瑞思邁 (RMD) 2017 Q2 法說會逐字稿

Welcome to the Q2 FY17 ResMed Inc earnings conference call.

My name is Maryama 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, Vice President, Investor Relations and Corporate Communications.

Agnes, you may begin.

Thank you, Maryama.

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 investor.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 prospect for the Company, corporate strategy, integration of acquisitions, 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 are in the forward-looking statements detailed in filings made by ResMed with the Security and Exchange Commission.

I will now hand the call over to Mick Farrell.

Thanks, Agnes, and thank you to all of our shareholders as we summarize our results for the second quarter of FY17.

We achieved solid double-digit global revenue growth this quarter, led by sales from Brightree and continued strong growth in our device platforms.

We also saw the start of a steady ramp of our latest mask technologies.

For the call today, I will review top-level financial results, outline some regional highlights, and discuss key announcements this quarter.

Then I will hand the call over to Brett who will walk you through our financial results in further detail.

We achieved strong device sales due to our leadership in digital health and connected care.

The number of patients managed on the Air Solutions platform and the number of daily users of our Brightree platform continued to grow rapidly.

This quarter, we announced that we have reached a milestone with more than 1 billion nights of sleep data in our cloud-based physician and provider solution called AirView.

With well over 2 million 100% cloud connected medical devices, we are liberating data and unlocking value for physicians, providers, and patients like never before.

Midway through the quarter, we commenced the launch of our new AirFit range of masks, the AirFit N20 nasal mask and the AirFit F2 full face mask.

Both of these products leverage new step-change technology called InfinitySeal that provides significant advances in fit and comfort for patients.

Earlier this month at the JPMorgan healthcare conference, I announced that we had received FDA clearance for the ResMed AirMini, our world-leading travel-friendly CPAP technology.

I will talk more about that a little later.

At the bottom line, in terms of non-GAAP net operating profit, we grew at 13% on a year-on-year basis in Q2.

Including financing costs, our diluted earnings per share, or EPS, was $0.73 on a non-GAAP basis.

We continue to balance revenue growth and gross margin improvements, as well as ensuring appropriate investments in both R&D and SG&A so that we can maximize the success of multiple product launches across our global markets.

Now for some regional highlights.

The Americas region produced double-digit revenue growth.

These results were fueled by software as a service revenue from Brightree and 13% growth in devices.

Device growth was particularly remarkable, given that we were up against a 24% year-over-year comparable.

The mask and accessories category in the Americas grew 4% in the quarter.

This is up sequentially and reflects the fact that our sales team that received product around Thanksgiving timeframe has started showing the new technology to physicians and providers.

There is clearly a long way to go on the ramp of these products in Q3, Q4, and into FY18.

Growth in devices was driven by the continued support for the Airsense 10 systems by our customers.

These are powered by the cloud-based Air Solutions software platform including the myAir patient engagement app that has over 1,000 new patients sign up every day.

We achieved good growth in our respiratory care device platforms in the Americas, particularly our cloud-connected life support ventilation platform called Astral.

We earned strong growth in our combined EMEA and APAC regions this quarter, primarily driven by flow generator sales, with some outstanding performance from our combined curative and ResMed China businesses.

We have now completed the earn-out and the integration is going very well.

As we enter the Chinese New Year, we have truly formed one ResMed China team with one vision, one mission, two brands, and many and varied customer channels.

The team is really coming together well.

Mask, accessory and other sales in the combined EMEA and you APAC regions were down year-over-year due to a couple of factors.

One, we had some international licensing revenue from the comparable quarter a year ago in the region, and two, the N20 and F20 were only released in a few countries.

And as we know, uptake of new masks is a lot slower in EMEA and APAC than the US market.

We expect this mask category to return to positive growth in EMEA and APAC as we continue to launch the N20 and F20.

Feedback from patients, physicians and home care providers on the fit range and comfort of the N20 and F20 are very positive.

This is a great indicator for stronger mask growth in Q3, Q4 and into FY18.

Looking at our software as a service revenue, Brightree continues to grow strongly and in line with our acquisition model in the low- to mid-teens.

We are on track with our work to integrate Brightree software functionality into the Air Solutions portfolio.

We are truly creating end-to-end software solutions for our customers and Brightree is achieving strong double-digit growth, with high levels of customer satisfaction and customer work flow efficiency gains.

Let me now take a few minutes to update you on the progress against each of the three horizons in our 2020 growth strategy and then hand the call over to Brett.

In the first horizon of growth, which focuses on our core sleep apnea business, we are making significant advances with the smallest, quietest, and most comfortable products, catalyzed by digital health in connected care solutions.

We launched our new AirFit F20 full-face masks and our new AirFit N20 nasal masks in the second quarter.

The infinity seal technology is a step change in comfort for patients and fit ranges of 97% to 99% of patient populations are proving a winning value proposition with respiratory clinicians.

We are seeing exceptionally strong demand for the N20 and F20 products.

And for some of the mask SKUs, demand is in fact outpacing supply as we ramp up our production capabilities for these new technologies.

We will continue to ramp up our supply and we expect to be outpacing demand as we go through Q3 and into Q4.

At the JPMorgan healthcare conference in San Francisco earlier this month, we announced the FDA clearance of the world's smallest CPAP called the ResMed AirMini.

It's a tiny, portable travel PAP with all of ResMed's best-in-class comfort features.

AirMini is intended to be a secondary device for travel and it truly complements our world leading Airsense 10 platform.

AirMini is an amazing technology and we expect to launch this product commercially before the end of the fiscal year.

I have personally been using a prototype of the ResMed AirMini for over 12 months.

It has traveled with me to Asia, all over Europe, and throughout the Americas.

