ResMed Inc. (RMD) Earnings Call Transcript & Summary

Hello, everyone. So my name is Gretel Janu. I'm the Australian Healthcare Analyst. I am very pleased to have Mick Farrell, CEO of ResMed here with us today for a fireside chat. As we go through the fireside chat if you have any questions, please feel free to send them through to my email, that's [email protected] and I'll throw your questions into our conversation here today. So Nick, thank you so much for joining us today, and thanks for participating in our conference. It's definitely been a very exciting, interesting period for ResMed over the last 12 to 18 months with COVID recovery, supply chain challenges and now the Philips recall. So I guess to start off, do you want to mention how ResMed is responding at the moment to all of these different challenges. And how is ResMed's positioned to continue to grow strongly through the medium term and into longer term. Thank you.

Yes, Gretel, great opener. And so maybe I'll just do like a 5-minute opener and then we'll keep the other 35 minutes for Q&A and hopefully get some great questions from the group on the call. But yes, we had a really good first quarter fiscal year '22 result that we just reported a couple of weeks ago, and I think it demonstrates really strong growth across our businesses, both in sleep, respiratory care, and in our Software as a Service division. We saw double-digit growth across the group. And we saw continuing sort of what I'd call steady U-shape recovery that we said 12 to 18 months ago as we went through COVID. It's going to be a steady U-shape recovery in patient flow. And we're really seeing that. While there's a little jagged part, but across our portfolio of 140 countries, it's steady increases in the flow of patients coming through the system. I mean, obviously, supply chain constraints are hitting everybody. You'd have to be living under a rock not to see what's happening to the automotive industry, to the cellular communications industry, to the consumer electronics industry. Frankly, any product, and frankly, all of them that has a semiconductor, you can't buy a product. Even a refrigerator is cloud connected these days. And so we're just seeing those. And I've personally seen the 100-plus ships out there on Long Beach that can't get through. And here at ResMed, we leased our own 777 from Ethiopian Airways that was sitting on Singapore tarmac being unused, and we leased that to fly product from Singapore to Los Angeles, because you just couldn't get it any other way. It was cheaper to lease a plane from -- that was being unused from a consumer airline, and we just jampacked it with medical products in the overhead and on the seats and strapped in, and it was incredible. I saw photos of that and I said, this is an insane world that we're living in, but that's what it is, right? And we're doing what we can. And as you saw in the quarter, we were able to deliver. Really importantly, we helped 130 million people with either a hardware or a software product in the last 12 months. We helped them sleep better. We helped them breathe better. We helped them live better lives outside the hospital. We have over 10 billion, with the a B, 10 billion nights of medical data in the cloud, sleep apnea, COPD, asthma and out-of-hospital care. And we've got 15.5 million 100% cloud connectable nodes on people's bedside tables sold in 140 countries worldwide. I'll finish with the ResMed's top 3 strategic priorities and then we can jump into the Q&A. Our #1 priority is to grow and differentiate our core sleep apnea, COPD and asthma businesses, right? So be the world's leader as we have been for the last 3 decades in sleep and respiratory care; two, to design and develop and deliver world-leading medical devices and combined digital health solutions that can be scaled globally; and three, to innovate and grow the world's best software solutions for care delivered outside the hospital, where people live, preferably in their home. And that's skilled nursing facilities, home health hospice and obviously, in home medical equipment. So that's for you to look at, our goal and our path towards 2025 is double-digit volume growth over these next 4 years, 3.5 fiscal years through 2025, and our goal is to impact 250 million lives in that 2025 year. And we're on a path to do that. And despite recalls, despite COVID lockdowns, despite shipping constraints, we're still powering through now. Our operations and supply chain team are just Six Sigma Black Belts in getting these products to market. And it's hand to mouth, every product we make, we sell. I tell Andrew Price, our President of Operations. He's now President of Sales because everything he makes, I can sell and certainly true on the device side. And we're not doing too poorly on the masks as well despite setups being down due to COVID and the Philips recall. But Gretel, over to you, and we'll -- I think I did that in 5 minutes, right on, it's 5 past the hour and back to you.

Perfect. Thanks, Mick. So I guess let's start with the Philips recall, given that it is so big and it has disrupted the entire industry. So at the first quarter, you did achieve [ $80 million to $90 million ] of incremental device sales. And you've maintained the guidance for $300 million to $350 million of incremental device sales for FY '22. So can you explain what's happened in that first quarter? And how we could think about the phasing between first quarter, second quarter, third quarter and fourth quarter? And how you're responding to the Philips recall? And if the market is being completely served? Or whether there's still a lot of patients that you're not able to cater for?

