ResMed Inc. (RMD) Q4 2012 Earnings Report, Transcript and Summary

Peter C. Farrell - Founder, Executive Chairman, Chief Executive Officer and President Brett A. Sandercock - Chief Financial Officer and Principal Accounting Officer Michael J. Farrell - President of Americas Operations Donald Darkin - President of SDB Strategic Business Unit David Pendarvis - Chief Administrative Officer, Global General Counsel and Secretary Geoff Neilson - President of Respiratory Care Strategic Business Unit Robert Douglas - Chief Operating Officer

Dan Hurren - UBS Investment Bank, Research Division Jacob Messina Michael Matson - Mizuho Securities USA Inc., Research Division Ben Andrew - William Blair & Company L.L.C., Research Division Ian Abbott - Goldman Sachs Group Inc., Research Division Nicholas Cameron - Deutsche Bank AG, Research Division Anthony Petrone - Jefferies & Company, Inc., Research Division David Stanton - Nomura Securities Co. Ltd., Research Division Matthew Prior - BofA Merrill Lynch, Research Division Saul Hadassin - Crédit Suisse AG, Research Division

Good afternoon, ladies and gentlemen. Welcome to the Fourth Quarter 2012 ResMed, Inc. Earnings Conference Call. My name is Chris, and I will be your conference moderator 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 for any purpose. Second, during the conference call, ResMed may make forward-looking statements, such as projections of future revenue earnings, new product development or new markets 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 would like to turn the call over to Dr. Peter Farrell, ResMed's Chairman and CEO. Dr. Farrell, please go ahead, sir.

