ResMed Inc. (RMD) Earnings Call Transcript & Summary

Hey, good afternoon, everyone. My name is Margaret Kaczor. I am the research analyst here at William Blair & Company who covers ResMed. I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Now because the conference is, unfortunately, still virtual this year, we are going to keep this to a fireside chat. So we're going to go over some of the company based in some recent updates as well as some more future outlook detail. There is a way to send us some questions online. So feel free to submit those, and I will certainly ask them as they come up. But with that, we're very pleased to have Rob Douglas, President and COO of ResMed with us. Rob, thanks for joining us.

Yes. Thanks, Margaret. Just by way of quick introduction, we announced our results about a month ago now. So that's where we are. Basically, that was a story of recovering new patient flow. We had a big headwind with a $35 million comparable from the previous year. And basically, I think that FY '20 for us is not really a good baseline for anything, and you must be seeing that with lots of companies. But without that $35 million headwind, we did have 1% constant currency growth. So as I said, it was a recovering patient flow. In the U.S., we had typical seasonal headwinds of deductible resets. In Europe, we had a reintroduction of lockdowns, and I mentioned those vent comparables. Other notable things in the results were really strong expense control, which continues to serve us well. And then challenges in supply and freight costs, in particular, that sort of add-on to the sort of cost of running the business. We did have an announcement where we'd put aside a sum for our settlement with the ATO, which we're still in negotiation. So coming up, the tough comparables going to continue for a couple of quarters. I think the current quarter that we're in, we had $120 million of ventilator sales that were really sort of really just COVID related that won't repeat. But certainly, by the time we're into the new calendar year, we should be seeing good double-digit growth and starting to see a decent baseline for that. Also, we're excited to sort of talk a little bit about the AirSense 11, which is in its controlled market launch. And I know you asked me some more questions about that. And we saw improvements -- incremental improvements in the SaaS business. Clearly, our facility-based customers have been hit really hard in the COVID time. So we're supremely confident in our sort of strategy, our role of digitally monitoring CPAP. We're really confident in our ability to execute, and we think we're well positioned for steady growth into the future.

Absolutely. Well, double-digit growth is, I would argue, more than steady, but I guess, steady would be an accurate description. So thanks for the update. Maybe the first thing for us to start talking about is recovery in sleep. But I know it's difficult comps with vents. But if we take vents out of it, what does the sleep business look like? And I'll just add one more bit. We saw Apria provided some encouraging commentary in the U.S. on the quarter with resupply trends trending positive and so on. How do you think that aligns with what you're seeing in the U.S.?

There's lots of moving parts going on at the moment and continuously. And it's encouraging to hear our customers give positive outlooks, but it's only 1 customer. And so there are different versions of that. And also globally, obviously, some of the challenges in Europe are gradually getting better. And we -- clearly, there are challenges in a few of our smaller -- for us, smaller markets, the large markets in India and Latin America that will be headwinds again this quarter. So it's quite a challenge to unpack exactly how it's all going. But we did, as we mentioned in the call, March was a much better month than the other 2 in that quarter. And we should continue to see ongoing incremental improvement. But it should be steady that we really don't expect to see massive lockdown stopping everything or instantaneous open-ups. But clearly, we're still not fully open in terms of diagnostic capacity. And that's still a work in progress in some markets. And as challenges -- as great as the vaccination situation is in the U.S. and how positive that's looking, many other markets, it's just not quite so solid.

Okay. So maybe we'll kind of keep it into 3 markets because you have the U.S. You have Europe with rising vaccination rates and then you have more of EM type countries or U.S. or in Europe. So if we think about that, in the U-shaped recovery, are you kind of on the up-slope in the U.S. on the kind of you guys talked about the U-shape, are you on the kind of right up-slope? Does that make sense?

Yes. Again, I think we're getting there. The challenge, obviously, is those comparables that will be big there. But clearly, it seems that there are incremental improvements going on. There are a lot of issues around the global supply chain that's affecting one of our competitors, in particular, with an announcement that they made that we don't have a lot of clarity on and the impact of that in terms of short-term demand. But more taking a longer-term view of capacity in the industry and our patients, the flow-through of patients, we'd say we stick with our sort of its steadily recovering.

