瑞思邁 (RMD) 2014 Q1 法說會逐字稿

Hello, and welcome to the Q1 2014 ResMed Inc.

earnings conference call.

My name is Maisha.

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.

During the question and answer session, please limit yourself to two questions at one time.

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, Maisha, and thank you all for joining us today.

The Company is 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 10K, which you can access through the Company's website at www.ResMed.com.

As Maisha said, please limit your questions to two at any one time.

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

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

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

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

Mick, go ahead.

Great.

Thanks Connie, and thank you all for joining us today.

I will review the highlights of our fiscal Q1 and then hand the call over to Brett to go through the quarter in more detail.

So, first, the financial summary.

Global revenue in Q1 of fiscal 2014 grew 5% year on year to $358 million.

That is up 4% on a constant currency basis.

Americas revenue grew 4% to $202 million.

Europe, Asia, and the rest of the world headline revenue increased 7% for the quarter, which is 5% growth in constant currency terms.

We believe the overall global growth of the industry remained steady at 6% to 8%, with global flow-generated products in the 4% to 6% range and global mask category growth at approximately 8% to 10%.

Net income for the quarter increased 14% to $81 million while earnings per share increased 14% to $0.56 for the quarter.

This bottom-line result demonstrates strong global operating performance from the team.

I am going to start with an overview on Europe where we saw strong regional growth with solid performance in many countries including France -- particularly France, the UK, as well as Switzerland.

Both our German homecare business and our German dealer business also grew strongly.

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

One of the main drivers of flow-generated products in Europe was the AutoSet CS product.

This product includes the proprietary PaceWave algorithm designed for congestive heart failure patients with cardiorespiratory disorders, including Cheyne-Stokes respiration, amongst others.

We also saw strong growth in our respiratory care products throughout Europe, including continued adoption of our Stellar ventilation platform.

Mask growth was also solid across the European region with both the Quattro Air and the Swift FX Nano masks being well-received across the region.

In France, the government confirmed during the quarter that its telemonitoring requirements would take effect right at the start of this quarter on October 1. We believe that this announcement during the quarter dispelled any confusion in the home care provider space in France, and will help ResMed grow its share in both the flow generator and the emerging healthcare informatics space in France as well as across Europe.

We are starting to see success in the way we position EasyCare Online solutions for monitoring requirements, not only in France, but also in other parts of Europe.

Building on the strength in the US, this is becoming a global trend.

We expect that success to continue.

We announced on our website today that we have acquired an Eastern European-based distributor of sleep-disordered breathing as well as respiratory care products.

The acquisition is in Poland, a country with a population of around 40 million and a gross domestic product of around $490 billion.

This acquisition strengthening strengthens our presence in Eastern Europe, allowing us to expand ResMed's reach to help more patients with access to comfortable and effective treatment for respiratory disorders, and also to be able to more closely support the local home care provider networks in developing respiratory care as well as cardiorespiratory markets.

This acquisition is an element of our ongoing global emerging market growth strategy.

In the Asia-Pacific region, sales were lumpy, influenced by our business primarily in Japan.

The long-term opportunities in this region remain incredibly strong, especially in our emerging markets growth opportunities in this region, with a focus particularly on China as well as India.

In the Americas, we saw steady 5% flow generator growth, knowing that we were up against a very tough prior-year comparison, flow generators were up 17% in Q1 fiscal 2013 and we hit 5% in Q1 2014.

This 5% increase is in line with market growth, which we said is around 4% to 6%.

We are holding share in this category.

The strong mix shift from CPAP to APAP was evident again as the trend to home sleep testing continues to drive this mix shift.

The S9 AutoSet remains our flagship product in this region and it is growing well.

We are seeing a trend that new patient growth is very solid in the US, and we attribute some of the growth that is part of that trend to the increased availability of home sleep testing.

We estimate that approximately 35% of all US sleep diagnostic tests are now with HST.

This is driven primarily by payer mandates.

We also think that HST will grow in the next 12 months to around 40% to 45% of all tests done within the US.

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

We think it is around 55% based on our latest sleep lab survey data, but sleep labs are really engaging in HST and looking to offer it as a choice to patients.

And we are partnering with our sleep labs to help provide our ApneaLink services, our VPAP Dx services, and other services that can help them diagnose patients.

In terms of respiratory care devices in the Americas, we are seeing positive early trends with our VPAP STA and our VPAP COPD products.

You will remember VPAP COPD was just recently launched.

Both of these are now on the S9 platform.

These products have a long lead sales cycle and we expect this growth to continue over the coming quarters and beyond.

We are taking share in the respiratory care space and these products are positive margin contributors.

We believe regulatory approval of the Stellar product in Brazil is imminent.

And we expect that this will be a great geographic market for growth, given its particular homecare ventilation needs in that geography.

We're making good progress on our respiratory care pipeline and we plan to launch a new respiratory care platform for patients in fiscal year 2014.

