Welcome to the First Quarter 2015 ResMed Incorporated Earnings Conference Call. My name is Larissa and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. Please note this conference is I'll now turn the call over to Agnes Lee, Senior Director of Investor Relations.
Agnes, you may begin.
Thank you, Larissa, and thank you for attending ResMed's live webcast today. Joining me on the call today are Mick Farrell, our Chief Executive Officer and Brett Sandercock, our Chief Financial Officer. 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 investor. Resmed.com.
I want to remind our listeners that our discussion today may include forward looking statements, including but not limited to statements about future expectations, plans and prospects of 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 Nick 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 Q1 fiscal year 2015 results. I'll provide an update on our new product launches, some key sales highlights and our progress against our 3 Horizons strategy. Then I'll turn the call over to Brett, our CFO, to walk you through our financial results in greater detail. As we promised during our investor call last quarter, the ResMed team has been focused on executing on our strategy of launching new products, new services and new solutions that provide exceptional value to all key players in our value chain. That includes physicians, providers, payers and most importantly, patients.
We have delivered exciting offerings that begin to fulfill the promise in our core sleep apnea market with the launch of the Air Solutions ecosystem and its key enabling component, the AirSense 10 platform. We are very pleased with our strong first quarter growth and our overall results. We saw strength across our Europe and Asia Pacific regions as well as solid growth in the Americas. These results are primarily due to the success of our new product launches in both the sleep disordered breathing and our respiratory care markets, which includes COPD as well as neuromuscular diseases. On a constant currency basis, we grew 6% year over year for our global business in Q1.
We delivered gross margins of 62.4%, which is right near the middle of our guidance range. We have continued to invest SG and A to promote our new product launches. As you've seen from our recent press releases, we have launched products across our portfolio, including sleep apnea, sleep wellness and respiratory care. Our GAAP diluted earnings per share grew 4% to $0.58 On a non GAAP basis, diluted earnings per share was a penny higher at $0.59 In the Q1, we grew at 11% on a constant currency basis across our combined Europe and Asia Pacific regions. Sales growth came from flow generators associated with our new product launches as well as masks and accessories.
With the launch of the AirSense 10 platform in its early days, we see upside in Europe and Asia Pac as both the AirSense 10 and our new platforms continue to ramp. In the respiratory care market, our leadership positions and our established channel in Western European countries have allowed us to rapidly grow our business and build good momentum with the launch of our new life support ventilator, the Astral platform. We expect this momentum to continue solidly in Europe over the coming quarters and fiscal years. Additionally, we are continuing to invest in Asia Pacific. This quarter, we took advantage of opportunities to realign our distribution channels in several Asia Pac markets, and we have started investing in a dedicated Asia growth initiative with a focus on China and India.
We are planning for strong growth from China and India as well as other emerging markets including Brazil and Eastern Europe during fiscal 2015. Moving on to Americas results. We had a very solid performance this quarter from the region with the Americas sales team achieving a 10 percentage point growth turnaround from Q4 to Q1, resulting in 3% growth for the region in Q1 on a year on year basis. We are seeing U. S.
Patient volumes growing in both flow generators and mask categories. We are very pleased with the initial progress of our U. S. Flow generator product launches. I'll talk first about our sleep apnea category product platform, the AirSense 10, and then I'll talk about our new care platform, the Astrum.
We have received very positive feedback from our customers for AirSense 10, and although it is still early days, our sales are ramping up quickly, exceeding our original expectations. As a result of this excess demand, we ended the quarter with a modest backlog for some categories of AirSense 10 devices in the Americas. We are swiftly accelerating our manufacturing and supply chain, and we believe that we will catch our supply curve up to that growing demand curve during this fiscal Q2. In September, we also announced the launch of our new life support ventilation platform, the Astral, into our U. S.
Market. The Astral platform has some of the most advanced engineering that ResMed has produced, delivering key advantages for customers such as lower total cost of ownership for HME We have received good feedback from our HME customers and our key opinion leader physicians on the Astral product, and we look forward to growing our ventilation presence with Astral. Moving back to the sleep apnea market. The ongoing product mix shift from CPAP to APAP continues steadily as home sleep testing continues to grow. We estimate that approximately 40 percent to 45% of diagnoses in the last 12 months in the U.
S. Were through home sleep testing. Almost every player in 50% in the near future and beyond. Looking at the masks and accessories categories, our FIT range of masks had solid volume growth in the quarter. We gained share on a sequential basis.
Customer feedback on the P-ten, N-ten and F-ten has continued to be excellent. On a sequential basis, volumes were up and prices were relatively stable in masks. On a year over year basis, we are still annualizing price changes from earlier this calendar year. As a reminder, we are still expecting price to be a negative factor for year on year revenue numbers until the quarter ended March 2015, the anniversary of price adjustments that we made earlier this calendar year. Now I'd like to take a broader longer term view and spend some time talking about progress against our 3 horizon strategy.
