Q1 2023 Resmed Inc Earnings Call
Hello, and welcome to the resume first quarter fiscal 2023 earnings call. At this time all participants are in a listen only mode. A 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.
It's now my pleasure to turn the call over to your host Amy Wakeham, Vice President of Investor Relations and corporate Communications. Please go ahead Amy.
Great. Thank you, Kevin Hi, everyone and thanks for joining US this call is being webcast live and the replay will be available on the Investor Relations section of our corporate website later today, along with a copy of the earnings press release and presentation, which are both available now.
Joining me on the call today are chief Executive Officer of mix, Daryl and Chief Financial Officer, Brett Sander Cock Mick will provide a brief high level overview of our financial results ill review progress towards our RESNET at 2025 strategic goals and discuss the current state of things as we continue to navigate the ongoing macro industry.
<unk> and supply chain challenges.
Brett will then review our financial results in more detail and finally, we will move into the Q&A portion of our call.
During the Q&A session, making Brett will be joined by Rob Douglas President and Chief operating Officer, and Davidson Darvis, Chief administrative officer, and Global General Counsel.
During our call today, we will discuss discuss several non-GAAP measures.
For a reconciliation of non-GAAP measures. Please review the supporting schedules in today's earnings release.
And as a reminder, our discussion today will include some 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. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward looking statements made today I'd like to now turn the call over to Nick.
Thanks, Amy and thank you to all of our stakeholders for joining US today as we review results for the September quarter, our first quarter of fiscal year 2023.
These financial results demonstrate solid performance across our entire business driven by strong sales growth in the Americas region as well as ongoing high demand for our sleep and respiratory care devices and mask systems worldwide.
Achieving these numbers hasn't been easy given supply chain constraints, but we are powering ahead focused on the long term.
Of course, we see the same macroeconomic challenges that many other industries are also facing as well as an industry specific issue of a competitor driven supply demand imbalance. The past 18, plus months, resulting in excess demand for our products. The good news is this al.
Global resume team demonstrates over and over again, the incredible ability to pivot and to solve problems to support customers and to meet the needs of people around the world with market, leading therapies and software solutions.
We are building on the success, we achieved last quarter with al Reengine need air since 10 cloud to cloud device customer acceptance has been strong, particularly in the United States region and this has enabled us to substantially increased shipping volumes to support patient demand, while we continue to fight through.
<unk> global supply chain challenges. It is interesting to note that outside the U S. We are not seeing the same magnitude of adoption of the <unk> card to cloud device as we are in the U S. This is due to the fact that they are 100% cloud connected both platforms, such as essence 11 than others and our ecosystem of software.
Solutions are so embedded into the workflows of health care systems. This is particularly evident in countries, where we have partnered to develop digital health reimbursement models customers in countries, such as France, and Japan and beyond prefer to work with the limited product flow of a 100% cloud.
Connected devices, rather than change they workflows for cob to cloud models. While this means that some patients will have longer wait times in these regions. It does show the power of our long term digital health strategy, lowering labor costs, improving efficiency and improving patient outcomes are just too hard.
Switchable.
Nevertheless on a global basis, the redesign and launch of the cloud to cloud device have greatly improved our ability to get closer to meeting the incredible demand in the market essence, 10 cabinet cloud provided meaningful growth for the quarter and far more importantly, it meant that patients could get access to.
<unk>, a world leading resume device to treat their sleep apnea.
Clearly launching this platform to address the spiking demand was and is the right decision.
Our number one priority will always be patients doing our best to help those who need treatment for sleep apnea chronic obstructive pulmonary disease respiratory insufficiency, Judah neuromuscular disease obesity, hypo ventilation syndrome, asthma, and all of those who need access to our out of.
Hospital Health care systems, our goal is to ensure that patients get the care that they need where they need us and when they need it.
We continue partnering with our global supply.
Supply chain to increase access to the critical components that are needed to accelerate production of our medical devices last month I had the opportunity to fly to Sydney and many of our supply partners in person for the first time in three years at our Star supplier event in Sydney Star is an annual fee.
Celebration of our partnership with top suppliers.
The event was also an opportunity to bring the resume story to life for our critical suppliers focusing on the lifesaving importance of what we do every day.
We showed our suppliers that increased component allocation for resume ultimately benefits patients providers physicians and all of our stakeholders worldwide.
Supplier feedback from the Star event was overwhelmingly positive and many attendees commented how the event help them to better understand our strong patient focus here at <unk> as well as our commitment to product quality and the patient driven need for them to increase supply to regimen.
As a consequence of these partnerships our supplies are responding positively and I can share. This we expect steady increase in resumes device production each quarter throughout this fiscal year and beyond.
Let me now review updates on <unk> top three strategic priorities number one to grow and differentiate our core sleep apnea and respiratory care businesses number two to design develop and deliver market, leading medical devices as well as digital health solutions that can be scaled.
<unk> globally and number three to innovate and grow the world's best software solutions for care delivered outside the hospital and especially in the home.
The launch and acceptance of our next generation device platform called essence 11 continues to go very well patient feedback remains very positive and we continue to see very strong adoption of our my patient App.
In fact more than it's more than double the adoption right of Maya with the <unk> 10 platform.
With over 60% of all patients downloading and using the App on air since 11.
We know the patient engagement in their therapy through Maya is an incredibly important part of the therapy process and the ongoing compliance ecosystem.
Due to our clinical publications in the area.
Published real World evidence data showed that we achieve 87% adherence rates when our full tech stack is used including both my air and Air view.
Clearly increasing production of the essence 11 platform remains a top priority for regimen and we are doing that every quarter.