Masks in the Americas were up against a tough year year-on-year comparison.

Masks, if you remember, grew 13% year on year in Q1 fiscal 2013.

We acknowledge that we lost share in this quarter due to a competitive product cycle, particularly in the nasal category and to a lesser extent in the pillows category.

We held share in the full face category, helped by initial momentum from the launch of Quattro Air.

It was released late in the fourth quarter.

As I stated in our press release, the Quattro Air is on its way to be our best mask product launches ever and there is lots of runway left for that product.

We are only at 90 days in.

We also launched the Swift FX Nano in the US during September, which is just a couple of weeks ago, the last month, obviously, of the quarter.

The Nano has a low profile nasal cushion, minimal headgear, and we expect the Nano to help get back on the front for -- in the nasal category.

We have had a leading position in the mask space for many years and we will maintain that.

We obviously expect competition in the space and we expect customers to sample new competitive products.

The increasing competition, in fact, in the nasal and pillow categories, demonstrates that the market continues to look for and reward new product innovation.

Despite the ongoing reimbursement pressures, we think that is good for our business because innovation is our strong suit.

We have an incredibly exciting pipeline of innovative new masks across all the categories coming out over the next three, six, nine months and beyond, with one mask launch literally just around the corner.

The [second round] of competitive bidding launched on July 1, the first day of the quarter that we are talking through here -- Q1, and that caused some distraction, as we have talked about, for our US channel in the quarter.

Our HME customers had new reimbursement rates that were announced in February, but went into effect on July 1. Remember, [CB2] is a significant part of Medicare, which is around 25% of the HME payer portfolio in the US market.

HMEs who won new CB2, or competitive bidding 2 -- obviously, CB2 is an abbreviation in this call.

Contracts in geographies with where they didn't have a brick and mortar presence now have to set up subcontracts.

HMEs who won CB2 in areas where they have an established presence now have to collect paperwork on the new Medicare patients and establish replenishment programs for those new patients.

HMEs who lost contracts in CB2 are now looking on driving new referrals for commercial payers, which is the other 75% of their payer portfolio, and on subcontracting partnerships for the 25% that is CB2.

It looks to us that CB2 has temporarily impacted volumes in the US market.

But as that distraction clears, volumes will pick up to meet the ongoing growth in patient demand.

As I said earlier, we have seen new patient growth that is solid and the underlying fundamental patient dynamic of home sleep testing is driving that.

And the fact that 85% of this most penetrated of our markets, which is the US, 85% of the patients still need to be diagnosed and treated.

That is a lot of runway ahead of us.

We continue to see the trends that sleep disordered breathing and COPD prevalence awareness and patient referrals are all growing.

It is notable that in the round one re-compete bid that was announced during Q1, the reimbursement rates for sleep and respiratory care products increased versus CB2.

We believe this is a very good indicator.

With CB2 rates and contracts now in effect and have been in effect for over 90 days, we are encouraged that uncertainty is receding and customers are focusing on how to succeed in this new environment.

We are partnering with our HME customers in helping them take costs out of our mutual supply chain and out of the system.

Our solutions include EasyCare Online, [New Sleep], electronic data interchange, replenishment optimization, drop-ship programs, PCP awareness, and patient engagement programs, and more in the healthcare informatics space.

As a particular example in the healthcare informatics management space, we announced an alliance at Medtrade during the quarter with Brightree.

Brightree is a cloud-based software development company.

The ResMed online store will now be integrated with Brightree's HME management solutions, simplifying the ordering process for our mutual HME customers.

So HME customers who use Brightree's systems will be able to order ResMed products with a single login, and access to inventory availability data directly in their own management systems.

This makes it easier to do business with ResMed and it makes it more cost-efficient to do business with ResMed.

Brightree's share of the healthcare informatics space is somewhere in the 30% to 40% range, we believe, in the HME management solution space in the US.

As the example of patient engagement programs, we just crossed over the one-year anniversary mark for our Wake Up to Sleep offering.

Wake Up to Sleep is ResMed's comprehensive sleep apnea support community.

It is intended to help people along their entire sleep-disordered breathing journey from awareness to diagnosis to treatment to ongoing adherence.

There are already multiple tens of thousands of people signed up for the program, which focuses on the lifelong value to the patient.

Once engaged, Wake Up to Sleep helps patients through their journey and helps them maximize adherence.

This benefits the patient, but it also benefits the physician, the HME provider, and the payer.

Finally, on the intellectual property front, we were just designated by an independent IP firm, Intellectual Asset Management, as a leading global Company in the Asia-Pacific region with, in their words, world-class IP functions and strategies, and strong IP protection.

So ResMed is seen by them as a truly global IP player committed to asserting its IP rights.

We have demonstrated this by defending and protecting our intellectual property and our solid R&D investments over the years with lawsuits against both Apex and BMC.

Let me wrap up with this.

Our respiratory medical market is no longer just about selling equipment to treat sleep-disordered breathing.