Okay. And then Europe, the vaccination breakthrough in the last month or so, the last few weeks, have really started to climb as well. So should we assume it's very similar to the U.S. just on a little bit of a lag?

It could well be. As I say, it's a little bit hard to triangulate as to whether the vaccination rates really will clear the lockdowns, and they've clearly been constraints in the European countries in this quarter that will have an impact. But there's no reason why the recovery shouldn't be good and then the sleep labs will get back into their rhythm and start pulling patients through and do that gradually. I think the important thing to realize is that it didn't look like we saw anywhere a massive bottleneck clearing and a sudden surge in diagnosed patients. The capacity -- it's a complex treatment process to get patients through the whole diagnosis and onto treatment, and the capacity through that stays fairly steady. So the patients just start flowing through rather than we have another massive bolus of patients treated.

Okay. So that's kind of that comment of study where you won't get the bolus, but things will come back, and then there's maybe more patients in the channel that ultimately, they're progressing through moderate and severe and so on.

Yes, absolutely.

And as we look at Japan, Asia, India, China, any kind of context you can give us there, whether it's -- how big they are as a percentage of your business at this point? And they're not true lockdown. So how should we think about the pressures in the ebbs and flow?

Yes. Well, I mean, Japan has always been one of our major countries, one of our top five, at least, or better. And it's a significant country. But it's been relatively steady through that in terms of performance and the way that patients have flown through there. The other markets are not material in the sense of our threshold of materiality, and we've never really broken them out, but they can be positive or incremental towards growth rates, absolutely. And we've seen some sort of ups and downs clearly early this time last year in China or earlier in the year in China, last year was pretty challenging. India is not as big a market for us as China, but it's been incredibly challenging. It's been a really tough environment there. And we've got a decent team -- decent-sized team on the ground there, who are looking after patients making sure equipment is in the right place and doing that. And for them, operating in that environment has been quite a big challenge. But we certainly had an increase in demand for ventilators in that market, not that ventilators anywhere are the primary treatment for COVID patients anymore as they were last year. But there's certainly been significant demand, and we've done everything we can to get ventilators onto the ground in India quickly, which thankfully we can because of our home -- much like last year because we make home care ventilators, we tend to make a lot more of them than manufacturers of hospital ventilators. So we are able to swing capacity and get products on the ground quickly. Latin America is another one. That's also really, really quite challenging in terms of market conditions and how things are going there and what the priorities of the -- short-term priorities of the health systems are.

And is that just more of a headwind to the growth rate? Or can the combination of those 3 or 4 geographies really make a sizable impact on the ResMed growth rate?

Obviously, if we have outsized orders for ventilators in some of those markets, they may have a better quarter than what they normally would. But as I say, it's still off a base of not material, and it still wouldn't move them to materiality, but it can be helpful.

Okay. Fair enough. So let's maybe move at two different things. One, you talked a little bit about one of your competitors having some difficulty sourcing product. I believe that's Philips, but confirm for me, if you don't mind. And then -- okay. And as we think about the impact for you guys, I think they highlighted Europe as the more likely candidate where they would see the pressure. What can you do to take advantage of that? Or I guess, not take advantage as much as help the market through that period.

Yes. I mean, certainly, our approach to it is we're going to prioritize getting products to the more acute patients, if we can. So we would want to make sure that we're providing as many ventilators, as many ASV type devices, as many bilevel devices for patients who really need that mode of treatment. And they'll typically have a more urgent need than others, but we'll focus on really best quality of care of patients and making products available to them on that. That's really our focus on it. In terms of what the situation is with the competitor, actually, there's little information around. And if you've done any research, you'll -- I assume you're seeing the same. We're not -- there's not a lot of information around what the real underlying issue is. There was a provision made for a quality issue. There's been little communication around that. And then supply chains for many manufacturers around the world are really challenging at the moment. And so that's probably adding into the issues as well. But as I said, there's a little clear information for it, but we will make sure that we -- patients can get treated to the best of our ability, and that's the approach we're taking globally.