For those listening to this call who may also be CPAP patients, feel free to go to airmini.resmed.com and sign up.

We will make sure that you are amongst the first to know when the product is fully launched through our home care channel partners.

We continue to lead in the field of connected care, one of the key foundations of our growth strategy.

We have reached, as I said earlier, 1 billion nights of sleep data and are focusing on algorithms to convert big data into actionable information.

The ultimate goal is to unlock even more value for physicians, providers, payers, and most importantly, for patients.

This quarter, we announced results from a European study published by PricewaterhouseCoopers analyzing data from more than 23,000 patients in Germany and the UK.

The study showed that myAir patients, when compared to controls, used their CPAP devices for longer durations and have significantly higher adherence rates.

This adherence study was executed in our core sleep apnea vertical.

We are extending these cloud-based coaching algorithms to our ventilation and oxygen technologies.

Watch this space.

This is a great transition to the second horizon of the ResMed 2020 growth strategy.

We know that COPD is the number three cause of death and the number two cause of re-hospitalization in the western world.

The spectrum of cloud-connected respiratory care products across our ResMed portfolio will play a big role in reducing costs for providers and improving outcomes for patients with this debilitating disease.

Connected care in ventilation can reduce costs and improve patient outcomes in COPD and beyond.

We continue to see portable oxygen concentrators, or POCs, as an important addition to our spectrum of respiratory care products.

Our integration of the Inova acquisition has focused on quality improvements to the current Activox POC platform.

We are gradually ramping the launch of this technology to our global sales teams as we continue to improve quality and functionality of the product.

We will ultimately add cloud connectivity to our POC platform, which will help drive adherence for patients, fleet management for providers, and activity tracking for physicians.

Our third horizon of growth encompasses a portfolio of long-term opportunities including sleep health and wellness as well as clinical adjacencies, such as atrial fibrillation and heart failure with preserved ejection fraction.

Another key area of horizon three growth is our work in chronic disease management algorithms including population health models, healthcare analytics, care coordination and software as a service models for home health, home nursing, and hospice.

In the area of sleep health and wellness, we are making good progress with our new joint venture called SleepScore Labs, with capital investments from ResMed, Pegasus Capital and Dr. Mehmet Oz.

We started the partnership last quarter with an entire Dr. Oz show dedicated to the field of sleep wellness.

Dr. Michael Breus and Dr. Oz leveraged the S+ by ResMed, the world's first non-wearable sleep device and smartphone app designed to help people track, better understand and improve their sleep.

The sleep awareness campaign encompassed anonymous sleep data from a database with over 1 million nights of sleep.

SleepScore Labs calculated America's overall sleep score and Dr. Oz announced the results at the consumer electronics show, or CES, in Las Vegas earlier this month.

Dr. Oz reported that people are not sleeping as well as they should.

We're getting less than what the national sleep foundation recommends which is seven to eight hours plus of sleep.

We are about one hour behind the minimum with around six hours of sleep.

People say they're tired and people say they want to understand their sleep better.

SleepScore Labs will do just that.

They will truly quantify sleep and help people objectively determine which sleep solutions are best for them.

For ResMed, this is about driving the importance of sleep awareness and sleep health.

We will be helping people realize that they need to go see their doctor if they have any risky breathing at night or any shortness of breath, day or night.

These and other signs and symptoms of sleep apnea and COPD impact overall health.

We will continue to drive sleep health and sleep awareness and our ResMed brand as a leader in the field.

Let me close with this: We are incredibly excited about the ongoing launch of our N20 and F20 mask technologies and our pipeline of products in 2017, including the new ResMed AirMini.

We continue to lead in connected care with enhanced solutions that lower costs for providers and improve outcomes for patients.

We are leading the industry, driving consumer awareness of sleep, so that undiagnosed consumers go to see their doctors and healthcare providers.

We continue to bring our strategy into action for the benefit of physicians, providers, payers, and most importantly, to improve the lives of tens of millions of sleep apnea and COPD patients around the world.

With that, I will turn the call over to Brett for his remarks and then we will go to Q&A.

Over to you, Brett.

Great.

Thanks, Mick.

In my remarks today, I will provide an overview of our results for the second quarter FY17.

As Mick noted, we had a solid quarter.

Revenue for the December quarter was $530.4 million, an increase of 17% over the prior-year quarter.

In constant currency terms, revenue increased by 18%.

Excluding acquisitions and in constant currency terms, organic revenue increased by 10% over the prior-year quarter.

Taking a closer look at our geographic distribution and excluding revenue from our Brightree acquisition, our sales in the Americas were $293 million, an increase of 9% over the prior-year quarter.

Sales in combined EMEA and Asia-Pacific totaled $203.6 million, an increase of 10% over the prior-year quarter.

In constant currency terms, sales in combined EMEA and Asia-Pacific increased by 13% over the prior-year quarter.

Breaking out revenue between product segments, Americas device sales were $154.3 million, an increase of 13% over the prior-year quarter.

Masks and other sales were $138.6 million, an increase of 4% over the prior-year quarter.

The revenue in combined EMEA and Asia-Pacific device sales were $146.7 million, an increase of 19% over the prior-year quarter.

In constant currency terms, an increase of 21%.

Masks and other sales were $57 million, a decrease of 7% over the prior-year quarter, or in constant currency terms, a decrease of 4%.

Globally in constant currency terms, device sales increased by 17% while masks and other increased by 2% over the prior-year quarter.

Brightree revenue for the second quarter was $33.8 million, with growth on a prior-year comparable basis continuing to track in the low- to mid-teens.

During the rest of my commentary today, I will be referring to non-GAAP numbers.

