Resmed Inc (RMD) — Q2 2018 Earnings Call Transcript

Thank you, Christine, 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, litigation, tax outlook, 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 our shareholders joining us today as we review our financial results for the second quarter of fiscal year 2018. For the call today, I will review top-level financial results, business highlights, and key announcements this quarter. Then I will hand the call over to Brett, who will walk you through our financial results in further detail. We are very grateful to our global team for another quarter of strong performance. We achieved double-digit revenue and double-digit profit growth, led by sales of our software, solutions, mask systems, and sleep apnea devices. At the bottom line, we're starting to see leverage from ongoing operating excellence initiatives, with net operating profit growth of 20%. We see more runway ahead for operating excellence as we move forward. Our diluted earnings per share were $1 on a non-GAAP basis. We're very proud of this strong top-line and bottom line performance from our Global ResMed team. Growth in our Brightree software-as-a-service business continues to be strong at 14% growth year-on-year and we're pleased with the continued innovation and execution by the Brightree team. Turning to our global therapy businesses, we continue to build our digital health leadership and we now have well over 1.5 billion nights of medical sleep and medical respiratory care data. We continue to unlock significant value for our customers from these data, creating efficiencies for providers, simplifying workflow, and care delivery for physicians, and improving outcomes for patients and their caregivers and loved ones. During the quarter, the U.S. Government passed tax reform through Congress moving to a territorial tax system. This has liberated our global cash assets to be able to be invested without artificial constraints. We will now be free to invest in three new ways: one, growing upon our existing strong U.S. manufacturing footprint; two, growing our existing U.S.-based research and development capability; and three, building upon our existing valuable U.S.-based intellectual property assets. We will provide updates on all these areas as we move forward. Now for some geographic business highlights. The U.S., Canada, and Latin America teams achieved solid revenue growth of 12% on a constant currency basis. These results were fueled by strong growth of devices and masks, as well as continued strong double-digit software sales growth. Sleep apnea patient volume continues to grow steadily through our marketing efforts and those of our channel partners. Growth in devices for the U.S., Canada, and Latin America was 12% for the quarter on a constant currency basis. It has been three-and-a-half years since we launched the AirSense 10 device platform and the Air Solutions cloud-based software platform. We continue to grow our device market share as homecare providers and physicians choose ResMed, because of the sustainable value proposition of our connected health and digital health solutions. The mask and accessories category grew 12% in the U.S., Canada, and Latin America markets this quarter. We have seen good demand across all mask categories. In the nasal and full face categories the AirFit N20 and the AirFit F20 respectively are doing very well. We continue to expand production to meet the growing demand for these products. Our newest mask technology, including memory foam capability, in the AirTouch F20 is receiving high patient comfort ratings and is creating a new market niche for patients with high sensitivity to therapy, a previously unmet market need. Revenue across Europe, Asia, and other markets grew at 8% in the quarter on a constant currency basis. Mask sales across these markets grew at a very strong 16%, reflecting strong adoption of our F20 and N20 mask products. Device sales grew steadily at 5% this quarter across Europe, Asia, and other markets. ResMed France has continued to drive solid device growth, catalyzed by increased reimbursement for telemonitoring of sleep devices relative to non-cloud connected devices, a change which went into effect January 1, 2018. We're excited to highlight France as the first country to recognize the value of connected health by establishing a reimbursement system change that drives the market to a new world of efficiency and better patient outcomes. We're working with other governments and payers on similar initiatives, over the coming period just watch this space. I'll now take a few minutes to update you on each of the three horizons in our 2020 growth strategy and then I'll hand the call over to Brett. In the first horizon of growth, which focuses on our sleep apnea business, we're making significant advances with the smallest, quietest, and most comfortable products, enhanced by digital health and connected health solutions. We have begun to leverage the well over 1.5 billion nights of actionable medical sleep and respiratory care data in clinical studies and to provide insights that improve patient care and healthcare delivery efficiencies. We have over 6 million patients monitored in our cloud-based AirView system and over 4 million patients monitored with 100% cloud-connected medical devices in their homes. We also continue to grow patient engagement. We have over 1,300 new patients who sign up for the My Air Patient Engagement app every day. We see My Air enrollment continue to rise exponentially; patient engagement is working. The bottom line is people love seeing their data and