Resmed Inc (RMD) — Q2 2023 Earnings Call Transcript

Great. Thank you, Kevin. Hi, everyone. Happy New Year and welcome to ResMed's second quarter fiscal year 2023 earnings call. Thanks for joining us. This call is being webcast live and the replay will be available on the Investor Relations section of our corporate website later today, along with a copy of the earnings press release and the presentation, both of which are available now. Joining me on the call today are Chief Executive Officer and Chairman, Mick Farrell; and Chief Financial Officer, Brett Sandercock. Mick will provide a brief high-level overview of our financial results, review our progress towards our ResMed's 2025 strategic goals, and discuss our progress as we continue to navigate the ongoing macro industry and supply chain challenges. Brett will then review our financial results in more detail. And we'll then move into the Q&A portion of our call. During the Q&A session, Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer; and David Pendarvis, Chief Administrative Officer and Global General Counsel. During today's call, we will discuss several non-GAAP measures. For a reconciliation of the non-GAAP measures, please review the supporting schedules in today's earnings press release. And as a reminder, our discussion today will include some forward-looking statements, including, but not limited to, expectations about our future operating and financial performance. We do believe these statements are based on reasonable assumptions. However, our actual results may differ. Please review our SEC filings for a complete discussion of the risk factors that could affect our actual results to differ materially from any forward-looking statements made today. I'd like to now turn the call over to Mick.

Thank you, Amy and Kevin, and to all our stakeholders for joining us today to discuss our results for the December quarter, the second quarter of fiscal year 2023. Our financial outcomes show strong performance across our entire business, driven by robust sales growth in the Americas region, where we significantly increased both production and delivery of flow-generator devices. We continue to see high demand for our sleep and respiratory care devices globally and are making steady progress with our suppliers to expand production to meet the needs of all customers, especially patients. Our mask sales have increased globally, fueled by a heightened awareness post-COVID of the importance of respiratory hygiene and health. In the U.S., ReSupply programs continued to support consistent market mask growth, especially due to the end-of-calendar-year deductible momentum. Mask sales also improved in Europe, Asia, and other regions, driven by an uptick in new patient setups as connected device supply has increased. Our teams have worked hard to achieve these impressive numbers despite an ongoing constrained supply chain market. We see the supply situation getting better each week and month, with increased access to necessary electronic components. We are confident in our ability to meet all customer demand by the end of calendar year 2023 and anticipate steady incremental device revenue growth in the latter half of fiscal year 2023. Acceptance of our reengineered AirSense 10 Card-to-Cloud device remained strong in the second quarter, particularly in the U.S. As we ramp up production of fully connected AirSense 10 and AirSense 11 devices over the coming quarters, we will phase out the AirSense 10 Card-to-Cloud device and focus more on our strategy that centers around the growth of 100% cloud-connectable devices globally. Outside the U.S., adoption rates for the AirSense 10 Card-to-Cloud device have not matched those in the U.S., but we do see opportunities for growth in some regions as we increase fully connected AirSense 10 and AirSense 11 products and obtain regulatory clearance market by market. In December, we launched our newest product, the AirSense 11 platform, in the Japanese market, and we are eager to continue supporting doctors and patients in Japan with our leading 100% cloud-connectable medical devices and cloud-based software technology. Our top priority in all markets will always be the patient, ensuring they receive the healthcare they need for conditions such as sleep apnea, COPD, respiratory insufficiency due to neuromuscular diseases, and asthma, and having access to out-of-hospital healthcare. We want to ensure that patients get the care they need, where and when they need it. Now, let's briefly review our top three strategic priorities: first, to grow and differentiate our core sleep apnea and respiratory care businesses; second, to design, develop, and deliver market-leading medical devices and scalable digital health solutions; and third, to innovate and enhance the world's best software solutions for care outside the hospital, particularly in patients' homes. The launch of our AirSense 11 device platform is going very well, with positive patient feedback and strong adoption of our myAir patient app, which has an adoption rate of about 55%. Increasing production and delivery of the AirSense 11 platform is a primary focus for our teams globally, and we anticipate better results and greater market penetration each quarter. Earlier this month, we removed the allocation limits on our AirSense 10 fully connected device in the U.S., which is an exciting development for our commercial team and customers. We aim to expand supply of fully connected AirSense 10 and AirSense 11 devices to ensure supply becomes unconstrained in all countries as we move forward through fiscal 2023. A crucial element of our ResMed 2025 strategy is to reach hundreds of millions of patients with our respiratory care solutions, including both non-invasive and life support ventilation, as well as innovative therapeutic areas like cloud-connected pharmaceutical delivery and home-based high-flow therapy. We are seeing growth and adoption of our ventilated devices globally, with good uptake of both life support and non-life support ventilator platforms during the quarter, as well as the ongoing adoption of Propeller’s monitoring system. Its digital therapeutic platform has now integrated with leading U.S. electronic health record systems, making it easier for healthcare providers to onboard people to the Propeller platform. Although it's still early for this technology, combined with our investments in home-based high-flow therapy for COPD, we view this integration as a significant addition for treating lung disease and critical to our growth strategy. Our Software-as-a-Service offerings for out-of-hospital care saw 18% year-over-year growth, including strong organic growth of around 7% in our U.S. SaaS business, further accelerated by the recent acquisition of MEDIFOX DAN, which has enhanced our revenue this quarter. Our partnerships with outside hospital care customers continue to grow as they utilize our software and data solutions to enhance efficiencies and patient care. With the post-COVID patient census improving in our facilities, we see increased demand for technology investments. Our HME SaaS business under the Brightree brand is also expanding rapidly, providing tech solutions to our HME customers across the U.S. We are excited to have closed the acquisition of MEDIFOX DAN, and we look forward to integrating and growing this business while advancing SaaS innovation in Germany and beyond. I've met with key leaders of the MEDIFOX DAN team and am optimistic about the cultural alignment and technological synergies we can achieve together. This investment marks our first step into the external hospital software market outside the U.S., and I can assure you that our global SaaS team is closely aligned and ready to strengthen collaboration. We look forward to updating you as we hit key milestones in this business in the future. Our SaaS business is integral to ResMed's growth trajectory, complementing our strong software and device offerings in sleep apnea and respiratory care. A prime example of the synergy between our SaaS and core business is the success of the Brightree ReSupply program, which automates the entire process from patient outreach to management of coverage and logistics. The goal is to ensure that therapy users have the necessary supplies for better adherence and quality of therapy. We have clinical data indicating that patients on a ReSupply program show higher adherence to therapy, with studies demonstrating a notable reduction in mortality rates for compliant CPAP users. This data underscores the financial and health-saving potential of these synergies as we move forward. We aim to continue identifying and leveraging synergy opportunities. We are well-positioned as a leading global provider of SaaS solutions for out-of-hospital care while creating differentiated value for customers and sustainable growth for our stakeholders. We are innovating out-of-hospital healthcare on a large scale, leading in digital health technology. We have accumulated over 13.5 billion nights of medical data in the cloud and have more than 19 million 100% cloud-connectable medical devices in use across 140 countries. We are continually unlocking data and value for patients, providers, and entire healthcare systems. We are at the forefront of the industry, but we see this as just the beginning of our digital health journey. Notably, ResMed's Chief Medical Officer Dr. Carlos Nunez has recently been appointed Chair of the Health Division of the Consumer Technology Association, which is rapidly expanding. The division focuses on technology-enhanced health solutions for improved health outcomes and reduced healthcare costs. Their mission aligns perfectly with ours, and we are proud of Carlos's leadership and contributions at key industry events, including CES. We are excited about how Carlos and the CTA Health Division will continue to influence our industry in the future, promoting cost reduction and improved health outcomes while empowering consumers in their healthcare journeys. ResMed's clear mission is to improve 250 million lives through better healthcare by 2025. This patient-focused mission inspires our teams daily, and we've made significant strides toward this goal over the last year. In the past 12 months, we improved the lives of over 149 million individuals by delivering devices, masks, or digital health solutions that enhance sleep, breathing, and overall quality of life. Our aim is to provide care where people live, primarily in their homes. Before I conclude, I want to express my sincere gratitude to our more than 10,000 employees for their dedication and hard work every day. Thank you. Now, I’ll hand the call over to Brett in Sydney, after which we will open the floor to Q&A. Brett, it's yours.

Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2023. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q2. Group revenue was $1.03 billion, an increase of 16%. In constant currency terms, revenue increased by 20%. Revenue growth reflected increased demand for our sleep products across our portfolio and ongoing increased device demand generated by our competitor’s product recall. Year-on-year movements in foreign currencies, in particular, the weaker euro negatively impacted revenue by approximately $36 million this quarter. As mentioned, we closed the MEDIFOX DAN acquisition on November 21, 2022, and accordingly, we have recognized MEDIFOX DAN revenue of $10.7 million in our Q2 FY 2023 results from this date. While we continue to experience ongoing challenges in securing sufficient electronic components to meet market demand, we are now seeing a more predictable and improving supply chain environment. We expect to continue to deliver sequentially higher quarterly device revenue through the balance of fiscal year 2023. Looking at our geographic revenue distribution and excluding revenue from our Software-as-a-Service business, sales in the U.S., Canada, and Latin America countries increased by 26%. Sales in Europe, Asia, and other markets increased by 8% in constant currency terms. Our product segment, globally, in constant currency terms, device sales increased by 25%, while masks and other sales increased by 13%. Breaking it down by regional areas, device sales in the U.S., Canada, and Latin America increased by 41% as we benefited from incremental revenue derived from the introduction of the Card-to-Cloud device and improving availability of our connected devices. Masks and other sales increased by 11%, reflecting solid ReSupply revenue. In Europe, Asia, and other markets, device sales increased by 5% in constant currency terms, reflecting the ongoing supply constraints in those markets for our connected devices. Masks and other sales in Europe, Asia, and other markets increased by 14% in constant currency terms. Software-as-a-Service revenue, including revenue from our MEDIFOX DAN acquisition increased by 18% in the December quarter, driven by continued strong performance from our HME vertical. On an organic basis, SaaS revenue grew by 7% in the December quarter. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release. Gross margin declined by 80 basis points to 56.8% in the December quarter. The decrease is predominantly attributable to product mix shifts due to increased flow generator sales as well as unfavorable foreign currency movements, partially offset by increases in average selling prices. Moving on to operating expenses, SG&A expenses for the second quarter increased by 14%, or in constant currency terms increased by 20%. The increase was predominantly attributable to increases in employee-related costs, additional expenses related to our acquisitions, and travel and entertainment expenses. SG&A expense as a percentage of revenue was 20.5% compared to the 20.7% we recorded in the prior year period. Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the balance of fiscal year 2023. R&D expenses for the quarter increased by 4%, or in constant currency terms, increased by 15%. R&D expenses as a percentage of revenue were 6.8% compared to 7% in the prior year quarter. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of fiscal year 2023. Operating profit for the quarter increased by 14%, underpinned by strong revenue growth, partially offset by lower gross margin. Our effective tax rate for the December quarter was 18.3% compared to the prior year quarter rate of 15.6%. Looking forward, we estimate our effective tax rate for fiscal year 2023 will be in the range of 19% to 21%. Our net income for the December quarter increased by 13% and non-GAAP diluted earnings per share also increased by 13%. Cash flow from operations for the quarter was $129 million, reflecting solid underlying earnings, partially offset by higher levels of working capital. Capital expenditure for the quarter was $27 million, depreciation and amortization for the quarter totaled $38 million. We recorded equity losses of $3.1 million in our income statement in the December quarter associated with the Primasun joint venture with Verily. We expect to record equity losses of approximately $3 million per quarter through the balance of fiscal year 2023 associated with the joint venture operation. On November 21, 2022, we completed our acquisition of MEDIFOX DAN for consideration of $997 million, and this was funded through a drawdown on our existing revolver credit facility. During the quarter, we recorded acquisition-related expenses of $8.4 million associated with the MEDIFOX DAN acquisition. The acquisition was EPS neutral on a non-GAAP basis in Q2, and we expect the acquisition to be mildly accretive to EPS on a non-GAAP basis in the second half of FY 2023. We ended the second quarter with a cash balance of $253 million. At December 31, we had $1.8 billion in gross debt and $1.5 billion in net debt, reflecting the funding of our MEDIFOX DAN acquisition. At December 31, we had approximately $390 million available for drawdown under our fleet revolver facility, and we continue to maintain a solid liquidity position. Following the acquisition of MEDIFOX DAN, our net interest expense is expected to increase to approximately $15 million per quarter for the second half of fiscal year 2023, reflecting our increased debt position. Our Board of Directors today declared a quarterly dividend of $0.44 per share. Going forward, we plan to continue to reinvest in growth through R&D and also expect to continue to fund future tuck-in acquisitions. And with that, I'll hand the call back to Amy.

