瑞思邁 (RMD) 2018 Q2 法說會逐字稿

Welcome to the Q2 Fiscal Year 2018 ResMed Inc.

Earnings Conference Call.

My name is Christine, and I'll 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, Christine, 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 prospects of the company, corporate strategy, litigation, tax outlook and performance.

We believe 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 our shareholders joining us today as we review our financial results for the second quarter of fiscal year 2018.

For the call today, I will review top level financial results, business highlights and 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 are very grateful to our global team for another quarter of strong performance.

We achieved double-digit revenue and double-digit profit growth, led by sales of our software solutions, mask systems and sleep apnea devices.

At the bottom line, we're starting to see leverage from ongoing operating excellence initiatives, with net operating profit growth of 20%.

We see more runway ahead for operating excellence as we look forward.

Our diluted earnings per share were $1 on a non-GAAP basis.

We're very proud of this strong top line and bottom line performance from our global ResMed team.

Growth in our Brightree software-as-a-service business continues to be strong at 14% growth year-on-year, and we are pleased with the continued innovation and execution of the Brightree team.

Turning to our global therapy businesses.

We continue to build our digital health leadership, and we now have well over 1.5 billion nights of medical sleep and medical respiratory care data.

We continue to unlock significant value for our customers from these data, creating efficiencies for providers, simplifying workflow and care delivery for physicians and improving outcomes for patients and their caregivers and loved ones.

During the quarter, the U.S. government passed tax reform through Congress, moving to a territorial tax system.

This has liberated our global cash assets to be able to be invested without artificial constraints.

We will now be free to invest in 3 new ways: one, growing upon our existing strong U.S. manufacturing footprint; two, growing our existing U.S.-based research and development capability; and three, building upon our existing valuable U.S.-based intellectual property assets.

We'll provide updates on all of these areas as we move forward.

Now for some geographic business highlights.

The U.S., Canada and Latin America teams achieved solid revenue growth, up 12% on a constant currency basis.

These results were fueled by strong growth of devices and masks as well as continued strong double-digit software sales growth.

Sleep apnea patient volume continues to grow steadily through our marketing efforts and those of our channel partners.

Growth in devices for the U.S., Canada and Latin America was 12% for the quarter on a constant currency basis.

It has been 3.5 years since we launched the AirSense 10 device platform and the Air Solutions cloud-based software platform.

We continue to grow our device market share as health care providers and physicians choose ResMed because of the sustainable value proposition of our connected health and digital health solutions.

The mask and accessories category grew 12% in the U.S., Canada and Latin America markets this quarter.

We have seen good demand across all mask categories.

In the nasal and fullface categories, the AirFit N20 and the AirFit F20, respectively, are doing very well.

We continue to expand production to meet the growing demand for these products.

Our newest mask technology, including memory foam capability, in the AirTouch F20 is receiving high patient comfort ratings and is creating a new market niche for patients with the highest sensitivity to therapy, a previously unmet, or at least under met, market need.

Revenue across Europe, Asia and other markets grew at 8% in the quarter on a constant currency basis.

Mask sales across these markets grew at a very strong 16%, reflecting strong adoption of our F20 and N20 mask products.

Device sales grew steadily at 5% this quarter across Europe, Asia and other markets.

ResMed France has continued to drive solid device growth, catalyzed by increased reimbursement for telemonitoring of sleep devices relative to noncloud-connected devices, a change which went into effect January 1, 2018.

We're excited to highlight France as the first country to recognize the value of connected health by establishing a reimbursement system change that drives the market to a new world of efficiency and better patient outcomes.

We are working with other governments and payers on similar initiatives.

Over the coming periods, just watch this space.

I'll now take a few minutes to update you on each of the Three Horizons in our 2020 growth strategy, and then I'll hand the call over to Brett.

In the first horizon of growth, which focuses on our sleep apnea business, we're making significant advances with the smallest, quietest and most comfortable products, enhanced by digital health and connected health solutions.

We have begun to leverage the well over 1.5 billion nights of actionable medical sleep and respiratory care data in clinical studies and to provide insights that improve patient care and health care delivery efficiencies.

We have over 6 million patients monitored in our cloud-based AirView system and over 4 million patients monitored with 100% cloud-connected medical devices in their homes.

We also continue to grow patient engagement.

We have over 1,300 new patients who signed up for the myAir patient engagement app every day.

We see myAir enrollment continue to rise exponentially.

Patient engagement is working.

The bottom line is people love seeing their data, and when they do, they engage with their therapy more and more.

With continued global adoption of Air Solutions, the AirSense 10, the AirMini, the N20 and F20, these masks provide world-leading fit, feel and comfort.

We see a future of solid ongoing revenue growth in this space across that portfolio.

This quarter, ResMed announced the integration of AirMini data with AirView, our cloud-based remote monitoring patient platform.

The connectivity between AirMini and AirView enables physicians and home care providers to see patients' nightly data, verify adherence and spot any therapy issues that need to be addressed.

This gives physicians a great opportunity to educate and engage patients to reach the best possible health care outcomes even on their brand new travel device.

