Agnes Lee - Senior Director-Investor Relations Michael J. Farrell - Chief Executive Officer & Director Brett A. Sandercock - Chief Financial Officer James Hollingshead - President-Americas Robert A. Douglas - President & Chief Operating Officer.

Ian Abbott - Goldman Sachs (Australia) Pty Ltd. Matt C. Taylor - Barclays Capital, Inc. Sean Laaman - Morgan Stanley (Australia) Ltd. William Dunlop - Bank of America Merrill Lynch Victor Windeyer - Citigroup Global Markets Australia Pty Ltd. Margaret M. Kaczor - William Blair & Co. LLC Steve D. Wheen - JPMorgan Securities (Australia) Ltd.

Andrew Goodsall - UBS Securities Australia Ltd. David Stanton - CLSA Australia Pty Ltd..

Welcome to the Q1 Fiscal Year 2016 ResMed, Inc. Earnings Conference Call. My name is Melissa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Thank you, Melissa, and thank you, everyone, for attending ResMed's live webcast. Joining me on the call today are Mick Farrell, our CEO, and Brett Sandercock, our CFO. Other members of the management team will also be available during the Q&A portion of the call.

If you have not had a chance to review the earnings release, it can be found on our website at investors.resmed.com.

I want to remind our listeners that our discussion today may include forward-looking statements, including but not limited to statements about future expectations, plans and prospects for the company, corporate strategy, as well as performance.

We believe that these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. Important factors which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings made by ResMed with the SEC. I will now hand the call over to Mick Farrell..

Thanks, Agnes. And thank you to all of our shareholders who are joining us on today's investor call as we provide an overview of our fiscal Q1 2016 quarterly results. We have started the year with very strong sales growth in both our sleep apnea business and our respiratory care business.

In my remarks, I'll discuss our top and bottom line results, some regional highlights from our global business, as well as an overview of the progress that we have made against our ResMed 2020 strategy. After that, as usual, I will hand over to Brett to walk you through the financial results in greater detail.

Once again, this quarter, our global team achieved double-digit top line revenue growth on a constant currency of 15%. We saw strength in the Americas region with robust double-digit growth, and we achieved solid steady growth our combined EMEA and APAC group.

These global results were fueled by the success of our new product and solutions launches in both our sleep apnea and our respiratory care businesses. Looking at the bottom line, our diluted EPS was $0.58 on a non-GAAP basis. EPS was $0.57 on a GAAP basis.

We have been balancing our investment growth opportunities whilst carefully managing our growth in R&D and SG&A. We gained operating leverage this quarter, as both R&D as well as SG&A grew at a lower rate than our top line revenue.

We are on track to further increase operating leverage throughout fiscal year 2016 and we are executing on our plans to improve gross margin, driving further efficiency improvements in both manufacturing and supply chain costs, as I outlined last quarter.

We have a lot of runway left for ongoing growth of our high margin product businesses, including the AirCurve 10 bilevel platform and our Astral life support ventilation platform.

As we look forward over the coming fiscal quarters and the fiscal year, we will further leverage our automated informatics solutions to drive ongoing mask and accessories resupply growth. Now for some regional highlights.

In the Americas region, we had a very strong sales performance in Q1, with our team driving north of 20% growth on a year-on-year basis. Flow generator growth was 39%, reflecting the ongoing success of our AirSense 10, AirCurve 10, and our Astral platforms, as well as our end-to-end Healthcare Informatics solutions.

Mask and accessories grew at 9% during the quarter in the Americas. Pricing continues to be stable in the mask categories. We continue to expect positive mask and accessories growth throughout fiscal year 2016. Moving on to our combined EMEA and APAC group, we grew at 5% on a constant currency basis in the quarter.

We saw strong sales growth from flow generators and our mask and accessory businesses in the EMEA and APAC group. Clearly, the SERVE-HF results and our contraindication for ASV in heart failure with reduced ejection fraction and predominant central sleep apnea patients was a headwind. ASV sales in Europe were more affected than we had predicted.

However, it is important to note that ASV sales in APAC and the U.S. were significantly less affected than in Europe. We have not seen any impact beyond our ASV sales for patients with heart failure and reduced ejection fraction in predominant central sleep apnea.

This is consistent with the conclusions from the New England Journal of Medicine publication and the commentary from key opinion leaders in The Lancet, in CHEST, and in the Blue journal, all stating that the data from the study should not be extrapolated beyond the treatment group. It just makes good sense.

APAC sales were strong in the quarter and we continue to see robust growth across all of our high growth markets this quarter, including China. We announced earlier this month that we have now completed the acquisition of Curative Medical.

This partnership of our ResMed China business and the Curative Medical team provides us with a leading market share position in China and a separate brand with innovative products that are developed and manufactured in China for China. This acquisition will allow us to expand both the sleep apnea and respiratory care markets in China and beyond.

Now I'd like to talk more about our progress against our ResMed 2020 Three Horizons Growth Strategy. Earlier this month, ResMed was a platinum sponsor for the annual meeting of AdvaMed, the Advanced Medical Technology Association, and the meeting was held right here in San Diego.

AdvaMed is the world's largest med tech association and its conference is the most important in the med tech industry globally. One of the main themes of AdvaMed 2015 was the increasing importance of digital health for medical devices and connected care for patients.

ResMed has been at the very forefront of healthcare informatics innovation for over a decade. We are leading and driving this trend for our industry.