Great, thanks, Brett and thanks, Mick. Kevin, I'd like to now turn the call back over to you to provide the instructions and then run the Q&A portion of our call.

Thanks. Good morning and good afternoon. It's great to hear that the fully connected AirSense 10 is no longer allocated. Can I ask what will happen with the C2Cs that I assume are now in surplus? Additionally, should we be considering any impacts on pricing or inventory valuation for the second half?

Thanks for the question, Chris, and it's a good one. Obviously, we're thrilled to have AirSense 10 fully connected now unconstrained in the U.S. geography. As you know, we operate in 140 countries worldwide. The AirSense 10 Card-to-Cloud inventory, we're working our way through that and it actually is moving very quickly. I'd state it this way that we've got the number one device in the market, which is the AirSense 11 fully connected in terms of customer ratings. We also have the number two device in the market, which is the AirSense 10 fully connected. But then we have the number three device, the third best device in the market, which is the AirSense 10 Card-to-Cloud; I believe that's better than the tier 2, 3, and 4 competitors that are in the market. And so we've got the number one, two, and three device there, and we're selling them, and different customers want different things. And certainly, the AirSense 11 fully connected is at a price premium. But we'll start to see, I think us work through all of our inventory; the excess patient demand is still there globally. And I think we'll be there for a period of time, even after one of our competitors looks like they may come back into the market, hopefully sometime this calendar year, so that we can get our mask attachment rates onto them. But yes, Chris, we expect to work through all that AirSense 10 Card-to-Cloud inventory. Good question.

Mick, can you hear me all right?

Got you loud and clear, Suraj.

Congratulations on a strong quarter. Mick, I’d like to ask for some additional insight. You mentioned that by 2025 the target is 250 million lives. If I consider your current figure of around 150 million, that represents almost a 70% increase in patients covered by CPAP. How should I interpret the guidance? Am I being too premature in my thinking, or are you indicating that you should be able to achieve a compound annual growth rate of about 17% to 18% over the next three years? Thank you.

