Welcome to the Q4 2015 ResMed Incorporated Earnings Conference Call. My name is Kelly, 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, Kelly, 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 and 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 now 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 Q4 and our full fiscal year 2015 results. I'm pleased to report that we finished our fiscal year with robust performance in both our core sleep apnea business and our respiratory care business, as well as a return to solid growth for our mask products. In my remarks, I'll discuss our top and bottom line results, regional highlights from our global business and an update regarding our long term strategy. I'll also provide high level summaries of 2 recent acquisitions. 1st, CareTouch, a healthcare informatics acquisition that we announced just a few weeks ago and second, an investment that we made and announced just earlier today, a few minutes ago, we went over the wire with Curative Medical.
Finally, I'll turn the call over to Brett, our CFO, to walk you through our financial results in greater detail and then we'll get to Q and A. As you saw in our press release, our global team achieved double digit revenue growth of 17% on a constant currency basis during the quarter. This is our best performance in over 4 years and quite an achievement on the robust foundation of a $1,700,000,000 global business. Our team performed incredibly well. In our Americas region, we achieved double digit revenue growth.
And in our combined European and Asia Pac region, we achieved solid mid single digit growth on a constant currency basis. These global results were fueled by the success of our new product and solutions launches in both our sleep and respiratory care businesses. Looking at the bottom line, our diluted EPS was $0.68 on a non GAAP basis. Our global team produced excellent top line growth this quarter and we have been balancing our investments in growth opportunities while managing costs in R and D and SG and A. As we look ahead to our fiscal year 2016, we believe that we can achieve further operating leverage in both R and D and SG and A.
Greg will talk about gross margin guidance in more detail in his remarks, but I would like to outline 3 areas for efficiency that are critical to our FY 2016 plans. First, we are moving more and more of our shipping volume from airfreight to sea freight as we continue to ramp our product launches. 2nd, we are reducing supply chain costs with significant and sustained internal and external cost out programs throughout FY 2016. And third, we continue to grow incremental manufacturing volume in our lower cost plants. In addition, we have also established sales plans for accelerated growth in our high margin products throughout FY 2016 and beyond, including the AirCurve 10 Biteable platform and the Astral life support ventilation platform.
Okay. Now for some regional highlights. In the Americas, we had strong performance in Q4 sales with the commercial team driving 27% year on year growth. Our team achieved phenomenal flow generator growth of over 50% for the quarter. This exceptional result was driven by the ongoing success of the AirSense 10 and the AirCurve 10 platforms and it was powered by our healthcare adoption as we continue to expand our life support ventilation business in the Americas with the Astral platform.
We achieved good mask growth in the quarter with our AirFit portfolio and it's important to note that pricing in this mask category is in a good place. We continue to expect solid mask and accessories category growth over the next year. Moving on to our combined European and Asia Pac region, we grew at 5% on a constant currency basis in the 4th quarter. We saw strong sales growth from flow generators in Europe, again driven by the AirSense 10, the AirCurve 10 and the Astral platforms, as well as robust growth in our masks and our accessories businesses. The big news for the Asia Pac Group this quarter is our investment in expansion of our China business.
I'll talk more about the Curative Medical acquisition in a few moments. Let me now roll up to a broader perspective to discuss the project we have made against our long term growth plans, our 3 horizons growth strategy. In our first horizon of growth, which encompasses 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 CareTouch allows us to add key features to our resupply offerings. CareTouch is a provider of internet based solutions and resupply programs for the home care industry.
This technology provides an easy use solution for managing patient populations with patient engagement algorithms and an automated IVR outreach as well as a live multilingual call center. We have rebranded this offering as ResMed resupply. We will continue to serve current CareTouch customers and expand this offering so that it's available to all our HME partners. As you heard at our Investor Day in San Francisco a few months ago from Raj Soudi, the President of our Healthcare Informatics business, we now have established Healthcare Informatics as a core competence for ResMed. We will continue to build HI capabilities and buy them when appropriate so that we can drive channel efficiencies, unlock cost savings and ultimately improve patient outcomes.
We also continued our ongoing efforts to build market awareness regarding the importance of sleep and sleep apnea during the quarter. We announced in the press release results from a study on our consumer wellness offering, the S Plus by ResMed. The study showed that after 1 week of use, 67% of S Plus users with low baseline sleep scores achieved an improvement of an average 30 minutes of extra sleep per night. We are excited that our 1st consumer sleep wellness offer has achieved these results. The more consumers become aware of the importance of sleep and aware of any risky breathing or suffocation they have during the night, the better for addressing the vast majority of sleep apnea sufferers who are still not aware of their condition and have not yet seen a doctor about their problem.
During the quarter, we also announced a $5,000,000 $5,000,000 donation for medical research into sleep apnea and COPD to help create a center for excellence in this field at the University of California, San Diego. UCSD is a leading academic research institution located just a few miles from our global headquarters here in California. We believe that academic industry partnerships like this are critical to the ongoing innovation in the fields of both sleep and respiratory medicine. Moving on to our 2nd horizon of growth. We are making solid progress on 2 fronts: respiratory care market development and ongoing investments in our high growth markets.
We continue to grow our European Respiratory Care business from the strong base that we have developed over the last decade since our acquisition of CEM in Europe in 2,005. Our Americas region is fast following suit, fueled primarily by the Astral product offering. There is a very long global runway ahead for our life support ventilation and our non invasive ventilation solutions to help both COPD as well as neuromuscular disease patients. The Curative Medical acquisition that we announced earlier today hits on our strategy in Horizon 2 on both vectors. It grows our respiratory care product portfolio by adding current and existing and future ventilation products.
