ResMed Inc. (RMD) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 ResMed Earnings Conference Call. My name is Keisha, and I'll be your operator for today. [Operator Instructions] The company has asked me to address certain matters. First, ResMed does not authorize the recording of any portion of this conference call for any purpose. Second, during the conference call, ResMed may make forward-looking statements such as projections of future revenue or earnings, new product development or new market for the company's products. These statements are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties exist that could cause actual results to materially differ from the forward-looking statements. These factors are discussed in ResMed's SEC filings, such as Forms 10-Q and 10-K, which you may access through the company's website at www.resmed.com. With that said, I will like to turn the call over to Dr. Peter Farrell, ResMed's Chairman and CEO. Dr. Ferrell, please go ahead, sir.

Thank you very much, Keisha. Good afternoon. Good morning. Thank you for joining us. I'll begin with a summary on the quarter and talk about -- briefly about acquisitions and the recent partnership announcement. And I'll then turn the call over to Brett Sandercock, who as you know is our CFO. And Brett will go through the numbers in more detail, and then we'll take questions. And most members of the senior management team are also with us today and I might -- in fact, I'll very likely call on them in to get involved in some of the question -- some of the answers to your questions. First, the financial summary. We finished what we would describe as a very solid quarter and another excellent year. Global revenues in the fourth quarter of 2011, the final quarter, grew 17% to $342 million or up 11% on a constant-currency basis. Revenues in the Americas grew a very solid 14% year-over-year to $183 million, while the rest of the world revenue increased by 22% or in constant currency terms, 8% to $159 million. GAAP EPS increased 9% to $0.37 for the quarter. And if we exclude amortization of acquired intangibles, EPS was $0.39. In discussing product category performance, let me start with Masks and accessories as the results in this category were extremely encouraging. We've now exceeded over $0.5 billion in annual Masks sales alone. We believe we're hitting home runs on all the value propositions for the decision makers in our channel. We have a suite of products, in particular, the recent Quattro FX or let me say the FX series, the Quattro FX, the Mirage FX and the Swift FX, which meet the market needs all the way from the lab to the patient. Our Masks are effective, easy to fit, comfortable and more value for money. And they require less callbacks and ensure more compliance. In fact, on Tuesday, I was visiting a sleep position in Oklahoma City where the temperature -- beautiful day, the temperature hit about 114 degrees. But Jonathan Schwartz's lab, he has 24 beds, and he was waxing lyrical almost about the Mirage FX, which he said fits virtually all patients immediately. Turning to flow generators. Our global growth in sleep therapy devices was once again driven strongly by sales of our S9 order set. Preference for this product continues to increase globally, and the order set has become a consistent source of our growth. We believe the increase in home sleep testing is and will continue to fuel sales of the order set. As expected, the addition of the bilevels on the S9 platform has arrested the decline in overall device sales in the Americas, and sales of the new S9 bilevels are doing very well and are ramping to our expectations. Adding to flow generator performance was the recent launch in Europe of the Stellar 100, which is an adult and pediatric ventilator designed for both noninvasive and invasive use. Sales of Stellar have been growing progressively each month as we've launched country by country in Europe and parts of Asia. As we've always maintained, it takes time to launch any new product, but it is certainly ramping to our expectations. And the Stellar 150, where we will launch globally in fiscal Q2, that is the final quarter of this year, calendar 2011, this product includes what's known as IPAPs, our new automatic bilevel mode, which is automatic in both expiration and inspiration. The success of the Stellar is another positive indication of our progress in product development. In addition to our success in internal development, we are pleased with the progress we are making in building strategic partnerships or relationships. And let me comment briefly on CareFusion, Gründler, which was just announced of course, and BiancaMed. Just over a week ago, we announced a 5-year exclusive distribution agreement with CareFusion to market our ventilation products in hospitals, long-term acute facilities or acute-care, I should say, facilities and skilled nursing facilities. The initial focus will be on the launch of the Stellar 100 and related products, and the Stellar is an excellent fit in the CareFusion ventilation platform as it provides them with the product facilities' differentiated features and a more competitive price point. It also allows us to quickly enter the institutional healthcare pressure support ventilation marketplace. According to -- in Medicare's February 2011 report, the Americas sub-acute noninvasive pressure support ventilation market is the fastest-growing segment, estimated to be, albeit sub-$100 million, but it's growing at more than 6% annually. As we announced today along with our results, we acquired Gründler Medical GmbH from Freudenstadt in Germany. Gründler is obviously a German-based company, developing innovative medical humidification products. These humidifiers fit a wide range of ventilators from neonatal and pediatric to noninvasive pressure support to the intensive care unit. The strategic implications of this deal are that it enables us to provide a system sale with existing and future ventilators into the home -- into both the home and the hospital markets. In short, it's a one-stop shop for humidification. It will provide incremental revenue as we enter into a new market segment, allowing us to build our expertise, as well as allow us to build a competitive position in humidification, which we have never really had. And we'll be able to leverage the humidification technology between both ventilation and the sleep-disordered breathing space. We have known the founders of Gründler for several years and are looking forward to having them join the ResMed team, and I might parenthetically add that 2 of the senior people in Gründler are both physicians. So that will add to our medical support team. Also, just a few weeks ago, we announced that we had acquired BiancaMed, a leading, high technology, Irish company. BiancaMed, we've had an association with them from -- which goes back to 2003 when we initially invested in them. So we know them very, very well. And again, the acquisition of BiancaMed brings in 2 very, very qualified engineers. They're Conor Hanley and Conor Heneghan. Conor Hanley has a Ph.D. in Chemical Engineering from Pen [Pennsylvania], and Conor Hannigan has a Ph.D. in Electrical Engineering from Columbia. They're both very talented people, and again, we see them helping us beyond the BiancaMed acquisition. However, BiancaMed itself has developed and is marketing an innovative, convenient, noncontact device to one of the sleep and breathing in the home and hospital. BiancaMed's SleepMinder is an accurate, touchfree device that measures sleep and breathing with sophisticated biometric software, also using Doppler. The core of BiancaMed's proprietary technology is a motion sensor that can detect respiration and movement without physical contact with the body. The company is developing a number of other applications for this technology across a wide range of medical and consumer settings, and we'll have more to say later about the consumer aspects of it. But we're actually quite excited about that. BiancaMed will become a part of ResMed's newly created Ventures and Initiatives unit, which will now be run by Jim Hollingshead. There may be questions on that, and we're happy to talk about it. With each of these transactions, the CareFusion, the Gründler and BiancaMed, we're adding external expertise in strategically important areas. And although they are not yet material contributors to our short-term financial results, we're very confident they'll add value in the years to come. On the home testing front in the Americas, interest in HST continues to evolve. HST increased significantly, actually doubling in fiscal 2011. And we now believe it's somewhere in the vicinity of 10%, maybe a little more of sleep test volumes. And we'll continue to expand due to patient convenience and commercial pairs pushing HST, although that push has not yet been broadly enforced. And many of you probably saw the recent announcement by United Healthcare in which United is now requiring prior authorization for attended polysomnography and encouraging the use of HST. This is early days, and a recent external report suggested that maybe the tipping point could be 18 months to 2 years away. One doesn't know about that, but we are seeing a definite and increasing interest in HST. Why? Because it's far more effective. It's far more efficient. It's done immediately, and it's certainly far less expensive, probably over all about 1/3 the cost of going through PSG and pressure setting in the lab. So we see this continuing, and we see it being driven primarily by the insurers. We also expect growth to result from continued and improved awareness and validation of the critical role that sleep-disordered breathing plays in the very serious, most rapidly growing and most costly diseases in the world, namely cardiovascular and cerebrovascular disease and diabetes, as well as, of course, obesity, which hits just about all the bases anyway. Increasingly, there is evidence coming to light that early intervention in the treatment of sleep-disorder breathing will not only slow or prevent the progression of these co-morbidities, it actually treats the co-morbidities. And we're very, very excited about this data, although very early days, of course. In fact, just last month, the American Heart Association published new research demonstrating that LSA can cause changes in blood vessel function in the endothelium that reduces blood supply to the heart in people who are otherwise quite healthy. The research showed that treatment with 26 weeks of CPAP improved study participants' blood supply but also a function of the blood vessels. This adds to other smaller studies showing blood vessel abnormalities in untreated sleep-disordered breathing patients. On that note, I'm happy to report that the 800 patients -- 800th patient has been enrolled in our survey chip study, which of course is being conducted in Europe, mainly Germany, and to a lesser extent, France. Now I'll turn the call over to Brett, who can provide some additional detail on the financials, and then we'll attempt to take care of your questions. Brett?

