Resmed Inc (RMD) — Q1 2018 Earnings Call Transcript

Thank you, Mariama, 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 investor.resmed.com. I want to remind our listeners that our discussion today may include forward-looking statements, including, but not limited to, statements about future expectations, plans, and prospects for the company, corporate strategy, integration of acquisitions, 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 Securities and Exchange Commission. I will now hand the call over to Mick Farrell.

Thanks, Agnes, and thank you to all of our shareholders that are joining us today as we review financial results for the first quarter of fiscal year 2018. For the call today, I will review top-level financial results. I will then cover some business highlights and discuss some key announcements this quarter. Then I will hand the call over to Brett Sandercock, who will walk you through our financial results in more detail. We are very grateful to our global team for a very strong performance this quarter. We achieved double-digits global revenue growth led by sales of our software solutions, our mask systems, and our sleep apnea devices. At the bottom line, we grew operating profit 12% and our diluted earnings per share was $0.66 on a non-GAAP basis. We are proud of this solid top and bottom line performance from our global ResMed team. Brightree’s growth continues to be strong at 15% year-on-year inclusive of tuck-in acquisitions. We are making great progress as we expand our connected care offerings for all of our customers, creating efficiencies and improving patient outcomes. Now let me cover some geographic business highlights. The U.S., Canada, and Latin America teams achieved solid revenue growth at 11%. These results were fueled by strong growth in devices and masks as well as continued double-digit software sales growth. Sleep apnea patient volume continues to grow steadily. Growth in devices in these countries was 8% for the quarter. It has been over three years since we launched AirSense 10 and Air Solutions cloud-based software, and we continue to grow our device market share as homecare providers and physicians find ongoing sustainable value from our connected care solutions. The masks and accessories category grew 13% in the U.S., Canada, and Latin America countries this quarter. We've seen good demand across all mask categories. The AirFit N20 and the AirFit F20 masks are performing well, and we are able to fully supply the fast-growing demand for these products. Our brand new AirTouch F20 is in its very early days and has high patient comfort ratings right out of the gate. Device sales in the combined European and Asian countries were up a very strong 9% this quarter on a constant currency basis. ResMed France achieved very strong device growth catalyzed by the announcement of increased reimbursement for telemonitored sleep devices relative to non-cloud connected devices. We expect to continue our connected care value creation for our customers across Europe and Asia Pacific as we expand digital health and connected care globally. Across Europe and Asia, our teams achieved strong mask growth of 15% this quarter. We expect ongoing growth based on continued adoption of our recent mask technology and positive customer feedback across the spectrum: patients, physicians, and homecare providers. I’ll now take a few minutes to update you on our three horizons 2020 growth strategy and then I will hand the call over to Brett. In the first horizon of growth, which focuses on our sleep apnea business, we are making significant advances with the smallest, quietest, and most comfortable products enhanced by digital health and connected care. We now have over six million patients monitored with AirView software and over four million patients monitored with 100% cloud connected medical devices at their bedside. In addition, we have seen over 1,300 new patients signing up for the myAir patient engagement app every single day. It turns out consumers love seeing their own data. We are expanding globally with our connected care solutions, translating the value creation that we have brought to our customers in the U.S. over to France and across Europe and beyond. In September, we featured our recently launched travel CPAP solutions, the ResMed AirMini at the European Respiratory Society Conference in Milan. There continues to be demand and interest for a category of small travel-friendly second-use CPAP devices that patients are willing to buy with their own cash. We are focused on