Resmed Inc (RMD) — Q4 2020 Earnings Call Transcript

Great. Thank you, Cheryl. Good afternoon, and good morning, everyone. Welcome to ResMed's fourth quarter fiscal year 2020 earnings call. Thanks for joining us. The call is being webcast live and the replay along with a copy of the earnings press release and our updated investor presentation will be available on the Investor Relations section of our corporate website later today. Joining me on the call today to discuss our quarterly results are CEO, Mick Farrell; and CFO, Brett Sandercock. Other members of management will be available during the Q&A portion of the call. During today's call, we will discuss some non-GAAP measures. For a reconciliation of the non-GAAP measures, please review the notes to today's earnings press release and earnings presentation. As a reminder, our discussion today may include forward-looking statements, including but not limited to expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. You are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. With that, I'd like to go ahead and now turn the call over to Mick.

Thanks, Amy, and thank you to all of our stakeholders for joining us today. During this global pandemic caused by a novel coronavirus, and COVID-19, the disease state that leads to it, I hope that you, your family, and your friends remain safe and healthy during these times. Way back in early January, a ResMed employee in Hubei Province, China, put on a hazmat suit and helped set up ventilators to provide the gift of breath to many thousands of people in that city, while their immune systems fought against the first global cases of COVID-19 that ResMed saw in Wuhan. Since that time, our global team has provided vital support globally to combat this coronavirus. Not just across China, but across Asia, then across Europe, across North America, and now we're just starting to prepare and are actually in the midst of continuing that battle in Latin America, Sub-Saharan Africa, and parts of the Middle East and Asia that still have what we call the peak impact ahead of them in terms of hospitalizations and ventilator needs. So, I noted in our call 90 days ago, in our Q3 call, that we would do more to support the global community and local healthcare systems with ventilators and ventilation mask systems across the 140 countries that we serve. During Q4, during this June quarter, we produced around 100,000 invasive and non-invasive ventilators, including bi-level positive pressure ventilators. That brings our cumulative total to over 150,000 ventilators that we produced since the beginning of calendar year 2020. So, we've delivered on our promise to triple our production, and in fact, if you take the period from January 1 to June 30 for 2020, that is a 3.5 times increase over the period for 2019. For our flagship ventilator, which is the Astral life-support ventilator, we reached a peak of over five times our weekly production rates during the period, and we're still running at full capacity for the Astral to ensure that ResMed is there for what we call the preservation of life as the coronavirus continues to move around the globe. I'm particularly proud of the role that our supply chain, our manufacturing, our distribution, and our tech services teams have played during this coronavirus crisis, making sure that ResMed devices and a complete ventilation system were there at the bedside when someone needed help breathing as their immune system fights against COVID-19. So, looking forward, we have built a sophisticated set of analytic capabilities, including an epidemiology patient model that has helped us model the impacts of both the headwinds and the tailwinds that are part of this COVID-19 crisis, and we have detailed scenarios of the impacts by city, region, country, and ResMed business line. Through that analysis, I'm happy to say that we're confident in our ResMed ability to execute across the full range of potential scenarios for all of our customers and for all of our global businesses. The tailwinds for ventilation in the March quarter and the June quarter from both the ventilator devices and the ventilation mask systems are starting to recede, and while we are still working on current and future contracts with hospitals, as well as city and national health authorities for these ventilators, the volumes will be significantly lower in the September quarter for these ventilators. At the same time, the headwinds we experienced especially in the June quarter for our sleep apnea and COPD patient flow and patient diagnosis are also receding. So, people are starting to return for their primary care physician visits and specialist physician visits, and we see the system today growing from its nadir during the last period as we now see city-by-city and country-by-country the markets coming back online. So, over the portfolio of 140 countries that we serve, we expect a gradual sequential recovery of patient flow to primary care physicians, sleep physicians, as well as pulmonary physicians treating COPD and asthma throughout fiscal year 2021. We expect the expansion of home sleep apnea testing to continue as it did during the crisis, we think it will continue post the crisis, and we also expect a steady increase in sleep lab activity and visits to pulmonary specialists both in person and through Telehealth, which has been expanding rapidly under COVID. Additionally, some early research into the post-COVID clinical world shows that select patients who have recovered from COVID-19 may have lung damage, and some of them may require long-term ventilator support. This is an area of focus for us, but I have to say, it's very early days in that area. In my prepared remarks today, I will provide some insights into our Q4 and our full fiscal year 2020 business performance. I'll also recap our long-term strategy, our ResMed 2025 strategy, and some execution highlights against some of our key operating priorities as part of that strategy. Finally, I'll discuss how we're advancing and learning in a post-COVID peak world, including how this pandemic has accelerated three important trends: one, the importance of respiratory medicine; two, the importance of digital health; and three, the importance of outside hospital healthcare. These are three key elements of our ResMed 2025 strategy that were in play well before the global pandemic, but these are three trends that have accelerated during this pandemic, and we think the momentum will continue in a post-COVID world. So, for our business performance, we delivered strong revenue and earnings growth for the fourth quarter and for the full fiscal year 2020. We had year-on-year annual 15% top line revenue growth to $3 billion in annual revenue for ResMed. Our results reflect strong growth and positive momentum across our innovative MedTech portfolio and our market-leading digital health software solutions. We have grown our global market footprint finding new patients amidst a global pandemic, and we have driven growth with recurring revenue from our installed base of sleep apnea patients. While our financial results in March and June have benefited from high demand for ventilation devices and lower operating costs, our underlying core business of sleep apnea, COPD, and asthma remains strong and well-positioned for long-term growth. During fiscal year 2020, we generated $802 million of cash that allowed us to return $225 million of cash dividends to you, our shareholders, while also investing in our future with a double-digit increase in R&D, including clinical research, both digital and in-person, as well as design and digital innovation across our sleep apnea, COPD, asthma, and our software-as-a-service businesses. We have a full pipeline of innovative solutions that will generate