瑞思邁 (RMD) 2014 Q2 法說會逐字稿

Welcome to the Q2 2014 ResMed Inc.

earnings call.

My name is Cherie 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.

Before we begin, ResMed has asked me to remind you that during this 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.

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

Additional information about factors that could cause actual results to materially differ from those in the forward-looking statements is included in the ResMed's SEC filings, which are available on the Company's website.

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 present that will be available to answer questions.

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

Mick, please go ahead.

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

As usual, I will review the highlights of our fiscal Q2, and then I will hand the call over to Brett to go through the quarter in some more detail.

So, first, the financial summary.

Global revenue in the second quarter of fiscal 2014 grew by 2% year on year to $384 million.

That's up 1% on a constant-currency basis.

Europe, Asia, and rest of world headline revenue increased 8% for the quarter to $178 million, which is 5% on constant-currency terms.

Americas revenue decreased by 2% to $207 million.

We believe the long-term global growth rate for our industry remains in the 6% to 8% range.

Net income for the quarter increased 11% to $86.6 million.

GAAP EPS increased by 13% to $0.60 for the quarter, while hybrid EPS, which includes the amortization of intangibles, was $0.61 per share.

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

Let me start with the Americas where clearly we had some external headwinds and where we were not satisfied with the results.

The Americas had a challenging quarter with overall sales decreasing by approximately $5 million year on year, which was 2% on a year-on-year basis.

It is interesting to note that it was approximately $5 million increase on a quarter-to-quarter basis, which is a 3% sequential quarter-to-quarter increase.

Sales revenues from masks were flat year on year, while flow generator sales revenue declined by 5% year on year.

It is also of note that we were up against some very tough prior-year comparisons in both those categories.

Flow generators were up 16% in Q2 fiscal 2013 and masks were also up 16% 12 months ago in Q2 fiscal 2013.

However, the result was not solely a reflection on these comparables.

I will walk through the two key areas of impact in this regard.

Firstly, competitive bidding, and secondly, competitor actions in the marketplace.

So first, on competitive bidding.

US market dynamics were challenging in Q2 and remain challenging today, as we have been discussing.

The distraction we saw in Q1 continued throughout Q2, as we had indicated it would on our call.

And our customers have grappled with the US reimbursement changes that went into effect in July for Medicare patients, which is [CB2].

As we discussed on our Q1 call, winners and losers of competitive bids adjusted their market strategies and structures, and this temporary distraction caused a net reduction in sales volumes for the quarter.

Patients are navigating their way through the new HME landscape, while HME providers simultaneously try to ensure that patients they are picking up meet their reimbursement and documentation criteria.

This occasionally causes what are so-called orphan patients who are not able to be serviced by the old or a new HME.

And this has reduced net volumes for the quarter.

This also impacts new patients as winning HMEs establish a presence in new territories through subcontracts, acquisitions of assets, or greenfield facilities.

As we work through these challenges with our US HME customers, we continue to believe that this interruption in volume is temporary.

Customers are developing new business models and footprints and finding ways to serve both new and existing patient needs.

While it is hard to predict the future precisely, we continue to think that there is a number of months before the market stabilizes.

The key signs we see indicating that this is the case are that the distraction is beginning to recede in some leading indicators in the US market.

First, we continue to see new patient growth in the US in PCP visits, in elective procedures, and in referrals to sleep physicians.

Second, many of our US customers are picking up existing and new patient volume through asset purchases and referral pathway development.

The other key area I want to walk through regards to competitor actions.

We saw impact from our competitors in Q2, in addition to the external market conditions.

On the product introduction front, we saw strong competition in both the nasal mask and the nasal pillows categories.

Product introductions from our major competitors have reversed some portion of the share gains that we've had in these two categories over the last number of years.

Competitive pricing, particularly in the CPAP category, also influenced our results.

And we are establishing appropriate value pricing premiums to ensure that we get back to taking share in that category, too.

Let me go into a little more detail on product introduction.

We are executing to our plan that we talked about in our Q1 call to bring our strong product pipeline to the market.

This product innovation dynamic is a return to the competitive product cycle that we have demonstrated for over two decades in this market.

We are confident that our new product offerings and our pipeline can address this challenge.

It is a game we have played before and we know that we can win.

Last quarter, we said we would launch three new masks throughout this fiscal year and we're executing well against that plan.

At the beginning of last week, we launched the AirFit P10, our latest nasal pillow system.

This is our quietest mask to date.

It is 50% quieter than the market category leader, our existing Swift FX.

The AirFit P10 is literally whisper quiet.

It is also 50% lighter, weighing in at just 1.6 ounces.

And finally, its revolutionary vent technology, which we call QuietAir, gently diffuses the air, minimizing disturbance to both the patient and their bed partner.

After only two weeks in the market, the AirFit P10 has received many positive reviews in social media, on the online stores, and from patients who have tried the product with our US HME customers.

I personally have been using this product for the last two months, and I've got to tell you it is the most comfortable, quiet, and effective mass mask that we have brought to the market.

Continuing with our announced product innovation plan, we will launch two additional new masks during the balance of fiscal-year 2014.

We expect them to similarly be well received by patients, providers, physicians, and patients.

