瑞思邁 (RMD) 2016 Q2 法說會逐字稿

Welcome to the Q2 FY16 ResMed Inc.

earnings conference call.

My name is Suzanne and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Agnes Lee, Senior Director of Investor Relations.

Agnes, you may begin.

Thank you, Suzanne, and thank you for attending ResMed's live webcast.

Joining me on the call today are Mick Farrell, our CEO; and Brett Sandercock, our CFO.

Other members of the management team will also be available during the Q&A portion of the call.

If you have not had a chance to review the earnings release, it can be found on our website at investors.resmed.com.

I want to remind our listeners that our discussion today may include forward-looking statements, including but not limited to, statements about future expectations, plans and prospects for the Company, corporate strategy, and performance.

We believe that these statements are based on reasonable assumptions but actual results may differ materially from those indicated.

Important factors which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings made by ResMed with the SEC.

I will now hand the call over to Mick Farrell.

Thanks, Agnes, and thank you to all of our shareholders joining us today as we summarize our results for the second quarter of FY16.

We have great progress towards our long-term ResMed 2020 goals this quarter.

We achieved solid double-digit constant currency revenue growth led by strong regional results in the Americas.

Last week, we announced the acquisition of Inova Labs based in Austin, Texas.

This acquisition expands our respiratory therapeutics portfolio for COPD to now include portable oxygen concentrators.

First, I will discuss our top and bottom-line results.

I will then review some regional highlights from our business and progress on our ResMed 2020 strategy.

After that, I will hand the call over to Brett, our CFO, to walk you through our financial results in greater detail.

For the fifth quarter in a row, our global team achieved double-digit top-line revenue growth on a constant currency basis.

We saw strength in the Americas region with robust double-digit growth at 17%.

We achieved solid steady growth in our combined EMEA and APAC regional groups.

These global results were fueled by the ongoing success of Air Solutions, our cloud-based connected care software platform, as well as AirSense 10 and the AirCurve 10 medical device platforms.

Looking at the bottom line, our diluted earnings per share was $0.69 on a non-GAAP basis.

We have been bouncing our investments in growth opportunities and significantly expanding our install base of cloud-connected medical devices.

At the same time, we have been efficiently managing our OpEx growth in both R&D as well as SG&A.

This quarter, we gained operating leverage in SG&A keeping its growth well below our top-line growth.

We continue to invest for the future in research and development maintaining our R&D investment level at around 6% to 7% of top-line revenue.

Now for some regional highlights.

In the Americas region, we had a very strong sales performance in Q2 with our commercial team driving to 17% growth in a competitive market.

Road generated growth in the region was 23% reflecting the ongoing success of our AirSense 10 and AirCurve 10 platforms powered and categorized by Air Solutions software.

The mask and accessories categories grew at a solid 11% in the Americas for Q2.

We continue to expect solid mask and accessories growth throughout FY16 and beyond.

We grew our combined EMEA and APAC group at 7% on a constant currency basis in Q2.

We continue to see good growth in our sleep-disordered breathing business and our respiratory care businesses in these regions.

The headwind that we have faced from the SERVE-HF trial results of May 2015 continue to be annualized through the P&L and this will continue until May 2016.

The ASV sales impact for Q2 in Europe was broadly consistent with last quarter.

As we know that during our last quarter investor call, the ASV sales impact in the US continues to be less than that in Europe.

The ASV platform remains an excellent therapeutic solution for a number of important clinical applications including: one, treatment emergent central sleep apnea; two, opioid or pain management induced central sleep apnea; three, post-traumatic stress disorder, or PTSD.

This quarter we acquired Maribo Medical, our distributor in Denmark.

These forward vertical integration acquisitions have proved very valuable to us in the past; we expect this to be the same.

We also expect that our partnership with the great team at Maribo, which is now part of ResMed Denmark, will allow us to continue to lead in market development in the country and to build connected care and digital health solutions for sleep apnea, COPD, neuromuscular disease, and beyond.

Now, I'd like to provide an update on our ResMed 2020 strategy.

Before going into the three horizons, I'd like to talk about three key underlining enablers of our strategy.

The first of these is our global leadership in healthcare informatics.

The second is our expansion in high-growth geographic markets, and the third is a focus on our best in class operational excellence.

So the first enabler on our list is our global leadership in healthcare informatics.

Connected care and digital health are almost now industry buzzwords that are referred to by many companies in the space.

We're not just talking about it.

We are executing on this front with over 1 million cloud-connected medical devices sending data every morning to the cloud and more than 750 patients signing up every day for our patient application called myAir.

We are transforming ResMed into a tech-driven medical device leader.

Our first step on this journey has been changing the basis of competition in our core sleep apnea business.

We led the industry 15 months ago with 100% cloud-connected medical devices and now our competition has had to follow.

We are improving the efficiency of our customers by embedding our software solutions in their workflow and providing value to providers, physicians, and patients by improving patient device adherence, and therefore patient outcomes.

We can leverage these core competency from sleep apnea into chronic obstructive pulmonary disease, or COPD, into neuromuscular disease and other chronic disease spaces.

Our second enabler is our investment and expansion in high-growth geographies.

Our investment in Curative last quarter is an example of this strategy in action.

Curative allows us to have products developed in China, made in China, for sale in China.

It opens up channels that just weren't available for imported products.

We will continue to invest and expand our presence in China, South Korea, India, Brazil, and many countries in Eastern Europe.

In each country, the value we deliver is to improve patient outcomes and reduce overall healthcare costs for the country in key chronic diseases.

Our third enabler is operational excellence.

