Resmed Inc (RMD) — Q2 2016 Earnings Call Transcript

Thank you, Susan, and thank you for attending ResMed’s live webcast. Joining me on the call today are Mick Farrell, our CEO, and Brett Sandercock, our CFO. Other members of the management team will also be available during the Q&A portion of the call. If you have not had a chance to review the earnings release, it can be found on our website at investors.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 Mick Farrell.

Thanks, Agnes. And thank you to all of our shareholders joining us today, as we summarize our results for the second quarter of fiscal year 2016. We have made great progress towards our long-term ResMed 2020 goals this quarter. We achieved solid double-digit constant currency revenue growth led by strong regional results in the Americas. Last week, we announced the acquisition of Inova Labs based in Austin, Texas. This acquisition expands our respiratory care therapeutics portfolio for COPD, which now includes portable oxygen concentrators. First, I’ll discuss our top and bottom-line results, then I’ll review some regional highlights from our business and progress on our ResMed 2020 strategy. After that, I’ll hand the call over to Brett, our CFO, to walk you through our financial results in greater detail. For the fifth quarter in a row, our global team achieved double-digit top line revenue growth on a constant currency basis. We saw strength in the Americas region with robust double-digit growth at 17%. We achieved solid steady growth in our combined EMEA and APAC regional groups. These global results were fueled by the ongoing success of Air Solutions, our cloud-based connected care software platform, as well as the AirSense 10 and the AirCurve 10 medical device platforms. Looking at the bottom line, our diluted earnings per share was $0.69 on a non-GAAP basis. We have been balancing our investments and growth opportunities and significantly expanding our install base of cloud connected medical devices. At the same time, we have been efficiently managing our OpEx growth in both R&D as well as SG&A. This quarter, we gained operating leverage in SG&A, keeping its growth well below our top line growth. We continue to invest for the future in research and development, maintaining our R&D investment level at around 6% to 7% of top line revenue. Now for some regional highlights. In the Americas region, we had very strong sales performance in Q2, with our commercial team driving 17% growth in a competitive market. Flow generator growth in the region was 23%, reflecting the ongoing success of our AirSense 10 and AirCurve 10 platforms powered and catalyzed by Air Solutions software. The mask and accessories categories grew at a solid 11% in the Americas for Q2. We continue to expect solid mask and accessories growth throughout fiscal year 2016 and beyond. We grew our combined EMEA and APAC group at 7% on a constant currency basis in Q2. We continue to see good growth in our sleep disorder breathing business and our respiratory care businesses in these regions. The headwinds that we have faced from the SERVE-HF trial results of May 2015 continued to be annualized through the P&L and this will continue until May 2016. The ASV sales impact for Q2 in Europe was broadly consistent with last quarter. As we noted during our last quarter investor call, the ASV sales impact in the U.S. continues to be less than that in Europe. The ASV platform remains an excellent therapeutic solution for a number of important clinical applications including treatment-emergent central sleep apnea, opioid or pain management induced central sleep apnea, and post-traumatic stress disorder. This quarter, we acquired Maribo Medico, our distributor in Denmark. These forward vertical integration acquisitions have proved very valuable to us in the past, and we expect this to be the same. We also expect that our partnership with the great team at Maribo, which is now part of ResMed Denmark, will allow us to continue to lead in market development in the country and to build connected care and digital health solutions for sleep apnea, COPD, neuromuscular disease, and beyond. Now, I’d like to provide an update on our ResMed 2020 strategy. Before going to the three horizons, I’d like to talk about three key underlying enablers of our strategy. The first of these is our global leadership in healthcare informatics; the second is our expansion in high growth geographic markets; and the third is a focus on our best-in-class operational excellence. So, the first enabler on our list is our global leadership in healthcare informatics. Connected care and digital health are almost now industry buzzwords that are referred to by many companies in the space. We’re not just talking about it; we’re executing on this front with over 1 million cloud connected medical devices sending data every morning to