Agnes Lee – Vice President, Investor Relations and Corporate Communications Mick Farrell – Chief Executive Officer Brett Sandercock – Chief Financial Officer Jim Hollingshead – Chief Strategy Officer, President, Ventures and Initiatives Strategic Business Unit Rob Douglas – Chief Operating Officer.

Joanne Wuensch – BMO Capital Markets David Stanton – CLSA Steve Wheen – JPMorgan David Low – JPMorgan Margaret Kaczor – William Blair Sean Laaman – Morgan Stanley Saul Hadassin – Credit Suisse Andrew Goodsall – UBS Matt Taylor – Barclays Anthony Petrone – Jefferies.

Welcome to the Q1 Fiscal Year 2018 ResMed Inc. Earnings Conference Call. My name is Mariama, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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, Mariama, 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 for the company, corporate strategy, integration of acquisitions 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 Securities and Exchange Commission.

I will now hand the call over to Mick Farrell..

patients, physicians and homecare providers. I’ll now take a few minutes to update you on our three horizons 2020 growth strategy and then I will hand the call over to Brett.

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

We now have over six million patients monitored with AirView software and over four million patients monitored with 100% cloud connected medical devices on their bedside tables. In addition, we have seen over 1,300 new patients’ signup for the myAir patient engagement app every single day. It turns out consumers love seeing their own data.

We are expanding globally with our connected care solutions translating the value creation that we have brought to our customers in the U.S. over to France and across Europe and beyond. In September, we featured our recently launched travel CPAP solutions, the ResMed AirMini at the European Respiratory Society Conference in Milan.

There continues to be the demand and interest for a category of small travel-friendly second-use CPAP devices that patients are willing to buy with their own cash. We are focused on growing this category all around the world with particular success in existing cash pay markets such as Australia, New Zealand, Singapore, Canada and the UK.

This quarter ResMed and Brightree launched another integration solution. Together, we provide a seamless solution for all homecare providers through automated resupply enrollment for patients managed by both Brightree Connect and AirView software.

With this enhancement, AirView automatically alerts Brightree Connect once the patient has achieved compliance criteria. So that the patients can be automatically enrolled into the Brightree Connect resupply program.

This feature helps our homecare customers to ensure that every sleep apnea patient is getting the supplies that they need in order to have the best possible therapy experience while saving the customer labor costs through software automation.

This enhancement is the latest in a growing list of time saving features for our customers that maximize both the patient benefits as well as homecare provider benefits. Brightree also launched ConnectPRO at the Medtrade Industry Conference just earlier this week.

ConnectPRO is a comprehensive solution that combines all technology services and data analytics that are necessary for our homecare customers to efficiently manage resupply workflows and to improve patients' resupply engagement. Our connected care strategy is also having a positive impact on the clinical front with ongoing publication of studies.

The American Journal of Respiratory and Critical Care Medicine known more simply as The Blue Journal published a study run jointly by ResMed and Kaiser Permanente, which reported that remote monitoring improve the patient adherence to sleep apnea therapy.

The key takeaway from the study was that telemonitoring of sleep apnea patients with ResMed's algorithms resulted in an increase of therapy adherence of 22% to 37%. This is statistically significant and also clinically significant data. We look forward to more publications using ResMed's database of the identified aggregated data.

We are transforming big data of more than 1 billion nights of sleep metrics into actionable information that can improve clinical outcomes. Moving to the second horizon of the ResMed 2020 growth strategy.

Our cloud connected non-invasive ventilators and light support ventilators continue to grow globally and we are building our connected care strategy for COPD. We relaunched our portable oxygen concentrator called Activox with improved quality and performance at our U.S., Canada and Latin America Sales Conference during the quarter.

We expect steady growth of Activox throughout the year and beyond. Watch this space for future enhancements of our connected COPD offering.

We are driving awareness of key clinical studies that have shown improvements in COPD mortality and reductions in COPD hospitalizations such as our home oxygen therapy, home mechanical ventilation study called HOT-HMV.