both medium and long-term growth opportunities with an industry-leading intellectual property portfolio of over 6,000 patents and designs. Importantly, we have also seen significant growth in our digital health ecosystem. We now have over 6.5 billion nights of sleep and respiratory medical data in the Air Solutions platform. We have grown connectivity to our digital health ecosystem by over 26% this fiscal year, and we now have over 12 million 100% cloud-connectable medical devices in the market, and we have around 14 million patients enrolled in the AirView software solution. Our digital health ecosystem is a competitive advantage for ResMed that offers innovative solutions, as well as integrated care to drive superior outcomes, better patient experiences, and lower healthcare system costs. Our acquisition and continued investment in the development of the Propeller platform has been a digital health accelerant for ResMed. Our recently-announced commercial partnership with Novartis, which I will describe in more detail later during the call, is a great example of this progress with Propeller. During the last 12 months, we have improved 16 million lives by providing a person with a device or complete mask system to help them breathe. Importantly, the ability to help these patients on their individual journey to better sleep and better breathing is powered by over 6.5 billion nights of medical data in our ecosystem. This data forms a significant competitive advantage as it enables us to perform sophisticated analytics and drive actionable insights to benefit all our customer groups, including the patients, most importantly, but also in improving workflows for physicians, providers, payers, and for full healthcare systems. Fundamentally, we believe the future of healthcare delivery is outside the hospital. That's where ResMed competes today, and that's where we win today. Globally, there are 936 million people with sleep apnea. There are over 380 million people, who suffer from COPD, and there are over 340 million people living with asthma, they all need our help. And they all want that help at home, definitely not in a hospital. Our SaaS business is 100% focused on out-of-hospital care leveraging the global trend for seniors to age in place, and we think this trend will accelerate in a post-COVID world. ResMed can provide seamless care for our portfolio of out-of-hospital care settings, including home medical equipment, skilled nursing facilities, senior living, life plan communities, home health, hospice, as well as home care services. COVID-19 has accelerated the rapid adoption of digital health technologies, the recognition of the value of remote monitoring, virtual diagnosis, and the evolution of global reimbursement models in the field of digital health. This acceleration of digital health adoption represents a significant medium to long-term tailwind for our business. These three trends—the increased importance of respiratory medicine, the increased importance of digital health, and the increased importance of out-of-hospital healthcare—will help ResMed achieve our goal to improve 250 million lives by 2025. So, on to our operating priorities, we have three operating priorities that guide our daily focus here at ResMed. Number one is to grow and differentiate our core sleep apnea, COPD, and asthma businesses across global markets. With over 1.6 billion people across these three chronic disease states, we know that delivering our innovative solutions to these under-penetrated markets is our number one priority; and our second priority is to design, develop, and deliver world-leading medical devices as well as digital health technology solutions to better engage physicians, providers, and payers, as well as patients, so that we can improve clinical outcomes, reduce costs, and enhance the patient experience; and our third priority is to innovate and grow the world's best seamless software solutions for care that is delivered outside the hospital. We think ResMed is uniquely positioned to deliver on these three priorities. So, I'll quickly walk through some examples of innovation in each of these priorities, and then I will hand over to Brett and go to Q&A. In our core market of sleep apnea, we launched what we call the ResMed MaskSelector into our U.S. geography. The ResMed MaskSelector is a digital health technology to make remote patient mask selection and sizing both easier and more effective, helping the patient themselves receive the care they need from home. We think that this is the digital solution to help our HME medical equipment customers in their challenge to find the right mask for each patient when they can't physically touch them due to physical distancing during COVID-19. We are providing this solution at no charge during the coronavirus public health emergency. However, we think this technology's efficiency and benefits for both providers and patients will last well beyond the pandemic. Digital tools like this, as well as capabilities including video support for doctors and their patients, as well as remote mask patient fittings, have seen good application during COVID-19 combined with our mask resupply solutions. We have delivered solid mask growth. In terms of new patient flow, the COVID lockdowns have had a significant impact on our business. We saw double-digit declines in new sleep apnea patient flow across all markets that experienced lockdowns; individual cities, regions, and countries had unique approaches to any lockdown and reopening processes. For instance, today in Germany, we stand at more than 85% of pre-COVID sleep lab capacity already up and running, whereas in China, at the other end of the spectrum, we stand at 50% of pre-COVID diagnostic capacity in that geography; and most of the other 140 countries worldwide fall somewhere between those two extremes. In big countries like the U.S., it's a story of 50 states with unique models, again as a spectrum between these boundary conditions. The average in the United States is probably somewhere around 70% of diagnostic capability, but some states will be closer to the 60% range, and some will be closer to the 75% range. As I stated earlier, we expect a steady sequential quarter-by-quarter sort of U-shaped recovery of the sleep apnea, COPD, and asthma patient flow throughout fiscal 2021. A highly effective vaccine or a highly efficacious treatment for COVID-19 could, of course, turn that U-shaped recovery into a dramatic V-shaped recovery. However, we're not counting on that, and an event like that remains upside from our expected or likely case scenario. In terms of execution in our second key disease state of COPD and our ventilation solutions, we launched our cloud-based remote monitoring software called AirView for our ventilator solution in Europe, including the Astral product, the Stellar ventilator, and the Lumis ventilator. Through AirView, clinicians and care providers can now remotely monitor their patient's respiratory rate, as well as their blood oxygen saturation. These are two critical indicators for a respiratory patient's condition. We accelerated the delivery of this technology for clear and urgent needs during the pandemic. However, this enhanced AirView capability providing insights across European ventilation patient populations will provide differentiation for ResMed through the clinical value for physicians and better outcomes for patients in perpetuity. In terms of execution in our third key disease state of asthma, ResMed has partnered with Novartis to co-package the Propeller solution and digital platform with the new triple action asthma medication in a brand called Enerzair Breezhaler. This novel combination has been cleared by the European Commission for launch. The Propeller sensor