ResMed Inc.

Welcome to the Q4 fiscal year 2019 ResMed earnings conference call. My name is Rob 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 Rob. Good afternoon and good morning everyone. Thanks for joining us and welcome to ResMed's fourth quarter fiscal year 2019 earnings call. This call is being webcast live and the replay along with a copy of the earnings press release and our updated investor presentation will be available on the investor relations section of our corporate website. Joining me on the call today to discuss our quarterly results are CEO Mick Sarrell and CFO Brett Sandercock. Other members of management will be available during the Q&A portion of the call. During our call we will discuss several non-GAAP measures. For reconciliation of the non-GAAP measures please review the notes to 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. You are encouraged to review our SEC filings for 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 of our shareholders for joining us today as we review results for the fourth quarter of fiscal year 2019 for ResMed. On today's call I will discuss our long-term strategy, I'll review top-level financial results, some business highlights from the quarter and a few key milestones. Then I'll hand the call over to Brett who will walk you through our financial results in further detail. Reflecting back on fiscal year 2019 we have a lot to be proud of here at ResMed. The business is performing well. We passed 2.6 billion dollars in revenue and grew at double digits in the top line and the bottom line. We are exiting the year with momentum and I feel strongly that we are well positioned heading into fiscal year 2020 and beyond. ResMed is the world's leading technology driven healthcare company. We have more than 10 million 100 percent cloud connectable medical devices in the market around the world and our airview cloud ecosystem monitors more than 11 million patient accounts while our -of-hospital software systems are helping to manage 90 million more. So that is over 100 million lives that we improved with ResMed products, services and solutions in the last 12 months. We have over 4.5 billion nights of medical sleep and respiratory care data which continues to grow exponentially and we are turning these data into actionable insights that will inform future innovation in products and software solutions to further benefit our customers. Our relentless focus on innovation continues to set us apart from our competition demonstrated by the success of our latest software releases and our latest sleep apnea mask systems that we've just launched. We have ambitions and strong ambitions to grow. We're going to grow our business at volume at double digits and we're going to improve 250 million lives in 2025. We'll do that by helping people live happier, healthier and higher quality lives outside the hospital. We remain laser focused on growth in our core business of sleep apnea as well as in our adjacent businesses of COPD, asthma and other chronic conditions. We've expanded our focus to include -of-hospital software solutions that help customers create efficiencies, take costs out of the system and improve the quality of care across home medical equipment providers, home health and hospice services as well as skilled nursing facilities and beyond. In short we believe the future of healthcare is outside the hospital. That's where ResMed competes and that's where we win. Let's briefly now review our top-level financial results. I mentioned earlier that we ended the fiscal year on a wrong note and it is thanks to our 7,500 person global team and their hard work to drive these great results. We achieved another quarter of double digit revenue growth, up 15% in constant currency. We produced constant currency growth in both domestic and international sales as well as in our software as a service business which is growing organically as well as through contributions from our recent acquisitions. We continue to deliver operating leverage through the business with non-GAAP operating profit growth of 18% year over year and non-GAAP diluted earnings per share of 95 cents. Let me now turn to a discussion of highlights across our sleep apnea and respiratory care businesses. In the devices category across these two businesses we delivered a good quarter with -over-year constant currency growth of 8% globally supported by 11% growth in the United States, Canada and Latin America geography. We had 1% constant currency growth of devices in combined Europe, Asia and the rest of world. We continue to cycle through strong -over-year comparisons in France and Japan as a result of digital health related fleet upgrades that we've previously discussed and we will continue to do so for a number of years. Underlying patient growth remains healthy around the globe. ResMed is well positioned to continue to benefit from strong fundamental market dynamics including an aging population as well as increased awareness and attention from governments, payers, providers and physicians to better manage chronic disease. The masks and accessories growth of our business was very strong during Q4. We were up 15% in constant currency globally. In the US, Canada and Latin America geographies masks and accessories grew at 16% and in Europe, Asia and the rest of world geographies we grew at 12% in constant currency terms in masks and accessories. We are taking share around the world with our latest patient interface innovations. We make the smallest, quietest and most comfortable masks in the market. Results this quarter show the benefits of this innovation as customers vote for ResMed with their wallets. Our flagship masks, the AirFit F20 in the full face category and the AirFit N20 in the nasal category continue their success across global markets. Our three most recent mask launches, the F30, the N30i and the P30i have taken off at an incredible pace. These market share gains are complemented by higher rates of adherence driven by our digital solutions and increasing adoption of mask resupply programs through the market. We have expanded our mask portfolio to offer even more options for physicians and home care providers and for the specific needs of the ultimate customer, the person who suffocates every night with sleep apnea. We remain focused on driving innovation to meet underserved customer needs and while these new masks have a lot of runway ahead, we also have an exciting product pipeline for the future. We are the industry leader in digital health technology. We now support well over 11 million patients with AirVue, our cloud-based platform for managing sleep apnea and COPD patients and more than 10 million 100% cloud connectable ResMed devices have been sold into the market. Over the past 12 months we have improved the lives of 15 million people by delivering sleep apnea and COPD treatment 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 patients and health care providers choose ResMed and physicians prescribe ResMed. Our digital health technology solutions have been proven to improve both business and patient outcomes. We're the market leader and we will never stop innovating in this field. We believe that digital health technology combined with the medical equipment used to treat patients can add substantial value and improve both clinical outcomes and the patient experience. Digital -to-end solutions, connectivity, making information available to patients on their own smartphones through apps like MyAir and Propeller as well as supporting patients through their chronic disease progression can altogether make a significant difference in both health outcomes and quality of life of patients. Through digital health technology we are driving engagement with patients so they can enjoy the benefits of the best therapy available and so that costs of chronic disease can be better managed by their physicians and other health care providers. The success of our connected health devices is producing an incredible data engine. We now have over 4.5 billion nights of medical sleep apnea and COPD data in the cloud. Using advanced analytics we are turning these clinical data into actionable insights. We are lowering labor costs for our home care provider customers and we are taking waste out of the system through our focus on