ResMed Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2023

There are 12 speakers on the call.

Operator

Hello, and welcome to the ResMed Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Amy Lakeam, Vice President, Investor Relations and Corporate Communications. Amy, please go ahead.

Speaker 1

Great. Thank you, Kevin. Hi, everyone. Happy New Year, and welcome to ResMed's Q2 fiscal year 2023 earnings call. Thanks for joining us.

Speaker 1

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 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 and A portion of our call. During the Q and 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.

Speaker 1

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 forward looking statements, including, but not limited to, expectations about our future operating and financial 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.

Speaker 1

I'd like to now turn the call over to Mick.

Speaker 2

Thanks, Amy and Kevin, and thank you to all of our Thank you for joining us today as we review results for the December quarter, our Q2 of fiscal year 2023. Our financial results reflect solid performance across our entire business, once again driven by strong sales growth in the Americas region as we were able to significantly increase both production and delivery of flow generator devices. We're seeing ongoing High demand for our sleep and respiratory care devices worldwide, and we're making steady progress working with our suppliers to continue to increase our production to ultimately meet the needs of all customers and especially patients. Our mask sales growth was strong across the globe, reflecting a post COVID pandemic awareness of the importance and need for respiratory hygiene and respiratory health. Resupply programs in the U.

Speaker 2

S. Continue to drive solid ongoing sustained market mask growth, Catalyzed somewhat by the end of calendar year deductible momentum in the U. S. Geography. Mask sales across Europe, Asia Our teams worked incredibly hard to achieve these extraordinary numbers in the face of an ongoing industry supply chain constraint market.

Speaker 2

We see the supply environment improving every week, every month and every quarter and our access to the specific electronic components we need has increased. We are confident in our ability to fulfill all customer demand before the end of calendar year 2023, and we expect to see Steady ongoing incremental device revenue growth in the 3rd and 4th quarters of our fiscal year 2023. Customer acceptance of our reengineered Essence 10 card to cloud device remained strong During the Q2, particularly in the United States geography. As we increase the volume of fully connected AirSense 10 fully connected AirSense 11 devices over the next few quarters, we will be able to phase out the AirSense 10 card to cloud device and refocus on our strategy, which is based around the growth of 100% cloud connectable devices across the globe. Outside the U.

Speaker 2

S, we have not seen the same adoption rates of that AirSense 10 card to cloud device. However, there have been pockets of success in some geographies, and we see a strong growth path going forward as we ramp up our fully connected AirSense 10 And our fully connected AirSense 11 products and as we achieve regulatory clearance of the latter platform market by market. To that point, we introduced our newest product, the Essence 11 platform into the Japanese market during December. And we look forward to continuing to support doctors and patients in Japan with our world leading 100% cloud connectable medical devices And our cloud based software technology. Our number one priority across all of our markets will always be patients, Doing our best to help those who need treatment for sleep apnea, COPD, respiratory insufficiency due to neuromuscular disease, Asthma and all those who need access to out of hospital healthcare.

Speaker 2

Our goal is to ensure that patients get the care that they need, where they need it and when they need us. Let's now briefly review updates on ResMed's top three strategic priorities. Number 1, To grow and differentiate our core sleep apnea and respiratory care businesses number 2, to design, develop and deliver market leading medical devices as well as digital health solutions that can be scaled globally. Number 3, to innovate and grow the world's best Software solutions for care delivered outside the hospital and especially in a patient's own home. The launch and acceptance of our AirSense 11 device platform continues to go very well.

Speaker 2

Patient feedback remains very positive and we continue to see Strong adoption of our MyAir patient app. In fact, adoption rates are at more than Double the adoption rate of MyAir with the Essence 10 platform and about 55% of all patients getting their data every day on their MyAir app. Increasing production and delivery of the Essence 11 platform remains a top priority for our ResMedians around the globe and we will continue to achieve better results and stronger market penetration each quarter. Earlier this month, we were able to take our AirSense 10 fully connected device off allocation in the U. S.

Speaker 2

Market. This is a very exciting development for our commercial team here in the Americas and for all of our customers. We look forward to continuing to Expand the supply of fully connected AirSense 10 and fully connected AirSense 11 devices so that supply can become unconstrained in all countries, but we will progress throughout fiscal 'twenty three on this endeavor. An important aspect of our ResMed 2025 strategy is to reach 100 of millions of patients with our respiratory care solutions, including non invasive ventilation and life support ventilation as well as newer therapeutic areas such as cloud connected pharmaceutical delivery solutions and home based HiFlo Therapy Solutions. We are continuing to drive growth and adoption of our ventilator devices around the world, And we saw good uptake of both our life support and our non life support ventilator platforms during the quarter.

Speaker 2

There is also ongoing adoption of Propeller's monitoring system. Its digital therapeutic platform is now integrated with the 2 leading U. S. Electronic Health Record Systems, Epic and Cerner. This digital health integration makes it easier for doctors and health care workers to onboard people to the Propeller platform.

