ResMed Inc.

Welcome to the second fiscal year 2020 ResMed earnings conference call. My name is Christine and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. Please note this conference is being recorded. I would now like to turn the call over to Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Amy, you may begin.

Great. Thank you, Christine. Good afternoon and good morning, everyone. Thanks for joining us and welcome to ResMed's second quarter fiscal year 2020 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 later today. Joining me on the call today to discuss our quarterly results, our CEO, Mayor and CFO Brett. Other members...

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold. The conference will resume momentarily. Thank you for your patience.

We continue to take share with our software solutions that enable increased therapy adherence with resupply programs providing support to those who need it and with innovative new product introductions. Customers are voting with their wallets and they are voting for ResMed. We continue to take share with our software solutions that enable increased therapy adherence supporting digital health technology to transform... We have sold one... A medical device into the market, and AirSolutions, our cloud base ecosystem, now manages more than 12 million patients. In the last 12 months, we have changed and improved over 15 million lives by providing person with a ResMed device or a complete ResMed mask system to help them breathe better and live better lives. In addition our Bright Tree and Digital Health Technology everything that we do here at ResMed. Propeller and a portfolio of our systems allow us to better engage with our customers and partners. Our customers, providers, We are in our capability machine learning and grow this digital healthcare ecosystem and we are to our ambitious forward-looking goal of improving 250 lives in 25. An important differentiator for ResMed

ladies and gentlemen this is the operator I apologize but there will be a slight delay in today's conference please hold the conference will resume momentarily thank you for your patience you hello M派

you you Back in good afternoon and good morning everyone Thanks for joining us and welcome to resmed second quarter fiscal year 2020 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 later today joining me on the call today to discuss our quarterly results our CEO Mick Farrell 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-gap measures for a reconciliation of the non-gap measures please review the notes to today's earnings press release and 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 made today With that I'd like to now turn the call over to Mick

