Welcome to the Q2 2014 ResMed Inc. Earnings Call. My name is Sherry and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. Before we begin, ResMed has asked me to remind you that during this 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. Risks and uncertainties exist that could cause actual results to materially differ from those forward-looking statements. Additional information about factors that could cause actual results to materially differ from those in the forward-looking statements is included in the ResMed SEC filings which are available on the company's website. (Operator Instructions) Speaking on the call today are Mick Farrell, CEO, and Brett Sandercock, CFO. There are also other members of the management team present that will be available to answer questions. I would now like to turn the call over to Mick Farrell. Mick, please go ahead.

Thanks, Sherry, and thank you all for joining us today. As usual, I will review the highlights of our fiscal Q2 and then I will hand the call over to Brett to go through the quarter in some more detail. So first the financial summary. Global revenue in the second quarter of fiscal 2014 grew by 2% year-on-year to $384 million, that’s up 1% on a constant currency basis. Europe, Asia, and rest of the world headline revenue increased 8% for the quarter to $178 million, which is 5% on constant currency terms. Americas revenue decreased by 2% to $207 million. We believe the long-term global growth rate for our industry remains in the 6% to 8% range. Net income for the quarter increased 11% to $86.6 million. GAAP EPS increased by 13% to $0.60 for the quarter, while hybrid EPS which includes the amortization of intangibles, was $0.61 per share. This bottom line result demonstrates strong global operating performance from the global team. Let me start with the Americas, where clearly we had some external headwinds and where we were not satisfied with the results. The Americas had a challenging quarter with overall sales decreasing by approximately $5 million year-on-year, which was 2% on a year-on-year basis. It's interesting to note that it was approximately $5 million increase on a quarter-to-quarter basis which is a 3% sequential quarter-to-quarter increase. Sales revenues from masks were flat year-on-year while flow generator sales revenue declined by 5% year-on-year. It's also of note that we were up against some very tough prior year comparisons in both those categories. Float generators were up 16% in Q2 fiscal 2013 and masks were also up 16% 12 months ago in Q2 fiscal '13. However, the result was not solely a reflection on these comparables. I will…

Great. Thanks, Mick. Revenue for the December quarter was $394.3 million, an increase of 2% over the prior year quarter. While in constant currency terms, revenue increased by 1%. Income from operations for the quarter was $105 million, an increase of 14% over the prior year quarter, and net income for the quarter was $86.6 million, an increase of 11% over the prior year quarter. Diluted earnings per share were $0.60 for the quarter, an increase of 13% over the prior year quarter. Gross margin for the December quarter was 64.7%, an increase of 290 basis points compared to Q2 FY '13. On a year-on-year basis, our gross margin benefited from manufacturing improvements, favorable product mix and favorable currency movements, partially offset by ASP declines. Looking forward, we expect our gross margin to be in the range of 63% to 65%, assuming current exchange rates. Additionally, we continue to execute on initiatives targeted at improving our global manufacturing, supply chain and logistics cost structure. SG&A expenses for the quarter were $111.7 million, an increase of 4% over the prior year quarter. While in constant currency terms, SG&A expenses increased by 5%. SG&A expenses as a percentage of revenue were 29.1% compared to the year ago figure of 28.6%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the vicinity of 29% for fiscal year 2014. R&D expenses for the quarter were $29.5 million, a decrease of 3% over the prior year quarter. In constant currency terms, R&D expenses increased by 5%. R&D expenses as a percentage of revenue were 7.7% compared to the year ago figure of 8.1%. Looking forward, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2014. This…

(Operator Instructions) Our first question comes from Joanne Wuensch of BMO Capital Markets.

I actually have two. The first one happens to be, how much of the foreign exchange uptick year-over-year is associated with foreign exchange.

Brett?

How much of the earnings?

Well, no. I mean your -- the gross margin was up well over 200 basis points year-over-year, almost 300 basis points. And I am just wondering how much of that is from foreign exchange.

On the margin, yes. So on the year-over-year, Joanne, on the FX was about 140 basis points of that.