Yes. So it's a great question, and there's a lot in that. So I'll unpack it. Yes, so the guidance we gave last quarter and on our call a few weeks ago is $300 million to $350 million in incremental revenue above what we previously forecasted for FY 2022, right? And so everyone, sell-side, buy-sides got their own models, but for our model that we don't release, our model, we're looking at a gain of $300 million, $350 million. And actually, that played out pretty well. We saw $90 million -- versus our model, we saw $90 million in incremental device sales in that Q1, as you noted. And you can't just take that and multiply it by 4 and say, "Oh, great. So that's $360 million. You guys are good, right?" So no, actually, it's going to be -- as I said on the call and the color I gave without quantifying is that December quarter and the March quarter, particularly are tough. In June quarter, it opens up. We've done a lot of engineering supply chain work and stuff that -- if I go talk today to a semiconductor manufacturer and they tell me today on a Zoom call, Mick, you're getting this 45-nanometer, 60-nanometer part, goes into this, goes into that, goes through these 5 suppliers and then you've got it in Singapore, that's months away for me getting it in a product. And then I've got a charter a plane or get [indiscernible] if the rates get better to then get it to Atlanta, Moreno Valley or our European distribution warehouse or across Asia. And so there's just a lead time to these. And so without quantifying it in detail, it's not just take Q1 [indiscernible] before. It's down in December, right, because it's tougher. It's down in March because it's tougher. And then it comes better in June because we start to see some of those semiconductor flow pick up. Now having said that, after I did that earnings call, I went straight to a call with, I won't say the name of it, but a very large global semiconductor manufacturer, talking to the Chief Revenue Officer, and as a customer then saying what my customers say to me every day is like how can I improve this allocation or this part, this piece? And it was actually a very constructive conversation and look, there's -- actually the mother of this individual is on a ResMed CPAP. And so look, the emotional connection is there, and also the business connection is there because ResMed is a very good customer. We pay high prices for our products relative to consumer and automotive. We -- so it's a good margin business for them. We are a reliable supplier. Look at the AirSense 10, still the best product in the market other than the AirSense 11? The AirSense 10 is better than the DreamStation 2. So it was -- the DreamStation 2 almost caught up to AirSense 10. So after 8 years, still the best in market. And so that's 8 years of supply of parts and pieces if you are an original supplier for AirSense 10. So we're a long-term supplier. And the other one is, I think we're recession resistant. We proved that during the GFC in '08 and '09 that ResMed kept buying products through that, whereas car manufacturers, cell phone manufacturers, refrigerated manufactures, all those consumer products, fast-moving consumer goods, they slowed down dramatically because people stop those purchases during the recession. So those 3 things, high-margin, long-term supplier, willing to sign long-term contracts and that we're recession resistant, I think, make us an excellent customer. And then you add on to it, hey, do we need another cell phone, another Tesla, another iPhone and other fridge, Samsung is connected to the cloud or do we need another CPAP that's desperate right now because 3.3 million of them were recalled by the #2 manufacturer. Answering the last part of your question is how much of the supply will we take? Well, that's a difficult one because every customer had a different share of ResMed, Philips and other. But let's say, you're a good example customer, right? You're 60% ResMed, 30% Philips and 10% other: 3B, BMC, Apex, Yuwell, whatever. And so if you were 60%, 30%, 10%. And then mid-June, Philip says, sorry, I'm not going to be supplying you any new patients for 12 months. By the way, they reiterated that 12 months, 3 months later. So that means 12 months is not June 2022, it's now September 2022. I have some intel that tells me from Europe that is December 2022 for some European countries, but they're promising governance there. So anyway, it's somewhere around 12 months from now that they'll be back in market. So that means if you are that customer, you had 60% from us, 30% from them, 10% from other, you went -- that 30% just went away. That's