Speaker 2

It's still early days for this technology. However, combined with our investments in home based high flow therapy for treatment of COPD in the home, We see this technology combination as an important clinical addition for treating lung disease and an integral part, an important part of our 2025 growth strategy. Turning to our software as a service offerings For outside hospital care, our SaaS business grew 18% year over year. This extraordinary growth includes sustained High single digit organic growth of our U. S.-based SaaS business at around 7% and is accelerated by the addition of approximately 6 weeks of Medifox Dhan revenue.

Speaker 2

As we close that acquisition and welcome that German team into the ResMed family of SaaS solutions Just over midway through the December quarter. We continue to grow with outside hospital care customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care. As the post COVID patient census continues to improve in our facilities verticals, we are seeing pent up demand for technology investments That continue to come to the market. Our HME SaaS business under the Brightree brand continues to grow at a very And we welcome tech solutions for our HME customers across the U. S.

Speaker 2

Market. As I just mentioned, during the quarter, we received final regulatory approval and closed our acquisition of Medifox DARM, The leading provider of end to end software solutions for nursing homes and home health customers in Germany. We're now focused on integrating and growing this business as we accelerate SaaS innovation and SaaS growth in Germany and beyond. I've met in person with many of the key leaders of the Medifox Darn team and I can tell you I'm excited about the cultural fit, the technology focus, The sharing and learning opportunities that they bring and we bring to our global SaaS team. This is our first investment in an Hospital software business beyond the U.

Speaker 2

S. Market, but I can tell you the global SaaS team is very much in sync and they have come out of the great strongly, not just in the revenue growth I just talked about, but also in the soft side, team collaboration, transparency and beyond. We look forward to updating you as we achieve key milestones in that business over the quarters and years ahead. Our team is ready to deliver. Our SaaS business is an important part of ResMed's future growth and complements the incredibly strong software and device solutions that we have in our core sleep apnea Brightree resupply automates the entire process from contacting the patient, interacting with the insurance company on coverage and interacting directly with the patient on co pays as well as managing the logistics and distribution process.

Speaker 2

The ultimate goal is to keep a CPAP, APAP or bilevel therapy user replenished with the supplies that they need to enable a better And longer lasting therapy experience. We have published clinical data that show that a patient on a resupply program has higher adherence to therapy. And we also have peer reviewed published data in CHEST showing, it's called the Alaska study, that there is a 39% reduction in mortality For patients who are adherent to CPAP versus control. These are incredible data and they lead to these synergies not just Being a good revenue opportunity, but bringing an incredible cost saving opportunity for the health care system and life saving opportunity for the patients involved. We will continue to identify and capitalize on synergy opportunities as we move forward.

Speaker 2

We are well positioned as the leading global strategic Provider of SaaS solutions for out of hospital care globally and we have created differentiated value for customers and long term sustainable growth for our stakeholders. We are transforming out of hospital healthcare at scale, leading the market in digital health technology across our business. We now have over 13,500,000,000 nights of medical data in the cloud and over 19,000,001 100 percent Cloud connectable medical devices on bedside tables in 140 countries worldwide. We are liberating data to the cloud every day And unlocking value for patients, providers, physicians, payers and entire health care systems and communities. We are leading the industry.

Speaker 2

But I see this as just the start of the digital health marathon. And I can tell you, we love the race. As the overlap between digital health and consumer tech industries continues, it is important to note that ResMed's Chief Medical Officer, Doctor. Carlos Nunez, Was recently named Chair of the Board of the Health Division of the Consumer Technology Association or CTA. And the Health Division is the fastest growing division within CTA.

Speaker 2

The Health Division focuses on consumer based Technology enabled health solutions to deliver better health outcomes for patients and reduce overall health care costs for the health care system. Their mission is fully aligned with our ResMed mission, and I'm delighted to see Carlos be recognized for his leadership. And the sessions that he chaired at CES In Vegas, a couple of weeks ago, showed that ResMed's thought leadership and Carlos' thought leadership is helping to craft the future of digital health and bring it to consumers As we have done over the past decade. We're excited about the ways Carlos and CTA's Health division can help continue to shape our industry for the future, lowering costs and improving outcomes and engaging consumers in their own health care. ResMed's mission and clear goal is to improve 2 50,000,000 lives through better healthcare in 2025.

Speaker 2

This patient centric mission drives and motivates ResMedians every day. We made excellent progress towards that inspiring goal over the last period. During the last 12 months, we improved over 149,000,000 lives With delivery of a device platform to a patient, a full mask system to a patient or a digital health software solution, Helping people to sleep better, to breathe better and to live higher quality lives with healthcare delivered right where they live and mostly in their own home. Before I close, I want to once again express my sincere gratitude to more than 10,000 ResMedians now for their perseverance, Hard work and dedication both today and every day. Thank you.

Speaker 2

With that, I'll hand the call over to Brett in Sydney, And then we will move and open up for Q and A from the group. Brett, over to you.

Speaker 3

Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the Q2 of fiscal year 2023. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q2.

