Q2 2022 Resmed Inc Earnings Call
Hello, and welcome to the resumes second quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Amy Wakeham, Vice President of Investor Relations and corporate Communications. Please go ahead Amy.
Great. Thanks, Kevin and Hi, everyone welcome to resume in the second quarter of fiscal year 2022 earnings Conference call. We thank you for joining US. This call is being webcast live and a replay will be available on the Investor Relations section of our corporate website later today, along with a copy of the earnings press release and presentation.
<unk>, which are both available now.
With me on the call today are Chief Executive Officer, Mick Farrell, and Chief Financial Officer, Brett Sandra Cock during the Q&A portion of our call, making Brett will be joined by Rob Douglas, Our President and Chief operating Officer.
Jim Hollingshead, our president sleep, and respiratory care and David Pendarvis, our chief administrative officer and Global General Counsel.
As a reminder, on today's call, where we'll discuss some non-GAAP measures for a reconciliation of the non-GAAP measures. Please review the notes in today's earnings press release or the appendix of the earnings presentation.
Our discussion today May also include forward looking statements, including but not limited to expectations about resumes future performance.
We believe these statements are based on reasonable assumptions. However, our actual results may differ you are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward looking statements that are made today.
Now I'll turn the call over to Mick.
Thanks, Amy and thank you to all of our shareholders for joining US today as we review results for the December quarter, the second quarter of our fiscal year 2022.
Our second quarter results continued to demonstrate the strong performance across our business benefiting from the ongoing extremely high demand for our sleep and respiratory care devices as well as the steady recovery of markets from the peaks of COVID-19 impacts.
We achieved double digit growth in our business as we navigate three major externalities one the recovery of patient flow post the COVID-19 maximum peaks to global supply chain constraints, particularly in the electronic components and three the almost unlimited demand associated with a competitor recall.
That has actually extended further in terms of volumes of data devices that were impacted and the duration of the repair and replace process.
The bottom line is we have at least 12 more months of this incredible demand for <unk> products.
I'm very proud of <unk> 8000, <unk>, serving patients in 140 countries worldwide. Our global teams are finding ways to deliver products and solutions to homecare providers physicians and health care systems, and ultimately into the hands of patients who need them. Most clearly the global supply chain environment remains very challenging.
Across multiple industries, and we are not immune to its impact during the quarter. Despite growing double digits year on year, we were not able to meet all the demand evaluable in the market, we are being allocated components from our suppliers, particularly electronic components and even more specifically semiconductor chips and we are thus being forced to allocate out.
Outbound products to our customers.
We have established an allocation process with clear guiding principles that give priority to the production and delivery of devices to meet the needs of the highest acuity patients first.
In addition to component supply issues, the ongoing challenges of sea freight and air freight are impacting our ability to respond as rapidly as we would like to the demand for <unk> products.
Freight costs are increasing across the board on inbound components from suppliers and on outbound products to our distribution centers and for ultimate delivery to our customers. As a result of these increased costs, we implemented a surcharge on our products starting in January to share some of the burden of these increased costs with.
<unk>.
Given all of the increase in prices from commodities to specialty specialty products across multiple industries around the world. The necessity of this surcharge has been understood and accepted by our customers.
We are working closely with our global supply chain partners doing everything that we can to gain access to additional supply of the critical components that we need to further increase production of our medical devices. We're also reengineering designs validating new parts pieces suppliers and accelerating new product launch and development to <unk>.
Further catch up with the demand.
We understand that this is a difficult situation for all of our customers, including physicians home medical equipment providers payers and health care systems and the most important customer the patient.
Our number one priority will always be patients doing our best to help those who suffer from sleep apnea, COPD asthma and other respiratory chronic diseases as well as those who benefit from our out of hospital health care software solutions to grow and differentiate our sleep and respiratory care business, we will develop design and.
Deliver well bleeding therapy solutions that can be scaled globally, and we're going to deliver the world's leading out of hospital software solutions to empower each person's health care wherever they are.
Our goal is to ensure that every person gets the care the Titan aid, where they need it and when they needed let.
Let me step back to discuss the broad market conditions in our industry.
We're seeing steady ongoing recovery of demand across the countries that we operate in.
We are still seeing a divergence in the total patient flow from 85% to 100% of pre COVID-19 levels in most countries and about 100% of pre COVID-19 levels in a few locations. These.
These metrics will continue to steadily increase towards pre COVID-19 levels and beyond is vaccines and boosters rollout globally.
You covered variant has an impact but with the adoption of digital health solutions for screening diagnosis and remote patient setup and remote patient monitoring as well as established and well established processes for COVID-19 cleaning protocols at sleep labs, we expect the impact of new variance to diminish in absolute impact each time, a global <unk>.
<unk> team remains committed to working with National State and city governments as well as local health care systems hospitals, and health care providers to supply ventilators masks and training for acute care and the important transition home as needed given the steadily decreasing as the severity of the impact on the hospitalizations and severe disease from Covid the <unk>.
<unk> is now consistent with pre COVID-19 levels.
Let me now update you on our top three strategic priorities number one is to grow and differentiate our core sleep apnea, COPD and asthma businesses.
Number two is to design develop and deliver world, leading medical devices as well as digital health solutions that can be scaled globally.
And number three is to innovate and grow the world's best software solutions for care delivered outside the hospital and especially in the home.
The U S launch of our next generation device platform called essence 11 continues to go very well. This new platform has provided much needed additional product supply as we face all time high demand for resume devices.
We expect to introduce the essence 11 platform into additional countries throughout calendar year 2022 in parallel we will continue to sell our globally available market leading platform. The <unk> 10 to maximize the total volume of CPAP, Ipass <unk> and <unk> available for sale in <unk>.
The only product that the <unk> 10 is inferior to is the <unk> 11.
As you saw in our results with double digit growth this quarter the ongoing adoption of both the <unk> 10, and essence 11 platforms remains very very strong.
With the essence 11 platform and our digital health technology ecosystem, we are engaging patients in their therapy digitally like never before in the industry.
We are also making it easier and more efficient for our customers to manage their patient populations using our full suite of software solutions, including my error for patients.
For physicians and brought tree for home medical equipment providers.
When customers use these digital health technology solutions, they have increased efficiencies lower costs, and we achieved improved outcomes for patients and their physicians.
We have peer reviewed published evidence showing that combining <unk> platform with my software and <unk> software, we see over 87% adherence to positive airway pressure therapy.
This was in a study with over 85000 patients.
On our latest and greatest platform. The essence 11, we are driving even higher adoption rates of the <unk> app than ever before.
In fact, we are seeing more than double the uptake of patients signing up to Maya and fully engaging with resumes software technology. The net result is that this delivers a better patient experience better efficiency for the homecare providers and more importantly, greater long term adherence to therapy.
We saw this demonstrated in the Alaska study in partnership with the French Health care systems, where we showed in a study with over 176000 patients that those patients who have adhered to CPAP therapy had a 13, 9% relative reduction in mortality rates versus control.
Demonstrating these types of better patient outcomes and lower costs for the health care system at a scale not seen before in the industry are critical components of the resumes 2025 strategy.
Another key aspect of our long term growth strategy is driving awareness and increasing the flow of patients through the top of the sleep apnea diagnosis funnel.
