ResMed Inc. (RMD) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2013 ResMed, Inc. Earnings Conference Call. My name is Christine, and I'll be your operator for today's conference. [Operator Instructions] Please note, today's conference is being recorded. I will now turn the call over to Constance Bienfait, Director of Investor Relations at ResMed. You may begin.

Thank you, Christine, and thank you, all, for joining us today. 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 markets of 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. Please limit your questions to 2 at any one time, so that we can accommodate as many people as possible. If you have additional questions, please return to the queue. With that said, I would like to turn the call over to Peter Farrell, ResMed's Chairman and CEO.

Great. Thanks, Connie. I'll begin as usual with a summary and then turn the call over to Brett to go through the numbers in a little more detail. And then if there's any time left, we'll take questions. Just kidding about that. First, finances, we finished with another very solid quarter. Global revenue in Q1 '13 grew 8% to approximately $340 million, up 12% on a constant currency basis. Revenue in the Americas grew an encouraging 15% year-over-year to $194.4 million. ROW revenue at $145.4 million grew 9% in constant currency terms, and we believe that our superior product offerings continue to drive our growth as does awareness of the seriousness and importance of diagnosing and treating sleep apnea. Net income for the quarter increased 41% to $71 million, while GAAP EPS increased a robust 48% to a record $0.49 for the quarter. And if we exclude amortization of acquired intangibles, EPS was a record $0.50. And I should note that the net income figure of $71 million is actually 21% of revenues, which shows a pretty solid performance. With respect to product performance, I'll start with masks. Again, all mask categories showed strong growth across all geographies. Accessories also grew strongly, as both large and small DMEs and HMEs are becoming more systematic and effective with resupplied patients who need them. With the success of MS recent mask line, we are seeing the benefits of the replenishment of these masks, as patients are happy to stay with what is most comfortable and most effective. Global growth in Flow Generators this quarter was primarily driven again by AutoSet but also bilevels and VPAP Adapt, our adaptive servo-ventilation product. We are seeing excellent acceptance also for our new high-end S9 products from physicians, especially cardiologists. In the Americas, the S9 AutoSet and the VPAP Adapt ST did particularly well. Growth in the Flow Generator segment was also driven by a continued positive mix from basic CPAP to APAP due to the ongoing growth of home sleep testing, as well as physician preference to put patients on AutoSet since it provides flexible therapy but also improved patient comfort, as well as enhanced compliance. The new EasyCare Online system, which helps compliance management, continues to be well received, and we are seeing a solid uptake from existing but also new accounts. With new technology and superior algorithms, we believe we are taking Flow Generators, and EasyCare Online are certainly one of the benefits which our customers value. There is still uncertainty in Europe, but many countries had very good quarters, especially the U.K., Germany and the Nordics. Despite the challenging economic climate throughout all of Europe, as well as the fiscal constraints therein, the focus is still on treatment that keeps patients out of hospital and keeps them healthy. Our Stellar products did well again this quarter, and EasyCare Online is also gaining traction. We are continuing to see attention and focus on cardiology and its connection with sleep-disordered breathing. There was also a great deal more focused on compliance, especially in France, which, of course, positions us well with our high-quality products. In Asia Pac, we also had a solid quarter, particularly in Japan, due to sales in both Stellar and the AutoSet CS, which is equivalent to the Adapt product sold in the U.S. With the increase in reimbursement in Japan for respiratory and bilevel, we are seeing solid growth in the high-end Flow Generator line. Japan is also very focused on compliance and ensuring that the patient is using the therapy. We are also planning to replicate the Japanese cardiology model, if possible, in other parts of the world. Cardiologists see the quality of life improved on adaptive servo-ventilation therapy, even independent of the level of sleep-disordered breathing, that is in half-value [ph] patients. In short, we're seeing that cardiologists in Japan are actually using adaptive servo-ventilation to dry up the lungs and the pleura, independent of the extent of the sleep-disordered breathing. Emerging markets like India, China and the Middle East also did well in this quarter, with encouraging sales, in particular, of ventilation products in India. Ventilation sales again of Stellar 100 and Stellar 150 continue to grow, especially in Europe, Latin America and, as I indicated, in Japan and India. We are still awaiting regulatory approval in other geographies. Stellar is a very competitive noninvasive ventilation offering for the emerging markets, and the Stellar 150, which includes iVAPS, the intelligent Volume-Assisted Pressure Support system, which is our new automatic bilevel mode, is being extremely well-received. In the humidification area, the HumiCare D900 is now fully launched in Europe and is also being well-received, and we have made our submission to the FDA on the D900 as well. With respect to sales of Stellar products in the U.S., we've decided to discontinue our distribution partnership with CareFusion. It was a mutual decision, and it will allow both of us to more closely align the activities of our field organizations with the priorities of our own businesses. We continue to invest in the development of an advanced ventilation products, and we'll sell the Stellar products and HumiCare D900 to institutions through our own respiratory care sales force. And we've already begun to build that sales force. Our strategy is to sell Stellar into institutional care settings and provide homecare patients with our VPAP ST-A also with iVAPS. And just by parenthetically there, the VPAP ST-A with iVAPS has been approved for respiratory insufficiency, and we've launched this with the S9 platform. Our new Narval mandibular repositioning device, which was recently launched in the U.S., is being well-received, but it is, of course, early days. However, the Narval products, well-received in Europe where it's already been launched. On the home sleep testing front, by next month, 4 out of 5 of the largest commercial payers will require prior authorization for attended PSG in an effort to steer providers and patients towards home sleep testing. United goes live in all its territories, which constitutes 34 million lives on November 1, and certain regions under the world point plan will have the requirement in place by November as well. As a result, 70% of covered lives will need pre-authorization for PSG, and we estimated that in 2011, about 15% of all sleep tests were HST. We expect to see this at around 25% by the end of this calendar year. We continue to see a steady increase in the number of sleep labs involved in HST, over 30% in the last 12 months and 41% in August. We're also participating in primary care physician awareness, as HST continues to advance with PCPs becoming more involved and more important, in fact, in the diagnosis and management of the sleep apnea patient. Self-reported data suggests 10% of PCPs are using 1 of the 3 HST models, that is sleep lab HST, IDTF, mail order HST or PCP direct HST. And another 40% are evaluating HST. So we'll continue to grow. In addition to the studies mentioned in the press release on how diagnosing and treating sleep-disordered breathing can improve health care outcomes, lower hospitalization and readmission risks and also reduce medical expenses, CMS is rolling out 2 major pay-for-performance programs to cut readmission rates and improve hospital care overall. Hospitals with high Medicare patient readmission rates for heart attack, heart failure, as well as pneumonia, will face penalties, and those penalties are slated to grow over the next 3 years for hospitals that fail to drive down readmission rates. Whether it stays in place or works out is a question, of course, but the premise is good and the clinical data show treating sleep-disordered breathing does bring down hospital readmission. And that bodes well for us. Finally, David Pendarvis, Glenn Richards, our Medical Director, and I attended the second meeting at the Society of Anesthesia -- Anesthesiology and Sleep Medicine, which was held 2 weeks ago in Washington, D.C. The conference shows continued interest by clinicians in the perioperative management of sleep-disordered breathing. In fact, data presented showed that patients with sleep apnea have a significantly higher risk of post-surgery complications, ranging from longer hospital stays to even death. Several leading institutions, particularly the Mayo Clinic and Northwestern University, have initiated protocols to screen patients going under the knife for sleep apnea and to monitor and treat those patients after surgery. Their protocols we've had are extremely impressive, and we aim to collect some more detail from both these institutions. 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 continually mounting evidence connecting serious health disorders to untreated sleep-disordered breathing and point to the necessity of making the diagnosis and treatment of sleep-disordered breathing a standard of care in all medical practice. At this point, I'll turn over to Brett for additional detail on the financials. Brett?