when they do, they engage with their therapy more and more. With continued global adoption of Air Solutions, the AirSense 10, the AirMini, the N20, and the F20, these masks provide world-leading fit, seal, and comfort. We see a future of solid ongoing revenue growth in this space across that portfolio. This quarter ResMed announced the integration of AirMini data with AirView, our cloud-based remote monitoring patient platform. The connectivity between AirMini and AirView enables physicians and homecare providers to see patients' nightly data verified here and spot any therapy issues that need to be addressed. This gives physicians a great opportunity to educate and engage patients to reach the best possible healthcare outcomes even on their brand new travel device. We continue to show progress on the clinical importance of treating sleep apnea. The American Journal of Medicine published a ResMed-sponsored study during the quarter including over 5,000 hospitalized patients. The study showed that diagnosing and treating sleep apnea in the hospital improved these patients' long-term survival rates. Undiagnosed sleep apnea is highly prevalent among hospital patients and there is an opportunity to simplify and efficiently diagnose them in the hospital and ensure they receive life-changing therapy post-discharge. Following pathways like this will not only reduce costs for the healthcare system, it will also increase survival rates and quality of life for the patient. It is great to have more proof that we are not only saving money for the healthcare system, our therapy is also saving lives. Moving to the second horizon of the ResMed 2020 growth strategy, our cloud-connected non-invasive ventilators and life support ventilators form the basis upon which we are building our connected health and digital health capability for chronic obstructive pulmonary disease or COPD. With over 380 million COPD patients worldwide and COPD being the third leading cause of death and the second leading cause for rehospitalization, we know that we can provide value for payers, providers, physicians, and, most importantly, patients from these data. In San Francisco, a few weeks ago we announced Mobi, the first ResMed branded portable oxygen concentrator. Mobi offers excellent oxygen output and battery life and a great balance of mobility, comfort, and therapeutic quality to the many millions of people who rely on supplemental oxygen. We expect steady growth in this POC category throughout the year and we have plans for continued enhancements for ResMed's oxygen concentrator pipeline. Mobi forms a critical path of our spectrum of respiratory care products, along with cloud-connected non-invasive ventilators like the AirCurve, high-flow therapy, and our cloud-connected life support ventilator called Astral. Our third horizon of growth encompasses a portfolio of opportunities including sleep health and wellness, chronic disease management tools, and out-of-hospital software business expansion opportunities. This quarter our Brightree team announced integration alerting to improve reporting for home health and hospice businesses. The seamless transfer of data between Brightree and the post-acute care data analytics company called Strategic Healthcare Programs allows home health agencies to immediately receive accurate reports to help improve patient care and compliance. Out-of-hospital software continues to be an exciting growth area for us, with strong long-term growth potential ahead. On the consumer and wellness side, our joint venture SleepScore Labs launched its latest and greatest non-wearable sleep improvement system for consumers called SleepScore Max. This product is powered by ResMed's non-contact sensor technology for best-in-class respiratory and sleep architecture analysis. At the CES Conference in Las Vegas, SleepScore Labs announced a partnership with Williams-Sonoma to offer what they call the Robin Sleep System which is a combination of the SleepScore Max product and a Williams-Sonoma Mattress Set. This will be available at their online stores and select brick-and-mortar stores. For ResMed, this sleep awareness partnership provides a pathway to inform the 50 to 70 million Americans who suffocate every night but do not yet know that they need to seek diagnosis and treatment for their sleep apnea. You will continue to hear more from us on the sleep awareness front as we move forward. We've had two strong quarters to start our fiscal year and we are well positioned to grow revenues throughout the second half of fiscal year 2018 and beyond. We are also well positioned to continue to grow our operating profit as we execute on our ongoing operating excellence initiatives. We have seen success with new masks and new device products including the AirFit N20, the AirFit F20, the AirTouch F20, and the ResMed AirMini. Most recently, we are excited about our first ResMed branded portable oxygen concentrator called Mobi. We are positioning the company for long-term top and bottom line growth for 2020, as we continue to execute on our strategy and action, implement operating excellence initiatives, and lead the Medtech field to unlock value with connected health as well as digital health solutions. We have changed well over 12 million lives over the last 12 months and we continue to drive what we call our triple aim in the out-of-hospital healthcare market: one, improving the quality of life for patients; two, slowing chronic disease progression; and three, reducing overall healthcare system costs. With that, I will turn the call over to Brett for his remarks and then we'll go to Q&A.