growing this category all around the world with particular success in existing cash pay markets such as Australia, New Zealand, Singapore, Canada, and the UK. This quarter ResMed and Brightree launched another integration solution. Together, we provide a seamless solution for all homecare providers through automated resupply enrollment for patients managed by both Brightree Connect and AirView software. With this enhancement, AirView automatically alerts Brightree Connect once the patient has achieved compliance criteria, so that the patients can be automatically enrolled into the Brightree Connect resupply program. This feature helps our homecare customers ensure that every sleep apnea patient is getting the supplies that they need to have the best possible therapy experience while saving the customer labor costs through software automation. This enhancement is the latest in a growing list of time-saving features for our customers that maximize both the patient benefits and homecare provider benefits. Brightree also launched ConnectPRO at the Medtrade Industry Conference just earlier this week. ConnectPRO is a comprehensive solution that combines all technology services and data analytics that are necessary for our homecare customers to efficiently manage resupply workflows and improve patient resupply engagement. Our connected care strategy is also having a positive impact on the clinical front with ongoing publication of studies. The American Journal of Respiratory and Critical Care Medicine, known more simply as 'The Blue Journal,' published a study run jointly by ResMed and Kaiser Permanente, which reported that remote monitoring improves patient adherence to sleep apnea therapy. The key takeaway from the study was that telemonitoring of sleep apnea patients with ResMed's algorithms resulted in a therapy adherence increase of 22% to 37%. This is statistically significant and clinically significant data. We look forward to more publications using ResMed's database of identified aggregated data. We are transforming big data of more than 1 billion nights of sleep metrics into actionable information that can improve clinical outcomes. Moving to the second horizon of the ResMed 2020 growth strategy. Our cloud connected non-invasive ventilators and light support ventilators continue to grow globally, and we are building our connected care strategy for COPD. We relaunched our portable oxygen concentrator called Activox with improved quality and performance at our U.S., Canada, and Latin America Sales Conference during the quarter. We expect steady growth of Activox throughout the year and beyond. Watch this space for future enhancements of our connected COPD offering. We are driving awareness of key clinical studies that have shown improvements in COPD mortality and reductions in COPD hospitalizations, such as our home oxygen therapy and home mechanical ventilation study called HOT-HMV. Our market access teams are working to change the standard of care for COPD in key countries around the world to drive future growth in non-invasive ventilation, portable oxygen concentrator usage, and life support ventilation businesses to serve COPD patients. Our third horizon of growth encompasses a portfolio of opportunities including sleep health and wellness, chronic disease management models, and out-of-hospital software businesses. This quarter, Brightree announced the appointment of Robert Dean as General Manager of our home health and hospice business within Brightree. This continues to be a very exciting area for us with lots of long-term growth potential. We are expanding out-of-hospital software offerings as we continue to grow and acquire software-as-a-service businesses for home health, home nursing, and other alternative care settings. We’ve had a tremendous start to the fiscal year, and we are well positioned to grow revenue throughout fiscal year 2018 and beyond. We are encouraged by the success of our new product launches with the AirFit N20, the AirFit F20, the AirTouch F20, and the ResMed AirMini. We continue to work on a pipeline of new products and enhanced connected care solutions for sleep apnea, COPD, and other critical chronic diseases. We have improved the lives of 12 million people over the last 12 months, and we continue to pursue the holy grail of health care: improving patients’ quality of life, slowing chronic disease progression, and reducing overall health care system costs. With that, I will now turn the call over to Brett, our CFO, for his remarks, and then we will go to Q&A. Over to you, Brett.