It is about forming partnerships with our customers and offering full-service solutions for patients, providers, physicians, and payers to help manage outcomes of chronic disease.

This solutions approach applies in our core market of sleep-disordered breathing, but it also applies in our growing respiratory care business as well as in our fast-growing cardiorespiratory business.

For these three horizons of growth, the combination of our world-leading quality flow generators, as well as the most comfortable and effective patient interface systems on the planet, as well as easy to access, robust, and actionable software solutions, makes ResMed the leading value proposition for our customers.

We have a robust pipeline of new products in both devices as well as in masks, as well as in future business process innovations that are planned for sleep, respiratory care, and cardiology.

We are laser-focused on bringing these innovative solutions to our market and we are managing the fundamentals of our business.

Those fundamentals are that we continue to improve patients' quality of life.

We continue to prevent disease progression, and we continue to reduce the burden of health care costs for critical, chronic diseases such as sleep-disordered breathing, COPD, and heart failure.

Now I will turn the call over to our Chief Financial Officer.

Brett.

Great.

Thanks, Mick.

Revenue for the September quarter was $357.7 million, an increase of 5% over the prior year quarter.

In cost currency terms, revenue increased by 4%.

Income from operations for the quarter was $96.9 million, an increase of 20% over the prior year quarter.

And interest income for the quarter was $80.9 million, an increase of 14% over the prior year quarter.

Diluted earnings per share were $0.56 for the quarter, again an increase of 14% than the prior year quarter.

Gross margin for the September quarter was 63.7%, an increase of 230 basis points compared to Q1 FY 2013.

On a year on year basis, our gross margin benefited from favorable currency movement, favorable product mix, and manufacturing improvements, partially offset by ASP decline.

Looking forward, we expect our gross margin to be in the range of 62% to 64%, assuming current exchange rates.

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 $101.3 million, an increase of 3% over the prior year quarter.

And in constant currency terms, SG&A expenses increased by 4%.

SG&A expenses as a percentage of revenue improved to 28.3% compared to the year ago figure of 28.9%.

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 $27.4 million, an increase of 1% over the prior year quarter.

Or in constant currency terms, R&D expenses increased by 9%.

R&D expenses as a percentage of revenue was 7.7% compared to the year ago figure of 8%.

Looking forward, we expect 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 pipelines, tempered somewhat by the depreciation of the Australian dollar, as a majority of our research and development is undertaken in Australia.

Amortization of acquired intangibles was $2.4 million for the quarter, while stock-based compensation expense for the quarter was $10.8 million.

Our effective tax rate for the quarter was 20.7% compared to the prior year quarter effective tax rate of 21.6%.

The lower tax rate this quarter reflects the ongoing benefit of lower effective tax rates associated with our Singapore manufacturing operations.

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 $201.5 million, an increase of 4% over the prior year quarter.

Sales outside the Americas totaled $156.2 million, an increase of 7% over the prior year quarter.

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

Breaking out revenue between product segments, in the Americas, flow generator sales were $88.6 million, an increase of 5% over the prior year quarter, reflecting solid growth in our APAP and bilevel B glasses.

Masks and other sales were $112.9 million, an increase of 3% over the prior year quarter, reflecting a very competitive market, particularly in the nasal and pillow segments.

For revenue outside the Americas, flow generator sales were $103.2 million, an increase of 7% over the prior year quarter, or in constant currency terms, an increase of 4%.

Masks and other sales were $53 million, an increase of 9% over the prior year quarter, or in constant currency terms, an increase of 7%.

Globally, in constant currency terms, flow generator sales increased by 4%, while masks and other also increased by 4%.

Cash flow from operations was $90.4 million for the quarter, reflecting strong underlying earnings in working capital management.

Capital expenditure for the quarter was $16.8 million, while depreciation and amortization for the September quarter totaled $17.9 million.

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

During the quarter, we repurchased 432,000 shares for a consideration of $21.1 million.

At the end of September, we had approximately 4.1 million shares remaining under our authorized buyback program.

We plan to repurchase at least 2 million shares during fiscal year 2014.

In addition to the buyback, our board of directors today declared a quarterly dividend of $0.25 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 $616 million, and at September 30, total assets stood at $2.3 billion and net equity was $1.7 billion.

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

(Operator Instructions) Andrew Goodsall, UBS.

Could I perhaps just dig in a little bit to the US flow generators, of course, and just ask you to clarify your comments or elaborate on your comments around volume and price?

You mentioned that being weakest in volumes or just disruption, I think, through the bidding process.

Yes, Andrew, so there was some temporary distraction that we talked about from the CB2 rates that we saw in Q1.

The Americas flow generators growth was 5% year on year, which is in the middle of that 4% to 6% range that we think is around that, so reasonably solid growth from us.

But, in looking at our partners, our HME business, and working with them, we noticed some distraction in, as we said, the contracts from the winners, the subcontracting from the non-winners, and the relationships that have to happen in terms of getting both prescriptions and referrals for patients who are on the replenishment programs for -- who transferred from non-winners to winners.