Thank you, Chris, and thanks, everyone, for joining. I'll begin as usual with some summary remarks, and then turn the call over to Brett Sandercock for some more granularity on the finances. And we will then do some Q&A. First, the financial summary. We finished with another extremely solid quarter and fiscal year. Global revenues in the fourth quarter of 2012 grew 9% to $372 million, up 13% on a constant currency basis. Revenues in the Americas grew 13% year-over-year to $207 million. And ROW revenues increased by 3% or 13% in constant currency terms to $165 million. This represents our 70th consecutive quarter in which we've grown the top line since we went public. I don't believe there are too many companies in that category that can boast a record like that. But we'll get some more granularity on that for those who are interested. For fiscal 2012, we reported revenues of approximately $1.4 billion, up 10% year-over-year and earnings per share of $1.71, up 19% year-over-year. We believe that superior product quality continues to drive our growth. Net income for the quarter increased 31% to $77 million, while GAAP EPS increased a robust 43% to a record $0.53 for this quarter. Excluding amortization of acquired intangibles, EPS was a record $0.54. With respect to product performance, let me start with masks. All mask categories showed strong growth. And we continue to take market share, particularly with the Mirage nasal mask, which is thus far proving to be a seeming game changer. Accessories also grew strongly, as both large and small HMEs and DMEs are becoming more systematic about resupply and delivery of replenishment supplies to the patients who need them. Our global growth in Flow Generators this quarter was primarily driven by the high-end devices. Strong sales reflect the benefits of having all of our PAP devices configured on the smaller, quieter and more appealing S9 platform. In the Americas the S9 AutoSet and the VPAP Adapt, which is an adaptive servo-ventilator did particularly well. Growth in the Flow Generator segment was also driven by a positive mix shift from basic CPAP to APAP due to the ongoing growth of home sleep testing, as well as, we believe, physician preference to put patients on the AutoSet, which provides more flexible therapy, improves patient comfort and appears to enhance compliance. The new EasyCare Online Compliance Management system continues to be well received, and we expect to see some solid ongoing uptake from existing, as well as new accounts. Products and programs which provide superior therapy and better compliance are what bring the most value to the patients, customers and service providers. In other words, across the whole food chain. Europe continues to be challenging due to difficult macroeconomic environment, although sales were relatively strong in both Germany and the U.K. Despite this challenging economic climate, bilevel, AutoSets CS, which is also our version of the adaptive servo-ventilator in the rest of the world, and the Stellar products all did well in this quarter. We also believe that great opportunities exist in Europe to address the connection between sleep-disordered breathing and various comorbidities, such as heart disease, diabetes and so on, as well as occupational health and the more compelling economic case and the more -- and the more and more compelling economic case for treating sleep apnea in general. There's also a great deal more focus on compliance, which certainly positions us well with our high-quality products. The Asia Pacific region also had a solid quarter, particularly in the Japanese market, due to strong sales in sleep, as well as our bilevel and respiratory product portfolio, which also did very well. Of interest, cardiologists are adopting adaptive servo-ventilation, with some bigger in Japan. In fact, some cardiologists are actually using ASV even in patients without frank sleep-disordered breathing. And as they have noted, an improvement in various chronic heart failure parameters, particularly ejection fraction. Emerging markets like India, China and the Middle East also did very well this quarter. Ventilation sales of Stellar 100 and 150 continue to grow, especially in Europe, Latin America and Asia and again, more particularly in Japan. Of note, the Stellar 150 includes iVAPS, which is a new automatic bilevel mode. iVAPS is also included in the new S9-based VPAP ST and the ST-A products. These are launching this quarter. VPAP ST-A with iVAPS has FDA clearance for respiratory insufficiency. The launch of this product on the S9 platform is significant, as we have actually skipped a generation in this segment in going from the S9 platform, which is a lot more bulky to the much smaller S9 platform. On the home sleep testing front, commercial payers continue to introduce the requirement of pre-authorization for intended PSG sleep test. United joined the club in July. And as a result, by the end of summer, 2/3 -- more than 2/3 of covered lives will need pre-authorization to polysomnography. We estimate that in -- we estimated that in 2011, about 50% of all sleep tests were HST, and we expect to see at least 25% of all sleep tests being HST-derived by the end of this calendar year. And we continue to see a steady increase in the number of sleep labs involved in HST, which is up to close to 30%. We're also participating in primary care physician awareness initiatives as HST continues to advance, with PCPs becoming more involved and interested in sleep apnea diagnosis. A few weeks ago, we acquired an innovative data services technology provider, known as Umbian, headquartered in Halifax, Nova Scotia. Umbian offers a comprehensive patient compliance management solution called U-Sleep, which monitors CPAP devices and provides a suite of interactive follow-up services for health care providers. For HME providers, usually there's an effective tool to reduce cost and improve business efficiency. U-Sleep supports CPAP devices from the leading CPAP manufacturers so that usage data can be consolidated and viewed from one software platform. This technology is able to assess a patient's compliance using a flexible set of rules that have been set up for that specific individual and provide immediate notification of compliance outcomes via e-mail, phone or if the provider prefers, text messages. U-Sleep's simple yet powerful design also provides multiple reporting options tied to the varying needs of HME providers. One of the biggest issues facing HMEs is competitive bidding and concomitant pricing pressures. By providing a scalable solution for compliance outreach, we are taking a significant step in supporting our HME partners to drive efficiencies and cost reduction in their businesses. Customers use products from a range of manufacturers. And this is one of the strengths of the U-Sleep platform. U-Sleep will continue to transfer compliance data from therapy devices manufactured by other companies. On the clinical front, the flow of data substantiating the connection between sleep-disordered breathing and chronic diseases continues to materialize. Just to summarize a few of the newest findings. Sleep disorders are associated with the following: One, a higher risk of dying from cancer with the risk correlated with the severity of the disease; diabetic peripheral neuropathy, a debilitating disease, which causes severe pain in the hands and feet; three, frequent co-morbidity with polycystic ovary syndrome, a hormonal disorder which affects up to 10% of women of childbearing age; four, poor prognosis in chronic heart failure. But with the treatment of the sleep-disordered breathing with nocturnal ventilation the outcomes are significantly improved. Let's see, six, untreated central sleep apnea and heart failure readmission to hospital. This is particularly significant since it turned out that central sleep apnea was by far and away the most significant parameter, which was involved with the readmission of patients with chronic heart failure to the hospital. This suggests a wonderful opportunity for our adaptive servo-ventilator products. And finally, there's double the risk -- if the patient has sleep-disordered breathing, there is double the risk of retinal vein occlusion. In summary, this suggests that sleep-disordered breathing is involved with a multitude of diseases, and treatment of the disorder really ought to be part of any standard of care, just like one would take blood pressure. Finally, a study has just been published in Population Health Management on the cost savings associated with an education campaign on the diagnosis and management of sleep-disordered breathing. The primary objective was to determine if medical expenses of members enrolled in the not-for-profit U.S.-based Union Pacific Railroad Employes Health Systems health plan were reduced after implementing a low-cost, patient-focused education program on sleep-disordered breathing. Based on the retrospective analysis of medical claims data, the campaign was associated with a 145% increase in the uptake of PAP therapy by members with sleep-disordered breathing. And within 2 years after initiating the program, the use of PAP therapy was associated with almost $5 million in differential savings and overall medical costs, lower inpatient hospital costs and fewer hospital admissions than those members with sleep-disordered breathing who did not receive therapy. These findings suggest that the sleep-disordered breathing education campaign can improve health care outcomes and result in substantial savings through for the health care plan. All of the peer-reviewed literature continues to make it abundantly clear that untreated sleep-disordered breathing is at best seriously debilitating and costly to the health care system and at worst life threatening. These findings add to the continuing mounting evidence connecting serious health disorders to untreated sleep-disordered breathing and point to the necessity of making the diagnosis and treatment of SDB, as I've just said, a standard of care in all medical practice. Now I'll turn the call over to Brett to provide more granularity on the financials, and then we'll take your questions. Brett?