The non-GAAP measures adjust for the impact of amortization for acquired intangibles, acquisition-related expenses associated with additional contingent consideration, restructuring expenses, and litigation settlement expenses.

In the prior-year comparable, they exclude amortization of acquired intangibles, restructuring expenses, and the release of the SERVE-HF accrual.

We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second-quarter earnings press release.

Our gross margin for the December quarter was 58.3%.

On a year-over-year basis, our non-GAAP gross margin increased by 20 basis points, reflecting manufacturing and procurement efficiency and the favorable impact from our Brightree acquisition.

These were partially offset by product mix, typical declines in our average selling prices, and unfavorable currency movement.

Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin to continue to be in the range of 58% to 60% for the balance of FY17.

Moving on to operating expenses, our SG&A expenses for the quarter were $139.3 million, an increase of 18% over the prior-year quarter, and in constant currency terms, also an increase of 18%.

Excluding the impact from acquisitions and in constant currency terms, our SG&A expenses increased by 10%.

SG&A expenses as a percentage of revenue were 26.3% compared to the 26% that we reported last year.

Looking forward and subject to currency of movements, we expect SG&A as a percentage of revenue to be in the range of 27% to 28% for the balance of FY17.

This reflects expected marketing expenses associated with product launches and ongoing legal expenses.

R&D expenses for the quarter were $38.2 million, an increase of 32% over the prior-year quarter, or on a constant currency basis, an increase of 28%.

This increase largely reflects the impact of our recent acquisitions and incremental investments across our R&D portfolio.

Excluding the impact from acquisitions, our R&D expenses in constant currency terms increased by 11% over the prior year.

R&D expenses as a percentage of revenue were 7.2% compared to the year-ago figure of 6.4%.

Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of FY17.

Amortization of acquired intangibles is $11.7 million for the quarter, an increase of $7.3 million over the prior year, reflecting the additional amortization associated with our recent acquisitions.

Stock based compensation expense for the quarter was $10.8 million.

Non-GAAP operating profit for the quarter was $131.6 million, an increase of 13% over the prior-year quarter.

Non-GAAP net income for the quarter was $103.3 million, an increase of 1% over the prior-year quarter.

Net income for the quarter was $76.7 million.

Non-GAAP diluted earnings per share for the quarter was $0.73, consistent with the prior-year quarter, while GAAP diluted earnings per share for the quarter were $0.54.

Note that our prior-year earnings per share comparable was restated as a result of our adoption of accounting standard ASU 2016 09, whereby we recorded a tax benefit of $5.1 million in Q2 FY16.

In the current quarter, under the standard, we recorded a tax expense of $25,000.

Excluding this impact, non-GAAP earnings per share would have increased by 6% over the prior-year quarter.

Additionally, foreign exchange movements negatively impacted second-quarter earnings by $0.03 per share, reflecting the unfavorable impacts from the weaker euro and stronger Australian dollar relative to the US dollar.

On a non-GAAP basis, our effective tax rate for the quarter was 21.1% and looking forward we estimate our effective tax rate for the FY17 will be in the range of 20% to 22%.

During the quarter, we recognized restructuring expenses of $4.4 million associated with the rationalization of our European R&D activities.

Additionally, we recognized an expense of $10.1 million for additional contingent consideration associated with our curative acquisition.

The additional accrual was a result of the business achieving performance milestones that resulted in the maximum contingent consideration payable under the purchase agreement.

Finally, we recognized an expense of $8.5 million as part of the global settlement of all litigation between ResMed, BMC and 3B.

Cash flow from operations was $119.9 million for the quarter.

This reflects strong underlying earnings offset to some extent by a modest increase in net working capital balances during the quarter.

Capital expenditure for the quarter was $14.7 million.

Depreciation and amortization for the December quarter totaled $27.7 million.

Our Board of Directors today declared a quarterly dividend of $0.33 per share, an increase of 10% over our prior-year quarterly dividend.

As previously announced, we have temporarily suspended our share repurchase program due to recent acquisitions.

At present, we expect to recommence the buyback in FY18.

At December 31, we have approximately $1.2 billion in gross debt and $318 million in net debt.

Our balance sheet remains strong with modest debt levels.

At December 31, total assets were $3.3 billion and net equity was $1.7 billion.

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

Thanks, Brett.

We will now turn to Q&A.

And we ask that everyone limit themselves to one question and one follow-up question.

If you have additional questions after that, please get back in the queue.

Maryama, we are now ready for the Q&A portion of the call.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

David Low from JPMorgan is online with a question.

Thanks very much.

If we could just start with the mask rollout.

Mick, you mentioned that you've had some issues with keeping up with demand and you've also talked about the rollout into other countries outside the US.

I was wondering if you could just expand on those two issues, and wondering particularly whether that production issue means that the rollout internationally might take a little longer.

Thanks for the question, David.

Look, the patient and provider and clinician acceptance of the mask has been great.

The infinity seal technology particularly and its ability to reach 97% to 99% of the patients that come into a sleep lab or through a clinic and so the acceptance has been great and certainly exceeding what we had thought it may be.

And so what we're finding with the new production technology that we're using for this infinity seal is that as we ramp across the different stock keeping units, that in some of those SKUs, we are not keeping up with the very high demand.

But as we look forward over Q3 and Q4, we will start to catch up and we would expect by certainly the end of Q4, that we'll be well ahead of the demand for the product.

Rob, do you want to add something on that?

David, regarding the rest of the world rollout, the volumes in the US are much larger than elsewhere in the world and we really don't see a big impact on the rest of world rollout or this that will continue at slow and steady progress as we'd reported previously.

Great.

Yes, look, it obviously seems like a good problem to have if you can't keep up with demand.