It is an important and fundamental foundation to our growth strategy.

It's just part of our DNA.

We continue to create efficiencies to allow us to free up cash, to invest back into innovative organic R&D programs, and also allow us to better unlock value from our tuck-in acquisitions.

We take a continuous improvement approach across our entire global business including component supply management, manufacturing excellence, supply chain and logistics optimization, and OpEx management.

We are committed to grow our operating profit and to ensure that we have headroom to free up cash to reinvest in the business and continue to drive profitable growth.

Now, I'd like to spend a few minutes updating you on progress against our long-term ResMed 2020 growth strategy.

In our first horizon of growth, which includes our core sleep apnea franchise, our leadership in healthcare informatics remains a critical growth driver.

Last month, a market research firm called Berg Insight published a report on mobile health and home monitoring.

The report ranked ResMed as the number one global leader in connected care for all medical devices.

This was not just in respiratory medicine but in all device categories including cardiovascular disease, diabetes, and beyond.

So 15 months after the launch of AirSense 10, AirCurve 10, and Air Solutions, the cloud-based software platform, we have achieved this market leadership position.

I want to tell you that we are not done.

We intend to continue our leadership in connected care and digital health as we add features and enhancements to our solution to bring even more value for providers and physicians, and even better applications for patients to see their own data to participate more in their own health and wellness.

With well over 1 million patients, cloud-connected medical devices sitting on their bedside tables providing daily updates to the cloud, we are liberating data, providing actionable information, unlocking value, and improving outcomes for patients, physicians, providers, and for payers.

Our customers are clearly experiencing the value proposition of the AirSense and Air Solutions platform and incorporating this into their workflows and reaping cost savings in their own P&L.

On our investor call last year, I referenced a clinical care study that was presented at the American Thoracic Society in which an Air Solutions customer saw patient adherence increase from 73% to 83%, along with a 59% decrease in their own labor costs.

Earlier this month, this clinical care study was published in the peer review journal called Sleep and Breathing.

We continue to deliver results like this for many of our customers and many of these are proprietary results that we just cannot share.

One study that I was permitted to share at the JPMorgan Healthcare Conference in San Francisco early this month showed an increase from a very solid baseline of 60% adherence for a customer with standard care up to top-tier patient adherence of 87% when using our cloud-based Air Solutions platform.

You will see further publications and evidence from us showing increased operating efficiencies for our customers and increased patient adherence like this, all enabled by Air Solutions.

Connected care is here to stay.

Our acquisitions of Jaysec and CareTouch have added both ResMed brand and resupply solutions combined with an end-to-end referral and document management system for our customers.

Our system provides automated resupply solutions for customers so that they can effectively manage ongoing supplies of masks and accessories to patients via automated text, via email, and even via interactive voice response.

We also have a multilingual call center backing up the solution.

The referral and document management capability reduces days to patient and physician sign off, reduces the number of errors and incomplete documents, and eliminates a large number of follow-up phone calls.

These systems improve both our homecare customers' efficiencies and just as importantly, their cash flow.

In terms of progress against the second horizon of our ResMed 2020 growth strategy, we announced the acquisition of Austin, Texas-based Inova Labs, which we plan to complete this quarter.

With this acquisition, we have expanded our therapeutic portfolio for COPD to include portable oxygen concentrators, or POCs.

POCs enable patient mobility and fit well with our life support ventilator platform called Astral.

Both of these give increased mobility and increased freedom back to COPD patients.

Inova Labs fits well with our respiratory care strategy and our innovative Company culture here at ResMed.

We know that we can manage the business to add to ResMed shareholder value.

With Inova, we will have opportunities to grow revenue by selling POCs through our global market channels.

We will work to prioritize the 100 countries that we sell into to maximize physician, provider, and patient value.

We will also be able to bring global operational and technological capability to create economies scale in supply-chain management, manufacturing, and logistics at Inova Labs.

Finally, together with the team in research and development in Austin and Sydney and beyond, we can create next generation products that leverage our healthcare informatics leadership to create solutions for connected care for COPD.

Finally, I would like to review our third horizon for growth.

Our third horizon of growth includes a portfolio of opportunities in new markets including atrial fibrillation, nocturnal asthma, and also sleep health and wellness.

Rob and I and others from our team attended the Consumer Electronics Show, or CES, earlier this month in Las Vegas.

Almost every wearable and non-wearable health and wellness technology at CES included sleep as part of their offering.

This clearly shows that there is a demand from consumers to measure, monitor, and improve their sleep.

Our S+ by ResMed sleep wellness tool is just our first foray into this space.

Consumers realize that sleep health is as important as cardiovascular exercise and good nutrition for overall health, and we agree.

We also continue to explore clinical areas of interest in adjacent markets.

For our more than 26 year history, our team at ResMed has emphasized relationships with key opinion leaders in pulmonology, cardiology, neurology, and related clinical areas.

Through our recent $5 million gift to the University of California at San Diego, we have helped establish a world leading center for clinical care and medical research in the fields of sleep apnea and COPD, the two most costly and most important chronic diseases in the field of respiratory medicine.

You will see plenty of exciting developments in the field from this team.

One recent example was a sleep apnea and cancer symposium at UCSD that brought together key opinion leaders in pulmonology with KOLs from oncology to discuss the impacts of sleep-disordered breathing and specifically repetitive hypoxia on cancer cell development.

Although these discussions are still in their early days, literally at the molecular level, this is just one of many new clinical areas that could lead to new therapeutics and solutions for patients that ResMed could provide in the future.