All right. Thanks, Peter. Revenue for the June quarter was $371.9 million, an increase of 9% over the prior year quarter. Unfavorable currency movements reduced our fourth quarter revenues by approximately $14.6 million. In constant currency terms, revenue increased by 13%. Income from operations for the quarter was $89.7 million, an increase of 35% over the prior year quarter. Net income for the quarter was $76.8 million, an increase of 31% over the prior year quarter. Diluted earnings per share for the quarter were $0.53, an increase of 43% over the prior year quarter. Gross margins for the June quarter was 60.9%, up sequentially from Q3 FY '12. On a sequential basis, our gross margin continued to benefit from a favorable product mix and manufacturing efficiencies. Looking forward, we expect our gross margin to be in the range of 59% to 61%, assuming current exchange rates. We continue to execute on initiatives targeted at improving our global manufacturing supply chain and logistics cost structures. SG&A expenses for the quarter were $105.9 million, an increase of 3% over the prior year quarter. Or in constant currency terms, SG&A expenses increased by 9%. SG&A expenses, as a percentage of revenue, improved 28.5% compared to the year ago figure of 29.9%. Looking forward and subject to currency movements, we expect SG&A, as a percentage of revenue, to be in the range of 29% for the fiscal year 2013. R&D expenses for the quarter were $27.9 million, an increase of 3% over the prior year quarter. In constant currency terms, R&D expenses increased by 10%. R&D expenses as a percentage of revenue was 7.5% compared to the year-ago figure of 7.9%. Looking forward, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2013, reflecting the strong Australian dollar and continued investment in our product pipeline. Amortization of acquired intangibles was $2.9 million for the quarter, while stock-based compensation expense for the quarter was $8.1 million. Our effective tax rate for the quarter was 22% compared to the prior year quarter effective tax rate of 24.3%. The lower tax rate reflects the benefit of lower effective tax rates in our Singapore and Australian operations. For the full year, our effective tax rate was 23.2%, and we currently estimate our effective tax rate for fiscal year 2013 will be in the vicinity of 22%. Turning now to revenue in more detail. Overall sales in the Americas were $207.4 million, an increase of 13% over the prior year quarter. Sales outside the Americas totaled $164.5 million, an increase of 3% over the prior year quarter or in constant currency terms, sales outside the Americas increased by 13% over the prior year quarter. Breaking out revenue between product segments. In the Americas, Flow Generator sales were $90.2 million, an increase of 9% over the prior year quarter, reflecting strong growth in our APAP devices. Masks and other sales were $117.2 million, an increase of 17% over the prior year quarter, underpinned by strong contributions across our mask product range and continued growth in accessories. Revenue outside the Americas, Flow Generator sales were $110.8 million, an increase of 2% over the prior year quarter or in constant currency terms, an increase of 12%. Masks and other sales were $53.7 million, an increase of 6% over the prior year quarter or in constant currency terms, an increase of 15%. Globally, in constant currency terms, Flow Generator sales increased by 10%, while masks and other increased by 16%. Cash flow from operations was $97 million for the quarter, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $12.1 million. Depreciation and amortization for the June quarter totaled $22.4 million. Cash flow from operations for fiscal year 2012 was a record $383.2 million, an increase of 35% over the prior year. Our share buyback continues to play a major role in our capital management program. During the quarter, we repurchased 2.8 million shares for consideration of 89 million. For fiscal year 2012, we repurchased 13.6 million shares for consideration of 391.2 million. The 38.6 million shares purchased in fiscal year 2012 represents approximately 9.3% of our diluted shares outstanding. At the end of June, we had approximately 8.8 million shares remaining under our authorized buyback program. And in addition to our share buyback, our Board of Directors today declared a quarterly dividend of $0.17 per share, consistent with our previously advised dividend policy. We ended the fiscal year financially and operationally in excellent shape. Net cash balances at the end of the quarter were $559 million. And at June 30, total assets stood at $2.1 billion and net equity was $1.6 billion. I will now hand the call back to the operator for your questions.

[Operator Instructions] Our first comes from the line of Dan Hurren with UBS.

I just wanted to -- actually, first question just you mentioned a new product being added to the S9 range. I miss some of the details there. Could you just fly through that?

Those are Dan -- well the VPAP ST and the VPAP ST-A are bilevel units are now in the S9 platform. So initially, we did the CPAPs. But now we're putting all products, including the adaptive servo-ventilator into the S9 platform. So it's much more appealing, it's smaller, it's quieter and we're pretty excited now that we've got everything. And we're just launching the ST and the ST-A this quarter.

Understood. Look, just one of the other big issue that's obviously been going around, there's been a lot of discussion about competitive bidding, the impact on the company. Some of the discussion around the industry is that ResMed, in fact -- ResMed are looking to partner with some of the HMEs. There might actually be some volume offsets here. Could you sort of give us a bit of a run-through on what you think the competitive bidding impact is?

Well, let me just make a few comments, and I'll turn it to Mick for some further comment. The competitive bidding, if you look at our business, the impact is total revenues, the exposure is about 10% of the revenues. So I'll call it $140 million. But the interesting thing, as I've said in a previous earnings call, we have no significant impact on ASPs. And bear in mind, this is all and I guess stating the obvious, it's all CMS. And so the private payers have already dealt with this on ASPs. And if you like, they're ahead of CMS. But we don't see it as a significant factor at all. And I think you, in fact, Dan, have actually written about this. So private payers are not impacted. It's only CMS. And we're continuing to support our customers through a variety of resources to enable them to incorporate the latest Medicare requirements. But it's -- we don't -- it's just not -- it seems to spook people out in the marketplace, for some reason, the analysts in particular. But it doesn't spook us. And I don't know whether -- Mick, do you want to add anything to that?

No, I just confirm 3 points on competitive bidding. Number one, as you noted, it's 20% to 25% of our U.S. business, but that's 10% to 12% of our global business. Number two, in the first 9 cities, we're in a real-time experiment here. We're in month 14 of that, and we haven't seen a material impact on us. In fact, we've maintained or grown share with the customers who were the winners. And that the winners, third point, have scale. They are large companies that we either have electronic data interchange or some ways of finding efficiencies in the system. So that would take cost out of the system of delivering to patients. So they're the 3 points I'll make on that, Dan?