And it also takes us to a leadership position in the geography in the high growth respiratory medical device market in China. Curative provides a complementary product portfolio for ResMed in both sleep apnea and respiratory care. ResMed and Curative offerings serve different customer segments through complementary channels. Together, we have the broadest portfolio of innovative sleep apnea and ventilation devices from premium imported devices to locally designed and manufactured product offerings that are tailored for the needs of the China market. We plan to continue to invest in both R and D and manufacturing in China for the Curitiv brand.
We will maintain separate brands and distribution channels in order to quickly respond to the needs of the full spectrum of customer segments in China. Our Curative acquisition is an example of us putting our capital to work. We will continue to invest in China, India, Brazil, Eastern Europe and other key high growth markets in medical devices. We will execute on long term strategies that are tailored to each individual country, while improving patient outcomes and reducing overall health care costs. Our 3rd horizon of growth includes a spectrum of cardiorespiratory conditions.
We expect presentation of the SIRV HF results by the study's primary investigators in a few months. Without going into too much detail on SIRV HF, I would like to say that I am very proud of the global ResMed team and how we dealt with the SIRV HF study. Our ethics and integrity was on full show. We made patient safety the most important priority. I believe that we have built credibility with patients, providers, cardiologists and our core sleep, pulmonary and critical care physicians that only adds to the ResMed brand.
Subsequent quotes and discussions with key opinion leaders both publicly and privately have provided strength for this belief. We follow the data and we do the right thing. To this point, you will see in the published results some interesting insights. For example, as discussed by our Chief Medical Officer at the APSS Conference in Seattle just a few months ago, as ejection fraction increases, there is an increasing trend towards benefit from ventilation therapy even amongst the ServHF group. We will continue to monitor heart failure patients in our U.
S.-based heart failure trial, which is called CAT HF. Longer term, we see further adjacent opportunities in cardiology in heart failure, but also in atrial fibrillation and coronary artery disease. I'll provide more regarding our ongoing cardiovascular strategy during our next quarterly call. We remain active on the capital management front. This quarter, our Board has declared an increase of our dividend by 7% to $0.30 per share, $3 opportunities that meet these three criteria.
1st, the business is aligned with our long term growth strategy. 2nd, we can leverage the asset to increase ResMed shareholder value. And third, that there is a cultural fit between the leaders of the business and ResMed in our innovation culture. We found 2 great companies that meet all three of these criteria recently, CareTouch and Curative Medical. We will continue to seek further opportunities as appropriate.
Let me close with this. We remain excited about our performance, our near term outlook and our long term 3 Horizons growth strategy. We are the global leaders in sleep and respiratory medicine, not just in market share, but more importantly in product, service, channel and market innovation. We remain excited as we build the road ahead for our industry, our partners and most importantly for our patients. With that, I'll turn the call over to Brett for a more detailed review of our Q4 and full year financials.
Brett?
Great. Thanks, Mick. As Mick has noted, revenue for the June quarter was $453,100,000 an increase of 9% over the prior year quarter. In constant currency terms, revenue increased by 17%. Movements in exchange rates predominantly a weaker euro relative to the U.
S. Dollar negatively impacted revenue by approximately $32,500,000 in the 4th quarter. At a geographic level, overall sales in the Americas were $273,700,000 an increase of 27% over the prior year quarter. Sales in Europe and Asia Pacific totaled $179,400,000 a decrease of 10% over the prior year quarter. But in constant currency terms, sales in Europe and Asia Pacific increased by 5% over the prior year quarter.
Breaking out revenue between product segments. Americas Flow Generators sales were $151,500,000 an increase of 53% over the prior year quarter. Masks and other sales were $122,200,000 an increase of 6% over the prior year quarter. For revenue in Europe and Asia Pacific, flow generator sales were $121,100,000 a decrease of 11% over the prior year quarter, but in constant currency terms an increase of 4%. Revenue growth in Europe and Asia Pacific was lower mostly due to lower ASV sales and a tough prior year comparable for Asia Pacific reflecting typical lumpy order cycles.
Mask and other sales were 58,300,000 dollars a decrease of 9% over the prior year quarter or in constant currency terms an increase of 6%. Globally, in constant currency terms, flow generator sales increased by 25%, while masks and other increased by 6% over the prior year quarter. During the quarter, we incurred a one time charge of $5,000,000 associated with the field safety notice expenses in response to the result of the SIRV HF clinical trial. Additionally, we made donations totaling $6,000,000 which comprised a $5,000,000 donation to the University of California, San Diego and a one off incremental donation of $1,000,000 to the ResMed Foundation. All of these charges have been excluded in non GAAP numbers.
In addition, the non GAAP measures exclude amortization of acquired intangibles in the current year and restructuring expenses and amortization of acquired intangibles in the prior year quarter. A full reconciliation of the non GAAP to GAAP numbers is included in our 4th quarter earnings press release. My subsequent commentary will reference non GAAP measures. Non GAAP gross margin for the June quarter was 58.4%, lower than guidance essentially due to product and geographic mix, notably the strong performance in Americas flow generator sales and the impact from lower ASV sales as a result of the SERVE HF trial outcome. On a year over year basis, our gross margin contracted by 4.50 basis points, reflecting adverse currency movements, unfavorable geographic mix, unfavorable product mix and declines in average selling prices.
Looking forward, in fiscal year 2016, we expect gross margin to be in the range of 57% to 60%, assuming current exchange rates. Now I'd like to spend a little time just walking through the drivers of our gross margin guidance. We are assuming that average selling prices remain relatively stable with a normal level of modest decline as we have cycled the price change we made in the first half of fiscal year twenty fourteen. Our range does assume that we continue to have relative outperformance in Americas flow generated growth, which is positive to the top line, but will have a negative product and geographic mix impact on our gross margin in fiscal year 2016. It also factors in the product mix impact associated with the expected reduction in ASV revenue.