So returning back to our quarterly results, we remain active on the capital management front and this quarter in Q2, we bought back 700,000 shares, in addition to funding our dividend and completing the acquisitions of Curative Medical and Maribo Medical.

We continue to look for potential acquisitions where these three criteria are met: one, the business is aligned with our long-term ResMed 2020 growth strategy; two, we can leverage the asset to increase ResMed shareholder value; and three, very importantly, that there is a cultural fit between the business team and ResMed.

We clearly hit and nailed all of these three criteria with our acquisition of Inova and our acquisition of Maribo.

We will continue to refresh our acquisition radar screen with further growth opportunities as we move forward.

We are the global leaders in sleep apnea and respiratory medicine, not just in market share but more importantly in products and solutions innovation and connected care.

We remain excited as we build the road ahead for our industry, our partners, and most importantly, for patients all around the world.

With that, I will turn the call over to Brett for a more detailed review of our Q2 financials.

Brett?

Thanks, Mick.

Revenue for the December quarter was $454.5 million, an increase of 7% over the prior-year quarter.

In constant currency terms, revenue increased by 13%.

Movements in exchange rates, predominately a weaker euro relative to the US dollar, negatively impacted revenue by approximately $21.7 million in the second quarter.

At a geographic level, overall sales in the Americas were $269.5 million, an increase of 17% over the prior-year quarter.

Sales in combined EMEA and APAC totaled $185 million, a decrease of 4% over the prior-year quarter; however, in constant currency terms, sales in combined EMEA and APAC increased by 7% over the prior-year quarter.

Breaking up revenue between product segments.

Americas flow generator sales were $136.5 million, an increase of 23% over the prior-year quarter.

Masks and other sales were $133 million, an increase of 11% over the prior-year quarter.

For revenue in combined EMEA and APAC, flow generator sales were $123.5 million, a decrease of 4% over the prior-year quarter but in constant currency terms, an increase of 6%.

Masks and other sales were $61.4 million, a decrease of 2% over the prior-year quarter or in constant currency terms, an increase of 8%.

Globally in constant currency terms, flow generator sales increased by 14%, while masks and other increased by 10% over the prior-year quarter.

During the quarter, we incurred restructure expenses of $6.9 million associated with rationalizing our European R&D and manufacturing facilities.

These operations have been integrated in their existing larger-scale locations.

The restructure charge consists primarily of severance payments and an asset write-down of a legacy manufacturing facility.

Additionally during the quarter, we released $2.4 million of an accrual associated with our SERVE-HF field safety notice activities as we have substantially concluded the obligations arising from the field safety notification.

During the rest of my commentary today, I'll refer to non-GAAP numbers.

The non-GAAP measures exclude the impact of the restructure expenses and the SERVE-HF accrual release in the current quarter as well as the amortization of acquired intangibles both in the current year and last year.

We have reconciled the non-GAAP to GAAP numbers in our second-quarter earnings press release.

Non-GAAP gross margin for the December quarter was 58.1%.

On a year-over-year basis, our gross margin contracted by 410 basis points reflecting an unfavorable product mix, client and average selling prices, and an unfavorable geographic mix partially offset by favorable net currency movements.

However, on a sequential basis, non-GAAP gross margin improved slightly increasing from 58% in the September quarter.

Given current exchange rates and taking into account the current trend in product and geographic mix, combined with the impact from our cost out programs and our recent acquisitions, we continue to expect gross margin to be in the range of 57% to 60% for the remainder of FY16.

Moving on to operating expenses.

Our SG&A expenses for the quarter were $118.2 million, a decrease of 4% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 4%.

SG&A expenses as a percentage of revenue improved to 26% compared to the year-ago figure of 29%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 26% to 27% for the remainder of FY16.

R&D expenses for the quarter were $29 million, a decrease of 1% over the prior-year quarter but in constant currency terms, an increase of 14%.

This increase largely reflects incremental investments across our R&D portfolio.

R&D expenses as a percentage of revenue were 6.4% compared to the year-ago figure of 6.9%.

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 the remainder of FY16.

This reflects our ongoing commitment to investing in our diverse product pipeline including informatics solutions, but also the benefit of the weaker Australian dollar in which the majority of our R&D is denominated.

Amortization of acquired intangibles was $4.4 million for the quarter.

The increase over the prior-year amortization expenses of $2.2 million reflects the additional amortization associated with our recent acquisitions.

Stock-based compensation expense for the quarter was $11.5 million.

Our non-GAAP effective tax rate for the quarter was 20.5% compared to 21.1% in the prior-year quarter.

Looking forward, we estimate our effective tax rate for the full fiscal year will be in the range of 20% to 21%.

Non-GAAP operating profits for the quarter was $116.9 million, an increase of 5% over the prior-year quarter.

Non-GAAP net income for the quarter was $97.5 million, also an increase of 5% over the prior-year quarter.

Net income for the quarter was $90.5 million.

Non-GAAP diluted earnings per share for the quarter were $0.69, an increase of 6% over the prior-year quarter while diluted earnings per share for the quarter were $0.64.

Overall foreign exchange movements positively impacted second quarter earnings by $0.04 per share reflecting the favorable impact from the weaker Australian dollar partially offset by the weaker euro.

Cash flow from operations was a record $147.4 million for the quarter.

This reflects strong underlying earnings and an improvement in networking capital balances.

Capital expenditure for the quarter was $12.9 million while depreciation and amortization for the December quarter totaled $21.5 million.

We have continued to be active on the capital management front.

Our Board of Directors today declared a quarterly dividend of $0.30 per share.