developing solutions to get the right health care product or service for the right patient at the right time. At the American Thoracic Society and at the Sleep Medicine Conference during the quarter we presented over 40 clinical studies from our digital health databases. We are advancing the field of sleep medicine with doctors Nunez, Benjofield and Armistead and their physician colleagues from around the world. Just over one year ago we announced a joint venture with the Alphabet subsidiary Verily to study the health and financial impacts of untreated sleep apnea. Based on research outcomes from this JV we will develop software solutions to help identify, engage and better manage people with sleep apnea. The JV has been set up and is running since November of last year and the combined ResMed Verily team is making good progress to analyze data, to code software and to launch pilot studies into the market. This investment which can be seen as a sophisticated tech driven research and development project is a great long-term bet. Over time we know this work will drive incremental growth in our course sleep apnea business while allowing ResMed to participate in a broader ecosystem covering sleep apnea, cardiovascular disease, diabetes and other major chronic diseases. 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 or COPD. In January we closed on the acquisition of Propeller Health. This is a significant addition to our vision of longitudinal solutions in respiratory care. Propeller's digital health solution helps people and their doctors better manage COPD and asthma health care. Propeller rounds out ResMed's portfolio to now treat COPD patients through all stages of their disease. As a reminder Propeller's advanced digital health platform leverages small sensors that are attached to the inhalers for these medicines. These sensors then pair with an easy to use cloud-based mobile app that automatically tracks COPD medication use and provides personalized feedback and insights to the individual. Much like my air and our other sleep apnea patient engagement systems, just not at the same scale yet. The propeller team is making really good progress as they work with partners to reach commercial scale. We're very encouraged about where we are at with the team. There are a few things that I can point to that give you an idea of how propeller solutions are being recognized and adopted by their partners. In May the Cleveland Clinic published research showcasing that the use of Propeller's digital medicine platform for COPD patients reduced the Cleveland Clinic's COPD related health care utilization and hospitalizations across their clinic. In the year before the study patients averaged 3.4 visits per patient per year following the use of Propeller's technology, the rate decreased to 2.2 visits per patient per year with the majority of patients indicating that the sensor was convenient and very easy to use. That 35% reduction in clinic visits is an incredible cost savings and productivity opportunity for hospital systems and payers. Earlier this week Walgreens announced that Propeller has been added to the pharmacy's health platform called Find Care, expanding the ability to get Propeller into the hands of people struggling to manage their chronic disease through Walgreens. Propeller's clinically validated solutions have demonstrated amazing outcomes including pilot studies showing a 58% improvement in medication adherence, a 48% increase in symptom-free days, as well as a 53% reduction in emergency room visits. These are impressive results and we can't wait to scale. The evolution that we have made in our respiratory care business has set ResMed up to become the global leader in digital health for COPD from stage 1 and 2 COPD with Propeller to stage 3 and stage 4 COPD with portable oxygen and non-invasive solutions. We will continue to help physicians, providers, payers and patients as they manage COPD, this important progressive and chronic disease keeping people out of the hospital happy and healthy in their homes. Let's now turn to a discussion of our software as a service business for the -of-hospital healthcare settings that we operate in. Our SAS portfolio continues its growth trajectory with revenue up 111% year on year on a reported basis this quarter. On an organic pro forma basis comparing results in Q4 to the results of these businesses before recent acquisitions, Brightree grew in the high single digit range and Matrixcare grew low double digits. We are pleased with the momentum and progress the teams have made as we integrate and optimize across the portfolio for growth. Our competitive advantages and leading SAS positions in home medical equipment, skilled nursing facilities, home health, hospice and other -of-hospital care markets support ongoing portfolio growth. On a pro forma basis we are growing this portfolio at high single digits across the blended SAS portfolio and we have a solid digit growth in our SAS portfolio as we further integrate these businesses. I'd like to call out a few highlights from the quarter. Our Brightree home health and hospice electronic medical record solution was awarded the 2019 MedTech Breakthrough Award for best overall healthcare administration software. Additionally our latest KLAS or class scores for home health and hospice have gone up again. KLAS looks at many aspects of customer satisfaction which provides a holistic measure of performance so the trend and these latest data further validate our leading position and high quality offering in the marketplace. As you may recall Matrixcare has received the best in class for long-term care software three years in a row. We have now organized all of our home health and hospice solutions from both Healthcare First and Brightree under Matrixcare management. This will allow customers who operate across care settings to enjoy the scalability and seamless transfer they want but it also helps patients and aging seniors to navigate more easily across these healthcare settings. Additionally we launched Matrixcare 1 which is a single platform for care management across -of-hospital healthcare settings. Having this single platform enables centralized management of care settings, consistency between functions, user management and navigation and a single view of the individual resulting in streamlined care transitions for our customers. Also during the quarter Brightree launched a new pharmacy suite for home infusion therapy providers and HME pharmacies. We've also expanded our Brightree resupply solution into three new categories in continence, diabetics and entero to enable HMEs to create efficiencies and optimize patient support. In summary for the fast business we have a vision to transform and significantly improve -of-hospital healthcare. ResMed is the strategic player best position to lead this transformation. We are connecting capabilities across Brightree and Matrixcare platforms and care settings to help our customers be more efficient so they can better serve an aging population helping them stay out of hospital and in a lower cost higher quality care setting of their choice. And the best place is almost always their own home. Before I turn the call over to Brett let me close with this. We had a 15% in constant currency and we translated that into 18% operating profit growth. We are well positioned to continue to drive top and bottom line growth in fiscal year 2020 and beyond. We published the prevalence data study showing the 936 million people worldwide with sleep apnea in the top tier clinical journal Lancet. Our connected health strategy continues to support growth across global markets and the continued traction of our diversified mask and device portfolio along with an expanding pipeline of new products and enhanced digital health solutions for sleep apnea, COPD and -of-hospital medical software markets. We have confidence in our ongoing momentum. Finally with position ResMed for the long term as an innovative global leader in digital health our triple aim is to slow chronic disease progression to reduce overall healthcare system costs and to improve outcomes and quality of life for the ultimate customer the patient. With that I'll turn the call over to Brett for his remarks and then we'll open the lines up for Q&A. Brett over to you in Sydney.