Our market access teams are working to change the standard of care for COPD in key countries around the world to drive future growth in non-invasive ventilation, portable oxygen concentrator usage and life support ventilation businesses to serve COPD patients.

Our third horizon of growth encompasses a portfolio of opportunities including sleep health and wellness, chronic disease management models and out-of-hospital software businesses. This quarter Brightree announced the appointment of Robert Dean as General Manager of our home health and hospice business within Brightree.

This continues to be a very exciting area for us with lots of long term growth potential. We are expanding out-of-hospital software offerings as we continue to grow and acquire software-as-a-service businesses for home health, home nursing and other alternative care settings.

We’ve had a tremendous start to the fiscal year and we are well positioned to grow revenue throughout fiscal year 2018 and beyond. We are encouraged by the success of our new product launches with the AirFit N20, the AirFit F20, the AirTouch F20 and the ResMed AirMini.

We continue to work on a pipeline of new products and enhanced connected care solutions for sleep apnea, COPD and other critical chronic diseases.

We have positioned the company for long-term top and bottom line growth for 2020 as we continue to execute our strategy and action, drive operating excellence and pioneer market leading connected care solutions.

We have improved our 12 million lives over the last 12 months and we continue to pursue the holy grail of health care improving patients’ quality of life, slowing chronic disease progression and reducing overall health care system costs. With that I will now turn the call over to Brett, our CFO, for his remarks and then we will go to Q&A.

Over to you, Brett..

Great, thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter 2018. As Mick noted, we had a strong quarter. Group revenue for the September quarter was $523.7 million, an increase of 13% over the prior year quarter. In constant currency terms, revenue increased by 11%.

Taking a closer look at geographic distribution excluding revenue for Brightree, our sales in the Americas were $296.6 million, an increase of 11% over the prior year quarter. Sales in combined EMEA and Asia Pacific totaled $189 million, an increase of 15% over the prior year quarter.

In constant currency terms, sales in combined EMEA and Asia Pacific increased by 11% over the prior year quarter. Breaking out revenue between product segments. Americas device sales were $157.9 million, an increase of 8% over the prior year quarter. Masks and other sales were $138.7 million, an increase of 13% over the prior year quarter.

The revenue in combined EMEA and Asia Pacific, device sales were $128.3 million, an increase of 13% over the prior year quarter or, in constant currency terms, an increase of 9%. Masks and other sales were $60.7 million, an increase of 19% over the prior year quarter or, in constant currency terms, an increase of 15%.

Globally, in constant currency terms, device sales increased by 8%, while masks and other increased by 14% over the prior year quarter. Brightree revenue for the first quarter was $38.1 million, an increase of 15% over the prior year quarter. The Brightree results include two small acquisitions we made in our fourth quarter of FY 2017.

On an organic basis, Brightree revenue for the quarter grew by 13%. During the rest of my commentary today, I'll be referring to non-GAAP numbers. The non-GAAP measures adjust the impact of amortization of acquired intangibles.

And in the prior year comparable, they exclude amortization of acquired intangibles, and the Astral battery field safety notification expenses. We have provided a full reconciliation of our non-GAAP to GAAP numbers in our first quarter earnings press release. Now, I’ll turn to rest of the P&L.

Our gross margin for the September quarter was 58.4%, lowering our prior year non-GAAP margin predominantly due to ASP declines. On a sequential basis, we saw an increase in gross margin reflecting favorable foreign currency movements and improved product mix from stronger masks sales.

Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for fiscal year 2018 to be broadly consistent with our Q1 FY 2018 gross margin. Moving on to operating expenses. Our SG&A expenses for the quarter were $143.9 million, an increase of 12% over the prior year quarter.

In constant currency terms, SG&A expenses increased by 10%. SG&A expenses as a percentage of revenue increased to 27.5% compared to the 27.7% that we reported last year. Looking forward, and subject to currency movements, we expect SG&A growth rates to moderate over the course of fiscal year 2018.