To the extent we continue to see outperformance in the Americas flow generated growth, we would expect to move towards the lower end of our guidance range. However, as I said at our recent Investor Day, we're working very hard on our cost out programs, which include the benefit of shifting from airfreight to sea freight as well as the pipeline of cost out initiatives in the areas of procurement, production and logistics. The benefits of these programs will be realized over the course of fiscal year 2016 will have a positive impact on our gross margin. Finally, in terms of currency impacts on gross margin, the recent depreciation of the euro relative to the U. S.
Dollar will continue to be a headwind in Q1. However, there will be a positive benefit from the recent depreciation of the Australian dollar relative to the U. S. Dollar, which will be reflected in our gross margin from the Q2 of fiscal year 2016. Moving on to operating expenses.
Our SG and A expenses for the quarter were 100 and $23,300,000 an increase of 1% over the prior year quarter. In constant currency terms, SG and A expenses increased by 12%, primarily due to higher variable employee compensation, the impact of recent acquisitions and the release of contingent consideration in the prior year quarter. SG and A expenses as a percentage of revenue improved to 27.2% compared to the year ago figure of 29.4%. Looking forward and subject to currency movements, we expect SG and A as a percentage of revenue to be in the range of 27% to 28% for fiscal year R and D expenses for the quarter were $28,500,000 a decrease of 10% over the prior year quarter or in constant currency terms an increase of 6%. This increase largely reflects incremental investments across our R and D portfolio.
R and D expenses as a percentage of revenue was 0.3% compared to the year ago figure of 7.7%. Looking forward and subject to currency movements, we expect R and 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, informatics solutions and clinical trials, but also the benefit of the weaker Australian dollar in which the majority of our R and D is denominated. Amortization of acquired intangibles was $2,100,000 for the quarter, while stock based compensation expense the quarter was $13,100,000 On a non GAAP basis, our 4th quarter effective tax rate was 17.8 percent and for the full fiscal year 2015, our non GAAP effective tax rate was 19.5%. We estimate our effective tax rate for the full fiscal year 2016 will be in the range of 20% to 21%.
Non GAAP net income for the quarter was $96,400,000 an increase of 3% over the prior year quarter. Net income for the quarter was $87,500,000 Non GAAP diluted earnings per share for the quarter was 0 point 68 dollars an increase of 3 percent over the prior year quarter, while diluted earnings per share for the quarter was 0 point 6 negatively impacted 4th quarter earnings by $0.05 per share, reflecting the impact from the weaker euro, only partially offset by the weaker Australian dollar. On a constant currency basis, non GAAP earnings per share increased by 11% year over year. Cash flow from operations was $99,600,000 for the quarter, reflecting strong underlying earnings and a modest increase in working capital. Capital expenditure for the quarter was $12,200,000 while depreciation and amortization for the June quarter totaled $17,700,000 dollars 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, representing an increase of 7% over the previous quarterly dividend. Additionally, during the quarter, we repurchased 941,000 shares for consideration of $55,900,000 And for fiscal year 2015, we repurchased 2,700,000 shares for consideration of $152,600,000 At the end of June, we had approximately 15,500,000 shares remaining under our authorized repurchase program. In addition, as Mick outlined, we announced the acquisition of Curative Medical and expect the transaction to close before the end of calendar year 2015. We've not disclosed the financial terms of the transaction. In fiscal year 2015, we've returned 97% of free cash flow to our shareholders via dividends and repurchases.
And over the last 5 years, we've 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 $417,000,000 and at June 30, total assets stood at $2,200,000,000 and net equity was 1,600,000,000 dollars And with that, I will hand the call back to Agnes.
Thanks, Brett. We will now turn to Q and A and we ask that everyone limit themselves to one question and one follow-up question. If you have additional questions after that, please get back into the queue. Kelly, we are now ready for the Q and A portion of the call. Thank
Your first question comes from the line of Andrew Gazzall from UBS. Your line is open.
Thanks very much for taking my call. Terrific results. Could I perhaps just ask the effect or just to characterize the effect of ASV from the safety recall, just whether you saw any trend lines, I guess, particularly around people with a normal heart function who might have complex sleep apnea?
Thanks, Andrew, for the call. And I agree with you. It was a good quarter. With regard to serve HF and the follow-up from that, the results these last months since we published the serve HF results or had them presented by our Chief Medical Officer at the conferences and discuss them with regulators, publication will be in a couple of months, have been pretty much in line with the information that we put out there. And so we said that, ASV accounts for around 7% of our revenues and about a quarter of that is potentially in this affected population.
So we're talking about impact of less than 1.75% of our group sales and that's sort of the trend line that we've seen approximately in that range over the last month since the data were published on the trial. Interestingly, our ASV business in narcotic induced central sleep apnea or treatment emergent central sleep apnea has not been affected and that's mostly in the U. S. Side of the business. And it's an opportunity for us to grow that, what they sometimes call complex sleep apnea or treatment emergent central sleep apnea opportunity in Europe.
And would Dave I know you described Europe as having some impact for ASV. Would there be any reason why Europe is perhaps a little bit more difficult post the safety notice in Europe and perhaps the U. S?
Yes. Thanks for the follow-up, Andrew. And yes, since we had run the SIRV HF trial predominantly in Europe, there were some sites in Asia Pac, but mostly in Europe and had been a big focus on the heart rate component that the majority of the ASV effect has been within the European region.
Terrific. And I know we can't touch it, just really quick housekeeping, just the FX effect at the net income level from Brett?
Yes. So on the FX impact on EPS this quarter was pretty significant, Andrew. So it's around $0.05 negative on EPS.
Okay, perfect. Thank you very much.
Your next question comes from the line of Matt Taylor from Barclays. Your line is open. Again, your next question comes from the line of Matt Taylor. Your line is open.
