Q3 2022 Resmed Inc Earnings Call
Hello, and welcome to the Q3 fiscal year 2020 to resume earnings conference call. My name is Kevin and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session. Please note that this conference is being recorded I will now.
I'll turn the call over to Amy Wakeham, Vice President of Investor Relations and corporate Communications, Amy you may begin.
Great. Thank you Kevin.
Hi, everyone and welcome to resume the third quarter of fiscal year 2022 earnings Conference call. We appreciate you 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 our earnings press release and presentation, which are both available now.
With me on the call today are resumes 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 President and Chief Operating Officer, Jim Hollingshead, President sleep and respiratory care.
And David Pendarvis, our Chief administrative officer, and Global General Counsel.
During today's call, we will discuss several non-GAAP measures.
For a reconciliation of these non-GAAP measures. Please review the supporting schedules in today's earnings release or the appendix of the earnings presentation.
As a reminder, our discussion today will include forward looking statements, including but not limited to expectations about our future operating and financial 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.
I'd like to now turn the conference call over to Nick.
Thanks, Amy and thank you to all of our shareholders for joining US today as we review results for the third quarter of our fiscal year 2022 ended March 31st.
Our third quarter results reflect strong performance across our business with double digit revenue growth, you know sleep and respiratory care business and high single digit growth you know software as a service segment.
Our growth is the direct result of our global team's ability to pivot and drive for results. Even as we continue to manage through several external challenges that are impacting our business, including one ongoing supply chain disruptions to COVID-19 restrictions in parts of the world.
Three recovering post Covid peak patient flow and for unprecedented demand from a competitor recall, which will keep them out of the market at least through the end of the calendar year.
The global supply chain environment remains very challenging across multiple industries I'm very proud of our team growing double digits. This quarter year on year with an astounding, 30% growth this quarter for devices in U S, Canada and Latin America.
Even with this incredible growth the demand in the market was even greater.
As with almost all customers in the global components industry, we remain on allocation from our suppliers, particularly for electronic components with our number one bottleneck being semi conductor chips.
This allocation impacts our ability to meet the incredible demand that we see in our marketplace and we are forced into and to allocate resume products to our customers.
We have established guiding principles for allocation, giving priority to the production and delivery of devices to meet the needs of the highest acuity patients first.
Additionally, the ongoing challenges of sea freight and air freight due to reduced availability and increased prices are impacting our ability to efficiently get components into and finished goods out of our factories worldwide.
We are working closely with our global supply chain partners doing everything that we can to secure additional supply to further increase production of our devices.
This work includes a combination of a number of work streams, one shoring up the flow of existing parts from existing suppliers to establishing flow of existing parts from new supplies, three validating new parts from existing suppliers and for validating and verify.
New parts from new suppliers, as we review and redesign across key devices in our portfolio.
In addition, we have fifth line of work. So it's five lines of work in that fifth one is reengineering designs to eliminate <unk> mitigate the top bottlenecks to achieve greater flow through our supply chain. The most significant example of a project in this fifth line of work is our newly <unk>.
Released S. Since 10 card to cloud device. This device eliminates the number one bottleneck of the three G. <unk> com's chip, while facilitating secure data upload to a cloud based software platform called <unk>, so that providers and physicians can access.
Data and better manage the patient.
We've already begun to offer essence 10 cod the cloud devices in select markets to some customers and we will be ramping up from there with these five lines of work continuing in parallel we have been able to offset some of the impact of continuing component shortages and day commits to help us better support.
Patients providers and physicians.
We recognize that this is a very difficult situation for all of our customers, including physicians, who feel the pressure from their patients home medical equipment providers, who see this every day in their businesses, but also tires and entire health care systems, and especially the most important customer the patient themselves.
We are partnering across the industry to be the solutions provider to these problems, we expect a significant backlog of patients diagnosed and coming through the system to be present for at least the next 12 to 18 months with incredible associated demand. We are working to address this demand with these portfolio of <unk>.
Apply projects and beyond and we will get through this time stronger than ever as an industry and as a company.
Our number one priority will always be patients doing our best to help those who suffer from sleep apnea chronic obstructive pulmonary disease asthma and other key chronic respiratory insufficiency diseases as well as those who benefit from our out of the hospital care software as a service so.
<unk>.
Our goal is to ensure that every person gets the care that they need where they need us and when they need it.
Let's now briefly discuss the other broad market conditions in our industry. We continue to see steady ongoing recovery of patient flow and demand through the diagnostic channel across the countries that we operate in in fact, many countries are above 100% of pre COVID-19 levels of patient flow.
However, ongoing surges variance and government restrictions contingent impact a few countries, which remain below pre COVID-19 diagnostic levels. China is a case in point right now with severe shutdowns in Shanghai and beyond.
But across our portfolio our global portfolio. We're in 140 countries that we serve I expect that these metrics will steadily improve to pre COVID-19 patient levels and beyond as vaccines and boosters rollout globally and people remain focused on their personal respiratory health and hygiene and that's been a big learning.
<unk> covered with the adoption of digital health solutions for screening diagnosis, and remote patient setup and remote patient monitoring as well as establish COVID-19 cleaning protocols sleep labs and other facilities I expect the impact of new variance to diminish in absolute impact each and every time.
Let me now update you on our top three strategic priorities number one which is to grow and differentiate our core sleep apnea chronic obstructive pulmonary disease and asthma businesses number two to design develop and deliver world, leading medical devices as well as digital health solutions that can be scaled.
Globally.
And number three to innovate and grow the world's best software solutions for care that is delivered outside the hospital, where people live and especially in the hub.
The U S launch of our next generation device platform called essence 11 continues to go very well, although it is challenging to differentiate ongoing positive customer sentiment and feedback from the incredibly high demand in the U S market and beyond the.