gone. So at best, if we all do what we did last year, and we didn't have any constraints around supply chain and everything, we get 70%. So for the customer, they're 30% down. And that's really tough. If ResMed does amazing things and we are, if we grow our growth by 30% on our parts and pieces, right, what's that? 60% x 1.3 so 78%. So then we're 78% and then you've got the 10%. So now you're at 88%. Do those people do a little better? Can they get -- And actually, that little 2% player, can they get double there and get to 4%? Okay. So maybe that 10% becomes 12% or a little bit more. So now you're -- I don't know, 80%, 85%, 90% of your flow. The customer still sees 10% down year-on-year, and you're seeing that with some of the [ public ] people Adapt and [ Apple ] released some of their data. But look, we're talking to customers every day, and they're really grumpy. Their flow of product is down usually 0%, 5%, 10%, 15%, 20%. And if they were really Philips loyal, it's down like 80%. And those are -- we're not going to be able to serve many of them. And so what we're doing is like customers are -- we're allocating product because we're getting allocations. And we're saying, okay, we've got a limited pie. We've got to take care of the sickest patients first. So if you're on an Astral or a Stellar or a VPAP ST-A, an ISV and APAP, you're getting product first in that order because it's linked to patient acuity. It is also overlapped with our shareholders' interest that they're high-margin products and costs are going up every year, so with better margin, better pricing, we can have the better -- to have cash flow to continue to be there. So we do patient acuity first. And then we do existing customers with existing contracts, of course, we fulfill all those first. And then we say, okay, existing customers growing contracts and they can take some share from some of the other maybe more [indiscernible] distributors or whatever. And then we just work our way down through the list and what we're really trying to do is really look for long-term contracts and long-term approaches with customers. So we're not going to take someone who just wants to buy cheap CPAPs and ship them out there and drop ship them. We're going to work with people that say, I'm going to use myAir, I'm going to use AirView. I'm going to get patients on myAir. I'm going to get doctors on AirView and they have all the cost savings we get by the digital health that we've invested in for 7 years, and we're going to get the higher adherence rates, which is good for the patient. It's good for the doctor. It's actually also good for the provider because the patients last long. Our products are more expensive, but they make actually better lifetime value if they go with it. We've proven this. And we work on that solution. So that's why I don't think these share gains are temporary. I think we can do our best to maintain the vast majority of them for the very long term. And when Philips come back in 9, 12, however month, 15 months, they're going to first have to go after the low-price stuff, go after the BMC, the Apex, the Yuwells because that's just price. They can get it on price, they don't have to compete on cloud, the software and connectivity and linked to the EMR or EHR, and then they'll come and fight us. If they want to war on 2 fronts, fine, and they can fight low-priced and high tech, but if I was them, I'd go for the low-hanging fruit first. But anyway, we're ready for all of the above scenarios, and it's going to be a very interesting 9, 12, 15 months. Here's what I will say that, just the last thing on this is, people will like, "Oh, you're going to shake hands," we were the #1 before they started. So it's like if we're playing European football, we were up 3-0 in the European Champions match. They gave us a penalty kick, so now it's 4-0. But we were already winning the match. And Rugby, I know we have a lot of Aussies here. If we were up 40-0 in the rugby match, they gave us a penalty kick. So it's 43-0. We were already winning and then there are people saying, "Oh, gosh, are you going to beat them in the next match?" It's like, okay, well, we'll finish this match. And I think we've got the same team, actually an upgraded team with some of the talent we're bringing in from tech and our new CTO and so on. And I think we're going to win in the next one. But look, we've got to prove it every quarter, prove it every year. It's going to be a very interesting year with the sort of perfect storm of COVID recovery, supply chain constraints and Philips recall, but we're going to plow through.

