ResMed Inc. (RMD) on Q4 2021 Results - Earnings Call Transcript
Operator: Welcome to the Fourth Quarter Fiscal Year 2021 ResMed Earnings Conference Call. My name is Rob, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Amy, you may begin.
Amy Wakeham: Great. Thank you, Rob, and hi, everyone. Welcome to ResMed's fourth quarter fiscal year 2021 earnings conference call. Thanks for joining us. As Rob said, this call is being webcast live and the replay will be available on the Investor Relations section of our corporate website later today along with a copy of the earnings release and presentation. On the call today are CEO, Mick Farrell; and CFO, Brett Sandercock. Other members of management will join us during the Q&A session. During today's call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please review the notes in today's earnings press release or the appendix of the earnings presentation. 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, actual results may differ. You are encouraged to review ResMed's SEC filings for a discussion of the risk factors that could cause actual results to differ materially from any forward-looking statements made today. Before I turn the call over to Mick, I would like to highlight ResMed's upcoming Virtual Investor Day on September 8, which we announced in our earnings press release today. More details and information including an agenda and how to register will be available on our Investor Relations website approximately 2 weeks before the event. Okay, Mick, over to you.
Mick Farrell: Thanks, Amy, and thank you to all of our shareholders for joining us today as we review result of our June quarter, the fourth quarter of our fiscal year 2021. On today's call, I'll provide a high-level overview of our financial results as well as review progress towards ResMed's 2025 strategic goals. I will discuss execution highlights against our top three strategic priorities and our urgent and ongoing actions to address current industry supply chain issues and opportunities. I'll then hand the call over to Brett for further detail on our financial results. Let me start with the situation that has generated many stakeholder questions in the last month and half. During the quarter, demand for ResMed's Sleep and Respiratory Care devices surged dramatically after our competitors recall announcement, putting additional pressure on an already challenging environment for our industry's supply chain. Global supply chain limitations including a shortage of electronic components, as well as ongoing freight constraints and costs are impacting our ability to respond to the unprecedented increase in demand for ResMed products. Executive teams across automotive, consumer product and communications technology industries have confirmed on their recent earnings calls that they are struggling with the same issues. Some major producers have suggested the chip and electronic components shortages could extend 12 or even 18 months. We are working incredibly closely with our global supply chain partners to ensure access to additional supply of the critical components that we need to further increase production of our medical devices. During this June quarter, the demand spike was so high that we have been forced to allocate products due to the unprecedented demand and these real world supply chain capacity constraints. In doing so, our guiding principles are very simple. We are focused on the highest acuity patient needs first. It's very similar to our approach to ventilator allocation during the peaks of the COVID crisis these last 18 months. We will continue to coordinate with all of our stakeholders as the situation develops, and we begin to open up the supply constraints. We understand this is a frustrating situation for all of our customer groups, including physicians, home medical equipment providers, payers, and most importantly the ultimate customer, the patient. It is a unique time in our industry, with steady recovery of patient flow after COVID-19 peaks in various countries. With these global supply chain constraints and with an unforeseen competitor recall, all occurring simultaneously. I want to be clear that through it all our priority will always be patients, doing our best to help those who need treatment for sleep apnea, chronic obstructive pulmonary disease and other respiratory diseases. Our goal is to ensure that patients get the therapy that they need and when they need it. Let me be very clear about a couple of things. One, ResMed sleep apnea and respiratory care devices are safe to use. They are the best in the market. They are the smallest, the quietest, the most comfortable and the most connected therapies. And Positive Airway Pressure therapy remains the gold standard for the treatment of sleep apnea. And two, ResMed will not be able to fill the entire supply gap that has been created by this situation caused by a competitor just 7 weeks ago. They were the number two player to our number one leading market position in almost all of the 140 countries that we compete in worldwide. We're doing everything that we can to partner further and further up our supply chain in order to increase our access to the supply of the past, the pieces and the components that we need to manufacture at scale. We expect to be in a somewhat supply chain constrained environment throughout fiscal year 2022. This news from our competitor was only released to the market on June 14. So we are in the first 7.5 weeks of our response. However, we have already partnered with our global supply chain team both internal and external. And although we expect the current quarter and the December 2021 quarter will be the most supply constrained. We do see room for expansion of supply ahead. We expect that the flow of ResMed products will accelerate significantly during the March 2022 and the June 2022 quarters. We are focused on partnering with physicians, providers and distributors to ensure that our devices get to newly diagnosed patients. And while that human impact is the most important, I know our investors and our analysts need to model the future financial impact of this accelerated growth on our ResMed financials. Based upon our latest supply chain information and analysis, we see a path to $300 million to $350 million in additional revenue in fiscal 2022 over and above our previously planned revenue growth for fiscal 2022. Importantly, we see a clear opportunity to increase our long-term sustainable market share, as patients, physicians and providers experience our ResMed market leading device and integrated cloud-based software solutions. Our experience over the last 7 plus years since we launched our online platform called Air Solutions at scale is that when providers adopt and embrace our suite of digital health solutions, they can lower their own labor costs by over 50%. They can drive their own patient adherence rates up to over 87% and beyond. After doing that, they don't want to go back to an inferior solution. And yes, during the near distant future, we will be starting the full product launch of our brand new next-generation platform called AirSense 11. Let me now turn to overall market conditions in our industry. As we discussed last quarter, the countries we operate in are at various stages of the post-COVID peak recovery process in terms of sleep apnea and COPD patient flow. We are seeing continued improvement in patient flow country-by-country. But there is a wide variance in that total patient flow from 75% of pre-COVID levels in some