attaches to the new inhaler from Novartis, and its new medication can collect medication usage data. The app works both as an adherence measure that gives the patient reminders to take the medication, but also as a means of collecting information about the patient's medical condition to help their physician provide better care to the patient. This is a breakthrough innovation as it is the first time a respiratory medicine has been co-packaged with a digital health platform and co-prescribed. The benefits of this combination are tremendous for the patient. It's a simple and convenient way to have a fully integrated experience that allows them to better live with their chronic disease, with no incremental cost to the patient. This brand-new approval is a world-first technology that will accelerate the adoption of digital health in the respiratory medicine space and will help us identify other innovative opportunities to combine our Propeller technology with medicine delivery. This new Novartis partnership follows our announcement in May that the Propeller sensor gained U.S. 510(k) clearance for use with the Symbicort inhaler for both asthma and COPD patients from AstraZeneca. This sensor is built to fit various inhalers and their generic equivalents. Propeller's cloud-based system tracks medication usage through a smartphone app, which patients can use to paint a clearer picture of their disease control for their clinicians. These new partnerships with both Novartis and AstraZeneca, as well as previously-announced collaborations with Ryan and Boehringer Ingelheim, expand the potential reach of Propeller's technology to around 90% of inhaled medicines for both asthma and COPD in the United States. We believe that this represents a significant upside opportunity for the expansion of the Propeller platform in the U.S. market, but also around the world as the benefits of digital health grow and move around the world. So, before I transition to details of our software-as-a-service business, I'd like to recap briefly why the SaaS business is integral to ResMed's long-term strategy to provide seamless transitions between hospital care and post-acute care, or as we call it here at ResMed, out-of-hospital care, because we don't think you have to go to the hospital to get good care. Our vision is to enable a system where a patient's health data moves with him as they transition care settings, giving providers the information they need to deliver personalized care, saving the patient and the caregiver both time and money. We are focused on leveraging our competitive advantage as the only long-term strategic player with solutions that span across these seven important out-of-hospital healthcare verticals: home medical equipment, skilled nursing facilities, senior living, life plan communities, home health, hospice, as well as home care services. During the quarter, our software-as-a-service business grew 7% compared to the year-ago period. We are integrating and optimizing the out-of-hospital SaaS portfolio to support long-term growth. We continue to believe that the long-term weighted average growth of these SaaS verticals that we're in is in the high single digits. The COVID-19 market impact has particularly affected the skilled nursing facility census levels, and that vertical that we serve. We believe this impact will continue over the next several quarters, moving the weighted average market growth of these verticals to the mid-single digit range for our SaaS businesses for that period, with a return to high single digits as we start to see elective surgeries and hospital discharges return to their normal rates, at which time we believe that the market's weighted average market growth rate will return to the high single digits. Our goal here at ResMed is always to not just meet, but to beat that market growth through the delivery of superior market-leading solutions. Turning to more details of our SaaS business performance during the quarter, we've been pleased with the early impact of SnapWorx Technology, which we acquired in February. As we discussed on our last earnings call, SnapWorx provides patient contact management and workflow optimization for sleep apnea resupply for our HME customers. The timing of the acquisition couldn't have been better with COVID-19. Our HME customers have been increasingly focused on resupply and better technology to interact with patients in a no-touch, non-contact world. The combination of SnapWorx, Oracle, and Brightree ReSupply, all of these three technologies are under our Brightree brand, provides the strongest suite of resupply solutions available in the market period. This technology is important to our customers, their patients, as well as our internal SaaS business and our core sleep apnea business, driving both patient engagement, better outcomes, and revenue growth. In October 2019, we announced that ResMed entered into an agreement with Cerner Corporation to help clinicians make informed treatment decisions, control costs, and deliver seamless care across healthcare systems. We have now integrated our Brightree branded home health and hospice platform with the Cerner Electronic Health Record, or EHR. This partnership is performing above our expectations, and we anticipate opportunities to deepen and expand this collaboration. In summary, the SaaS portfolio is performing well and remains an important driver of our digital transformation of healthcare in settings outside the hospital. The COVID headwinds in the near term will recede, and we will continue to invest now and in the future in research and development to make sure ResMed has the best solutions for long-term growth and market leadership. The future healthcare delivery is outside the hospital. COVID-19 has accelerated that, and we here at ResMed are well positioned to capitalize on it. Our diversified solution portfolio and capabilities are related against the compelling and expanding market opportunity in sleep apnea, COPD, asthma, and out-of-hospital SaaS. Through the first seven months of this COVID-19 crisis and this calendar year, we've maintained strong growth through our effective execution, our right to innovation, our recurring revenue businesses, as well as margin expansion driven by our global operating excellence programs. While we look forward to moving COVID-19 into the rearview mirror, there are beneficial trends that it has accelerated, which are now passing through and are persistent and we believe impactful. The importance of respiratory medicine, the importance of digital health, and the importance of healthcare delivered outside the hospital. Those three trends have accelerated, and they're here to stay. While these macro trends have increased telehealth and increased remote patient monitoring, they represent short, medium, and long-term benefits for ResMed's business. More importantly, they represent tailwinds for significant improvement on the most critical patient metrics—improving clinical outcomes for patients' chronic disease and enhancing levels of patient satisfaction for that ultimate customer. The person who just wants to sleep better, breathe better, and live with a better quality of life. So before I hand the call over to Brett for his remarks, I want to express my personal gratitude to the 7,500 ResMedians around the world. In an unprecedented fiscal year, you have remained focused on creating value in our core markets and honoring commitments to patients through COVID-19. You helped us pivot and produce 150,000 lifesaving ventilators to help people breathe in 140 countries worldwide. Without our team, our current and future success would not be possible. So thank you to all of you. With that, I'll hand the call over to Brett in Sydney, and then we'll open up for Q&A.

