瑞思邁 (RMD) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013 ResMed Inc.

earnings conference call.

My name is Ellen and I will be your operator for today's call.

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

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

Please note that this conference is being recorded.

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

Constance, you may begin.

Thank you, Ellen.

And thank you, everyone, for joining us today.

The Company has asked me to address certain matters.

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

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

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

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

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

Please limit your questions to two at any time.

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

Speaking on the call today are Mick Farrell, our CEO; and Brett Sandercock, our CFO.

There are also other members of the management team present here today that will be available to answer your questions.

I would now like to turn the call over to Mick Farrell.

Mick?

Please go ahead.

Thanks, Connie.

And thank you all for joining us today.

I'll review the highlights of our fiscal Q4, and then I'll hand the call over to Brett to go through the quarter in more detail.

So, first, the financial summary.

We finished with solid financial performance.

This is the 74th consecutive quarter in which we have grown the top line since our IPO in 1995.

We're pretty proud of that achievement, but we have huge opportunities in front of us.

We believe we are in mile one of a marathon, with plenty of energy, innovation, and a solid strategy for the 25-plus miles to go.

Global revenue in the fourth quarter of fiscal 2013 grew 11% year-on-year to $415 million.

Also up 11% on a constant currency basis.

America's revenue grew 11% to $230 million.

Europe, Asia, and rest-of-world combined headlined revenue increased 12% for the quarter.

And that is 11% on a constant currency basis.

For fiscal year 2013, and for the first time in ResMed's history, we reached $1.5 billion in annual global revenue.

We're pretty proud of this milestone.

ResMed's world-leading products quality, exceptional service, and our innovative data solutions all continue to drive growth and these types of results.

Net income for the quarter increased 18% to $91 million on a non-GAAP basis, while EPS increased 17% to $0.62 for the quarter.

That's also on a non-GAAP basis.

These non-GAAP numbers exclude the impact of the previously announced one-time Sydney University charge.

Brett will walk you through all the details on GAAP and non-GAAP financials shortly.

Earnings per share was a record $0.63, excluding amortization of acquired intangibles.

This bottom-line result demonstrates excellent global operating performance from the global team of 4000 ResMedians.

Our global growth in flow generators this quarter was primarily driven by strong sales of our leading S9 AutoSet device, our VPAP range of bilevel devices, and our latest ventilation flow generator, the Stellar.

We continue to expand market share in the APAP and the bilevel categories as well.

Our respiratory care products are receiving broad acceptance, especially in the treatment of COPD, the number three killer in the Western world, and a disease that can be significantly helped with our noninvasive ventilation solutions.

In the Americas region, flow generator sales were strong this quarter.

The S9 order set and the VPAP Adapt device, which treats patients with central sleep apnea and periodic breathing, both performed particularly well.

We attribute a lot of these share gains and positive mix shifts to EasyCare Online and growth of home sleep testing, respectively.

Additionally we are seeing a trend that new patient growth is improving in the US.

Turning to Europe, France performed well in the quarter, and both our German dealer business as well as our German homecare business had strong growth, as did the UK and the Nordics region.

European results were driven by strength in both flow generators and in masks.

The AutoSet CS, which is now on our S9 platform, and the Stellar, both did particularly well.

Mask growth was also solid across the region.

So, despite fiscal constraints and the changing macroeconomic environment in Europe, the ResMed value proposition of treating patients at home, saving healthcare costs, while improving quality of life, has proven itself to be in demand.

In the Asia-Pacific region, we had an excellent quarter, growing at solid double-digit rates.

We had strong sales in mature markets like Japan, as well as in key emerging markets, including India and China.

Rob, our COO, and I spent a number of weeks visiting doctors, distributors, patients, and government groups throughout Asia this quarter.

We believe this growth opportunity is just beginning.

And as our Executive Chairman would say, we're just facing our shoes for the Asian growth marathon.

We have an excited, focused, and dedicated team in that region, and that will help us drive towards this potential.

On healthcare informatics, EasyCare Online, which is our cloud-based clinical management system, continues to lead and to grow.

Additionally, our U-Sleep patient engagement solution is gaining traction.

We're seeing solid uptake from both existing and new customers.

In this challenging environment with government reimbursement changes, coupled with mandates to address growing healthcare costs, we believe ResMed's core value proposition of reducing healthcare costs by taking care of respiratory diseases at home is being well-received by patients, physicians, providers, and by payers.

It's all about driving outcomes and having the data to prove it.

ResMed is demonstrating we deliver these results for our customers.

Regarding our patient interface business, growth was driven primarily by sales in the full face mask category, particularly in Europe.

We also saw solid growth in mask components and accessories across the globe.

We plan to stay ahead of the game in our mask business, where we are the number one brand preferred by patients.

We are constantly innovating, and our solutions will continue to be smaller, quieter, more comfortable, and better than ever.

Our product pipeline in patient interfaces remained strong.

We released two exciting new masks this quarter.

First, the Quattro Air launched.

It is the smallest, lightest, and least intrusive full-face mask on the planet.

We're very excited about its prospects for patients, and its initial reception was very positive.

Second, we released the Swift FX Nano, our latest nasal mask.

This launched in Europe and Canada, and is progressing very well.

We have plans to release more patient and face products during fiscal 2014, and we're very excited about our innovation in this space.

Moving on to our respiratory care business, we had our best quarter ever in this space with record global sales.

