ResMed Inc. (RMD) Q4 2013 Earnings Report, Transcript and Summary

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

Thank you, Ellen, and thank you, everyone, for joining us today. The company has asked me to address certain matters. First, ResMed does not authorize 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 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. [Operator Instructions] Speaking on the call today are Mick Farrell, our CEO; and Brett Sandercock, our CFO. There are also other members of the management team present here today that will be available to answer your questions. I would now like to turn the call over to Mick Farrell. Mick, please go ahead.

Thanks, Connie, and thank you all for joining us today. I'll review the highlights of our fiscal Q4, and then I'll hand the call over to Brett to go through the quarter in more detail. So first, the financial summary. We finished with solid financial performance. This is the 74th consecutive quarter in which we have grown the top line since our IPO in 1995. We're pretty proud of that achievement, but we have huge opportunities in front of us. We believe we are in mile 1 of a marathon with plenty of energy, innovation and a solid strategy for the 25-plus miles to go. Global revenue in the fourth quarter of fiscal 2013 grew 11% year-on-year to $415 million, also up 11% on a constant-currency basis. Americas revenue grew 11% to $230 million. Europe, Asia and rest of the world combined headline revenue increased 12% for the quarter. And that is 11% on a constant-currency basis. For fiscal year 2013, and for the first time in ResMed's history, we reached $1.5 billion in annual global revenue. We're pretty proud of this milestone. ResMed's world-leading product quality, exceptional service and our innovative data solutions all continue to drive growth and these types of results. Net income for the quarter increased 18% to $91 million on a non-GAAP basis, while EPS increased 17% to $0.62 for the quarter. That's also on a non-GAAP basis. These non-GAAP numbers exclude the impact of the previously announced onetime Sydney University charge. Brett will walk you through all the details on GAAP and non-GAAP financials shortly. Earnings per share was a record $0.63, excluding amortization of acquired intangibles. This bottom line result demonstrates excellent global operating performance from the global team of 4,000 ResMedians. Our global growth in Flow Generators this quarter was primarily driven by strong sales of our leading S9 order set device, our VPAP range of bilevel devices and our latest ventilation flow generator, the Stellar. We continue to expand market share in the APAP and the bilevel categories as well. Our Respiratory Care products are receiving broad acceptance, especially in the treatment of COPD, the #3 killer in the Western world, and a disease that can be significantly helped with our noninvasive ventilation solutions. In the Americas region, flow generator sales were strong this quarter. The S9 order set and the VPAP Adapt device, which treats patients with central sleep apnea and periodic breathing, both performed particularly well. We attribute a lot of these share gains and positive mix shift to EasyCare Online and growth of home sleep testing, respectively. Additionally, we are seeing a trend that new patient growth is improving in the U.S. Turning to Europe. France performed well in the quarter and both our German dealer business, as well as our German homecare business had strong growth, as did the U.K. and the Nordics region. European results were driven by strength in both Flow Generators and in Masks. The order set CS, which is now on our S9 platform, and the Stellar, both did particularly well. Mask growth was also solid across the region. So despite fiscal constraints and the changing macroeconomic environment in Europe, the ResMed value proposition of treating patients at home, saving healthcare costs while improving quality of life is proving itself to be in demand. In the Asia-Pacific region, we had an excellent quarter, growing at solid double-digit rates. We had strong sales in mature markets like Japan, as well as in key emerging markets, including India and China. Rob, our COO, and I spent a number of weeks visiting doctors, distributors, patients and government groups throughout Asia this quarter. We believe this growth opportunity is just beginning. And as our Executive Chairman would say, we are just lacing our shoes for the Asian growth marathon. We have an excited, focused and dedicated team in that region. And that will help us drive towards this potential. On healthcare informatics, EasyCare Online, which is our cloud-based clinical management system, continues to lead and to grow. Additionally, our U-Sleep patient engagement solution is gaining traction. We're seeing solid uptake from both existing and new customers. In this challenging environment with government reimbursement changes coupled with mandates to address growing healthcare costs, we believe ResMed's core value proposition of reducing healthcare costs by taking care of respiratory diseases at home is being well received by patients, physicians, providers and by payers. It's all about driving outcomes and having the data to prove it. ResMed is demonstrating that we deliver these results for our customers. Regarding our patient interface business, growth was driven primarily by sales in the full face Mask category, particularly in Europe. We also saw solid growth in Mask components and accessories across the globe. We plan to stay ahead of the game in our Mask business, where we are the #1 brand preferred by patients. We're constantly innovating and our solutions will continue to be smaller, quieter, more comfortable and better than ever. Our product pipeline in patient innovations remains strong. We released 2 exciting new masks this quarter. First, the Quattro Air launch. It is the smallest, lightest and least obtrusive full face mask on the planet. We're very excited about its prospects for patients. And its initial reception was very positive. Second, we released the Swift FX Nano, our latest nasal mask. This launched in Europe and in Canada, and is progressing very well. We have plans to release more patient in face products during fiscal 2014. And we are very excited about our innovation in this space. Moving on to our Respiratory Care business. We had our best quarter ever in this space with record global sales. This growth is primarily due to sales of the Stellar device range in Europe, especially in Germany and in France. Japan also had a very strong quarter in Respiratory Care. In the U.S., Respiratory Care market sales of the VPAP COPD, specifically targeted for Chronic Obstructive Pulmonary Disease, is exceeding our expectations. And the ClimateLine Oxy, a heating breathing circuit that allows oxygen connectivity to the humidified circuit, is also doing well. For our VPAP STA product, which advanced 2 generations from our S9 to our -- from our S7 to our latest S9 platform, we're seeing incredibly strong growth. In the humidification category, our HumiCare D900 product is doing very well in Germany and the Nordics. We also received FDA clearance for this product during the quarter. Stay tuned for additional growth and product pipeline expansion in our Respiratory Care business. On the home sleep testing front, now over 50% of commercially covered U.S. adult lives require PSG pre-authorization. This is steering providers and patients towards home sleep testing. To that point, we estimate that at the end of fiscal '13, approximately 30% of all U.S. sleep diagnostic tests were through home sleep testing. We anticipate and model that to grow to 40%-plus over the coming 12 months. And we think it will end up beyond that in the years ahead. Additionally, we continue to see a steady increase in the number of sleep labs involved in HST. Around 60% of sleep labs in the U.S. are now offering home sleep testing based on our latest sleep lab survey data. Primary care physicians continue to become more involved in the diagnosis and management of sleep apnea, and are partnering with their pulmonary colleagues. That involvement is starting to gain momentum. Finally, an overview of our global clinical trials. Enrollment in our heart failure trial, SERVE-HF, as in a tennis "serve" dash "HF," for heart failure is now complete with over 1,325 patients recruited. This milestone makes SERVE-HF the biggest and most important heart failure trial in the history of our industry. We should have final data late in calendar year 2015 through early calendar 2016. Our goal is to present at major cardiovascular conferences, and to publish final results in a premier medical journal. In addition, we've completed the protocol, as shown in our press release, for a new U.S.-based heart failure study, which we are calling CAT-HF, as in "cat" dash "HF." This trial will be run by professional Chris O'Connor, who is a global leader in heart failure and cardiovascular medicine from Duke University on the East Coast of the United States. Professor O'Connor is an accomplished clinical investigator, who has been an author on more than 400 peer-review publications in the field. We expect enrollment in CAT-HF to commence in the latter part of this calendar year. So let me wrap up with this. Our core sleep apnea business is no longer just about selling equipment to treat sleep-disordered breathing. It's about forming partnerships with customers and offering full-service solutions for patients, providers and payers to manage outcomes for this costly chronic disease. This solutions approach also applies to our growing Respiratory Care business and our fast-growing Cardiorespiratory business. The combination of our range of world-leading quality Flow Generators, the most comfortable and effective patient interface systems, as well as easy to assess robust actionable software solutions makes ResMed's offering the leading value proposition for our customers. We have a robust pipeline of new masks and new technology, as well as business process innovation for the plan across our 3 horizons of growth: sleep, respiratory care and cardiology. We are improving patient's quality of life and preventing disease progression, as well as reducing the burden of healthcare costs for chronic diseases. We think of this as the Holy Grail of healthcare. We changed more than 7 million lives during these last 12 months. And we plan to drive that to 10 million lives and well beyond in the coming years. So now I'll turn the call over from here in San Diego to our CFO in Sydney. Brett, over to you.