Great thanks Nick. My remarks today will provide an overview of our results for the fourth quarter of fiscal year 2019. As Nick noted we had a strong quarter. Group revenues for the June quarter were 705 million, an increase of 13% over the prior year quarter, when constant currency terms revenue increased by 15%. Excluding revenue from acquisitions group revenue increased by 8% on a constant currency basis. Taking a closer look at our geographic distribution and excluding revenue from our software as a service business, our sales in US, Canada and Latin American countries were 386 million, an increase of 11% over the prior year quarter. Sales in Europe, Asia and other markets totaled 234 million, decrease of 1% over the prior year quarter. However in constant currency terms sales in combined Europe, Asia and other markets increased by 4% over the prior year quarter. Breaking out revenue between product segments, US, Canada and America device sales were 203 million, an increase of 7% over the prior year quarter. Masks and other sales were 183 million, an increase of 16% over the prior year quarter. For revenue in Europe, Asia and other markets device sales were 156 million, a decrease of 4% over the prior year quarter but in constant currency terms a 1% increase. Masks and other sales in Europe, Asia and other markets were 79 million, an increase of 6% over the prior year quarter or in constant currency terms a 12% increase. Globally in constant currency terms device sales increased by 4% while masks and other sales increased by 15% over the prior year quarter. Software as a service revenue for the fourth quarter was 85 million, an increase of 111% over the prior year quarter. During the rest of my commentary today I will be referring to non-GAAP numbers. The non-GAAP measures adjust the impact of amortization of acquired intangibles, a purchase account in fair value adjustment to matrix care deferred revenue, restructuring expenses, litigation and settlement expenses, tax related expenses associated with US tax reform and an impairment on a minority interest investment. The prior year comparable excludes amortization of acquired intangibles, restructuring expenses and expenses associated with US tax reform. And you'll be pleased to know we provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press relief. Our gross margin for the June quarter was .3% compared to .1% during the same quarter in the prior year and .2% in Q3 FY19. Compared to the prior year our gross margin increased by 120 basis points, predominantly attributable to manufacturing and procurement efficiencies and the matrix care acquisition, partially offset by typical declines in average selling prices. Assuming current exchange rates and likely trends in product and geographic mix we expect gross margin for fiscal year 2020 to be broadly consistent with our Q4 FY19 gross margin. Moving on to operating expenses, our SG&A expenses for the fourth quarter were 171.6 million, an increase of 9% over the prior year quarter. In constant currency terms SG&A expenses increased by 14%. Excluding acquisitions SG&A expenses increased by 3% on a constant currency basis. SG&A expenses as a percentage of revenue improved to .3% compared to the .1% that we reported in the prior year quarter. Looking forward subject currency movements and taking into account our recent acquisitions we expect SG&A as a percentage of revenue to be in the range of 23 to 25% during fiscal year 2020. Consistent with trends in prior years Q1 FY20 will be at the higher end of the range while the second half of the year will trend toward the lower end of the range. R&D expenses for the quarter were 51.1 million, an increase of 29% over the prior year quarter. For a constant currency basis an increase of 32%. Excluding acquisitions R&D expenses increased by 6% reflecting incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue was .3% compared to .4% in the prior year. Looking forward subject currency movements and taking into account our recent acquisitions we expect R&D expenses as a percentage of revenue to be in the range of 7 to 8% for fiscal year 2020. Amortization of required insangibles was 23.4 million for the quarter, an increase of 102% over the prior year quarter reflecting the impact from our recent positions. Stock-based compensation expense for the quarter was 14.2 million. Non-GAAP operating profits for the quarter was 196.2 million, an increase of 18% over the prior year quarter. While non-GAAP net income for the quarter was 137.6 million, an increase of 1% over the prior year quarter. Non-GAAP diluted earnings per share for the quarter were 95 cents consistent with the prior year quarter while GAAP diluted earnings per share for the quarter was 48 cents. On a GAAP basis our effective tax rate for the June quarter was .2% while on a non-GAAP basis our effective tax rate for the quarter was 21.8%. Looking forward we estimate our effective tax rate for fiscal year 2020 will be in the range of 21 to 23 percent.