countries around the world to 95% or even 100% of pre-COVID levels in other countries. Vaccines are steadily rolling out country by country. And at the same time new variants including the Delta variant continue to cause disruption in some geographies. Our team remains committed to working with hospitals and health care providers to provide the ventilators, masks and training that they need for acute care. We will continue to support frontline respiratory therapists and physicians as well as providers, patients and our ResMedian team throughout the 140 plus countries that we operate in. A few things that have become really clear during this pandemic is that every country in the world has: one, increased its adoption of digital health solutions; two, increased its focus on respiratory hygiene and respiratory health; and three, increased its investments in health care treatment outside the hospital, and particularly in the home. These are all catalysts for ResMed's long-term growth. We are pleased with the steady progress that we are seeing in diagnosing new sleep apnea, COPD and asthma patients. During the fourth quarter, our sales team delivered very strong revenue growth across our core sleep apnea and respiratory care business. This incredible double-digit growth was despite the headwind from lapping $125 million of incremental COVID related ventilator sales in the June 2020 quarter, and with some tailwinds from our competitors recall right at the end of the quarter. While I am proud of the team for this 10% constant currency revenue growth in the quarter, I'm also very proud of their achievement over the fiscal year with over 6% growth in revenue throughout fiscal year 2021 to over $3.2 billion in total annual revenue, and with leverage producing over 12% growth in our non-GAAP operating profit and all the while fighting for recovery patient flow and battling COVID-19 impacts. Quite a performance from our team of 8,000 ResMedians helping people in 140 countries. We expect to see steady improvement in patient flow for sleep apnea and respiratory care therapy as we move throughout our fiscal year 2022. We are encouraged to see patients, physicians and providers adopting digital health tools for remote patient screening, for home-based testing, for patient monitoring and for ongoing population health management. As the leader in digital health for the treatment of sleep apnea, COPD and asthma as well as other chronic respiratory conditions, we are well-positioned to drive this growth with our health care delivery partners. During the quarter, we generated over $227 million of operating cash flow, allowing us to return $57 million in cash dividends to shareholders these last 90 days. Today, we announced an 8% increase in our quarterly dividend for shareholders to $0.42 per share. We are pleased to return your cash to you, our shareholders, reflecting our confidence in ResMed's resilient business and our ongoing cash flow. We also increased our R&D investments in digital health technology during the quarter, as well as our research and development for masks, for devices, for embedded device software and for global clinical research. All the while maintaining fiscal discipline with SG&A and keeping other operating costs in line. We are reinvesting for long-term growth. We lead the field of remote patient engagement and population health management with over 15 million cloud connectable medical devices in the market. Our increasing investments in digital health innovation will ensure that we provide superior value to patients, to physicians and to providers to be their partner of choice. We don't take our leading market share position for granted, we have to earn it every day with every product, every solution, and every service and every customer interaction. Customers vote with their wallets. And right now they are voting for us, and we plan to keep earning their support. Our digital health technologies are a growth catalyst for our business. We have an exciting pipeline of innovative solutions that will generate both medium and long-term value. With an industry leading intellectual property portfolio, including over 8,200 patents and designs. We now have over 9 billion nights of respiratory medical data in our cloud-based platform called Air Solutions. We have over 16.5 million patients enrolled in our cloud-based AirView software solution for physicians. And we recently upgraded our patient engagement tool called myAir. This app is now cloud native and serverless in the cloud. This new myAir 2.0 release supports our next-generation platform called AirSense 11. The AirSense 11 platform comes to the market with new capabilities with improved data delivery, with scalable architecture, and with support for full cycle teams. And what that all means is that we have the opportunity for accelerated innovation in our ecosystem. We have over 110 million patients managed within our Software-as-a-Service network for out of hospital care. These incredible data assets allow us to unlock value for all of our customer groups, for patients, for physicians, for providers, as well as for private and government payers and the community -- communities that they serve. Let me now update you on our top three strategic priorities. These are: one, to grow and differentiate our core sleep apnea, COPD and asthma businesses; two, to design, develop and deliver world-leading medical devices as well as digital health solutions that can be scaled globally; and three, to innovate and grow the world's best software solutions for care delivered outside the hospital, and especially in the home. Last quarter, we previewed our next gen platform called AirSense 11. Responding to the current industry situation, our market leading research and development team accelerated the launch of the AirSense 11. First, by expanding the control product launch to additional customers just this last month. And second by moving to an earlier full product launch date. We now expect to launch in the United States before the end of this current quarter, and then to other countries gradually over time. This AirSense 11 device launch will be a device launch like no other in the history of ResMed. Previously we carefully timed new product platform launches to minimize the selling overlap of device platforms. We are in a unique situation today. Our market leading AirSense 10 continues to be very strongly adopted, and we believe that it is better than any other device currently on the market. In short, it makes sense to continue to sell the AirSense 10 at Skype, particularly as this will help maximize the overall CPAP, IPAP and bilevel volume available for our customers for sale given the unprecedented demand for new patients to receive ResMed devices in the market right now. The bottom line is that we're going to be selling both the AirSense 10 and the AirSense 11 in parallel for quite some time, as we meet this extraordinary market demand over the coming fiscal year. And as we continue to expand the availability of AirSense 11 to new markets and new geographies around the ResMed world. We are very excited to bring the AirSense 11 to market, and I am understating the results when I say that the response to our control product launch has been very positive. AirSense 11 benefits patients and bed partners and the device and software platform combination will also benefit physicians, providers, payers and overall health care systems. As I said earlier, we make the smallest, the quietest and the smartest and the most comfortable