The essence 11 has provided much needed additional product supply as we face all time high demand for resume devices and it couldnt have launched at a better time for that purpose to help us mitigate ongoing component shortages, we will introduce the <unk> 11 to into additional countries in the fourth quarter that we're in right now.
For fiscal year 2022 and throughout fiscal 2023.
In parallel we will continue to sell a globally available market leading platform. The <unk> 10, which is second in customer preference only to the essence 11, including the new card to cloud <unk> 10, as we seek to maximize the total volume of CPAP iPad and bar levels available.
For all of our customers.
With our digital health technology ecosystem, we are engaging patients in their therapy in a digitally native environment like never before in the industry.
We are also making it easier and more efficient for our home medical equipment and home care provider customers to manage their patient populations using our full suite of software solutions, including my error for patients if you for physicians and providers and brought tree for HMA.
Providers.
When customers use these digital health technology solutions, they have increased efficiencies lower costs and together with US we achieved improved outcomes for patients and their physicians.
With the latest technology built into the essence 11 platform, we are driving higher adoption rates of the my app by patients higher than ever before right. Now we are seeing more than double the my adoption right as patients engage directly in their own health care people want person.
Okay. They want their own data on their own app on their own phone and they liked the coaching and the personal engagement of our digital ecosystem.
This means more patients are signing up onto my everyday and fully engaging with resumes software technology, helping us to now pass over 11.5 billion nuts of respiratory medical data in the cloud.
Ultimately these software solutions these big data deliver a better patient experience they deliver better efficiencies for homecare providers and most importantly, they deliver greater long term adherence to therapy by patients. Let me spend just a couple of minutes outlining some real world evidence showing that great.
Therapy adherence leads to lower hospitalizations, lower mortality and better clinical outcomes through mitigation of chronic disease.
We are demonstrating better patient outcomes and lowering costs for the health care system at a scale not seen before in the industry. These are critical components of the resume in 2025 strategy. The latest example is a study recently published in the landmark American Journal of respiratory and critical care Medicine Journal also known as <unk>.
The industry is the Blue Journal. This article demonstrates that patients with obstructive sleep apnea and chronic obstructive pulmonary disease, who were adherent to CPAP therapy versus not adherent to CPAP therapy, and it showed significant year, one and year two reduction of clinical use by over <unk>.
<unk>, 30% and reduction of inpatient hospitalizations by nearly 50% it showed a 20% reduction in year, one and year two total healthcare resource costs, which included a 25% reduction in emergency room costs, and a 52% reduction in <unk>.
Patient hospitalizations.
These are important metrics for the whole health care system.
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 diagnostic funnel.
COVID-19 has advanced awareness adoption and acceptance of digital health and respiratory health, including telehealth tools, and specifically hung based sleep apnea tests.
Although driving demand generation is not a priority in the immediate term given the supply shortage and incredible demand with pricing we are maintaining our long term focus and investments in this diagnostic channel. So that we are ready when conditions improve to ensure sustainable long term pipelines of new patients coming through the channel with <unk>.
One 6 billion people worldwide suffering from sleep apnea, COPD and asthma. It's also our duty to do this we are innovating with partners and our customers to create even more efficient and effective approaches to sleep apnea patient identification screening diagnostics treatment and management.
We will continue to invest in technology that enable what we call an end to end seamless digital experience for patients.
One example, we recently rolled out is the next generation of our remote masked selected tool that makes masked selection and sizing easier and more effective by creating personalized mask recommendations based on a patient's health sleep attributes and their own spatial measurements choosing the right Mark.
It is challenging to do remotely, but getting the right mask fit is crucial to patient comfort and long term adherence.
The technology masked for Elekta is a web based tool that solves this problem by prompting the patient to answer a few simple questions and follow a few easy steps with the camera enabled smartphone to capture a digital facial scan.
Based on the answers and the digital facial measurements masked selector then provides a recommended mask and sizing.
Whether a patient is then being set up at home remotely all preparing for a face to face interaction with the respiratory therapist and clinical staff at a Provider's office masked selector helps the patient quickly get to the right mask for their unique needs.
Turning to a discussion of our respiratory care business focusing on our strategy to better serve the 380 million patients with COPD worldwide and the 330 million patients that suffer from asthma worldwide. Our goal is to reach many hundreds of millions of patients with our respiratory care solutions, including noninvasive ventilation and.
Life support ventilation as well as new therapeutic areas, such as our cloud connected pharmaceutical delivery solutions for map propeller technology.
And high flow therapy offerings, such as our product platform called Loomis H F T.
Demand for our core noninvasive ventilation and life support ventilation solutions for COPD and other respiratory insufficiency patients remained strong throughout the quarter, especially in markets outside the U S where providers shifted focus to supporting the most severe and highest acuity patients.
This demand and the work of providers is aligned with the resume guiding principles of our allocation process, specifically to give the highest priority to manufacturing life support ventilation as I speak we are not component constrained on our life support ventilator called Astral.
Let me now review our software as a service business for out of hospital care during the quarter, our SaaS business 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.
SaaS customers recognize the need for technology solutions to solve their challenges with efficiency and scale and our software services and solutions helped them achieve above.
The continued growth of home based care is providing tail wins for our home medical equipment, and our home health products and we continue to grow with our customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care, including at landmark.
Brought tree and snap resupply products as.
As businesses continue to open up we've been able to visit customers in person as well as to attend SaaS trade shows where interest in our broad tree matrix care and service offerings to name a few remain very strong we have a very solid pipeline in SaaS.