COVID-19 has advanced awareness adoption and acceptance of respiratory health and respiratory hygiene, but also adoption and acceptance of digital health and telehealth tools, including home based sleep apnea tests.
Although increasing demand is not as important in the immediate short term given the ongoing competitor recall, we have a long term focus and were always focused on that long term demand gen opportunity.
We are innovating with partners and our customers to create an even more efficient and effective approach to sleep apnea patient identification screening diagnostics treatment and management, we will continue to invest in technology that enables an end to end seamless digital experience for patients as we mentioned in our.
TOBA coal during the second quarter, we acquired <unk>, a leading provider of cloud connected home sleep apnea testing technology worldwide, We believe <unk> digital and easy to use solutions in the hands of physicians sleep lab technicians as well as consumers can help significantly increase both.
Boston and screening rights as well as general sleep apnea awareness.
Let me now turn to a discussion of our respiratory care business focusing on our strategy to better serve the 318 million patients with chronic obstructive pulmonary disease or COPD worldwide, and the 330 million patients that suffer from asthma worldwide.
Our goal is to reach hundreds of millions of patients without respiratory care solutions, including noninvasive ventilation and life support ventilation as well as new therapeutic areas such as cloud connected pharmaceutical delivery solutions from our propeller technology and high flow therapy offerings, such as our product platform called lunar.
This H F C.
Demand for our core noninvasive ventilation and life support ventilation solutions was strong throughout the quarter, especially in markets outside the U S where providers shifted focus to support the most severe highest acuity patients. This demand is aligned with the guiding principles of our allocation process, namely to give the highest.
Priority to manufacturing life support ventilation, and noninvasive ventilation devices, including bar levels that meet the needs of these highest acuity patients first.
Adoption of the <unk> for ventilation software solution that we launched in Europe , a little over a year ago remains solid and we continue to expand this technology to regions around the world.
If you for ventilation has provided valued by helping physicians and the health care systems. They operate in to manage high risk patients during the COVID-19 pandemic, but it is also increasingly being used on an ongoing basis to enhance quality of care through early and proactive intervention.
The first sign of respiratory medical issues to help reduce the risk of hospitalization.
We see a world where <unk> for ventilation is standard of care for COPD Trackman. The way that are closely back Neo <unk> platform is now standard of care for sleep apnea treatment.
Sure.
Let me now review our software as a service business for out of hospital care.
During the quarter, our SaaS business showed improved sequential growth, we achieved high single digit growth year on year across our portfolio of SaaS markets, including home medical equipment as well as facilities based and home based care settings.
The continued growth of home based care is providing tayo wins for our home medical equipment as well as our home health and hospice products and we continue to grow with customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care, including bright tree and.
Snap re supply.
The COVID-19 pandemic has been and remains challenging for some of the verticals in our SaaS business, particularly skilled nursing facilities as the effects of the Hollywood titles on the ground there remains a headwind for patient volumes in these settings.
We will continue to watch this closely as Covid rights peak, and then decline with the slightest areas as has happened in many regions around the country and around the world.
As COVID-19 restrictions continue to age and our customers improve their line of sight to better conditions, we expect to see pent up demand for technology investments, which provides opportunities for us to sell more and more services and solutions to existing customers as well as to increase our new customer pipeline.
As we look at our portfolio of solutions across care settings, we expect our SaaS group revenue.
South to accelerate achieving sustainable high single digit growth as we exit this fiscal year.
As always our growth our goal is to meet or beat that market growth rate as we continue to innovate and continue to take market share from competitors. We are the leading strategic provider of SaaS solutions for out of hospital care and we provide mission critical software across a broad set of very attractive markets.
Our latest and greatest SaaS solutions address the number one issue reported across our customer base, which is staffing challenges our SaaS customers expect this problem to persist and they recognize the need for technology solutions to help solve their challenges with efficiency and scale in our software services and solution.
<unk> helped them achieve both of these outcomes, we are well positioned and we have created differentiated value for our customers and for resume within our SaaS business.
Looking at the broader portfolio of resumes businesses across sleep and respiratory care as well as SaaS solutions, we remain confident in our long term strategy and our pipeline of innovative solutions, our sleep and respiratory care solutions treat the most prevalent and highest cost chronic conditions and our SaaS solutions to support the care settings, where people.
<unk> face these and other chronic conditions.
With this combination we can fundamentally transform out of hospital health care at a scale that no. Other company can match and we are set up for sustainable growth through ongoing investments in R&D to the tune of 7% of our revenues commercial excellence and partnerships with Cvs verily and beyond as well as future acceleration.
Through strategic M&A as well as tuck in M&A as we move forward.
Our patient centric physician centric and provider centric approach combined with our unique resume culture means that we are positioned to continue winning in the vastly underserved medical markets have sleep apnea, chronic obstructive pulmonary disease asthma and beyond.
We are transforming out of hospital healthcare at scale, leading the market in digital health technology with over $10 5 billion nights of medical data in the cloud and over $16 million, 100% cloud connected medical devices on bedside tables in 140 countries worldwide, we are unlocking value by using <unk>.
Identified data to help patients providers physicians payors and in entire healthcare systems, we have invested in the privacy cloud operations and AI and ml driven data analytics capabilities to do this at a scale that is unmatched by competitors and we are increasing our lead every day.
Our mission to improve 250 million lives through better healthcare in 2025 drives and motivates <unk> every day, we again made excellent progress toward that inspiring golf during this last quarter.
I hand, the call over to Brett for his remarks, I want to once again express my sincere gratitude to more than <unk> for their perseverance hard work and dedication. During these ongoing unprecedented times. Thank you and with that I'll hand, the call over to Brett in Sydney, and then we'll move to the group for Q&A Brett over to you.
Great. Thanks, Mike.
My remarks today I will provide an overview of our results for the second quarter of fiscal year 2022.
Unless noted all comparisons out of the prior year quarter.
We are pleased with our financial performance in Q2, despite the headwinds we faced as a result of significant ongoing supply chain constraints and a challenging freight environment.
Revenue for the December quarter was $895 million, an increase of 12%.
In constant currency terms revenue increased by 13%.
Revenue growth reflects increased demand for our sleep and respiratory care products across our portfolio driven by a recovering market conditions and will increase the lost demand in response to the ongoing product recall by one of our competitors.
In the December quarter, we recorded a material incremental revenue from COVID-19 related demand consistent with prior year quarter.
Looking forward, we expect negligible revenue from COVID-19 related demand. However, we will continue to estimate it for you as appropriate.
In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $45 million to $55 million in the December quarter.
For the first half of FY 'twenty. Two this reflects incremental revenue in the range of 125 million to $145 million.
We continue to expect component supply constraints will limit the total incremental will be lost revenue opportunity to somewhere between 303 hundred $50 million for the full fiscal year 2022.
As we shared last quarter, we expect our fiscal third quarter to remain supply constrained similar to our fiscal second quarter, therefore, limiting incremental revenue during the third quarter.
We see supply challenges to some extent easing in our fiscal fourth quarter and into fiscal year 2023.
Looking at geographic revenue distribution and excluding revenue from our software as a service business sales in U S, Canada, and Latin America countries increased by 14%.