Just over one year after the launch of the Air Solutions Platform and the AirSense 10 and the AirCurve 10, we have well over 1 million patients with cloud-connected medical devices sitting on their bedside tables.

As these devices provide daily updates to the cloud, it allows ResMed to provide actionable information for patients, physicians, providers and for payers.

We have built an industry-leading core competency in healthcare informatics allowing us to provide the best value with market-leading solutions that improve operational efficiency, improve patient adherence and improve long-term outcomes for patients. Our customers clearly understand the value proposition of ResMed's Air Solutions.

Most of the time, we cannot talk publicly about these results, but one of our customers has allowed us to report on their increased staff efficiency and accelerated business growth after adopting Air Solutions from ResMed.

Based on their own data, this customer is saving 80 labor hours per month, reducing the number of unreached patients by more than 85% and increasing the number of new patient setups by 55% on a year-over-year basis. These results are a big part of why so many customers are partnering with ResMed.

We have many other examples of customer success using our healthcare informatics solutions. U-Sleep is the ResMed-branded cloud-based application that monitors patient adherence and automatically identifies and triages which patients need the most help so that a homecare provider can proactively address issues and provide better care.

In a previous investor call, I talked about a study presented at the American Thoracic Society in which a U-Sleep customer saw patient adherence increase from 73% to 83% along with a 59% decrease in their labor costs.

To prove that this was not a one-time, one-customer event, let me provide an overview of a study just published in the Journal of Sleep and Sleep Disorders Research.

This study showed that by using adherence coaching from U-Sleep, the customer was able to increase compliance from 60% using standard adherence monitoring up to 87% using the automated compliance monitoring capabilities of our U-Sleep solution.

In addition to this 27% increase in the number of adherent patients on therapy, the customer staff was able to set up 83% more patients at the same labor cost. This is clearly a very significant operating efficiency improvement for our customer.

The acquisitions of Jaysec and CareTouch have added new capabilities to our end-to-end solution that we call ResMed ReSupply.

This capability provides automated resupply solutions for our customers so that they can efficiently manage mask and accessory resupply to patients through automated text, email or interactive voice response, with a multilingual call center backing up the solution live, if necessary.

We have seen great success with the Air Solutions platform and devices, and we will continue to build our healthcare informatics capabilities so that we can drive channel efficiencies, unlock cost savings, drive appropriate growth in masks and accessories provision to patients, and, ultimately, improve long-term patient outcomes.

In the second horizon of our ResMed 2020 growth strategy, we see opportunities to leverage the healthcare informatics strength from our sleep apnea business directly into our adjacent respiratory care businesses. We are already taking AirCurve 10 data to the cloud, and you will hear more from us on this front as we move forward. Watch this space.

We are expanding our presence in the U.S. respiratory care market and building on our strong presence in Europe for both our life support ventilation solutions, and our non-invasive ventilation solutions for chronic obstructive pulmonary disease and neuromuscular disease.

Another growth vector under our second horizon of growth is our ongoing investments in high growth market geographies. With the completion of the Curative Medical acquisition, we are now the market share leader in the sleep apnea and respiratory care market in China.

We are extremely well-positioned for sustained long-term growth, with two strategically aligned, yet operationally independent teams targeting different, yet fast-growing customer segments within the China market. We continue to invest in high growth markets like China, India, Brazil, and Eastern Europe.

In each geography, we provide and drive long-term strategies to improve patient outcomes and reduce overall system healthcare costs within each individual country, proving on that promise with hard data. Finally, let's review our third horizon of growth. Let me first spend a few moments talking about SERVE-HF.

As you all know, ResMed put patient safety first and foremost. It was the most important priority when we announced the preliminary study results from SERVE back in May, many months before the study was eventually published. As we had expected, the SERVE-HF study was published in The New England Journal of Medicine quite recently.

The study's primary investigators presented results at the European Society of Cardiology and at the European Respiratory Society conferences. The results of the study, the safety signal, and the contraindication remain unchanged from May.

It is worth noting that our ASV business in other market segments has been unaffected in these last five months since the SERVE-HF announcement. These other segments include treatment-emergent central sleep apnea, time-management-induced central sleep apnea, and post-traumatic stress disorder-related uses of ASV.

These all remain strong market segments in the U.S., and we are working on expanding these applications further through Europe and Asia Pacific.

Our third horizon of growth includes a number of cardio-respiratory treatment opportunities, including atrial fibrillation, heart failure with preserved ejection fraction, and chronic disease management opportunities in cardiology. These are very exciting longer-term opportunities that we will speak more about later.

Returning to our quarterly results, we remain active on the capital management front. In this quarter, we bought back 1.2 million shares in addition to funding our dividend. Through September 30, our stock repurchase program has returned to shareholders a total of $1.5 billion. It's your cash and we think you should get it back.

We continue to look for potential acquisitions where three key criteria are met; one, the business is aligned with our long-term strategy; two, we can leverage the asset to increase ResMed's shareholder value; and three, that there is a cultural fit between the acquisition target business and ResMed's team.

We hit all of these three criteria solidly with the Curative Medical acquisition, and we will continue to refresh our acquisition radar screen with further growth opportunities as we look forward.

At ResMed, we are the global leaders in sleep apnea and respiratory medicine, not just in market share but, more importantly, in products and informatics solutions innovation, as well as in service, channel, and market innovation.

We remain very excited as we build the road ahead for our industry, for our partners, and, most importantly, for many, many millions of patients around the world. With that, I will turn the call over to our Chief Financial Officer, Brett, for a more detailed review of our Q1 financials.

Brett?.