Great. Thanks, Peter. Revenue for the September quarter was $339.7 million, an increase of 8% over the prior year quarter. Unfavorable currency movements reduced our first quarter revenues by approximately $12.6 million. In constant currency terms, revenue increased by 12%. Income from operations for the quarter was $80.5 million, an increase of 32% over the prior year quarter. Net income for the quarter was $71.3 million, an increase of 41% over the prior year quarter. Diluted earnings per share for the quarter were $0.49, an increase of 48% over the prior year quarter. Gross margin for the September quarter was 61.4%, up sequentially from Q4 FY '12. On a sequential basis, our gross margin benefited from manufacturing efficiencies and a lower Australian dollar. Moving forward, we expect our gross margin for fiscal year 2013 to be in the range of 60% to 62%, 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 $98.3 million, an increase of 4% over the prior year quarter. In constant currency terms, SG&A expenses increased by 9%. SG&A expenses as a percentage of revenue improved to 28.9% 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 28% to 29% for fiscal year 2013. R&D expenses for the quarter were $27.3 million, an increase of 4% over the prior year quarter. In constant currency terms, R&D expenses increased by 6%. R&D expenses as a percentage of revenue were 8% compared to the year-ago figure of 8.3%. 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 $2.6 million for the quarter, while stock-based compensation expense for the quarter was $7.9 million. Our effective tax rate for the quarter was 21.6% compared to the prior year quarter effective tax rate of 24%. The lower tax rate reflects the benefit of lower effective tax rates in our Singapore and Australian operations. 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 $194.4 million, an increase of 15% over the prior year quarter. Sales outside the Americas totaled $145.4 million, consistent with the prior year. However, in constant currency terms, sales outside the Americas increased by 9% over the prior year quarter. Breaking out revenue between product segments. In the Americas, Flow Generator sales were $84.8 million, an increase of 17% over the prior year quarter, reflecting strong growth in our APAP devices. Masks and other sales were $109.6 million, an increase of 13% over the prior year quarter, underpinned by strong contributions across our mask product range and continued growth in accessories. For revenue outside the Americas, Flow Generator sales were $96.7 million, a decrease of 2% over the prior year quarter, but in constant currency terms, an increase of 7%. Masks and other sales were $48.6 million, an increase of 4% over the prior year quarter or in constant currency terms, an increase of 13%. Globally, in constant currency terms, Flow Generator sales increased by 11%, while masks and other increased by 13%. Cash flow from operations was $78.3 million for the quarter, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $13.8 million, while depreciation and amortization for the September quarter totaled $18.7 million. Our share buyback continued to play a major role in our capital management program. During the quarter, we repurchased 216,000 shares for consideration of 8.1 million. For fiscal year 2012, we repurchased 13.6 million shares for consideration of 391.2 million. At the end of September, we had approximately 8.6 million shares remaining under our authorized buyback program, and during fiscal 2013, we intend to purchase at least 2 million shares under our share buyback program. 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. Our balance sheet remains very strong. Net cash balances at the end of the quarter were $625 million. And at September 30, total assets stood at $2.2 billion, and net equity was $1.7 billion. I will now like to hand the call back to the operator to take your questions.

