Resmed Inc (RMD) — Q3 2015 Earnings Call Transcript

Thank you, Adrienne. And thank you 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. 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, and performance. We believe 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 our shareholders who are joining us on today's investor call as we provide an overview of our Q3 fiscal year 2015 results. I'm pleased to report that we continued to make excellent progress from new product launches in our core sleep disorder breathing market. We also saw solid progress in our cardiology and respiratory care markets during the quarter. In these opening remarks, I'll discuss our high-level top and bottom line results, our progress in healthcare informatics, and the early trajectory of our latest product and solution launches globally. Finally, I'll cover progress against our longer-term three horizons growth strategy. Then I'll turn the call over to Brett in Sydney, our CFO, to walk you through our financial results in greater detail. As you saw in our press release, our global business achieved double-digit revenue growth of 13% on a constant currency basis during the quarter. Including currency headwinds, our global growth was 6% on a year-on-year basis in U.S. dollars. We saw strength in our Americas group, with continued double-digit growth in the region, driven by robust sales growth in flow generators as well as high-single-digit constant currency growth in our combined European and Asia-Pacific region. These results were fueled by the success of new product launches in sleep apnea and respiratory care markets, including both COPD and neuromuscular disease states. Looking at the bottom line, our diluted earnings per share was $0.65 on a non-GAAP basis. EPS was $0.64 on a GAAP basis. In the Americas, we had strong performance in Q3 sales, with the commercial team there driving 16% year-on-year growth. We're particularly pleased with flow generator growth in the region which was over 40%. This exceptional result was driven by the ongoing successful rollout of our Astral, our AirSense 10, and our AirCurve 10 platforms. Customers continue to see the value proposition of our healthcare informatics platform that we have branded Air Solutions. This platform continues to drive our flow generator success. The strong flow generator sales were partially offset by lower mask sales. On that front, we're still facing annualization of price adjustments that we made from January through to June in 2014. In addition, we're facing a tough competitive environment in the mask category. However, we're confident that we will return to positive growth in the mask and accessory category as we move forward. Moving on to our combined European and Asia-Pacific region, we grew at a very solid 9% on a constant currency basis in the quarter. After we account for the strong currency headwinds, particularly from the declining euro and the strong U.S. dollar, headline growth declined by 6% for the combined Europe and Asia-Pacific region. We saw strong sales growth from flow generators in Europe associated with our new product launches as well as steady growth in masks in the region. With the latest launch of our AirCurve 10 bilevel flow generator platform in Europe, we continue to add to the broad suite of launches with solid multiyear product life cycles. There continues to be strong interest in respiratory care and cardiorespiratory opportunities across the European region. We have seen good adoption of our Astral platform in Europe and we're excited about future opportunities as we combine Astral with our healthcare informatics solutions. We continued to work with our European and Asia-Pacific teams to develop treatment pathways that facilitate standard-of-care protocols, including both pulmonary and cardiology physician groups in both hospital and home care environments. As an important component of our SERVE-HF clinical trial, we're investing in cardiology awareness, cardiology screening, and cardiology diagnostic referral infrastructure to the pulmonary folks in the European region and beyond. In Asia-Pac, we're continuing to execute on our strategies for longer-term growth while working across a variety of mask and market delivery channels. In addition, we had strong double-digit growth in key emerging market countries, particularly China, as we continue