All right. Thanks, Mick. In my remarks today, we will provide an overview of our results for the fourth quarter of fiscal year 2020 and some remarks on our Q1 FY '21 outlook. As Mick noted, we had a strong quarter. Group revenue for the June quarter was $770 million, an increase of 9% over the prior year quarter. In constant currency terms, revenue increased by 10% compared to the prior year quarter. Revenues for the fourth quarter were favorably impacted by significant sales of ventilated devices and accessories, partially offset by declines in our sleep business. We estimated the incremental net revenue benefit from COVID-19 related impacts to be around $20 million, reflecting estimated incremental ventilator and related accessory revenue of $125 million, partially offset by an estimated $105 million impact on our sleep revenue relative to our pre-COVID forecasts. Taking a closer look at our geographic distribution and excluding revenue from our Software as a Service business, our sales in the U.S., Canada, and Latin America were $401 million, an increase of 4% over the prior year quarter. Sales in Europe, Asia, and other markets totaled $278 million, an increase of 19% over the prior year quarter and an increase of 22% in constant currency terms. By product segment, U.S., Canada and Latin America device sales were $206 million, an increase of 1% over the prior quarter. Mask and other sales were $195 million, an increase of 7% over the prior year quarter. In Europe, Asia, and other markets device sales total $206 million, an increase of 32% over the prior year quarter or a 35% increase in constant currency terms. Mask and other sales in Europe, Asia, and other markets totaled $73 million, a decrease of 8% over the prior quarter or a 6% decrease in constant currency terms. Globally, in currency terms, device sales increased by 16% while mask and other sales increased by 3% over the prior year quarter. Software as a Service revenue for the fourth quarter was $91 million, an increase of 7% over the prior year quarter. On a non-GAAP basis, SaaS revenue increased by 6%. During my commentary today, I will be referring to non-GAAP numbers. The non-GAAP measures adjusted for impacted amortization of acquired intangibles, the purchase accounting, fair value adjustments, matrixcare deferred revenue, restructuring expenses, and litigation settlement expenses. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press release. Our non-GAAP gross margin increased by 60 basis points to 59.9% in the June quarter, compared to 59.3% in the same quarter last year. This increase is predominantly attributable to favorable product mix, partially offset by increased costs in logistics, component parts, and manufacturing. These cost increases largely reflect the impact of COVID-19 on our rapid ramp up in ventilator production. In particular, we incurred significantly higher inbound and outbound air freight costs during the quarter, reflecting both higher volumes and significantly higher rates. We are rebalancing air freight and sea freight volumes, but in the meantime, we expect to see elevated freight costs continue into Q1 FY '21. Moving on to operating expenses, our SG&A expenses for the fourth quarter were $165 million, a decrease of 4% over the prior year quarter. In constant currency terms, SG&A expenses were consistent with the prior year. SG&A expenses as a percentage of revenue improved to 21.5%, compared to 24.3% reported in the prior quarter, benefiting from cost management and reduced travel as we work through the uncertain COVID-19 environment. Looking forward, we expect SG&A expenses to increase in the low single digits relative to the year-ago period. R&D expenses for the quarter were $53 million, an increase of 3% over the prior year quarter or an increase of 4% on a constant currency basis. R&D expenses as a percentage of revenue were 6.8%, compared to 7.3% in the prior year. We continue to prioritize investments in innovation because we believe our long-term commitment to technology and product development will deliver sustained competitive advantage. Looking forward, we expect R&D expenses to continue to grow in the high single digits to low double digits, reflecting our commitment to innovation through the economic cycles. Total amortization of acquired intangibles was $20 million for the quarter, a decrease of 14% over the prior quarter, reflecting historical intangible assets becoming fully amortized during the quarter. Stock-based compensation expense for the quarter was $16 million. Non-GAAP operating profit for the quarter was $243 million, an increase of 24% over the prior year quarter, reflecting strong top-line growth, expansion of gross margin, and well-managed operating expenses. On a GAAP basis, our effective tax rate for the June quarter was 16.2%, while on a non-GAAP basis our effective tax rate for the quarter was 16.8%. Looking forward, we estimate our effective tax rate for fiscal year 2021 will be in the range of 17% to 19%. Non-GAAP net income for the quarter was $193 million, an increase of 40% over the prior year quarter. Non-GAAP diluted earnings per share for the quarter were $1.33, an increase of 40% over the prior year quarter. Cash flow from operations for the fourth quarter was $330 million, reflecting robust underlying earnings and working capital management. Capital expenditure for the quarter was $18 million. Depreciation and amortization for the June quarter totaled $39 million. During the quarter, we also paid dividends of $56 million. We recorded equity losses of $6 million in our income statement in the June quarter associated with a fair joint venture. We expect to record equity losses of approximately $15 million for the full fiscal year 2021 associated with the joint venture operations. We ended the fourth quarter with a cash balance of $463 million, having generated $330 million in operating cash flow during the fourth quarter and $802 million during our fiscal year 2020. At June 30, we had $1.2 billion in gross debt and $717 million in net debt. Our debt levels remain modest; on June 30, we had just under $1.1 billion available for drawdown under our existing revolver facility. In summary, our liquidity position remains strong. However, I also want to highlight that in these times of uncertainty, we are maintaining a disciplined approach and are currently managing expenses, cash flow, and liquidity. Today, our Board of Directors declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance. Finally, to recap our Q4 results, our earnings this quarter were very strong, reflecting significant demand for ventilators underpinning revenue growth, an expansion in our gross margin and lower operating expenses. Turning now to our first quarter of FY 2021 outlook, at a high level, we expect to see continued demand for ventilators but at a significantly lower level compared to Q4 FY 2020. Additionally, we expect to see continued headwinds for sleep device sales in Q1 in response to the temporary reduction in the diagnosis of new patients. Mask and accessories have continued to demonstrate resilience over the past three months, which reflects the insulating value of the large patient installed base. Consistent with these remarks, for the first month of Q1 FY 2021, we recorded group revenue growth in the low single digits. However, like many other companies, we're experiencing pervasive uncertainty in the current environment. As a result, our forecast and possible future revenue outcomes remain dynamic.