Matt, I think you've either got us on mute or you're not there. Let's go to the next question, Kelly.
Your next question comes from the line of Ben Andrew from William Blair. Your line is open.
Good afternoon, everybody. Thanks for taking the questions. Maybe 2 areas for us. Nick talk a little bit about the durability of the reacceleration in masks. You had an easy comp obviously in
the quarter, but you're getting rid of
the price declines. Do you see masks in the U. S. And you talked a little bit to this in your script, but do you see it getting back to the high single digit growth rate durably?
So good question, Andrew. And yes, it was a great turnaround from Q3 to Q4 from minus 3% to plus 5 percent on the masks line. We do think that's a sustainable turnaround for a number of reasons. The AirFit portfolio, particularly the P10 and the F10 are very solid and strong masks and are being received really well by customers, it's point 1. And point 2 is, yes, we annualize those price declines that we talk about from January to June 2014 through January to June 2015.
So we're through that sort of hurdle. So good products, good pricing, good positioning and we think the masks will continue to do well for the year ahead.
Okay. And then on the gross margin side, Brett, maybe give us some insights into the relevant magnitudes of currency, mix, geography, things like that. So whether for Q4 or maybe for 2016, so we can be a little more granular on how we think about that? Thanks.
Yes, Ben. If you look at Q4 year on year and as you know a bunch of drivers on that margin, but if you look at that, the single biggest impact for us was FX. I mean and put that into perspective, I think it was around sort of that 150 basis point mark. So that was the biggest impact. But each of the others were meaningful in terms of geographic mix, product mix and ASP decline, I think all played a part in that.
So that kind of gives you a sort of a relative sense of what was driving the gross margin there.
And then the guidance again for 2016 is it presumably product mix is a bigger impact? Did some of the other things start to go the other way? Is that fair?
Yes. I think that yes, I mean the mix the flow generator growth in U. S. Which you've seen is quite extraordinary. So it does swing your product mix and your geographic mix somewhat.
So it's sort of become a little more volatile if you like. So I think if you run through fiscal year 2016, I think some of those will tend to moderate as kind of your cycle product introduction and so on. As you know, we're working very hard on cost out programs and they will deliver, but the timing will be uncertain, but they'll deliver over the course of 20 16. And then currency is okay. That's always a bit of a wildcard.
But we've seen some depreciation in the Aussie dollar recently. We haven't seen the benefit of that yet. It tends to lag about a quarter. Really, we'll start to see some of that benefit in Q2 as well. So I think some of that certainly a lot of those drivers that we're working against us will certainly I think moderate over the course of 2016.
But again, they're quite volatile. So the kind of the gross margins guidance would be a little bit wider, I think,
to really account for some
of the volatility we're seeing in some of the drivers.
Ben, I'd just add to that, to Brett's comments, which I agree with all of them. And I don't want to sound like a broken record, but I reiterate what we're doing the next 12 months on this. We're moving from airfreight to sea freight as these products ramp up. We're moving these cost out programs in the supply chain.
So that's with suppliers and our
partners, but also within our manufacturing and COGS reduction. And thirdly, we're increasing the incremental growth at lower cost plants. And I think all those three elements, will help move GM to the higher end of Brett's guidance rather than the lower one. And then finally, our sales teams, Jim and Anne and their teams are being provided incentives to drive high gross margin growth. So growth in the AirCurve 10 range, growth in the Astral range and growth in the AirFit range of masks are all being provided incentives for the channel to make sure that we grow those high GM products.
And so all those together, I think, are pretty powerful weapon.
Great. Thank you very much.
Your next question comes from the line of Anthony Petrone of Jefferies. Your line is open.
Great. Thanks. Maybe just to focus in on SIRV HF and just cardiology. I'm wondering, Mick, maybe if you can resize the opportunity post the SIRV HF results here. It seems there's still certainly an opportunity in the less sick patient population.
And I'm just wondering if there's any numbers that you can share with us around that. The follow-up to be to that would be, is there an update on timing in getting to that patient population? And then lastly on this topic, which would be an update on CAT HF? Thanks.
Yes. Thanks, Anthony. So to size the opportunity in heart failure globally, well, in the U. S. There are more than 8,000,000 patients and globally there are more than 20,000,000 patients with heart failure worldwide.
Obstructive sleep apnea prevalence in that group is north of 40%. We think central sleep apnea is around 30%. ServHF was targeted at the 30%. If you look at all the key opinion leaders post ServHF and their comments around both obstructive sleep apnea and central sleep apnea in general is that obstructive sleep apnea should be treated with all comorbidities and that the Serve HF results have no impact on that area. I might go into some information and some publications that have come out from ATS and the American Journal For Respiratory and Critical Care Medicine on that front if we need to.
But certainly that's what the key opinion leaders are saying. It's what we've seen in practice as we look at our sales over the last sort of 60, 90 days since the SIRV HF results have come out. So as we look forward, we think there's still a significant physicians are still physicians are still trying to work out what to do, whether it's just CPAP or a combination of oxygen, CPAP or bio level, and they're working through each of those modalities. And I think you'll see a lot of research in the area to go post serve HF to next steps. We are working with Chris O'Connor and the group at Cat HF to certainly finish and follow through on the patients who are already in that trial.
And Rob and I just had a teleconference with Chris O'Connor a couple of days ago, and we're planning for next steps post SIRV HF and post CATHF. How do we find the groups of patients who are well treated? And we can really focus on health economics, keeping patients out of hospital beyond that 30 day, 90 day period with heart failure, which is such a focus and their functional outcomes as steps that we look ahead for post CAT HF and post SIRV HF. And look, as I said in the preliminary remarks, we're in the field of play here. We'll give you an update next quarter as to where we are with our cardiovascular strategy, But we're not moving away from this area.
