ResMed Inc. (RMD) Earnings Call Transcript & Summary

Good morning, everyone. It's a pleasure to have all of you on the call this morning, and I'm especially pleased to have Rob Douglas, CEO of ResMed on the line with us. Rob, I'll let you have the floor, and then we'll jump into the fireside chat.

Thanks Suraj. Just a brief intro to ResMed. We're the global leader in connected and digital health. We've got 3 main businesses; sleep apnea -- untreated sleep apnea or sleep suffocation, respiratory care, treating COPD and other chronic diseases and our Software as a Service businesses providing the operating system for the providers of out-of-hospital care services now around the world. These are all incredible businesses with really strong growth profiles. The number of patients around the world with sleep apnea is approaching 1 billion people, only a tiny fraction of those people are even aware that they have the condition and the treatment would be a good option for them. And our long-term strategy really is to accelerate and enable access to those patients, particularly using digital and connected solutions to get those patients onto treatment for the long term. And once they're on treatment, they continue to be our customers through needing mask replenishment and updates like that. We think there's probably 500 million people with COPD, and 300 million with asthma around the world. And these are conditions that are really devastating for people, very expensive for the health care system. And our treatments can really improve outcomes there. And with our connected strategy, we're seeing a whole lot of data now come out as real-world evidence. We're really showing that these types of treatments actually improve outcomes for patients, they lower cost for health care systems and they reduce the trajectory of chronic disease. So we've really got some great solutions there, and we're very confident in our outlook for our future growth.

Great. Rob, can you hear me all right? I know I'm having some technical issues on the audio side. Hopefully, you can hear me all right?

I can hear you, Suraj, it's a little soft. So if you speak up, it would be helpful.

Okay. So hopefully, this is slightly better, Rob, I'll just kind of go closer to the microphone. Okay. So Rob, obviously, you guys have done very well over the last couple of years, even through COVID, in a variety of headwinds, right? One of the things that is almost on investors' mind is Philips. Everything going on in the Philips side. So to the extent I remember, Mick and you all at 1 point, I think, sort of was 18 months or almost 2 years ago, highlighting somewhere close to $750 million like immediate pickup opportunity. Fast forward now to today, walk us through how should we think about the share capture? How should we think about stickiness especially related to Philips?

Yes. It's a good question, and it's one that gets a lot of attention, as you could imagine. Actually, when Philips announced their recall, they announced that they expected it would take a year to correct it. And during that year, they would lose EUR 800 million of sales while they were out of the market for their devices. We actually -- people were very uncertain how much of that, that we would capture. And we actually unusually gave some guidance around that. In fact, we captured a fraction of that around $300 million. And the reason why it was a fraction was because of the challenges at the time with chip supply. And so then we were in a period where there's common -- what happens every few years, we have a cyclical challenge with chip supply and our usual risk management procedures, the processes of inventory and long-term commitments see us through that cyclical electronic shortages without us having to talk to investors about it and seeing that it could affect our sales. We can generally manage through it. And in fact, Philips not all of a sudden taken themselves out of the market. And we saw a huge uplift in demand. Again, we wouldn't have been talking to the world around the challenges of supply chain that we were having 18 months ago. We would have been managing it through our usual risk management processes. So -- since then, very much the discussion has been how much share could we get and it was largely driven by how much we could put through our supply chain. We had just commissioned a new factory. We also had the Air 11 coming, ready to launch, and we accelerated the launch of that as well. So in a sense, we had 2 manufacturing lines and production capacity both able to meet what would have been our normal market share, which would have been more than the total market share market available. Unfortunately, the electronic shortages really challenge us with getting those numbers through. And then we had to adopt a number of strategies, including at 1 stage when we had a lot of decommits on really the connectivity components from our suppliers that we then launched the Air 10 Card-to-Cloud, as you know. And in some markets, notably the U.S., that was really well taken up and through there. What we said now as time has gone on, our processes, we've redesigned components. We've got alternate suppliers. There's still more to come in that but at this stage, we have the Air 10 connected device off allocation to our customers in most markets. We've launched the Air 11 in major markets although it is still an allocation. But we're pretty confident that by the end of this year, we'll have all of the connected devices that our customers could want and available to them pull that. In terms of share, earlier on, we took relatively modest share. And since we've been able to ease the constraints on supply, that share has continued to improve. And we would expect that the share that we have retained -- have gained is sustainable, and we'll be doing everything we can to make sure that we retain that share. We have the best-connected solution. We've got the most -- the quietest, most comfortable, most effective device. We've probably got the top 3 devices on the market with the Air 11, the Air 10 Connected and the Air 10 Card-to-Cloud. And we're only just starting to see the value and the benefits of the new features in the Air 11, which we talk about ability to interact with the patients and ability to get more engagement with the patients. And we've talked about myAir uptake being significantly greater. And we expect the Air 11 to be a device that produces even better patient outcomes in terms of staying on treatment and getting engaged with the treatment than the Air 10 did as well.