Thanks, Brett. We will now turn to the Q&A portion of the call. I would like to remind everyone to please limit yourself to one question, and if you have follow-ups or additional questions, please feel free to return to the call queue. Cheryl, we're now ready to start the Q&A portion.

Thank you. Good morning, Mick. Good morning, Brett. Just a question for me; Mick, just some color around the rest of the world growth rate, the disparity between device sales at a very strong 35% benchmark and negative 6%. Can you just talk to ventilation and how that impacted there, and whether there was anything else to read into that mask growth rate, please?

Yes, thank you for the question. Europe, Asia, and the rest of the world, excluding the U.S., Canada, and Latin America, have shown significant year-on-year growth in device sales, largely driven by ventilator sales. We've established contracts with national governments in the U.K., France, and Germany for ventilators delivered in the June quarter, along with agreements in Asia and other regions. This has created a positive impact due to COVID-19, but there were also notable challenges, particularly with dramatic shutdowns in Western Europe and much of Southeast Asia, including China, which is currently operating at only 50% of its fleet capacity. This has significantly delayed the setup of new patients. In these regions, we haven't yet implemented our U.S.-based resupply technologies like SnapWorx, Oracle, and Brightree ReSupply, which presents an opportunity for future growth. However, these technologies are not yet utilized in Europe, and the mask sales lack the same level of resilience. This creates a contrasting situation between devices and masks in Q4 for Europe, Asia, and the rest of the world.

All right, thank you.

Thank you for answering my question. I'm trying to understand the timeline for the next few quarters, especially regarding the decline in vents and the return of your regular CPAP business. I know you've mentioned this before, but could you share any metrics or details about production that might help us understand how things will progress over the upcoming quarters?

Yes, Andrew, this is a question that macroeconomics around the world are working on in every industry, when are we going to see as these lockdowns turn to openings? Every city, every country that we're operating in has different metrics on how fast they're opening and where they're opening. Some never closed, like Sweden. Some are opening really well, like Germany, and some are going to second size shutdowns like China. The best we can see as we model it, and we've got a lot of scenarios for the next fiscal year, but the best we can see is across that portfolio of 140 countries, we expect a sequential sort of U-shaped recovery where we start with Q1, and then we build up to Q2, Q3, Q4 through the fiscal year, as we start to see these reopenings happen. We're going to expect second waves and third waves and fourth waves and the sort of W's within a particular city or particular state, but across the country level and certainly at the 140 country portfolio level, we expect that to be a U-shaped recovery in our likely case throughout the fiscal year, and so, it all sort of turns to a world where we look at sequential growth from Q1 to Q2, and then from Q2 to Q3, and Q3 to Q4, and that's how we're sort of modeling the recovery of our sleep apnea, our COPD, and our asthma patient flow. There will be resiliency in the mask resupply, particularly in the U.S. geography and some other buffers that we have around our SaaS business, but that's sort of how we're looking at it on a macro basis.

Would you expect to return to normal by FY'22 or close to normal?

Again, Andrew, I would be a great macro economist working for a large multinational bank to make a prediction like this, and they're often wrong when they make those predictions. I think it's very difficult to say when exactly we will be back to the pre-COVID times. I did see a presentation from a global bank economist, who talked about 12 months, 24 months return-to-normal type period; very difficult to know. Health care is more resilient; people as opposed to going to retail to get a new automobile, or a new sound system, or a new home repair, they are going to their primary care physicians and their elective surgeries much quicker, and you can look on those two metrics, which are pretty well-published in the major geographies, so PCP visits, GP visits, and for elective surgeries and hospital visits, and we're starting to see those metrics tick up on a week-to-week basis. The other types of analogs that we're watching are looking at, and then all the other parts come into play. Obviously, there's the upside, as I talked about in the prep remarks, if there's an effective vaccine or an effective treatment for COVID-19, all bets are off; this goes to a V-shaped recovery in the markets as they get vaccinal treatments, but we've got a likely expected case of a U throughout the fiscal year and then get back to that normal in that sort of 12 to 24-month time period. Great questions. But I'll hand it back to you, Andrew.