Great, thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter of 2018. As Mick noted, we had a strong quarter. Group revenue for the September quarter was $523.7 million, an increase of 13% over the prior year quarter. In constant currency terms, revenue increased by 11%. Taking a closer look at geographic distribution excluding revenue for Brightree, our sales in the Americas were $296.6 million, an increase of 11% over the prior year quarter. Sales in combined EMEA and Asia Pacific totaled $189 million, an increase of 15% over the prior year quarter. In constant currency terms, sales in combined EMEA and Asia Pacific increased by 11% over the prior year quarter. Breaking out revenue between product segments, Americas device sales were $157.9 million, an increase of 8% over the prior year quarter. Masks and other sales were $138.7 million, an increase of 13% over the prior year quarter. The revenue in combined EMEA and Asia Pacific, device sales were $128.3 million, an increase of 13% over the prior year quarter, or, in constant currency terms, an increase of 9%. Masks and other sales were $60.7 million, an increase of 19% over the prior year quarter, or, in constant currency terms, an increase of 15%. Globally, in constant currency terms, device sales increased by 8%, while masks and other increased by 14% over the prior year quarter. Brightree revenue for the first quarter was $38.1 million, an increase of 15% over the prior year quarter. The Brightree results include two small acquisitions we made in our fourth quarter of FY 2017. On an organic basis, Brightree revenue for the quarter grew by 13%. During the rest of my commentary today, I'll be referring to non-GAAP numbers. The non-GAAP measures adjust the impact of amortization of acquired intangibles, and in the prior year comparable, they exclude amortization of acquired intangibles and the Astral battery field safety notification expenses. We have provided a full reconciliation of our non-GAAP to GAAP numbers in our first-quarter earnings press release. Now, I’ll turn to the rest of the P&L. Our gross margin for the September quarter was 58.4%, lowering our prior year non-GAAP margin predominantly due to ASP declines. On a sequential basis, we saw an increase in gross margin reflecting favorable foreign currency movements and improved product mix from stronger mask sales. Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for fiscal year 2018 to be broadly consistent with our Q1 FY 2018 gross margin. Moving on to operating expenses, our SG&A expenses for the quarter were $143.9 million, an increase of 12% over the prior year quarter. In constant currency terms, SG&A expenses increased by 10%. SG&A expenses as a percentage of revenue increased to 27.5% compared to the 27.7% that we reported last year. Looking forward, and subject to currency movements, we expect SG&A growth rates to moderate over the course of fiscal year 2018. As a result, we continue to expect SG&A as a percentage of revenue to progressively improve and to be approximately 26% of revenue by the end of the fiscal year. R&D expenses for the quarter were $37.4 million, an increase of 9% over the prior year quarter, or, on a constant currency basis, an increase of 6%. This increase reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue was 7.1% compared to 7.4% in the prior year quarter. Looking forward, and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% for the balance of fiscal year 2018. Moving further down the P&L, Amortization of acquired intangibles was $11.8 million for the quarter, consistent with the prior year quarter. Stock-based compensation expense for the quarter was $11.9 million. Non-GAAP operating profit for the quarter was $124.3 million, an increase of 12% over the prior year quarter, while non-GAAP net income for the quarter was $94.1 million, an increase of 7% over the prior year quarter. Non-GAAP diluted earnings per share for the quarter was $0.66, an increase of 6% over the prior year quarter, while GAAP diluted earnings per share for the quarter was $0.60. Additionally, foreign exchange movements positively impacted first-quarter earnings by $0.01 per share, reflecting the favorable impacts from the stronger euro, largely offset by the stronger Australian dollar relative to the U.S. dollar. On a non-GAAP basis, our effective tax rate for the quarter was 21.7%. Looking forward, we estimate our effective tax rate for fiscal year 2018 will be in the range of 22%. Cash flow from operations was $94 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital balances. Capital expenditure for the quarter was $16 million. Depreciation and amortization for the September quarter totaled $29.6 million. During the quarter, we paid dividends of $49.7 million and repaid $60 million of our outstanding debt. Our Board of Directors today declared a quarterly dividend of $0.35 per share. And as previously announced, we expect to recommence our share buyback in the second quarter of fiscal year 2018. As a minimum, the aim of the buyback will be to offset the dilution impact from employee equity grants. This is estimated to be in the range of 1 million to 1.5 million shares annually. At September 30, we have $1 billion in gross debt and $208 million in net debt. Our balance sheet remains strong with modest debt levels. At September 30, total assets were $3.5 billion, and net equity was $2 billion. And with that, I will hand the call back to Agnes.

