ResMed Inc.

Welcome to the Q3 Fiscal Year 2019 ResMed, Inc. Earnings Conference Call. My name is Julie, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Amy, you may begin.

Great. Thank you, Julie. Good afternoon and good morning, everyone. Thanks for joining us and welcome to ResMed's third quarter fiscal year 2019 earnings call. As Julie said, this call is being webcast live and the replay along with a copy of the earnings press release and our investor presentation will be available on the investor relations section of our corporate website. Joining me on the call today to discuss our quarterly results are Mick Farrell, our CEO, and Brett Sandercock, our CFO. Other members of management will be available during the Q&A portion of the call. During the call, we will discuss some non-GAAP measures. For reconciliation of the non-GAAP measures, please see the notes to the financial statements in today's earnings press release. As a reminder, our discussion today may include forward-looking statements, including but not limited to expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions, however, our actual results may differ. Please refer to our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements. With that, I'd like to now turn the call over to Mick.

Thanks, Amy, and thank you to all our shareholders for joining us today as we review results for the third quarter of fiscal year 2019. On today's call, I will discuss our long-term strategy. I'll review top-level financial results, some business highlights, and a few key milestones from the quarter. Then I'll hand the call over to Brett, who's with me here in Sydney, who will walk you through our financial results in more detail. Before I get into the details, I'd like to discuss ResMed's long-term strategy and our goal to improve 250 million lives in 2025. Driven by a number of macro trends such as an ageing population, the increasing impact of chronic disease, growing healthcare costs and a move towards digital transformation in healthcare, we see very exciting opportunities for ResMed. Our goal is to empower people to live healthier lives outside of the hospital. Today there are numerous pain points in existing care delivery models and in the quality of patient care that ResMed can address. We all know healthcare costs are growing faster than GDP in many countries and there aren't enough doctors to treat the people who need to be treated. When you couple that with the difficulty of getting the right care at the right time, delivering that healthcare in lower cost settings and even further changes and challenges with interoperability, documentation and clinical data availability, it's a global healthcare system that is in a crisis and solutions are needed. On the microeconomic side, with ResMed's global leadership in digital health for sleep apnea, for COPD and for outside of the hospital healthcare, we believe that these are problems that ResMed can solve faster and better than our competitors, providing superior value for our customers. With that backdrop, I'd like to quickly review our financial results. We achieved another quarter of strong revenue growth. We were up 12% in US dollar terms. and up 15% in constant currency terms. We benefited from a full quarter of revenue contribution from one of our latest acquisitions, MatrixCare. We also drove constant currency growth in domestic as well as international device sales. Additionally, we had very strong growth in masks and other accessories. I'll talk about some new mask launches a little later. We delivered operating leverage with non-GAAP operating profit growth of 15% year-over-year. Non-GAAP diluted earnings per share was a robust 89 cents. We are proud of the top-line and bottom-line performance from the Global ResMed team. We expect to continue that success as we maintain fiscal discipline and invest in long-term growth of the Global ResMed business. Now let's turn to a discussion of highlights across our sleep apnea and respiratory care businesses. In the devices product category, we delivered a good quarter with year-over-year constant currency growth of 6% globally, supported by 8% growth in the United States, Canada and Latin America in the category. We also achieved a return to constant currency growth for devices in Europe, Asia and the rest of the world. As we discussed last quarter, we continue to cycle through strong year-over-year comparisons in both France and Japan. which were as a result of the digital health related reimbursement changes in those countries that drove the acceleration of device fleet upgrades over the last number of quarters. Despite that headwind that we had in the quarter and we will have for ongoing quarters, our team delivered 3% constant currency growth in devices across Europe, Asia and the rest of the world. Underlying patient activity in all geographies remains very healthy. The masks and accessories side of our business was robust during Q3, growing globally at 13% in constant currency. In the US, Canada and Latin America geographies, masks grew at 13%. And in the Europe, Asia and rest of world geographies, we grew at 12% in constant currency terms in masks. We continue to see excellent traction with the AirFit F2020. in the full-face category and the AirFit N20 in the nasal category. Our recent mask launches of the F30, the N30i and the P30i are all doing very well. Let me provide a little bit of colour on each of these innovative products. During October we launched the AirFit F30. This is an exciting innovation in the minimal contact full-face mask category. In January, we announced broad availability of our first tube-up mask, the AirFit N30, which is in the nasal category. Both these new masks, the F30 and the N30i, contributed to our strong mask growth in Q3. After quarter end, just last month, we announced the launch of the AirFit P30i. This is a new tube-up pillows option that complements our highly successful over many years, P10 mask. I have personally worn ResMed's nasal pillow technology for my own sleep apnea care every night for many years. A few years ago, I thought nothing could beat the Swift FX for pillow technology. Then I upgraded a few years ago to the P10. I'm now looking forward to personally upgrading to the P30i, which has freedom of movement and the ability