Additionally, we look forward to continuing to expand essence 11 into additional countries as we progress throughout fiscal year 2023, and as we continue to gain regulatory approvals country by country.
A key part of our resume in 2025 strategy is to reach hundreds of millions of patients without respiratory care solutions, including noninvasive ventilation and life support ventilation as well as <unk> therapeutic areas such as cloud connected pharmaceutical delivery solutions as.
As well as high flow therapy offerings.
During the quarter, our resume team presented data at the European Respiratory Society Congress that the that the prevalence of chronic obstructive pulmonary disease or COPD is much higher than previously estimated the epidemiology data presented at HRS showed that other 400.
Millions of people worldwide have COPD. This is $100 million more than previously published data.
As the global population continues to grow and age we estimate that over 590 million people will have COPD by 2050.
This represents a 23% relative increase in global COPD numbers from the baseline of 2020.
Combined with the estimated 330 million people worldwide that suffer from asthma. These prevalence figures highlight the importance of treating these chronic conditions with our respiratory care solutions.
Turning to our software as a service business for outside hospital care.
SaaS business achieved another quarter of high single digit growth year on year.
The continued trend to move to lower cost and lower acuity locations for care is driving strong growth of home based care.
This is providing tayo wins for our home medical equipment, and our home health software platforms provided under our <unk> brand.
We continue to grow with our homecare customers as they increase their utilization of our software and data solutions to improve and optimize their own business efficiencies as well as patient care, including specifically, our snap resupply offerings.
Census growth in skilled nursing as well as hospice is still challenged by post COVID-19 patient flow recovery as well as labor shortages.
One of our most innovative solutions in this space under our matrix care brand has been technology solutions to improve staffing efficiency, improving both staff hiring and management.
As post Covid patient census continues to improve and pent up demand for technology investments continues to come to the market, we expect to see even more growth opportunities to sell our services and solutions to new and existing skilled nursing and hospice customers.
Last quarter I discussed our agreement to acquire many Fox Dong, the leading provider of end to end software solutions for nursing homes and home health customers in Germany. We are on track to close this acquisition before the end of the calendar year. This current quarter. We're in December 2022.
We remain excited about our opportunity to accelerate SaaS innovation and SaaS growth in Germany.
This is our first investment in a pure play SaaS business outside the U S and we look forward to updating you as we achieved key milestones in that business over the year ahead, our integration team is primed and ready.
I'm excited about the future of our SaaS business, it's an important part of <unk> growth and complements the incredible software and device solutions, we have in our core sleep and respiratory care businesses.
We see a lot of opportunities to innovate in lower cost lower acuity settings of care. We believe this is the future of healthcare delivery and resume is the right strategic home for these growth businesses.
We are well positioned as the leading strategic provider of SaaS solutions for out of hospital care and we have created differentiated value for our customers and long term sustainable growth for our stakeholders.
Bringing it all together we are transforming out of hospital health care at scale, leading the market in digital health technology. We now have $12 5 billion nights of medical data in the cloud and $18 5 million cloud connected medical devices.
On bedside tables in 140 countries worldwide. We are liberating these data to the cloud and we are unlocking value for patients for providers for physicians for payers and for entire health care systems.
Our mission and goal to improve 250 million lives through better health care in 2025 drives and motivates me and <unk> every day, we made excellent progress towards that inspiring GUL over this last period.
During the last 12 months, we improved over 144 million lives without device platforms, and full mask systems, and our software solutions and digital health.
We're helping people sleep better helping people breathe better and helping people live higher quality and happier lives with care delivered right where they live.
So before I hand over the call to Brett Phase remarks, I want to once again express my gratitude to more than 8600 beds medians for their perseverance their hard work and their dedication to die and every day.
With that I will hand, the call over to Brett in Sydney for his remarks, and then we will open up to Q&A with Brett and the gang Brett over to you.
Alright, Thanks, Mike.
My remarks today I will provide an overview of our results for the first quarter of fiscal year 2023.
Listen I should all comparisons to the prior year quarter.
We had strong financial performance in Q1, despite the headwinds we faced as a result of significant ongoing supply chain constraints.
Group revenue for the September quarter was $950 million, an increase of 5% in constant currency terms revenue increased by 9%.
Revenue growth reflected increased demand for our sleep products across our portfolio and ongoing device demand generated by our competitors product recall.
Year on year movements in foreign currencies in particular, a weaker euro negatively impacted revenue by approximately 36 million this quarter.
Yeah.
While we continue to experience ongoing challenges in securing sufficient production components to meet market demand.
We are now seeing a more predictable supply chain environment.
This gives us confidence around our expectation of increasing the loss production in fiscal year 'twenty three relative to fiscal year 'twenty two.
Looking at our geographic revenue distribution and excluding revenue from our software as a service business sales in U S, Canada, and Latin America countries increased by 18%.
Sales in Europe , Asia, and other markets decreased by 6% in constant currency terms.
By product segment globally in constant currency terms device sales increased by 9%, while masks and other sales increased by 8%.
Breaking it down by regional areas.
<unk> sales in the U S, Canada, and Latin America increased by 23% as we benefited from incremental revenue derived from the introduction of our cloud to cloud the boss.
Masks and other sales increased by 11%, reflecting solid resupply revenue achieved despite the challenging device supply environment, which continues to limit new patient setups.
In Europe Asia, and other markets. The guar sales decreased by 10% in constant currency terms, mainly as a result of the ongoing challenges in securing sufficient production components for connected devices.