[Operator Instructions] The first question comes from Matthew Prior from Bank of America.

Just 1 question and a follow-up. I'm interested in regards to the round 1 and obviously the concerns of the competitive bidding. Yes, another quarter now. Have you seen any effects to the round 1 bidding process and certainly in terms of competitive behavior? Have you seen any changes from your competitors in terms of pricing behavior in the lead-up to the announcement, of course, of round 2?

Yes. I'll make 2 points on competitive bidding. We've had what I'll call a real-time pilot in the first 9 cities, the first 9 CMS calls and metropolitan statistical areas, 9 cities. We've had a number of quarters there. The 2 points are, firstly, that ASP declines in those 9 cities compared to the rest of the U.S. are in line. The second point is that growth for those 9 cities was in line with the rest of the market over the same period. Obviously, it was better with the winners than the non-winners within those cities, but it was awash overall. That's the message we gave 90 days ago, and, Matt, that hasn't changed in the last 90 days. It's still consistent with that.

Right. So just on that, did you see any change in -- or have you seen any change in competitive behavior around ASP outside of those 9 MSAs in the lead-up to the round 2 decision?

No. The behavior has been consistent both inside and outside, and it's consistent with what we have said, which is, depending on which SKU you look at, you generally got a 3% to 5% annualized reduction that can go slightly above that in some SKUs and slightly below that in some SKUs. That depends on the geography as we look at it, but it's sort of that mid single-digits number. And it hasn't changed significantly from -- within or outside the MSAs.

Excellent. Great. And, Peter, just back to you, just 1 follow-up question. You've often given us the industry growth rates and made comments around that before. Do you mind giving us your latest views on why you think the industry is growing at and whether you saw an uptick in the U.S. in the last quarter.

Yes. No. We are not aware of any upticks, and we are -- most of the people, when you go to Medtrade and talk to various DMEs and HMEs and others, the 6% to 8% seems to be the figure, and that's -- so that's for the U.S. And our best guess, and obviously, it's much more complicated to get exact figures outside the U.S. because of the different geographies, but again, that looks to be consistent with the 6% to 8% growth. If you want a bit more of granularity, you might say, "Well, it could be more like 5% to 7% in Europe and maybe a little higher, 7% to 9%, 8% to 10% in Asia Pacific." But overall, ROW also fits the bill of a 6% to 8%.

The next question comes from David Clair from Piper Jaffray.

First question for me just on the sales force for ventilation. How big do you think that will have to be?

We're going to start slowly, obviously, but I'm going to throw that one to Geoff Neilson, who's the President of Respiratory Care. But I think in the first year, we'll end up somewhere around 9 respiratory account managers, but Geoff, what are your plans? And then make them too vigorous, if you like.

So we'll grow the respiratory care sales force, in line with growing revenue in respiratory care in the U.S. At the moment, that's obviously small, but we plan to grow it to having 1 respiratory care manager per region over time. And depending on how sales pick up, we'll grow it appropriately.

Okay. Great. And then one quick one for Brett. What was the net impact to currency on EPS? And any update on the medical device tax?

Yes, David. For EPS impact on FX year-on-year was slightly negative but really less than $0.01 this quarter, so quite negligible. Medical devices tax, we still -- I think we're still waiting on the updated guidelines to come out. I mean, they're due out any time, but we think now they'll probably come out after the election. So really waiting to get some clarity from that before we give the market more clarity on it from how it's going to impact us.

Internally, David, we assume that it would not impact masks. Roughly, half the business would not be touched, and we also don't know about the devices. This -- again, we'll have to wait for the fine print, but we're even sort of contemplating that we may not even be stuck with the tax on the devices. But we don't know for sure yet.

The next question comes from Michael Matson from Mizuho Securities.

So based on the mask growth that you put up in the U.S., it looked like it may have slowed down a tad, but I was just wondering if you -- now that we're more than a quarter into this change to Medicare's resupply policy, if you think that had any impact on your mask growth at all.

It is early days, but we are seeing no impact whatsoever. Now we think the reason for that is that most people have been playing ball. I mean, I don't think that this CMS directive had much impact at all. I'll get -- make the comment on it, but it's -- if you look at the average, CMS will pay for 4 systems a year, and, in fact, the average is under 2. So we see it as a potential -- a significant potential area for growth. But Mick, do you want to comment?