We continue to show progress on the clinical importance of treating sleep apnea.

The American Journal of Medicine published a ResMed-sponsored study during the quarter, including over 5,000 hospitalized patients.

The study showed that diagnosing and treating sleep apnea in the hospital improved these patients' long-term survival rates.

Undiagnosed sleep apnea is highly prevalent among hospital patients, and there is an opportunity to simply and efficiently diagnose them in the hospital and ensure that they receive life-changing therapy postdischarge.

Following pathways like this will not only reduce costs for the health care system, it will also increase survival rates and quality of life for the patient.

It is great to have more proof that we are not only saving money for the health care system, our therapy is also saving lives.

Moving to the second horizon of the ResMed 2020 growth strategy.

Our cloud-connected, noninvasive ventilators and life support ventilators form the basis upon which we are building our connected health and digital health capability for chronic obstructive pulmonary disease, or COPD.

With over 380 million COPD patients worldwide and with COPD being the third leading cause of death and the second leading cause for rehospitalization, we know that we can provide value for payers, providers, physicians and, most importantly, patients from these data.

In San Francisco, a few weeks ago, we announced Mobi, the first ResMed-branded portable oxygen concentrator.

Mobi offers excellent oxygen output and battery life, and a great balance of mobility, comfort and therapy quality to the many millions of people who rely on supplemental oxygen.

We expect steady growth in this POC category throughout the year, and we have plans for continued enhancements for ResMed's oxygen concentrator pipeline.

Mobi forms a critical part of our spectrum of respiratory care products, along with cloud-connected, noninvasive ventilators like the AirCurve, high flow therapy and our cloud-connected life support ventilator called Astral.

Our third horizon of growth encompasses a portfolio of opportunities, including sleep health and wellness, chronic disease management tools and out-of-hospital software business expansion opportunities.

This quarter, our Brightree team announced integration alerting to improve reporting for home health and hospice businesses.

The seamless transfer of data between Brightree and the postacute care data analytics company called Strategic Healthcare Programs allows home health agencies to immediately receive accurate reports to help improve patient care and compliance.

Out-of-hospital software continues to be an exciting growth area for us, with strong long-term growth potential ahead.

On the consumer and wellness side, our joint venture, SleepScore Labs, launched its latest and greatest non-wearable sleep improvement system for consumers called SleepScore Max.

This product is powered by ResMed's noncontact sensor technology for best-in-class respiratory and sleep architecture analysis.

At the CES Conference in Las Vegas, SleepScore Labs announced the partnership with Williams Sonoma to offer what they call the Robin Sleep System, which is a combination of the SleepScore Max product and a Williams Sonoma mattress set.

This will be available at their online stores and select brick-and-mortar stores.

For ResMed, this sleep awareness partnership provides a pathway to inform the 50 million to 70 million Americans who suffocate every night but do not yet know that they need to seek diagnosis and treatment for their sleep apnea.

You will continue to hear more from us on the sleep awareness front as we move forward.

We've had 2 strong quarters to start our fiscal year, and we are well positioned to grow revenue throughout the second half of fiscal year 2018 and beyond.

We are also well positioned to continue to grow our operating profit as we execute on our ongoing operating excellence initiatives.

We have seen success with new masks and new device products, including the AirFit N20, the AirFit F20, the AirTouch F20 and the ResMed AirMini.

Most recently, we are excited about our first ResMed-branded portable oxygen concentrator called Mobi.

We are positioning the company for long-term top and bottom line growth for 2020 as we continue to execute on our strategy and action, implement operating excellence initiatives and lead the med tech field to unlock value with connected health as well as digital health solutions.

We have changed well over 12 million lives over the last 12 months, and we continue to drive what we call our triple aim in the out-of-hospital health care market: one, improving the quality of life for patients; two, slowing chronic disease progression; and three, reducing overall health care system costs.

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

Over to you, Brett.

Great.

Thanks, Mick.

In my remarks today, I'll provide an overview of our results for the second quarter of fiscal year 2018.

As Mick noted, we had a very strong quarter.

Group revenue for the December quarter was $601.3 million, an increase of 13% over the prior year quarter, or in constant currency terms, revenue increased by 11%.

Taking a closer look at our geographic distribution and excluding revenue from our Brightree software-as-a-service business, our sales from the U.S., Canada and Latin America countries were $329.2 million, an increase of 12% over the prior year quarter.

Sales in Europe, Asia and other markets totaled $233.4 million, an increase of [15%] over the prior year quarter, or in constant currency terms, sales in Europe, Asia and other markets increased by 8% over the prior year quarter.

Breaking out revenue between product segments.

U.S., Canada and Latin America device sales were $173.7 million, an increase of 13% over the prior year quarter.

Mask and other sales were $155.5 million, an increase of 12% over the prior year quarter.

The revenue in Europe, Asia and other markets, device sales were $163.3 million, an increase of 11% over the prior year quarter, or in constant currency terms, an increase of 5%.

Masks and other sales were $70.1 million, an increase of 23% over the prior year quarter or, in constant currency terms, a 16% increase.