Our next question comes from the line of Joanne Wuensch from BMO Capital Markets.

It's Jacob Messina in for Joanne. Just quickly wanted to ask a little bit about -- more about Umbian, if you could. The U-Sleep, How it fits with EasyCare, how it fits with the franchise, how it will be marketed, that kind of thing.

Well, I'm going to flip that question to Don Darkin, who is President of the Strategic Business Unit for Sleep. Because Don is the guy who negotiated the purchase and the earner. So, Don, over to you to make a comment?

Thanks. So what we're doing here is pulling in a compliance software package, which actually is sort of adjunct to the EasyCare online solution that we've just launched. So what we're seeing here is that with that program and the program we just launched, it will become a much easier solution for HMEs and providers where we intend to take costs out and allow these guys to focus on their business, while this program will manage the compliance end of the patient.

Okay, great. And should we assume that the revenue impact is immaterial and dilution is immaterial as well?

At this case -- at this time, yes, absolutely. It's immaterial to us.

The maximum would be $0.01 a share and it probably won't even get to that. And a year out, it will be accretive.

And then maybe just quickly on the med tech tax. If you had any further update on how it will impact you all? And how you might handle it?

Well, there hasn't been any greater clarification in that space. And as far as we're concerned, we're making the assumption that it may well impact -- we're not sure about this, but it might impact the dental appliance area, the Narval products. But they're almost an immaterial part of our business at this point. So therefore, it doesn't affect current numbers at all. And maybe some of the hospital-based products, Stellar 100, 150 perhaps might accrue, but we're talking, 2.3%. But again, it's not really a material amount. Now if it affects all the products, you can do the math there. That is 2.3%. But there's a lot more water that's going to flow onto the bridge in this space. And we're not, at this point -- we're more concerned about Obamacare, which is a shambles in our view than the tax itself and maybe it won't even be implemented with a bit of luck.

Next question comes from the line of Michael Matson with Mizuho Securities.

So just to clarify what you said on the medical device tax there. So that's not in the guidance for SG&A that was given earlier in the call, correct?

Yes. Michael, it's Brett here. Yes, that's correct. I mean, it's still -- as Peter said, it's just too uncertain for us to know what -- which within our portfolio what products are in or out. We certainly think we'll get a clearer view of that when the final regulations come out. I think we expect them sometime in September. But there's even -- I mean, even within the industry and peers and so on, there's even conjecture about where does the medical device tax sit, does it sit in COGS, SG&A, where is it going to sit. So even that's not perfectly clear right now. But I think as we get to September, we'll get the final regulations. I think we'll certainly have some more clarity around that for you.

But Michael, we are reasonably sure, at least our internal tax guy has checked with a lot of sources. We think it's -- and again, we need clarification, as Brett said, but we think it's -- the impact is going to be fairly minimal for us that is.

And that's -- is that because the products are essentially considered to be sold at retail to patients? Or...

Yes. We think of it -- it does impact, as I said, the dental end of our business, which of course is not material at this point. We're planning on making it material, of course and also any hospital-based products. That's as far as we're reading the 2 at least. And we're fairly comfortable with that.

Okay, all right. So just moving on. I mean, you got the question on competitive bidding, but I guess the other Medicare change is this the resupply policy where the HMEs now have to sort of somehow verify that the equipment is no longer functioning before they can replace it, I guess, for masks and tubing and things like that. So what is your expectation of the impact, if any, that, that will have on your mask and accessories business?

Well, I think it's a sensible approach by the government. I mean, it's -- if people aren't using it, you shouldn't be sending masks out. So I think that most people are just -- it's going to make them become more systematic and make sure that the patient needs it. But frankly, we think this is really a storm in a teacup. We are seeing less than 2 masks a year being used per device as it stands and the -- and CMS allows 4. So we're not even pushing the side. It's not a boundary condition for us. So I would say it's not something that we're the least bit concerned about. And I think it's tightening up the system and I think it's sensible that this is being done. But, Mick, do you want to make a comment?

Yes, Michael, it's Mick here. I would just add 2 points that firstly, this is just an opportunity for us to support our customers. It's only 20% of their business, so 25% of their business that's affected just the Medicare component. But it gives us a chance to talk to them about resupply, which has a lot of runway left for growth. And secondly, the customers that we're talking with over these last couple of months since this reasonably nebulous legislation came out is that they've swiftly added into their IVRs or their call center scripts and their documentation, steps that are necessary to show that it's nonfunctional in the replacement process. So that's been the chance. The good business conversations, we think, there's growth left. And our customers are responding swiftly and efficiently. And we think it's probably a good thing for us long-term to start thinking this way.

Okay. I guess just one more question and I'll be done. The -- you mentioned that the PCP is taking a bigger role and it's something that seems -- does seem to be happening with home testing. How do you view that? And do you think that's a good thing or bad thing? And since they're served somewhat outside of your call point, I mean, how do you ensure that those patients are ending up with ResMed equipment when you've been calling on the sleep labs to kind of convincing them to write out branded prescriptions. But if it's really dictated by a primary care doctor, then it may leave it more in sort of the hands of the HME as to what type of equipment they end up with?