Let me also go into a little more detail on pricing.

Clearly, the pricing environment is very competitive in the Americas.

Pricing declines impacted our results across the board in the US, but especially in our CPAP product category.

Going forward, we will continue to evaluate our price premium, category by category, segment by segment, and we will ensure that we are appropriately positioned, reflecting both the current market realities and the superior value proposition that our products deliver to our patients and to our providers.

Importantly, I want to let you know that, for competitive reasons, we are not going to announce the details of our average selling price changes, whether global or by region or by product segment.

The reason behind this is that, one, other market participants do not publicly reveal their amount of detail, and two, we are concerned this information may affect us in the marketplace.

In short, we don't believe doing so is in the best interest of our shareholders.

Finally on the Americas, and before turning to Europe, Asia, and rest of world, there are a few bright spots in the Americas results for Q2.

We saw good growth of our Adapt SV and Stellar devices, reflecting our emerging growth in both cardiology and respiratory care markets.

The Stellar received regulatory approval in Brazil during the quarter, and we're encouraged about the prospect for respiratory care in the Latin America market over the coming years.

The VPAP COPD, which is the first and only device with an FDA clearance with an indication for use to treat COPD, is gaining traction in respiratory care.

And finally, accessories sales for both flow generators and for masks were solid, reflecting growth in the installed base and the fact that many of our customers, despite competitive bidding, continued to drive and increase their focus on patient replenishment programs.

So now, I'm going to switch to an overview on Europe where we saw good growth with solid performances in many countries, including our European dealer network, the UK, Switzerland, and both our German dealer business, as well as our German homecare business.

Two of the main drivers of growth in Europe were our respiratory care and cardiology markets, including in particular the products Stellar and AutoSet CS, which both produced good growth.

It is interesting to note that in Europe, plus Asia and rest of world, our flow generator growth year on year was plus 6% constant currency.

We also saw contribution from our recently released mask products in that region, the Quattro Air and the Nano.

In France, the previously announced telemonitoring requirements went into effect October 1, right at the start of the quarter.

We believe this development started to help and will help grow our share in flow generators in the region.

The emerging focus on healthcare informatics in France and throughout Europe as it grows plays to ResMed's strength.

We are seeing interest in EasyCare Online solutions both within France, but now outside France in various parts of Europe where customers recognize EasyCare Online is efficient and provides adherence benefits and high quality.

It also has incredibly strong and robust data protection that is increasingly important for these markets and also for our global customers.

We continued to expand our reach in Eastern Europe during the quarter, building on our recent acquisition that we announced in Q1 in Poland.

In December, we acquired Unimedis, which is a Czech Republic-based distributor of sleep-disordered breathing and respiratory care products.

The Czech Republic has a population of over 10 million and its healthcare spending ranks just below the general European level.

It has more physicians per capita than most other EU countries.

This acquisition allows us to drive market growth in emerging markets' opportunity in Eastern Europe, in Poland, and now Czech Republic across sleep-disordered breathing, home-care ventilation, as well as cardiology markets.

In the Asia-Pacific region, sales growth was light.

Although we were encouraged by progress in our cardiology sales in Japan, overall sales to our Japanese customers were not as strong as we would have hoped.

We expect Asia-Pac to be stronger in the second half of this fiscal year as patient flow remained solid in the region overall.

And we are partnering with our customers in the region to do so.

We saw good growth in China in Q2 and we remain confident in the long-term opportunities of emerging markets in Asia-Pac, as well as the more established markets in the region of Japan and Australia/New Zealand.

Turning to R&D, in addition to the patient interface product development that we mentioned on our press release and earlier in the call, we are also making good progress in our respiratory care pipeline.

We are on track to launch our next-generation respiratory care platform in Europe during this fiscal year, with a subsequent launch into the Americas and then into Asia-Pac.

We have a strong R&D team focused on bringing meaningful innovation to the market and the benefit to patients, physicians, and providers in this space.

It includes the diseases of COPD, neuromuscular disease, obesity hypoventilation syndrome, and beyond.

We are very encouraged by the results of the first patients who've been put on this next-generation respiratory care product, and we'll go into further detail in the coming quarters.

In short, horizon two of our three horizons growth strategy, which is this respiratory care market, is lining up for growth in Europe and in the Americas and Asia-Pac.

Watch this space.

Let me close with this.

We remain focused on the long run.

Our markets remain underpenetrated and our solutions provide symptomatic relief for patients, while slowing the progression of key chronic diseases, while saving money for the entire healthcare system.

We have the right solutions, we have the right people, and we have the right strategy to succeed.

And we are confident that we will continue to do so.

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

Brett, over to you.

Great, thanks, Mick.

Revenue for the December quarter was $394.3 million, an increase of 2% over the prior-year quarter, or in constant-currency terms, revenue increased by 1%.

Income from operations for the quarter was $105 million, an increase of 14% over the prior-year quarter, and net income for the quarter was $86.6 million, an increase of 11% over the prior-year quarter.

Diluted earnings per share were $0.60 for the quarter, an increase of 13% over the prior-year quarter.

Gross margin for the December quarter was 64.7%, an increase of 290 basis points, compared to Q2 FY 2013.