to build for the future in those markets. Let me spend a few moments reviewing some of the background behind our progress in informatics. As outlined earlier, we call our healthcare informatics ecosystem Air Solutions. Air Solutions is providing significant quantifiable value to our customers, leading to discretionary share gains in flow generator sales. More importantly, Air Solutions uses liberating data to help patients, physicians, providers, government and private payers, and other partners in the healthcare delivery channel. We're seeing the results of our innovation, even though it is just over seven months since the launch of our first AirSense 10 product. Customers have recognized the value of Air Solutions, an end-to-end system that can help them one, lower costs; two, drive efficiencies; three, increase patient adherence; and four, improve patient care. During the quarter, we further enhanced the Air Solutions ecosystem through the integration of our AirView software with leading healthcare informatics partners. We also announced the acquisition of Jaysec. Jaysec is a provider of Internet-based software solutions for our home medical equipment customers. This acquisition allows us to deliver automated, streamlined business solutions, such as mask and accessory resupply systems, that are both cost-effective and drive efficiencies for our HME partners. We're offering all Jaysec products to all customers. We see many opportunities to enhance and expand our informatics solutions as the broader healthcare industry continues to move towards connected care models. We will use our newest core competence in healthcare informatics to drive channel efficiencies, unlock cost savings, and most importantly, improve patient outcomes. Let me drill into the detail of our new product launches just a little. We launched the AirCurve 10 in the U.S. in December. And although it is still early days, we had good uptake and excellent customer feedback in this, our first full quarter of sales. We also launched the AirCurve 10 in Europe during Q3. This included an important new device, the AirCurve CS PaceWave. PaceWave is our brand name for our proprietary minute ventilation-targeted adaptive servo-ventilation therapy. Our PaceWave algorithm is unique and highly protected with patents and other intellectual property. As part of the AirCurve 10 launch, we added Air Solutions, our cloud-based software solutions technology, to our bilevel, noninvasive ventilation, and adaptive servo-ventilation platforms. The combination of the AirCurve 10 CS PaceWave with our Air Solutions platform is particularly powerful, given the hospitalization rates and the severity of disease for patients who suffer from heart failure and concomitant sleep apnea. For our mask and accessories category, the market remains stable but competitive. As I stated earlier, we're confident that we will return to solid growth in the mask and accessory category as we move forward. Now I would like to take a broader longer-term view and spend some time talking about progress against our global three horizons growth strategy. In our first horizon of growth, which includes our core sleep apnea market, we have continued to drive healthcare informatics solutions that meet our customers' needs for efficiency, patient adherence, and improved outcomes. Our recent acquisition of Jaysec and completing our integration with leading informatics partners are good milestones in that journey. We're taking advantage of future opportunities to grow even more connected care solutions with customers through the AirCurve 10 launch. Reimbursement remains relatively stable across our geographies, including the U.S. Last week, our U.S. customers welcomed positive news as legislation that added anti-fraud provisions to competitive bidding was signed. This change requires binding bids and proof that a DME or HME is licensed in the state that it is providing products to customers. Although this legislation does not impact current bidding rounds, it will have a positive impact on future recompete rounds. The bottom line is that this should improve the quality of bidders to ensure that they deliver good service to patients and it should improve the stability of the channel. On the legal front, we won an injunction against a Chinese-based competitor in Germany during February. The Munich District Court upheld