Globally, in constant currency terms, device sales increased by 9% for masks, and other increased by 13% over the prior year quarter.

Brightree revenue for the second quarter was $38.7 million, an increase of 14% on the prior year quarter.

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

The non-GAAP measures adjust for the impact of amortization acquired intangibles and tax-related charges associated with the recently enacted U.S. tax reforms.

In the prior year comparable, I exclude amortization of acquired intangibles, acquisition-related expenses associated with additional contingent consideration, restructuring expenses and litigation settlement expenses.

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 58.2% compared with 58.3% during the same quarter in the prior year.

Our margin was essentially consistent with the prior year and reflects typical declines in average selling prices, largely offset by manufacturing and procurement efficiencies.

Consistent with our comments last quarter, on a sequential basis, our gross margin in Q2 was negatively impacted by unfavorable foreign currency movements.

Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for the balance of fiscal year 2018 to be broadly consistent with our Q2 FY '18 gross margin.

Moving on to operating expenses.

Our SG&A expenses for the quarter were $151.8 million, an increase of 9% over the prior year quarter or, in constant currency terms, SG&A expenses increased by 6%.

SG&A expenses as a percentage of revenue improved to 25.2% compared to the 26.3% that we reported last year.

Looking forward, and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 25% to 26% for the balance of fiscal year 2018.

R&D expenses for the quarter were $40.6 million, an increase of 6% over the prior year quarter or, on a constant currency basis, an increase of 4%.

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

R&D expenses as a percentage of revenue was 6.8% compared to 7.2% in the prior year.

Looking forward, and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the balance of fiscal year 2018.

Amortization of acquired intangibles was $11.3 million for the quarter, a decrease of 3% over the prior year quarter.

Stock-based compensation expense for the quarter was $12 million.

Non-GAAP operating profit for the quarter was $157.3 million, an increase of 20% over the prior year quarter, while non-GAAP net income for the quarter was $143.8 million, an increase of 39% over the prior year quarter.

Non-GAAP diluted earnings per share for the quarter were $1, an increase of 37% over the prior year quarter, while GAAP diluted earnings per share for the quarter was $0.07.

The growth in our non-GAAP earnings per share was partly due to a lower tax rate this quarter.

Assuming a normalized tax rate of 22%, our non-GAAP earnings per share would have been $0.83, an increase of 14% over the prior year quarter.

Now I would like to spend some time discussing tax-related matters.

On a GAAP basis, our effective tax rate for the December quarter was 93.3%, reflecting onetime charges associated with the recent change in U.S. tax laws.

U.S. accounting rules require us to recognize the effect of any tax law changes during the period in which they are enacted.

Accordingly, we have recorded an additional income tax expense for $126.6 million in our December quarter.

Specifically, this amount includes 2 items: first, the transition tax imposed on our accumulated foreign earnings, resulting in additional income tax expense of $119.9 million; and second, the write-down of the carrying value of our net deferred tax assets means a lower U.S. corporate tax rate, which resulted in additional income tax expense of $6.7 million.

On a non-GAAP basis, which excludes the onetime charges I have just discussed, our effective tax rate for the quarter was 6%.

Adjusting for the impact from ASU 2016-09, which governs accounting for the tax deductions for employee stock-based payments, our non-GAAP effective tax rate for the quarter was 11%.

Our non-GAAP effective tax rate was lower this quarter because our tax rate in previous quarters have forecasted the repatriation of cash to the U.S. this fiscal year.

The taxes attributable to repatriation will no longer be due in the U.S. because of the recent U.S. tax reforms.

For the same reason, we now estimate that our non-GAAP effective tax rate for the second half of fiscal year 2018 will be in the range of 15% to 16%.

Now I'll turn to guidance on our expected fiscal year 2019 effective tax rate.

There are 2 important factors to consider: first, Australian draft legislation designed to implement certain base erosion and profit shifting, or BEPS, initiatives related to hybrid mismatches, is likely to be enacted in calendar year 2018 and be effective for our 2019 fiscal year.

This will impact the taxation of our transactions between Australia and the rest of our global businesses and likely result in additional fiscal income attributable to the Australian tax jurisdiction, resulting in a higher effective tax rate.

Secondly, the recent U.S. tax changes will reduce our effective tax rate, predominantly associated with a new territorial tax system, which will allow for little or no tax on future earnings repatriated to the U.S. from our foreign subsidiaries.

Taking into account the impacts from both the Australian prospective legislative changes and the U.S. tax legislative changes, and our estimates of the geographic attribution of our income, we estimate our fiscal year 2019 effective tax rate will be in the range of 21% to 23%.

To round out the implications of the U.S. tax reform, it's important to note that the U.S. legislative changes will be positive for ResMed from a financial and treasury management perspective.

We will now have far more flexibility to repatriate cash back to the U.S. at little or no tax costs.

We will be able to more effectively utilize our strong global cash flows to invest in growth opportunities and undertake capital management activities.

Moving on from tax-related matters.

During the second quarter, cash flow from operations was $132.6 million, reflecting strong underlying earnings.