So all that together caused some temporary distraction during the quarter and we think that has had some effect on the flow generator growth of the market.

And we did reasonably well, I think, in terms of holding our share in a pretty tough quarter for that where we hit 5%.

And just, when you look at that 5%, can you elaborate any further on mix or what was price versus volume, because you have spoken to the impact of price on the group before?

Yes.

So, as we talked about on our last call in the intervening period, around 5% to 7% is the sort of a year-on-year price reduction that we have seen.

If you remember last call, we talked about 4% to 6%.

So that is a delta of 100 basis points.

We think that is temporary and associated with the distraction that happened, particularly in the US market, and that 5% to 7% can possibly go back to the 4% to 6%.

And we think that will happen as the distraction clears.

So without, Andrew, breaking out the specifics of exactly what unit volumes are, which we never do here, and we just talk about revenue growth, that 5% number has sort of all those factors weighed into it.

Ben Andrew, William Blair.

The question for me, first off, is talk a little bit about the revenue that you might be getting from ventilators and ventilatory kind of masks in the quarter in the United States.

And break that out, if you can, to give us a kind of raw sleep number, if that is relevant.

And then, second, just on the currency side for Brett, if rates hold steady, what do you expect for the quarter and the year?

I will take the first part and Brett'll take the second.

It will be a quick answer, Ben.

We are not going to breakout respiratory care versus sleep.

We are just going to keep to flow gens versus masks.

Brett, do you want to take the second part?

Yes.

I mean, the currency impact mostly benefited on the gross margin with the currency in this quarter.

And if you look through from Q1 into Q2, I still think we will see some favorable benefits there.

And I would estimate probably it's probably going to be in the order of 70 basis points, if currencies hold.

But I only would caution, as all these crept up a bit over the quarter, if you look then forward again into Q2, Q3, then you will see something like half of that 70 basis points reversing back in Q3.

So we are going a long way out in terms of predicting on currencies.

But if you think about it, Q2 will still see some favorable benefits from currency.

Then as you wash into Q3, they'll probably on a sequential basis reverse a little bit.

But looking kind of underlying theme of favorability from currency movements, I think we are still going to see that play out on the bottom line the next few quarters.

David Low, Deutsche Bank.

Just touching I masks, I mean, masks [breathe supply] and the growth in number of masks per a patient has been a big trend in recent years.

I was wondering if you could, one, comment on that.

And, two, just comment on whether you are seeing much brand change or seeing patients change the mask model they you use once they are already established users of CPAP.

Thanks, David.

Yes, mask resupply has been and will continue to be a strong element of growth long-term for the industry.

We have partnered very closely, particularly in the US market, with our customers to help drive replenishment programs really over the last three, five years.

And even beyond that in terms of helping them access, their patients understand adherence rates, understand the importance of that, for keeping the patient out of hospital, saving money for their health care system, and that it is good for the patients, it's good for the payer and it is good for the provider.

So there is a good incentive for all the parties involved.

And we have seen that grow really well, as you have, over the quarters.

We think that trend will absolutely continue and we will be a part of it.

Clearly, in Q1, we did not grow as fast as we would like to in the nasal -- and particularly the nasal category, but also somewhat in the pillows category.

With the launch of the Swift FX Nano, we are back on a firm foot in the nasal category.

And it has got an S-curve to go up.

But, as I said in my opening remarks, we have three great masks coming out across the categories over the next three, six, nine months.

And we believe that those will, again, it's on the front foot for the new patient setup.

On the second part of your question about switching patients, masks tend to be like those really comfortable pair of jeans or those really comfortable pair of shoes where it is hard to get someone to change.

And if they change, they often buy the same pair of jeans or the same pair of shoes that they were wearing before.

And it is difficult to get patients to switch.

We think that fundamental is still there and that is why it is all the more important for us to get these great new masks out, and get back on the front foot for new patient setup, because there is a trailing revenue opportunity -- and a trailing opportunity to really help the health care system by keeping those patients with masks for their lifetime.

Saul Hadassin, Credit Suisse.

Mick, just a question on -- you mentioned the temporary disruption that you [saved post company].

Can you talk to how long that disruption is likely to last?

Thanks.

Thanks.

Yes, it's a temporary distraction in the US market, as I said, with CB2.

The US market, which is 50% of the global, fits within that 25% that other [payer side] that is Medicare.

That temporary distraction -- how long is a piece of string?

We don't have a 100% knowledge on how long it will take, but we believe it is a matter months.

It is not a matter of weeks, but it is not a matter of quarters.

This is a matter of months and we think the US customers have been dealing this for now 90 plus 20.

We are talking 110, 114 days now.

It is not new to them.

We have been partnering with them over this period.

They know what the challenges are and they are working hard at getting all the paperwork sorted out, getting the subcontracts sorted out, getting the new prescriptions, getting the patients on their databases and working with them.