Great, thanks, Mick. In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2018. As Mick noted, we had a very strong quarter. Group revenue for the December quarter was $601.3 million, an increase of 13% over the prior year quarter or in constant currency terms, revenue increased by 11%. Taking a closer look at our geographic distribution and excluding revenue from our Brightree software-as-a-service business, our sales in the U.S., Canada, and Latin American countries were $329.2 million, an increase of 12% over the prior year quarter. Sales in Europe, Asia, and other markets totaled $233.4 million, an increase of 15% over the prior year quarter or in constant currency terms, sales in Europe, Asia, and other markets increased by 8% over the prior year quarter. Breaking out revenue between product segments, U.S., Canada, and Latin Americans device sales were $173.7 million, an increase of 13% over the prior year quarter. Masks and other sales were $155.5 million, an increase of 12% over the prior year quarter. The revenue in Europe, Asia, and other markets device sales were $163.3 million, an increase of 11% over the prior year quarter or in constant currency terms, an increase of 5%. Masks and other sales were $70.1 million, an increase of 23% over the prior year quarter or in constant currency terms, a 16% increase. Globally, in constant currency terms, device sales increased by 9%, while masks and other increased by 13% over the prior year quarter. Brightree revenue for the second quarter was $38.7 million, an increase of 14% on the prior year quarter. During the rest of my commentary today, I'll be referring to non-GAAP numbers. The non-GAAP measures adjust for the impact of amortization of acquired intangibles and tax-related charges associated with the recently enacted U.S. tax reforms. In the prior year comparable, they exclude amortization of acquired intangibles, acquisition-related expenses associated with additional contingent consideration, restructuring expenses, and litigation settlement expenses. We will provide a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release. Our gross margin for the December quarter was 58.2% compared with 58.3% during the same quarter in the prior year. Our margin was essentially consistent with the prior year and reflects typical declines in average selling prices, largely offset by manufacturing and procurement efficiencies. Consistent with our comments last quarter, on a sequential basis our gross margin in Q2 was negatively impacted by unfavorable foreign currency movements. Assuming current exchange rates, and likely trends in product and geographic mix, we expect gross margin for the balance of fiscal year 2018 to be broadly consistent with our Q2 FY18 gross margin. Moving onto operating expenses, our SG&A expenses for the quarter were $151.8 million, an increase of 9% over the prior year quarter or in constant currency terms, SG&A expenses increased by 6%. SG&A expenses as a percentage of revenue improved to 25.2% compared to the 26.3% that we reported last year. Looking forward, and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 25% to 26% for the balance of fiscal year 2018. R&D expenses for the quarter were $40.6 million, an increase of 6% over the prior year quarter or in constant currency a basis increase of 4%. This increase reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue were 6.8% compared to 7.2% in the prior year. Looking forward, and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the balance of fiscal year 2018. Amortization of acquired intangibles was $11.3 million for the quarter, a decrease of 3% over the prior year quarter. Stock-based compensation expense for the quarter was $12 million. Non-GAAP operating profit for the quarter was $157.3 million, an increase of 20% over the prior year quarter, while non-GAAP net income for the quarter was $143.8 million, an increase of 39% over the prior year quarter. Non-GAAP diluted earnings per share for the quarter were $1, an increase of 37% over the prior quarter, while GAAP diluted earnings per share for the quarter was $0.07. The growth in non-GAAP earnings per share was partly due to a lower tax rate this quarter. Achieving a normalized tax rate of 22%, our non-GAAP earnings per share would have been $0.83, an increase of 14% over the prior year quarter. Now I'd like to spend some time discussing tax-related matters. On a GAAP basis our effective tax rate for the December quarter was 93.3%, reflecting one-time charges associated with a recent change in U.S. tax laws. U.S. accounting rules require us to recognize the effect of any tax law changes during the period in which they are enacted. Accordingly, we have recorded an additional income tax expense of $126.6 million in our December quarter. Specifically, this amount includes two items. First, the transition tax imposed on our accumulated foreign earnings resulting in additional income tax expense of $119.9 million; and second, the write-down of the carrying value of our net deferred tax assets means a lower U.S. corporate tax rate, which resulted in additional income tax expense of $6.7 million. On a non-GAAP basis which excludes the one-time charges I just discussed, our effective tax rate for the quarter was 6%. Adjusting for the impact from ASU 2016-09 which governs accounting for the tax deductions for employee stock-based payments, our non-GAAP effective tax rate for the quarter was 11%. Our non-GAAP effective tax was lower this quarter because our tax rate in previous quarters have forecasted the repatriation of cash to the U.S. this fiscal year. The taxes attributable to repatriation will no longer be due in the U.S. because of the recent U.S. tax reforms. For the same reason, we now estimate that our non-GAAP effective tax rate for the second half of fiscal year 2018 will be in the range of 15% to 16%. Now I'll turn to guidance on our expected fiscal year 2019 effective tax rate. There are two important factors to consider. First, Australian draft legislation designed to implement certain base erosion and profit shifting, or BEPS, initiatives related to hybrid mismatches likely to be enacted in calendar year 2018 and be effective for our 2019 fiscal year. This will impact the taxation of our transactions between Australia and the rest of our global businesses and likely result in additional accessible income attributable to the Australian tax jurisdiction resulting in a higher effective tax rate. Secondly, the recent U.S. tax changes will reduce our effective tax rate predominantly associated with a new territorial tax system which will allow for little or no tax on future earnings repatriated to the U.S. from our foreign subsidiaries. Taking into account the impacts from both the Australian perspective legislative changes, and the U.S. tax legislative changes, and their estimates of the geographic attribution of our income, we estimate our fiscal year 2019 effective tax rate will be in the range of 21% to 23%. To round out the implications of the U.S. tax reform, it's important to note that the U.S. legislative changes will be positive for ResMed from a financial and treasury management perspective. We will now have far more flexibility to repatriate cash back to the U.S. at little or no tax cost. We will be able to more effectively utilize our strong global cash flows to invest in growth opportunities and undertake capital management activities. Moving on from tax-related matters, during the second quarter cash flow from operations was $132.6 million reflecting strong underlying earnings. Capital expenditure for the quarter was $16 million. Depreciation and amortization for the December quarter totaled $29.4 million. During the quarter we paid dividends of $49.9 million. Our Board of Directors today declared a quarterly dividend of $0.35 per share. Additionally, as we discussed during last quarter's call, we recommenced our share buyback during the second quarter and repurchased 100,000 shares for consideration of $8.5 million. At December 31, we have $1 billion in gross debt and $160 million in net debt. Our balance sheet remains strong with modest debt levels. At December 31, total assets were $3.6 billion and net equity was $2 billion. And with that, I'll 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 only. If you have additional questions after that please get back into the queue. Christine, we are now ready for the Q&A portion of the call.