This growth is primarily due to sales of the Stellar device range in Europe, especially in Germany and in France.

Japan also had a very strong quarter in respiratory care.

In the US, respiratory care market sales of the VPAP COPD, specifically targeted for Chronic Obstructive Pulmonary Disease, is exceeding our expectations.

And the ClimateLine Oxy, a heated breathing circuit that allows oxygen connectivity to the humidified circuit, is also doing well.

For our VPAP SDA product, which advanced two generations from our S9 to our -- from our S7 to our latest S9 platform, we're seeing incredibly strong growth.

In the humidification category, our HumiCare 900 product is doing very well in Germany and the Nordics.

We also received FDA clearance for this product during the quarter.

Stay tuned for additional growth and product pipeline expansion in our respiratory care business.

On the home sleep testing front, now over 50% of commercially covered US adult lives require PSG preauthorization.

This is steering providers and patients towards home sleep testing.

To that point, we estimate that at the end of fiscal '13, approximately 30% of all US sleep diagnostic tests were through home sleep testing.

We anticipate and model that to grow to 40%-plus over the coming 12 months.

And we think it will end up beyond that in the years ahead.

Additionally, we continue to see a steady increase in the number of sleep labs involved in HST.

Around 60% of sleep labs in the US are now offering home sleep testing based on our latest sleep lab survey data.

Primary care physicians continue to become more involved in the diagnosis and manage of sleep apnea, and are partnering with their pulmonary colleagues.

That involvement is starting to gain momentum.

Finally, an overview of our global clinical trials.

Enrollment in our heart failure trial, SERVE-HF -- as in a tennis serve, dash, HF for heart failure -- is now complete, with over 1325 patients recruited.

This milestone makes SERVE-HF the biggest and most important heart failure trial in the history of our industry.

We should have final data late in calendar year 2015 through early calendar 2016.

Our goal is to present at major cardiovascular conferences and to publish final results in a premier medical journal.

In addition, we've completed the protocol, as shown in our press release, for a new US-based heart failure study, which we are calling CAT-HF -- as in C-A-T dash HF.

This trial will be run by Professor Chris O'Connor, who is a global leader in heart failure and cardiovascular medicine from Duke University on the East Coast of the United States.

Professor O'Connor is an accomplished clinical investigator who has been an author on more than 400 peer-reviewed publications in the field.

We expect enrollment in CAT-HF to commence in the latter part of this calendar year.

So let me wrap up with this.

Our core sleep apnea business is no longer just about selling equipment to treat sleep disorder breathing.

It's about forming partnerships with our customers, and offering full-service solutions to patients, providers, and payers, to manage outcomes for this costly, chronic disease.

This solutions approach also applies to our growing respiratory care business, and our fast-growing cardiorespiratory business.

The combination of our range of world-leading, quality flow generators, the most comfortable and effective patient interface systems, as well as easy-to-access, robust actionable software solutions, makes ResMed's offering the leading value proposition for our customers.

We have a robust pipeline of new masks and new technologies, as well as business process innovation for the plans across our three horizons of growth -- sleep, respiratory care, and cardiology.

We are improving patient's quality of life, and preventing disease progression, as well as reducing the burden of healthcare costs for chronic diseases.

We think of this as the Holy Grail of healthcare.

We changed more than 7 million lives during these last 12 months, and we plan to drive that to 10 million lives and well beyond in the coming years.

So now, I'll turn the call over from here in San Diego to our CFO in Sydney.

Brett, over to you.

Great.

Thanks, Mick.

Revenue for the June quarter was $414.6 million, an increase of 11% over the prior-year quarter.

In constant currency terms, revenue also increased by 11%.

Excluding the impact of the one-time Sydney University charge, income from operations for the quarter was $110.9 million, an increase of 24% over the prior-year quarter.

Net income for the quarter was $90.7 million, an increase of 18% over the prior-year quarter.

Non-GAAP diluted earnings per share, which excludes the impact of the Sydney University charge, was $0.62 for the quarter, an increase of [17%] over the prior-year quarter.

GAAP net income for the quarter was $73 million, and GAAP diluted earnings per share for the quarter were $0.50.

Gross margin for the June quarter was 62.7%, up sequentially from Q3 FY '13.

On a sequential basis, our gross margin benefited from a favorable product mix, manufacturing supply chain improvements, partially offset by ASP declines.

Looking forward, we expect our gross margin to be in the range of 61% to 63%, assuming current exchange rates.

Indeed, we estimate the weaker Australian dollar will contribute approximately 70 basis points to our gross margin in the first quarter of fiscal year 2014.

Additionally, 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 $115.1 million, an increase of 9% over the prior-year quarter.

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

SG&A expenses as a percentage of revenue improved to 27.8% compared to the year-ago figure of 28.5%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the vicinity of 28% for fiscal year 2014.

R&D expenses for the quarter were $31.4 million, an increase of (technical difficulty) [12%] over prior-year quarter.

In constant currency terms, R&D expenses increased by 14%.

R&D expenses as a percentage of revenues were 7.6% compared to the year-ago figure of 7.5%.

Looking forward, we expect our R&D expenses as a percentage of revenue to be in the range of 7% to 8% for fiscal year 2014.

This reflects an ongoing commitment to investing in our product pipeline, tempered somewhat by the depreciation of the Australian dollar, as the majority of our research and development is undertaken in Australia.