Thanks, Brett. We will now turn to Q&A, and we ask everyone to limit themselves to one question and one follow-up question. If you have additional questions after that, please get back into the queue. Mariama, we are now ready for the Q&A portion of the call.

Hi. Good afternoon. Can you hear me okay?

Got you loud and clear, Joanne.

Excellent, it was a very good quarter. I have two questions. The first concerns the adoption of the ResMed AirMini. You mentioned adoption in certain regions where consumers are more comfortable paying out-of-pocket, but I noticed the United States wasn't included. Can you explain which regions are more open to this wonderful product and why the United States is not among them?

Sure, Joanne. I’ll start and have a go, then I might hand to Jim Hollingshead, the President of our Sleep Business, to talk about how we're expanding our AirMini business. Firstly, I'm a personal user of the ResMed AirMini and have been for many months. I have traveled all around the world with it and just love it as my new travel companion; literally, anywhere I go around the planet, it follows me. I get my great sleep apnea kit without having to get distilled water in Tokyo at 2 o'clock in the morning when I land from the direct flight from San Diego. The adoption of AirMini in countries like Australia, New Zealand, Canada, Singapore, and the UK, where we have established cash pay channels, has been very strong, in fact far above our early expectations. Patients are really loving paying out-of-pocket for something that has provided such great care. But I’d say in our business-to-business-to-consumer markets like the U.S., where we sell to our homecare providers and then they sell cash to patients, it's been a slower ramp-up as those customers start to ramp up their cash businesses with all the changes of competitive bidding in the U.S. landscape change. Our homecare providers in the U.S. are working to build their cash businesses strategically for a number of years. And we think the ResMed AirMini, along with portable oxygen concentrators, is a great opportunity for them, and we’re supporting them in both of those efforts. But with that introduction to it, Jim, anything further to add for the U.S. or beyond?

Yeah, thanks, Mick. I would just add that sales of the AirMini in the U.S. are actually going very well. I think that the comparison intended to Mick’s comments is about the relative volume of AirMini against the AirSense 10 platform on a per patient basis. So in the U.S. market, AirMini is performing as expected. We think it's launching really well—it will ramp. We’re in a business-to-business-to-consumer model in the U.S. because we're selling it through our channel partners, as Mick just spelled out, and we see those volumes growing very nicely. It's in the markets where patients are having to pay cash for an AirSense 10 or they choose an AirMini, where we're seeing on a proportional basis, AirMini being purchased more frequently.

And as my follow-up question, you spoke about patient volumes for sleep apnea patients being somewhat strong, which is quite the opposite of what we're seeing in other pockets of med tech utilization. Can you give us an idea of what you're seeing in patient volumes and how you’re measuring that? Thank you.

Thanks for your follow-up, Joanne. We don’t go into the details of patient volume growth within geographies. What I can say, and the difference maybe between us and other parts of med tech, is this is a very personal experience of suffocation before therapy and then the experience of getting that gift of breath and the life change that can happen with sleep apnea. And taking the U.S. geography, with somewhere between 40 million to 60 million Americans suffocating every night, we have maybe six or seven million diagnosed and on treatment. We still have 85% plus of the opportunity in front of us. So I think that a large pool of undiagnosed patients provides a regular flow into the sleep labs and into the homecare providers that allows for that steady growth of patients into the channel. We've got a long way to go on that journey. If you go to other geographies around the world, Western Europe, 85% to 90% of the opportunities are still in front in terms of sufferers and getting them through the system. And in our Asia growth markets, the opportunity is above 95%, 98%, or even 99% in some of the geographies. So we think we’re in mile one of a marathon here, and we're really excited about patient volume growth continuing to grow steadily not just in this quarter, but throughout the fiscal year that we expect ahead and beyond.

Thanks very much, and thank you for taking my question. I had a question about replenishment of masks. I know that you’ve rolled out a new replenishment system through Brightree. Can you give us some kind of idea about what kind of replenishment growth rates, particularly in the U.S., that would be greatly appreciated? Thank you.

Yeah, thanks, Dave. That's a good question. Clearly, through ResMed Resupply, which is part of the AirView software solutions package and part of Brightree Connect, as we talked about linking on the backend with AirView, we are really working very closely with our homecare providers to make sure that every patient who wants the mask and is qualified for a mask has the opportunity to get one. As I’m saying earlier, I am a personal user of this therapy, and you need to change this mask. It's a piece of plastic that touches your face every day and stays on for hopefully seven hours of sleep every night. Even with regular washing, the mask needs replacement. We think there's a lot of opportunities. We know there's a lot of opportunities to work with patients and empower them with the information that they need to be able to access the supplies that they need. So without going specifically into numbers, we can tell you that qualitatively the pool of installed base of customers, patients who are using masks and want to resupply them is increasing quite strongly. And it's a large part of our mask and accessories category.