And lower sales of higher acuity losses relative to the strong styles, we experienced in the prior year quarter.
Boston all the styles in Europe , Asia, and other markets increased by 3% in constant currency terms.
Software as a service revenue increased by 9% in the September quarter, we saw particularly strong performance from the high <unk> vertical as customers continued to utilize our SaaS solutions to streamline and more efficiently run their businesses.
During the rest of my commentary today, I will be referring to non-GAAP numbers.
A full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release.
Gross margin increased by 40 basis points to 57, 6% in the September quarter.
The increase is predominantly attributable to increases in average selling prices, partially offset by unfavorable product mix and foreign currency movements.
Moving onto operating expenses SG&A expenses for the first quarter increased by 10% or in constant currency terms increased by 16%.
The increase was predominantly attributable to increases in employee related costs and a post COVID-19 normalization of travel and entertainment expenses.
SG&A expense as a percentage of revenue was 24% compared to the 19, 5% we recorded in the prior year period.
Looking forward and subject to currency movements, we expect SG&A expenses as a percentage of revenue depending on the range of 20% to 22% for fiscal year 'twenty three.
R&D expenses for the quarter increased by 5% or in constant currency terms increased by 9%.
R&D expenses as a percentage of revenue was six 6% consistent with the prior year quarter.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year 'twenty three.
Yes.
Operating profit for the quarter increased by 4% underpinned by strong revenue growth and improvement in gross margin, partially offset by higher operating expenses.
Our effective tax rate for the September quarter was 19, 9% compared to the prior year quarter rate of 20% looking.
Looking forward, we estimate our effective tax rate for fiscal year 'twenty three will be in the range of 19% to 21%.
Our net income for the quarter was 222 million and non-GAAP diluted earnings per share was $1 51, both consistent with the same period in the prior year.
Year on year movements in foreign currencies negatively impacted earnings per share by approximately 7% this quarter.
Cash flow from operations for the quarter was $45 million, reflecting solid underlying earnings offset by higher levels of working capital.
Capital expenditure for the quarter was 29 million depreciation and amortization for the quarter totaled $36 million.
During the quarter, we paid dividends to shareholders totaling $64 million.
We recorded equity losses of $2 million in our income statement in the September quarter associated with the <unk> joint venture with Verily.
We expect to record equity losses in the range of 3 million to 5 million per quarter through the balance of fiscal year 'twenty three associated with the joint venture operation.
We ended the first quarter with a cash balance of 207 million at September 30, we had $795 million in gross debt and $508 million.
Our debt levels remained modest at September 30, we had approximately $1 4 billion available for drawdown under our revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declared a quarterly dividend of <unk> 44 per share.
As reported last quarter, we expect to close on the <unk> acquisition by the end of the calendar year pending regulatory clearances.
Additionally, we plan to continue to reinvest in growth through R&D and also expect to further deploy capital for tuck in acquisitions.
And with that I'll hand, the call back to Amy.
Great. Thanks, Brad Kev.
Kevin I'd like to call you back onto the call and turn it over to you to provide the instructions and ran the Q&A portion of the call.
My pleasure, Amy if you'd like to be placed in the question queue. Please press star one on your telephone keypad, we do as you. Please ask one question and then return to the queue. Once again Thats star one to be placed in the question queue and we ask you. Please ask one question then return to the queue, if you'd like to remove yourself from the queue. Please press star two.
One moment, please while we poll for questions. Our first question today is coming from Steve Wheen from Jordan. Your line is now live.
Good morning, good afternoon, Thanks for taking my question.
Looking at working capital was one for Brett.
So the levels of inventory.
Continue to increase just wondering how you're going to think about.
Managing card clubs inventory levels at a time.
As your supply chain starts to <unk>.
Free up a little bit more to allow you to make more sense to live and just trying to workout.
Whether there is any risk around inventory obsolescence as you try and transition back towards your latest platform.
Yes.
I'll think of them.
Market is very much characterized by bought really excess demand.
We're still trying to meet that and I think thats going to be with us for a wall. So.
Building inventory really looking at that kind of future.
Production that we're looking at looking to match.
Manufacturer.
And then we will manage we've introduced cloud to cloud.
<unk> been very successful, particularly in the U S market. So that's that's part of our portfolio is important but we certainly have the plans where I think we can we can manage that that transition between the cloud and connected the losses as we get more advice components team. So I think it will be kind of manner.
Managed plan that will move from manufacturing that account to cloud to more connected devices.
As electronic components come in but we've got.
Have plans in place to do that and make that transition.
If I could just add to that inventory build that we've had really a deliberate outcome of our strategy around managing the supply constraints, we've had to really build up the materials components inventories for everything so that we could build the maximum when we buy through the bottlenecks on the specific components.
And then as the supply chain situation improves into the future we will be up to one back from that.
Thank you. Your next question is coming from Matthew <unk> from Keybanc. Your line is now live.
Great. Thank you for taking the questions.
A follow up on on the mass growth.
You said at one point in the call that debt.
That mask growth is still being affected by.
With lower patient setups, I mean with card to cloud. It was that it was that the O U S comment a global comment or is that still an issue with the U S where we're still below the patient setup.
Yes, thanks for the question Matt.
I mean, if you look at if you look at the mosque gross numbers in the quarter, we saw 11% growth in U S. Canada Latin America, so really strong.
Double digit growth there in <unk> and 3% in Europe , Asia and rest of world with the total global growth of 8%.
2019, we talked about market growth being mid single digits for devices in high single digits for mask. So so we're right there at 8% total growth.
But I actually think we could be higher than that if we were taking care of every new patient that's out there.
