ResMed Inc. F1Q09 (Qtr. End 09/30/08) Earnings Call Transcript

Nov. 7.08 | About: ResMed Inc. (RMD)

ResMed Inc. (NYSE:RMD)

Q1 FY09 Earnings Call

November 6, 2008, 4:30 PM ET

Executives

Brett Sandercock - CFO

Kieran T. Gallahue - President and CEO

David Pendarvis - Sr. VP of Organizational Development and General Counsel

Analysts

David Clair - Piper Jaffray

Ben Andrew - William Blair

Paul Choi - Merrill Lynch

Joshua Zable - Natixis

Jason Mills - Canaccord Adams

Alexander Smith - JPMorgan

Joanne Wuensch - BMO Capital Markets

Michael Matson - Wachovia Securities

David Low - Deutsche Bank

David Stanton - ABN Amro

Helen Cameron - Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 ResMed Incorporated Earnings Conference Call. My name is Jerry and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

The company has asked me to address certain matters. First, ResMed does not authorize the recording of any portion of this conference call for any purpose.

Second, during the conference call ResMed may make forward-looking statements, such as projections of future revenue or earnings, new product development, or new markets for the company's products. These statements are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Risks and uncertainties exist that could cause actual results to materially differ from the forward-looking statements. These factors are discussed in ResMed's SEC filings, such as Forms 10-Q and 10-K, which you may access through the company's website, at www.resmed.com.

With that said, I would like to turn the call over to Kieran Gallahue, ResMed's President and CEO. Mr. Gallahue, you may go ahead, sir.

Kieran T. Gallahue - President and Chief Executive Officer

Thanks, Cherrie, and welcome everybody to ResMed's Q1 conference call. As in the past, we're going to begin with an overview of the business and the quarter, and then I'm going to hand the ball over to Brett Sandercock, our Chief Financial Officer, to provide details of the financial results, and then we'll open the call up to your questions.

So for those of you that have seen the press release, you can see that Q1 was once again a record quarter for ResMed. We are very pleased with our progress across the globe as the ResMed team continues to execute quite well.

As always, I'd like to take the opportunity to thank our team members from around the globe from the various functions for their efforts, their contributions, and most importantly, for the results.

So let's get into the quarter. Well, global revenues grew at a robust 17% in the first quarter of 2009, and this growth was again very balanced across geographies. Americas revenue growth accelerated to 16%, up sequentially from 14% in Q4, and RoW did one better with an 18% growth rate in Q1 '09.

We also saw balanced growth across product categories, with both the global flow generator and mask segments growing at 17% each during the quarter. Flow generator growth was bolstered by a full quarter of our S8II CPAP line that we launched in Q4 and which is evidenced by the US flow generator line, which is up 14% in Q1, up from 8% growth in Q4. So we continue to make progress in that area.

Our new Easy-Breathe technology continues to set a new standard in the industry. It's helping to differentiate ResMed from our competitors and it really is a quantum leap in improved noise level and in comfort for patients.

It's notable to mention that the fastest growing segment in the US flow generator business in percentage terms is our AutoSet product category. ResMed continues to be the leader in APAP technology and we've invested heavily in R&D over the years, and we continue to do so.

During Q1, we also began launching our new VPAP line, which is now in the smaller S8 box. This brings the Easy-Breathe technology into our bilevel product line, so we're excited about the potential upside moving into Q2 and beyond, because this is our first new series of bilevels in five years. So a huge upgrade for the product line, one that I can tell you the sales force is incredibly excited about.

The mask segment posted another double-digit quarter globally due to new product introductions led by the smaller low-noise nasal pillows mask, the Swift LT.

We also recently launched the first mask product specifically designed by women and for women, called the Swift LT for Her. We expect this new addition to the Swift product line will provide a comfortable and quiet solution for our female patients, as this is the first and only gender-specific mask product on the market.

Now, the question is why did we do it? We did it because women now represent 30% to 50% of newly diagnosed patients going into certain labs. So it is an important segment that is becoming increasingly important and gives us the opportunity to design new products and marketing categories around that vastly growing market.

Additionally, gross margins stabilized in Q1, even in the face of growing Americas sales and a significant uptick in flow generator sales. We remain confident that we'll be able to improve margins as we progress in fiscal year '09.

I'd also like to point out that we generated a record amount of cash this quarter, with $67.9 million in operating cash flow. That means in the past two quarters we've generated approximately $125 million in operating cash flow. This demonstrates our commitment to strong operating performance and a commitment to working capital control.

During these recent times of global economic uncertainty, our deliberate focus on building a strong balance sheet with exceptional liquidity has proved to be a successful and an appropriate strategy.

We continue to repurchase stock during Q1 with $24.1 million in share buybacks during the quarter. And as of September 30, 2008, we have repurchased 5.5 million shares in an authorized $8 million share buyback program.

On the market development front, there's been an astounding three months or so of validation of the critical role that SDB plays in very serious comorbidities, such as cardiovascular disease and diabetes. We are pleased to see the newly revised cardiovascular disease guidelines in Europe now include a formal recommendation for the use of CPAP therapy in symptomatic heart failure patients.

What I'm referring to, of course, is the recent released European Society of Cardiologists' guidelines on the diagnosis and treatment of chronic and acute heart failure. This is the first time ever these influential guidelines have referred to the importance of identifying and treating sleep disorder breathing in heart failure patients.

This follows the International Diabetes Federation consensus statement on sleep apnea published in June, where global experts, after carefully reviewing the clinical literature, concluded that Type II diabetes should be evaluated to determine if SDB is present, and then it went on to confirm that CPAP treatment is a gold standard therapy.

So to summarize, influential global bodies have confirmed what we've long believed and have long been communicating, that it's critical to identify and treat sleep disorder breathing in patients suffering from two of the most costly and chronic disease states on the planet, diabetes and heart failure.

So in summary, this was another great quarter, another record quarter for ResMed and the industry. We're confident about our ability to grow the market in 2009 and beyond. We have a strong business model, a very strong balance sheet, with substantial cash and little debt, and we look forward to growing shareholder value in fiscal year '09.