Excellent. So let's just stay on the share gains. So how should we think about quantifying that? I know it's very difficult to -- at this point in time to be able to forecast. But so where are the share gains coming from? Is it because some of the physicians now are prescribing ResMed? And will they continue? Is that a sticky market? Or is it just the fact that your DME customers had now -- they will get used to ResMed over this time and then just keep a little bit more of ResMed even once Philips comes back with a lower price? Just trying to think about where the stickiness will come from here.

Yes. And I mean it's a complex answer to that question because it's not just simple of -- we're not a simple market where it's just 1 customer. The customer is actually 5 different groups, right? It's patients who have patient choice and more and more patients are googling and having choice and going to doctors certainly in high deductible health plans, health savings accounts in the U.S. very much consumer-driven, but even in Europe with government insurance and others and parts of the world where there's government insurance, patients are having the say. So ultimate customer is the patient. So our Net Promoter Score amongst patients was high before this recall. It went up during this recall, and we're maintaining that NPS very high in consumers. And obviously, we're fully integrated in Germany, ANZ and other markets in Singapore and others, so I know these NPSs from my own too, but we also work with our distributors and NPS for consumers. So patient is really important. As you said, physician prescriptions, physicians are very angry at Philips right now. They probably have known about this for many years. You don't suddenly have an issue that suddenly pops up and it was thrown upon physicians who were told, "Hey, go see your physician, if you have a problem, like they were given a tough task by Philips in this. So we already had good prescription levels, very high prescription levels with physicians, that's gone up during this crisis, and I think it will be maintained long term. As people try our digital solutions, AirView, doctors love it, and it is better. And some of the high -- there was a very small group, I'd say, KOL doctors who like a certain aspect of Philips [indiscernible]. We're bringing actually something like that within this period of this recall to market because you don't really need it on every patient, but for that crazy professor who really thinks they do, we'll have it there and you just click a button and get it on a per use basis. They'll pay for it because it costs money to get data to the cloud, and it costs a lot of money to get every breath the patient took at night but we'll have that. But I think those KOLs will get some of them on board. But I think the vast majority, whatever percentage -- I threw a number at it before, if we were 60% of the prescriptions, I think it moves up. How far, I'm not going to quantify it for you, but it goes up and it stays up. And then -- so patient preference, NPS, physician preference up. And then for provider preference, I used that example customer that was 60-30-10. If they switch now to whatever, [ 80, 15 ] and then they're a little bit behind, and then Philips comes back in and goes after the 15 first and comes after up. Where do we end up between 60 and 80, I don't know, but it's going to be -- I think we get a vast majority of that because once you're integrating the workflows, they've seen how low cost it is, they've seen how integrated it is, the doctors are getting the data in their area. The patients are happy, the respiratory therapists are happy and we get a higher adherence. We've got peer-reviewed published evidence in Lancet showing 87% adherence. And this is from Medix Cloud. And so I was at the California Sleep Society actually live this quarter and saw a professor of medicine present this. And I was like, "Wow, I like your slide. I want that for my Investor Day" because it actually had all the data points, and my Investor Day sort of trivializes it. Hopefully, we'll put that -- if [indiscernible] is listing, we'll put that clinical slide in so I can get nerdy, at least on one of my investor ones and present it. But 87% adherence, doctors love that. And then there's the payer. And this is the fourth customer that people don't talk about enough. But when you can prove the ROI, the study we did in France called ALASKA. We called it ALASKA. Don't ask me why a French study is not called Lyon or Saint-Emilion, but it was called ALASKA. But the ALASKA study done in France proved that when you treat patients with CPAP, APAP, you lower mortality and you lower hospitalization. So you save money and you say lives. I think those payer data as we go country by country, payer by payer, are going to be very powerful, and we're the only one presenting peer reviewed published evidence like that. And it is on our device, it is using cloud connectivity, and it is -- the 87% had to be using myAir and AirView. And so it is prescription-driven and it's hopefully long-term share [ prospect ]. Do we have a guarantee that all the patients, the provider, the physician and others, we get all that share? No. And on my Teams channel beside here I just saw Amy say, she's going to make sure I have that slide from [indiscernible]. So thanks, Amy. At least I know my Head of IR is listening. But anyway, I'll leave that, Gretel, but your question is hard. It's going to be hard to model exactly how much of the share sticks forever. I think the vast majority of it does because we were winning before this happened. And once patients, physicians, providers get to use ResMed, they -- I don't think they'll switch back. And when the other comes back, no one wants 1 supplier, Sure. But is it 60-30, 10 goes to XYZ, yes, it does XYZ. But you see what those numbers are. X is going to be above what it was before. The #1 player is going to have better share than it had before and it's going to be sustainable. Just because smallest, quietest, most comfortable, most connected, most clever devices and best [indiscernible]. We have to be productively paranoid that we keep producing all of those, and we keep beating Philips on the devices, and we keep beating F&P on the masks and it's an ongoing game. It's not done. We are investing still even during this crisis 7-plus percent of our revenues in R&D, and it's going to digital health, it's going to the mask engineering and it's going to device engineering, all of the above.

Perfect. Thanks, Mick. And so why don't we move now just towards the AirSense 11 and really more in terms of the medium-term opportunity here because at the moment, every single product is just going to the patients that need it in this very challenged environment. But thinking once kind of supply normalizes, what's the upside from upgrade revenue that potentially could come from the AirSense 11? And how should we think about that opportunity?