its injunction that prohibits the sale or distribution of that company's masks that infringe our patents. At ResMed, we're committed to protecting our world-leading respiratory medical innovation and we will defend our more than 5000 patents and designs so that we can continue to innovate and continue to change millions of lives as we move forward. We will continue to take action to enforce our intellectual property and to defend our significant investment in research and development. Our global R&D investment is holding strong, at approximately 7% of our revenues, with a focus on pioneering clinical research, world-leading biomedical engineering, and cutting-edge healthcare informatics. Moving on to our second horizon of growth, we're making solid progress on two fronts, our respiratory care market as well as our emerging markets growth. The European respiratory care business is growing from the strong base that we have developed over the last decade and more. In the U.S., we continue to build our respiratory care channels and our strength in those channels. There is a very long runway ahead for COPD and neuromuscular disease patients to be helped by our Astral life-support ventilator and our other offerings. The Astral platform allows patient care to take place in the home rather than in the hospital, providing better quality of life for patients, including caregivers and loved ones, and simultaneously taking costs out of strained healthcare systems. On the geographic expansion component of horizon two, we continue to make progress in our emerging markets, with solid double-digit growth this quarter. We've increased our investment in these markets and are executing on our long-term strategies in China, India, Brazil, as well as Eastern Europe, where there are great opportunities to improve patient outcomes and reduce costs across these emerging markets. Our third horizon of growth focuses on cardiorespiratory conditions, with an emphasis on central sleep apnea and Cheyne-Stokes respiration, particularly in heart failure patients. There is growing momentum in the heart failure and sleep apnea space and we continue to facilitate strong partnerships between cardiologists and critical care and pulmonary physicians. There have been a number of new studies this quarter that continue to build a connection between heart failure and sleep apnea. At the American College of Cardiology meeting here in San Diego, we sponsored two posters on sleep-disordered breathing in patients with chronic heart failure. One of the posters with final data from nearly 7000 patients in Germany showed that 46% of patients with stable chronic heart failure had moderate to severe sleep-disordered breathing. The second poster suggested that treating sleep-disordered breathing in chronic heart failure patients may reduce hospital admission and hospital readmission rates. Our SERVE-HF trial in Europe and Australia is going well. In fact, data collection has been occurring at a faster pace during these last three months. As a result, we're now expecting presentation of the SERVE-HF data by the primary investigators to occur before the end of calendar year 2015. This is slightly ahead of the timeline that we discussed on our Q2 call. For our CAT-HF clinical trial in the U.S., we still expect that the CAT-HF results will be available during calendar year 2017. It is important to note that both studies use ResMed's proprietary minute ventilation-targeted adaptive servo-ventilation technology. We will continue to provide updates as significant milestones are reached in both of these important and pioneering clinical trials. We remain active on the capital management front, including share buybacks and dividends. You will hear more about these actions in Q3 from Brett in a couple of minutes. Additionally, we continue to look at M&A opportunities that are aligned with our long-term growth strategy and assets that we can leverage, manage better than the current owners, and enhance long-term shareholder value. Let me close with this. We're excited about our long-term outlook and our three horizons growth strategy. We're progressing on our journey to change 20 million lives by 2020 in both sleep and broader respiratory medicine. We're executing well to that plan. With that, I will turn the call over to Brett in Sydney for a more detailed review of our Q3 financials.