So Rob, if I could drill down 1 more layer on Philips. So let's say you -- pick a number, you've got 100 patients incremental, right? Out of the 100, how many would you say are de novo patients, first time to CPAP that you'll capture? How many were existing Philips patients with Dream Sense 1 or whatever, do we have an idea on -- just trying to drill down to the next layer of stickiness in this whole picture?

Yes. I would say that most of the patients we've had over the last few years have been new patients. Firstly, with the shortage of devices, we saw that there was quite a deferral of so-called [indiscernible] that is people who come up to their 5-year usage on their device. They would not give a priority for access to new devices. And the devices can operate for longer than 5 years, of course. So that was one aspect of it. The second aspect of it was in our allocation strategy. And again, we had to have a very principled approach during this critical shortage. But our principled approach was put patients first, which meant we would allocate our resources to the higher severity devices, treating more severe diseases, ventilators and devices like that. But our other priority in our principles was that we would respect our existing business relationships and work with people we knew looked after patients well. And we have long-term relationships there. So we ended up with an allocation process that was based on historical business with us. And so providers who had not been with ResMed traditionally, actually, we were unable to allocate products to them, unfortunately. So we weren't out there actively trying to convert Philips patients, new patients would probably refer -- more likely to be referred to our customers because they had more supply than Philips customers. So that was where we saw the share shift really in the referral patterns. And we would think that, that referral shift is relatively sustainable.

Got it. Fair enough. Rob, in your comments now and also on the last quarterly call, Mick also referenced this, and Brett also referenced this, in terms of the -- I believe the phrase you'll used was a moderating supply environment, if memory serves me right. So Rob, can you expand on that and what does the moderating supply environment mean? Just the different components? And how should we quantify supply moderation?

Yes. I mean it's very hard to put sort of a single thing on the supply. And you know the story in a manufacturing environment, if your product has 100 components on it and you've got great supply of 99 of them, you still can't ship your product. So what we're seeing is, when we talk about moderating or improving environment, is that chip providers were not decommitting anything like the rate they were, and decommits have always existed in these supply chains. And a decommit is where some supplier has promised you supply and then at some stage, they say, no, we actually can't do that. And that might be to tell us that next year, they can only deliver us 90% of what they promised us next year, but it also might be that next week, what they promised us isn't going to turn up. And they're very hard to manage in terms of managing the supply chain. You've seen us put things in place. We've talked a lot about [indiscernible] design. So we now have options for different supplied components in order to create the connectivity features that we've need. A simple look at our balance sheet will show how our entry levels have increased quite a bit during this period. And that's been a deliberate strategy to increase our overall component supplier so that when we break 1 bottleneck, we're going immediately run into another one. Long term, we'll look to revert that to our normal risk management processes around inventory and run that through. So we also are working hard with these suppliers in terms of long-term relationships, and we put in longer-term commitments than what we used to be able to do. The nice thing about our business with its really solid growth trajectory and really a clear understanding of the patient needs is that it's a very low risk for us to put these long-term commitments into our suppliers. And by the way, the chip suppliers like us because we can give long-term commitments, and we tend to have very steady growth profiles on products, and our products last a relatively long time, say, compared to consumer products. So it's good for them in terms of their production runs as well. So all of that says in terms of the net of things and how well our risk management is working. We are able to have more confidence in our supply that we can increase our volumes both in terms of the normal volume growth of patients and also in terms of risk management for when other things happen like a competitor drops out of the market or anything like that.