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

Looking forward, we expect our gross margin to be in the range of 63% to 65%, 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 $111.7 million, an increase of 4% over the prior-year quarter, or in constant-currency terms, SG&A expenses increased by 5%.

SG&A expenses as a percentage of revenue were 29.1%, compared to the year-ago figure of 28.6%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the vicinity of 29% for fiscal-year 2014.

R&D expenses for the quarter were $29.5 million, a decrease of 3% over the prior-year quarter.

In constant-currency terms, R&D expenses increased by 5%.

R&D expenses as a percentage of revenue were 7.7%, compared to the year-ago figure of 8.1%.

Looking forward, we expect R&D expenses as a percentage of revenue to be in the range of 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.

Amortization of acquired intangibles was $2.5 million for the quarter, while stock-based compensation expense for the quarter was $10.7 million.

Our effective tax rate for the quarter was 20.9%, compared to the prior-year quarter effective tax rate of 20.8%.

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 $206.6 million, a decrease of 2% over the prior-year quarter, while sales outside the Americas totaled $177.7 million, an increase of 8% 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 $88.7 million, a decrease of 5% over the prior-year quarter, while masks and other sales were $117.9 million, consistent with the prior-year quarter.

For revenue outside the Americas, flow generator sales were $118.3 million, an increase of 9% over the prior-year quarter, and in constant-currency terms, an increase of 6%.

Masks and other sales were $59.4 million, an increase of 6% over the prior-year quarter, and in constant-currency terms, an increase of 4%.

Globally in constant-currency terms, flow generator sales increased by 1%, while masks and other also increased by 1%.

Cash flow from operations was $84.2 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $19.7 million, while depreciation and amortization for the December quarter totaled $18.6 million.

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

During the quarter, we repurchased 1.5 million shares for consideration of $74 million.

At the end of December, we have approximately 2.6 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, consistent with our previously advised dividend policy.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $537 million, and at December 31, total assets stood at $2.3 billion and net equity was $1.6 billion.

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

(Operator Instructions).

Joanne Wuensch, BMO Capital Markets.

Thank you very much for taking my questions.

I actually have two.

The first one happens to be how much of the foreign-exchange uptick year over year is associated with foreign-exchange?

Brett?

How much of the earnings?

No, I mean your -- the gross margin was up well over 200 basis points year over year, almost 300 basis points.

I am just wondering how much of that is from foreign exchange.

On the margin, yes.

Year on year, Joanne, on the FX, it was about 140 basis points of that.

And that's mostly related to the Aussie, to the Australian dollar?

Yes, predominantly.

We have a little bit of benefit from the euro, but that's predominantly the Aussie dollar weakening.

Okay, and then I understand why you don't want to talk about your pricing paradigm, but can you step back and talk a little bit about what's happening to pricing in the industry?

Yes, Joanne, they are pretty much the same thing, asking what we are doing in pricing and what the industry is doing with pricing, given that we want to maintain our appropriate value premium over our competitors, but ensure that we are competitively priced to make sure we get back to taking share.

So specifically within the US market, we are looking at our value premiums and ensuring, based upon the market dynamics that are going on throughout Q1 and as we saw in Q2, to make sure that we get back to taking share across the segments.

So we are looking at pricing on a category-by-category basis, and an SKU-by-SKU basis, and a segment-by-segment basis, based upon how the customers look at it.

But to quantify that whether by industry or by us would sort of be parallel, and it doesn't make sense to break out either.

It's just not in the interests of our shareholders to do so.

Okay, just -- I'm going to push you just a little bit on that.

One of the things I am seeing from other companies that have products with competitive bidding is that the other companies around them are dropping prices that they need to respond to.

I am going to assume that's what's going on in your world, also.

Look, Joanne, we are the value premium leader.

We don't generally in our industry move down ahead of the curve.

So I think that's a safe assumption to say, and, yes, it's safe to say that we are more responding on the downward approach and trying to find and elicit the appropriate premium to maintain across each of the SKUs.

And we have got pretty good science behind us, and it's really just an adjustment of the external dynamics with our internal dynamics to make sure that it all makes sense.

But the premise does sound like what we have been executing to.

Okay, thank you very much.

David Clair, Piper Jaffray.

I was just hoping, Mick, in the commentary you talk about a moderating impact to competitive bidding in the quarter.

Can you just give us some additional thoughts there?

And I know you talked about 6% to 8% global growth.

Do you think the US grew as a market or did it decline, and when do you think that we should expect ResMed to rebound and put up positive growth in the US?

Clearly in the US market, we talk about 6% to 8% is the long-term growth of this industry.

Clearly, there is some impact through competitive bidding, as we talked about, when the patients get moving from HME A to HME B these last 90 days, that it will have some impact on the growth.

We don't have it down to the decimal point, and to your point, it doesn't make sense to go there, but the leading indicators that we see are that -- and we have a lot of data on this, and some of its public and we have shared that on our latest investor presentation, that patient flow to primary care physicians are picking up.

Patient flow for elective procedures, which are analogous to referrals for sleep-disordered breathing, such as hip and knee replacements, are starting to move up.

Referrals specifically in our industry to sleep-disordered breathing specialists are starting to move up on the diagnostic front.

So all these leading indicators are macro and generally public and allow us to talk about them.