Everyone, thanks for taking the question. First of all you guys had a really nice quarter in terms of showing operating leverage and SG&A leverage, even taking all the moving pieces out. But maybe walk us through what's been driving the recent results in SG&A leverage maybe what the long-term level for that SG&A or operating margin could be and really what it gets down to should we assume multiple years of leverage here?

Thanks for the question, Margaret. And as we talked about on previous calls, if you look back over five-plus years ResMed had around 30%, 32% of our revenue in SG&A and in most recent quarters we've taken that down to 27% as a percentage of revenue because we're able to grow and leverage our world-leading scale within the sleep apnea and respiratory care and now out-of-hospital software markets. We expect that to continue. And as Brett said in his prepared remarks we want to leave this fiscal year with a run rate of around 26% of our revenues at SG&A and even beyond that as we look to FY19. And so I think there's a lot of runway left for leverage around SG&A. We're a global leader, the global leader in sleep apnea and respiratory care, and we have a right to win in out-of-hospital software and I think we can leverage that scale to grow efficiently. So I'd summarize that there's a lot of runway ahead over multiple fiscal years here, Margaret.

Good. And then just as a follow-up on international, it seems like it continues to remain a focus for you guys in relation to telemonitoring. I know you had some weird comps with China from the year-ago period, but what inning are you guys today in driving telemonitoring internationally and are there any advanced talks on a national, regional level outside of France to drive ongoing fleet upgrades? Thanks.

Yes, that's a great question, Margaret; it allows us to talk about digital health and connected health beyond just the United States. We've had excellent progress the last three-and-a-half years in the U.S. millions literally north of $4 million, 100% cloud connected medical devices. 6 million patients in the AirView system, and that keeps growing every day. But as we highlighted in the prepared remarks, it's fantastic to see a country like France where the government, who pays most of the healthcare bill through Social Security healthcare, is looking at the sleep apnea space and saying there is an ROI here to invest in telemonitored sleep devices. If we have patients that have telemonitored devices they use them more and as the data showed that we published and the French government knows that if the patient uses their device more they stay out of the hospital more. They have a better quality of life and in fact their survival rates go up. So the French government making that change, January 1, is fantastic, we think there's a lot of runway ahead across France and as we look across Western Europe and across Europe, Asia, and all the other markets that we do business in, we are in regular conversations through our market access team with the governments and major players in the United States and others for-profit payers and we will get the message through that having telemonitoring, having connected health and digital health improves outcomes, lower costs, and saves lives. And we do think that other countries will follow suit after France and it's great to have them out there.

Good morning and thanks for taking my call. My first question is to Brett. Brett, could you give us a guide on the FX impact on GM in the quarter?

Yes. As we mentioned, Sean, it was pretty meaningful this quarter. If you looked at it sequentially it was kind of in the order of 50 basis points negative. So it was quite a big impact on the gross margins. So, yes, if we know that we're kind of pretty pleased with where we end up with the gross margins because we have quite a big headwind on FX.