the cloud, and more than 750 patients signing up every day for our patient application called myAir. We are transforming ResMed into a tech-driven medical device leader. Our first step on this journey has been changing the basis of competition in our core sleep apnea business. We led the industry 15 months ago with 100% cloud-connected medical devices, and now our competition has had to follow. We are improving the efficiency of our customers by embedding our software solutions in their workflow and providing value to providers, physicians, and patients by improving patient device adherence and therefore patient outcomes. We can leverage this core competency from sleep apnea into chronic obstructive pulmonary disease or COPD into neuromuscular disease and other chronic disease spaces. Our second enabler is our investment and expansion in high growth geographies. Our investment in Curative last quarter is an example of this strategy in action. Curative allows us to have products developed in China, made in China for sale in China. It opens up channels that just weren’t available for imported products. We’ll continue to invest and expand our presence in China, South Korea, India, Brazil, and many countries in Eastern Europe. In each country, the value we deliver is to improve patient outcomes and reduce overall healthcare costs for the country in key chronic diseases. Our third enabler is operational excellence. It is an important and fundamental foundation to our growth strategy. It’s just part of our DNA. We continue to create efficiencies to allow us to free up cash, to invest back into innovative organic R&D programs and also allow us to better unlock value from our tuck-in acquisitions. We take a continuous improvement approach across our entire global business including component supply management, manufacturing excellence, supply chain and logistics optimization, and OpEx management. We are committed to growing our operating profit and to ensure that we have headroom to free up cash to reinvest in the business and continue to drive profitable growth. Now, I would like to spend a few minutes updating you on progress against our long-term ResMed 2020 growth strategy. In our first horizon of growth, which includes our core sleep apnea franchise, our leadership in healthcare informatics remains a critical growth driver. Last month, a market research firm published a report on mobile health and home monitoring. The report ranked ResMed as the number one global leader in connected care for all medical devices. This was not just in respiratory medicine but in all device categories including cardiovascular disease, diabetes, and beyond. So 15 months after the launch of AirSense 10, AirCurve 10, and Air Solutions, the cloud-based software platform, we have achieved this market leadership position. I want to tell you that we are not done. We intend to continue our leadership in connected care and digital health as we add features and enhancements to our solution to bring even more value for providers and physicians, and even better applications for patients to see their own data, to participate more in their own health and wellness. With well over 1 million patients, cloud-connected medical devices sitting on their bedside tables providing daily updates to the cloud, we are liberating data, providing actionable information, unlocking value, and improving outcomes for patients, physicians, providers, and for payors. Our customers are clearly experiencing the value proposition of the AirSense and Air Solutions platform and incorporating this into their workflows and reaping cost savings in their own profit and loss statements. On an investor call last year, I referenced a clinical care study presented at the American Thoracic Society where an Air Solutions customer saw patient adherence increase from 73% to 83%, along with a 59% decrease in labor costs. Earlier this month, this clinical care study was published in the peer-reviewed journal called Sleep and Breathing. We continue to deliver results like this for many of our customers. And many of these are proprietary results that we just cannot share. One study that I was committed to sharing at the JP Morgan healthcare conference in San Francisco earlier this month showed an increase from a solid baseline of 60% adherence for our customer to top-tier patient adherence of 87% when using our cloud-based Air Solutions platform. You will see further publications and evidence from us showing increased operating efficiencies for our customers and increased patient adherence, all enabled by Air Solutions. Connected care is here to stay. Our acquisitions of Jaysec and CareTouch have added both ResMed branded resupply solutions combined with an end-to-end referral and document management system for our customers. Our system provides automated resupply solutions to customers so that