All right. Now over to Brett to provide some additional detail on the P&L and the quarterly results. Brett?

Brett Sandercock - Chief Financial Officer

Great. Thanks, Kieran. I'll briefly run through our September quarter results.

As Kieran noted, revenue for the September quarter was $217.9 million, an increase of 17% over the prior year quarter. Favorable currency movements added approximately $5.8 million to our Q1 revenues. In constant currency terms, revenue increased by 14% over the prior year quarter.

Our income from operations was $36.6 million for the quarter, and net income for the quarter was $28 million, an increase of 16% over the prior year quarter.

Excluding amortization of acquired intangibles, our diluted earnings per share for the quarter was $0.38.

Gross margin for the quarter was 58.3%, consistent with Q4 FY'08, reflecting unfavorable geographic mix changes and foreign currency movements, offset by manufacturing improvements.

The geographic mix impact was attributable to the acceleration of sales growth in US this quarter, while the strength in previous quarters of the Australian dollar relative to the US dollar negatively impacted our gross margin.

However, going forward, the recent and significant decline in the Australian dollar will be positive for our gross margin. I would expect this impact to be evident in the second half of fiscal '09, particularly in Q4, as inventory we are currently manufacturing is ultimately sold.

We also continue to progress our margin expansion initiatives in areas such as supply chain, manufacturing and product development.

SG&A for the quarter was $71.3 million, an increase of 13% over the prior year quarter. In constant currency terms, SG&A increased by a more modest 10% over the prior year quarter. And SG&A as a percentage of revenue improved slightly to 33% compared to the year ago figure of 34%.

R&D expense for the quarter was $17.3 million, an increase of 33% over the prior year quarter, and in constant currency terms, R&D increased by 29%. R&D as a percentage of revenue was 8% this quarter compared to the prior year September quarter of 7%.

And looking forward, and subject of course to currency movements, we would expect R&D expense as a percentage of revenue to be in the 7% range for the balance of fiscal year 2009.

The lower R&D spend as a percentage of revenue really reflects the depreciation in the Australian dollar against the US dollar, which happened recently, as the majority of our R&D spend is denominated in Australian dollars. I think it is important to note that we will continue to invest in product innovation throughout the economic cycle.

Amortization of acquired intangibles was $1.9 million for the quarter and stock-based compensation expense for the quarter was $5.6 million.

Now, before I move on to the revenue breakdowns, I would like to discuss FX currency impacts on our financial results, particularly given the unprecedented movements and volatility we are currently experiencing in these FX markets.

Obviously, we don't have a crystal ball in the area. However, assuming today's exchange rates are maintained, the net is we expect positive impact on our bottom-line in FY'09. However, on our revenue line, and again, based on today's exchange rates, we expect year-on-year currency headwinds in the range of $10 million to $15 million per quarter over the next two quarters.

Conversely, while we will be negatively impacted on our top-line, we'll actually benefit at the net income line due to the contribution of lower costs associated with the depreciation of the Australian dollar and the euro relative to the US dollar.

So over the next few quarters, we expect the net currency benefit, again assuming today's exchange rates, will equate to approximately $0.02 per quarter positive impact on our EPS. Furthermore, in Q4, we expect the positive impact to be north of $0.02, as inventory currently being manufactured in Australia is ultimately sold to customers and released to our P&L.

Turning now to revenues in a little more detail, overall Americas sales were $113.6 million, an increase of 16% over the prior year quarter. Sales outside of the Americas totaled $104.3 million, an increase of 18% over the prior year quarter.

Breaking out revenues between the product segments, in the Americas flow generator sales increased by 14% over the prior year quarter, while masks and other increased by 19%. The growth rates reflect the continuation of strong sales in our new product introductions, particularly the S8 flow generator range and the Swift LT nasal pillows mask.

For revenues outside the Americas, flow generators increased by 20% over the prior year quarter, while masks and other increased by 15%, again driven by strong sales across all our key international geographic markets. On a group basis, flow generator sales increased by 17%, while masks and other also increased by 17%.

Cash flow from operations was a record $67.9 million for the quarter, and it does reflect strong underlying earnings and an improvement in working capital management, and something we've been working fairly hard on for the last 12 months or so.

Capital expenditure for the quarter was $34.5 million, and this included $21.9 million in building construction costs, predominantly associated with construction of our new headquarters in San Diego. We expect to incur a further construction cost of approximately $43 million over the balance of FY'09 in relation to this building. The expectation is we'll be completed towards the end of this fiscal year.

Depreciation and amortization for the quarter totaled $14.3 million.

We continue to buy back shares as part of our capital management program and during the quarter, we repurchased approximately 653,000 shares for consideration of $24.1 million. Again, as of today, we have repurchased 5.5 million shares out of a total approved buyback of 8 million.

ResMed ended the first quarter of FY'09 in excellent financial shape. Our balance sheet remains very strong and is conservatively geared. At September 30, total assets stood at $1.3 billion and net equity was almost $1 billion. Cash and cash equivalents, net of our external debt, totaled $157 million.

I would now like to hand the call back to Kieran.

Kieran T. Gallahue - President and Chief Executive Officer

All right, great. Thanks, Brett. Well, why don't we… Cherrie, if we can open up the call to questions please.

Question and Answer

Operator

[Operator Instructions]. And your first question comes from the line of David Clair with Piper Jaffray. Please proceed.

David Clair - Piper Jaffray

Hi, guys. Congratulations.

Kieran T. Gallahue - President and Chief Executive Officer

Thank you.

David Clair - Piper Jaffray

Yeah. Just a question about the current economic environment, how sensitive do you think the sleep industry is to a weakening economy?

Kieran T. Gallahue - President and Chief Executive Officer

We haven't seen any impact, certainly no material impact out of changes within the economy. When we talk to our customers… obviously, they don't have a crystal ball, we don't have a crystal ball, but when we talk to them, they say that there is no material impact on them.

So I think we're probably lucky here that we're in a category that there is a significant benefit that's brought to the patient for the symptomatic relief and where it's an important part of their life.

David Clair - Piper Jaffray

Okay, great. And then, just a quick update on Apria, if you can let us know how things are progressing on that front.