Because of the COVID-19 pandemic has been and remains challenging for some verticals in our SaaS business, particularly skilled nursing facilities, where our headwinds have kept patient census rights below pre pandemic levels, but as COVID-19 restrictions continue to ease and our customers improve their line of sight to better.
Conditions, we expect to see pent up demand for technology investments, which provide opportunities for us to sell more services and more 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 growth to maintain high single digit growth as we exit this fiscal year and well into the next fiscal year and beyond.
As always our goal is to meet or beat that market growth rate as we continue to innovate and we expect to grow the market and take market share. We are the leading strategic provider of SaaS solutions for outside hospital care and we provide mission critical software across a broad range.
Very attractive vertical markets, we are well positioned and we have created differentiated value for customers and for resume with our SaaS businesses.
Excited about the future of our SaaS business, it's an important part of regiments future growth and I see a lot of opportunities to innovate and lower cost lower acuity settings of care, it's the future of health care delivery with strong organic and inorganic growth ahead for regimen.
Our focus is on personal care that is patient centric physician physician centric and provider centric. This 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 asked.
<unk> and beyond we are transforming out of hospital health care at scale, leading the market in digital health technology.
As I said earlier, we have over 11 5 billion nights of medical data in the cloud and we have over 17 million cloud connected medical devices on bedside tables in 140 countries worldwide. We are unlocking value by using de identified data to help patients directly but also to help providers physicians.
<unk> pay is an entire health care systems, we have invested in the cyber security the privacy cloud operations as well as data analytics, including artificial intelligence machine learning capabilities to do this at a scale unmatched by our competitors and we are increasing our lead each and every day.
Hi.
Our two key software customer facing products <unk> and my air and now 100% managed in the cloud so not only are our devices cloud connected and a software cloud enabled we here at <unk> as a company a cloud connected and cloud enabled in fact, we are a leading <unk>.
Digital Health Company Globe.
Our mission and goal to improve 250 million lives through better healthcare in 2025 drugs drives and motivates millions and millions around the world every day, we made excellent progress towards that inspire and golf during the last quarter before I hand, the call over to Brett for his remarks I want to again express my sincere.
<unk> to the more than 8000 <unk> worldwide for their perseverance their hard work and their dedication during these ongoing in unprecedented times and thank you for all that you do with that I will hand, the call over to Brett in Sydney, and then we will move to open the lines for Q&A over to you Brett.
Alright, Thanks, Mike.
Good morning, I will provide an overview of our results for the third quarter of fiscal year 2022, unless noted all comparisons are to the Bayou quarter.
We had solid financial performance in Q3, despite the headwinds we faced as a result of ongoing supply chain constraints.
Challenging freight environment.
Revenue for the March quarter was $865 million, an increase of 12% in constant currency terms revenue increased by 14%.
Revenue growth reflects increased demand for our sleep <unk> respiratory care products across our portfolio driven by recovering market conditions and will increase the box demand and response to the ongoing product grateful by one of our competitors.
In the March quarter, we recorded a immaterial incremental revenue from COVID-19 related demand consistent with the prior year quarter.
Looking forward, we expect negligible.
From COVID-19 related demand.
In relation to the impact of our competitors' recall, we estimate that we generated incremental incremental loss revenue in the range of 35 million to $45 million in the March quarter.
For the first three quarters of FY 'twenty. Two this reflects incremental revenue in the range of $170 million to $190 million.
We continue to experience challenges in securing sufficient components and this has hampered our ability to materially increase our supply of devices.
We expect our fiscal fourth quarter to remain supply constrained and similar to our recent fiscal quarters faithful limiting incremental revenue during the fourth quarter.
We now expect the total incremental would be lost revenue opportunity for fiscal year, 2022 will fall somewhere between $200 million and $250 million.
Looking at geographic distribution and excluding revenue from our software as a service business.
In U S, Canada, and Latin America increased by 18%.
Sales in Europe , Asia, and other markets increased by 11% in constant currency terms.
Ballpark segment globally in constant currency terms device sales increased by 21%, while masks and other sales increased by 9%.
Breaking it down by regional areas device sales in the U S, Canada, and Latin America increased by 30% as we benefited from incremental revenue due to competitiveness revel.
Favorable product mix as we sold an increased proportion of higher acuity losses.
This is consistent with our guiding principles for product allocation, namely that we are giving priority to the production and delivery of ASIC losses to meet the needs of the high acuity patients first.
Masking other styles in the U S, Canada, and Latin America increased by 7%, reflecting solid waste acquired revenue.
Despite the challenging deepwater supply environment, which continues to limit new patients at all.
In Europe Asia, and other markets device sales increased by 10% in constant currency terms.
Sales in Europe , Asia, and other markets increased by 13% in constant currency terms.
Software as a service revenue increased by 8% in the March quarter.
So a strong performance out of the <unk> segment as customers continued to utilize our solutions to streamline and more efficiently run their businesses.
We're seeing more stability in the skilled nursing care segment as it continues to emerge from the challenges of the COVID-19 pandemic.
During the rest of my commentary today I'll be referring to non-GAAP numbers, we have provided a full reconciliation of the non-GAAP to GAAP numbers.
Third quarter earnings press release.
non-GAAP gross margin declined by 150 basis points to 58, 1% in the March quarter.
Crazy is predominantly attributable to higher fright component and manufacturing costs, partially offset by a positive product mix due to strong growth in higher acuity, if losses and improvement in average selling prices. Following the introduction of the <unk> surcharge.
Moving onto operating expenses.
Normalized expenditure protocol as COVID-19 impacts have saw it compared to the low comparable and negative growth rates, we experienced in Q3 last year.
SG&A expenses for the third quarter increased by 14% or in constant currency terms increased by 17%.
The increase was primarily attributable to an increase in employee related expenses.
