瑞思邁 (RMD) 2015 Q4 法說會逐字稿

Welcome to the Q4 2015 ResMed Incorporated earnings conference call.

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

(Operator Instructions).

Please note that this conference is being recorded.

I will now turn the call over to Agnes Lee, Senior Director of Investor Relations.

Agnes, you may begin.

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

Joining me on the call today are Mick Farrell, our CEO; 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 investors.resmed.com.

I want to remind our listeners now that our discussion 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 on today's investor call as we provide an overview of our Q4 and our full fiscal year 2015 results.

I'm pleased to report that we finished our fiscal year with robust performance in both our core sleep apnea business and our respiratory care business, as well as a return to solid growth for our mask products.

In my remarks, I will discuss our top- and bottom-line results, regional highlights from our global business, and an update regarding our long-term strategy.

I will also provide high-level summaries of two recent acquisitions.

First, CareTouch, a healthcare informatics acquisition that we announced just a few weeks ago.

And second, an investment that we made and announced just earlier today -- a few minutes ago, it went over the wire -- with Curative Medical.

Finally, I will turn the call over to Brett, our CFO, to walk you through our financial results in greater detail, and then we'll get to Q&A.

As you saw in our press release, our global team achieved double-digit revenue growth of 17% on a constant currency basis during the quarter.

This is our best performance in over four years and quite an achievement, on the robust foundation of a $1.7 billion global business.

Our team performed incredibly well.

In our Americas region, we achieved double-digit revenue growth.

And in our combined European and Asia Pac region, we achieved solid mid-single-digit growth on a constant currency basis.

These global results were fueled by the success of our new product and solutions launches in both our sleep and respiratory care businesses.

Looking at the bottom line, our diluted EPS was $0.68 on a non-GAAP basis.

Our global team produced excellent top-line growth this quarter and we have been balancing our investments in growth opportunities while managing costs in R&D and SG&A.

As we look ahead to our fiscal year 2016, we believe that we can achieve further operating leverage in both R&D and SG&A.

Brett will talk about gross margin guidance in more detail in his remarks, but I would like to outline three areas for efficiency that are critical to our FY16 plans.

First, we are moving more and more of our shipping volume from air freight to sea freight as we continue to ramp our product launches.

Second, we are reducing supply chain costs with significant and sustained internal and external cost-out programs throughout FY16.

And third, we continue to grow incremental manufacturing volume in our lower-cost plants.

In addition, we have also established sales plans for accelerated growth in our higher-margin products throughout FY16 and beyond, including the AirCurve 10 bi-level platform and the Astral life-support ventilation platform.

Okay, now for some regional highlights.

In the Americas, we had strong performance in Q4 sales, with the commercial team driving 27% year-on-year growth.

Our team achieved phenomenal flow generator growth of over 50% for the quarter.

This exceptional result was driven by the ongoing success of the AirSense 10 and the AirCurve 10 platforms, and it was powered by our healthcare informatics solutions, including AirView, U-Sleep, and myAir.

We also saw ongoing customer adoption as we continued to expand our life-support ventilation business in the Americas with the Astral platform.

We achieved good mask growth in the quarter with our AirFit portfolio.

And it's important to note that pricing in this mask category is in a good place.

We continue to expect solid mask and accessories category growth over the next year.

Moving on to our combined European and Asia Pac region, we grew at 5% on a constant currency basis in the fourth quarter.

We saw strong sales growth from flow generators in Europe -- again, driven by the AirSense 10, the AirCurve 10, and the Astral platforms -- as well as robust growth in our masks and our accessories businesses.

The big news for the Asia Pac group this quarter is our investment in the expansion of our China business.

I will talk more about the Curative Medical acquisition in a few moments.

Let me now roll up to a broader perspective to discuss the [progress] we have made against our long-term growth plans, our three-horizons growth strategy.

In our first horizon of growth, which encompasses our core sleep apnea market, we have continued to drive healthcare informatics solutions that meet our customers' needs for efficiency, patient adherence, and improved outcomes.

Our recent acquisition of CareTouch allows us to add key features to our resupply offerings.

CareTouch is a provider of Internet-based solutions and resupply programs for the homecare industry.

This technology provides an easy-to-use solution for managing patient populations, with patient engagement algorithms and an automated IVR outreach, as well as a live, multilingual call center.

We have rebranded this offering as ResMed Resupply.

We will continue to serve current CareTouch customers and expand this offering so that it's available to all our HME partners.

As you heard at our Investor Day in San Francisco a few months ago from Raj Sodhi, the President of our Healthcare Informatics business, we now have established healthcare informatics as a core competence for ResMed.

We will continue to build HI capabilities and buy them when appropriate so that we can drive channel efficiencies, unlock cost savings, and ultimately improve patient outcomes.

We also continued our ongoing efforts to build market awareness regarding the importance of sleep and sleep apnea during the quarter.

We announced in a press release results from a study on our consumer wellness offering, the S+ by ResMed.

The study showed that after one week of use, 67% of S+ users with low baseline sleep scores achieved an improvement of an average 30 minutes of extra sleep per night.

We are excited that our first consumer sleep wellness offer has achieved these results.

The more consumers become aware of the importance of sleep and aware of any risky breathing or suffocation they have during the night, the better for addressing the vast majority of sleep apnea sufferers who are still not aware of their condition and have not yet seen a doctor about their problem.

During the quarter, we also announced $5 million donation for medical research into sleep apnea and COPD to help create a center for excellence in this field at the University of California, San Diego.

UCSD is a leading academic research institution located just a few miles from our global headquarters here in California.

We believe that academic industry partnerships like this are critical to the ongoing innovation in the fields of both sleep and respiratory medicine.

Moving on to our second horizon of growth, we are making solid progress on two fronts: respiratory care market development, and ongoing investments in our high-growth markets.

We continue to grow our European respiratory care business from the strong base that we have developed over the last decade, since our acquisition of Saime in Europe in 2005.