they can effectively manage ongoing supplies of masks and accessories to patients via automated text, email, and even via interactive voice response. We also have a multilingual call center backing up the solution. The referral and document management capability reduces days patient and physician sign-off, reduces the number of errors and incomplete documents, and eliminates a large number of follow-up phone calls. These systems improve both our home care customers' efficiencies and, just as importantly, their cash flow. In terms of progress against the second horizon of our ResMed 2020 growth strategy, we announced the acquisition of Austin, Texas-based Inova Labs, which we plan to complete this quarter. With this acquisition, we have expanded our therapeutic portfolio to COPD to include portable oxygen concentrators. POCs enable patient mobility and fit well with our life support ventilator platform called Astral. Both of these give increased mobility and increased freedom back to COPD patients. Inova Labs fits well with our respiratory care strategy and our innovative company culture here at ResMed. We know that we can manage the business to add to ResMed shareholder value, and we know that we will have opportunities to grow revenue by selling POCs through our global market channels. We will work to prioritize the 100 countries that we sell into to maximize physician, provider, and patient value. We will also be able to bring global operational and technological capability to create economies of scale in supply chain management, manufacturing, and logistics at Inova Labs. Finally, together with the team in research and development in Austin and Sydney and beyond, we can create next generation products that leverage our healthcare informatics leadership to create solutions for connected care for COPD. Finally, I would like to review our third horizon of growth. Our third horizon of growth includes a portfolio of opportunities in new markets including atrial fibrillation, nocturnal asthma, and also sleep health and wellness. Rob and I, along with others from our team, attended the Consumer Electronics Show or CES earlier this month in Las Vegas. Almost every health and wellness technology at CES included sleep as part of their offering. This clearly shows that there is a demand from consumers to measure, monitor, and improve their sleep. Our S+ by ResMed sleep wellness tool is just our first foray into this space. Consumers realize that sleep health is as important as cardiovascular exercise and good nutrition for overall health, and we agree. We also continue to explore clinical areas of interest in adjacent markets. For our more than 26-year history, our team at ResMed has emphasized relationships with key opinion leaders in pulmonology, cardiology, neurology, and related clinical areas. Through our recent $5 million gift to the University of California at San Diego, we have helped to establish a world-leading center for clinical care and medical research in the fields of sleep apnea and COPD, the two most costly and important clinical diseases in the field of respiratory medicine. You will see plenty of exciting developments in this field from this team. One recent example was a sleep apnea and cancer symposium at UCSD that brought together key opinion leaders in pulmonology with KOLs from oncology to discuss the impacts of sleep disorder breathing and specifically repetitive hypoxia on cancer cell development. Although these discussions are still in their early days, literally at the molecular level, this is just one of many new clinical areas that could lead to new therapeutics and solutions for patients that ResMed could provide in the future. So returning back to our quarterly results, we remain active on the capital management front. In Q2, we bought back 700,000 shares. In addition to funding our dividend and completing the acquisitions of Curative Medical and Maribo Medico, we continue to look for potential acquisitions where these three criteria are met: One, the business is aligned with our long-term ResMed 2020 strategy; two, we can leverage the asset to increase ResMed shareholder value; and three, very importantly, that there is a cultural fit between the business team and ResMed. We clearly hit and nailed all of these three criteria with our acquisition of Inova and our acquisition of Maribo. We will continue to refresh our acquisition radar screen with further growth opportunities as we move forward. We are the global leaders in sleep apnea and respiratory medicine, not just in market share, but more importantly in product and solutions innovation in connected care. We remain excited as we build the road ahead for our industry, our partners, and most importantly, for patients all around the world. With that, I’ll turn the call over to Brett for a more detailed review of our Q2 financials. Brett?

