ResMed Inc.

Welcome to the Q3 fiscal year 2020 ResMed earnings conference call. My name is Diego 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. Thank you Amy, you may begin.

Great. Thank you, Diego. Good afternoon and good morning, everyone. Welcome to ResMed's third quarter fiscal year 2020 earnings call. We appreciate you joining us and I hope you all remain healthy and safe during these times. 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 from various remote locations across San Diego and Sydney are CEO Mick Farrell and CFO Brett Sandercock, as well as other members of management who will be available during the Q&A portion of our call. During today's call, we will discuss several non-GAAP measures. For reconciliation of these 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, particularly in light of the highly uncertain global environment we are currently operating in and the effects of the COVID-19 coronavirus on our business. 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 go ahead and now turn the call over to Mick.

Thanks, Amy, and thank you all for joining us today. These are unprecedented times, as Amy just noted. We are in the midst of a global pandemic, which is having profound effects on public health, particularly the most vulnerable among us. During this time, our top three goals here at ResMed are simple. Goal one is the preservation of life, helping people breathe with world-class ResMed ventilators and ventilation masks, while their own immune system fights against this novel coronavirus and the disease it causes, COVID-19. Goal two is the safety and health of our amazing team of 7,500 ResMedians providing solutions in 140 countries worldwide. Because without our people, we can't help anyone breathe better. And goal three is the ongoing delivery of world-leading products and services to treat sleep apnea, chronic obstructive pulmonary disease and asthma, as well as the ongoing production of market-leading software to take care of over 110 million people with care delivered by home medical equipment providers, skilled nursing facilities, nursing homes, hospice, and importantly, in the place where people prefer to be, their home. I've never been more proud to call myself a ResMedian than I am today. Every one of our global team is fully engaged in the COVID-19 crisis. They are demonstrating impressive feats of ingenuity, compassion and drive to support patients, clinicians, providers, health systems and beyond. My email inbox is overflowing daily with stories of ResMed heroes, including frontline workers such as our own respiratory therapists and clinicians, as well as ResMedians who are showing up every day using all of our updated safety procedures to source ventilator components from around the world to produce ventilators and masks and tubing and software and deliver these life-changing solutions worldwide. To share just one example from many is the story of a ResMed hero from our China team, actually in Wuhan in Hebei province. who donned a full hazmat suit every day for the first 10 weeks of the corona outbreak in that region. He was setting up thousands of people on ResMed ventilators and ResMed masks, including a ventilator that we call the Guardian Angel, or GA ventilator, produced right there in China. We don't know how many lives this gentleman saved there in Hubei province, but I have the good fortune of calling him my ResMed teammate. So to all those ResMed heroes, I say thank you and that I'm inspired by you and how you stepped up to help patients at the start of this crisis there in January and for the duration now through April and beyond. As a global company providing solutions in over 140 countries, we have mobilised our efforts and resources to address COVID-19 as this deadly disease moves from region to region. We have accelerated production and distribution of invasive ventilators, non-invasive ventilators, including bi-level devices, as well as ventilation masks for the patients who need them most, no matter where they live. We produced over 52,000 non-invasive ventilators, including bi-levels, and invasive ventilators during the quarter. This is a three-fold increase on our production from the same quarter in 2019, living up to the expectations that we set publicly. We have also driven a tenfold increase in our ventilation mask production, actually more than tenfold. We are aligning distribution of these ventilation products worldwide using a global, ethical, epidemiology-based model of ventilation needs based on our models of the surge of COVID-19 patients around the world. And our key guiding principle is the preservation of life. We can and will do more over the coming days, weeks, months and quarters to support healthcare systems as COVID-19 continues to impact countries across Asia, Europe and North America and with future patient surges just starting to begin in South America, Africa, Middle East and beyond. We have been able to achieve these outcomes while ensuring that we always place the health, safety and wellbeing of our ResMed team at the top of our priority list. Without our people, as I said earlier, we can do nothing. Our actions have included work from home policies for all whose job function allows for that. We have instituted non-contact temperature screening, mask wearing policies and physical distancing protocols for all of our