Yes, Mike, I'd make 3 points on this area about CMS documentation. The first point is this is just Medicare. So it's 25% of the U.S. market, which is about 10% to 12% of the global market or under 12% of the global market. Number two, they made changes to documentation but no changes to frequency or the reimbursement rates. So it's just changes to the documentation. And number three, that those changes to documentation, after some further clarification, which took 2 or 3 months because it's the government after that clarification came out, customers were pretty quick to change their systems, whether it's an IVR where you press 1 to say that the system is dysfunctional or it's a call script that requires that question and documents it or it's a formal written sign-off process where the patient signs off on nonfunctional use. So those 3 things, I think, have played out and sort of minimized effect, if any, really, of this in terms of -- over the long term.

All right. And then my second question is on a new technology. I've been at TCT this week, and there's a lot of excitement around renal denervation. And obviously, it's targeting hypertension initially, but there's talk of a lot of other potential indications, including OSA and complex sleep apnea -- or sorry, central sleep apnea. So I'm just wondering if you had taken a look at this therapy and whether or not it's something that you would view as a potential threat to CPAP therapy down the road. Admittedly, this is years off, years off and years off in the future before it would potentially even be approved, but...

Yes. No. It's hard for me to envision -- or first, let me make the point but JNC7, the Joint National Commission on the diagnosis, management and treatment of hypertension, has suggested or made the statement that the #1 cause out of 9 identifiable factors for hypertension is untreated sleep-disordered breathing, of which, obviously, obstructive sleep apnea is the main manifestation. Now the renal nerve innovation or the use of the barbecuing of the artery, it's hard to see how that connects. It appears to work in drug-resistant hypertension, and we know that 83% -- well into the 80s of drug-resistant hypertension patients do have sleep-disordered breathing. But if you have sleep-disordered breathing and your hypertension is ameliorated by the renal denervation, then you still need to have the sleep-disordered breathing treated because it doesn't stop the other -- the sympathetic neural activity that's associated with the catecholamines. So I just found this such a long bow. I can't even imagine that this would be a treatment for any form of sleep-disordered breathing. And if it were, it would only be in the central area. Because looking at what sleep-disordered breathing is, it's really a mechanical issue, and it's due to the -- as your diaphragm moves, you create negative pressure, the air flows into the lungs and, of course, that causes a negative pressure in the upper airways. So if you have a floppy upper airway and wherever it may be in the pharynx, the velo, hypo, oropharynx, it's a mechanical issue. So I think it's a very, very long bow. Now maybe, maybe there are some impact on central sleep apnea, but it's -- you'd -- I'd like to see a hell of a lot of compelling data to show that it would impact it. But obviously, with central sleep apnea, we have an open airway. It's not the same -- it's not a mechanical issue, it's a neurologic issue. And because it's neurologic, it's -- you could say, "Well, okay, maybe it's -- it could be impacted by anything that -- it appears with the neuro system." But I'd like to see some compelling data before we're sold on it.

The next question comes from Ian Abbott from Goldman Sachs.

My first question is on manufacturing. Just wondering how sort of far through you are, your migration to Singapore, how much more capacity there is to ship production there.

Yes, we -- currently, it's roughly for masks, interfaces and devices. It's roughly 54% of our total production. Given how easy it is to work with the Singaporean government as opposed to more socialist governments, we will be probably moving more manufacturing into Singapore. It's got an extraordinarily favorable tax rate, and you can sit down with the Singaporean government. And when they talk about academic business and governments working together, it's one of the weirdest things in the world, they actually mean it. So you actually sit down with people that actually want to help you and not hinder you with more regulations and more workplace relation issues and so forth. Australia, frankly, is a nightmare of industrial relations. But having said that, we will be continuing to invest in Singapore for ease of doing business, meaning regulations and working relationships and an extraordinarily favorable tax rate, which is well under 10%. So if I had to guess, we'll just keep expanding in Singapore, and I wouldn't be surprised, that this is -- I haven't looked at the actual numbers, but I wouldn't be surprised if we are more like 75% this year. But Rob, do you want to make a comment on that since you are closer?

Yes, Ian, we're really happy with the way Singapore is going. And so the long-term plan was then progressively increasing capacity and putting production up there. We've been really happy with the capacity that's there off a pretty small footprint, and we see a lot more efficiency guidance. So that trend will keep going. We're not going to jump off and [indiscernible]. We'll be progressive always as things move up. We're also pretty happy with our Malaysian factory, which is up and running, doing headgear. And down the track, we might see more options in that area as well.

My second question, just looking at pricing and price declines, one thing, the payback from the industry is pretty consistent that over the last 5 years, most of the price declines have been seen in low-end Flow Gens, whereas mask pricing has been relatively stable. Just wondering firstly if that's true. And secondly, have you seen any changes to that sort of in recent times?