Great. Thanks, Mick. Revenue for the September quarter was $411.6 million, an increase of 8% over the prior year quarter, where in constant currency terms, revenue increased by 15%. Movements in exchange rates, predominantly a weaker euro relative to the U.S. dollar, negatively impacted revenue by approximately $26.8 million in the first quarter.

At a geographic level, overall sales in the Americas were $254.1 million, an increase of 23% over the prior-year quarter. Sales in combined EMEA and APAC group totaled $157.5 million, a decrease of 9% over the prior-year quarter. However, in constant currency terms, sales in combined EMEA and APAC group increased by 5% over the prior-year quarter.

Breaking out revenue between product segments. Americas' flow generator sales were $132.1 million, an increase of 39% over the prior-year quarter. Masks and other sales were $122 million, an increase of 9% over the prior-year quarter.

For revenue in the combined EMEA and APAC group, flow generator sales were $107.5 million, a decrease of 10% over the prior-year quarter or, in constant currency terms, an increase of 5%. Masks and other sales were $50 million, a decrease of 8% over the prior-year quarter or, in constant currency terms, an increase of 7%.

Globally, in constant currency terms, flow generator sales increased by 20% while masks and other increased by 9% over the prior-year quarter. Gross margin for the September quarter was 58%.

On a year-over-year basis, our gross margin contracted by 440 basis points, reflecting an unfavorable product mix, declines in average selling prices, an unfavorable geographic mix, and adverse currency movements. Looking forward, in fiscal year 2016, we still expect gross margin to be in the range of 57% to 60%, assuming current exchange rates.

If gross margin drivers like currency fluctuation and geographic and product mix move beyond their expectations, they could swing this range further.

As we discussed last quarter, we expect to progressively see the benefits from our cost out programs, including procurement, production, and logistics improvements, reflected in our fiscal year 2016 gross margin.

In particular, in the second quarter of fiscal year 2016, we expect to see a benefit from a normalized sea/air freight mix and from the recent depreciation of the Australian dollar. Moving on to operating expenses. Our SG&A expenses for the quarter were $111.1 million, an increase of 1% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 11%, primarily due to higher employee compensation and the impact of recent acquisitions. SG&A expenses as a percentage of revenue improved to 27% compared to the year-ago figure of 29.1%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 26% to 27% for fiscal year 2016. R&D expenses for the quarter were $27.2 million, a decrease of 9% over the prior-year quarter, but on a constant currency basis, an increase of 12%.

This increase largely reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue were 6.6% compared to the year-ago figure of 7.9%. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% in fiscal year 2016.

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

Amortization of acquired intangibles was $2.3 million for the quarter, while stock-based compensation expense for the quarter was $12.4 million. Our effective tax rate for the quarter was 19.1%, compared to 18.3% in the prior-year quarter.

You may recall in the prior-year tax rate, this was favorably impacted by a net tax benefit of $3.2 million, arising from the conclusion of a long-running German tax audit. Looking forward, we estimate our effective tax rate for the full fiscal year 2016 will be in the range of 19% to 20%.

Operating profit for the quarter was $98 million, an increase of 4% over the prior-year quarter. However, net income for the quarter declined by 3% to $80.4 million as a result of foreign currency hedging losses and lower interest income. Diluted earnings per share for the quarter were $0.57, a decrease of 2% over the prior-year quarter.

Overall, foreign exchange movements negatively impacted first quarter earnings by $0.01 per share, reflecting the impact from the weaker euro, largely offset by the weaker Australian dollar. On a constant currency basis, diluted earnings per share were consistent with the prior-year quarter.

Cash flow from operations was $122.1 million for the quarter, reflecting strong underlying earnings and an improvement in net working capital balances. Capital expenditure for the quarter was $16.4 million, while depreciation/amortization for the September quarter totaled $18.4 million. We have continued to be active on the capital management front.

Our board of directors today declared a quarterly dividend of $0.30 per share. Additionally, during the quarter, we repurchased 1.2 million shares for the consideration of $62 million. At the end of September, we had approximately 14.3 million shares remaining under our authorized share repurchase program.

In October, we announced the closing of the Curative acquisition. We have not disclosed the financial terms of the transaction. The acquisition has been funded by utilizing our existing cash balances, and the entity will be included in our consolidated results in the second quarter of fiscal year 2016.

For the rolling 12 months ended September 30, we have returned 92% of free cash flow to shareholders for our dividends and repurchases. And over the last five years, we have returned 99% of free cash flow to our shareholders via dividends and repurchases. Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $321 million. And at September 30, total assets stood at $2.3 billion and net equity was $1.5 billion. And with that, I will hand the call back to Agnes..

Thanks, Brett. We will now turn to Q&A, and we ask everyone to limit themselves to one question and one follow-up question only. If you have additional questions after that, please get back into the queue. Melissa, we are now ready for the Q&A portion of the call..

Thank you. We will now begin the question-and-answer session. And the first question comes from the line of Ian Abbott with Goldman Sachs. Your line is open..

Yes. Good morning. Thank you for taking my questions. I was wondering if you could perhaps talk through the guidance a little bit. There's been some changes. So I think at the full year result you talked about an SG&A range of 27% to 28%. That's come down by 100 basis points. And the tax rate guidance has also come down by 100 basis points as well.

I'm just wondering what's changed in the last three months to see those things come down..

Brett, do you want to have a go at that?.