Kieran T. Gallahue - President and Chief Executive Officer

Sure. As always, I can't go into too much detail on any given customer. But I'll you, the relationship remains strong, it gets closer every day. Like many of our customers, we do everything we can to help them serve the patients and help them grow the marketplace and that holds us in good stead over time.

So that relationship is developing very nicely.

David Clair - Piper Jaffray

All right, great. Thanks a lot.

Kieran T. Gallahue - President and Chief Executive Officer

You bet.

Operator

And your next question comes from the line of Ben Andrew with William Blair. Please proceed.

Ben Andrew - William Blair

Great. Maybe a quick question first for Brett. Did I hear you say that the $10 million to $15 million FX benefit would occur over the next two quarters or few quarters?

Brett Sandercock - Chief Financial Officer

Yeah. Ben, on the revenue we'll have a headwind, so it will reduce our revenues between $10 million and $15 million over the next few quarters. So you're talking over Q2 and Q3.

Ben Andrew - William Blair

But, I mean the movements in the currency really occurred in the euro kind of September for the most part. And when we look at it, you don't get back to normalization for a full year. Is there something --

Brett Sandercock - Chief Financial Officer

Correct. Yeah, there will be further headwinds in quarters going out as well until you anniversary, so to speak. But given the currencies are moving around hugely at the moment, I didn't think it was worth going further than that. But obviously, as you move out, if they stay the same, then you'd get… that $10 million to $15 million would grow. It would be higher in later quarters.

Ben Andrew - William Blair

Okay. It actually becomes bigger in the third and fourth quarter, primarily the fourth quarter out?

Brett Sandercock - Chief Financial Officer

Correct. Provided exchange rates stay exactly where they are.

Ben Andrew - William Blair

Yeah, I mean, that's --

Brett Sandercock - Chief Financial Officer

Yeah, correct.

Ben Andrew - William Blair

-- figure out where they are going to be in six months.

Brett Sandercock - Chief Financial Officer

That's right.

Kieran T. Gallahue - President and Chief Executive Officer

But, again, Ben, you got the bottom-line impact, and I think that's what we're all looking at here. The bottom-line impact is these currency exchange rates that we've seen are a net positive for us. Obviously, we can't control it, but we're pretty damn pleased by what we've seen happen here recently.

Ben Andrew - William Blair

I mean just to get an example, Brett, I think to put a fine point on it, in Aussie dollar terms, if you spent whatever it was on R&D this quarter, $16 million, if we were out and that same number was going to happen in the March quarter, wouldn't that be more like $12 million or $13 million?

Brett Sandercock - Chief Financial Officer

Yeah, I mean you guys you've seen the currency. If you look at the Aussie down from its highs, you should remember that the highs actually occurred in July of Q1. So we were actually in that quarter. It's probably down around 30% off its highs at the moment.

So you can see that that will be a substantial benefit on the cost side for us. And if you roll that through and you roll through the headwind we have on the revenue and margins and so on, you will get a positive benefit on the bottom-line, and around that sort of $0.02 range. And as we move through Q4, we'll certainly be north of that.

The top-line reduces, but the bottom line actually increases, because our cost base is substantially lower in US dollars.

Ben Andrew - William Blair

Okay. So my follow-up, I guess, I'll limit it like we should, but on the gross margin side, the cost of sales, how big a chunk of that, if you can tell us with any granularity, is coming from Aussie-denominated costs versus more global, maybe hedged cost?

Brett Sandercock - Chief Financial Officer

Yeah. The manufacturing, the majority of that is done down here in Sydney. So when you think about it, all the labor and overhead is obviously in Australian dollars, and some of the material. Obviously on the material front, we like to naturally hedge where we can. So we'll look to purchase in US dollars where we can. But a significant portion of the cost is Australian dollar-denominated.

And that's why we're saying, as you move forward, and if that Aussie dollar is maintained where it is, we will get a significant improvement on our gross margin, because those costs will be so much lower. We don't feel that immediately because the inventory you make today you won't sell through the cycle for four or five months.

So, therefore, you don't pick that benefit up until you finally release it in your P&L.

Ben Andrew - William Blair

Okay. Thank you. I will jump back in the queue.

Operator

And your next question comes from the line of Jason Mills with Canaccord Adams. Please proceed.

Kieran T. Gallahue - President and Chief Executive Officer

Jason? He is quiet today. All right. Why don't we move to the next one, Cherrie? Hello? Cherrie, are you still there?

Operator

And your next question comes from the line of Paul Choi with Merrill Lynch. Please proceed.

Paul Choi - Merrill Lynch

Thanks. Thanks for taking the question, guys. Just a little bit, perhaps, on the operating expense side. Kieran, as you look into your… head into year, how do you feel with respect to the size of the sales force right now? You guys obviously have had a bunch of new products out here. You have the Swift LT for women coming out.

Do you feel like you are comfortable with the size of the sales force, or do you want to go ahead and add a few more heads in the coming year?

Kieran T. Gallahue - President and Chief Executive Officer

Yeah. Well, good question. Our focus is always on two areas, right? One is on market expansion, and that's one of our primary goals, the continuing growth of this market, and the second one is the capturing of market share. And the sales force actually gets involved… in fact, the whole commercial organization gets involved in both of those categories.

And we continually look at the balance of our reps and the balance of other commercial assets to determine how we can make the biggest impact, both on market growth or market expansion, as well as market share. I can tell you the way that we're designed now, we're in pretty good shape.

As our sales grow, you do tend to expand the organization on a variable basis, which is natural. You split territories and you look to expand it. We've got some great opportunities on the new market development side that give us the opportunity to look at growth into diabetes and making more people aware of the role that diabetes plays or SDB plays in diabetes and cardiovascular disease.

So we're not looking at some massive expansion at this point, but doing what we always do, which is incrementally adding as we see opportunity to go grow either the market or grow our share.

Paul Choi - Merrill Lynch

Okay, great. Thanks for that. Then in terms of your feedback from your customers right now, are they generally indicating in terms of their order patterns as they look ahead, given the fact that they will be facing some reimbursement cuts, for instance on the Medicare side and so forth.

