瑞思邁 (RMD) 2015 Q1 法說會逐字稿

Welcome to the first-quarter 2015 ResMed Incorporated 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.

I'll now turn the call over to Agnes Lee, Senior Director of Investor Relations. Agnes, you may begin.

Thank you, Larissa, and thank you for attending ResMed's live webcast today. Joining me on the call today are Mick Farrell, our Chief Executive Officer, and Brett Sandercock, our Chief Financial Officer. 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.

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 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 our shareholders who are joining us on today's investor call as we provide an overview of our first-quarter fiscal year 2015 results.

I'll provide an update on our new product launches, some key sales highlights and our progress against our Three Horizons strategy. Then I'll turn the call over to Brett, our CFO, to walk you through our financial results in greater detail.

As we promised during our investor call last quarter, the ResMed team has been focused on executing on our strategy of launching new products, new services and new solutions that provide exceptional value to all key players in our value chain. That includes physicians, providers, payers and most importantly patients.

We have delivered exciting offerings that begin to fulfill the promise in our core sleep apnea market with the launch of the Air Solutions ecosystem and its key enabling component, the AirSense 10 platform.

We are very pleased with our strong first-quarter growth and our overall results. We saw strength across our Europe and Asia-Pacific regions, as well as solid growth in the Americas. These results are primarily due to the success of our new product launches in both the sleep disorder breathing and our respiratory care markets, which includes COPD as well as neuromuscular diseases.

On a constant currency basis, we grew 6% year over year for our global business in Q1. We delivered gross margins of 62.4%, which is right near the middle of our guidance range. We have continued to invest SG&A to promote our new product launches. As you've seen from our recent press releases, we have launched products across our portfolio, including sleep apnea, sleep wellness and respiratory care.

Our GAAP diluted earnings per share grew 4% to $0.58. On a non-GAAP basis, diluted earnings per share was a $0.01 higher at $0.59. In the first quarter, we grew at 11% on a constant currency basis across our combined Europe and Asia-Pacific regions. Sales growth came from flow generators associated with our new product launches, as well as masks and accessories.

With the launch of the AirSense 10 platform in its early days, we see upside in Europe and Asia Pac as both the AirSense 10 and our new Astral platforms continue to ramp. In the respiratory care market, our leadership positions and our established channel in Western European countries have allowed us to rapidly grow our business and build good momentum with the launch of our new life-support ventilator, the Astral platform.

We expect this momentum to continue solidly in Europe over the coming quarters and fiscal years.

Additionally, we are continuing to invest in Asia-Pacific. This quarter we took advantage of opportunities to realign our distribution channels in several Asia-Pac markets, and we have started investing in a dedicated Asia growth initiative with a focus on China and India. We are planning for strong growth from China and India, as well as other emerging markets, including Brazil and Eastern Europe during fiscal 2015.

Moving on to Americas results, we had a very solid performance this quarter from the region. With the America sales team achieving a 10 percentage point growth turnaround from Q4 to Q1, resulting in 3% growth for the region in Q1 on a year-on-year basis. We are seeing US patient volumes growing in both flow generators and mask categories. We are very pleased with the initial progress of our US flow generator product launches. I'll talk first about our sleep apnea category product platform, the AirSense 10, and then I'll talk about our new respiratory care platform, the Astral.

We have received very positive feedback from our customers for AirSense 10, and although it is still early days, our sales are ramping up quickly, exceeding our original expectations. As a result of this excess demand, we ended the quarter with a modest backlog for some categories of AirSense 10 devices in the Americas. We are swiftly accelerating our manufacturing and supply chain, and we believe that we will catch our supply curve up to that growing demand curve during this fiscal quarter Q2.

In September, we also announced the launch of our new life-support ventilation platform, the Astral, into our US market. The Astral platform has some of the most advanced engineering that ResMed has produced, delivering key advantages for customers such as lower total cost of ownership for HME providers and increased battery life, which means up to 24 hours of freedom for patients.

We have received good feedback from our HME customers and our key opinion leader physicians on the Astral product, and we look forward to growing our US life-support ventilation presence with Astral.

Moving back to the sleep apnea market, the ongoing product mix shift from CPAP to APAP continues steadily as home sleep testing continues to grow. We estimate that approximately 40% to 45% of diagnoses in the last 12 months in the US were through home sleep testing. Almost every player in the industry from sleep positions to HME providers expects that private insurance companies will continue to drive this trend above 50% in the near future and beyond.

Looking at the masks and accessories categories, our AirFit range of masks had solid volume growth in the quarter. We gained share on a sequential basis. Customer feedback on the P10, N10 and F10 has continued to be excellent. On a sequential basis, volumes were up, and prices were relatively stable in masks.

On a year-over-year basis, we're still annualizing price changes from earlier this calendar year.

As a reminder, we are still expecting price to be a negative factor for year-on-year revenue numbers until the quarter ended March 2013. The anniversary of price adjustments that we made earlier this calendar year.