Sales in Europe , Asia, and other markets increased by 12% in constant currency terms.
By product segment globally in constant currency terms device sales increased by 16%, while masks and other sales increased by 10%.
Breaking it down by regional areas device sales in the U S, Canada, and Latin America increased by 19% as we benefited from incremental revenue due to a competitive recall and favorable product mix as we sold an increased proportion of higher acuity devices.
This is consistent with our guiding principles for product allocation 90 that we are giving priority to the production and delivery of royalty losses to meet the needs of the highest acuity patients first.
Mask and other sales increased by 9%, reflecting solid re supply revenue and achieved despite the challenging device supply environment, which continues to limit new patient setups.
In Europe Asia, and other markets device sales increased by 13% in constant currency terms.
Again, reflecting the benefit from incremental revenue due to a competitor's recall.
Masks and other styles in Europe Asia, and other markets benefited from improved patient flow relative to the prior year and increased by 11% in constant currency terms.
Overall, our Asian operations in particular delivered a strong quarter.
Software as a service revenue increased by 8% in the December quarter, we saw strong performance out of the HMA segment as customers continued to utilize our SaaS solutions to streamline and more efficiently run their businesses.
And we are seeing some stability in the skilled nursing care segment as it continues to emerge from the challenges of the COVID-19 pandemic.
For the second half of fiscal year 'twenty two.
We expect to continue to benefit from a competitor's inability to supply new patients and from the global fleet markets General recovery from COVID-19 impacts.
However, as we have said for the last few quarters, while we are working hard to increase the gas output, we will not be able to meet all we expected demand, resulting from a competitor's recall.
Primarily because of significant and ongoing supply constraints for electronic components.
We are operating at very dynamic supply chain environment is outside of the earlier, we continue to expect component supply constraints will limit the incremental degloss revenues, resulting from a competitive recall to somewhere between 303 hundred $50 million for fiscal year 'twenty two.
This includes the device revenue, we were able to generate in the first half of fiscal year 'twenty two.
We expect Q3 to remain challenging with Q4 to be better.
During the rest of my commentary today, I'll be referring to non-GAAP numbers we.
We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release.
And non-GAAP gross margin declined by 230 basis points to 57, 6% in the December quarter the.
The decrease is predominantly attributable to higher fright component and manufacturing costs and unfavorable currency movements, partially offset by positive product mix, particularly in relation to strong growth of our higher acuity devices.
Moving onto operating expenses during Q2, we maintained a disciplined approach in our ongoing spend to support our operations.
But we are seeing a more normalized expenditure probably fall as COVID-19 impacts of thought.
SG&A expenses for the second quarter increased by 9% on a constant currency terms increased by 10%.
The increase was predominantly attributable to an increase in employee related expenses.
Importantly, SG&A expense as a percentage of revenue improved to 27% compared to 21, 2% in the prior year period.
Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the second half of FY 'twenty two.
Okay.
R&D expenses for the quarter increased 14% on both a headline and a constant currency basis.
R&D expenses as a percentage of revenue was 7% compared to six 9% in the prior year quarter.
We continue to make significant investments in innovation, because we believe our long term commitment to technology product and solutions development will believe the system sustained competitive advantage.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the second half of FY 'twenty two.
Our non-GAAP operating profit for the quarter increased by 5% underpinned by strong revenue growth, partially offset by the contraction of our gross margin.
On a GAAP basis, our effective tax rate for the December quarter was 15% lower on a non-GAAP basis, our effective tax rate for the quarter was 15, 6% compared to the prior year quarter of 15, 2%.
The relatively low tax rate in Q2 in both the current quarter and prior year quarter reflects a favorable tax benefit associated with employee equity vesting that typically occurs in the second quarter looking.
Looking forward, we estimate our non-GAAP effective tax rate for the full fiscal year 'twenty two will be in the range of 19% to 20%.
Our non-GAAP net income for the quarter increased by 5% and our non-GAAP diluted earnings per share for the quarter increased by 4%.
Cash flow from operations for the quarter was $220 million, reflecting robust underlying earnings partially offset by higher working capital.
Capital expenditure for the quarter was $15 million depreciation and amortization for the quarter totaled $41 million.
During the quarter, we paid dividends to shareholders totaling $61 million.
We recorded equity losses of $1 9 million in our income statement in the December quarter associated with the premise on joint venture with Verily.
We expect to record equity losses of approximately 2 million per quarter through the balance of fiscal year 'twenty two associated with the joint venture operation.
We ended the second quarter with a cash balance of $194 million at December 31, We had 680 meeting gross debt and 496, meaning net debt.
Debt levels remain modest and at December 31, we had approximately $1 6 billion available for drawdown under our existing revolver facility in.
In summary, our liquidity position remains strong.
Our board of directors today declared a quarterly dividend of 40 <unk> per share, reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provide flexibility in how we allocate capital.
Going forward, we plan to continue to invest for growth through R&D. We also expect to continue to deploy capital for tuck in acquisitions, such as <unk> health anecdotes, Vince and acquisition, we completed on October one.
And with that I will hand, the call back to mining.
Great. Thanks, Brad and thanks, Nick Kevin Let's go ahead, and now turn the call over to you to provide infections and then ran the Q&A portion of the call.
It certainly will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions.
First question today is coming from Chris Cooper from Goldman Sachs. Your line is now live.
Afternoon, and good morning. Thanks for taking my question can you just remind us please of the specific message you're employing to mitigate the component supply challenges and I think thats, where youre seeing more or less success.
Yes, Chris Thanks, It's a very pertinent question, obviously and we are pursuing multiple pods as I outlined in the prep remarks.
We're focusing on the first thing we're doing is going to our existing supplies and existing supply chain and really imploring them to prioritize medical devices.
The other aspects they have choices to give to electric cars cellular phones consumer devices and medical devices and we have.
Working with them directly on that we're seeing some benefit on that certainly at the.
The level of maintaining the sort of double digit growth that you saw during this quarter. In addition to that we are redesigning parts and pieces and components within our existing platforms and we're bringing new platforms to market faster. So we're working on a <unk> designs and are 11 designs. We're also reengineering our supply chains to validate and verify our new supplies to be able to get there and so.
That whole combination gives us a lot more confidence that as we look to march quarter to be better than December , but then June quarter to get significantly better than March and then as we go through September and December of this calendar year, we really start to free up a lot of those projects come into play we're seeing a lot of confidence with them.
But over that portfolio, Rob do you have any more information to provide might be Chris around what we're doing with supply chain and parts. <unk> also Chris This is sort of been going on for a year now and we knew the shortages we are going to be coming so team.
It seems that they are working on all of those activities at Nic spending talking about throughout the year.
Starting to bear fruit it does take time and that's why we're talking at that sort of.
Fix immediately.
Talking about it continuing to be challenging for this coming quarter and starting to see improvement further out that said, it's a very dynamic situation and things do change on a weekly basis and so that teams have to be extremely agile.
We've got we're actually putting a lot of resources into it.
Really strong team of engineers and <unk>.
<unk> relationship people with the suppliers.
And our product teams that will really focused on this as we are.
We worked through these challenging times.