Hi, everyone. Thanks for taking the question. This is actually Brandon on for Margaret. I just wanted to go back to the vents really quick. You'd mentioned that you manufactured another 100,000 vents that can be used within the hospital. Have you sold most of these, or any of these, and is this kind of a similar situation to the prior 50,000 that they are maybe lined up for contracts already that could be recognized in the next quarter? Part of that is just trying to understand where vent demand is going to end up, especially since you had mentioned that Astral is still being made at full capacity, but you're expecting a steep drop-off in the next quarter. Thanks.

Yes, Brandon, thanks for the question. Yes, certainly we're very proud of the 150,000 ventilators that we made during the first-half of the calendar year; the second-half of our fiscal year. As you know, that's a very small percentage compared to the sleep apnea devices, which are more in the sort of 2 to 2.5 million on an annualized basis for devices that we make across the CPAPs, IPAPs and the sleep apnea bi-levels. We did obviously sell as we talked about, and Brett talked about in his remarks, we had an extra $35 million of sales in the March quarter at Q3 from ventilator, ventilator masks, and we had an extra $125 million in ventilator and ventilator mask sales in the fourth quarter. We're not going to predict exactly what that will be here in the September quarter. We're working on hospitals, state and national bidding processes, but I can tell you that the volume of bidding and the volume of processes in the sort of expected likely case of that is significantly lower here in the September quarter for that, so that demand has gone down a lot. I mean, it's ironic in some ways because the populations of the regions that are now impacted, Brazil, India, Pakistan, Malaysia, Indonesia, you add up these countries and you start to get to the billions of people; I would like to see demand significantly higher because I think humanitarian-wise, we're going to need more ventilators.

The only thing I would add, Mick, is that there would be a portion of that production that remains in inventory as of June 30. So, that's certainly the case. Well, as Mick said, Astral is still producing, still fairly tight, and I think we will continue to do that in the next little while.

Good morning. Thank you. My question was just trying to understand again, just the shape of recovery. Maybe look at Europe and the macro, it looks like some of the European countries have started to recover a little earlier than the U.S. Have you seen anything that could guide you to have the U.S. come out of this in Germany or France or any other countries you have been doing business?

Yes, John, it's a great question, and actually, we are looking at Germany as sort of a model of not only how to have dealt with the crisis; that country did a really good job of preparing early. They got their ventilator orders in early, they never reached peak capacity in any of the major regions, cities, or hospitals, and now in recovery, as I said in the prepared remarks, they are north of 85% of the sleep lab capacity. They were behind the COVID Germany on home sleep apnea testing, but they leapfrogged forward in that. I think that will move from 5% or 10% of diagnoses in Germany pre-COVID to a solid double-digit number post-COVID. But Germany is a great model for the recovery, and it’s a country right next door. France had excellent home sleep apnea testing pre-COVID, and I think the recovery will be quite swift in France as well. You can almost look and you're asking for the analogy to the United States; take those two countries as different regions within the U.S. Germany could be analogous to some of the states in the U.S., like mostly in the Midwest, where there's a lot of sleep apnea tests done in a sleep apnea lab. I think that will take longer to get to capacity just because of all the restrictions around COVID, the deep cleaning, and just people's psychology about turning up to a sleep lab and staying overnight. Some states like California or Massachusetts or Florida, where home sleep apnea testing was more prevalent, those areas not only had less of a dip during the crisis because they're able to move their patient flow to home sleep apnea tests; we think they may recover faster in patient volumes in those areas. We're certainly looking at those analogs and sharing learnings internally here at ResMed from our Germany team, the CEO of Germany, Katrin Pucknat, is a member of my Global CEO Operations team. Her best practices of what they're doing there are brought to the global team and Jim Hollingshead and the team on the sleep and respiratory care side are driving that through our U.S. market with our great commercial team we have here in the U.S. and beyond. So, I'm quite confident that we're going to see a sequential quarter-to-quarter recovery throughout the fiscal year. I think we've reached that idea here in Q4 of a flow of patients globally within our major geographies, and we're going to pick those up every quarter as we go through. I do think there's going to be second or first waves impacting Latin America and Africa and so on. I do hope that we're able to secure some good ventilator sales into there for now, because that will need them on a humanitarian basis. They will recover a little later in those geographies. Still, I am pretty comfortable with our plan, and our likely case scenario of a steady sequential recovery, Q1, Q2, Q3, Q4 throughout the fiscal year, assuming no vaccine or treatment. If those happen, it could lead to a significant increase where you speak about year-on-year numbers again, versus quarter-on-quarter numbers.

Great, thanks very much. Good morning, Mick. Good morning, Brett. Just had a question in relation to the U.S., in particular regarding that commentary around sleep lab capacity, I'm interested in where you think that might have got to on an average basis over the year, over the June quarter, and perhaps any commentary might provide over that, you know, it was April the trough, and then improving towards June? Just any commentary you can provide there would be appreciated.

Yes, David, it's a really good question, and we actually have some good data around that because we have both the sort of digital end-to-end play on the sleep apnea market where we have ApneaLink Air, which is cloud connected, and we see activation rights on that weekly basis. You picked it; we have seen during the quarter sort of that idea in that sort of late April, early May timeframe, and we've started to see weekly increases from that idea. You see public data around primary care physician visits and elective surgeries are picking up, and we also see, and without quantifying because that's proprietary data for ResMed, I can certainly say qualitatively in response that idea, in late April, early May, we have seen week-to-week increases on enhanced sleep apnea tests and activation, especially as a market leader in market share for sleep apnea devices. We're seeing activations increase from that idea point on a weekly basis, and we have our geography, and you can see all these effects like did this or that city did that. You can see little W shapes in some of those but we’re seeing a steady U-shaped recovery, even down to a granular level during the quarter. That gives us the confidence as we project forward into a lot of uncertainty; 52 weeks seems like a lot of uncertainty, but we think there will be that steady across the portfolio steady U-shaped recovery. That's the most color I can provide you there, David.

