted to ask another question.

Focusing on the US mask business, certainly, we've seen a trend towards much stronger growth in masks, driven by these replenishment programs.

And you've talked about a market growth of 6% to 8%, so presumably, as we move through the process, are we going to see mask growth come back towards that market growth rate?

I'm just wondering where you think we're up to in that trend.

Well, it's a difficult mix, David, and I'll throw the question to Don.

But just to make a comment that, as you put more and more patients onto treatment, you've got this growing replenishment opportunity.

And if you look at our business, that is an extraordinarily fast-growing area.

And there's a lot of potential to go from just under two masks per patient per year to three to four.

So there's a lot of potential there, if the patient does, in fact, need a new mask.

And so we think that it's a pretty attractive space, actually.

And so I don't see any time soon the growth rates coming back to the 6% to 8% in the mask space.

But, Don, what are your feelings?

And maybe Mick can chime in as well.

Yes, similarly, I agree with you Peter, we don't see that coming off any time soon.

I think with the growth in the segments and the strength we have in those channels, it's going to be around those numbers.

We're seeing a mild dip in numbers along with our expectations due to the new masks that have been launched this period.

It's pretty much in line with what we think, And we'll probably be back over the next period, as people start to look at the relative merits of those new masks.

But as far as the space is concerned, it still remains very healthy.

Yes, and I mean to Don's point, if competitors are launching new products, people are going to try them.

But it takes a while for the water to flow under the bridge and we've done our own comparisons.

We feel comfortable -- very comfortable, I should say, with our products.

But other people have got to sack it and see.

And -- but we're confident that we have a little bit of air between us and the other guys, but --.

Yes, David, all I'd add is that there is runway left on replenishment.

We can get more movement there.

But in addition to that, compliance systems and the focus on adherence is becoming a greater and greater focus for our HME customers and their customers, the payer.

And as they look more at that, they have more systematized approaches to it.

We launched the product EasyCare Online, which was a major global initiative that the team was able to bring to the market.

And now the data as to whether you're using your device or not, is taken to the physician, the payer, and the patient from the cloud.

And that visibility to compliance rates allows customers to better treat their patients, and healthcare systems to better keep their patients out of hospitals.

So that focus on adherence should provide some long-term runway to growth of replenishment revenues like masks and other accessories -- tubing filters and even REPAP, because every five years or so, you should replace the device as well.

Mick, in terms of replenishment, do you think the majority of your DME customers have got onto that and have become a serious focus of their business?

Or are we still saying it may be a tier of DMEs that are just not yet doing it?

Yes, David, I would say a majority of the large nationals have moved, although there's still some further improvements that they can make to their systems.

But the next tier down of the large regional has a lot more room for improvement on that front.

And frankly, at the mom-and-pop level, the local regionals there is still, sadly, a large segment where the focus on long-term compliance and adherence and replenishment is not even part of the conversation.

It's part of the conversation we had with them, but not necessarily something that they're implementing yet.

So, the answer to that is, there's at least, of the three tiers, there's two tiers where we've got considerable room for improvement.

Great.

Well, thanks very much for that.

Anthony Petrone, Jefferies.

Thank you, everyone, for taking my questions.

Just going to rattle off a few here, just to get a better sense of gross margin potential and mix.

And I know you haven't given this out in the past, but on the generator side, would you care to share the mix of CPAP, Autos and Bi-Levels, sort of where that is today?

And potentially where that can go?

And then one on the distributor side.

Can you give a sense of how many -- in the US, how many distributors you're dealing with today?

And has that consolidated to any extent with competitive bidding?

Well, Anthony, firstly, it would be a first if we started to share granularity on -- you know, we've said that the APAP is growing very fast compared to the fixed pressure CPAPs, but we just -- first of all, there's competitors would love to know it.

And so we don't share that information about product mix, so I'm not going to go any further than that.

And your second question -- what was that again?

With regard to distributor validation.

I'll throw that to Mick.

But there is a little bit.