supply chain, production, distribution and technical service teams worldwide. While we have around 65% of our global team now working from home, these important jobs such as production, distribution and tech service, just can't be done from home. We've established world-class safety and quality procedures in all of our manufacturing plants, distribution centres and offices, and we're ready to get back to work as cities and countries plan to do that. Safety and quality are part of our DNA at all times, and today, more than ever, these capabilities enable us here at ResMed to support our customers with a sustainable supply of products, services and solutions throughout this COVID-19 crisis and beyond. I also want to express my gratitude and appreciation for the extraordinary efforts of people beyond the boundary of ResMed, especially the frontline healthcare workers in hospitals worldwide. Respiratory therapists, critical care nurses, critical care doctors, and many others have demonstrated extraordinary leadership and personal sacrifice at this time. These clinicians are triaging people with symptoms into various therapeutic pathways. depending on the changing acuity of each individual with this novel coronavirus. From CPAP therapy to bi-level therapy to more advanced non-invasive ventilation, as well as to full endotracheal intubation with invasive ventilation for the patients who need that. These clinicians are using ResMed ventilators and ResMed ventilation masks with direct person-to-person engagement, which even with full personal protective equipment, still includes significant risk for that clinician. We are working with customers worldwide to drive digital pathways to try to minimise unneeded person-to-person interaction. Examples of this include remote monitoring of ventilation devices, telehealth solutions and virtual patient population management. We have over 11 million devices with available connectivity to our cloud-based solutions, including MyAir and AirView. We have over 13 million patients as well as over six billion nights, six billion nights of respiratory medical data in the cloud. We had a running start in the field of digital health well before this COVID-19 crisis. One of the few positive benefits out of this awful crisis is that it has brought to the forefront the importance of digital health for the health and safety of respiratory therapists, respiratory nurses and critical care physicians. Digital health also brings benefits of more scalability, more cost efficiency, and better outcomes for patients. Throughout the quarter, despite all the changes brought by this coronavirus, we have continued to execute on our long-term ResMed 2025 strategy, including digital health, expanding end-to-end pathways for sleep apnea, for COPD, and for asthma, as well as building the world's best out-of-hospital healthcare software network. Fundamentally, we believe and continue to believe through this crisis, even more so, that the future of healthcare is outside the hospital. That's where ResMed competes today and that's where ResMed wins today. The COVID-19 pandemic has proved an interesting point. The more we can establish non-contact digital health pathways at scale, the better the health of therapists, nurses and physicians and the better the efficacy, the efficiency, the scale and the quality of care for patients. We have accelerated our ability to improve over 250 million lives in outside the hospital healthcare by 2025. The fundamentals of our ResMed business are strong, even as we see uncertainty in the changing kinetics and dynamics of the COVID-19 disease. as it continues to move across geographies, from Asia to Europe to now North America and on to South America, Africa and regions worldwide. We are seeing tailwinds in our business from increased demand of our ventilators, such as Astral, Stella, Loomis, as well as our non-invasive ventilators, Aircurve, Flexo and the GA. We are also seeing increased demand for ventilation mask solutions, We do not know exactly how long the surge of demand will last for each hospital, for each city, for each country and for each region as this COVID-19 virus moves. But as patient flow surges, peaks and then flattens, we are there. And we are getting pretty good at modelling these demand curves using our global COVID-19 epidemiology model of patient flow and the learning from each city that we serve. Currently a lot of short-term impact also depends on our ability to keep ventilator production at its maximum capacity and as I mentioned earlier we are already at three times last year's production capacity and we are doing our best to meet the surge and peak flow in multiple geographies worldwide. A key element in our ability to deliver is our ability to source critical components and ship product in response to the incredible demand as this COVID-19 virus moves around the world. I want to be clear on this point, though. Even as we face increased demand for our products, we are doing everything that we can to keep efficiency high and to keep our costs down. Our primary humanitarian goal is 100% locked. At ResMed, we are committed to enabling access to ventilators for COVID-19 patients in order to preserve life. We are keeping pricing steady and we will not opportunistically increase prices or per unit profit in our response to COVID-19. We believe that there will be