And that’s mostly related to the Aussie, the Australian dollar?

Yes. Predominantly. We have a -- there is a little bit of benefit from the euro but that’s predominantly the Aussie dollar weakening.

Okay. And then I understand why you don’t want to talk about your pricing paradigm, but can you step back and talk a little bit about what's happening to pricing in the industry?

Yes, Joanne, I mean they are pretty much the same thing asking what we are doing in pricing, what the industry is doing with pricing. Given that we want to maintain our appropriate value premium over our competitors but ensure that we are competitively priced to make sure we get back to taking share. So specifically within the U.S. market, we are looking at our value premiums and ensuring, based upon the market dynamics that are going on throughout Q1 and as we saw in Q2, to make sure that we get back to taking share across the segments. So we are looking at pricing on a category by category basis and SKU by SKU basis and the segment by segment basis, based upon how the customers look at it. But to qualify that, whether by industry or by us, we would sort be parallel and it doesn’t make sense to break out either. It's just not in the interests of our shareholders to do so.

Okay. Just [indiscernible] a little bit on that. One of the things I am seeing from other companies that have products with competitive bidding is that the other companies around them are dropping prices that they need to respond to. I am going to assume that’s what's going on in your world also.

Look, Joanne, we are the value premium leader. We don’t generally in our industry move down ahead of the curve. So I think that’s a safe assumption to say and, yeah, it's safe to say that we are more responding on the downward approach and trying to find and elicit the appropriate premium to maintain across each of the SKUs. And we have got pretty good signs behind this and it's really just an adjustment of external dynamics with our internal dynamics to make sure that all makes sense. But the premise does sound like what we have been executing to.

Thank you. And the next question comes from David Clair of Piper Jaffray.

So I was just hoping, Mick, in the commentary you talked about a moderating impact to competitive bidding in the quarter. Can you just give us some additional thoughts there? And I know you talked about 6% to 8% global growth, do you think that U.S. grew as a market or did it decline? And when do you think that we should expect ResMed to kind of rebound and put up positive growth in the U.S.

Yes. I mean clearly in the U.S. market, we talk about 6% to 8% as the long-term growth of this industry. Clearly there is some impacts through competitive biddings. We talked about the patients who get moving from HME A to HME B, you know these last 90 days, that will have some impact on the growth. We don’t have it down to the decimal point, and to your point, it doesn’t make sense to go there. But the leading indicators that we see that -- and we have a lot of data on this and some of it's public. And we have shared that on our latest investor presentation that patient flow to primary care physicians are picking up. Patient flow for elective procedures which are analogous to referrals for sleep-disordered breathing, such as hip and knee replacements, are starting to move up. Referrals specifically in our industry to sleep-disordered breathing specialists are starting to move up on the diagnostic front. So all these leading indicators are macro and generally public, and allow us to talk about them. We have many other indicators that we have customer by customer as they buy assets of patients. So they are starting to monetize that asset. Getting the pipe work together. Working with patients to ensure that pipe works is of the standard of the acquiring HME versus the HME who sold the asset, and ensuring that they can get that replenishment revenue and get the patients back on the right care that’s needed to happening there. So they are the sort of what we would call, David, the green shoots of growth that we are seeing on these leading indicators to make us believe that the impact of competitive bidding is beginning to moderate in the market. We are not done but there are green shoots starting to appear which, as we look forward the next 12, 24, 36 months, we see a whole lot of opportunity. The change that we often get asked that is, will be it a one month or a three month, or a five month. We don’t know exactly. And so we say it's a number of months for those green shoots to start turning to moderation of the entire market and for us to, as an industry, get back on the growth track. And we think we are well positioned to do that, we are partnering with our HME customers to do that.

Okay. Thank you for that. And then on the pipeline, I mean obviously you guys have a lot of stuff going on there. Can you give us a sneak peek at Medtrade? Should we expect some material product launches coming up here?