devices on the market. But they are also the most connected and the most clever devices. All AirSense 11 devices are 100% cloud connectable with upgraded digital health technology to increase patient engagement and inherence to improve clinical outcomes and to deliver proven cost reductions within our customers own health care systems, engaging patients directly in their own digital therapy like never before in the industry. Let me now turn to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million chronic obstructive pulmonary disease patients and the 330 million asthma patients worldwide. Our goal is to reach these many hundreds of millions of potential patients with our Respiratory Care Solutions, including non-invasive ventilation, and life support ventilation, as well as newer therapeutic areas such as cloud connected pharmaceutical drug delivery solutions, and high flow therapy offerings. We announced that our respiratory care business benefited this time last year in the June 2020 quarter as we sold incremental ventilation devices and mass solutions to meet the growing demand for COVID, on an acute scale to the tune of $125 million in sales. During the current June 2021 quarter, we had modest COVID-related ventilator sales. They were not material to our overall results, they were under $20 million in sales, just under. As the Delta variant of this coronavirus surges in various markets and regions, we will still be there to support governments and health care systems and the patients they serve in their acute need. But we do not expect the resulting revenue from COVID to be material to our global business. Of course, the broader humanitarian impact is measurable with preservation of life through our ventilation solutions, a top priority in all of these countries. Our supply chain focus is for Astral, our life support ventilator, then Stellar, our non-invasive ventilator, and then our Lumis and AirCurve platforms to ensure that we can help patients who need our support the most. Demand for our core, non-invasive ventilation and life support ventilation solutions for COPD are experiencing the same steady recovery and new patient flow as we see in our sleep apnea business. We are balancing the growth in demand with the supply of ventilators that made it to market throughout the last 18 months as customers balance their inventory with ongoing acute and chronic ventilation patient needs. We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe this time a year-ago. We are now expanding this technology to regions around the world. The value being provided through AirView for ventilation has been helpful to physicians not only during the COVID crisis, but it is also increasingly valuable as an ongoing clinical tool for them and for the health care systems that they operate in. In summary, we are helping to ensure that digital health is the new standard of care for respiratory care. Let me now review our Software-as-a-Service business for out of hospital health care. During the quarter, our SaaS business grew in mid single digits year-over-year across our portfolio of markets, including home medical equipment, skilled nursing facilities, home health, hospice, private duty home care, home infusion, and life plan communities. The continued growth of home-based care is providing tailwinds for our HME and home health products. And we continue to grow with customers as they utilize and optimize our resupply solutions to improve patient care. The COVID-19 pandemic has been challenging for some verticals in our SaaS business, particularly skilled nursing facilities, or SNFs. However, we are seeing positive trends as census rates improve across SNFs, and other care settings. We are watching this very closely as COVID peaks in the case of varying rates around the country. We expect there to be pent-up demand for our software purchasing that provides opportunities for us to increase our pipeline as COVID restrictions continue to ease state-by-state. Our leading position as the software provider of choice to the HME market enabled us to help customers manage through the pandemic and to maintain a healthy business. Our Brightree branded software solutions are allowing HMEs to work through current challenges within our industry, including the need for increased patient support, the need for management of product shortages in some categories, as well as ongoing growth in the resupply of much needed home medical equipment. As we look across our portfolio of solutions, we expect our SaaS revenue growth to gradually accelerate increasing from its current mid single-digit growth to high single-digit growth by the back end of this fiscal year. As always, our goal is to meet or beat these market growth rates as we continue to innovate and take market share from competitors. Additionally, we see opportunities on our radar screen to drive growth through further SaaS acquisitions to augment our existing organic growth. We have a good history of thorough due diligence, ensuring that ResMed is the best owner of the asset. And of course, that we can bring additional value for our customers with the new offering, and of course additional value for all of our shareholders. In summary, our SaaS offerings are well received in each of the verticals that we serve. And we see an increasing opportunity to leverage analytics to minimize acute care episodes for residents, patients and clients in our provider network. And ultimately, to allow people to age in place, away from a hospital and preferably in their own homes. Looking at the portfolio of ResMed's businesses across both sleep and respiratory care as well as our SaaS solutions, we remain very confident in our long-term strategy and our pipeline of innovative products and solutions. Our mission and specific goal to improve 250 million lives through better health care in 2025 drives and motivates ResMedians every day. The light shining on the importance of respiratory health and hygiene is brighter than it ever was due to this pandemic. COVID has also highlighted the importance of digital health, it's accelerated awareness and adoption of technologies that can be used for remote patient screening, diagnosis set up as well as patient monitoring and management. We continue to invest aggressively in R&D to ensure ResMed solutions remain market leading and provide a catalyst for long-term growth. With over 1.5 billion people around the world suffering from sleep apnea, COPD and asthma, we see incredible opportunities for greater identification, enrollment, and engagement of people within our digital health ecosystem. We are relentlessly driving innovation and development to provide the scale needed to expand the impact of this technology across all of the 140 countries that we operate in. Before I hand the call over to Brett for his remarks, I want to again express my sincere gratitude to the more than 8,000 ResMedians for their perseverance, hard work and dedication during the most unusual, almost perfect storm of circumstances. You have helped save the lives of many hundreds of thousands of people around the world with emergency needs for ventilation these last 18 months as we suffered through COVID. And now you have rapidly pivoted the company back to provide ongoing support for our customers and patients during very challenging industry dynamics and supply chain constraints with unprecedented demand. Thank you. With that, I'll hand the call over to Brett in Sydney and then we will go to Q&A with the whole team. Brett, over to you.