During the quarter, we reached an agreement with the University of Sydney to pay $24.8 million for the establishment of two perpetual academic chairs, the funding of future research in the field of sleep medicine and biomedical engineering, and the settlement of legal proceedings between the parties.

This is a nonrecurring charge, and we have expensed the full amount of $24.8 million in our fourth-quarter results.

Amortization of acquired intangibles was $2.5 million for the quarter, while stock-based compensation expense for the quarter was $10.5 million.

Our effective tax rate for the quarter was 16.9% compared to the prior-year quarter effective tax rate of 22%.

The lower tax rate this quarter reflects a tax benefit from the Sydney University charge and the ongoing benefit of lower effective tax rates associated with our Singapore manufacturing operations.

Excluding the impact of the Sydney University charge, our full-year effective tax rate was 20.7%.

We currently estimate our effective tax rate for fiscal year 2014 will also be in the vicinity of 21%.

Turning now to revenue in more detail.

Overall, sales in the Americas were $230.3 million, an increase of 11% over the prior-year quarter.

Sales outside the Americas totaled $184.3 million, an increase of 12% over the prior-year quarter.

In constant currency terms, sales outside the Americas increased by (technical difficulty) [11%] over the prior-year quarter.

Breaking out revenue between product segments.

In the Americas, flow generator sales were $104.7 million, an increase of 16% over the prior-year quarter, reflecting strong growth in our APAP and bilevel devices.

Masks and other sales were $125.6 million, an increase of 7% over the prior-year quarter.

For revenue outside the Americas, flow generator sales were $124.8 million, an increase of 13% over the prior-year quarter, and in constant currency terms, an increase of 11%.

Masks and other sales were $59.5 million, an increase of 11% over the prior-year quarter, and in constant currency terms, also an increase of 11%.

Globally, in constant currency terms, flow generator sales increased by 13%, while masks and other increased by 8%.

Cash flow from operations was a record $123.9 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $16 million, and depreciation and amortization for the June quarter totaled $19.7 million.

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

During the quarter, we repurchased 1.5 million shares for considerations of $72.7 million.

For fiscal year 2013, we repurchased 4.3 million shares for consideration of $188 million.

At the end of June, we had approximately 4.5 million shares remaining under our authorized buyback program.

In addition to the share buyback, our Board of Directors today declared a quarterly dividend of $0.25 per share.

This represents an increase of 47% over our previously declared dividend, and demonstrates our commitment to delivering shareholder returns through our capital management program.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $575 million.

And at June 30, total assets stood at $2.2 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 know you haven't spoken about it and you probably don't want to talk about it, but just the issue of price.

It's been such a big topic of discussion in the industry, both in the investment industry and in the sleep apnea industry.

And you can't spend more than five minutes in the industry without people giving you sort of 20 examples of big price declines.

Can you just talk about what you're seeing and why you think the market is getting it so wrong in the message that they're getting from your customers?

Thanks, Dan.

That question allows us to talk about our long-term cost control and investment strategy looking forward.

But yes, certainly, price is a question.

It's a discussion that comes up with our customers because it's Monday morning and the sun is out.

And it comes in as a question when it's the end of the quarter and when it's the start of the quarter.

So, pricing is always a discussion for us with our customers.

We tend to focus on looking for the long-term.

We invest in driving growth through volume gains, and can use prices as a tool as part of that.

And when we work with customers and they are seeking price discounts, we look for volume gains to get there.

We also -- you know, when the topic of price comes up and when we're discussing price, we look at the long-term value that we provide the customer, which we are very good at modeling at, and getting better at, as we look at the economics of our HME customers in the US and our HCP, Home Care Provider, customers in Europe, and the many other business models we have in the 100 countries we do business in.

And as we analyze that, we are able to come up with effective ways to take costs out of the supply chain, to take cost out of the systems for electronic data change or whether it's healthcare informatics data, or supply data and beyond.

So, in short, we've talked about traditionally a sort of 3% to 5% price reduction that we've seen in the market.

It's probably more in the 4% to 6% range now, and we can model that sort of range going forward.

But it's certainly something that, when we look at our cost structure and we look at our investments for the future, we're looking at taking more than that 4% to 6% out, so we can maintain our margins.

And as you saw in these quarters' results, we had a very solid [62%-plus] number and we're pretty proud of that.

Okay.

And just one other one.

Just in regards to the ventilation business, I know you don't break that out, but can you give us an indication of just how material that is becoming?

I mean, I'm just trying to understand what level of this pretty extraordinary US flow gen growth is -- oh, sorry, global flow gen growth is being driven by the respiratory part of the business.

Thanks, Dan.

We're not going to break out our respiratory care or ventilation business.

We already, as the only global pure play in respiratory medicine company whose public expose every 90 days a far greater deal of granularity than any of the other players out there.

We have to do research to understand how the other two large-ish players are doing.

But I can talk to it directionally and certainly the growth in respiratory care is very strong.

We're number one or number two in every respiratory care home care market throughout Western Europe.

But we are not in the Americas and many parts of Asia-Pacific.

So there's a huge opportunity in front of us to grow our US respiratory care business, to grow our Latin American respiratory care business, to grow our respiratory care business in many countries in Asia-Pacific, where often our products can move from the hospital to the home.

And that hospital to the home approach is something that we have excelled at in Europe and can bring to the other markets around the world.