As we said and as I said in the prep remarks.
With our competitor out of the market. These last 12 to 15 months at least can be 18 months, maybe 24 months out of the market in total.
They were the number two player and we are the number one player and were taking as much of the number two excess demand as we can but we're not getting all of them are still even with card the cloud in the quarter, we werent getting to every patient that needed a device and so that delta is what we're talking about the mask growth could have been even higher but to your point.
<unk> caught the clouds acceptance was so much better in the U S. We did get better mask growth. There, we saw 11% growth in the quarter and very strong.
Cloud to cloud as I said in the prep remarks, not being taken up in countries, where the whole reimbursement model has changed around digital health and cloud connected devices, such as France, and Japan, and it's just structurally difficult and they don't want to switch from the great efficiencies and outcomes that we get with without 100% cloud connected system. So that's sort of the new.
Once around that what it talks to us an opportunity to continue to grow out our device business, but to even further increase al.
Mask growth not only in the U S. But also in Europe Asia and rest of world. Thanks for the question Matt.
Thank you next question today is coming from Gretel <unk> from Credit Suisse. Your line is now live.
Thanks. Good morning, everyone. How are you allocating your 11 <unk> between U S and rest of world given that in the U S is adopting the cloud to cloud and you're getting great.
So rest of world relative to what you historically.
Has the mix between the two agents.
Yes, it's a great question, it's a very complex one and we've actually established during the Covid crisis on ventilators, we established a global epidemiology model. The humanitarian based epidemiology model, where we really looked at the flows of the virus around the world, where we should allocate limited supply than light is for that and I think we did a really good job.
In that in that process of 2020, we applied those same skills really these last 12 to 15 months of having a global team looking at the 140 countries. We operate in looking on a humanitarian basis as the needs for people who are suffocating now in our core market suffocating with sleep apnea and other.
On the <unk> platform, we do have other respiratory care and respiratory insufficiency capabilities as well.
And the.
The <unk> 10 connected devices on bi levels. So we have a global model, we look at allocations based on on the demand on patients on the need to get them. There is a complex and moving dynamic equation.
The lightest moving apart is that essence, Tim Coffey cloud has been coming out the guide incredibly strongly in the June quarter, we talked about 90 days ago and here in the September quarter, we expect that to continue that $9 million, increasing some <unk> 11 allocation to places like France, or Japan, where.
They aren't seeing the same adoption due to the changes there. So it's an ongoing dynamic thing that we look at daily weekly monthly and our production shipping and delivery schedules. So it's not a simple question, but yes.
The impetus of your question was would we look to the humanitarian need and do our best to make sure the device gets to a patient.
Fairly and that's exactly what we're trying to do on a global basis. Its not simple it's quite complex, but we are working at it every day and the team is doing an incredible job as you saw in these in these great growth numbers. Thanks for the question Gretel.
Thank you next question today is coming from Salt Dawson for better Joe Your line is now live.
Thanks, and good morning, Jamie.
Yes, I mean, we're seeing a lot of.
Data breaches in the last few weeks, including in the healthcare space and on the basis of how much data you guys have access to I'm. Just wondering if this has caused you to have a look again about data accessibility and risks associated with potential.
<unk> and just what your thoughts on thoughts on the strength of protection that you have had.
How do you protect against something like this happening in the future. Thank you.
Yes.
Yes, so it's a great question and obviously cyber security is something we think about it.
All day, and every day and our Chief Information Security Officer and his team are.
What I would call productively paranoid about.
The $12 5 billion nights of data and the $18 5 million, a 100% cloud connected medical devices out there and 140 countries and I did see the news in Australia, we have a number of health.
Health care system hacks, and we've had them here in the U S as well.
<unk> had one in a number of local health care systems habits, as well as some infrastructure areas and look it's a case of productive paranoia you have to be investing in this space you have to be looking at what happened on doing a root cause analysis of the hacks that have happened in almost every case, it's been a human a person clicking on something and giving allocation.
And so we're looking very carefully at our training and holding back systems for.
And fixing systems, where there are weak links in making sure that all day everyday youre looking at this because yes people are out there initially hackers went to consumer Tech and Fintech industries. As you said health care is on the right I would probably third on the right, but we are definitely there and it's something that we think about and we invest a lot in <unk>.
Security protections, but it's an ongoing guy.
<unk> of investments and making sure that we stay at or ahead of the curve and how we work with our partners in the health care system to make sure that the data we look at privacy as well as cyber security and interoperability of those three have to all be balanced, but cyber securities right. There is one of our core competencies right now when we invest a lot in that area.
Thanks for the question so.
Thank you next question is coming from Dan <unk> from M. S. T. Macquarie. Your line is I'm, sorry, Mark Hughes. Your line is now live.
Good morning, and thanks, everyone.
I wanted to ask about frankly.
Previously talked about some degree of inventory build shift away from enterprise.
And we've seen other market participants already through that to some degree.
Where you are in that transition and what sort of impact it has a lot of it.
Brett do you want to have a go at that yes, So, yes, hi, Dan yes.
We've moved.
We are almost exclusively if I would move some to see fright.
So that's happening it's probably.
It's progressive and probably measured because we still want to get we still want to get inventory.
Throughout the season, and then obviously on.
Patients. So we're just trying to balance that but we have we have started progressing that to safe right.
So that's happening again.
Probably seeing we're seeing a little bit of relief or moderation in freight rates that are coming through it will take a little bit of time for that to wash through for us, but I still think in the second half we'll start to see some benefit from some kind of overall freight costs coming down relative to last year.