In our first horizon of growth, we are driving engineering innovation with the launch of our Air Solutions ecosystem and its key component, our AirSense 10 platform. We expect our bi level range of devices, which we will call the AirCurve 10 platform to launch in the U. S. By the end of this calendar year and then into other key markets globally thereafter. We're expanding our digital informatics offerings by increasing the connectivity from our Air Solutions ecosystem to the informatics ecosystems of our customers.
In September, we announced the integration of Air Solutions with Fairview Health Services and their Epic Electronic Health Record System. This is just one example of ResMed looking to eliminate non reimbursed costs from the value chain and to provide increased efficiency and profitability for our customers. We continue to look for opportunities to link our technology to streamline health care processes and to drive efficiencies for our partners in the channel. Earlier this week, we announced the availability of the ResMed data exchange program, enabling even more customers to integrate sleep and respiratory data into their own software systems. We want to liberate the data.
Watch this space for further expansion of our health care informatics offerings for our partners, including HME providers, physician practices, hospital systems and beyond. At the Medtrade Conference in Atlanta earlier this week, we demonstrated a new personalized therapy management tool, which we call MyAir. MyAir is delivered through web based applications that can run on both Apple's iOS and Android platforms. MyAir allows sleep apnea patients to see data about their positive airway pressure therapy and for our HME provider partners and could ultimately support better outcomes for their patients. MyAir will be commercially available in the U.
S. Market next week and then we will release it to other key markets in the future. We continue to believe that ignorance of the impacts of untreated sleep apnea is our major competitor in our first horizon of growth. So we are focusing even more attention on the importance of sleep quality for good health. In this vein, earlier this month, we launched 2 important sleep awareness initiatives.
First, we launched an education and product focused campaign called Better Sleep for Women. As part of this campaign, we created a new website that educates women on how to achieve a better night sleep and to provide a forum for women to discuss their sleep issues. Women are 40% of the patients presenting for sleep diagnostics and they are well over 50% of the decision makers in the health care space for themselves and their families. This is true across healthcare and particularly in the sleep space. Our new AirSense 10 Autoset for her product with its unique patented algorithm designed for female SDB respiratory patents is a key part of this offering.
This is not just great marketing. It is also solid science. This product has been very well received in its early weeks on the market. The second initiative we launched is the world's 1st non contact digital health device, which tracks both sleep quality, including light sleep, deep sleep and REM sleep and the bedroom sleeping environment, including temperature and light levels. The product is called the S Plus by ResMed.
The S Plus by ResMed is a combination of a sleep wellness product and a sleep coaching service that delivers personalized sleep strategies to individuals. The S Plus has a patented non contact sleep sensor technology as well as sophisticated cloud based algorithms that are backed by solid sleep science. The data can be reviewed on a dedicated ResMed app, which runs on both Apple's iOS and Android compatible devices. The app itself is a free download from the cloud. The S plus by ResMed sleep wellness device is priced at $149 We have made the S plus available in the U.
S. Market in the future at select Apple Stores as well as Bed Bath and Beyond Stores as well as online for U. S. Customers at both Amazon and a dedicated site, mysplus.com. That is all one word.
The S Plus has already been reviewed favorably in the Wall Street Journal, in Time Magazine and on Fox Television. We believe this tool can help engage some of the hundreds of millions of consumers around the world who have sleep issues and who want a sleep wellness tool to help them sleep better. We believe that it will create meaningful conversations about sleep between consumers and their caregivers and loved ones as well as with expert clinicians and physicians. On the legal front, in the Q1, we reached a settlement with a small Taiwanese manufacturer called Apex. The agreement met our goals to protect our world leading respiratory medical innovation and showed ResMed strong defense of its intellectual property.
We will continue to take actions to enforce our intellectual property and to defend the significant investment of approximately 8% of our revenues that we make into science and engineering within our global R and D team. We are also making progress within our second horizon of growth, which includes both our respiratory care market and new geographic market expansion. We have continued to see solid growth in our European respiratory care business, where we have had a leading presence in home care ventilation for a number of years. We expect to grow Astral and it will build on its momentum from Q4 in Europe as government insurers continue to see the value of moving patients from costly hospitals to economic and more patient friendly treatment in the home. In September, we launched the Astral life support ventilator platform in the U.
S. As I outlined before, we have received good initial feedback from customers. Combining our existing vPAP COPD non invasive ventilation device and our new Astral life support ventilation device, we now offer our HME provider and pulmonary physician customers the opportunity to provide the right treatment at the right time for both COPD as well as neuromuscular disease patients. On the geographic expansion component of Horizon 2, we continue to make progress in our emerging markets with double digit growth this quarter. I traveled to our India national sales team meeting this month, and I got to tell you the energy level was palpable.
Our country leader there, Jeetu, and our entire India leadership team have an incredible outlook. Their commitment to real time expanding future growth targets during a sales meeting is something that I have not seen in over 14 years at ResMed and 20 years in the Healthcare and Technology Industries. We intend to remain focused on geographic diversification with an emphasis on China and India as well as emerging markets beyond Asia, including Brazil and Eastern Europe. So that in the future, these markets become a material contributor for ResMed's global growth. Our 3rd horizon of growth focuses on cardiorespiratory disease and other new market opportunities.