Rob, if I remember correctly, last year, your CAGR was approximately 14%. I'm just jogging my memory on that number. But somewhere in the mid-ish teens. And now the supply chain is moderating, should we necessarily think as the year progresses -- the fiscal year progresses and next year, your -- does it necessarily mean the CAGR upticks even higher? How should we think about it? Because you'll said very well in a tough macro backdrop, right, you'll manage as best as you all could. Now things are improving, does it necessarily mean 14.2%, I don't know, whatever percent? Or is that too much of a leap at this stage of the game?

Yes. I mean we want to be careful about short-term predictions. But if you look at our last publicly announced quarter, we had growth rates of 20% and in the U.S., that are much higher than that. They're not long-term sustainable, those types of growth rates. We've just use up the patient flow. We always revert that CAGR back into how we think about sort of the patient inflows into the businesses. And so when I talk about [indiscernible] untreated sleep apnea patients, and we only have treated a fraction of them. We've got an incredible opportunity really to drive awareness and activate those patients through the health care system and then to keep them on treatment long term that should drive our CAGR. So short term, while supply chains normalize, while there's sort of a fair bit of lack of clarity around the competitive structure given the nature of what our competitor's recall going on, there could be good opportunities for us. But long term, we'd say that ResMed is a long-term steady growth company. We think that those be in patients, and it's actually the same in our respiratory care and the same in our SaaS business opportunities. Long term, all of those industries are going to see steady demand driven by increases in patients into the health care settings for which we're providing the technology. And there's unlikely to be sort of sustainable inflection points of dramatic increase in growth or a huge up step in patients because you need the infrastructure to look after these patients. We talk about patient awareness, being aware of going to their primary care and having primary care who can refer them to sign sleep apnea case, a sleep specialist, who can test them, usually will get a positive test and then to a provider who can look after them long term. And then all of those, as I say, are bottlenecks and our digital solutions are all about breaking those bottlenecks and driving demand at each of those points. And when we break 1 bottleneck, we sort of hit the next 1 and work on that, and that nets into what we would say the sleep -- really the sleep business and these other businesses should be long-term high single-digit growth businesses markets, and we should be able to do better than that as we drive our strategy.

Got it. So Rob, one of the things that as an engineer, I thought your -- it was a brilliant move with the Card-to-Cloud, right? In terms of managing, getting around the component shortages and then just technically or engineering wise, it's a pretty brilliant move. Walk us through where we are in terms of Card-to-Cloud conversion in the U.S. And if I could just broadly categorize it all U.S., just in terms of adoption rates, how are things going? And also, if you could quickly tie it together in terms of how you see it in terms of margin improvements quantitatively over time?