And we are partnering with them, as we said, with things like the Brightree to make it single order entry, single approach to it to one healthcare informatics system to be able to order and resupply.

So we think that over the next number of months we will be able to help them through that process and we are pretty confident in that.

Jim, I don't know if you want to add a couple of comments.

Jim Hollingshead, who is our President of the Americas, might add a couple of comments (inaudible).

Sure.

To give you guys a sense of the scale of it, roughly half of competitive bid 2 contracts were won by HMEs who did not have physical facilities in the place where they wanted.

And so, as Mick referred to in the opening comments, that means that there is a lot of subcontracting arrangements that have to be worked out.

And so if you think about that side of it alone, and just think of the contracts that have to be set up and the subcontracting model is actually new, for the most part, in the HME world.

And so there is a big administrative burden.

Once you figured out a model, you have got a lot of paperwork you have got to do.

And you have got arrangement you have to set up around things -- who owns the inventory and how does it get shipped and things like that.

So it creates an extra burden on top of, in parallel to, the reimbursement cuts.

And so how long will it take to work through?

We see people working through it already.

Our customers are very good businesspeople.

They have historically shown real resilience in dealing with administrative burden created by both government payers and by Medicare and by private payer.

So we think we see them working through it now and we think it is probably months and not weeks, but it is not an all-year thing.

We think we will they clear it and we think they are working through it right now.

Follow-up question for Brett.

Just wanted to ask where you are at in terms of manufacturing production out of Singapore and where you think that might get to over the next 12 months or so?

Yes.

We are around the 60% mark.

We are a little bit more on the flow gens, a little bit less on the mask, but you could sort of blend it around the 60%.

And I think, as we said before, I think we just progressively kind of lift that as our production increases still.

So, won't predict exactly where we will be, but that will certainly become a larger percentage of our manufacturing out of the [con].

Steve Wheen, JPMorgan.

Just on your rest of world numbers, and Asia-Pacific you referred to as being lumpy, could you sort of give a little bit more color as to what is happening there?

And in particular in reference to Japan, what is going on in that market?

Thanks for the question, Steve.

I will hand the bat to Rob Douglas, our Chief Operating Officer.

Yes.

Thanks, Steve.

The Japan market has always been lumpy for us.

Probably you are aware we've got just a few large customers there that run very significant homecare businesses.

And they replenish periodically.

Tracking the underlying patient numbers and the whole progression of the sleep business there is progressing well, but order timing and that just meant that we were in a low part of the lumpy run in Japan.

We are very confident at the business there.

We have got great relationships with our customers and our teams are working well together in serving those markets.

That was really the main issue.

The other smaller markets in Asia-Pac all did pretty well and we saw good growth through the emerging markets in there.

But they are not yet material enough to show up on these numbers.

Okay.

And then just also on France, the formalization of that compliance regime, what sort of response are you seeing from the buyers in that market?

Okay, Steve, so we are 110 days in and we think it is months away on CB 2 lineup.

We are 23 days into the French announcement of the telemonitoring, and so three weeks.

Ann Reiser, who is our President of Europe, is all across this.

She is actually our previous president of France and ran that business since we hired her from Medtronic for almost a decade in sales and leading it.

So she knows the French market intimately.

And we have good relationships with both the authorities and excellent relationships with our customers in France.

We have seen this coming and have been planning for it.

We have had great learning from our US market with EasyCare Online now becoming the leader in healthcare informatics for the sleep-disordered breathing space.

And we have been able to scale that business very well over the last number of years in the US.

So we have the systems, the tools, and the scalable capabilities that we have now taken literally to within the country of France and availability now across the European Union.

So it is early days.

We think the customers are starting to get to grips around it and understanding how to work with us.

We think it is going to be a benefit for the S9 AutoSet with wireless capabilities and for our EasyCare Online solution in France.

But, Steve, it is too early days to say how quickly that S-curve will start to happen.

The starting gun just went off.

Matthew Prior, Bank of America.

Mick, just a question just peeling back the layers on CB a little bit further, the 100 basis points of both discounting on price pressure that you saw since the last update, can you give us a sense as to whether that was pressure from private insurers or payers?

Or was that driven more from a competitive element, given the volumes that are depressed from the distraction factor and the various manufacturers fighting for volume?

Matthew, we don't have visibility into the exact per customer, per payer knowledge of our customers.

And so what we do is look at it as a portfolio.

Clearly, globally we saw 100 basis points, with the 5% to 7% year on year price declines.

And so there is some impact there, but breaking it out between public and private is very hard.

What we know are the facts.

The facts are that CB2 was announced in February and went into play in July 1, and that is the main impact that has happened across that payer portfolio.

There have been very minor changes in private payers that are not out of the ordinary of what was happening over the last just five quarters but five years, so unaffected by CB or CB1 or CB2.

So I would say that you could deduce that primarily price changes were driven by CB2.

But we don't have true visibility into it.

So it is an assumption, but a pretty good one based upon the data that we have in hand.