G&A expenses as a percentage of revenue at 21, 1% remained broadly consistent with the 29% we reported in the prior year period.
Looking forward and subject to currency movements, we expect SG&A expense.
Revenue to be in the range of 20% to 22% for the balance of FY 'twenty two.
R&D expenses for the quarter increased 19% were in constant currency terms increased by 23%.
R&D expenses as a percentage of revenue was 71, 7% compared to seven 3% in the prior year quarter.
We continue to make significant investments in innovation, because we believe our long term commitment to technology.
And solutions development will deliver a sustained competitive advantage.
Looking forward subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of FY 'twenty two.
non-GAAP operating profit for the quarter increased by 5% underpinned by strong revenue growth, partially offset by the contraction of our gross margin and higher operating expenses.
On a non-GAAP basis tax rate for the March quarter was 21, 1% compared to the prior year quarter non-GAAP tax rate of 19, 4%.
Looking forward, we estimate our non-GAAP effective tax rate for the full fiscal year 'twenty two in the range of 19% to 20%.
non-GAAP net income for the quarter increased by 2% and non-GAAP diluted earnings per share for the quarter also increased increased by 2%.
Cash flow from operations for the quarter was $117 million, reflecting robust underlying earnings partially offset by higher levels of working capital.
Capital expenditure for the quarter was $48 million depreciation and amortization for the quarter totaled $42 million.
During the quarter, we paid dividends to shareholders totaling $61 million.
We recorded equity losses of $2 6 million in our income statement in the March quarter associated with that premise joint venture with verily.
We expect to record equity losses of approximately two to 3 million per quarter, the balance of fiscal year 'twenty, two and into FY 'twenty three associated with the joint venture operation.
We ended the third quarter with a cash balance of 202 million at March 31, we had 691.
And 417.
Great.
Debt levels remain modest.
And at March 31, we had approximately $1 6 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declared a quarterly dividend of <unk> 42 per share, reflecting the board's confidence in our operating performance.
Our cash flow and low leverage provides flexibility in how we allocate capital.
We plan to continue to invest in growth through R&D. We also expect to continue.
To deploy capital for tuck in acquisitions.
And with that I'll hand it.
Call back to Amy.
Great. Thanks, Brett.
Kevin I'd like to ask you to come back on the line I'll turn the call over to you to provide instructions and to manage the Q&A portion of the call on the call.
Thank you, we'll now begin the question and answer session, if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
As a reminder, we ask you please limit yourself to one question. If you have another question Youre welcome to hop back into the queue.
Our first question today is coming from David low from Jpmorgan. Your line is now live.
Thanks, very much if I could just start with a question on the guidance from the benefit from the field pretty cool.
$100 million short of where you are projecting a year or so ago. Im just wondering how you are now thinking about that opportunity set as we move into the new financial year.
Hey, David Yeah, It's Mick here, that's a good question and.
Clearly as we in the second half of the year now we are readjusting that that expectation for for FY 'twenty two now in total to be 200 to 250.
Look I'll just be very open very specifically a contract from 12 months ago with a particular I will not name them at a particular semiconductor supplier had a very significant double digit decommit and these lost.
Months weeks and.
This is a commitment from 12 months ago that had some very strong supply and it went down double digits and so with that as.
As a headwind into us all the <unk> of our work the five projects.
Five lines of projects going on in our supply chain allowed us to sort of.
Take.
<unk> forward in two steps back versus two steps forward and one step back and that didn't allow us to achieve that extra $100 million of incremental revenue that we thought that we would achieve here through fiscal 'twenty two for the first half.
And so that's going to be tougher and it moves things a little bit further back having said that some of these projects coming to market such as the.
The comp to cloud <unk> 10 device, where we eliminate that bottleneck will the number one bottleneck which is the.
<unk> Com's chip and we allow the next bottleneck, which is another electronic component to become the one week and then speed up some production to make up some of that difference and thats allowed us to achieve the 30% year on year growth that we saw in devices in U S, Canada, and Latin America in the 10% year on year growth that we achieved this quarter for Europe .
Asia and rest of world.
Not perfect sailing ahead, when you get it.
<unk> I'd never heard that word they commit we are offering you guys saw on contract Youre offering money very good margins long term contracts and people just can't supply.
Often the force majeure in other aspects coming into play, but I can tell you that all the work that we've been doing these hard work by our supply chain have allowed us to actually to achieve these results despite that headwind.
We're not planning on giving guidance for FY 'twenty three around this we are saying that this is what all side. What we're doing is going to strive for sequential growth every quarter. As we go ahead. So sequential growth from March to June June to September September to December throughout this fiscal year, that's what we're going for and I actually think as you start to look to.
The second half of the calendar year, you look at the December quarter. There are a number of other projects that don't involve necessarily.
The risk of an externality of other decommit from someone else there's enough projects in enough.
I would say new supplies, new components, new designs and new engineering reengineering that we're doing around both the hardware and the software to give us strong confidence and supply of product ahead, so I think that supply chain and down amazingly.
And if you look at what we would have achieved 14% growth constant currency year on year, Yes, we could we could have got 20 or 25, if we'd had unlimited supply decommit and changes in supply chain and global semiconductor and other electronic components had been a headwind, but I think with all the work. We've got we're going to power through this we've got a strong ship that are wide.
Ahead, we're going to power through its stronger than ever and I think our team has done a great job on the supply that we're going to get throughout this calendar year will be a great opportunity for sequential growth as we go through.
Thank you. Our next question is coming from Gretel <unk> from Credit Suisse. Your line is now live.
Thanks, Good morning, Nick just one question on the backlog of patients. So you did mention in your prepared remarks, just trying to say.
You can quantify how large the backlog is currently and how long a patient spiking to get onto treatment.