Now, I'd like to take a broader longer-term view and spend some time talking about progress against our Three Horizons strategies. In our first horizon of growth, we're driving engineering and innovation with the launch of our Air Solutions ecosystem and its key component, our AirSense 10 platform. We expect our bilevel range of devices, which we will call the AirCurve 10 platform, to launch in the US by the end of this calendar year and then into other key markets globally thereafter.

We're expanding our digital informatics offerings by increasing the connectivity from our Air Solutions ecosystem to the informatics ecosystems of our customers. In September, we announced the integration of Air Solutions with Fairview Health Services and their epic electronic health record system. This is just one example of ResMed looking to eliminate nonreimbursed costs from the value chain and to provide increased efficiency and profitability for our customers.

We continue to look for opportunities to link our technology to streamline healthcare processes and to drive efficiencies for our partners in the channel.

Earlier this week, we announced the availability of the ResMed Data Exchange program, enabling even more customers to integrate sleep and respiratory data into their own software systems. We want to liberate the data. Watch this space for further expansion of our healthcare informatics offerings for our partners, including HME providers, physician practices, hospital systems and beyond.

At the Medtrade conference in Atlanta earlier this week, we demonstrated a new personalized therapy management tool, which we call myAir. myAir is delivered through web-based applications that can run on both Apple's iOS and Android platforms. myAir allows sleep apnea patients to see data about their positive airway pressure therapy and to improve their engagement in their own health care. This patient engagement tool could reduce or potentially eliminate nonreimbursed costs for our HME provider partners and could ultimately support better outcomes for their patients.

myAir will be commercially available in the US market next week, and then we will release it to other key markets in the future.

We continue to believe that ignorance of the impacts of untrained sleep apnea is our major competitor in our first horizon of growth. So we are focusing even more attention on the importance of sleep quality for good health. In this vein, earlier this month we launched two important sleep awareness initiatives.

First, we launched an education- and product-focused campaign called Better Sleep for Women. As part of this campaign, we created a new website that educates women on how to achieve a better night's sleep and to provide a forum for women to discuss their sleep issues. Women are 40% of the patients presenting for sleep diagnostics, and they are well over 50% of the decision-makers in the healthcare space for themselves and their families. This is true across healthcare and particularly in the sleep space.

Our new AirSense 10 Autoset for Her product with its unique patented algorithm designed for female SDB respiratory patterns is a key part of this offering. This is not just great marketing. It is also solid science. This product has been very well received in its early weeks on the market.

The second initiative we launched is the world's first noncontact digital help device, which tracks both sleep quality, including light sleep, deep sleep and REM sleep, and the bedroom sleeping environment, including temperature and light levels. The product is called the S+ by ResMed.

The S+ by ResMed is a combination of a sleep wellness product and a sleep coaching service that delivers personalized sleep strategies to individuals. The S+ by ResMed has a patented noncontact sleep sensor technology, as well as sophisticated cloud-based algorithms that are backed by solid sleep science.

The data can be reviewed on a dedicated ResMed app, which runs on both Apple's iOS and Android compatible devices. The app itself is a free download from the cloud. The S+ by ResMed sleep wellness device is priced at $149. We have made the S+ plus available in the US market in the future at select Apple stores, as well as Bed Bath and Beyond stores, as well as online for US customers at both Amazon and a dedicated site mysplus.com. That is all one word.

The S+ has already been reviewed favorably in the Wall Street Journal, in Time magazine and on Fox television. We believe this tool can help engage some of the hundreds of millions of consumers around the world who have sleep issues and who want a sleep wellness tool to help them sleep better.

We believe that it will create meaningful conversations about sleep between consumers and their caregivers and loved ones, as well as with expert clinicians and physicians.

On the legal front in the first quarter, we reached a settlement with a small Taiwanese manufacturer called APEX. The agreement met our goals to protect our world-leading respiratory medical information and showed ResMed's strong defense of its intellectual property. We will continue to take actions to enforce our intellectual property and to defend the significant investment of approximately 8% of our revenues that we make into science and engineering within our global R&D team.

We are also making progress within our second horizon of growth, which includes both our respiratory care market and geographic market expansion. We have continued to see solid growth in our European respiratory care business where we have had a leading presence in home care ventilation for a number of years.

We expect to grow Astral, and it will build on its momentum from Q4 in Europe as government insurers continue to see the value of moving patients from costly hospitals to economic and more patient-friendly treatment in the home.

In September, we launched the Astral life support ventilator platform in the US. As I outlined before, we have received good initial feedback from customers. Combining our existing VPAP COPD noninvasive ventilation device and our new Astral life support ventilation device, we now offer our HME provider and pulmonary physician customers the opportunity to provide the right treatment at the right time for both COPD, as well as neuromuscular disease patients.

On the geographic expansion component of horizon two, we continue to make progress in our emerging markets with double-digit growth this quarter. I traveled to our India national sales team meeting this month, and I've got to tell you the energy level was palpable. Our country leader there, [Jito], and our entire India leadership team have an incredible outlook. Their commitment to real time expanding the future growth targets during the sales meeting is something that I have not seen in over 14 years at ResMed and 20 years in the healthcare and technology industries.