Okay. And so that sort of gets me into this topic of inflation as well. So how do you guys think of inflation? I'm trying to remember if you guys went through another inflationary period or not, maybe not as much. But how do you think about that and its impact on gross margin?

Yes. Well, we've lived in, particularly for our products, the opposite of inflation for as long as I can recall, which is sort of 20 years. And we're configured for that situation where we have a volume -- we've got a lot of untreated patients. We've got a volume-driven need to keep providing more products. We've got products that we're constantly redesigning and improving, which includes improving -- includes taking cost out of them. So we've been able to run as fast as is that sort of price headwind for us. Shorter term, if we get back into an inflationary scenario, there's lots of different settings, how that relates into manufacturing and supply chains and how it changes the discussions you have in supply chains would be something that we'd be looking at. But we certainly won't be configuring the company expecting that we'll all of a sudden get price increases all over the place. I mean, in some areas, some reimbursements are indexed to inflation. That doesn't -- much like when reimbursement goes down, though, when it goes up, it doesn't necessarily translate into exactly what our pricing levels are as well. So I think that's still a wait-and-see story as to how to do it. But I'm pretty confident that even in that type of environment, we'll be able to continue to run our leverage story effectively.

And so how do you think about AirSense 11 playing into that?

Well, we've had a history of not quite 11 platforms, but it is a sequence of platforms, and we always build on what we know and continue to learn. And you know as technology improves and particularly with electronics, technology improves. And you can do more with less silicon and that type of thing or less parts in particular. So we always look at designing better functionality, better performance at lower cost on the new platforms. And then as you get a platform in there, you're able to incrementally figure out what are the key cost points and how do you improve them and make those as incremental continuous improvement changes. The AirSense 11 will be just one more step in that journey for us.

Okay. And there are some published documents, as you were kind enough to talk about on the last call. We did go through some of them. There's a bunch of reviews out there on the product. But it did look like it had some nice enhancements, but it almost seems to me like it was going to be more software focused, is that fair? Or do you think it's -- there's something that maybe we're missing or not seeing based on the reviews today?

I think there's a mixture of things. We'll be looking at improving on all of the sort of functional points and the important performance points in the product, both whether they're software or electronics or sort of usability, mechanical, things like that. So there are -- we think there are a lot of improvements across the board on that. One thing, though, we'll continue, as we, said with the AirSense 10. We released that quite a while ago, but still a very strong product. And in fact, the software capabilities have been continuously up -- improved and upgraded on that. So AirSense, it's not a 6-year-old product that we're dealing with there. And we think the AirSense 11 will have a continuing ability to improve and upgrade it over time as it goes forward and continue to keep it fresh and look at innovative solutions through that.

One of the things that we had noticed online. I don't know if it's true or not, so I'll ask you, are there any kind of -- is there a lifetime on the motor, for example, where maybe you have to swap out the product after a certain number of hours of use? And so this may just stimulate folks buying it both for the features, but as well as just to kind of get something newer quality-wise.

Nothing new on that. I've always said, when you want to design a high-quality product, it's going to last, and you cannot design products to last their defined life and then not last easily. So we don't do that at all. The devices are -- they're really well-designed and extremely reliable. And that motor is sort of the moving -- the only moving part in it. So it's likely to be the part that eventually causes any concerns or issues, but -- or it stops working. But that's way, way down the trade. There's no way we reduce the reliability of our products. We design them to increase the reliability on them. And the reason for that is when you have so many products, you always have a bell curve of performance, right? And so you actually want that bell curve to be right out of the expected life of user's time on the product.

Okay. So normally, like you said, it's a 5-year sort of upgrade cycle historically. You're maybe up to 6, COVID maybe had an impact. Maybe it didn't have an impact. But have you seen folks maybe slow down on upgrades in the last year or 2 without having a splashy new product out there?

I don't think so. And in fact, several people have asked us about the performance of the device business, looking like it was outperforming the diagnostic capacity reductions that happened. And obviously, some of that would have been existing patients getting a new machine. So I don't think we're seeing any particular slowdown of that at all.