Great. Thanks, Peter. Revenue for the June quarter, as Peter mentioned, were $341.9 million, an increase of 17% over the prior year quarter. Favorable currency movements added approximately $17.8 million to our Q4 revenue. So in constant currency terms, revenue increased by 11%. Income from operations for the quarter were $66.7 million, a decrease of 3% over the prior year quarter. And net income for the quarter was $58.5 million, an increase of 10% over the prior year quarter. Diluted earnings per share for the quarter was $0.37, an increase of 9% over the prior year quarter. And excluding amortization of acquired intangibles, earnings per share for the quarter was $0.39. Gross margin for the June quarter was 58.2%, broadly consistent with Q3 FY '11. On a sequential basis, our gross margin benefited from a favorable product mix, offset by ASP declined and an unfavorable geographic mix. Currency impacts on a sequential basis were relatively neutral this quarter. Looking forward in Q1 FY '12, the appreciation of the Australian dollar will negatively impact our gross margin by around 100 basis points. However, assuming there's no other currency movements, we expect initiatives targeted at reducing product costs to its supply chain efficiencies and manufacturing improvements, together with a favorable product mix trend, should lead to an improvement in gross margin in the second half of FY '12 compared to the first half of FY '12. SG&A expenses for the quarter were $102.3 million, an increase of 22% over the prior year quarter. In constant currency terms, SG&A expenses increased by 13%. SG&A expenses as a percentage of revenue were 29.9% compared to the year-ago figure of 28.8%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 30% for fiscal year 2012. R&D expenses for the quarter were $27 million, an increase of 35% over the prior year quarter. In constant currency terms, R&D expenses increased by 11%. R&D expenses as a percentage of revenue were 7.9% compared to the year-ago figure of 6.8%. Looking forward, and again, subject to currency, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2012, reflecting the strength of the Australian dollar and also the continued investment in our product pipeline. Amortization of acquired intangibles was $2.9 million for the quarter, and stock-based compensation expense for the quarter was $7.5 million. Our effective tax rate for the quarter was 24.3% compared to the year ago quarter effective tax rate of 26.1%. The lower tax rate reflects the benefit of lower effective tax rate in our Singapore and Australian operations. For the full year, our effective tax rate was 25.3%, while we currently estimate our effective tax rate for fiscal year 2012 will also be in the vicinity of 25%. Turning now to revenue in more detail. Overall sales in the Americas were $182.8 million, an increase of 14% over the prior year quarter. Sales outside the Americas totaled $159.1 million, an increase of 22% over the prior year quarter, with currency movements having a positive impact on revenues. In constant currency terms, sales outside the Americas increased by 8% over the prior year quarter. Breaking out revenue between product segments. In the Americas, flow generated sales were $82.8 million, an increase of 3% over the prior year quarter. As expected, our growth this quarter was positively impacted by the launch of our S9 bilevel platform. Masks and other sales were $100 million, an increase of 25% over the prior year quarter, underpinned by strong contributions from our FX range of Masks and continued growth in accessories. For revenue outside the Americas, flow generated sales were $108.4 million, an increase of 22% over the prior year quarter, or in constant currency terms, an increase of 7%. Masks and other sales were $50.7 million, an increase of 22% over the prior year quarter, or in constant currency terms, an increase of 11%. Globally, in constant currency terms, flow generated sales increased by 5%, while Masks and other increased by 20%. Cash flow from operations was $74.3 million for the quarter, reflecting strong underlying earnings and working capital management. Capital expenditures for the quarter was $17.4 million, while depreciation and amortization for the June quarter totaled $19.5 million. We continue to buy back shares as part of our capital management program. During the quarter, we repurchased 2.1 million shares for consideration of $64 million. For the full year, we repurchased 4.9 million shares for consideration of $160.1 million. As of today, we have approximately 9.3 million shares remaining under our authorized buyback program. Our balance sheet remains strong. Net cash balances at the end of the quarter were $635 million. And at 30 June, total assets stood at $2.1 billion, and net equity was $1.7 billion. I will now hand the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Michael Matson with Mizuho Securities.