So David, we don’t give sneak peeks on any trade show. Not one for Medtrade or about trade shows in medicare in Europe or elsewhere. But I will recite what I said, that we have three amazing new masks coming this fiscal year. The first one is out there, the AirFit P10. The other two masks will go on other categories and they are very exciting. Can't give you any details, David. I can tell you that we have a respiratory care next generation platform that has had its first patient on therapy already in Europe, and we are excited about a full product launch of that product before the end of the fiscal year. That I can share with you. But no details on any of the trade shows throughout 2014, David.

Thank you. Our next question is from Ben Andrew of William Blair. Ben Andrew - William Blair & Company: So let’s see. If we think about volumes and new patients are growing and overall domestic CPAP was down 5%, in the lower side masks were flat. That has to suggest that existing patient volume on masks was -- volume was either negative or modestly positive if price is probably worse this quarter than it had been. Is that a fair way to characterize it?

Well, Ben, you used a number of different parameters there. What we saw and I think what we said, is that in the quarter there were some volume impacts from competitive bidding. I mean that’s clear. As a patient is moving from HME A to HME B and that asset is picked up, you know if they were on a replenishment cycle that was every three months and then they are changing from HME A to HME B over a three months or a six months process, that maybe one of those masks in terms of the pickup or one of those cushions in terms of the pickup is left out. So that temporary distraction is real for competitive bidding and will have an impact on market price within a particular period of time, for a particular DME. But to ramp that up over the 4000 to 6000 plus HMEs out there in the U.S. marketplace, it's really difficult to know exactly, you know precisely pick where that volume change is occurring. But the leading indicators of patient flow into the channel are there. The analogy that we used at JPMorgan last week is it's like you have got a garden hose, where the garden hose is the flow of patients is the water, and the garden hose has got a crimp in it, which is this competitive bidding. And it's a [indiscernible] bend in the curve of the pipe. And we starting to work with our HMEs to uncrimp or unkink that garden hose and the water is starting to flow. So the patients are starting to come through the channel and they will get to an HME. The new HMEs that are establishing in the areas where they have won have to establish referral pathways and pick up those patients. And even established HMEs have to ensure those referral pathways are solid. But as we look to the long-term, we see getting back to that 6% to 8% market growth rate as something we will absolutely do. This is not a structural change, it's a temporary change that will allow us to help the customers and get us back to growth. Ben Andrew - William Blair & Company: Mick, I guess my second question would be, as the HME customers obviously have seen their profitability tighten, they are clearly coming back at you guys and asking for concessions. You competitors are responding, you are not going to respond to them more aggressively, you are not going to give us pricing information anymore which I understand. But shouldn’t we assume that this is a more permanent dynamic on the pricing side and that the volume as they come back over the course of time with the new patient flow that the structural growth rate has to be lower than it was before.

So I will hand to Jim to go in a little more detail on the profitability of the HME customers and then I will come back to talk to your point about long-term and why I think we can get back to the 6% to 8%. Jim?

Hi, Ben. I don’t think the market dynamic that we are seeing now is a permanent market dynamic. I mean that’s your question. I think what we are seeing, we have been talking internally about how to describe what we see going in the market, and the metaphor that we keep coming back to is, it's like a thunderstorm has passed through town. The storm is through but there is cleanup, right. And so -- and talking to our customers what we are seeing, we have talked about in this call before, is the things that our customers have to go through with doing subcontracting, and a lot of the larger customers are doing acquisitions, and as they do that they are buying a -- they are either buying a business whole or they are buying a list of patients. They then have to figure out how to get those patients in their replenishment systems and so on. There is a lot of logistics and administration that is working its way through the HME world right now. There is pricing pressure, there is clearly pricing pressure. And as Joann said earlier, you have seen that in all the competitive bid markets. But I don’t think there is any reason to believe that what's going on right now is just sort of a new normal that will last forever. I think the market is working its way through what we have previously described as distraction. And I think over the next several months, and it makes very difficult to know how long that timeframe is, but over the next several months we will see it stabilize. So, no, I don’t think this kind of challenge is a permanent challenge. I think we have to work our way through it as an industry and we are working with our customers to do that. Ben Andrew - William Blair & Company: Right. And, Jim, what I was trying to get at is that I think the value proposition for a user in a lower reimbursement environment to the HME is more compressed and so they are going to be more price sensitive to the higher end products or to any product, and less willing to step up on the mix side which is a structural change versus the ability you have had in the past to keep moving that mix a little bit higher and holding price as a result. That’s what I am concerned about.