Our Americas region is fast following suit, fueled primarily by the Astral product offering.

There is a very long, global runway ahead for our life-support ventilation and our noninvasive ventilation solutions to help both COPD as well as neuromuscular disease patients.

The Curative Medical acquisition that we announced earlier today hits on our strategy in horizon two on both vectors.

It grows how respiratory care product portfolio by adding current and existing and future ventilation products; and it also takes us to a leadership position in the geography, in the high-growth respiratory medical device market in China.

Curative provides a complementary product portfolio for ResMed in both sleep apnea and respiratory care.

ResMed and Curative offerings serve different customer segments through complementary channels.

Together, we have the broadest portfolio of innovative sleep apnea and ventilation devices, from premium, imported devices to locally designed and manufactured product offerings that are tailored for the needs of the China market.

We plan to continue to invest in both R&D and manufacturing in China for the Curative brand.

We will maintain separate brands and distribution channels in order to quickly respond to the needs of the full spectrum of customer segments in China.

Our Curative acquisition is an example of us putting our capital to work.

We will continue to invest in China, India, Brazil, Eastern Europe, and other key high-growth markets in medical devices.

We will execute on long-term strategies that are tailored to each individual country while improving patient outcomes and reducing overall healthcare costs.

Our third horizon of growth includes a spectrum of cardiorespiratory conditions.

We expect presentation of the SERVE-HF results by the study's primary investigators in a few months.

Without going into too much detail on SERVE-HF, I would like to say that I am very proud of the global ResMed team and how we dealt with the SERVE-HF study.

Our ethics and integrity was on full show.

We made patient safety the most important priority.

I believe that we have built credibility with patients, providers, cardiologists, and our core sleep pulmonary and critical care physicians.

That only adds to the ResMed brand.

Subsequent quotes and discussions with key opinion leaders, both publicly and privately, have provided strength for this belief.

We follow the data and we do the right thing.

To this point, you will see in the published results some interesting insights.

For example, as discussed by our Chief Medical Officer at the APSS Conference in Seattle just a few months ago, as ejection fraction increases, there is an increasing trend towards benefit from ventilation therapy, even amongst the SERVE-HF group.

We will continue to monitor heart failure patients in our US based heart failure trial, which is called CAT-HF.

Longer term, we see further adjacent opportunities in cardiology in heart failure, but also in atrial fibrillation and coronary artery disease.

I will provide more regarding our ongoing cardiovascular strategy during our next quarterly call.

We remain active on the capital management front.

This quarter, our Board has declared an increase of our dividend by 7% to $0.30 per share, and we are continuing with our share purchase program.

You will hear more from Brett just a few moments.

On the M&A front, we continue to look at acquisition opportunities that meet these three criteria: first, the business is aligned with our long-term growth strategy; second, we can leverage the asset to increase ResMed shareholder value; and, third, that there is a cultural fit between the leaders of the business and ResMed in our innovation culture.

We found two great companies that meet all three of these criteria recently, CareTouch and Curative Medical.

We will continue to seek further opportunities as appropriate.

Let me close with this: we remain excited about our performance, our near-term outlook, and our long-term three-horizons growth strategy.

We are the global leaders in sleep and respiratory medicine; not just in market share, but more importantly in product, service, channel, and market innovation.

We remain excited as we build the road ahead for our industry, our partners, and most importantly for our patients.

With that, I will turn the call over to Brett for a more detailed review of our Q4 and full-year financials.

Brett?

Right.

Thanks, Mick.

As Mick has noted, revenue for the June quarter was $453.1 million, an increase of 9% over the prior-year quarter.

In constant currency terms, revenue increased by 17%.

Movements in exchange rates, predominantly a weaker euro relative to the US dollar, negatively impacted revenue by approximately $32.5 million in the fourth quarter.

At a geographic level, overall sales in the Americas were $273.7 million, an increase of 27% over the prior-year quarter.

Sales in Europe and Asia-Pacific totaled $179.4 million, a decrease of 10% over the prior-year quarter.

But in constant currency terms, sales in Europe and Asia-Pacific increased by 5% over the prior-year quarter.

Breaking out revenue between product segments.

Americas flow generator sales were $151.5 million, an increase of 53% over the prior-year quarter.

Masks and other sales were $122.2 million, an increase of 6% over the prior-year quarter.

For revenue in Europe and Asia-Pacific, flow generators sales were $121.1 million, a decrease of 11% over the prior-year quarter; but in constant currency terms, an increase of 4%.

Revenue growth in Europe and Asia-Pacific was lower, mostly due to lower ASV sales and a tough prior-year comparable for Asia-Pacific, reflecting typical lumpy order cycles.

Masks and other sales were $58.3 million, a decrease of 9% over the prior-year quarter; or, in constant currency terms, an increase of 6%.

Globally, in constant currency terms, flow generator sales increased by 25%, while masks and other increased by 6% over the prior-year quarter.

During the quarter, we incurred a one-time charge of $5 million associated with the field safety notice expenses in response to the result of the SERVE-HF clinical trial.

Additionally, we made donations totaling $6 million, which comprised a $5 million donation to the University of California, San Diego; and a one-off incremental donation of $1 million to the ResMed Foundation.

All of these charges have been excluded in non-GAAP numbers.

In addition, the non-GAAP measures exclude amortization of acquired intangibles in the current year, and restructuring expenses and amortization of acquired intangibles in the prior-year quarter.

A full reconciliation of the non-GAAP to GAAP numbers is included in our fourth-quarter earnings press release.

My subsequent commentary will reference non-GAAP measures.

Non-GAAP gross margin for the June quarter was 58.4%, lower than guidance, essentially due to product and geographic mix, notably the strong performance in Americas flow generator sales and the impact from lower ASV sales as a result of the SERVE-HF trial outcome.

