瑞思邁 (RMD) 2014 Q4 法說會逐字稿

Welcome to the fourth-quarter 2014 ResMed earnings conference call.

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

(Operator Instructions).

Please note this conference is being recorded.

Now I would like to turn the call over to Agnes Lee, Senior Director of Investor Relations at ResMed.

Agnes, you may begin.

Thank you, Larissa, and thank you for attending ResMed's live earnings webcast.

Joining me on the call today is Mick Farrell, our Chief Executive Officer, and Brett Sandercock, our CFO.

Other members of the management team will also be available during the Q&A portion of the call.

If you have not had a chance to review the earnings release, it can be found on our website at investor.resmed.com.

We have also posted an updated investor deck which may be found under the Events and Presentation section of the Company's Investor Relations website.

I want to remind our listeners that our discussions today may include forward-looking statements including, but not limited to, statements about future expectations, plans and prospects for the Company, corporate strategy and performance.

We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated.

Important factors which could also cause actual results to differ materially from those in the forward-looking statements are detailed in filings made by ResMed with the SEC.

I will now hand the call over to Mick Farrell.

Thanks, Agnes.

And thank you to everyone who is joining us today as we provide an overview of our fourth quarter and full fiscal year 2014 results.

I will review the market dynamics, provide an update on product launches, and review progress against our three horizons growth strategy.

Then I will turn the call over to our CFO, Brett, to walk you through our financial results in greater detail.

To briefly review the highlights.

Q4 revenue was flat on a year-on-year basis and declined 1%, excluding currency impacts.

Non-GAAP earnings per share grew 3% for the quarter to $0.64.

Non-GAAP EPS excluding amortization of intangibles was $0.66.

Our revenue was lower than anticipated during Q4, primarily due to headwinds in our US sales.

This was offset by very strong growth in Europe particularly, as well as in Asia.

Before I discuss our Americas results in more detail, I would like to emphasize that we believe that our performance in the US will improve over the coming fiscal year.

And there are three reasons for this.

One, the US market structure is stabilizing as we anniversary the second round of competitive bidding.

We have patient referral volumes starting to grow.

Two, the pricing adjustments that we put in place during Q3 will begin and continue to wash through the comparisons.

And three, the change in buying behavior that we saw from some US customers in Q4 to move away from end of quarter bulk deals to a more consistent ordering pattern should continue.

This latter point is good for us in the medium to long term as it steadies the supply chain for our customers, our suppliers, and for our global operations team.

However it clearly had a negative short-term impact that we saw in Q4 in the US numbers.

In terms of the factors that we control, our ResMed team will continue to execute on our strategy of launching new products, services, and solutions that provide exceptional value for our customers.

I remain confident in the more than 4,000 strong ResMed team, our global growth and our ability to execute to our long-term strategy.

Okay, let me drill down into our US sales into categories.

First, our flow-generated category and, second, our masks and accessories category.

We have seen continued stabilization in the underlying market trends with patient referrals and growth in volumes and referrals to diagnostic channels in our flow-generated category.

However, flow generator and the accompanying mask revenue softened at the end of Q4.

There were two key reasons for this.

One, the changing volume behavior that we noted previously in some large US customers.

And two, industry rumors circulated during the quarter regarding a predicted launch of a new ResMed sleep flow generator on July 1. It was actually a particular date that was part of the river.

Since we are past that date, it was clearly a false rumor.

In fact we are 30 days past it, but nevertheless it caused some customers to hold off on ordering from ResMed during the fourth quarter.

Consistent with our past approach to this topic, we have not given a timeline and we do not intend to discuss the details of our plans for our next generation sleep flow generator platforms.

And we are ready -- and when we are ready for full commercial launch, we will issue a press release and before that we will talk to our sales teams so that they can talk to customers, whether they be physicians, providers, or technicians.

Looking at the masks and accessories categories, sales were lower in the quarter compared to Q4 2013, due to three factors.

One, variations in customer buying behavior as we just talked about; and two, the continued year-over-year impact of new pricing structures that we introduced during Q3, as we also just talked about; and three, the transition to our new generation of masks.

The AirFit series.

So as we regain market share and ramp up on the AirFit series, that is part of the complication.

Specifically, we have seen good adoption of our AirFit P10 product in the pillows category since its launch in January.

Additionally, we just launched the AirFit N10 and the AirFit F10, respectively, in the nasal and full face categories during the first -- fourth quarter.

So our results for Q4 only include partial quarter sales for those products.

We expect that the F10 and the N10 will wrap up swiftly over the next few quarters and they have had a very solid start.

Physician, HMA customer, and patient feedback has been excellent on the whole AirFit series -- the P10, the N10, and the F10.

It is important to note in this mask category that we had a relatively high comparable growth hurdle from Q4 fiscal 2013, which was tough to overcome especially with a brand-new ramp-up of the F10 and the N10.

As you may remember from our call last October, we promised to launch three new mask systems during the back half of fiscal 2014 and we have delivered on that promise.

With the global launch now of the AirFit family of mass, ResMed continues to lead in product innovation, particularly in this mask category.

We have quieter, lighter, less intrusive and easy to fit masks than ever before.

We expect the mask product categories to perform very well in fiscal 2015.

On the diagnostics front, we continue to see an increase in home sleep testing and we expect that trend to continue as sleep labs expand their diagnostic options.

North of 60% of sleep labs now offer home sleep testing in addition to polysomnography.