Additionally during the quarter, we repurchased 700,000 shares for consideration of $40.1 million.

At the end of December, we had approximately 13.6 million shares remaining under our authorized share repurchase program.

During the quarter, we completed three international acquisitions: Curative Medical based in China; Maribo Medical, our distributor in Denmark; and Bennett Precision Tooling Company, located in Sydney.

These acquisitions were funded by utilizing our existing cash balances.

Additionally this month, we announced a definitive agreement to acquire Inova Labs.

Inova Labs is a US dominated entity, and this acquisition will be funded by utilizing our existing credit facility.

We expect to include Inova Labs in our consolidated results in the third quarter of FY16.

For the rolling 12 months ended December 31, we have returned 84% of free cash flow to shareholders through dividends and repurchases, and over the last five years, we have returned 98% of free cash flow to our shareholders via dividends and repurchases.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $257 million, while December 31 total assets stood at $2.2 billion, and net equity was $1.5 billion.

And with that, I will hand the call back to Agnes.

Thank you.

(Operator Instructions)

Your first question comes from the line of Matthew O'Brien of Piper Jaffray.

Your line is open.

Good afternoon.

Thank you so much for taking the question.

I was hoping to start off on the generator side and the performance in the quarter has been very, very strong.

I'm just curious, Mick, as far as what you're seeing in the marketplace with Res products now out there today.

Are you guys competing head-to-head?

And if so, it seems like you're continuing to be very successful.

Is that a trend that we should expect going forward?

Thanks for the question, Matt.

That allows us to talk about our Air Solutions portfolio and AirSense 10 and how it sits in the market.

I'll have a first go and I might hand to Jim Hollingshead to talk a little bit about the Americas business what's happening there with the AirSense 10 launch.

As I said in the remarks earlier, we have had competitors follow us into the space with the cloud-connected devices.

We think our offering is superior because it's 100% cloud connected and requires the channel to do nothing other than plug it in and breathe.

And in the morning the data go to the cloud and then can be accessed by the patient on myAir or the physician on AirView or the payer-provider through an API from Air Solutions.

And we think it's a really strong value proposition taking up to 60% of the labor costs out of the channel for them.

It's just a really important improvement to their P&L and it's really embedded in their workflow and becomes something that they're doing well.

We believe in competition.

We like healthy competition, and we like the fact that our competitors are looking to compete on value offerings, not just in the flow generator segment but in the mask segment and looking to compete with technology.

And so as we look forward, the market growth rate is in the mid- to high-single-digit numbers.

We like to meet or beat market growth rate.

We don't accept it; we drive beyond it.

That's where we're at.

But Jim, any more color on the Americas?

Yes.

Thanks, Mick.

We're very confident in our offering.

The AirSense 10, the AirCurve 10 platforms have been very, very well received.

We've taken significant marketshare and the Air Solutions inclusion in that.

So as Mick is saying, I think we've now clearly proven to our customers that we can drive efficiencies in their business with the platform, and so that's a very compelling offer and remains a very compelling offer, even in light of competitor launches.

We obviously have big comps that we're going to work through, and so your question was about sustainability, and we intend to continue to grow our program position above market growth rates.

But given the share we've taken, I don't think that's sustainable indefinitely -- the growth rate you've seen this quarter.

Okay, thank you.

And as the follow-up, talking about the Inova acquisition, just curious as far as where they were selling historically and where you can take that device fairly quickly, and then the investments that you're going to need to make in support of it.

Is that going to be pretty sizable?

And then how does that business affect the financial makeup of ResMed?

I think the gross margin profile and operating margin profile will likely be somewhat of a headwind going forward.

Thanks, Matt.

The Inova acquisition is a great opportunity for us.

It's our first foray -- for 26 years of positive airway pressure noninvasive ventilation and dental fleet medicine, it's our first foray into portable oxygen concentrators.

And it's a great technology and has great mobility and gives great freedom back in terms of the battery life and the weight of these portable oxygen concentrators.

When you look at our scale and selling to 100 countries, Inova currently sells into 5 to maybe 10 countries, so you've got a 10 to 20 X multiple just on the number of geographic countries that we can move into.

And so we're really excited about it.

I might ask -- Rob Douglas, our COO, President, and Chief Operating Officer and I were touring the plant in Austin last week just before JPMorgan, and it was great to walk around and see all the team and to get a feel for the innovation.

Rob, any further comments as to the investments and what we need to do going forward?

Obviously, Inova is at a scale not where ResMed is at, but they are a scale that ResMed used to be at.

So walking around the factory, there's a lot of very similar focus what ResMed had taken in the early days, and we know that we can actually share a lot of experiences and working and integrating those teams.

We can really accelerate the development of where those products go and how we take them into the market.

A huge amount of opportunity there and a really good cultural fit.

It's going to be very exciting for us all to work in that area.

Thanks for the questions, Matt.

And your next question comes from the line of David Low of Deutsche Bank.

Go ahead, your line is open.

Thanks very much.

First I have a question around pricing.

In the experience of competitive bidding round two and what that led to and the manufacturer of prices, just wondering what your experience has been as we head into a national rollout of competitive bidding.

Thanks for the question, Dave.

Competitive bidding has been in play for almost seven years now.

CB1, CB2, and then the national expansion that is going on as we speak from January 1 through July 1. So these obviously have had an impact.

We've talked about that over the last number of quarters, on our customers, and we've worked with our customers to make sure that we can help them improve the efficiencies of their P&L and drive to a profitable growth for all of us in the value chain so that we can continue to serve patients and invest in infrastructure.