Speaker 3

Group revenue was $1,030,000,000 an increase of 16%. In constant currency terms, revenue increased by 20%. Revenue growth reflected increased demand for our sleek products across our portfolio And ongoing increased device demand generated by our competitors' product recall. Year on year movements in foreign currencies, in particular, the weaker euro, Negatively impacted revenue by approximately $36,000,000 this quarter. As mentioned, we closed the Medifox Dhan acquisition on November 21, 20 And accordingly, we have recognized Medifox Dhan revenue of $10,700,000 in our Q2 FY 'twenty three results from this date.

Speaker 3

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 'twenty three. Looking at geographic revenue distribution and excluding revenue from our Software as a Service business, Sales in U. S, Canada and Latin America countries increased by 26%. Sales in Europe, Asia and other markets Increased by 8% in constant currency terms.

Speaker 3

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 cards 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.

Speaker 3

Mask and other devices. Mask 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 Dhan 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.

Speaker 3

We have provided a full reconciliation of the non GAAP to GAAP numbers in our 2nd 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 and A Expenses for the Q2 increased by 14% or in constant currency terms increased by 20%.

Speaker 3

The increase was predominantly attributable to increases employee related costs, additional expenses related to our acquisitions and travel and entertainment expenses. SG and 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 and A expense as a percentage of revenue to be in the range of 20% to 22% for the balance of fiscal year 'twenty three. R and D expenses for the quarter increased by 4% or in constant currency terms increased by 15%. R and D expenses as a percentage of revenue was 6.8% compared to 7% in the prior year quarter.

Speaker 3

Looking forward and subject to currency movements, we expect R and D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of fiscal year 'twenty three. 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 'twenty three 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%.

Speaker 3

Cash flow from operations for the quarter was $129,000,000 reflecting solid underlying earnings, partially offset by higher levels of working capital. Capital expenditure for the quarter was $27,000,000 Depreciation and amortization for the quarter totaled 38,000,000 We recorded equity losses of $3,100,000 in our income statement in the December quarter associated with the PrimaSung joint venture with Verily. We expect to record equity losses of approximately $3,000,000 per quarter through the balance of fiscal year 'twenty three associated with the joint venture operation. On November 21, 2022, we completed our acquisition of Medifox Dhan for consideration of 997,000,000 And this was funded through a drawdown on our existing revolver credit facility. During the quarter, we recorded acquisition related expenses of 8 point $4,000,000 associated with the Medifox Dhan acquisition.

Speaker 3

The acquisition was EPS neutral on a non GAAP basis in Q2, We expect the acquisition to be mildly accretive to EPS on a non GAAP basis in the second half of FY 'twenty three. We ended the Q2 with a cash balance of $253,000,000 At December 31, we had $1,800,000,000 in gross debt and $1,500,000,000 in net debt, At December 31, we had approximately $390,000,000 available for drawdown under our revolver facility, and we continue to Following the acquisition of Medifox Dhan, our net interest expense is expected to increase to Approximately $15,000,000 per quarter for the second half of fiscal year 'twenty three, 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 and D and also And with that, I will hand the call back to Amy.

Speaker 1

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 and A portion of our call.

Operator

Certainly, we will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question One moment please while we poll for questions. Our first question is coming from Chris Cooper from Goldman Sachs. Your line is now live.

Speaker 4

Thanks. Good morning. Good afternoon. So good to hear that the fully connected AirSense 10 is now off allocation. Can I ask what happens with the CTCs, C2Cs that are effectively now, I presume, surplus to requirements?

Speaker 4

And Are there any sort of impacts on pricing or inventory valuation we need to think about in the second half?

Speaker 2

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.

Speaker 2

As you know, we operate in 140 countries worldwide. The Essence 10 card to cloud inventory, we're working our way through that and it 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 2 device in the market, which is the Essence 10 fully connected. But then we have the number 3 device, The 3rd best device in the market, which is the Essence 10 Card2 Cloud. I believe that's better than the Tier 2, 3, 4 competitors that are in the market.

Speaker 2

And so we've got the number 1, 2 and 3 device there and we're selling them and different customers want different things. And certainly the Essence 11 fully connected is at 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 rights onto them. But yes, Chris, we expect to work through all of that Essence 10 card to cloud inventory.

Speaker 2

Good question.

Operator

Thank you. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Speaker 5

Mick, can you hear me all right?

Speaker 2

Got you, Loudon, please, Suraj.

Speaker 5

Congrats on a great quarter. Hey, Mick, maybe I'm just Trying to thread the needle here, but love to get some extra color. I heard you say by 2025, 250,000,000 lives, That's the plan. If I use where you are currently, let's say $150,000,000 just rounding it off, That's a 70% almost jump in patient covered by CPAP. How should I think about the implied guide?

Speaker 5

Am I jumping the gun here or are you sort of telegraphing you all should be in a position for the next 3 years deliver about 17%, 18% Thank you.