Yes, it will be interesting because there will be some sort of bolus of patients who got a prescription and couldn't get served during this crisis, right? Because no matter how much we increase, unless we can double, right, almost we're not going to be able to take share of all the patients. So I think there'll be some sort of bolus of patients that will come through. I think a lot of them will see. We're being very careful with how we're marketing AirSense 11 to consumers because as I said earlier, every device we make we sell right now, and I don't want to upset consumers who come through and say, hey, I saw this and I can't get this because if you get an AirSense 10, it's still the best technology in the market other than the AirSense 11, right? And they're both excellent. And so -- but yes, as we start to see CPAPs and APAPs and [ BiPAPs ]come online from our competitor, we will then start to ramp up our marketing and D2P and D2B and our whole D2C as well approach for marketing to get consumers, former patients and providers, all aware of the advances of AirSense 11. I mean, look, all I can give you is data from firstly, [indiscernible]. I personally use our product. I have tried the AirSense 11. I'm not actually turning it to my permanent device yet. I've kept my beautiful -- actually, it was prereleased, but it's an 8-year-old AirSense 10 working beautifully on my bedside table. I've kept that for now. But I tried the AirSense 11 for a week. It was smaller, it was quieter, it was more comfortable. It was more connected. My wife even asked, she said it's not on. Could you turn it on. I can't hear it. And so I said, it is on because I had the mask on it. It is on. It is incredible innovation. The other thing about it, apart from the quiet, noise out the gate is the digital screen and the touch screen. You can flow up and down like an iPhone or whatever, and I did love that it made me engage digitally. I'm a nerd, chemical engineer, I like to press all the buttons anyway. But I was -- it engaged me and sort of said, here's a way to connect your phone to myAir. Here's a way to Bluetooth or go through cellular, how do you want to do it? And even if you didn't do any of that, you said, "No, no, just keep me on the device. The device communicated with you. It had 2-way coms on the device. It had this patient care assistant. And these little things that just made it personal right upfront. And I think all that innovation is going to be incredible when it gets on the patient front. The doctors will love it, too. It's got all the algorithms and capabilities that it had before and some extra capabilities for them, particularly as you get to the high-level devices over time. And it also has incredible connectivity. And for shareholders listening in, we'll be able to, as we get through the supply chain crisis and can do the value engineering, we'll be able to take a lot of cost out of this over time and get our COGS down and get our gross margins back up to where they should be. But right now, we're just doing everything we can to get product to market. You saw that, that we're not going to save, "Oh, gosh, that's too expensive to get a plane here." The patients need the products, our brand name means more than a couple of pennies on getting a plane to market. And so getting the product to market. So we're going to be doing that through the crisis. But as you start to see supply chain ease, semiconductor flow come back. And then our competitor comes back online, that's when Airsense 11 marketing will take off and it's patient pool is huge. The last thing I'll say on the myAir uptake rate, right, and we analyze that. So about $15.5 million, basically AirSense 10s out there, right? 100% cloud. Some S9s with connectivity. It was mostly AirSense 10. We've got 3.5 million to 4 million myAir users. That's good. But we divide it out, that's a good 20% plus take-up of myAir. This device is getting 60%, this platform, 60% take-up of myAir. That is huge. That's more than double, well more than double, almost triple. And we were the market leader in getting consumer engagement. Now we're taking it to another level with the AirSense 11. So the engagement of patients on myAir, engagement of patients on the device, engaging with doctors on the device and then providers. This is going to be one of the best first time setups, lowest return rates, highest quality products in the market. And so I look at all that and say I think we've got a really good runway as we go towards 2025 out of this. Right here in fiscal 2022, it's hand-to-mouth, product to market. But I think as we get into '23, '24, '25, you're going to see some pretty good uptake of people wanting to re-PAP up to Air 11 from whatever they were on. And certainly, I think we'll have competitors re-PAPing over to ours. F&P basically of the market and then from the low-price players, I can see them moving over. And if you were using Philips, you'd have to be hiding under a rock to not see a CPAP chat or comms to say, "Gosh, maybe there was a problem with their quality." And I think that brand name will impact them for a period of time, and it will take a long time to come back. Patients, particularly, doctors remember things for a long time in our industry. So anyway, they are the reasons that I think AirSense 11 is going to be great, but we are going to be very careful about marketing in the next 3, 6, 9 months, and then we'll steadily ramp it up as we move forward from there.