During the

quarter we recognize the restructuring expenses of 9.4 million, predominantly associated with a workforce planning review, now a respiratory care business, closure of an R&D facility in Germany and costs associated with ongoing integration program in the SAS portfolio. Additionally, during the quarter we recognize a write-down of 5 million associated with a minority equity investment. Finally, in relation to the legal settlement we have tentatively agreed with the government to civilly resolve the US Department of Justice's investigation for a payment of 39.5 million. We expect it would also incur legal and administrative costs that typically accompany such a resolution. As a result we have recognized a reserve of 41.2 million in our fourth quarter results in connection with this tentative agreement. While we believe a voluntary resolution is likely there can be no assurance as to whether or when the parties will finalize a negotiated settlement. Cash flow from operations for the fourth quarter was 141.8 million reflecting strong underlying earnings. Capital expenditure for the quarter was 22.2 million. The appreciation and privatization for the June quarter totaled 42.8 million. During the quarter we paid dividends of 53.1 million. Our joint venture with Verily continued operations during the quarter and we recorded equity losses of 6.5 million in our income statement in the June quarter associated with the joint venture. We expect to record approximately 7 million of equity losses each quarter in fiscal year 2020 associated with the joint venture operations. Our Board of Correctors today declared a quarterly dividend of 39 cents per share representing an increase of 5% on our previously declared dividends. At June 30th we had 1.3 billion in gross debt and 1.1 billion in net debt. Our balance sheet remained strong with modest debt levels. On July 10 we closed on a US private placement offering of 500 million in debt consisting of 250 million in seven year senior unsecured notes at a .24% coupon and 250 million in 10 year senior unsecured notes at a .45% coupon. Net proceeds from the offering were 498 million which we used to reduce our current borrowings under the unsecured devolving credit facility. The transaction significantly lengthens our debt maturity profile and provides improved visibility on our long-term debt funding costs. Finally to recap our top line revenue was strong this quarter with growth across all major categories. Growth nitrogen was solid and our operating costs remained well controlled even as we absorbed the impact of acquisitions. As a result we're continuing to drive operating leverage with Q4 non-GAAP operating profit up 18% year on year. We are focused on driving operating results, integrating our SAS acquisitions and ensuring we continue to invest in our strategic long-term opportunities. And with that I'll hand the call back to Amy.

Great thank you Brett. We will now go ahead and turn to the Q&A portion of the call. Before we start I would like to remind everyone to please limit yourself to one question. If you do have additional questions or a follow-up please feel free to return to the call queue. Operator Rob we are now ready for the Q&A portion of the call.

Thank you. We will now begin the question and answer session. If you have a question please press star then 1 on your touchtone phone. If you wish to be removed from the queue please press the pound sign or the hash key. If you are using a speakerphone you may need to pick up the handset first before pressing the numbers. We ask that you as a reminder to please limit yourself to one question. If you have another question you are welcome to hop back into the queue. Once again if you have a question please press star then 1 on your touchtone phone. And your first question comes from Leanne Harrison of Bank of America Merrill Lynch. Please go ahead. Again Leanne Harrison. Please go ahead your line is open.

Hi Mick and hi Brett thank you so much for taking my question. It's in relation to the SaaS business. Can you shed some light on how the growth was achieved whether it's new users, new modules, an increase in revenue per user and also how we how you might or when you might expect Brightree to get to double digit growth?

Yeah Leanne thanks for the question and as we said during the quarter or during the prep marks you know during the quarter we had strong growth across the SaaS portfolio. High single digit growth from Brightree and double digit low double digit growth from from Matrixcare with a blend of the two in the very high single digits. You know your question of where the revenue comes from it's a combination of the above. We've had new users that come into the system both Brightree and and Matrixcare. There is churn out but we have net new users that come in. We have also launched some recent new modules including apps directly for patients in Brightree and then we also have price increases that apply to some elements of that portfolio. So it's sort of a combination of all three that have driven that strong growth and as we said we think as we continue to integrate across the different -of-hospital healthcare settings we have the opportunity to increase the value we give to customers and therefore increase the revenue to sustainable double digit growth across that portfolio. So we're not giving a specific timeline exactly where that's going but now that it's called out on our 10Qs and 10K we'll be going through you know very detailed data on a 90-day basis as to where that growth is coming from. But I can tell you having just had a Steering Committee review with both the Brightree management team and with the Matrixcare management team just this week that we have a really good portfolio of new solutions and services and new lines of business including getting into infusion businesses from Brightree into enteral care and diabetics and beyond. So there's a very good portfolio ahead.

Thank you.