Are you seeing any particular change in order patterns among the DMEs in anticipation potentially of a slower economy in calendar 2009?

Kieran T. Gallahue - President and Chief Executive Officer

No, we're really not. But most of our customers don't carry much inventory from a days perspective. Their business model is not one that's built around significant inventory. So, no, we're not seeing any significant changes in that and I don't really anticipate any change in that.

Paul Choi - Merrill Lynch

Okay. Thanks for that and I'll jump back in queue.

Kieran T. Gallahue - President and Chief Executive Officer

All right. Great, Paul.

Operator

And your next question comes from the line of Joshua Zable with Natixis.

Joshua Zable - Natixis

Hi, guys. Congrats on a great quarter here. Thanks for taking my question. I guess my question relates to the market growth and volumes in general. It seems like just you guys are in a new product cycle. Volumes in the market from the checks we've done seem to be pretty healthy. It seems like on a constant currency, you were 14%. Can you just kind of talk to us?

I know you obviously have headwinds with foreign exchange, so the way we should think about revenues definitely should keep that in mind. But in terms of just the volume side, can you just kind of talk about what you're seeing out there?

And then, I guess sort of as a second part of that question, not to be too long-winded here, but the flow generation in the Americas grew 14%. That's a significant jump. It's been out for a full quarter. Can you kind of help us understand kind of what inning we are in this new product cycle, if we should see that kind of accelerate type of thing?

Kieran T. Gallahue - President and Chief Executive Officer

Sure. But that counts as your follow-up question. That's sort of two.

Joshua Zable - Natixis

Fair enough.

Kieran T. Gallahue - President and Chief Executive Officer

No, no. Let me go after the first one first, the volume in the market. We've been saying the last couple of quarters that the market seems to be growing about 15%, where we see it may be a couple points below that on the revenue and a couple points above that on the volume and that seems to be maintaining itself.

We're seeing good, solid, consistent growth. As we look forward with everything from home sleep testing to the IDF statement coming out to the guidelines on heart failure, we've got these great signals for the continued expansion of this marketplace because it is relevant in multiple medical silos and in the most costly comorbidities that exist and that are plaguing this planet. So, we're extremely well positioned and I think that's rolling through the results and it's rolling through the volume that we are seeing in the marketplace.

As far us specifically, with the flow generator growth, yeah, you bet, we were very pleased to see that quarter-to-quarter we jumped from 8% growth in the United States right up to 14% growth in the United States. And that was really on the back of the CPAP range of flow generators, right, because that's what we had out for the full quarter. The S8II AutoSet and the Elite and Escape II.

The bilevels, which we introduced in the Americas… two of the three of them we introduced in the Americas towards the backend of the quarter, one of them in the Americas we just released this quarter, Medtrade, and in Europe, we only released the bilevels at the ERS Show in October.

So we've got these great bilevel products that will be coming through the pipeline here and impacting results, and it's a good margin product and one that still uses that Easy-Breathe technology and is just incredible. I mean, up to 90% quieter than the alternatives, better response rate, better performance. And we are seeing that in the results. It's just very, very good product and very good execution at the commercial level.

Joshua Zable - Natixis

Great. That's really helpful. And then, just a follow-up. I know everyone is talking about this or asking about it, so I don't mean to ask it in a third way here. But I guess just on the FX on the bottom-line, obviously, very, very good here, helps your bottom-line.

Just in terms of the gross margin, and obviously, R&D and the SG&A, I think, Brett, you gave us a good way to think about R&D for the rest of the year. But as we model out, just how should we sort of account for that benefit, more on the gross margin, more on the SG&A side, or sort of split it down the middle?

Brett Sandercock - Chief Financial Officer

Yeah, I mean those costs or the Australian dollar cost, the euro cost benefit throughout SG&A, R&D and our COGS line, obviously. Think about it from an SG&A perspective, we're likely to see an improvement in that ratio. We're at 33% to revenue. My view is that that will improve because it reflects the lower cost base that we'll have.

And on the margin front or the COGS front, again, I want to stress that you don't see that impact immediately, but it will flow through and It flows through as you ultimately sell the inventory. So I think through Q4 you will see the full impact of that. And it will be a significant impact, and there is no reason why that shouldn't have an impact on the margin expansion of the margin as that rolls through. But at the moment, that's not immediate. That will take a little bit of time to roll through.

Joshua Zable - Natixis

I guess because between your new products, obviously, benefiting hopefully stronger in the US, especially on the flow generator side, with the bilevels coming through, et cetera, is it sort of fair to think of the savings coming on the SG&A line right now because of the mix?

And then, as we go through the end of the year, we see the gross margin tick up more as well as benefit from the SG&A?

Brett Sandercock - Chief Financial Officer

Correct. You'll get SG&A now in the more immediate because they are translation-type impacts. And then, the margin will come through later on. That way, that's a reasonable way to look at it.

Joshua Zable - Natixis

Great. Thanks for the clarification. Congrats again, guys. Great work.

Kieran T. Gallahue - President and Chief Executive Officer

All right. Thanks.

Operator

And you next question comes from the line of Jason Mills with Canaccord Adams. Please proceed.

Jason Mills - Canaccord Adams

Hi, guys. Can you hear me this time?

Kieran T. Gallahue - President and Chief Executive Officer

I feel like it's a telephone commercial here. Yes, we can hear you.

Jason Mills - Canaccord Adams

It's a good commercial this quarter. Thanks.

So the question I have is about this $0.02 upside. It would seem to me that folks are going to focus on this. I think what you saw right after you reported your quarter is some confusion as you reported $0.36, but we all report to First Call $0.38. So I'm probably telling you stuff you already know, but I want to clarify, at least, for my own erudition here so that we all are on the same page.

The $0.02 upside per quarter that you presume may come from foreign currency, could you talk about how that relates to baseline? A $0.02 upside to what? And perhaps, you could answer that with respect to how you've guided long-term for the business. Kieran, you've talked about sort of mid teens type revenue growth, mid to high teens type earnings growth. Do those sort of percentages apply? While you don't give guidance, do those apply? And then, from that we are to expect perhaps the penny or two upside?