We intend to remain focused on geographic diversification with an emphasis on China and India, as well as emerging markets beyond Asia, including Brazil and Eastern Europe. So that in the future these markets become a material contributor for ResMed's global growth.

Our third horizon of growth focuses on cardiorespiratory disease and other new market opportunities. In terms of current contribution, our cardiology products grew strongly in Europe this quarter. Even though it is now 18 months since enrollment was completed on SERVE-HF, we're still seeing excitement in this space and good partnerships in patient care between cardiology and pulmonary physicians.

In terms of other ongoing clinical trials in heart failure, we are currently enrolling patients for our CAT-HF trial at sites across the United States. We expect to complete CAT-HF soon after the SERVE-HF trial data is first published, which we expect to happen during calendar year 2016.

CAT-HF is powered to show improvements in cardiovascular outcomes, whereas SERVE-HF is powered to show changes in mortality and morbidity with both studies using ResMed's proprietary, adaptive servo-ventilation technology. We'll continue to provide updates as significant milestones are reached for both of these important clinical trials.

It is worth noting that there continues to be clinical interest in positive airway pressure technology as a tool to help reduce the cost of care for cardiac patients. Dr. Richard Schwab and his colleagues at the University of Pennsylvania Medical Center published a study last week in the Journal of Clinical Sleep Medicine showing a reduction in hospital readmission rates for cardiac disease patients with adherence sleep apnea treatment.

Reduction of hospital readmission rates costs -- helps reduce costs and can help mitigate the reimbursement penalties that hospitals face when Medicare patients are readmitted within 30 days of a discharge. I talked to a lot of hospital CEOs and CFOs, and they are looking at heart failure and they are looking at COPD patient readmission rates very closely. We know we can help them with technology that includes positive airway pressure and also technology that goes way beyond their future.

Finally, on the capital management front, we continue to generate strong cash flow during the quarter, and we have maintained our commitment to return cash to you, our shareholders. We have just declared a quarterly dividend of $0.28 per share, which is a 12% increase from our previous dividend. And during the quarter, we repurchased 835,000 shares at a cost of approximately $43 million.

We plan to continue with a very strong capital management strategy throughout fiscal year 2015.

Let me close with this. The next 12 months will be very exciting for our global ResMed team as we continue to ramp up the launches of the new products that we discussed here as well as others and new services and new solutions across our Three Horizons of our growth.

We continue to focus on improving patient quality of life, halting the progression of severe chronic diseases and lowering the costs of highly stressed healthcare systems around the world.

With that, I'll turn the call over to Brett for a more detailed review of our Q1 financials and then to Q&A. Brett?

Great. Thanks, Mick. As Mick has noted, revenue for the September quarter was $380.4 million, an increase of 6% over the prior year quarter, and in constant currency terms, revenue also increased by 6%.

At a more detailed level, overall sales in the Americas were $207.2 million, an increase of 3% over the prior year quarter. Sales outside the Americas totaled $173.2 million, an increase of 11% over the prior year quarter. In constant currency terms, sales outside the Americas also increased by 11% over the prior year quarter.

Breaking out revenue between product segments. America's flow generator sales were $95.3 million, an increase of 8% over the prior year quarter. Masks and other sales were $111.9 million, a decrease of 1% over the prior year quarter.

For revenue outside the Americas, flow generator sales were $119 million, an increase of 15% over the prior year quarter and in constant currency terms also an increase of 15%.

Masks and other sales were $54.2 million, an increase of 2% over the prior year quarter and in constant currency terms a gain in increase of 2%.

Globally in constant currency terms, flow generator sales increased by 12%, while masks and other were flat compared to the prior year quarter.

Gross margins for the September quarter were 62.4%. On a year-over-year basis, our gross margin contracted by 130 basis points, reflecting declines in average selling prices and unfavorable product mix, partially offset by manufacturing and supply chain improvements.

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

With respect to currency impacts on gross margin going forward, on a sequential basis and assuming current exchange rates, we expect to see a minor negative impact on gross margin as the impact from a weaker euro will be largely offset by the weaker Australian dollar.

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

Moving on to operating expenses, our SG&A expenses for the quarter were $110.5 million, an increase of 9% over the prior year quarter. In constant currency terms, SG&A expenses also increased by 9%, primarily due to higher marketing costs associated with recent product releases, additional headcount to support commercial activities and an increase in variable, employee compensation. SG&A expenses as a percentage of revenue were 29.1% compared to the year ago figure of 28.3%.

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

R&D expenses for the quarter were $30 million, an increase of 10% over the prior year quarter and 9% on a constant currency basis, reflecting incremental investment in the areas of healthcare informatics and cardiology.

R&D expenses as a percentage of revenue were 7.9% compared to the year ago figure of 7.7%.