Great. Thank you, Mick. As Mick has noted, our revenue for the March quarter was $422.5 million, an increase of 6% over the prior-year quarter. And in constant currency terms, revenue increased by 13%. Movements in exchange rates, predominantly a weaker euro relative to the U.S. dollar, negatively impacted revenue by approximately $28.5 million in the third quarter. At a geographic level, overall sales in the Americas were $250.9 million, an increase of 16% over the prior-year quarter. Sales in Europe and Asia-Pacific totaled $171.6 million, a decrease of 6% over the prior-year quarter. But in constant currency terms, sales in Europe and Asia-Pacific increased by 9% over the prior-year quarter. Breaking out revenue between product segment, Americas' flow generators sales were $133.1 million, an increase of 42% over the prior-year quarter. While masks and other sales were $117.8 million, a decrease of 4% over the prior-year quarter. For revenue in Europe and Asia-Pacific, flow generator sales were $115.9 million, a decrease of 2% over the prior-year quarter. And in constant currency terms, an increase of 13%. Masks and other sales were $55.7 million, a decrease of 11% over the prior-year quarter, or in constant currency, an increase of 3%. Globally in constant currency terms, flow generator sales increased by 26%, while masks and other decreased by 1% over the prior-year quarter. Gross margins for the March quarter were 59.5%, lower than guidance, essentially due to larger-than-expected depreciation of the euro during the quarter and outperformance on Americas flow generator growth. On a year-over-year basis, our gross margin contracted by 380 basis points, reflecting declines in average selling prices, unfavorable product mix, unfavorable geographic mix, and adverse currency movements. Looking forward in the fourth quarter of fiscal year 2015, we expect gross margin to be broadly consistent with Q3, being in the range of 59% to 60%, assuming current exchange rates. Gross margin drivers, like currency fluctuations and geographic and product mix could swing this range further if they move beyond their expectations. We do expect to see some traction in late Q4 from our cost-out programs for the AirSense platform and should see ongoing benefits from our cost-out programs, including procurement, production, and logistics improvements reflected in our fiscal year 2016 gross margin. Moving on to operating expenses. Our SG&A expenses for the quarter were $116.3 million, an increase of 1% over the prior-year quarter. In constant currency terms, SG&A expenses increased by 10%, primarily due to higher variable employee compensation, the impact of recent acquisitions, and the release of contingent consideration in the prior-year quarter. SG&A expenses as a percentage of revenue improved to 27.5% compared to the year-ago figure of 28.9%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 27% to 28% in the fourth quarter of fiscal year 2015. R&D expenses for the quarter were $27 million, a decrease of 8% over the prior-year quarter. But on a constant currency basis, an increase of 4%. This increase largely reflects incremental investment in the areas of healthcare informatics and cardiology. R&D expenses as a percentage of revenue were 6.4% compared to the year-ago figure of 7.4%. 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 the fourth quarter of fiscal year 2015. This reflects our ongoing commitment to investing in our diverse product pipeline, informatics solutions, and clinical trials, but also a benefit of the weaker Australian dollar, in which the majority of our R&D is denominated. Amortization of acquired intangibles was $2.2 million for the quarter, while stock-based compensation expense for the quarter was $11.7 million. Our effective tax rate for the quarter was 20.4%. We estimate our effective tax rate for the full fiscal year 2015 will be in the range of 20% to 21%. Net income for the quarter was $91 million, an increase of 1% over the prior-year quarter. Diluted earnings per share for the quarter was $0.64, an increase of 2% over the prior-year quarter. Foreign exchange movements negatively impacted third-quarter earnings by $0.02 per share, reflecting the impact from the weaker euro, partially offset by the weaker Australian dollar. Cash flow from operations was $90.9 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital. Capital expenditure for the quarter was $10.6 million, while depreciation and amortization for the March quarter totaled $17.9 million. We've continued to be active on the capital management front and our Board of Directors today declared a quarterly dividend of $0.28 per share. And during the quarter, we repurchased 300,000 shares for consideration of $20.3 million. For the first nine months of fiscal year 2015, we have repurchased 1.8 million shares for consideration of $96.7 million. At the end of March, we had approximately 16.5 million shares remaining under our authorized share repurchase program. To date in fiscal year 2015, we have returned 92% of free cash flow to our shareholders via dividends and repurchases. And over the last five years, we have returned 98% 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 $406 million. And at March 31, total assets were $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 that everyone limit themselves to one question and one follow-up question only. If you have additional questions after that, please get back into the queue. Adrienne, we're now ready for the Q&A portion of the call.