On a year-over-year basis, our gross margin contracted by 450 basis points, reflecting adverse currency movements, unfavorable geographic mix, unfavorable product mix, and declines in average selling prices.

Looking forward in fiscal year 2016, we expect gross margin to be in the range of 57% to 60%, assuming current exchange rates.

Now I'd like to spend a little time just walking through the drivers of our gross margin guidance.

We are assuming that average selling prices remain relatively stable, with a normal level of modest decline, as we have cycled the price changes we made in the first half of fiscal year 2014.

Our range does assume that we continue to have relative outperformance in Americas flow generator growth, which is positive to the top line, but will have a negative product and geographic mix impact on our gross margin in fiscal year 2016.

It also factors in the product mix impact associated with the expected reduction in ASV revenue.

To the extent we continue to see outperformance in the Americas flow generator growth, we would expect to move towards the lower end of our guidance range.

However, as I said at our recent Investor Day, we are working very hard on our cost-out programs, which include the benefit of shifting from air freight to sea freight, as well as a pipeline of cost-out initiatives in the areas of procurement, production, and logistics.

The benefits of these programs will be realized over the course of fiscal year 2016 and will have a positive impact on our gross margin.

Finally, in terms of currency impacts on gross margin, the recent depreciation of the euro relative to the US dollar will continue to be a headwind in Q1.

However, there will be a positive benefit from the recent depreciation of the Australian dollar relative to the US dollar, which will be reflected in our gross margin from the second quarter of fiscal year 2016.

Moving on to operating expenses.

Our SG&A expenses for the quarter were $123.3 million, an increase of 1% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 12%, primarily due to higher variable employee compensation, the impact of recent acquisitions, and the release of consideration in a prior-year quarter.

SG&A expenses as a percentage of revenue improved to 27.2% compared to the year-ago figure of 29.4%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in a range of 27% to 28% for fiscal year 2016.

R&D expenses for the quarter were $28.5 million, a decrease of 10% over the prior-year quarter, or in constant currency terms an increase of 6%.

This increase largely reflects incremental investments across our R&D portfolio.

R&D expenses as a percentage of revenue were 6.3% 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 be in the range of 6% to 7% in fiscal year 2016.

This reflects our ongoing commitment to investing in our diverse product pipeline, informatics solutions, and clinical trials, but also the benefit of the weaker Australian dollar in which the majority of our R&D is denominated.

Amortization of acquired intangibles is $2.1 million for the quarter, while stock-based compensation expense for the quarter was $13.1 million.

On a non-GAAP basis, our fourth-quarter effective tax rate was 17.8%, and for the full fiscal year 2015 our non-GAAP effective tax rate was 19.5%.

We estimate our effective tax rate for the full fiscal year 2016 will be in the range of 20% to 21%.

Non-GAAP net income for the quarter was $96.4 million, an increase of 3% over the prior-year quarter.

Net income for the quarter was $87.5 million.

Non-GAAP diluted earnings per share for the quarter was $0.68, an increase of 3% over the prior-year quarter, while diluted earnings per share for the quarter was $0.61.

Foreign exchange movements negatively impacted fourth-quarter earnings by $0.05 per share, reflecting the impact from the weaker euro, only partially offset by the weaker Australian dollar.

On a constant currency basis, non-GAAP earnings per share increased by 11% year-over-year.

Cash flow from operations was $99.6 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital.

Capital expenditure for the quarter was $12.2 million, while depreciation and amortization for the June quarter totaled $17.7 million.

We have continued to be active on the capital management front.

Our Board of Directors today declared a quarterly dividend of $0.30 per share, representing an increase of 7% over the previous quarterly dividend.

Additionally, during the quarter, we repurchased 941,000 shares for a consideration of $55.9 million.

And for fiscal year 2015, we repurchased 2.7 million shares for consideration of $152.6 million.

At the end of June, we had approximately 15.5 million shares remaining under our authorized repurchase program.

In addition, as Mick outlined, we announced the acquisition of Curative Medical, and expect the transaction to close before the end of calendar year 2015.

We have not disclosed the financial terms of the transaction.

In fiscal year 2015, we have returned 97% of free cash flow to our shareholders via dividends and repurchases.

And over the last five years, we have returned 98% of free cash flow to our shareholders via dividends and repurchases.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $417 million.

And at June 30, total assets stood at $2.2 billion, and net equity was $1.6 billion.

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

Thanks, Brad.

We will now turn to Q&A, 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 into the queue.

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

(Operator Instructions).

Andrew Goodsall, UBS.

Terrific result.

Could I perhaps just ask the effect -- or just to characterize the effect of ASV from the safety recall, just with [your soaring] trend lines; and I guess particularly around people with a normal heart function who might have complex sleep apnea.

Thanks, Andrew, for the call; and I agree with you, it was a good quarter.

With regard to SERVE-HF and the follow-up from that, the results these last months since we published the SERVE-HF results or had them presented by our Chief Medical Officer at the conferences and discuss them with regulators -- publication will be in a couple of months -- have been pretty much in line with the information that we put out there.

And so we said that ASV accounts for around 7% of our revenues, and about one-quarter of that is potentially in this affected population.

So we're talking about the impact of less than 1.75% of our group sales.

And that's sort of the trend line that we've seen, approximately in that range, over the last months since the data were published on the trial.

Interestingly, our ASV business in narcotic-induced central sleep apnea, or treatment-emergent central sleep apnea has not been affected, and that's mostly in the US side of the business.

And it's an opportunity for us to grow that, what they sometimes call complex sleep apnea or treatment (technical difficulty).

An emergent central sleep apnea opportunity in Europe.

And with their -- I know you describe Europe as having some impact for ASV.

Would there be any reason why Europe was perhaps a little bit more difficult, post the safety notice in Europe than perhaps the US?

Yes, thanks for the follow-up, Andrew.

And, yes, since we had run the SERVE-HF trial predominantly in Europe -- there were some sites in Asia Pac, but mostly in Europe -- and there had been a big focus on the heart failure component, that the majority of the ASV effect has been within the European region.