So can I ask you mean relative to the updates you were providing in the last quarter results in October .
More or less confident with the decades that you're currently seeing in components can be addressed by the fourth quarter.
Yes, it's a good question, Chris I'm actually.
Precisely where it wasn't October .
We said in October it is going to be tough in December it's going to be tough in March and really start to open up in June and then as we go out throughout the calendar year, So I stand by that.
And as Brett said earlier looking at fiscal 'twenty, two the $300 million to $350 million of incremental product I mean look at the December quarter, six 8% growth year on year in devices amongst our global supply chain crisis, COVID-19 recovery and all the challenges that are there that is really strong, but we're going to get stronger than that as we go throughout the fiscal.
And as we go throughout the calendar year.
Seemingly infinite demand is going to be with us for the whole of this calendar year.
And potentially beyond that and so we all the projects that Rob talked about if the starting gun went off sort of June 14, when the competitor put this put this recall notice and field safety notices globally out I'll tell you we've done a pretty darn good job getting to 16% year on year and this crosses from the December quarter I think it will as I said in October I think it will get better in March.
Simba and significantly better in June and then really start to free up as we hit September and December and with almost infinite demand you never quite catch up to that but we're going to get faster and faster and grow more year on year as we go throughout the calendar year.
Thanks very much.
Thanks, Chris.
Thank you as a reminder, we ask you. Please ask one question and return to the queue in order to for time our.
Our next question is coming from Dan <unk> from MST Marquee. Your line is now live.
Well good morning, everyone and thanks very much.
Mentioned that ventilation demands back at pre COVID-19 levels, but I presume you're talking about the hospital.
Hospital patients.
So can you give us some color some color or detail on ventilation into the home health care market specifically.
Perfect.
Before most displacing the trilogy rates over the last couple of quarters.
Yes. Thanks for the question Dan I'll have a first stab at that and then hand to Jim Hollingshead, who is our president of sleep and respiratory care, yes. So what I said in the prep remarks is that what we're seeing is the demand for <unk> is really around that COPD neuromuscular disease respiratory insufficiency markets are where they were.
<unk> pre.
COVID-19 pandemic, so that we're seeing that flow of sick patients finding their way through digital health solutions Telehealth monitoring digital work with their pulmonary and <unk> carbon cleaning protocols and labs with their pulmonary physicians were getting the prescriptions for those products. The vast majority of our revenues 90 plus percent globally on respiratory care, our out of hospital respiratory care.
So even asked roles that astellas.
And volatile stis season.
<unk> and Isps, they useful ventilation outside the outside the hospitals. So those seem to be back in terms of patient flow Jim any further color to provide Dan on that yes, Dan the only thing I would add to what <unk> said is that in.
Our actual product is performing really well in the market. It's got very sophisticated algorithms that can treat a wide range of patients and demand for it has been really strong.
So in general the Astral has been very well accepted in some of the algorithms. We've added over the last several months have driven demand upward. It's also benefiting from the for what is for US a tailwind from the filter recall and so theres a bit of incremental demand for astral in that in that context as well.
Alright, thanks for that.
Thank you. Our next question is coming from Sean Lavin from Morgan Stanley . Your line is now live.
Good morning may contain <unk> well.
Let me come hoping we could get an update on the new <unk> from CMS and how that might be influencing propeller.
Yes, Thanks, John It's a great question and as you know propeller technology is for those who may not know is out of cloud connected the pharmaceutical delivery product for both COPD and asthma and a lot of those are in pilot study stage and partnerships with governments in Europe and private payors in the United States.
And so we do.
Do have some commercial models going they're not material to the global business, but Dave Pendarvis do you have any data about ITM codes that we've got through reimbursement and any any impacts on those for propeller and cross business. Yes, we will generally we're happy to see coding and reimbursement flow towards more remote.
Train type activity, that's a positive at the same timing of propellers working both to have physician adoption of those codes and we're working to see the funding come through with that and nothing changes quickly in terms of medical practice.
And propeller is also working with health care systems, and other system wide basis to try to adopt the propeller system. So I would say we are encouraging but it's still a little early in the day for us to say, we are seeing material uptake for propeller as a result, but certainly it improves the operating conditions and we think this is a long term trend that will be.
<unk> propeller as well as the rest of the business and its remote patient monitoring in the long run.
Yes.
Okay. Thanks, Dave Thanks Mick.
Thanks, Sean. Thank you. Our next question today is coming from Matthew Mission from Keybanc. Your line is now live.
Hey, good afternoon guys.
You saw a sequential improvement quarter over quarter in U S. Masks can you give us a sense of what the drivers of that are.
And whether or not you expect continued sequential improvement.
Moving forward.
Yeah.
Thanks for the question, Matt and it's great. It's great to see U S, Canada, Latin America, or the strong 9% constant currency growth of masks and Europe Asia rest of world at 11% year on year with a strong double digit 10% growth worldwide and as he said that is up from last year.
I'll start and maybe hand to Jim for some more color, but at the broad level. COVID-19 has shown the importance of respiratory health and respiratory hygiene and we said this in 2020, when we saw that sort of uptick all of the growth of our masks and accessories business and we just launched snap and we have <unk> resupply and a lot of people thought well. This is a secular step up its just that.
While people.
People would stock holdings some commodity products. This is a stockholding issue. We said no. This is sustainable we are talking to patients with doing the net promoter score. We're analyzing the data consumers want have always wanted to more health care. They've now seen the reason for respiratory health and respiratory hygiene. We're now two years into this and we are seeing sustained growth at <unk>.
The patient level demand for respiratory health respiratory hygiene, we're adding to that the technology from snap technology from broad tree, but in other parts of the world where those technologies out there, we're partnering with our homecare providers with patients directly and beyond to encourage and make that happen, but Jim any further color.
We're on the sustainability of this strong market I think the mix just listed a couple of tailwind as it related to I do think patients have changed their behavior in the context of Covid and are much more keen to good.
Clean refresh consumables and their experience and I think our our customers worldwide have gotten better at providing that in the U S market in particular, Theres, a very strong push on resupply and hasnt been for months and so that's a tailwind there is always a Q2 cyclicality tailwind because of deductibles. So.
That's a normal cyclical thing, but the other thing I think is really important to point out is that our mass portfolio is performing really really well. We have we do have the widest range of masks available to fit really almost any patient experience we.
Continue to take share I think which is a really important dynamic for us so not massive shocking movement that incrementally we continue to take a bit of share over the last two or three quarters. We've taken we've taken some points assurance. So that's been really good the only headwind unmask as the filter recall because of folks recall.
As dampening new patient starts.
And so that's a tiny headwind against four or five tailwind that we've just lifted and we feel really confident about our mass portfolio going forward.
Yes.
Thank you. Our next question today is coming from Craig Wong Pan from Royal Bank of Canada. Your line is now live.
Thanks, just a question on U S device sales I was wondering if you could provide any comments on the split there between essent delivered in <unk> and how that on a proportion of sales.
Sales between the two might compare to the first quarter.
Greg It's a pertinent question, but it's one we don't feel comfortable going into the details of what I can tell you as as an equal one personal user of this essay 11 platform is the delivery is smaller quieter more comfortable more connected.