And approximately 40% of US diagnoses in the last 12 months were through home sleep testing as insurers and insurance company colleagues continue to drive that trend.

Finally, on the Americas we are seeing strong traction of our healthcare informatics offerings.

EasyCare online continues to expand its reach and U-Sleep is rapidly increasing its penetration of accounts.

U-Sleep's core value proposition is to increase patient adherence while also lowering HME labor costs by up to 60%.

In the post competitive bidding world, this type of cost reduction and efficiency improvement is a necessity for our home care provider customers.

The ability for U-Sleep to text, email, and to use interactive voice response or IVR has been well received by patients and helps coach them on their treatment journey.

The net result is increased adherence which is good for everyone in the supply chain and the value chain.

The bottom line, the improving market conditions, new product flow and informatics solutions should enable us to significantly improve our America sales as we move through fiscal year 2015.

Moving on now to sales outside of the Americas, our Europe and Asia-Pacific regions were bright spots in the quarter, especially with respiratory care and cardiology sales.

Growth in these regions, particularly strong in Europe, partially offset our Americas performance bringing us to a flat global headline result.

The benefit of having around 50% of our revenue outside the US particularly in tough times like this in the US was well exhibited during fiscal year 2014 and especially during Q4.

We launched the Astral life-support ventilator in Europe and Asia during the quarter.

Although it is still very early in the lifecycle of a life-support ventilator, the Astral has demonstrated very good traction during Q4.

Astral is ramping up even faster than we expected and its value proposition in this platform has been presented to physicians, providers, and patients across the regions.

Customer demand is growing very rapidly and we are ramping up our operational ability to deal with that increased demand.

We are excited about the prospects for this platform in FY15 globally.

Our gross margins came in at the higher end of our expectations in the fourth quarter.

We continued to manage the key parts of the P&L better in our control, including initiatives to lower product cost and COGS and to leverage our global manufacturing and supply-chain capabilities.

Now I would like to spend some time talking about the progress against our three horizons growth strategy.

We are continuing to innovate in our first horizon which is focused on our core sleep-disordered breathing business.

During the fourth quarter we completed a detailed review and then made changes within our commercial and R&D teams to do two things.

One, to better align those resources and teams with our strategy and, two, to further increase the efficiency of our overall business and SG&A.

Brett will go into further details regarding the restructuring charge we took during Q4 as part of those changes.

Additionally, in our first horizon we have been taking actions to enforce our intellectual property throughout the fiscal year.

During the fourth quarter specifically, we incurred significant SG&A legal costs as two of those cases went to trial.

Those efforts also produced some early wins on the legal front.

We don't like to be in court.

We prefer to be in the design labs and talking to customers.

But we like it even less when we believe our competitors are copying our inventions and infringing our intellectual property.

When we are in court we like to have some battle victories.

Even if they are a small part of a larger campaign.

These last few weeks have seen two victories for ResMed over a small type A-based competitor.

The first win was in the US in the International Trade Commission where the ITC ruled that despite a redesign of its iCH CPAP device, the Taiwanese device manufacturer continued to infringe ResMed's humidification patents.

Also, in Germany we won a permanent injunction against the same manufacturer prohibiting sales of infringing headgear used on two of its masks systems.

The judgment was entered by the Regional District Court in Munich, is appealable and covers the entire jurisdiction of Germany.

In today's more dynamic and competitive market, we are committed to innovating and providing solutions to our customers while improving patient outcomes and reducing costs for global healthcare systems.

We invest 7% to 8% of our revenue back into R&D and we are choosing to defend that innovation in court to ensure that we can continue to have the ability to innovate, and ultimately make life better for millions and millions of untreated sleep apnea patients.

We are also making progress against our second horizon of growth which includes both the respiratory care market and new geographic market expansion opportunities.

With the full product launch of our new life support ventilator, Astral, in both Europe and Asia, we executed against that plan during Q4.

Also, during the fourth quarter we received FDA clearance for the Astral for the US market.

And we are expecting to execute that launch before the end of this calendar year.

On the geographic expansion side, we continue to make progress in our emerging markets and we had strong growth this quarter in these geographies, particularly in the countries of Brazil, India, and China.

We intend to remain focused on geographic expansion to drive growth within these countries and also other important emerging markets.

Our third horizon of growth focuses on cardiorespiratory and other new market opportunities.

SERVE-HF, our 1,325 patient clinical trial in heart failure, has now been fully enrolled for 15 months.

Our partners in SERVE are focused on event-driven data collection in the clinical trial size.

We currently expect the first publication from this study during calendar year 2016.

As this is a completely blinded trial, we will not know the results until the first part of the study is released late calendar year 2015.

We will continue to provide updates as significant milestones are reached.

During the quarter, I visited Professor Martin Cowling, who is the Cardiologist Principal Investigator of [Survey Chair] based in London at the Brompton.

In summary, the clinical trial appears to be running very smoothly from a logistics perspective which is a very good sign at this stage of a large clinical trial.

Also from Europe on the clinical front, there has been some recent encouraging data on the use of noninvasive inhalation and its impacts on mortality for COPD patients.

In a study recently published in Lancet, Dr. Thomas [Choline] and colleagues found that the long-term use of noninvasive positive pressure ventilation for patients with hypercapnia chronic obstructive pulmonary disease showed a substantial improvement in both survival and quality of life.

With the use of effective noninvasive ventilation, one-year mortality was 12%.