Perfect.

And just a really quick housekeeping, just the FX effect at the net income level from Brett.

Yes, on the FX impact on APS this quarter was pretty significant.

It was around $0.05 negative on EPS.

Perfect.

Thank you very much.

Matt Taylor, Barclays.

Ben Andrew, William Blair.

Maybe two areas for us.

Mick, talk a little bit about the durability of the reacceleration in masks.

You had an easy comp obviously in the quarter, but you're getting rid of the price declines.

Do you see masks in the US -- and you talked a little bit to this in your script -- but do you see it getting back to the high-single-digit growth rate, durably?

Good question, Andrew; and yes, it was a great turnaround from Q3 to Q4, from minus 3% to plus 5% on the masks line.

We do think that's a sustainable turnaround for a number of reasons.

The AirFit portfolio, particularly the P10 and the F10, are very solid and strong masks, and have been received really well by customers.

That's point one.

And point two is we annualize those price declines that we talk about from January to June 2014 through January to June, 2015; so we're through that sort of hurdle.

So, good products, good pricing, good positioning; and we think the masks will continue to do well for the year ahead.

Okay.

And then on the gross margin side, Brett, maybe give us some insights into the relative magnitudes of currency, mix, geography, things like that.

So whether for 4Q or maybe for 2016, so we can be a little more granular in how we think about that.

Thanks.

Yes, Ben.

If you look at the Q4 year-on-year -- and there's, as you know, a bunch of drivers on that margin.

But if you look at that, the single biggest impact for us was FX.

To put that into perspective, I think it was around that 150 basis point mark, so that was the biggest impact.

But each of the others were meaningful in terms of geographic mix, product mix, and ASP decline.

I think all played a part in that.

So that gives you a relative sense of what was driving the gross margin there.

And then the gains again for 2016, is it -- presumably product mix has a bigger impact, as some of the other things start to go the other way.

Is that fair?

Yes, I think the -- yes.

The mix -- with the flow generator growth in the US, what you're seeing there is quite extraordinary, so it does swing your product mix and your geographic mix somewhat.

That's become a little more volatile, if you like.

I think as you run through fiscal year 2016, I think some of those will tend to moderate as you cycle product introduction and so on.

As you know, where working very hard on cost-out programs, and they will deliver -- the timing we've been uncertain -- but they will deliver over the course of 2016.

Currency is -- okay, that's always a bit of a wild card -- but we've seen some depreciation in the Aussie dollar recently.

We haven't seen the benefit of that yet.

It tends to lag about a quarter.

Really we'll start to see some of that benefit in Q2 as well.

So, I think some of that -- certainly a lot of those drivers that we're working against us will certainly I think moderate over the course of 2016.

But again, they are quite volatile, so they are kind of -- the gross margins guidance will be a little wider I think to really account for some of the volatility we're seeing in some of the drivers.

Ben, I'd just add to Brett comments, which I agree to all of them; and I don't want to sound like a broken record, but I'd reiterate what we're doing in the next 12 months on this -- we're moving from air freight to sea freight as these products ramp up.

We're moving these cost-out programs in the supply chain, so that's with supplies and our partners, but also within our internal programs and manufacturing and COGS reduction.

And thirdly, we are increasing the incremental growth at lower-cost plants.

And I think all those three elements will help move GM to the higher end of Brett's guidance, rather than the lower one.

And then finally, our sales teams: Jim and Anne and their teams are being provided incentives to drive high gross margin growth.

So growth in the AirCurve 10 range, growth in the Astral range, and growth in the AirFit range of masks are all being provided incentives to the channel to make sure that we grow those high GM products.

And so, all those together I think are a pretty powerful weapon.

Great.

Thank you very much.

Anthony Petrone, Jefferies.

Maybe just to focus in on SERVE-HF and just cardiology: I'm wondering, Mick, maybe if you can resize the opportunity, post the SERVE-HF results here.

It seems there is still certainly an opportunity in the less-sick patient population, and I'm just wondering if there's any numbers that you can share with us around that.

The follow-up to that would be, is there an update on timing and getting to that patient population?

And then lastly on this topic, which would be an update on CAT-HF.

Thanks.

Yes, thanks, Anthony.

So, to size the opportunity in heart failure globally, well, in the US there are more than 8 million patients and globally there are more than 20 million patients with heart failure worldwide.

Obstructive sleep apnea prevalence in that group is north of 40%.

We think central sleep apnea is around 30%.

SERVE-HF was targeted to the 30%.

If you look at all the key opinion leaders, post- SERVE-HF, and their comments around both obstructive sleep apnea and central sleep apnea in general, is that obstructive sleep apnea should be treated with all comorbidities and that the SERVE-HF results have no impact on that area.

I might go into some information and some publications that have come out from ATS in the American Journal of Respiratory and Critical Care Medicine on that front if we need to; but certainly that's what the key opinion leaders are saying.

It's what we've seen in practice as we look at our sales over the last 60, 90 days since the SERVE-HF results have come out.

So, as we look forward we think there's still a significant opportunity in heart failure with the obstructive sleep apnea patients.

And amongst the central sleep apnea patients, which is the 30% prevalence side, physicians are still trying to work out what to do, whether it's just CPAP or a combination of oxygen and CPAP or bi-level.

And they're working through each of those modalities.

And I think you'll see a lot of research in the area to go, post- SERVE-HF, to next steps.

We are working with Chris O'Connor and the group at CAT-HF to certainly finish and follow through on the patients who are already in that trial.

And Rob and I just had a teleconference with Chris O'Connor a couple of days ago, and we're planning for next steps post- SERVE-HF and post- CAT-HF: how do we find that groups of patients who are well treated and we can really focus on health economics; keeping patients out of hospital beyond that 30-day, 90-day period with heart failure, which is such a focus; and their functional outcomes as steps that we look ahead for post- CAT-HF and post- SERVE-HF?