I think the mix dynamic is still there, Ben, and here is why. The CPAP to APAP mix shift is still going even despite the compounding of the two effects. We talked about competitive bidding and the volume impact, the competitors actions and the pricing impact. So all that hit at once. Yet, still, we see some growth there for us. And as we are partnering with our customers to try and understand how to make that happen, the move to HST is implied. And we said somewhere between 30% to 35% of the tests, the diagnostic tests done in the U.S. were home sleep tests in the last 12 months. That will get to 40% within the next nine months. And it will then go to 45% and up and beyond. And we have said it many times, that the analogy is some markets in Europe, where you are talking about 70%-80% of the test being home sleep tests. This is sort of endpoint. That drives volume into the market. It allows more patients to get into the diagnostic channel who man not have gone to a PSG. This is all being driven by the insurance companies and payers but it has a benefit of providing more volume as a long-term. And the positive mix-shift, to your point on pricing, that allows that CPAP to APAP mix shift to happen. Additionally, for ResMed, as we start to launch more of our respiratory care products that we are launching in Europe and also launching in the Americas over the coming year or two, will have a mix shift for ResMed that allows us to move to higher end products. Where ASPs are just higher and there is mix shift from segment A to segment B that is a positive tailwind for us. So that’s why as we look at the market and as we look at our opportunities, we think a 6% to 8% market growth rate makes a whole lot of sense. But going from the global macro, I will drill back down to your question which is on the Americas. Jim, do you have any more to add there?

Yes, thank you, Mick. I just wanted to add one thing to that, Ben, which is, what we are seeing is actually what we have anticipated happening in the market. Which is as HMEs are working through the challenges that reimbursement cuts have posed for them, there is pricing pressure and that makes sense to us, but they are also looking for more efficiencies in their business. And so they are looking to a couple of things. Everybody wants to drive up their compliance rate and that actually works in our favor because our products have higher compliance, both on flow gen and on mask. The other thing they are looking to do is to get each patient compliant and then to get them into replenishment programs in the cost effective way. So that’s why you have been seeing us focus on some of the [indiscernible] You have seen us improve EasyCare Online platform. You have seen us with our [indiscernible] subsidiary driving some automation into the business process. And you will continue to see things like that from us over the coming months. We are working with our customers -- you know our products still get a premium. They get a premium because they are better products but we continue to enjoy good position with the customers because we are helping to drive efficiencies into their business. And so we are very bullish on where we are taking our offering in that direction.

Thank you. (Operator Instructions) Our next question is from Matthew Prior of Bank of America.

Just a question in regards to the exit trajectory from the quarter. Mick, you spoke about, obviously, this being a question of months not necessarily quarters, in terms of when we see those green shoots having benefit. But in terms of the three months of the quarter can you talk us through, given the last six months of seeing the impact of competitive bidding, was September the darkest month of the six? To give us a sense as to how that line would look over the six months.

Yes. To determine the exact trajectory of this combines a whole bunch of factors across 4000 to 6000 customers, and as they look at their patient referrals in and as they look at subcontracting, as they look at building facilities, and as they look at developing new organic referral pathway. So to pick down exactly where the nadir is and when the curve starts to move up, is very difficult. And that’s why we are here saying, look, it's going to be a number of months for us to get through this and we don’t know exactly how many. You know by customer of course you have all the dynamics going on, but if customer A buys customer B than one has a 100 percent growth, they are doubling, and the other is going to zero. Yet, the volume remains the same. So putting that across the whole weighted average of our customers is a difficult equation. And then you are predicting other market dynamics as to who is going to be better at developing referral models to cardiologists or to new pulmonary referral sources, or within the U.S. market as the development of the accountable care organizations or ACOs, where hospitals and primary care physicians are now working together with shared costs. You have other dynamics of cost and volume that go in on a market-by-market basis. So predicting exactly where the bottom is and how many months it is to see the trajectory moving up is very, very difficult, Matt.