So, I think although the core growth in the global respiratory care space is probably in the mid-single digits, we can beat that by going after a new geographic expansion, and also creating and leveraging new categories that our technologies as a leader in the sleep disorder breathing space, with the cost structure and scale that that brings can allow us to penetrate and expand -- take share, but also grow reach in the global respiratory care business.

Okay, thank you very much.

Ben Andrew, William Blair.

So, following on the prior question, maybe talk a little bit about something that's been rather topical.

The checks that people are getting where DME's are claiming 20% price cuts and concessions from you guys and from other players, how do you characterize that?

Where is that coming from?

Is that things you're walking away from?

Or, in some cases, you're taking in exchange for volumes?

Or -- these comments have been quite broadspread, and I'm just trying to get some context on where people are wrong, if they are taking those data points.

Yes, Ben, I'm going to hand this question over to Jim Hollingshead, who is our President for the Americas.

But just on the global scope of things, we're in 100 countries.

These data points that I believe were published by someone doing research was in one of those countries, the US, which happens to be around 50% of our revenues.

But the -- it's one data point out of thousands of customers.

So with that caveat, I'll hand over to Jim to provide some color to your question.

Thanks, Mick.

Hi, Ben.

So, guys, what's -- obviously, what's going on in the Americas market is the implementation of competitive bidding.

And that implementation literally just went live.

And so in the run-up to that, the price points that came out of competitive bidding are painful for our customers.

And we talked about that last quarter.

And I think that's the first point I would make, because we understand it's painful for our customers and we're working through that with them.

In terms of -- we're not going to talk about any specific deals or any specific customers.

I would say that our practice and pricing remains the way it has been, which is, we use pricing strategically.

And so, when we do deals with customers, we are typically doing them either because we're gaining volume or we're gaining share, we're doing something that makes economic sense for us and for our customers.

The price trend in the market, we've been saying for a long time that in the category has consistently had ASP declines in the 3% to 5% range on an annualized basis.

And as Mick just said, that's probably moved now to maybe a 4% to 6% annualized range.

I would say in the quarter, in the run-up to the implementation of competitive bidding, we have seen some increasing short-term price pressure.

But we've dealt with that strategically, and we're working with our customers to help them address their business needs.

And price is only one way that we work with our customers.

Right?

So we do other things with our customers.

On a product basis, clearly, we provide products that create more value for them.

They drive more compliance.

They are more effective products.

And we're increasingly introducing solutions that help them run their business more efficiently as well, you know, things like ECO and the U-Sleep platform.

So, price is an issue, CB2 is an issue in the marketplace, but it's, I think -- bluntly, I think it's been overblown in the way people are looking at the market broadly.

It's painful for our customers and we're working that through with them.

And I'd add on to that -- thanks, Jim; agree fully with your comments -- and I'd add on to that that this is not Coke versus Pepsi in a limited software drink market growing 0% to 3%.

This is about a market where we are less than 10%, 15% penetrated, even in the US, which is our most penetrated market of all our geographies.

So it's about the 85% in front of us and finding the right investments to grow those markets.

But I underline Jim's comments.

Okay.

And Jim, just following on with that, I know the run-up has maybe been a little bit more intense.

Why wouldn't it intensify further?

Is there something about that run-up that then sets price for the coming period?

Or are we going to continue to have this intensification when we talk next quarter and the December quarter?

Thank you.

Well, Ben, I think that's a really good question.

And we don't have a crystal ball, and so it's hard for us to predict exactly what's going to happen.

But in the run-up period, what's going on, of course, is that people who have won and accepted contracts -- and I'll make a side point there, which is, not everybody accepted the contracts, right?

Because there are a number of players out there that have decided that they can make more money in commercial pay.

But those who have won and accepted contracts are building business models of their own for the quarter and getting ready to implement against what will probably be higher volume for them.

And they need to understand how they are going to run their businesses, so they are negotiating for price in front of that.

Right?

So, it's hard to know exactly what will happen, say, over the next quarter or next two quarters, as that continues to play itself out.

And we're going to continue to work strategically with all the leverage we bring to our customers' businesses.

But if you just look at what they are getting ready for as Medicare throws the switch on the pricing, our anticipation is that most of the pressure is probably Q4 and maybe in Q1 a little bit.

And then the private payers, are they following on?

Or is this sort of a delayed response on their side?

And that's it, thanks.

So (multiple speakers) I would assume there have been.

Look, I'll answer that, Jim, if that's okay with you.

The Medicare CMS competitive bidding process has been in place for four, five-plus years.

All these changes have been signaled with 12, 24, even 36 months' notice for their customers.

So, our customers are pretty sophisticated and have been able to model out their economics pre and post-round one, round two, and beyond.

So there's nothing new that's going to happen from today from yesterday.

And frankly, since the numbers came out earlier this calendar year, there have been no changes to those core economics.

But historically, CMS has been priced significantly above all the private payers, which is kind of unique in medtech.

Usually it's the other way around.

And as soon as we've seen that four years ago, like an efficient government process, they took four years to get there but have eventually, four years later, starting line with the private payers.

We don't think this triggers a response on the private payers and we haven't seen that.

The private payers have been looking at this quarterly over those four years and will continue to look at it on an ongoing basis as well.

Thanks for the questions, Ben.

Thank you.

(Operator Instructions) As a reminder, ladies and gentlemen, you are limited to two questions at any one time.

The next question comes from Saul Hadassin with Credit Suisse.

Please go ahead.