As a result, we continue to expect SG&A as a percentage of revenue to progressively improve and to be approximately 26% of revenue by the end of the fiscal year. R&D expenses for the quarter were $37.4 million, an increase of 9% over the prior year quarter or, on a constant currency basis, an increase of 6%.

This increase reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue was 7.1% compared to 7.4% in the prior year quarter. Looking forward, and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% for the balance of fiscal year 2018.

Moving further down the P&L. Amortization of acquired intangibles was $11.8 million for the quarter, consistent with the prior year quarter. Stock-based compensation expense for the quarter was $11.9 million.

Non-GAAP operating profit for the quarter was $124.3 million, an increase of 12% over the prior year quarter, while non-GAAP net income for the quarter was $94.1 million, an increase of 7% over the prior year quarter.

Non-GAAP diluted earnings per share for the quarter was $0.66, an increase of 6% over the prior year quarter, while GAAP diluted earnings per share for the quarter was $0.60.

Additionally, foreign exchange movements positively impacted first quarter earnings by $0.01 per share, reflecting the favorable impacts from the stronger euro largely offset by the stronger Australian dollar relative to the U.S. dollar. On a non-GAAP basis, our effective tax rate for the quarter was 21.7%.

Looking forward, we estimate our effective tax rate for fiscal year 2018 will be in the range of 22%. Cash flow from operations was $94 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital balances. Capital expenditure for the quarter was $16 million.

Depreciation and amortization for the September quarter totaled $29.6 million. During the quarter we paid dividends of $49.7 million and repaid $60 million of our outstanding debt. Our Board of Directors today declared a quarterly dividend of $0.35 per share.

And as previously announced we expect to recommence our share buyback in the second quarter of fiscal year 2018. As a minimum, the aim of the buyback will be to offset the dilution impact from employee equity grants. This is estimated to be in the range of 1 million to 1.5 million shares annually.

At September 30, we have $1 billion in gross debt and $208 million in net debt. Our balance sheet remains strong with modest debt levels. At September 30, total assets were $3.5 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 and we ask everyone to limit themselves to one question and one follow up question. If you have additional questions after that, please get back into the queue. Mariama, we are now ready for the Q&A portion of the call..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Joanne Wuensch, BMO Capital Markets is online with a question..

Hi. Good afternoon.

Can you hear me okay?.

Got you loud and clear, Joanne..

Excellent, very nice quarter. I have two questions. The first one has to do with adoption of the ResMed AirMini. You are talking about adoption in certain geographies that are more comfortable paying out-of-pocket and I noticed the United States wasn't on the list.

Can you discuss how – which regions are more willing to get into [indiscernible] with wonderful product and why not United States?.

Sure, Joanne. I’ll start and have a go then I might hand to Jim Hollingshead, the Present of our Sleep Business to talk about how we're expanding our AirMini business. Firstly, I'm a personal user of the ResMed AirMini and have been for many months.

And I traveled all around the world with it and just in love with it as my new travel companion; literally anywhere I go around the planet it follows me. So that I get my great sleep apnea kit without having to get distilled water at Tokyo at 2’o clock in the morning when I land from the direct flight from San Diego.

The adoption of AirMini in countries like Australia, New Zealand, Canada, Singapore and the U.K. where we have established cash pay channels has been very strong in fact far above our early expectations. Patients are really loving paying out-of-pocket for something that has provided such great care.

But I’d say in our business to business to consumer markets like the U.S. where we sell to our homecare providers and then they sell cash to patients. It's been a slower ramp up as those customers start to ramp up their cash businesses with all the changes of competitive bidding in the U.S. landscape change, our homecare providers in the U.S.

are loving to build their cash businesses and it's something they've been working on strategically for a number of years. And we think the ResMed AirMini along with portable oxygen concentrators is a great opportunity for them and we’re supporting them in both of that. But with that introduction to it, Jim anything further to add for the U.S.

or beyond?.