In fact, we're likely to double down on it, because as you'll see the results from SIRV HF come out, there's some pretty interesting insights as you look at the different quintiles and the different groups of patients. But I'm not going to say too much more on that because we've got to wait for the data to be published in a peer reviewed article and then I can start to talk about the market opportunities that are part of that. Thanks for the question, Anthony. Thank you.
Your next question comes from the line of Steve Wein from JPMorgan. Your line is
Just a quick question on the margin again. You mentioned the various factors, Brett, that were impacting it. One of them is the ASP, ongoing ASP declines. You've obviously seen a rebasing of pricing in masks now that it's returned to growth. So is there can you just sort of talk to the pricing pressure you're seeing across the flow generators, which I assume is where that is coming from?
Yes. I mean that the ASP declines was year on year, Steve. So we're still cycling a little bit of that kind of second half impact. So we're basically through that now. So we do think the impacts from ASP declines will certainly moderate from where they've been, and that's kind of being factored into the guidance.
As Mick said, I think we're seeing relatively stable environment, I guess, on the pricing at the moment. And that's kind of across the whole product range, really.
Okay. And then some commentary that you made last quarter was that you'd be expecting to not be as reliant on air freighting. Was that did that not pan out as you expected just because of the sheer uptick in volume that you saw in Flow Generators? So we're still seeing that sort of impact on the gross margin from airfreight?
Yes, true. We haven't been able to get basically move from airfreight to seek freight quite as quickly as we would have liked and you saw just in the latest quarter. I mean when you look at it frankly the flow generation growth has been accelerating through the quarter. This quarter, you saw 50% growth in the U. S, which is quite phenomenal.
But the guys have been really done a great job in making sure we've got the capacity there and that product is going out to market quite seamlessly. But we've been doing that with obviously more air freight than we would like. This time to trend down kind of where we're looking at July that I'm quite happy with how we're kind of trending that now. But I do think that we'll start to see meaningful benefit I think coming through in Q2 on the freight out program. The trajectory and the trend is absolutely there.
So I'm quite confident we'll see that likely to be Q2 impact at this stage.
Yes. And just to be clear, that airfreight cost is sitting in your gross margin, not in your SG and A line. And if you can just cover off on whether or not because of that demand, inflow generators, you've got any unfilled orders?
Yes. So definitely, it's in our gross margin, the freight. And we don't no, we think look, we would have finished the quarter pretty much with negligible back orders.
Great. Thank you.
Your next question comes from the line of Matthew Prior from Evans and Partners. Your line is open.
Good day, guys. Great results. Just two questions. First one for me is, Mick, just in terms of U. S.
Sales and the great FlowGen result there, where are we in terms of the Astral product cycle and ramp up given that I'm just wondering there's a strong U. S. Flowgen result, the uptake of informatics if we're focused a little bit too much on the sleep side of the business, then you may be having success in ventilation and natural in the U. S. That's somewhat covered up, I guess, in the focus on that number.
Look, Matthew, the U. S. Flow generators numbers includes both sleep and respiratory care products. But the AirSense 10 and the AirCurve 10 are the vast majority of it. But I'll hand over to Jim Hollingshead, our President of the Americas, to maybe give a little more color on the growth of our Astral line of respiratory care and the flow generation, the amazing flow generation growth for the quarter.
Yes. We've had great flow generation growth across the entire quarter. Specific to your question on Astral, it's still early days on Astral. And so that's still ramping, but it's so far exceeding our expectations. The device is quite a good device.
It's very strong clinically and it has very high ease of use. And so we're very happy. We're very pleased with the adoption of Astral. It's ahead of expectations.
Right. Thanks. And just a second question for me. Mick, in terms of informatics, can you talk to whether the informatics rollout and uptake has driven any mask resupply sales increase in terms of that important metric and whether that aided you in the Q4 with U. S.
Mask sales? And if I can also just ask, are you seeing any repapping
on the back of informatics success? Thanks. Good questions, Matt. The health care informatics core competency or the capability of AirView, uSleep and MyAir has really enabled us to achieve those flow generated growth numbers. The analogy would be iTunes is such a great platform that people are buying a lot of iPhones and iPads.
And so we do think that the growth of those flow generation is linked to really the changing of the basis of competition in our industry from just smaller, quieter, more comfortable to smaller, quieter, more comfortable and more connected. And that more connected element is the informatics that liberates the data, unlocks values for patients, providers and physicians and ultimately hospital systems. Your question is sort of part 2 of the question was, is there a link to the Q4 masks number? And I'd say no just yet, right? The acquisition of JSEC earlier this fiscal year and Care Touch that we announced just earlier this month, both will enable us to use those data to drive resupply programs and to get them out to all the HMEs and make them available to all the HMEs.
And we think there's still a huge opportunity to contact patients, let them know how far they are along in their mask aging and give them an opportunity to buy. So I think as you look forward over FY 'sixteen and beyond, there's a huge opportunity for informatics to drive mask sales, but it wasn't really there in Q4. And the repapping opportunity, again, I'd say that's not in the historic, that's in the future. And we do have an opportunity to reach out to patients through the informatics solutions to email, text or IVR to patients on coaching and adherence. And that could lead to reaching out on masks and on repapping.
So you'll hear more from us over the coming fiscal year, and we can give you an update next quarter as to the link between informatics and driving those trailing revenues. But it's a huge opportunity for us and for our channel and for the patients.
Your next question comes from the line of Bruce Liu from CBA. Your line is open.
Hi guys. I just firstly was following up on the ASV question prior. You touched on sort of the impact in Europe. But I was just wondering whether or not you've seen or probably expect to see in the next couple of quarters any impact in terms of demand out of Asia. And I know sort of you mentioned that Japan in the past has been sort of quite a lumpy market, but there's been good take up there?