Thank you. And then I guess my follow-up would be, would it be fair to say that replenishment masks are growing as strong or less strong than new masks?

So, David, we probably don't want to go into the specifics of each category of masks—the installed base and new patient flow and how quickly they’re growing. But if you think about it from a mathematical point of view, as the installed base grows larger and larger and we work on replenishment protocols with patients and expand them, there's some linear opportunities with new patient setup and some exponential opportunities with replenishment as you engage patients throughout the world in all sorts of different models.

Yes, hello. Can you hear me?

Got you loud and clear, Steve. And I'm glad we’ve got your company right too.

No, no, that other one. Anyway I just had a question on the revenue for masks. Obviously, a very nice step-up in mask growth, and it follows the fourth quarter where there was a bit of a hiatus just because of capacity. Is this an unusual growth rate that we’re seeing in this quarter in terms of catch-up and therefore it might moderate going forward? Or how do you see the appetite for these new masks now that there are no restrictions on oversupply?

Yeah, Steve, as we talked about 90 days ago, we did still have some supply constraints that we were just leaving at the end of Q4. Throughout Q1, we were supply unconstrained, and we were able to meet and beat the very fast demand, as you saw for masks throughout the world. If you look at the masks and accessories category, it grew at 13% on a constant currency basis in the U.S., Canada, and Latin America, and it grew at 15% on a constant currency basis in Europe and Asian countries. Look, we think that we can continue to grow masks all the way throughout the fiscal year. Various changes happen in terms of comparables from quarter X to quarter Y as you go through the fiscal year. But as you think about the next twelve months and twenty-four months, we think the runway of the F20, the AirFit F20, and AirFit N20, as well as the brand new AirTouch F20, which incorporates both the liquid silicon rubber and foam technology, are very strong. We’re just out of the gate with the AirTouch F20, and patients are really loving that opportunity. We’re working with our channel partners on the business side of it, but in terms of patient acceptance, we’re seeing some really good patient acceptance. So having said all that, I think we've got a really good runway ahead for growth throughout fiscal 2018 for our masks. I don't think it's a catch-up; I think it's the start of a steady growth pattern that we should see throughout fiscal 2018, 2019, and beyond.

Great. And then just on my follow-up question. On the SG&A side, I wonder if Brett you might be able to give us some color as to the major drivers of that tailing off as a percentage of revenue by the end of the year. What's driving that? Is it legal costs related? Yes, if you could just give us some color on what the major – what’s underpinning that?

I wouldn’t say that – that’s a difficult one to predict. I wouldn’t say that any one area is going to build specifically into that, if you can’t – it's a more steady build, let’s say it builds more into the run rate so to speak.

Thanks very much. Could I start with Brett's comment regarding gross margins and the pressure on average selling prices? Could you elaborate on anything specific that is appearing this quarter that is different from what we’ve seen previously?

I mean, not particularly, David. You see every year in and year out, you see ASP impacting your gross margin. So I guess it’s just to call out the main impact on gross margin year-on-year. If I look at it sequentially, it looked actually pretty good, and we’re quite pleased with that uptick there on the margin. So, no, I wouldn’t say it’s an unusually met; it’s kind of more typical with what we experience in terms of ASP declines.

Okay, great, thanks. And if I could just touch on the oxygen concentrator, the Activox, could you talk a little bit about where you think that product is positioned versus the competition? It’s been a fast-growing space. Do you see something that now becomes a material contributor quite quickly, or is that something that’s slightly to grow gradually over time?

Look, yeah, David, as I said in the prepared remarks, we just relaunched with the quality and new capability in systems around our Activox system as we’ve now incorporated that acquisition of Inova into our business and relaunched it with our sales team this quarter. I will hand to Rob Douglas, our COO, to maybe provide some further detail on our POC business.