In terms of current contribution, our cardiology products grew strongly in Europe this quarter. Even though it is now 18 months since enrollment was completed on Serve HF, we are still seeing excitement in the space and good partnerships in patient care between cardiology and pulmonary physicians. In terms of other ongoing clinical trials in heart failure, we are currently enrolling patients for our CAT HF trial at sites across the United States. We expect to complete CAT HF soon after the SERVE HF trial data is first published, which we expect to happen during calendar year 2016. CAD HF is powered to show improvements in cardiovascular outcomes, whereas SIRV HF is powered to show changes in mortality and morbidity with both studies using ResMed's proprietary adaptive servo ventilation technology.
We will continue to provide updates as significant milestones are reached for both of these important clinical trials. It is worth noting that there continues to be clinical interest in positive airway pressure technology as a tool to help reduce the cost of care for cardiac patients. Doctor. Richard Schwab and his colleagues at the University of Pennsylvania Medical Center published a study last week in the Journal of Clinical Sleep Medicine showing a reduction in hospital readmission rates for cardiac disease patients with adherent sleep apnea treatment. Reduction of hospital readmission rates costs helps reduce costs and can help mitigate the reimbursement penalties that hospital space when Medicare patients are readmitted within 30 days of a discharge.
I talked to a lot of hospital CEOs and CFOs and they are looking at heart failure and they are looking at COPD patient readmission rates very closely. We know we can help them with technology that includes positive airway pressure and also technology that goes way beyond that in the future. Finally, on the capital management front, we continued to generate strong cash flow during the quarter and we have maintained our commitment to return cash to you, our shareholders. We have just declared a quarterly dividend of $0.28 per share, which is a 12% increase from our previous dividend. And during the quarter, we repurchased 835,000 shares at a cost of approximately $43,000,000 We plan to continue with a very strong capital management strategy throughout fiscal year 2015.
Let me close with this. The next 12 months will be very exciting for our global ResMed team as we continue to ramp up the launches of the new products that we discussed here as well as others and new services and new solutions across our three horizons of growth. We continue to focus on improving quality of life, halting the progression of severe chronic diseases and lowering the costs of highly stressed healthcare systems around the world. With that, I'll turn the call over to Brett for a more detailed review of our Q1 financials and then to Q and A.
Brett? Great. Thanks, Mick. As Mick has noted, revenue for the September quarter was $380,400,000 an increase of 6% over the prior year quarter. And in constant currency terms, revenue also increased by 6%.
At a more detailed level, overall sales in the Americas were $207,200,000 an increase of 3% over the prior year quarter. Sales outside the Americas totaled $173,200,000 an increase of 11% over the prior year quarter. In constant currency terms, sales outside the Americas also increased by 11% over the prior year quarter. Breaking out revenue between product segments. Americas flow generator sales were GBP 95,300,000 an increase of 8% over the prior year quarter.
Masks and other sales were CHF 111,900,000 a decrease of 1% over the prior year quarter. For revenue outside the Americas, flow generator sales were $119,000,000 an increase of 15% over the prior year quarter and in constant currency terms also an increase of 15%. Masks and other sales were $54,200,000 an increase of 2% over the prior year quarter, and in constant currency terms, again, an increase of 2%. Globally, in constant currency terms, flow generator sales increased by 12%, while masks and other were flat compared to the prior year quarter. Gross margin for the September quarter was 62.4%.
On a year over year basis, our gross margin contracted by 130 basis points, reflecting declines in average selling prices and unfavorable product mix, partially offset by manufacturing and supply chain improvements. Looking forward for the full fiscal year 2015, we expect our gross margin to be in the range of 61% to 63% assuming current exchange rates. With respect to currency impacts on gross margin going forward, on a sequential basis and assuming current exchange rates, we expect to see a minor negative impact on gross margin as the impact from a weaker euro will be largely offset by the weaker Australian dollar. Finally, we continue to focus on initiatives targeted at improving our global manufacturing, supply chain and logistics cost structures. Moving on to operating expenses.
Our SG and A expenses for the quarter were $110,500,000 increase of 9% over the prior year quarter. In constant currency terms, SG and A expenses also increased by 9%, primarily due to higher marketing costs associated with recent product releases, additional headcount to support commercial activities and an increase in variable employee compensation. SG and A expenses as a percentage of revenue were 29.1% compared to the year ago figure of 28 0.3%. Looking forward and subject to currency movements, we expect SG and A as a percentage of revenue to be in the range of 29% for fiscal year 2015. R and D expenses for the quarter were $30,000,000 an increase of 10% over the prior year quarter and 9% on a constant currency basis, reflecting incremental investment in the areas of health care, informatics and cardiology.
R and D expenses as a percentage of revenue was 7.9% 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 continue to be in the range of 7% to 8% for fiscal year 2015. This reflects our ongoing commitment to investing our diverse product pipeline, informatics solutions and clinical trials consistent with our strategy. Amortization of acquired intangibles was $2,100,000 for the quarter, while stock based compensation expense for the quarter was $11,400,000 Our effective tax rate for the quarter was 18.3%. The lower tax rate this quarter reflects a net tax benefit of $3,200,000 arising from the favorable conclusion of the long running German tax audit.