Well, Ian, pricing is something that you deal with every day. And as far as pricing pressures go, I think we've been fairly consistent. We've expected somewhere around the 4% to 5% annual decrease in prices, and obviously, we need to keep ahead of the curve. And with manufacturing efficiencies, we've been able to do that. We don't see the terrain. Look, it's challenging. And the irony of this market is that most of the pricing pressure is actually driven by competitors as opposed to the customers, and it's just one of those weird markets where as you can see from our numbers, given the growth rates being around 6% to 8% and our growth rates in constant currency being around 12%. But if you look at the net income, the revenues, I mean, obviously, that's a reflection of a number of things. But improvements in the valuable growth improvements with the S9 platform and, obviously, the movement from basic CPAP to APAP, pretty encouraging. But I'll throw that question, I mean, make Don -- maybe Don Darkin can talk about masks, and you can talk about devices or -- but there's nothing scary that we're seeing. That's just the way of the world. People want to buy...

Yes, I wasn't suggesting any scare. I just [indiscernible] was there any differential in the price declines between masks and Flow Gens.

Don, do you want to go first?

Yes, I don't -- Ian, I don't think there's anything that's headline with our expectations, and quite frankly, we're tracking pretty much as we expected across this year's fiscal. So there's no real difference at all in -- not from what we're seeing.

I mean, all I'd add is that the conversation with customers and really payers in this space is starting to turn from a discussion around price to one about value. We're moving away from just a discussion around utilization management, which is, can you do competitive bidding and move from x to point 9x on a unit price to are you saving money for my health care system by keeping these patients out of hospital? So the discussions are moving to a higher level, and we're having them with customers and with their customers' payer groups to change that conversation from more utilization management, which focuses on price, to one on care management, which focuses on sort of the return on investment that a payer gets by putting a high-value patient on the VPAP Adapt and keeping them out of the ICU and CCU and similarly for an LSA patient on CPAP or even better on AutoSet. So that's sort of where the discussions are going in, but no big differential to your question between masks and Flow Gens on that pressure.

But having said that, and I agree, but moving from utilization management to care management is a lot easier to say than do. And there's a lot of work that we have to put in. We're putting a lot of time and effort into healthy economics by gathering data, showing people what -- in fact, this is -- as we said in the press release, it is the holy grail. I mean, we've given up collecting testimonials on the quality of life because it's just real. I mean, it's there. And so it's not something we're surprised at. The second thing is we're seeing more and more data on savings of inpatient and outpatient costs, particularly with these readmission rates. I mean, it is going to become standard of care because, simply, if -- unless you treat the sleep-disordered breathing, if you have 25% to 30% of the adult population with sleep-disordered breathing at some level, I should stress. That's an AHI greater than 5. Do they all need treatment? Well, they do if they've got a co-morbidity such as hypertension, diabetes, reflux nocturnal and depression and on and on. But we are seeing this moving very favorably. And the third thing is what we're seeing and a lot more encouragingly is that we're seeing not only is the disease process in these co-morbidities being slowed, it's actually in some cases being reversed. So if you've got quality of care on your side, you've got reduced cost on your side and you've got reduced disease progression. All this translates into a very favorable environment going forward. Now there will be challenges, but we're very comfortable in the space we're in.

The next question comes from Ben Andrew from William Blair. Ben Andrew - William Blair & Company L.L.C., Research Division: So I've got a couple of questions for you, please. The -- can you break out for us what's going on with the international generator business? How big a chunk is Stellar today and what the growth rates are in underlying blowers for CPAP within that broader number?

Well, as you know, we don't get very granular, Ben, but I will say that the Stellar 100 and the Stellar 150 is selling extraordinarily well. And if you look at percentages of devices, it's a higher percentage -- a much higher percentage -- well, considerably higher percentage ROW compared to the U.S. But with the push into institutional sales, it's going to be built up gradually. And we're -- as I said in my remarks, we're targeting the Stellar for NIV, noninvasive ventilation institutional sales, and the homecare would be the VPAP ST-A with iVAPS. The reimbursement favors that kind of push. But do you want to add any more, Geoff or Mick?

No. I think you said it all. Ben Andrew - William Blair & Company L.L.C., Research Division: So just to finish that point of Peter, the growth rate of underlying international CPAP blowers is consistent with the total for that segment, if nothing else?

The growth rate ROW is less with the blowers, for sure. It's, in terms of granularity, hard to know, but it's a little -- as I said before, it's a little less in Europe and a little higher in Asia Pac. But it comes out -- Ben, it comes out at about the same. We think the market's growing at about 6% to 8%. It's a little lighter in Europe and a little higher in Asia Pac. Ben Andrew - William Blair & Company L.L.C., Research Division: Okay. And then just my second question, if I may. Thinking about gross margin and the move into -- the further move into Singapore, as well as the mix. As you go through the next couple of quarters, Peter, you start to annualize the launch of the S9 bilevel. I think that's in the June quarter, so your comps will get a little bit tougher. Are you confident you can continue to see a strong generator growth kind of in the middle to back half of next year on generators with that dynamic? And then second, can you continue to see gross margin trending up with currency staying stable?