A lot of our investments around Air Solutions are about taking 50%, 60% of the costs, the labor costs out of the channel and so therefore improving the P&Ls.

Obviously, acquisition price of CPAPs, APAPs, and noninvasive ventilators are in the P&L as well, but when you're able to take 60% of the labor costs out, that frees up a lot of cash for reinvestment in their business, and it's really bringing a technology solution into play.

I would characterize the pricing environment as historic normal and what it has been over the last number of many years.

We don't go to quantitative detail of that for competitive purposes, but I'd say it's at historic normal levels.

Great.

Thanks very much.

I think I'll follow up on the same topic.

I guess what I'm looking for is a little bit of conflict that what we saw with round two where I think your commentary was quite similar at this stage after it just being announced that you're comfortable that we're not going to see the same dynamic where the competitors, I think in my read of it the competitors push prices down and ResMed in due course followed.

Are you concerned that there's a risk of that playing out again or are we really well -- (technical difficulty)

David, I can't predict the psychology of other players in the market.

I can tell you what we've done and what we continue to do, which is we bring technology into play that improves the P&L for our value chain.

And we really understand how that value chain operates.

We've got embedded into the work flows and really helped partner with the industry to take those costs out and we will continue to do that in the future.

Other players in the marketplace have followed and produced similar technologies.

We don't think they're quite as good, but they're doing similar things, which is looking to take labor costs and inefficiencies out of the system.

And frankly, together we and our competitors in this space are fighting the real competitor, which is frequent fliers in the hospital.

And getting those patients with sleep apnea and COPD rather than going back to the ER, taking care of them by a product on their bedside table and using data from that to get back to the hospital system, back to the ACO system so that they know that they are kept out of play.

Thanks for the questions, Dave.

And just a reminder, it is one question and one follow-up question.

Chris Kallos of Morningstar is online with a question.

Please go ahead.

Your line is open.

Thanks for taking my question.

Mick, I just wanted to ask in light of the acquisitions in Inova and Denmark, how does that affect your CapEx going forward?

Can you provide some guidance on that?

Brett, do you want to take that question?

Yes, I will.

Thanks, Mick.

The CapEx is running at around, let's say a run rate of 13, 14, 15 in a quarter, something like that.

In terms of Maribo, it's very much a distributor so it's not a lot of capital tied up at once.

I don't see too much impact there.

And things like Inova, it will probably be a small uptick, but it will be pretty negligible.

It's a fairly small operation at the moment.

I think the big one on that in terms of investment end up being where we will incrementally put some money, I think it's in R&D.

I really think we can turbocharge those products and make them very effective.

And obviously with our distribution and channel capability, with what we can bring to the table, we very much think we can grow that business very nicely.

But pretty -- some small investments, but nothing significant.

And just a follow-up on the R&D in Inova, are you planning on keeping the domiciled in the US, and how does that affect your 67% forecast on R&D?

Rob, do you want to answer that question maybe?

Rob, why don't you go first and then maybe Brett can answer the follow-on.

We're still working on integration plans and finalizing how all that's going to work.

We don't see in the short term major moves.

It's a really good team in Austin who really know their stuff around that and a safe core confidence, and we're very keen to maximize the value of that.

In terms of ongoing (inaudible) this will need a short-term bit of investment in the R&D, but long term it shouldn't change how we think about the right level of investment for R&D for our overall business.

Anthony Petrone of Jefferies is online with a question.

Please go ahead, your line is open.

Great.

Thanks a lot.

One quick for Brett and then I will follow up with the question on just some CMS news that was coming out late last year.

Brett, on the acquisitions in the quarter, there were three that -- one was -- we were aware of, but the other two in terms of distributor vertical integration, we were not aware of.

So what was the collective contribution just from those three acquisitions in the quarter in terms of revenue and EPS and then one follow-up.

Thanks.

These are pretty small acquisitions.

We're not going down to that granularity.

I think we did for those once, but not material from our perspective, so we haven't disclosed too much detail on that.

Great.

And then just from a margin perspective, this vertical integration, will that help offset some of the pressures that you have been seeing?

And maybe just an update on the transition from air freight charges, which was a tailwind that was potentially coming in the second half of this year.

Was there any benefit from that this quarter, or do you expect that to be more of a second-half event?

So on the first one, it really will depend on the acquisitions.

Again, our framework is fairly small, so it's around the edges.

But typically with a vertical integration.

For example, in the distribution that would help, if you like, help improve your margins are be accretive to your margin, for example.

If you look at Bennett, for example, that's really vertical integration within our suppliers, and we think there we can pick out actually a better tooling cost, but also improvements in strategically in tandem market and things like that.

So that was what we thought was quite a smart strategic tuck-in for us.

If you look at acquisitions such as Inova, we highlighted that at the time, there will be a little bit of dilution to gross margins there, so that does present a little bit of a headwind.

But I think the opportunities are so good for us on there on growing that portable oxygen concentrator market and our share and the product and so on, that I think it was quite compelling for us to do.

So we're not going to worry about some sort of minor margin dilution, if you like, impact.

For not doing the deal, we think it will be pretty compelling in due course.

And on the freight side of things, we're seeing some of that coming through and obviously we will see more of that coming through in the second half as well of the fiscal.

Thanks for your questions, Anthony.

Saul Hadassin of Credit Suisse is online.

Please go ahead, your line is open.

Thanks very much.

Maybe question for Brett as well.

On the gross margin, just looking at the sequential movement up about 10 basis points.

And looking at your mix, profit mix, if anything, it's probably slightly better this quarter than 1Q 2016.