Great. Thanks, Mick. Revenue for the June quarter was $414.6 million, an increase of 11% over the prior-year quarter. In constant currency terms, revenue also increased by 11%. Excluding the impact of the onetime Sydney University charge, income from operations for the quarter was $110.9 million, an increase of 24% over the prior-year quarter. Net income for the quarter was $90.7 million, an increase of 18% over the prior-year quarter. Non-GAAP diluted earnings per share, which excludes the impact of the Sydney University charge, was $0.62 for the quarter, an increase of 17% over the prior-year quarter. GAAP net income for the quarter was $73 million. And GAAP diluted earnings per share for the quarter were $0.50. Gross margin for the June quarter was 62.7%, up sequentially from Q3 FY '13. On a sequential basis, our gross margin benefited from a favorable product mix, manufacturing and supply chain improvements, partially offset by ASP declines. Looking forward, we expect our gross margin to be in the range of 61% to 63% assuming current exchange rates. Indeed, we estimate the weaker Australian dollar will contribute approximately 70 basis points to our gross margin in the first quarter of fiscal year 2014. Additionally, 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 $115.1 million, an increase of 9% over the prior-year quarter. In constant currency terms, SG&A expenses also increased by 9%. SG&A expenses, as a percentage of revenue, improved to 27.8% compared to the year-ago figure of 28.5%. Looking forward, and subject to currency movements, we expect SG&A as a percentage of revenue to be in the vicinity of 28% for fiscal year 2014. R&D expenses for the quarter were $31.4 million, an increase of 12% over the prior-year quarter. In constant currency terms, R&D expenses increased by 14%. R&D expenses as a percentage of revenue was 7.6% compared to the year-ago figure of 7.5%. Looking forward, we expect our R&D expenses as a percentage of revenue to be in the range of 7% to 8% for fiscal year 2014. This reflects an ongoing commitment to investing in our product pipeline tempered somewhat by the depreciation of the Australian dollar, as the majority of our research in development is undertaken in Australia. During the quarter, we reached an agreement with the University of Sydney to pay $24.8 million for the establishment of 2 perpetual academic chairs, the funding of future research in the fields of sleep medicine and biomedical engineering, and the settlement of a legal proceedings between the parties. This is a nonrecurring charge and we have expensed the full amount of $24.8 million in our fourth quarter results. Amortization of acquired intangibles was $2.5 million for the quarter, while stock-based compensation expense for the quarter was $10.5 million. Our effective tax rate for the quarter was 16.9% compared to the prior-year quarter effective tax rate of 22%. The lower tax rate this quarter reflects a tax benefit from the Sydney University charge and the ongoing benefit of lower effective tax rates associated with our Singapore manufacturing operation. Excluding the impact of the Sydney University charge, our full year effective tax rate was 20.7%. We currently estimate our effective tax rate for fiscal year 2014 will also be in the vicinity of 21%. Turning now to revenue in more detail. Overall, sales in the Americas were $230.3 million, an increase of 11% over the prior-year quarter. Sales outside the Americas totaled $184.3 million, an increase of 12% over the prior-year quarter. In constant currency terms, sales outside the Americas increased by 11% over the prior-year quarter. Breaking up revenue between product segments. In the Americas, Flow Generators sales were $104.7 million, an increase of 16% over the prior-year quarter, reflecting strong growth in our APAP and bilevel devices. Masks and other sales were $125.6 million, an increase of 7% over the prior-year quarter. For revenue outside the Americas, Flow Generators sales were $124.8 million, an increase of 13% over the prior-year quarter, and in constant currency terms an increase of 11%. Masks and other sales were $59.5 million, an increase of 11% over the prior-year quarter, and in constant currency terms also an increase of 11%. Globally, in constant currency terms, Flow Generators sales increased by 13%, while Masks and other increased by 8%. Cash flow from operations was a record $123.9 million for the quarter, reflecting strong underlying earnings in working capital management. Capital expenditures for the quarter was $16 million. And depreciation and amortization for the June quarter totaled $19.7 million. Our share buyback continues to play a major role in our capital management program. During the quarter, we repurchased 1.5 million shares for consideration of $72.7 million. For fiscal year 2013, we repurchased 4.3 million shares for consideration of $188 million. At the end of June, we had approximately 4.5 million shares remaining under our authorized buyback program. In addition to the share buyback, our Board of Directors today declared a quarterly dividend of $0.25 per share. This represents an increase of 47% over our previously declared dividend, and demonstrates our commitment to delivering shareholder returns through our capital management program. Our balance sheet remains very strong. Net cash balances at the end of the quarter were $575 million. And at June 30, total assets stood at $2.2 billion. And net equity was $1.6 billion. I'll now hand the call back to the operator for your questions.