lessons learned during the crisis that will enhance our ability here at ResMed to drive innovation in the quarters coming years through our research and development pipeline, particularly in the fields of digital health technology, as well as our product and software innovation. We are very competitively positioned in these fields today but we think we will be even more so tomorrow. While balancing our response to the global public health crisis, we have also been executing well in our core business. We have delivered strong growth in our sleep apnea, COPD and asthma businesses across geographies with solid contributions from our software as a service business during the quarter. In a few minutes, our CFO, Brett Sandercock, will provide the details of our third quarter financial performance along with our outlook for the remainder of fiscal 2020. But first, I'll provide just a few financial highlights and briefly discuss execution towards our ResMed 2025 strategy, along with some milestones for the quarter. So for the third quarter of fiscal year 2020, we delivered just around $770 million in quarterly revenue, which is up 17% year over year, reflecting growth and positive momentum across our product portfolio, software solutions, and global markets. As part of our global COVID-19 response, we have seen tailwinds for the increased demand for invasive ventilators and non-invasive ventilators, including bi-level devices, masks, and accessories, as I mentioned earlier. We estimate the incremental impact to be approximately $35 million of COVID-19-related revenue during the quarter. So from this $770 million in quarterly revenue, we generated a strong $240 million in cash flow from operations during the quarter. enabling us to return cash dividends to shareholders as declared by our board today. We continue to invest in the future growth of our enterprise with double-digit increases in our research and development investments during the quarter. This R&D investment includes shifting resources to ventilators and ventilation masks and clinical research and technical help people to help clinicians, physicians, inventors, and people worldwide during the COVID-19 crisis, as well as keeping the ongoing innovation work going for our core sleep apnea, COPD, asthma, and software as a service businesses. We have set a clear path for ResMed to maintain our position as the global leader in digital health technology, transforming the way healthcare is delivered for those suffering from sleep apnea, COPD, and asthma, as well as enabling people to live healthier lives in a portfolio of settings away from the hospital. The execution of our long-term strategy drives progress against our triple aim of first, slowing chronic disease progression, second, reducing overall healthcare system costs, and third, improving the quality of life for our ultimate customer, the person who uses our products to help them sleep better, breathe better, and to live a higher quality of life away from the hospital. We believe that when we help a person sleep better, breathe better and live a better quality of life away from acute care, this positions ResMed to help those people achieve their best health outcome in other chronic disease conditions, including cardiovascular disease, diabetes, mental health and beyond. We are forming multiple partnerships to drive these long-term health benefits, including our joint venture with Verily and many other private partnerships beyond. Watch this space. We have three priorities that guide our daily focus. Number one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses across global markets. That's just our clear number one priority. Number two, to deliver world-leading medical devices and digital health technology to engage physicians, providers, and patients so that together we can improve clinical outcomes, reduce costs, and enhance patient experiences. That's our triple aim. And our third priority is to build the world's best software solutions network for healthcare that is delivered outside the hospital, and we're well on track to do that. We have advanced on all three of these priorities during the quarter, and I'll briefly touch on a few recent highlights to demonstrate areas where we have momentum and are driving innovation. We had an exceptionally strong growth this quarter on a geographic and product basis, including 17% growth globally. Our team delivered strong and distributed geographic growth, including a 12% increase in the combined United States, Canada and Latin America regions, as well as an incredibly strong constant currency increase of 27% across the combined Europe, Asia and other regions. As discussed earlier, there was an impact from the COVID-19 surge in demand for ventilation in the quarter of around $35 million in revenue, So that's around 4.5% of the $770 million in revenues for the quarter. In short, our core underlying business remain robust over and above that of the ongoing surge of demand. On a product basis during the last 12 months, we improved over 16 million lives by providing a person with a ResMed device or a ResMed complete mask system to help them breathe better and live a better life. Including our digital health solutions for out-of-hospital software in this number, we impacted together over 110 million lives during these last 12 months. The ability to improve these lives is