Capital expenditure for the quarter was $16 million.

Depreciation and amortization for the December quarter totaled $29.4 million.

During the quarter, we paid dividends of $49.9 million.

Our Board of Directors today declared a quarterly dividend of $0.35 per share.

Additionally, as we discussed during last quarter's call, we recommenced our share buyback during the second quarter and repurchased 100,000 shares for consideration of $8.5 million.

At December 31, we have $1 billion in gross debt and $160 million in net debt.

Our balance sheet remains strong with modest debt levels.

At December 31, total assets were $3.6 billion, and net equity was $2 billion.

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

Thanks, Brett.

We will now turn to Q&A.

(Operator Instructions)

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

(Operator Instructions) Margaret Kaczor from William Blair is on the line with a question.

First of all, you guys had a really nice quarter in terms of showing operating leverage and SG&A leverage, even taking all the moving pieces out.

But maybe walk us through what's been driving the recent results in SG&A leverage, maybe what the long-term level for that SG&A or operating margin could be.

And really, what it gets down to is should we assume multiple years of leverage here?

Thanks for the question, Margaret.

And as we've talked about on previous calls, if you look back over 5-plus years, ResMed had around 30%, 32% of our revenue in SG&A, and in most recent quarters, we've taken that down to 27% as a percentage of revenue because we're able to grow and leverage our world-leading scale within the sleep apnea and respiratory care and now, out-of-hospital software markets.

We expect that to continue.

And as Brett said in his prepared remarks, we want to leave this fiscal year at a run rate of around 26% of our revenues at SG&A and even beyond that as we look to FY '19.

And so I think there's a lot of runway left for leverage around SG&A.

We're a global leader, the global leader in sleep apnea and respiratory care.

And we have a right to win in out-of-hospital software, and I think we can leverage that scale to grow efficiently.

So I'd summarize that there's a lot of runway ahead over multiple fiscal years here, Margaret.

Good.

And then just as a follow-up on international.

Seems like it continues to remain a focus for you guys in relation to telemonitoring.

I know you had some weird comps with China from the year-ago period.

But what inning are you guys today in driving telemonitoring internationally?

And are there any advanced talks on a national, regional level outside of France to drive ongoing fleet upgrades?

Yes, that's a great question, Margaret.

Allows us to talk about digital health and connected health beyond just the United States.

We've had excellent progress the last 3.5 years in the U.S., millions literally, north of 4 million; 100% cloud-connected medical devices; 6 million patients in the AirView system, and that keeps growing every day.

But as we highlighted in the prepared remarks, it's fantastic to see a country like France, where the government who pays most of the health care bill through social security, health care, looking at the sleep apnea space and saying, "There's an ROI here to invest in telemonitored sleep devices." If we have patients that have telemonitoring devices, they use them more.

And as the data showed that we published, and the French government knows it, if the patient uses a device more, they stay out of hospital more.

They have a better quality of life, and in fact, their survival rates go up.

So the French government making that change, January 1, is fantastic.

We think there's a lot of runway ahead across France.

And as we look across Western Europe and across Europe, Asia and all the other markets that we do business in, we are in regular conversations through our market access team with the governments and major payers in the United States and other for-profit payers.

And we will get the message through that having telemonitoring, having connected health and digital health improves outcomes, lowers costs and saves lives.

And we do think that other countries will follow suit after France, and it's great to have them out there.

Sean Laaman from Morgan Stanley is on line with a question.

My first question is to Brett.

Brett, could you give us a guide on the FX impact on GM in the quarter?

Yes.

As we mentioned, Sean, it was pretty, pretty meaningful this quarter.

If you look at it sequentially, it was kind of in the order of 50 basis points negative.

So it was quite a big impact on gross margins.

So yes, if you ignore that, it kind of -- I'm pretty pleased with where we end up with the gross margin because we had quite a big headwind on FX.

Okay, great.

And Mick, are you able to give us a bit of a guide on what features the Mobi has versus Activox?

Sure, thanks for the question.

Unfortunately, for the call, but fortunately, for our sales team and our commercial teams, it's been a long time designing and getting this product ready.

We're not ready yet to publicly announce the specific features and capabilities.

What I said at the conference earlier this month, and I'm happy to repeat here, is that this has got really good oxygen output.

It's got excellent battery life and a really good blend of all the other parameters that are needed to make out-of-home, portable oxygen concentrators the best they can be.

And by putting the ResMed brand on it, running it and release it when we believe the quality's at the level that deserves that brand, and that's what we're working towards.

David Low from JP Morgan is on the line for a question.

Perhaps we could just touch on France again, Mick.

Just you talked about the change happening from the 1st of January.

Just wondering what you're seeing there.

I mean, presumably, from the results we've seen, you saw good buying ahead of the change.

And sort of where do you think we're up to in terms of fleet replacement to take advantage of the new reimbursement structure?

Yes.

So David, as you indicated, the reimbursement change went into effect January 1, but our French colleagues and customers and partners in the ecosystem in France have known about this for a number of months or quarters.

And so there has been some, if you like, upgrading of the fleet from noncloud-connected to cloud-connected devices over the last 3, 6 months.