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 and clinical trials consistent with our strategy.

Amortization of acquired intangibles is $2.1 million for the quarter, while stock-based compensation expense for the quarter was $11.4 million. Our effective tax rate for the quarter was 18.3%. The lower tax rate this quarter reflects a net tax benefit of $3.2 million, arising from the favorable conclusion of long-running German tax audit. Excluding the impact of this one-time benefit, our effective tax rate was 21.5%. We estimate our effective tax rate for the full fiscal year 2015, excluding the one-time tax benefit, will be in the range of 21% to 22%.

Net income for the quarter was $83.3 million, an increase of 3% over the prior year quarter. Diluted earnings per share for the quarter were $0.58, an increase of 4% over the prior year quarter. Excluding the benefit of the one-time tax item noted previously, diluted earnings per share would have been $0.56, consistent with the prior year quarter.

Cash flow from operations was $86.5 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital. Capital expenditure for the quarter was $20.7 million, and depreciation and amortization for the September quarter totaled $18.6 million.

You will have seen we began including the cash flow statement with our earnings release this quarter. Many of you have mentioned it would be helpful to have that with the release, and we plan to continue to include that going forward.

Our share repurchases continue to play a significant role in our capital management program. During the quarter, we repurchased 835,000 shares for consideration of $42.9 million. At the end of September, we had approximately 17.4 million shares remaining under our authorized share repurchase program. We do expect to maintain an active share repurchase program during fiscal year 2015.

In addition to our share repurchases, our Board of Directors today declared a quarterly dividend of $0.28 per share. Our balance sheet remains very strong. Net cash balances at the end of the quarter were $506 million, and at September 30 total assets were $2.3 billion and net equity was $1.7 billion.

And with that, I'll hand the call back to Agnes.

Thanks, Brett. We will now turn the call over to Q&A, and we ask that everyone remember to limit themselves to one question and one follow-up question please. If you have additional questions after that, please get back into the queue.

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

(Operator Instructions). Andrew Goodsall, UBS. Margaret Kaczor, William Blair.

So first for us, can you talk a little bit about how quickly the DMEs are responding to the new product features of the AirSense and that connectivity capability? Is it making the sales cycle longer? A little bit more detail there.

Thanks, Margaret. You know, as we said, the AirSense 10 launch is going very well. It's exceeding our expectations. We've received very positive feedback from our customers. To your question, the discussion around healthcare informatics and its use within the business of the homecare provider is a more detailed conversation and takes a little longer to have that discussion, but we also think it's very sticky in that it provides a lot of value to the HME provider.

Some of the value to the HME provider can be the fact that with the inbuilt modem, you no longer have to manage a set of SKUs of modems and connect them and manage a fleet of modems all the way through to dealing with customers who have their customers -- the patients who have may have problems with devices that can be instantly checked that the humidifier is working, say, from the HME provider to save that cost of $75 to $100 of driving out to see the patient or the customer tax that comes with the customer coming in. So there are just some of the simple ones.

They are obviously a lot more advantages as we look at Air Solutions and the value we can provide with the end to end solution and providing value across the value chain. But even those initial discussions with HME providers do provide a great opportunity to get beyond features and benefits and start talking about end to end solutions.

I'll hand to Jim Hollingshead, President of the Americas. Do you have any further detail on the first months of AirSense 10?

Yes, sure. I would you say a couple of things, Margaret. It's not slowing the sales cycle for the devices at all. The devices are doing very, very well. The device is a fantastic device. It's small. It's quiet. It's very easy to set up, etc. But there is a sales cycle associated with then using the wide and growing range of solutions from a business process flow point of view for our customers.

So the device is selling extremely well, and we're in more and more conversations about how they can take our software solutions and embed those into their business process.

Okay. So maybe they are a little bit longer, and so that can start to accelerate and take more shares as we go on throughout the year. But the (multiple speakers) go ahead, sorry.

I just clarified. It's not taking longer. The devices are selling very well. What then is happening is we are engaged in deeper conversations about using the device to its full effect along with our solutions. So there is some kind associated with that conversation, and it is almost a solutions consultant conversation that comes on the backend. So the device sales have not slowed down at all. It's how they apply the solutions into their business that can take some time for them to embed, and that part of it is what makes this so sticky.

Got it. And then how much of the growth this quarter beyond the AirSense launch do you think was actually kind of the delayed sales from the man previous quarter that maybe got pushed into this quarter? Thank you.

Yes, I don't think we have a material breakdown of that. There were some S9 devices that we sold obviously during the quarter, a significant component of the sales S9 devices. The AirSense 10 had a rapid ramp faster than we had expected, and a couple of the SKUs, the categories were on backorder at the end of the quarter.

I'm not sure, Brett, if we have a breakdown of any material change from Q4 to Q1 then. Brett, do you want to make any comments there?

No, I think that's right, Mick. It would be hard to really know if there was an impact what that impact would be. Certainly though when you look at AirSense and how it's gone the first two months, it's gone very well. But yes, I don't think we can tease out that impact.