Thanks Leon. Your next question comes from John Deacon Bell of City. Please go ahead.

Good

morning Nick.

Could you give us a bit more of a sense from your perspective about the mass growth in the US? So if we had you and you made your competitor over the last 12 months it generally looks like it's accelerated versus you know kind of the average over the last five years and if ASPs have declined a bit the volumes you know the volumes look like they're up maybe 15%. Can you just give us a little more perspective from what you're seeing in terms of is that the driven by the resupply? What are the key components of that elevated mass growth?

Yeah thanks for the question John. That allowed us to talk about what we've been doing to help our customers on masks and adherence and so on. As you noted our US, Canada, Latin America growth in the quarter was very strong. It was 16% constant currency in that geography but it was also 12% in constant currency in Europe, Asia and rest of world and so a sort of global number of 15% constant currency growth across the business. It was driven primarily by market share gains that those high you know strong double-digit growth there. You know we say the market is growing in mid to high single digits so at 15% growth we're clearly taking share so that's one point. Secondly what we're driving is increased adherence. You know as I talked at length on the prep remarks on digital health technology we're driving up to 87% adherence rate on patients who are set up on a resmed device using my air and all the air solutions capabilities and so 9 out of 10 people are staying on therapy and so that just drives a stronger tail of the number of patients who will adhere to therapy and therefore will need masks as they get dirty and decay over time. So that's a big part of it. So it's a share gain, it's the adherence that we're driving and it's also you know getting new patients into the funnel and we're doing a better job of identifying engaging and enrolling patients around the world not just by publishing the prevalence data that we just did but using the big data to partner with health care providers and governments and payers to show that there's a return on investment in diagnosing and treating sleep apnea patients not only improving the quality of life and the individual and their life's changed and lower incidence of chronic disease but also directly the lower health care costs for government insurance and private insurance as well. So it's sort of a combination of all three, more people into the pipeline, the pipeline expanding through adherence and also resmed gaining its share of that pipeline through the mask innovation.

Great Tyler, thank you.

Thanks Joel. Your next question comes from Saul Hattison of UBS. Please go ahead.

Thanks, good morning Mick, good morning Brett. Mick maybe can I just ask, resupply can be a very strong driver of growth in the US for masks and accessories. We've seen the pilot bundling program effectively come and go. Do you see any risks at all from a payers perspective or in those perspectives the sustainability or funding of that product growth?

So the key element in this is really health economics and outcomes research right and the acronym is HEOR. And one thing we're doing with the 4.5 billion nights of medical data we now have on sleep apnea and CFPD patients is partnering up with You saw our data with the Kaiser Permanente Group in California which is where we publish the 87% adherence data. Obviously we don't share all the partnerships that don't get published and what we're doing. We have talked about the latest work with Walgreens and there with Cleveland Clinic on some of our digital health applications. The bottom line is if you keep a patient on therapy for sleep apnea and you're investing a couple hundred dollars per year per patient on masks you are saving far more than that in reducing emergency room visits, additional costs for cardiovascular care, diabetes and all the sequelae that come from untreated obstructive sleep apnea. So we've had decades now of clinical data showing this. We now have true economic data that we can show a customer where that customer is a payer provider system like Inamountain Health or Geisinger or the government of Finland and look at data in their system with their people. So your question was do I see resupply as a risk? No. I see resupply as an opportunity to show the return on investment for the people who are paying that that actually this is a cost saving, a net-net cost saving for them over the life of that patient with their own data, retrospective and prospective.

Thank you.

Thanks, Saul. Your next question comes from Steve Ween of Evans and Partners. Please go ahead.

Yeah, good morning. I just wonder if you could go back to that settlement figure and just remind me what the issue was. I think this is related to that OIG issue and does that change, is that just an estimate at this point or is it being finalised? And secondly, does it change the way you've got to run that resupply business going forward?

Steve, I'll hand that question to Dave Vandoz.

Steve, the conduct that was the subject of investigation has been laid out in our 10 cues over time. So if you just go back and reference that, it'll give you the details. But basically there were sort of four different categories. How we made our resupply programs available on a trial basis was one element. There were issues about marketing programs, issues about financing and issues about making some apnea links available. So all four of those would get wrapped into this resolution. It is a tentative resolution. And so we're comfortable in taking a reserve now because we think it's probable that that resolution will get finalised. But that's likely only to occur, our best estimate now would be by the end of the calendar year that that will take place. And we're pretty confident of the numbers. The 39.5 number that Brett referenced is a confident estimate of the ultimate exposure for payments to the government. The remainder of it, the fees and expenses are a little more of an estimate. But there's a pretty high confidence level that that reserve ought to be sufficient to cover all these expenses associated with it. Importantly, we're not going to be required in this resolution to admit any wrongdoing. In fact, we believe that we handle ourselves appropriately. But like in a lot of situations, you resolve matters on a contentual basis to get it behind you. And we feel it is the best resolution for our customers, our patients and for the company and our shareholders. But going forward, we don't expect any significant changes to the way that we do business. We're going to continue to remain focused on, as Nick was saying, making resupply systems available for customers so they can get, patients can get adequate supplies and consumables in the future. We'll still do that. And in the other areas, providing support to our customers and support for our patients, we don't expect any significant changes in the way we do business.

Fantastic. Thank you.