We see more runway ahead of that for France.

And really, importantly, we see patients getting better care, using their devices more, therefore, using more masks, but most importantly, staying out of the hospital and being well taken care of.

And we think there's a positive domino effect here where other countries will see this change based upon real data, including the data that we published in the peer-reviewed press this quarter and say, "This is the right direction to go." So we're in active discussions well beyond just 1 or 2 countries here, all 120 countries we sell our products into.

We are looking to get the message out there that telemonitoring and cloud connectivity and digital health and connected care can save costs and improve lives.

But more runway left in France and a lot more across the other 119 countries we sell into over the coming fiscal years.

Great.

And just one other.

I mean, you had very strong sales growth, which is really impressive.

But perhaps if you could talk to market conditions.

I mean, I think, let's, perhaps, start in the U.S. I'm trying to get a sense as to how much is this ResMed gaining share and how much is this market conditions picking up in terms of patient setups, mask replacement.

Yes, that's a good question, David.

I'll hand that to Jim Hollingshead, who runs our global sleep business.

Yes.

Thanks, David.

I think patient growth continues to be strong.

Globally, as you know, sleep apnea is underdiagnosed, and we're continuing to see increasing awareness in the markets and increasing patient setup.

There's a little bit of cyclicality in the mask business, especially in the U.S., because of the way deductibles end at the end of the calendar year and see we always get a little bit of pickup in mask with some cyclicality.

But under -- the underlying growth in the market, I think, is driven by patient awareness, and obviously, the economy's been a little bit stronger.

So overall, positive in both directions.

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

Very nice quarter.

Can you spend a moment talking about your Mobi portable oxygen concentrator?

How is that going to be sold into the home?

Will you combine that with your current home CPAP sales force?

Are you going to build out something separate?

That's a great question, Joanne.

I'm going to hand that to Rob Douglas, our Chief Operating Officer.

Yes, thanks, Mick.

Joanne, we're currently selling the Activox throughout our existing sales field force and doing that very successfully.

And the relationship and the discussions with the customers around the world are very relevant.

And portable oxygen, we think, represents a really good business opportunity for me and the customers around the world.

Mobi, as ResMed-branded, will just be an extension of that and a stronger player and that will be part of our existing sales teams.

And we're really looking forward to it coming out.

We're really excited about it.

It's going to have very strong performance.

As a follow-up, were there anything -- was there anything specific in the quarter of extra selling days, stocking?

Anything particularly of note that we should be able to factor in to -- as we think about this quarter but also project onto next year?

Yes, thanks, Joanne.

No, nothing out of the ordinary in this Q2 in terms of the channel.

I think what we're seeing is we've had 3.5 years of the Air Solutions and AirSense portfolio.

That's incredibly value for customers.

They continue to buy those sleep devices and those respiratory care devices that fit on the AirView platform.

And we're seeing really good traction of the N20 nasal mask and the F20 fullface mask.

These are the smallest, quietest, the most comfortable in their category.

The plastic that fits on the bridge of the nose on an F20 and N20 is the thinnest and most comfortable plastic that you can have of any mask on the market.

So I think that's what's leading to the share gains that we got this quarter, and I think there's some sustainability to those share gains as we look forward.

Steve Wheen from Evans & Partners is on line with a question.

Just a question around gross margin for Brett.

You've obviously got, in this quarter, a particularly large headwind from currency, and therefore, the offset through manufacturing efficiencies was obviously pretty compelling.

What's the runway like on those manufacturing efficiencies for the back half of the year?

Because I expected, actually, must improve, mainly because the currency now has probably got an even bigger headwind to come given the strength of the Aussie dollar recently.

Can you just sort of talk through how that might look?

And what are the moving parts going into the back half of the year?

Sure, Steve.

I mean, we have a program around kind of initiative in both manufacturing, procurement, logistics, and so on that really work on a number of initiatives, and we kind of keep track of that pipeline pretty full.

Then it's a matter of executing on those and then the timing of when they drop.

So not to get overly granular, but we're working on that all the time, and we expect to kind of drop, if you like, initiatives that will take costs out over a period of time.

And there'll be some of that will manifest in the second half.

But it's something progressive and it's a long-term program, and you just got to continue to execute on initiatives you identify and then keep that pipeline full.

And that's certainly what the team does.

So I guess, it's more progressive, Steve, rather than sort of a sudden big jolt to it.

So we've just got to keep executing on those initiatives, and that will continue to drive costs out of the all that COGS area.

So even with the Aussie dollar at 0.80, you still got the ability to maintain that gross margin at current levels with the procurement side and manufacturing efficiencies?

Yes.

I mean, I'm trying to be broadly consistent, right.

We will have some headwind with the Aussie at $0.80.

I mean, clearly, if that keeps tracking up, that's a different ballgame.

But at the moment, I mean, it's a quarter lag, too, so into Q3, it won't be so bad.

If you look into Q4, then clearly, there is a bit of a headwind there.

But we've kind of managed currencies on the Aussie all the way from, in my time, $0.47 to $1.03.