Thanks, Margaret.

Andrew Goodsall, UBS.

Thanks very much for taking the question. I'm sorry my phone had dropped out -- maybe a bit repetitive. But actually I thought I might ask you quickly just on the launch of the bilevel range, just where you're at with that. Does that appear in the inventory build and whether you have had any effect in the quarter by not having that product out there?

Thanks, Andrew, and good that your phone is working now. The bilevel products which we are calling the AirCurve 10, we did show at the Medtrade conference earlier this week in our US market, and we will launch the AirCurve 10 before the end of the calendar year. So they are out there in the public environment.

Given the competitive environment, we are not going to give the date or the level of inventory that we have or do not have of AirCurve 10 within our factories or our distribution warehouse. So it just doesn't make sense to go into that level of detail.

But I can tell you, I'll stand behind what we showed at the conference and what we said at the AirCurve 10 will provide fantastic value. It will be part of the Air Solutions ecosystem, and we look forward to launching it in our US market before the end of the calendar year.

And I guess last time with the launch with the delays, obviously it was a prolonged delay last time. Don't you think there's any small levels of deferral that you'll experience between now and then?

You know, Andrew, given that we will be launching the AirCurve 10 within three months of the AirSense 10, we don't expect any dramatic holdovers on the bilevels like we had from the S8 to S9 or the S9 to S9 bilevel timings. As you remember, those were more of the order of 24 months and 36 months respectively. So, we are talking three months. Any impact may have happened in Q1 where we had the Airsense 10 products and the CPAPs and APAPs but not the bilevels. The bilevels were still on the S9 platform. But we think it's relatively de minimus, and we think going forward that the full value proposition we will have by the end of Q2 will be in the market, and we shouldn't be materially affected by that.

Okay. That's terrific. Thanks very much, and I'll get back in queue.

Thanks, Andrew.

Steve Wheen, JP Morgan.

I just had a quick question for Brett on the currency effect on the gross margin for the current quarter. At the last quarter, you highlighted that there might be a small headwind. Are you able to quantify it? And then just talk to what sort of benefit we may have seen from the weakening of the dollar going into subsequent quarters. I take your point about the euro, but just if we could provide (multiple speakers) on that. Relativity (multiple speakers) that would be useful.

Yes, sure, Steve. Yes, if you look at our margin sequentially through Q4 to Q1, there was a currency headwind. It was around 50 basis points. So that certainly did impact our gross margin when you looked at it sequentially. If you look forward Q1 to Q2, we certainly have a headwind from the weaker euro, which is impacting revenues and their margin.

If you look at that -- I think we will get a small headwind, it will probably I suspect be around the 40 basis point mark for that. As you know, the only dollar benefit tends to lag by a quarter or so. So more of that benefit would then flow through into Q3 where, in fact, in Q3 I think on a sequential basis, we get some more upside from currency because of the weaker Aussie. So that sort of plays out like that.

Yes, that's very useful. And then just separately a quick question on Japan. Been waiting for some -- it has obviously been a market that has been a little bit disruptive over recent quarters. Could you just give some update as to what might be happening there?

Yes, Rob Douglas, our President and Chief Operating Officer, will answer that.

Yes, thanks, Steve. So the fundamentals of the Japan market haven't changed dramatically. We still have a good patient flow. We still got a really good business with our cardiology product, and we're seeing strong product flow there.

Because of the structure of the way we go to market, these are lumpy businesses it reflects in our sales. And this quarter we had a positive result from that lumpiness. But we will continue to see that lumpiness through there and we will have positive strong quarters, and that'll be offset periodically. It's pretty well going pretty well.

Right. Thanks very much.

David Low, Deutsche Bank.

I was wondering if we could just touch on mask sales. So the numbers or the growth rate is relatively weak there and particularly in light of the fact that there's a number of new products being launched. Could you talk to what's causing the weakness with that new product range being out?

Thanks, David. I'll mention three things and then maybe hand over to Don Darkin, President of our SDB business, to talk after that.

First point, we saw volume growth in the quarter sequentially increase, and we expect that to continue as we ramp up. So we saw a sequential increase in volume from Q4 to Q1. Masks were down. Second-quarter masks were down in Q1 on a year-on-year basis due to the lower prices that were washing through from the sort of January to March 2014 quarter that will happen going forward through to the January to March 2015 quarter. And so we are still expecting that to wash through on that time horizon.

But the third point is we have seen really good traction of the AirFit range from the P10, which I personally wear and have been for a number of months, the N10 and the F10, and the growing share sequentially and the anecdotal feedback from customers is they really like those masks. So I think that augers well for us as we look to future volume growth and then future revenue growth as we look to our end of Q3 and Q4.

Okay. Thanks. So you would classify that as -- not off on share. It is more around price than it is share loss.

I'd actually say we took share, David, from Q4 to Q1 on a sequential basis and that the year-on-year numbers you are looking at obviously we are washing through the price changes that have happened there. So that's how I'd nuance that.