This compares to 33% in the control group leading to a relative mortality reduction of 76%.

This is quite an astounding result from the largest study of its kind.

This augers well for future growth of our respiratory care business.

During the quarter and for the full year, we have continued to generate strong cash flow and we maintain our commitment to return that cash to shareholders.

We have just declared a quarterly dividend of $0.28 per share which represents a 12% increase from the previously declared quarterly dividend of $0.25.

This is the second consecutive increase since we began paying a dividend in September 2012.

In addition, we ended the year having repurchased 4.4 million shares at a cost of approximately $208 million for the year.

We plan to continue with a strong capital management campaign for fiscal year 2015.

At a broader level for fiscal year 2015 we are expecting to see topline constant currency revenue growth improvements as we continue to drive innovation with the launches of new products in both our core sleep and our new and emerging respiratory care markets.

The sleep-disordered breathing markets remain underpenetrated with continued growth in patient volumes.

Clearly, short-term market conditions in the US are tough right now and we will continue to carefully manage our expenses in that geography, while appropriately funding our long-term growth initiatives globally.

In the US market, we are seeing the annualization of [CB2] which is the biggest round of competitive bidding and this augers well for ongoing channel stability and patient volume growth in the US.

In the Europe and Asian regions, patient volume growth has been strong in Q4 and we expect it to remain so throughout fiscal year 2015.

Here at ResMed, we lead the industry with innovative product offerings and we see ample opportunity to drive revenue growth through solid execution of those new product launches.

The solutions will bring value to our customers in FY15.

We will reduce costs for broken healthcare systems that badly need our help and also improve the life -- the lives and the quality of life for millions and millions of undiagnosed patients of sleep-disorder breathing, COPD, and cardiorespiratory disease.

We have exciting plans for fiscal year 2015 with new products, services and solutions.

In fact, I would say that we have the most exciting product pipeline that I have seen in the last 14 years here at ResMed and probably in our 25 years of existence.

Our team can't wait to bring that value to customers globally.

With that I will turn the call over to Brett.

Right, thanks, Mick.

As Mick has noted, revenue for the June quarter was $415.2 million consistent with the prior year quarter.

In constant currency terms, revenue decreased by 1%.

At a more detailed level, overall sales in the Americas were $214.9 million, a decrease of 7% over the prior year quarter.

Sales outside the Americas totaled $200.3 million, an increase of 9% 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.

America's flow generator sales were $99.3 million, a decrease of 5% over the prior year quarter, reflecting continued pricing pressures in a tough prior-year comparable.

Masks and other sales were $115.6 million, a decrease of 8% over the prior year quarter, reflecting a very competitive environment.

We expect an improvement in our mass trajectory in fiscal year 2015 as our recently launched masks continue to gain traction in the market.

For revenue outside the Americas, flow generator sales were $136 million, an increase of 9% over the prior year quarter or in constant currency terms, an increase of 6%.

Masks and other sales were $64.3 million, an increase of 8% 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 decreased by 4%.

Before I move to the [plain old] commentary, I would like to take a moment to walk you through the charges that were excluded in our non-GAAP earnings per share.

We have excluded the impacts of the restructuring charge this quarter and the one-time Sydney University charge in the prior year quarter.

As a result, non-GAAP income from operations for the quarter was $104.8 million, a decrease of 6% over the prior year quarter and non-GAAP net income for the quarter was $92 million, an increase of 1% over the prior year quarter.

Our non-GAAP diluted earnings per share for the quarter were $0.64, an increase of 3% over the prior year quarter.

Our non-GAAP earnings per share excluding amortization of acquired intangibles was $0.66 for the quarter.

Now, on a GAAP basis, net income for the quarter was $87.7 million and GAAP diluted earnings per share for the quarter were $0.61.

Gross margins for the June quarter were 62.9%, down sequentially from Q3 FY14.

On a year-over-year basis, our gross margin benefited from favorable foreign currency movements, favorable geographic mix, and manufacturing and supply chain improvements, partially offset by ISP declines.

For fiscal year 2015, we expect our gross margin to be in the range of 61% to 63%, assuming current exchange rates.

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

Moving onto operating expenses.

Our SG&A expenses for the quarter were $122.2 million, an increase of 6% over the prior year quarter.

In constant currency terms, SG&A expenses also increased by 6%, primarily due to higher legal expenses associated with patent litigation.

Excluding these legal expenses, SG&A expenses increased by approximately 3% year over year.

SG&A expenses as a percentage of revenue were 29.4% compared to the year ago figure of 27.8%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenues to be in the range of 28% to 29% for fiscal year 2015.

R&D expenses for the quarter were $31.8 million, an increase of 1% over the prior year quarter or 3% in constant currency terms.

R&D expenses as a percentage of revenue were 7.7%, compared to the year-ago figure of 7.6%.

Looking forward, and subject to currency movements, we expect R&D expenses as a percentage of revenue to continue to be in the range of 7% to 8% for fiscal year 2015.

This reflects our ongoing commitment to investing in our diverse product pipeline, informatics solutions, clinical -- and clinical trials consistent with our strategy.

During the quarter, we incurred a restructure charge of $6.3 million, resulting from the reorganization of our commercial and research and development teams primarily in our Sydney and San Diego locations.

The restructure charge included severance payments made to employees.

This is a discrete charge and we have expensed the full amount of $6.3 million in our fourth-quarter results.

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 17.7%.