Great. Thanks Amy and I'll go a little fast from my prepared remarks So we still have time for Q&A despite the phone difficulties Thanks, Amy And thank you to all our shareholders for joining us today as we review results for resmed's second quarter of fiscal year 2020 On today's call I will discuss our long-term strategy I'll then 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 financials in further detail Our team achieved another quarter of strong revenue growth across the portfolio driven by superb performance in the mass category Particularly in the US market with good performance across the 140 countries where we provide our solutions We continue to take market share with our software solutions that enable increased therapy adherence with resupply programs providing support to those who need it and with our innovative new products customers are voting with their wallets and they are voting for resmed as the world's leading Software driven medical device company we are using digital health technology to transform the industry We have sold nearly 11 million 100 percent cloud connectable medical devices into the market and air solutions our cloud-based Ecosystem manages more than 12 million patients in the last 12 months We have changed over 15 million lives by providing a person with a resmed device or complete Resmed mask system to help them breathe better and live better lives In addition our bright tree and matrix care software systems are helping to manage 90 million more people outside the hospital Digital health technology is an integrator across everything that resmed does Airview my air propeller and a portfolio of other digital health solutions Allow us to better engage with our customers and partners including patients physicians providers payers and complete health care systems We are investing in advanced analytics and expanding our capabilities in machine learning and machine intelligence So that we can grow this digital health ecosystem at double digits on a volume basis We will grow from just over 100 million lives improved with our health care products and solutions as we ended 2019 to our ambitious forward-looking goal of improving 250 million lives in 2025 We now have over 5.5 billion nights of respiratory medical data in the cloud And we are analyzing these data to derive actionable insights for the benefit of patients physicians providers and health care systems Our relentless focus on product and software innovation continues to set us apart from our competition We have massive opportunities ahead in sleep apnea in COPD as well as in outside the hospital Software to help patients live better quality lives to help patients and health care systems save money And to help achieve better management of chronic disease We believe that the future of health care is outside the hospital That's where resmed competes today, and that's where we are winning today We have the right elements in place to achieve our strategy and to drive Financial success as we provide market-leading value to customers Let's now briefly review our top-level financial results We achieved another quarter of double-digit revenue growth. We were up 14% in constant currency across our portfolio This growth continues to be well balanced across our domestic us as well as our global product sales as Well as from our software as a service businesses We continue to deliver operating leverage with non-gap operating profit growth of 21% -over-year and non-gap diluted earnings per share of $1.21 I'd like to focus now on our core sleep apnea and respiratory care businesses in the devices category We delivered a good quarter with -over-year Constant currency device growth of 8% globally Supported by strong 9% device growth in the United States Canada and Latin America Geographies as well as by improving Europe Asia and rest of world growth which was at 6% Constant currency in the device category we continue to face headwinds for device growth in France as a result of the 2018 and 2019 digital health related fleet upgrades We expect that the headwinds will begin to abate in the upcoming European summer and we will start to return to market growth for devices in France during fiscal year 2021 Underlying patient growth remains healthy around the globe and we continue to benefit from strong market dynamics with over 900 million people worldwide suffering from undiagnosed and untreated sleep apnea Growth in the masks and accessories category of our business was incredibly strong during the quarter. We were up 16% Constant currency globally in this category well ahead of market growth rates indicating that we gained significant market share with our latest patient interface innovations Removing the impact of some software within this category. We are still growing our global mask franchise in the mid teens Our flagship masks the air fit f20 and the air fit n20 Continue their growth across global markets the success of these masks was augmented by continued good uptake of our more recent mask launches We have launched a steady rhythm of mask innovation over the past 15 months We have just lapped the successful launch of the f30 in the December quarter And we will lap the launch of the n30 the n30i and the p30i During the coming 12 months the f30i was launched just over a week ago combining the needs for patients in the freedom and the minimalist mask segments With our portfolio of solutions. We are ensuring that we have the right mask for every patient every time We are innovating and expanding our mask portfolio to offer Comprehensive options for physicians and home care providers and for the specific needs of the ultimate customer That's the person who suffocates every night with sleep apnea We remain focused on driving innovation to meet underserved customer needs. We are creating future products that are smaller quieter more comfortable and more customized to each person's needs Through digital health technology such as the my air app We are driving patient engagement with our therapy so that people can enjoy the benefits of better breathing and better sleep We have well over 2 million patients using my air and leveraging its insights and personalized feedback through coaching algorithms In parallel, we are also ensuring that the cost of sleep apnea as a chronic disease can be better managed by physicians providers payers and healthcare systems our digital -to-end solutions combined with available 100% cloud connectivity as well as information provided to patients on their own smartphones are all leading to significant improvements in cost Improvements in healthcare outcomes and improvements in quality of life We believe cloud-based software combined with world-leading medical devices can add value and improve both clinical outcomes as well as the patient experience On the partnership front our joint venture with verily is creating software solutions to help identify and Engage and enroll people with sleep apnea on a journey to better sleep and better breathing We have commenced pilots in a handful of US cities to improve awareness identification and engagement with the importance of good sleep and breathing to overall health Our philosophy is this the more a person knows about how much they suffocate every night and the Consequences of that suffocation on their overall health outcomes the more likely they will seek solutions At its simplest level this partnership will drive incremental growth in our core sleep apnea business Over the longer term and on a deeper level this partnership will also allow resmed to participate in a broad chronic disease management platform covering sleep apnea cardiovascular disease diabetes mental health and beyond I'd like to now focus on our business in respiratory care. There are nearly 400 million people suffering from chronic obstructive pulmonary disease or COPD worldwide We don't believe these people are well served by global healthcare systems today and many COPD patients are frequent visitors to hospital emergency rooms with admissions and frequent readmissions We have a vision to better manage COPD patients through the use of technology with digital -to-end solutions Technology such as our propeller platform helps how patients are communicated to it Helps how they are encouraged in their medical care and it helps how folks are looked after as an individual person We believe that technology combined with world-leading medical equipment can add Substantial value to improve both clinical outcomes and the patient experience We plan to offer a portfolio of solutions through all stages of COPD progression We will be there with stage 1 and stage 2 COPD patients as they commence inhaled Pharmaceutical therapy managed by the propeller platform We will be there with stage 2 and stage 3 COPD patients as they add Portable oxygen therapy to their care We will also be there with stage 3 and stage 4 COPD patients as they commence Non-invasive ventilation therapy and ultimately life support ventilation therapy We will manage the person on one -to-end digital health COPD platform helping the patient Helping their caregivers and loved ones as well as helping their physicians and providers So that they have the right information at the right time lowering costs and improving outcomes Our team at propeller continues to progress their business as we move along the path from pilot trials to commercial partnerships with both pharmaceutical partners and healthcare systems The digital health opportunity with inhaled respiratory medicine adherence will take time to build and we are making good progress In December propeller was included as the only chronic respiratory disease solution in Express Scripts first formulary for digital health solutions in November access for propeller users was expanded to pharmacy services from CVS from Walmart From Kroger and from Rite Aid This was accessed directly from the propeller app via the my pharmacy feature within that smartphone application We will update you on the milestones for propeller with partners in both pharma as well as healthcare systems as we move forward throughout 2020 Finally, I'd like to focus on our software as a service business We continue to integrate and optimize the out of hospital SAS portfolio for long-term growth We are focused on leveraging our competitive advantage as the only strategic player competing with leading software solutions focused on home medical equipment providers skilled nursing facilities as well as home health and hospice providers our SAS portfolio revenue grew 37% -on-year this last quarter Benefiting from the matrix care acquisition that we lapped during November We estimate that the weighted average market growth rate of these sectors we compete in is in the high single digits excluding the timing benefit of the matrix care acquisition and on a pro forma basis our SAS Portfolio grew in line with market in Q2 Our plan is to beat that market growth rate over the medium to long term As we reach the fourth anniversary of our bright tree acquisition here in 2020 We are achieving strong in our home medical equipment or HME sector with our bright tree team in Atlanta We just passed the one year anniversary with our matrix care acquisition in the quarter And we are increasing our investments in our matrix care team up there in Minneapolis This investment is focused on new module introduction for our matrix care platform So that we can ensure that we are able to grow and share You know skilled nursing facility as well as home health and hospice sectors as we move forward