[Operator Instructions] The first question comes from Dan Hurren with UBS.

Look, I know you haven't spoken about it, and you probably don't want to talk about it, but just issue a price. It's been such a big topic of discussion in the industry both in the investor [ph]industry and in the sleep apnea industry. And you can't spend more than 5 minutes in the industry without people giving you sort of 20 examples of big profit lock. Can you just talk about what you're seeing, and why you think the market is getting it so wrong in the message that they're getting from your customers?

Thanks, Dan. That question allows us to talk about our long-term cost control and investment strategies looking forward. But, yes, certainly, price is a question. I mean, it's the discussion that comes up with our customers because it's Monday morning. And the sun is out. And it comes into the question when is the end of the quarter, and when is the start of the quarter. So price is always the discussion for us with our customers. We tend to focus on looking for the long term. We invest in driving growth through volume gain, and can use price as a tool as part of that. And when we work with customers, and they are seeking price discounts, we look for volume gains to get there. We also, when the topic of price comes up, and we're discussing price, we look at the long-term value that we provide the customer, which we are very good at modeling at and getting better at as we look at the economics of our HME customers in the U.S. and our HCP, home care provider customers in Europe, and the many other business models we have in the 100 countries we do business in. And as we analyze that, we're able to come up with effective ways to take costs out of the supply chain, to take costs out of the system through electronic data in change or whether it's healthcare informatics data or supply data and beyond. So in short, we've talked about traditionally a sort of 3% to 5% price reduction that we've seen in the market. It's probably more in the 4% to 6% range now. And you can model that sort of range going forward. But it's certainly something that when we look at our cost structure and we look at our investments for the future, we're looking at taking more than that 4% to 6% out so that we can maintain our margins. And as you saw in these quarter's results, we had a very solid 62%-plus number. And we're pretty proud of that.

Okay. And just one other one. Just in regards to the ventilation business. I know you don't break that out, but can you give us an indication of just how material that is becoming? And I mean, we're just trying to understand what level of this pretty extraordinary U.S. flow gen [ph] growth -- or sorry, global flow gen [ph] growth is being driven by the respiratory part of the business?

Thanks, Dan. We're not going to break out our Respiratory Care or ventilation business. We already, as the only global pure play and respiratory medicine company who's public, expose every 90 days a far greater deal of granularities than any of the other players out there. We have to do research to understand how the other 2 large-ish players are doing. But I can talk to it directionally. And certainly, the growth in Respiratory Care is very strong. We're #1 or #2 in every Respiratory Care home-care market throughout Western Europe. But we are not that in the Americas and many parts of Asia-Pacific. So there's a huge opportunity in front of us to grow our U.S. Respiratory Care business, to grow our Latin American Respiratory Care business, to grow our Respiratory Care business in many countries in Asia-Pacific where often our products can move from the hospital to the home. And that hospital-to-home approach is something that we've had excelled at in Europe, and can bring to the other markets around the world. So I think although the core growth in the global Respiratory Care space is probably in the mid-single digits, we can beat that by going after new geographic expansion, and also creating and leveraging new categories that our technologies as a leader in the sleep disorder breathing space with a cost structure and scale that brings can allow us to penetrate and expand, take share, but also grow reach in the global Respiratory Care business.