Thanks, Mick. Revenue for December quarter was $454.5 million, an increase of 7% over the prior year quarter. In constant currency terms, revenue increased by 13%. Movements in exchange rates, predominantly a weaker euro relative to the U.S. dollar, negatively impacted revenue by approximately $21.7 million in the second quarter. At a geographic level, overall sales in the Americas were $269.5 million, an increase of 17% over the prior year quarter. Sales in combined EMEA and APAC totaled $185 million, a decrease of 4% over the prior year quarter. However, in constant currency terms, sales in combined EMEA and APAC increased by 7% over the prior year quarter. Breaking our revenue between product segments, Americas flow generator sales were $136.5 million, an increase of 23% over the prior year quarter. Masks and other sales were $133 million, an increase of 11% over the prior year quarter. In the revenue of combined EMEA and APAC, flow generator sales were $123.5 million, a decrease of 4% over the prior year quarter, but in constant currency terms, an increase of 6%. Masks and other sales were $61.4 million, a decrease of 2% over the prior year quarter or in constant currency terms, an increase of 8%. Globally, in constant currency terms, flow generator sales increased by 14% while masks and other increased by 10% over the prior year quarter. During the quarter, we incurred restructuring expenses of $6.9 million associated with rationalizing our European R&D and manufacturing facility. These operations have been integrated into their existing largest care locations. The restructuring charge consists primarily of severance payments and an asset writedown of a legacy manufacturing facility. Additionally, during the quarter, we released $2.4 million of an accrual associated with our SERVE-HF field safety notice activity, as we substantially concluded the obligation arising from the field safety notification. During the rest of my commentary today, I’ll refer to non-GAAP numbers. The non-GAAP measures exclude the impact of restructuring expenses and the SERVE-HF accrual released in the current quarter, as well as the amortization of acquired intangibles, both in the current year and last year. We’ve reconciled the non-GAAP to GAAP numbers in our second quarter earnings press release. Non-GAAP gross margin for the December quarter was 58.1%. On a year-over-year basis, our gross margin contracted by 410 basis points, reflecting an unfavorable product mix, declines in average selling prices, and an unfavorable geographic mix partially offset by favorable net currency movements. However, on a sequential basis, non-GAAP gross margin improved slightly, increasing from 58% in the September quarter. Given current exchange rates and taking into account the current trending products and geographic mix combined with the impact from our cost-out programs and our recent acquisitions, we continue to expect gross margins to be in the range of 57% to 60% for the remainder of fiscal year 2016. Moving onto operating expenses, our SG&A expenses for the quarter were $118.2 million, a decrease of 4% over the prior year quarter. In constant currency terms, SG&A expenses increased by 4%. SG&A expenses as a percentage of revenue improved to 26% compared to the year ago figure of 29%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 26% to 27% for the remainder of fiscal year 2016. R&D expenses for the quarter were $29 million, a decrease of 1% over the prior year quarter, but in constant currency terms, an increase of 14%. This increase largely reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue were 6.4% compared to the year ago figure of 6.9%. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for the remainder of fiscal year 2016. This reflects our ongoing commitments to investing in our diverse product pipeline including informatics solutions, but also a benefit of the weaker Australian dollar in which the majority of our R&D is denominated. Amortization of acquired intangibles was $4.4 million for the quarter. The increase over the prior amortization expense of $2.2 million reflects the additional amortization associated with our recent acquisition. Stock-based compensation expense for the quarter was $11.5 million. Our non-GAAP effective tax rate for the quarter was 20.5% compared to 21.1% in the prior year quarter. Looking forward, we estimate our effective tax rate for the full fiscal year will be in the range of 20% to 21%. Non-GAAP operating profit for the quarter was $116.9 million, an increase of 5% over the prior year quarter. Non-GAAP net income for the quarter was $97.5 million, also an increase of 5% over the prior year quarter. Net income for the quarter was $9.5 million. Non-GAAP diluted earnings per share for the quarter was $0.69, an increase of 6% over the prior year quarter, while diluted earnings per share for the quarter was $0.64. Overall, foreign exchange movements positively impacted second earnings by $0.04 per share, reflecting the favorable impact from the weaker Australian dollar, partially offset by the weaker euro. Cash flow from operations was a record $147.4 million for the quarter; this reflects strong underlying earnings and an improvement in the net working capital balances. Capital expenditure for the quarter was $12.9 million, while depreciation and amortization for the December quarter totaled $21.5 million. We continue to be active on the capital management front. Our Board of Directors today declared a quarterly dividend of $0.30 per share. Additionally, during the quarter, we repurchased 700,000 shares for consideration of $40.1 million. At the end of December, we had approximately 13.6 million shares remaining under our authorized share repurchase program. During the quarter, we completed three international acquisitions: Curative Medical based in China; Maribo Medico, our distributor in Denmark; and then a precision tooling company located in Sydney. These acquisitions were funded by utilizing our existing cash balances. Additionally, this month, we announced the definitive agreement to acquire Inova Labs. Inova Labs is a U.S. domiciled entity, and this acquisition will be funded by utilizing our existing credit facility. We expect to include Inova Labs in our consolidated results in the third quarter of fiscal year 2016. For the rolling 12 months ended December 31, we returned 84% of free cash flow to shareholders through dividends and repurchases. Over the last five years, we’ve returned 98% of free cash flow to our shareholders via dividends and repurchases. Our balance sheet remains very strong. Net cash balance at the end of the quarter was $257 million while December 31 total assets stood at $2.2 billion and net equity was $1.5 billion. And with that, I’ll hand the call back to Agnes.