Yes, I guess to clarify, Mick, what I was really after was, do you think that second quarter is the worst that we have seen in terms of all the dynamics going on around price and competitive effect and irrationality out in the marketplace, and behavior of DMEs and disruption of patients finding equipment? Is it just a question of the rate of exit in terms of things get better from here or given the dynamics are still in flux, could we see, obviously, another quarter of weaker performance than what we have seen? I am trying to get a sense as to the dynamics you have seen, how long have they been going on to the extent of could things get worse from here, or is it just a question of the rate of trajectory out of the quarter?

Yes. You listed about 15 things which we are trying to predict all of them as we go forward. And to say precisely on all those 15, we don’t know. Here is the thing we can control. We can control our new product launch. And we just launched the AirFit P10, which in its first two weeks if flying off the shelf. We will be launching two other new masks between here and June 30 that similarly have huge opportunities for value generation. For patients, providers and for physicians. And we are also launching, I would call a leapfrog next-generation respiratory care system that I might ask Geoff Neilson to talk about some of its value as we have started to get our first patients on therapy in Europe for. So we know that we have the pipeline to start delivering and turning to strong growth here, and to get back to share gain in some of the categories like nasal masks and nasal pillows. And then also in the CPAP category with regard to appropriate pricing. So we have got the plan of action ready to go. And I will go back to what I said in the early notes when I said at the start of your question, Matt, which is, it's a number of months for us to get back to that growth trajectory but there a number of bits in play. Some are macroeconomic that we can't control. Some are directly within our control, like delivery of products. And we have done a pretty darn good job over the last two plus decades on that and we plan to execute on that over the coming 6-12 and beyond.

Thanks, Mick, understood. My second question is in regards to France. You know given the changes to reimbursement there and obviously informatics. Have you seen anything in terms of the second quarter around mask consumption relating to those informatics in France in terms of that shift that has occurred?

I will hand to Rob Douglas to talk about that France and the HI.

Yes, thanks, Mick. Matt, the French business has been going well. We are encouraged by the performance of our system, our online system and how we are picking up all the patient numbers and managing the data. And also compiling with all of the privacy rules and that type of thing, which are quite complex throughout Europe. We think that’s performing well. In terms of, other sort of structural changes in terms of mask usage and things like that, it's still too early days to make a comment on that. But we are pretty happy with the way the French business has been going in the light of those changes.

Thank you. Our next question is from David Low of Deutsche Bank.

If we just switch in to the rest of world [indiscernible] right there. Mick, you began talking about that you think market growth could be 6% to 8% again. Help us understand why rest of world growth, constant-currency growth, I think is 5% versus that 6% to 8%. What's holding back that business or perhaps the market outside the U.S. at the moment?

Yes. So, David, the line was cutting in and out a little bit, but you were asking about Europe, Asia and rest of the world growth and who to get that to the 6% to 8% range. Look there are many impacts that are -- I mean counties obviously when we say Europe, Asia and rest of the world. We are talking about the other 99 countries we are in other than the U.S. But within those markets there are many different market dynamics. We talked in some detail in the call earlier about Japan being soft in Q1 and also being soft in Q2. We think there is some tailwind for us potentially in Asia Pac as we look to Q3 and Q4. So that has an opportunity to get us back to stronger growth rates and we think that can help get the rest of world number to where it should be. Look, I got to tell you, I was incredibly impressed by our European team. We don’t breakdown the particular countries within the Europe or the particular countries within Asia Pac. But there was some really good performances, particularly in Northern Europe, within our teams of partnering with insurance systems. Understanding the total value of the healthcare system and how ResMed takes patients with providers. Takes patients out a hospital, puts them in the home, and treats them more cost effectively and saves money for the healthcare system. And when you have socialized medicine and governments involved in healthcare, as you do in northern Europe, they'd very heavily involved in analyzing all that. So we have a lot of partnerships in the U.K. and Northern Europe that are moving us down that road and we are very excited about it. So as we look to that long-term and talk about 6% to 8% market growth. And do I feel confident that our Europe, Asia, and rest of the world group can achieve in that range, I absolutely do. We have got the right strategy, we have got the right people, and they are starting to execute on it. There will always be some lumpiness from quarter-to-quarter but as you look forward over 4, 8, 12 quarters, we can absolutely see our growth being very solid within that range.