Yeah.
Thank you. Our next question is coming from Mike Matson from Needham. Your line is now live.
Yes, I think thanks for taking my questions.
Just on the international side of the business was quite a bit weaker than the north American side.
<unk>.
I think you've commented on the card to card not seeing as much uptake, but I just wanted to see if that was really the primary issue there or was there anything else going on in kind of economic challenges in any of the U S market.
Yes, thanks for the question, Mike and really truly the the major component is getting card to cloud in those areas. If cloud the cloud had the same adoption in Europe Middle East Africa, and rest of world as it did within the U S. Canada, we would be seeing significantly higher <unk>.
<unk> growth numbers.
And so that's it.
Item number one on how we can address that and actually in countries, where there is not reimbursement models and others. We are pushing towards those cloud to cloud as well as increasing as I said earlier to <unk> question. The flow of essence elevens. One other thing that Brett did note in his prepared remarks was that this quarter a year ago Europe saw very high sales of <unk>.
<unk> some of that was in the Covid space and in the response to some recalls from a competitive space around <unk> in Europe .
Ventilators respiratory care as a larger portion of our European business than it is in the U S and so that was in the comp on the other side. So those those are the two main factors that with their cloud to cloud adoption and year on year with regard to our noninvasive ventilation lots of port ventilation and whole respiratory care business. If you like in Europe .
Just a bigger a bigger portion of the business there, but thanks for the question Michael.
Thank you next question is coming from David Bailey from Macquarie. Your line is now live.
Yeah. Thanks, good morning, all.
Yes, Brett you sort of mentioned some of the constraints to sit upstream component shortages and a competitor recall.
Neil thoughts on.
That patient backlog, if you've got any estimates as to.
Many patients do you think it could be <unk> worked through them and what that $1 million or industry growth relative to that mid single digit number you sort of spoke to previously.
Well look I'll have a go at that first David Thanks for the question Brett.
And Robyn dive pile on.
This excess demand thats out there with your number two player.
Highly competitive market being out of the market for 15 months now and they say they maybe back in January but I'm not optimistic actually be back.
Given all the issues that are that are there for them and so we look at that and say, let's do as much as we can towards this we know we are not getting.
We know the size of the market. We know the total flow of patients we know what our number one share was how it's grown and we're taking care of all of that we know what the number two share was and how that's grown and we know we're taking a high double digit percentage of that but not all of them were not at a 100% of it and so we know there is that gap to fill which is excess demand.
Yes, it does build up to a pipeline a great pipeline of patients that are out there, but on the downside it's tough for those patients because white tons go from days and weeks to weeks and months and and for months to quarters in some regions and so that's why we have pivoted this redesign and re engineered.
Essence 10 cloud to cloud, it's why we are redesigning parts and pieces within our essence 11, and <unk> 10 connected devices and we're ramping up all three of those so if you put it together we have the number one product in the market the best product, which is the essence 11. We then have the number two best product, which is the essence 10 fully connected and we have the number three best of us.
As the <unk> 10 card to cloud with selling all three and ramping up all three throughout Sydney, Singapore, Atlanta, and European distribution centers and so.
We're doing the best we can it would be very difficult I mean, we do have a lot of quantification or competitive reasons I don't want to go out to exactly what we're looking at but the timing of how we feel it is dependent upon how fast we get the components and parts and pieces into our Singapore plant and beyond and those every day they get better I said on the prep remarks that every quarter this year.
We're going to make more and more of the essence 10 cloud to cloud and we're going to make more and more of the essence 11, you've seen that we delivered in June we delivered in September we will deliver again in December we will deliver again in March 'twenty three will deliver again in June 23, and so every quarter, we'll give you the update on it but I almost don't want to quantify it in a time basis, because we know what it is in a device basis I want the time.
To get shorter and shorter as resume accelerates faster and faster towards getting that excess demand and making sure our supply can get as close to meeting it and then when we made that we can then get back to a balanced inventory situation.
Thank you. Your next question is coming from Matt Taylor from Jefferies. Your line is now live.
Hey, this is Zack on for Matt I was just curious if you could give us some color on supply chain improvement.
<unk> over quarter basis, and any color on how you can reach full capacity over the next couple of quarters. Thanks.
Rob do you want to have a go at that sure. Thanks, Nick Yeah.
Talking before around the quarter on quarter and were talking device volumes there Ed.
Bret earlier comment, saying, we're sort of seeing a stabilizing view of the supply chain and what had happened in the past was that.
<unk> had a plan, but then these decommit could come through.
We're definitely seeing a big reduction in the right of the committee did not fully gone.
So there is that sort of.
Still some uncertainty in exactly which products, we can deliver on what day, because some of that can come out.
Other things that are going to help us going forward is that the engineering projects that Nick talked about including validating new.
Component you communications modules.
And recall we.
We're in an environment of the.
The economy and consumer products it looks like the demand the excess demand of phones and those types of devices is moderating a bit.
Excess demand that autos with creating isn't isn't moderating as far as we can see and that's two very significant and in fact, the technologies that we use are more likely to be the types of things in autos that in funds.
So there is still some sort of industry pressure on the chip chip components, but is that our engineering projects develop and we get more options validated we have more likelihood of increasing that volume and so what we're saying is we're actually producing a huge amount more devices now than we were before the <unk>.
Dennis or even before the competitive recall happened.
Our plans if we can follow up you can see in our inventories we've got the path foot if we get the final parts.
We'll absolutely keep driving these volumes.
There is risk to the upside.
We haven't completely eliminated risk to the downside, but were pretty confident that we're in good shape.