My wife actually asked me if it was on when I turn it on it is that much smaller quarter and better than our last generation already the leading platform. So what I can tell you is it is taking off every single Asn's 11, we can Mike is solved that day. It comes out of the factory, it's already pre sold and they are moving fast and so it is increasing as a portion.
All of our U S sales for competitive reasons, we're not going to split out how quickly that S curve is coming up but the points I made in the prep remarks are really strong the essence team on its own is the second best product in the market. After only the essence 11. So it is already there and every essence 10, we can get components for and then put through the production line gets solved as well, so we're selling vault and <unk>.
Our level and customers are demanding and we will take bulk over any of the competition and so we're driving those out there driving great growth for both and we will do throughout all of calendar year 2022, as the Philips recall will last at least that long in their update just this week and so.
90 days ago. It was 12 months ending in September we were ready for that scenario. They will come back in September and get our great mosque uptake as Jim was saying earlier, we're now ready for the new scenario, which is December and we are ready to expand our components and our our share on the device side and driving as much as that demand is as is possible. So we're ready for all of the scenarios of all the above but.
Yes, we're going to break down the exact essence 11 vessels essence pain I can tell you its growing extraordinarily fast the ESCO uptake is great and and patients are loving it so throughout calendar year, we will introduce it to other countries.
Around the world and we expect the same sort of level of uptake in those other countries.
Thank you. Our next question is coming from Andrew Paine from CLSA. Your line is now live.
Yes, thanks for taking my question.
Just wanted to get more clarity on your ability to reengineer redesign.
<unk> is one element.
Austin.
How does that do anything to change and does this mean you won't be as exposed.
Shortages from <unk> and onwards.
And when do you think these changes will allow you to be running at full capacity.
Many current demand.
Yes, Andrew Great three part question I'll start with it and then maybe Rob you can cover anything I missed Avengers components, there, but look.
The starting gun went off on this project in April .
April when they said there was a quality issue June when they said there was a recall we were already ready for the supply chain shortages that COVID-19 would drive in and if this recall from a competitor hadn't happened we would be able to meet all the existing demand as you saw we grew 16% year on year in this quarter and that would have been great growth, taking some good share in the core competitive market.
But with that starting gun going off in June we did stop those reengineering projects. We said look we're not going to be able to just go back and ask for more supply. We know the supply chain constraints, we know the automotive industry cellular columns and how those roll screaming for more products to and so we started those reengineering of components and parts. We started also reengineering.
Six Sigma black belts looking at our supply chain and analyzing different supplies and re validating and assuring that we could get them there and so there's a bunch of projects going on I run out of fingers looking at them, but when I look at that portfolio gives me strong confidence to say we saw some good some of them come to fruition in December some more in March.
But in the June quarter, I think a bunch of these projects will free up supply and then you hit September and December and the portfolio of projects that are going to get to market in terms of new supply a new pace and you'd redesign we will get there and that's what gives us that confidence in that recovery of the amount of share we're going to take through 2022, Rob what did I Miss there maybe just go into some.
The sort of the reengineering processes.
Andrew.
We have hundreds of components in them and if you're missing one you can't build any of the products. So.
You'll actually see is as we build buses around all of this we will see our inventory levels of materials go up as we build buffetts of these alternatives.
Now some of the components that they're easy to have as alternatives you've got to re validate them in the medical device world you've got to have very rigorous revaluation of alternate components and that's often a lot of the engineering work, but some of the other components like the micro controllers and things like that there are a lot more complex I interact with the embedded software on the systems.
That type of thing that design and validation processes for those are more complex.
Do take more time, we've got projects across all of those.
Areas going on there.
And as we make these alternatives then we're scheduling the longer term commitments the relationships with the suppliers building the inventories and making sure. We have options that said keep coming back to the sector is a very variable situation.
And just when you think you've got everything right. Then you start saying that the other components be challenges. So that teams as I said earlier, you have to be really agile and keep competing.
Keep running really fast to track these issues.
Thank you. Our next question today is coming from John Deakin Bell from Citigroup. Your line is now live.
Thank you I'm, just trying to get a bit more color around the underlying.
New patients might be between the U S and the rest of the world and just give us a sense of where you think we are at.
In different markets.
I had some sense of when you think it might get back to the patient growth.
In 2019.
Yeah, John It's a very complex question because as you know we operate in 140 countries in <unk>.
All of the different Greek letter variants of covered.
Flow through those 140 countries at different rights, one great thing because we have strong visibility and awareness into this as we talk to the pulmonary and critical care physicians and we watch hospitalization rights.
And ventilation usage rights and ICU CCU usage rights as each variant seems to be although more and more communicable less and less severe than the impact in terms of hospitalizations severe nature of ambulatory health and death.
And so the work that we did in 2020 in 2021, establishing these digital protocols home sleep apnea testing protocols that pulmonary doctors, who previously hadn't done telehealth visits and now doing them doctors, who weren't embracing apnea link or some of the Nox digital diagnostics components have embraced them.
Throughout 2020 out of necessity, and then 2021 out of scale. So as we enter 2022 here. We are feeling very comfortable across those 140 countries I gave in the prep remarks, as sort of a wide band right, 85% to 100% pre COVID-19 patient flow depending on the country. The city. The location. There was some as I said in the prep remarks, there are some locations that are above 100.
And I won't go into detail.
North Rhine Westphalia, this quarter or Bavaria, Motorola southern France this quarter.
Southeast of the U S. This quarter, but what we're seeing is as volumes come down these protocols.
We're hitting those.
If you take 2019 as the base year, we're hitting those 100% triple digit rights in some locations and so it gives us a lot of confidence because the beautiful. The beauty is we're in all 140 countries. So that portfolio I feel every 90 days, we're seeing positive movement, even though a particular location might get back two steps and one might go forward three steps on.
We're seeing sort of one step forward for resume as we look across that portfolio. Every 90 days. That's why we're able to see this great strong 16% device growth across a region that has not only shaped I can there is some good flow of patients coming through what worries me a little bit John is actually some of the backlog that might be happening in the system due to a competitive just nothing in the mark.
For 18 months right in aggregate according to their call. This week. It will be 18 months from June 2021 through to December 2022.
Backlog of patients, we can't get them all right, we're ramping up as Rob said doing everything we can to ramp up we're not going to get them. All in so that backlog of patients even when a competitor comes back is going to have to flow through the system. So this is not just an effect that is over the day our competitors back there's going to be a number of quarters, where regimen is going to grow take share and deal with this flow of patients through.
So although we are pushing very strong around our long term demand Gen. We're not turning up the doors yet on driving the top of the funnel because frankly the top of the funnel is full and growing and we will do for the next 12 months.
Thank you. Our next question today is coming from Gretel <unk> from Credit Suisse. Your line is now live.
Thanks, Good morning, all more of a medium term question Nick.
As the industry has been able to meet the demand from the patient environment. What are you doing to ensure that patients that fall off the wagon with.
I guess do you see any risk that the industry will see lower grade from the medium term from all of the disruption I would say.
12, 24 month period.
Thanks, Craig I'll have a first go at it in hand, and Jim I mean, the short answer to your question is absolutely not I do not see any growth slowing down in fact, the backlog certainly for resumes I see incredible growth coming for our industry and a lot of the demand Gen stuff I talked about and we talked about on Investor day with Cvs partnerships on the brick and mortar side in the frontline.