And just a follow-up question.

I guess furthermore, have you seen any change in competitive behavior to the extent of, again, on year lower volumes from the destruction factor?

Or are the various manufacturers still behaving in the same manner that they should have behaved in that round one in previous quarters given this backdrop of low volume growth?

Look, I think the pricing behavior has been pretty steady in that 5% to 7% range.

I mean, clearly, the new product introduction behavior is that there have been a number of new products introduced by -- primarily our two major competitors.

Without going into detail we talked about the nasal category and pillows category being where they are looking to enter, and the customers are sampling those products.

We are very confident that not only the Quattro Air's success, but Swift FX Nano's a great start.

And without going into detail, but the pipeline that we have coming in the next three, six, and nine months will get us back on the front foot for that first-time setup.

So if I was to summarize competitive the behavior I would say it is about innovation and it is about competition through smaller, quieter, more comfortable and better for the patient because everyone is starting to realize that adherence is the outcome that matters.

That is what saves money for the payer.

It is what saves money for the employer and it is what benefits the patient directly each night.

That level of competitive behavior of innovating on value is something that we think is healthy for the industry.

But we also think plays to our strong suit over the last couple of decades, and is something that we are absolutely confident we can get back on the front foot.

Joanne Wuensch, BMO Capital Markets.

Could we spend a moment on gross margins, which were pretty spectacular this quarter?

How sustainable is that and what drove almost 100 basis points uptick sequentially?

Brett?

Yes.

Hi Joanne.

I mean, the big one sequentially would have been FX impact, so sequentially, that contributed around [90] basis points.

So you think on that, that basically most of that expansion, if you like.

But if you are still looking at trend-wise, we are still getting product mix benefits.

And things like CPAP to APAP, the respiratory care business, all those provided a bit of tailwind for us on the gross margin.

And some geographic mix.

We had the benefit around geographic mix this time around, which generally we probably don't get to the same magnitude we got this time.

So there's a few things playing out.

The other one is we are working really hard in the manufacturing and the cost outside of the businesses world, and you are seeing that sort of manifest pretty consistently now through the gross margin.

And we are absolutely committed to those programs.

So again, you will see them flying through as well.

And now what we are looking to do is, you have probably seen it here in the last year or two -- is really do enough through the product mix, through manufacturing logistics to offset those ASP declines.

Now I know you don't like to give revenue guidance, but given all of the pushes and takes that are happening in the first quarter and, quite frankly, the constant currency growth rate, which is a meaningful step down from where you have been, can you comment on what you think your revenue may grow at, even if it is a range for 2014?

No, Joanne.

We don't give guidance on revenues.

I will reiterate our market guidance that we believe that the global market will grow at 6% to 8%, flow generators will grow at 4% to 6% and masks will grow at 8% to 10%.

David Clair, Piper Jaffray.

Just kind of a bigger picture one for me, but how do you defend your market share from lower-cost manufacturers and the post competitive bidding environment?

And net trade it seemed like a lot of fringe players were talking about using this as an opportunity to take some share.

David, low-cost competition is nothing new in our industry.

It has been around for over a decade.

Millions of players at Medtrade, players who have been trying to enter this market and/or other markets, and when I say this market, I mean the one we are at in Medtrade, the US market and/or other markets around the world for many years.

And the way I'd look at it is if a supplier was unable to enter the Chinese market or the Brazilian market, and their levels would focus on quality and cost trade-off, what are their chances in the US market?

So I think it comes back to the fundamentals.

The fundamentals here are that healthcare systems are growing at a fast rate relative to GDP for every major developed country.

And the US is 18% of its GDP on healthcare.

Most of Western Europe is somewhere in the 10% to 12% of its GDP on healthcare.

Every healthcare system around the world is looking for outcomes and value.

And that is driven by long-term adherence and reduction of cost with improvement of quality of life of the patient.

We have focused very closely on this.

And every new product we bring to market, every new solution we bring to market is to take cost out of the system and improve adherence rate to the patient, and reduce the long-term costs for payers and for employers.

So in that environment with all that going on, I don't think a low-cost solution that has low value has a great opportunity to get into the market.

We have great value products at good value prices.

So this is happening on a global scale, but I guess you were in the US at Medtrade.

Maybe I will hand it to Jim Hollingshead to give some detail on what (inaudible) the US market with those new entrants.

The first thing, I think it's a great question, and I completely agree with mix answer.

But if I just think with our customers, the basic equation for our customers is they need products that work.

So they need to be able to easily set up a patient, they need to be able to track the compliance of that patient.

Make sure the patient gets compliance and then create a resupply model.

And so the better product works, the better off they are.

Our products work better than any other products on the market.

We have the best products on the market.

Most of the low-cost Asian entrants are producing products that really are not in that class.

They don't work that well.

They create cost to set up.

They create lower compliance rates, et cetera.

So it is not a very good value proposition.

Having said that, we are very mindful.