Some of the other feedback we've had from speaking to your customers is that they are looking for perhaps a broader entry-level device, a fixed pressure device that captures all the compliance requirements.

I think we're seeing one of your competitors come out with such a product.

Are you guys considering moving back into that fixed pressure segment of the market?

Or is your focus still the high-end APAP segment?

Thanks.

So, Saul, we've been playing in the fixed CPAP market since 1989.

And we've been playing in the APAP category with our AutoSet range since 1992, I think.

So, both of these two decades worth of experience playing in both fixed pressure and auto setting pressure categories.

The reason we believe -- in fact we're incredibly confident that APAP as a category will continue to grow -- is that APAP is a requirement for the cost savings achieved through home sleep testing.

To make home sleep testing effective, you have to be able to allow the patient to have their pressure set in the home.

And the only way to do that cost-effectively is with an APAP category device.

Our S9 AutoSet happens to have that 20 years of legacy in its algorithm and advances, and we believe is the leading algorithm in that space.

So we believe the category of APAP will continue to grow share, and we believe that the S9 AutoSet will continue to grow share within that growing category.

And so therefore, we are already in the fixed pressure device category and we will remain there.

There are some markets and some geographies and some patient groups for which CPAP pressure is the best approach.

But there are many, and it's growing, where the value of products like the S9 AutoSets are incredibly important.

So, we're already there.

And we'll continue to play in CPAP.

But driving the high-value APAP category is just part of an industry trend, and we are absolutely on top of that and a big part of it.

While we are thinking about flow generator and the types of margins, the real highest end of this range is our respiratory care business.

And that's an area where we are playing with customers with much higher cost bases and bringing in devices from the sleep space.

So we think that opportunity to have margins at solid levels into the future is driven by not only the CPAP and APAP categories, but also by the VPAP category, which is the vital devices, and really importantly, the noninvasive ventilation devices, like our Stellar product.

Okay, thanks, Mick.

And maybe just a separate thought question.

But you mentioned the small increase in ASP declines that you've seen.

Can you talk to what impact do you think competitive bidding this year will have on volume growth for the industry?

And whether you realistically think you will see DME's closing down patients that need to migrate across to other stores?

How impactful do you think this whole process will be on the DME base?

Thanks.

So we had the real-time experiment with round one, where we believe that as some of the smaller mom-and-pop type HME's went out of business in some cases, larger regionals and some large national players took the share of patients, and we were worried about some orphan patients in that process.

So patients that had a device and didn't have anyone following up with the mask side.

What we found was that the large regionals and the large nationals with their very efficient systems for contacting patients, and checking appropriately if they leave you masks and accessories, as they pick up those patients, we saw some increase in volume, on the trailing revenue side, the opportunity for masks and accessories.

So, I would say it's probably neutral on the device side, but there may be some volume upside on the masks and accessories side.

But that's how we'd look at round one.

And round two we're in day 31.

So we'll be watching that on an ongoing basis.

But we would expect the same model to play out, as the same types of people have become the winners in round two as were winners during round one.

I don't know if, Jim, you'd like to add any more detail to that?

Yes, I mean, I completely agree with what you said.

I would just add a couple of things.

I think it's confusing for the patients, but it's not confusing for the DME's at some level.

Right?

So to Mick's point, any DME is out there buying up a patient list from a smaller DME is doing that because they know they're going to go find that patient and work with them.

Right?

So I think the way Medicare has communicated to patients has created some confusion for patients.

And so there is -- that's got to be worked through.

But I think the people buying lists will figure that out from the DME side.

I don't think CB 2 has a material impact on volume in the market overall, except it might have upside, as Mick has just described.

I think US market, and therefore America's volume, is likely to be more impacted by the shift to home sleep testing, which is, we think is bringing in more new patient volume right now.

And the reason for that is commercial payers are shifting the market to home sleep testing.

And home sleep testing is more acceptable to the patient.

So, it's a long time been a barrier for a patient to get tested for OSA, because they don't want to go spend the night in a lab.

And as payers move to HST, more patients on the margin are going to agree to get tested.

And we think that's already creating a little bit of a lift in total new patient volume in the market.

Right, thank you very much.

Matthew Prior, Bank of America Merrill Lynch.

Just a follow-up question, I guess, from Saul's in terms of volume disruption.

And Mick or Jim, who'd want to take this.

I guess one of the other things in regards to the volume discount deals are being done, given with round one and the washup from round one, we saw from CMS reports that utilization of volumes had slowed down.

Do the volume discount deals being done around this period of CB 2 help mitigate that volume slowdown risk going into obviously the December quarter?

Jim?

I think there is conflicting data on utilization and growth in the market.

I don't see a big risk to the dropping in utilization to Medicare.

And I think that the incidents and problems with disease keeps going up.

The latest data that I've seen from Medicare shows that the max of all increasing claims over the last couple of quarters.

And as I say, I think the overall market is growing.

So again, I don't -- that's not how I would think about modeling the volume in the market.

And you know Matthew, focusing on competitive bidding, you're thinking about the 25% of the market that is CMS, the 75% of the market that is private payers are looking at this differently.

And many of them have had, for many years, disease management programs.

Many of them are now starting to look at care management programs.

As we have conversations with payers, we are driving conversations, along with our HME partners, that drive towards the opportunity for our therapies to take patients out of the hospital and to save money, and to improve the quality of life for the patients.

This matters especially to the employers who are the payers' customers, who are self-insured.