Well, our best guess, as Brett said, is that the gross margin will remain in the 60% to 62% range. We're seeing -- it's -- we considerably hope, Ben, as you would obviously know, the change with the HST to AutoSet. That's extremely helpful. The price pressures are greater at the low-end CPAP, but the growth is much lower there and there's the switch with the requirements of pre-authorization, et cetera. So I think we see that area. I mean, this is just me talking now. But I think this time next year, we're going to see -- of all the tests, I think it's going to be closer to 50%, it could even be higher, depending upon how aggressive the payers are with the PSG authorization area. It could even be -- I might have to go crazy, it could be 75%, but I mean, that's just sort of in the lap of the gods. But... Ben Andrew - William Blair & Company L.L.C., Research Division: Okay. But the point [indiscernible].

So we don't -- strong price -- I don't see -- we don't see any -- sorry, what's that? Ben Andrew - William Blair & Company L.L.C., Research Division: I was just saying that even in the face of more difficult comparisons on bilevel as you annualize the launch of the CPAP, auto -- the auto PAP trends remain strong.

Yes, they do. And we're actually very optimistic with the Stellar products. I mean, they are -- the Stellar 150 with iVAPS is being extraordinarily well-received. Do you want to say a word about that -- or Brett, do you want to comment? And maybe Geoff after Brett.

Just on them, I mean, we have -- the product mix has been favorable for us, and we've got, I mean, the CPAP to APAP Chief there. Obviously, the bilevel is coming to the S9 box, and they've done particularly well. So those factors are there. And if you're going to be realistic there, it's quite a nice uptick from that. I do think that mix will still be favorable for us going forward, Ben, but maybe not to the extent that we've seen. But I still think we'll see some favorable mix coming through, which will help us.

And Geoff, do you want to say...

So all I would add is that with iVAPS being very well-received globally, particularly in Japan more recently, I know that we've got iVAPS on the S9 platform. Obviously, that's going to give us a very good margin product, and we expect to see that growing quickly over the coming quarters.

I guess in short, Ben, we're cautiously optimistic that we can stay ahead of the curve.

The next question comes from David Low from Deutsche Bank.

Just a question on rest of world. I was very impressed with your rest of world constant currency growth. And, in particular, I listened to the comments last quarter about Japan being a bit lumpy and had been a good quarter. It would seem that it's happened again in this quarter. Just wondering if you think we should think about Japan as being something about a step-up that will continue on for the rest of this -- at least the rest of this year.

Well, David, the one thing that I noted in the comments was that as opposed to reimbursement cuts, which everybody expects, this was, in fact, a reimbursement uptick. And also, there's very favorable environment for cardiologists to adapt -- or take on adaptive servo-ventilation, and we are actually planning on taking some physicians [indiscernible] heart failure, one particularly influential heart failure expert from the U.S. to Japan to talk to some of the cardiologists there, the heart failure cardiologists, to see if we can leverage some of their results. And I mean, it's a critical mass of cardiologists in Japan who are now have -- doing not only adaptive servo-ventilation, they're not involving sleep physicians at all, they're just doing it themselves. So we -- yes, we -- I think we need a little bit more information, a little bit more data. I mean, we're anxious to see what we can sort of -- what lessons we can learn and then apply to other markets, in particular, the U.S., which, of course, is our, by far, in a way, our biggest market. But I would say, yes, we are pretty encouraged about Japan and not just with adaptive servo-ventilation but also with Stellar, with Teijin. And Geoff knows that he needs to improve his numbers. But with Teijin and Fukuda Denshi, both of our Japanese distributors are really impressed with the Stellar product.

And obviously, I'm very happy with the number there, Peter.

Oh, okay. Good. But they need to be...

Would it be fair to say that the growth that we've seen in Asia Pac you've mentioned is a bit stronger than Europe? Is Japan a very important part of that stronger growth?

Yes. Yes. But also India and China. So India -- obviously, the base is -- the growth rates are bigger in India or in China, but the base is smaller. But we are very optimistic about India -- about both India and China and Japan. We've been in there for 15-or-so years. I mean, that's always been a good market, and we don't see that changing.

I just wanted to ask another question focusing on U.S. mask business. Certainly, we've seen trend towards much stronger growth in masks, driven by these replenishment programs. I know you've talked about a market growth of 6% to 8%. So presumably, as we move through the process, we're going to see market growth come back towards that market growth rate. I'm just wondering where you think we're up to in that trend?

Well, it's a difficult mix, David, and I'll throw the question to Don. But -- and just to make a comment. As you put more and more patients onto treatment, you've got this growing replenishment opportunity. And if you look at our business, the -- that is an extraordinarily fast-growing area, and there's a lot of potential to go from just under 2 masks per patient per year to 3 to 4. So there's a lot of potential there if the patient does, in fact, need a new mask. And so we think that it's a pretty attractive space, actually. And so I don't see anytime soon the growth rates coming back to the 6% to 8% in the masks space. But Don, what are your feelings? And maybe Mick can chime in as well.

Yes. Similarly, I agree with you, Peter. We don't see that coming off anytime soon. I think with the growth in the segments and the strength we have in those channels, it's going to be around those numbers. We're seeing a mild dip in numbers along with our expectations due to the new masks that have been launched this period. It's pretty much in line with what we think, and we'll probably be back over the next period as people start to look at the relative merits of those new masks. But as far as this space is concerned, it still remains very healthy.