Excluding the impact of this onetime benefit, our effective tax rate was 21.5%. We estimate our effective tax rate for the full fiscal year 2015, excluding the onetime tax benefit, will be in the range of 21% to 22%. Net income for the quarter was 83 point $3,000,000 an increase of 3% over the prior year quarter. Diluted earnings per share for the quarter were $0.58 an increase of 4% over the prior year quarter. Excluding the benefit of the onetime tax item noted previously, diluted earnings per share would have been 0 point 56 consistent with the prior year quarter.
Cash flow from operations was CAD86.5 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital. Capital expenditure for the quarter was $20,700,000 and depreciation and amortization for the September quarter totaled 18,600,000 dollars You will have seen we began including cash flow statement with our earnings release this quarter. Many of you have mentioned that it would be helpful to have that with the release, and we plan to continue to include that going forward. Our share repurchases continue to play a significant role in our capital management program. During the quarter, we repurchased 835,000 shares for consideration of 42,900,000 At the end of September, we had approximately 17,400,000 shares remaining under our authorized share repurchase program.
We do expect to maintain an active share repurchase program during fiscal year 2015. In addition to our share repurchases, our Board of Directors today declared a quarterly dividend of $0.28 per share. Our balance sheet remains very strong. Net cash balances at the end of the quarter were $506,000,000 And at September 30, total assets were at $2,300,000,000 and net equity was 1,700,000,000 dollars And with that, I'll hand the call back to Agnes.
Thanks, Brett. We will now turn the call over to Q and A, and we ask that everyone remember to limit themselves to one question and one follow-up question, please. If you have additional questions after that, please get back into the queue. Larissa, we are now ready for the Q and A portion of the call.
Thank you.
We'll now begin the question and answer session. Our first question comes from Andrew Goodsall from UBS. Andrew, your line is now unmuted. Andrew, perhaps your line is muted on your end. Our next question comes from Margaret Kaczor from William Blair.
Good afternoon, guys. So first for us, can you talk a little bit about how quickly the DMEs are responding to the product features of the AirSense and that connectivity capability? Is it making the sales cycle longer? A little bit more detail there.
Thanks, Margaret. As we said, the Air Sense 10 launch is going very well. It's exceeding our expectations. We've seen very positive feedback from our customers. To your question, the discussion around healthcare informatics and its use within the business of the home care provider is a more detailed conversation and takes a little longer to have that discussion.
But we also think it's very sticky in that it provides a lot of value to the HME provider. Some of the value to the HME provider can be the fact that with the inbuilt modem, you no longer have to manage a set of SKUs of modems and connect them and manage a fleet of modems, all the way through to dealing with customers who have their customers, the patients who may have problems with devices that can be instantly checked that the humidifier is working say from the HME provider to save that cost of $75,000,000 to $100 of driving out to see the patient or the customer tax that comes with provide with the end to end solution and providing value across the value change. But even those initial discussions with HME providers do provide a great opportunity to get beyond features and benefits and start talking about end to end solutions. I'll hand to Jim Hollingshead, President of the Americas. Do you have any further detail on, I mean, the 1st months of AirSense 10?
Yes, sure. I would just say a couple of things, Margaret. It's not slowing the sales cycle for the devices at all. The devices are doing very, very well. The device is a fantastic device.
It's small. It's quiet. It's very easy to set up, etcetera. What there is a sales cycle associated with then using the wide and growing range of solutions from a business process flow point of view for our customers. So, the devices are selling extremely well and we're in more and more conversations about how they can take our software solutions and embed those into their so that can start
to accelerate and take more share as we go on throughout the year. So that can start to accelerate and take more share as we go on throughout the year. But the general go ahead.
I just clarified, it's not taking longer. The devices are selling very well. What that is happening is we're engaged in deeper conversations about using the device to its full effect along with our solutions. So there is some time associated with that conversation and it's almost a solutions consulting conversation that comes from the back end. So the device sales are not slowed down at all.
It's how they apply the solutions into their business that can take some time for them to then embed and that part of it is what as MiXS makes it so sticky.
Got it. And then how much of the growth this quarter beyond the AirSense do you think was actually the kind of the delayed sales from the previous quarter that maybe got pushed into this quarter? Thank you. Yes. I don't think
we have a material breakdown of that. There were some S9 devices that we sold obviously during the quarter, a significant component of the sales for S9 devices. The Essence 10 had a rapid ramp faster than we had expected and a couple of the SKUs, the categories were on back order at the end of the quarter. I'm not sure, Brett, if we have a breakdown of any material change from Q4 to Q1 then. Brett, you want to make any comments there?
No, I think that's right, Mick. I mean, it would be hard to really know what if that was an impact, what that impact would be. Certainly, though, when you look at AirSense and how it's gone the first 2 months, it's gone very well. But yes, I don't think we can sort of tease out that impact.
Thanks, Margaret.