Yes. Look, that's a good question. Years ago, we were working with Philips within Respironics in order to educate PCPs about the existence of sleep-disordered breathing. That program has now stopped, all the primary care physicians, not all of them. But most of them, the bulk of them understand sleep-disordered breathing. And what they are left familiar with is the connection with signs and symptoms of the various co-morbidities that they're dealing with. And if you look at this area, and as I said, this should be -- sleep testing should be standard of care, you couldn't produce enough sleep physicians in 100 years to deal with the patients that have sleep-disordered breathing. We think internally, the prevalence of adults is that's at some level of an AHI greater than 5 is close to 30%. I mean, Susan Redline at Harvard is using a figure of 25%. The Canadians are using a figure of 26%. In short, it is impossible for the sleep infrastructure to handle the numbers of patients. So we, in fact, have to market to the PCPs. The question is how do you do it? And the easiest way to do it is through social media. And so we're working on a number of initiatives in this space. We've worked with the Joslin Clinic at Harvard to try to educate PCPs about the fact that nearly 80% of patients with type 2 diabetes, whose first call point are the internist PCPs family physicians and so forth. So it's kind of a long-term play if you like, Michael. We're well and truly into it. We're targeting them. And it sort of -- the analogy is with asthma and diabetes without worrying about the SDB and diabetes. If every asthmatic patient had to see a respirologist, or every diabetic patient had to see an endocrinologist, the system would simply freeze. And given the prevalence of sleep-disordered breathing, which is roughly 3x what it is for asthma and diabetes. We absolutely have to educate the PCPs. The good news is we're finding now, with the push towards pre-authorization with HST going to AutoSet. I just mentioned that the end of last year, it was 15% going to 25%. I think it will be, this time, next year, could even be 50%, because United is going to run the program out in November. And you're going to see some -- a really big acceleration of HST to APAP. This is a much easier route for -- you don't have to be a sleep physician to understand HST and the use of AutoSet. So we are very encouraged about the information we've got back thus far. A lot of work, a lot of water that flow into this, a lot of work to do. But we think this is a perfect area to focus on. Again, Mick, do you want to say something?

The only thing I'd add is that in terms of influencing ResMed brand, I think is where you're also asking, Michael, that we're working with sleep physician key opinion leaders from Harvard and Stanford, but also in regional groups around the country. And we have very strong relationships with the sleep physicians in terms of influencing towards not only the awareness of sleep apnea but that ResMed's products and services are ideally treated to keep the patient adherent, which is the big message. And we're also, in addition to that, doing some e-learning approaches with both the primary care physicians and train the trainer approaches with HME sales forces. So reaching the 250,000 primary care physicians can be done through social media, e-learning and by leveraging key opinion leader sources is what I'd add to what you just heard there.

And without sort of beating a dead horse here, just to add a little bit of more flavor, with the PCPs, we're seeing -- it's almost a bifurcation. There may be many more phenotypes as we get more information back. But you have the PCPs that are kind of interested in doing the HST, not necessarily in putting the patients on treatment, that would be done by, as you correctly pointed out, by the -- currently, both the DMEs or the HMEs. But they would end up with a $50 or something around that order. And then there are the PCPs that actually don't want to get involved, and they are using the IDTFs. So in other words, if they recognize the patient needs help, they can just sort of say, "Well, here, listen, why don't you go and we'll give you a list of IDTFs, and you can pick a geographically close one or one with a national footprint." But we're seeing roughly that. And there'll be more clarity over the next few months in that area, maybe over the next 6 months.

Our next question comes from the line of Ben Andrew with William Blair. Ben Andrew - William Blair & Company L.L.C., Research Division: I wanted to touch base on a couple of things, following up on of the earlier question. Peter, I know you're under 2 masks per year on average for patients. Can you talk about the typical experience in terms of when a mask actually wears out, how it does? And is that 2x or 3x a year for a compliant patient? Or is it the 1.6x that you all are getting at this point? And I know that's not necessarily why people are getting the mask today. But do you think there could be a transitional issue as we go through this that needs new requirements? And just kind of talk about those 2 points, if you would.

Well, Ben, it's like asking how long is a piece a string, what causes a mask to wear out. Again, if -- I mean, there are all sorts reasons. The dog gets it, puts a hole in it, and it leaks or the patient has a particularly oily face and the material itself breaks down. All sorts of reasons, some people are very, very careful, they clean their mask, they look after it and so on and so forth. So there's all sorts of things that can happen out there. But our average is of the order -- it's a little a shade under 2, and that's all we can really say about that. But, Don, you might want to make a comment there. But it's really the DMEs and the HMEs working with the patients. And it's up to them to do it. We just don't get involved with that.

Yes. I agree with Peter, Ben. It's a very difficult area to really understand. It's very patient-specific, and you get quite a variability in the numbers. But generally, it's sitting around that 1.5 plus. And I think as people understand the importance of compliance and understand the importance of getting good, comfortable, effective masks, then they'll start to realize that, that number might creep up a little bit, but obviously it's a slow process at this point.