Brett Sandercock: Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the fourth quarter of fiscal year 2021. Unless noted, all comparisons are to the prior year quarter. Group revenue for the June quarter was $876 million, an increase of 14% over the prior year quarter. In constant currency terms, revenue increased by 10% compared to the prior year quarter. Revenue growth reflected increased demand for our sleep devices and masks, which was in turn driven by both sleep patient flow recovering from the COVID-19 impacted reduced levels in the prior year quarter, and by increased demand in response to the recent product recall by one of our competitors. The increased year-over-year demand for our sleep solutions during Q4 was partially offset by a significant decline in COVID-19 related demand for our ventilators and related accessories. In the June quarter, we estimate the incremental revenue from COVID-19 related demand primarily in India was approximately $20 million, a decline of $105 million compared to the prior year quarter. Excluding the impact of COVID-19 related revenue in both the June '21 and June '20 quarters, our global revenue increased by 29% on a constant currency basis. Going forward, we expect minimal revenue from COVID-19 related demand. Note, as a reminder, in Q1 FY '21, we had COVID-19 related incremental revenue of approximately $40 million. As I mentioned before, during the June quarter, one of our competitors announced a product recall on certain sleep and respiratory devices, which in turn has resulted in significantly increased demand for our devices. We estimate that we generate an incremental device revenue of approximately $60 million to $70 million in the June quarter due to our competitors recall. Taking a closer look at our geographic distribution, excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada and Latin America countries were $472 million, an increase of 18%. Sales in Europe, Asia and other markets totaled $308 million, an increase of 11%, or an increase of 2% in constant currency terms. By product segments, U.S., Canada and Latin America device sales were $268 million, an increase of 30%. Masks and other sales were $204 million, an increase of 5%. In Europe, Asia and other markets device sales totaled $210 million, an increase of 2% or in constant currency terms, a decrease of 6%. Masks and other sales in Europe, Asia and other markets were $98 million, an increase of 36% or in constant currency terms a 24% increase. Globally in constant currency terms, device sales increased by 12%, while masks and other sales increased by 10%. Excluding the impact of COVID-19 related sales in both the current quarter and the prior year quarter, global device sales increased by 46% in constant currency terms, while masks and other sales increased by 16% in constant currency terms. Software-as-a-Service revenue for the fourth quarter was $96 million, an increase of 5% over the prior year quarter. Looking forward to fiscal year '22, we expect several factors will drive demand, including the general recovery of the global sleep market from COVID-19 impacts, the launch of our next-generation AirSense 11 platform and share gains during our competitors recall. However, while we are working hard to increase capacity, we will not be able to meet all the expected demand resulting from our products -- compared from our competitors recall, primarily because of supply constraints for electronic components. And we expect these constraints to be more limiting in the first half of FY '22 than the second half. As Mick mentioned, we believe component supply constraints as they stand will currently limit incremental device revenue attributable to our competitors recall to somewhere between $300 million and $350 million during fiscal year '22. During my remaining commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press release. Our non-GAAP gross margin decreased by 260 basis points to 57.3% in the June quarter, compared to 59.9% in the same quarter last year. The decrease is predominantly attributable to a negative product mix impact, specifically a proportional increase in sales of our lower margin sleep devices, ISP declines and unfavorable foreign currency movements. We also continue to experience elevated and significant freight costs. Moving on to operating expenses. Our SG&A expenses for the fourth quarter were $181 million, an increase of 10% or in constant currency terms SG&A expenses increased by 4% compared to the prior year period. SG&A expenses as a percentage of revenue improved to 20.7% compared to the 21.5% we reported in the prior year quarter. Looking forward and subject to currency movements, we expect the SG&A as a percentage of revenue to be in the range of 20% to 22% during fiscal year '22. R&D expenses for the quarter was $60 million, an increase of 14%. While on a constant currency basis, an increase of 9%. R&D expenses as a percentage of revenue was 6.8%, which is consistent with the prior year. We continue to make significant investments in innovation because we believe our long-term commitment to technology, product and digital solutions will deliver sustained competitive advantage. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenues to be in the vicinity of 7% during fiscal year '22. Total amortization of required intangibles was $19 million for the quarter and stock-based compensation expense for the quarter was $17 million. Our non-GAAP operating profit for the quarter was $260 million, an increase of 7% underpinned by strong revenue growth. As I reported last quarter, we estimated and recorded an accounting tax reserve of $255 million during the previous quarter, which was net of credits and deductions for a proposed settlement of transfer pricing audits by the Australian Taxation Office or ATO. During the quarter, we progressed our settlement discussions with the ATO and have refined our tax reserve estimate. As a result, we have determined the required reserve is $249 million or $6 million lower than the previous quarter estimate. And accordingly, we have recorded this as reduction in our GAAP tax expense in the June quarter. Next steps involve concluding a written agreement with the ATO and obtaining final approvals from each side, which we hope to achieve this quarter. On a GAAP basis, our effective tax rate for the June quarter was 18.4%. While on a non-GAAP basis, our effective tax rate for the quarter was 21.5%. Our non-GAAP effective tax rates for FY '21 was 18.7%. Looking forward, we estimate our effective tax rates for fiscal year '22 will be in the range of 19% to 20%. Non-GAAP net income for the quarter was $198 million, an increase of 3%. Non-GAAP diluted earnings per share for the quarter were $1.35, an increase of 2%. Our GAAP net income for the quarter was $195 million and our GAAP diluted earnings per share for the quarter were $1.33. Cash flow from operations for the quarter was $227 million, reflecting robust underlying earnings partially offset by increases in working capital. Capital expenditure for the quarter was $28 million. Depreciation and amortization for the June quarter totaled $42 million. During the quarter, we paid dividends of $57 million. We recorded equity losses of $1.3 million in our income statement in the June quarter associated with the Verily joint venture, now called Primasun. We expect to record equity losses of approximately $2 million for the quarter for fiscal year '22 associated with the joint venture operation. We ended the fourth quarter with a cash balance of $295 million. At June 30, we had $655 million in gross debt, and $360 million in net debt. Our debt levels remain modest. And at June 30, we had a further $1.6 billion available for drawdown under existing revolver facility. In summary, our liquidity position remains strong. Our Board of Directors today declared a quarterly dividend of $0.42 per share. This represents an increase of 8% over the previous quarterly dividend and reflects the Board's confidence in our strong liquidity position and operating performance. Our solid cash flow and liquidity provides flexibility in how we allocate capital. During the pandemic we have focused on paying down debt. Going forward, we plan to continue to reinvest for growth through R&D. We will also likely continue to deploy capital for tuck-in acquisitions such as Citus Health. And with that, I will hand the call back to Amy.
Amy Wakeham: Great. Thanks, Brett. Rob, let's go ahead and start the Q&A portion of the call. I will turn it over to you to provide instructions and get going.
Operator: Thank you, Amy. Your first question comes from John Deakin-Bell with Citigroup. Pleased proceed with your question.
John Deakin-Bell: Thanks very much. My question was just around the likely mix going forward. You've talked about that $300 million to $350 million impact from the recall, but we noticed quite a big difference in the growth rates in the U.S versus rest of the world in the quarter for devices. Can you just give us a feel for, firstly, why there was such a difference in the U.S versus the rest of the world for the quarter? And then going forward, how you think that mix might look in FY '22?