Thanks very much, Mick. If I could keep on the same topic. You were talking about a U-shaped recovery, just to be really clear and simple here; we're at the bottom of that U, so effectively, the first couple of quarters you'd expect pretty low growth, not so dissimilar to what Brett talked about in terms of the low single-digit growth you're saying in July. Is that what you're saying?

Yes, exactly, David, that's exactly how I interpret the sort of classic U. Thank you for clarifying that.

Great, thanks.

Good morning. Thanks for taking my questions. I just wanted to get some color on ventilator pricing over Q4. How much of a benefit with ventilator pricing over Q4, and what do you expect the price to do coming into the first quarter?

Thanks, Hashan, great question. I'll hand that to Rob Douglas, our COO.

Yes, Hashan. We previously told you we actually had a policy of not trying to lift prices around this, mainly because of the ethics around it and making sure we were getting the ventilators into the right people's hands at the right prices. We actually kept our pricing very steady through it and did slow some increased logistics costs and things like that that Brett was talking about, and we also made sure we were selling ventilators to people, who needed them immediately and were going to be using them. We weren't selling to stockpiles, so you can see we've had a pretty moderate approach to it, and we think it's absolutely the right approach. Obviously, the ventilators are higher price items compared to our fleet devices, and so there was some sort of mix shift effect in our overall results. But we were very steady and our team was totally committed to making sure that we were looking after patients as a priority.

Thanks. Good morning. Just on the gross margin, I was just wondering if you could give a bit more color on the outlook for that going forward. You'll have a lower proportion of ventilators, the negative mix shift, and then with the increased kind of technical difficulties, do you expect to wake gross margin into the first quarter of '21? Just any color you can give on that? Thanks.

Sure, Mick. Hi, Gretel. Yes, I mean, you've covered a few of those moving parts in the gross margin, and it's probably heightened at the moment with COVID-19 and where those impacts will end. We are seeing some elevated costs rolling through, and some of those, I think, on freight will continue for a little while. We are actively trying to mitigate that, but I think we would get drawn into specific guidance, but I think you'd have to say there's probably not likely that we’d say gross margin expansion in the short-term.

Good afternoon, Mick, Brett. Can you hear me all right?

Yes, I've got you loud and clear, Suraj.

Perfect. So, Mick, I heard the $125 million contribution from ventilator sales in the quarter. Forgive me, I was just hopping in between calls. Can you give us the growth between North America and the rest of the world in devices when you split out ventilators? Thank you for taking my question.

Suraj, that's a great question, but it gets into a level of detail that we don't want to share for competitive reasons. But look, I can give some color around it: the $125 million in ventilator sales were to the countries that during that last 90 days you heard about through various media areas who had the most impact from COVID-19. We’ve talked about a contract with the U.S. government and FEMA, a $32 million public contract for 2,500 or so Astral devices, and then we had some public contracts with other countries, the U.K., National Health Service, Germany, France, Japan, and Australia. I thought some of the items we've talked about in various media areas, but just given the nature of competitive dynamics, I don't want to go into any further detail on that. One thing that really made us proud is that $125 million of ventilator sales saved lives. There are tens of thousands of people that wouldn't have been breathing with COVID-19 that were, and if their immune system could beat this little protein virus when it gets into the body, they lived, and we think that was a great benefit for those countries and individual people and their families.

Hi, good morning. I just had one clarification, and then my question. The clarification was just with regards to the one-month sales figure that Brett mentioned, being in the low single digits. Can you just give us an indication as to whether that's just pure sleep or whether it includes ventilators? My question really was regarding competitive bidding; there's been a regard reaction, I guess, to try and delay the implementation. Just wonder if you had any thoughts or likelihood of that actually happening. Thank you.

Yes, to clarify that July group revenue, Steve, that's everything. That's the entire company.

With regard to your question on competitive bidding, Steve, we certainly support a delay. We were very pleased to see that just earlier this week, I believe a letter went over from over 100 members of the House and Senate urging the administration and CMS to delay competitive bidding. We've been working with other industry participants to try to advance that perspective. Obviously, there's a lot going on, and we don’t get real-time feedback from them as to whether it’s likely or not. So, we just have to wait and see like everyone else, but we certainly would support that. Having said that, we'll do what we can to support our customers whenever competitive bidding does come out, so fingers crossed on that.

Great. Thanks. Maybe just one question as it relates to core sleep between resupply and vents. I'm assuming that the comments are mostly on new patient starts, but maybe just a quick update on resupply. As we move into an extended first wave, do you expect that there is sort of benefit as we saw early on in the pandemic? And then a quick follow-up would just be regarding the world rule. I know there's a push to delay that as well, H.R.2771, so just an update on where the rule on global rates for comp exists. Thanks again.