Is there something that management can do to keep patients engaged already said risk that potentially fall out of the system.
Onto product.
In a short period of time.
Thanks Gretel.
Right question and yes, as you noted I talked about at least 12 to 18 months of backlog, which is which is.
In many industries, you say fantastic to have a backlog, but these are patients waiting therapy and to the specific part of your question Gretel, how long do any individual patient white, it's not like a patient gets a diagnosis and they have to wait 12 to 18 months it depends on the geography and the environment it might be.
Days or weeks, depending on the geography and outflow of products, but any individual patient is not sitting out there. That's all you've got this life threatening disease, we will take care of you next April .
<unk> been told look it's going to take four weeks and they are not happy with that I mean, they've been told by suffocate, maybe a 100 times per night, maybe maybe 50 tons per hour, if they've got very severe sleep apnea and the suffocating they want therapy and so that pressure is there and the desire is there we're watching very carefully I mean, obviously, we're involved in the substitute therapies we sell.
A dental device all across western and northern Europe , where the number one provider with novel <unk> technology, we're not seeing a huge movement over to dental and the hypoglossal nerve steam that we're investing through <unk>, we're not seeing a huge movement over to those substitutes so they're being told by the Doctor.
It's <unk> or it's eight weeks and they are accepting that and they're sitting there in that pipeline what I mean by the 12 to 18 months backlog is if you look at the net of the industry.
This is building up because the number two player here is out as I said earlier. This week. They said at least through the end of this calendar year I think they said that only be 90% done with their recalled by the end of this calendar year. So that means the rest of us have to step up and resume as the number one player and we're stepping up the most and we're stepping up incredibly well and I think we will do that through it but even when they come back online.
It's not like the backlog goes away the day they come on that's there and it's for all of US to drive I think the share that we've gained is going to be entrenched because of the digital solutions, we have and we will go and gain from the.
But the patients are there.
I think it's awful that somebody might have to wait four weeks or eight weeks I don't want them to like more than 48 hours, but right. The amendment. We're in this situation will be that way.
A time given these unprecedented circumstances.
Thank you. Your next question is coming from Lyanne Harrison from Bank of America. Your line is now live.
And good morning, all thank you for taking my questions.
Just talk a little bit about the device and dynamics in them.
Both Americas and rest of the world.
The Americas had softer Dubai, but.
Sorry.
Hum.
Device graph that much softer.
Greg.
Can you I guess share what your thoughts are around to the extent that strengthened by.
<unk> devices in the market as opposed to re supply and then vice versa.
But the rest of the world.
Okay.
Thanks Lee for the question, Yes, as you mentioned very strong device growth in the U S, Canada, Latin America, 30% and very solid growth in devices in Europe Asia elsewhere at 10% netting out at 21% cc across that sector in the Moscow I'd actually if you go back to 2019.
And when we were talking about market growth rate. We were talking then about devices mid single digits and masks being high single digits I look at our global mask growth rate at 9% constant currency with the headwind of new diagnoses downward with competitive bidding out for new patient starts and in the U S. Canada Latin America at 7% constant currency is pretty reasonable.
Growth new patients are down, but what we're actually doing there is working with resupply wood brought tree resupply with stamp technology re supply in the U S and around the world with some of our.
Our models are working with patients directly in markets like Australia, and New Zealand, Singapore now within the northern European teams working with hospitals and care delivery systems to to achieve that 13% constant currency growth in Europe , Asia, and America, and I think I'll hand to Jim Hollingshead, the president of our global sleep business, but Jim I think we're actually taking share in some of those categories during the quarter.
Thanks, Nick.
Thanks, Leann is a great question I think this is one of those weird circumstances for us for the numbers don't actually very clearly convey the underlying dynamics.
And the reason for that is.
The volumes and the revenue growth, we're producing a different markets is almost completely contingent on which skus, we can produce and so there's a little bit it's a little bit complicated, but we can when we can produce devices that have sell chips that can go into certain European markets and we have those components. Then we have more growth for that period of time as we ship those products and then sometimes those specific escalators kick in.
Strained and so the dynamic is actually pretty pretty constant across all geographies, which is very very high demand for our devices very very high demand for our masks there as a headwind unmasks because new patient starts are down because the market is under supplied but really across all geographies. They are a tailwind for masks because in the U.
We are very resilient resupply and in other European markets, we have very resilient resupply in markets like France, and northern Europe , and so the number the differences you've seen in the growth rate is actually driven by component supply and not by demand dynamics, if that makes sense. So continues to be.
Really almost unlimited demand for our products across the board with devices, obviously in the U S. We introduced there since 11 that freed up a lot of capacity for us. That's why we got such outsized growth relative to the other markets in the U S market this quarter and the mask growth is pretty steady across across all the markets.
Thank you next question today is coming from Saul <unk> from Baird and Joe Your line is in our lives.
Hi, good morning, Thanks for taking my questions.
Quick one on the.
The guidance that you provided for the full year for the Philips hue guidance net revenue contribution.
The other component is obviously, what do you think is the underlying growth rate of the base business, excluding that share gains I guess in other words, what were you expecting to grow the business by how do you come up with that $200 million to $250 million.
And I guess the question really is what do you expect of the device business to be able to grow out considering the supply constraints that are in the market at the moment. Thanks.
Yes. So thanks. Thanks for the question look these estimates started about six months ago, I'm, probably getting Brent to give a little bit of detail around how we actually do.
Came up with the details of the calculations of the 300 to 350 and the $202 50, I'll give you the perspective first and the CFO will come in.
And give more quantitative detail in a moment, but the way I look at it is about six eight months ago.
It was I guess it was June mid June when the competitive announced this.