Thank you. Your next question today is coming from Lyanne Harrison from Bank of America. Your line is now live.
Yes, good morning, Nick.
And Rob just following on that question about how long your competitor might be out of the market.
And it gets delayed or pushed out up to 24 months.
Thanks Mitch.
We will be in that.
In volume as we think about third quarter fiscal <unk> fourth quarter fiscal enough volume to meet them.
The gap that Philips has left and then also.
Last quarter, you also spoke about some of your demand generation initiatives.
We're at a point now in terms of your visibility on production.
And implementing some of that demand generation initiatives.
Thanks Leann.
Really good question with sort of two.
Elements to it while it's difficult for me to determine because it requires knowledge of the U.
U S government from FDI and Doj on a consent decree with the competitor that I'm not involved in those conversations I see what we all see publicly out there and so how long our competitor will be out we don't know, but we run scenarios on that right that they'll come back in January of that come back in July they'll come back lighter than that in 2023.
And.
As I look at that I think about our ability and what we can do in every quarter, we're going to increase production with essence 10 count to cloud essence, 10, calms essence, 11 columns and so if I track those lines up and move them up there are scenarios, where we can get to the full industry demand.
Calendar year 2023, a lot of things have to come together for that to happen and there is a lot of scenarios as Rob said around parts and pieces coming in and on the other side, but we're doing everything we can to get closer and closer to that.
So yes, I mean, we can strive towards it and we're going to move towards it and we wont know patient left behind we want anyone who suffocates and gets a prescription to have a short white time no matter what country. They are in to a resume device and we're doing everything we can to keep up with that excess demand it'll be there for the next 369 12 months, but.
As you start to look through 2023, I think potentially the supply and demand codes could could crossover for us and the other players in the industry as well so.
How long there's a number of scenarios around that as I discussed second part of your question demand Gen initiatives, Yes, we have some really exciting demand gen initiatives from our Asia Latin America team. The work that we're doing in China and in India, and Brazil. These huge population markets to look at different methods of getting to patients.
And ensuring that care is delivered across social economic bounds of this health equity and the delivery of our products in these high growth markets with some really exciting things Justin Leon and his team are driving in our Asia Latin America demand Gen initiatives and then here.
In the U S market, we've got some really exciting work on joint venture with Verily called Premier Sun.
I just ran into the CEO of <unk> there at the Med Tech conference. This week in Boston and there's some really exciting milestones that we'll be looking at throughout calendar year 2023 to drive demand Gen to identify engage and enroll patients actually sleep concern consumers to a pathway to become patients and so those will start to run.
All out during the year in addition.
Western European and northern European teams and our teams across the world have really exciting programs that frankly, we've been experimenting in politics during the Covid crisis, the embracement of digital healthy embracement of respiratory health and <unk>.
<unk> care delivered outside the home during the Covid crisis and actually during a competitive recall process. So I think we've seen an ability for us to partner, even more closely with out with our partners in the channel physicians and providers are willing to experiment, even more so I do expect us to turn on a number of these demand gen initiatives throughout <unk>.
The year 2023, as we start to get supply up to where demand is and then can drive core demand of the market back again through through that dimension. So great question Lyanne.
Thanks for that.
Thank you. Your next question is coming from Craig Wong Pan from RBC. Your line is now live.
Perhaps your phone is on mute.
Okay.
Hi, sorry about that.
Thanks.
I think there's been some changes with some of the expectations for cost lines like R&D Opex now expected to be $6 to 7% of sales.
Seven to eight and then pretty much done joint ventures, the losses have increased as well could you just talk about what led to those shifting expectations.
Yes, sure I'll take that I think that's a great day.
Yes. Thanks.
<unk>.
Yes.
It's just up tick slightly low.
A lot of that has to do with the weaker Australian dollar generic.
The face amount of voluntary undertaken here in Australia. So.
It kind of reflects the lower currency there Craig it's not it doesn't we will still be.
Having signed number of more people in R&D and working on that but obviously the translation impact is going to be filled as we forecast forward.
So that's on the island.
Sort of things.
Your other question.
The premise on joint venture loans.
Thanks, John .
Yes.
Mick mentioned that some of the milestones some of the activities they are undertaking.
So valuable look to invest will fund more of those demand gen activities as I kind of move into a more commercializing <unk>.
That's kind of uptick I think having next few quarters.
Sure those costs essentially.
So that's why that's why I guided that to be a little bit higher over the next several quarters.
Thank you. Your next question is coming from Chris Cooper from Goldman Sachs. Your line is now live.
Thanks for taking the question.
Last one on the outlook for pricing.
Some pockets of feedback late in the quarter at least one of your competitors is beginning to crosswalk recipe of mosques.
Are you seeing that through yet.
If you do begin to see more competitive price environment, how would you envisage responding tobacco. Thank you.
Yes, Thanks for your question Chris.
Certainly pricing is a big topic always in our industry.
Over these last.
12 months is inflation around the world has moved from low single digits to mid single digits to high single digits.
In almost every country. We're in that we've we've started to respond to that and as shipping costs have gone up we've started to respond to that as you know at the start of this calendar year, we instituted some surcharges on products in.
In the U S and in Europe for those extra costs that were associated with shipping and then we have.
As appropriate working with customers and within the health care systems increased.
Prices on specific parts in places, where the costs have gone up and so therefore, we're sharing some of that burden of increased costs without channel.
In terms of.
While appreciating your channel check in a conversation with a customer or two.
We are not seeing across the board.
Major changes in Isps on either the device all the mask side.
Interesting to note that without without really strong growth in masks.