Just the other question I had, Brett, you mentioned in the SG&A commentary you've given us guidance, which I think is above what we've just seen and I think you made a comment about legal expenses.

Just wondering if that relates to the settlement that's already happened or are we talking about the other ongoing legal expenses?

No, that's really the ongoing legal expenses, Dave.

I mean, we're into, obviously, legal action with F&P, so that's not inexpensive.

Okay, right.

Thanks very much.

Thanks, David.

Andrew Goodsall with UBS is online with a question.

Thanks for taking my call.

Probably a follow-on call, sorry, follow-on question from David, just trying to get a bit more granular on the N20 series.

Just the 4% mask growth you saw in the US, just if you're willing to characterize, was that mainly the N20, I guess, after a sort of flat growth elsewhere?

And just also any feedback from the pilots that you guys ran on those masks.

Thanks, Andrew.

Well, both the N20, which is the nasal mask, and the F20, which is the full-face mask, are doing very well.

They both have the infinity seal technology, this new single-layer technology that provides excellent fit and movement for patients.

I personally wear a CPAP mask and the N20 is particularly comfortable for me, but both products are going very well and doing well in the US market and that's what got us to the sequential uptick in US mask growth and we expect to, as we go through Q3 and Q4 and pick our production up, to continue to grow quite strongly there and to turn back to positive growth in EMEA and APAC.

And any feedback from the pilot?

Did it meet your expectations in terms of the way the DMEs are thinking about this mask ahead of other masks?

Yes, certainly as the DME or HME home care providers, as we call them in Europe, start to see this product, that fit range, fitting 97% to 99% of the patients that walk through your clinic, has just been a real winning value proposition for the respiratory technicians.

The N20 is a go-to mask for nasal now for them and the F20 we believe is a go-to mask for them on full-face and it's early days in the rollout.

The US team got this the week of Thanksgiving.

So it really only had half a quarter and one with a bunch of Thanksgiving and Christmas holidays, but we do expect, as we look for Q3 and look for Q4 and start to ramp the production up, that it will be a slow, steady, gradual increase in both the US and other regions through Q3, Q4, and of course, beyond to FY18.

These technologies have a lot of legs.

That's great.

And I just want to think of that 4% as a good lead indicator of the early success.

Correct.

Okay.

That's great.

Really appreciate it.

Thank you.

Thanks, Andrew.

Joanne Wuensch from BMO Capital Markets is on the line with a question.

Thank you very much for taking the question.

Couple of things.

You mentioned the impact of lower ASPs and mix on the expense structure.

Could you expand upon that just a little bit?

Thanks, Joanne.

Brett, you want to take that?

Yes.

Yes.

Just on -- that was really through the gross margin, year-on-year, that kind of ASP, product mix is probably the biggest one year-on-year.

We're still seeing, well, you're seeing that really strong device growth continuing and unfavorable FX impacts was quite a bit too.

If you just look at it sequentially, Joanne, it was 60 basis points, but we had unfavorable FX of 40 basis points.

So it was kind of -- that was probably the driver if you look at it on a sequential basis.

Okay.

That's very helpful.

Share repurchases, when are you likely to restart those, given your cash flow in the quarter?

We're still of the view that we'll commence that in FY18.

Okay.

That's very helpful.

I'll leave it at that.

Thank you very much.

Thanks, Joanne.

Margaret Kaczor from William Blair is online with a question.

Good morning, Brett.

The first question is really what drove the acceleration in Americas devices and the number was pretty big.

The question is, is it sustainable and can your mix of new products in ASV offerings really keep that revenue growth profile for ResMed in the low-double-digit or teens range?

Thanks for the questions, Margaret.

It's Mick here.

We did have very strong growth in devices in the Americas at 13% on a constant currency basis.

We think that was primarily fueled by Air Solutions, the portfolio of AirView and myAir capabilities to lower the labor costs for setting up a CPAP by 50%, 60% for a home care provider.

Also, the ability for engagement apps like myAir to drive adherence from previous industry standards of 50%, 60% up to 80%, 87% in some of the data that we've talked about publicly.

We think all that comes together to drive good, sustainable growth and that does of course include some of the growth in the respiratory care line, our Astral ventilation, our life support ventilation line.

Look, we talk in terms of the industry growing in the mid- to high-single digits.

Clearly, we were taking some share in devices in this quarter and as we look forward, we'd expect to see good mid- to high-single-digit growth of the industry and we like to meet or beat that, and clearly, we beat that this quarter.

Okay.

And then maybe a similar question on the international side.

Obviously, you had strength international generators.

Was there anything specific to this quarter?

And then I hate to sneak one more in, but the constant currency in mask growth, what was it excluding the licensing fees that you referenced at the beginning of the call?

Thanks.

Okay.

I'll hand to Rob to talk about international devices and licensing.

Yes, so, Margaret, the factors driving the international sales are similar to the ones driving the US sales, just that the sort of the ramp [rate] has been different as the take-up and the whole process of explaining AirView and getting the myAir going is a longer process.

And then the other really significant thing in the rest of world data, the outside of the US data, is China had a big impact and so we had a very strong quarter in China.

Really related to the teams getting together and our integration plan going really well and the team all pulling together, and focusing on new channels, and really getting the sleep business and also really driving our respiratory care business in China.

And then of course, you know, the Q2 is sort of like the end-of-year in China.

It's traditionally a strong quarter for us.

The other thing I'd add to that, Rob, which I think is really good is that ASV turned from the post-survey check where it was a headwind into a tailwind again.

So we're starting to see growth at ASV, not just in complex sleep apnea and central sleep apnea, but for pain management, and in the US, in the PTSD category.