Brett Sandercock - Chief Financial Officer

Yes, Kieran, do you want to answer that?

Kieran T. Gallahue - President and Chief Executive Officer

Let me just answer the market growth piece and then you can get into the financial piece, Brett.

Brett Sandercock - Chief Financial Officer

Okay.

Kieran T. Gallahue - President and Chief Executive Officer

So, on the growth piece, you had mentioned mid to long-term looking at mid teens growth. I do want to highlight to you, the question was about market growth, right? What the market growth was going to be. We see it around 15%, a little bit lower on revenue and a little bit higher on volume.

Our goal has always been and our history has always been that we've been able to outgrow the marketplace. As we look forward, and we look at these other market drivers, if you are talking about certainly the timeframes you are talking about or mentioned, we continue to believe that this market will grow robustly and we continue to believe that we have the ability to outgrow that marketplace.

So I just want to be clear about that that those are two different questions. But anyway --

Jason Mills - Canaccord Adams

Fair enough.

Kieran T. Gallahue - President and Chief Executive Officer

Brett, do you want to answer the EPS question?

Brett Sandercock - Chief Financial Officer

Yeah, great. So, Jason, what I've done is tried to simplify down what their net impact is going to be and what our view is really of the base rate or currency there… is our average rates for this very quarter, for Q1. So if you look at that, it was around the 150 mark for the euro and around $0.88 for the Aussie. So they're still quite high.

I mean, clearly, it's unprecedented that you would get that sort of decline in exchange rates in any ordinary time. So I think the way we've done it, the way we've hedged with purely option structures and so on means we have not taken out forward. So we can really only lose what we put in, in terms of premium or mark-to-market.

So its put us in good stead to really participate in these lower exchange levels. And you'll see that come through on the bottom-line. My estimates are around $0.02 per quarter for the next few and going north of that in Q4.

Jason Mills - Canaccord Adams

Great. So, let me come clear here, Kieran and Brett. I am trying to nail you down on guidance that you don't give. So, with all of that out on the table.

Kieran T. Gallahue - President and Chief Executive Officer

At least we've got it out in the open now, Jason.

Jason Mills - Canaccord Adams

With all that out on the table, so '05, '06 you're a low to mid-20s type grower. '07 and '08, we were sort of between mid-single digits and low-double digits. So you do have easier comps. You have a favorable currency tailwind to your earnings. New product cycle in the US. And you've talked about your business, the end market looking pretty good.

So I know I am not going to get you to give us a number, but perhaps you could talk about growth rates, earnings growth rates. Kieran, you mentioned that that is the most important thing. So help us out so we can model this a bit better. And then we can make our… draw our conclusions about how currency could positively impact that level in our own models.

Kieran T. Gallahue - President and Chief Executive Officer

So, look, I think, the guidance that we've provided over the long haul, which is that the Americas market tends to grow in that 15% to 20% range; that the ROW market tends to grow in the 10% to 15% range; than you sort of bucket that all in and you are in the mid-to-upper teens; and growth in the marketplace; and we tend to outgrow that. I continue to strongly believe in that.

And we've tended to have earnings growing basically at the same rate. It varies quarter-to quarter, but basically at that same rate as revenues. And the reason for that is we do get leverage, but we also invest back in R&D and we invest back in market development. And in a market that is 85% to 90% untapped, we are going to continue to do that.

Jason Mills - Canaccord Adams

Okay.

Kieran T. Gallahue - President and Chief Executive Officer

There is an enormous amount of innovation to be brought to bear in the market. You saw what we invested in R&D this quarter. Why did we do it? Because we're accelerating certain product development projects that we see huge hope for. We are investing in a clinical study known as SERVE-HF, which is demonstrating the link between congestive heart failure and SDB, and when you treat that SDB the cardiovascular benefits that can occur. Those are very important markers, both for growing the marketplace as well as for establishing our position in that. And we absolutely plan to continue to invest.

Jason Mills - Canaccord Adams

Completely understand. Perfect. Thank you.

Operator

And your next question comes from the line of Alex Smith with JPMorgan. Please proceed.

Alexander Smith - JPMorgan

Hi, guys. Just a couple of questions here. You mentioned that the auto setting product set is the fastest growing in the States. Can you elaborate why you think that is? Does it have something to do with at-home testing?

Kieran T. Gallahue - President and Chief Executive Officer

You know, I think it's got… there's a number of different drivers to it, right? So, number one, our product remains the absolute best algorithm in the marketplace. It long has been. But last year, the Americas commercial team specifically focused on ways that they could demonstrate and communicate that to customers, all right?

So not just studies, which are very important and very compelling, but also to get a little bit more visceral, a little more hands on and we developed tools and techniques, which allowed comparison of our products to competitive products, are allowed them to see how the technologies worked in reality.

And they could pull the competitors' product off their shelf, pull ours off. So there is nothing staged about this. It's real world selling tools. And those selling tools have really helped communicate the benefit of the technology, which has existed. So, I think that is a big part of it.

In addition, we do have some things going on in the marketplace that bode well for auto setting technology as well as data-rich products. So, for instance, home sleep testing has a lot of people very interested in the idea of how they can effectively use auto setting devices.

The requirements that seem to be developing on monitoring compliance, which we think are great, right? Because anything that focuses on patient compliance means that people are going to stay true to the therapy. It means that they are going to go through that early hump that everybody goes through, and then once you get a person compliant, you have them for decades. It's great for the patient, it's great for the healthcare system and governments that are paying for this, and it's great for our business over the long haul.

And so the data-rich nature of our auto setting device allows the HME to help troubleshoot patient compliance and help figure out how they can improve that patient compliance. So I think there's multiple reasons for that stem from execution on the fundamental back of a great product.

And I should mention, of course, the S8II motor is in there now, I mean the Easy-Breathe motor technology. I shouldn't forget that. I mean this is a hugely, hugely beneficial piece of technology that significantly reduces noise, continues on our high quality platform that's always driven ResMed, and allows that system to be even more responsive to patient needs.