There were estimates on the sell side from $50 million of incremental revenue to resume during the fiscal year up to $950 million from some of the sell side analysts and we thought what that range is just too broad we generally don't give guidance.
I'll leave that to the job of the very smart people on the sell side and the buy side to do so but that variance was too big and so we said, let's calculate it let's take our forecast that we had at that time.
Months ago for the fiscal year 'twenty, two and then look at what we think we can achieve based upon parts and components, we can get into our factories and product. We can make to take care of what is a seemingly infinite demand. So we'll just be right limited on the parts and pieces and we looked at mostly columns chips and some other electronic components would be rate limiting and so we said, okay, let's see how high we can ramp those without.
Great work from our ops team looking at resume 2000, 32035, and a brand new plant in Singapore, We actually weren't limited not limited on manufacturing capacity. It was just about supply and we estimated $300 million to $350 million in incremental revenue above our forecast growth, we didn't actually give a public number on what our forecast growth, whilst we just talked about that incremental revenue thing theyre letting sales.
Type models for therefore costs add onto that in a 300 to 350, we've adjusted that to 200 to 250. So on top of whatever that growth was we think it'll be $202 50, and thats really getting down to these this loss.
Q4 gives a bit more detail on that Brett any any further quantitative info you want to give on that to soles question that.
Yeah. Thanks, Mig I think of that so really what we did is we looked at out pre recall forecast and its very much an estimate on what we think that incremental demand was.
Okay.
Question on kind of what was the underlying growth.
Back that that incremental revenue you would probably get circa 10% growth on the losses.
Pretty strong.
Thank you. Our next question is coming from Danaher in front of Mr. <unk>. Your line is now live.
Hello, Good morning, Thanks, so much.
Just wanted to ask.
You mentioned, you're absolutely absolutely normal and allocation is unlimited.
Can you just talk about how that park is traveling.
Competitive and the competitive market.
Their products.
Yes, Dan Thanks for the question and yes, you're right as I said in the prep remarks.
Is that guiding principle that we take care of the sickest patients first and the highest security devices first.
And the Astral is that and so we've done a great job our upstream supply chain same manufacturing team has done a great job. We are not supply constrained on that and we are going head to head with the trilogy, and Eva and what I see.
Regular leases of recalls and issues with our competitor in that space and so not just our brand reputation and the amazing <unk>.
Acknowledging thats in the Astral, it's incredibly reliable and very high quality and I believe we've been taking share there for a number of quarters, but Jim do you want to give detail on the astral and how well that's doing U S rest of world.
Yes, Thanks, Mike Thanks, Dan the Astros, performing really really well from a competitive point of view, we've taken share with the Australia.
Very very strong device offering we made a number of improvements to that platform over the last couple of years and and also remember that the astral can be connected to a detachable modem, which can then allow us patients using an astro to be monitored in the cloud and we have.
We have that capability now in on every platform.
Worldwide and so we've had a lot of.
A lot of adoption of monitoring ventilated patients in our <unk> platform, especially very strong growth in Europe with that offering so asheville continues to perform extremely well.
Thank you. Our next question is coming from Matthew Mission from Keybanc. Your line is now live.
Good afternoon, and thank you taking the question.
Just going back to the <unk>.
Decommit.
Did you give a sense of why.
Your orders were from a year ago.
We're committed and.
How do you how does this.
The semiconductor supply chain get unlocked over like the next three to six months like what are they telling you would need to happen incrementally. So that you can get a steadier supply moving forward.
Matt It's a great great question, and I'll talk a little bit about what our supply chain is doing and I'll hand over to Rob Douglas our CFO to go through the incredible work that Andrew price and Linda <unk>, our president of global Ops and the head of our supply chain is doing that I can tell you what theyre getting made getting me to work with.
The Ceos of these of these companies and the heads of.
Our production.
We're working and providing information to show the importance and how.
These technologies are they providing a going into life saving medical devices.
I actually.
Created a video for the investors and the internal employees at one of our major electronic component suppliers too to talk to them about how every chip. They give us gives the gift of breath to a person who is suffocating and to really get that message through I mean I think.
In the huge demand for electric cars and cloud connected consumer devices and across the board demand is up across industries and so it can be hard if you were a component micah to differentiate industry ie from be from C and know where it's going when they know firstly that we pay high margins that we have long term.
Contracts that we're recession resistant industries, we showed through the global financial crisis and the.
The benefit for employees looking for purpose that hey, this chip doesn't just go into a column I guess from a to B U R. R. <unk> cloud connectivity to a refrigerator. This thing literally keep someone breathing and allows them in their doctor to see that breadth and that improvement of income reduction of costs and reduction in mortality. So getting that message through is really strong we've been working very strongly.
The starting gun went off on this June last year, and we're getting better and better but across the industry. Robert It's a tough environment for supply there is tough.
<unk>.
The way there yet.
Chronic and semiconductor industry works is like any other industries as the number of players they've got long term forecast.
We signed late to have because the capital investment in order to build capacity take a long time to develop.
But that really only got short term clarity on what the demand levels are going to be in.
The actually the electronic industry has always been faithful famine for particular components.
That this is just the worse than usual version of the usual situation.
There was so much excess demand around the COVID-19 environment.
So many new dynamics as Nick mentioned electric vehicles.
Taking up demand in consumer electronics.
Electronics and all of that and then the.
The key suppliers have all their own inputs that have those sort of same investment issues coming so they're also an allocation for their raw materials as well and then I have a number of contracts and as Mick gets to it is if we can manage the priorities that these people have.
And by the way whenever we talk to almost anyone in any industry.