to enjoy better sleep. We believe that many other sleep apnea patients, not just the CEO, will have the same excitement after experiencing the P30i. All these recent mask launches are important additions as we expand our mask portfolio to offer even more options for physicians and home care providers and ultimately for the varying needs of the ultimate customer, a person who suffocates every night. We remain focused on driving innovation to meet underserved customer needs. We have an exciting product pipeline. We are the industry leader in digital health technology. We are now supporting well over 10 million patients with AirView, our cloud-based patient management system, and more than 9 million 100% cloud-connectable ResMed devices in the market. Over the past 12 months, we have improved the lives of nearly 15 million people by delivering sleep apnea and COPD devices and full mask systems. Our industry-changing AirSense 10 device platform and the AirSolutions cloud-based software ecosystem are still seeing strong adoption. Our device market share continues to grow as healthcare providers and patients choose and physicians prescribe ResMed solutions. Our digital health technology solutions have been proven to improve both business efficiencies and patient outcomes. We are clearly the market leader, but we will never stop innovating in this space. The success of our connected health devices is producing an incredible data engine. We now have over four billion nights of medical sleep apnea and COPD data in the cloud. This is twice as many nights as we had just a year ago. We are truly driving exponential digital health growth. Using advanced analytics, we are turning this clinical big data into clinical actionable insights. We are focused on developing solutions to get the right healthcare to the right patient at the right time and always more cost-effectively for all of our customers. Everything we do supports our ambition to help the more than 936 million people worldwide who suffocate every night with sleep apnea and the nearly 400 million people worldwide who suffer from chronic obstructive pulmonary disease. As we expand our digital health platforms, one of our goals has been to take the success we have had with MyAir and AirView in sleep apnea and replicate that within our respiratory care business vertical. Today, many patients with COPD and other respiratory conditions aren't getting the treatment that they need until it's too late. They're often frequent flyers at the hospital. We believe that technology combined with the medical equipment used to treat patients can add substantial value to improve both clinical outcomes and the patient experience. Digital end-to-end solutions, connectivity, making information available to that ultimate customer, the patient, on their own smartphones and supporting patients through the COPD disease progression can make a huge difference. Through digital health technology, we are driving engagement with patients so they can benefit from the best therapy before it's too late. We've made good progress with cloud-connectable air-curved devices for non-invasive ventilation and with astral devices that have cloud-connectable options for life support ventilation. Non-invasive ventilation and life support ventilation solutions treat stage 3 and stage 4 COPD patients, those who are in the end stages of this dreadful disease. To meaningfully drive improved patient and clinical outcomes, our strategy and approach have expanded to take a more holistic, longitudinal view of the COPD patient journey and to offer solutions for therapy and support through earlier stages of COPD so that we can be there for the CFPD patient from stage one all the way through to stage four of their disease. In early January, we moved Mobi, our premier portable oxygen concentrator, to a full product launch. Mobi best meets the needs of users who want to be mobile and enjoy healthy, active lives outside the home. Early results have met our expectations and we are about to commence sales of Mobi through our German team. In the US, we are working in partnership with our HMRE customers to grow this category for healthcare system reimbursed patients and to use portable oxygen in situations where a portable solution will benefit the patient most. We also continue to test, pilot and define other potential go-to-market models with the ultimate goal to ensure the patient has the most efficient path to a portable oxygen solution. We expect the POC category to grow given very strong patient demand. We also expect that Resmil will grow its share within the POC category. I want to be clear that it will take a long while for POC to be material next to our core sleep apnea and our core ventilation device businesses. So it's a long road ahead. During the quarter, we added another significant element to our vision for longitudinal solutions in respiratory care. when we closed on the previously announced acquisition of Propeller Health in January. Propeller's digital health solutions help people and their doctors better manage COPD and asthma. We are helping with this new addition to round out LeadMed's portfolio to treat COPD patients through all stages of their disease as I mentioned earlier. Propeller's sophisticated digital health platform leverages small sensors that are attached to the pharmaceutical inhalers, along with a sophisticated cloud-based mobile application that automatically tracks the medication use and provides personal feedback, coaching and insights to the individual, much like our sleep apnea patient engagement system, MyAir does, just not at the same scale yet. Propeller's clinically validated solutions have demonstrated incredible outcomes including a 58% improvement in pharmaceutical adherence, a 48% increase in symptom-free days and a 53% reduction in emergency room visits. These are truly impressive pilot results and we cannot wait to scale them. In the same way that we scaled our digital medical device ecosystem in sleep apnea and COPD to now 4 billion nights of medical data. Propeller is operating as a standalone entity with its dynamic and innovative management team still in place in Wisconsin and San Francisco. We are working with the Propeller CEO, David Van Sickle, and his team to continue their momentum towards commercial scale