Suraj, that's an excellent question. We measure the lives changed using a straightforward formula that accounts for CPAPs, APAPs, and bi-level devices, alongside full mask systems. The growth is both linear with the devices and slightly exponential with the mask systems due to replenishment rates and repeat customers. Additionally, we consider patients who interact with digital health solutions—like a Brightree patient accessing their device or other HME equipment, a patient using an app for COPD medication reminders, or someone with a life support ventilator receiving digital reminders for replenishment. Combining all these impacts illustrates how lives are changed. A life can be greatly affected by the arrival of a brand new device at home, just as much as by an app that ensures they take their medication and stay out of the hospital. In terms of our target, yes, we are looking at 150 million for the calendar year 2023. The projected compound annual growth rate is 17.5%, reflecting the volume growth of the lives we touch over the next three years through 2025. Our aim is to increase the number of patients using CPAPs, APAPs, and bi-level devices, as well as expanding our ReSupply and mask systems, along with our digital health platforms. It’s an ambitious target, but we are confident that we can change 250 million lives by 2025. Thank you, Suraj, for your great question.

Hey. Good afternoon, Mick. I have a quick question about the gross margins. How has the productivity of manufacturing and shipping improved over the last few months? Are you still dealing with high-cost inventory? How much spot buying are you experiencing? Also, is the slight decrease in gross margin mainly due to the mix of devices compared to masks and accessories?

Yes, Matt, I’ll begin and then hand it over to Rob Douglas, our President and Chief Operating Officer, for more details. To start, there was a sequential decline in gross margin. One way I could have avoided that would have been to instruct the team to limit the sales of CPAPs and APAPs, as those products generated significant gross profit and positively impacted patients' lives. This could have increased our gross margin by 70 to 80 basis points, but we chose not to do that. We prioritized the humanitarian aspect of providing those devices, which led to extraordinary growth of 41% in our U.S. device market. While this segment doesn’t have the highest gross margin and diluted the margin percentage, it contributed positively to gross profit dollars. Ultimately, this decision benefited both patients and our stakeholders. So, that’s what we did. Now, Rob, yes, that's a really good question regarding the first part.

Yes, Matt, thanks for the question. There's lots of factors in that gross margin and you're asking specifically about productivity and productivity improvements. We've done a whole lot of work around volume improvements and really driving volume, and all of our discussions with suppliers have been increasing volume and reliability of delivery. Our normal settings in a normal world is we have a long-term outlook volume commitment and we're looking at optimization and pricing improvements and things like that. Those activities have pretty well been on hold while we've been doing this sort of real scramble to drive volumes. Freight's a similar situation, although we are seeing freights probably going to improve faster than some of these other costs that were in there. But totally in terms of our supply chain culture, we absolutely will be aiming to go back to our continuous improvement situation where we have a really strong volume leverage gain. We continue to drive the volumes in a systematic way and we use that to drive productivity and drive cost out of the system.

Yes, thanks Mick. I just wanted to follow up on that gross margin question. In the previous quarter, I think Brett was talking to the efficiencies that you're achieving through doing more volume; was the margin benefit from that efficiency was sitting in your inventory balance and that's obviously been building and built again this quarter. I'm just interested, is that still the case that when that inventory comes off the balance sheet, you should automatically start to see the efficiency gains that you've been able to achieve to date?

Brett, do you want to have a first go of that question?

Yes, Mick, thanks. So, Steve, at the moment, we're prioritizing delivery over efficiency. We're currently operating three platforms and focusing on getting devices to patients, which is having an effect. A major factor we need to address is the freight cost, and we're observing some reductions there. However, these changes haven't yet appeared in our profit and loss statement; we expect them to show up in Q3 and Q4. Therefore, as we move forward, we anticipate some benefits in those quarters that won't be reflected until we clear our inventory. While we are focused on delivery right now, we will definitely shift our attention to improving efficiency as the fiscal year progresses.

I’d just pile on there that you look at Brett's guidance, nice conservative guidance is that our gross margin will be sort of steady as we go forward. I look on this and say, I think there's some upside. As we start to see mask rates start to improve, we saw 13% constant currency growth in masks during the quarter. I think, yes, as Brett said, the freight costs will wash through the inventory. And we're getting great scale from the biggest respiratory medical manufacturing plant on the planet, there in Singapore, and the efficiency we've got is well above any competitor, and we're doing really well on that, and I think that'll come through. And then in addition to that, you'll get some upside from MEDIFOX DAN, which is accretive to revenue, gross margin, and EPS, as Brett said, throughout fiscal and beyond. So, that would be my guidance there as well, Steve. Thanks for the question.

Yes, thanks very much. Morning Mick and Brett. Just got a question on new patient growth. Just thinking about patients who have been prescribed the device and waiting, and also those yet to be diagnosed, just wondering if you could compare and contrast the U.S. and rest of the world? And then some comments on what you think it means for industry device growth for fiscal 2023 and 2024 relative to our historical growth rates?