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

Excluding the impact of the restructure charge, our full year effective tax rate was 20.1% and we currently estimate our effective tax rate for fiscal year 2015 will be in the vicinity of 21%.

Cash flow from operations was $115.6 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $18.5 million while depreciation and amortization for the June quarter totaled $19.8 million.

Our share repurchases continue to play a major role in our capital management program.

During the quarter, we repurchased 800,000 shares for consideration of $40.4 million and we ended fiscal year 2014 having repurchased 4.4 million shares for a total consideration of $208 million.

This represented approximately 3.1% of total shares outstanding.

At the end of June we had approximately 18.3 million shares remaining under our authorized share repurchase program.

In addition to our share repurchases, our Board of Directors today declared a quarterly dividend of $0.28 per share.

This represents a 12% increase over our previously declared dividend and demonstrates our commitment to delivering shareholder returns through our capital management program.

Indeed, on the fiscal year 2014 we returned 110% of our free cash flow to our shareholders through dividends and share repurchases.

We expect to continue to maintain an active share repurchase program in fiscal year 2015.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $605 million.

At June 30, total assets stood at $2.4 billion and net equity was $1.8 billion.

And with that I will hand the call back to Agnes.

Thanks, Brett.

We will now turn to Q&A portion of the call.

And we ask that everyone limit themselves to one question and one follow-up question.

If you have additional questions after that, please get back in the queue.

Larissa, we are now ready for the Q&A portion of the call.

(Operator Instructions).

Andrew Goodsall, UBS.

I am going to assume that you are not prepared to talk about the new product.

So, perhaps if I could ask the extent to which you think that the deferrals impacted in the quarter in anticipation of that product.

And if I could just throw a cheeky one in, just quickly ask also the impact of FX on gross margin or masks on just what influenced the gross margin increase as well?

Thanks for the question, Andrew.

I will take the first part of the question and, Brett, you will take the second.

It's very hard to understand exactly the extent to which the circulating rumors impacted our flow generator sales in the Americas.

It was really just in the US and just from a couple of competitors.

But it was reasonably broad spread.

That was not just one territory or two territories.

I know some executives who were traveling in the field during the quarter who told me they heard it from every customer.

And so it was pretty broad.

Understanding the depth of that impact and how it specifically hits our numbers in terms of flow generator growth for Q4 is very hard to say.

The good news is that our news from the field is that patient volumes as the channel has stabilized now with the annualization of CB2 that the patient volumes are there and so therefore a missed sale in Q4 should lead to, throughout fiscal 2015 as inventories required and patients continue to come to the channel that we start to get those back.

It won't be immediate.

But, Andrew, I'm sorry it is just very hard to quantify exactly what the impact of it would be.

But it was there and it was probably slightly material in some aspects in terms of the US sales.

Brett, do you want to take the second half of the question?

Yes, sure.

Andrew, yes, on FX on gross margin year on year it was in the order of 150 basis points, favorable for us.

If you look at it more on a sequential basis, it was a benefit of around 30 basis points for us.

And then currencies where they are just on a go forward, you look at Q1 like going forward probably have a head, we will have a headwind of around probably 30 to 40 basis points going into Q1.

Okay.

And to what extent do you think your efforts in masks sales ticked up the margin up as well?

It's just -- pretty small really, Andrew.

I mean those, they only just came through in the quarter.

So really at the early stages of [a traction] in those new masks.

I think that will manifest more through FY15.

Got it.

Thank you very much.

Ben Andrew, William Blair.

Good afternoon.

Let's talk about masks in the US and you guys have high market share.

Obviously you're (inaudible) target even with the great new products coming through.

This is not a great mask number.

What happened there?

Because obviously you were still selling the older mask for the bulk of the quarter and then the new one is starting to roll out, but what are you seeing competitively there?

You mentioned bulk versus kind of regular way but give us a little bit more flavor on US masks.

Yes, there are three factors that affected US masks.

One is the variations in customer buying behavior, right, moving from a bulk order to throughout the year type of steady behavior which is tough short term, better in the long term.

Two, there's the impact of the Q3 pricing reductions that we put in place so that we need to roll through the comparisons over a 12-month period of time in terms of the pricing impact.

And three, there's the impact of a transition to our new masks.

We just launched the N10 in the nasal space and the F10 in the fullface space literally during the quarter.

So you have only got a half quarter of sales or so from those two products in the category.

So, there are the three major effects.

You mentioned the fourth affect which is there in terms of the competitive dynamic.

And there are some reasonable masks from our competitors, they are not as good as ours, but we do compete out there and it's a tough market at times.

But we think that with the product portfolio that we have just launched this AirFit series, that over FY15 we have a very strong possibility for not only maintaining but growing share and rising with the market there.

I guess I'll stick to one follow-up and just ask directly.

Did pricing get worse in the fourth quarter versus third quarter or was it the same and do you think you gained or lost share in masks in the fourth quarter in the US?

Well, that was technically two follow-up questions, Ben, but I think that the price changes that we put into place in Q3 were reasonably effective and probably just went broader to more customers during Q4.

So relatively stable on the price side from Q3 to Q4.

Obviously on a year on year basis there was a significant price relief for our customers that, of course, we don't quantify now on these calls.

Cute question about market share.

You know, it is very hard by each category to get the details of market share in categories.

What I can say is that it is early in the ramp curve of the N10 and F10, so my conjecture would be that the N10 and F10 have a lot more runway to get market share over FY15.