Perfect. And so I just want to touch on one of the other comments you just made there around cost. So you said AirSense 11 will have the ability to take cost out. But at this point in time, there's not really much opportunity there. So how should we think about with all the supply chain challenges, how ResMed is responding to all of the inflationary pressures with price? And kind of what's the outlook for gross margin going forward in the short term and then into the medium term as well?

Yes. Obviously, in many markets we have contracts and government run things for many of our customers around fixed pricing. One of the good things, if you just look at the U.S. market, the the Medicare market CMS is about 20%, 25% of our customers book if you think about the payer portfolio. Those will go up with inflation. So if inflation was 5.4%, trailing 12 months, CMS reimbursements, they will go up 5.4% from where they were. So that's some relief for our, at least, U.S. HME providers in the Medicare side. Private payers, they will all make their own individual decisions and we'll watch those over time. But look, our goal is to focus on the long term here. There are some short-term cost increases. As you saw in the quarter, that impacted our gross margins down 150-plus basis points year-on-year. It's tough. But on the other hand, we're getting product to market. It's a crisis. We're going to do the right thing. Same thing we did during the COVID ventilator crisis. We just manufactured the product, airfreighted around the world, and we got it to market. We actually made some good revenue and some good profit out of that. But there was costs that were -- that we took on in terms of transportation and procurement of product and parts and pieces that -- as you saw over the last 6 quarters, did impact our GM as well. But look, I think of it in the long term, and as I said, with AirSense 11, it's an incredible, scalable product, and we're manufacturing it and we have it at scale at our new plant in Singapore called Tuas. And I can tell you that thing, literally, the trucks that bring the inbound product, circle the building. So the big trucks go in, circle the building and get to the top. They do removal of product on the top of the building, and then the product flow goes down. The seventh floors of the building from the roof deck down. And so then the manufacturing hub is part piece, part piece and then the same truck can come down the bottom and pick up finished goods as it comes down the spiral, if you think about it as a spiral truck going up and down, the same spiral truck can come and pick it out on the way out. It's a feat of supply chain engineering and production engineering and manufacturing engineering. That is not the rate limiting capacity right now. That thing is ready to go. And the rate limited capacity is a specific semiconductor, actually a part for a specific semiconductor that I know who makes it, where they make it, and I'm begging every day and we're fighting every day to get that. And when we fix that one, we'll find another one, and then we'll go fix that. But I got to tell you, I'm spending a lot more time being the customer in meetings versus talking to customers in meetings than I ever have in my 8 years as CEO. But I am flying in a couple of weeks to visit one of our top customers in Europe, going to spend time in Brussels with the European Union talking about GDPR and MDR and looking for some relief on some of those regulations and also seeing my team in Munich and spending time with our German team and a lot of our European leaders are going to fly in. I can't wait to do all that and spend time with customers and team and governments on all that. But yes, from my little Zoom here, I'm in the office today. But here or at home, I'm spending a lot of time getting that supply. And I can tell you we're doing everything we can to bring it through. And when we get AirSense 11 and scaling through that big factory, what we're going to see is that we will value engineer and we will take cost out. COGS will come down and will prove it. In the short term, we are increasing price on the AirSense 11. It's a higher price than the AirSense 10. It's an [indiscernible] technology. We've been working on it for 5 years. It's incredible, all the things I talked about earlier for patients, for physicians, it's going to be at a premium to AirSense 10. And that's been tough because we haven't done that with the S8, S9, AirSense 10 we didn't increase price, but this time we did on the AirSense 11. And it's a unique time. Inflation is up, costs are up. Every single product that people are buying bread, milk, bananas, gasoline, petrol, it's going up. And so if everything is going up, it's part of that, and we're not increasing price on our old products, but we are increasing price on our new product. What we are doing on our old products is there were a lot of things like early payment discounts or long terms or other aspects of, I would say, nonprice-related costs that we are eliminating customer by customer, step by step because often those were in response to a competitor bringing them in, that competitor isn't around. And so we can say, well, that's gone. And you're not actually increasing price, but you are improving the margin that ResMed can make over time. These all won't fully compensate for the increased costs, but they'll allow us to maintain sort of, what I would call a, reasonably steady gross margin through the crisis and allow us to come back and have gross margin expansion and really good bottom line leverage that you've seen from us. The SG&A reductions that we've got during COVID, we're not having all those go back. I'm flying to Europe, we're not having teams of 50 fly to Europe. It's going to be very much for a purpose and any meeting you can do. Look at us Gretel, you're in [indiscernible], I'm in California, and it's like we're next door.