You should have had a benefit from a lower Aussie US through the [cost] line.

Just wondering, was there anything holding back that gross margin uplift?

For example, what was referenced before so that moved to sea freight, is that still to come through?

In terms of our your underlying gross margin, ex the dilution that might come from Inova, just wondering, should we think sequential gross margin uplift over the course of this fiscal year assuming currency holds where it is?

Thanks.

If we look at it sequentially, we still are seeing an impact on -- a negative impact from product mix and also geographic mix.

The big standouts, obviously Americas growth and the flow generator growth as well.

It remains really strong.

There are still headwinds for us.

But in the frame, there's a whole bunch of other stuff.

We had a small uplift from FX, you're right, that was probably around 40 basis points or so.

There's a bunch of other stuff that plays out on that that can impact you quarter to quarter.

But as a rule, I guess you can characterize that as margins pretty much stabilized.

And depending on trends on product mix and geographic mix, it determines where we land within that guidance span that I gave.

We're still working on a way on the cost out programs and so on.

We've got opportunities there that will flow through into the second half.

So then it does.

It depends a lot on the normal product mix, geographic mix, a little bit on the acquisition around the edges.

There will be a little bit of a headwind for us, you've got typical as decline that are always in the mix.

So you've got all that all in and as I said, quite a lot, it's pretty hard to predict on the gross margin when you're looking at a 90 day windows.

But overall, pretty comfortable where that margin is and clearly, we're working hard to improve that.

But we've got to be really stuck on what we're seeing with product mix and geographic mix and acquisitions and so on.

But rest assured, we are working hard on margin improvement.

And just a follow-up on that, regarding the ASV sales that you would not had this quarter, was there any material change to those lost sales relative to the quarter that's just passed, relative to 1Q 2016?

I'll take that, Brett, if that's all right.

As I said earlier, the impact that we saw in Q2 was the same as the impact we saw pretty much in Q1 for Europe.

And the impact that we saw in the US was much less than that that we saw in Europe, which is, again, the identical situation to what we saw in Q1.

So it's still going through the P&L being annualized.

The impact of the SERVE-HF results from May 2015 and we are in mid-January now, so we've got four more months of annualizing that through the P&L, and then we will be clear of the annual comps of the ASV impact in May 2016 here in five months -- four months time from now.

Margaret Kaczor of William Blair is online with a question.

Please go ahead, your line is open.

Good afternoon, everyone.

So just to go back to Inova Labs and that acquisition.

Obviously, they have a good product.

It's got some good advantages, but that said, do you have an interest in bringing a new POC to market that's up to the same standards as ResMed, similar to what you guys did with Astral and [SAMs]?

And should this be a shorter a longer timeframe, or are you happy and willing to continue selling the existing products to your customers today?

Yes, thanks Margaret.

Good afternoon to you.

That's a good question, and it allows us to talk to the longer-term play here around Inova.

Inova is a strong player in the POC market, and they have excellent mobility and excellent freedom that they give back to patients because their battery life is best in class and lasts a very long time.

Similar to what we do with the Astral life support ventilator where we give 24 hours of freedom back to patients with that.

Having said all that, and as Rob alluded to earlier, there's a lot of capabilities that we have from our global business in the 26 years in respiratory medicine here that we can bring some skills to the table for the next generation of products in the portable oxygen concentrator front.

Some of that will be some of the engineering around efficiencies of supply chain logistics, manufacturing, quality of the liability, and those types of factors that we have learned a lot.

But really importantly, bringing the capability or the core competence of cloud-based healthcare informatics solutions, to be able to put a cloud-connected POC as part of an end-to-end across the chronic obstructive pulmonary disease medical device space.

So all the way from noninvasive ventilators, life support ventilators, and the portable oxygen concentrators, and take that data and be able to give pulmonary and critical care physicians, or ACOs, data that can really help them understand mobility, freedom, breath rate, and hospitalization rates on their COPD patients to help them improve outcomes and lower costs.

That's the game, and we do think that we can bring a lot to the table.

So the short answer is, obviously we like the product.

We will continue to sell existing products, but we like even more the combination of the Inova portable oxygen concentrator engineering with ResMed's healthcare informatics engineering and what the two combinations, what that synergy could bring.

Okay.

I don't know if you had talked at all about the timeframe, because it obviously took you guys a little bit of time with SAMs to bring that kind of a product to market.

So should we assume it's within that 2020 timeframe or longer than that?

You should assume it's within the 2020 timeframe for sure.

The difference between SAM where you've got life support ventilators where the lifecycle of those is sort of 6 to 7 or even up to 8 to 10 years.

The lifecycle of the portable oxygen concentrator is probably closer to that of a C-pap type device or that sort of time horizon.

So we will have a next generation well before 2020.

Joanne Wuensch of BMO Securities is online for the question.

Go ahead, your line is open.

Very nice quarter.

Could we touch on SG&A, please?

Revenue was stronger than we expected, but you really also pulled in your SG&A.

What's going on there?

Great question.

Rob, do you want to address that maybe?

Or maybe Rob first, Brett, then you can go.

Joanne, actually we've got a number of areas that we're working on.

Brett will probably go into a few of them, but across the board, we're running a really strong operational excellence program that not only talks about our products and our supply chain, which we've talked about a lot, but we're also moving a lot of that thinking and approach into our SG&A world as well.

So we've done a lot of work around the world.

And we do run at different countries with different go-to-market models, and so there are different programs around the world.

But we can really call out the US and Americas team for pulling a lot of operational leverage in, and we've got very strong plans around our European teams.