We have many other indicators that we have, customer by customer, as they buy assets of patients that they are starting to monetize that asset, getting the paperwork together, working with patients to ensure their paperwork is at the standard of the acquiring HME versus the HME who sold the asset, and ensuring that they can get that replenishment revenue and get the patients back on the right care that's needed to be happening there.

So they are the sort of what we'd call, David, the green shoots of growth that we are seeing on these leading indicators to make us believe that the impact of competitive bidding is beginning to moderate in the market.

We are not dumb, but there are green shoots starting to appear, which, as we look forward the next 12, 24, 36 months, we see a whole lot of opportunity.

The change that we often get asked at is will be a one month or a three month or a five month, and we don't know exactly.

And so, we say it's a number of months for those green shoots to start turning to moderation of the entire market and for us to, as an industry, get back on a growth track.

And we think we are well positioned to do that and we are partnering with our HME customers to do that.

Okay, thank you for that, and then on the pipeline, obviously you guys have a lot of stuff going on there.

Can you give us a sneak peek at Medtrade?

Should we expect some material product launches coming up here?

David, we don't give sneak peeks on any trade show, not one from Medtrade or any of our trade shows in Medicare, in Europe, or elsewhere.

But I will restate what I said that we've three amazing new masks coming this fiscal year.

The first one is out there, the AirFit P10.

The other two masks will go on other categories, and they are very exciting.

Can't give you any details, David.

I can tell you that we have a respiratory care next-generation platform that is -- had its first patients on therapy already in Europe, and we are excited about a full product launch of that product before the end of the fiscal year.

That I can share with you, but no details at any of the trade shows throughout 2014, David.

Okay, thanks, guys.

Ben Andrew, William Blair.

So let's see, if we think about volumes and new patients are growing, and overall domestic CPAP was down 5%, and the lower side masks were flat, that has to suggest that existing patient volume on masks was -- volume was either negative or modestly positive if price is probably worse this quarter that it had been.

Is that a fair way to characterize it?

You used a number of different parameters there.

What we saw -- and I think what we said is that in the quarter, there were some volume impacts from competitive bidding.

That's clear.

As a patient is moving from HME A to HME B, and that asset is picked up, if they were on a replenishment cycle that was every three months and they're changing from HME A to HME B over a three-month or a six-month process, that maybe one of those masks in terms of the pickup or one of those cushions in terms of the pickup is left out.

So that temporary distraction is real for competitive bidding and will have an impact on market growth within a particular period of time within -- for a particular DME.

But to ramp that up over the 4,000 to 6,000, plus, HMEs out there in the US marketplace, it's really difficult to know exactly and to precisely pick where that volume change is occurring.

But the leading indicators of patient flow into the channel are there.

The analogy that we used at JPMorgan last week is it's like you've got a garden hose where the garden hose is the flow of patients is the water, and the garden hose has got a crimp in it, which is this competitive bidding.

And it's a [foldo] bend in the curve of the pipe.

And we are starting to work with our HMEs to uncrimp or unkink that garden hose.

And the water is starting to flow.

And so, the patients are starting to come through the channel, and they will get to an HME.

The new HMEs that are establishing in the areas where they won have to establish referral pathways and pick up those patients, and even established HMEs have to ensure those referral pathways are solid.

But as we look to the long term, we see getting back to that 6% to 8% market growth rate as something we will absolutely do.

There is not a structural change.

It is a temporary change that will allow us to help the customers and get us back to growth.

So, Mick, I guess my second question would be as the HME customers, obviously, have seen their profitability tighten, they are clearly coming back at you guys and asking for concessions.

Your competitors are responding.

You are now going to respond to that more aggressively.

You're not going to give us pricing information anymore, which is -- it's -- I understand.

But shouldn't we assume that this is a more permanent dynamic on the pricing side and that the volumes as they come back over the course of time with that new patient flow, that the structural growth rate has to be lower than it was before?

So I will hand to Jim to go into a little more detail on the profitability of the HME customers, and I will come back to talk to your point about long-term growth and why I think we can get back to the 6% to 8%.

Jim?

Hi, Ben.

I don't think the market dynamic that we are seeing right now is a permanent market dynamic.

I mean, that's your question.

I think what we are seeing -- we have been talking internally about how to describe what we see going on in the market, and the metaphor that we keep coming back to is like a thunderstorm has passed through town.

The storm is through, but there is cleanup, right?

And so, in talking to our customers, what we are seeing, we have talked about on this call before the things our customers have to go through with doing subcontracting and a lot of the larger customers are out doing acquisitions, and as they do that, they are buying -- they are either buying a business whole or they are buying a list of patients, and then have to figure out how to get those patients into their replenishment system and so on.

There is a lot of just logistics and administration that is working its way through the HME world right now.

There is pricing pressure.

There is clearly pricing pressure, and as Joanne said earlier, you have seen that in all the competitive bid markets.

But I don't think there's any reason to believe that what's going on right now is just a new normal that lasts forever.

I think the market is working its way through what we have previously described as distraction, and I think over the next several months, and as Nick said, very difficult to know how long that timeframe is, but over the next several months, we will see it stabilize.

So no, I don't think this kind of challenge is a permanent challenge.