We are

doing the hard work To make matrix care as successful as bright tree is in the resmed portfolio And we have all the elements in place to do that It took around 24 months to see strong sustainable returns from our investments in R&D and our management team at bright tree We think we can meet or beat that timeline for strong and sustainable returns from our matrix care Investments that we are currently making Last quarter we announced a collaboration with Cerner as the new preferred Partner for home health and hospice software for Cerner's customers It is early days in that partnership and things are going very well We've started to migrate existing home health and hospice customers to our matrix care solution Our sales team is actively engaged with Cerner's sales team with customers learning of the benefits of our matrix care home health and hospice software We are excited to drive growth from this partnership The rich interoperability between our two solutions will provide value for both Cerner and ResMed customers as well as their patients and residents. I Would like to take a moment to announce an exciting technology tuck-in acquisition that we are just in process of completing Just this week bright tree signed an agreement to acquire a company called snapworks Snapworks is a privately held software company that provides patient contact management and workflow optimization for slip apnea resupply The combination of bright trees technology and live call services with this new snapworks technology Creates the largest resupply base in the industry with -to-end workflow automation For our HME customers the combination of these two technologies bright tree and snapworks will increase patient adherence and increase operational efficiency We expect the transaction to close very shortly The acquisition of snapworks is expected to be neutral to our non-gap resmed earnings per share initially However, we expect this acquisition will be accretive to non-gap earnings per share during fiscal year 2021 in Summary, we have the vision to transform and significantly improve software solutions across outside the hospital health care sectors We see a future where patients seamlessly transfer from HME to skilled nursing facilities To home health providers to hospice providers and beyond with reduced costs and increased efficiency Resulting in better system outcomes as well as a higher quality of life for the person in -of-hospital care Before I turn the call over to Brett Let me close with this the first half of fiscal year 2020 was strong and we are well positioned to grow through the second half of fiscal 2020 and beyond The continued success of our mask and device portfolio Along with a solid pipeline of new products and new digital health solutions covering sleep apnea COPD and out of hospital software gives us confidence in continued growth as we move through the year We have positioned resmed for the long term as the global leader in digital health driving top line and bottom line growth as We execute toward our 2025 strategy We are focused on our triple aim first to slow chronic disease progression Second to reduce overall health care system costs and third to improve quality of life for the ultimate customer the patient With that I'll hand the call over to Brett in Sydney for his remarks and then we'll go to Q&A Brett

Great. Thanks, Nick In my remarks today, I'll provide an overview of our results for the second quarter of fiscal year 2020 As Nick noted we had a strong quarter group revenue for the December quarter was 736 million an increase of 13% Over the prior year quarter in constant currency terms revenue increased by 14% Excluding revenue from acquisitions group revenue increased by 11% 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 America countries were 408 million an increase of 14% over the prior quarter Sales in Europe Asia and other markets totaled 242 million an increase of 5% over the prior quarter However in constant currency terms sales and combined Europe Asia and other markets increased by 8% over the prior quarter Breaking out revenue between product segments US Canada and Latin America device sales were 204 million an increase of 9% over the prior quarter Masks and other sales were 204 million an increase of 19% over the prior quarter For revenue in Europe Asia and other markets device sales were 162 million an increase of 4% over the prior quarter Or in constant currency terms an increase of 6% Masks and other sales in Europe Asia and other markets were 79 million an increase of 8% over the prior quarter Or in constant currency terms an increase of 11% Globally in constant currency terms device sales increased by 8% while masks and other sales increased by 16% over the prior quarter Software as a service revenue for the second quarter was 87 million an increase of 37% over the prior quarter During the rest of my commentary today I'll be referring to non-GAAP numbers The non-GAAP measures adjust for the impact of amortization of acquired intangibles Purchase accounting fair value adjustments to matrix care deferred revenue Litigation settlement expenses and acquisition related expenses We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release Note that this quarter for GAAP reporting purposes we are now reflecting the portion of amortization of acquired intangibles Attributable to develop technology in our cost of sales rather than being allocated to operating expenses We've made this change to align with SEC disclosure guidance This will mean we will disclose both GAAP and non-GAAP gross profit measures going forward We have included a reconciliation of both GAAP and non-GAAP gross profit and gross margin in our press release Going forward I will reference this non-GAAP metric because I believe it is the best measure of our underlying gross margin Our non-GAAP gross margin improved to .7% in the December quarter compared to .1% in the same quarter last year Compared to the prior year our non-GAAP gross margin increased by 60 basis points This was predominantly attributable to favorable product mix and manufacturing efficiencies partially offset by typical declines in average selling prices Moving on to operating expenses our SG&A expenses for the second quarter were 171 million and increased 6% over the prior year quarter In constant currency terms SG&A expenses increased by 8% Excluding acquisitions SG&A expenses increased by 2% on a constant currency basis SG&A expenses as a percentage of revenue improved to .3% compared to .8% that we reported in the prior year quarter Looking forward subject to currency movements and taking into account recent acquisitions We expect SG&A as a percentage of revenue to be in the range of 23 to 25% for the remaining two quarters of fiscal year 2020 R&D expenses for the quarter were 50 million and increase of 16% over the prior year quarter or on a constant currency basis an increase of 18% Excluding acquisitions R&D expenses increased by 4% on a constant currency basis R&D expenses as a percentage of revenue was .8% compared to .6% in the prior year Looking forward subject currency movements we expect R&D expenses as a percentage of revenue to be in the range of 7 to 8% for the balance of fiscal year 2020 Total amortization of acquired intangibles was 20.6 million to the quarter An increase of 30% over the prior year quarter reflecting the impact from our recent acquisitions Stop-based compensation expense for the quarter was 14.1 million Our non-GAAP operating profits for the quarter was 218.5 million an increase of 21% over the prior year quarter While non-GAAP net income for the quarter was 176.3 million an increase of 22% over the prior year quarter On a gap basis our effective tax rate for the December quarter was .2% While on a non-GAAP basis our effective tax rate for the quarter was .6% Our tax rate was favourably impacted by a tax benefit of 20.3 million associated with the vesting of employee share based compensation In particular the tax deduction associated with the vesting of executive performance stock units in November Excluding the impact from this benefit our gap effective tax rate would have been .6% And our non-GAAP effective tax rate would have been .8% Looking forward we estimate our effective tax rate for the second half of fiscal year 2020 will be in the range of 19 to 21% Non-GAAP diluted earnings per share for the quarter were $1.21 an increase of 21% over the prior year quarter While GAAP diluted earnings per share for the quarter were $1.10 Our diluted earnings per share were also favourably impacted by the tax benefit that I've just discussed Excluding the impact of this gain our non-GAAP earnings per share would have been $1.07 Cash flow from operations for the second quarter was 69.9 million reflecting robust underlying earnings Partially offset by the timing of tax payments with $111 million in tax paid in our second quarter Additionally, we made the payment for our settlement to the US Department of Justice of $40.6 million this quarter Capital expenditure for the quarter was $25.1 million depreciation and amortization for the December quarter totaled $45.5 million During the quarter we paid dividends of $56.1 million We recorded equity losses of $6.9 million in our income statement in the December quarter associated with a Verily Joint Venture We expect to record approximately $6 million in equity losses each quarter for the balance of fiscal year 2020 associated with the Joint Venture operations Our Board of Directors today declared a quarterly dividend of $0.39 per share At December 31 we had $1.3 billion in gross debt and $1.1 billion in net debt Our total assets were $4.4 billion and our balance sheet remained strong with modest debt levels Finally to recap our top line revenue was strong this quarter with growth across all major categories Gross margin expanded and our operating costs remained well controlled As a result we are continuing to drive operating leverage with Q2 non-GAAP operating profit up 21% 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'll now turn to the Q&A portion of the call I would like to remind everyone to limit yourself to one question and if you have additional questions Please feel free to return to the call queue Christine we're 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 one on your touchtone phone. If you wish to be removed from the queue Please press the pound sign or hash key. If you're using a speaker phone You may need to pick up the handset first before pressing the numbers We ask that as a reminder, please limit yourself to one question If you have another question, you're welcome to hop back in the queue Once again, if you have a question, please press star from the number one on your touchtone phone Your first question comes from the line of Margaret Kisler from William Blair. Your line is open