And I'll hazard a guess here. Ben, that with the switch to HST, and I really think that's going to accelerate. There are different views with -- even within ResMed about that. I'm -- you can call me optimistic, I just think it's going to really pick up hugely. It's going to be adopted fairly rapidly. And with that, the patients are going to be going on to AutoSet. And the beauty of the AutoSet is you get really good, solid information on mask leak and how the patient is doing. And it gives the HMEs and the DMEs the opportunity to say, hey, listen, you seem -- your treatment seems to be suboptimal. It could be the mask and ask them to check their mask or even bring the stuff in, and we'll take a look at it. So I think were going to see that number creeping up.

I thought -- just add one more thing there. I think as patients become more aware of the disease, are more aware of the importance of compliance for themselves, they will take control of that mask number as well, and I believe that will drive it even higher.

And so it would be consumer-driven.

Exactly.

Our next question comes from the line of Ian Abbott with Goldman Sachs.

I was wondering if you could talk about the buyback. I think this year was a record year for shares bought back, just wondering how you're thinking about that looking forward.

Yes. Well, I'll trade that one to Brett -- I mean, as you know, we've got an active program with 3.6 million shares into it. There's another 8.8 million shares approved. Basically, we think it's based on our feelings -- more than feelings, based on our projections. We think it's just damn good value. Brett, do you want to add any more flavor to that?

Yes. It's Brett. We'll continue with the buyback. I think at this stage, we expect the buyback -- to buy back a minimum of stock to at least offset dilution from employee equity grants. So as you look at last year, that would be roughly 2 million shares. So I suppose that would be the starting point. But as Peter said, we'll -- that will be a starting point and likely to be more than that. But we have now the dividend as well that we'll be paying on a quarterly basis. But I don't think it's an either/or, I think we'll both do the dividend and continue with the share buyback as well.

But is it -- so it's unlikely to be as strong as it was this year at around 30 million shares?

Yes. I mean, it was pretty significant this year. I mean, that's getting to quite a significant proportion of our shares that we did buy back. So I think with the context of the dividend now being paid, you'd probably expect that wouldn't be quite as aggressive as what we had done this year.

But is it fair to assume the share count might fall again?

Yes, I think so. Well, I think you could definitely predict that.

Definitely. You can pick a number, I mean.

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

This is Nick Cameron, going for David Low. Brett, perhaps just a couple of quick questions to you and then one for Dr. Farrell. Firstly, Brett, Singapore manufacturing, just roughly what percentage does that represent now and how much more have you got to go there?

Yes. On the Singapore manufacturing, it's probably roughly at the 50% -- about 50% of the production in Singapore now. And we've always said that, that -- what's happening there is incremental production continues to flow up to Singapore. We've also started heavy manufacturing in Malaysia as well now. So we have a small operation in Malaysia to really supplement that Singapore operation now. So it's 50%, and you expect over time that percentage will climb.

Okay, great. And just quickly on the payout ratio implied by this result, can we sort of expect that going forward? Or is it a flat $0.17?

Well, it's -- well, I mean, the board will determine the dividend policy. And at this stage, let me say, it's $0.17 a quarter.

Okay, no problem. And then, for Dr. Farrell, if he may. I just want to get your feeling on how you're seeing compliance in the eyes of the payers at the moment on some of the product side. So I just wanted to see what your thoughts are on that. And what it is, you think, they're looking for and will ultimately come up with in the end?

Well, I think people are recognizing that compliance is the ace in the whole. If you don't get compliance, everybody loses. In other words, a machine that's bought and gets stuck in a cupboard, you don't get replenishment and so on, so that's all obvious. But I would put it more strategically. What we do know is that patients have significantly improved quality of life. We also know -- and the data, I was referring to it in my initial comments, I mean, you've got the co-morbidities are not just heart disease and diabetes, it's peripheral neuropathy, it's cancer and so on and so forth. So it actually, treatment -- compliant treatment prevents disease progression. And we also have a significant amount of data internally. And there was a recent report about a year ago from McKinsey, which is on the Harvard website -- the Harvard Sleep Medicine website, showing that there's a return on investment in the first year for treating patients, and that is with a reduction in inpatient and outpatient services. So it's kind of like the holy grail, improve quality of life, reduce costs and stopping the progression of disease. People are becoming more and more aware of that aspect. And so compliance is the holy grail in itself for the patient. It's a holy grail, if you are compliant, for the reasons I just mentioned. I think that word is getting out, and it's -- the CMS -- actually the government did something senseful, it's sort of hard to believe, it's not often you see that. But by requiring this 90 days with 30 days continuous use, that's the CMS, this is forcing the DMEs and the HMEs to look very, very seriously at compliance because they don't get paid if the patient isn't compliant. So we've seen in some of the bigger customers, compliance sub-50 going to mid-70s. So we're seeing and maybe that's reflected also in the incredible growth that we're seeing in our replenishment program. It's getting better and better. And of course the other side of the coin is that our products are better and better. I mean, you've got much more like 75 gram masks, machines that are about a kilogram, 24 decibels, I mean, they're quiet, they're small, they're appealing and they're so much, so much easier to use. So everything is moving in the right direction. The technology is, the knowledge of the -- both the consumer and the physician, the improvements in technology and so forth. So we are seeing -- now I couldn't give you specific numbers, but I would say -- well I can give you a specific number, but it's not based on hard-nosed data, but it's somewhere around the mid-70s at one year. And once the patients are on after first month, we're seeing, even the first couple of weeks, we're seeing that, that's the way it tends to continue.