Mick Farrell: Yes, thanks for the question, John. And, yes, look, it's really exciting to be able to provide $300 million to $350 million in incremental revenue for our shareholders, but devices for much needed patients out there over the coming fiscal year. And we actually we hope to get better than that as we look for more parts and pieces and components. That's our current forecast. Look, just breaking down the device numbers for the quarter, really strong device numbers for the U.S., at plus 30%. That was off the comp. If you remember this time a year-ago where sleep devices were way down and ventilators were picking up in the U.S., I think it was around plus 1% the comp, and so huge turnaround there plus 30% in this last quarter. And then in EMEA, Asia and rest of world this time last year, we had plus 35% growth because we had really strong ventilator sales, particularly to some Asia Pacific regions in their COVID crisis. And so that combo plus 35% was being analyzed, and we saw a minus 6% for EMEA, Asia and rest of world. So it's a combination, John of multiple factors of COVID for both those sort of regions, U.S., Canada, Latin America, plus 30% versus EMEA, Asia and rest of world lapping a plus 30% at their minus 6%. So as we project for the $300 million to $350 million, I think that's probably the most guidance we've ever given around an opportunity like this. I'm not going to split that by region, or by type or by area. But I can tell you, its supply chain constrained, not demand constrained. And everyone in all the 140 countries wants ResMed products. And everyone we make we sell and we are doing everything we can to drive more and more elements in our supply chain, wherever that bottleneck is in supply, whatever that part or pieces. I personally as the CEO, I'm calling up that supplier and talking to their CEO and saying, look, this component can go into a cell phone or a car, or it can go into a medical device that literally gives someone the gift of breathe. Please prioritize our part of the supply chain, and it's been working those last 7 weeks. We've been able to match $300 million to $350 million in additional revenue. And our goal is to continue every week, every month to do better and better on that.
John Deakin-Bell: Thanks, Mick.
Operator: Your next question comes from Dan Hurren of MST. Please proceed with your question.
Dan Hurren: Good morning, everyone. Mick, thanks very much for that additional information, the $300 million to $350 million. We're just trying to understand how that plays out over the year. And I guess we're trying to understand what the exit run rate would be on that plan as an uplift of your normal operations. So I guess, looking at how linear that will be and what sort of shape you'll be as you exited the full year?
Mick Farrell: Yes, Dan, it's a good question. And I don't want to get into a sort of breakdown every 90 days approach on it. But what I can say in terms of color, Dan, for your modeling is that, we found out about this 7.5 weeks ago, and we've been working like crazy these last 2 months on the supply chain. And it's easy to open up supply 3 months out, 6 months out, 9 months out. So a lot of the additional flow of parts and pieces is back end loaded in the fiscal year. And so, much less supply chain constrained in the March quarter, and the June quarter of this fiscal year '22 we're in. And it's going to be tough out here. We're already in the September quarter, and we're hand to mouth. But look, we're not stockpiling. We're not putting stuff in inventory. We are pushing stuff through plants. Our plants aren't at full capacity, so we have capacity. It's really around components and parts and pieces that are the bottlenecks. And so, if you think about that color, it sort of gives you guidance to know that Q3 and Q4 will be a lot less constrained than Q1 and Q2. Q2 should be slightly better than Q1 and Q3 should be significantly better than Q2, and Q4 should be significantly better than Q2 and Q1 as well.
Dan Hurren: Understood. Thank you very much.
Operator: Your next question comes from David Bailey with Macquarie. Please proceed with your question.
David Bailey: Yes, good morning, Mick. Good morning, Brett. I mean, that's great additional detail on $300 million and $350 million. Is that devices or is that the entire opportunity, as you said currently capturing consumables as well as ventilator -- any incremental ventilator sales coming through?
Mick Farrell: Yes, David, that's a good clarification. So the $300 million to $350 million is incremental devices, including Astral, Stellar, AirCurve, Lumis as well as AirSense 10 and AirSense 11. So it's all physical product devices. It does not include any potential upside in masks that you can get while selling great flow generated capabilities. And so it doesn't include incremental sales of those. It's focused on the device side, but both ventilation and sleep apnea devices are included in that number.
David Bailey: Okay. And then just a quick follow-up, if I can. Just on the -- on a new patient coming in to the system, into observations over the last 12 months, I mean what sort of proportion should we think about of new patients that have a ResMed device also have ResMed ResMed consumables. Is there a sort of a rough number, you're able to provide to try and understand what that could look like?
Mick Farrell: Yes, I see where you're going with the question. It's sort of trying to get to the understanding of how much incremental mask share we might get when they're on a ResMed device. Look, as you know, it's an open system. And there's no requirement that a ResMed device has a ResMed mask. They are designed by the same engineers and the same building out there in Sydney, in the manufacturing -- advanced manufacturing site across the road. So they design to work together very well and they are better together. So there is a better uptake of ResMed masks with ResMed devices. And certainly, it's going through a channel where there's a sales person who's providing both of them. And so there's some opportunities on both the sort of clinical and technical side as well as the commercial and execution side for some incremental growth. I won't quantify that for you. But I do think there is some upside.
David Bailey: That's great. Thank you, Mick.
Mick Farrell: Thanks, David.
Operator: Your next question comes from Sean Laaman with Morgan Stanley. Please proceed with your question
Sean Laaman: Thank you, and good morning, Mick and team. Mick, my question relates to the commonality between components of the various devices. Is that -- is there a lot of commonality between the S 10 and S 11 platform. So therefore, the challenges of the same with respect to sourcing and does the 3x increase to capacity from your competitor compound the picture for you? Thanks, Mick.
Mick Farrell: Yes, Sean, two very good questions and very much related. Yes, I think there is some overlap of some of the parts and pieces between the AirSense 10 and the AirSense 11 platform. It's 7 years newer in the market. And so there's a lot of upgraded electronic, mechanical, plastic and digital health technology in the device. And so there's a lot of new components as well. And there is demand from our competitor out there trying to cover their recall amount as well as catch up with the patients that need urgent replacements. We're not seeing as much of the latter, though. We have a supply chain that have some overlaps with some of our competitors, but actually very individually designed. And as we work through the supply chains, the whole medical device industry is a very small percentage point of the suppliers total capacity, which is great for us in that. We're not fighting for limited share versus a competitor, we're really fighting for share versus a large consumer phone company or automobile company and the suppliers, like medical devices, because firstly, we're relatively recession resistant. We don't suddenly stop our sales during the recession, as some people do in consumer purchases and automotive, and we're usually high margin for them. So -- and more sustainable growth in terms of what we're doing for our platforms. The AirSense 10 has been in the market for 7 years. And so these are long-term sustainable for them. So our arguments are very good with the supply chain. And that's why in the last 7 weeks, we've been able to identify that extra $300 million to $350 million in opportunity. But there is some commonality between our devices. And we will make those trade-offs and that's why we will provide both AirSense 10 and AirSense 11. But the AirSense 11 is a huge leap forward to the industry and our goal will be country-by-country to roll that out. But, yes, for the next 6, 12 months, there's going to be a lot of selling both the fantastic AirSense 10 and the amazing AirSense 11 in parallel in countries around the world.