The next question comes Ben Andrew with William Blair. Ben Andrew - William Blair & Company L.L.C., Research Division: So following on the prior question, maybe talk a little bit about something that's been rather topical. Did the checks that people are getting where DMEs are claiming 20% price cuts and concessions from you guys and from other players, how do you characterize that? Where is that coming from? Is that things you're walking away from or in some cases, you're taking in exchange for volumes? Or these comments have been quite broad spread, and I'm just trying to get some context on where people are wrong if they're taking those data points.

Yes. Ben, I'm going to hand this question over to Jim Hollingshed, who's our President for the Americas. But just on the global scope of things, we're in 100 countries. These data point that I believe were published by someone doing research was in one of those countries -- the U.S., which happens to be around 50% of our revenues. But it's one data point out of thousands of customers. So with that caveat, I'll hand over to Jim to provide some color to your question.

Thanks, Mick. Hi Ben. So guys obviously, what's going on in the Americas market is the implementation of competitive bidding. And that implementation literally just went live. And so when the run-up to that the price points that came out of competitive bidding are painful for our customers. And we talked about that last quarter. And I think that's the first point I would make because we understand its painful for our customers and we're working through that with them. In terms of -- we're not going to talk about any specific deals or any specific customers. I would say that our practice in pricing remains the way it has been, which is we use pricing strategically. And so when we do deals with customers, we're typically doing them either because we're gaining volume or we're gaining share. We're doing something that makes economic sense for us and for our customers. The price trend in the market, we've been saying for a long time that in the category, has consistently had ASP declines in the 3% to 5% range on an annualized basis. And as Mick just said, that's probably moved now to maybe a 4% to 6% annualized range. I would say in the quarter in the run-up to the implementation of competitive bidding, we have seen some increase in short-term price pressure. But we dealt with that strategically. And we're working with our customers to help them address their business needs. And price is only one way that we work with our customers, all right? So we do other things with our customers. We're -- on a product basis, clearly, we provide products that create more value for them to drive more compliance to more effective products. And we're increasingly introducing solutions that help them run their business more efficiently as well, things like ECO and the U-Sleep platform. So price is an issue. CB2 is an issue in the marketplace. But it's, I think -- bluntly, I think it's been overblown and the way people are looking at the market broadly, it's painful for our customers. And we're working that through with them.

And I know -- I'd add on to that. Thanks, Jim. Great performance with your comments, and I'd add on to that. But this is not Coke versus Pepsi in a limited soft drink market growing 0% to 3%. This is about a market where we're less than 10%, 15% penetrated even in the U.S., which is our most penetrated market of all our geography. So it's about the 85% in front of us and in finding the right investments to make, to grow those markets. But I underline Jim's comments. Ben Andrew - William Blair & Company L.L.C., Research Division: Okay. And, Jim, just following on with that, I know the run-up has maybe been a little bit more intense. Why wouldn't they intensify further? Is there something about that run-up that then sets price for the coming period? Or are we going to continue to have this intensification when we talk next quarter and the December quarter?

Well, Ben, I think that's a really good question. And we don't have a crystal ball and so it's hard for us to predict exactly what's going to happen. But in the run-up period, what's going on, of course, is that people who've won and accepted contracts, and I'll make a side point there, which is not everybody accepted the contracts, right, because there are a number of players out there that have decided that they can make more money in commercial pay. But those who have won and accepted contracts are building business models of there after the quarter and getting ready to implement against what will probably be higher volume for them. And they need to understand how they're going to run their businesses so they're negotiating for price in front of that, right? So it's hard to know exactly what will happen, say, over the next quarter or next 2 quarters as that continues to play itself out. And we're going to continue to work strategically with all the leverage we win for our customers' businesses. But I think that if you just look at what they're getting ready for as Medicare throws the switch on the pricing, our anticipation is that most of the pressure is probably Q4 and maybe into Q1 a little bit. Ben Andrew - William Blair & Company L.L.C., Research Division: And then the private payers are they following on? Or is this sort of a delayed response on their side? And that's it.

Yes. Look, I'll answer that, Jim, if that's okay with you. The Medicare CMS competitive bidding process has been in place for 4, 5-plus years. All these changes have been signaled with 12, 24 even 36 months notice for the customers. So our company's pretty sophisticated, we've been able to model out their economics pretty intense around 1, around 2 and beyond. So there's nothing new that's going to happen from today, from yesterday. And frankly, since the numbers came out earlier this calendar year, there's been no changes to those core economics. But historically, CMS has been priced significantly above all the private payers, which is kind of unique in med tech. Usually, it's the other way around. And as CMS has seen that 4 years ago, like an efficient government process, they took 4 years to get there, but have eventually, 4 years later, got in line with the private payers. We don't think this triggers a response from your private payers and we haven't seen that. The private payers have been looking at this quarterly over those 4 years and we'll continue to look at it on an ongoing basis as well. Thanks for the questions, Ben.