I mean, we are watching the competitor set.

And the key thing for us over time is to continue to be able to innovate with great product, which we have a great track record of doing.

So that is it.

Now, one of the things we found and I was going to actually suggest we might turn to Dave to comment is, the other issue is around our intellectual property.

So, in this space, intellectual property is very strong and as you guys know, we have defended our intellectual property against a couple of Asian entrants.

And that is another way we defend.

But I think that the -- basically, we defend -- we have great products that work and create more revenue for our customers.

Yes.

It is a good suggestion.

Dave, you want to address the IP side and the (inaudible) and beyond?

Sure.

So the key here is when people come into compete, and they compete using our intellectual property, we are not going to let it happen.

So whether that is a small competitor or whether it is a large competitor, we intend to enforce our intellectual property.

So that is a different question from the small competitor who comes in and tries to compete using their own R&D, which obviously they have to get off their own merit.

But we are not going to hesitate to continue to enforce our intellectual property against market entrants who want to use the innovation of our hard-working employees.

And that is something we are continuing to fight with Apex and DNC on.

We expect to continue to win those battles and then, at the same time, we expect to be able to prepared to launch them if we need to.

We prefer to see competitors respect our intellectual property and battle on the field, but if we need to battle in court, we won't hesitate to do that.

Okay.

Thank you.

In terms of the temporary distraction that you guys saw during the quarter, how would you -- would you kind of say that things started out badly in early July and they kind of got progressively better as the quarter rolled on?

Or was it just kind of depressed throughout the quarter?

David, we have daily conversations with our customers.

It's hard to get a read on this at that level of detail.

But what I can say is the temporary distraction is receding and it is a question on how far fast it recedes.

Our 111, 114 days in, it is better than 100 days in.

It is better than 90 days in.

And it is going in the right direction and we believe it will resolve over a matter of months.

The exact kinetics of it during the quarter is something that we just out have visibility to, but the needle is moving in the right direction.

Ian Abbott, Goldman Sachs.

Just wondering in bilevels whether you can talk to some of the initiatives you are doing to broaden the channel in the class of patients that use those products.

Yes.

Absolutely.

We are very focused on our VPAP STA, our VPAP COPD, and across our pipeline in the COPD space.

So that is the first market that we have huge opportunities for our bilevels.

The VPAP COPD product was just launched in the end of Q4, so it's at the initial part of its S-curve.

It involved some interaction through the pathway with the sleep lab where we have excellent channels -- access and channel control.

And we have our VPAP TX titration devices available in sleep labs across the country.

And so we are really excited about the opportunities in COPD.

Secondly, in the bilevel side, long-term there is a huge opportunity in heart failure.

And, as you saw, we talked about our European growth being very strong during the quarter.

That is helped by the fact that we are running SERVE-HF in France, Germany, the Nordics, as well as UK, as well as outside Europe.

But we are seeing a halo effect from that trial in the cardiorespiratory space.

So the AutoSet CS product, which is an adaptive servo-ventilation product, an extension of those bilevels, saw some incredible growth not just here in Q1, but over the last number of quarters.

That is a long S-curve.

And as we get to the end of results from SERVE-HF, which is mid-2015, there could be an inflection point in really accelerating those cardiorespiratory sales.

So I would summarize, Ian, by saying this is a great initial movement on our S9 by levels.

But there is a heck of a lot of runway ahead for us, particularly in the cardiorespiratory space.

Can I -- my question second, just changing topics to DME, so just wondering if you look at your US business, and breaking the DMEs into some of the large national, and then obviously you've got the regionals and then some of the smaller single person operator.

If you could look at, say, your business last year and then projecting your business maybe not this year, but maybe another year out, to what extent do you see the percentage of your business changing across those various classes of DMEs?

Is it going to be material or is it going to be relatively gradual?

Yes.

We have good relationships with all those segments of customers from large nationals to regionals to mom and pops.

As to the exact change of that over time, I'm going to hand to Jim Hollingshead for some thoughts there.

Jim?

Thanks, Mick.

The consolidation has been a gradual tectonic move in channel over the last several years.

And I think it will continue at that.

Logically, you might expect a little bit of acceleration to consolidation because of CB2.

But right now we are not seeing a massive step change on that basis.

And bear in mind, too, that DME is such a local business that in many cases the local setups will still be done by DMEs who are now subcontracting.

So I continue to see it as a more gradual movement.

Partnerships like our partnership with Brightree really help the regionals.

We have got [ADI] partnerships which really helped the nationals.

We have got PCP awareness, which helps the mom-and-pops, the regionals, and the nationals.

So we are looking to partner across the segment and across the categories of customers and products.

And we see it as a pretty solid and steady move going forward, would be my summary, then.

Dan Herrin, UBS.

We noticed that when we are talking to the market that there is a range of deals out there, as we would expect, so sort of discounts of volumes of those sort of things.

Just wondering how they impact the P&L over time and other discounts upfront or either account back.