That's a great question, David. We could spend the entire Q&A discussing it because our focus is on reaching the 936 million people suffering from sleep apnea globally. We've seen significant growth, achieving a 41% increase in new patient setups for devices in the U.S., Canada, and Latin America, and we are also making positive progress in Europe, Asia, and other regions. We're addressing the excess patient demand, and the numbers indicate that in the U.S., we're moving quickly toward a situation where patients can receive their prescriptions and devices within days or weeks, rather than months as experienced during the peak of the crisis. Every country we operate in has unique challenges, and we need to secure regulatory approval for AirSense 11 in those areas. We're taking a methodical approach. I believe we will meet all customer demand before the end of this calendar year, which reflects our confidence in increasing supply and our commitment to addressing the urgent needs of patients who are experiencing long waits for therapy. This is critical; it’s a life-and-death situation, and we have the data to demonstrate that. We want to expedite the path to therapy. Additionally, we are reevaluating our patient demand generation efforts, which have been paused for the past 18 months. I am examining our strategies in Australia, New Zealand, Korea, Japan, Singapore, the UK, and other markets where we can engage directly with consumers who have sleep concerns. In the U.S., we have both direct models and a joint venture with Verily and Primasun, where we have conducted successful demand generation tests in various cities. We are close to launching those initiatives. Our goal is to create a seamless transition from addressing excess demand to generating new patient demand to support our growth trajectory.

Yes, thank you for taking my questions. Mick, you mentioned high flow therapy in your prepared remarks. I wanted to get an update on the progress of commercializing that and discuss the market opportunity involved. Thank you.

Yes. Look, it's a great question, Mike. And our long-term goals there in 2025, a number of those 250 million lives that are going to change in 2025 will be patients with neuromuscular disease or chronic obstructive pulmonary disease. And two of those great therapies, high flow therapy in the home, I want to be very specific; it's been used in the hospital during the pandemic. High flow therapy in the home, we see as a huge opportunity, probably 10 times the size of our ventilation market in COPD is available for home therapy, HFT therapy. And then Propeller, yes, early days and the pilots are going well. We're integrated into the payer-provider EHR systems, which gives us the credibility now to go from pilots to start to scale some payer providers, particularly in the U.S. geography. But Rob, any further details on our work on HFT and cloud-connected inhalers for Mike there?

Yes, Mike. We're quite enthusiastic about this. It's a long-term initiative, but as Mick mentioned, we see this as a very large potential market, significantly larger than some of our other respiratory care markets. We are conducting tests and are specifically focusing on how it complements home oxygen therapy, as adding this will likely lead to much better outcomes. We're diligently working on market access and evidence generation programs. Currently, most of these programs involve either randomized controlled trials or real-world evidence trials. We're in a limited market release at this time in specific areas where we are making these claims. As we develop this evidence and present it to payers and standard-setting organizations, we anticipate that this will become a very strong market for us, but it is a multi-year project.

Thank you. Just a question on the SaaS business. The 7% organic growth that you mentioned, I was wondering if much of that was benefiting from price increases or if the price increases you started through the quarter have a bigger benefit to come through in future periods?

Yes, thanks for the question. That doesn't include many price increases. In fact, we paused price increases during the COVID pandemic in some of our SaaS businesses, and we are likely moving towards implementing price increases as we move forward. We've transitioned from pandemic to endemic, so that will begin to happen and unfold over the next 12 to 24 months. I'm really excited about this. Our domestic SaaS business, which saw growth during the worst of COVID decline to low single digits, has now improved to mid-single digits. Furthermore, Bobby and his team have accelerated organic growth to 7% last quarter and 8% this quarter, indicating strong growth in high single-digits. We also see potential for further growth in the organic segment when considering Brightree, MatrixCare, and Citus Health. Additionally, with MEDIFOX DAN and its capabilities, we expect the combined business to generate significant inorganic growth, likely reaching double digits. Looking ahead to 2025, we identify opportunities for high single-digit and even low double-digit growth across this combined business as we integrate the acquisition. Thus, we anticipate solid growth moving forward, and while price increases will play a role in that, they haven't historically been a factor, which directly addresses your question.

Good morning Mick, hope you are well. Mick my question is do you have enough visibility on the component pipeline to ascertain when you might be able to provide direct cloud connected devices in those markets that have an aversion to the Card-to-Cloud?

Yes, Sean, I hope your Sydney morning is going well the day after Australia Day. Look, the way we're looking at this is we've got 140 countries. We've got a very complex supply logistics program to get the patients to minimize the time from prescription to therapy across all those markets, but it's a complex equation. The good news is we are seeing supply of those rate-limited semiconductors for communications. The 3G, 4G, and 5G chips are starting to see supply come back. The microprocessors, the next rate-limited step are starting to increase and so we're seeing our path through this. And you saw in the quarter, we were able to deliver incredibly strongly on that, and we're off allocation for the AirSense 10 100% connected. Look, I'd love to tell you, we've got a very complex jigsaw puzzle here. I'd love to tell you it will be off allocation on the AirSense 11 in all of our markets. It's just not going to happen in the short-term. But as we go through this year, we'll update you as we go off allocation, and it will happen market-by-market and geography-by-geography. Rob, did I miss anything there?