So I think we just got to -- we just have to live with currencies moving around and make sure that we've got initiatives in place, I guess, to counteract that.

But also, I mean, we're much more broader on our manufacturing nowadays compared to what we were a decade ago.

So we have manufacturing in Singapore, for example, it's pretty big.

We have some in the U.S. now that we're undertaking.

So I get that portfolio's a little more balanced.

I mean, clearly, as you know, over many years on the materials side, it was really looked as sort of space in, essentially, U.S. dollars to try and mitigate some of that.

So it certainly has an impact, but I guess, there's some things we do to try and mitigate that, and we've just got to live with the currency whichever way it goes.

Okay.

And just with the tax changes, one of the problems, as you've identified, is some of the repatriation historically.

And now that, that's -- somewhat -- those barriers have been somewhat removed, is this the opportunity that you're talking to of actually capital management initiatives?

Is that sort of the first sort of cap off the rank with regards to what you'll be able to do now that you can shift that cash around a little bit more freely?

Yes, I mean, we certainly have the flexibility now.

I guess, we're still reviewing that.

So I kind of -- I wouldn't want to sort of preempt anything just yet, but it does give us that flexibility.

The key will be around being able to utilize that cash essentially anywhere in the world and that could mean growth opportunities, acquisitions, investments where we might want to undertake.

We have far more flexibility to do that.

And additionally, we -- it's not necessarily either/or, but we would have, I think, the ability to do some more capital management as well.

I mean, there's a few things in the tax reform.

You've got some limits or caps on interest deductibility and things like that.

So you have to navigate a few things.

But for us, it will -- it's a great benefit for us because of the flexibility is much greater than we had before.

And we've kicked off the buyback, for example, in Q2.

We'll continue with that.

At the moment, I expect it to be relatively modest or just offset the share -- equity share grants to employees, for example, which is sort of that $1 million to $1.5 million annually.

But we certainly have more flexibility around that.

But I've not -- we don't have anything completely planned out of this stage.

I think we're just assessing through on our options and so on.

(Operator Instructions) Your next question comes from the line of David Stanton from CLSA.

I wonder if you could explain how Brightree and ResMed are going about increasing mask replenishment and particularly in the U.S. market.

Yes.

Look, I mean, I'll start off, and then maybe Jim can add into that.

We have some excellent programs with Brightree Connect and ResMed ReSupply, some platforms that we've enhanced and put together to provide an end-to-end service for our HME customers who want to get involved in resupply programs.

We have automatic e-mail, text, interactive voice response that we can provide for our customers to go directly to their patients.

We have dropship programs, where we can dropship directly to the patients if the care companies require that or want that.

So we have many offerings in that.

And everyday, we are looking at ways to upgrade our resupply programs, including engaging patients with their myAir applications.

We think that there is an underutilization, if you like, of patients saying they want to get a clean mask when they need a clean mask because they don't know it's available in the options therefore.

They don't know the co-pay, they don't know the timing.

So we want to turn that ignorance into education and educate patients that when their mask does start to go up and/or their masks starts to get dirty, they can get a new one.

And this is a piece of plastic that touches your face for 7 hours a night every night.

It needs to be replaced on a regular basis.

And we think there's an under met need to drive that.

Any further detail on that, Jim?

I think the only thing I would add to that is the reason there are 2 platforms is because Brightree Connect is really designed for our HME customers who are using Brightree as their billing platform.

And there's many thousands of those, results from thousands of HMEs that don't use Brightree as their billing platform.

And so the ResMed ReSupply platform is really designed to be agnostic of billings since it will be usable by HMEs who are on the Brightree billing platform.

In that way, the 2 offers effectively cover the entire market.

And my follow-up is, given your strong numbers in the U.S. in particular, I wonder if you'd sort of give us an update, your updated thoughts on U.S. market growth rates and, indeed, perhaps, European market growth rates as you see them going into 2018.

Yes, thanks for the question, David.

Look, we look at the global sleep apnea and respiratory care market that we play in growing at that mid- to high single digits, with devices growing at the mid-single digits and masks systems growing at the high single digits.

Yes, clearly, this quarter, we took share in both of those categories.

Air Solutions, AirView and the AirSense 10 and AirCurve 10 systems themselves helped us gain share in the device side.

And these new masks -- well, they're not perfectly new now, 3 or 4 quarters after launch, but they're still growing well in the nasal and fullface categories with the N20 and the F20.

And I got to tell you, the AirTouch F20, that full mask has formed a nice little niche for those patients who are very sensitive to their -- to plastic on their face and now have a far more comfortable foam that they can have there.

So I think the market is in that mid- to high single digits.

I think we took share in this last quarter.

I mean, we have the capability of taking share over further quarters.

But we're also putting 6%, 7% of our revenues into research and development to make sure we have a regular cadence of innovation to bring on the mask front as well as on the software front, which we upgrade on a 4 to 6 weekly basis with the cloud upgrades.

David Bailey from Macquarie is on line with a question.

Just had a question on the average selling price decline you've highlighted this quarter.