Thanks, Mick. Maybe one for you, Brett, just on gross margins. You talked about there being a negative mix effect in there. Could you just touch on that whether you're talking geographic or products, please?

Yes, that would be on the product side, Dave, and it's really that as you saw the kind of flow generator growth relative to the mask growth was the big driver there.

Yes. So would it not be right to say that geographically there was a positive mix effect?

Yes, if you looked at it year on year, yes, correct. But fairly -- pretty small, pretty small.

All right. That's all I had. Thanks very much.

(Operator Instructions). Saul Hadassin, Credit Suisse.

First question maybe just for Brett. Brett, operating cash flow was actually down on the PCP. Earnings were up slightly. Can you just talk to what the drivers of that was? Is it receivable days that have increased on a PCP basis?

That would be. Yes, it is around some modest increases in working capital on a relative basis. The receivables DSOs is little higher, and probably the other driver there would be some inventory build as well. So they are playing out with a modest increase in working capital, which has lowered cash flow a little bit. Having said that, I still think the $86.5 million is still pretty strong cash flow.

Sure. Okay and just a separate question for Mick. Mick, October saw the introduction of the CMS penalties to hospitals with readmission rates, one of them being COPD. Are you starting to have any increased dialogue where engagement with those hospitals with regards to use of bilevels in particular for management of COPD in the home?

Saul, that's a great question, and it actually leads into something I had in the prepared remarks. But COPD and heart failure together are two of the top readmission disease states for hospitals CEOs and CFOs as they look at this in the US. And yes, currently it's around a 30-day readmission cycle. And the penalties are significant, and they go across the whole Medicare CMS reimbursement for that hospital.

So this is real money that you're looking at. You have to be above the million, above the 50% mark for hospitals across the United States to not get a penalty. So it's a competitive game that gets more competitive as everyone gets better.

We are certainly partnering with our hospital customers and our DME providers to make sure there is a strong hospital to home transition for those patients with COPD. The opportunity is twofold. It goes beyond just bilevel. The opportunity is our VPAP COPD, which is the bilevel noninvasive ventilation device, and it's also for the Astral, which is a life support ventilation device that can be used for both COPD and neuromuscular disease patients. So there's a right solution for the right patient at the right time that the hospital and the HME provider can get.

And so we are partnering with discharge planners and hospital systems across the country, and frankly, in the new world of ACOs, accountable care organizations, where hospitals and primary care now share per member per month budgets, we think the time is right to move on this, and we should see progress on this over the coming quarters and fiscal year because this is a long development cycle but again has stickiness as you look to that long term.

David Clair, Piper Jaffray.

I guess the first one for me, you guys have been very active on the informatics development recently. Can you just remind us how are these initiatives going to translate into revenue for ResMed?

Well, that's a great question, David, and I will hand the second part of this to Don Darkin, the President of our SDB business unit. But the informatics investment is a major one for us. As you can see with Air Solutions, which comprises both AirView, which is the combination of our EasyCare online, as well as U-Sleep as well as now myAir, you've got a variety of applications that are primarily cloud based and can interface with HME providers, hospitals and also with U-Sleep to coach patients.

These are major investments, and the way in which this connects through to revenue is that as for instance take one of the plays in the channel, an HME provider realizes they can save nonreimbursed costs by drive outs, pickups and no-fault balance with devices, they will want to adopt this new technology. And as they see its capabilities on that front, they will realize the value that they get is far above the price that we are charging them for access to those informatics data points.

And for us, taking weight out of the system and providing investment to get some return from that is also a positive economic argument. So it works for us, and it works for our HME providers.

If you take another example and say the Epic hospital integrations with Fairview, not only is the HME providers that are involved there getting the benefit of reducing nonreimbursed costs, but the hospital system that is looking to manage say the COPD readmits or say their accountable care organization, total economic or total cost of ownership or total patient management approach, they can find both a clinical and economic value out of that informatics investment. And that should for us lead to more share and more stickiness with those hospitals, HME providers, patients throughout the value chain.

Don, anything to add beyond that regarding our healthcare informatics investments in connection to revenue?

Yes, David, the broader issue here would be to look at like a Kindle. If you think about how people will select the best conditions for whether they are a large HME or a small HME, it will run into many realizations of revenue from troubleshooting. You won't need to roll a truck to check if a unit is working or not. You'll be looking at share shift on big customers to who want to get more units into that solution end to end. The compliance programs will drive more usage, better outcomes for the patient, better outcomes for the HME. This will also then drive programs for accessories, which will again increase better patient compliance and a better business for the HME.

So there's a multitude of areas here, notwithstanding the actual costs coming out of the actual value chain and increasing profitability for the customers as well. And they are all on top of any sort of flat rate fees that may be paid for purely phone usage either way. So it's not going to be a one-size-fits-all solution. It will reflect itself in many, many ways in many, many countries.