The only other comment, Sean, is some of this is driven by regulatory requirements around getting approvals and validations and also, several of these markets have different components that they need. So, they're different validation and engineering projects to do it. And we just have to sequence that through our prioritization process as well. So, that's actually true with all product launches.

Yes, and the good news is, it's not our first rodeo. We've done these launch platforms in 140 countries many times before, and we're back to our sort of meat and potatoes here. This is what we do all day every day. And going off supply chain constraints over the calendar year will be fantastic for us to be able to then just go back to what we do, which is helping people sleep better, breathe better, and live better lives outside hospital care. Thanks for the question, Sean.

Hi, good afternoon guys. Thanks for taking the questions. Good morning to Brett. I wanted to follow-up on the growth drivers as we think about this and next year, because I'm hearing there's patient backlog, obviously, there's core market demand generation that will start to pick up. And then from our perspective, we look at RePAPs as well. So, how do you layer those together over what time period? How much growth could you handle? And then maybe specific to RePAPs, since we haven't talked that much about them on this call, where have they been in the last two years? And when should they return to be a bigger piece of the mix itself? Thanks.

Yes. Thanks, Margaret. It's a great question and it's one we're thinking about a lot here. And we're thinking about all three prongs that you talked about. The first one, excess patient demand, how do we work through that? U.S., we're getting close to really working through it. We've got 140 other countries. And to Rob's point, it's a complex equation to get the supply chain and deliver in all 140, but we're working through that. Secondly, demand generation, yes, where we have omnichannel and have really established social media presence and abilities to drive demand gen, we'll be starting to turn those on country-by-country. And then thirdly, RePAPs, to your point, the last two and a half, three years of COVID crisis, pandemic crisis, competitor recall crisis, we have not turned the knob on RePAP. And in fact, we know our customers have been holding back when they're supply chain constrained on contacting patients who reach that three-year, five-year post-warranty, you're ready for a new device on insurance and/or patient making the call. So, I think all three of those are going to be applied in all 50 states here in the U.S. and in all 140 countries worldwide. We do have scenarios and plans, I'm not going to detail them here on this call, but I can tell you that we expect to see steady growth throughout our market and we're going to drive that. And we're going to make sure that patients waiting lists are not long. We're not going to turn the needles until we're ready to get there in supply. I'm just happy we're having this conversation this quarter and it's so much better than the last eight quarters that we're talking about demand gen and driving RePAPs because that's what we've done for 33.5 years in the business and it's what we love doing, and we're going to do more of it.

Great. Thank you for taking the question and good morning and good evening. I had a follow-up on that question. I guess I just wanted to understand what are your expectations if and when your competitor does come back? I mean, presumably, there could be some, I guess, impact on flow gens that would create pressure, but maybe you get some pickup in the mask. Could you characterize how quickly you would expect things to change dynamically in both directions? And then how much juice can you actually get out of the demand creation and ReSupply to backfill or you, kind of, increase growth? What are your pilot programs or places where you've done that telling you about how much of a quantitative pickup you can get?

Thank you for the question, Matt. I'll begin and then let Rob provide more details because this is a significant area for us. Our competitor has been in the market for 18 months, and we will likely learn more later this week during their earnings call regarding the consent decree and any associated timelines. It would be beneficial for the market to have some clarity on that. We have run various scenarios, including potential return dates of February 1, July 1, and even January 1, 2024. In all these scenarios, ResMed continues to grow and effectively addresses the unmet patient needs. If our competitor returns earlier, we anticipate a substantial attach rate of over 60% for our masks, which would enhance our margins and allow us to provide excellent patient care with our top-quality products. They will start with a 0% share for new patients and will have to compete on an account-by-account basis, facing Tier 2, 3, and 4 competitors filling that gap, who are performing adequately. Once they face us, the market leader, it will be a different challenge, so we welcome their return in terms of the mask business. If their return is prolonged, it doesn't concern us since we are increasing our supply and working to meet all customer demand. While this situation is not insignificant, it won't disrupt our long-term strategy or business model. We are prepared with various scenarios and adjustments for additional mask production or demand generation as necessary. I believe some investors and analysts are more worried about this than we are; we have carefully considered these factors and have a plan ready for any situation. The potential changes do not alter the long-term outcomes for ResMed and our patients. Rob, do you have any additional insights for Matt?

Yes, Matt, I’d like to add that we consider the market growth rate in relation to the patient journey through this serious condition, where awareness is the main challenge. The journey starts with gaining awareness. Does your primary care physician know to refer you to a sleep specialist? Can that specialist guide you to either home or lab testing? Then, do you receive a referral to a provider who can adequately care for you? Staff capacity remains a significant hurdle for them. Furthermore, will that provider offer long-term care and maintain the ReSupply programs? Our solutions address all these aspects, but there are bottlenecks throughout the patient journey. We are offering solutions that drive improvements across these areas, leading to a promising long-term outlook for steady business growth, as Mick mentioned.