Yes, Bruce. Well, I'll hand to Rob Douglas to talk about the impacts on ASV in Asia Pac. Rob, you want to take that? Yes, definitely. We've talked quite a lot that the ASV has been very successful and there have been a lot of local trials in Japan.
And in various patient populations, there's an incredible amount of support for the ASV in Japan. Given the different regulatory being and being and what it all means. But we expect there's still to be significant interest in Japan. And in the short term, Japan remains still because of the nature of the market. We have variable demand on a quarter to quarter basis through Japan.
So it's a little bit hard to measure that exactly at this stage. The only thing I'd add to Rob's comments, which I agree with them, is that in Japan, ASV is often used in an acute setting. The SurveyGeF results were done in a chronic setting. And so the physicians there are working through the difference of application between acute and chronic care, and there are different clinical implications. And more will come out post the publication of the SURF HF data on that in the coming months.
Okay, great. And I just had one more. It was just around clarifying. Is it correct that the non invasive ventilation is now out of competitive bidding the upcoming round?
I'll hand to Dave Van Davis to answer that.
Yes. Short answer is yes, Bruce. That the next rounds of competitive bidding will not include non invasive ventilation. There was an initial proposal that it would and then an announcement after that, that it's not included in competitive bidding, which our customers feel good about and we feel good about.
Okay. Excellent. Thanks.
Your next question comes from the line of Matthew O'Brien from Piper Jaffray. Your line is open.
Afternoon. Thanks for taking the question. Hoping to start with the follow-up to a previous question on the informatics. Mick, just as you think about where that product line can go going forward, I think we're probably low single digits in terms of market share at this point, but just how that market is going to segment itself over the next several years between the real high end featured products, including informatics versus kind of your average level of feature set and then the low end as well?
Yes, Matthew, the impact on revenue of the informatics is really through the rest of the business. So if you think of informatics really as an enabler or a new basis of enabling our HME providers, our patients and our physicians to get access to data. So physicians can access data in AirView, patients can access it in MyAir And then through electronic data interchange, we're able to put the data into Epic and Cerner systems for hospitals and even payer providers so they can leverage that data. So the monetary you're talking about what percentage of revenue or the monetary feedback directly from payment for the informatics solutions is de minimis and it's not material. But the enabling of the sales such as the 53% growth in flow generators in the quarter in the Americas was really fueled and catalyzed and powered by those healthcare informatics solutions.
So we do have internal calculations of the value of informatics to justify our ongoing investment in that space. But it's a really it's a long term play about showing the value of home care of taking sick patients out of hospital, putting them in the home and saving money for broken health care systems that's there.
Yes. Sorry, Mick. I think I wasn't real clear on the question. It wasn't a function of what kind of revenue can you get from the informatics. It was more a function of if you don't offer informatics on your CPAP system, are you just not going to be able to participate in the segment of the market?
And will that segment of the market be 25%, 30% of all CPAPs being sold in a few years?
That's a good question. Thanks for the clarification, Matthew. Look, I think that it will fast be 100% of the market that you require data because what's happening is what we're doing is if you look at the data that's in our investor deck there, the published data that we've put out there on the product called U Sleep, where we showed a 59% reduction in the labor costs for the HME upon using U Sleep and an increase in adherence from 73% to 83%, you start to run the economics for a customer and it's going to become just an essential basis of competition to play. But I want to make it clear that informatics is not informatics. It's not just saying, well, I can get my data to the cloud.
It's doing it fast, securely, enabling systems to move quickly. And I do think there's a partnership element of connecting directly into the Epic or Cerner system or into our HME provider systems on the electronic front. And it's a global play. It goes beyond just the first foray has really been in the U. S.
And in the Americas region, but we are now moving our informatics capabilities into France, Germany, Japan, and it's really something that is going to go global. So I think it quickly goes from where it is now to 100% over the coming quarters and fiscal year.
Okay. And then as the follow-up, the curative transaction that you just announced, I know you don't want to provide too much in the way of details, but can you just give us a sense for how quickly that business is growing and the profitability profile versus overall ResMed?
So we're not going to get into specific details on it because it's not material to our global business. It's of the order of 1% of our group revenues. It's growing faster than our group and we're very excited about the opportunity. It takes us to a leadership position within the China market in sleep and respiratory medicine. And Jason Sun, the Founder and CEO, is a great gentleman and individual, a very smart leader and entrepreneur who's created a very strong team around him in Suzhou.
And we're really excited to be partnering with Curative to help grow and help the Chinese population get access to great care across the customer segments from Curative and ResMed.
Got it. Thank you.
Your next question comes from the line of Matt Taylor from Barclays. Your line is open.
Hi, apologies for the forecast. Thanks for taking the question. I guess, I wanted to ask one about masks in the beginning of your prepared comments that you said that you were excited about mask growth next year or you expected robust growth. And I was wondering if you could just help us qualitatively understand what's driving that, if it's pull through or launches or both or just continued strength of the product?
Yes, Matt, I'm excited about the mass growth. People close to the business are even more excited about it. I'm going to hand over to Jim Hineshead, our President of the Americas to talk about it.
Yes, thanks, Matt. We've talked over the last two 3 quarters about how we changed our pricing strategy and that's been grandfathered. And I think the biggest move that happened this quarter is a lot of those pricing moves that we made in mask in the second half of the prior year of Nat Grandpa's improved. So we've seen pricing stabilize. The AirFit range of masks continues to be very, very strongly, I would say especially in pillows and full face.
The nasal market has always been the most competitive category of masks. It continues to be quite competitive. But our volumes are up and our pricing is stabilizing. We have
a very strong position and we feel confident we can maintain growth. Thanks for that. And just to follow-up on FlowGens, I mean, just given how strong the Americas growth has been, once you start comping those big numbers, I mean, how much more can you grow over those 53%, 42% growth numbers that you had in the back half?