[Operator Instructions] The next question calls -- comes from Saul Hadassin with Credit Suisse. Saul Hadassin - Crédit Suisse AG, Research Division: Some of the other things I've seen speaking to your customers is that they are looking for perhaps a broader entry level device -- a fixed pressure device that captures all the compliance requirements. I think we're seeing one of your competitors come out with such a product. Are you guys considering moving back into that fixed pressure segment of the market? Or is your focus still the high-end APAP segment?

So we've been playing in the fixed CPAP market since 1989. And we've been playing in the APAP category with our AutoSet range since 1992, I think. So both of these 2 decades’ worth of experience playing in both in fixed pressure and auto-setting pressure categories. The reason we believe -- in fact, we're incredibly confident that APAP as a category will continue to grow, is that APAP is a requirement for the cost savings achieved through home sleep testing. To make home sleep testing effective, you have to be able to allow the patient to have their pressure set in the home. And the only way to do that cost effectively is with an APAP category device. Our S9 AutoSet happens to have that 20 years of legacy in its algorithm and advances, and we believe is the leading algorithm in that space. So we believe the category of APAP will continue to grow share. And we believe that the S9 AutoSet will continue to grow share within that growing category. And so therefore, we are already in the fixed pressure device category. And we will remain there. There are some markets and some geographies and some patient groups for which CPAP pressure is the best approach. But there are many, and it's growing, of the greater value of our products like the S9 AutoSets are incredibly important. So we're already there, and we'll continue to play in CPAP. But driving the high-value APAP category is just part of an industry trend and we are absolutely on top of that, and a big part of it. While thinking about flow generators and the types of margins, the real highest end of this range is our Respiratory Care business. And that's an area where we are playing with customers with much higher cost basis and bringing in devices from the sleep space. So we think that opportunity to have margins at solid levels into the future is driven by not only the CPAP and APAP categories, but also by the VPAP category, which is the bilevel devices, and really importantly the noninvasive ventilation devices like our Stellar product. Saul Hadassin - Crédit Suisse AG, Research Division: And maybe just a separate follow-up question. But you mentioned the small increase in ASP declines to be the same. Can you talk to what impact do you think competitive bidding this year will have on volume growth to the industry? And whether you realistically think you will see DMEs closing down patients having to migrate across to other stores. How impactful do you think this whole process will be on the DME base?

So we have the real-time experiment with round 1 where we believe that as some of the smaller mom-and-pop type HMEs went out of business in some cases. Larger regionals and some large national players took the share of patients. And we were worried about some orphan patients in their process, patients that had a device and didn't have anyone following up with the Mask side. What we found was that the large regionals and the large nationals, with their very efficient systems for contacting patients, and checking appropriately if they need new masks and accessories, as they picked up those patients, we saw some increase in volume on the trailing revenue side, the opportunity for Masks & Accessories. So I would say it's probably mutual on the Device side. But there may be some volume upside on the Masks & Accessories side. But that's how we'd look at round 1 and round 2. We're in day 31. So we'll be watching that on an ongoing basis. But we would expect the same model to play out as the same types of people have become the winners in round 2, as we're winners during round 1. I don't know if, Jim, you'd like to add any more detail?

Yes. I completely agree with what you said. And I would just add a couple of things. I think it's computing for the patients, but it's not computing for the DMEs at some level, right? So the next point, any DMEs that they're buying up a patient list from a smaller DME is doing that because they know they're going to go find that patient and work with them, right? So I think the way Medicare has communicated to patients has created some confusion for patients. And so there's -- that's got to be worked through. But I think the people buying list will figure that out from the DME side. I don't think CB2 has a material impact on volume and market overall, except they might have upside, as Mick has described. I think U.S. market, and therefore America's volume, is likely to be more impacted by the shift to home sleep testing, which is we think is bringing in more new patient volume right now. And the reason for that is commercial pairs are shifting the market to home sleep testing. And home sleep testing is more acceptable to the patient. So it's a long time been a barrier for patient to get tested for OSA because they don't want to go spend the night in a lab. And as payers move to HST, more patients on the market are going to agree to get tested. And we think that's already creating a little bit of a lift in total new patient volume to the market.

Our next question comes from Matthew Prior with Bank of America Merrill Lynch.

Just a follow-up question, I guess, from solds in terms of volume instruction, and Mick or Jim, if you want to take this. I guess one of the other things in regards to the volume discount deals that's being done. Given with round 1, on the wash-up from round 1, we saw from CMS reports that utilization of volumes has slowed down. Do the volume discount deals being done around this period of CB2 help mitigate that volume slow down risk going into, obviously, the September quarter?

Jim?

I don't -- I think there's conflicting data on utilization and growth in the market. I don't see a big risk to a drop in utilization to Medicare. And I think that the incidents and problems of disease keeps going up. The latest data that I've seen from Medicare shows that the max of all increase in claims over the last couple of quarters. And as I say, I think the overall market is growing. So again, I don't -- that's not how I would think about the model of the volume of the market.