It's been an impact over the past few years, and I just wondered if you'd willing to characterize the decline you saw in the second quarter relative to the industry.

Yes, David.

We don't, and haven't for 4 years, given out ASPs.

That's fine.

And just in relation to currency, you've historically provided an impact on a per share basis in previous quarters.

Just wondered if you're able to provide us with the overall impact of currency on a per share basis for the second quarter.

Sure.

Brett, you want to take that question?

Yes.

So for this quarter, it was $0.02 favorable for us, which is really the reflection of the stronger euro.

So it was $0.02.

Matt Taylor from Barclays is on line with a question.

So the first question I wanted to ask was around your device growth.

It was pretty strong this quarter on a tough comp.

And just curious if you could give us any color on some of the components.

I know you mentioned that the Air Solutions and AirSense platform continues to grow well.

And you talked about vents.

Can you talk about the different kind of sub-businesses within devices and how each of those are doing?

Yes.

Thanks for the question, Matt.

Yes, we don't break out the detail between the sleep devices and the respiratory care devices.

But I can break that out by geography.

The devices grew globally at 9% on a constant currency basis.

In Europe, Asia and our other markets around the world, it was around 5% growth of the devices.

And in the U.S., Canada and Latin America groups combined, we grew at 12%.

A way to think about why there's that relative growth by geography is the penetration rate of Air Solutions and the digital health and connected health platforms.

The more that we're able to show that data with our customers of managing a fleet of products, so managing a fleet of patients within the digital health platform enables them to see the value, reduce their labor costs when they use a ResMed device through that ecosystem, their labor costs for setting up sleep apnea therapy go down by up to 59%.

So that's a big, compelling value proposition that you want to buy ResMed.

As I said during -- earlier in the Q&A, during the prepared remarks, we have had some success in France of getting differential reimbursement for that, and I'd say that's the first geography outside the U.S. that will have now sort of an S curve of growth, if you like, of the digital side that allows to bring some of that faster device growth there.

But look, our French team are doing an amazing job, firstly, in market access and talking to the government, and then also in execution of driving that.

And we like to see that continue there in France but also across Western Europe and other markets we participate in.

I just had one follow-up for Brett.

I mean, there's a lot of things moving around on the tax line, and I was wondering if you could give us some sense for when you're developing these ranges for the second half of fiscal '18 and for '19.

How much of that is still kind of moving around?

And what are the factors we should think about that could actually move those ranges up or down or moving within the ranges?

Yes, sure, Matt.

I mean, it is -- I mean, all of this is very recent, and there's been a lot of activity.

So these are our, if you like, best estimates going forward given what we know about the draft Australian legislation and also the U.S. tax reforms.

So put that guidance out there, which ResMed is confident on, but they are estimates.

But -- and I'm looking forward, and I guess, impact's, it'll just be around geographic mix of income and operations, okay?

So as operations evolve in different geographies and that can impact your tax rates typically over time.

So that would be kind of longer-term impacts that you might see.

But on shorter term, I think these -- that's kind of our best estimates with what we know on the legislation, which you know is very hot off the press.

So clearly, we'll tune or refine that as we go through the quarters, if we need to.

Vic Windeyer from Citi is on line with a question.

Just quickly, firstly, I just wanted to understand the tax.

The lower tax that brought non-GAAP back from $1 to $0.83.

Can you just tell us what's been different?

Yes.

In terms of the non -- essentially, it boils down to we were forecasting some repatriation, which would typically have U.S. tax attributed to it under the new tax reform, which came into force, that any repatriation we make is no longer taxed in the U.S. So that does in fact impact us favorably through FY '18, and that has lowered our tax rate on a non-GAAP basis, not having to pay that tax in the U.S.

Yes.

Okay.

All right.

Great.

And then just as a follow-up, does -- just in the Respiratory Care business, I guess, the -- when I look at end of the second horizon of growth, I suppose, that -- when do we sort of expect that, that might go through an inflection point then we get higher rate of growth out of that business, given the large opportunity that resonates some of that back at sort of maybe been on slightly to the point of being modest?

So I'm just wondering whether you could outline how you see that coming through and the timing on that.

Yes, Vic.

It's Mick here.

Look, there are the 380 million COPD patients.

We think somewhere around 10% of them will ensure to have some type of therapy, whether it's noninvasive ventilation, portable oxygen concentrator and/or life-support ventilation.

So it's a huge long-term opportunity.

But it's not overnight, and it takes a long time.

I think a really important factor about that second horizon of growth for us is that the money that can be saved for the health care system is huge.

These 380 million patients are incredibly expensive for the health care system.

They come back and back and back again to the emergency room, and they get rehospitalized within 90 days on a very high frequency.

And when they use our products, and we show this in the HOT-HMV study, when they use our noninvasive ventilator and they use our oxygen concentrator together, we can reduce hospitalizations by 51%.

So look, like we did with the French government and working with them on telemonitoring and showing the return on investment, we are going country-by-country, payer-by-payer in the for-profit country insurance markets and showing these data.

So it's not an overnight S curve.

It's market-by-market, but we see a lot of runway ahead.