Yes. Matt, if you look at our global sleep and respiratory market, we believe it's growing in the sort of mid single digits. So you can't grow it double digits forever. But our goal is to not just meet, but we want to beat market growth in every geography we're in, in every financial period we're there. So we're searching for excellence.
The team has produced excellence, and we're going to continue to do what we can to outperform market growth.
Your next question comes from the line of Ian Abbott from Goldman Sachs.
Yes, good afternoon. I was just wondering on the informatics where you're at in the rollout of that to DMEs in the U. S? Do you think you've pretty much reached all of them with your latest informatics? Or have you still got some way to go there?
Jim? It's a great question, Ian. Thanks. We're reaching everybody with the initial offering, right? So the uptake of initial offering has been very, very strong and I think that that's a huge contributor to the Flow Gen growth, right.
We're taking share in Flow Gen and I think we're taking share in Flow Gen in large part of the device as great as the device both the AirSense and AirCurve devices are fantastic devices just in their own right. But the informatics side of that with integrated comms and the software as a service platform is clearly starting to get uptake because it creates a lot of value for our customers. And what they're seeing is both they can increase compliance and therefore increase revenue, but they also take out a lot of labor intensive processes with it in troubleshooting and patient management and so on. So broadly it's getting adopted. We will add to the platform.
So you see things like the JSEC acquisition and the CareTouch acquisition. As we build on the platform, our customers will get even more growth. And so as we build the platform, we hope to drive even more adoption, which should maintain and even grow share in the Flow Gen space, make our customers businesses more productive, more profitable and improve the health of the market for both us and for our customers.
So would most people be on some version of it already? I mean, I know you're saying you're rolling out more, but do you feel like you're fairly well there already?
Yes, I think there's a lot of growth to come. I mean, I think that the platform will grow and so we'll have more feature sets and more opportunities for growth as the platform grows. But we've had very broad adoption of the product set across the whole market of HMEs. It's not restricted to a customer set. We're getting broad adoption across all of our customers.
We're getting growing adoption across our customers and we will continue to drive that as we add more features to the platform.
And Ian, I'd add that beyond the U. S. Geography, which sort of has been the 1st early adopter here, if you like, of the healthcare informatics solutions, and that study I referenced was based in the U. S. We're seeing the same thing as we take this offering to France, to Germany, to Japan, across Northern Europe, and we will be taking this globally to all the 100 countries that we provide products in.
And the value that's provided in this is universal. I mean, we take waste and inefficiency out of the delivery system. We provide data real time. We call it the halo, hour after last off. You literally can put your mask down at 6:30 a.
M. By 7:30 a. M, your data are in the cloud and they're available for you on your smartphone or MyAir. They're available for the doctor at your 7:30 appointment and they're available to the portfolio managers looking at a population of chronic disease of COPD, sleep apnea or heart failure or hypertension patients. And so the value of that has such a long runway that Jim saying it's available to every customer in the U.
S. Is 100% true, but is it fully unlocked all its value in the U. S? No way. And has it gone to every country around the world that we do business in?
And have we been able to show that value fully yet? No way. There's a whole lot of runway left on that.
Okay. Thank you. And my other question was about SIRVHF. It's now a couple of months since you actually came out with the trial, initial trial data. How would you characterize the response from the sleep doctors from that and the cardiologists?
How would you sort of in general characterize the response? And what sort of things are they looking for going forward?
So on this one, I won't characterize the response. I'll read out the response from the American Journal of Respiratory and Critical Care Medicine, which is the journal of the American Thoracic Society. Let's read 2 paragraphs out. This is 4 authors from University of British Columbia, Johns Hopkins, Brown and others. The title of the paragraph is what should we do with patients being treated with ASV for other indications.
And I'll just quote this. It's important to note that SIRV HF study only included patients with heart failure with reduced ejection fraction and predominantly central events, and the findings should not be extrapolated beyond the study population. Patients who have been given ASV for other indications such as narcotic induced central sleep apnea, heart failure with preserved ejection fraction or complex sleep apnea can likely continue ASV safely as we see no compelling reason to withdraw it, especially if there is a beneficial impact on their symptoms. And they go on further to say, we believe that newly diagnosed patients with obstructive sleep apnea should be treated on CPAP as a first line treatment of obstructive sleep apnea is clinically indicated as there is no compelling reason to believe that CPAP is harmful in any way with heart failure with reduced ejection fraction patients. So they're just 2 quotes directly from publication in mid July from ATS.
What we've seen out in the market then is exactly that. The sleep physicians and the cardiologists are working together to look for patient groups where they can double down on the treatment with, I would say, bilevel, oxygen and ASV, and they're looking for areas where there might be a safety signal. But as we delve further and further into the SIRV HF data, as our Chief Medical Officer said at a session at APSS, when you get ejection fraction above 30%, the safety signal goes away. So these data are going to get out there. There's going to be public and there's going to be a lot of follow on.
But the dust has sort of settled over these last 2 months and it's sort of what we predicted as I said earlier in the numbers. And as I just said earlier, they're from the peer reviewed press that we're starting to see articles confirming that. And certainly in the numbers that we're seeing in sales in the channel, we're seeing that we're all moving forward. And a great thing about this is that we've done some great scientific research. We have the data on kernloyne showing a 60% reduction in mortality in severe COPD.
And we had a safety signal in heart failure, but our reputation at ResMed in our clinical community only goes up by these large randomized controlled trials that we published in the peer review press and we'll continue to do that.
Great. Thank you.
Your next question comes from the line of David Lowe from Deutsche Bank. Your line is open.
Thanks very much. Look, I think most of the questions have been asked, but just a couple of ones. Competitive bidding, we see the national rollout next calendar year. What are your expectations or the implications of
that? Dave? So it's still a little bit up in the air.