Yeah, thanks, Mick. I would just add that sales of the AirMini in the U.S. are actually going very well. I think that the comparison intended to Mick’s comments is about on a sort of per patient basis you know where the relative volume of AirMini against the AirSense 10 platform. So the U.S. market, AirMini is performing as expected.

We think it's launching well – really well. It will ramp. We’re in a B2B2C model in the U.S. because we're selling it through our channel partners as Mick just spelled out and we see those volumes growing very nicely.

It's in the markets where patients are having to pay cash for an AirSense 10 or they choose an AirMini where we're seeing on a proportional basis AirMini is being purchased more frequently..

And as my follow up question, you spoke about patient volumes for sleep apnea patients being somewhat strong, which is quite the opposite of what we're seeing in other pockets of med tech utilization. Can you give us an idea of what you're seeing in patient volumes and how you’re measuring that? Thank you..

Thanks for your follow up, Joanne. We don’t go into the details of patient volume growth within geographies.

What I can say and the difference maybe between us and other parts of med tech is – this is a very personal experience of suffocation before therapy and then the experience of getting that gift the breath and the life change that can happen with sleep apnea. And taking the U.S.

geography with somewhere between 40 million to 60 million Americans suffocating every night and maybe we have six or seven million so far diagnosed and on treatment. We still have 85, 80 plus – 85% plus of the opportunity in front of us.

So I think that a large pool of undiagnosed patients provides a regular flow into the sleep labs and into the homecare providers that allows for that sort of steady growth of patients into the channel. We've got a long way to go on that journey.

And if you go to other geographies around the world, Western Europe, 85%, 90% of the opportunities still in front in terms of sufferers and getting them through the system. And in our Asia growth markets, the opportunity is above 95%, 98%, 99% in some of the geographies.

So we think we’re in mile one of a marathon here and we're really excited about that, patient volume growth continuing to grow steadily not just in this quarter, but throughout the fiscal year that we expect ahead and beyond..

Thank you. David Stanton from CLSA is online with a question..

Thanks very much and thank you for taking my question. I had a question about replenishment of mask. And I know that you’ve rolled out a new replenishment systems through Brightree. Can you give us some kind of idea about what kind of replenishment growth rates particularly in the U.S. that would be greatly appreciated? Thank you. .

Yeah, thanks, Dave. That's a good question. Clearly through ResMed Resupply which is part of the AirView software solutions package and part of Brightree Connect as we talked about linking on the backend with AirView.

We are really working very closely with our homecare providers to make sure that every patient, who wants the mask and is qualified for a mask has the opportunity to get one. As I’m saying earlier I am a personal user of this therapy and you need to change this mask.

It's a piece of plastic that touches your face every day and stays on it hopefully for seven hours of sleep every night and even with regular washing and regular drawing the mask needs replacement. And we think there's a lot of opportunity.

We know there's a lot of opportunity to work with patients and empower them with the information that they have to be able to access the supplies that they need.

So without going specifically into numbers, we can tell you that qualitatively the pool of installed base of customers, patients who are using masks and want to resupply them is increasing quite strongly. And it's a large part of our mask and accessories category..

Thank you.

And then I guess my follow-up would be, would it be fair to say that replenishment masks are growing as strong or less strong than new masks?.

So, David, we probably don't want to go into the specifics of each category of masks, the installed base and new patient flow and how quickly they’re growing.

But if you think about it from sort of a mathematics point of view as the installed base grows larger and larger and we work on replenishment protocols with patients and expand them, there's some linear opportunities with new patient setup and some exponential opportunities with replenishment as you engage the patients throughout the world in all sorts of different models..

Okay, understood. Thank you..

Steve Wheen from JPMorgan is online with a question. I apologize Steve Wheen is from Evans and Partners..

Yes, hello.

Can you hear me?.

Got you loud and clear, Steve. And I am glad we’ve got your company right too..

No, no, that other one. Anyway I just had a question just on the revenue for mask. Obviously, a very nice step-up in mask growth and it follows the fourth quarter where there was a bit of hiatus just because of capacity.