Hey, good afternoon guys and good morning to uh to Brett out in Australia Um, thank you. Maybe the first one For me is is on mass growth. Uh, obviously you guys continue to do very very well from that perspective Um, so as we look at the last maybe 12 to 18 months Can you give us a sense of the relative impact of new product launches? Especially in the white spaces new that you weren't in before Um the resupply agreements that you kind of referenced a little bit of JP Morgan Um market growth and general share taking and the idea is you know as we look forward And how are the moving dynamics between those? Those categories and how do you kind of adjust your strategy to keep performance

high? Thanks Yeah, thanks for your question Margaret and uh, as you noted there's a number of factors contributing to this, uh, this very strong Mass growth that we had, you know 16 percent constant currency on a global basis and even taking out some of the software Just well up there in the mid teens, uh, you you hit on pretty much all of them There's an increased adherence that we're driving through our digital health solutions You know when we're achieving 87 adherence when the doctor's using Airview and the patients using my air and all the digital techs in play that that drives up our mass growth Secondly when there's resupply, you know and patients have the opportunity if they want to to participate in Getting a a fresh mask as their old mask becomes used um, and and we are partnering with uh bright tree Connect and with resmed resupply to provide that and the acquisition of snapworks Will help and then thirdly and really importantly, uh these last 15 months the the steady flow of of four Really exciting new mask innovations interestingly these mask innovations aren't to replace a previous product but to go after underserved or Undermet customer needs and we call the minimalist category in the freedom category where people move through in different positions during sleep Prone left right sleepers want a freedom mask and people who have some claustrophobia or want small Lighter masks go for the minimalist category and the f30 that we just launched is right in the heart of both of those So it's all the above contributing to this really strong growth We still think that the market growth rate is in the high single digits for masks And that we took you know, really good share during this december quarter Our job and challenge is to keep driving all those things resupply adherence and mask innovation and we plan to do just that Thanks,

head Your next Your next question comes from the line of matthew mishan from keybank. Your line is open

Um, great and thank you for taking the questions Um, hey just to follow up on that mark on the market share games and in masks Are you winning new new patients at a higher market share clip? Or are you able to convert existing sleep apnea patients from from competitors and getting them to switch?

Yeah matthew, that's a really good question i'll hand that to jim hollingshead the president of our sleep division to walk through that

Good morning matthew i'm down in australia. So I hope you can all hear me as well Yeah, I can hear you just fine Yeah, it's a combination of both Um, we feel very confident in our overall position with masks that we've had so many mass launch, you know As mick referenced we've had several mass launches in the last 15 months. All of them have been successful launches But we now have a very wide portfolio the widest portfolio offering Of masks on the market. So we continue to take new patient share across all three mass categories Um, then you know, i'm sure we're We're likely to also be getting competitors switching and there's less market data available on that dynamic But we're very confident that we're taking new patient share pretty successfully

Thank you Your next question comes from the line of sean lamann from morgan stanley your line is open

Uh, good morning, mig. Hope you're well. Um, my question relates to um something you announced last quarter I wonder if we give an update on on how this um novartis deal with propeller There's any update there and how that might be tracking.