And, Matthew, you -- if adjusting on competitive bidding, you're thinking about the 25% of the market that is CMS. The 75% of the market, that is private payers, looking at this differently. And many of them has had for many years disease management programs. Many of them are now starting to look at care management programs. As we have conversations with payers, we are driving conversations along with our HME partners that drive towards the opportunity for our therapies to take patients out of the hospital and to save money, and to improve the quality of life for the patients. This matters especially to the employers who are the payers customers, who are self-insured. It matters incredibly importantly to the new accountable care organizations or ACOs that are forming as part of Obamacare, the Affordable Care Act. And we're going to see more and more systems of payer provider combination, such as you have at the VA, at Kaiser, at Intermountain Health, at Geisinger. Those types of models are going to expand. And we think the long-term return on investment -- in fact, we know the long-term return on investment of taking a patient with sleep-disorder breathing and getting them on treatment saves money for the healthcare system. So we think that 75% of the market is more apt on the private side for those conversations and fresh for it. We think the government will probably follow. But that will be our take on the long-term view and plans for care management.

Right. And just my second question in terms of, I guess, again, focusing on the volume-type deals that are done to offset the pricing impact, when you think of the big 3 manufacturers, you represent such a large portion of the whole industry. With the small guys now, you're relatively small in market share terms. If all the big 3 are doing volume discount-type deals, and that's why each of the 3 have tried to offset the price impact of competitive bidding. Obviously, they're getting market share winners or losers out of that? And if you're a DME that's been offered a similar deal from all 3 brands, who do you obviously favor then in terms of giving that volume to then, obviously, get that discount from that manufacturer? Can you talk about like the CMS order effect on this? And whether compliance provider payout point of view of private or government is having influence? So do you think you will win out on that market share front because of compliance bartering the [indiscernible]? And as the market shifts in that direction, is that a fair statement or -- because obviously there's going to have to be winners and losers are out of this in terms of market share in order to kind of stay neutral on the pricing effect?

Well, thanks, Matthew. That was a very complex question with a multi-varied areas that actually we could take the whole -- rest of the Q&A session to go through each of them. I'll choose to focus, which are great questions in some ways. I'll focus on your question about the big 3 and what -- really the big 2, what will happen with the market going forward. I think as we partner with our HME providers in the U.S. and with our homecare providers in Europe and the different models we have in different geographies, our strong partnerships in Japan, we're getting a much greater understanding of the value of our products, the value of our health informatics products to provide data to a payer or data to a provider or data to a physician. And now, with SleepSeeker and U-Sleep data to a patient. And the value associated with all of that. So the discussion of will our market share grow or decline is less to do with the latest changes in U.S. Medicare reimbursement. It's more to do with the long-term value proposition of what we bring to the market, an understanding of that. You saw the data that we showed that our brand value from patients is very high in the Mask area. We've known that for many years. But what we're getting to understand more is our brand value with our partners, the providers, the physicians and the customers, and how we can save them money and save them time. So we think rational economic decisions will be made along the value chain. And we think ResMed is well-positioned to grow its market share based upon those rational economic decisions, based on real value that we bring to our customers. And a lot of that is tied to the ResMed brand. The underlying foundation for that is the core economic and strategic growth value we bring to the market. The SERVE-HF study is just an example of how we're driving long-term growth. But there are multi-varied detailed areas that we provide value that we don't have time to cover in this call, but we can in upcoming calls.

I guess, will make this as just a confirmation that to offset competitive bidding with the revenue line, you really have to take market share step by step?

So, yes. Look, as price goes down, the volume goes up. Cost structures go down. Cost was taken out of the system to keep gross margin where it's at. We have to -- if this 4% to 6% price declines on an annualized basis, we have to take 4% to 6% out of the total cost structure. But there are probably many different ways to drive long-term economic value apart from just looking at the GM line. I don't know if others want to have a comment?

I will just add, I do think the question's a bit complicated. And I now understand what you're trying to get, Matthew. So excuse me for being a little slow on the uptake. But it depends on how fast the market's growing, right? And globally, the market continues to have healthy growth. In the Americas, the market continues to have healthy growth. And so we can gain or lose market share and still have a healthy business depending on our underlying market growth. As it happens, the market is growing, and we're taking share. And we're taking share because our products are better. And our products aren't just better on some abstract feature and functionality sense, they're better because they're more comfortable, which means that patients are more compliant and in the U.S. reimbursement scheme, that means our DMEs get paid on a higher percentage of patients to get set up on our devices. And they get more replenishment revenue out of us -- they're better from a revenue point of view. And we're also taking share because our solutions take costs out and help our customers drive more efficiency. And that's how our system works. We invest in innovation to make it better for our patients and for our customers. So market's growing and we're taking share.

The next question comes from Alex Smith with Citigroup.

You mentioned your patient growth is improving. Does that mean market growth rates will then move beyond the 6% to 8%? And can you make some comments around market growth?

Thanks, Alex. Our market growth outlook is still in the 6% to 8% range on a revenue basis globally. And I would say in the Americas market, it's around 6% to 8% as well. In Europe, we're probably looking at the low end of that -- 6% or slightly lower. In Asia-Pacific, we're looking at north of the 8% into the double digits. So those market's growth numbers as best we can tell are there. We're starting to see some volume uptick in the U.S., as we mentioned in our remarks earlier, offset somewhat by some of the price declines that we are seeing in that geography. But over the globe, we're looking at a solid 6% to 8% market growth industry. As I go to JPMorgan and go to all these med tech conferences, is a pretty darn good growth rate for a med tech space. And to be positioned at #1 or #2 in that space in all of the 100 countries we're in we think is a very solid position to be in. But it's not material enough for any of those individual country changes yet to change that sort of 6% to 8% global growth number. But it's a complex calculation, Alex. It's not simple. We know in detail 40-something percent of it because it's our revenues. We don't know the other 50% as well and have to garner that the way you do. But our estimate is solid in that 6% to 8% range globally.