Speaker 2

Suraj, it's a great question. And how we measure the lives changed is a pretty simple The formula includes the CPAPs, APAPs, bi level devices, but it also includes full mask systems, which the sort of linear growth, if you like, of the devices and some slight Financial growth of the mask systems because of replenishment rates and repeat customers coming back. But it also includes patients' lives touched through digital health. So whether it's a Brightree patient who gets access to their device or other HMA equipment, whether it's a patient in COPD medicines that gets An app that reminds them to take their medicine on a propeller or a patient that has a life support ventilator that gets A digital health reminder to get replenishment. And so you are combining all those impacts on a life.

Speaker 2

And the way I look at it is a life is changed as much Buy a brand new device arriving in their house as it is by an app that helps them take a medicine that keeps them out of hospital. So that's how we sort of look at lives change. Yes, dollars 150,000,000 calendar year 2023. You got it right. I mean, you got the math.

Speaker 2

The mathematics there is the CAGR is 17.5% volume growth of the lives that we touch over the next 3 calendar years through 2025 and we're going to do that. We're going to get more and more patients on CPAPs, APAPs, by levels, More and more on resupply and mask systems and then more and more on our digital health platforms. And we've got a it's a lofty goal and it's a stretch goal, but We believe we can get there and change 250,000,000 lives by 2025. Thanks, Suraj. Great question.

Operator

Thank you. Next question is coming from Matthew Mishan from Ebank Capital Markets, your line is now live.

Speaker 2

Hey, good afternoon, Mick. Just a quick question on the gross margin. Just how has the productivity of manufacturing and shipping improved over the last few months? Are you guys still working through High cost inventory, how much spot buying is there? And then is sort of the decrease in gross margins here, slight decrease Gross margin mainly on the mix of devices versus masks and accessories.

Speaker 2

Yes, Matt. I'll start and then I'll hand to Rob Douglas, our President and Chief Operating Officer to cover in detail. But just at the start, yes, there was a sequential decrease in gross margin. One way, Matt, I could have avoided that Please tell the team, don't sell all those CPAPs and APAPs that we have to create, right? Because it was great gross profit dollars to the business and it was great to Change a patient's life by a new device, but I could have kept my GM 70 basis points 80 basis points up by saying slow down those CPAP and APAP Of course, we didn't do that.

Speaker 2

The right thing is the humanitarian aspect to get those devices that we pivoted our supply chain reengineered and redesigned to get them to market. And you saw Extraordinary growth, 41% growth in our U. S.-based device market. Now that's not our highest gross margin, it's dilutive to GM percentage, but it's Contributory and positive to gross profit dollars and so it's good for patients and it's good for our stakeholders. So that's what we did.

Speaker 2

But Rob, yes, it's some really good question. First, Carlos. Yes.

Speaker 6

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 Our normal settings in normal world is we have a long term outlook, volume commitments 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 these sort of real scramble to drive volumes. Freight is a similar situation, although we are seeing freight is 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.

Speaker 6

We continue to drive the volumes in a systematic way and we use that to drive productivity and

Operator

Our next question is coming from Steve Wien from Jordan. Your line is now live.

Speaker 7

Yes. Thanks, Nick. I just wanted to follow-up on that gross margin question. In the previous quarter, I think it was Brett was talking to the efficiencies That you're achieving through doing more volume was and the margin benefit from that efficiency was sitting in your inventory balance. And that's obviously been building and built again this quarter.

Speaker 7

I'm just interested is, is that still the case that when that inventory comes off the balance We should automatically start to see the efficiency gains that you've been able to achieve to date?

Speaker 3

Yes, I will. So Steve, yes, I mean that's what we're doing I mean, I think Rob articulated, really, at the moment, we're optimizing for delivery rather than efficiency. And we've got things like we're running the 3 platforms at the moment. So I'm really focused on delivering devices to patients. So that's having an impact.

Speaker 3

The big one as we work through inventory or the wash through is the freight Costs, we're seeing some reduction in freight costs, but that's not manifested in our P and L yet. That's more of a Q3, Q4. So there will be some benefit that starts to wash through into Q3 and Q4 that we're not seeing it that's currently still in inventory. But on the efficiency side, we're really we will get there, but we're optimizing on delivery for the moment. But I think as we work through the fiscal, We'll be in a much better position to drive on efficiency measures.

Speaker 2

I'll 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 So wash through the inventory and we're getting great scale from the biggest respiratory medical manufacturing plant in the Planet there in Singapore and the efficiencies we've got are well above any competitor and we're doing really well on that and I think that will come through.

Speaker 2

And then in addition to that, you'll get Some upside from Medifox DARM, which is accretive to revenue, gross margin and EPS, as Brett said, throughout fiscal and beyond. So that'd be my guidance there as well, Steve.

Operator

Thank you. Next question is coming from David Bailey from Macquarie. Your line is now live.

Speaker 3

Yeah, Thanks very much. Good morning, Mick and Brett. Just got a question on new patient growth. Just thinking about patients who've been prescribed the device and waiting and then also those yet to be diagnosed. Just wondering if you could compare and contrast the U.