It's pretty good now with the virtual world, we've all adapted. So now let's just go on to the masks side of things because U.S. masks were impacted because of less industry new setups in the first quarter. So how should we think about that for the remainder of the year? And how much of that of a drag would that potentially be? And then let's talk about some of the offsetting factors with resupply continuing to be strong as well.

Yes, Gretel, it's a good question. And so just in the Q1, we had 8% global growth on masks. It was actually 18% growth in Q1 for Europe, Middle East, Africa, rest of the world, right, Latin America and beyond and so it was 18%. But yes, in the U.S. market, it was 5% growth. And as you said, and so that's being the bulk of the mask area business, that's what brought the weighted average growth down to 8% globally. Look, I actually think 5% growth in that quarter given the comp we had with all those accelerations a year ago with HMEs having nothing to do with any new devices a year ago and forget that in the September quarter of 2020, they were driving that, and we had Snap technology and Brightree resupply, all powered on full tilt for the HMEs so they could resupply customers and maintain their businesses through that crisis. So despite that comp, they were able to get to 5% growth. Look, I think those sort of -- if you think about it and go back to the analogy I was using earlier of that example customer that was 60-30-10, right? The day after the first recall, you're down to 70% of your flow. That means 70% of new patients. That's 30% reduction of new patient setups on devices and masks and so it's a headwind, a severe headwind for masks. And even if masks are only whatever, 20% of that masks flow in any given year is new patients and it's 80% resupply, that's still a significant chunk of headwind that the industry is facing there in terms of new patient setups for masks. We actually have -- we don't release it, but we actually have excellent data on our market share. It comes through de-identify data from Brightree over. We actually -- when I was running the marketing in the U.S., I actually used to buy the data from the Scotsman, Dave Cormack, who used to run Brightree. I would negotiate and we get amounts of how I get the market share data it would deidentify it and get it. [indiscernible] to 90 days, we kept that same protocol because it was great. It was an arm's-length transaction. And I now have those data, it's an inter-company transfer from [ ResMed SRC to ResMed app ], but Brightree [indiscernible] but we get those market share data. And what I can tell you is we held share. We even took a bit of share in 1 category and lost a little in another, but we held share and even took a little on aggregate during Q1. And so that 5% growth number is real. I do think that we'll go through some tough quarters with the tough comps on that, and then we'll get back to sort of more normal as Philips comes on and as we make up more of the difference. And frankly, some of the low-priced ones are making up some of the difference on the other side. It's weird because -- and I'm not just speaking out of pure altruism, but I want patients taken care of. So I what Philips back in the market because patients get taken care of. I just want people taken care of. And I want to win in a fair game. I don't like penalty kicks. Just give us -- come back to market and play like you were before. So we can take share properly. But what I really think is that we get like a good 60-plus percent of new patient setups no matter whose device and it's on masks. And so when they come back, I get 60% of all those masks, I want them back online. And I think that, that will happen over time, and ResMed will make up the difference. And obviously, our products are designed to be and work better together, and we're getting more of that share when it's a ResMed device. And so obviously want to sell both. But for the moment, I just want them all back. But yes, your question on mask growth, it's going to be -- there are some tough comps, and it's going to be a little bit of a tough time. But I do think we come out of it strong as we increase our scope, the low-priced people and as Philips comes back online. Also, on the resupply side, I've never seen more engagement, right? You're in HME. You've got nothing to do during COVID, you had nothing to do. Now with the Philips recall, you've got nothing to do but go after those patients. And so they're looking to re-PAP people over or get them their replacement devices from Philips and then get back on that resupply program. We're actually, obviously, people on ResMed devices that were contacting in myAir and all those, we're very close to. And we're working hand-in-glove with HMEs to make sure Brightree resupply, Snap resupply and any direct help they need on their own proprietary systems, we're helping them to get that patient when they want it, you get a new mask. And we are not manufacturing constrained on masks yet, right? There might be some plastics part and pieces that were like, "Oh, gosh, they headgear this part. We're not yet. The whack a mole team is ready to go into to the supply chain Six Sigma on any of the parts and pieces because chemicals and special chemicals we use in some of the headgear and others are close to not at red zone, but they're sort of high green, low yellow zone. We're watching that very carefully. But right now, we're not supply chain constrained on masks. And I think we can push right up to high yellow zone as we get that resupply picking up. And as we see ourselves pick up, low price pickup and eventually Philips pick up, we'll get the new patients for the back 20% of it as well.