And then on our Verily partnership premise on the frontline we are not turning the dials on that demand Gen up when we don't need to through 2022, but we will start to turn them up in 2023 and <unk>.
What we'll see is the backlog will come in and our demand Gen will come in and we will actually post COVID-19 and see a faster growth rate of our industry because of all the learnings of digital health home sleep apnea.
Testing seamless digital end to end journeys for patients, it's got better for patients when they get into the system. The trouble is now we're competitive provide the therapy at the end and that does create a bit of a backlog, but I think on the other side of this will actually see increased secular growth that mid to high single digit growth of our industry move up 50 to 100, even more basis points.
Because of the Embracement of digital net net the gym.
Anything to <unk> question around industry growth, Yes, Gretel, I guess I would just add a couple of things. The first one is.
We're working really hard with our channel partners to understand the dynamic of patient waitlist and working really hard with physicians on that and so.
We're as you know, we're prioritizing higher acuity patients higher acuity conditions with our with our production, but we know that there are kind of straight OSA patients out there they are facing longer weightless and we're working with our customers to try to reduce those wait times and to better manage an understanding of when we can deliver product to which customers. So thats just sort of a general thing we're trying to do I think.
The other thing that will help us to drive growth on an ongoing basis as we're working right now on programs that will allow us to capture patients who may be faced along waitlist don't want go into great detail on that but our marketing teams in our main countries are working on those programs right now.
As we have more supply.
We feel pretty confident we'll be able to run programs.
And be able to re engage patients that maybe have they are tired of waiting or something like that so we think we'll be able to capture a big big part of that backlog, which I think there is a backlog and we think there'll be an even bigger backlog as that goes forward and the last thing I would add is we're pretty active in developing new channels and so those are those are new and growing areas for.
US, but if you think about something like.
Cvs health hubs there is a new channel that continues to grow Cvs continues to invest there.
It's a new way for patients to <unk>.
Minded that they were diagnosed with OSA or to be reminded that they might need resupply and Cvs is just one example, where we're working in new channels, we're doing that not just in the U S. But in multiple markets around the world. So we're going to expand the ability of the reach of different channels for patients to get treated and we'll be we're accelerating those now we'll be accelerating those programs even more.
Or as production comes up to higher volumes, and we're able to treat more patients.
Thank you. Our next question today is coming from Salford Dawson for Diamond jewelry capital. Your line is now live.
Hi, Good morning, good afternoon, and thanks for taking my question.
Just maybe one for Rob Rob just on the discussion around semiconductors and the shortages can you.
Talk to us about the <unk>.
The line of thought you'd get as it relates to the flow of those chips and then manufacture ability in other words.
Is it still takes three months to process devices and so are you in a position now to know what your volume on slide generally disease looking into fourth quarter. Because you would have those chips either city, which you know what they do to come in over the next few weeks.
Actually as I was saying earlier, we've actually had to greatly extend our forecast lead tonnes.
For it to get the supply commitments that we want actually multi years so.
At that level, we had a long long view.
Yeah, our cycle times are actually pretty short the longest part of our cycle time and variable part of it is <unk>.
So a lot of the challenges of forecasting sales on a weekly basis.
What's happening to any freight that stuck off Los Angeles or something like that.
Now, we can mitigate that cost with air freight and we do that but we certainly count to a 100% on freight and so we're trying to balance out those sort of fight demands and that does create a variability. So the hardest thing for predicting what's going to what we're forecasting over the next couple of weeks is actually those freight deliveries our internal systems around delivering them.
Out of our warehouses are extremely slick and really run well and we've got great teams in those warehouses our factory capacity we.
Typically run a policy of having significant burst capacity in these factories.
And as we've said before just invested in a major new factory into us in Singapore.
And out of that factory, we would normally have the capacity to meet all of the industry demand. So we can actually pushed up through that system really quickly.
The key issue is that variability.
The propensity of the applause to meet their commitments now they'll do everything they can to make their commitments, but actually some of those Friday shoes. They have the same issues.
They have the same issues of allocation from their suppliers.
So we have to.
Manage all the way through all of those layers to get there so the long answer but.
But really the nine factories suppliers in the short term variability is freight.
Yes.
Thank you. Our next question today is coming from Lyanne Harrison from Bank of America. Your line is now live.
Yes, good morning all.
Yes, just talking about.
In detail, but can only talk about price.
Color on the trends you're seeing in average Dubai prices this quarter.
Perhaps just two.
<unk> mix and discounting as you can.
Yes. Thanks, Lyanne. It's a good question and you know traditionally we don't talk much about it or what.
One thing I will say is that.
We announced it and now our prep remarks, my prep remarks here today that we have a surcharge now on all <unk> devices.
That are associated with exactly the last question from Seoul, where Rob was talking about increased air freight and sea freight costs.
<unk> costs are <unk>, what they were air freight was always a significant factor above safe right and it's got more expensive too.
And so all of that has meant that we had to provide that surcharge to our patients. So we haven't done a price increase.
Some of our competitors have to the customers, but we have put a.
We have put a surcharge on devices.
Starting in January our customers have accepted it I mean, the people running these companies go to a supermarket and see the price of milk or the process of whatever commodities that there are purchasing in the daily lives going up in price and so a surcharge from us given the nature of this has made sense to them and so your question was what's the levels of price discounting there was no.
Discounting right now in fact, we're taking why some of the.
Early pie and some of the other factors that were there there were non price related by the impacted sort of cash flow there because it's very important in an environment like this to make sure that the.
The cost of shared in a fair and equal way.
Through the supply chain and we're doing that through through a surcharge, but as I say the mix side. The second part of your question.
We're following our guiding principle on allocation here, if we have limited chips in parts and pieces, we will make an astro before seller before an echo of STI, and Este and <unk> and so on down to an <unk> happened CPAP and so the mix.
Lead to some sort of ISP mix increases on that but any individual like for like product, we're keeping the prices where they are because we're in a steady reimbursed environment. Our customers, we have relationships going back decades, we want them for decades for the future and we really value those relationships and so we're really focused on this sort of temporary surcharge, which is going to be associated with those increased costs we have.
And any any impact on ISP is really around mix towards those higher acuity products.
Thank you. Our next question today is coming from Steve Wheen from Jarden, Australia. Your line is now live.
Yeah, Thanks very much.
I've got a somewhat related question for Brett just with regards to the gross margin.
So I was just wondering if you could help us.
Sort of breaking into that number a little bit, particularly.
Particularly from the point of view of the next few quarters.
Trying to put into context.
Just to what sort of effect that will have.
And then there's obviously other drivers, which all look quite positive like FX mix.
Maybe the essentially the pricing.
So if you could sort of maybe comment on any of that and then lastly, maybe a headwind is there any.
Pricing pressure coming from the semiconductors suppliers to you guys.
Yes.
Hilton.
Package that gross margin that would be great.
Yeah. Thanks, Thanks, David let me try to unpack that a little bit on the gross margin. If you look at it year on year pretty big decline in really.
Right with the big one and logistics costs.