And as I said in the preliminary remarks, we're in the field of play here.

We'll give you an update next quarter as to where we are with our cardiovascular strategy, but we're not moving away from this area.

In fact, we are likely to double down on it, because as you'll see the results from SERVE-HF come out, there's some pretty interesting insights as you look at the different quintiles and the different groups of patients.

But I'm not going to say too much more on that because we're going to wait for the data to be published in a peer-reviewed article, and then I can start to talk about the market opportunities that are part of that.

Thanks for the question, Anthony.

Thank you.

Steve Wheen, JPMorgan.

Just a quick question on the margin again.

You mentioned the various factors, Brett, that were impacting it.

One of them is the ongoing ASP declines.

You are obviously seeing a rebasing of pricing in masks now that it has returned to growth.

So is there -- can you just talk to the (technical difficulty) pressure you're seeing across the flow generators, which I assume is where that is coming from?

Yes, the ASP declines was year-on-year, Steve, so we're still cycling a little bit of that second-half impact.

So we're basically through that now.

We do think the impacts from ASP declines will certainly moderate from where they have been, and that's been factored into the guidance.

As Mick said, I think we're seeing relatively stable environment on the pricing at the moment, and that's across the whole product range, really.

Okay.

And then some commentary that you made last quarter was that you'd be expecting to not be as reliant on air freighting.

Did that not pan out as you expected, just because of the sheer uptick in volume that you saw in flow generators, so we're still seeing that impact on the gross margin from air freight?

Yes, true.

We haven't been able to basically move from air freight to sea freight quite as quickly as we would've liked.

And you saw, just in the latest quarter, when you look at it frankly, the flow gen growth has been accelerating through the quarters.

This quarter, you saw 50% growth in the US, which is quite phenomenal.

But the guys have really done a great job in making sure we've got the capacity there, and that product is going out to market quite seamlessly.

But we've been doing that with obviously more air freight than we would like.

These [tend] to trend down of where we're looking at July, that I'm quite happy with how we're trending that now.

But I do think that we'll start to see meaningful benefit I think coming through in Q2 on the freight-out program.

That trajectory and the trend is absolutely there, so I'm quite confident we'll see that; likely to be Q2 impact at this stage.

Yes.

And just to be clear, that air freight cost is sitting in your gross margin, not in your SG&A line.

And if you can just cover off on whether or not because of that demand in flow generators you've got any unfilled orders.

Yes, so definitely it's in our gross margin, the freight.

And we don't -- no, look, we would have finished the quarter pretty much with negligible backorders.

Great.

Thank you.

Matthew Prior, Evans and Partners.

Great results.

Just two questions: first one for me is, Mick, just in terms of the US sales and the great flow gen result there, where are we in terms of the Astral product cycle and ramp up, given that -- I'm just wondering with the strong US flow gen result, the uptake of informatics, if we're focused a little bit too much on the sleep side of the business; and you may be having success in ventilation and astral in the US that's somewhat covered up in the focus on that number.

Matthew, the US flow generators numbers includes both sleep and respiratory care products.

But the AirSense 10 and the AirCurve 10 are the vast majority of it.

But I will hand over to Jim Hollingshead, our President of the Americas, to maybe give a little more color on the growth of our Astral line 9 respiratory care and the flow generators -- the amazing flow generators growth for the quarter.

Yes, we've had great flow generator growth across the entire quarter.

Specific to your question on Astral, it's still early days on Astral.

And so that's still ramping; but it's, so far, exceeding our expectations.

The device is quite a good device.

It's very strong clinically and it has very high ease of use.

And so we're very happy; we're very pleased with the adoption of Astral.

It's ahead of expectations.

Great, thanks.

And just a second question for me.

Mick, in terms of informatics, can you talk to whether the informatics rollout and uptake has driven any mask resupply sales increase in terms of that important metric, and whether that aided you in the fourth quarter with US mask sales?

And I can also just ask, are you seeing any re-papping on the back of informatics' success?

Thanks.

Good questions, Matt.

The healthcare informatics core competency or the capability of AirView, U-Sleep, and myAir, has really enabled us to achieve those flow generator growth numbers.

The analogy would be iTunes is such a great platform that people are buying a lot of iPhones and iPads.

So we do think that the growth of those flow generators is linked to really the changing of the basis of competition in our industry from just smaller, quieter, more comfortable to smaller, quieter, more comfortable, and more connected.

And that more connected element is the informatics that liberates the data; unlocks values for patients, providers, and physicians, and ultimately hospital systems.

Your part two of the question was, is there a link to the Q4 masks number?

And I'd say no, just yet.

The acquisition of Jaysec earlier this fiscal year, and CareTouch that we announced just earlier this month -- both will enable us to use those data to drive resupply programs and to get them out to all the HMEs and make them available to all the HMEs.

And we think there's still a huge opportunity to contact patients, let them know how far out they are along in their mask aging, and give them an opportunity to buy.

So I think as you look forward over FY16 and beyond, there's a huge opportunity for informatics to drive mask sales, but it wasn't really there in Q4.

And the re-papping opportunity -- again I'd say that's not in the historic; that's in the future.

And we do have an opportunity to reach out to patients through the informatics solutions, to email, text, or IVR to patients on coaching and adherence.

And that could lead to reaching out on masks and on re-papping.

So you'll hear more from us over the coming fiscal year.

And we can give you an update next quarter as to the link between informatics and driving those trailing revenues.

But it's a huge opportunity for us, and for our channel and for the patients.

Right.

Thanks, guys.

Bruce Du, CBA.

I just firstly was following up on the ASV question, prior.

You touched on the impact in Europe.

But I was just wondering whether or not you see, or probably expect to see in the next couple of quarters, any impact in terms of demand out of Asia.

And I know you mentioned that Japan in the past has been quite a lumpy market, but there's been good take-up there?

Yes, Bruce.