Is this an unusual growth rate that we’re seeing in this quarter in terms of catch up and therefore it might moderate going forward? Or how do you see the appetite for these new masks, now that there is no restrictions oversupply..

Yeah, Steve, as we have talked about 90 days ago, we did 90 days ago still have some supply constraints that we were just leaving at the end of Q4 throughout Q1 we were supply unconstrained. And we were able to meet and beat the very fast demand as you saw for masks throughout the world.

And if you look at the masks and accessories category, it grew at 13% on a constant currency basis in the U.S., Canada and Latin America and it grew at 15% on a constant currency basis in Europe and Asian countries. Look, we think that that we can continue to grow masks all the way throughout the fiscal year.

There were all sorts of different changes that happen in terms of comparables from quarter X and quarter Y as you go through out of fiscal year. But as you think about the next twelve months and twenty four months, we think the runway of the F20, the AirFit F20, the AirFit N20, so the full phase and the nasal components are very strong.

And we're just out of the gate with the AirTouch F20, which is our brand new technology which incorporates both the LSR, or liquid silicon rubber, but also foam technology. And it's early days, but patients are really loving that opportunity. And so we're working with our channel partners on the business side of it.

But in terms of patient acceptance, we’re seeing some really good patient acceptance. So having said all that, I think we've got a really good runway ahead for growth throughout fiscal 2018 for our masks. I don't think it's a catch up. I think it's the start of a steady growth pattern that we should see throughout fiscal 2018, 2019 and beyond..

Great. And then just on life follow up question. On the SG&A side, I wonder if Brett you might be able to give us some color as to the major drivers of that tailing off as a percentage of revenue by the end of the year.

What's driving that? Is it legal costs related? Yes, if you could just give us some color as to what the major – what’s underpinning that?.

Brett Sandercock:.

,:.

So there would be specifically a reduction in legal costs within that number..

I not let that, I mean, you can’t – that’s a difficult one to predict. I wouldn’t say that I’d say you kind of – it builds more, let’s say builds more into the run rate so to speak..

Yeah, sure. Thank you..

David Low from JPMorgan is online with a question..

Thanks very much. Could I just start with Brett your comment with when you talk on gross margins about some ASP pressure, let’s see if you could talk a little bit anything in particular that showing up in this quarter that [indiscernible] different from what we’ve seen in the past..

I mean not particularly, David, we – you see every year in and year out. You see ASP the content impacting your gross margin. So I guess it’s just to call out of the main impact on gross margin year-on-year. If I look at it sequentially, it looked actually pretty good and we’re quite pleased with that uptick there on the margin.

So, no, I wouldn’t say it’s adjusting unusually met and it’s kind of more typical with what we experienced in terms of SSP declines..

Okay, great, thanks. And if I could just touch on the oxygen concentrator, the Activox, could you talk a little bit about where you think that product is positioned versus the competition? It’s been a fast growing space.

You see something that now becomes a material contributor quite quickly or is that something that’s slightly to grow gradually over time?.

Look, yeah, David, as I said in the prepared remarks, we just relaunched with the quality and new capability in systems around our Activox system as we’ve now incorporated that acquisition of Inova into our business and relaunched it really with our sales team this quarter.

I will hand to Rob Douglas, our COO, to maybe provide some further detail on our POC business..

Sure, David. We described some of the quality improvements that’s really under the hood quality improvement. So, we’re very happy with those quality improvements and how they’re going and our customers let’s say use the product will start to experience those improvements. The product positioned us very portable. It's got the longest battery life.

It’s very light weight. It’s a good performer. And we see steady take up of it. And we’re patient with this product and we're going to make sure it has really the ResMed quality, and provides really good treatment to patients and we’ll build on that..

Thanks..

Margaret Kaczor from William Blair is on the line with a question..

Good morning Brett. Good afternoon everyone else. First question for me is on the generator growth this quarter, which remained quite strong in the Americas. So maybe you guys can give us a little bit more detail around what's driving the strength. You've been keeping in this high single-digit range.