I was just going to perhaps focus on masks. Just trying to sort of understand when we might expect or what internally you're seeing yourselves doing, when we might expect, I guess, that to sort of show up in the numbers in terms of recovery against perhaps when you moved your prices last year. And perhaps just a comment on the percentage conversion you might be seeing of your flow generators in the mask conversion -- why that's up perhaps a little higher?

That question allows us to talk a little bit about the mask side. And we're expecting to return to positive growth, not just in the Americas, but globally, to continue good trends we have outside the Americas. The mask category continues to be competitive, Andrew, but stable. We'll be annualizing those price declines that we made a year ago, January through June of 2014, through January through June 2015. So we're over the halfway point, but there is still some sort of time to -- as we went customer by customer, region by region, for those to annualize. So as we look forward, we will get back to positive growth. And we have a strong mask portfolio and a good pipeline to follow beyond that.

And is it reasonable to expect that you're achieving some level of conversion along with the flow generators with your bundling or looking to sell the solution as a combined solution?

Andrew, there is some halo effect, certainly when you walk in with the value proposition of the AirSense 10 and the Air Solutions. And as you saw, stellar growth of 42% year-on-year in the Americas there. You've obviously got a sales force with a lot of interest from their customers. And it allows conversations to start, obviously, about other parts of the business, like ventilation, like respiratory care, and like masks. So I do think there are some halo effects that come from that. But I think some of the more important factors are the fact that we're annualizing the January to June price adjustments. The market is competitive and our team is getting back on the front foot in that category while winning very strongly in some other categories.

Couple ones from me. Can you maybe comment on U.S. generator growth which clearly accelerated this quarter. How sustainable is that? And are you seeing a similar growth rate that you saw in AirSense 10 last quarter or is that also accelerating?

Margaret, I'll take the first part of that question and I'll hand to Jim Hollingshead, President of the Americas, for the second one. Clearly, with a number like that that we probably haven't seen since 2006 or 2007 of 42% growth for the quarter year-on-year in flow generators in the Americas, you're not just growing with the market. You're clearly taking some share. So to the extent that there is market share taking, that can happen for a period of time and then that period of time ends. But we do think that there's strong growth in the core U.S. market and, frankly, in our core global markets in the sleep disorder breathing space. And we expect that to continue because we're vastly underpenetrated in developed markets as well as our developing and emerging markets. Jim, would you like to add any more color that?

Sure, Mick. Thanks. And thanks for the question, Margaret. We think that the flow gen growth represents not just the fact that the AirSense 10 platform and the AirCurve 10 platform are really strong products in their own right as flow gens and bilevels, but also the recognition on the part of our customers of the value of the all-in solution that we're offering. So both of those platforms have onboard communications, but it goes beyond just having an onboard modem. It allows our customers to drive efficiencies into their businesses through the use of our solution software platform. So the number of features related to our software that are driving efficiencies in our customers' businesses, and we think we have a very clear advantage with the overall offer in the market right now that customers are taking advantage of.

Okay. So you guys are seeing kind of similar or maybe accelerating growth in AirSense as kind of the way that I read maybe that answer. And then Brett, can you walk us through the gross margins this quarter? You guys broadly talked about FX. Which currencies are most important? And then just to make sure, the price declines that you guys cited in the press release are really year over year versus sequential.

On the gross margin, it's all the margin drivers, essentially, but I think it's happened for a long time is really mostly sort of headwinds for us this time around. So we had, obviously, year-on-year your currency impact was negative for us. That's really being driven by the euro which has declined quite significantly, as I think everybody knows. We do get some offset for the Aussie dollar weakening, but to some extent, that's to the lag the quarter before it turns up in margin. So I do expect -- well, all things being equal on currency which is probably a big assumption, but I do expect with that Aussie weakness, some of that benefit will flow through into Q4 for us. We haven't seen that in Q3, but we do cop up front, if you like, that euro falls straightaway. So I think that's something that will help us going into Q4. But then you have other -- the product mix and geographic mix and really that's kind of driven by flow gen outperformance in the U.S.. So you've got that geographic impact and that product mix impact. And they've been negative for us as well. And really, even on the sort of optimization of production and manufacturing, something that we have a really good track record on, really haven't been able to focus on that just at the moment. We've really been looking to make sure that we meet demand in the marketplace. And obviously, take for granted that we absolutely don't compromise on quality either, but what we have had to do is probably just delay a little bit on the cost-out programs. We're obviously getting on to those now and I think we'll see some benefit there. There are other things, like we've been running with much higher air freight than we typically would. Again, that's really a consequence of meeting demand, particularly on that flow gen growth number that you saw. So there is just a number of factors. A lot of those are kind of first-class problems to have. And the ones in the cost side though, they are under our control and we'll absolutely get on top of those.

Is there anything that you can quantify in that in terms of the FX impact this quarter?

Yes. If you looked at -- yes, I mean, the year-on-year -- without -- I don't get too granular, but it's quite meaningful, as it's north of 50 basis points negative.