Great, thanks very much. And just coming back to the U.S. Trends in the mix shift through auto setting devices and then bilevel devices. I know you have mentioned it particularly the gross margin, but just wondering with this move to competitive bidding and DMEs being under pressure, are you seeing any sort of pushback towards a basic CPAP where in the past you were seeing a trend to auto setting devices?

Look, this is all being driven by the payer and insurance companies, right. When they move the market from PSG to HST, they are driving it. And so when the payer establishes a home sleep testing protocol, it's going to require that the device that goes out is an APAP. Because otherwise you have to bring them back into the lab to get them titrated. So payers are generally driving the HST shift. They are also then driving the APAP shift. So that’s just a fact. It's going to happen. The bilevel opportunity is really about a broader opportunity which is about non-invasive ventilation. And the idea there is bringing something that’s been pretty well established in Western Europe, which is using non-invasive ventilation to treat patients with COPD, neuromuscular disease and obesity hypoventilation syndrome, to bring more of that and to grow that category within the Americas market. I am going to ask Geoff Neilson to talk a little bit about our global respiratory care business and how that might apply to allow us to get some of that positive mix shift in our ventilators.

So if we take COPD as an example, you know bilevel treatment for COPD in Europe is well established, particularly in Germany and ResMed is competing well in that space. There is a huge opportunity for COPD globally, including in the U.S. But it's somewhat muted by the reimbursement pathways to actually get patients on to therapy. However, on the other side, that has created some larger opportunities around higher-end ventilation products for COPD. And that’s a segment that should really be growing quickly. So that brings me into the our ventilation platform, which can be positioned for COPD in the U.S. and also globally across the range for life-support and ventilation. So our Astro platform, we have started market trials in Europe. So we have had significant number of patients on that device now. It's being incredibly well received. As Mick mentioned there, this is a leapfrog platform that was developed from scratch over the past year and we are looking forward to launching that globally, but certainly in Europe by the end of this fiscal year. And depending on FDA timing and so on, as soon as we have a 510(k) approval, we will route further up our ventilation sales force in the U.S. and start driving into that couple of hundred million dollar market with this product, which is replacing our Elisée and VS ranges [ph].

Thank you. Our next question comes from Andrew Goodsall of UBS.

Actually, just to take up that point on ventilation. You mentioned it's been growing quickly and I know you don't break it out at the quarter. But could you just characterize it at the quarter? Was it actually growing and did it contribute to growth in this quarter?

Yes. So Andrew we don’t break out ventilation and we will, as Geoff talked to, it's a material opportunity for us, but not yet by country and by segment a material business that we will break out as yet. But we are very excited about that product launch. And you know over the coming quarter, two or three, we will start to go into more detail as to the product launch and how that moves over time. We are already quite well established respiratory care player in some countries in Europe. So the product will roll into an existing referral and sales channel that we have already developed. In other markets, as Geoff was talking about the U.S. market and some others globally, we are developing the referral channels and the pipeline as well as bringing the product to market. So it's an S curve that will go rapidly in some countries and slowly in other countries. But specially to your question, Andrew, we are not going to break out the details in Q2 but as we look to going forward we will give more details of the products as it's launched in each of the different geographies worldwide.

Okay, and just with the masks, I think going into this quarter, you would have full contribution from the Quattro full face Air and the Swift Nano FX. Obviously from the quarters, there is a lot of noise in the numbers, pretty difficult to understand sort of what traction you're getting. Could you just again characterize what they might have been doing on an underlying basis?