Yes, I guess just a question regarding the commentary around the gross margins for fiscal 2012. So you're at about 58% for the fourth quarter. So you're seeing that you expect another 100-basis-point decline, but things should get better in the second half of 2012. Does that mean we should be modeling roughly 57% range for at least the next 2 quarters? Am I hearing that correctly or not?

Well, Michael, it was actually 58.2%, so that will be aimed to 58.1%. But as you know, it's a complicated equation with geographic mix. And in this particular instance with the very encouraging growth in the U.S. market, which was 14%, where the prices tend to be a little lower, that obviously impacted the figure, but let me throw it to Brett for some more granular input.

Sure. Mike, this is Brett. Yes, I mean, what we want to call out is, we're coming up with some pretty strong headwinds on the currency, particularly the Australian dollar, obviously. So that's going to have quite a big impact. But as Peter said, there's a lot of other factors that play out on the margin, product mix, geographic mix, manufacturing improvements we have in supply chain and so on. So on a sequential basis, in the short term, I think we've definitely got some opportunities there where we'll do better than that. But on far more comprehensive work-through on some of the initiatives we have that, that will start to impact the margin, particularly in the second half. So I'm not saying that some of those won't manifest in the first half. I think some of them will. But certainly, we think that will be stronger in the second half. And it's a pretty significant headwind we're facing just in terms of the Aussie dollar. But as you know, there's a lot of uncertainty out there in the world at the moment, so -- that all the dollar could do anything at the moment. So we're just trying to give you a little more color around that, but rest assured that we're working pretty hard on initiatives to expand that margin.