Thank you, Brett. We will now turn to Q&A. And we ask everyone 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. Susan, we are now ready for the Q&A portion of the call.

Good afternoon. Thank you so much for taking the questions. I was hoping to start off on the generator side and the performance in this quarter again very, very strong. Just curious as far as what you’re seeing in the marketplace with this product now out there today, are you guys competing head-to-head? And if so, it seems like you’re continuing to be very successful. Is that a trend that we should expect going forward?

Thanks for the question, Matt. Yes, that allows us to talk about our Air Solutions portfolio and AirSense 10 and how it fits in the market. I’ll have a first go and then I might hand to Jim Hollingshead to talk a little bit about Americas business and what’s happening there with the AirSense 10 launch. So, as I said in the remarks earlier, we have had competitors follow us into the space with the cloud-connected devices. We think our offering is superior because it’s 100% cloud-connected and requires a channel to do nothing other than plug it in and breathe. In the morning, the data goes to the cloud, and then can be accessed by the patient on myAir or the physician on AirView or the payor provider through an API from Air Solutions. And we think it’s a strong value proposition taking up to 60% of the labor costs out of the channel for them. It’s a really important improvement to their profit and loss. We believe in competition; we like healthy competition; and we like the fact that our competitors are looking to compete on value offerings, not just in the flow generators segment but in the masks segment and looking to compete with technology. As we look forward, the market growth rate is in the mid- to high single-digit numbers. We like to meet or beat market growth rate; we don’t accept it, we drive beyond that. That’s sort of where we are at. But Jim, any more color on the Americas?

Thanks, Mick. We are very confident in our offering. I mean the AirSense 10 and AirCurve 10 platforms have been very, very well received. We have taken a significant market share and the Air Solutions inclusion in that. As Mick is saying, I think we’ve now clearly proven to our customers that we can drive efficiencies in their business with the platform. So that’s a very compelling offer, remains a very compelling offer, even in the right of competitor launches. We obviously have big comparisons that we are going to work through. Your question was about sustainability, and we intend to continue to grow our program and position above market growth rates. But given the share we’ve taken, I don’t think that’s sustainable indefinitely, given the growth rate you’ve seen this quarter.

Okay, thank you. And as a follow-up, talking about the Inova acquisition, just curious as far as where they were selling historically and where you can take that device fairly quickly? And then the investments that you’re going to need to make in support of it, is the activity pretty sizable? And then how does that business affect the financial makeup of ResMed? I think that the gross margin profile and operating margin profile likely be somewhat of a headwind going forward.

Thanks, Matt. The Inova acquisition is a great opportunity for us; it’s our first foray after 26 years of positive airway pressure, noninvasive ventilation, and dental treatment, so our first foray into portable oxygen concentrators. It’s a great technology, has great mobility, and gives great freedom back in terms of the battery life and the weight of these portable oxygen concentrators. Yes, when you look at our scale and selling into 100 countries, Inova currently sells into five to maybe 10 countries. So, you've got a 10 to 20x multiple, just on the number of geographic countries that we can move into. We are really excited about it. I might ask Rob Douglas, our COO, to add any further comments regarding the investments and what we need to do going forward.

Yes. Inova is at a scale not where ResMed is at but they are at a scale that ResMed used to be at. Walking around the factory, there’s a lot of very similar approaches to what ResMed has taken in the early days. We know we can share a lot of experiences and that by working and integrating those teams, we can really accelerate the development of those products and how we take them into the market. There’s huge opportunity there, and it’s going to be very exciting for us all to work in that area.