Thank you. Our next question comes from Andrew Goodall from UBS.
Thanks very much for taking the question. Sorry, my phone did drop out. I may be a bit repetitive. But actually, I thought I might ask you quickly just on the launch of the buy level range, where you're at with that. Does that appear in the inventory build?
And whether you've had any effect in the quarter by not having that product out there?
Thanks, Andrew. And good that your phone is working now. The bilevels products, which we're calling the AirCurve 10, we did show at the Medtrade conference earlier this week in our U. S. Market, and we will launch AirCurve 10 before the end of the calendar year.
So they're out there in the public environment. Given the competitive environment, we're not going to give the date or the level of inventory that we have of or do not have of AirCurve 10 within our factories or our distribution warehouses. So it just doesn't make sense to go in that level of detail. But I can tell you, I'll stand behind what we showed at the conference and what we've said that the AirCurve 10 will provide fantastic value. It will be part of the Air Solutions ecosystem and we look forward to launching it in our U.
S. Market before the end of the calendar year.
And I guess last time with the launch with the delays, obviously it was a prolonged delay last time. I mean do you think there's any sort of small levels of deferral or anything like that that you'll experience between now and then?
Andrew, given that we'll be launching the AirCurve 10 within 3 months of the AirSense 10, we don't expect any dramatic holdovers on the buy levels like we had from the S8 to S9 or the S9 to S9 buy level timings. As you remember, those were more of the order of 24 months 36 months, respectively. So we're talking 3 months. Any impact may have happened in Q1, where we had the AirSense 10 products, so the CPAPs and APAPs, but not the buy levels. The buy levels were still on the S9 platform.
But we think it's relatively de minimis, and we think going forward that the full value proposition we'll have by the end of Q2 will be in the market, and we shouldn't be materially affected by that.
Thanks.
Thank you. Our next question comes from Steve Wien from JPMorgan.
Good afternoon. I just had a quick question for Brett on the currency effect on the gross margin for the current quarter. At the last quarter, you highlighted that there might be a small headwind. Are you able to quantify it? And then just talk to what sort of benefit we may have seen from the weakening Aussie dollar going into subsequent quarters?
I take your point about the euro, but just if we could provide some
relativeities there
that would be useful.
Yes, sure, Steve. So yes, if you look at our margin sequentially through Q4 to Q1, there was a currency headwind. It was around 50 basis points. So that certainly did impact our gross margin when you looked at it sequentially. If you look from look forward to Q1 to Q2, we certainly have a headwind from the weaker euro, which is impacting revenues and then margin.
If you look at that, I think that we'll get a small headwind. It'll probably, I suspect, be around the 40 basis point mark for that. As you know, with the Ollie dollar benefit, it tends to lag by a quarter so. So more of that benefit would then flow through into Q3, where in fact in Q3, I think on a sequential basis, we get some more upside from currency because of the weaker Aussie. So it sort of plays out like that.
Yes, that's very useful. And then just separately a quick question on Japan. We've been waiting for some it's obviously been a market that's been a little bit disrupted over recent quarters. Could you just give us some update as to what might be happening there?
Yes. Rob Douglas, our President and Chief Operating Officer, will answer that.
Yes. Thanks, Steve. So the fundamentals of the Japan market haven't changed dramatically. We still have a good patient flow. We still got a really good business with our cardiology product, and we're seeing strong product flow there.
Because of the structure of the way we go to market, it is a lumpy business as it reflects in our sales. And this quarter, we had a positive result from that lumpiness. But we'll continue to see that lumpiness through there, and we'll have positive strong quarters, and that'll be offset periodically. So it's pretty well going pretty well.
Our next question comes from David Lowe from Deutsche Bank.
Thanks very much. I was wondering if we could touch on mask sales. So the numbers or the growth rate is relatively weak there and particularly light of the fact that there's a number of new products being launched. Could you talk to what's causing the weakness with that new product range being out?
Thanks, David. Yes, I'll mention three things and then maybe hand over to Don Duncan, the President of our SDB business to talk after that. First point, we saw volume growth in the quarter sequentially increase and we expect that to continue as we ramp up. So we saw a sequential increase in volume from Q4 to Q1. Marks were down 2nd point, masks were down in Q1 on a year on year basis due to the lower prices that we're washing through from the sort of January to March 2014 quarter that will happen going forward through to the January to March 2015 quarter.
And so we're still expecting that to watch through on that time horizon. But the third point is we've seen really good traction of the AirFit range from the P-ten, which I personally wear and have been for a number of months, the N10 and the F10 and they're growing share sequentially and the anecdotal feedback from customers is they really like those masks. So I think that's all goes well for us as we look to future volume growth and then future revenue growth as we look to end of Q3 and Q4.
Okay. So you'd classify that as no loss in share. This is more around price than it is share loss?
Yes, I'd actually say we took share, David, from Q4 to Q1 on a sequential basis. And that the year on year numbers you're looking at, obviously, we are washing through the price changes that have happened there. So that's how I nuance that.