Okay, great, thanks Brett. And Mick, are you able to give us a bit of a guide on what features the Mobi has versus Activox?

Sean, thanks for the question. Unfortunately for the call but fortunately for our sales team and our commercial teams has been a long time designing again this product ready. We're not ready yet to publicly announce the specific features and capabilities. What I said at the conference earlier this month, and I'm happy to repeat here, is that this has got really good oxygen output; it's got excellent battery life and a really good blend of all the other parameters that are needed to make our home portable oxygen concentrators the best they can be. And by putting the ResMed brand on it, running it and releasing it when we believe the quality is at the level that deserves that brand and that's what we're working towards.

Thanks very much for taking my questions. Perhaps we could just touch on France again, Mick, just you talked about the change happening from the 1st of January, just wondering what you're seeing there. I mean presumably from the results we're seeing, you saw good buying ahead of the change and sort of where do you think we are up to in terms of sleep replacement to take advantage of the new reimbursement structure?

Yes, David, as you indicated the reimbursement change went into effect January 1, but our French colleagues and customers and partners in the ecosystem in France have known about this for a number of months or quarters. And so there has been some upgrading of the fleet from non-cloud connected to cloud-connected devices over the last three, six months. We see more runway ahead of that for France. And really importantly, we see patients getting better care, using their devices more therefore using more masks, but most importantly, staying out of the hospital and being well taken care of. And we think there is a positive domino effect here where other countries will see this change based upon real data including the data that we published in the Peer Reviewed press this quarter and say this is the right direction to go. So we are in active discussions well beyond just one or two countries; we are looking to get the message out there that telemonitoring and cloud connectivity and digital health and connected care can save costs and improve lives. But more runway left in France and a lot more across the other 119 countries we sell into over the coming fiscal years.

Great, thanks very much. And just one other, I mean you had very strong sales growth which is really impressive. But perhaps if you could talk to market conditions, I mean, I think let's perhaps start in the U.S. trying to get a sense as to how much is this ResMed gaining share and how much is this market conditions picking up in terms of patient setups, mask replacement?

Yes, thanks David. I think patient growth continues to be strong. Globally, as you know, sleep apnea is underdiagnosed and we are continuing to see increasing awareness in the markets and increasing patient setups. There is a little bit of cyclicality in the mask business especially in the U.S. because of the way deductibles, end of the calendar year, and so we always get a little bit of pick-up in masks, with some cyclicality, but the underlying growth in the market I think is driven by patient awareness, and obviously the economy has been a little bit stronger, so overall positive in both directions.

Good afternoon, very nice quarter. Can you spend a moment talking about your Mobi portable oxygen concentrator? How is that going to be sold into the home? Will you combine that with your current home CPAP sales force? Are you going to build out something separate?

Yes, thanks, Mick. Joanne, we are currently selling the Activox throughout our existing sales force and doing that very successfully and the license ship and the discussion for customers around the world are very relevant and portable oxygen we think represents a really good business opportunity for many of our customers around the world. Mobi, as a ResMed brand, will just be an extension of that and a stronger player, and that will be part of our existing sales teams. Mobi and we are really looking forward to it coming out, we're really excited about it; it's going to have fairly strong performance.

As a follow-up, was there anything specific in the quarter, extra selling days, stocking, anything particularly of note that we should be able to factor in to as we think about this quarter, but also project on to next year?

Yes, thanks Joanne. No nothing out of the ordinary in this Q2 in terms of the channel. I think what we're seeing is we've had three-and-a-half years of the Air Solutions and AirSense portfolio that's incredibly valuable for customers. They continue to buy those sleep devices and those respiratory care devices that fit on the AirView platform. And we're seeing really good traction of the N20 nasal mask and the F20 full-face mask. These are the smallest, quietest, and most comfortable in their category. The plastic that fits on the bridge of the nose on an F20 and N20 is the thinnest and most comfortable plastic that you can have of any mask on the market. So I think that's what's leading to the share gains that we got this quarter, and I think there is some sustainability to those share gains as we look forward.

Yes, good morning. Just a question around gross margin for Brett. You've obviously got in this quarter a particularly large headwind from currency and therefore the offset through manufacturing efficiencies was obviously pretty compelling. What's the runway like on those manufacturing efficiencies for the back half of the year because I expected actually it must improve, mainly because the currency now has probably gotten an even bigger headwind to come given the strength of the Aussie dollar recently? Can you just sort of talk through how that might look and what are the moving parts going into the back half of the year?