I mean the announcement is that you've got a January 1 phase in that goes sort of half and half of existing rates and half with the national averages or national averages plus 110% depending upon whether you're in an MSA or not. And then July 1 going forward would be the new rates set on either the national or local averages. But we're we obviously support our customers. We think our customers ought to be getting fair value for the services that they're providing. And I know there's still dialogue that's going on.
So remains to be seen whether or not this goes forward on the dates as scheduled. But regardless, we think that the competitive bidding that's been in round 1 and in round 2 is a known quantity. So from a disruption standpoint, there should be less, there's a little bit easier to plan for it. And also because there's no reduction in the number of providers, while on the one hand you'd say for our customers it's not quite a spare, because they're just taking the price cuts without getting the volume up. The other hand, there's less disruption in terms of who's going to be in the market as a customer.
So we'll wait and see when it comes out and how it progresses, but we feel reasonably confident about how the market is going to develop between here and there.
Okay, thanks. And just switching to the acquisition that's been announced today, China? And is that a strategy that you'd expect to take to other markets?
So Rob Douglas will answer this. Yes. Thanks, David. Yes. So we think the Curative brand is actually quite strong in China.
It's one of the major players there. And interestingly, behind sort of the acquisition rationale, there's a very strong correlation in sort of culture and values in those brand values. And also as we think about China in terms of segmentation in the market where there are people who want to buy foreign stuff, expensive stuff and people who want good stuff, local. And so we and our distribution channels are actually quite complementary through that. So specifically in China, we see that multi brand strategy working well.
And we talk with our teams, we will have coordinated strategies, but we'll be very independent entities. And we think that's a very efficient way to run an integration plan. As we look at other markets, they'll be sort of done on a market by market basis as to what makes sense in those as we move across the world.
So is the curative offer cheaper presumably than a ResMed or Respironics offer?
I don't think we'd go there. It's more a matter of functioning of good functioning, good value products target into the right segments. And really, these products have all been designed in China for the China market. So they really got the right feature set for those patients that have targeted that.
Your next question comes from the line of Joanne Wuensch from BMO Securities. Your line is open.
Hi, good afternoon and thanks for taking my questions. I have a very specific one and a very big picture one. First on specific, what's really interesting to me is that year over year your gross margins declined by 4.50 basis points, but operating margins are only down 90 basis points, which means you're managing the rest of your expenses. How do we think about the FX impact that rolls through the other expenses that's helped you capture that only 90 basis point hit?
Brett, do you want to have
a first go at that and maybe Rob add some color?
Yes. I mean, Joanne, you're right. I mean, we do take more of a holistic approach to it and sort of the production, for example, on the Flowgen growth being great on top line, being some pressure on the gross margin, but we've also managed the operating expenses as well. So at an operating profit level, when you look at a non GAAP basis, operating profits grew 5%, notwithstanding a bunch of FX headwinds and distractions from Serve HF and so on. So this thing kind of demonstrates pretty resilient, pretty robust business, I think.
And so we try to manage it across the board, not just kind of one particular segment. So but the currency is there. I mean, certainly, it helps us, if you like, the currencies through the SG and A and R and D, hurts a bit on gross margin. I think if you step back and take a longer term, I think we're still very committed to getting operating leverage at the kind of SG and A or operating profit level. So I think think about in that context that we do want to get operating leverage there.
To the extent we get that, that's certainly going to drop to the bottom line and help our earnings per share.
That's helpful. So it implies that that is the right way to think about this holistically that there's a lot of pieces running through this and that there's room over time still there.
Exactly. Okay. Exactly.
Thank you. Now for the big picture question. Most of my med tech companies at this stage are consolidating. We're running a lot of merger models on a regular basis. You guys have done an amazing job since the spin out from Baxter.
You're making tuck in acquisitions like we saw today in China. How do you think about playing in the New World order where more product is better product?
Well, Joanne, we play in a different space to companies like the big ones you're talking about like Medtronic, Covidien, right, where you're selling products to hospitals and large GPOs. Our job and it sort of aligns with the Western European health care systems and where the U. S. Health care system has now gone with accountable care organizations that the goal now is to keep patients out of hospital and in the home. And within the home care medical device space, we have a very strong position.
And certainly within the respiratory medical and COPD side, we're the market leader in driving those channels. So I would say our opportunity is to continue to drive value to show that taking patients out of hospital and putting them into the home is the right thing. And our job is to run faster and do better and to make sure that we continue to grow. We will continue to look at M and A as we announced on this call to acquisitions. And our goal is organic growth and leveraging our current business, driving the operating leverage that you mentioned in the first part of your question, but also looking strategically at how we can add value to the marketplace.
And I think taking patients out of the hospital, managing them in the home, getting the data to the cloud so you can quantify the benefit of that. It's kind of a unique value proposition, if you like, to the medical device market. Now we have competition and we continue to compete against our fellow competitors in the home care space and the respiratory space. I think we do it better. And I think we'll continue to lead and innovate and look at appropriate M and A to keep ourselves at the front of the pack.
Thank you.
Thanks, Joanne.
And we are now at the 1 hour mark. I will turn the call back over to Mick Farrell for closing remarks.
Thanks, Kelly. In closing, I want to thank the more than 4,000 strong ResMed team from around the world for their continued commitment to changing millions of lives with every breath. We've had an incredible year launching game changing products and services, and we've reached $1,700,000,000 in annual revenues, but we remain laser focused on our long term aspiration of changing 20,000,000 lives by 2020. Thanks for your time today.
Thank you again for joining us. If there's any additional questions, please feel free to contact me. The webcast will be available on our website at investors. Resmed.com. Kelly, you may now close the call.
This concludes ResMed's 3rd quarter earnings live webcast. You may disconnect.