I think we have to work our way through it as an industry, and we're working with our customers to do that.

Right, and Jim, what I was trying to get at is that I think the value proposition for a user in a lower reimbursement environment to the HME is more compressed, and so they are going to be more price sensitive to the higher-end product or to any product and less willing to step up on the mix side, which is the structural change versus the ability you've had in the past to keep moving that mix dynamic higher and holding price as a result.

That's what I'm concerned about.

I think the mix dynamic is still there, Ben, and here's why.

The CPAP to APAP mix shift is still going, even despite the compounding of the two effects.

We talked about competitive bidding and its volume impact, the competitor actions and the pricing impact.

So all that hit at once, yet still we see some growth there for us.

And as we are partnering with our customers to try and understand how to make that happen, the move to HSE is in play, and we said somewhere between 30% to 35% of the tests -- the diagnostic tests done in the US were home sleep tests in the last 12 months.

That will get to 40% within the next nine months, and it will then go to 45% and up and beyond, and we have said it many times, but the analogy is some markets in Europe where you're talking it's 70%, 80% of the tests being home sleep tests as a sort of endpoint.

That drives volume into the market.

It allows more patients to get into the diagnostic channel who may not have gone to a PSG.

This is all being driven by the insurance companies and payers, but it has a benefit of providing more volume over the long term and a positive mix shift, to your point on pricing, that allows that CPAP to APAP mix shift to happen.

Additionally, for ResMed as we start to launch more of our respiratory care products that we are launching in Europe and also launching in the Americas over the coming year or two, we will have a mix shift for ResMed that allows us to move to higher-end products where ASPs are just higher, and there is a mix shift from segment A to segment B that is a positive tailwind for us.

So that's why as we look at the market and as we look at our opportunities, we think a 6% to 8% market growth rate makes a whole lot of sense.

But going from the global macro -- I will drill back down to your question, which is on the Americas -- Jim, do you have any more to add there?

Thank you, Mick, I just wanted to add one thing to that, Ben, which is what we are seeing is actually what we have anticipated happening in the market, which is as HMEs are working through the challenges that reimbursement cuts have posed for them, their focus -- there is pricing pressure and that makes sense to us, but they are also looking for more efficiencies in their business.

And so, they are looking to do a couple of things.

Everybody wants to drive up their compliance rates, and that actually works in our favor because our products drive higher compliance, both on flow gen and on mask.

The other thing they are looking to do is to get each patient compliant and then to get them into replenishment programs in the most cost-effective way possible.

So that's why you have been seeing us focus on some of the (technical difficulty).

You have seen us improve our EasyCare Online platform.

You have seen us with our [unbion] subsidiary driving some automation into the process.

And you will continue to see things like that from us over the coming months.

We're working with our customers -- our products still get a premium.

They get a premium because they are better products, but we continue to enjoy a good position with our customers because we are helping to drive efficiencies into their business.

And so, we are very bullish on where we are taking our offering in that direction.

Thanks for the questions, Ben.

Thank you.

(Operator Instructions).

Matthew Prior, Bank of America.

Just a question in regards to the exit trajectory from the quarter.

Mick, you spoke about, obviously, this being a question of months, not necessarily quarters, in terms of when we see those green shoots having benefit.

But in terms of the three months of the quarter, can you talk us through, given the last six months of seeing the impact of competitive bidding, was September the darkest month of the six, to give us a sense as to how that line would look over the six months?

Yes, to determine the exact trajectory of this combines a whole bunch of factors across 4,000 to 6,000 customers, and as they look at their patient referrals in and as they look at subcontracting, as they look at building facilities, and as they look at developing new organic referral pathways.

So to pick down exactly where the nadir is and when the curve starts to move up is very difficult.

And that's why we're here saying, look, it's going to be a number of months for us to get through this and we don't know exactly how many.

By customer, of course, you have all the sort of dynamics going on, but if customer A buys customer B, then one has 100% growth -- they're doubling -- and the other is going to zero, yet the volume remains the same.

So putting that across our whole weighted average of our customers is a difficult equation, and then, you are predicting other market dynamics as to who is going to be better at developing referral models to cardiologists or to new pulmonary referral sources or within the US market as the development of the accountable care organizations, or ACOs, where hospitals and primary care physicians are now working together with shared costs.

You have other dynamics of cost and volume that go in on a market-by-market basis.

So predicting exactly where the bottom is and where -- how many months it is to see the trajectory moving up is very, very difficult, Matt.

Yes, I guess to clarify, Mick, what I was really after was, do you think that second quarter is the worst that we have seen in terms of all the dynamics going on around price and competitive effect and irrationality out in the marketplace, and behavior of DMEs and disruption of patients finding equipment?

Is it just a question of their rate of exit in terms of things get better from here, or given the dynamics are still in flux, could we see, obviously, another quarter of weaker performance than what we have seen?

I am trying to get a sense as to the dynamics you have seen, how long have they been going on, to the extent of could things get worse from here or is it just a question of the rate of trajectory out of the quarter?

Yes, so you listed about 15 things, which we are trying to predict all of them as we go forward.

And to say precisely in all those 15, we don't know.

Here's the thing we can control.