Yeah, I'll take that, Mick. Thanks. Yeah, Ian, that's right, we have guided that down a little in SG&A. As Mick mentioned, we've been focused on the operating leverage throughout the group and we do think we can achieve that through fiscal year 2016.

So with some of the plans we have, we do believe that we can bring that down a little and provide some operating leverage there. So on the SG&A front, we feel confident we should bring that guidance down where we see some improvements we're planning throughout the year. On the effective tax rate, it moves around a bit with geographic mix.

If you look at last year's sort of full-year underlying tax rate, it was sort of around that 19.5% level. So it's kind of in that range. So we just brought that down a tad just based on where we see the forecast going out..

Okay. And then in a similar vein, you mentioned the gross margin. You kept that guidance the same, but you did sort of flag that various movements could see you go out of the range. It is a very wide range and this result was pretty much in the middle of the range. I'm just wondering what sort of things could drive it materially outside that range..

We did widen that a little bit, Ian, really because there's, if you look at it over the last year or so, quite a bit of volatility on exchange rates. For example, you're seeing the Aussie come down something like 7%, 8%, which is quite significant.

Now I'm not suggesting that that's going to happen again this year, but, as you know, anything is possible. And we're also seeing some pretty significant movements or some big outperformance on flow generators, particularly in the U.S. So I suppose as a caveat, there's always quite a bit of volatility around the gross margin.

It's probably the hardest number to predict. So we widened that out a little bit. I think as we get through the course of the fiscal year, we can probably get some more confidence on sort of the band or how wide that is. But at this stage early in the fiscal, we've left it as is.

But I have said there that certainly on the things such as freight, where we are normalizing that now, certainly doing a lot less air freight as we have the inventories at levels that we think are appropriate. That's certainly going to help us into Q2. And, as you know, the Aussie dollar has depreciated more recently.

There's about a quarter's lag on that, so we don't really see that benefit until Q2. But that benefit will be meaningful as well going into Q2. I guess some of the headwinds we're facing are kind of abating a little bit, and so we should be able to see some improvements throughout fiscal year 2016..

Great. Thank you very much..

Your next question comes from Matt Taylor with Barclays. Your line is open..

Hi. Thanks for taking the question. I was wondering if you could give us any qualitative commentary on what helped the mask growth this quarter. I mean, you had, I guess, a little bit of easier comp, but certainly saw some acceleration there.

If you could talk about any products or trends or pull-through, things that might help us to understand how the mask growth could progress..

Thanks for the question, Matt. Yeah, that allows us to talk about the mask business in total. I mean, what we've seen over the last three quarters is clearly some good growth turnaround and success in masks. It's not driven by brand new products; it's more driven by us focusing on partnering with our customers around understanding resupply.

And as I said in the prepared remarks, we've invested a lot these last 12 months in getting well over 1 million bedside tables with 100% cloud-connected devices that now enable us to have information on patients.

And we're able to take those data to the cloud and contact patients and encourage them and drive patient adherence and work with our HME providers in the U.S. and with our other partners in other countries around the world to give patients appropriate access to masks and accessories as they need them over the time of their therapy.

And I think you're just seeing the very start of the roadmap of us working on those informatics systems and leveraging them to drive mask and accessories resupply, but I think that's been a factor in the equation. As you said, the comp was not incredibly difficult.

And so having 9% growth in the Americas over the comp is somewhat a result of that comp. But I think it's more due to the fact that we're focused on resupply, we're partnering with our customers on it and we're really establishing tools and capabilities that are automated, scalable and replicable.

And so that gives us a long runway throughout the fiscal year to be able to drive resupply in masks and accessories..

Thanks. And just to follow up on that, could you give us any metrics that you're tracking or some kind of a guidepost on resupply to help us understand the improvements you've made and maybe where you could go? I don't know if it's masks per year or how you think about it? And then you mentioned price was stable in masks.

Any changes outside the U.S.? I think your comment was on the Americas..

Yeah, I'll hand the first part of the question to Jim Hollingshead, who's probably closer to the business and any metrics we're looking at from the resupply, but we may or may not want to release that..

I don't think we'd want to talk about metrics that we put on the resupply business. I think what I'd add to Mick's comments about the Americas market, in particular on masks, is that we've been talking for several months about the pricing strategy we made a while ago.

And those pricing changes have now annualized, so one of the things that allowed us to show a better revenue growth number this quarter was the pricing has really stabilized for us. We're the mask market leader both in the Americas and globally. In particular, our Air Fit range is very well positioned.

And so we continue to enjoy good volume growth just in the mask business with patients getting – new patients getting masks. And then, with the efforts we made in automating resupply and driving resupply, we've enjoyed the growth on the back end of that, but I don't think we want to get into sort of ratios and metrics on that at this point..

And maybe the second part of the question, which focused beyond the U.S., the global aspects, Rob Douglas, our COO, any thoughts on that?.

Yeah, Matt. Globally, the masks are performing well. The AirFit range is a very strong mask range, and we are very competitive with those masks. Our teams work hard with our customers and they've got strong relationships around the world. And we're confident those masks are going to keep performing strongly..

Great. Thank you very much..

Your next question comes from Sean Laaman with Morgan Stanley. Your line is open..

Good morning, and thanks for taking my question. Just wondering if we could get a bit of a guide on device growth ex-ASV, if possible..

Sean, I don't think we're going to release a new metric on this earnings call. I mean, the bottom line is, as we said in May, less than 7% of our global business is in the ASV side of the business, and it's obviously reduced from that over these last sort of 150 days.