We ended up talking to somebody who has sleep apnea or their loved ones have slate that Neal. They are good friends have sleep apnea. So we can get a really strong message through to what should be a priority, but sometimes they've got contracts of 90 to call force majeure on those contracts before they can supply us. So it's a very complex complex project.
Working on it.
As Mick mentioned, we've got these other longer term projects that are really designing around the constraints and putting in options. So that we can have what would traditionally single source components. We would have options to multiple source components. We have many different communication modules that can operate in the into the.
Units now in different protocols.
And we'll keep working on that but it's not going to clear short term.
We have done and they describe sort of agile performance from our supply chain to really try and predict that.
Areas of Decommit, so that we can inform our engineering teams of what they should be designing around and get started on those key areas before they become problems, but these are tough problems to solve but we're working on them.
Our goal will be through all of that work that Rob just talked about to make sure. We take three steps forward. So that when you do get the two steps back or this and that component. We're still moving forward sequentially every quarter throughout the year, and then really freeing up as Rob said, the long term stuff starts to come into fruition over the next 369.
And beyond thanks for the question Matt.
Thank you. Your next question is coming from David Bailey from Macquarie. Your line is now live.
Thanks, very much good morning, I might just follow up on those on those five areas, where you've mentioned sourcing validation and reengineering.
Just wondering way of progress sits relative to your plans. If there had been any benefit to date and when do you think these projects are expected to complete such a need to start the season, most benefits coming through.
David It's a great great question and it's in it's really complex.
Hand to Rob to maybe give some of the detail on it but those five lines of work.
Multiple projects within each of them.
I'll try to term like.
New parts for new supplies that means our R&D team is reengineering, our new pop validating verifying putting through all the quality tests, we're seeing in our market how incredibly important that is and we will not compromise on quality.
And then you've got to validate and verify a new supplier and get them through and so just one of those five lines of work is an incredible amount of work for our quality regulatory R&D engineering production and manufacturing teams and so these aren't overnight.
Uh huh.
Like we're just having a cell phone here or I.
It comes chip in a consumer device. This thing a lot support then has to be working all day every day of CPAP has to work every night and we are.
I think.
Able to with all that work I mean, as you saw we got $200 million to $250 million. This just this fiscal year ahead of incredible growth in our supply chain pivoted to all of that if they haven't been this competitor recall.
We as an industry resume it would have been absolutely able to do with every single supply chain constraint that had happened throughout this and Thats speaks to the flex and the abilities. We.
We have these projects have been going nine months I actually think they're doing well, it's hard to say.
Even even if I gave you on each of those five lines of work the key milestones on it they are probably five projects within each of those sort of a five by 525 matrix robs looking at as Jim's looking at this on a daily basis. So I guess I get the updates every second or third day.
I used to focus all my time, just on customers talking to customers talking to health insurers and showing the benefit of our therapy I'm spending a lot more time with supply chain that I want to but right now thats, where the urgent need is for the next.
306, 912 months, that's where we're going to be focused but at the same time, we're investing in demand Gen. So that as supply starts to come back and it will and has a competitor comes back online. We can turn that demand gen back on securing all the share gains we got through the digital entrenchment, and then drive for future growth, but how do you summarize all the all the work we're doing for David succinctly.
We wouldn't break down all the individual projects, but I mentioned, having multiple columns protocols multiple chip multiple sources of chips and to <unk> point around quality and patient safety is just so important.
We can't really take any undue risk or give any give on the quality of the validation processes and making sure. We're doing the right thing through all of that so you can't just throw in a new component and so let's see if it works we got to really do all the proper life testing a check through so that's why it doesn't happen overnight, but the teams are working on it.
Let's say the thinking around how to forecast that broad areas. So that we can get on the front foot on this.
Another important area is our ability to burst demand in births supply when they do get.
Solutions come in.
You actually will see our inventory levels have increased.
Increased and Thats interesting in a time when really every product weeknights immediately delivered to customers and sold and that's because we are working hard on making sure. We've got all the raw material inventories, including longer term commitment with a surplus which actually we've had to do in order to guarantee short term supply.
And so we've got very strong inventories of nearly everything but the few that are short, but when those few unsure that were shortcoming, rather put them quickly into production and quickly get them on to patients.
Thank you. Our next question is coming from Mike Matson from Needham <unk> Company. Your line is now live.
Yes. Thanks for taking my question I wanted to ask about this carrier to cloud device.
Sorry card to cloud device can you maybe comment on how that works I assume that the collected data on the car and then has to be uploaded somehow but.
And then is there.
Any kind of long term repercussions from having these out there in your installed base in terms of lost data over time or anything like that.
Thanks for the question Mike and.
I'll hand to Jim to walk through some some further detail on it I can tell you from resonate.
When we really first to get got into digital health in 2002, we had.
Paging devices on experimental parts of our devices in 2005, we started to with the site launched in 2067 had some SD cards that were in those devices and so we sort of had this this world of <unk> the cloud at regimen for well over a decade.
15 years that we've had the ability to do that type of technology.
Obviously with the essence 10, we changed the whole market, we did the the sort.
A reverse Amazon play, where we said, 100% connectivity and the <unk> 10 through the <unk> Chip and then you take it seamlessly and its and its taken together look this is a humanitarian emergency right now we have.
A competitor out of the market and there is not enough comms chips to go around the world and we looked at this and said well look why don't we go to where we were before which is a great technology a card to cloud the differentiator for US is that the doctors use my Ed that the patients using the whole ecosystem of data and so.
I think it's far more efficient and appropriate then it goes strike and a secure end to end encrypted from the device there, but in this time of emergency for a period of time.
How long lost these essence 10 cod the clouds are whole lot better patient getting that technology. Then one of the competitors out there that has some <unk> solution that may or may not be encrypted who knows how it works and that <unk> might not be as reliable. So the essence 10 is the second best device on the market second only to the <unk> 11, So cloud the cloud is out there but Jim.