And that if there was any market share gain in Q4 it would have been in the pillows category; if there are any stresses, it would have been in that nasal and fullface category.

But that is sort of just based on the timing of those product launches and where they are.

And thanks for the three questions, Ben.

Thanks, Mick.

David Low, Deutsche Bank.

Mick, could I start with the (inaudible) perhaps talk to us about change.

And I guess the question that comes out of that is if you have seen a hit in Q4.

Presumably we start to see a benefit particularly in the first quarter when things are typically a little weaker.

David, you were a little light at the start of that question.

Could you repeat the whole question?

I couldn't quite hear you.

The change in buying patterns that you talked about from made to customers, I just want to understand what changed and then what the impact is going to be in the future.

Most notably it seems to me that Q4 is a strong quarter when there's a lot of deals done towards the end of the period, so presumably we see some benefit from this change in patterns, particularly in Q1.

Is that reasonable?

Good question, David.

So, more granularity on the change in buyer behavior.

So, what we are referring to is that sometimes during the quarters whether it is Q1, Q2 are Q3, but particularly in Q4 there are larger bulk purchases by usually larger customers towards the end of the quarter.

And we saw those throughout fiscal year 2014, Q1, Q2, and Q3.

But not in Q4.

And the difference between missing or hitting on the US sales could be three or four deals to make up that difference.

And if you think about four deals over that $3 million to $5 million range you can start to see those types of numbers adding up.

The question of why those deals didn't happen in Q4 and why the customers are choosing probably to have a lower inventory stake are a eight more efficient operation, I think the answer is that they have all faced the reality now of 12 months of -- particularly in the US market, 12 months of competitive bidding round 2 impact.

And everybody in the space is looking for efficiency, for supply chain efficiency, for ordering efficiency and for making sure that operations are delivered to patients.

But that they don't have excess inventory.

So I think it was part of that and it came to a head in Q4.

I don't think the wash through is a 90 day wash through, though.

I think the wash through on an inventory supply chain when you start look on that is more of a 365 day timeframe.

It's total conjecture because I don't know the details of the operations or the 5,000 customers in the US or in the top 50 for that great level of detail.

But my conversations with top customers in the US are that they are looking for operational efficiency.

They are looking to take costs out.

For instance, that is why U-Sleep has been so popular.

Not only in Q4 but throughout the whole year.

Because people say if I can increase adherence by 10 percentage points and take labor cost out by 60%, that is a technology I need.

So I will start using then.

EDI technologies, just-in-time delivery, dropships to patients.

All these types of things are being used by customers.

So there -- that is sort of the summary of the 50,000 feet or the changes in buying behavior and I just don't have the granularity on a 10, 45, 90 day scale.

But my best guess is that it is a 365 day sort of adjustment that you would have if you were running a large business on that front.

Great.

Thanks for that.

One follow up then.

Brett, the legal costs looks to me like close to $4 million based on the comments you made about growth in SG&A.

But what should we expect going forward?

Are we going to see further legal costs of that magnitude in Q1, Q2, or is it going to come down?

To some extent it depends on timing of court cases, trials and so on.

There will be -- you can expect there will be some continuation of litigation costs through FY15.

I think the main thing is we are committed to protecting our patents in the marketplace and in our innovation.

So we will continue to do that and if that means we spend some money on litigation from time to time, then we will certainly do that.

So there will be some come through -- it was this quarter we did have the court case which was happening in that quarter.

So that probably popped it a little bit.

You could expect some base litigation, I think, will continue for the next few quarters.

Right.

Thanks very much.

Saul Hadassin, Credit Suisse.

Good morning.

A quick question on U-Sleep, if I could.

There has been some discussion more recently about the compatibility of some of the other manufactured devices across that platform.

Could you clarify, Mick, whether all manufactured products are still compatible with the U-Sleep product?

Yes, Saul.

So the question is whether U-Sleep is compatible with all manufacturers' products.

And the answer is yes.

The technology is perfectly capable of taking data from all manufacturers who are able to get data to the cloud that can interface with an API that can be accepted by our product, which is all the major manufacturers' capabilities.

So U-Sleep is perfectly, technically capable.

Great.

And a follow up.

You published that study quite recently, the abstract about the labor costs saves.

Can you talk to how effective that has been in terms of driving some higher U-Sleep subscriptions?

Yes.

Without going into -- because we don't go into details of individual customers, but what I can tell you is that that presentation at the American Thoracic Society from the main stage and then some posters and some follow-up with customers created some great buzz amongst key opinion leaders, physicians.

Because they see that the world of telemedicine is coming.

Digitized data is here to stay and that efficiency is needed for our global health care system.

So the key opinion leaders are on board.

Specifically as we talk to customers, particularly in the US with all the price pressures they have had particularly from CMS, they are really looking, as I said earlier, for efficiency tools.

And the data in that study were 59% reduction in total labor costs.

And if you are running your P&L and you look at what that reduction on that line is, even if you halve it.

Say, well, that was a clinical study, in practice I am only going to get half of that, it is a huge potential cost savings for customers.

So what we have seen is a lot of customers asking about it.

Our territory managers and our corporate account managers are talking to customers about it every day and we have seen good uptake from those customers who are doing pilots and trials.

Obviously, it is an S-curve of penetration for anything whether it is a mask, a software product or a new platform.

But a software platform when it goes it can go pretty fast because it is very scalable and it is digital.

And that is how it is designed.

We are very excited.