Yes. So for us, Card-to-Cloud was a reaction to shortage, and I talked about our guiding principles, which was put patients first and we felt that we couldn't be in a situation where patients were on treatment because we couldn't supply them with a connected device -- where patients were not on treatment because we could not supply them with a connected device. And as much as our strategy is around making sure we're connected with the patients and we're driving better outcomes for them over the long term, we felt that we actually had to do something to try and get treatment available to these patients. So with Card-to-Cloud in a sense, that was actually how most patients were managed prior to 2014 or '15 when we launched the AirSense 10 connected device. So in some markets, they still had good experience on how to do that and could manage that well. And notably, the U.S. market took it up well. Other markets where they had pretty tight -- really staffing constraints were their main problem, it's the main problem in nearly all of these health care settings actually, the commentary more is, well, we know we used to work with the Card-to-Cloud but we know it doesn't get as good outcomes, and we know it's more effort and work for our staff who are already too busy to set up those patients. So we didn't see strong uptake on that. That said, in the markets where we did see strong uptake, it was incredibly successful, and we got an awful lot of patients on treatment that otherwise would have still been on waiting list. Late last year and early this year, as we've sort of managed to get better access to AirSense 10 components for connectivity and put in some alternate components there as well, we've been able to take AirSense 10 off allocation in major markets. And as we do that, we'd much rather sell an AirSense 10 connected device, if we can than a Card-to-Cloud device. So we'd say that Card-to-Cloud has pretty well served its purpose, done a fantastic job for us getting patients under treatment, and now we move forward with our connected strategy as much as possible. In terms of margin, particularly talking around gross margin, clearly, it's been a challenging time. And our usual strategy of leveraging our volume growth to really leverage cost reductions in the base platform challenge when you're really begging for components from suppliers, it's not the time to ask the cost reductions. But as things normalize, we'll get back to that setting, and we will have our long-term volume growth. There is a few other things going on there. The Air 11, we always introduce new platforms with an ability to improve sort of the basic cost proposition as the volumes increase. But at the moment, while we're running 2 platforms at major volumes, as I say, it's been a wonderful thing for us, but it does mean that we're not getting the usual volume leverage that we would and somewhere down the track, we'll see us return to that as well. A few other things in the margin. The freight has also been a factor. We've seen that improve a lot. But because of the inventory levels, you haven't actually seen the financial impact come through in reported results yet, but that will happen.

Got it. So Rob, in terms of you mentioned AirSense 11, Air 10, where are we in that adoption curve? And also, if I could tie into myAir, right? That is one of the -- and now the [indiscernible] app also, just kind of if you could encapsulate all of this and talk to us in terms of specific adoption rate and ultimately, how do you all see the progression towards compliance rates within the CPAP category for ResMed?

Yes. So -- and if you look on our website in our investor deck, you'll see reports on studies on compliance rates and we're producing incredible data around there. When we launched the Air 10 and we launched myAir app with it, really is a tool to improve patient engagement. It's a direct interface to patients, but we do need the providers to encourage the patients to take it up to lobby in and use it. And we were thrilled with the AirSense 10's performance of myAir take up around 25%, which is much higher than what you'll often get for optional reporting apps or things. But the providers quickly saw that patients who use myAir didn't need to call them as back as often with problems because they can [indiscernible] for them with videos. And my -- I could say, look, we noticed you [indiscernible], why don't you try this and that. And we also -- and we published data on this, we saw that patients who use myAir were more likely to stay compliant. And in the U.S., in particular, they are more likely to meet the Medicare compliance rules earlier in the 90-day window that they have, all of which helps our provider customers with their billing and their efficiency and all of that. With Air 11, we're super excited to see on Air 11 that the myAir uptake has more than doubled. It's over 50%, which is really good. So you've got an even higher population of patients who are digitally engaged with myAir app and also more likely to stay on treatment long term. And then earlier on with some smaller studies we published, we showed that with patients who are using myAir and providers using AirView and keeping up to track the types of compliance levels they could achieve in terms of the short-term Medicare compliance would be close to 90%, which is way, way better than any other reported numbers we've been talking about. We continue to back that up. And we've actually shown similar types of performance over the first 1 and 2 years that we published in there. And so these are very significant. And the more we keep these patients on treatment long term, as we said, the more they're going to need masks and actually staying in a resupply program and keeping your mask up [indiscernible] actually really helps improve your long-term compliance outlook as well. So all of this continues to build on itself. In terms of our sort of technologies, we do have data come from the devices and from the interactions with the myAir app, and we're able to see what type of solutions work well for which patients and we're actually able to take that data and normalize it appropriately. So we're all safe on the privacy front and keeping that very secure and private, but then use that to allow our systems to learn what are the best ways of interacting and what are the best interventions that should start driving better long-term compliance improvements into the future as well.