So, all that together, Margaret, is sort of what are the tailwinds driving those strong device numbers.

Thank you.

Thanks, Margaret.

Matthew Taylor from Barclays Bank is online with a question.

Hello.

Thanks for taking the question.

Can you hear me okay?

Yes, got you loud and clear, Matthew.

Okay, great.

So one question I wanted to ask is you announced the settlement of all your litigation with BMC.

I just wanted to know if you could help us understand what the ongoing impact is going to be in terms of the licensing royalty revenue that you could see and the lower legal expense that you could have now that you have this settlement.

I'll hand that question to Dave Pendarvis, our Global General Counsel.

Thanks, Matt.

First of all, we're really pleased with the settlement.

We think that it is helping to validate the strength of our IP that we're now going to get paid royalties on sales in the US by our competitor for the products that are covered by the deal.

The reality is those royalty streams will not likely be material to us going forward and that's fine.

They don't have a large market share in the US market and we don't expect that to change any time soon.

So we don't expect it will be material.

Obviously, there is a reduction in the ongoing litigation costs that were associated with that case and really a number of cases around the world.

But as Brett mentioned earlier, we continue to have really, frankly, a larger case against F&P and some other ongoing legal expenses, so there still will be significant legal expenses going forward, but obviously, one of the reasons you settle cases is to avoid the further ongoing expense and that was one of the reasons that motivated us to reach the settlement with BMC that we did.

But, we're very pleased with it.

Great.

And then just a follow-up on some earlier questions.

It's a little bit surprising this late in kind of the flowgen launch to see such a big acceleration.

Was there any kind of a stocking order or anything else that was abnormal that you would call out or was this just a good-execution quarter?

Yes, Matthew, I think it was really about good execution.

The value proposition of Air Solutions has shown itself to be very sustainable.

It's a sustainable, compelling value proposition for customers.

When you're reducing the costs of therapy set up by 50% or 60%, it becomes embedded into the work flow and just is how our home care provider partners like to work.

They like to work with a cloud-based system.

They like to work with one that lowers costs and drives adherence.

And so, as Rob said, there was some sort of good acceleration in China and some good sales of our China team running through the tape.

But then globally, we're seeing the Air Solutions platform have a really good impact and Astral, as it comes into play and is now a part of the cloud-based or cloud-connected system, is getting some good traction as well.

And then the third factor is ASV, the adaptive server ventilation technology coming to a tailwind.

So all that together has provided strong flow generator growth and we expect strong growth to continue and, obviously, the rates will be what they'll be.

But mid- to high-single-digits is what we see the market growing at and, again, we like to meet or beat that.

Thank you.

Thanks, Matthew.

Sean Laaman from Morgan Stanley is online with a question.

Thank you for taking my question.

I have a question on Brightree.

So good revenue number there ahead of us.

I was just wondering, Mick, if you could give us a sense of, I guess, some of the CPAP share dynamics and some of the resupply dynamics you've seen amongst new adopters of Brightree as a first question.

Great.

Thanks, Sean.

I think I'll hand that question over to Jim Hollingshead who runs the Americas.

I would just start up with, yes, the low- to mid-teens growth from Brightree is strong.

Again, it's a compelling value proposition for our home care providers and they like it; they incorporate it into their work flows.

But, Jim, any further color with regard to ongoing resupply sales associated with Brightree?

Yes.

The Brightree platform, if you think of it from the point of view of the core sleep business, is an extension of process automation.

And so there's a lot of affinity between new Brightree customers and customers who are users of the Air Solutions platform and the data connection between the two of those platforms makes it much easier for them to continue to do that.

And so it's, even though the two businesses have separate commercial teams, separate sales teams out in the market, they tend to reinforce each other in the market.

Brightree customers tend to have a very good experience with ResMed sleep products and back and forth.

And then the Brightree software platform for resupply, which is called Connect, is getting increasing adoption in the market.

It's very valuable for customers who adopt it and very, very good for patients because it drives regular resupply for patients and they therefore have a better experience on therapy and that is a growing part of their offer.

Sure.

Thank you.

And just as a quick follow-up, when might we see the P20?

Sean, we don't talk about future pipelines to a great extent.

We did open up a little bit on this call about the ResMed AirMini, the world's smallest travel CPAP, that we got FDA clearance on.

That was a public FDA clearance.

But we won't be talking about the pipeline of future masks.

But thank you for the question.

Yes.

Thank you, Mick, and understood.

Thanks for answering my questions.

All right.

Thanks, Sean.

Will Dunlop from Bank of America is online with a question.

Hello, guys.

Thanks for taking my question.

Just firstly on pricing in the US, I think you mentioned a few quarters ago that you had gone early with customers in reducing price prior to the introduction of competitive bidding on July 1. Not all customers, but some I remember you saying.

Just wondering when you might cycle those price reductions and you might see maybe a more favorable pricing environment in the US?

Will, I think you're referring to something maybe 18 plus months ago where there was some changes around competitive bidding round two.

So 18, almost 24 months ago now where there was some resets.

I'm referring to the latest round of competitive bidding, the round two.

Okay.

Well, if it's related to that, then no.

What we've been saying, which is the reality around the competitive bidding round three and round three national expansion and the re-bids going on now, is that it's pretty steady, the pricing picture.

In fact, no step change at all, sort of industry normal price changes year on year and a steady pricing environment.

Obviously, we're seeing a lot of competition amongst innovation, innovation in the masks and innovation in the cloud connectivity and connected care side.

So intense competition from us and our competitors in masks and digital offerings.

But in terms of price, it's been a very steady environment the last four, eight plus quarters.

Okay.

Thanks.

And then could you just talk to demand for the AirSense in Europe, please?