First, I just had a question around pricing. I mean really there has been the experience of competitive bidding round two and what that led to and how the manufacturer process, just wondering what your experience has been as we head into international rollout of competitive bidding?

Thanks for the question, Dave. Competitive bidding has been in play for almost seven years now, CB1, CB2, and the national expansion that is going on as we speak from January 1 through July 1. These obviously have had an impact. We have talked about that over the last number of quarters regarding our customers, and we have worked with our customers to ensure that we can help them improve the efficiencies of their profit and loss and drive profitable growth through all of this in the value chain, so that we can continue to serve patients and invest in infrastructure. A lot of our investments around Air Solutions are about taking 50%, 60% of the labor costs out of the channel and thereby improving the profit and loss. Obviously acquisition price hold pressures are in their profit and loss as well but when you’re able to take 60% of the labor costs out, that frees up a lot of cash for reinvestment in their business. I’d characterize the pricing environment as historic normal and what it has been over the last many years. We don’t go to quantitative detail on that for competitive purposes, but I’d say it’s at historic normal levels.

I think to follow up on the same topic, I guess what I’m looking for is a bit of comfort that what we saw with round two, where I think your commentary was quite similar at this time, is that you’re comfortable that we’re not going to see the dynamic with the competitors, I think that competitors pushed pricing down and ResMed in due course followed. Are you concerned that there’s a risk of that playing out again?

Yes, Dave, I can’t predict the psychology of other players in the market. I can tell you what we’ve done and continue to do; we bring technology into play that improves the profit and loss for our value chain. We really understand how that value chain operates. We’ve embedded it into workflows and really helped partner with the industry to take those costs out; we will continue to do that in the future. Other players in the marketplace have followed and produced similar technologies. We don’t think they are quite as good but they are doing similar things which is looking to take labor costs and inefficiencies out of a system. Frankly, together we aimed our competitors in the space are fighting the real competitor, which is inefficient hospital care, and getting those patients with sleep apnea and COPD rather than going back to the emergency room. We keep caring for them with the product on the bedside table and using the data from that.

Great, thank you. Thanks for taking my question. I just wanted to ask in light of the acquisitions and Inova in Denmark, how does that affect your CapEx going forward? Can you provide guidance on that?

I mean CapEx has been running at around $12 million to $13 million per quarter. In terms of Maribo, it’s very much a distributor, so it’s not a lot of product costs there, so I don’t see too much impact there. In terms of Inova, probably a small uptick but fairly negligible; it’s a small operation at the moment. I think the big one in terms of investment will be in R&D. We think we can turbo-charge those products and make them very effective. With our distribution channel capability, we can bring to the table, we think we can grow that business very nicely. And obviously with our distribution channel capability, we can bring to the table, and we think we can grow that business very nicely. So, there will be pretty small investments, but nothing significant.

Thank you very much. I have a quick question for Brett, followed by a question regarding some CMS news that surfaced late last year. Brett, regarding the acquisitions this quarter, we knew about one, but the other two, specifically related to distributor work or integration, were surprises to us. Can you share the overall contribution of those three acquisitions in this quarter in terms of revenue and EPS? I have one more follow-up. Thank you.

Yes, I mean these are pretty small acquisitions, so not going down to that granularity. I think we did for those ones, they’re not material from our perspective, so we haven’t disclosed too much detail on that.

And then just from a margin perspective, this vertical integration, will that help offset some of the pressures that you’ve been seeing? And maybe just an update on the transition from, I guess, area of freight charges which was a tailwind that was potentially coming in the second half of this year. Was there any benefit from that this quarter or do you expect that to be more of a second half event?

Just on the first one; continuing on the acquisitions, they're fairly small, so that’s around the ages. But typically with the vertical integration for example, in distribution that would help, that would sort of be, if you like, help improve your margins or be accretive to your margin for example. If you look at benefit from vertical integrations for supplies, we think we can pick up better tooling costs, and strategically improve margins. So, that’s one we’d call sort of a strategic tuck-in for us. If you look at acquisitions such as Inova, we highlighted at the time that there will be a little bit of dilution to gross margin there. So, that does present a little bit of a headwind but the opportunities are compelling for us in terms of portable oxygen concentrator market growth and our share in the product, so we think it was compelling to pursue.