Speaker 3

S. And Rest of World and then some comments on what you think it means for industry device growth for fiscal 'twenty And 24 relative to historical growth rates.

Speaker 2

David, that's a great question. It's actually The answer we could take the whole rest of the Q and A session to go through it because it's what we do is trying to reach out to the 936 1,000,000 people in our core market that suffocate every night with sleep apnea around the world and we're laser focused on it. As you saw, we delivered very strongly on those new patient setups, 41% growth of devices in U. S, Canada, Latin America and we turned to positive there in Europe, Asia and other. And what I can tell you is We're really working through that excess patient demand.

Speaker 2

Those numbers will tell you we're working faster through that excess demand in the U. S. And getting closer to a state where you get a prescription and you'll get a device in days or weeks versus it got up in the months there at the peak of the crisis. And I think You look across the other 140 countries we sell into, every country is different. We've got to get the regulatory approvals for Essence 11 there.

Speaker 2

We've got to work our way through, but we're going Step by step on that journey. And so as I look at this excess patient demand, I made the comment there in my prep I think we will get to all of our customers' demand before the end of this calendar year and that tells you our confidence in increased supply and our ability to meet that need and Okay. This is a case of life and death. We've got the data to show that. We want your path to therapy to be expedited.

Speaker 2

And in addition The final thing I'll say is that we are looking at our patient demand generation activities that have been on hold these last 18 months. And I'm looking at our models in Australia, New Zealand, Korea, Japan, Singapore, U. K. And beyond, where we have these omnichannel markets, the availability to contact consumers or sleep concerned consumers directly and get them into the funnel. Here in the U.

Speaker 2

S, we have direct models and also a joint venture there with Verily and Premason that we've done some really good demand gen tests and a number of cities Just waiting for me to fire the starting gun for that team and we're getting very close to firing that starting gun. So we'll have a smooth flow From excess patient demand to now patient demand generation to continue our growth trajectory.

Operator

Thank you. Our next question is coming from Mike Matson from Needham and Company. Your line is now live.

Speaker 8

Yes. Thanks for taking my questions. I guess, Nick, I think you mentioned high flow therapy in your prepared remarks. I just wanted to get an update on Kind of where things stand with commercializing that and maybe talk about the just the market opportunity there? Thanks.

Speaker 2

Yes. Look, it's a great question, Mike. And our long term goals there in 2025, a number of those 250,000,000 Going to change in 2025 will be patients with neuromuscular disease or chronic obstructive pulmonary disease. And 2 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, but high flow therapy in the home, we see as a huge opportunity, probably 10 times the size And then Propeller, yes, early days and the pilots are going well.

Speaker 2

We're integrated to the payer provider EHR systems, which gives us the credibility now to go from pilots to start to scale with 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.

Speaker 2

We're pretty excited about this. It's a long term project though. But as Mick said, we view this

Speaker 6

as a Very large potential market, very significantly larger than some of our other respiratory care markets. And we believe that we're Running tests, we're really focusing on its complementariness with our home oxygen therapy. That is you'll get much better outcomes if you add this in. And we're working hard on all of the market access and evidence generation programs to do that. Now most of those programs are trying either RCTs These are real world evidence trials.

Speaker 6

So we're sort of in limited market release at the moment in specific markets where we're making these claims. But as that evidence evolves and we generate it and take it to the payers and standard setting Organizations, we see this is going to be a very strong market for us, but it is a multiyear project.

Operator

Thank you. Next question is coming from Craig Montan from RBC. Your line is now live.

Speaker 4

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?

Speaker 2

Yes, Craig, thanks for the question. No, that doesn't Include a whole lot of price increases. In fact, we put price increases on hold during the COVID pandemic in some of our SaaS businesses. And so We probably are changing to the area of price increases as we go forward. We've gone from pandemic to endemic.

Speaker 2

So that will happen and then flow out over the coming 12, 24 months. I'm really excited. We're looking at that domestic SaaS business in the worst of COVID getting down to low single digits. We moved to Mid single digits and then Bobby who's President of that division and his team have really accelerated that organic growth to 7% 8% last quarter, 7% this quarter and so that high single digits Organic growth and actually we see upside from that in the organic, if you think about it, Rytary, Matrix Care and Sidus Health path. So we see opportunity to move that up.

Speaker 2

And then when you add on Medifox Dhan and its capabilities, I think the combined business, obviously, the next 4 quarters We'll call out the inorganic part. It will be double digits on the inorganic of course. But even going forward as we look out towards 2025, we see opportunities for high single digit and even low double digit growth Across that combined business as we lap the acquisition. So really good growth there. Price increases will be a part of that going forward, but they weren't historically to answer your question directly.

Operator

Thank you. Next question is coming from Sean Womond from Morgan Stanley. Your line is now live.

Speaker 2

Good morning, Mick. Hope you're 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 day after Australia Day.

Speaker 2

Look, the way we're looking at this We've got 140 countries, we've got a very complex supply logistics program to get the patients 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 Conductors for communications, the 3 gs, 4 gs, 5 gs chips are starting to see supply come back. The microprocesses, 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're able to deliver incredibly strongly on that.