Okay. But just to make sure I'm understanding it correctly, you're kind of saying that there'll be 100-basis-point hit, which would be -- that's sort of a baseline, and you're going to try to improve things from there, right?

Correct. Correct.

Okay. All right. And then that's off of the fourth quarter level, right? Not the full year 2011 level?

Yes, sequentially from fourth quarter.

Okay. All right. And then I just have kind of a high-level strategic question. Given the management changes, given the Venture group that you've established, are you trying to -- it seems like you're trying to further diversify the company. And is -- can I read anything into that about what you're seeing in terms of long-run growth in the sleep apnea market or sleep-disordered breathing market? And in the longer run, do you intend to become sort of a broad respiratory play, more akin to what the old respironics used to be like?

Well, Michael, I think a general feeling is that not being in the hospital market, we're sort of leaving money on the table. So that's certainly part of the equation. And if you look at that, we spent quite a bunch of money on R&D in the ventilation spot. Geoff Nelson may want to add some more flavor here, Geoff being the President of the Respiratory Care Strategic Business Unit. But we thought we would just leave the money on the table. And the good news is that outside the United States, we're actually doing not so badly in the institutional environment. But in the U.S., we were nowhere. We were literally nowhere. And it was just happenstance, I guess, with Kieran going to CareFusion and having a very good feel for the amount of effort and time we put into the ventilation space, and it just fitted nicely with the gap that they had. So we're kind of encouraged by that. But on the broader -- in the broader picture, those strategic initiatives that we referred to, taking no particular order of priority, chronic obstructive pulmonary disease or more specifically overlap syndrome, where a patient has upper airway instability, plus needs some help with ventilation, that's an area where we see huge potential, roughly 30 million patients in that space. And of that, roughly 1/3 of them having overlap syndrome. That's 10 million people, which are not, we don't believe, being effectively addressed. The second area is, if you like, both cardiovascular and cerebrovascular. In other words, taking into account, transient ischemic attack, stroke. 75% of both TIA and stroke patients have sleep-disordered breathing. We have enough data to know that if you don't treat the sleep-disordered breathing after a patient has either a TIA or a stroke, you're not going to effectively treat them. We need, obviously, to educate neurologists in that space, and we've got plans to do so. In the cardiovascular space, everybody is pretty much now familiar with the connection to atrial fibrillation. And of course congestive heart failure I mentioned, the 800th patient having been added to the survey chip program, and we had unbelievably good results with Adaptive-Servo Ventilation across the globe. That is the sales of the S9 Adaptive-Servo Ventilative products, really, really, really encouraging growth there. And we see that continuing. And obviously, there's also drug-resistant hypertension. Type 2 diabetes mellitus, you've heard me talk about Diabetes -- type 2 Diabetes before. We're working with the Joslin Institute at Harvard. We also have plans to not just work with them, but we've just recently had 2 key opinion leader dinners with international Endocrinologists. There are only about 5,000 in the U.S., so it's not hard to target. And we're kind of excited. The good news is that with our current chuckwagon, we've got all the products we need. Because basically, that's a play with HST and the S9 order set. I mean, that's really the best way to address the issue. And recent data are showing a huge number of patients in that space, 26 million full-blown diabetics in the country, of which 90% are type 2 diabetes. But more importantly or more disturbingly, another 79 million have metabolic syndrome. In other words, you can't tick the box if they're full-blown diabetic patients. But that's 105 million, so take out the 10% type 1s, that's in the 90 -- mid-90 millions of people, of which 80% have sleep-disordered breathing. So we see this as a wonderful opportunity to reduce the expense of the current healthcare system. Then we've got the perioperative care. There's a big meeting coming up in October 14 in Chicago, the Society of Anesthesiology and Sleep Medicine. We were important catalysts in getting that meeting set up. And finally, of course, there's Occupational Health and Safety with truck drivers, railway drivers, pilots and so on and so forth, air traffic controllers and what have you. And we're making really good headwind in those spaces. So it's a long winded,really long winded answer to your question, but in those 5 areas, we'll be making continued investments. And we've got a very strong balance sheet as you know, as Brett said, $635 million net cash. And we are going strategically use that to invest in small technology-based companies where we can direct them into areas that we think are important. And we can take an equity position in them not to make money on the equity. In fact, you could even look at it more as a marketing expense, but to direct them into areas that we think is important and hopefully allow us to kick the ball down the field a little more efficiently and effectively. So sorry for the long-winded answer, but it was an important question.

No, that's helpful. I appreciate it. Just final question for Brett. This should be pretty quick. Can you quantify what the actual EPS impact of the currency was in the current quarter?

Yes. Michael, for Q4, it's approximately $0.02.

Positive or negative?

Negative.

[Operator Instructions] Your next question comes from the line of Matt Prior with Merrill Lynch.