Well, I'll hand to Rob Douglas to talk about the impacts on ASV in Asia Pac.

Rob, do you want to take that?

Yes, definitely.

We've talked quite a lot that the ASV has been very successful and there have been a lot of local trials in Japan.

And in various patient populations there's an incredible amount of support for the ASV in Japan.

Given the different regulatory environments in that the Japanese regulators have -- are moving at a very deliberate pace towards analyzing and understanding what this has [been] and what it all means.

But we expect there still to be significant interest in Japan.

And in the short term, Japan remains -- still because of the nature of the market, we have variable demand on a quarter-to-quarter basis through Japan.

So it's a little bit hard to measure that exactly at this stage.

The other thing I'd add to Rob's comments, which I agree with them, is that in Japan ASV is often used in an acute setting.

The SERVE-HF results were done in a chronic setting.

And so the physicians there are working through the difference of application between acute and chronic care, and there are different clinical implications.

And more will come out, post- the publication of the SERVE-HF data on that in the coming months.

Thanks for the question, Bruce.

Okay, great.

And I just had one more.

It was just around clarifying, is it correct that the noninvasive ventilation is now out of competitive bidding -- the upcoming round?

I will hand to Dave Pendarvis to answer that.

The short answer is yes, Bruce; that the next rounds of competitive bidding will not include a noninvasive ventilation.

There was an initial proposal that it would, and then an announcement after that that it is not included in competitive bidding, which our customers feel good about, and we feel good about.

Okay, excellent.

Thanks.

Matthew O'Brien, Piper Jaffray.

Hoping to start with a follow-up to a previous question on the informatics.

Mick, just as you think about where that product line can go, going forward, I think we're probably low-single-digits in terms of market share at this point.

But just how that market is going to segment itself over the next several years between the real high-end featured products, including informatics, versus your average level of feature set, and then the low end as well.

Yes, Matthew, the impact on revenue of the informatics is really through the rest of the business.

So if you think of informatics really as an enabler or a new basis of enabling our HME providers, our patients, and our physicians to get access to data.

So physicians can access data in AirView; patients can access it in myAir.

And then through electronic data interchange, we're able to put the data into Epic and Cerner systems for hospitals and even payer providers so they can leverage that data.

So the monetary -- you're talking about what percentage of revenue or -- the monetary feedback directly from payment for the informatics solutions is de minimis, and it's not material.

But the enabling of the sales, such as the 53% growth in flow generators in the quarter in the Americas, was really fueled and catalyzed and powered by this healthcare informatics solution.

So, we do have internal calculations of the value of informatics to justify our ongoing investment in that space.

But really it's a long-term play about showing the value of home care, of taking sick patients out of hospital, putting them in the home, and saving money for broken healthcare systems that's there.

Sorry, Mick.

I think I wasn't real clear on the question.

It wasn't a function of what kind of revenue can you get from the informatics.

It was more a function of if you don't offer informatics on your CPAP system, are you just not going to be able to participate in the segment of the market?

And will that segment of the market be 25%, 30%, of all CPAPs being sold in a few years?

That's a good question.

Thanks for the clarification, Matthew.

Look, I think it will fast be 100% of the market that you require data.

Because what's happening is -- what we're doing is -- if you look at the data that is in our investor deck there, the published data that we've put out there on the product called U-Sleep, where we showed a 59% reduction in the labor costs for the HME upon using U-Sleep, and an increase in adherence from 73% to 83%.

You start to run the economics for a customer, and it's going to become just an essential basis of competition to play.

But I want to make it clear that informatics is not informatics.

It's not just saying, well, I could get my data through the cloud.

It's doing it fast, securely; enabling systems to move quickly.

And I do think there's a partnership element of connecting directly into the Epic or Cerner system or into our HME providers systems on the electronic front.

And it's a global play.

It goes beyond just the first forays really been in the US and in the Americas region; but we are now moving our informatics capabilities into France, Germany, Japan, and it's really something that is going to go global.

So I think it quickly goes from where it is now to 100% over the coming quarters and fiscal year.

Okay.

And then as the follow-up, the Curative transaction that you just announced, I know you don't want to provide too much in the way of details.

But can you just give us a sense for how quickly that business is growing, and the profitability profile versus overall ResMed?

So we're not going to get into specific details on it because it's not material to our global business.

It's on the order of 1% of our group revenues.

It's growing faster than our group, and we're very excited about the opportunity.

It takes us to a leadership position within the China market in sleep and respiratory medicine.

And Jason Sun, the Founder and CEO, is a great gentlemen and individual, a very smart leader and entrepreneur who's created a very strong team around him in Suzhou.

And we're really excited to be partnering with Curative to help grow and help the Chinese population get access to great care across the customer segments from Curative and ResMed.

Got it.

Thank you.

Matt Taylor, Barclays.

Apologies for before, guys.

Thanks for taking the question.

I wanted to ask one about masks.

In the beginning of your prepared comments that you said that you were excited about mask growth next year, or you expected robust growth.

And I was wondering if you could just help us qualitatively understand what's driving that: if it's pull-through or launches or both, or just continued strength of the product.

Yes, Matt, I'm excited about the mask growth.

People close to the business are even more excited about.

I'm going to hand over to James Hollingshead, our President of the Americas, to talk about it.

Yes, thanks, Matt.

We've talked over the last two or three quarters about how we changed our pricing strategy.

And now that that's been grandfathered in I think the biggest move that happened this quarter is a lot of those pricing moves that we made in masks in the second half of the prior year got grandfathered through.

So we've seen pricing stabilize.

The AirFit range of masks continues to compete very, very strongly, I would say especially in pillows and full face.

The nasal market has always been the most competitive category of masks; it continues to be quite competitive.

But our volumes are up and our pricing is stabilizing.

We have a very strong position, and we feel confident we can maintain growth.

Thanks for that.

And just a follow-up on flow gens.