Speaker 2

And we're off allocation For the Essence 10 100 percent connected. Look, I'd love to tell you, we've got a very complex jigsaw puzzle here. I'd love to tell you we'll be off Allocation on 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 By market, geography by geography. Rob, did I miss anything there?

Speaker 6

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 That's actually true with all product launches.

Speaker 2

Yes. And the good news is it's not our first rodeo. We've done this 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 The 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.

Operator

Thank you. Next question is coming from Margaret Kaczor from William Blair. Your line is now live.

Speaker 9

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 in next Because I'm hearing there's patient backlog, obviously, there's core market demand generation that will start to pick up.

Speaker 9

And then from our perspective, we look at repass as well. How do you layer those together over what time period? How much growth could you handle? And then maybe specific to Repap since we haven't talked that much about them on this call, Where have they been in the last 2 years? And when should they return to be a

Speaker 4

bigger piece of the mix itself? Thanks.

Speaker 2

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 3 prongs that you talked about. The first one, excess patient Demand, how do we work through that?

Speaker 2

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 delivery at all 140, but we're working through that. Secondly, demand generation, yes, where we have omni channel and Really established social media presences and abilities to drive demand gen, we'll be starting to turn those on country by country.

Speaker 2

And then thirdly, repaps, to your point, the last 2.5, 3 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 their supply chain constrained on contacting patients who reach that 3 year, 5 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.

Speaker 2

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 8 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.

Operator

Thank you. Next question today is coming from Matt Taylor from Jefferies. Your line is now live.

Speaker 10

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 FlowGens that would create pressure, but maybe you get some pickup in the mass.

Speaker 10

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?

Speaker 2

Yes. Thanks for the question, Matt. I'll start and hand to Rob for further detail because it is a really important area for us. Look, if you think about our competitors who have been out in the market for 18 months and who knows? They've got to we'll find out probably later this week.

Speaker 2

They've got an earnings call. Maybe they'll Tell us what's happened to the consent decree and give us some timing. Frankly, give the market some timing, it would be good. We've run scenarios that they come back Monday, February 1, July 1, we've also run scenarios that it's January 1, 2024. And actually in all those scenarios, ResMed grows and ResMed does really well and ResMed does a really good job of taking care of the unmet patient need.

Speaker 2

So if they come back early, come back Monday, we get a 60% plus or minus attach Straight about masks, so we get good GM contribution, great patient care in terms of the best masks on the planet going to them and we're able to drive that. Now they'll be starting from 0% New patient share, they're going to have to go and fight account by account. And they won't be fighting against ResMed out the gate. They'll be fighting against the Tier 2, 3 and 4 players who've come in to fill That part of the equation and they're doing an okay job. So they have to fight against the okay players and then they have to fight against us, the market leader.

Speaker 2

But I look forward to them coming back actually in terms of the math side of business, it will be really good. The scenario where it's further out, it's later this calendar year or early next calendar year or beyond. We're okay with that too because we're ramping up our supply and we're going to get closer to closer to meet all of customer demand in this. So frankly, it's not irrelevant, but it's not a big perturbation Of our long term strategy or our long term business and we've got the scenarios and the little pivots that we need to have more masks or more demand gen in the different scenarios. So I think investors and some analysts are thinking more about this more worried about this than we are because we've thought so much And have the scenarios and the playbook ready for all three of those scenarios and 2020 beyond.

Speaker 2

I look forward to this sort of people calling it binary. I see there's a mild perturbation of a Monte Carlo SIM that really doesn't change in the long term outcomes for ResMed and our patients It's not changed in any of those scenarios. But Rob, any further detail for Matt Hume?

Speaker 6

Yes, Matt. The only other thing I'd add is we Think of sort of market growth rate in terms of the patient lifetime journey through this condition, terrible condition, very serious. And the biggest problem is awareness. And so you start off with how do you become aware of it. Does your primary care know to refer you to sleep specialists?

Speaker 6

Can that specialist refer you to either home or lab testing? And then do you get a referral to a provider who's got the capacity to look after you. And basically staff capacity is even a big issue for them. And so and then will that provide a look after you long term and keep the resupply programs. And our Solutions are across all of those, but there's bottlenecks in all of those parts of the patient lifetime, patient journey, if you like.

Speaker 6

And as I say, we're providing solutions across that and incrementally driving improvements across all of those. So that provides a really Long term outlook for steady growth in the business, as Nick was saying.

Operator

Thank you. Next question is coming from Michael Pollack from Wolfe Research. Your line is now live.

Speaker 10

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 leave those units that have gone into the market over the last And then the second quick one is Medifox Dawn, the gross margin on that revenue ballpark, Can you share what that is? Thank you so much.