So we're just executing on a number of different fronts very well. The team is doing a great job.

Alexander Smith - JPMorgan

So with home sleep testing, the view is still that's maybe 12 months away from having any meaningful impact?

Kieran T. Gallahue - President and Chief Executive Officer

The starting gun has really gone off with home sleep testing. I mean it's… you've now got a number of private payers, that they are involved in. In fact, in just a minute, I will pass it over to Dave and he can talk a little bit more about this, Dave Pendarvis.

But, we have long said, in fact, ever before home sleep testing was ever approved, we said, when this thing comes through there's going to be a time period of adoption where the things that are going to trigger us and say, this is going well are private insurers jumping on board with it over time.

And it's also going to be pilots, that are going to be launched, that allow for different models of how to implement home testing to come through. And I'd tell you, you look a year ago to today, if you told me a year ago that the number of private payers would have jumped on board and the government was going to say the starting gun has gone off on home sleep testing, we'd have said… this is fantastic. And we do believe it's fantastic. It's moving very well.

At Medtrade, we saw a number of both sleep physicians and HMEs, who were telling us about new models of home sleep testing that they are piloting. So this is beginning to happen. And so, we remain very bullish about the expectation. Dave, do you have anything to add on that?

David Pendarvis - Senior Vice President of Organizational Development and General Counsel

Just a little bit Kieran and Alex, I think what Kieran said was absolutely correct, that if you look at the progress we've made so far, we are very encouraged by it. We think more progress will continue to be made.

CIGNA and United, two large private health insurers, have authorized home testing under their policies. The federal government under the CMS guidelines authorized home testing. And also, you are starting to see now, beginning in November 1 just a few days ago, the new compliance standards, which are not directly related to home testing but came out at about the same time, being put into place. We think any emphasis on compliance is going to be good for us.

As you indicated earlier, it would help drive sales of the AutoSet device and other data-rich devices. So, we think it's going to be slow and steady and inexorable progress with regards to home sleep testing and the emphasis on compliance.

Alexander Smith - JPMorgan

Thanks. Final question, if I may, probably for Brett, about the working capital improvements that have gone to help operating cash flows. Can you elaborate a little bit more on what those working capital improvements have been? And can we expect more of them?

Brett Sandercock - Chief Financial Officer

Yes, on the working capital, Alex, I mean the big one has really been driving down the inventory and improving our inventory turnover, over, probably trended down over the last six months or so. That's been a big benefit to us. And we were a little distracted somewhat previously with the recall, as well and purchasing for that, and the building of those units and so on. That's all behind us now. We can focus back on really getting that down to an efficient level of inventory holdings. So that has had a big impact.

Receivables, we looked at around the group as well. We have just sat there and done a lot of the basics right and looked through there. Creditors, we've try to realign through supply accounts and so on. Just to realign days sales we have with suppliers, to more realign with what we get with our customers.

Just a lot of those things that we're doing that hopefully we are getting right and we'll see that working capital improves. I mean, clearly, you cannot get your working capital to zero, so to speak, but is there improvement left? Yes, I believe we still have improvement that we can make there and I think we will.

We have also put in software, for example, in part of our forecasting and planning. That, we think, has already shown a good early results. And I think that will improve our overall planning and forecasting, for example, in manufacturing.

So, a lot of things that we're doing on multiple fronts that maybe not a silver bullet, but add them up and they really do have an impact. And we'll stay focused on that, particularly in the current environment. Obviously, you can't be lazy in those areas.

Alexander Smith - JPMorgan

Thanks very much, guys.

Kieran T. Gallahue - President and Chief Executive Officer

You bet.

Operator

And your next question comes from line of Joanne Wuensch with BTO [ph] Capital Markets.

Joanne Wuensch - BMO Capital Markets

I changed firms again, apparently. Thank you very much for taking my question. Joanne from BMO. A couple of housekeeping questions. The tax rate in the quarter was somewhat lower than we had expected. Could you give us an idea of what you think your full year tax rate may be?

Brett Sandercock - Chief Financial Officer

Yes, Joanne, I think when I've looked at that and we've looked through what we're forecasting through the year and the geographic mix and so on. I think around that 28% mark is a reasonable estimate of the tax rate going forward.

We've benefiting from R&D concessions, obviously, here in Australia. Also, continue to benefit, for example, Germany. It's a little while ago now, but reduced their corporate tax rates quite significantly. As you know, we have a sizable operation in Germany.

So those factors have tended to bring that down a little over time. And around that 28% is, I think, a reasonable estimate going forward.

Joanne Wuensch - BMO Capital Markets

Okay, that's helpful. What was your exit rate share count in the first quarter?

Brett Sandercock - Chief Financial Officer

Exit rate? So just the closing rate of shares, or --

Joanne Wuensch - BMO Capital Markets

Not the average rate for the quarter. What's your released exit rate?

Brett Sandercock - Chief Financial Officer

Yes, well, average dollar shares outstanding was $77.2 million.

Joanne Wuensch - BMO Capital Markets

Right, I'm asking the exit, not the average for the quarter.

Brett Sandercock - Chief Financial Officer

That at exit? Around a little lower than that, probably just under… a little under $77 million.

Joanne Wuensch - BMO Capital Markets

All right. You guys have done a very good job of pushing, encouraging, researching sleep apnea and the comorbidities. At what stage do you think you might be in a position to start breaking out the contribution to revenue? Are you in a position to say that 5% of the revenue growth comes from comorbidities at this stage?

Kieran T. Gallahue - President and Chief Executive Officer

No. There is such a mix in the way that the volume that gets driven out of these comorbidities exists that breaking it out would not really be a useful exercise. Remember, these are patients who have comorbidities. But what they're presenting, what we're treating in many cases is stop [ph] standard SDB, right? I mean it is the disorder. We treat it with the same products and the same technologies. The difference is where the referrals are coming from.

Now there is a difference there on advanced heart failure, as an example, when we use products such as the ACS2, the adaptive servo-ventilation, which, by the way, since you brought it up, is an incredible technology.