Sure, Steve. I mean we have a program around kind of initiatives in both manufacturing, procurement, logistics, and so on to really work on a number of initiatives, and we're kind of keeping track of that pipeline pretty full. Then it's a matter of executing on those and in the time when they drop. So let's not get overly granular but we’re working on that all time and we expect to drop initiatives that will take cost out over a period of time, and there will be some of those will manifest in the second half. But it's only progressive and it's a long-term program and you've just got to continue to execute on the initiatives you identify and keep that pipeline full and that's certainly what the team has done. So I guess it's more progressive, Steve, rather than sort of sudden big jolt to it. So we just got to keep executing on those initiatives and that will continue to drive cost out of all that COGS area.

And so even with the Aussie Dollar at $0.80, you still got the ability to maintain that gross margin at current levels with the procurement side and manufacturing efficiencies?

Yes, I mean guiding to be broadly consistent. Right. We will have some headwind with the Aussie at $0.80. I mean clearly if that keeps tracking up that's a different ball game but at the moment, I mean, it's a quarter away, so into Q3 it won't be so bad, if you look into Q4 then clearly there is a bit of a headwind there. But we've kind of managed currencies on the Aussie all the way from $0.47 to $1.03. So I think we just got to live with currencies moving around and make sure that we've got initiatives in place to counteract that. But also, I mean, we will get much more broader on our manufacturing nowadays compared to what we were a decade ago. So we have manufacturing in Singapore, for example, it's pretty big, we have some in the U.S. now that we are undertaking. So I guess that portfolio is a little more balanced and then clearly, as you know, over many years on the material side it was really looked at sort of space or even essentially U.S. dollars to try and mitigate some of that. So it certainly has an impact but I guess there are some things we do to try and mitigate that and we've just got to live with the currency whichever way it goes. Yes, we definitely have more flexibility now. While it's too early to make any specific announcements, this flexibility allows us to use our cash for growth opportunities, acquisitions, and investments anywhere in the world. We are in a much better position to do so. Additionally, we could also engage in some capital management. There are certain limitations in the tax reform regarding interest deductibility that we need to keep in mind, but overall, this situation presents a great advantage for us as our flexibility has significantly increased. For example, we initiated a buyback in Q2, which we plan to continue. I currently anticipate it will be relatively modest, primarily aimed at offsetting the equity share grants to employees, amounting to about $1 million to $1.5 million annually. Although we have more options, we haven't fully planned everything just yet and are still evaluating our possibilities.

Good morning and thanks for taking my questions. I wonder if you could explain how Brightree and ResMed are going about increasing mask replenishment and in particular in the U.S. market. Thank you.

Yes, look I've been out to often and then maybe Jim can add to that. We have some excellent programs with Brightree Connect and ResMed ReSupply, some platforms that we've enhanced and put together to provide an end-to-end service for our HME customers who want to get involved in ReSupply programs. We have automatic, email, text, interactive voice response that we can provide to our customers to go directly to their patients. We have dropship programs where we can dropship directly to the patients if the care companies require that or want that and so many offerings in that and every day we are looking at ways to upgrade our ReSupply programs including in guiding patients with their my applications. We think that there is an underutilization if you like of patients saying they want to get a clean mask when they need a clean mask because they don't know it's available in the options therefore, they don't know the co-pay, they don't know the timing. So we want to turn that ignorance into education and educate patients that when their mask does start to go up and/or their mask starts to get dirty, they can get a new one. And this is a piece of plastic that touches your face for seven hours a night, every night, it needs to be replaced on a regular basis and we think there's an undermet need to drive that. Any further details, Jim?

I think the only thing I would add to that is the reason there are two platforms is because Brightree Connect is really designed for our HME customers who are using Brightree as their billing platform and there's many thousands of those. There are also thousands of HMEs that don't use Brightree as their billing platform, and so the ResMed ReSupply platform is really designed to be agnostic of billing since it will be usable by HMEs who are on the Brightree billing platform. In that way, the two offers effectively cover the entire market.

Thank you. As a follow-up to your strong numbers in the U.S., I would like to hear your updated thoughts on U.S. market growth rates and possibly some insights on European market growth rates as you anticipate them for 2018. Thank you.