But do you want to address it?

Yes, I mean the answer, Anthony, is that we're not going to obviously go into the, again, the granularity of the number of customers we have now and had 12 months ago.

But we will give the general trend that there is industry consolidation at the HME level.

You've seen the public announcements of Linde buying Lincare.

You've seen the public announcements of Apria buying the assets of Praxair.

And there are other acquisitions that have happened obviously.

But in terms of this industry, it's got a large degree of fragmentation.

Smooth consolidation has gone on and will continue to go on, and is probably catalyzed a little by competitive bidding.

But we have good relationships with the large nationals, and we have good relationships with the regionals.

And we expect those to continue on throughout that consolidation.

But it's a trend that's been there and we expect to continue that at the same rate but not to change dramatically.

One quick one, if I may.

You have a high-class problem here, $890 million in cash, and I know about a year ago or a little bit more than that now, there was an effort to sort of look at things outside strategically.

I'm just wondering if we can get an update there?

Thanks.

Yes, well, you know, we've spent -- if you look at 2012 and 2013, just the first quarter, we spent close to $400 million just simply doing share buyback.

And that's one use of the capital there.

But you're right, I mean, $890 million, even if you take out the total amount of debt, it still leaves us, give or take a bit, with $600 million.

So, yes, we have dry powder, and we are continually scanning the horizon.

And basically, we're looking -- we're not going to get into moviemaking or sailboat making or anything like that.

We're in the sleep business and that's where we're -- sleep and respiratory care business, and that's where we're staying, obviously.

But you saw the purchase of BiancaMed; we're absolutely delighted with that.

We're also delighted with the 12.5% tax rate in Ireland and we're also delighted with the fact that the Irish government, like the Singaporean government, want to sit down and talk to you.

And you get academics and the business guys and the government guys all in one room, and they really do want to help you.

And we get some help there with the R&D.

But we are continually looking at -- as you know, we've got a ResMed Ventures and initiatives group, which is headed up by Jim Hollingshead, and virtually every day, there's something that comes across Jim's desk and we take a look at it.

So I guess what we're looking at is new technologies that dovetail into the respiratory sleep business.

We're also looking at people that are out there that we can take -- as Connie just shoved under my nose, of course, we did buy Grundler in the humidification space.

And I haven't forgotten that, Connie, but thanks.

(laughter) And also, Ambien, of course, with the compliance where we're now able to get compliance measurements not just for our own products, but also for competitive products.

And we are making a push, obviously, in the area of dental sleep medicine.

We've just got FDA approval working through the reimbursement for mandibular repositioning devices.

Kristi Burns and that's all in Jim Hollingshead's group.

We're making a big push on dental sleep within the US environment.

And we're kind of encouraged by the strides we're making there.

But yes, there's no question we have plenty of dry powder, but we are also looking carefully at what's around.

But when you look at where to invest, we're looking for things that potentially can grow 20% top and bottom line.

And I mean there just aren't that many opportunities.

But if you come across something, Anthony, give us ahoy.

Will do.

Certainly.

Thanks again.

Pleasure.

Dan Herrin, UBS.

(multiple speakers) Just understand you don't want to break out products, but previously we've discussed publicly the loss of market share in the Bi-Levels and the servo ventilators, and those sorts of things, and where you think you are today following launch.

Has that market share come back?

Or has that been rebuilt and you're just sort of doing organic growth right now?

Well, I think if you look at the growth figures, if you just step back strategically and you look at a market growing at 6% to 8% globally, and then you look at our numbers 41% up at the bottom line on net income, and net income of 21% to revenues.

And you look at gross margin of 61.4%, that clearly reflects a higher value product growing very well.

And that obviously is adaptive servo ventilators.

So we are really doing extremely well in getting back lost business in the adaptive servo ventilation area.

And we're also seeing nice growth now that every -- the Bi-Level is in the S9 platform.

You can argue we should have done it sooner.

Maybe we should have.

But you know, clearly, the numbers are reflective of the fact that we're -- we are, if you like, back on deck.