Yes, and, I mean, to Don's point, if competitors are launching new products, people are going to try it. But it takes a while for the water to flow under the bridge, and we've done our own comparisons. We feel comfortable, very comfortable, I should say, with our products. But other people have got to [indiscernible], and -- but we're confident that we have a little bit of air between us and the other guys. But...

David, all I'd add is that there is runway left on replenishment. We can get more movement there, but in addition to that, compliance systems and the focus on adherence is becoming a greater and greater focus for our HME customers and their customers, the payer. And as they look more at that, they have more systematized approaches to it. We launched the product, EasyCare Online, which was a major global initiative that the team was able to bring to the market. And now the data, as to whether you're using your device or not, is taken to the physician, the payer and the patient from the cloud. And that visibility to compliance rates allows customers to better treat their patients and health care systems to better keep their patients out of hospitals. So that focus on adherence should provide some long-term runway to growth of replenishment revenues like masks and other accessories, tubing, filters and even repair, because every 5 years or so, you should replace the device as well.

Mick, in terms of replenishment, do you think the majority of your DME customers have gone on to that and have become a serious [indiscernible] to their business or we're still seeing maybe a tier of DMEs that you're doing?

Yes, David, I would say a majority of the large nationals have moved, although there's still some further improvements that they can make to their systems. But the next tier down is the large regionals has a lot more room for improvement on that front. And frankly, at the moment, PAP level, the local regionals, there is still, sadly, a large segment where the focus on long-term compliance and adherence and replenishment is not even part of the conversation. It's part of the conversation we have with them but not necessarily something they're implementing yet. So the answer to that is there's at least -- of the 3 tiers, there's 2 tiers where we've got considerable room for improvement.

The next question comes from Anthony Petrone from Jefferies. Anthony Petrone - Jefferies & Company, Inc., Research Division: Just going to rattle off a few here just to get a better sense of gross margin potential and mix. And I know you haven't given this out in the past, but on the generator side, would you care to share the mix of CPAP autos and bilevels, sort of where that is today and potentially where that can go? And then one on the distributor side. Can you give a sense of how many in the U.S., how may distributors you're dealing with today? And has that consolidated to any extent with competitive bidding?

Well, Anthony, firstly, it'd be a first if we started to share granularity on -- we've said that the APAP is growing very fast compared to the fixed pressure CPAPs. But we just -- first of all, competitors would love to know it. And so we don't share that information about product mix. I'm not going to go any further than that. And your second question, what was that again? Anthony Petrone - Jefferies & Company, Inc., Research Division: With regard to distributor consolidation.

I'll throw that to Mick. But there is a little bit, if you want to address it.

Yes, I mean, the answer, Anthony, is that we're not going to -- obviously, going to the, again, the granularity of the number of customers we have now and had 12 months ago, but we will give the general trend that there is industry consolidation at the HME level. You've seen the public announcements of Linde buying LinCare. You've seen the public announcements of Apria buying the assets of Praxair, and there are other acquisitions that have happened, obviously. But in terms of this industry, it's got a large degree of fragmentation. This consolidation has gone on and will continue to go on, and it's probably cataloged a little by competitive bidding. But we have good relationships with the large nationals, and we have good relationships with the regionals. And we expect those to continue on throughout that consolidation. But it's a trend that's been there, and we expect to continue at its same rate but not to change dramatically. Anthony Petrone - Jefferies & Company, Inc., Research Division: One quick one, if I may. The high-class problem here, $890 million in cash, and I know about a year ago or a little bit more than that now, there was an effort to sort of look at things outside strategically. I'm just wondering if we can get an update there.

Yes, well, we've spent -- if you look at 2012 and 2013, just the first quarter, we spent close to $400 million just simply doing share buyback, and that's one use of the capital there. But you're right, I mean, $890 million, even if you take out the total amount of debt, it still leaves us, give or take a bit, with $600 million. So we have dry powder, and we are continually scanning the horizon. And basically, we are looking -- we're not going to get into movie-making or sailboat-making or anything like that. We're in the sleep business, and that's where we're -- sleep and respiratory care business, and that's where we're staying, obviously. But you saw the purchase of BiancaMed. We're absolutely delighted with that. We're also delighted with the 12.5% tax rate, and then we're also delighted with the fact that the Irish government, like the Singaporean government, want to sit down and talk to you. And you get academics and the business guys and the government guys all in one room and they really do want to help you, and we get some help there with the R&D. But we are continually looking at -- as you know, we've got a ResMed Ventures and Initiatives group, which is headed up by Jim Hollingshead. And virtually, every day, there's something that comes across Jim's desk, and we take a look at it. So I guess what we're looking at is new technologies that dovetail into the respiratory or sleep business. We're also looking at people that are out there that we can take -- oh, as Connie just shoved down to my nose, of course, we did buy Grundler in the humidification space. I mean, I hadn't forgotten that, Connie, but thanks. And also [indiscernible], of course, with the compliance where we're now able to get compliance measurements. It's not just for our products but also for competitive products. And we are making a push, obviously, in the area of dental sleep medicine. We've just got FDA approval, working through the reimbursement for mandibular repositioning devices, Kristie Burns. And that's also in Jim Hollingshead's group, we're making a big push on dental sleep within the U.S. environment. And we're kind of encouraged by the strides we are making there. But yes, there's no question we have plenty of dry powder, but we are also looking carefully of what's around. But when you look at where to invest, we're looking for things that potentially can grow 20% top and bottom line. And, I mean, there's just not that many opportunities. But if you come across something, Anthony, give us a hoy.