Sure, David. We described some of the quality improvements that’s really under the hood, quality improvements. We’re very happy with those quality improvements and how they’re going and our customers—let’s say use the product will start to experience those improvements. The product positioned us very portable. It's got the longest battery life. It’s very lightweight. It’s a good performer. We see steady take-up of it, and we’re patient with this product and we're going to make sure it has really the ResMed quality and provides really good treatment to patients, and we’ll build on that.

Good morning Brett. Good afternoon everyone else. First question for me is on generator growth this quarter, which remained quite strong in the Americas. So maybe you guys can give us a little bit more detail around what's driving the strength. You've been keeping in this high single-digit range. Is it existing accounts increasing their mix of the resonate platform given all of the new software offerings, just underlying patient volume? Any additional color would be great. Thanks.

Thanks for the question, Margaret. And yes, we did see strong growth in Q1. If you take the U.S., Canada, and Latin America countries combined, we saw 8% constant currency growth in Q1, and across the Europe and Asia countries, we saw 9% constant currency growth. Look, we think the total market is growing in that mid-to-high single digits across the sleep market, with devices sort of more towards the mid-single digits and masks toward the high-single digits. Implying in Q1 that we did take share within the device and mask categories, and we believe that to be true. Of course, we don't go into detail around that. But some of the reasons behind that are certainly all boats are floating on the strong patient growth that we talked about earlier, but we are taking share. And I think the share is as you've seen now, it's 36 months since we launched AirSense 10 and the Air Solutions platform. It's really a solution when you combine it together. We've published data now in the peer-reviewed press that shows that we can reduce labor costs for our home care provider customers by up to 59%. So when you have a system that can lower labor costs for your customers by 59%, it can really help them to say not only will I try this device and try this software, but I'll double down on it, and I’ll continue to invest in it. And we're seeing a lot of customers garner a lot of profit growth for themselves, and they didn't take that cash reinvest in the business for better patient care. So we think this is really a win for ResMed. Obviously, as you see in these numbers, it's a win for our home care customers that use ResMed, and it's a win for the patients because they get better care. They engage daily sometimes with their myAir app and check out their myAir score, and their adherence rates move from 50% to 60% historically in this industry up to 87% in one of our published studies and beyond that in some of our unpublished work. So we think it is a sustainable, strong value proposition with our customers that's driving it, Margaret.

Great. And then on the breakthrough side as a follow-up, that one is chugging along as well, you’ve got this low to mid-teens, and I know some of that is the acquisitions, but how should we think about acquisitions being off for the rest of the Brightree installed base? Can those be material to your growth? And then just as you think about that underlying growth, is it new accounts? Or, again, those existing accounts just choosing and selecting more new offerings that you have? Thanks.

Yes, another good question, Margaret. As you observed this quarter, our Brightree growth was 13% in constant currency, excluding any tuck-in acquisitions, and 15% in constant currency when including the modest tuck-in acquisitions we made throughout the year, such as AllCall. We have solid low to mid-teen growth in our software-as-a-service business, which we believe is partly due to new accounts. Our sales team at Brightree is excellent. Recently, I, along with several team members, including Raj, visited Atlanta to engage with the team in a leadership program, focusing on top leaders not only in sales but also in development, and how they are collaborating while embracing both the ResMed culture and the Brightree software-as-a-service culture, all while driving strong commercial performance. We believe this growth is sustainable, considering both market share and the increase in users within existing accounts. We've noticed that home medical equipment providers who partner with Brightree experience growth, and as they grow, they add more users. Additionally, software-as-a-service users pay on a per basis, allowing us to expand by acquiring new accounts while also supporting the growth of current customers. So we are managing to achieve both.

Good morning. And thank you for taking my question. Just back on Activox, Mick. I'm just wondering if you can give us a bit more granularity on sort of specifically the relaunch and what you might have changed from what you're doing before to what you're doing with the relaunch—that would be really good.