It matters incredibly importantly to the new Accountable Care Organizations, or ACO's, that are forming as part of Obamacare, the Affordable Care Act.

And we're going to see more and more systems of payer/provider combination, such as you have at the VA, at Kaiser, at Intermountain Health, and Geisinger -- those types of models are going to expand.

And we think the long-term return on investment -- in fact, we know the long-term return on investment of taking a patient with sleep disorder breathing and getting them on treatment saves money for the healthcare system.

So we think that 75% of the market is more apps on the private side for those conversations and fresh forward, and we think the government will probably follow.

But that would be our take on the long-term view and plans for care management.

All right, thank you.

And just my second question.

In terms of, I guess, again focusing on the volume type deals that are done to offset the pricing impact, what do you think of the big three manufacturers represent such a large portion of the whole industry, with the small guys now, and you're relatively small in market share terms.

If all the big three are doing volume discount type deals, and that's why each of the three are trying to offset the price impact of competitive bidding, obviously there's going to be market share winners and losers out of that.

And if you're a DME that's been offered a similar deal from all three brands, who do you obviously favor then in terms of giving them that volume, to then obviously get that discount from that manufacturer?

Can you talk about like the CMS audit effect on this, and whether it combines private payer point of view or private government, you keep having influence.

So do you think you will win out on that market share front because of compliance monitoring in the S9 wireless units?

And as the market shifts in that direction?

Is that a fair statement?

Because obviously there are going to have to be winners and losers out of this, in terms of market share, in order to kind of stay neutral on the pricing impact.

Well, thanks, Matthew.

That was a very complex question with a multi-varied area.

So actually, we could take the whole rest of the Q&A session to go through each of them.

I'll choose to focus -- which is a great question in some ways.

I'll focus on your question about the Big Three, and what -- really, it's the Big Two -- what will happen with the market going forward.

I think as our we partner with our HME providers in the US and with our homecare providers in Europe, and the different models we have in different geographies, our strong partnerships in Japan, we are getting a much greater understanding of the value of our products.

The value of our health informatics products to provide data to a payer or data to a provider or data to a physician, and now with SleepSeeker and U-Sleep data to a patient -- and there's value associated with all of that.

So, the discussion of, will our market share grow or decline, is less to do with the latest changes in US Medicare reimbursement.

It's more to do with the long-term value proposition of what we bring to the market and understanding of that.

You saw the data that we showed that our brand value from patients is very high in the mask area.

We've known that for many years.

But what we're beginning to understand more is our brand value with our partners -- the providers, the physicians, and the customers, and how we can save them money and save them time.

So we think rational economic decisions will be made along the value chain, and we think ResMed is well-positioned to grow its market share based upon those rational economic decisions, based on real value that we bring to our customers.

And a lot of that is tied to the ResMed brand -- the underlying foundation for that is the core economic and strategic growth value we bring to the market.

The SERVE-HF study is just an example of how we're driving the long-term growth, but there are multi-varied detailed areas that we provide value, that we don't have time to cover in this call, but we can in upcoming calls.

Okay, thanks for that.

I guess what I was looking for was a confirmation that to offset competitive bidding at the revenue line, you really have to take market share.

Is that a fair statement?

So yes, as price goes down and volume goes up, cost structures go down, cost is taken out of the system to keep gross margin where it's at, we have to -- if there is 4% to 6% price declines on an annualized basis, we have to take 4% to 6% out of the total cost structure.

But there are probably many different ways to drive long-term economic value apart from just looking at the GM line.

I don't know if others want to have a comment.

Jim?

I just want to say I do think the question is a bit complicated.

I now understand what you're trying to get at.

So excuse me for being a little slow on the uptake.

Look, it depends on how fast the market is growing.

Right?

And globally, the market continues to have healthy growth, and the Americas market continues to have healthy growth.

And so, we can gain or lose market share and still have a healthy business, depending on underlying market growth.

As it happens, the market is growing and we're taking share.

And we're taking share because our products are better.

And our products aren't just better in some abstract feature and functionality sense; they're better because they are more comfortable, which means that patients are more compliant.

And in the US reimbursement scheme, that means our DME's get paid on a higher percentage of patients that get set up on our devices.

And they get more replenishment of revenue items that are better from a revenue point of view.

And we're also taking share because our solutions take costs out and help our customers drive more efficiency.

And that's how our system works.

We invest in innovation to make it better for our patients and for our customers.

So market is growing and we're taking share.

All right, thanks, guys.

Thanks, Matthew.

Alex Smith, Citigroup.

You mentioned new patient growth is improving.

Does that mean market growth rates look like they've moved beyond 6% to 8%?

And can you make some comments around market growth?

Thanks, Alex.

Our market growth outlook is still in the 6% to 8% range on a revenue basis globally.

And I would say in the Americas market, it is around 6% to 8% as well.

In Europe, we're probably looking at the low end of that, 6% or slightly lower.

In Asia-Pacific, we're looking at north of the 8% into the double digits.

So, those market's growth numbers, as best we can tell, are there.

We're starting to see some volume uptick in the US, as we mentioned in our remarks earlier, offset somewhat by some of the price declines that we're seeing in that geography.

But over the globe, we're looking at a solid 6% to 8% market growth industry, which, you know, as I go to JPMorgan and we go to all these medtech conferences, is a pretty darn good growth rate for a medtech space.