We can control our new product launch, and we just launched the AirFit P10, which in its first two weeks is flying off the shelves.

We will be launching two other new masks between here and June 30 that are similarly -- have huge opportunities for value generation for patients, providers, and for physicians.

And we're also launching, I would call, a leapfrog next-generation respiratory care system that I might ask Geoff Neilson to talk about some of its value as we've started to get our first patients on therapy in Europe for it.

So we know that we have the pipeline to start delivering and turning to strong growth here, and to get back to share gain in some of the categories like nasal masks and nasal pillows, and then, also, in the CPAP category with regard to appropriate pricing.

So we've got the plan of action ready to go, and I will go back to what I said in the early nights and what I said at the start of your question, Matt, which is it is a number of months for us to get back to that growth trajectory, but there are a number of bits in play.

Some are macroeconomic that we can't control.

Some are directly within our control, like delivery of products, and we have done a pretty darn good job over the last two-plus decades on that and we plan to execute on that over the coming six, 12, and beyond.

Thanks, Mick, understood.

And my second question is in regards to France.

Given the changes to reimbursement there and, obviously, informatics, have you seen anything in terms of the second quarter around mask consumption relating to those informatics in France in terms of that shift that has occurred?

I will hand to Rob Douglas to talk about France and the HI.

Thanks, Mick.

Matt, the French business has been going well.

We are encouraged by the performance of our system -- our online system and how we are picking up all the patient numbers, and managing the data, and also complying with all of the privacy rules and that type of thing, which are quite complex throughout Europe.

We think that's performing well.

In terms of other sort of structural changes, in terms of mask usage and things like that, it's still too early days to make a comment on that.

But we're pretty happy with the way the French business has been going in the light of those changes.

Okay, great.

Thanks, I will get back in the queue.

Thanks, guys.

David Low, Deutsche Bank.

If we just (technical difficulty) that is filed right there.

Mick, you began talking about that you think market growth could be 6% to 8% again.

But help us understand why rest of world growth at -- constant-currency growth, I think, is 5% versus that 6% to 8%.

What is holding back their business or perhaps the market outside the US at the moment?

Yes, so, David, the line was cutting in and out a little bit, but you were asking about Europe, Asia, and rest of world growth and how to get that to the 6% to 8% range.

Look, there are many impacts that -- I mean, many countries, obviously, when we say Europe, Asia, and rest of world.

We are talking about the other 99 countries were in, other than the US.

But within those markets, there are many different market dynamics.

We talked in some detail in the call earlier about Japan being soft in Q1 and also being soft in Q2.

We think there is some tailwind for us, potentially, in Asia-Pac as we look to Q3 and Q4, so that has an opportunity to get us back to stronger growth rates, and we think that can help get the rest of world number to where it should be.

Look, I've got to tell you, I was incredibly impressed by our European team.

We don't break down the particular countries within Europe or the particular countries within Asia-Pac, but there were some really good performances, particularly in northern Europe, within our teams of partnering with insurance systems, understanding the total value of the healthcare system and how ResMed takes patients with providers, takes patients out of hospital, puts them in the home, and treats them more cost effectively and saves money for a healthcare system.

And when you have socialized medicine and governments involved in healthcare, as you do in northern Europe, they are very heavily involved in analyzing all that.

So we have a lot of partnerships in the UK and northern Europe that are moving us down that road, and we are very excited about it.

So as we look to that long term and talk about 6% to 8% market growth, and do I feel confident that our Europe, Asia, and rest of world group can achieve in that range, I absolutely do.

We have got the right strategy, we have got the right people, and they are starting to execute on it.

There will always be some lumpiness from quarter to quarter, but as you look forward over four, eight, twelve quarters, we can absolutely see our growth being very solid within that range.

Great, thanks very much.

And just coming back to the US, trends in the (technical difficulty) through auto setting devices and then bilevel devices, I know you have mentioned it particularly at the gross margin, but just wondering with this move to competitive bidding and DMEs being under pressure, are you seeing any sort of pushback towards a basic CPAP, where in the past you were seeing a trend to auto setting devices?

Look, this is all being driven by the payer and the insurance companies, right?

When they moved the market from PSG to HST, they are driving it, and so when the payer establishes a home sleep testing protocol, it's going to require that the device go out -- that goes out is an APAP, because otherwise you have to bring them back into the lab to get them titrated.

So, payers are generally driving the HST shift.

They're also, then, driving the APAP shift.

So that's just a fact.

It is going to happen.

The bilevel opportunity is really about a broader opportunity, which is about noninvasive ventilation, and the idea there is bringing something that's been pretty well established in western Europe, which is using noninvasive ventilation to treat patients with COPD, neuromuscular disease, and obesity hypoventilation syndrome, to bring more of that and to grow that category within the Americas market.

I'm going to ask Geoff Neilson to talk a little bit about our global respiratory care business and how that might apply to allow us to get some of that positive mix shift in our ventilators.

So if we take COPD as an example, bilevel treatment for COPD in Europe is well established, particularly in Germany.

And ResMed is competing well in that space.

There is a huge opportunity for COPD globally, including in the US, but it's somewhat muted by the reimbursement pathways to actually get patients onto therapy here.