Some really easy stuff for us to do in terms of sharing the way some things work, make it easier.

We are taking a view that we are freeing up a lot of capacity to continue to invest in innovation and really optimizing these acquisitions as well.

So Brett, I don't know if you want to go into a little more on some of the areas?

Yes.

We -- we've adopted some of the methodology that they're using with the supply management team and so on and being more disciplined around that, so that is certainly helping a lot.

And just making sure their on the kind of mindset thinking about expenses as well in a smart way.

And so that has sort of enabled us to get some pretty solid leverage there.

Obviously, if you go back last year running, we had, for example, AirSense and SAM, we're doing some marketing and then some variable comps, and so on.

That's more normalized this year, which has helped us a bit as well.

And to some extent, you're getting some currency benefit there as well.

But even if I normalize for currency, we've been around that 27% mark, so we'd still be in very good shape.

Some of those savings or holding expenses type thing and then with revenue growth, obviously you'll get that leverage.

So that's been -- we've been working on this for a while, and I think it's just starting to flow through another P&L now.

And as a follow-up if I may, I think there was some surprise you bought Inova.

It's going outside of your core OSA type of area into more traditional DME type of oxygen concentrators.

What made this be the right acquisition at this time?

Thank you.

Thanks, Joanne.

With respect, I'll disagree that it's not in our space.

Our space -- ResMed is respiratory medicine.

What we've done in the field of sleep apnea certainly for 25 years is lead that market and most recently, lead it by taking costs out through healthcare informatics and really showing we can improve the efficiencies of the delivery of this amazing non-invasive ventilation and positive airway pressure therapy to patients with sleep apnea.

We'd already started within the field of chronic obstructive pulmonary disease with our non-invasive ventilators to help those patients as well stay out of hospital and get better with COPD through non-invasive ventilation.

Including publication of studies showing that we can actually reduce the mortality rate, so literally save lives of COPD patients with severe hypercapnic COPD with non-invasive ventilation through the [kerneling] study that we published.

So the extension, through that vertical if you like, of the disease state of COPD into the other medical device that is often used in that COPD space, which is oxygen therapy.

We aren't really doubling down in stationary oxygen.

It does have a stationary oxygen concentrator, but it's actually the only one in the world that the stationary oxygen concentrator can allow a portable oxygen concentrator to connect directly onto it and charge and be there.

So that when the patient wants to leave the home, because these folks are still active folks with COPD.

They can grab their POC and see the grandchildren, get out to the park and play ball with the grandkids and have their freedom back, which is what POCs bring.

The total market for oxygen therapy is $1.2 billion or so; all of that, around $200 million, plus or minus, is the portable oxygen concentrator market.

But it's that $200 million portable oxygen concentrator market that has very strong growth.

Mid-to-high, even low-double-digit numbers growth in terms of year on year, and we are real excited to participate in that POC market and to bring our own innovation to play.

And we think it's a very logical extension into the vertical of COPD patient treatment and overcome a great part of our portfolio, not just in the US where it primarily sells now, but globally.

Your next question comes from Andrew Goodsall of UBS.

Your line is open.

Thanks very much and great results.

I wanted to pick up on the mask.

Obviously second quarter now that you've achieved quite good US sales, I just want to understand what's been behind that.

Is it conversion or I guess better pairing, or is it again conversion on the compliance rates data that you're showing?

And then I guess, Brett's probably covered this a little bit, but how I guess incrementally that continues, we might see that in the margin.

Okay, I'll handle the first part of the question.

11% solid growth in masks and accessories in Americas and hand it to Jim Hollingshead.

And then Brett, maybe you take the second part about GM.

Yes.

There is a lot going on behind that mask number, just to be -- try to think about it.

And the first thing is the price reductions that we've put into place in the January to June period of 2014 are now completely annualized.

So we're through that, and while the market remains, the mask market in particular remains very competitive, we're into more of a historic norm kind of pricing situation in masks.

Our offering remains very strong, in particular the AirFit line of masks are very well received and continues to do very, very well in the market.

Our resupply offerings have driven a lot of growth, and that is directly connected to our health informatics offering because the acquisition of the providers that we're now integrating into a program we call ResMed ReSupply, and that's an automated resupply program.

It's part of our HI offering, that's helping to grow our mask business.

And then we've done a number of things.

We've done a number of -- without getting into deep tactics, a number of things in marketing and a number of things with sales compensation and so on, and all of those levers have contributed to the growth we saw.

And what you're expecting on gross margin -- (multiple speakers).

I was just going to say gross margins like much has been the same the next couple of quarters then -- (technical difficulty).

Brett, you want to address the -- it sounds like it was actually a third question.

Why don't you address the gross margin and then Jim or I will address the ongoing masks.

So pretty simply, typically mask margins are higher than flow gen margins.

So to the extent you get stronger growth in masks obviously be supportive to group margin.

So that's the basic math.

In terms of where it goes, I think all the activities we have in place would suggest that that's stable.

Thanks for the questions, Andrew.

Steve Wheen of JPMorgan is online with a question.

Please go ahead, your line is open.

Thanks very much.

I have a question for Brett just on the FX.

Typically in the past you've given us some indication on current exchange rates, what the gross margin impact might be going into third quarter.

And then also you've often provided the FX impact at the impact line as well.

On gross margin going forward, assuming currently where they are and they're particularly volatile at the moment.

But we probably -- sequentially we probably get a small uptick, but it will be only around 10 the basis-point mark, Steve.

It'd be pretty small sequentially at this point in time.