Thanks very much. Maybe a question for Brett as well, on gross margins, just looking at the sequential movement up about 10 basis points. Looking at your mix, product mix, if anything is probably slightly better this quarter than Q1 ‘16. You should have had a benefit from a lower Aussie U.S. sort of line, just wondering if there was anything holding back that gross margin uplift? For example, what was the reference before so that moved to? Is that still to come through? In terms of your underlying gross margin ex the dilution that might come from Inova just wondering if we should expect sequential gross margin uplift over the course of this fiscal year assuming current factors hold where they are.

Yes, it’s a little sequentially. We still are seeing an impact from negative product mix, as well as geographic mix. The standout remains strong in the Americas and flow generator growth. So there’s still headwinds for us, but in the frame, there’s a bunch of other stuff. We had a small uplift from FX; you’re right, and that was probably around 40 basis points or so. There are other factors that play out that can impact quarter to quarter. Overall, I guess you’d characterize that as margins pretty much stabilized. It depends a lot on normal product mix, geographic mix, and a little bit on acquisition around the edges, a bit of a headwind for us. We’re still working on a way on cost-out programs and that will be flowing into the second half.

The ASV sales, as I said earlier, the impact that we saw in Q2 was the same as the impact we saw pretty much in Q1 for Europe. The impact that we saw in the U.S. was much less than what we saw in Europe, which is once again the identical situation to what we saw in Q1. It’s still going through the P&L being annualized. The impact of SERVE-HF results from May 2015 and we’re in mid-January now, so we’ve got four more months of annualizing that through the P&L.

So just to go back to Inova Labs and that acquisition, obviously they have a good product and some good advantages. That said, do you have an interest in bringing a new POC to market that’s up to the same standards as ResMed, similar to what you guys did with Astral and Sans? And should this be a shorter or longer timeframe or are you happy and willing to continue selling the existing products to your customers today?

Yes, thanks Margaret, good afternoon to you. That’s a good question. It allows us to talk to the longer term play here around Inova. Inova is a strong player in the POC market and they have excellent mobility and excellent freedom that they give back to patients because the battery life is best in class and lasts a very long time, similar to what we do with the Astral, where we give 24 hours of freedom back to patients with that. Having said all that, as Rob alluded to earlier, there’s a lot of capabilities that we have from our global business in the 26 years in respiratory medicine that we can bring with the Engineering to the table for the next generation of portable oxygen concentrators. Some of that will be our healthcare informatics expertise, and data solutions for COPD. We like the product, we will continue to sell existing products, but we like even more the combination of the Inova portable oxygen concentrator engineering with ResMed’s healthcare informatics, enabling connected care solutions for COPD. So the short answer is within the 2020 timeframe for sure.

Could we touch on SG&A please? Revenue was stronger than we expected but you really also pulled in your SG&A; what’s going on there?

We’ve got a number of areas that we are working on. Brett will probably go into few of them but across the board we are running a really strong operational excellence program that not only talks about our products and supply chain, but also moves a lot of that thinking and approach into the SG&A side as well. We’ve done a lot of work across the different countries with different go-to-market models. We can really call out the U.S. and Americas teams for pulling a lot of operational leverage in and we have big strong plans around our European teams as well.

We adopted some of the methodologies they’re using with the supply management team and being more disciplined. That’s certainly helping a lot and making sure our mindset extends into a smart way. Even normalizing for currency, we still see around that 27% mark, so we’d still be in very good shape. Some of those savings or holding expenses tight, and with revenue growth, obviously, you get the leverage. So that’s been a solid factor for us, and I think it’s just starting to flow through into the profit and loss statement now.

Thank you again for joining us today for this call. If there are any additional questions, please feel free to contact me. The webcast replay will be available on our website at investors.resmed.com. Susan, you may now close the call.