And when we launch the Mobi, we'll have another part of the portfolio in there, another ResMed brand as part of the portfolio to add in there.

So as you look forward the next couple of fiscal years, you'll start to see some good growth out of our Respiratory Care business.

Perfect.

And then just on the tax, for a follow-up.

What would the tax be in FY '19 if the Australian legislation doesn't get through?

What's the impact of that particular component there?

Yes, in the unlikely event it didn't go through, then that would likely pull it back to closer to the kind of rates that we're seeing in the second half.

So yes, more like that 15%, 16%, 17% area if it didn't go through or it happened to be delayed or something like that.

But I think that's a very low likelihood.

I think that's going to parliament in February, and I expect that to be passed.

Suraj Kalia from Northland Securities is on line with a question.

So Brett, you mentioned 50 bps negative FX impact.

Can you split out the impact?

Because the dollar -- the U.S. dollar, as we know, has depreciated quite a bit against the euro, whether you want to look at it from the beginning of '17 or even from the beginning of 2018.

The Aussie dollar obviously has trended, so I understand they're working against each other.

But is 50 bps the net impact?

And if you could kind of give us what happened?

From a revenue perspective, what was the FX impact on the top line?

Yes.

The top line was that -- kind of drove that growth from 11% to 13%.

So that couple of percent benefit, if you like, with strong euro year-on-year.

The 50 basis points I mentioned was sequential.

So it's coming through from Q1 to Q2.

And if you look at the kind of euro sequentially, it was relatively flat, but the Aussie has been kicking up and then we have the impact of a 1 quarter lag.

So you've seen that probably appreciate over that time.

That has driven that sequential impact for us.

Got it.

And Mick, one question for you.

In terms of Brightree, can you give us the broad contours of your international strategy?

Congrats on a nice quarter.

Yes, thanks, Suraj.

Brightree really is a U.S.-designed and operated software.

However, we do have software programmers who are in the U.K. and other parts of the world.

So it is a globally supplied business.

We operate in 120 countries.

The amazing efficiency that we brought to our U.S. home care customers with Brightree, I wouldn't want to limit it to just that country.

Having said that, I don't want to distract the team from the really strong teens level double-digit growth, and so they will be focused on that.

But Suraj, it's a good question, one we're looking at, and we are looking at other geographies, including ones that we're heavily invested to think, can we start some pilot trials and experiments, some courageous experiments, if you like, of taking the Brightree technology to some of the other markets that we do business in.

So I guess that's part of our horizon 3 strategy, that out-of-hospital software expansion.

You'll see us talk more about that as we go forward.

Tom Godfrey from UBS is on line with a question.

Just one for me.

With regards to new AirTouch memory foam cushion sort of setup, just wondering if you've heard from any of your customers?

Obviously, it's got the 30-day replenishment schedule.

Anything from your customers around pushback from funders, just given that increased replacement run rate?

Or are you managing to show enough sort of uplift in compliance or comfort levels so that funders are happy to pay the increased replacement?

It's a good question, Tom.

I'll hand that to Jim Hollingshead from our global sleep business perspective.

Thanks, Tom.

And I think the most remarkable thing about mask is the patient feedback we received on it.

It's an incredibly comfortable mask, and the patient feedback is really almost overwhelmingly positive on it.

From a funding perspective, as we take it out to our channel partners, we're working with them for them to fully understand the replenishment cycle and what impact that might have, depending on what insurance the patient has or what the funding situation is patient-by-patient.

And so we haven't heard any real feedback, any real negative feedback from the market broadly about the mask, but it's being put on patients who, for whom it's appropriate, given their particular either health insurance situation or their payment out-of-pocket or whatever.

Yes.

I mean, I'd add onto that, that it's such a comfortable mask that it can be a second line of defense.

If a patient doesn't tolerate LSR or plastic touching their face, there are people who object to that, it interferes with their sleep.

Foam is incredibly comfortable.

It's what a lot of mattresses are made out of.

It feels more like the bed covers.

And so it's a great niche that, I think, goes after those customers who need that.

And as Jim said, it will depend on the insurance and their reimbursement schedule but also depends on that individual patient selection.

And if you're able to get a patient compliant versus not compliant, the differences, as we showed in those published data, are huge for the health care system.

So they're sort of self-evident, but obviously, we're collecting health economics and market access data while we launch a product like this into all our markets.

We are now at the 1-hour mark, so I will turn the call back over to Mick Farrell.

Great.

Thanks, Christine.

In closing, I want to thank the 6,000 strong ResMed team for their execution on our product launches and their commitment to our operating excellence initiatives.

This quarter, that work translated into continued market share gains, strong revenue growth and excellent operating leverage.

Our team remains focused on our future pipeline of products and software solutions that change patients' lives and benefit our customers: patients, physicians, payers and providers.

Thank you for your time, and we'll talk to you again in 90 days.

Okay.

Thank you again for joining us today.

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

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

Christine, you may now close the call.

This concludes ResMed's Second Quarter of Fiscal Year 2018 Earnings Live Webcast.

You may now disconnect.