The growth that we saw – pretty phenomenal growth of 39% in the Americas, flow generators, and on a constant currency basis, 5% growth of flow generators in EMEA and APAC combined – was driven really by the new launch of the AirSense 10 and the AirCurve 10 and the Astral. And so those have been driving the growth.

Europe clearly had a bit of a headwind due to the contraindication for heart failure patients with a reduced ejection fraction and predominant central sleep apnea, where we issued that contraindication.

But as I also said in the prepared remarks, we really have not seen any impact on ASV beyond that in the other market segments, if you like, that we sell the product in. So it's been pretty steady in that.

But, Sean, yeah, I don't want to start breaking out ASV and non-ASV mask growth for competitive reasons, and also just for the fact of – we've got quite a lot of runway left on those product launches, and I want to just look at the macro numbers as they come out..

Sure, Mick. Thanks.

Can I just squeeze one more in? Just to clarify, with respect to mask pricing in the U.S., is that fully lapped yet, or is it a next quarter event when it's fully lapped, the reduction in mask pricing?.

Yeah. So, Sean, yeah, you're referring to, I think, the January through June 2014 price changes, which have now lapped because we passed – we lapped the June 2015 timeframe. So we are now fully lapped on those ASP reductions and we're back to sort of steady, as we said, pretty steady mask pricing.

And we're seeing often our competitors out there competing on value of what the masks can achieve in terms of patient fit, quiet, comfort, first time fit and patient acceptance..

Great, Mick. Thanks. That's all I had. Appreciate your time..

Okay. Thanks, Sean..

Your next question comes from Suraj Kalia with Northland Securities. Your line is open. Suraj, your line is open. Your next question comes from Will Dunlop with Merrill Lynch. Your line is open..

Hi. Good afternoon. Thanks for taking my question. Just wondering if you can please talk to the different market growth you're seeing in the U.S. between flow gens and masks. Do you think the market for both categories is growing at a slightly decent rate? And if so, what are some of the trends that are driving that/ Thank you..

Well, I'll start at a high level and then hand over to Jim maybe for some detail. Globally, we see the sleep apnea market in general growing in the mid-single digits. As you saw from these numbers, we don't accept market growth. We drive ResMed growth and we want to meet or beat those market growth numbers.

And so we were able to beat across our businesses, able to beat both mid-single-digit numbers in flow generators and in masks.

The commentary I'd make before handing to Jim is that the high flow generator numbers we saw particularly in the Americas were driven by new product launches, and a lot of that was share gain based upon the value prop of the Informatics systems, the air solutions that I talked about in the prepared remarks.

So, less to do with the differential between flow gens and masks, they are more to do with the value prop of air solutions.

But, Jim, any more color from the rest of the market, the Americas market?.

Yeah, I think that's spot on. I think the difference you see in the numbers is we've, on a longstanding basis, been the mask market leader. But with the AirSense 10 and AirCurve 10, we've taken significant market share over the last several months since the launch of both of those product lines.

And that's due both to the fact that those product platforms, just as products, as flow generators, are outstanding products.

But really it's about, as Mick has just said and said in his opening comments, it's about the all-in solutions offer, the Air Solutions platform is driving significant revenue growth in business efficiencies for our customers, and they're recognizing that.

And as they continue to recognize that and adopt the overall Air Solutions platform, they're of necessity buying more of our flow generators to enjoy those benefits. So really there's not a separate growth number behind those two product categories. The underlying market growth is the same, we're just taking more share in flow gen..

Okay. Thanks. And are you seeing any change in the way private insurers are funding or reimbursing CPAP in terms of moving from a fee-for-product model to perhaps a capitation or a per-patient model? Thanks..

Yeah. Look, the U.S. market particularly is evolving from a fee-for-service market to really a value-driven or a fee-for-value driven market as a whole. And you're seeing more models like the Kaiser Permanente model, the Intermountain Healthcare model, the Geisinger model start to come into play.

And the government is trying to replicate those really solid private company payer provider models with its accountable-care organization or ACO models and its IDN models. And we are very good partners with Kaiser, with Intermountain Health, and with Geisinger.

But also with the governments of the United Kingdom, the governments of Sweden, the governments of Norway, the governments of Finland, where a payer provider model has been in place for many decades. Since World War II, almost all of Western Europe adopted socialized medicine systems, public health care.

And we've been working for the last 25 years with systems of fee-for-value or providing value models. And so we're very used to that type of environment. So the U.S. is undergoing an evolution.

Are we a part of that evolution? And I think the informatics capability that we have, the ability to take data to the cloud and share it with patients to drive adherence is amazing, to take costs out of the system for the providers is very valuable.

But the data to do population health management for a payer or a payer-provider is an opportunity through our data exchanges that we are really just starting to extrapolate. So I think your question is probably a little bit ahead of the curve as to where the value is, but we are working with systems in this new payer-provider, fee-for-value model.

And we're actually really excited about that transition because our market shares are incredibly strong across Western Europe and we think we can do that in all the payer-provider models that are out there..

Great. Thank you..

Thanks..

Your next question comes from Victor Windeyer with Citi. Your line is open..

Hi, guys. Thanks. Well, I just wanted to ask a few things related to the ASV product. So you drew out that the pullback in Europe has been a little bit larger, a little harder than you had expected, and that Asia and Americas were in line with your expectations.

I just wonder with Asia given the high use of ASV in the high (39:12) population, first, you had with the positive reimbursement in that location.