with their pharmaceutical customers as well as their health insurance customers. We had a board meeting last month, and I've got to tell you, I'm very encouraged by the progress we're seeing. Earlier this quarter, Propeller announced publicly a partnership with Orion, which is a pharmaceutical company in Finland, and we're going to connect the Propeller digital health platform to Orion's easy inhaler line for both asthma and COPD patients. Propeller Health is at the beginning of converting from pilots to scale and commercialisation. We will empower the team to grow and to scale and bring all our skills to the table. The opportunities are vast. There are more than 60 million diagnosed COPD and asthma patients in the United States and major markets in Europe alone. Many of these patients could benefit from Propeller solutions and Propeller is the clear leader in digital health for inhaled pharmaceuticals. The evolution we have made in our respiratory care business I think is game-changing. We are now in an even better position to become the global leader in digital health for COPD, from Stage 1 to Stage 2, as well as our existing players, Stage 3 and Stage 4 COPD. We will continue to help physicians, providers, payers and patients as they manage this important, progressive, chronic disease. Let's now turn to a quick discussion of our software as a service business, and then I'll hand over to Brett. The Software as a Service portfolio continues its trajectory of excellent growth, with revenue up 101% year-on-year on a reported basis, driven by continued expansion of Bright Tree and Healthcare First, along with the first full quarter of contribution from our acquisition of MatrixCare. On a pro forma basis, comparing results in Q3 to the results of those existing businesses before the acquisition Bright Tree is growing in the mid to high single digit range and Matrix Care is growing at the low double digit growth range. Overall we see significant growth opportunities for these SAS businesses serving the out of hospital healthcare space with a lot of runway ahead. The total addressable market is over $1.5 billion in out of hospital SAS in the United States alone. With our competitive advantages and our leading positions in multiple SAS verticals, we expect ResMed's SAS portfolio to move from high single digit pro forma growth to low double digit pro forma growth over the medium term and to be sustainable at that rate for the long term. We've started the process of integrating some of our SAS portfolio assets. We recently transferred leadership of our home health and hospice offerings from Bright Tree and Healthcare First to under the Matrix Care Management Team. That will combine our strength in home health and hospice with private duty and beyond. This move will allow us to accelerate our product innovation and deliver a wider range of features for customers who have businesses across these verticals. It also supports our strategy of driving improved patient outcomes and business efficiencies for customers across all out-of-hospital healthcare settings. As our SAS portfolio grows, I'd like to reiterate the promise we made when we first acquired Riketree back in 2016. We are committed to protecting our customers' business sense of information. We have firewalls to do just that. My father founded ResMed 30 years ago. In 1989 the company was founded on the fundamentals of honesty, integrity and doing the right thing always. That is what we've always done and what we will always continue to do. We have a vision to transform and significantly improve out-of-hospital healthcare. We have a strategy to enable better patient care, improve clinical decision support and drive interoperability across these healthcare settings. The acquisitions we have made over the past year established ResMed as the strategic player who is best positioned to lead this transformation in out-of-hospital healthcare. We now offer software solutions across out-of-hospital healthcare settings from home medical equipment to home health and hospice to skilled nursing facilities to senior living to private duty and beyond. We are connecting capabilities across these platforms for these care settings to help our customers be the most efficient they can be. to ultimately better serve people, to keep them out of the hospital and in a lower cost, higher quality setting of their choice as they age. And the best place is often their own home. Together with our customers and partners, we are revolutionising how healthcare is delivered. We're building an ecosystem of integrated digital solutions and services. The ultimate goal is to help individuals, ageing individuals, move seamlessly between these healthcare settings. so that they and their loved ones can receive optimal care and optimal quality of life with frictionless moves wherever they live. In parallel, helping individuals will drive superior outcomes for physicians, payers and providers. We've built a portfolio now to our SAS team to execute and ultimately deliver on the promise of this strategy. At the highest level, the mission of ResMed in our 2025 strategy is to impact and improve 250 million lives in out-of-hospital healthcare. Our purpose is to empower people to live healthier, happier and higher quality lives in the comfort of their own home. Our advantage comes from our focus on tech-driven integrated care, from sleep apnea and COPD awareness, to diagnosis, to treatment, to management and then to ongoing therapy and healthcare management of chronic disease. with digital health solutions. Let me close with this before I hand over to Brett. We have delivered a strong quarter. We are well positioned for continued success throughout the last quarter of FY19 that we're just in and beyond. The continued traction of our diversified mask and device portfolio along with our expanded pipeline of new products and enhanced digital health solutions for sleep apnea, COPD and out of hospital medical software gives us confidence in our ongoing momentum as we look to the future. We have positioned ResNet for the long term as an innovative global leader in digital health but we're just getting started. With that I'll turn the call over to Brett for his remarks and then we'll open the lines up for Q&A. So over the table here in Sydney to you Brett.