Sure.

Rob, do you want to address (multiple speakers)?

Yes.

We don't really break it out, but as we said, as I said before, the value proposition around AirView and the connectivity is the same in European countries as it is in the US.

It's just that some of the sort of the dynamics of how people understand the value and create the value is different and it has taken more time to build that up.

In particular in France, we had talked about, there was some legislation or some rules brought in that were going to effectively create a differential reimbursement so there was more reimbursement for devices that were monitored wirelessly and that was then knocked out in a court case.

But subsequently, that rule has been reversed and we're expecting sometime this year to see it become the norm that there will be that differential back in the French business and that, for example, in that one country, of all those many countries would help drive volume.

Other than that, we continue to see the volume increase going on.

The take-up of myAir is strong and we continue to see that patients in Europe are very interested in getting at their own data and using that to help their treatment and help improve their own health outcomes.

Okay.

Thanks.

Thanks for the questions, Will.

Mike Matson from Needham & Company is online with a question.

Hello.

Thanks for taking my questions.

I guess I just wanted to start with your manufacturing operations.

I think they're pretty much all outside the US.

One, I want to know if that's correct.

And two, how do you think you'd be affected by some of these border tax proposals that the Republicans are talking about?

Listen, Mike, our current -- we have a very strong global supply chain footprint that manufactures in many countries and we talk a lot about Singapore and Sydney as being major parts of our supply chain.

What we don't often talk about is that we do have manufacturing in the US as well and our motor, ResMed motor technology subsidiary is based in the Los Angeles area and we also manufacture some masks in the US in our Atlanta facility.

And so we've actually got the capability to respond to what is needed on a tax basis as needed and we'll keep an eye out and be flexible with it.

Dave, I think you had a comment as well.

Yes, Mike, this is Dave here.

Though I think the one thing we can all agree on about US politics today is it's going to be hard to predict.

There are a lot of -- there's a lot of discussion about tax reform and what that might mean and we'll just have to wait and see what the actual proposals are and what the details are and what gets implemented and when it gets implemented.

As Rob said, we've got opportunities to do things and, frankly, if there become incentives to manufacture more in the US, that could be an opportunity for us.

We've got a lot of customers in the US, a lot of patients in the US.

But we take care of all of our stakeholders.

We look at what we do best for shareholders.

What we do best for customers.

What we do best for employees.

And take all those factors into account when we make our decisions.

But it's going to be, I think, a few years for things to sort themselves out and we'll obviously make the best decisions we can on the basis of whatever the details are.

Okay.

Thanks.

And then just curious on, for AirMini, I think there's one other product out there that's a big part of that segment of the market.

So I was just wondering if you had a feel for how big that market is currently, I guess, in the US at least, if not globally.

Thanks for the question, Mike.

The current travel PAP is a very small niche segment and what our goal at ResMed, as the global leader in sleep apnea therapy, is to bring the world's smallest, the world's most comfortable, the world's quietest, and most engaging travel CPAP to the market.

And so we think we will actually expand on what is currently a very small travel CPAP niche and create a sizable segment of travel CPAP users that are willing to pay retail cash and work with our home care providers to access those products and really make it as part of their care so that you can have the same experience when you're traveling around the country or around the world as you do at home.

So that's the goal with the ResMed AirMini and as we launch that between now and June 30, you'll see us talk about how we're going to drive awareness, create that niche, and then make sure that patients the world over have the opportunity to have ResMed therapy with them wherever they are.

Thanks.

Can I squeeze one more in?

Just curious if the liquidation of AirStart devices had any kind of material impact on of your US flow generator growth in the quarter.

Thanks, Mike.

I'll hand that over to Jim.

Any thoughts on AirStart?

It was a very small part of sales in the quarter, not material.

Thanks for the questions, Mike.

Suraj Kalia from Northland Securities is online with a question.

Hello, everyone.

So, Mick, a couple of questions from my side.

First, you just mentioned you're expecting AirMini to be cash-pay for customers, specifically from a travel perspective.

Mick, can you give us some idea about how you'll stratify this market in terms of numbers in the US?

Just trying to get a sense -- obviously, you guys have a head start here also -- how the numbers could play out.

That would be one question.

And the second question would be how do you all view a potential Tom Price confirmation as HHS head?

Our checks obviously are that he's pro DME.

Any color from you guys' thinking perspective also would be greatly appreciated.

Thank you for taking my questions.

Thanks.

I'll take the second one first and then I'll hand to Jim maybe to talk a little about AirMini and how we're looking at segmenting the cash-pay market and working with our provider customers.

But the second part first.

Tom Price was a Congressman from Georgia who spoke at the Medtrade conference in Atlanta last fall and I don't think anyone in the room knew or thought that he might become HHS Secretary.

But when he got up on the floor and made a very passionate speech about the importance of home care, the importance of keeping patients out of hospital, taken well care in the home.

He's an orthopedic surgeon, I think he understands the economics of the broken sort of sick care system where patients are frequent fliers in the ICU and CCU with COPD and we believe also sleep apnea is a big impact on that, I think he'll be a big supporter.

And if he puts in place some of the policies that he was advocating for on behalf of the home care industry as HHS Secretary, we think it could be beneficial for our industry.

But look, as Dave said earlier, there's a lot of things going on in Washington right now, a lot of change and we're going to wait and be ready to hopefully see some more home care friendly policies out of Washington, but we'll wait until we see them and then we'll act on them.

But that's sort of the early take on Tom Price.

I'd say it's a positive for our industry.

Jim, on the AirMini, thoughts?

On the AirMini, we see a couple of opportunities with the AirMini, one for patients and one for our HME customers.