I mean, all the takes that little trajectory and stays there then probably Q4 you'd see that impact on a sequential basis being a little bit bigger than Q3, but for Q3 I think it would be around 10 basis points.

So overall net impact from currencies, I do typically give it on EPS and I think I did in my commentary, but it was around $0.04 favorable this quarter as we're starting to see some of that benefit from a lower Aussie dollar kind of kicking through, which is offset to some extent by the way to euro, but we are starting to see the benefit from the Aussie dollar now, which is great.

And then just final follow-up.

In the past, in the last quarter, you guided towards the effective tax rate going down by 100 basis points.

You seem to have changed the stance on that.

Could you just give some reconciliation as to what might have changed there?

It sits around the cusp of each one, so I probably should have said in the vicinity of 20%.

It's around that range, Steve, on that.

And just it varies around with the basically where the geographically taxable income is.

And so we continue to have pretty good numbers out of the US and that's probably moved it up a little bit.

But in the vicinity of that 20%, I've just gone with 20% to 21%.

So maybe you could say a increase that a shade above where I was thinking from Q1.

And your next question is Sean Laaman online from Morgan Stanley.

Your line is open.

Good morning, and thank you.

I have a question on myAir.

I'm just wondering if there's any way you've been able to track or quantify the uptake and usage patterns from patients and any observable benefit to the Company.

Thanks.

Great question, Sean.

I mentioned that it's actually now in our investor deck that we're adding 750 patients per day to the myAir application.

And myAir, for those who don't know, is an app that can run on an iPhone or an Android, Samsung, or whatever device, portable device where a patient can access and interact with their own therapeutic data from their device and trends and gaming and interaction with it.

And in the same way that many people around the world are now measuring their steps either with a Fitbit or an embedded app in their smartphone to try and get the 10,000 steps a day and keep the cardiovascular exercise up.

A lot of patients now with myAir are looking to get their score to 100, because we literally give a score out of 100 every day on how you slept which includes duration of sleep, any apneas or problems with mask leak, and efficacy of the respiratory rate, and so on throughout the evening.

So it's an algorithm, if you like, that score the patients' wellness with regard to sleep and their treatment of sleep apnea.

We've seen incredible engagement from patients on it.

I talked about 60% adherence going up to 87% adherence with some customers in the case studies from the JPMorgan presentation.

I'd tell you, a big part of that is engagement of the patient through these cloud-based algorithms that are interact, email, text, IVR, and psychologically work with patients through these cloud-based capabilities.

So we're really excited about myAir and we think it's a big contributor and we're in mile one of a marathon on this one.

There's a long way to go onto the capability for us to engage with patients.

Thanks for the question, Sean.

We might just take one more question and then close it up please, Suzanne.

Certainly.

Your last question in today's question-and-answer session will be from Matt Taylor of Barclays.

Go ahead, your line is open.

Hello, thanks.

Can you hear me okay?

Yes.

Got you loud and clear, Matt.

Okay, great.

I just wanted to ask a follow-up on the acquisitions, because you're talking about them very excitedly, but also think they're immaterial this quarter.

You said Curative was about 1% last quarter so two things.

One is, when do they become material as [engines] more material?

And then are you going to call them out separately for reporting purposes, because most of us just have masks and flow gens in the model, so it's hard to reconcile.

So, I'll let Brett talk to the first part of that materiality, and then I'll talk into a little bit as to why we're excited about the long term.

At this stage, it's still not material from an accounting stance and even on that aggregate there, Matt, so at this stage we wouldn't -- won't disclose that in any too much granularity.

Now obviously, as we go forward and so on, we keep looking at how we report or disclose from a business perspective but at this stage, we're going through pretty much the same channels and so on, we would continue to basically aggregate that into our results and not try to split that out.

And Matt, just to give you some sort of ballpark on it, we have mentioned that it's less than 2% of our global revenues, so you can run the math on $1.7 billion; that puts it at less than $34 million in revenues.

We're not going to go into exactly what number it is for competitive reasons, but take that number and then also think about the $200 million market of POCs and think about what ResMed's done, I guess if you look back over the last 20, 25 years in the sleep apnea market where we started from a very small base and have grown to a very strong global leadership number one position.

We would look to do the same in POCs, and how we look to do that is the same way we did in sleep apnea, which is innovation and technology.

And I've talked a lot about the innovation in healthcare informatics and engaging patients.

Applying that to POCs, we think is a huge opportunity and we're very excited about being a major player in the POC market.

And really importantly rolling it up to a major play around COPD, which is the number three killer in the United States and the number two cause of re-hospitalization in ERs and ICUs and CCUs.

So we think it's a huge opportunity and we look to be a part of that.

Okay.

That's helpful, thank you.

Thanks for your questions, Matt.

We are now at the one hour mark.

I will turn the call back over to Mick Farrell.

Thanks, Suzanne.

In closing, I want to thank the more than 4,300 strong ResMed team from around the world for their continued commitment to changing the lives of literally millions of patients with every breath.

I'm very proud of what our team has accomplished in creating market leading innovation in connected care including new product lines, new solutions, new channels that we've incorporated into our business portfolio.

We remain laser focused on our long-term goal of impacting 20 million lives by 2020.

That impact is literally giving the gift of breath back to each of those patients.

Thanks for your time and we will talk to you in 90 days.

All right.

Thank you again for joining us today for this call.

If there are any additional questions, please feel free to contact me.

The webcast replay will be available on our website at investors.resmed.com.

Suzanne, you may now close the call.

Thank you.

This concludes ResMed's second quarter of FY16 earnings live webcast.

You may now disconnect.