It is early days, but we are very excited about U-Sleep and the value it can bring to our channel particularly the providers, but also the patients.

Patients just love being coached and engaged on their therapy.

And moving adherence from 73% to 83% as we shown in that study may not sound like much, 10 percentage points, but for seven out of 10 to eight out of 10, that's a big needle move when you look at what pharmaceutical compliance rates are in the 50s and 60s at best with all the coaching materials they have.

The difference is that we have electromechanical device that we can send data to the cloud and we can coach that patient on what actually happened, not whether we think they took the pill or opened the cap.

So we are pretty excited about U-Sleep and its penetration and we can give updates as we go through FY15.

Thank you.

Eric [Fong], Bank of America.

Can I ask a question -- can I ask for an update on the Japanese market and as my follow-up can I confirm whether you are assuming the same level of market discounting in FY14 as was in FY -- sorry, FY15 as was in FY14 in respect of your gross margin guidance?

Sure.

Rob, do you want to take the question on Japan, maybe both of the questions.

Rob?

Sure.

In Japan, as we have constantly said, Japan does stay a lumpy market, given the business structure of our few customers there.

This quarter we had a pretty good run at it, and the business goes there and Japan remains a very good market for us.

We saw good patient reimbursement and a good opportunity because we think we can still get a lot more patients in that market.

In particular our cardiology products continue to do very well there.

Sorry, Eric, your second question on pricing.

It was on gross margin guidance.

I Are you assuming the same level of market discounting in FY15 as was in FY14?

The guidance of 61% to 63%?

Yes.

Maybe I can take that, Eric.

On the gross margin, yes, regarding 61% to 63%.

If you look at the pricing -- if you look at it year on year, certainly we -- the pricing or some of the adjustment we made in Q3 that will wash through Q4 and you are seeing that year-on-year impact.

That year-on-year impact that will still be with us through -- if you like the first half Q1, Q2.

So we will still see those year-on-year price declines, if you like.

And then but when you look at the second half and a lot of that would sort of anniversary in terms of some of those adjustments.

Now, we are not going to make any predictions on where pricing might head that far into the future, but think of it, that first half (inaudible) wash through, second half might be more normal with the caveat that that is going to be unpredictable, really.

Great.

Thanks.

Steve Wheen, JPMorgan.

Good morning.

I wanted to get you to clarify that restructuring charge of 6.3 where that fits and whether or not there is any likelihood of ongoing restructuring charges going into fiscal 2015.

Brett.

Yes And -- Steve, where that fits, what are you -- what do you mean there?

What sort of line -- where -- what line item would we be looking at if we were trying to normalize it?

Yes.

So it would be -- it is a combination around SG&A and R&D.

Probably a little more skewed on the SG&A side for that.

If you are thinking about that.

And at the moment, I mean it is important for us to keep looking and making sure we are doing things as efficiently as we can.

It is important for us to make sure our resource allocation is really focused on achieving strategic objectives.

So we will do that.

But this, right at the moment would not -- there's no plans on the table for further restructuring.

But we need to continue to make sure we are operating the business as efficiently as we can.

Yes, okay.

And back to that comment on Japan, Rob.

There was some issue with one particular distributor that sort of slowed down quite significantly.

Have you got any update on the way they are seeing that market and whether or not they are back to full run rate?

Yes.

Look, Steve, we don't really want to break out customer by customer data.

Japan is interesting because there's only a few of them as we have said.

But pretty well, I would stick with where I was at saying that the underlying business remains pretty strong.

We had talked some issues around -- similar with other markets around inventory policies and stuff like that.

But we think that the business will go forward on a pretty steady basis.

And the patient flow is really solid there.

So that creates the underlying demand for the products.

Okay, thanks.

Alex Smith, Citigroup.

You mentioned in the US, [the pressure fall into there], can you give us an estimate of what you think is going on at the market level in terms of market growth rates in terms of volume?

Thanks, Alex.

I will hand that question to Jim.

Yes, we think that patient growth rates are about in line with where they have been.

We haven't seen a big drop-off in patient diagnostics in any way.

We don't actually name the percentage growth rate on this call anymore.

We stopped doing that a couple of quarters ago.

But we haven't seen any [medical] (technical difficulty) decline in patient volumes in the US.

And as a follow-up, so really the dynamics you are seeing are [end] priced and share, you're not really seeing a huge change to underlying demand.

Yes, it is the flow-through of the Q3 price changes.

It is the changing in the buying behaviors of customers from mobile to more steady -- and some of the channel changes that have happened throughout Competitive Bidding Round 2 that have impacted -- all together those three factors have impacted the US growth results there in Q4.

Thank you.

Joanne Wuensch, BMO Capital Markets.

Good afternoon and thank you for taking the question.

Two questions really.

One is, you talk about review next year being greater than this year.

Could you ballpark what greater means and my second question is CMS has introduced a pilot program for bundling products.

Could you please comment on that?

Thank you.

Sure.

Thanks, Joanne.

I will take the first part and then Dave Pendarvis can take the second part regarding CMS.

Yes, Joanne, we don't give guidance with regard to revenue.

We are going to improve globally and we are going to improve in the Americas for FY15 because the macro conditions are going to get better.

CB2 is done which is the largest round of competitive bidding.

We are going to wash through the pricing changes from Q3.

We are going to work with customers to take waste out, including moving from more bulk to more day-to-day sales as best we can.

And we are going to manage that volatility.

So with all that, we know the needle is going to normalize and we are going to move the needle in the right direction.