Hey, good afternoon. Two quick ones if I can sneak them in. Is there a vision or strategy to convert Card-to-Cloud products to connected solutions over time? Or is the base case to lead those units that have gone into the market over the last year or so, as is? And then the second quick one is MEDIFOX DAN, the gross margin on that revenue ballpark; can you share what that is? Thank you so much.

Thanks, Mike, for the two questions. Regarding Card-to-Cloud, as the AirSense 10 Card-to-Cloud devices approach the end of their warranty or payer-approved period—typically three to five years—patients will have the chance to upgrade to the AirSense 11 device. For the first 26 years of ResMed's history, we utilized non-connected and Card-to-Cloud technologies. While these methods work, they aren’t optimal for patient engagement through myAir, which contributes to the 87% adherence rate. Nevertheless, they provide effective therapy, being the smallest, quietest, and most comfortable option available. Our HME customers, primarily in the U.S., have been using Card-to-Cloud for years, with data seamlessly sent to the cloud, enabling doctors to access and analyze it through AirView. As a result, patient care can be significantly enhanced. We anticipate a surge of patients upgrading over a 12-month period, especially those eager for the latest technology in a couple of years, with some consumer pay markets potentially advancing faster. As for your question about gross margin, MEDIFOX DAN positively contributes to our overall group gross margin. While I can’t provide an exact figure, I believe you’ll notice an increase in our gross margin as we progress through the fiscal year due to MEDIFOX DAN. It adds to both revenue and gross margin percentage and enhances our net operating profit and EPS performance moving forward. Thanks for your questions, Mike.

Good afternoon and good morning. Thanks for taking my question. Mick, just a quick one. Just the U.S. flow generator growth rate of 41%, obviously, very strong. Just wondering if you can give us any color as to within that, how much was volume versus price and also mix?

Yes, Saul, it's a great question. We don’t disclose details on pricing, but I can share some general insights. Competitive dynamics are very tight. We were transparent about implementing a surcharge at the beginning of last year due to high freight costs, which were around $12 and EUR12 across all devices. We will begin to remove that surcharge gradually on a customer-by-customer basis as we progress through the year. As we see those freight costs reflected in our inventory, it will take some time for the cost of goods sold reduction to materialize. Regarding the 41% growth, it was significantly boosted by the AirSense 10 Card-to-Cloud, which helped get those devices out. Additionally, as we have started this quarter, turning on the AirSense 10 fully connected will likely provide a favorable impact for our business. Brett, I'll pass it over to you for any further insights that could assist Saul with his modeling concerning this strong U.S. flow generator growth.

Yes. Thanks, Mick. The only thing I would add, Saul, is that the sleep devices or APAP devices performed really well as we had device availability that went directly into the market. This significantly contributed to our growth, especially since these devices are higher volume compared to bi-levels, for example. This certainly played a major role in that revenue increase.

Thanks so much. Mick you talked about being unconstrained on supply by the end of the calendar year, and then I think to Sean's question, you talked about different markets and regulatory approvals. So, the question I've got is will the AirSense 11 be unconstrained more quickly in the U.S.? And can you give us any sort of sense as to when you expect that will be the case?

Yes, thanks for the question, David. Yes, clearly, AirSense 10 fully connected will be unconstrained first just because that platform has been in the market for a long period of time. We've got all the inventory, all the capabilities to drive it, and it's regulatory approved in virtually every market, 140 around the world. And so it's just much easier to turn that off-constraint and get it moving first. But yes, to your point, the smaller, the quieter, the more comfortable and the most connected and most clever device is the AirSense 11. As we get regulatory approvals and we're going country-by-country on this. As we said, we just got Japan during the last quarter and we're going to go country-by-country on this, when we get regulatory approvals and as we get supply starting to improve on those components, we can really ramp that up with all its great technology and really good cost advantages and patient-friendly advantages. It's got coaching capabilities and interaction with the patient on the screen that's interactive and can do some really good over-the-air upgrades, but also over-the-air interactions with physicians and its connectivity to myAir, 55%. I mean almost the vast majority of patients are being offered and almost for all them are saying, yes, I want to see my data every day and get a myAir score. So, it will go faster and less constrained in those markets where it has approval. I'm not going to predict the exact date that that will happen because we've got scenarios around that. But I think we will start to see that go off-constraints before the end of the calendar year because that's when we're going to be able to meet all the customer demand, which is our goal and with on a fast-track to do it this calendar year. Rob, what did I miss there on David's question?

Yes, thanks, David. Just to build on Mick's comment there, the supply chain patients and delivery issues do vary between geographies as well, so there are complexities around regulatory requirements.