Just a follow-up question on the gross margin. Brett, there is a lot of I guess, things that you can do going forward. I was just surprised to see your guidance for the fourth quarter be very much the same as third quarter. So can you tell us what is sort of holding you back on that front?

I guess just looking at what we're seeing in terms of product and geographic trends, okay which it probably tend to be negative on that. But offsetting that, I think we'll see some benefit from the weaker Aussie and we will start to see some of our cost-out program gain some traction. So when you look at it, we have some -- going forward, looks like we have some negative drivers, if you like and then there are some positive ones. And there is a question of what the timing is like and how they balance up. And when I looked at it, I think in that kind of short term, where we broadly consistent with where we're in Q3, when we look forward and we look at some of the things that are coming through, if you think of the AirCurve on the bilevels, if you think of Astral and as we build that market in the U.S., clearly, those sort of products will be supportive of the margin. I think we'll get some momentum on our cost-out programs; that will be supportive of the margin. So you can see some of these shorter-term headwinds, I think, will certainly abate. And then some of them, I think, will turn positive for us. Yes, if you look forward, I think optimistic on the margin, but at the moment, we're dealing with quite a few headwinds. But notwithstanding those, I think the margin is in pretty good shape.

And could you just sort of provide some comment on some of the rest-of-world markets, maybe France, Germany, and Japan? Perhaps most interest in Japan as to -- that's obviously been quite historically lumpy. What your experience was in the latest quarter for that region?

Thanks, Steve. So Japan, yes, is historically lumpy. It had a pretty good quarter this quarter with the products getting good take up going well. We continue to have excellent relationships with our customers and we stay in close touch. And the market there is very stable and moving along well, but will continue to be lumpy through the ordering patterns. Europe had a pretty good quarter as well. France performed well. There is still the debate going on in France over the telemonitoring, where for a while the rules were very supportive of telemonitoring and many telemonitored units were in the market there. But at the moment, it's still in a sort of a government legal case while they decide what their future policy is going to be, but the market there is again, stable and moving along well. And Germany is also moving well, both our home care business has been winning business and also our wholesale business there is working well.

But we will continue to work closely with our teams across those regions to ensure that we capitalize on the key opportunities.

Brett, just to clarify, the adverse product mix in the U.S., you are suggesting that the success of the flow generators being a low-margin product has impacted the margin. Is that clear -- is that what you're saying?

Yes, that's correct.

And just the other question I had was just can we get an update on Astral? How that's tracking?

Sure, Chris. We'll take a broader view on that. Astral has had a good two or three quarters of runway in our European markets. In those markets, Chris, we have more than a decade of established partnerships on the pulmonary critical care discharge from the hospital to home care environment. So Astral is seeing very good success. In the U.S. market, we launched it later. We launched it sort of in the August-September timeframe. And in the U.S. market particularly, we're still developing the respiratory care channel and our strength and capability to sell into that.

Having said that, we have many thousands of customers in the U.S. and all of them are now aware that ResMed has a life support ventilator, that it's called Astral and that it has some great benefits, such as giving freedom back to patients or the battery that can extend up to 24 hours away from home. So we think there are some great sort of unique selling propositions around it which will give us over the coming fiscal quarters and fiscal years, frankly, an opportunity to grow that business in that geography. So we're excited about Astral as a long-term sustainable opportunity for us to drive high-margin flow generator growth.

Guys, I'm wondering if you can just talk about the pricing strategy on U.S. devices, particularly compared to the prior corresponding period.

Sean, we haven't made any dramatic changes to our pricing strategy. The biggest thing we're seeing in pricing in the U.S., as we've discussed on the call, is the grandfathering in of some changes we made to our pricing approach last year at this time. So we're still working through some of the pricing changes we made during Q3 and Q4 of last year and that's grandfathering through. But other than that, we haven't made any dramatic changes to pricing.