Speaker 2

Thanks, Mike. And cheeky sneaking in 2 questions, but I'll answer both for sure. CardiCloud, as those devices, as those essence 10 CardiCloud devices reach their either warranty period or Pay allotted period at which a patient can get another device allocated to them, which is usually in the 3 years or 5 years normally Time horizon, those patients will get the opportunity to upgrade their devices from an Essence 10 card to cloud to presumably an Essence 11 device. And look, 1st 26 years of ResMed's existence, we had firstly non connected and then card to cloud Pager type technology sort of sneak in that. It works.

Speaker 2

It can get you there. It's not as optimal. It doesn't get that sort of patient engagement on myAir and on all the abilities that we can get to that 80 10% adherence, but it's darn good therapy. It's the smallest, quietest, the most comfortable therapy. And with the card to cloud, our HME mostly sold in the U.

Speaker 2

S. HME customers have done this for years and the data go to the cloud. And so the doctor doesn't see much difference because the doctor is seeing all the data in AirView on card to cloud and directly connected. And so We're actually able to drive really good care with those patients. So it will be a bolus of patients over that sort of 12 month period.

Speaker 2

And We've had I would say some pretty good success in humanitarian aid really and showing that ResMed isn't just going to stick to a strategy. It's going to say if we need to pivot tactically Take care of patients, we'll do it and we'll take care of them long term. But there will be a bolus of patients, I think, jumping at the front of Repap in a couple of years who want to get the latest The second question around gross margin, yes, look, Medifox Darn is accretive To our group gross margin, I'm not going to quantify it exactly, but that's why I said you're going to see I think some upside to our GM as we go Through the fiscal year, including Medifox Darn, it's accretive to revenue, gross margin percentage, but also NOP dollars and our EPS performance over the fiscal and beyond. Thanks for the questions, Mike.

Operator

Thank you. Next question is coming from Suraj Dasan from Barrene Joey Capital. Your line is now live.

Speaker 3

Good afternoon. Good morning. Thanks for taking my question. Mick, just a quick one. Just the U.

Speaker 3

S. Slow generated 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?

Speaker 2

Yes. So look, it's a great question. We don't split out our details on price. But I can give some sort of general color and maybe Rob, Brett, maybe you want to add a little bit on to Sol to the color that we can provide. Competitive dynamics are very tight.

Speaker 2

Look, we were very open that we had a surcharge that we put at the start of last Yeah, around the freight costs that were incredibly high, euros 12.12 across all devices and so on. We will start to actually take that away to get customers by our customer and appropriately as we go through the year and as we actually see To Rob's point earlier, as we see those freight costs come through our inventory, they don't just come in a spot change. It takes time for the COGS Reduction there to come through. But in terms of that 41%, I can tell you it was materially improved by the Essence 10 card to cloud and was able to get those devices there. But our ability, I think also as we have started this quarter To turn AirSense 10 fully connected off constraint, I think will continue to be a nice tailwind for our business there.

Speaker 2

But Brett, I'll hand to you for any further color we can provide to Saul to help on his modeling on this great U. S. Play generated growth.

Speaker 3

Yes. Thanks, Mick. I mean, the only thing I'd add, Phil, is that we it was really the sleep devices or APAC devices were really strong. As we got device availability, that went straight into the market. So that was really kind of driving that, which is obviously Higher volume devices than, say, bilevels, for example.

Speaker 3

So that did definitely play a big part in that revenue growth.

Operator

Thank you. Next question is coming from David Lau from JPMorgan. Your line is now live.

Speaker 3

Thanks very much. Just a quick one. Mick, you talked about being unconstrained on supply by the end of the calendar year. And then I think into Sean's question, you talked about Markets and regulatory approval. So the question I've got is, will the Essence 11 be unconstrained more quickly in the U.

Speaker 3

S? And Can you give us any sort of sense as to when you expect that will be the case?

Speaker 2

Yes. Thanks for the question, David. Yes. Clearly, Essence 10 fully connected will be unconstrained first just because that platform has been in the market for a long 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.

Speaker 2

But yet to your point, the smaller, the quieter, the more comfortable and the most connected and most clever device Is the Essence 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 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 Vast majority of patients are being offered and almost all of them are saying, yes, I want to see my data every day and get a MYERS score.

Speaker 2

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 we're on a fast track to do it this calendar year. Rob, what did I miss there on David's question?

Speaker 6

The only other thing is, David, it's been really important

Speaker 7

for us to be

Speaker 6

able to supply those 2 platforms. It's been a great thing for us to have sort of a double basically, we've So much extra capability and capacity because we've got 2 platform lines designed for the market.

Operator

Thank you. Next question is coming from Dan Huynh from MST Macquarie. I'm sorry, Marquis. Your line is now live.

Speaker 7

Hi, Good morning, everyone. Thanks for taking the question. Look, it's pretty clear that a lot of the growth is now coming from products that have been reengineered and didn't really Even existing, they're current forms a little while ago. So and we've said the SNC Connected, you're talking about, launch of parts and alternate But we've also seen some early regulatory approvals for an AirSense 11 with apparently different communication chips. Just is there any reason why that product couldn't launch within the next few months as we've seen roughly the same timeline between approval and launch for something like the SS10 clinic?