They are at 11% in the quarter in U S, Canada, and Latin America, that's in a market, where there's no recall from anybody that's just the standard competitive market and resume is out there fighting for it even with the lower <unk>.
Our new patients as we talked about earlier due to the fact that not every patient who needs a new setup is getting even though the vast majority of ourselves repeat sales to customers already in in our installed base of amazing people being traded every day by resume mosques, so not a huge sort of.
Impact on pricing right now if anything prices are stable to slightly up on devices and I would say stable in the in the mask side.
Youll sort of in line with where they have been and so no major changes there obviously, we watch that it's a dynamic approach, but we don't focus on price we focus on value. We talk about how the first time fit with resumes where it's at and how the adherence rates are where they are in the mosque league is much lower and customers know that and track that and we give them data and <unk>.
My Air and give them all analytics to know how well our masks are doing compared to the competitors and that's why the doctors prescribe al.
And that's why the <unk> and homecare providers around the world choose them off so we compete on value.
And we look forward to to increased competition and increased growth in both the device and Matzoh, we love a competitive market and we tend to win them.
Thank you. Your next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Good afternoon, everyone. Mick can you hear me all right.
Got you loud and clear Suraj perfect Sumit, you mentioned about taking most of the excess demand sure maybe if I could ask my question a little differently.
So lets say, we use three buckets patients either remain on Philips patients switch to risk med or the third bucket of patients are left to finish on their own right.
Assume these three buckets.
The pie charts.
Existing patients.
As new patients coming into the funnel looks like just trying to understand at a very simplistic level.
And the share transfer and what is happening to these patients. Thank you for taking my questions.
Yes, Thanks, Suraj and I appreciate the angle you are coming out on it let me let me.
Give you my thoughts on it and address your question from this angle. So I'll put it also there's two buckets those new patients and those patients getting what we call <unk> or.
A device Thats five to seven years old let's say.
It's out of warranty maybe at three to five years and they want to upgrade and then there's a third bucket of patients who.
Part of the competitive recall, so the first bucket, which is new patients yes.
Yes look there's resume and a bunch of small share players competing all day every day for those new patients and incredible excess demand and every product. We make we can sell into that space and we are doing very well and taking a lot of shares as you see in the numbers, 23% growth in devices in U S, Canada, Latin America, 9% growth.
Wide in that category of devices are doing incredibly well and that that new patients.
The bucket if you look at the existing patients that are looking to recap right. After three 5% to seven years on therapy, I think some homecare providers and <unk> in Europe and rest of the world won't be contacting those patients right now they know the situations I don't want to get somebody into the channel where the white tons, along and so I think there's some opportunity for even.
Further excess demand in that second bucket.
Bucket of existing patients looking to recap that haven't been turned on its another type of demand Gen. Totally Ann's question earlier that our channel probably is not turning on March and keeping that Dol very low except for those patients who come and say look I'm really need an upgrade then they put them in the Q. That's the second bucket. The third bucket is the $5 5 million patients who.
We were on a competitive device from the recall that was announced June a year ago.
You know how competitive they are.
Judy in.
They are working through those theyre not there they say there may be $3 million into the $5 billion I'm skeptical of that I think they're talking about production numbers versus delivered numbers as I look to the channels and speaking to people about how many of the losses that they've asked for will have actually been received for as part of that recall, so that third bucket is tough and so what does a patient do there.
Do they just white or do I go get a prescription and try to go to <unk> dot com or <unk> dot com or some other retail channel in a different market and try to come in and drive some excess demand that way.
Hard to determine all of that we do have some numbers around it but that third bucket is really the beauty of our competitor to take care of and they are working their way through it and it looks like it's 18 months through December if I get there by June next year. That's 24 months I would hope that they are at least they are then and can come back again as I said earlier with the scenarios. We're looking at all sorts of scenarios I want them back.
I love the competitive game I love, beating them in the game of Who's.
Got the smallest quarters, most comfortable and most cloud connected devices that lowest cost improves outcomes and we're doing that in 2019 actually from.
The launch of <unk> 10 in 2014 to 2019 for thoughts strong years, and I look forward to continuing to do that afterwards, but that's how I look at the three buckets, new patient is doing incredibly well recap not really turning that data right now probably turn it on as we get demand Gen and the third one yes, we will be getting some of that but we're not fighting for that because thats not where we want to play that's a competitive Judy take care.
And with focus for the long run and the 1 billion people worldwide, who suffocate, who haven't yet been brought into the channel that's the real opportunity. Thanks for the question Suraj.
Thank you. Your next question is coming from mortgage <unk> 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 the mask growth quickly and just trying to get a better picture of that as.
The resupply trends. So obviously you can appreciate the amount of new patients coming on service, but maybe if you can kind of talk about the recent trends and what youre seeing and what we can kind of expect for the remainder of the fiscal year. Thanks.
Thanks, Maggie look it's a really good question around resupply and as you know.
Looking at our SaaS business through <unk> resupply and snap re supply we have some really good models in our SaaS business Thats truly the synergy between our SaaS business in our core sleep and respiratory care business I mean, you've got the back end synergies around cyber security as we talked to earlier cloud ops and interoperability, but the front end synergies there around <unk>.
Diving resupply have been really strong and <unk> resupply and snap re supply or a good part of driving that resupply revenue. Yes. I mean look you saw 11% growth rate in U S, Canada, and Latin America in those and as we supply in the U S is primarily the market for that where they're a very sophisticated models.
Very strong incentive for both the patient the provider and resume and actually the player with the return that they get by reduced hospitalization to ensure that patients continue to get new mosques those systems are not quite as evolved or.