Thanks Thanks sean well, we we don't talk in our core business or in our you know new software businesses about individual Customers or partners and until things are public and moving along but there was public data last quarter from our work with pilot trials with both gsk and novartis in the Propeller area looking at inhaled pharmaceutical medicines look The the beauty of as I sort of described in the the opening remarks the beauty of propeller is it provides an -to-end platform To help us take care of people with chronic obstructive pulmonary disease And so stage one two with propeller and take care of the patients ensure they have the medicine that their doctor prescribed for them But also engage with that person because they're going to it's a progressive disease They're going to move from stage one to stage two and stage three and stage four Copd and so our goal with propeller is not just to have a partnership with pharma company a or b But it's to really create a platform where we help -to-end management of a person as they move through disease progression and it helps us engage with that person to help them adhere to their therapy whether That therapy is the pharmaceutical inhaler or that therapy is a portable oxygen Concentrator or that therapy as they move forward is a non-invasive ventilator or a life support ventilator And so that's our goal with these partnerships as we hit milestones during 2020 on the pharmacy side And and as we hit milestones on the healthcare system side We'll give updates on that We did talk to the magnified trial that we are still enrolling patients for With with Novartis that's in its early days So we'll give updates on the clinical data, but also importantly, you know commercial partnerships as they as they move forward through 2020 Thanks for your question, Sean

Yes, thank you me

Your next question comes from the line of John Deacon Bell from Citigroup. Your line is open

Well, good morning my question just relates to the the increase in the SG&A obviously you've got fantastic leverage From that and I think we've talked about it previously But that 2% underlying seems I think that's a record low number for you And just give us a sense perhaps of how that might look over the next six months and maybe going forward Should it return back to the kind of mid single digit levels? So

I'll have that Santa Claus down in Sydney.

Yeah. Yeah. Thanks. Thanks. Hi John Yeah, it was it was low this quarter and we did benefit Certainly from much lower litigation related expenses this quarter relative to last year So that did certainly moderate that growth rate If you in my guidance, I said, I think we'll revert back to the range of 23 to 25 for the second half Which would suggest that we will track higher in terms of growth rates for SG&A at least in the back half, but Certainly helped by some reduction or significant reduction in litigation costs coming through this quarter relative to last year It was probably the single Biggest driver and that that that certainly moderated the growth rate And try to adjust for that in that kind of range that I've given as a percentage of revenue going forward To be a better indicator, I think

That's helpful. Thanks, Brett

Your next question comes from the line of Saul Hadassani from UBS your line is open

Saul you may be on mute

No, I'm not can you hear me

We can hear you now.

Yes Great. Thanks Yeah, just a question for Brett Brett just on gross margin. Just wanted to give some color On the underlying sleep and respiratory care business So what the gross margin might have done ex-ex acquisition contribution and usually provide an outlook for the rest of the fiscal year for gross margin As well, can you just give us that some color there too?

Thanks Yeah, I mean I think going forward the second half I think broadly consistent with where we are Would be an estimate on the gross margin as you know a lot of moving parts on that That would be our expectation If you look at the acquisitions we did Matriarchal care coming halfway through the quarter So fairly it's kind of a fairly minimal impact this quarter the big drivers of that you on your growth in You know or expansion of our gross margin around the product mix And that's really been driven by that that out performance you're seeing in in mass growth and that's You know typically higher margins what you would see on devices. So that's the biggest impact And then we're still seeing manufacturing efficiencies Come around logistics and so on as well and they continue to come through on gross margin So they're the two to be two big drivers this quarter Right, thank you

Your next question comes from the line of Shane story from Wilson HTM limited your line is open

Yeah, hi, thanks just looking again back at the US mask business if I can just from another angle I mean you spoke about the adherence and resupply but have you measured the step up in the number of masks per patient per year say Last 12 to 18 months meant the last reference point that I've got is maybe a tick under two For patient peers so any observations around that might be very useful.

Thanks Yeah, Shane, thanks for your question I think there's there's a whole portfolio of customers doing different levels of resupply in different countries Around the world if you take the example of front there's a government mandated requirement that you provide two masks Two masks per patient per year and and it's different in all the 140 countries Yeah, you're focused on the US growth which which was strong And yes, the last public number we did talk about that was was 1.9 masks per patient per year, but look over the 5,000 customers in the US. There's a broad spectrum of adoption of Bright tree resupply a bright tree connect resmed resupply and Technologies like snapworks that we just acquired and so there's a broad range But Jim, do you want to Jim? Holy said do you want to provide any further color as to? What you'd want to share on mask resupply metrics

Yes, thanks. Thanks. Thanks. Thanks. Thanks. Thanks Shane. I would just add to a mix. I just say a couple things the first one is The trend we don't we don't talk about that number publicly Obviously that the trend in the US has been steadily slowly But steadily top over the last several years and we attribute that both to The range of things make talk about earlier in the call so better adherence tools that we're providing our platforms Better masks lead to better adherence initially in there for better long-term adherence and also the adoption of resupply Platforms by our H&E customers. So the trend is slowly and steadily up. It's still well below Medicare and commercial payer allowables and so it's a good trend and there's still a lot of opportunity

Okay, thanks Your next question comes from line of Steve win from Evan and partners your line is open

Yeah, good afternoon My question is just on your staff And the growth right there is one of you could help us Reconstruct that growth right particularly between metrics care and Right tree and perhaps, you know as part of that to give us an update as to Your understanding of how those businesses are performing since you've been acquired I guess with reference to the EPS outlook that you provided at the time of the acquisitions