Sean Laaman: Great color, Mick. Appreciate it. Thank you.
Mick Farrell: Thanks, Sean.
Operator: Our next question is from the line of Margaret Kaczor with William Blair. Please proceed with your question.
Maggie Nolan: Hey, this is Maggie on from Margaret today. I wanted to ask a little bit more on the assumption of the $300 million to $350 million. So, in that assumption, are you assuming that new patients or is that going to be swapping your competitors existing patients. And then is there a potential here for more than your current revenue assumptions, if that incremental supply can be located a bit earlier than your current expectations. And then taking a one step further and looking out to fiscal year 2023, how are you guys looking at the tail of the benefit post recall? Thanks.
Mick Farrell: Okay. Great, Maggie. This -- I think four great questions in your question there. I'll address the first half of that, and then I'll hand over to maybe Jim Hollings to address some of the latter questions about long-term. Firstly, yes, we are focused on new patients as they come through. We’re the number one provider in almost all of the 140 countries that we're in, but the competitive with this recall was often the number two to our number one position. And so there's a lot of demand for new patient flow, and that's where we're focused, that’s where we're laser focused. Frankly, it's their job to focus on replacement or recall, that was their job and their duty to go take care of those patients, and we're focused on the new patients, both together will create unprecedented demand in the market. So that's point one. We are focused on new patients. At a high-level, as we look out beyond sort of this competitive recall to say, what's the steady state as we get to fiscal '23 and towards the end of fiscal '22, I do think, as I said in the prepared remarks that we will achieve a permanent market share increase from this. ResMed has always been the quality leader, always been the clinical leader, always been the smallest class and most comfortable. But there were some customers who just been used to, the old devices from an American brand that was bought by the Dutch company for a long time, they just stuck with what they had. I think that will get a chance to experience. The improvement, the efficiency improvement, the doctors being excited about having full digital on AirView and patients being excited about the interaction on MyAir and that they get patients happy, physicians happy and provider happy because a happy patient is one who is buying masks because they need them on a replenishment basis. So I won't quantify it for you. But I do think there's a magnificent opportunity for us to get our technology in front of a whole new range of customers. On the other hand, where supplies are constrained right now, so we're focused on our existing customers and taking care of them and making sure that we can get the new patients set up for them. But Jim, any other color, you think on sort of changes to the market conditions and longer term implications?
James Hollings: Yes, thanks, Mick and thanks, Maggie, for your question. I would say on long-term, as we were preparing to launch AirSense 11, our plan was to take market share, to take device share with the offering because the AirSense 11 offering both the device and the software we think is by far the best offering on the market. We're introducing at launch a number of innovations and the platform because of its connectivity allows us to introduce even more software innovations post-launch on an ongoing basis. And so as Mick said in his opening comments, we feel very confident that with AirSense 10 and AirSense 11, we have the two best sleep therapy devices on the market. So that was our plan all along. And I think that our competitors recall simply creates a window of opportunity for us, as Mick to familiarize more customers, more patients with the innovations and to streamline workflows for providers and to provide, continually improving the patient experience on therapy, which drives up adherence, improves outcomes for patients and all of our stakeholders then winners with that. So we felt very confident as we were launching and I think the circumstances give us even more of an opportunity.
Maggie Nolan: Great. Thanks so much.
Mick Farrell: Maggie.
Operator: Our next question is from the line of Andrew Paine with CLSA. Please proceed with your question.
Andrew Paine: Yes, hi. Thanks for taking my call. Just looking at the supply chain issues, in particular, semiconductors, what can you do to actually increasing supply there. I noted last year you got 38 million semiconductors from Infineon to the COVID response. Are you able to get more access to semiconductors due to your position within the medical -- the health care system?
Mick Farrell: Andrew, great question. I'll address maybe the first half and hand to Rob Douglas to talk a little bit to that. But look, I can tell you, as CEO, traditionally I'm taken into discussions with major customers, talking to the large multinational customers around the world and governments that we provide these great therapies and solutions for so that I can engage with them and talk about our great value. But at the moment I'm not doing that, because customer demand is almost infinite. And I'm being taken by my global supply team to talk to suppliers. And Andrew without naming individuals, I know that individual supply was named during the COVID crisis at their request, we are going and I'm spending time not just 1, 2, 3, 4 and 5 steps up our supply chain and talking to people who make these basic plastics, electronics and components and parts and pieces and telling them. Sometimes they're unaware that further down the supply chain there's a life support ventilator or a non-invasive ventilator or a sleep apnea device that cures and treats sleep suffocation. And so just getting me that opportunity, firstly, it's very interesting for me. It's a new dynamic, and we're getting really good response from these suppliers. They also are under difficult supply chain conditions and often asked me to go with them further up the supply chain to talk to someone else. And it's a game of sort of bottleneck -- debottlenecking, if you like, in the global supply chain. We have a very advanced engineering team that are looking all day every day in our global supply alliance internally, led by Linda Laidlaw and her team and Andrew Price and his team. And they are pulling me in and doing much more themselves all day, every day to drive that. So it's an ongoing opportunity for us. It's a supply chain opportunity, but unique through the COVID impacts on freight costs and impacts on freight availability, but also the growth that we see ahead due to this unique situation. Rob any more color to talk about there on about supply chain for -- to Andrew's question?