Do you expect further pullback in Japan as awareness of SERVE-HF results close out through there? And then is the Curative Medical acquisition and revenue and associated gross profit enough to offset that should that occur? And then in terms of the preserved ejection fraction population that you mentioned, what's happening with the CAT-HF study given the mixed population of that enrolled patient population there?.

Thanks, Victor. Well, that was a great way to get three questions in one, so I'll try to address all of that, Vic. Yeah. The first part of your question was about the ASV impact being more in Europe and less in Americas and Asia.

And I think part of the genesis of your question or the core of the question, kernel of the question was, is it just that the communication is taking time to get from Europe to Asia or Europe to the Americas, and the answer to that is an emphatic no.

We have, in all the 100 countries we do business in, been incredibly proactive in working with the physician groups, directly writing letters to physician groups and to physicians, working with our providers to contact all physicians and let everybody know about the field safety notice, and that was in the month of May, so north of five months ago now.

And so that information has been available not only at all the international societies, but in national societies, in all the countries we do business in, and particularly the major ones. So, really, it's not a result of – the fact that there's been less impact in Asia and Americas is not a result that the communication hasn't gone out there.

It's a result of the fact that there was, frankly, less heart failure referrals into our ASV business in those countries. Particularly if you look at the U.S., it was primarily at our business year in the U.S.

that was driven by complex sleep apnea or treatment-emergent central sleep apnea driven by opioid-induced central sleep apnea and driven by PTSD, where ASV was used in those applications. And so, there was just less of the business that was coming from cardiology referrals, and so that just wasn't impacted.

Within Japan – you mentioned Japan specifically – the use of ASV in Japan is focused on an acute basis in the hospital.

And these data were based on longitudinal data in the home with no data at all about acute effect, and there have been some studies with mutual outcomes on safety but some positive outcomes on some heart failure indicator results, such as ejection fraction and others.

And so, the use in Japan has sort of continued on an acute basis because it's a different application. And I don't think that will be affected by SERVE-HF and their ongoing work with Japanese researchers in the field to keep proving their safety but also the efficacy of the product in that area. The next part of your question was Curative.

Is Curative going to materially offset some of this ASV decline that we're seeing in different parts of the world. I'll hand to Rob. Rob is leading the charge on the Curative integration..

Sure. So, Vic, the Curative acquisition was part of our Three Horizons Strategy, specifically in the second horizon. Talking about positioning ourselves to grow in these markets that look like they're going to be very high growth markets, we only completed the acquisition at the beginning of October, so we're about three weeks into it at the moment.

I could say it's going very well at the moment. We're just at the CMEF, China Medical Equipment, today. It's a huge medical equipment fair in China.

And we had – showing off our strategy as strategically aligned but operationally independent, we had ResMed and Curative side by side in booths but strongly showing their respective brands, and we're seeing reaction in that market to the two brands that's appropriate for what we look like.

So at this stage, we're very confident that that program is going to go well..

And the third part of your question, Vic, was to do with HFpEF, heart failure with preserved ejection fraction and our CAT-HF study. The CAT-HF study is really a pilot study now.

We've closed off enrollment and we're going to follow through on all the patients and collect the data from that and likely publish those data as a pilot trial for heart failure with preserved ejection fraction work that we may do in the future.

I think between atrial fibrillation, to some extent coronary artery disease in a number of markets, and heart failure with preserved ejection fraction may remain exciting, cardio-respiratory conditions that we are looking at. Given what happened in there, we're unlikely to do a five-year $50 million study in each of these three areas.

What we're likely to do is partner with payer providers like those I mentioned earlier or governments or small payer-provider groups to run pilot trials to show improved outcomes and improved reduction in hospitalizations on a commercialized basis.

So you run pilots that you get commercially paid for that can produce clinical data that may or may not get published but allows you to expand the model. And that's sort of where we're thinking for those three areas. So that includes HFpEF, AF and CAD..

Okay. Thanks very much for that.

I just as my follow-up, I'll just ask, is there any evidence that the result from an acute hospitalized heart failure population will be different from the population that's been studied in SERVE?.

Yeah, there is, Vic, some indication of that. There was a study published called SAVIOR that was run out of Japan that showed a neutral safety signal but some positive data on the clinical aspects, such as ejection fraction, fluid in the lungs and length of stay in hospital. And so there's some clinical publications in that area on acute HF.

You'll likely see more coming out from the Japanese researchers on that front over time..

Okay. Terrific. Thanks very much. Just on masks, you talked of steady state. We're now at steady state in the U.S.

Does that mean we can think of high-single digit mask growth as we look forward?.

Well, Vic, you're jumping to five questions here now, but I'll answer it and then we'll move on. The masks growth that we saw in the U.S. of 9% this quarter was clearly very solid. Look, the market is growing in the sort of mid-single digits range. We look to meet or beat that.

And as I said in the prepared remarks, we're planning for positive mask and accessories growth throughout the year and we're excited and looking forward to that. Thanks a lot for your questions, Vic..

Okay. Thank you. Bye..

As a reminder, please limit your question to one and one follow-up. Your next question comes from Margaret Kaczor with William Blair. Your line is open..

Good afternoon, guys. So first maybe, Mick, if you can talk about what gives you guys confidence that you can really grow generators now in the face of a potential competitive launch from Respironics.

If you guys have seen anything in the field and maybe some of those guys coming back to Air Solutions that have trialed that or if (47:04) is active in that HCIT-based device yet..

Thanks, Margaret. Yeah, clearly, we have seen launch from one of our competitors. The other one you mentioned hasn't launched an HCIT product yet or a cloud-connected sleep apnea product yet and we don't expect in the short term.