Our next question comes from the line of Anthony Petrone with Jefferies. Anthony Petrone - Jefferies & Company, Inc., Research Division: Got few number questions for Brett and then a few for Dr. Farrell and the rest of the team. So Brett, just on the FX overall, given the rising shift of manufacturing to Singapore and later down onto Malaysia. Do we still have a 6-month lag as it relates to shifts in the Australian dollar versus the U.S. dollar?

Yes. I mean, we're still -- still a decent chunk of those costs are in the manufacturing front. So we're still -- yes, it would be probably just overauarter. You could rule of thumb probably a quarter delay. Now we've -- if you look at inventory turnover for us now, it has improved quite a bit over the last few years. So I think the rule of thumb would be on about a quarter's lag on impact from the Aussie dollar. Anthony Petrone - Jefferies & Company, Inc., Research Division: And then just to stay on that, is about 30% of R&D still local in Australia? And does that still play the one quarter lag as well further down the P&L?

Yes. I mean, so the majority -- much more than that, the majority of the R&D is undertaken here in Australia. But that impact we feel straight away through normal translation. So you'll see that whatever the average rate is for the quarter, that would be reflected in our R&D spend. Anthony Petrone - Jefferies & Company, Inc., Research Division: And Dr. Farrell, one product question. In late July, CareFusion actually announced a Class I recall of its EnVe Ventilator. And about a year ago, I guess ResMed and CareFusion now have the distribution relationship with the Stellar 100 and 150. So I'm wondering, due to that recall, do you see an incremental opportunity for Stellar 100 and 150?

I'm going to give that one to Geoff Neilson. I don't know what Geoff's about to say. But I think it's almost no impact as far as -- from where I see it. But, Geoff?

They're playing in different segments in the hospitals. So really, it's not going to have any impact. Anthony Petrone - Jefferies & Company, Inc., Research Division: All right, perfect. And then last one for me and I'll get back in. Just to go back to competitive bidding. Fully understanding your comments that you're not seeing any impact, but as we look into the beginning of 2013 when the program actually gets extended, not so much that there'll be a permanent impact on the part of DMEs to sort of reposition how they negotiate with manufacturers. But do you envision any initial knee-jerk reaction as you move into and get up to 90 MSAs? And to that respect should we expect to -- maybe a moderation from low double-digit growth into the back end of '13?

Anthony, sort of reiterating what I've said there. We -- the first 9 MSAs we, sort of if anything, it was a slightly -- and it sounds bizarre, slightly positive impact on ASPs. We're not quite sure why that is. But let's say it had -- it virtually had no impact. We don't see -- and we've looked at this pretty carefully because people seem to be spooked by it. But our data show that it is not really having any impact at all. Now that could change, but I don't see it. We just don't see it. And again, it's 10% -- it's of the order of 10% of our total global revenues. So -- but I mean, we don't even see it impacting that 10%. The other people do apparently, but we just don't. And we are talking about real data, not guesses.

And our next question comes from the line of David Stanton with Nomura.

I wonder if you could give us an update on growth rates in the U.S. for bilevels and APAP compared to the overall machine growth rate? That's my first question.

David, we don't give that sort of granularity. What we have said is that we're incredibly encouraged by our -- but since the bilevels have been put into the S9 platform, we're seeing some very encouraging growth, very encouraging. And as I just said, we're releasing the VPAP ST and the VPAP ST-A in -- also in the S9 platform, and we expect to see that being received positively. The other thing I mentioned is the HST-driven switch -- lastly, HST-driven switch too, what I said. And we expect that to continue and we're expecting in fact another 100% increase in HST, and the obvious way to go is to put patients on auto-setting devices. So we expect to see a modest to very poor growth in the low-end CPAPs and quite good growth in the high-end CPAPs. And bilevels and AutoSets, we see continuing to grow.

Great. And could you give us -- as my final question, give us an update on what you think market growth rates are at present in the U.S. and EU? Are you guys gaining share, I guess, is my ultimate question.

Yes. Well you would say -- so we haven't changed our view on where we are with growth rates. It's 6% to 8%, and pretty much worldwide. Maybe it's a little higher in Asia Pac because it's starting from a lower base. So you might be able to say 8% to 10% in Asia Pac, possibly a little higher in China or in India, but it's not reached a point where it's hugely material for us just yet. But 6% to 8%, for the bulk of our business, that is Europe and the U.S. And as you saw, our constant currency growth was 13%, so that would be suggestive of market share gains. And the rate of growth for both devices, 9% in the U.S. for devices and 13% for masks. That would suggest that we're doing nicely.

Our next question comes from the line of Louisa Abdo.

This is actually Matt Prior. Peter, if I could ask -- and maybe if Ann is on the line or if you want to pick this one to Brett. But with rest of world growth being so strong and we had anticipated the Japan would kick back in this quarter. Can you talk a little bit about Europe versus Japan? And specifically, I guess is the margin better in Asia? Or -- sorry, your business in Asia, I should say. And is the margin better in Asia than it is versus Europe? And is that one of the reasons why we saw a slightly better GM than I think the market was looking for this quarter?