Dave, you want to take the second part of the question which is with regard to the CMS pilot that they are looking at?

Sure, Mick.

It is a little hard to tell; at the moment what we have got is a proposed rule from CMS which hasn't become a final rule and the proposed rule itself is proposing pilots and about, I think, it is 16 markets as part of Competitive Bidding 3. Of course the timing of the third round of competitive bidding is itself part of a proposed rule.

It is not final yet.

But assuming all these things go through, it would be sometime in 2016 that they would start piloting in some of the CB3 regions of some form of bundling.

We don't know what form that will take.

And depending upon how it goes, we will obviously react to it and help our customers operate with that kind of a model.

So it is a long ways off, it remains to be seen how the final rules come out and how the pilots come out.

But we are familiar with bundling as it operates in different markets throughout the world.

So, we are confident that we will be able to work with our customers and work through this as it gets rolled out and look forward to the pilots.

David Clair, Piper Jaffray.

Good afternoon.

So the first one I just want to see is there any way to quantify a change in buying behavior on the US flow generator mask results?

And if I am hearing you right you think that this will take a year to normalize?

Yes.

So, David, difficult to quantify the exact one and you can only need a handful of customers to talk about changing a $3 million to $5 million end of quarter buying to others to have an impact.

So, we don't -- my answer to the question of how long it will take to wash through of that changing and buying behavior, I don't know if it will be a rapid deployment or if there is sort of efficiency approaches and they can get it done in a 90-180 day period or if it will be a little bit beyond that.

365 is the absolute outlier, right, because then it is annualized.

It has to be less than that.

The answer is, we just don't know.

It is how long is a piece of string on that.

So you are asking me to quantify something that I -- it is dependent upon the psychology of the customer.

It is very hard to go.

What we are doing with our US customers is partnering with them across the board.

Solutions like U-Sleep that we talked about to bring efficiency.

Products like Astral.

When we launched this life-support ventilator, which is the first life-support ventilator we have ever launched in the US market during this calendar year, we are going to be bringing to them choice.

The first time they have had choice in life-support ventilation.

And they are screaming for it.

And we can't wait to bring that for them.

And so we think that will bring some faster orders and maybe some upfront stocking orders as they need the stock to train their staff and get them up to speed on a great life-support ventilator.

So there are so many factors including the new masks and how quickly they roll up and what inventory is needed on those.

That understanding the exact inventory policies of even the top 10, 50, 100 customers, let alone the 5,000 in the US is very difficult.

So that is why, David, getting a specific quantification of the days of inventory roll through on average across the customer base is just very difficult.

I am sort of giving you the guard rails between 90 and 360.

The answer is, I don't know exactly where it will be within that.

Okay.

And then as a follow-up here, the reorganization, so what exactly did this entail, why are you doing it now and will there be any kind of disruption?

Yes, Jim, you want to take that?

Yes, well I can speak to the Americas reorganization.

Really what -- the way to think about what we did in Americas was to align with a strategy.

And so without getting into great detail we made some changes in some additions to the salesforce in preparation for the launch of Astral.

And then we made some changes to align across some business silos so we've done some things to better align the marketing organization and also to create better alignment between sales and marketing.

So it was obviously a lot of, if you will, effectiveness moves in alignment with strategy there.

In doing that, we also took the opportunity to look for efficiencies.

Don Darkin -- Don, do you want to talk a little bit to some of the R&D restructuring that we did and how that positions us for the future?

Yes, so we basically just shifted a few people around to really try to reshape the organization for some of the approaches we are moving into going forward.

So apart from some minor reductions in some areas, we are reshaping and creating some new areas for targeting going forward.

So I mean, David, in net, we are talking less than 1% to 2% or around 1% to 2% of our global workforce here.

Not a huge amount, but it was important for us to refocus our team towards the strategy and to where we need to be in 2015 and towards our three horizons growth strategy.

And so it was really around aligning our SG&A and aligning our R&D around those long-term strategies and making sure that long-term bets are all accounted for and some short-term efficiencies can be gained where we no longer need to expand assets and resources.

Okay.

Thank you.

Bruce Du, CBA.

I had a question around pricing and I guess it is more specifically to masks.

You mentioned that you haven't really seen a change from Q3 to Q4, but you are offering the sort of [deeper] or the broader discounts more broadly.

What are you seeing with regards to the pricing ahead of your competitors in 4Q?

Have they changed much at all from Q3 to Q4 and do you anticipate yourselves potentially having to move again or has it been relatively stable?

Yes, look, I think some of the competitive moves were more in Q1 and Q2 from our major competitors in the US market associated around Competitive Bidding Round 2 and our moves in Q3 were a response to maintain our appropriate premium over our competitors in that space.

And so it's steady.

Predicting what is going to happen in FY15.

I will predict there will be some price competition, but what I predict is when we launch our Astral product, which is the second of its kind, right?

It will be one of only two players in that market.

That price will not be the issue.

It will be about efficiency, long-term cost of ownership, the value and efficiency for the customer.

And the value to the patient of that life-support ventilator.

In our new masks, where you are able to get first time fit and easier to fit and easy to use, those values become very important when you are looking at the full P&L of managing your HME business.

So price is there.

It will always be there.

Our job and our job of our R&D teams, and the job of our marketing teams is to produce and then position and then provide through the sales team that value to customers so that they can get the efficiency.

And we are going to do that throughout FY15.

Okay, great.