I'm going to start out by saying it's a huge compliment I think to our innovation and our leadership in the field that our competitors are talking about and starting to follow us into cloud-connected sleep apnea devices.

We think it's (47:44-48:07) right way to go, we think that the value we extracted, like I talked about, we can improve outcomes and lower costs for the channel and take out waste and inefficiency and get patients more on therapy and follow up with them more to provide appropriate mask and accessories.

So I just think as an industry, it's a really good thing that we're all moving to compete on value and drive healthcare informatics-driven sleep apnea solutions.

Look, clearly maintaining a 39% Americas growth in flow generators in a market where, as I said, it's growing at mid-single digits, it's unrealistic to stay at those types of levels and I don't think you or any of the other sell-side analysts, Margaret, have numbers at that exact 39% sort of rate.

But clearly our goal is to not only lock in the share that we already got, but to continue to meet or beat market growth rates, which means by taking share. So that really comes down to is our value proposition better than the competition.

And from what we've seen of the first competitor to launch their cloud-connected devices is that, frankly, they're not 100% cloud connected. It's got three SKUs of widgets that you need to plug in with three different connectivity modules, which is SKUs for the HMEs to manage.

It's not 100% cloud-connected out of the gate in that the DME or the HME or the patient has to take some action to provide the connectivity to the cloud. So we think while it's following us in the strategic direction, some of the tactical implementations are not as good as ours.

And, really importantly, even when you are connected, it comes down to then competition of whose cloud is better. And I think our healthcare informatics capability on Air Solutions is clearly the leader now.

And we intend to maintain that leadership by regular updates, regular value that we provide to both patients, to providers, to physicians and to payers. So we're really excited about the new basis of competition of the industry.

It's changed from being just smaller, quieter, more comfortable to smaller, quieter, more comfortable and more connected and then better connected. So we look forward to that, Margaret..

Great. And then for my follow-up, Brett, you talked about maybe seeing more of a shift to a normalization for air/sea freight next quarter. So how far along were you guys this past quarter? Did you see any benefit from those cost-outs? Thanks..

Yeah, Margaret, the programs are in place in a number of initiatives that the team is working on for sure and have got back to that in earnest. We're sort of over that hump of making sure we matched our supply with demand, so we're through all that and we're working through.

Typically, what we do with the new platforms is then drive a pretty solid cost-out program on that new platform. So we're now in the throes of doing that. You probably – maybe a little bit but really, I think more of that will flow through over the course of 2016.

And it will be, as I said earlier, it will be more progressive throughout the year, I think..

Great. Thank you..

Your next question comes from Steve Wheen with JPMorgan. Your line is open..

Yes. Good morning. Just a question on gross margin again. Brett, in the past because of that one quarter lag, you've kind of indicated as to what sort of basis-point improvement we might see from FX in the next quarter.

Is that something you could comment on today?.

Yeah, I mean, the sequential impact there if – and I'm going to caveat this because the exchange rate is moving around all the time – but if you looked at it on the current exchange rate, it's – probably the sequential benefit of the weaker Aussie – it's in the order of 50 basis points, give or take. It's that sort of quantum..

Okay. And then as part of your gross margin commentary. You indicated that mix shift obviously was going against you but also ASP declined.

Could you just provide some more color as to where those declines were being felt and what the drivers were?.

Yeah. I mean, it's not – we're not giving a lot of granularity around ASP, obviously, from a competitive perspective and so on.

But as Mick and Jim mentioned earlier, we've kind of let through – some of those more kind of acute adjustments we were facing on pricing, we're through that now, so it's very much more of a kind of a typical or historical type marketplace in terms of pricing.

So there's still, year-on-year, still an element of declines in selling prices and so on, but they're certainly, in today's environment, much less acute than what we were facing back 12 months ago, for example. So let me say it's kind of a more of a kind of historical normal state of play..

Okay. That's great. Thanks..

Your next question comes from Andrew Goodsall with UBS. Your line is open..

Thanks very much, guys. I was just going to talk to the SG&A. Obviously, up 11% constant currency, and you mentioned some investment in, I guess, emerging markets.

Just trying to get a sense of that investment, whether there's much or so in your established markets like EU, and I guess the sort of payback period you're looking for with that investment, I guess, to grow those markets..

Yeah. Good question, Andrew. I'll hand it to Rob Douglas..

Yeah. So, obviously, Andrew, you know we've made some acquisitions in Australia last year, which were a bit of a change in our market model, and that's going very well for us. And then obviously the Curative that we talked about.

But sort of on a case-by-case basis, our strategy is we will continue to invest locally for the local market development as appropriate, and we've got very strong teams around there. And then we're sort of challenging that with trying to get efficiency with common core processes that let us leverage really the key product range through there..

Terrific. And I guess just a quick follow-up. I know it's been a bit of mention around your competitor's entry to the market. I guess we're expecting that to take place at Medtrade this coming week.

Just trying to understand if you've got particular strategies or variations that you bring to the market, I guess, just as a response or to coincide with those events..

Good question, Andrew. Clearly, this is a public conference call. So if we have strategies, tactics, and plans to compete with a very clearly known 12-month anticipated product launch, it's not something we'd go through on the earnings call here. But look, the bottom line is, of course, we're ready for competition in this space.

As I sort of talked to on the response to Margaret earlier, we're quite complimented and excited about the fact that the new base of the competition is healthcare informatics and how good your cloud is. And we're really excited about how strong Air Solutions is, and the value that we provide.