Some component cost increases coming in and also manufacturing because it really had to optimize on the manufacturing front at the moment, where we're just trying to make sure. We can we can.
Really maximize output level and efficiencies.
So that's playing out that played out year on year, if you look at it sequentially.
And quite good shape, a little bit of an increase sequentially actually if you go forward with you getting to have freight and logistics costs coming through I mean, that's still going to be I think a headwind.
I think for the rest of this calendar.
<unk> probably be relatively neutral as we look forward and I think I asked.
Pay declines.
We've typically heard that but I think we'll see that going forward, we have the surcharges only a small surcharge so and we're only we're not recovering anywhere near.
Increasing costs, there, but where it is mixed.
We can share that.
So they kind of they are still with US there are some headwinds that we've got.
11, coming through which is at a price premium, but thats only in the U S market at the moment, taking a medium term view that'll that'll be supportive.
But the other one to call out.
As particularly in Q4 as we increase the output of the volumes from the supply constraints easing and we will have higher revenue there, but in a relative sense it'll be more of a kind of lower acuity.
In terms of that mix. So that one we are a little bit of a headwind from the product mix won't be as beneficial as it has been.
So there's been puts and takes there but.
That's kind of how it's how.
I say it at the moment.
Thank you. Our next question today is coming from David Bailey from Macquarie. Your line is now live.
Yeah. Thanks, Good morning, Megan Britt you sort of touched on this.
And part of your earlier remarks, but I just wanted to confirm you're confident that some of the Chinese are in relation to the digital initiatives over the past couple of years well they have a system to deal with the backlog of your patience over the medium term.
Yes, David its a really pertinent question and I feel very confident and we've watched it.
Before this ratio was announced through to through the June 21, we saw great adoption for 18 months of all the digital solutions from doctors getting involved in telehealth to the adoption of identification engagement enrollment and diagnostic systems on a digital basis in countries like in Germany.
So about an interesting was less than 10% of the total diagnoses in 2019. It went to a huge double digits throughout 2020 and has stayed quite hot.
<unk>, the reopening with cleaning protocols of sleep labs throughout Germany, and so I think as you look on an aggregate David that adoption that happened in the last two years will be a huge impact permanent adoption of digital health screening tools and as Jim said as we open up new channels, we're going to roll that digital end to end solution through multiple new funnels to.
Patients into the funnel through our early partnership with <unk>.
Hassan throughout Cvs partnership level, two public ones in the U S. But we are doing as Jim said stuff in the other 140 countries that are on a partnership basis with the U K given with the NHS. Some great information from our UK team was looking at over the last week incredible work in our northern Europe team, our western European team the partnership with the French government.
I talked about the Alaska study that's just the peer reviewed published evidence that's out there we're doing stuff on the ground that we're not talking about publicly but it has incredible adoption of digital health technologies in conjunction with the French Alps.
Security system supporting that through high reimbursement of cloud connected CPAP versus non cloud connected sleep because they see the results they see higher adherence dicey better outcomes, they see lower costs, not only desk right lower death rate of those with CPAP adherent, but lower hospitalization. So at sites of the lives and save some money. So David it's a permanent adoption I think it will improve our efficiency.
As an industry as we get into 'twenty, two 'twenty three and beyond.
Thank you. Our next question today is coming from Margaret Kaczor from William Blair. Your line is now live.
Hey, good afternoon, and good morning to all.
Right Sir.
I wanted to follow up a little bit on some of them off.
You guys had implied from the benefit of the competitor.
Recall in yeah.
If we can sort of keep the fiscal Q3 benefit similar to what we saw in fiscal Q2, maybe tick it up a little bit.
In the fiscal Q4 benefit from like one.
130, $140 million or so one of your range. So.
As we think about that with Philips extending the time and what the impact of the recall should we be using that $1 40 as the base benefit as we go into the second half of the calendar year.
Especially given that it sounds like even at that range the demand fully satisfied.
So theoretically go higher, especially with the underlying market improvement.
Any thoughts there would be great.
Yes, Margaret it's a great question and I'm not going to get into sort of the detailed breakdown of the $3 50 through through the fiscal year, but as you said look at it is.
Backend loaded in terms of Q4 is going to be the lion's share of that of that because all the projects that Rob talked about earlier will come to fruition in June September and December .
So the only guidance I think I've given in the last nine years as CEO was around this $350 million on the revenue side there for fiscal 'twenty, two so I'm not going to go into 2023, we did that because the models were quite wide there on the benefit from this recall on the sell side from as low as $50 million to as high as 950 million. So we wanted to to write set it at 300 to 350, we're still comfortable with that.
For fiscal 'twenty, two but as you look through fiscal 'twenty three look I do think that the share that we're taking this year will be a long term sustainable share when we go in and take share. We don't just go into a competitive account say great hazy product. We work with people who are adopting existing relationships with people who are adopting <unk> for their patients getting that.
60, 70% uptake that we've seen with essence 11, theyre working with their view all their physicians are on the cloud platform getting that efficiency. They are using <unk> and they are partnering up in the United States and beyond so that digital and when it becomes a very sticky platform because the value is so strong they lower their labor costs by 50% setting up the device they improve adherence to 87%.
Their patients and their physicians and it becomes permanent so I do think that the share we're taking will be long term sustainable when a competitor comes back they're going to have to go after the low price people first that don't have all that digitally into and when they try to come after us we're going to be so far ahead with 18 months worth of digital health innovation and all the work that we're doing to partner with physicians patients and <unk>.
<unk> I look forward to it we're winning this football game before we got the penalty kick that's likely where the Kansas City Chiefs and were up 42 to zero and then we got a penalty kick in then we're up 45 to zero. It doesn't we didn't need the penalty kick to get there. So I still think we'll win on the other side of this but having said that we're not going to give guidance around 23.
But everyone will have their models I think that.
With a competitor being out for the calendar year, we're going to take incredible share. This calendar year I think as they come back then nine brand will be different they will have to start from the ground up and we will have a strong lead as we go through fiscal 'twenty three and beyond the most important thing we're not really looking back at our competition. We're looking forward as we are talking about as Jim and I have been talking about it's about the digital health.
Solutions getting patients into the funnel and finding new ways to get the 1 billion people worldwide, who have sleep suffocation into the funnel and 80% to 90% of them are undiagnosed, that's what we're laser focused on.
Thank you. Our next question today is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Good afternoon, everyone. Mick one question from my side.
Let me pause this is a hypothetical obviously demand is not being met.
Right.
Because of supply constraints.
It was so forth how do you ration between an organic Richmond patient.
It will be sticky long term versus let's say, a philips patients that potentially could generate higher ESP short term.
Yes.
Part of that Im also trying to understand do you see mix and match is going out in the field I E cubes and accessories with floors being mixed and matched just to meet demand. Thank you.
Roger It's a good question and look we don't.
Particularly in the United States market, we work with homecare providers and we're really taking.
The human the human patient first model here first which is we start with the highest acuity patients and work our way down with our partnerships with homecare providers, we start with existing relationships digital adoption and because it drives best efficiency for the system and best outcomes for patients. So we don't make priorities I'll choose these patients because it would be more profitable this system because it will be there.