Yes. So Quattro Air was launched sort of mid-calendar year. So we are in month five or six of that. We are actually seeing in the full face category, we are doing pretty well and Quattro Air is a strong part of that. And we like what Quattro Air is doing and customers seem to like the fact that it's 3.3 ounces and incredibly light on the face for the category of patients, the segment of patients that it's able to treat, the Quattro Air is doing well. Having said that, the Mirage Quattro and the Quattro FX, the other two full face masks we have are also holding share quite well. So we are reasonably comfortable with those. The Swift FX Nano has had a good start up, particularly in Europe, Asia and rest of the world. I mean masks were up, 6% headline and 4% constant currency in rest of the world. So the Swift FX Nano has started to have a pull up. But it was launched in the September timeframe in the U.S. and a little later in Europe so we haven't seen as much material contribution from that in the nasal category. But we are looking forward to that over time. But we are also, Andrew, looking very much forward to the next two masks and what contribution they are going to bring as we look forward.

Okay, and just a final bit of housekeeping. Just going to ask the FX contribution to EPS, and I think we got that number here from Brett?

Yes. Andrew that was $0.05 this quarter, the EPS impact.

Thank you. Our next question is from Ian Abbott of Goldman Sachs.

My first one is around share loss in masks. Do you think you're losing share just in new patients or do you think there is some spillover into existing patients?

So as you know we don’t sell directly to patients so we don’t have any idea as to whether it's a new patient or an existing patient. In the U.S. market we sold to distributors who move that forward. As we look at the temporary distraction from competitive bidding impacting as well as the competitor actions of new product launches, particularly in nasal masks and nasal pillows categories. There is a whole combination of factors going on there. It's very difficult to discern that. And underlying fundamental is that it is difficult to switch existing patients out. So like a comfortable pair of jeans or a pair of shoes that you love wearing, you tend to stick to the same ones. It's difficult to get a patient, particularly something they were every night if they are comfortable and happy. Firstly, you probably don’t want to do it if you are physician or a patient. And then even the provider who might have some margin gain. The margin gain of that versus the margin loss of potentially losing the patient to another HME or not being able to switch the patient and spending the cost to do so, generally means that they are not switched as often. Having said that, we believe that the new products, the three new products that we are bringing out this fiscal year, the AirFit P10 and the two others, will allow us to get back to rapid gain of new patients and establish therefore installed base that should be a replenishment for years to come on that basis.

Great, and my second question was around the cost side of things. You have raised your guidance on SG&A from 28% to 29%. R&D, you pushed the guidance just to a straight 8%, previously 7% to 8%. Is that a function of higher investment or is that more a function of lower expected sales outlook? And I suppose if there is, if it's the latter, I'm just wondering how much ability is there to start to trim those expenses and how long would that take?

Yes, Ian, there is rough estimates or a range where we think it will be. So I mean that can easily move around from that number so it's not kind of, probably not the precision that you are thinking about. We have got this pipeline through on product and so on so you can expect R&D will really, I think to some extent a factor of a pretty solid pipeline in R&D that we are undertaking. And also we are taking a foot off in terms of R&D and what we are doing there. And in SG&A we need to contain those. I think we have done a reasonable job and we will continue to make sure we are spending effectively and efficiently. But we will certainly be investing in some of these newer growth areas around respiratory care, around cardiology. Geoff mentioned earlier in terms of ramping up, for example, in the sales force in the U.S. when the time is appropriate to support sales there. So there is a number of those programs or projects that we definitely want to support. But notwithstanding that, clearly we want to continue to leverage on SG&A and make sure we are driving R&D expenditure efficiently. So we will continue to do that. So the short answer, yes, I think there is scope that I think that we can continue to be effective in those areas and drop that benefit to the bottom line.

Thank you. Our next question is from Saul Hadassin of Credit Suisse.

Mick, just two questions. First one is, I think in your opening remarks you spoke to what was happening on the competitive dynamics on the CPAP side of the business. I assume you were referring to fixed pressure devices. I was wondering if you could give us a bit more color as to what you are seeing there, whether it's share loss as opposed to just competitive pricing and just what your response is to that? And the second question is, just with regards to your customer, well, to your DME customers, whether you are actually seeing any consolidation yet, actual closures of particularly small to medium-sized players? Thanks.