How well we have done, frankly, the last 12 months of getting north of a million devices out there, connected to the cloud and providing value to those customers. And we know that they've seen the value. Of course they're going to try and sample a new product out there.

And we do think that the share we've gained will be something that we build upon because of the value that we're providing. But it's a competitive game and we look forward to it and we're ready for it..

I know it's adding to the question, probably wasn't phrased particularly well. But I guess the feedback we're getting with the cloud is quite a sticky proposition in a way it wasn't in the past. The flow generator, I guess, just sort of seeing how much you think that gives you a bit of a stronger defense than what you might have had in the past..

Yeah. Look, I think the value is incredible. I mean, I talked about in the last call, 59% labor cost savings. I talked about on this call, 83% more patient setup with the same labor cost.

I mean, these numbers are incredible and these are just the ones that customers have said that it's okay for us to talk about because they're in markets where they sort of have stronger control and they're comfortable sharing those data. The ones in competitive markets are getting similar results and don't want to share the data.

Jim, I mean, you're closer to the business on this.

Do you want to share any further anecdotes?.

Yeah, I think it's a really good question, Andrew. We feel very confident that we have a superior offer. We're getting what you might term a lot of customer loyalty off of the offer because of the value that it's driving. The device is a better device. It's simpler to use. It's simpler to set up.

It has a very elegant and reliable cloud connection built into it, so it's not complex to get a connection to the cloud; and then our software offerings are the only offerings on the market that are proven to increase compliance and therefore increase revenue and to lower costs. And so we feel very confident.

As Mick said, it's actually good for the market for the basis of competition in sleep apnea to shift towards health informatics because it provides end-to-end care for patients. It will provide better bang for the buck for the entire healthcare system.

And it puts us in a very good position because we've enjoyed more than a year long lead in that now, and we'll continue to press that lead, so we feel very confident..

Terrific. Thank you..

Thanks, Andrew..

Your next question comes from David Stanton with CLSA. Your line is open..

Thanks very much for taking my questions and good afternoon. You said, Mick, in your prepared remarks that you had the highest market share globally. I'd be very interested to know what you think your market share is and how you derive that number. That's my first question..

Yeah, David. Absolutely willing and happy to say that we are the market share leader. I don't want to go – we're in 100 countries, and I don't want to go into individual countries or individual market shares within any of those individual countries.

But as you've seen these really, really strong high double-digit growth numbers over these last four quarters in flow generators and look at the number of devices that we've sold and the market share and your assessment of the market.

I think you'd be pretty confident, and pretty much every sell-side analyst out there would be pretty confident that we're the market share leader in not only flow generators, but also in masks globally. But we don't sort of want to go into the details of it, David, for competitive reasons.

Look, the main thing about market leadership is not just the market share leadership but the fact that you're innovating better and driving value. And I think one of the core parts of this is providing value for the end users in this whole system, who are the patients.

We provide the smallest, quietest, most comfortable, and most connected care altogether to patients, and I think that's what's really driving our growth and leadership. And frankly, it's a challenge for us and anyone else playing in the field to continue to do that.

And that's what the game is going to be going forward, providing that long term value to patients..

Thank you. And I wonder if you could give us an update, basically following on from previous questions, can you give us an idea of the replenishment, the mask replenishment environment in the U.S. in terms of payers? Are payers more or less willing to see mask replenishment than perhaps they were even a year or two years ago? Thanks very much..

Yeah. Thanks, David. Replenishment is a really important part of sleep apnea care because the masks do degrade over time and become more leaky.

And to have a patient on sleep apnea care – for a payer who is following it properly, a payer provider who is following it properly, the investment of $100-odd on a mask every six months to keep a patient out of hospital where a visit to a hospital can cost $2,000 to $3,000 to $5,000 just walking in the door and spending one day there.

The return on investment for our payer providers who are really following this model closely amongst their sleep apnea patients, their COPD patients, their neuromuscular disease patients, their (1:01:08) patients, the ROI is a no-brainer when you've got the data.

I think our informatics solutions are allowing us to have the data to provide the payer-providers and show that ROI.

And so, I think you are transitioning from sort of a world of utilization management, where people just think of unit costs in a fee-for-service world, to a world of care management where people are thinking about holistic costs to the patient and what it costs to not provide the diabetes supplies or to not provide the hypertensive meds or to not provide the sleep apnea mask.

And it's saying, I'm going to cut back on diabetes supplies to save myself money when then the diabetic is back in the hospital or to cut back on the number of masks and, therefore, have the sleep apnea patients show up at the hospital is sort of a 1980s way of looking at things in the utilization management front.

So I think we are seeing that transition and I think that the payers are really moving to that world of ACOs and payer-providers and looking to mimic the model of those successful payer-providers.

But it's a transition world and we are playing in both the fee-for-service world and in the care management world and balancing between the two very carefully..

We are now at the one-hour mark, so I will turn the call back over to Mick Farrell..

Well, thanks a lot, Melissa. And thanks for all the good questions. In closing, I want to thank the more than 4,000 strong ResMed team from around the world for their continued commitment to changing the lives of literally millions of patients with every breath.

I'm very proud of what this team has accomplished in creating the market-leading innovation in connected care and healthcare informatics solutions in our medical devices. And we remain focused on our long-term goal of changing 20 million patient lives by 2020. Thanks a lot and we'll talk to you all in 90 days..

This concludes ResMed's first quarter fiscal year 2016 earnings live webcast. You may now disconnect..