Yes. I’ll hand it over to Rob.

Yes, Sean. As I said before, ResMed's position in the markets is very high-tech, high-quality value, and innovation. As we got our early experience with the Activox, we saw a number of improvements that we wanted to make, and we made those improvements. I described them earlier as improvements under the hood. So they're really—not features, but they're improving the delivery of the existing features. We’ve progressively incremented them on a sequential basis, and then we’re really looking to the absolute measure of our customers' responses to those to see how we go— to see to really put the metrics around the quality improvements and what extra value that adds. I can't really get granular on the exact next steps of improvements that we're coming up simply because we don't forecast our R&D programs for competitive reasons, but I would say we've got a very strong team working on it. We've got some great ideas. We’ve still got the features that we have talked about—adding some of our connected care capability into the system, which we believe will further improve the quality of delivery of oxygen treatment for patients while also improving the ability of our HME customers to manage those patients and that fleet of devices that they need to. And that's all work in progress.

Good afternoon, good morning. Thank you for taking the question. Maybe make a little bit on rising tide carrying all boats here, Philips put up a pretty good print as well in high single-digit growth. So maybe a little bit more on is it a reimbursement thing that that benefiting everyone in the marketplace? Is it another dynamic that whether it's in a DME channel or again you also mentioned reimbursement coverage in France. Just trying to get maybe why this quarter's a little bit different from an underlying funnel/volume perspective.

Thanks for the question, Anthony. Yes, look, I think there is some rising tide there, and that's a global mid-single digits to high-single digits market growth. Other players are also in that mid-to-high single digit range as well. As I said earlier, I do think we're taking share with connected care. You mentioned France. There are four levels of reimbursement for sleep apnea therapy that starts from January 1 in France. The highest is for telemonitored patients with adherence over 4 hours, followed by telemonitored patients with 2 to 4 hours, and below that non-telemonitored patients, and so on. ResMed has been leading in connected care not just in the U.S. but globally, and we've been preparing for this type of change, and we're really excited that the government of France has recognized that they get a return on investment by telemonitoring patients, increasing adherence, and taking those patients out of the hospital. So we think this market is great and growing and good for all players, but we think it's particularly good for those looking at ways to takecost out of that channel and partner with their customers, which include the home care providers but also the patients. When patients use their devices more, adherence rates of 87% is unheard of in our industry, and we’re publishing that and getting it in the peer-reviewed press in journals like the Blue Journal, Jama, and Lancet, and you're going to see more from us on that. We have one billion nights of sleep data in the identified aggregated data, and we're going to be putting clinical studies out there to show this therapy, sleep apnea therapy is very beneficial, and we'll be doing the same in COPD as we move forward.

Great and then just a follow-up would be just a bit on working capital once again, just on a year-over-year basis. AARs ticked up quite a bit as inventory. I'm just wondering is there reason to hold more inventory? Is there an elongated sales cycle in the same on the credit sales? Is there an elongated cycle there as well? Thanks.

So I’ll handle the question to Brett.

Thanks, Mick. Thanks, Anthony. On the data side, I think it’s still within our range that we would expect and fairly typical historically, and it's probably still may be allow us maybe 12 months ago, but still comfortable with where we are on that. On the inventory front, you're right, we're up a little on the inventory, but it's been pretty well documented that we're a little bit supply constrained on masks, so some of that is kind of a rebuild into getting that right. You see that manifest a little bit in the inventory as well; that's all the way through the supply chain. We're now in much better shape, but I guess that's reflected in some inventory build. Going forward, I’d expect not necessarily to come down, but I'd expect sort of the growth to moderate as we kind of balance a bit better now.

Thanks, Mariama. In closing, I want to thank the more than 6,000-strong ResMed team for their execution on our new product launches. This quarter, that hard work has translated into market share gains, revenue growth, and 12% net operating profit growth. Our team remains focused on our future pipeline of products and software solutions that change patients' lives and benefit all of our customers, including patients, physicians, payers, and providers. We will talk to you again in 90 days. Thank you.