Implemented within Europe , Middle East Africa, and rest of World and so in Asia Pac we do have models, particularly where we're working directly with.
Providers and patients to drive resupply models and those are working well.
But look there's I would say there is a lot of opportunity to drive rate supply in Europe , Middle East Africa, and Asia Pacific and if you look at Catherine putting out an entertainment, Germany. What she is doing to engage with patients you look adjustments and what he is doing across Asia, and Latin America to engage directly with patients and show them the path to get a fresh clean new mask on a regular basis.
And become part of subscription program for that there's a lot of innovation to come so Luke.
I am proud of the 8% growth in a tough environment with new patients coming in I want that to get higher and.
I, certainly want to Europe , Asia and rest of world.
To go from low to mid to high single digits again, and we will get there as that re supply and the new patient flow bus come to market. So lot of moving pieces there Maggie thanks for the question.
Okay.
Our next question today is coming from Mathieu Chevrier from Citi. Your line is now live.
Thank you good morning. Good afternoon. Thanks for taking my question just a longer term question.
Do you see home testing and the premium on JV impacting the longer term growth rate the industry. Thank you.
Yes look it's a great question home.
<unk> testing is.
Now just part of the game I think what happened during Covid is we were all forced to do telehealth digital health and to embrace that across the 140 countries that we're in and we've seen increased adoption rates of home sleep testing across the world. It's just really exciting I mean look if you look at France, and Germany, France had always adopt.
Home sleep testing in very very good rights of that Germany really had pre COVID-19 are now has and the physicians have seen it.
The homecare providers have seen that we are vertically integrated in that market. So we are really driving the adoption. If you look at.
Northern and Western Europe of home sleep testing and I do think.
When and if not when we get our supply up to a demand as we can start to turn on those home sleep testing demand Gen opportunities because as I said earlier 1 billion people suffocating worldwide, we've got less than 20% on treatment in the U S with $10, 15% in Europe and less than 5%.
In Asia listen, 1% some of the high population countries and so home sleep testing is a really interesting part of that.
There was some really interesting sort of viral videos, our India team is doing a great job they've actually got an Indian wrap started talk about home sleep testing, we saw a huge spike in the response rate and people going through that it's really interesting with relatively low cost. These pilots and experiments we are doing with non <unk> media buying a super Bowl ad or buying an add on.
On.
Champions League European football, we're going down to social media levels and using I would say very strong interesting experiments around social media marketing to drive demand. Gen 400 late testing and if you ask a person would they prefer to be tested.
Sleep apnea in the home or in a hospital, 80% of people site in the home, 20% really should always go to a hospital. They have a couple of <unk> history, a strong history of heart attack COPD, some other comorbidity or some other sleep disorder and there are 100 other sleep disorders other than sleep apnea, they ramped but they are there.
So we're going to ramp up of <unk> testing in the U S with our verily joint venture, but we're also going to do it directly with all of our homecare partners across the U S.
And in the other 140 countries, we do business in so thanks, a lot for the question and I think that will be our last question will just running straight out but one more question, maybe Amy what do you think.
Our final question today is coming from Steve Wheen from Jordan. Your line is now live.
Thank you.
Sneak in another one.
Just wanted to in response to the consent decree.
If you look in the prices of negotiating there's obviously been a very large and payment risks.
Historically steepness.
Any sort of thoughts as to.
What may not be meeting to contemplate as part of that whether it would be packaging innovation, whether it impacts their ability to.
To manufacture.
If you had any high level thoughts.
What do you think that the creek would look like.
That's a great question I'll give some thoughts on hand to dive into all of us as not only our chief administrative officer, but also a lawyer and maybe you will understand that.
You have to wait till these things come out we haven't seen a public discussion of what the consent decree it looks like the negotiating it now so when that comes out we will look at it what has been public as.
A number of responses on that 483, and really specifically talking about culture changes management changes and our focus on quality, the reengineering and re cultural training that that type of change.
Was a lot of a lot of work and I would think people will have to move from development and R&D back to what I would call quality remediation and quality systems improvements. So there will be some sort of quality debt. If you like that would be needed to payback. If you just raised through the public information on that for <unk>, but.
What are your thoughts.
And perspective on this.
Yes, I think you've got it right Mick.
There's a broad range of where this thing could land.
<unk> sort of watch and report on the one hand to almost closing down operations on the other end and without being in the mix of of either talking to the agency or talking to the company, which we can't do either one on this particular topic, it's hard to know where theyre going to land in between there, but as Nick said, if you look at.
The.
Public statements, which is that both the 483 and also their proposal to take control of the of the recall you can see the issues that the agency is concerned about and so what they're going to want to do is get assurance that those issues are not going to put.
Put patients at risk in the future you got to have systems in place not only for the products that are at issue now but for other products that may be out there on the market or be brought to the market in the future. So it's up to the agency obviously a consent decree for a reason that means that there's a agreement between the parties as to what those parameters will be and until they announce.
It's really tough to speculate on what the exact details will be but and as I said, there is a pretty broad range.
Thanks.
We've reached end of our question and answer session I would like to turn the floor back over to Mick for any further closing comments.
Well, thanks, Kevin and thank you to all of our shareholders for joining us on this call I'd like to once again take the opportunity to thank the 8600 <unk>. Many of whom are also shareholders for their dedication and hard work, helping people breathe better sleep better and live better lives in residential medicine in over 140 countries.
Worldwide. Thanks for all you do I look forward to talking with you all right here in 90 days. Thank you.
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.