Patients, we believe, have a strong pent-up demand for a good travel solution for CPAP.

And right now, there are some solutions on the market that we think are not up to snuff.

We think our offer is going to be very superior.

And we'll actually, as Mick was saying earlier, we'll grow demand in the category because patients really want to take a full-featured CPAP with them when they travel.

And so we see an opportunity for patients to have better care and a more convenient life with their CPAP as they travel.

For customers, it's an opportunity because we know that our HME customers, especially in the US, are trying to grow their cash-pay business.

There's more and more healthcare spend that's out of pocket in the US because of the way insurance is increasingly shifting the landscape.

Our DME customers, HME customers are looking for and often exploiting "cash-payer, out-of-pocket opportunities." We intend to take this product through our dealers, which will allow them to service patients and that pent up need for a good travel PAP experience, and also create a cash-pay opportunity to grow their businesses.

Thanks for the questions, Siraj.

Anthony Petrone from Jefferies is online with a question.

Thanks.

Just a couple on underlying device growth in the quarter and it sounded like there's some moving parts there.

I'm just wondering if you have the combined contribution for Astral and Inova and ASV.

And then maybe just a revisit on underlying sleep margins, where they sit today, just getting all the moving parts with pricing and mix versus Americas [O-US] in masks and flowgens and then one follow-up question.

Thanks.

Great.

Anthony, well, look, yes, the underlying device growth we don't split up sleep versus respiratory care and then respiratory care down to ventilation and oxygen.

But as you saw in the Americas, a really strong 13% constant currency growth in devices, and in EMEA and APAC, very strong 21% with the global, 17% growth.

We think that, that growth is strong and sustainable, but there are elements, as we said earlier with regard to China where there was some things that were sort of one-time and they were out of more sustainable parts such as the Air Solutions platform and its ability to continue to drive AirSense 10 and AirCurve 10 sales along those lines.

But with regard to margins and then as we look forward, I think other than the foreign exchange impact, it was really pretty a reasonably good quarter in terms of margins.

Any color there, Rob, you'd like to add?

Well, I think, as he Brett said, some of the drivers around margins in the sleep have to do with product mix.

So while machines grow stronger, that's a headwind for margins.

Sales strong in the US compared to our lower-volume markets in Europe and in Asia will generally also been a headwind to margins as well.

Offsetting that, our efficiency improvements in our supply chain and as we really crank the production for the AirSense 10 and in other products we see ongoing improvement in that and it's a continual headwind to our win rates that we run neck-in-neck to.

Brett, I don't know if you have any other comments.

No.

I think you've articulated it pretty well.

I guess we try to take it all into account as best we can and so we're still looking at that guidance of 58% to 60% and then it's just contingent on how the product mix, geographic mix, FX plays out during the quarter.

That's helpful.

And then a follow-up would just be did you quantify the benefit from China and then just any comments on the Cures Act, with that passing, obviously, that pushed out some of the reimbursement cuts.

You how does that play out?

Our checks are suggesting there's sort of one-time payments that DMEs will get at some point in 2017, but that it could be scattered throughout the year.

Thanks.

Great.

Thanks, Anthony.

I think somehow you managed to get four questions in there.

But, we don't quantify the breakdown there.

Rob was talking qualitatively to the curative ResMed China combination and its impact on the quarter, so we're not going to break all that out.

Dave, do you have any comments with regard to 21st century cures and impacts for ResMed?

Sure.

It's really well done by the industry to get this through.

It's been a long time coming.

You remember we were a while back and we were about to have some relief for the rollout of the national expansion of rates and it was stopped by a protest on the floor of the House for gun control.

It just goes to show you, crazy things can happen when you're trying to go through the legislative process.

So the industry worked very hard, really across the board, and was able to ensure that this time around, it stuck and they got some relief.

It was six months of relief and there's still some issues with competitive bidding rates and how competitive bidding is determined.

But the industry, I think, on the whole feels good about having gotten a win and feels like, as Mick was saying earlier, that if Congressman Price is confirmed as Secretary of HHS, there should be at least a sympathetic ear for perhaps some further regulatory relief and as the industry moves forward, you've got some stability now.

The rates are set with Medicare for the next two years until January of 2019.

Congressman Price's bill to add in a binding bids, so that now anyone who bids in an area has to put up a bond, that's a benefit.

And so I think the industry's feeling like it's a better environment with some more predictability and some more stability and that's a positive.

Thank you.

Thanks for the questions, Anthony.

(Operator Instructions)

Your next question, Saul Hadassin from Credit Suisse is online with a question.

Good morning, guys.

Maybe first question, Mick, any more color on just what the production issues involved with regards to those SKUs on the masks.

In other words, is it a matter of adding more manufacturing lines, for example, or is it just simply putting more product through the existing lines and the demand has maybe caught you by a bit of surprise versus the production capabilities?

Thanks.

Yes.

Thanks, Saul.

Clearly, the market acceptance has been ahead of our expectations and, Rob, do you want to go into some detail with regard to the manufacturing ramp-up?

Yes.

Any new products, Saul, has new tooling and new things to learn about it and really new fine-tuning to do on the process and it's really just a matter of mixing that fine-tuning and matching that fine-tuning and process building, plus capacity building, which is predominantly driven by tooling and supply chain management, matching that with the take-up of demand.

And we should see that sort of match up, as we said earlier, through the quarter.

Great.

Thanks.

Just a follow-up for Brett maybe.

But just on the cash flow from operations, for the half, again, looks like it's reasonably weak versus the PCP.

You did flag the inventory build.

Should we expect that to recover second half as you start to clear this product that you've been building up, particularly on the mask side for the launch?

Yes, Saul, I think the key to cash flow around $120 million was quite good.