Thanks for the question Steve that allows us to talk to to our investment in sass and in sass You know this quarter was 12 12 percent of our global revenue And so it's a it's a sector that we're calling out and you'll see that in our financials It's a very Competitive sector when you look at HME software you look at skilled nursing facility Software and you look at home health and hospice software So I'm gonna be really hesitant to give detailed market share and or growth rates within each of those sectors Look what I said on the on the prepared remarks is is true that across you know, if you look at resmed's weighted average Revenue across HME skilled nursing facility home health and hospice as well as the others, you know private duty home care and life plan communities the the weighted average market growth rate in those sectors is in that high single digits and During the December quarter, you know over that portfolio. We held share We grew at the you know taking out the acquisition Benefit that gave us 37 percent growth we grew in that in that high single digits on our weighted average portfolio One thing I'll say is you know, we've when we hit April here at 2020 we will have owned Bright tree four years and As you guys remember because you followed the stock for a long time the first, you know, two years with bright tree We were investing. Yeah, we put some new management team leaders in there We brought in you know a new CEO new CTO and and some skill sets in R&D We're doing very similar things now in our matrix care journey and so, you know I'm not going to break it out in detail But qualitatively I'll say that the investments that we put in those first two years into bright tree are really starting to pay off We've got new logos new customers new modules and we're taking share picking up And at matrix care we're making those investments today in more R&D You know more management Skills and capabilities and and looking obviously back end synergies across our portfolio so, you know I think we can meet or beat the timing of our bright tree investments and the Strong and sustainable growth that we're now getting out of that in our matrix care investments

Your next question your next question comes from a line of David Lowe from JP Morgan your line is open

Thanks very much just a quick one from me you've mentioned that the mask sales included some software revenues Just wondering if you could explain what that is and you know, how much of a contribution that will make going forward

Yeah, there's a little bit of that I'll hand it to Brett to go through the the financial details on that

Sure, Dave Probably the bigger one there is the just through the software related to the or the platform related to propeller acquisition So that that's kind of that's probably the biggest single Delta there be a few others in there, but that's probably the biggest one

Great thanks very much

Your next question comes from line of Andrew good so from MST marquee your line is open.

Oh Thanks very much. It's just obviously looking at the current coronavirus issue And I think if we go way back to stars you made sales of about five million dollars of CPAP and by levels into China Just wondering if there's any flow through effect to yourselves from current the current coronavirus

Yeah, thanks Andrew it's Rob speaking You know, there's a pretty dynamic situation going on at the moment in China and so tracking it's difficult But we are tracking very closely In terms of our China business, we think you know, obviously, you know, the hospital is going to be very busy on their respiratory So there'll be a lot of focus on that We would expect to see increased demand for ventilators whether it's of the same relative scale to stars or not We we don't know yet. We're actually working hard on our local supply chain there. Remember, we've got a really good team in China building good ventilators in China for China and so in fact some of our team have been working in some of these hospitals and Jason Sun ahead of China said they're their local heroes who are really staying on the ground there And and helping look after patients in the face of this terrible disease So it wouldn't be predicting exactly what the impact will be on an overall scale. There will be an offset as well Likely the hospitals won't be looking at sleep patients for a while So there may be something to our sleep in China, but it's unlikely all of that to be material Just one other point in terms of the overall Business, you know, we we've mentioned many times our supply chain isn't configured around China Most of its not in China, but there are some second and third tier supplies in there and we're working closely with them at the moment We wouldn't expect this to be a problem, but we'll have to keep a close eye on it

Thank you very much

Your next question comes from the line of lane Harrison from Bank of America. Your line is open

And Good morning gentlemen, and thank you for taking my question Just to just to continue the discussion on the staff business and and probably more specifically You know previously we talked about resupply expansion and that given you're over about six months in can you share how the resupply? program outside of Sleep out nearest tracking and what your expectations are for the remainder of TryNitro year 20

Thanks, then yes, so you're talking about our expansion of our resupply capabilities We went into some diabetic supplies and orthotics and urology products And so those you know, they're not a material part of resmed's overall business But they were a good expansion of resmed's capabilities to look after the HME Sector beyond just you know sleep apnea and CPAP supplies that we are Very good at making sure that that they work through and so you know it's not material to our overall business So I'm not going to break out the specifics Leanne other than to say they're going well and customers are adopting them And you know I'd love them to become a material part Of our overall business to be able to break out like that But it's it's it's early days, and it's a good strategic play of right tree to sort of expand their capability With workflow Automization and you know but the combination of live call and tech that we use on you know masks and CPAP supplies it's the same technology used on those diabetics and and Those those other areas of HME and so we're just helping our customers grow their businesses and get appropriate Resupply when customers are there and requiring full authorization for it as well. So sorry. I can't get more specific than that Leanne

Thank

you Thank you

your next question comes from line of Gretel Danu from Credit Swiss your line is open

Thanks good morning, so would you be able to give us an update on the outlook for competitive bidding? So what are your expectations in terms of reimbursement changes in 2021 and if there is potentially a decline in mass reimbursement How is resmen thinking about responding?