Thanks.

Ian Abbott, Goldman Sachs.

Good afternoon.

I had a question around your -- on the balance sheet, the days sales outstanding seems to have gone up again.

And I was perhaps a little bit surprised to see that go up given you have talked about an absence of end of quarter sales.

I was wondering if you can reconcile that for me.

Brett.

Yes.

Ian, that's -- I mean in particularly in the US there's some longer payment terms I think that are out in the market nowadays really on comparative response from us.

And you will see -- and obviously that sort of doesn't manifest straightaway but will build up over time.

So you are seeing a little bit of that coming through in the days sales outstanding.

But not really.

It is kind of not really a factor or relation to some of the ordering cycles.

It is really something that was put in place a while ago that then starts to manifest in days sales outstanding.

Okay.

And as a follow-up, could I ask around some of the higher end products?

I'm not sure if you had mentioned on the call whether the shift is from CPAP to APAP is still ongoing and also some of the high-end products in the bilevel segment, just how they performed during the quarter and what the outlook for those is?

Yes.

So, we alluded to it a little in the prepared remarks, Ian, you are the first question on it, but the home sleep testing is now at 40% when you look at a trailing 12-month period of all US diagnoses.

60% being polysomnography.

It is being driven by the insurers and specialty benefits managers and others associated with insurance companies driving that switch.

And that channel is responding.

When home sleep testing increases, it does almost directly impact the shift that is continuing between CPAP to APAP.

And so we are continuing to see the APAP category increasing and that did continue during the quarter.

We didn't see any big major changes in Q4 for bilevel; pretty steady as a percentage of total sales through there.

The impact on all of them was the changing in buying behavior, the pricing and all the macro effects impact across all those segments.

But within the individual CPAP versus APAP categories we are seeing a positive mix shift from CPAP to APAP continuing, bilevels being steady and as we launched the Astral life-support ventilator; we will open up a brand-new category for us at the really highest end of the spectrum in terms of value and margin.

And value, all the way through to the COPD patient and neuromuscular disease patient that it might treat.

Thank you.

Anthony Petrone, Jefferies.

Good afternoon, good morning.

Just a little bit, Mick, on the DME ordering patterns.

Is there any maybe clarity you can give around all those longer-term supply agreements where they have committed to purchase commitments or are they just in a position now where they are ordering based on their needs?

And then one quick follow-up.

Thanks.

All right, I will hand that to Jim regarding US DME purchasing patterns.

Thanks, Anthony, for the question.

This is going to sound like a bit of a cliche, but every customer is different.

And so what we're seeing is a wide range of behaviors.

We have got customers who are getting more aggressive about managing their own inventory balances.

We have a wide range of different types of agreements so it is actually very difficult to characterized in the context and the way you framed it.

But I think we can say that we did see at the end of the quarter a change in behavior with some of our customers being more reluctant to do larger deals.

And I do think that that is hand-in-hand with some of the anticipation that is out in the market based on the rumor that was spread by one of our competitors that we were launching a product platform eminently.

So those two things were connected.

But it is very, very difficult to say because of the variety of behavior across the customer base.

No, yes, that's helpful.

And maybe a follow-up from Mick is previously you spoke on consolidation within the US of DMEs and that number was sort of in close to 8,000 and coming down a bit.

You characterized that number lower.

So I am just wondering.

Are we mostly complete with consolidation in your view or is there still a little bit more to go?

Thanks again.

Yes, Anthony, it is a good question and it is hard to know the exact answer to it.

We sold to more than 5,000 customers during Q4 just in the US.

As Rob was talking to earlier, I can count on my right hand, less, half of it the number of Japanese customers.

And so, yes it is north of 5,000.

Will there be more consolidation?

I will expect some further mergers and acquisitions activity within the DME channel.

I think quite a lot of it was pre-CB2 and during CB2.

I think now it is almost the survival of the fittest.

Those who have got through this year and have still got their cash flow and still got operating businesses and good relationships with referring doctors and good relationships with the patients who are members of their portfolio that they have the opportunity to continue to do that.

We are going to partner with all our customers.

The small, the mom-and-pop, the medium regionals, the large regionals, and the nationals.

And we are helping all of them with efficiency.

A lot of the tools we provide such as U-Sleep can apply to a customer across that spectrum.

So you don't have to be a large customer to use it.

Some of the others of sort of electronic data interchange and interfacing with the billing capability, we can do through partnerships with some of the small guys and directly with some of the larger ones.

So whatever the opportunity to bring value to all those segments of customers we are looking at doing it.

But to answer your question directly, do we expect further consolidation.

Yes.

Do we think it will be dramatic?

Probably not.

It will probably be an ongoing quarter-by-quarter consolidation of it without a major step change.

Thanks again.

We are now at the one-hour mark.

I will turn the call back over to Mick Farrell.

Well, great.

In closing I would like to thank the more than 4,000 ResMed employees who sometimes listen to this call around the world for their contribution to the world's leading respiratory medical inventions that position us for the future.

And we are going to continue to execute against our three horizons of growth and we are very excited about the product pipeline that you guys have developed and we get to launch during fiscal year 2015.

Our global team continues to be more than ever focused on changing the lives of millions of patients with every breath.

Agnes?

This concludes our fourth quarter and full year 2014 earnings life webcast.

If there is any additional questions please feel free to contact me.

The webcast replay will be available on our website at investor.resmed.com.

Thank you again for joining us today.

You may disconnect.