We just had some sort of modest working capital gains, but that was pretty good.

If you look at comparing it to the prior year, I guess we're kind of, working capital was definitely moving in our favor and we pushed that down quite a bit, so we're generating some good cash flow last year.

But I'm still -- Q1 was a little low.

So I was quite happy with Q2, actually, that cash flow around $120 million.

And you might -- we've got new product flow and so on that we need to sort of catch up with.

So you might see that build a little bit, but I still think overall working capital probably will just get modest increases that we'll see.

Great.

Thanks, guys.

That's all I had.

Thanks for the question, Saul.

Matthew O'Brien from Piper Jaffray is online with a question.

Good afternoon.

Thanks for taking the questions.

Just to start with on the core sleep business, by my calculations, and there's a lot of inputs here, looks like it increased, the gross margin increased by about 80 basis points.

First of all, is that fair sequentially?

And then is that strictly -- it looks like it's mostly manufacturing driven, maybe a little bit of mix on the generator side, but would love to hear your thoughts on that.

Yes, Matt, it's Brett.

So I'm not sure.

Matt, sequentially, if you look at it sequentially, we're at Q1 was 58.9% and this quarter, we're 58.3%.

I mentioned before unfavorable FX impact's around 40 basis points, a little higher than what we expected with kind of deterioration in the euro really through the quarter.

I guess the rest was pretty benign if you looked at it sequentially.

If you look at it year on year, we're just up a tad from 58.1% to 58.3%.

Brett, excluding Brightree.

Yes, so excluding that, we've got -- yes, I mean, the bigger impact there is from product mix and we're still seeing really strong device growth.

I think as we go forward and we get some improvements in mask growth with the new products and so on, then you'll see that impact moderate.

But at the moment, it's still a headwind for us.

That's kind of, if you like, kind of offsetting this to a large extent on the Brightree.

And we have typical ASP declines and then with FX also having year on year which was unfavorable.

But as we mentioned earlier, manufacturing procurement and so on, we've driven that and we've got efficiencies there as well, which has more than offset those other elements.

Okay.

I'll follow up a little bit offline on that.

As far as Inova goes, I think when you bought that about this time last year, you said it would take about 18 months to refine the product, feel more comfortable in rolling that out to your broader sales force.

Just based on the comments from earlier in the call, is it fair to say that you're a little bit ahead of schedule and you could be a little more aggressive in rolling that out throughout the course of 2017?

I'll take that, Matt.

I'd say we're pretty much on schedule for that sort of 18 month to get it to where we think ResMed quality and functionality should be.

Look, the Activox product is a great POC.

It's light and it's very portable.

But it can improve in some areas and we're really working on the improvement of those areas in terms of oxygen delivery and sustainability of that over the many months that they're out there helping patients get freedom back.

So no, I'd say we're right on track and we're looking forward to gradually ramping that Inova product out there.

As we said in the prepared remarks earlier, adding communications capability onto that and pulling it as part of the whole Air Solutions portfolio we think will allow our home care providers to do better fleet management of all these POCs that are out there, but really engage the patients in terms of adherence for the product as well.

The conclusion is I think we're just pretty much right on track with that versus the time line that you talked about.

Thank you.

Victor Windeyer from Citi Investment Research is online with a question.

Hello.

Look, thanks very much.

Look, my phone dropped out before so if I'm going to be repeating something, I apologize.

I just wanted to understand the rest of the world masks and I think, from the questions, you've been saying that supply outstripped demand on this.

Can you just confirm that?

And why the masks in the rest of the world declined 4% post launch and what we're expecting there.

Thanks, Victor.

So yes, I'm sure you heard the prepared remarks where we talked about there were two factors behind EMEA and APAC on the masks.

Number one, we had a big comparable.

It was about around 8% constant currency growth in the quarter a year ago in EMEA and APAC.

So we had some licensing revenue in there and some really good sales to particular customers.

And we just launched the N20 and F20 at the ERS and so this is the first quarter out there and, as you know, you've been following our stock for a long time, mask launches in EMEA and APAC, you're talking hundreds of countries.

And you go country by country and they see the mask, they don't immediately buy the mask.

It can even slow down purchases of current masks because they see the next generation technology and they put it through their systems.

They have it as their front-line set up and they work out how to put it into their protocols and it starts to get launched through there.

So, as we said earlier, we expect a gradual improvement of mask growth, not only in the Americas but also in EMEA and APAC.

Certainly to positive in that region and then through Q3 and Q4, we really think the impact in N20 and F20 are going to be there and sustainable throughout FY18.

Okay.

Great.

And then I just wanted to ask about the sort of pricing and whether there has been a significant return -- end of quarter bulk discounts been away for a while.

Has that come back into the market?

How are you sort of seeing pricing around those types?

We're seeing pricing, as I said earlier, in a pretty steady state these last six, eight quarters.

You're back to industry standards on year on year in terms of price.

The competition is fierce, but it's around innovation.

Who's got the best fit, the best comfort, the quietest device, and now the best informatic solution to really improve quality of care with patients and providers to improve their work flow efficiency.

Thanks for your questions, Victor.

We are now at the one hour mark, so I will turn the call back over to Mick Farrell.

Thanks.

In closing, I want to thank the 5,000 strong ResMed team from around the world for their commitment to changing tens of millions of lives.

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

And we look forward to executing on everything we talked about these last 60 minutes and driving this innovation, great products throughout 2017.

Thanks for your time today and we'll talk to you again in about 90 days.

Thanks.

Thank you, everyone, for joining us today.

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

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

Maryama, you may now close the call.

This concludes ResMed's second-quarter of FY17 earnings live webcast.

You may disconnect.