All right. Thanks, Mick. Just maybe one for you, Brett, just on gross margins. You talked about there being a negative mix effect in there. Could you just touch on that whether you're talking geographic or products, please?
Yes. No, that would be on the product side, David. And it's really that as you saw the kind of the flow generated growth relative to the mass growth was the big driver there.
Yes. So would it not be right to say that geographically there's a positive mix effect?
Yes. If you look at it year on year, yes, correct. But fairly pretty small, pretty small. Okay. All
right. That's all I had. Thanks very much.
Thanks, David.
Thank you. Our next question comes from Saul Henderson from Credit Suisse.
Thanks. Good morning. First question, maybe just for Brett. Brett, operating cash flow was actually down on the PCP. Earnings were up slightly.
Can you just talk to sort of what the drivers of that was? Is it receivable days that have increased on a PCP basis?
Yes. There would be yes, I mean, it is around some modest increase in working capital on a relative basis. The receivable DSO is a little higher. And probably the other driver there will be some inventory build as well. So that they're kind of they're playing out with a modest increase in working capital, which has lowered cash flow a little bit.
Having said that, I still think that the $86,500,000 is still pretty strong cash flow.
Sure. Okay. Just a separate question for Mick. Mick, October saw the introduction of the CMS penalties for hospitals for those readmission rates, one of them being COPD. Are you starting to have any increased dialogue or engagement with those hospitals with regards to use of bio levels in particular for management of COPD in the home?
So that's a great question and actually leads into something I had in the prepared remarks. But COPD and heart failure together are 2 of the top readmission disease states for hospital CEOs and CFOs as they look at this in the U. S. And yes, currently it's around a 30 day readmission cycle and the penalties are significant and they go across the whole Medicare CMS reimbursement for that hospital. So this is real money that you're looking at.
You have to be above the median, above the 50% mark for hospitals across the United States to not get a penalty. So it's a competitive game that gets more competitive as everyone gets better. We are certainly partnering with our hospital customers and our DME providers to make sure there's strong hospital to home transition for those patients with COPD. The opportunity is twofold. It goes beyond just bilevel.
The opportunity is our VPAP COPD, which is the bilevel non invasive ventilation device. And it's also for the Astral, which is a life support ventilation device that can be used for both COPD and neuromuscular disease patients. So there's a right solution for the right patient at the right time that the hospital and the HME provider can get. And so we are partnering with discharge planners and hospital systems across the country. And frankly, in the new world of ACOs, accountable care organizations, where hospitals and primary care now share per member per month budgets, we think the time is right to move on this and we should see progress on this over the coming quarters and fiscal years because this is a long development cycle, but again has stickiness as you look to that long term.
Thanks.
Thank you. Our next question comes from David Clair from Piper Jaffray.
Hi, good afternoon and thanks for taking my questions. I guess the first one for me. You guys have been very active on the informatics development recently. Can you just kind of remind us how are these initiatives going to translate into revenue for ResMed?
Well, that's a great question, David. And I will hand the second part of this to Don Darkin, the President of our SDB business unit. But the informatics investment is a major one for us. As you can see with Air Solutions, which comprises both AirView, which is the combination of our EasyCare Online as well as U Sleep as well as now MyAir, you've got a variety of applications that are primarily cloud based and can interface with HME providers, hospitals and also with U Sleep to coach patients. These are major investments.
And the way in which this connects through to revenue is that as, for instance, take one of the players in the channel, an HME provider realizes they can save non reimbursed costs by drive outs, pickups and no fault founds with devices, they will want to adopt this new technology. And as they see its capabilities on that front, they will realize the value that they get is far above the price that we're charging them for access to those informatics data points. And for us, taking waste out of the system and providing investment to get some return from that is also a positive economic argument. So it works for us and it works for our HME providers. If you take another example and say the Epic Hospital integrations with Fairview, not only is the HME providers that are involved there getting the benefit of reducing non reimbursed costs, But the hospital system that's looking to manage, say, their COPD readmits or, say, their accountable care organization total economic or total cost of ownership or total patient management approach, they can find both a clinical and economic value out of that informatics investment.
And that should for us lead to more share and more stickiness with those hospitals, HME providers, patients and throughout the value chain. Don, anything to add beyond that regarding our healthcare informatics investments and connection to revenue?
Yes, David. The broader issue here would be to look at this like a kindle. If you think about how people will select the best conditions for whether they're a large HME or a small HME. It will run into many realizations of revenue from troubleshooting. You won't need to roll a truck to check if a unit is working or not.
You'll be looking at share shift on big customers who want to get more units into that solution end to end. The compliance programs will drive more usage, better outcomes for the patient, better outcomes for the HME. This will also then drive programs for accessories, which will then increase better patient compliance and a better business for the HME. So there's a multitude of areas here, notwithstanding the actual cost coming out of the actual value chain and increasing profitability for the customers as well. So and they're all on top of any sort of flat rate fees that may be paid for purely phone usage either way.
So it's not going to be a one size fits all solution. It will reflect itself in many, many ways in many, many countries.