Okay. And Brett, can you -- what sort of currency assumptions are you seeing, and particularly for U.S. dollar in saying that it will add 70 basis points to gross margin?

Yes.

Were you wondering who are addressing?

Yes. No, I'll take that, Alex. Yes, so looking at that as you know, with the infield washing through, you've always got about a one-quarter lag on currency. So if that's -- that's sort of in play now. That's already happening in terms of that improvement there. Going forward, as it washes through, if you're looking to quarter 2 and 3 with current exchange rates and you'll certainly get incremental benefit north of that as we work into Q2. But essentially, Q1 gets locked in and then we should get some more benefit coming through in Q2 as inventory washes through this system. So if -- and currency is a really volatile environment, so you never know for sure. But at current rates, you would expect that we'll get 70 basis points in Q1, and then we should get a bit better in Q2.

The next question comes from Joanne Wuensch with BMO Capital Markets.

I want to switch gears a little bit here and get back to your clinical trials. What is the timing of when we will see the SERVE-HF data?

So, Joanne, the SERVE-HF trial has just completed enrollment this last quarter. So 1,325 patients enrolled, but it's a 2-year follow-up study. So each patient, including the last ones that were enrolled, have to remain on the therapy for 2 years. Just as a reminder for everybody, the 2 outcomes from that trial, that the trial is powered for, is mortality and morbidity. So saving lives and saving money through hospitalization reduction. So we need to keep those patients on for 2 years. So that pushes us to about this time, 2015, when the final patient has reached that 2-year mark. Then we have to assess the data. Of course, this is a completely blinded trial to ResMed and to the investigators. So it's a CIC that has to be unblinded, and then analyzed and go through all the bio analytics and so on. And then it has to go seek publication in a large cardiovascular journal and get put on the conferences. So in short, we're looking late calendar '15, early calendar '16 for those data to be released to the public and then we'll be discussing on those types of conference calls. So it's a real long-term investment for the industry. And we're really proud that it's the largest study to ever complete enrollment and when it finishes, we think it will be the largest and most important in pivotal study in heart failure treatment with adaptive servo-ventilation. And we are very excited about its prospects.

Okay. My second question has to do with the U.S. Mask market. It was a little bit weak in the third fiscal quarter and a little bit weaker in the fourth fiscal quarter, and I was just curious, do you have any color on what may be going on there?

Thanks, Joanne. Yes, clearly, we have seen some pressure, competitive pressure on the patient interface front. We love a health industry. We love various industry players coming to compete in the different categories. The Mirage FX had, had many, many, quarters of incredible success through this launch a couple of years ago in the nasal category space. Recently, Philips Respironics introduced their Wisp mask into that category. And F&P introduced their Eson mask into that category. So we have seen some pressure in the nasal mask category. Mirage FX remains the best, we believe. But the others have some value propositions that are being trialed and selected by some customers. As we said in the pre-remarks, we have a very solid pipeline in patient interfaces. And over the coming fiscal year '14, you will see us release products not only into that nasal category, but beyond that without going into any further granularity as to those releases. And we will not say by quarter, by category because we're the only public player in this space. We're very excited about the patient interface pipeline and as it comes to market, we think our customers will, as they have historically, see its value.

The next question comes from David Clair with Piper Jaffray.

I have another mask question as well. So we saw a pretty nice reacceleration, all U.S. I was hoping you could maybe tell us what you think is driving the rebound there?

Rob, do you want to address that perhaps...

Yes. And look, I think it's just cost supported markets where teams have been performing well and executing well, getting the deals, servicing the customers. We think the competitive products have been there for a while and they have had some impact, but it's not permanent impact. So some response from that. Overall, just good performance all around really. We're having a good quarter in many, many countries around the world.

Regarding some pretty strong relationships, David, with our European customers and the value that we bring on the masks are very different. They don't get paid on a per unit basis as reimbursement is in the U.S. So the value is more long term. So some of those assessments are more long term. But we've been able to provide that data to them and we think that communication and that partnership with our major customers in Europe and throughout Asia-Pac has allowed us to drive that Europe and Asia-Pacific mask growth. And we think it's reasonably sustainable into the future because the value you get is over a long period of time and it can be sustainable.

Okay. And a quick one for Brett. You alluded to pricing impact in gross margin in the quarter? Can you quantify how much of an offset that was to gross margin?

Well, I mean it's working through on the really around that 4% to 6% range on ASPs and sort of working through that impact, David. So if you look at the kind of the drivers on the gross margin was, obviously, we're still getting favorable product mix coming through. And we're also working pretty hard on the cost basis, Mick mentioned around manufacturing around our supply chain and procurement and so on. So those have been the drivers really of the margin expansion for a while now. And traditionally, we've always had some offsets with ASP declines. It is typically 3% to 5% and around the 4% to 6%. And that's the major offset, but you can still see that we're still getting expansion in our gross margins. So those positive drivers are currently outweighing ASP declines. But it does have some negative impact.