Hi, good morning everyone. Thanks for taking the question. It's evident that a significant portion of our growth is now driven by products that have been redesigned and didn't exist in their current form until recently. We've noticed the launch of AirSense 10 connected with various components and alternative suppliers. Additionally, we've seen some early regulatory approvals for an AirSense 11, which seems to have different communication chipsets. Is there any particular reason why that product couldn’t be launched in the next few months, considering the similar timeline we observed between approval and launch for the AirSense 10 connected?

Yes. Thanks Dan. And clearly, you're very diligent looking at FDA and different regulatory approvals around the world. Look, what I'll say to this is that the AirSense 10 Card-to-Cloud was a reengineered re-pivoted device, absolutely. And the AirSense 10 fully connected, we did rejig the comms chip to get one that was less supply chain constraints. So, those two are reengineering back in the line. We didn't reengineer the AirSense 11 that's selling right now. But of course, there will be variance. This is a long-term platform. This platform, the AirSense 11 is going to do CPAP, APAP, bi-level, all sorts of amazing therapy models. If you even look at the work that we're doing on the Lumis HFT device that we talked about earlier in the Q&A and during my prep remarks, that's on a platform of the AirSense 10, and obviously, AirSense 11 will become the platform of note for us over the coming years. But we don't go into details of our future product pipeline. So, thanks for the question. But look, I can tell you, those three products in the market are number one, two, and three and as you saw this quarter, they're selling well, and we expect them to continue to.

Good morning all. I might just come back to that full customer demand comment by the end of calendar 2023. Mick, is that in relation to just the new starts? Or do you also expect that you'll meet the demand for the backlog of RePAPs as well that we've had over the last few years?

Yes, Lyanne, you're touching on some of the complexities involved. Our aim is to move beyond the supply constraints within this calendar year, and we believe we can achieve that. However, we cannot do this by fully activating every available option for demand generation and RePAP generation globally. We will gradually implement these strategies for demand and RePAP generation through our customers and directly as we enhance supply on a country-by-country basis. I believe we can meet all customer demand if we manage the pace correctly, but we also aim to address the needs of the 80% to 90% of individuals in many countries who remain undiagnosed and untreated. This mission aligns with both altruism and our profit objectives, providing us with a strong foundation for sustainable long-term growth, as we have demonstrated over the past 33.5 years. If we were to max out every option, we wouldn’t be able to overcome the constraints this year. While we won't set everything to maximum, we are initiating these strategies and launching programs in various cities, states, and regions worldwide as we begin to alleviate constraints. So, while I won’t elaborate further, yes, Lyanne, it is more complex than simply reaching our goals. It's about achieving those goals and then stimulating market growth as the market leader, which is both our responsibility and obligation. We are committed to growing the market and increasing our share while delivering for patients.

Thank you for taking my question. I'm curious about the diagnosis rate in the U.S., specifically for OSA. There has been some frustration regarding the diagnosis of patients. I'm wondering what improvements you've observed during the quarter related to this issue.

Yes, Steve, thank you for your question. It's good to see your continued engagement. Our diagnosis rate in the U.S. was initially affected by COVID as labs were closed, but we have since observed a significant shift towards home sleep apnea testing. Many companies, including ResMed, have developed models to assist physicians in remotely screening, diagnosing, treating, and managing sleep apnea patients. As we transition from pandemic to endemic, our data indicates that at least 50% of patients are utilizing home sleep apnea tests. For the remaining 50%, some are doing home tests and then following up in a lab for titration and mask fitting. There has been strong adoption of home sleep apnea testing. Demand generation involves not just social media and advertising for customer acquisition but also collaborating with the channel to identify capacities in different regions. We recently acquired Ectosense and their product, NightOwl, which is a compact device that allows for sensitive and specific screening and diagnosis of sleep apnea, with reimbursement options in the U.S. We are also exploring its use in Asia, Latin America, and other regions. This technology originated in Europe, and we're hopeful for its adoption there as well. I'm enthusiastic about the progress in home sleep apnea testing because it is discreet, convenient, and cloud-connected. I believe we will see an increase in the diagnostic rate in the U.S. following the pandemic, as telemedicine and remote diagnostics have proven effective and scalable. While this may be initiated here in the U.S., it has potential for success in many countries. We are excited about collaborating with both physicians and patients to enhance their sleep and breathing quality. Thank you for the question.

Thanks, Kevin, and thank you again to all of our shareholders and stakeholders for joining us on this call. I'd want to thank once again the opportunity for all 10,000 ResMedians, many of whom of you are also shareholders. So, thank you for that. Thank you also for your dedication, hard work, helping people breathe, sleep, and live better lives in over 140 countries. You delivered these numbers. Thank you for all that you do. And I'll hand back to you, Amy.

Great. Thank you, Mick, and thanks everyone for joining us. We appreciate your interest and your time. And as always, if you have any additional questions or need to follow-up, please don't hesitate to reach out directly. This does conclude ResMed's second quarter 2023 conference call. Kevin, I'll turn it back to you to close things out.