First question on U.S. flow gen growth. Can you delineate or give us any kind of sense as to the growth rate, say, into the CPAP versus APAP? And previously, you've talked about CPAP growing single-digit, APAP growing at double-digit, especially with the trend in home sleep testing. Are we seeing that deviation in growth rate get even bigger? And do you expect that to accelerate in fiscal '12?

It's just, really, Matt, a continuation of what we talked about last quarter. In other words, we're seeing a significant growth flowing in the escape the lower-priced units. And the good news is, of course, the clubs are basically the same. But a switch to the order set is definitely occurring. We believe we'll get more data as we go forward, obviously. We've been seeing this is the third quarter that we've seen this. And back to that visit I made to Jonathan Schwartz out in Oklahoma City. Jonathan has a huge sleep program, and he's an exclusive S9 order set user. And he was telling me that it's made him a better physician, he's moved away from the fixed order set completely. And if he's representative, and we believe he is, of what's happening, there's going to be less sales, we believe, in the noncompliance CPAP. The figure he gave me was that, with the SA products -- and the good news is he's been an exclusive ResMed user, and he's a big user for quite a while. So we have really, really tight statistics in terms of compliance. By the way, he said he's compliant. And I'll give you more granularity here, but his compliance was 90% using the S9 order set. I mean, that's an astounding figure. We'd say anything above 75% is magic. So he's getting very, very good compliance. But what he said was that using the S9 order set where we tweaked the algorithm even beyond the S8 -- the S8 was a great product, but this is a magic product -- and he was telling us how good the algorithm was. And his usage of bilevel, that is the noncompliant CPAP, percentage has gone from 15% to 5%. And we are seeing this as well. We're seeing very good growth in the ST, STA and the Adaptive-Servo Ventilation space. In fact, the ASV is just mind bogglingly excellent. I don't want to share what those numbers are, but they brought tears to our eyes. And we're seeing a slowing down of the VPAP S and a slowing down of the low-level CPAP units, but they're all moving to higher-priced devices. And that trend, we see that continuing particularly with the growth of HST.

Great. And I guess just a follow-up question, maybe for Brett. I guess, Brett, with this positive mix to APAP or to CPAP and of course, within the mix of bilevel, and then of course, the launch of the Stellar series in the U.S., which should, again, be margin accretive. As I understand, are these the kind of things that should naturally mitigate this gross margin expansion in the second half of fiscal '12 as that'll still lift with CareFusion and bilevel recovers more so?

Yes. I think that's right. We've got -- I think if you look through the product mix and that has been stable for us for a little while now. We see that continuing. We saw some of those trends that Peter articulated, and just sort of moving up their complexity chain, I suppose, in the more sophisticated product. And with that, generally, a better margin as well. And I think there's no reason to believe that trend won't continue.

This is Peter, Matt, a word of caution there. I mean, we're not releasing the Stellar 150 until fourth quarter calendar year. And new product launches, as we said earlier, I mean, it's not like a binary thing 0 to 1. I mean, it takes a while for people to test them out and see how good they are. So there's no question that it's going to help, but the rate of which it's going to help, of course, is in the lap of the gods.

Sure. My question varies more, but basically this current trend, it's not like you have to chase extra cost out initiatives to offset the effects?

Right, it's healthy.

Is that correct?

Yes, that's right, Matt. We're working on that all the in terms of the cost initiative as well. We're not standing still, so we'll continue with those programs as well.

Your next question comes from the line of David Claire with Piper Jaffrays.

Yes. I was just hoping, Peter, to maybe dive a little bit deeper into the CareFusion Agreement, When do you think we should see this make a contribution to results in the Americas here? And if you could give us an update on sales force training, and just how the whole agreement is going so far?

I'm going to try that to Jeff, but just make a comment. It is a 5-year agreement, and it just involves at the moment, Stellar 100 and the Stellar 150. And of course, they have FDA approval, but we have to train their people. And I mean, the good news for us is we are relatively happy with the volumes that they've told us they can do. It's not going to change our lives, but it's a reasonably comforting figure, and we're happy with the margins and the pricing. And as I said, it's a 5-year agreement. But it is going to take a while to ramp up. Obviously, we've got to train their people and they're going through their own internal changes as well. But over to Geoff, because Geoff was the guy who negotiated -- primarily, negotiated the agreement. So Geoff, would you like to add some comment?

Yes, so we signed the agreement a couple of weeks ago. The training with their sales force is scheduled for September, and we imagine that we're going to be launching that in our Q2. There's going to be a period of sampling and so on, so we don't think we'll see immediate results. The market size is around about $85 million for noninvasive institutional ventilation. CareFusion, they're obviously a strong player in that market, but there's a very strong established player with R&D and the ventilation in these markets, so it's not going to change overnight.