The next question comes from Ian Abbott with Goldman Sachs. Ian Abbott - Goldman Sachs & Partners Australia Pty Ltd, Research Division: Yes. Could I ask a follow-up question on gross margin? Just asking if you look at the drivers, Brett, in fiscal '13 looking forward to '14, you're looking at cost out mix shift to Singapore and also the bilevels. Which of those factors do you think were strongest in '13? And which will have the same sort of character in '14?

I think, I mean they're both meaningful contributors. And, no, if you look at it over the years and on the trends, pretty consistent kind of contributors for both of those. We continue to -- it depends how fast and how the mix goes through FY '14. It is notoriously difficult to predict on some of these mix changes and timing of when we get, for example, improvements coming through on manufacturing. It is driven, for example, by new product introduction and so on where we can get some, if you like, kind of step change-type improvements. And then we work on a bunch of incremental improvements along the way. So that can -- coming at various times. But I think looking forward, I still think we'll get a benefit from both of those. And we will, if the currencies sort of stay where they are, we'll get some tailwind from the currency as well, which is back -- the Aussie is back to where it was selling like 3 years ago selling against the U.S. dollar. So we've been up against headwinds on the currency for quite a few years and that looks like we may get some benefit from the currency going forward. And that's also into the gross margin mix. And so I think now you can have -- you have 3 positive factors playing out on that margin and you'll just have the negative on the ASP. But so far, we've built -- with currency, and we'll deal with other things that are thrown at us and continue to work hard on cost out initiatives. Ian Abbott - Goldman Sachs & Partners Australia Pty Ltd, Research Division: Great. Can I ask a last, perhaps, Mick or Jim, on the pricing? The ResMed has always been historically a premium price player. And after on a sort of like-for-like basis after budding discounts, where do you see your premiums, your 2P is currently?

Ian, we're not going to go into the detail of pricing information. But generically and globally, we are the premium player. The premium may be in the single digits on some flow generator lines. It might be in the double digits in terms of percentages on some of our high-differentiated items at the high end of, say, the Mask range or the Respiratory Care range where we have the value given to the customer. All those premiums on pricing are linked to the premium that the customer attributes to the value of that product. And so it's by SKU, it's by geography, it's by customer and it's by our current share with the customers and our future growth opportunities with the customers. So it's a very complex equation. But in short, we haven't changed that philosophy. We're the value player. We're the premium player. And we maintained ourselves as the value player in this Q4 and throughout fiscal year '13. And we will do that going forward in FY '14. We think the discipline of pricing to your value is incredibly important for the long-term sustainable growth of this industry. And the investments that we are making in a $20 million, $30-plus million trials in SERVE-HF to change the potential trajectory of millions of heart failure patients only comes by linking value to pricing, to long-term investments for the industry. So the short answer is we are a value player. And we will maintain ourselves as a value player going forward.

The next question comes from Anthony Petrone with Jefferies.

Just on -- a couple for Brett and one for Mick. The $5.8 million in other expense, was that all AUD hedge losses and heavy renewed year hedges and more favorable rates considering the currency move? And then just a follow-up for Mick.

Yes, Anthony. That is essentially FX hedging losses that have come through. We do mark-to-market. So basically, that brings forward any losses into that quarter. So as you think about if currencies then stay pretty much exactly the same, then you get fairly negligible FX gains and losses going forward. Of course, that'll move around. But essentially, that's what would happen. So that's basically what that was. And your other question, Anthony?

Sure. If we elaborate a little bit, Mick, on the volume sort of range, and instead you're engaging with DME customers, can you sort of go into actually how those are structured? Are you requiring them to purchase up from volumes, excess inventories upfront? Or are those commitments over an extended period of time? And then maybe just a quick follow-up would be are there any other promotions that you will be engaging in as you move into the round 2?

So the short answer is, Anthony, there's nothing new in this space. The long answer is that we don't go into detailed descriptions of any of our contracts with customers in any geography. Some of them can be a month. And some of them can be 2 years. And some of them have volume commitments. Some of them have strategic market development commitments that we make to each other. The variance across our contracts with the thousands of customers we do is so broad. But there was nothing new in Q4. And we don't plan to do anything new in fiscal '14 in terms of volume and pricing arrangements. What we intend to do is invest for the long-term sustainable growth of this industry. And with 99%-plus of the opportunity left in countries like China and India, that Rob and I were at just a couple of weeks ago, with certainly 95% of the opportunity in front of us in Asia, with 90-plus percent of the opportunity in Europe and 85%-plus of the opportunity left in the Americas, we think that we truly are in mile 1 of the marathon and we're not getting tired.

We are now at the 1-hour mark. So I will turn the call back over to Mick Farrell for his final remarks.

Thank you very much. And what I'd like to say is as always, thanks to the many investors, analysts and customers, and even the competitors who listen to this conference call. But most importantly, I'd like to take this opportunity to say a special thank you to the nearly 4,000 employees of ResMed from Asia-Pacific, Europe and Americas for their hard work, dedication and continued excellence. Together, we are changing lives in respiratory medicine one breath at a time. Thank you very much.

Thank you, ladies and gentlemen. This concludes the fourth quarter 2013 ResMed Inc. Earnings Conference Call. Thank you for participating. You may now disconnect.