Thanks, Steve. Your next question comes from Margaret Caxor of William Blair. Please go ahead.

Good afternoon, folks. And thanks for taking the question. Nick, on the front end, commentary, I think you had referenced your goal of double the volume growth over the next several years. So I wanted to maybe go into that a little bit more in terms of the drivers of that growth, you know, sleep versus COPD versus SASS. You know, if you plan a similar pace of product launches maybe that we've seen. And really, when does the law of large numbers, whether it's healthcare IT or resupply, start to impact you?

Yeah, thanks for the question, Margaret. As you noted, I did talk about that in the prep remarks, that the way we look at our business is it's exciting, the 2.6 billion in revenue. But just as exciting, probably more exciting for the people who work here is the 100 million lives we touched, 15 million through products, and now over 90 million through our services and solutions in the SASS part of the business. So our goal is to grow that combined portfolio, double digits in volume through 2025 and beat 250 million lives that we improve in the year 2025. So that's sort of our five-year growth plan. Yeah, we haven't split, I mean we have obviously internally, we haven't publicly split out exactly how the different elements of sleep, sleep apnea, respiratory care, primarily through COPD but also asthma now through propeller and then also through the -of-hospital software side and how each of those elements will grow. So what I can say is that sort of core market of sleep apnea is growing mid to high single digits as you saw this quarter and last quarter. We don't just accept market growth, we drive it by getting market share and getting new patients into the funnel to actually fundamentally improve that core sleep apnea market growth. In respiratory care, we're revolutionizing the whole space there with the acquisition of propeller. So it will only take one of the three to five non-public pharma pilot trials that we're doing to go to scale for that growth of that business to improve very significantly from its current run rate. And we're betting on that happening. We have a very exciting set of partnerships with Big Pharma there that we can only talk about at the appropriate time. And then the third part of our business, the combination of Bright Tree and Matrix Care businesses, as I said, we have a clear pathway to drive those from high single digit to double digit growth and to sustain that over time. I mean, people want to be taken care of outside the hospital and we have the best software systems to do that. So there'll be secular trends moving people from the hospital to hospice, home health, skilled nursing facilities, life plan communities and so on. And ResMed will be to improve on all of them. So we're going to go across each of those portfolios and there's lots of different factors over the next five years that will drive it. But we're very confident we'll get double digit volume growth across that portfolio.

Great, thanks.

Thanks, Margaret. Your next question comes from Gretel Janu of Credit Suisse. Please go ahead.

Thanks. Good morning. So just on SG&A, you continue to lower that SG&A to sales ratio. Just wondering, like, where do you see that going? How long can you continue to actually continue to lower it? And where exactly are the gains coming?

Yeah,

thanks Gretel. I'll

hand that to Rob Douglas, our COR. Yeah, thanks Gretel. You know, the really good thing in our volume growth business, we were talking earlier about the volume growth, is that sort of engineering leverage into the systems and processes is not that hard to do if you really focus and keep going. Obviously, you know, our sales processes and all of our sort of systems and the way we work do need continued investment and you can't promise that you'll be getting leverage forever. But while the volume growth is strong, you know, we'll continue to be efficient and drive that. Obviously, you did see, you know, in our organic business, we got very good leverage and as we've brought in the new businesses that maybe haven't had some of that sort of leverage thinking applied to them, that sort of added on quite a bit. But they've remained then huge opportunities to build leverage with some of the thinking around the process management and the continuous improvement programs that we've got. So we've still got plenty of headroom to keep driving that leverage.

Thanks. Thanks Gretel. Your next question comes from David Bailey of Macquarie. Your line is open.

Yeah, morning Mick. Just one from me. Just wondering if you could perhaps give us a sense as to the contribution of non-invasive ventilators to devices revenue for the group.

Yes, thanks David. We don't split it out to a granular level of detail. What I can say is in general, if you look at sort of the growth of respiratory care in ventilation versus say sleep apnea care and the device growth, it's a little lower in respiratory care as a sort of secular growth rate. And so again, we don't just accept that and say well that means our non-invasive ventilators will grow slower than our sleep apnea devices. But it is something that is generally there from the secular trend. We actually, you know, this last quarter and before that David, we had really strong growth in our ventilators. We made a software upgrade. And this wasn't cloud software. This was actually embedded software that is within the Astrol ventilator that was really well received by customers in Europe and in the US. And so we saw some pretty strong market share gains that drove good growth in devices in both Europe and in the US from our ventilator side of the business. But we don't split it out yet. I look forward to when Propeller is so successful driving the digital health side that we have to break out our respiratory care division the way that we do our SAS division. And at that point, I'll be able to give you a whole lot further color into the ventilation part of the business. But I can say it grew well this quarter. And we think that software upgrade has more legs on it and has some more growth ahead.

Thanks very much.

Thanks David. Very nice question. Comes from Anthony Patrone of Jeffreys. Please go ahead.

Thanks. Good afternoon. Good morning. So maybe just a question on, I'll just keep it to one, on France and Japan. You mentioned that the connected devices there, the upgrades seem to be completed. So is there an expectation, France, Japan, to sort of normalize after those upgrades are completed? And if so, what extent do you think the benefit can be as a tailwind as those two countries normalize on the device side? Thanks.