Rob Douglas: Yes, a few other factors, Mick. One is, after following up with COVID last year, when we rapidly ramp ventilation, usually for that ramp, you've got to put in longer term commitments. So we did have actually a lot of commitments on the ventilator devices going forward. And that will be helpful for us. As Mick said, we can always make a better case than a cyclical consumer product. And in fact, one of the key factors around that not only residing lives, but also for these supplies, we can give them very long-term forecasts that we usually hit and do really well. So we're able to give long-term forecasts and we know they like that and they can plan that in. The forecast is stable. It's unusual to have the sort of sudden increments that we've had as a result of recent industry events. And so we're putting that in and pulling stuff forward. But also given out, just the number of patients we've got to treat and where we are in the market, we're able to make some really solid long-term commitments with the suppliers as well. And so that really, really helps. And we will see, our commitment horizon actually had go quite a lot longer than what traditionally it's been. And then the other fact that Mick mentioned briefly also is we've got a really strong design team. And where there are sort of acute bottlenecks on particular components, we can forward design around those, but those design changes do take time. And they've got to be properly validated and tested and very rigorous testing on these products. So we can't just rapidly switch to a new component. But we can plan some months out that we'll be able to add in additional sources of components. So as you can imagine, this is sort of full core press for our supply chain and engineering teams and they're going flat out on this.
Andrew Paine: That's great. Thanks very much.
Operator: Your next question comes from the line of Chris Cooper with Goldman Sachs. Please proceed with your question.
Chris Cooper: Thanks, Mick and Brett. Can I just ask about the cost side of the equation. I mean, presumably, given the competition for chips here that you've been referring to through the call, I mean, it would be reasonable to assume that the cost side of the $300 million to $350 million is just going to be elevated versus what we normally see if you're business. And if that is the case, are you going to need to try and offset some of that pressure with price?
Mick Farrell: Chris, that's a good question. I'll hand to Brett to talk a little bit around the costs and how we're taking care of those. And Rob, if he wants to chime in as well. Look, this is an unprecedented time. Before our competitor made this announcement, 7 weeks ago, there was already constraints in the market around some of the components. And certainly because of nobody travelling really internationally, consumer travel was down so much and all the freight in the back of those consumer jets was gone. The costs were higher. And look, we talked about this 90 days ago on our last earnings call, and you saw it in the COGS numbers for this June quarter. And that's going to be with us for a while. I mean, these, these costs aren't going away. It is more costly to get freight than it was because there's much less planes available. And it is -- with scarce components, although we have very long-term contracts, prices are being impacted by that. At the same time, we're in an environment where we have customers with contracts with payers, and the consumer side of our business, there might be some opportunity to work with the supply chain to think about how to get some of those costs through the channel. But certainly in the reimburse side of the market, it's about and you've got to think really long-term about on the other side of this crisis, how we and our customers going to engage in our long-term interactions. And so it's a complex equation. And -- but, Brett, do you want to talk a little bit to what we're doing to negotiate to achieve the best prices that we can get and to manage our gross margin there and the COGS there. And, maybe Jim talked to how we're working with customers on long-term pricing. So Brett, and then Jim.
Brett Sandercock: Yes, Thanks, Mike. I mean, we do -- Chris, we do. I mean, obviously, and Rob mentioned that kind of, we have some of these longer term commitments that are contractually so that helps us there. But if you look at an industry wide, I think for electronic components, you are seeing price pressures there. So I think over the course of the year, you expects, I think, some increases on those components there. We can mitigate that to some extent with some of these longer term contractual arrangements. So that is a pressure point, if you like on our cost side. And then freight, definitely as Nick mentioned, that remains pretty elevated. And for a number of reasons, and just really even getting slots and so on, that's a freight. That’s even into even containers now for . So that I think we will continue some -- probably for this year. With that, you think -- I don't think the freight is going to be I think that will resolve itself over time. But I think for the over the course of this fiscal, I think that's going to remain as a cost pressure for us.
Rob Douglas: If I just pick up on the price topic, very quickly, I think Mick has covered in broadly quite well. But if you think of our industry, it's historically been a price down industry, right. And that's because reimbursements come down, and prices come down, because we as manufacturers have been able to drive down the materials and move the industry in that direction while preserving margins. Our customers still are very constrained on their ability to pass on any price increases that they face, because for the most part, they're either have government reimbursement or they have some sort of contracted reimbursement with a commercial payer. And those reimbursements have remained static or come down over time. So as we think about what we might be able to do pass price forward, we have to be very thoughtful about how we accomplish that if we can do it. And then couple that with the fact that we're also in contracts with most of our customers, right? So we might be in a tender contract with the government payer or many of our larger customers. We've contracts around for 12 months, that have a renewal cycle and that sort of thing. So I think that we've done very good job of being disciplined in pricing and maintaining price stability. And we'll be very, very thoughtful as we think about any kind of price changes that we do over time. But I think the circumstances are quite unique. And we really want to preserve long standing relationships with our customers who are really our partners in the channel.
Chris Cooper: Perfect. Thanks a lot.
Mick Farrell: Thanks, Chris.
Operator: The next question comes from the line of Lyanne Harrison with Bank of America. Please proceed with your question.
Lyanne Harrison: Good morning. Well, I'd like to continue with that line of thought. You mentioned there that with some of the larger customers, obviously, you've got contracts with them. Can you talk a little bit about whether those contracts with those larger customers to what extent they might have volume pricing in terms of that wholesale price? Is that with more volumes going through? Is that likely to squeeze margins further?
Mick Farrell: Jim, I'll hand that question to you. It's a follow up really to your response to the previous question. Yes, that’s a terrific question. And we're actually in many way -- in many cases working through those contract negotiations in real time, I think that we have pretty good clarity with most of our customers that this is an unusual set of circumstances. And so we have a number of customers. And this varies a lot by geography, for everybody to understand. But we have we do have a number of customers who have, need volume based or rebate -- volume based rebates or pricing levels. And this is an unusual set of circumstances that drive more volume into those accounts. And so those are contracts we're working through in real time, but they're not uncapped discounts. And we're managing those conversations, I think very carefully. This is in a way, the flip side of the previous question where because we have relationships with customers who understand the dynamic of what's going on, we're able to negotiate pretty, pretty good price stability. So there's no risk for us of runaway in a sort of runaway discounts and rebates. And on the other hand, we're, working to create a kind of a stable pricing environment for our customers as well.
Lyanne Harrison: Thank you.
Mick Farrell: Thanks, Lyanne.