Okay. Thanks for the answer, guys. Just a quick one on emerging markets for my follow-up. I'm just curious, are you planning on selling the same products in emerging markets? Or are you going to be launching low cost lower cost alternatives?
David, great question. I'll hand that to Rob Douglas. Yes. Thanks, David.
So the emerging markets have got quite a lot of different dynamics in them. Each one of them is complex as any of the other markets. Some of them are actually high priced markets and some of them are lower priced markets. And then they've got different medical reimbursement schemes and different systems. So there's less focus on compliance management than in developed countries.
And so in some markets, the value proposition of the telecoms in the device will be different. And so in a sense, really what we're going to do is go market by market and configure products that are appropriate for them. And we've got a platform solution that lets us do that very
effectively.
Our next question comes from Bruce Doo from CBA.
Hi, guys. Just two questions from me. Just to clarify, so in terms of the timing for SIRVHF, I think you mentioned the initial results would be in calendar year 'sixteen. Has that timetable been pulled back a little bit? No, Bruce.
We've always said that the final patient the power around the study, it's an event driven trial. So we don't know the exact date. But the based on the power analysis and the event rate that we have predicted, the final patient should hit the 2 year mark from initial setup sometime in 2015. Then the primary investigators have to collect the data, analyze the data, create a peer reviewed publication, go through the peer reviewed process and then get published so that they can present at ACC or HFSA or And so that process will result in a first publication and presentation sometime in calendar year 20 16. I'd like to make the point that there will be multiple publications that come from this study.
And this is just the first publication, but we think it will be a seminal one that will come out during calendar year 2016. Okay, great. Thanks. And just the second one was around the Astral in the U. S.
Could you perhaps give us a bit of color in terms of the degree of, I guess, understanding and sophistication by DMEs around that product given it is a relatively new product for you? Does that imply a relatively slower ramp up? So there will be a slower ramp up of the ASPRIL product in the U. S. Market vis a vis our European market because in Europe, we played in home life support ventilation for the last 7 years since our well, longer than 8 years since our acquisition of SEM.
In the U. S. Market, we are developing our channel with our respiratory account managers and interfaces between them and our territory managers and through our U. S. Channel.
I can tell you, we've been ramping up that team over the last 6, 12 months. We trained them very well at the Americas sales meeting a couple of months ago and they will be and are talking to customers on a day to day basis already in the market. The customers have used a similar product from competing companies. And so there are a number of HME providers who are well versed in using home life support ventilation. So the customer education is not the issue and the customers actually would like other suppliers based on our initial conversations and we think that the value we provide with a lower total cost of ownership, increased freedom for patients, increased ease of use and increased maintenance and capability of these devices for both the patient and the provider that there's a very good value proposition.
But if you like, there'll be a faster ramp up of the S curve penetration in Western Europe versus our ramp curve for the United States. You said the Americas. In Canada and Latin America, the ramp curve will be faster and we have more home ventilation supported markets there where we've been selling products already from our existing portfolio there.
Okay. Thanks.
Thanks, Truist.
Our next question comes from Joanne Wuensch from BMO Capital Markets.
Thanks for taking our questions. This is Andrew Hanover in for Joanne Wuensch. I had two questions for Brett, but I wanted to start off with the first more strategic one for Mick, just as a follow-up to the last question as it relates to the sales force for Astral. And do you believe that you have the right sales force right now? Or are you expecting to increase or decrease it?
So I'll take the first half of that question, Andrew, and then I'll hand the second half to Jim to talk about the readiness. Our sales teams globally are very ready for Astral and particularly in France, Germany, the U. K, all the Nordics in many countries in Asia including Japan not limited to it. The teams are very well versed in life support ventilation and home ventilation and we have an existing number 1 or number 2 market share in home ventilation in most of Western Europe. So I believe the SKINs agreed for those country markets.
Similarly for Canada and Brazil within the Americas. Within the United States, we are ramping up that team as I discussed. Jim, do you want to add any further detail to that ramp up to
answer Andrew's question? Yes, sure.
We're not starting from scratch just right now. That team has been in place for a while and we're adding incrementally to it as we launch the product. I think we have the right level of coverage and I think we're fine.
Great. And for Brett, just two quick ones. How much was FX how much did FX help or hurt EPS this quarter?
Actually, Andrew, it's pretty much flat. No actual impact year on year this quarter.
Great. And then as it relates to flow generators, flow generators were up 12% in the quarter. And in the Q4 of last year, they were up 1%. And I was just trying to understand how we think about demand for the remainder of the year. And thanks for taking our questions.
So demand for the rest of the year?
Trend for the rest of the year, just so we get a good understanding.
Well, on the trends on that on flow gens, I'll probably let Mick talk about it. It's not something we'd give out in any sort of detailed guidance or anything.
No, Brett, you're right. We're not going to go into detailed guidance on that. Next question, please.
Thank you. Our next question comes from Ian Abbott from Goldman Sachs.
Yes, good morning. Thanks for taking my questions. Firstly, about Asia. You mentioned you'd in sourced a number of distribution channels, including in Australia. Just wondering, sort of outside Americas, how much do you now distribute directly and how much is through distributors?