Okay, great. Thanks. And then maybe a quick one for Brett here. The 3% growth that we saw in the Americas, is there any way you could tease out, say, volume versus price versus mix? Was volume still positive overall or how are things shaping up there?

Well, I mean, I don't want to get too granular on what we're looking there. I mean, if the volumes were positive. And the volumes, like it traditionally done, run a few points ahead of revenues, so that trend's still there as well.

So, David, we normally figure a 5% decrement in ASPs. And it was of that order. In some cases, a little higher, but about where we expected it to be. So to Brett's point, yes, the volumes were higher than the revenues.

Okay. And then just one more quick one here, can you tell us about the leadership change at ResMed Ventures?

Yes. JC was, as you know, running sales and marketing in the Americas. And the result of discussions of the board was that he should be off at the ResMed Ventures and Initiatives. And this happened fairly quickly. I was on vacation last week and came in Monday morning, and I was planning to have a discussion with JC about the 3 areas I mentioned, the cardiac and cerebrovascular and cardiovascular and perioperative care/risk and the Type 2 diabetes. And he said, well, before we do that, I'd just like to mention that I've accepted another position. And as we talked it through -- look, one of the things that concerned us initially was when you looked at what Jim Hollingshead was doing in the strategy part of our business, and what JC was planning to do, you had about a 75% to 80% overlap, and it looked a little crazy on paper. I wasn't worried about it because the idea of ResMed Ventures and Initiatives is that, that's going to become a P&L responsibility, and that would leave the strategy group just focusing on the future. And the near-term future would be the P&Ls and all the Adaptive-Servo Ventilation business was going to go through there. Narval was going to report through JC. That's the mandibular repositioning device, and also BiancaMed was going to report in. However, it turned out that all the negotiations with BiancaMed were done by Jim Hollingshead, anyway. And Jim is right across the Narval business. And people, internally, were concerned about a little bit about of overlap, I mean, it was not just a little bit, it was 75% to 80%. And therefore, but I said don't worry because this is very quickly, and that's the goal I wanted JC to work on, is turning more of those areas into P&L activities. And JC said, "Look, I've come from a P&L environment with 400-or-so people. And here, I've got to build from ground 0." And he said, "As I thought about it, I just wasn't comfortable." So he actually approached CareFusion. So it wasn't like Kieran saying, "Gee, I'll take all the boys that I can." It wasn't that at all. JC approached him, and I think he's got an absolutely fabulous job. And it took like a nanosecond to say, "Wow, that's good for him." And Jim is all across the ResMed Ventures and Initiatives. So he's the perfect guy to run that group. And I think it's a good outcome all-around. And certainly, no hard feelings. I mean, JC is a great guy. He did a terrific job. He came in with a huge challenge 3.5 years ago. We had only increased year-over-year 5%, and then he brought it up to double-digits and did a great job. And we wished him well, and I think he's going to do a great job.

Your next question comes from the line of Ben Andrew with William Blair. Ben Andrew - William Blair & Company L.L.C.: I was curious if you have kind of a thought in terms of volume trajectory from here? Do you see things kind of steady as we look at OSA volume growth in '12 in the U.S. and in Europe, trying to isolate that from some of the other dynamics? Or do you see things kind of decelerating with the economy looking a little strange?

It's difficult looking into a crystal ball, you don't know what the heck is happening there. Just about everything you hear about the U.S. economy is highly negative. I mean, I think the debt ceiling bill was partially a joke. I mean, you increase the debt ceiling and you'll get a team together and take a look at what you're going to chop out. I mean, there needs to be complete structural change in the U.S., but obviously, we're not on a position to drive that, so we've just got to take what we get. The pundits are suggesting -- the lowest figure I've seen in terms of growth in the U.S. market for devices is 5%, Phillips is looking more like 8%. So you can say 5% to 8%. We would say that it's probably high-single digits, maybe a 7%, something like that 7% or 8%. So given our growth, we feel that we're taking market share. Just what the real number for growth is, we don't know. I think there's going to be a bit of a fill-up from HST. We're confident that's going to happen. Sleep labs are still growing, albeit slowly, maybe a 5% figure will be the lowest, probably closer to 7%, maybe as high as 8%. But that's our expectation, and that's what we're going with. If it's different, it'll be different. But that's what we think it's going to be.

Fine. My second question is, if generator growth in the quarter was about 3%, bilevels were flat versus down over 20%, do you see yourself in an accelerating share-taking move as the next quarter comes in? Because it always took up a couple of quarters to fully launch a new generator. And so are things going to improve over the course of '12 relative to the market? Or are you sort of at your stride and you'll maybe hold that share gain position where it is?