It sounds like a U.S. folks [ph] question. Jim, you want to address that too?

Sure, I shall. So, yes, the CPAP dynamic that Mick was referring to in the opening comments was about the fix pressure devices. What we are seeing is continued growth in the AutoSet or APAP part of the market. There is a mix shift underway across the whole markets. AutoSet where we continue to do well. In CPAP what we are seeing is increased pricing pressure, especially at the low end. That is a decreasing part of the market. So the low-end CPAP is actually a smaller part of the market than mid-tier CPAP which is, it's about smaller than AutoSet. And that we are seeing more severe pricing pressure at the low-end. So we have lost some share and there is pressure down in that part of the market. And as we said in the opening comment, we are looking hard at how we want to be positioned in that space in terms of -- we have a great offering, we are looking hard how we want to be positioned as the category declines and we see pricing pressure there.

And the second one was with regard to DME customers and consolidation. And on that one, Saul, clearly we have -- 4000 to 6000 plus HMEs in the U.S. market. There are some changes as we talked about as we go through. I liked the analogy of the storm going through and it's led some order there. There is some cleanup there and there will be some consolidation and we have seen, and some of that has been public of some of these companies selling their assets from company A to company B. And the fundamental is that the patients are there, the volume is there and it will increase over the coming years. And so to what extent there is consolidation, we can't precisely tell but we are working with those who won bids within the competitive bidding environment and those who are bidding on the future. And as we look around the HME landscape, there are definitely signs of an HME that is planning for future growth. If an HME is investing in EasyCare Online, is driving usually to drive patient engagement and get patients adherent to care. And if an HME is using our electronic data in the change and programs to say, use our billing systems, such as say Brightree, where you can do a one stop shop and click to purchase ResMed products. Then they are thinking about efficiency, they are thinking about scale, they are thinking about cost and they are thinking about the long-term. And they are the type of HMEs that we are spending a lot of time working with to say what's an appropriate price premium for our products and what value will it drive for you in the market over the next 6, 12, 24 months. And we are working through all that. So we are very confident that we are working with those who are investing in the long term for this industry and those who are preparing for the long-term growth that we see of patients coming through the channel. Both in sleep and in home care, respiratory care and as longer-term, as we are already doing in Europe and Japan, in the cardiorespiratory space.

Thank you. And our final question comes from Ben Haynor of Feltl and Company.

Just had a bit of a mechanics question on product introductions. When you introduce, say a new mask, do you typically see larger stocking orders to the DMEs and HMEs when the product is first introduced than you might see in subsequent quarters? Or is the reorder rate often enough where that doesn't factor in?

Yes, Ben, it's more often than not it's an S curve that goes up over time. There is not usually large lump at the start, it's more around spending time with the physicians, spending time with the providers, and spending time working with the channel to help get them familiar with the benefits of a new mask. For instance the AirFit P10, being 50% quieter and 50% lighter, you have to sit down there with the doctor and explain and show the benefits for it. And I think there is some early clinical data and a white paper showing, a patient gets 40 minutes more of sleep from that product, for instance. So you then need to talk to the physician and get them onboard with that. You have to talk to the provider to make sure it's on their schedule and negotiate pricing and so on. So it you like, it's an S curve with a bit of lag at the start, but then acceleration from there rather than the other way around.

Okay, great. So with a product like the AirFit P10, we should expect to see that go up the S-curve as time goes on?

Correct.

Okay. Great, well, congrats on that product. It seems like it is blowing the doors off.

And we are now at the 1 hour mark, so I will turn the call back over to Mick Farrell for his final remarks.

Well, thank you. And as always, I would like to say thanks to all of you on this conference call for your interest and support of ResMed. Most importantly, I would like to thank the global ResMed team for our focus on improving the lives of patients, one breath at a time. We are about 7.5 million patients improved over the last 12 months. I couldn’t thank you enough. Thanks a lot. Bye bye.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.