Is it existing accounts increasing their mix of the resonate platform, given all of the new software offerings, just underlying patient volume? Any additional color would be great. Thanks..

Thanks for the question Margaret. And yes, we did see strong growth in Q1. If you take the U.S., Canada Latin America countries combined we saw 8% constant currency growth in Q1, and across the Europe and Asia countries, we saw 9% constant currency growth.

Look, we think the total market is growing in that mid-to-high single digits across the sleep market with devices sort of more towards the mid-single digits and masks toward the high-single digits. Implying in Q1 that we did take share within the device and mask categories, and we believe that to be true.

Of course, we don't go into detail around that. But some of the reasons behind that are certainly all boats are floating on the strong patient growth that we talked about earlier, but we are taking share. And I think the share is as you've seen now, it's 36 months since we launched AirSense 10 and Air Solutions platform.

And it's really a solution when you combine it together. We've published data now in the peer-reviewed press that shows that we can reduce labor costs for our home care provider customers by up to 59%.

So when you have a system that can lower labor cost for your customers by 59%, it can really help them to start to say not only will I try this device and try this software, but I'll double down on it, and I’ll continue to invest in it.

And we're seeing a lot of customers garner a lot of profit growth for themselves that they didn't take that cash and reinvest in the business for better patient care. So we think this is really a win for ResMed. Obviously, as you see in these numbers.

It's a win for our home care customers that use ResMed, and it's a win for the patients because they get better care.

They engage daily sometimes with their myAir app and check out their myAir score and their adherence rates move from 50%, 60% historically in this industry up to 87% in one of our published studies and beyond that in some of our unpublished work. So we think it is sustainable, strong value proposition with our customers that's driving it, Margaret..

Great. And then on the breakthrough side as a follow-up.

That one is chugging along as well, you’ve got this low to mid-teens, and I know some of that is the acquisitions, but how should we think about acquisitions being off for the rest of the Brightree installed base? Can those be material to your growth? And then just as you think about that underlying growth, is it new accounts? Or again those existing accounts just choosing and selecting more new offerings that you have? Thanks..

Yes. So another good question, Margaret. Yes, as you saw in the quarter, our Brightree growth was 13% constant currency if you didn't include any of the tuck-in acquisitions, and it's 15% constant currency, including the modest tuck-in acquisitions that we did throughout the year AllCall and so on into Brightree.

Look, yes, solid, low to mid-teen growth in our software-as-a-service business. We think that some of that is new accounts. Our sales team at Brightree is excellent.

[Audio Gap] and I and a bunch of the team, Raj went out there to Atlanta to spend time with the team and in a leadership program and looking at those top not just sales but development leaders and how they're teaming up and really adapting the ResMed culture but keeping a strong Brightree software-as-a-service culture and driving a really strong commercial performance.

And so we think that's sustainable, taking into account share but also growing users within existing accounts. We find that the HME providers who partnered with Brightree grow, and as they grow, they get more users. And software-as-a-service system users is paid on a per basis. So you can grow by getting new accounts.

You can also grow by helping new customers grow. So we're doing both..

Great thanks..

Sean Laaman from Morgan Stanley is online with a question. .

Good morning. And thank you for taking my question. Just back on Activox, Mick. I'm just wondering if you can give us a bit more granularity on sort of specifically the relaunch and what you might have changed from what you're doing before to what you're doing with the relaunch, that would be really good..

Yes I’ll hand it over to Rob..

Yes, Sean. As I said before, we – ResMed's position in the markets are very high-tech, high-quality value and innovation. As we got our early experience with the Activox, we saw a number of improvements that we wanted to make, and we made those improvements. I described them earlier as improvements under the hood.

So they're really – they're not features, but they're improving the delivery of the existing features.

And as I say we progressively incremented them in a sequential basis, and then we really looking to the absolute measure, which is our customers' response to those to see how we go – to see to really put the metrics around the quality improvements and what extra value that adds.