We focus on that acuity, one those relationships and the adoption of digital because the long term is what we're focused on we don't want some short term revenue and some short term guidance that you just gave up when you are looking for transforming the health care system towards about 2025 goal and so that's where our priorities are any further color Jim you'd like to provide on Roger's question, just just a couple of things.
First thing I'd say, we're not making the decision about the patient the provider that's making the decision about the patients.
We're driving our production mix for higher acuity, so that we can.
Can enable providers to meet the needs of the higher acuity patients first as a first thing I would say second thing just as a reminder, I think we mentioned this I think we mentioned it today, but we've certainly talked about this on previous calls.
The way, we're prioritizing product allocation is higher acuity patients, but we're also prioritizing.
Effectively prioritizing existing resume customer volumes right and that's a very explicit decision right. Because we could have said the alternative we could have said we're going to take this opportunity to go take it take.
Accounts that have favored the Philips historically been in fact, what we've done is we've done all of our allocation of the product based upon the history, we have with our with our customers.
And the fact that what that means is that it's customers.
Who were the more adopted a resume product who are getting more volume from us right and one of the opportunities for us as our volumes build is to actually once we once we have met the demands of those customers to actually take competitive share in accounts that Mike might have trended more towards Phillips historically, so that's when we've had some questions on growth next year, I think thats a big opportune.
For us in growth next year and then the third thing on your question is it's always been the case that that providers will mix and match one manufacturer's matched with one manufacturer's device or whatever there is a little bit more of a tie to the device and the tube. If it's a heated too because those are those are locking key so are either to work with our devices and not with others.
But we have higher share we have a higher attach rate for all the consumables in the market than our competitors do so when theres mixing and matching is almost always to our benefit.
Thank you. Our next question is coming from Michael Pollard from Baird. Your line is now live.
Hey, Good day, thanks for taking the question, it's a U S centric, one and I am curious.
Spire is.
Second line is deduct therapy in the U S.
Company has been running at fairly active marketing campaign with television commercials in 2021. They spent $50 million that number is going to be a lot higher in 'twenty, two and I think a regional campaign is going national.
Inspire second line so it goes without saying on that but the commercials tend not to portray CPAP therapy in the best light and I'm curious what you think about this and if theres any counter detailing efforts you can do to.
Respectfully pushed back on.
Some of the marketing around that.
It inspires doing.
Yes. Thanks for your question, Michael and it speaks to substitute therapies, which is something we look at very carefully because <unk> stands for respiratory medicine, not CPAP manufacturer right and so we've been in alternative therapies for sleep apnea therapy for decades, we have a dental three D printed dental device called <unk> with a number one.
Hyder of dental sleep apnea therapy in Western Europe , Northern Europe , and many other countries around the world and we've invested in technology in this space of the company mentioned inspire hypoglossal nerve stimulation is the category, we invested in a company called <unk> in Y X.
Which is actually now listed on NASDAQ and on a European exchange and they are in PMA trials here in the United States and an MD artwork in Europe , and so that product will come to market in this segment.
Yes, we've seen some people do DTC advertising in this space that was an oxygen delivery company that had a guy from Star Trek for a while I think these things of demand Gen and the old school ways not the future for US we're focused on social media, our partnership with Google and Verily is around people typing in my husband, Snores iron ore and getting through a digital end to end.
<unk> identify engage and enroll people through and we haven't really gone old school media with demand Gen. We certainly detonated in calendar 2022 to your point you can't change you can market. However, you want the industry cant change clinical and economic realities CPAP is the most economical and best noninvasive way to treat sleep apnea period.
Now, we make so that would be device and a dental device and we're invested in hypoglossal nerve stim I cited on the clinical and economic reality, you talked to any pulmonary.
Even in ANC surgeon will say now you have the <unk> that you have to try.
Dental and then Youll try the <unk> also noticed in RASM is going to be involved in all three categories. I think there will be valid, but I think they should be none his primary secondary and his tertiary.
And the economic reality is clear you can Google the price, it's probably gone up a little on CPAP dot com for a CPAP from from those those providers or <unk> dot com, probably $500 for the device and trialing of about $100 on a mask every year compare that to a $25000 surgery I didn't get what Youre high deductible Health plan health savings account is in the U S. That's a lot of money for.
The individual and a boatload for the health systems. So there'll be some economic realities of pie is doing care management around this as it grows good category long term.
My opinion on the stuff is any talk including the Wall Street Journal article. This morning around 1 billion people suffocating <unk>, 90%, obviously that undiagnosed any news about sleep apnea sleep suffocation is good for <unk> and its demand Gen. I prefer it in 2023 and 2022, because we've got enough demand to keep us going for 12.
We will be turning the knobs on our social media, our digital and al brick and mortar our demand Gen in 2023.
Thank you. Our final question today is coming from Mike Matson from Needham <unk> Company. Your line is now live.
Yes, thanks for fitting me in.
Just wanted to ask about the surcharge.
If you're willing to disclose roughly what percentage that is and is that something thats being applied to all your products in other words, the devices and masks and accessories or just specific to devices and then finally is this something thats tended to be temporary or something that.
Do you expect to be more permanent.
And I have a follow up as well on something else.
Yeah, Mike Thanks.
And we may not have time to have a follow up given with 15 minutes over already but look the surcharge uncomfortable I think there was a sell side note that was public out around this.
It's a $12 surcharge in the U S and the 12 euros surcharge in Europe , and it's basically on all devices, it's not applying on the mask side. So that's the answer to those to the question of how long will this last obviously, we're in discussions with customers around the world. If you look at Rob's answer to the question if you're reading the transcript further up that transcript.
It's a complex issue around sea freight if right.
Costs are semiconductor micro chips, and we don't know how long those freight costs will be high those component costs will be higher so I will say the surcharge will be there as long as those of its temporary but it's as long as those are there and I think you've got many others.
Stocks in your portfolio, where they are talking they all have a semiconductor manufacturer.
He will give you further detail on how long they think they will have supply chain constraints, and therefore higher cost to pass through to their customers. So that'd be the way I'd answer your two questions Mike.
For bringing those through and thank you to everyone for staying an extra 50 minutes. There is a lot to go on this quarter look thanks to all of our shareholders for joining us on the call once again like to thank the opportunity for the 8000 raise millions many of whom are also shareholders, who listen in here for your dedication and hard work, helping people breathe better sleep better and live better lives outside the hospital in 140 countries.
Thanks for all that you do today and every day. Thanks for surviving this COVID-19 and this and the zoom calls and all the craziness.
Thanks also to our frontline heroes, who Arnold zoom calls Theyre doing patient care technical care sales teams visiting customers every day I would also like a special call out to the frontline supply chain management procurement distribution and our digital health teams working around the clock to keep up with every new launch of my view and broad train.
<unk>. Thank you all I'll look forward to talking to you all again in 90 days. Thank you I'll hand to you to Amy to close us out.
Great. Thanks, Nick and to Echo Nicks comments. Thank you everyone for sticking with us that extra 15 minutes and enabled us to get through everybody in the call queue. We do appreciate your interest and your time and if you have any follow up questions or additional questions. Please don't hesitate to reach out to US directly. This does conclude our second quarter 2022 call Kevin.
Turn it back to you to close things out.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.