However, on the other side, that has created some large opportunities around higher-end ventilation products for COPD, and that is a segment that has really been growing quickly.

So that brings me into our new ventilation platform, which can be positioned for COPD in the US and also globally across the range for life support and ventilation.

So our Astro platform, we have started market trials in Europe.

We have had a significant number of patients on that device now.

It is being incredibly well received.

As Mick mentioned earlier, this is a leapfrog platform that was developed from scratch over the past years, and we're looking forward to launching that globally, but certainly in Europe by the end of this fiscal year.

And depending on FDA timing and so on, as soon as we have 510(k) approval we will ramp further up our ventilation sales force in the US and start driving into that couple hundred million dollar market with this product, which is replacing our Elisee [nps] ranges.

Great, thanks very much.

Andrew Goodsall, UBS.

Actually, just to take up that point on ventilation, you mentioned it's been growing quickly.

And I know you don't break it out at the quarter, but could you just characterize it at the quarter?

Was it actually growing and did it contribute to growth in this quarter?

Yes, so Andrew, we don't break out ventilation, and we will -- as Geoff talked to, it's a material opportunity for us, but not yet by country and by segment a material business that we will break out as yet.

But we are very excited about that product launch, and over the coming quarter, two or three, we will start to go into more detail as to the product launch and how that moves over time.

We are already a quite well-established respiratory care player in some countries in Europe, and so the product will roll into an existing referral and sales channel that we have already developed.

In other markets, as Geoff was talking about, the US market and some others globally, we are developing the referral channels and the pipeline, as well as bringing the product market.

So it's an S-curve that will go rapidly in some countries and slowly in other countries, but specifically to your question, Andrew, we're not going to break out the details in Q2.

But as we look to going forward, we will give more details of the product as it is launched in each of the different geographies worldwide.

Okay, and just with the masks, I think you're -- going into this quarter, you would have full contribution from the Quattro full face Air and the Swift Nano FX.

Obviously, from the quarters, there's a lot of noise in the numbers, pretty difficult to understand what traction you're getting.

Could you just again characterize what they might have been doing on an underlying basis?

Yes, so Quattro was launched mid-calendar year, so we are in month five or six of that.

We're actually seeing in the full face category, we are doing pretty well, and Quattro Air is a strong part of that.

And we like what Quattro Air is doing and customers seem to like the fact that it's 3.3 ounces and incredibly light on the face.

For the category of patients, the segment of patients that it's able to treat, the Quattro Air is doing very well.

Having said that, the Mirage Quattro and the Quattro FX, the other two full face masks we have, are also holding share quite well.

So we are reasonably comfortable with those.

The Swift FX Nano has had a good startup, particularly in Europe, Asia, and rest of world.

I mean, masks were up 6% headline and 4% constant currency in rest of world.

So the Swift FX Nano has started to have a pull-up, but it's launched in September timeframe in the US and a little later in Europe.

So we haven't seen as much material contribution from that in the nasal category, but we are looking forward to that over time.

But we're also, Andrew, looking very much forward to the next two masks and what contribution they're going to bring as we look forward.

Okay, and just a final bit of housekeeping.

Just going to ask the FX contribution to EPS and I think we got that number here from Brett?

Yes, Andrew, that was $0.05 this quarter, the EPS impact.

(multiple speakers) got it.

Terrific.

Thank you very much.

Ian Abbott, Goldman Sachs.

My first one is around share loss in masks.

Do you think you're losing share just in new patients or do you think there is some spillover into existing patients?

Yes, Ian, so as you know, we don't sell directly to patients, so we don't have any idea as to whether it's a new patient or an existing patient.

In the US market, we sell to distributors who move that forward.

As we look at the temporary distraction from competitive bidding impacting, as well as the competitor actions of new product launches, particularly in the nasal masks and nasal pillows categories, there is a whole combination of factors going on there and it's very difficult to discern that.

An underlying fundamental is that it is difficult to switch existing patients out.

It's like a comfortable pair of jeans or a pair of shoes that you love wherein you tend to stick to the same ones.

It's difficult to get a patient, particularly with something they wear every night, if they are comfortable and happy, firstly, you probably don't want to do it if you are a physician or a patient, or even a provider who might have a margin gain, the margin gain of that versus the margin loss of potentially losing the patient to another HME or not being able to switch the patient and spending the cost to do so generally means that they are not switched as often.

Having said that, we believe that the new products, the three new products that we're bringing out this fiscal year, the AirFit P10 and the two others, will allow us to get back to rapid gain of new patients and establish a therefore installed base that should be a replenishment for years to come on that basis.

Great, and my second question was around the cost side of things.

You have raised your guidance on SG&A from 28% to 29%; R&D, you pushed the guidance just to a straight 8%, previously 7% to 8%.

Is that a function of higher investment or is that more a function of lower expected sales outlook, and I suppose if there is -- if it's the latter, I'm just wondering how much ability is there to start to trim those expenses and how long would that take?

Ian, they are sort of rough estimates or a range of where we think we will be.

So I mean, that can easily move around from that number.

So it's not -- probably not the precision that you are thinking about.

We have got -- look, there is pipeline through on production, and so on, so you can expect R&D will really, I think, was some extent a factor of a pretty solid pipeline in R&D that we are undertaking.