And just one follow-up. Were there any sort of lumpy contracts in the U.S. device business sort of won or lost during the quarter compared to the prior corresponding period?

But we don't go into details on a customer basis. It just doesn't make sense to go into that level of detail for competitive reasons on a public conference call like this. Thanks for the question, but we really can't answer that.

I guess I just wanted to go back to the gross margin. I know you mentioned the various factors that affected it, but I was just wondering -- if one, if you could quantify those. I know some of my other companies will talk about specific basis point impacts for currency, pricing, etcetera. And if you can't get into that level of detail, can you at least kind of prioritize them and tell us which ones -- what had the greatest, the least impact on the gross margin?

Mike, we don't get quite as granular as that, but on those ones that I've mentioned, they all had -- if you looked at it year-on-year, they all had meaningful impact on the gross margin. Clearly, a mention on the FX impact which was quite large and then product and geographic mix had a quite large impact as well. And then pricing declines year-on-year also that we've been discussing. All of them were kind of meaningful contributors to that gross margin decline.

Okay. But would you say pricing -- I mean, I think investors are going to be concerned about pricing. And given these other factors, just wondering if you could -- was the pricing kind of equivalent to these other things? Was it more; was it less than the other factors taken individually?

They are all meaningful and not -- there wasn't any particular one that overwhelmed the rest, let me put it that way, that were kind of all there in the mix which is really unusual for us to have almost all of them as a headwind. So it's not like any of them were completely driving it, but when you take them as a sum total, then that adds up to quite a large contraction that we saw.

SERVE-HF is a multiyear journey for us going back a number of years. And we expect that sort of first publication of the trial results before the end of the calendar year. You know, that's almost the starting gun that would go off on a long journey, Mike. And there are multiple outcomes in a trial like this. There is the outcome that could improve cardiovascular outcomes. There's an outcome that could improve bigger things, like morbidity or mortality in intention and trade versus per protocol analyses. And so many analyses that the primary investigators will have to do from when they crack the code all the way through to when they present the results and then later publish them in a peer-reviewed published journal. So there's a long lead time. To your point, it will benefit the business. But it's a long journey from there. And so you won't see an immediate inflection point the day of presentation at whichever cardiology conference it may be. What you'll see is the starting gun go off on a marathon opportunity for us which goes over multiple quarters and multiple years.

I wonder if you could give us an update on your views in terms of overall market growth rates in the U.S. and Europe? Where do think that's accelerating from the 4% to 6% that you previously talked about, given the strong growth that we've seen in this quarter and previous quarters as well?

David, look, it's really hard being the only public company that sort of talks on a 90-day cycle here about growth rates to get details of the market growth rates. We talk about it in the mid-single digits in the U.S. and Western Europe. I think there certainly are regions and countries where you're getting double-digit growth, mostly in the emerging markets. We talked earlier about China, India, Brazil and Eastern Europe, where we're really partnering with our channel and focusing on growth in those areas. And then you get some opportunities, like we have with Air Solutions and what it has driven in great value to customers. And you get some share gains as part of that as well. Has market growth tipped up a little because we're moving to connected care models and we're partnering with integrated delivery networks and accountable care organizations? I would say it's a little early for that traction to have started to really move the market in growth.

And I guess my follow-up to that is as it is getting a little bit closer, can you give us sort of your views on where you see the introduction of the third round of competitive bidding in the U.S. for next year? What that will do, perhaps in your eyes to those market growth rates?

CB3, as it's been announced, is pretty much a known quantity now, so that's a good thing. There's stability and predictability in the market for our U.S. customers. They now know that in January of 2016, there begins a phased process that runs through the middle of the year, where reimbursement will be adjusted. There's still some questions about rural adjustments, where there can be a 110% of the national rates. But by and large, CB3 should be predictable and therefore, business planning can occur with customers knowing what the reimbursement is they're going to face. And without there being a reduction in the number of authorized customers or authorized suppliers in a region, we don't expect the kind of disruption that we saw in the second round of competitive bidding.