Okay.

Thanks.

And just another question.

You talked before about the potential for home sleep testing to become a very big part of the market as insurers become aggressive with this preauthorization.

Do you see any risk in that?

And what are you seeing on the ground during this changeover period?

I guess I'm just curious to see if there's any patients falling between the cracks as one system transitions to another?

You know, it's a very -- it's such early days.

You know what works; but will the primary care physicians adopt it in the way we'd like to see them?

Are they likely to use independent testing facilities, the IDTFs?

Or are the sleep labs going to go out and start marketing to the PCPs and say, hey, look, don't worry about it; we're going to offer you both PSG.

Even though it's preauthorization, we should be able to get that.

But we'll also offer you HST.

And we think that the smart sleep labs are offering both.

Obviously, they want more patients going through PSG because they make more money.

But it's a very complex mix.

But I -- if I had to guess, I'd say that we're going to see certain number of PCPs.

As they get comfortable with HST, they're going to take it up themselves and go straight to AutoSet.

It's the easiest thing to do.

You don't have the option of going to a lab to have the pressure set.

It's -- it has to be automatic.

The good news is that there are several papers out showing that, in fact, ironically, that if you go HST to APAP, you, in fact, get average longer -- there's a paper by Rosen, et al, and Susan Redline at Harvard -- but this was multiple groups.

I think it was seven or eight sleep centers across the country.

And they showed, in fact, almost an hour more per night usage on the average, and compliance that was around 12% up.

So, in fact, rather than the sleep labs used to say that it was really unprofessional and bad medicine, what we're finding is that if you do use HST, it's so much easier for the patient, it's so much cheaper, so much more convenient.

And APAP works just as well as we've always -- we've known that for over a decade -- works just as well as a fixed CPAP set in the lab.

In fact, the data is showing, if anything, it's at least as good, and in some cases even better.

So, this is not a complicated area.

And I think we're going to see far more involvement of PCPs.

But also in addition, specialists, like cardiologists and endocrinologists perhaps.

You know, if you're doing HST, you couldn't think of anything simpler.

And the treatment itself is safer than an aspirin.

So it's almost no downside.

So, complex area, very early days, but we see continuing good growth in the space, and more and more non-sleep-trained physicians implementing the therapy and sending all the tough ones to the sleep physicians, and stuff they can't work out, they'll send that to the sleep lab.

Dan, all I'd add to that is you've got -- your question was about risks as you move from PSG to HST.

We've got risk mitigation in that we have three models that are being trialed out in the ecosystem there.

There's IDTFs, and there's PCP Direct, but there's also sleep labs conducting home sleep testing.

And you heard in the remarks earlier, that 40% this quarter -- 40% of sleep labs are now offering home sleep testing as an alternative.

And we think that offering that choice is actually good for the patient, and can reduce what we call leakage through the value chain.

So we're mitigating the risk by looking at three models, and the market is choosing and the patients are choosing, and the sleep labs are helping facilitate patients to get that choice.

And we think that's a good thing for patients, for the payers, and for the long-term of our industry, so there's more money available to keep the patients on therapy compliant and out of hospital.

Couldn't have said it better.

So Mick, you're saying that there is sufficient home sleep testing capacity there now as the sort of insurers push hard?

There's actually scalable models being set up so that as patients come to these new modalities, they can scale with the patients that they come through.

So the answer is, capacity is there and capacity is available to grow through multiple methods.

So, in short, Dan, yes.

That's great.

Thank you very much, everyone.

Thank you.

I think we're probably good to call a close here, Christine.

Thank you.

Yes, we are at the one-hour mark.

Please go ahead with any final remarks.

All right.

Well, first of all, for those of you still on the call, thank you for joining us.

But more importantly, I would like to thank all our employees for their hard work, dedication, and continued exemplary performance.

We are delighted with your commitment and loyalty and efforts.

And so we all here around the table thank you very much.

And that's it.

Das ist alles.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect at this time.