Thanks So I'll hand that question to Dave Pindavas, Dave

Yeah, thanks Gretel, you know we continue to be at the same place we were Last quarter and that is we're awaiting along with everyone else in the industry what the results are the competitive bids that are in We expect them at the end of the North American summer So sometime around August or September and we'll know where the results are We are pleased with the efforts that we made and others in the industry made to educate bidders So they understand the portfolio nature of the lead item pricing and the impact of bidding on CPAP reimbursement on mass reimbursement. We're comfortable that that we you know conduct business with our customers now on a portfolio basis And however reimbursement settles out in the Medicare space We expect they'll continue to be strong demand for mass resupply that will continue to be important part of our customers Business and it'll be an important part for patients long-term adherent success. So we don't see any Significant changes in the trajectory going forward But obviously like with everyone else we just have to wait and see what the actual reimbursement amounts come out to date

Thanks very much

your

next question comes from the line of David Bailey from Matt Corey your line is open

Yeah, good morning guys just from me Brett cash flow Looked a bit weak this quarter. Just wanting to talk through some of the moving parts there. You've called out the Department of Justice litigation settlement just took us through what normalized tax cash payment would look like and then also Net interest on a cash basis for the quarter would be great

Yeah, so yeah was impacted by timing it down Tax payments as well. If you look at it underlying excluding those, but I still think actually pretty strong on the cash flow front Normalized you'd probably you're probably more like around the kind of 40 million a quarter and I think going into Q3 It's going to be more like that. So that that's just impact us for this quarter Expect Q3 and Q4 to be too much better in terms of cash flow performance and in the next one of What's on your interest in it was it David interest here just interesting interest expense or Yeah, the ministry expenses is a brilliant line of what the income statement something like oh Yeah, yeah pretty pretty pretty club pretty close. You wouldn't that's a good proxy. It's not gonna be far different to that Yep, okay. Thanks

Your next question comes from the line of Chris Cooper from Goldman Sachs your line is open

Thanks for taking the question out that's got a follow-up to one of the previous questions So they've gone competitive bidding. I know it's a bit early to speculate on the particular outcome I just guess I'm more interested in how you expect to manage the discussion with the D&E partners yourselves You know, would you expect positive and negative changes to be passed on to you -to-one or is there an outcome here where? I guess you bet more of the downside than the upside given, you know There's a possible outcome here where some categories gonna increase and some would decrease just any thoughts around how you think about that would be helpful

So I'll hand that You know if Jim you want to add any color from the customer perspective as well, but Dave you first and then Jim

Sure, I mean, you know, we already have ongoing discussions with our customers You know As good partners with us and and we have robust discussions where they would like to get the best prices they can And we want to make sure that we serve them as best we can that dynamic won't change with competitive bidding or anything else So we expect to continue to have good discussions with them, you know the environment for the last year and a half and for the balance of Bounce of calendar year 20 is that there's been about a 2% increase each year in the Medicare reimbursement So that's obviously contributed to a benign pricing environment that we've been experiencing for the last period of time But you know, we didn't participate with our customers in their bidding. Obviously they made their own decisions We're confident that the bidding process, you know Be a more fair one this time and we're hoping it'll end up with a process that will be able to be good for the overall industry But in terms of individual customer negotiations, Jim, you might want to comment on that Well, but we do have You know very good relationships with our all of our customers with our key customers and we'll work through it together The other thing I would just remind everybody is in Medicare -per-service is the minority part of the market So it's an important part of the market that it's a small percent of the market

And your next question comes from line of Mike Matson from Needham your line is open

I Think for taking my questions Just have I guess one more competitive bidding questions, so Specifically with non-invasive ventilation. That's the first time it's been included. I think so Could see a fairly steep decline So can you maybe comment on what you expect there? And then also I don't know if you can quantify you know Your sales are coming from non-invasive ventilation in the US but just to help us understand what the exposure is

Dive and Jim you

Up again, so thanks Mike, you know non-invasive ventilation obviously is in two different categories You know one what we would characterize as life support ventilation is the new category That's it's now going to be in competitive bidding our air curve range You know the bi-levels have previously been in competitive bidding So that's that's not changing. It's more on the life support side and You know is newly there, but there also have been reductions in that reimbursement over the past few years leading up to this so it's not necessarily the case that you'll see the same kinds of reductions that you saw in the You know round two kind of range previously for the sleep products, you know Nevertheless, we think it's important that patients can benefit particularly in-state COPD patients can benefit from these devices They ought to get into the hands and that's of those patients and it's certainly a device that requires a lot of service a lot of You know people in the in the home Making sure the device is working appropriate. So you need to have a strong reimbursement for it. It's a smaller group of Serving our so again, we're optimistic that our customers are sophisticated customers They'll bid appropriately so that they can make an adequate margin to be able to provide that service That's really particularly in this area very well needed So we'll wait and see how it goes, but we don't break out specifically, you know our sales of life support Anywhere in the US or otherwise, but thanks

Okay, thanks and then just with snap works Just comment on what that brings to the table they didn't already have with right tree.

Thanks Yes, so snap works is the technology that adds to bright tree There's some -to-end capabilities that snap works has to partner with the HME So it goes beyond just the live call and technology capability They have provided to a number of customers an ability to further reach out to customers and we we had observed this You know software that was partnering with our bright tree platform and performing really well with those customers And so we had a relationship with snap works over the last 12 24 36 months and we've seen them really grow into a really good technology tuck in and the bright tree team Looked at the technology from the team there in Nashville, Tennessee that created this tech and And the entrepreneurs that created it and we were really excited not only by what they were achieving in the market Which is better adherence and better engagement with both the HME and really importantly with the end user customer And what I bring it back, you know, which is the patient what I bring it back to this some data some clinical data that we presented from the 5.5 billion nights of data that show that as you increase adherence And as you engage with a patient in resupply the to add to each other and And some data that we just released last quarter shows that for every hour of sleep We reduce the total health care costs for inpatient by 8% So this is all tied together right? So right tree Resupply resmed resupply and snap works will increase adherence drive Increased mask resupply and that will also through that increase adherence lower the costs of the total health care system by 8% For every hour of sleep up to those seven hours And so I think that combination is really powerful of now bright tree plus snap works now it's early days We're just literally going through the final Sign off service acquisition, but but watch us over the next 12 24 months And we'll give you updates obviously every quarter as to how well that integration on that technology is going Thank you

your next question comes from the line of Saraj Kala from Oppenheimer your line is open