Great. Now I'm very conscious of time because we only have a few minutes left. So I do want to touch on SaaS because we haven't really talked about it in a great deal of detail today. So particularly with MatrixCare and more of the longer-term opportunity with your SaaS business and expanding the market. Can you talk to us a little bit around that opportunity and how we should think about ResMed in that longer-term story really.

Yes, absolutely. And I'll be [indiscernible] because we've only got 3 minutes left. But I'm talking about 10% to 12% of my business in 3 minutes. But hey, that's about 10% of the call, right? We only have 40 minutes for this, and so you're right on, Gretel. Yes, as you said, sort of intimated by not talking about it, Brightree is growing well and doing really well, right? So the group growth was 6% in Q1. We talked about mid-single digits and pushing towards high single towards the end of the fiscal year. So it's right there in that 6%. I can tell you, Brightree was well above that. Our MatrixCare was below that due to the census rates slowly coming back at skilled nursing facilities in hospice, particularly. But home health is actually growing pretty well, our lifeline communities and private duty home care and MatrixCare. And so their are parts of MatrixCare doing very well. Bobby Ghoshal, our new President of our Software as a Service group. He -- I worked with him for over a decade. He was my business partner in the Americas and then went over to run Brightree COO after we bought that for the first 3 years and then became Chief Technology Officer for the last 3 years. He is a doer, he is a leader, and he's going to drive good, I think, efficiency and product delivery, Net Promoter Score, [ class ] scores. And I think MatrixCare is just going to see a chance to accelerate on plan or faster. And he will absolutely empower Matt Mellott who's the CEO of Brightree to continue his amazing journey. I actually spoke to Bobby yesterday. He was at the Brightree Summit. There were over 500 HMEs live there in the Southeast. Vaccine checks and COVID checks and all that, but we are having live conferences. And so I think Brightree has a good chance to continue growing and customers are really excited in how we help them with protocols during COVID and the growth of that business. And I'm really excited about Brightree. But I'm excited about MatrixCare going from being behind group growth to accurate growth and even moving it faster than group growth in SaaS. And that's why I'm confident, and I said on the call that we're confident to go from mid-single digits to high single-digit growth in that area towards the end of the fiscal year. And I think I have full confidence in Bobby and the team and Matt and the team at Brightree and MatrixCare that we're going to start to see that steady recovery. We can't change census rate at skilled nursing facilities. We can change the delivery of our product and how fast it gets to market, the quality of it as it comes to market, and we can ride the waves of home health and lifeline communities in private duty home care, the sectors that are growing in MatrixCare and really double down on that growth. And I do think we're starting to see sort of slow, steady recovery in skilled nursing facilities that will help whole group of MatrixCare pick up and catch up to Brightree and help us grow. The last thing I'll say in the last 30 seconds is that's all organic growth, and we want to do that. We will continue to look for inorganic growth, and there are a number of tuck-ins like Snap and others that we continue to look at. The valuations are high right now. And so I want to make sure that ResMed can own the asset better than the current owner. There's a good cultural fit and it makes financial sense. But if we hit all 3 of those, you might see some tuck-ins or some larger transactions over the next 12, 24 months. But we're not rushing at it. We got a lot of dry powder in our equity but also on our cash, but it's not burning a hole in our pocket. We'll put it back into R&D and give it back to shareholders through dividends and share buybacks where appropriate.

Great. Thanks, Mick. And we are up on time now. So we will finish up there. But thank you so much for your time. Really appreciate it. We're all very interested in the current scenario, and we'll be watching in great detail in terms of how ResMed continues to respond to the current challenges, but thank you so much.

Well, thanks for having me. Thanks for getting up before 5:00 a.m. your time and asking such great questions. But as I told you in the prep call, you need to get your REM sleep. So we need to move the call back a little, so you can wake up at 7:00 a.m. next time. But anyway, thanks, Gretel. I'll look forward to catching up with you live in the not-too-distant future. [indiscernible]

Yes. Excellent. Thanks, Mick. Thanks, everyone as well. Bye.