supported by over 6 billion nights of respiratory medical data in the cloud. These data allow us to perform sophisticated data analytics and to drive actionable insights for the benefit of customers, including patients, physicians, providers, and healthcare systems. This makes ResMed the global leader in digital health for our field and the partner of choice for our customers, helping them increase efficiency, reduce costs and improve outcomes. So shifting to a discussion of our core sleep apnea business, we are seeing significant impact from the COVID-19 related lockdowns on new patient diagnoses in sleep. We have seen double digit declines in diagnosis rates in affected markets. Many sleep clinics, especially hospital clinics, are temporarily closed, and many pulmonary and critical care physicians that often work in sleep clinics are shifting their focus to treat COVID-19 patients as the surge comes to their city, their region, their state, their hospital. It is important to note that we have seen the mask and accessories resupply dimension of our business not only maintained, but actually increased during the quarter. As we look forward, there is uncertainty and it is not clear to what extent what extent the upsurge in ventilation device and ventilation mask revenue will offset the decline in sleep device revenue and whether sleep mask revenue will maintain its growth or decelerate somewhat. But we know these facts. Number one, that sleep apnea prevalence remains incredibly high, over 936 million people worldwide. And we know, fact two, that there is a backlog of diagnostic activity for sleep apnea and COPD that many clinics and physicians are preparing to ramp up their home sleep apnea testing, both now during the crisis and in the future as lockdowns are lifted around the world. For the on-premise or in-laboratory tests for sleep apnea, we are modelling how those will scale back up again, customer by customer, city by city and country by country, as the economy opens up and primary care physician visits and elective medical procedures come back online through telehealth and beyond. Physicians and therapists will then have to work through the backlog of undiagnosed patients that has been built through the COVID-19 lockdown in their region with a portfolio of both home sleep apnea testing and in-lab tests. The velocity of the diagnostic pathway return rate will depend on local regulations and behaviours and what we're calling a new normal for patient care. We have real-time experience of the opening back up in some cities in Asia, and throughout Europe, and we're starting to see them open up in the U.S. And we have modeled these open-ups carefully to ensure that we can best support customers as they start their home sleep apnea test scale and their in-lab test scale over time to meet the backlog of demand. Even today, around the world, we're working closely with our customers to accelerate these home sleep apnea testing models and remote patient setup on sleep apnea therapy where customers are pursuing those pathways. as well as our ongoing remote sleep apnea patient monitoring. And I mentioned earlier, we have over 11,100,000 cloud-connectable medical devices out there in the field and more that are distributed every day. It's important to note that these types of partnerships aren't new due to COVID-19. These are things we've been working on for years and decades in some states. And we believe these types of digital health and telehealth and remote monitoring models will only increase due to COVID-19 and as we move into a post-COVID-19 world. In terms of digital health innovation, we have recently rolled out a new pilot for telehealth over video chat so that the physician can not only access information on air solutions and air view, but it can also interact directly with the patient. And we think that will reduce the need for a recovered COVID-19 patient to return to the emergency room or a physician outpatient setting We view this as a trend that will be accelerated by a combination of changes in reimbursement methodologies and overall focus on safety and the preventative and health benefits for both the patient and the healthcare worker. Solutions like this can provide incredible scale when leveraged across a digital health network, including over 110 million patient lives. As I noted earlier, our investment in research and development grew by double digits in the quarter, and we put these R&D monies to work to expedite the tripling of ventilator production in the quarter and tenfold capacity increase in our ventilation mask production. We have also formed partnerships with clinicians around the world to help with the COVID-19 crisis, to help create and share clinical white paper best practice solutions in clinical practice to help with COVID-19 ventilation management, including triage between CPAP, oxygen, bi-level therapy, non-invasive ventilation therapy, and invasive ventilation therapy. At the same time, though, we have continued to invest in our core businesses for future growth in sleep apnea, COPD, asthma, and software as a service. As an example of this innovation in our core sleep apnea business, we introduced during the quarter the AirFit F This is the first CPAP mask with a tube up design in the full face category. This product now gives ResMed the most complete full face mask portfolio versus all