The next question comes from Dan Hurren from UBS.

I understand you don't want to break out products, but previously, we've discussed publicly the loss of market share in the bilevels and servo-ventilators and those sort of things and where you think you are today following launch. Has that market share come back or has that been rebuilt, you just were doing organic growth now?

Well, I think if you look at the growth figures, if you step back strategically and you look at our market growing at 6% to 8% globally and then you look at our numbers 40%, 41% up at the bottom line on net income and net income of 21% to revenues and you look at the gross margin of 61.4%, that clearly reflects a higher value products growing very well. And that, obviously, is adaptive servo-ventilators. So we are really doing extremely well in getting back lost business in the adaptive servo-ventilation area, and we're also seeing nice growth now that every -- the bilevels are in the S9 platform. You can argue we should have done it sooner, maybe we should have, but clearly, the numbers are reflective of the fact that we are, if you like, back on deck.

Okay. And just another question. You talked before about the potential for home sleep testing to become a very big part of the market, in short, become aggressive with this pre-authorization. Do you see any risk in there? And what are you seeing on the ground during this changeover period? I guess I'm just curious to see if there's any patients falling in between the cracks as 1 system transitions to another.

It's very -- it's such early days, what works. But will the primary care physicians adopt it in the way we like to see them? They likely will use independent testing facilities, the IDTFs, or the sleep labs going to go out and start marketing to the PCPs and say, "Hey, look, don't worry about it. We're going to offer you both PSG, even though it's pre-authorization. We should be able to get that, but we'll also offer you HST." We think the smart sleep labs are offering both. Obviously, they want more patients going through PSG because they make more money, but it's a very complex mix. But I -- if I had to guess, I'd say that we're going to see a certain number of PCPs as they get comfortable with HST because they take it up themselves and go straight to AutoSet, that's the easiest thing to do. You don't have the option of going to a lab to have the pressure set. It has to be automatic. The good news is that there are several papers out showing that, in fact, ironically, that if you go HST to APAP, you in fact get average along with those paper by Rosanne [indiscernible] and Susan Redline at Harvard. But this was multiple groups. I think it was 7 or 8 sleep centers across the country, and they show, in fact, almost an hour or more per night usage on the average and compliance that was around 12% up. So, in fact, rather than the sleep labs, they used to say that it was really unprofessional and bad medicine, and what we're finding is that if you do use HST, it's so much easier for the patient, it's so much cheaper, so much more convenient. And APAP works just as well as we've known that for over a decade, works just as well, the 6 APAP set in the lab. In fact, the data is showing, if anything, it's at least as good and, in some cases, even better. So this is not a complicated area, and I think we're going to see far more involvement of PCPs but also in addition, specialists, like cardiologists and endocrinologists, perhaps. If you're doing HST, you couldn't think of anything simpler, and the treatment itself is safer than an aspirin. So it's almost no downside. So complex area, very early days, but we see continuing good growth in the space and more and more non-sleep-trained physicians implementing the therapy and sending all the tough ones to the sleep physicians. Stuff they can't work out, they'll send back to the sleep lab.

Dan, what I'll add to that is you've got -- your question was about risks as you move from PSG to HST. We've got risk mitigation in that we have 3 models that are being trialed out in the ecosystem there. There's IDTFs and there's PCP direct, but there's also sleep labs conducting home sleep testing. And you heard in the remarks early that 40% this quarter, 40% of sleep labs are now offering home sleep testing as an alternative, and we think that offering that choice is actually good for the patient and can reduce what we call leakage through the value chain. So we're mitigating the risk by looking at 3 models. And the market is choosing and the patients are choosing, and the sleep labs are helping facilitate patients to get their choice. And we think that's a good thing for patients, for the payers and for the long term of our industry. So there's more money available to keep the patients on therapy compliant and out of hospital.

Couldn't have said it better.

So I think you're saying that there is sufficient home sleep testing capacity there now as the sort of insurers push hard?

There's actually scalable models being set up so that as patients come to these new modalities, they can scale with the patients that they come through. So the answer is capacity is there and capacity is available to grow through multiple methods. So in short, Dan, yes.

Thank you. I think we're probably good to close here, Christine.

Yes, we are at the 1-hour mark. Please go ahead with any final remarks.

Well, I will. First off all, for those of you still on the call, thank you for joining us. But more importantly, I would like to thank all our employees for their hard work, dedication and continued exemplary performance. We are delighted with your commitment and loyalty and efforts. And so we all here around the table, thank you very much. And that's it. That's [indiscernible].

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect at this time.