It's early days, how is that how's it going.
Sure.
It's very early days, and we will be bringing we'll be bringing it to more and more geographies to Nick's point.
Just wanted to make sure patients get on therapy, I mean thats.
That's the driving rationale for launching this device is card to collect version residence then it's basically an ever since then without the cell chip in it.
So the process question, Mike you asked us about.
The devices all have SD cards in them.
SD card has to get to the provider to provider upload the data into the cloud we've actually just re launched or launched a renewed and better version of the process for doing that but the software that allows the uploaded into the cloud and the great advantage.
The whole system is that the patient is still can be managed and interview and air view is.
The best.
Patient management system on the market, we know that it has the strongest preference the strongest performance it's secure.
It's encrypted it protects privacy and importantly, all of our customers are using every right now in their workflows and so the.
The car to car device is missing one step which is the daily cloud upload of data anywhere on the system. The data will come into the system into the clock when the CCAR gets uploaded by the provider so.
I don't think anybody will do that on a daily basis, they'll do it relatively infrequently. The data is all there in the <unk> the device stores the data for months. So no data is lost it's just the frequency of upload.
And again the main rationale behind it is we want to make sure patients get on therapy. There is a growing patient backlog, we can produce these devices at volume.
It gets around our biggest constraint, which is the communications Belgium.
Thank you. Our next question today is coming from Margaret because or from William Blair. Your line is now live.
Hey, guys. This is Maggie on for Margaret Thanks for taking our question.
I wanted to ask on that.
Incremental.
Guidance question, a little bit of a different way. So obviously the pie constraints here are.
Not allowing you to service all of the patients out there, saying, you're reducing it by $100 million, so as supply improves and when it does.
Do you think that you will be able to recover that full $100 million in that.
Next fiscal year, and even more than that thanks, so much.
Yeah.
Thanks for your question Maggie I mean, the short answer is yes, absolutely.
Through not just the technology, Jim was talking about the essence kind of the cloud, but all the other projects Rob has been talking about them.
Five by 525, plus matrix of incredible projects that are going through we're going to free up supply and sequentially. As we go through this year, we're going to get some growth and growth and so.
Just to be clear it was on top of as Brett said strong sort of 10% forecast growth. We then had in addition to that $300 million to $350 million of incremental that incremental was reduced to 202 hundred 50.
As we said today.
This fiscal year that were in that that incremental growth of those patients will be there and we will be in the back when we will get to them in fiscal 'twenty, three and more as we continue to grow throughout the fiscal year 2023, it's not like this is an overnight success and one of the 25 projects works Tomorrow, we're all perfect it's incremental continuous improvement step by step.
<unk> have an amazing ops and supply chain team and an amazing sales and delivery team working with customers on this allocation and understanding how to bring that product to market and understanding on the marketing side to just get ready for the demand Gen thats going to need to happen to get all the backlog in and new patients and as we go in throughout fiscal year 'twenty three and beyond.
The short answer is Maggie, yes, we will get to that increment and more throughout the coming 12 18 months.
Thank you. Our final question today is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Good afternoon, everyone.
Hey, Mike.
A lot of questions have been answered.
Okay.
A recessionary environment.
On top of an inflationary environment.
Can you just give.
Give us some guidance in terms of new order flow throughs our.
Patient behavior resupply orders, especially.
It almost seems inevitable.
Another complicating factor on the horizon. Thank you.
Thanks, Raj, Yes look I mean, clearly inflation is high and as you've seen that's been hitting some of the areas of cost we have.
Some some price mitigation on the <unk> 11, and on global surcharge in some sort of skus across the range to to deal with inflation and to share some of the pain of that that we are seeing from our suppliers.
With the channel, but so that's that's how we're sort of mitigating the impacts of inflation.
Your question about <unk>.
Future recession, who knows we have it a long bull market one thing I know about resumes and I was here through I was actually running.
The global sleep business through nine and 10 and I'd just taken over at the year before and resume is remarkably resistant to that global.
That global financial crisis, and then recessionary environment people may forgo that extra Tesla that extra.
Phone for $2000, but they will not forego that extra CPAP for $1000.
As much and so we were very recession resistant through that last global financial crisis had a bull run here globally for 10 12 years it is possible.
Suraj youll, probably better at predicting the timing of when a recession may come in the next 12 24 36 months I don't know, but I know that as opposed to other consumer industries and automotive industries in fast moving consumer goods mentor.
<unk>, and particularly consumer driven med tech like resumes in sleep apnea, we'd been very recession resistant. So a very strong player throughout that and give us competitive advantage I think over some of the other players fighting for the dollars available but look.
Who knows what the timing of any of that would be but we've got mitigation plans in for inflation I think very good <unk>.
<unk> and capabilities to deal with the downturn, <unk> and or recessions, but thanks for the question Suraj.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to Mick for any further closing comments.
Well, thanks, Kevin for hanging the refined back and thanks again to all of our shareholders for joining us on this call.
I'd like to once again, thank the 8000 raise millions. Many of you are also shareholders through our ESP pace. So thank you for that for your dedication and your hard work, helping people breathe better sleep better and live better lives outside the hospital in 140 countries worldwide. Thanks for what you do today and every day I look forward to talking to you and all.
All of our stakeholders here again in 90 days. Thank you and we can now close the call.
Alright, great. Thanks, Nick Nick to Echo Ham. Thank you everyone. We appreciate your interest and your time as a reminder, if you have any additional questions. Please don't hesitate to reach out to our Investor relations team directly.
Does conclude our third quarter 2022 conference call, Kevin I'll 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.