our competition on the planet. So what does this tube up design of the AirFit F30i do for customers? In essence, it gives the freedom of movement back to that ultimate customer, the patient, so they can sleep naturally in any position, that their slumber architecture follows during the night. The F30i also has an innovative cushion that prevents irritation on the nasal bridge, and it has a quick-release elbow that allows users to quickly disconnect and reattach the mask from its tubing, making it very simple to start therapy at the start of the night and to stop therapy in the morning. All this technology built into the AirFit F30i supports the third tenet of our triple aims, to improve the quality of life for the patient. If they have freedom of movement and don't wake up, that improves their sleep, it improves their day, it improves their life. Clearly, it is very early in the product life cycle for the F30i, and this product was launched amid a pretty unique global environment. However, despite some of the noise in the signal, we've been able to see good early acceptance as physicians, respiratory therapists, and that ultimate customer, the patient, recognized the benefit and functionality of the innovation in the F30i. Additionally, during the quarter, we invested $100,000 in partnership with the not-for-profit American Thoracic Society Foundation through a research grant. The goal of the research and the study is to look at how remote monitoring can help improve the management of patients with COPD. The study aims to detect early changes in lung function from daily recordings. and to notify patients and or physicians when to commence more intensive treatment or to seek high-level medical attention. Nearly 400 million people suffer from COPD worldwide, and we do not believe these people are well served currently by global healthcare systems. Our vision of better management for COPD patients through the use of digital health technologies will be accelerated from the findings of this study. It's great to partner with the non-profit ATS Foundation to help this move forward. As we discussed earlier, COVID-19 has accelerated the movement to fully remote care in our core sleep apnea and ventilation businesses. Looking at our growing digital health solutions for COPD and asthma, the Propeller platform continues to play an important role in keeping patients outside the hospital, out of acute care locations, leveraging the Propeller's world-leading pharmaceutical adherence technology for these diseases. Active use of propeller technology has actually increased during the COVID-19 crisis. We think this is due to the rising awareness of the importance of respiratory health and the fact that people just don't want to go to acute care settings and so they're using preventative medicines more to do so. While it's not yet material to ResMed's overall revenue, we are seeing increased interest in propellers technology to support health systems with population health. We'll keep you updated on any significant milestones with our pharmaceutical partners, as well as our work with global healthcare system partners throughout calendar year 2020 and 2021, as they adopt the Propeller platform for COPD, asthma, and beyond. Before I transition to a discussion of our out-of-hospital software as a service business, I'd like to recap briefly why we believe that the SAS business is critical to ResMed's long-term success and how it fits into our broader portfolio. Our consistent view of the evolution of the healthcare system is that care will be delivered outside the hospital. The contamination of hospitals with COVID-19 is just one of the latest examples of the types of contagion that are present in many hospital locations worldwide. Our vision is to enable a system where a patient can seamlessly transfer across a portfolio of outside hospital care settings, from home care providers to skilled nursing facilities to home health to independent living, assisted senior living and beyond. These settings have reduced costs versus the hospital, as well as increased efficiency and better health outcomes than the hospital. People are simply happier and healthier in the residential setting of their choice, and the ultimate residence of choice is their home. The SAS business clearly leverages the global trend for seniors to want to age in place and supports ResMed's continued execution against the triple AIM. Our SAS businesses enable us to participate more deeply in broader chronic disease across a patient's life cycle, creating additional strategic growth options. During the quarter, our software as a service business grew at 12% from the period a year ago. We are integrating and optimising this out-of-hospital SAS portfolio to support long-term growth. We continue to believe that the long-term weighted average growth of the SAS markets that we serve is in the high single digits. We clearly beat that growth this quarter, and we plan to exceed that rate in the long run as we execute to our SAS strategy. During the COVID-19 crisis, many out-of-hospital healthcare settings have switched their use to support overflow from hospitals, and there has also been a reduction in patient flow to these out-of-hospital facilities due to a reduction in elective surgeries at hospitals. Skilled nursing facilities and nursing home volumes have been extremely hard hit by