Well, Asia Pac had been soft for a couple of quarters and it's come back full steam, whether it was the tsunami, some of that was in there, psychological issues, if you like. Asia Pac has now good growth back on stream. And we -- I referred to the challenging economic climate in Europe, I mean. However, despite that, Germany was extremely encouraging. The U.K. almost hit it out of the ballpark. But you've got obviously huge challenges in Spain, Italy and France, where there's ASP pressures. But we grew constant currency, 13% in Europe, which was pretty damn good and significantly higher than that in Asia Pac. With respect to margins, we don't really get down to talking about -- I will say slightly better margins in Asia Pac. But it's not something that is of great importance to us. I don't know whether -- Brett, do you want to add to that or Rob?

Yes, thanks. The only thing I'd say on that is, Matt, is geographic mix wasn't really a driver of the margin. So that probably pretty much answers it.

Rob is going to add something.

Just to the -- markets in Asia Pac are generally higher in product. So they are -- that supports the margins a little bit and also some of the smaller Norther European countries did very well as well, so it's a mixed bag there, but netted out really good.

Okay, great. Just one follow-up question and given I know Geoff is on the call. Geoff, if I can talk to you on ventilation just given that there was reference to mix in that positive U.S. Flow Gen number. I think, and obviously you already talked to some extent about the CareFusion relationship on the call, but certainly to the 9% number we saw for U.S. Flow Gen, do you see, I guess, the Stellar and ventilation contributing to that yet at somewhat of a meaningful level? Or are we still waiting for the ventilation market for ResMed in the U.S. to take flight? And I guess the final point to that is do you see competitive bidding, the medical device tax, Obamacare, slowing down any of the kind of hospital purchase decisions around ventilation products over the next 1 or 2 quarters before it really gets a head of steam?

Okay. First of all on Stellar, globally, it's been growing very well. In the U.S., it's still in early days with CareFusion. We are seeing growth, but it's off a small base. And as far as all the other macroeconomic things, ResMed's presence in the hospital is small and not material at the moment. We obviously have plans to grow that. And so these issues aren't material at the moment.

Okay, great. I'm sorry, Peter, if I can ask just one last one? Linde's acquisition of Lincare, that was a fairly big event for the sector given that we are in the midst of, as you talked about, competitive bidding concerns. Does that reinforce, I guess, your view that currently Linde doesn't see big concerns around competitive bidding because they're making acquisitions like they have with Lincare?

All right. You've taken the words out of my mouth. It was a very decent premium that Lincare got, so $41 a share or whatever. It's a very decent -- I mean, premium. So clearly, Linde is seeing competitive bidding as being, I would say, a nonissue. I mean, they paid big bucks. And as far as the impact upon us, I mean, we can only go on what's written in the press releases and so forth. We haven't had any in-depth discussion with either Linde or Lincare management on this. But the press releases say that they're going to be run separately. And John Byrnes, the CEO of Lincare is still in the saddle. And so we treat -- they're both big customers, but we treat it as business as usual. So good luck to Lincare and the boys. And you've said it yourself, competitive bidding doesn't seem to have much of an impact on what could be considered a very, very generous premium.

And our last question comes from the line of Saul Hadassin with Crédit Suisse. Saul Hadassin - Crédit Suisse AG, Research Division: Just a question on Europe. Just wondering if you can provide any granularity or detail around the contribution of ventilation growth versus pure CPAP growth just in that specific market?

We've always done reasonably well in the ventilation space in Europe, France and so forth. France was, as I said, was a little soft. There are price pressures occurring there. I -- there's nothing really that stands out. Geoff, do you want to comment on?

I think and particularly in the noninvasive ventilation area, we're seeing strong growth both with our ST devices and with Stellar devices. And the life support products are holding their own, but mostly the growth is in NIV area, which is -- where the growth in ventilation is actually occurring. Saul Hadassin - Crédit Suisse AG, Research Division: All right. And just one last question back to the U.S.. Just this shift from lower-end CPAP to APAP, it's something you guys have been talking about for quite a long time. I'm just wondering how much room there still is for that mix shift effect within your portfolio as a percentage of, I guess, not asking for data on percentage split between the 2. But over how long do you think this trend will continue to play out for your specific business?

Well, we think it's -- the potential is there for it to accelerate. And the reason being the push to HST is building up an an incredible storm, if you like -- or maybe slightly less than a storm. But it's happening. And growing at 50% per annum, this is going to be reflected in more switching to AutoSet. It's happening. So -- and how long will it continue? I see it continuing for several years.

So one -- this is Mick here. One proxy to look at is the fact that we're 15% switched to home sleep testing from PSG, and we expect that to continue. So there's 85% of the runway left in terms of the potential switch from PSG to HST. So that could be a proxy metric you could look at -- to that as a suggestion.

Well, at the end of this year, we expect that to be 75%. But that's still a fair chunk...

Still lot of runway.

Fair -- yes, a lot of runway.

And we have no further questions at this time. I would now like to turn the call back over to Dr. Farrell for any closing remarks.

Well, thank you, Chris. I think we've said enough and we'll let people go. Those that are still on the -- and I guess the final thing I'd like to say is to just thank all the ResMed employees for doing another outstanding job. We have a great team of people. And I just want to publicly thank all our employees. So thanks, guys. See you next time, as they say.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.