Thank you for the question, David. We see the global sleep apnea respiratory care market growing in the mid-to-high single digits, with device sales increasing at a mid-single digit rate and mask systems growing in the high single digits. This quarter, we clearly gained market share in both categories. Our Air Solutions, AirView, and the AirSense10 and AirCurve 10 systems have contributed to our growth in the device market, and while our new masks have been on the market for three to four quarters, they continue to perform well in both the nasal and full face categories with the N20 and F20. The AirTouch F20 full mask has carved out a niche among patients who are sensitive to plastic on their faces, offering a more comfortable foam option. I believe the market is expanding in the mid-to-high single digits, and we gained share this last quarter with the potential for further gains in upcoming quarters. Additionally, we invest 6% to 7% of our revenues into research and development to maintain a consistent flow of innovation in both masks and software, which we update on a four to six week basis through cloud enhancements.

Yes, good morning. I just had a question on the average selling price decline just highlighted this quarter. It's been an impact over the past few years so I just wondered if you'd be willing to characterize the decline you saw in second quarter relative to the industry?

Yes, David we don't, haven't for four years given out ASPs.

That’s fine. Thank you very much. And just in relation to currency, you've historically provided an impact on a per share basis in previous quarters just wondering if you're able to provide us with the overall impact of currency on a per share basis for the other second quarter.

Sure, Brett you want to take that question?

Yes, for this quarter was $0.02 favorable for us, which is really the reflection of the stronger euro. So it was $0.02.

Hi, thanks for taking the question. So the first question I wanted to ask was around your device growth. It was pretty strong this quarter on a tough comp and curious if you could give us any color on some of the components I know you mentioned that the Air Solutions and AirSense platform continues to grow well. And you talked about vents. Can you talk about the different kind of sub-businesses within devices and how each of those are doing?

Yes, thanks for the question, Matt. We don't break out the detail between the sleep devices and the respiratory care devices. But I can breakout by geography that the devices grew globally at 9% on a constant currency basis. In Europe, Asia, and our other markets around the world it was around 5% growth of the devices and in the U.S., Canada, and Latin America groups combined we grew at 12%. A way to think about why does that relative growth by geography is the penetration rate all their solutions in the digital health and connected health platforms. The more that we're able to show that data with our customers of managing a fleet of products or managing a fleet of patients within the digital health platform enables them to see the value, and reduce their labor costs when they use a ResMed device through that ecosystem their labor costs for setting up sleep apnea therapy go down by up to 59%. So that's a big compelling value proposition that you want to buy ResMed. As I said during earlier in the Q&A and during the prepared remarks we have had some success in France of getting differential reimbursement for that and I'd say that's the first geography outside the U.S. that will have now sort of an S-curve of growth if you like of the digital side that allows us to bring some of that faster device growth there. But look out our French team are doing an amazing job firstly in market access and talking to the government but also in execution of driving that and we would like to see that continue there in France but also across Western Europe and other markets we participate in.

Thanks for that. I just had one follow-up for Brett. I think there's a lot of things moving around on the tax line and I was wondering if you could give us some sense for when you're developing these ranges for the second half of fiscal 2018 and 2019? How much of that is still kind of moving around and what are the factors we should think about that could actually move those ranges up or down or moving within the ranges?

Yes, certainly. All of this is very recent and there has been a lot of activity, so these are our best estimates going forward based on what we know about the draft Australian legislation and the U.S. tax reforms. We have shared that guidance, which I feel confident about, but these are still estimates. Looking ahead, the impacts will primarily relate to the geographic mix of income and operations. As operations develop in various regions, that can typically influence tax rates over time. Those would be longer-term impacts you might observe, while in the shorter term, these are our best estimates based on the recent legislation. We will continue to refine this as we progress through the quarters if necessary.

Hi, just quickly firstly I just wanted to understand the tax. The lower tax that brought non-GAAP back from $1 to $0.83 can you just tell us what would just be?

Yes, regarding the non-GAAP, we anticipated some repatriation that would usually incur U.S. tax due to the recent tax reforms. Now, any repatriation we conduct is no longer subject to U.S. taxation. This positively affects us for fiscal year '18 and has reduced our tax rate on a non-GAAP basis since we do not need to repay tax in the U.S.

Okay, all right, great, thanks. And then just as a follow-up, just in the respiratory care business I guess the end of that second horizon of growth I suppose that when do we sort of expect that that mark through inflection point then we go higher rate of growth out of that business given the large opportunity that resonates some of that back at sort of maybe been on slightly to the point of being modest? So I was just wondering whether you could outline how you see that coming through and the timing on that?