COVID-19 and this will impact our matrix care business growth in the coming quarters. We expect market growth in our current portfolio of SAS businesses that we serve to be in the mid single digit range for the next few quarters before its recovery to high single digit growth in the medium to long term as the COVID-19 surge passes and people return to their primary care physicians and return to their elective surgeries and patient volume returns. In support of the increased growth of the SAS portfolio during the third quarter, we completed the acquisition of a company called Snapworks. Snapworks provides patient contact management and workflow optimization for sleep apnea resupply for our HME customers. The combination of BrightTrees technology And live call services with this new Snapworks tech creates the largest resupply base in the industry with end-to-end workflow automation for HME customers. Resupply is an area of the HME business that has been a strong ballast in the boat during the COVID-19 lockdowns. And these types of programs, including Brighttree and Snapworks together, set up our customers for ongoing success and better patient engagement through the crisis and beyond. In summary, the SaaS portfolio is an important driver of our long-term success and a critical enabler of our ability to impact our triple aim. We are investing for long-term growth in SaaS and leadership in this space. Our performance across the entire ResMed portfolio during the quarter demonstrates the resiliency of our business during what I would call extremely challenging global times. And it highlights the dedications of ResMedians all over the world and the dedication of our customers, the clinicians, providers, and health systems to deliver for the people who need our help. Looking forward, we are modelling impacts of headwinds and tailwinds from the COVID-19 crisis with detailed scenarios of impacts by customer, by city, by region, and by business line. While we face temporary headwinds in sleep apnea diagnosis and SAS patient business flow, as I just talked about, We're also seeing tailwinds from increased demand for our ventilation devices, our ventilation masks around the world. The fundamentals of our overall business are strong, but these are uncertain times, and the crisis continues to unfold across geographies, and we don't know exactly how long the related headwinds and the related tailwinds will last. We don't know specifically by each city, country, and region how fast they will open up, but we know they will open up. And as we have seen in Asia and Europe, as these economies open up over the coming days, weeks and months, ResMed will be there to serve them. And we know one thing, that as they start to open up, there has been and will be a backlog of patients who need the channel's help for sleep apnea, COPD, asthma and out-of-hospital healthcare needs. We're investing now to be ready for those realities of the open up so that we can be there to support our customers with the best digital health solutions and the most scalable solutions to help them grow now. We are leading from the front. The nature of the COVID-19 crisis has highlighted the importance of our digital health strategies I mentioned earlier. Our ability to improve over 250 million lives by 2025 in out-of-hospital healthcare is not only on track, we think it's accelerated these last three months. This is the one welcome benefit in what has been an incredibly challenging 90 days for every company, not just ResMed, in every nation, every government dealing with this crisis. We're glad that we have made extensive investments in remote monitoring, remote patient setup, digital health, population health management over the last five, 10 plus years that we can now offer and bring to the market to help them when they need it. The combination of accelerated digital health technology and the recognition of the value of remote monitoring and the projected changes that are already happening in global reimbursement models for digital health, combined with the growing acceptance of virtual diagnosis and virtual setup represents a new and significant medium to long-term tailwind for the ResMed business. This, combined with our strong pipeline of new products and digital health solutions, including sleep apnea, COPD, asthma, and the out-of-hospital SAS, gives us strong confidence in our future. We think this is unique positioning that solidifies our leadership role in global digital health in MedTech, but will also support ResMed's growth over the medium to long term. Before I hand the call over to Brett for his remarks, I'd like to commit that while we have already played a significant role providing tens of thousands of ventilators, many, many more ventilation masks and clinical support to clinicians worldwide to fight the COVID-19 crisis, we are not done. We will do even more in the coming quarter and the coming quarters to deliver more ventilators, more ventilation masks for countries as they go through the patient search. And we will be there to support health care systems around the world in respiratory medicine and digital health. Not only during this COVID-19 crisis, but in what we call the new normal post-COVID-19 world that will be more digitally enabled and more digitally connected than ever before. With that, I'll turn the call over to Brett in Sydney. Brett.