That's a good question. And we tend to be a little conservative, I think. And flattish would be a good call, we think. If there's an uptick -- we certainly have stopped the leaky sieve. There's no question about that. It's some very, very encouraging numbers. It's a great product. It's being received according to what our expectations were, which is a good thing. So what we thought was going to happen, did happen. And we think it's going to continue. But we don't feel that there's going to be an acceleration. We think there will be an uptick, and it's just like watch this space -- we've stopped the hemorrhaging in the bilevels for sure. But the trends towards away from lower price CPAP to what I said we believe is going to continue, we think we're going to see a slowing of the noncompliant CPAP, that is the bilevel Ss, the VPAP S. And we see good growth still occurring with the ST, the STA and certainly Adaptive-Servo Ventilation.

Your next question comes from the line of Ian Abbott with Goldman Sachs. Ian Abbott - Goldman Sachs & Partners Australia Pty Ltd: If I could keep on with the devices, if you look to Europe, just wondering with your growth there, how significant was the contribution from ventilation sales in the quarter?

We only just launched, I mean, the Stellar 100 -- look, it's going to according to our expectations, but we haven't seen the huge acceleration in bilevels in ROW as yet. And maybe I'll turn that to Geoff. I mean, Geoff's been looking very, very carefully at the market. So Geoff, do you want to make a comment about our growth in ventilation and expectations?

Sure. So I think if you look at our Elysian VS [ph] range, they have a strong position in Homecare in Europe. We just launched Stellar in the -- one quarter ago. And so we've got one quarter results. It's been growing month-over-month. That's now a significant contributor in terms of its getting up to revenues that we're approaching, some of the other products increasing in Europe. But there's a way to go yet. And I think you know with ventilation is it takes longer than the sleep products in order to establish. So I think the growth we see is lower. And we still got to relatively low market shares in the institutions in Europe, and so that's some of the work we've got ahead of us. Ian Abbott - Goldman Sachs & Partners Australia Pty Ltd: Right. I mean, I suppose what I was also trying to get at is you sort of said that devices were growing about 7% in constant currency in the rest of world. Is RFO growing faster or slower than that?

We think that's about what it's growing at, I would say. We have now more granular understanding of that area, I would say 7 -- I'd be confident it's not going to go below that. And if you ask me what I think is going to happen as we go forward, I'd say it's probably going to go towards 10%. So we're comfortable with the things that are going okay in Europe and Asia Pacific. Ian Abbott - Goldman Sachs & Partners Australia Pty Ltd: Good. And so my second question, can I ask about the Mask business, obviously growing very strongly. Could you just comment, how much of that is you winning market share? And how much of that do you think is people trying to -- sort of get their numbers of Masks per annum up?

Well, the way I would sort of answer that is we are seeing just wonderful acceptance for the Forex platform. We are the king of the castle in full-faced masks. And the Quattro FX, which Don Back [ph] and his team developed is just really a great product. It's a fabulous product. The Mirage FX, we were getting -- frankly, our tail was getting kicked in the nasal mask category. We were gradually losing market share there, and we were well below 50% of the market. This is such a great product. We like the COGS. We like the way it fits 90-plus percent first time fit. And we are -- the biggest job that we've made in the Masks has been with the nasal Mirage FX. And it's just very encouraging. We love the product, and in fact, Jonathan Schwartz, I may mention, that I spend the day with him and we talked to a dozen patients who were on treatment. The bulk of them were on the Mirage FX. And he said, "This is the best product you guys have ever put out." I think he's exaggerating. We think we have lots and lots of good products. But he was absolutely over the moon. He said, "It is at least 100% better than any other nasal mask that you guys have put out." Be that as it may, that's where our most significant growth has come from. And of course, we're the king of the castle also with nasal pillow. So you've got the full-face masks, and you've got the nasal pillows where we've traditionally been in the very high -- very, very high percentages. And we're in the very low percentage area, around 30% in the nasal category. And we've seen a big, big jump up there. And that, I think, is the major change. Ian Abbott - Goldman Sachs & Partners Australia Pty Ltd: So you haven't seen any change from what you can sort of get from general feedback on the number of masks that patients are using per annum?

It's a very, very -- oh, per annum? We're still seeing figures of north of 1 but below 2. And that's a great -- a big area where we see we can make some inroads. And the data, I think -- you want to say anything about that, Nick? No? So it's sub-2, it's above 1, total 1.5. And that's -- we know even the worst insurers will allow you to have 3 masks a year, CMS-4. And that's obviously an area -- replenishment is an area which has a lot of potential for growth. But just to give you an idea, we would sell 5x as many masks as we do devices. So it's very hard to work out just where they're going. It's replacement. It's being used on other guys' devices. It's our devices. I mean, since we're not selling, in most cases, direct to customers, it's almost impossible to work out when you've got a ratio of 5:1, just where the Masks are ending up.

Your next question comes from the line of David Low with Deutsche Bank.