Yeah, thanks for the question, Anthony. That allows me to talk about that digital health upgrade in France and Japan, which was incredible to see the rate at which two countries moved into digital health. As you said, we will start to normalize as we pass all the comparables of that ahead of market growth that we've had in our

rearview

mirror. You know, look, what I'd say is that by the end, before the end of this fiscal year, we will normalize France and Japan. And really that will influence across that whole portfolio of Europe, Asia, and rest of the world that we report on. We'll start to see that whole group normalize to market growth. And then hopefully as we launch more of these digital health solutions into countries beyond France and Japan, that we'll be talking about the S curve of innovation of digital health in Finland and in Switzerland and in Germany. I don't have announcements on any other countries beyond those two, but I look forward to sort of walking through the intricacies of the other 120 countries we do business in as they embrace digital health the same way France and Japan did. But the short answer to your question is by the end of this fiscal year, before the end of this fiscal year, we would expect that out of US device growth to normalize. Thanks. Thanks,

Anthony. Our next question comes from Chris Cooper of Goldman Sachs. Please go ahead.

Hi. Thanks for taking my question. Just on the expansion of Brightree into other areas outside of OSA, can I just ask the rationale for the three areas you've chosen? And also, could you just confirm this is something you're going to continue to roll out across other areas of health care and if so, over what timeframe, please? Thank you.

Yeah, thanks for the question, Chris. Brightree has an incredible cloud-based enterprise resource planning and systems planning capability for home medical equipment companies. And they've actually always been able to, from our acquisition of them over three years ago to today, service beyond just sleep apnea and COPD. We've been servicing patients with incontinence, diabetics, and enteral at different levels. So, what we really decided to do was to bring our resupply capabilities that we'd first applied to the resident side of the business, which was in masks, over to those other areas of business. And so, it's not really expanding Brightree's footprint in terms of which customers it goes after. It's more expanding the services that we offer. Now, with the growth of the infusion business, that does bring some players in HME who have that infusion part of their business, it brings that into play for Brightree. But I consider it more of an adjacency. If you think about it, the core growth for Brightree is in home medical equipment providers and everything they do can be digitized and can be put on the cloud and that's Brightree's goal. And it was before we acquired them and it has been after we acquired them. And I'm just happy to see that we didn't just focus on sleep apnea and COPD growth for HME providers. We're actually thinking holistically about their business and these new launches will allow Brightree to grow. It's a very profitable part of the business. But also to serve those customers better and to bring more efficiencies to them, which will help for the health of that distribution of home medical equipment in the US and really help our partners grow. And it's good profitable revenue for ResMed as well. So I think there's a very strong good adjacency and a good part of our ongoing growth.

And this is a strategy you're going to continue to look to push going forward?

Yeah, absolutely Chris. We'll look to continue to find opportunities for home medical equipment providers to get efficiencies. So if there's parts of their business that are analog, that are fact-based, I mean you wouldn't believe some of the opportunities for innovation are actually quite relatively simple. And we have solutions, for instance our eFact solution to just digitize that whole space and help doctors and home care providers more

easily

integrate with each other. Stuff that just is on the pipeline that we really have to get the solutions out there and get customers adopting those new modules. But as I said earlier, I think we've seen some good adoption of modules and we have a good path to continue that.

Thanks Chris.

Your next question comes from Joanne Wench of BMO. Please go ahead.

Yes, hi. This is Matt Henerton in for Joanne. My question is with regards to the partnership or the agreement with Walgreens. Could you provide a little more detail into how many patients now you're opened up to using Propeller and then how important are these pharmacy partnerships going forward for the overall Propeller strategy?

So thanks for the question Matt. As I said in the prep remarks, the partnership with Propeller and Walgreens is a pilot trial. Like all of the Propeller trials are in that pilot trial stage. It's exciting because it's a new place at the pharmacy for Propeller to acquire new customers into the digital health platform that we have for COPD and for asthma. So it's not public how many pharmacies and how many patients are on that platform. But generally with Propeller's data, when we get to the end of a pilot, we're able to publish those data to get them into the peer reviewed press. And at that point, I'll be able to talk very liberally about those data, but I don't want to jeopardize the production or publication of those data. But what I can say is if you look at the data that we had with other partnerships with the Cleveland Clinic data that we did talk specifically to, a 35% reduction in the number of clinic visits or a double digit reduction in the visits to emergency room visits. These are, depending on the size of the business, if you're a large hospital system or a large payer, these are tens of millions or hundreds of millions of dollars that can be saved across a scalable business. And so it's early days with pilot data. I don't want to talk too much about the numbers until we really do start to scale it. But I think it's important to note where we want to go with digital health and COPD. And the Walgreens experiment I thought was worth sharing because it's a new sort of place to find these patients that goes beyond sort of the traditional doctor. We're now talking a pharmacy clinic. Thanks. Thanks for your question, Matt.

Your next question comes from Andrew Goodsell of MST Marquis. Please go ahead.

Thanks very much for taking my question. Just on competitive bidding, obviously the bids are now open for 21. Just trying to understand if you're starting to think about that and how you might posture yourself or what sort of thought process you might have going into that.

Yeah, thanks for your question, Andrew. We have a very sophisticated market access team looking and government affairs looking at this. Dave, do you want to give a summary of where we're at with CB?