Good afternoon, and thanks for taking my question. This is Mike on for Saraj We read recently that Fitbit is adding an oxygen variation graph for select users with an FDA submission for sleep apnea Diagnosis somewhere in the near term here I'm just curious if you see that as longer term helping to increase the number of OSA patients treated

Yeah, Mike thanks for the question and look it's really interesting that tech companies are really getting involved in the field of I call it health wellness and and Sleep-wellness is a big part of that Obviously we have our partnership with Verily and they have the the Google watch as part of their baseline study, and they're doing some Identification I'd call it you call it diagnosis I call it identification or potentially at risk people for for sleep suffocation or sleep apnea I think what Fitbit has is along those same lines and what they're trying to do and that Fitbit is now part of the Google portfolio, I believe there's an acquisition in line there. It'll probably add on to that capability of If you see desaturations in the oxygen, there's a higher likelihood There's other causes potentially of those D saps, but there's a higher likelihood of sleep apnea So I would call it more in the medical terms a screener that will then hopefully identify and engage a person that maybe I have a Sleep issue, maybe I have a breathing issue and indicate to them They need to get on to the true diagnostic pathway and then we can sort of bring them into the identification engagement enrollment Capability that we're trying to perform but look Jim, you know You run the global sleep business any further detail you think about some of these tech companies and the ability for them to identify more patients

Sure. Yeah, Mike. Thanks for the question. I think it's a you know, an unreserved good that companies like Fitbit are putting in place technologies to help consumers understand how they're sleeping and whether they might have a sleep disorder and You know, we know that there's 936 million people globally who suffer from sleep apnea and the vast majority of them don't know it and you know forever in the industry one of the bottlenecks has been driving awareness on the one hand and then Making objective screening and then diagnosis on the other hand easier And so when companies like Fitbit, you know There's a whole range of companies that are now doing something like that in the space when they when they decide to put that out in Consumers hands. That's fantastic for us and for those patients more importantly

Great thanks mckinjim

Your next question comes from the line of Anthony Patron from Jeffries your line is open

Maybe just two quick ones one just on local manufacturing just given Bush fires obviously, you know In Australia so any update just on on that manufacturing plant and then you know just one on on legislation in the US HR 2771 just to maintain the 50-50 blended rate in rural areas. Is there any update on Actually where that sits and the likelihood that it gets to Congress this year.

Thanks Thanks for the questions Anthony I'll ask Rob to answer the first one around manufacturing and then Dave to answer the second one around the HR Yeah,

thanks Anthony as we've said the ResMed supply chains configured around you know multiple sources at this stage most of our manufactured products come from our Singapore plant But we have full capability in the Sydney plant that does often focus on Newer and more complex products, but we have full process capability in both plants The fire season in Australia has been devastating However, it hasn't actually gone into the outskirts of Sydney Which would actually make the whole thing a lot worse if it did and today we haven't seen any any interference With that at all, but if there was interference, it wouldn't overly affect us because of our ability to reconfigure

Thank you Your last yeah and as

to the I'm sorry. Let me just keep going here. Just as to the the bill. I mean, we certainly support that bill Again we think it's important that our customers receive the appropriate reimbursement and particularly in rural areas It's it's difficult to do that. So we certainly support 2771. I think it's You know, you may have noticed there's a lot going on in Congress these days So it's it's a little difficult to get anything through But there is an opportunity in the middle part of the year when I think some of the Medicare extenders Come up for renewal that there there could be a push to get this Along with some of the other items industry supports in place. So we'll have to wait and see But you know, we certainly support that and at a minimum Congress indicating their support the industry is positive Thanks

Your last question comes from the line of David Bailey from Matt Corey. Your line is open

You know, I just I'm just following up on num souls question actually just wondering if you're able to quantify the contribution of those acquisitions to US or America's mask and accessories revenues for the quarter that would be helpful

Yeah, I said in the prepared Thanks for the question David. I said in the prepared remarks. It's the so if you take that sort of global mask growth rate of 16% and you take out propeller Software you're going to be in the in the mid-teens Maybe a hundred basis points or something on global and if you take the US growth where all the pretty much most of the propeller software is the US growth on masks was Was 19% on a constant currency basis if you take out propeller and the software you're about 200 basis points These you're probably around 17 17 percent growth in the US territory So, you know 16 becomes around 15 and 19 would become around 17 David I think that answers both your questions and thanks to everyone for spending an extra eight minutes as we were eight minutes delayed Due to the phone lines there, but appreciate that all

And there are no further questions at this time I turn the call back over to McPharaoh

Hey great. Thanks Christine and Thanks again to all of our shareholders for joining us on this call I'd also like to take the opportunity to thank the seven thousand five hundred res medians Many of whom are also shareholders for their dedication and hard work you produce these great numbers that we get to report you help People sleep better you help people breathe better you help people live better lives outside the hospital in a hundred and forty countries Which is which is pretty amazing Thanks for all that you do today and every day and we'll talk to all of you again in around 90 days Amy

great. Thank you all again for joining us today and to echo Mick Thanks for bearing with us through the audio difficulties if you do have any questions or additional questions Please don't hesitate to reach out as previously mentioned all the documents along with the transcript and hopefully a clean replay of today's call will Be available on our website Christine you can now close the call

This concludes res med second quarter of fiscal year 2020 earnings live webcast. You may now disconnect