Fair enough. Rob, let's move on to the M&A aspect. You all have done phenomenally well on the SaaS side or the connectivity part of the equation over the last few years, multiple acquisitions in the space. And I'm curious, as we think about ResMed, and obviously, you'll have been efficient stewards of capital. When we specifically think about M&A, should we think about more SaaS tuck-ins? Or are there other [ tangential ] targets out there that you think you'll are absolutely open to?

Yes. Look, our sort of M&A strategy is very much aligned with our company strategy. And so we definitely will be staying focused on the areas of business that we're in. And particularly over the last few years, our best acquisitions have really been around the SaaS area and tuck-ins in the SaaS area, but it doesn't mean that we're not in [indiscernible] and other technologies. We consider ourselves a sleep apnea chronic disease management company. And so strategies around that would be possible. We're proud of our track record of discipline and we've got a really balanced recent history of sort of capital allocation into R&D, which is actually the best investment that we can make given our technologies and then a balance into appropriate M&A and then also appropriate dividend and capital return. So we'll absolutely remain focused on sort of that discipline and balanced approach. In terms of opportunities that come up, we -- for a long time, we said that we liked our SaaS business. We think we can create a lot of value there. But we always think globally, and we were really thrilled to be able to execute the MEDIFOX DAN deal and get that going and start to view SaaS on a broader scale than predominantly U.S., which it was where we would have been successful. Those SaaS teams, the structure of the SaaS business as they build up quite an ecosystem around them, and they -- we interact with and resell actually a lot of other solutions as part of our overall SaaS team. So we actually get to identify bolt-on targets quite well in that area as well. And those SaaS bolt-ons, particularly when you've already had them integrated with your system, a really great integration and really value accretive. And then there aren't any particular SaaS areas that we -- in terms of that out-of-hospital care operating system, electronic health record and efficiency improvements, there aren't any areas that we need in order to execute our strategy. But if the right thing comes up and it's in an appropriate out-of-care setting and it's an organization that has the right culture and one that we believe we can add value to by managing it well and getting really integration and leverage out of, then absolutely, we'd be interested in those as well.

Perfect. Rob, I know we're almost up on time. I guess 1 last question from our side. Rob, Mick mentioned the 250 million lives by 2025. If I remember, and I know I asked a question about this. Maybe if I could just push you a little more and I promise this. What all needs to be done between where we are today to 200 -- touching 250 million lives, let's say, in the next 2.5 years?

Yes. So the 250 million lives is really -- that's our reason for being is why people work for ResMed, that's why we do what we do. Pretty well, everyone I talked to has a friend or relative who suffers from sleep apnea, and many of them have friends or relatives who are really happy on treatment from ResMed, and that's incredibly motivating for the team. Similarly, with our SaaS businesses, pretty well, everyone has early relatives or people who are needing of long-term care, and they're really motivated by that. So the 250 million that's made up of devices that we sell to patients via our providers, masks that patients need in order to stay on treatment, also all our ventilators and those other devices as well. And then also the number of patients that we improve or help their life really by a transaction or something through our SaaS businesses. And so we'll see growth in all of those through there. You can do the CAGR of going from high 100s up into 250 over the next few years. So it is a significant CAGR through there. And really for us, we just need to execute well to keep that growth going.

Great. Rob, it has been always some tidbits here or there in you guys' commentary. Congratulations again for, I know, a tough macro backdrop and you guys have navigated it exceptionally well. I do appreciate your time this morning. Thank you, so much.

Thanks, Suraj, I really appreciate it. Thanks, everyone.