Thanks for the answer, guys. Just a quick one on emerging markets for my follow-up. I'm just curious are you planning on selling the same products in emerging markets, or are you going to be launching low-cost, lower-cost alternatives?

David, great question. I'll hand that to Rob Douglas.

Thanks, David. So the emerging markets have got quite a lot of different dynamics in them. Each one of them is complex as any of the other markets. Some of them are actually higher price markets, and some of them are lower priced markets. And then I've got different medical reimbursement schemes in different systems. So there's less focus on compliance management than in developed countries. But so in some markets, the value proposition of the telecoms in the device will be different. And so in a sense, really what we are going to do is go market by market and configure products that are appropriate for them. And we've got a platform solution that lets us do that very effectively.

Bruce Du, CBA.

Just two questions for me. Just to clarify, so in terms of the timing for SERVE-HF, I think you mentioned the initial results would be in calendar year 2016. Has that time table been pulled back a little bit?

No, Bruce. We've always said that the final patient -- the power around the study -- it's an event-driven trial. So we don't know the exact date. But based on the power analysis and the event rates that we have predicted, the final patient should hit the two-year mark from initial setup sometime in 2015. Then the primary investigators have to collect the data, analyze the data, create a peer view publication, go through the peer review process, and then get published so that they can present at ACC or HFSA or AHA. And so that process will result in a first publication and presentation sometime in calendar year 2016.

I'd like to make the point that there will be multiple publications that come from this study, and this is just the first publication but we think it will be a seminal one that will come out during calendar year 2016.

Okay. Great. Thanks. And just the second one was around the Astral in the US. Could you perhaps give us a bit of color in terms of the degree of I guess understanding and sophistication by DMEs around the product given it is a relatively new product for you? Does that imply a relatively slower ramp up?

So there will be a slower ramp up of the Astral product in the US market vis-a-vis our European market. Because in Europe we played in home life support ventilation for the last seven years since -- well, longer than eight years since our acquisition of Saime.

In the US market, we are developing our channel with our respiratory account managers and interfaces between them and our territory managers and through our US channel. I can tell you we've been ramping up that team over the last six to 12 months. We trained them very well at the Americas sales meeting a couple of months ago, and they will be and are talking to customers on a day-to-day basis already in the markets.

The customers have used a similar product from competing companies in so there are a number of HME providers who are well versed in using home life support ventilation. So the customer education is not the issue, and the customers actually would like other suppliers based on our initial conversations. And we think that the value we provide with a lower total cost of ownership, increased freedom for patients, increased ease-of-use and increased maintenance and capability of these devices for both the patient and the provider that there's a very good value proposition. But if you like, there will be a faster ramp-up of the S-curve of penetration in Western Europe versus our ramp curve for the United States.

Use of the Americas. In Canada and Latin America, the ramp will be faster, and we have more home ventilation supported markets there where we've been selling products already from our existing portfolio there.

Okay. Thanks.

Joanne Wuensch, BMO Capital Markets.

Thanks for taking our questions. This is Andrew Hanover in for Joanne Wuensch. I had two questions for Brett, but I wanted to start off with the first more strategic one for Mick just as a follow-up to the last question as it relates to the salesforce for Astral. And you know do you believe that you have the right size salesforce right now, or are you expecting to increase or decrease it?

So I'll take the first half of that question, Andrew, and then I'll hand the second half of it to Jim to talk about the readiness. Our sales teams globally are very ready for Astro and particularly in France, Germany, and the UK all of the Nordics in many countries in Asia, including Japan, are not limited to it. The teams are very well versed in life support ventilation and home ventilation, and we have an existing number one or number two market share in home ventilation in most of Western Europe.

So I believe the skids are greased for those country markets. Similarly for Canada and Brazil within the Americas. Within the United States, we are ramping up that team as I discussed.

Jim, do you want to add any further detail to that ramp-up to answer Andrew's question?

Yes, sure. We're not starting from scratch just right now. The team has been in place for a while, and we are adding incrementally to it as we launch the product. I think we have the right level of coverage, and I think we're fine.

Great. And for Brett, just two quick ones. How much was FX -- how much did FX help or hurt EPS this quarter?

Actually, Andrew, it was pretty much flat. No actual impact year on year this quarter.

Great. And then as it relates to flow generators, flow generators were up 12% quarter, and in the fourth quarter of last year, they were up 1%. I was just trying to understand how we think about demand for the remainder of the year, and thanks for taking our questions.

So demand for the rest of the year?

Trend for the rest of the year, just so we get a good understanding, yes.

Well, the trends on that on the flow gens are probably, permit me to talk about it, it is not something we give out in any sort of detailed guidance or anything.

Now, Brett, you're right. We're not going to go into detailed guidance on that. Next question, please.

Ian Abbott, Goldman Sachs.

Firstly, about Asia. You mentioned you'd insourced a number of distribution channels, including in Australia. Just wondering outside Americas, how much do you now distribute directly, and how much is through distributors and where do you see the split moving?