Thanks, Anthony. I'll have a go at the first part of your question, and then Dave can have a go at the second part. In terms of the numbers I was talking about, the double-digit declines and then coming up from those nadirs during April, May, and June, and then we expect during the year, that was about patient flow, sleep apnea diagnosis, COPD patient diagnosis, and coming through the channel. It’s directly proportional to first-time setup of a sleep device and first-time setup of a mask system. As you know, Anthony, you followed us for a number of years; we've got a very resilient group of patients, who love their great sleep and love their great breathing, and they are on resupply programs either directly through retail in Australia, Singapore, U.K., or through home care programs in Europe or direct HME programs in the U.S. We saw very good resupply rates in the March quarter, and as we just talked about, we saw very good resupply rates in the June quarter. We expect those strong resupply rates to continue through September, December, and onwards. Obviously, first-time setups are impacted by those numbers I was talking about in the modeling, but resupply numbers have been not only equal to the year before but sometimes a little better, and we think the secular change around the importance of respiratory medicine, the importance of respiratory health, and the drive to get clean masks, clean tubing, and clean humidifiers that they—their insurance will pay for, and they could pay the copay for, or out of pocket for themselves, people are paying for those. We think that sort of secular change will be there, giving us a pretty resilient resupply throughout fiscal 2021 and beyond.

Sure. Thanks, Mick. Thanks for the question, Anthony. So, with regard to the bill itself, 2771 remains introduced in the House. It hasn't seen a companion legislation get introduced to the Senate. Obviously, the U.S. government is preoccupied with a lot of other things they're working on now, particularly trying to extend the aid. There likely will be some Medicare relief packages down the road, but we think it's an important shell of the will of Congress and sort of the sense of Congress that there ought to be relief in the rural areas. We were pleased to see that CMS has put a rule forward to advance telemedicine and telehealth reimbursement beyond the pandemic. They’re certainly listening to patients and providers as well as Congress. We'd hope that they would listen to this, and that CMS would be able to enact some relief, and it's always hazardous to predict U.S. legislation. So we continue to support it. Many of the same congressional offices that supported 2771 were writing letters about delaying competitive bidding, so we think that's a strong vote, and we would certainly continue to support it. We can't really predict what form, if any, relief will ultimately be granted.

Hey, thank you for taking the questions. Hey, Mick, congratulations on moving to the next stages for Propeller Health. Can you give us a sense of the commercial model that you settled on, and how should we think about the revenue ramp from here?

Yes, Matt, it's a great question, and look, what I'll give is the generic revenue model of how we at Propeller through David Van Sickle, who's the CEO of Propeller and his commercial team globally set out the revenue models without giving any specific customer or partner detail. The general revenue model for Propeller includes: number one, a development fee; there's often a development fee that we charge partners for the software engineers who create the codes for the app that works specifically for that customer; that’s a relatively small part of the lifecycle revenue, but it's there; and then secondly, we charge for the sense of the hardware that's provided each time—that's sort of the Propeller sensor that has cloud connectivity and collects data locally on usage adherence and other parameters; and then thirdly, which is the major part is the per activated user per month part of the revenue associated with that account. There’s a true alignment of Propeller and ResMed's revenue with the pharmaceutical company, but also very importantly with the patient and their actual usage of it. Most prominently, it aids in their outcomes; it helps them stay out of the hospital longer, reduces total system costs, and so on. There are three parts to that revenue, and all of them are in play for all customers we talked about in the prepared remarks. It’s early days; this isn't yet material revenue for ResMed in this quarter or next quarter, but we think over FY '21, FY '22, and certainly as we look to our long-term strategy, our ResMed 2025 strategy, I think this component of digital health and this recurring revenue component of medical adherence to COPD and asthma medications is going to be not only a material part of our business, but also a really exciting one for transforming care across the industry.

Hi, Mick and team. Thank you for taking my question. I just wanted to get a better understanding of resupply through the June quarter. Can you share what you saw through April, May, and June? I guess I'm trying to understand if there was any sort of residual panic buying at the start of the quarter, and what are you experiencing as unemployment rates increase in the United States?

Yes, Lyanne, thanks. It's a good question. Resupply was actually pretty steady through the April, May, and June rates. We didn’t year-on-year based on the cycles of where they are in the copay cycle and so on. There are double-digit unemployment numbers in the U.S. between 10% or 15% depending on the state, but in general, we have seen pretty steady resupply all of masks and accessories for customers. Rob, do you want to provide any further color on that?

Yes, sure, Mick. Lyanne, we never really saw a big panic buy issue, or we couldn't triangulate panic buying very much at all. There were some other things going on with the resupply programs; the people operating them, as we saw this as well, the callouts were more likely to find people at home. Because they were at home, the response to existing programs was better, and so we did see some solid improvement that sort of continued, but there's no major sort of up and down dynamic. We think it’s just steady, solid progress with patients on long-term treatment needing good masks, and we've got the best masks and systems to keep them in treatment, and we expect that to continue despite what else happens, given the uncertainties of COVID.

Thanks, Cheryl, and thanks to all of our shareholders for joining us on the call. I'd also like to once again take the opportunity to thank all 7,500 ResMedians, many of whom are also shareholders, for their dedication and hard work, not just this quarter and this year, but over the years, helping people sleep better, breathe better, and live better lives outside the hospital in 140 countries worldwide. Thanks for all that you do every day. Thanks especially to our ResMed heroes on the frontline, production, distribution, tech service, and those who helped in the setup of our ventilators and ventilation masks during this global crisis. You helped over 150,000 people potentially through those products, and I look forward to thanking you in person when this is all possible post-COVID, and we'll talk to everyone on this call in about 90 days. Thanks a lot.

Great. Thanks, Mick. Thank you all again for joining us today. If you do have any additional questions, please don't hesitate to reach out to me directly or to our general Investor Relations line. As previously mentioned, all the documents along with a transcript and a replay of today's call will be available on our website later today. Cheryl, you may now go ahead and close the call.