We're not taking our foot off in terms of R&D and what we doing there.

And SG&A, we need to contain those.

I think we have done a reasonable job and we will continue to make sure we are spending it effectively and efficiently, but we will certainly be investing in some of these newer growth areas around respiratory care, around cardiology.

Geoff mentioned earlier in terms of ramping up, for example, some sales force in the US when the time is appropriate to support sales there.

So there's a number of those programs or projects that we definitely want to support, but notwithstanding that, clearly we want to continue to leverage on SG&A and make sure we are driving R&D expenditure efficiently.

So we will continue to do that.

So the short answer, yes, I think there is -- there is scope that I think that we can continue to be effective in those areas, and get -- drop that benefit to the bottom line.

Great.

Thanks, guys.

Saul Hadassin, Credit Suisse.

Mick, just two questions.

First one is I think in your opening remarks you spoke to what was happening on the competitive dynamics on the CPAP side of the business.

I assume you are referring to fixed pressure devices.

I was wondering if you could give us a bit more color as to what you are seeing there, whether it's share loss as opposed to just competitive pricing, and just what your response is to that?

And the second question is just with regards to your customer -- well, to your DME customers, whether you are actually seeing any consolidation yet, actual closures in particularly small to medium-sized players?

Thanks.

It sounds like they are US-focused questions.

Jim, do you want to address those two?

Sure, hi, Saul.

So yes, the CPAP dynamic that Mick was referring to in the opening comments was about the fixed pressure devices.

What we are seeing is continued growth in the AutoSet or APAP part of the market.

There is a mix shift underway across the whole market to AutoSet where we continue to do well.

In CPAP, what we're seeing is increased pricing pressure, especially at the low end.

That is a decreasing part of the market, so the low-end CPAP is actually a smaller part of the market than mid-tier CPAP, which is itself smaller than AutoSet.

And we're seeing more severe pricing pressure at the low end, so we have lost some share and there is pricing pressure down in that part of the market.

And as we said in the opening comments, we are looking hard at how we want to be positioned in that space in terms of -- we have a very good offering.

We are looking hard at how we want to be positioned as the category declines and we see pricing pressure there.

And the second one was with regard to HME customers and consolidation, and on that one, Saul, clearly with 4,000 to 6,000, plus, HMEs in the US market, there are some changes, as we talked about, as we go through.

I like the analogy of the storm going through and it's left some water there.

There is some cleanup there, and there will be some consolidation, and we have seen some of that and some of that has been public of some of these companies selling their assets from Company A to Company B.

The fundamental is that the patients are there, the volume is there, and it will increase over the coming years, and so to what extent there is consolidation, we can't precisely tell.

But we're working with those who won bids within the competitive bidding environment and those who are betting on the future.

And as we look around the HME landscape, there are definitely signs of an HME that is planning for future growth.

If an HME is investing in EasyCare Online, is driving [yousleep] to drive patient engagement and get patients adherent to care, and if an HME is using our electronic data interchange and programs to, say, use a billing system such as, say, Brightree, where you can do a one-stop shop and click to purchase ResMed products.

Then they are thinking about efficiency, they are thinking about scale, they are thinking about cost, and they are thinking about the long term.

And they are the type of HMEs that we are spending a lot of time working with to say, what's an appropriate price premium for our products and what value will it drive for you in the market over the next six, 12, 24 months?

And we are working through all that.

So we are very confident that we are working with those who are investing in the long term for this industry and those who are preparing for the long-term growth that we see of patients coming through the channel, both in sleep and in home care, respiratory care, and over the longer term, as we are already doing in Europe and Japan, in the cardiorespiratory space.

Okay, thank you.

Ben Haynor, Feltl and Company.

Just had a bit of a mechanics question on product introductions.

When you introduce, say, a new mask, do you typically see a larger -- or larger stocking orders to the DMEs and HMEs when the product is first introduced than you might see in subsequent quarters, or is the reorder rate often enough where that doesn't factor in?

More often than not, it's an S-curve that goes up over time.

There is not usually a large lump at the start.

It's more around spending time with the physicians, spending time with the providers, and spending time working with the channel to help get them familiar with the benefits of a new mask.

For instance, the AirFit P10 being 50% quieter and 50% lighter, you have to sit down there with the doctor and explain and show the benefits for it, and I think there is some early clinical data and a white paper showing a patient gets 40 minutes more of sleep from that product, for instance.

So you then need to talk to the physician and get them on board with that.

You have to talk to the provider to make sure it's on their schedule and negotiate pricing and so on.

So, if you like, it's an S-curve with a bit of a lag at the start, but then acceleration from there, rather than the other way around.

Okay, great.

So with a product like the AirFit P10, we should expect to see that go up the S-curve as time goes on?

Correct.

Okay.

Great, well, congrats on that product.

It seems like it is blowing the doors off.

Great, thanks a lot, Ben.

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, and as always, I would like to say thanks to all of you on this conference call for your interest and support of ResMed.

Most importantly, I'd like to thank the global ResMed team for our focus on improving the lives of patients one breath at a time.

We're above 7.5 million patients improved over the last 12 months.

Couldn't thank you enough.

Thanks a lot.

Bye-bye.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.