I just wanted to get a little bit more color around the level of competition you're seeing in masks?

Sure, William. Masks are multiple categories. You have the full-face masks, you have nasal pillows, and then you have nasal masks. And in each of those subcategories, there are multiple players in multiple countries competing with their own innovation. What I can tell you is that it is a competitive game. And we're innovating incredibly well and some of our competitors are doing a reasonable job, too. And what that allows is good competition in a market, healthy competition in a market and the opportunity for us and our competitors to present those opportunities to patients, to HME providers, and to clinicians and get them excited about what we have. So as you go through each of the categories and you go through each of the countries, you win in some categories and in some countries and then you don't win for a while in some categories and countries. But over the long term, what we've showed at ResMed is that of the 7% of our revenues that we invest in research and development, we put a good chunk of that into world-leading mask and patient interface, more generally and accessory research. And we have, I would say, across countries and across the categories some world-leading innovation that's doing very well and more in the pipeline.

And just following on from that, last quarter, you mentioned that you think you probably took market share sequentially in masks. Would you be able to comment on what you think market share did in this quarter? And just finally, are you able to elaborate more on the pipeline that you just mentioned?

I'll take the second part first. And the answer to that is no. We're not going to go into details on the pipeline. And I'll hand the first part of the question to Jim to talk about relative share that you might've seen, particularly in the U.S. geography.

Yes, I mean, it's a typical member to get to market share, because there's not terrific data. But based upon what we see in the market, we think the shares are relatively stable and probably we took a little bit of share on the margin in the quarter, but it's very, very difficult to estimate. So if you went with stable shares, you probably wouldn't be far off.

Brett, if I could just start with a quick one on other income line. I was wondering if you could talk what's in that? Is it largely FX hedge gain?

Yes, the majority of that is some FX hedge gains and that was largely around our other euro hedging structures.

And just the only other one I had was with the very strong sales growth you saw in the U.S. devices. Just wondering if you are on backorder or whether you've been able to fully supply those orders?

No, David, we're off backorder in the U.S. flow generators and that's a really good thing. The downside of that, as Brett said is that we're doing a lot more air freight than we would like at this time. And so as we start to -- and Brett and Don and the team in Sydney are really getting the factory there, both there and in Singapore, moving. So we will expect to start to move from air freight to sea freight. And as Brett said earlier, to start those cost-out programs over the coming quarters to get us back on track there. But no, we were not on backorder this quarter which is a good thing.

Maybe to focus in on U.S. flow gens as well. Just trying to get a sense of AirCurve in the quarter or were there any large stocking orders on the bilevels in the quarter? I know it was launched late last quarter, so was just wondering the extent of the impact in this quarter?

Jim, do you want to take the question about the orders? Do you know how it impacted inventory-wise or replacements?

It's not something we have perfect visibility into, but I didn't see anything unusual in the quarter in terms of stocking orders. The year got off to a really good start since its launch and so it's on a really good growth and adoption ramp. And we think we're taking share in that category as well as in APAP and CPAP. But we didn't see anything unusual.

Yes, I think what you saw last quarter was a good ramp up of the AirSense 10. And what you saw this quarter was a good ramp up of the AirCurve 10 combined with ongoing ramp up of the AirSense 10. You have the addition of Astral, mainly in Europe, but starting to happen in the U.S. geography, Anthony. Well, thanks, Adrienne. In closing, I would like to thank the more than 4000 strong ResMed team from around the world for their continued commitment to changing millions of lives, literally with every breath. We certainly remain inspired by our long-term aspiration of changing 20 million lives by 2020. Thanks for your time today. We hope to see many of you at our ResMed Investor Day which we're holding this June 2015 in San Francisco. More details from Agnes on that later.

Yes. And thank you all for joining us again today. If there are any additional questions, please feel free to contact me. The webcast replay will be available in the investor relations section of our website. Okay, Adrienne, you can close now.