Just given how strong the Americas growth has been, once you start comping those big numbers, how much more can you grow over those 53%, 42% growth numbers that you had in the back half?

Yes, Matt, if you look at our global sleep and respiratory market, we believe it's growing in the sort of mid-single-digits.

You can't grow double digits forever.

But our goal is to not just meet, but we want to beat market growth in every geography we're in, in every financial period we're there.

So we're searching for excellence.

The team has produced excellence, and we're going to continue to do what we can to outperform market growth.

Great.

Thank you.

Ian Abbott, Goldman Sachs.

I was just wondering on the informatics, where you're at in the rollout of that to DMEs in the US.

Do you think you've pretty much reached all of them with your latest informatics, or have you still got some way to go there?

Jim?

It's a great question, Ian, thanks.

We're reaching everybody with the initial offering.

So the uptake of the initial offering has been very, very strong, and I think that that's a huge contributor to the flow gen growth.

We're taking share in flow gen; and I think we are taking share in flow gen in large part and the device is great as a device.

Both the AirSense and AirCurve devices are fantastic devices just in their own right.

But the informatics side of that with integrated comms and the software-as-a-service-platform is clearly starting to get uptake because it creates a lot of value for our customers.

And what they're seeing is both they can increase compliance and therefore increase revenue; but they also take out a lot of labor-intensive processes with it in troubleshooting and patient management and so on.

So, broadly, it's getting adopted.

We will add to the platform.

So you see things like the Jaysec acquisition and the CareTouch acquisition.

As we build on the platform, our customers will get even more growth.

And so as we build the platform we hope to drive even more adoption, which should maintain and even grow share in the flow gen space -- make our customers' businesses more productive and more profitable, and improve the health of the margin for both us and for our customers.

So would [my strip] will be on some version of it already?

I know you're saying you are rolling out more, but do you feel like you're fairly well there already?

I think there's a lot of growth to come.

I think that the platform will grow, and so we'll have more feature sets and more opportunities for growth as the platform grows.

But we've had very broad adoption of the product set across the whole market of a HMEs.

It's not restricted to a customer set.

We're getting broad adoption across all of our customers.

We are getting growing adoption across our customers, and we will continue to drive that as we add more features to the platform.

And Ian, I'd add that beyond the US geography which has been the first early adopter here, if you like, of the healthcare informatics solutions -- and that study I referenced was based in the US.

We're seeing the same thing as we take this offering to France, to Germany, to Japan, across Northern Europe.

And we will be taking this globally to all the 100 countries that we provide products in.

And the value that's provided in this is universal.

We take waste and inefficiency out of the delivery system.

We provide data of real-time.

We call it the HALO -- hour after last off.

You literally can put your mask down at 6:30 AM.

By 7:30 AM your data are in the cloud and they are available for you on your smartphone on myAir.

They are available for the doctor at your 7:30 appointment.

And they are available to the portfolio managers looking at a population of chronic disease, of COPD, sleep apnea or heart failure, or hypertension patients.

And so, the value of that has such a long runway that -- Jim's saying it's available to every customer in the US is 100% true; but has it fully unlocked all its value in the US?

No way.

And has it gone to every country around the world that we do business in?

And have we been able to show that value fully yet?

No way.

There's a whole lot of runway left on that.

Okay, thank you.

And my other question was about SERVE-HF.

It's now a couple of months since you actually came out with the initial trial data.

How would you characterize the response from the sleep doctors from that, and the cardiologists?

How would you in general characterize the response, and what sort of things are they looking for, going forward?

So, on this one, I won't characterize the response.

I will read out the response from the American Journal of Respiratory and Critical Care Medicine, which is the Journal of the American Thoracic Society.

I'll just read two paragraphs out.

This is a [full offers] from the University of British Columbia, Johns Hopkins, Brown, and others.

The title of the paragraph is: what should we do with patients being treated with ASV for other indications?

And I'll just quote this.

It is important to note that SERVE-HF study only included patients with heart failure, with reduced ejection fraction, and predominantly central events; and the findings should not be extrapolated beyond the study population.

Patients who have been given ASV for other indications such as narcotic-induced central sleep apnea, heart failure with a preserved ejection fraction, or complex sleep apnea, can likely continue ASV safely, as we see no compelling reason to withdraw it, especially if there is a beneficial impact on their symptoms.

And they go on further to say, we believe that newly diagnosed patients with obstructive sleep apnea should be treated on CPAP as a first line treatment of obstructive sleep apnea, if clinically indicated, as there is no compelling reason to believe that CPAP is harmful in any way with heart failure with reduced ejection fraction patients.

So there are just two quotes directly from the publication in mid-July from ATS.

What we've seen out in the market is exactly that.

The sleep physicians and the cardiologists are working together to look for patient groups where they can double down on the treatment, with, I would say, bi-level, oxygen, and ASV.

And they are looking for areas where there might be a safety signal.

But as we delve further and further into the SERVE-HF data -- as our Chief Medical Officer said at a session at ATSS: when you get ejection fraction above 30%, the safety signal goes away.

So, these data are going to get out there.

There's going to be public and there's going to be a lot of follow-on.

But the dust has sort of settled over these last two months.

And it's what we predicted, as I said earlier, in the numbers; and as I just said earlier there, from the peer-reviewed press that we're starting to see articles concerning that.

And certainly in the numbers that we're seeing in sales and the channel, we're seeing that we're all moving forward.

And a great thing about this is that we've done some great scientific research.

We had the data on Kohnlein showing a 60% reduction in mortality in severe COPD, and we had a safety signal in heart failure.

But our reputation at ResMed in our clinical community only goes up by these large, randomized, controlled trials that we publish in the peer-reviewed press, and we'll continue to do that.

Great, thank you.

David Low, Deutsche Bank.

Look, I think most of the questions have been asked, but just a couple of ones.

Competitive bidding -- we see the national rollout next calendar year.

What are your expectations are the implications of that?

Dave?