Operator: Next question comes from David Low with JPMorgan. Please proceed with your question.
David Low: Thanks. Thanks very much for taking my question. Just wanted to meet on mass resupplied, we had load or I had worried that with the recall that we might see a lot of patients stop using their device, particularly given that was the advice. And that would have a flow on effect to everyone's resupply programs. Now we can see the numbers today and then growth, obviously, it's not matching up with device sales growth by any means. And I know there's a lot of factors in that. But just wonder if you could talk to that risk and what your expectations are on that front, please.
Mick Farrell: Yes, David, there was some confusion after the June 14 announcement, but I think many of the regulatory authorities and many of the clinician groups came out pretty quickly to say, let's talk to you doctor and work out a risk pathway between now and when you get that replacement device from that competitor. And also, for new patients, the doctors and certainly all of us in the industry we're very focused on the safe and effective therapies from ResMed and other players in the market. And so I think that that messaging was actually pretty quickly put out there by those physician societies and relevant health authorities after somewhat confusing announcements, right on that June 14 from our competitor. And so long-term, there's been some impacts that are quite beneficial in patients making that trade off. And certainly for us, you saw plus 5% growth in masks in the quarter for the U.S., you saw plus 24% growth in Europe, over a COVID there, but very, very solid growth in our mask business. As you said, there's a bunch of factors, David, that this time last year, we had all the ventilation Mark sales, because it in the U.S which was, you know, a confident we were was like a headwind. And the other headwind, we had was the annualization of the snap acquisition, which we did just before COVID, we closed it just in that sort of February through June period. And then, there's some balancing of inventory and cash flow due to the competitive recall all going on at once. And so a lot of competing dynamics, but as you saw, it's a resilient business. When people getting great sleep apnea therapy, they love feeling better, sleeping well and waking up refreshed, and they want to get a new mask every three or six months. And they're doing it at increasing rates due to COVID, that step change has remained. And we're confident, we look through the fiscal year that we're going to see, mid single-digit up to high single-digit growth. In our mask business and it's all about us engaging with those, those patients getting new patients on board. As we talked about some incremental revenue opportunities, they're on the devices, maybe some of the masks, and then we get back to where we were before, right. And we go back to engaging patients, ensuring they stay on therapy, and they have really quick and easy access to resupply, if they want it and when they want it, and when it's covered by insurance and co pays and everything.
David Low: Great, thanks very much.
Operator: Next question comes from Matthew Mishan with Keybanc. Please proceed with your question.
David Low: All right. Good afternoon, guys. And thank you for taking the questions. Hey, Mick, just to switch it up for at least one question. Are there any meaningful milestones for Propeller or Verily -- or the Verily JV in FY '22 that you could that you would like to call out, and as the loss is a lower loss on the JV, because it's now generating some revenue.
David Low: Thanks, Matthew. And it's great to have a question that sort of looking out beyond the next 12 months, given the dynamics I'm not surprised by that. I'll take the first part on the joint venture with Verily and hand to Jim to talk a little bit more about Verily and also about Propeller and other great development opportunities we have across our portfolio in sleep and respiratory care. Yes, firstly, the joint venture with Verily. Its name -- now its Primasun. And so we've got the branding out there. And we have Jonathon Lobbins, fantastic CEO that comes to us from Edwards Lifesciences, and other large med tech companies that he's been a part of, and really exciting to have a new CEO there. He's a strong leader, and the ability to identify, engage and enroll. What I call sleep concerned consumers into a digital pathway and a treatment pathway for sleep apnea is incredible and some really good experiments happening in certain metropolitan statistical areas with that technology and so great to have a new leader and the opportunity. The milestones are really around those MSIS and the success we're having before will scale. And obviously, given the current industry dynamics, we don't need to drive demand right now. We have unprecedented, almost unlimited demand, but we're doing lots of pilots and lots of testing and I can see as we get towards our 2023 and we analyze all this and we're moving towards that 2025 strategy. That Primasun joint venture will create incredible opportunities to identify and engage and enroll the 936 million people worldwide who suffocate and want to find a pathway to treatment for their sleep apnea. Jim, any other thoughts about Primasun or Propeller or any other great developments you've got on the horizon in SRC ?
James Hollings: I would say just in specific to Propeller, we remain very excited about Propeller as a part of our portfolio. And, like a lot of number of things, over the last 18 months, the headwinds for Propeller were largely driven by their customer base, focusing on COVID. So, a big part of Propeller's business is working with payers and with health systems to drive adoption of their digital solutions, and there was just distraction in their customer base for many months, obviously. So we're starting to see some more traction in those conversations as COVID starts to decline, and the market starts to stabilize. And we've taken the opportunity during that span to do to continue to develop our capabilities in Propeller and I would say -- just a couple of highlights, I would say, we've added quite a lot of muscle to the commercial side of that business by adding talent into the business. And we've also been working hard behind the scenes to build out the cloud architecture and make sure that Propeller's cloud architecture is paired up really nicely matching and kind of aligned with ResMed's overall cloud architecture for our other digital offerings. And all of that kind of investment is just going to accelerate Propeller's traction in the market as we continue to accelerate digital offerings across our entire portfolio. So we're very excited about it. I think that material revenues out of Propeller are a couple of years away in all likelihood, but as we get more milestones and do things like sign contracts we will keep everybody apprised.
Operator: Thank you. We are now approaching the 75 minute mark. So I'll turn the call back over to Mick Farrell.
Mick Farrell: Yes, thanks, Rob and thanks to all of you for sticking around a little long. Clearly some unique circumstances in this perfect storm. Thanks again to all of our shareholders for joining us on the call today. I'd like to once again take the opportunity to thank 8,000 ResMedians, many of whom are also shareholders for their dedication and hard work helping people breathe better, sleep better, and live better lives outside the hospital in 140 countries worldwide. Thanks for all that you do today, and every day, and thanks especially to our ResMed heroes on the front lines during this global private crisis, including patient care provider support and hospitals, production, global supply chain management, distribution, and tech service. Once again, thank you. And I'd like to thank all of you, our shareholders for joining us here and we'll see you in 90 days. Thank you very much. Great. Thanks, Mick and thank you again for joining