Yes Vic, it’s Mick here. Look there are 380 million COPD patients out there, we think somewhere around 10% of them will and should have some type of therapy whether it's non-invasive ventilation, portable oxygen concentrator, and/or life support ventilation. So it’s a huge long-term opportunity but it’s not overnight and it takes a long time. I think a really important factor about that second horizon of growth for us is that the money that can be saved for the healthcare system is huge. These 380 million patients are incredibly expensive for the healthcare system, they come back and back and back again to the emergency room and they get re-hospitalized within 90 days on a very high frequency and when they use our products and we show this in the HOT_HMV study when they use our non-invasive ventilator and they use our oxygen concentrator together, we can reduce hospitalizations by 51%. So it’s not in overnight. It’s market by market but we see a lot of runway ahead and when we launched the Mobi, we will have another part of the portfolio in there, another ResMed brand that is part of the portfolio to add in there. So as you look forward to the next couple of fiscal years, you will start to see some good growth out of our respiratory care business.

Yes, in the unlikely event it didn't go through then that would likely pull it back to closer, closer to the corner right, so we are saying second half. So yes more like that $0.15, $0.16, $0.17 are if it didn't go through or happen to be delayed or something like that. But I think that's a very low likelihood, I think that's going to parliament in February and I expect that to be passed.

Good afternoon everyone. Thank you for taking my questions. So Brett you mentioned a 50 bps negative FX impact. Can you split out the impact because the dollar, the U.S. dollar as we know has depreciated quite a bit against the Euro whether you want to look at it from the beginning of 2017 or even from the beginning of 2018, the Aussie Dollar obviously has strengthened so I understand they are working against each other but is 50 bps the net impact and if you could kind of give us what happened from a revenue perspective what was the FX impact on the top-line.

Yes, the top-line growth was between 11% and 13%, benefiting from a strong euro year-on-year. The 50 basis points I referred to is a sequential figure from Q1 to Q2, and while the euro was relatively flat in that time frame, we've seen various factors influencing the changes, including a one-quarter lag. This has resulted in the sequential impact we observed.

Yes, Suraj, Brightree really is a U.S. designed and operated software. However we do have software programmers who are in the UK and in other parts of the world, so it is a globally supplied business. We operate in 120 countries, the amazing efficiency that we brought to our U.S homecare customers with Brightree, I wouldn't want to limit to just that country. Having said that I don't want to distract the team from the really strong teams level double-digit growth and so they will be focused on that but Suraj, it's a good question and one we're looking at, and we are looking at other geographies including ones that where we're heavily invested to think can we start some pilot trials and experiments, some greatest experiments if you like, of taking the Brightree technology to some of the other markets that we do business in. So I guess that's part of our Horizon three strategy that out-of-hospital software expansion you'll see us talk more about that as we go forward.

Good morning guys. Thanks for taking my question. Just one for me with regards to the new AirTouch memory foam cushion sort of set up I'm just wondering if you've heard from any of your customers around the 30-day replenishment schedule anything from your customers around pushback from funders just given that increased replacement run rate or are you managing to show enough sort of uplifting compliance or comfort levels, so that funders are happy to increase replacement. Thanks a lot.

Yes, it’s a good question. I'll hand that to Jim Hollingshead from our global sleep business perspective.

Yes, it’s a good question. I'll hand that to Jim Hollingshead from our global sleep business perspective.

Yes, thanks Tom. I think the most remarkable thing about the mask is the patient feedback we receive on it. It's an incredibly comfortable mask and the patient feedback is really almost overwhelmingly positive on it. From a funding perspective as we take it as our channel partners, we're working with them to fully understand the replenishment cycle and what impact that might have depending on what insurance the patient has or what the funding situation is patient by patient. And so we haven't heard any real feedback, any real negative feedback from the market probably about the mask but it’s being put on patients who for whom it's appropriate given their in particular either health insurance situation or they're paying out of pocket or whatever.

Yes, I mean I'd one to that it's such a comfortable mask that it could be a second line of defense if a patient doesn't tolerate LSR or plastic touching their face; there are people who object to that it interferes with their sleep. Foam is incredibly comfortable, it’s what a lot of mattresses are made out of, it feels more like the bedcovers. And so it's a great niche that I think goes after those customers who need that and as Jim said it will depend on the insurance and the reimbursement schedule but also depends on that individual patient selection. And if you're able to get a patient compliant versus not compliant the difference is as we showed in those published data a huge for the healthcare system, so they're sort of self-evident but obviously, we're collecting health economics and market access data while we launch a product like this into all our markets. Great thanks Christine. In closing, I want to thank the 6,000 strong ResMed team for their execution on our product launches and their commitment to our operating excellence initiatives. This quarter that work translated into continued market share gains, strong revenue growth, and excellent operating leverage. Our team remains focused on our future pipeline of products and software solutions that change patients' lives and benefit our customers, patients, physicians, payers, and providers. Thank you for your time. And we will talk to you again in 90 days.

Okay, thank you again for joining us today. 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. Christine you may now close the call.