And I can't really get granular on the exact next steps of improvements that we're coming up simply because we don't forecast our R&D programs for competitive reasons, but I would say we've got a very strong team working on it. We've got some great ideas.

We still got the feature that we have talked about, about adding some of our connected care capability into the system, which we believe will further improve the quality of delivery of oxygen treatment of patients but also improve the ability of our HME customers to manage those patients and those fleets of devices that they need to.

And that's all work in progress..

Thanks Rob, thanks Mick. And may be just a quick follow-up for Bret.

Are you able to give us a sense of what currency you might be thinking going forward for the euro and the Aussie?.

[Indiscernible] this morning they changed for me already, but when I was looking at that we're sort of – we were being forecasting around that sort of $0.78 to $0.79 of the U.S. and around $1.18 on the euro, euro U.S. they're moving around quite a bit of volatility.

So yes, on that one, Sean, but that's sort of what we're using as being current rates at the time we looked at it a few days ago..

Great. That’s all I had. Thank you everybody..

Saul Hadassin from Credit Suisse is online with a question..

Thanks. Good morning guys. Brett, can I start with a quick question on gross margin just to clarify or confirm your comments regarding the outlook for gross margin of the remainder of fiscal 2018.

Did you say it should be consistent with 1Q 2018 as a result?.

Yes, I said broadly consistent..

And I just wonder if you can give us some of the contributing points to that considering the mix seems to be improving on the mask side and just cognitive of what currency is doing.

But is there anything else presumably, you've got some efficiencies coming through manufacturing so what's maybe offsetting the incremental improvement in gross margin over the fiscal year?.

Sure. We saw – well, and I'll just we did see some incremental improvement from Q4 and Q1. And we did see certainly you can see some improvement in product mix, and that's been a turnaround for us. And the expectation is that will be more a tailwind for us as opposed to a headwind over the last few years that’s positive on that.

And there's number of factors playing out on ASP decline, FX, manufacturing procurement efficiencies, and so on, which we do expect to get over the course of the year. But the product mix and how we're looking, I guess, the portfolio a little more diversified now as well. So that plays into looking at predict on gross margin as well.

So I think all in the mix. I guess the other thing I would say is that stronger Aussie on a sequential basis kind of hurt us going into Q2 and essentially a factor that in as well. So that would be headwind for us going sequentially selects inclusive of that.

So some of the other underlying trends I think are there in a positive but there could be few going against us, particularly on the FX next quarter.

But broadly consistent, I guess, what we're saying is we're comfortable with that margin around where it's at, and we're seeing good growth across both devices and mask, which I think is really showing the strength of the business and a good diversified portfolio.

So I think it's going to – with that sales growth and good gross profit dollars, and I think that's in good shape for us going forward..

Thanks Brett. That’s all I had..

Andrew Goodsall from UBS is online with a question..

Thanks for taking my questions. Just in the U.S. instant card consolidation with DMEs over the last few years. Just try and give us a sense of what you seem pressure on prices, I guess, the business under the hands of larger buyers..

Thanks for the question Andrew. Clearly, over the last three, to five years, there has been some consolidation in our U.S. home care provider base, still around 5000-plus home medical equipment providers in the U.S.

So quite a large and diverse group of local mom-and-pop, regionals as well as national players, and we partner with people across that spectrum. As I look at the market, I think we see a relative sampling of changes in reimbursement, some of those big step changes that happen in the early phases of the U.S.

government CMS program to get in line with our private payers and now we have a sort of steady program going forward.

And I think a pretty broad view at CMS that actually investing in sleep apnea care reduces long-term costs for the government, and we're certainly as I said on the AdvaMed Board of Directors, we definitely spend time in Washington letting Washington know that medical devices as an industry is able to lower long-term costs by keeping patients, particularly in sleep apnea and in COPD, out of hospital and under better care.

So we're seeing a pretty steady reimbursement environment. It does have reductions, but they're reasonably steady.