Just touching on the rest of world growth, if I could get you to talk about, geographically, were there any particular countries that were better or worse than you've seen in trend terms?

There was nothing that spooked us there at all. I mean, constant currency was 8%. Asia Pac tends to be a little lumpy. Obviously, when you've got a distributor in Japan, it's obviously a big part of Asia Pac, and there was a bit of a hiccup, as you know, with the tsunami and so forth. Japan tends to be lumpy anyway, but when you have such a big customer like Teijin, obviously that's going to continue to be lumpy. Germany is our biggest market outside the U.S. Germany is going along pretty well. France is going along very well. And then you've got a smattering of Norway, Sweden, and so forth, the Middle East and the U.K. and so forth. There's been nothing there that spooked us in terms of growth rates in either Germany or France, our 2 biggest markets. And the lumpiness that we expect from Asia Pac still continues. But nothing...

Low constant currency growth of ROW numbers, you'd be comfortably going back to around the 10% level on average?

Yes. I must say, I was even a little surprised at the 8%. I would have expected 10%. But in talking to Stein, I had to check to him this morning. Stein Jacobson who runs our European operations, and nothing that's spooking him.

But I guess the fear with Europe in particular is that there's going to be funding pressure. Now, my sense is we haven't really seen much impact from that. I was just leary as to whether that was an explanation in this quarter?

David, Brett. Europe still remains pretty solid particularly across our emerging markets. And really, if you look at that CC growth rate, Asia Pac, that region was actually a drag on that this quarter. So they experienced low growth there. That was predominantly with Japan, and you now have some of the issues that we've had with the earthquake and so on. And as Peter said, it is traditionally lumpy. So, yes, I don't think there's anything to read into this particular quarter on that. Europe remains pretty solid and Asia Pac, lumpy as ever. But Japan is probably working through some of their issues, as well, in terms of their own country issues around the earthquake and so on. So overall, we still remain pretty pleased with the rest of the world growth.

David, let me make one other comment there, which David Pendarvis just reminded me of, and it is a big thing. We launched the S9 in France and Germany this time last year, and it went gangbuster. So we had just dreadful comparables, if you like, with a new product that everybody loved. Bingo. We had huge growth the previous year, so we had a huge mountain to climb. So that's the reason that it was softer than what one might expect.

Yes, now that's a very fair point. Just one other question then. Just on the acquisitions, so we've seen a couple of small acquisitions. Can I get you to talk about what to the level of spending or what the cost has been, or what you expect to spend there over the next 12 months?

It's factored in. We said that the BiancaMed -- look, Grundler is making money. In terms of revenues, we're talking about a few million. And we don't have FDA approval for Grundler products in the United States. So how long's that going to take? How long is a piece of string sort of thing? We will be seeking FDA approval, obviously. We need to do it. We will do it. But they are making money, so there's not going to be a hit from the Grundler acquisition. And as we said when we bought BiancaMed, it's roughly $0.04 for the year with BiancaMed. And I don't think it's going to be any different. Maybe, Brett, you might want to add some more to that but...

I guess I was trying to understand how much you're spending. So $635 million of cash on the balance sheet is something we've always looked at with great interest as to what the plans are. We've seen these acquisitions, I'm just trying to get a sense as to whether we're going to see $100 million go into acquisitions or is it going to become like...

Yes. We don't have anything immediately on the plate that we're looking at to be candid, but that doesn't mean there won't be. $100 million acquisition could happen, could happen. But there is nothing -- there's nothing that we're -- we're very familiar with Grundler and we're very familiar with BiancaMed. There are no other similar type companies that we've been working with for a long time that we're about to make an offer on. On the other hand...

Outside the buybacks, the cash level continues to go up?

Yes. Yes, outside the -- Yes. But look, let me tell you that we are looking very carefully as to how we should deploy it. So I could say now, we're not sort of putting the ruler over a number of other companies, but we intend to, that's for sure. And Jim Hollingshead, who's currently in India, when he gets back we'll be taking a good hard look of the terrain and seeing what's there that might help us move the ball down the field.

We are now at the one hour mark, so we'll turn the call back over to Dr. Peter Farrell for his final remarks.

Well, thank you all for joining. And let me just say that we continue to be excited by -- as we look out into the future. Innovative products rolling out over the year. We're especially excited about the FX Masks and the new S9 platform. The market for our sleep-disordered breathing is still highly under-penetrated. We have a robust balance sheet, which we just talked about. We're certainly generating cash in the vicinity of $0.25 billion a year. And finally, we have an absolutely first-rate team of people to assure continuing strong execution. And I want to thank all the staff, particularly those that are listening, for their commitment and loyalty. And we see great things happening in the sleep industry, and also within the company, and we look forward to keeping you posted on our progress. So, thanks again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.