We had in addition to the SERVE-HF, there is a pilot study that we're doing, a smaller study up in the Nordics, where there is 10 patients. And this hasn't been published yet, but since I am not going to get specific on it, I can talk a little bit about it.

10 patients, which have gone on the device in the last… well, I guess it's about six months now, a little bit under six months. One of those was on a heart transplant list. That person was released from the heart transplant list. So we've got some phenomenal data coming out of the comorbidities. But it's not the type of data it would make sense for us to break out in results.

Joanne Wuensch - BMO Capital Markets

Okay. And then, not to beat a dead horse on this FX impact, I want to think about this slightly differently. If you had operating margins of, call it, 21.2% in fiscal year '08, would you be surprised to see your operating margins up 80 to 100 basis points in fiscal year '09?

Kieran T. Gallahue - President and Chief Executive Officer

Brett, do you want to take that?

Brett Sandercock - Chief Financial Officer

Yes. I mean, the problem is there's a lot of factors and a lot of movements and things that happen. But if you said if all things being equal and the currencies where they are, then you would expect an expansion on that.

Joanne Wuensch - BMO Capital Markets

Right. But I'm trying to ask without… I know you guys don't give guidance, without giving guidance. Back into what the impact is to the bottom-line and then we're expanding margins, and then you quantify it as $0.02. And to go back to Jason's questions, it is $0.02 on top of what? So I want to sort of peel away all that to sort of say, what does it mean for operating margins?

And so, I am coming up when I plug in all my FX numbers, probably an expansion of about 100 basis points year-over-year. And I am just trying to see if that's in the ballpark of what you guys are coming up assuming FX rates stay the same way they are.

Brett Sandercock - Chief Financial Officer

Yes, we don't want to specifically start down the guidance path, because we don't, as you guys say. But just look at it logically. If those currencies, there is improvement there, our cost base is reduced, and so on. Then you expect that there would be an improvement there.

Joanne Wuensch - BMO Capital Markets

Okay, I tried. Thank you.

Kieran T. Gallahue - President and Chief Executive Officer

You bet.

Operator

And your next question comes from the line of Michael Matson with Wachovia Capital Markets. Please proceed.

Michael Matson - Wachovia Securities

Hi.

Kieran T. Gallahue - President and Chief Executive Officer

Hi, Michael.

Michael Matson - Wachovia Securities

Let's see. I just got on from another call, so I apologize.

Kieran T. Gallahue - President and Chief Executive Officer

Hey, wait. You mean you missed the whole intro?

Michael Matson - Wachovia Securities

Yes, unfortunately. We've done one of our surveys here again, and we asked the question of the HMEs about this 9.5% reimbursement cut. And at a high percentage of them seems to think that that will spill over to the private pay in part of the market. Then I know that's a little bit different from kind of your perspective.

I was just wondering if you could give me your thoughts on that. Maybe why do you think that their perception is that some of these private insurers may try to follow that?

Kieran T. Gallahue - President and Chief Executive Officer

Yes, well, you are going to get a lot of diversity in what people say. Certainly, we talk to substantial numbers of these HMEs on a daily basis, and there is always quite a bit of variability and everybody always ends up the conversation the same way, which is… none of us has a crystal ball.

But I'll tell you, when I look at this I look at history, right? And that's the way we as an organization look at it. And if you go the last time the CMS went through a significant cut, which is about three years ago, right? With the oxygen and the Mednet cuts.

And there was a lot of question at that time, a lot of handwringing. Is this going to be something that's going to be very difficult? Is it going to spread through all the product lines? Is this going to be a negative for us?

And the reality of what happened is… these HMEs are businesses and they need to figure out how to be profitable, and they need to figure out how to grow. And many of them found sleep at that point. And maybe more importantly, they found that in order to grow their business, there was this great thing called trailing revenues or annuity businesses that was available to them if they followed up with their compliant patients or would be available to them as they increase compliance.

So, as we look at these times of change, I see opportunity. This is an opportunity for us to demonstrate to HMEs, to show them how they can grow. We're getting much more receptive ears about how to approach the diabetes marketplace and the cardiovascular marketplace. We're getting very receptive ears about how to grow accessory programs. So I… when we look at these things, we see opportunity. We take it that way, and we're tending to have some very positive discussions with our customers.

Michael Matson - Wachovia Securities

Okay. I noticed that your accounts receivable were up by a couple, I guess, three days. I've heard some scuttlebutt out there about some strains in the HME community. Should we be concerned about that? Is there a risk that that could continue to go up and you could have to write-down some of your receivables or something at some point if the economy continues to be under pressure?

Kieran T. Gallahue - President and Chief Executive Officer

Look, we're feeling that our… the policies that we have with our customers are quite sound. We've got very good relationship with customers across the marketplace. We have a very broad group of customers, so we don't have a massive concentration in any given customer.

We monitor our payments from our customers on a regular basis. If we think that something is causing us concern, then we have conversations with them. And if necessary, we modify our behaviors. But that's something that's part of our ongoing business. So at this point, we're not seeing anything that gives us any great concern at all.

Michael Matson - Wachovia Securities

Okay. And you may have already talked about this, but just an update on how you're doing within Apria. Have you made any progress in terms of picking up any market share there so far?

Kieran T. Gallahue - President and Chief Executive Officer

Sure. It was asked earlier, but the answer to the question was, look, we were not going to go into a lot of detail on any customer relationship because we respect the privacy of those customers, and for obvious competitive reasons.

What I will say is that that relationship, like the relationships we have with other large customers, are quite sound. We have a very energetic and capable sales team, both at the field level as well as the key account level.

I'd say that the Americas commercial organization, overall, is executing incredibly well. Very crisply. And that translates into our relationship with our customers. So we're feeling very good about that relationship as well as the relationship we have with other major customers.

Michael Matson - Wachovia Securities

Okay. And then on R&D, it was up some. Can we expect it to stay closer to 8% over the next few quarters?

Kieran T. Gallahue - President and Chief Executive Officer

Yes, so what we're saying is that you can expect it around the 7% level is around what we're expecting.

Michael Matson - Wachovia Securities

Okay.