And to be positioned at number one or number two in that space in all of the 100 countries we're in, we think is a very solid position to be in.

But it's not material enough for any of those individual country changes yet to change that sort of 6% to 8% global growth number.

But it's a complex calculation, Alex.

It's not simple.

We know in detail 40-something-percent of it because of Dow revenues.

We don't know the other 50% as well, and have to garner that the way you do.

But our estimate is solid in that 6% to 8% range globally.

Okay.

Thanks.

And Brett, can you -- what sort of currency assumptions are you assuming particularly for all the US dollar and saying that it will add 70 basis points to gross margin?

Would you want to address him?

Yes.

No, I'll take that, Alex.

Yes, so looking at that, as you know, with the inventory washing through, you've always got about a one-quarter lag on currency.

So that's sort of in play now and that's already happened in terms of that improvement there.

Going forward, as it washes through, if you look into quarter two and three with current exchange rates, and you'll certainly get incremental benefit north of that as we work into Q2.

But essentially Q1 gets locked in and then we should get some more benefit coming through in Q2 as inventory washes through the system.

So, if -- the currency is really volatile at the moment, so you never know for sure, but at current rates, you would expect that we'll get 70 basis points in Q1 and then we should get a bit better in Q2.

Okay, terrific.

Thank you.

Thanks, Alex.

Joanne Wuensch, BMO Capital Markets.

I want to switch gears a little bit here and go back to your clinical trials.

What is the timing of when we will see the SERVE-HF data?

So, Joanne, the SERVE-HF trial has just completed enrollment this last quarter.

So, 1325 patients enrolled, but it's a two-year follow-up study.

So each patient, including the last ones that were enrolled, have to remain on the therapy for two years.

Just as a reminder for everybody, the two outcomes from that trial that the trial is powered for, is mortality and morbidity.

So, saving lives and saving money through hospitalization reduction.

So, we need to keep those patients on for two years.

So that pushes us to about this time 2015 when the final patient has reached that two-year mark, then we have to assess the data.

Of course this is a completely blinded trial to ResMed and to the investigator.

So, it's a CRC that has to be unblinded and analyzed, and go through all the bioanalytics and so on.

And then has to go seek publication in a large case.

That's what generally gets put on the conferences.

So, in short, we're looking late calendar '15, early calendar '16, for those data to be released to the public, and then will be discussed on those types of conference calls.

So it's a real long-term investment for the industry.

And we're really proud that it's the largest study to ever complete enrollment.

And when it finishes, we think it will be the largest and most important pivotal study in heart failure treatment with adaptive servo ventilation.

And we are very excited about its prospects.

Okay.

My second question has to do with the US mass-market.

It was a little bit weak in the third fiscal quarter and a little bit weaker in the fourth fiscal quarter.

And I was just curious, do you have any color on what may be going on there?

Thank you.

Thanks, Joanne.

Yes, clearly, we have seen some pressure, competitive pressure, on the patient interface front.

We love a healthy industry.

We love the various industry players coming to compete in the different categories.

The Mirage FX had had many, many quarters of incredible success and just launched a couple of years ago in the nasal category space.

Recently, Philips Respironics introduced their Wisp mask into that category, and F&P introduced their Eson mask into that category.

So we have seen some pressure in the nasal mask category.

Mirage FX remains the best, we believe, but the others have some value propositions that are being trialed and selected by some customers.

As we said in the pre-remarks, we have a very solid pipeline in patient interfaces.

And over the coming fiscal year '14, you will see us release products not only into that nasal category but beyond that.

Without going into any further granularity as to those releases, and we will not say by quarter by category, because we're the only public player in this space -- we are very excited about the patient interface pipeline.

And as it comes to market, we think our customers will, as they have historically, see its value.

Okay.

Thank you very much.

Thanks, Joanne.

David Clair, Piper Jaffray.

I have another mask question as well.

So we saw a pretty nice re-acceleration OUS.

I was hoping you could maybe tell us what you think is driving the rebound there?

Rob, do you want to address that?

Outside US?

Yes.

Look, I think it's just across the board in markets where it seems to be performing well and executing well, getting the deal servicing the customers.

We think the competitive products have been there for a while, and you know they have had some impact, but it's not permanent impact.

So, some response from that.

Overall, just good performance all-around, really.

We've had a good quarter in many, many countries around the world.

We're growing some pretty strong relationships, David, with our European customers, and the value that we bring on the mask side is different.

They don't get paid on a per unit basis as reimbursement is in the US.

So the value is more long-term.

So some of those assessments are more long-term.

But we've been able to provide that data to them, and we think that communication and that partnership with our major customers in Europe and throughout Asia-Pac has allowed us to drive that Europe and Asia-Pacific mask growth.

And we think it's reasonably sustainable into the future, because the value you get is over a long period of time and can be sustainable.

Okay.

Thank you.

And a quick one for Brett.

You alluded to pricing impact in gross margin in the quarter.

Can you quantify how much of a offset that was to gross margin?

I mean, it's working through on the -- really around that 4% to 6% range on ASPs, and sort of working through that impact, David.

So if you look at kind of the drivers on the gross margin was -- obviously, we're still getting favorable product mix coming through.

And we're also working pretty hard on the cost basis Mick mentioned around manufacturing, around our supply chain and procurement and so on.

So those have been the drivers, really, of the margin expansion for a while now.

And then -- and traditionally, we've always had some offsets with ASP declines as typically 3% to 5%, and now around the 4% to 6%.