And where do you see this split moving?
Yes. Ian, we have different models in all the different countries we're in and we adjusted based upon the needs within those countries. So we sell or distribute within 100 countries and there are very different models in all of them. For the vast majority of our revenues, we partner with home care providers and HME providers such as in the U. S.
And France and in markets where there aren't government reimbursement and others we have different models that apply. Our goal in all of this from a strategic perspective is to think about the best needs for the healthcare system and the best needs for patient and the best needs for everyone in the value chain. And what we're finding is that the solutions that we can bring to the market have applicability in each of those different country areas. And so I think Rob described it really well earlier that we customize our value prop from a platform that's flexible country by country, region by region and frankly even within countries reimbursement group by reimbursement group.
Great. And then if I could perhaps ask about the ASCEND. Do you have sort of any I know you're sort
of 1 step removed, but do you have any sense
of if it's driving any upgrades? Are you seeing existing patients actually coming in asking for the new model? Or is it mainly still new patients?
So, Ian, we don't have knowledge to that level of granularity to know at the patient level who is getting the new device set up. Certainly within our U. S. Environment, the HME providers that have started to order and use the AirSense 10 have been very pleased and delighted with the product that these have set up, it's small, it's quiet, it's all integrated, there's no excuse to manage and so we're seeing great benefit from that. On the patient side, there are a lot of patient benefits about being small and quiet and comfortable and having the ability to seamlessly have their data shared with their doctors so that they don't have to driving for doctor visits.
I think a particular aspect of patient engagement that's important is a product that may not have hit much on your radar, but it's called MyAir. It's a patient engagement solution that allows patients to directly interact with their data. We have a system called HALO, which is an acronym that stands for Hour After Last Off. So when the patient takes off the mask, let's say 6:30 am, by 7:30 am, their data is available in the cloud and then the HME provider or the doctor when they turn up at their office can have those data virtually real time. Similarly, if the HME provider and the patient think it makes sense, the patient can go on their own app on MyAir and see their own data.
And they can be coaching, they can be feedback and taking away non reimbursed costs for the HME provider and potentially improving outcomes and certainly reducing costs for the channel within that system. So we think there are so many advantages of the s solutions platform for patients that it will be very engaging. But given we're only 2 months in, it's hard to really piece out what is channel demand from HMB providers, channel demand from physicians who like features such as the AutoSet for Her, which is an algorithm specifically designed for women or features that as you indicated patients may like Myan.
Our
next question comes from David Stanton from CLSA.
Thanks very much for taking my questions and good afternoon. I wonder if you could give us some more color in terms of the numbers around whether the use of the AirSense 10 versus other products leads to a lower setup and maintenance cost for a U. S. DME and a patient? Thank you.
David, we have some data that we presented at the American Thoracic Society Conference in May this year. And it's related to the AirSense 10s Informatics automated informatics capability. And it was a presentation about a technology called uSleep, which an HME provider can use and it provides information via email, text or even interactive voice response, so direct voice to patients that coaches them through the sort of 3, 7, 14, 30 day process and beyond to 365 days and beyond that. And those data from that presentation showed that the costs for an HME can be reduced by up to 59%, that's 5%, 9%. And the adherence had a trend to improvement that went from 73% adherence to 83% adherence.
And that may not sound like a whole lot, but 10 percentage points improvement adherence for a payer system that's managing portfolio of patients or an HME provider that's looking at costs in a tough P and L environment for them could be quite a material contributor to the savings of both those groups. And more importantly for the patients themselves, it means they're going to stick to this therapy, which is going to help them improve their long term outcomes. So we think in terms of color for the AirSense 10 that the improvements are quantifiable and our customers will start to see them and quantify them in their own way with their own systems as they as it rolls out over the coming quarters months and years.
Thank you. That's very helpful. And I wonder if you'd make a comment in terms of period end discounting, how you characterize the market in recent periods compared to perhaps a year or so ago? Thank you.
David, thanks for the I'll hand that one to Jim, and I think it's the end of our Q and A after that.
David, I would say we haven't seen anything unusual this quarter. And I think for a long time, our sales have been in the quarter have been sort of back end weighted. But we didn't see anything substantially different this quarter as we have over the past several periods.
Thanks for your questions, David.
Thank you. We are now at the one hour mark. I'll turn the call back over to Mick Farrell.
Thanks, Larissa. I'd like to thank the more than 4,000 strong ResMed team from around the world for their contribution to our recent product launches. Your innovative engineering solutions are changing the game for customers in over 100 countries, helping them improve patient quality of life, helping them reduce the cost burden of chronic disease and helping them improve the delivery of respiratory healthcare. We remain focused on changing the lives of millions of patients with every breath. Thank you.
And we'll talk to you again in 90 days.
So this concludes our Q1 earnings live webcast. If there's any additional questions, please feel free to contact me. The webcast replay will be available on the Investor Relations section of our website at resmed.com. Thank you again for joining us today. Larissa, you can close the call now.
Thank you, ladies and gentlemen. This concludes this conference. Thank you for participating. You may now disconnect.