Speaker 2

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 Essence 10 card to cloud was a reengineered repivoted device, And the Essence 10 fully connected, we did rejig the comms chip to get one that was less supply chain constraints. So those 2 are reengineered back in the line.

Speaker 2

We didn't reengineer the Essence 11 that's selling right now, but of course there will be variance. This is a long term platform. This platform, the Essence 11 Is going to do CPAP, APAP, bilevel, all sorts of amazing therapy models. If you even look at the work that we're doing on the LUMUS HFT device that we talked about earlier in the Q and A and during my prep remarks that's on a platform of the Essence 10. And Obviously, Essence 11 will become the platform of note for us over the coming years.

Speaker 2

But we don't go into details of our future product pipeline. So thanks for the question. But look, I can tell you those 3 products in the market are number 1, 2 and 3. And as you saw this quarter, they're selling well and we expect them to continue to.

Operator

Thank you. Next question is from Leanne Harrison from Bank of America. Your line is now live.

Speaker 11

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

Speaker 2

Yes, Leanne. Yes, you're getting to some of the complexities behind that. Look, our goal is to get off the supply constraint During this calendar year, we know we can get there. We won't get there if we turn on every single knob that we have for demand generation and repack generation around the world. And so we will be turning those dials if you like for demand generation and repap generation through our customers and directly As we get supply improving country by country.

Speaker 2

And so, yes, I think we can get to all customer demand if we do no change Faster, but our goal is to take care of not just the patients who are currently in the pipeline, but also the 80%, 90% in many countries who are undiagnosed and untreated. And So our mission is to do that and it's aligned with altruism, but also our profit motive and the overlap of those is a really powerful tool for us to have Sustainable long term growth as we have in the last 33.5 years. And so clearly, if we turned every dial to MAX, we wouldn't be able to get off A constraint this year, we won't turn Ultimax, but we will and we are starting to turn those dials and getting the programs up and running In different cities, different states, different geographies around the world as we start to get off constraints. So I won't go into further detail than I'd say that Lianne, yes, you're digging in. It is more complex than just we get there.

Speaker 2

It's we get there and then we start turning on the market growth right, as the market leader, which is our sort of our duty and our obligation, and we're going to do both. We're going to grow the market and grow our share and deliver for patients.

Operator

Thank you. Our final question today is coming from Steve Wein. It's a follow-up from Jordan. Please go ahead.

Speaker 7

Yes. Thanks for taking my question. This question is about the diagnosis rate in the U. S, in particular for OSA. There has been some frustration to the ability to diagnose patients.

Speaker 7

I just wonder what you're seeing from during the quarter from an improvement on that front with regards to diagnosis.

Speaker 2

Yes, Steve, thanks and thanks for coming for your second question at the end of the queue. It shows that the system works and you can get the second question in. It's a good one. Diagnostic rate in the U. S.

Speaker 2

Obviously, impacted at the start of COVID with all the labs being shut down and then we saw that big pivot and adoption of home sleep apnea testing and Some great models from ResMed and many other players in the market to help physicians find ways to remotely Screen, diagnose, treat and manage sleep apnea patients. As we've come out from pandemic to endemic in the U. S, we've definitely seen I'd say, our data show that at least 50% of patients are going through a Hunt sleep apnea testing. And then of the other 50%, Some of them do a Hunt Sleep Apnea test and then just a follow-up in a lab for titration and mask fit and so on. And so really good adoption of Hunt Sleep Apnea testing.

Speaker 2

Yes. It's sort of related to our demand generation area that demand generation isn't just going out there on social media And advertising and finding that customer acquisition costs in appropriate place well under lifetime value and getting them into the channel, it's also working with the channel to understand Where we have capacity, what cities, what geographies that we have. And as you know, Steve, following us closely, we purchased a company called Ectosense And their product called Nightowl and I have one sitting on my desk right here. This thing is the size of my fingertip and it has the ability to have highly sensitive and specific Screening and diagnosis of sleep apnea with reimbursement in a geography like the U. S.

Speaker 2

And we're actually experimenting in Asia, Latin America and around the world on this and the technology is originally European. So hopefully it gets adopted there too. I love Ectosense Yes. So I think you're going to see that diagnostics rate in the U. S.

Speaker 2

Pick up post pandemic because people learn that telemedicine, digital health, remote screening, remote diagnostics work and we can scale them. But But it won't just be here in the U. S. It might be pioneered and launched here and scaled here, but it's going to work in many other countries around the world. And I can tell you we're really excited about

Operator

We've reached the end of our question and answer session. I'd like to turn the floor back over to Mick for any further or closing comments.

Speaker 2

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.

Speaker 2

Thank you for all that you do. And I'll hand back to you, Amy.

Speaker 1

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 a follow-up, please don't hesitate This does conclude ResMed's Q2 2023 conference call. Kevin, I'll turn it back to you to close things out.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.

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Earnings Conference Call
ResMed Q2 2023
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