Sure. So even though the bid window is open, it's going to be open for 90 days. And so the main thing that our team is doing now is continuing to work along with others in the industry to educate the industry to make sure they understand new rules of bidding and how to understand it, how to think about it, how to model the impact of lead item pricing. On your overall portfolio of products and to make sure that our customers are in the best position they can be in to be able to go forward and bid appropriately. So that's really the first, second and third priorities today. And that will continue. We've seen an uptick in the number of people who visited the website, the number of people who are attending seminars as we've gotten into the bid window opening period. So that's the main thing that we're doing. You know, beyond that, we're obviously trying to make sure that our customers who are the ones who are putting the bids in are in a position to do the best they can and make the best estimates they can for what they can do going forward. So we're trying to support the overall process, but we're really secondary to it. So we've got to be in a support role primarily.

Great. Thank you. Thanks, Andrew.

Your next question comes from David Lowe of GMP Morgan. Please go ahead.

Thanks very much. Perhaps a question for Brett. The restructuring charges. So we've seen restructuring come through for the second year in a row. Just wondering how you think about restructuring. Is this going to be something that we're likely to see on an ongoing basis? And how do you distinguish between what's a restructuring charge and what falls into the regular SG&A and R&D costs?

Yeah, thanks, Dave. I mean, with any business, I think from time to time it's inevitable that you have some restructuring coming through. But I don't think it's going to be something that's routine or necessarily going to happen all the time. These ones, I guess we distinguish anything that's kind of a larger program is really something that we're structurally changing. So the elements that we're looking at in respiratory care, we really had a look at strategically the workforce planning and looked at what capabilities we need, particularly if we move and focus more around the digital health. And you heard Nick talk about Propeller and what we're doing there. And it's really making sure that we have those capabilities. So in order to do that, really we need to look at workforce planning every now and then and strategically, if you like, make some calls. And we've done that this quarter in respiratory care. The other elements for the German R&D facility, which is a small legacy system that we've basically selected to close that down. They did good work there, but it's kind of subscale. So we've got, as you know, we've got the major hubs, Sydney, Singapore, in the US. So we really felt we could do that more effectively at the larger hubs. That's something that's kind of more permanent in nature, if you like. And then the SAS, the third element on the SAS restructuring is really related to the integration activities, particularly around the home health and hospice segment. We're really strongly integrating that portfolio. So again, that's something that we're doing in SAS that I think will only happen time to time. We're really aligning strongly around the HME and then around home health and hospice and then around matrix care with segments such as the skilled nursing facilities. So that again is really positioning that portfolio to operate as effectively as it can from a revenue growing perspective and also from clearly obviously cost related perspective as well. So I think from time to time it's inevitable, but I don't think it's not necessarily going to be routine. We're not going to have these every quarter, for example.

Great. Thanks very much.

Thanks, David. Your last question comes from Sean Lehman of Morgan Stanley. Please go ahead.

Good morning, Mick. Mick, I'm wondering if I could tease out a comment on the rate of Brightree users, buying other Brightree users during the quarter and what's that an issue?

Thanks for the question, Sean. Yeah, look in the US Home Medical Equipment channel, there's many thousands of providers and Brightree has a very strong double digit share of those many thousands of providers. And there has been at the time and will continue to be M&A. And so yeah, during the quarter there was M&A. I'm sure, I can't think of a particular example in my head, but I'm sure there were examples of Brightree accounts who used Brightree services acquiring other accounts who used Brightree services. As you know, we generally charge that business on a per user, per time period methodology. And so in general, if there are two accounts coming together, it could be neutral to revenue. Now there can be some efficiencies or there could have been one of those businesses using more modules or less modules. And so there could be many factors that either increase or decrease the revenue from the account during that process. But it's something that's there. It's part of the business. I'd say it's less of an impact than things like churn where you just have people, new people coming in and people switching to other solutions or turning off some of the automated solutions. But it's part of that business and we've managed that over the history, the three plus years we've managed Brightree and the entity and the team there have managed it for the last 10 years that they've been in business as well. So it's part of the equation, but it's not something that's new and it's not something that we're unable to manage. And I think you saw during the quarter with strong single digit growth that we were able to do well and we think we can even do better from that.

Right. Thank you,

Mick. Thanks for your question, Sean.

We are now at the one hour mark, so I will turn the call back over to Mick Farrell.

Thanks, Rob. And before we close the call, I want to thank our dedicated 7,500 strong team here at ResMed for their continued dedication, focus and commitment to our growth strategy and all the operating excellence initiatives. You folks are the core of what we do and your efforts have enabled us to deliver these great results that we just shared with our shareholders. We're focused as a team on our future pipeline and all the products and software solutions we have to improve outcomes and benefits for all of our stakeholders. It includes patients, it includes physicians, payers, providers, governments and of course our shareholders. Thanks all for your time today and we look forward to talking to you again at the end of the first quarter for fiscal 2020.

Great. Thank you all again for joining us today. If you do have any additional questions, you can always reach out to Investor Relations or me directly. As previously mentioned, all the documents and the transcript will be available on our Web site later today. Operator Rob, you can now close the call.

This concludes RedMed's fourth quarter and fiscal year 2019 Earnings Live Webcast. You may now disconnect.