So it's still a little bit up in the air.

The announcement is that you've got a January 1 phase-in that goes half-and-half of existing rates, and half with the national averages, or national averages plus 110%, depending upon whether you are in an MSA or not.

And then July 1, going forward, would be the new rates set on either the national or local averages.

But we obviously support our customers.

We think our customers ought to be getting fair value for the services that they are providing, and I know there still dialogue that's going on.

So, it remains to be seen whether or not this goes forward on the dates as scheduled.

But regardless, we think that the competitive bidding that has been in round one and then round two is a known quantity.

So, from a disruption standpoint, there should be less.

There's a little bit -- it is easier to plan for it.

And also because there's no reduction in the number of providers, while on the one hand you say for our customers it's not quite as fair, because they're just taking the price cuts without getting the volume up.

On the other hand, there's less disruption in terms of who's going to be in the market as a customer.

So, we'll wait and see when it comes out and how it progresses.

But we feel reasonably confident about how the market is going to develop between here and there.

Okay, thanks.

And just switching to the acquisition that's been announced today, Curative.

Am I right in understanding that effectively you will have two product branches in China?

And is that a strategy that you would expect to take to other markets?

So, Rob Douglas will answer this.

Yes, thanks, David.

We think the Curative brand is actually quite strong in China.

It's one of the major players there.

And interestingly, behind the acquisition rationale, there's a very strong correlation in culture and values in those brand values.

And also, as we think about China in terms of segmentation in the market, where there are people who want to buy foreign stuff, expensive stuff, and people who want good stuff, local.

And so we -- and our distribution channels are actually quite complementary through that.

So specifically in China, we see that multibrand strategy working well.

And we talk with our teams.

We will have coordinated strategies, but we'll be very independent entities.

And we think that's a very efficient way to run an integration plan.

As we look at other markets, they will be done on a market-by-market basis, as to what make sense in those as we move across the world.

So is the Curative offer cheaper presumably than a ResMed or a Respironics offer?

I don't think we'd go there.

It's a matter of functioning -- good functioning, good value products targeted into the right segments.

And really these products have all been designed in China for the China market.

So they've really got the right feature set for those patients that it's targeted at.

Okay, great.

Look, thanks very much.

Joanne Wuensch, BMO Securities.

I have a very specific one and a very big-picture one.

First on specific, what's really interesting to me is that year-over-year your gross margins declined by 450 basis points, but operating margins are only down 90 basis points, which means you are managing the rest of your expenses.

How do I think about the FX impact that rolls through the other expenses that has helped you capture that only 90 basis point hit?

Brett, do you want to have a first go at that, and maybe Rob add some color?

Yes.

Joanne, you're right.

We do take more of a holistic approach to it and the products; and, for example, in the flow gen growth has been great on the top line.

Been some pressure on the gross margin, but we've also managed the operating expenses as well.

So, at an operating profit level, when you look at it on a non-GAAP basis, operating profits grew 5%, notwithstanding a bunch of FX headwinds and just actions from SERVE-HF and so on.

So I do think kind of demonstrates pretty resilient, pretty robust business, I think.

And so we try to manage it across the board, not just one particular segment.

But the currency is -- certainly it helps us, if you like, the currencies through the SG&A and R&D; hurts us a bit on gross margin.

I think you should step back, take a longer term -- I think we're still very committed to getting operating leverage at that SG&A or operating profit level.

So, I think -- think of it in that context that we do want to get operating leverage there.

To the extent we get that, that's certainly going to drop to the bottom line and help our earnings per share.

That's helpful.

So it implies that that is the right way to think about this holistically, that there's a lot of pieces running through this, and that there's room over time to (multiple speakers).

Exactly.

Okay.

Now for the --.

Exactly.

Thank you.

Now for the big-picture question.

Most of my med tech companies at that stage are consolidating.

We're running a lot of merger models on a regular basis.

You guys have done an amazing job since the spin-out from Baxter.

You're making tuck-in acquisitions, like we saw today in China.

How do you think about playing in the New World order, where more product is better product?

Joanne, we play in a different space to companies like -- the big ones you're talking about is like Medtronic, Covidien, right?

-- where you're selling products to hospitals and labs, GPOs.

Our job -- and it sort of aligns with Western European healthcare systems, and where the US healthcare system has now gone with accountable care organizations; that the goal now is to keep patients out of hospital and in the home.

And within the home care medical device space, we have a very strong position in -- and certainly within the respiratory medical and COPD side -- we're the market leader in driving those channels.

So I would see our opportunity is to continue to drive value to show that taking patients out of hospital and putting them into the home is the right thing.

And our job is to run faster and do better and to make sure that we continue to grow.

We will continue to look at M&A, as we announced on this call, two acquisitions.

And our goal is organic growth and leveraging our current business, driving the operating leverage that you mentioned in the first part of your question, but also looking strategically at how we can add value to the marketplace.

And I think taking patients out of the hospital, managing them in the home, getting the data to the cloud so you can quantify the benefit of that, is kind of a unique value proposition, if you like, to the medical device market.

Now, we have competition, and we continue to compete against our fellow competitors in the home care space and the respiratory space.

I think we do it better.

And I think we'll continue to lead and innovate and look at appropriate M&A to keep ourselves at the front of the pack.

Thank you.

And we are now at the one-hour mark.

I will turn the call back over to Mick Farrell for closing remarks.

Thanks, Kelly.

In closing, I want to thank the more than 4,000-strong ResMed team from around the world for their continued commitment to changing millions of lives with every breath.

We've had an incredible year, launching game-changing products and services, and we have reached $1.7 billion in annual revenues.

But we remain laser-focused on our long-term aspiration of changing 20 million lives by 2020.

Thanks for your time today.

Thank you again for joining us.

If there's any additional questions, please feel free to contact me.

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

Kelly, you may now close the call.

This concludes ResMed's third-quarter earnings live webcast.

You may disconnect.