Yes, Ian, we have different models in all the different countries we are in, and we adjust it based upon the needs within those countries. So we sell or distribute within 100 countries, and there are very different models in all of them.

For the vast majority of our revenues, we partner with home care providers and HME providers such as in the US and France and in markets where there aren't government reimbursement. In others we have different models that apply.

Our goal in all this from a strategic perspective is to think about the best needs for the health care system and the best needs for the patients and the best needs for everyone in the value chain. And what we're finding is that the solutions that we can bring to the market have applicability in each of those different country areas.

So I think Rob described it really well earlier that we customize our value prop from a platform that's flexible country by country, region by region, and frankly even within country reimbursement group by reimbursement group.

Great. And then if I could perhaps ask about the AirSense 10. Do you have sort of any -- I know you're one step removed, but do you have any sense if it's driving any upgrades? Are you seeing existing patients actually coming in and asking for the new model, or is it mainly still new patients?

So Ian, we don't have knowledge to that level of granularity to know at the patient level who is getting the new device set up. Certainly within our US environment, the HME providers that have started to order and use the AirSense 10 have been very pleased and delighted with the product. Its ease of setup. It's small. It's quiet. It's all integrated. There's no SKUs to manage, so we're seeing great benefit from that.

On the patient side, there are a lot of patient benefits about being small and quiet and comfortable and having the ability to seamlessly have their data shared with their doctor so that they don't have to drive in for doctor visits. I think a particular aspect of patient engagement that's important is a product that may not have hit much on your radar, but it's called myAir.

It's a patient engagement solution that allows patients to directly interact with their data. We have a system called HALO, which is an acronym that stands for Hour After Last Off. So when the patient takes off the mask, let's say it's 6:30 AM, by 7:30 AM their data is available in the cloud and in the HME provider, or the doctor, when they turn up at their office, can have those data in virtually real-time.

Similarly, if the HME provider and the patient think it makes sense, the patient can go on their own app on myAir and see their own data. And there can be coaching, there can be feedback, and taking away nonreimbursed costs for the HME provider and potentially improving outcomes and certainly reducing costs for the channel within that system.

So we think there are so many advantages of the Air Solutions platform for patients that it will be very engaging. But given we are only two months in, it's hard to really piece out what is channel demand from HME providers, channel demand from physicians who like features such as the order set for her, which is an algorithm specifically designed for women or features that, as you indicated, our patients may like like myAir.

Great. Thanks.

David Stanton, CLSA.

I wonder if you could give us some more color in terms of the numbers around whether the use of the AirSense 10 versus other products leads to a lower setup in maintenance costs for a US DME and a patient. Thank you.

David, we have some data that we presented at the American Thoracic Society conference in May this year, and it's related to the AirSense 10's automated informatics capability. And it was a presentation about a technology called U-Sleep, which an HME provider can use, and it provides information via email, text or even interactive voice response. So direct voice to patients that coaches them through the sort of three-, seven-, 14-, 30-day process and beyond to 365 days and beyond them. And those data from that presentation showed that the costs for an HME can be reduced by up to 59%. That's 59%.

And the adherence had a trend to improvement that went from 73% adherence to 83% adherence. And that may not sound like a whole lot, but 10 percentage points improvement of adherence for a payer system that's managing a portfolio of patients or an HME provider that is looking at costs in a tough P&L environment for them could be quite a material contributor to the savings of both those groups.

And more importantly for the patients themselves, it means they're going to stick to this therapy, which is going to help them improve their long-term outcomes. So we think in terms of color for the AirSense 10 that the improvements are quantifiable, and our customers will start to see them and quantify them in their own way with their own systems as it rolls out over the coming quarters and months and years.

Thank you. That's very helpful. And I wonder if you'd make a comment in terms of period end discounting, how you characterize the market in recent periods compared to perhaps a year or so ago? Thank you.

David, thanks for the question. I'll hand that one to Jim, and I think it's the end of our Q&A after that.

David, I would say we haven't seen anything unusual this quarter, and I think for a long time our sales have been -- in the quarter have been sort of backend weighted. But we didn't see anything substantially different this quarter as we have over the past several periods.

Thanks for your questions, David.

Thank you. We are now at the one-hour mark, so I'll turn the call back over to Mick Farrell.

Thanks, Larissa. I'd like to thank the more than 4000 strong ResMed teams from around the world for their contribution to our recent product launches. Your innovative engineering solutions are changing the game for customers in over 100 countries, helping them improve patient quality of life, helping them reduce the cost burden of chronic disease and helping them improve the delivery of respiratory health care.

We remain focused on changing the lives of millions of patients with every breath. Thank you and we'll talk to you again in 90 days.

So this concludes our first-quarter earnings live webcast. If there's any additional questions, please feel free to contact me. The webcast replay will be available in the Investor Relations section of our website at resmed.com.

Thank you again for joining us today.

Larissa, you can close the call now.

Thank you, ladies and gentlemen. This concludes this conference. Thank you for participating. You may now disconnect.