And that's the major offset.

But you can still see that we're still getting expansion in our gross margin.

So those positive drivers are currently outweighing ASP declines, but it does have some negative impact.

Okay, thanks.

Congrats on the quarter.

Thanks, David.

Ian Abbott, Goldman Sachs.

Could I ask a follow-up question on gross margin?

Just asking -- look at the drivers, Brett, in fiscal '13, looking forward to '14, looking at cost out, mix shift to Singapore and also the buy levels.

Which of those factors do you think was strongest in '13 and which will have the same sort of carrythrough in '14?

I think, I mean, they're both meaningful contributors.

And no, if you look at it over the years on the trend, pretty consistent kind of contributors for both those.

We continue -- it depends how flow and how the mix goes through FY '14.

It is notoriously difficult to predict on some of these mix changes, and timing of when we get, for example, improvements coming through on manufacturing.

And you've driven, for example, by new product introduction and so on, where we can get some, if you like, kind of step-change type improvements.

And then we work on a bunch of incremental improvements along the way.

So that can come in at various times.

But I think, looking forward, I still think we'll get a benefit from both of those.

And we will -- if the currencies sort of stay where they are, we'll get some tailwind from the currency as well, which is back -- the Aussie is back to where it was selling like three years ago against the US dollar.

So, we've been up against headwinds on the currency foot for quite a few years.

And it looks like we may get some benefit from the currency going forward.

And that's also into the gross margin mix.

And so I think you're going to have -- you'll have three positive factors playing out on that margin, and then you'll just have a negative on the ASP.

But so far, we've dealt with currency and we'll deal with other things that are thrown at us, and continue to work hard on cost-out initiatives.

All right, thanks.

Can I also ask perhaps Mick or Jim on the pricing.

You know, ResMed has always been historically a premium price player.

And after on a sort of like-for-like basis after volume discounts, where do you see your premium to your two peers currently?

Ian, we're not going to go into detail on pricing information, but generically and globally, we are the premium player.

The premium may be in the single digits on some flow generator lines.

It might be in the double digits in terms of percentages on some of our high differentiated items at the high end of, say, the mask range or the respiratory care range, where we have the value given to the customer.

All those premiums on pricing are linked to the premium the customer attributes to the value of that product.

And so it's by SKU.

It's by geography.

It's by customer, and it's by our current share with the customer and our future growth opportunities with the customer.

So it's a very complex equation.

But in short, we haven't changed that philosophy.

We're the value player.

We're the premium player, and we've maintained ourselves as a value player in this Q4 and through our fiscal year '13.

And we will do that going forward in FY '14.

We think the discipline of pricing to your value is incredibly important for the long-term sustainable growth of this industry, and the investments that we're making in a $20 million, $30 million-plus trial in SERVE-HF to change the potential trajectory of millions of heart failure patients, only comes by linking value to pricing, to long-term investments for the industry.

So, the short answer is, we are a value player and we will maintain ourselves as a value player going forward

Thank you.

Anthony Petrone, Jefferies.

Just on a couple for Brett and one for Mick.

The $5.8 million in other expense, is that all AUD hedged losses?

And have you renewed your hedges at more favorable rates considering the currency move?

And then just a follow-up for Mick.

Yes.

Anthony, that is essentially FX hedging losses that have come through.

We do mark to market, so basically that brings forward any losses into that quarter.

So if you think about if currencies then stay pretty much exactly the same, then you get fairly negligible FX gains and losses going forward.

Of course, they'll move around, but essentially, that's what would happen.

So, that's basically what that was.

And your other question, Anthony?

Sure.

If we elaborate a little bit, Mick, on the volume sort of arrangements that you're engaging with BME customers, can you sort of go into actually how those are structured?

Are you requiring them to purchase upfront volumes, excess inventories upfront?

Or are those commitments over an extended period of time?

And then maybe just a quick follow-up would be, are there any other promotions that you would be engaging in as you move into the round two?

So, the short answer is, Anthony, there's nothing new in this space.

The long answer is that we don't go into detailed descriptions of any of our contracts with customers in any geographies.

Some of them can be a month.

Some of them can be two years, and some of them have volume commitments.

Some of them have strategic market development commitments that we make to each other.

The variance across our contracts with the thousands of customers we do is so broad.

But there was nothing new in Q4, and we don't plan to do anything new in fiscal '14, in terms of volume and pricing arrangements.

What we intend to do is invest for the long-term sustainable growth of this industry.

And with 99-percent-plus of the opportunities left in countries like China and India, that Rob and I were at just a couple weeks ago, we have certainly 95% of the opportunity in front of us in Asia, with 90-plus-percent of the opportunity in Europe, and 85-percent-plus of the opportunity left in the Americas, we think that we truly are in mile one of a marathon.

And we're not getting tired.

Thanks again.

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

Thank you very much.

And what I'd like to say is, as always, thanks for the many investors, analysts and customers, and even the competitors who listen to this conference call.

But most importantly, I'd like to take this opportunity to say a special thank you to the nearly 4000 employees of ResMed from Asia-Pacific, Europe and Americas for their hard work, dedication and continued excellence.

Together, we are changing lives in respiratory medicine one breath at a time.

Thank you very much.

Thank you, ladies and gentlemen.

This concludes the fourth-quarter 2013 ResMed Inc.

earnings conference call.

Thank you for participating.

You may now disconnect.