Does the customer have to do a certain volume before they get the rebate?

So will that hit the P&L later on?

Just want wondering how that flows through over time.

Brett, you want to talk about how we account for our bills?

There will be a combination of all those, Dan, really, and on things like volume [rate backs] and so on, what you do there, you have to -- it is pretty dynamic in terms of estimating where you think volume is going to be.

And then if we think they're going to hit those then we certainly accrue as we go.

So it is not like you're just going to get lumped with them all (inaudible).

That will be spread out to the course of the year, or whatever the volume contract is over.

And then, of course, you have to make a call on what you think is really speaking -- what you think that particular customer will achieve in terms of volumes.

So I guess what I am trying to understand is that have we seen sales today that will actually result in lower sales when the [rate back] is headed back in future periods.

No.

No, because we would be accruing or offsetting an accrual for that rebate as we go.

Jason Mills, Canaccord Genuity.

This is Jeff filling in for Jason.

Wanted to switch gears a bit and ask about the termination of the distribution agreement with Care Fusion, which I think you announced about this time one year ago.

First off, is this timing correct?

And secondly I was hoping you could quantify the US flow generator business during the quarter that were from products that were part of this distribution agreement.

I'm trying to understand the impact over the next several quarters as you anniversary this termination of the agreement.

Jeff, the distribution agreement with Care Fusion was immaterial a year ago and it remains immaterial now.

How we are distributing the Stellar range of products, which were involved in that agreement, is that we have our own respiratory account managers across the US market, which is where that deal was focused.

And now respiratory account managers and our respiratory clinical specialists who are part of our core sales force have picked up this product.

And we did better in our first quarter without them selling our product than another team trying to sell our product over a whole year.

So we are seeing some good momentum with Stellar, which has done incredibly well in France and Germany where it was primarily designed for, but it is a really good upside opportunity that have come to us in the US.

But, particularly, as I mentioned in my introduction remarks, Stellar is a great product for -- in the Americas geography for Brazil where we see the need for home care ventilation.

And in some of those emerging markets, products that are in the value space in respiratory care have a great opportunity in that geography.

So the Americas, I would say, one of the best geographic opportunities is right there in Brazil.

But here in the US, we have taken over that distribution and we have started to move pretty well in it.

And there is more, as I said in my opening, markets -- remarks, in this market through the end of fiscal 2014, we are going to see some very interesting platform launches in the respiratory care space.

Anthony Petrone, Jefferies Group.

One on mix and one on the overall US market.

On mix, I'd know you don't tend to give mix on flow generators, but certainly APAP over CPAP has been a driver.

It seems like that was a driver of gross margin this quarter as well.

So I'm just wondering if you could just give us an update on the runway there as still left in that mix shift as we move more towards APAP over CPAP.

Yes.

So we won't break it out, Anthony.

But what I will say is that with 35% of the diagnoses in the US market, the home sleep testing, pretty much every prescription that comes from a home sleep test requires some type of APAP device.

And so there is sort of a good relationship between them.

It's not necessarily one-for-one because physicians get to see products like the S9 AutoSet and get to love it and want to use it for many of their patients, and prescribe it (inaudible) from the lab as well as from HST.

But if you are looking for an indicator, that may be one that can help you in your calculations for working the downstream split between APAP and CPAP.

But, one thing remains, is that there is a positive mix shift from CPAP to APAP.

Why?

Well, of course, there is HST trend in the US market.

But if you look at other markets around the world, APAP and particularly the capital S9 AutoSet has gained share because it is better for patients.

It adjusts during the night.

It adjusts night to night, and it is very good long-term care.

And so there are some good outcomes from that.

As people focus more on the outcomes and the value of therapy, we are seeing products like the S9 AutoSet get more and more attention.

That's very helpful.

And then, just on the US market, just going back to reimbursement trends overall, I know in the past you have touched on private reimbursement relative to CMS.

Is there an update as to where they stand relative to CMS at this point?

And perhaps, again, as you look forward, is there any indication of directional, where private pays maybe going?

Thanks again.

Sure, Anthony.

As I said earlier in the Q&A here, CMS is -- announced CB2 in February and went into effect in July and we saw some effect in Q1.

The private payers during the last 90 days did what they had done over the last nine years, which is the steady reductions over time by geography, by state.

There has been business as usual as we look across the private payer space within the US market.

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

Great.

Well, thanks, everybody, for coming and listening in on this call.

I would like to say thanks to our investors, to the analysts, and our many customers who listen to this conference call.

Importantly, I would like to take this opportunity to say a special thank you to the 4000 strong global ResMed team from Asia-Pac, Europe, and the Americas, for your hard work, dedication, and continued excellence.

Together, we are improving literally millions -- multiple millions of lives in respiratory medicine, one breath at a time.

Thank you.

Thank you, ladies and gentlemen.

This concludes that Q1 2014 ResMed Inc.

earnings conference call.

Thank you all for participating.

You may now disconnect.