Kieran T. Gallahue - President and Chief Executive Officer

So we're going to continue to invest through the cycle. We've got some benefits on the foreign exchange side, given that a lot of that's denominated in Oz dollars, but we will continue to invest.

Michael Matson - Wachovia Securities

All right, that's all I've got. Thanks a lot.

Kieran T. Gallahue - President and Chief Executive Officer

Great. You bet, Michael.

Operator

And your next question comes from the line of David Low with Deutsche Bank. Please proceed.

David Low - Deutsche Bank

Thanks very much. Kieran, if I could get you to talk about rest of world sales, and particularly mask sales we saw come off on a sequential basis. Is there anything to speak of there, as to why that slipped? And perhaps, if I could get you to talk about the key markets outside the US as a general question.

Kieran T. Gallahue - President and Chief Executive Officer

Sure. Well, we… thank you for asking that. We do tend to spend a lot of time on the Americas and we've got an exceptional organization throughout the globe. And that deserve to be recognized for the accomplishments that they are making both in growing the market and for gaining market share.

We are doing quite well, both in Europe and in the Asia Pac area. We've seen some very significant improvements in markets such as Germany. We've talked quite a few years about the transitions that we have been going through in Germany and some of the challenges of consolidation.

And under the leadership of Lasse Beijer and Frank Rebbert, they've done an excellent job of a growing an organization, getting them commercially focused, putting in the tools and techniques that allow them to grow.

Japan is doing very, very well for us across the board and across our partners there. Obviously, we have some markets that have some challenges. So there's always some ups and some downs. And the balance of that is that we're doing quite well in ROW and the team does feel good and should feel good about themselves.

Specifically in mask, quarter-to-quarter you're going to get some variations in some of the line items. I wouldn't read too much into that. Summer months in Europe are always an odd time anyway, so I wouldn't read too much into that.

David Low - Deutsche Bank

Okay, thanks very much. And just the other question, we've talked in the past a lot about pricing in the States, particularly. And my understanding is post Philips taking out Respironics, things have calmed down, but maybe just as a general question there, what are you seeing on the pricing front and the level of competitiveness on that front?

Kieran T. Gallahue - President and Chief Executive Officer

We're feeling good about the pricing environment now. There is always a bit of price pressure out there, but you compare it to where it was six month ago, nine months ago, we're I think in a very good position today.

As you mentioned, Philips has been a good competitor to date. We haven't seen a lot of changes in their field organization or emphasis or focus at this point. And I remain hopeful that that organization will do as it has in other areas of medical technologies, which is invest in market expansion, invest in innovation, and not play the price game. Because I don't think that does anybody any good. And so far, everything we've seen has been consistent with that.

David Low - Deutsche Bank

All right, thanks very much.

Kieran T. Gallahue - President and Chief Executive Officer

You bet.

Operator

And your next question comes from the line of David Stanton with ABN AMRO. Please proceed.

David Stanton - ABN Amro

Thanks. Just to David's question previously, can you also talk about I guess pricing in Europe, with Philips in that market now? And also, I guess my follow-up is around the impact of home diagnosis. Are you seeing any declines in the number of beds that are being built in sleep centers in anticipation of home diagnosis growing? Thanks a lot.

Kieran T. Gallahue - President and Chief Executive Officer

So, on the European front, we're not seeing the acquisition of Respironics by Philips really any significant changes in Europe at this point at all. So that organization seems to have… I don't know if it's been left alone, but certainly what we're seeing from a commercial perspective is quite a bit of status quo. And we're certainly comfortable with that.

As far as the home sleep testing, yes, look, we're not seeing… we're not hearing from sleep labs that they are slowing down expansion. The funny thing is that as you've gone through this year, as more and more clarity has been brought to bear on home sleep testing, actually you see many members of the sleep community are gaining comfort and getting an understanding of how they can use home sleep testing, and how they can use PSG. Because PSGs aren't going away.

We have long believed that the introduction of home sleep testing is actually going to drive greater volume of PSGs. Because as our Chairman has often said, it is moving us from fishing in a pond to fishing in the ocean, because we're able to access and treat and help more patients because of the simplification of the diagnostic process as well as the expansion of capacity when you aggregate both the PSGs and the home sleep tests.

So we're not hearing… in fact, last week at Medtrade, I was hearing of a number of labs that were talking about expansion, in fact, were in the process of expansion. So I was quite encouraged to hear that, actually.

David Stanton - ABN Amro

Thanks a lot.

Kieran T. Gallahue - President and Chief Executive Officer

You bet.

Operator

And your next question comes from the line of Helen Cameron with Citi. Please proceed.

Helen Cameron - Citigroup

Thank you. Just a brief question on depreciation. It's dropped $2 million in this quarter after being higher for the previous two. Just wondering whether annualized we're looking at a lower depreciation figure there of around $8 million.

Brett Sandercock - Chief Financial Officer

Yes, the depreciation and amortization for the quarter, Helen, is down a little bit. It's around that $14.3 million mark. Currencies where they are, around that number, perhaps slightly less would be probably in the ballpark.

Helen Cameron - Citigroup

So annualized, probably around $8 million lower.

Brett Sandercock - Chief Financial Officer

Yes, if you look… yes, around that figure.

Helen Cameron - Citigroup

Okay, thank you.

Operator

We are now at the one-hour mark, so I will now turn the call back over to Kieran Gallahue for his final remarks. Please proceed, sir.

Kieran T. Gallahue - President and Chief Executive Officer

Well, thank you, Jerry, and thank you all for joining us on the call today. As always, I'd like to take the opportunity to thank our employees throughout the globe in the various functions. That is what drives ResMed, and it's a fabulous team and one that we are very proud of here.

I can tell also that, as you can hear from the call today, it was another great quarter, another record quarter for us in many different ways. We've seen some fabulous opportunities for market expansion in both the cardiovascular space and diabetes as well as through further improvement and adoption of the home sleep testing.

We've got great high margin new products rolling out in the masks and the bilevels. We've got new national account wins that we're implementing. Just a lot of good things going on, and we're very excited about the year as we move forward. So, thank you again for your interest. We appreciate it and we look forward to updating you as we move forward.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day. .

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