So I think we're able to weather that and work with our home care providers to make sure that they use Brightree and they use AirView, and they can lower their labor cost by 50%, 60%, and that's the way to free up cash to reinvest in marketing to primary care doctors and going after the 40 million, 50 million, 60 million people who are suffocating.

And as yet haven't had a chance to get diagnosed, get treated and get a better quality of life..

And Rob may be just to you as my follow-up question. I guess just in terms of your proposition, which is, I guess, potentially higher price mask relative to some of the competition, but I guess a bit of a longer-term recurring revenue line.

I’m just trying to understand how that's going with the better sales propositions going with the DMEs in terms of them taking through the benefits of that program versus perhaps just going for margin or sorry, low pricing to increase margin initially..

Yes thanks Andrew. I’ll handle that follow-up to Jim Hollingshead, our President of Global Sleep business..

Andrew I think on your first question we still see consolidation in the market, but it's nothing of out trend right. I mean, there's been no unusual change in consolidation in the U.S. market as Mick said remains very fragments where you get right down to it, right? 5,500 roughly providers of sleep.

What we're seeing is that HME customers more and more are realizing how important it is to them and their business to resupply patients. And so we have seen the scheme up a little bit earlier the call. We have an on ongoing increase in adoption of resupply platforms.

And our offerings, especially through Brightree, have made that a lot easier for our customers. And so as they adopt those more automated approaches to resupply, they're able to grow that side of their business..

That’s helpful. Thank you very much..

Matt Taylor from Barclays is on line with a question..

Hi thanks for taking the question.

Can you hear that?.

Got you loud and clear Matt..

Great. So Brett, I did have one follow-up on the gross margin. You had talked in the past about mix being the biggest factor. So I was still a little bit surprised that we didn't see more of a lift this quarter.

Can you just talk about the rest of the year, what you're expecting from effect on gross margin? And is it mainly the Aussie dollar that's holding it back from being better with this better mix?.

Sure, Matt. I mean, I guess, you should have asked that back a little while, I guess you've got to put a little bit of context a few years ago when we're seeing what you are experiencing like huge growth rates in devices. So we're talking 30%, 40%, almost 50%. So the differential between the device growth and mask growth was very substantial back then.

So that did have a bit of impact on product mix. So we're still seeing that impact, but obviously, can be more modest when differential is perhaps more like 5%. So I mean, part of it is, if you like, the resilience and the strength of the device that we're seeing, which is a very good thing. So therefore, the thing.

So therefore, the product mix, I guess, is more modest than what you might have seen two years ago, which makes sense. And the other thing I'd add to that is if you looked at you go back to FY’14, masks were probably something like, matching other categories something like 46% of our revenue. You fast-forward to today is about 38%.

So there has kind of been that kind of overall change in our mix as well. So that plays into it as well. But – so it's still there the trends there the improved product mix is there, but it's on a more modest scale than what you might have seen when devices were growing really strongly back in FY’15..

Thanks. And your continued device growth a couple of years after the AirSense launch has been impressive. And I guess, I was wondering if you thought you continue to grow at kind of above-market rates with just the base AirSense. And if you could comment on how material you think of oxygen concentrators and the Mini can be..

Yes that’s a great question Matt. I’ll turn try with that. Look, if you think about it, the portfolio of devices we have is a lot broader now. Brett's talking about the change of connected care and our sort of leadership in connected care, not only within our vertical, sleep apnea, COPD, but across the med tech sector has launched us to the No.

1 position in devices in flow generators, and that's a large ballast in the boat to Brett's point much higher percentage of our portfolio. So GM percentage lines move less strongly although gross profit dollars and net operating profit as you saw this quarter growing at 12% year-on-year in OP is really solid growth and that's free cash flow.

And we invest free cash flow cash back into our business. We don't invest percentages back into our business, and so we manage on the growth of that. But our continued device growth will expand, and I think you can add on sort of strong, steady maintenance and growth of share.

But more importantly growth of patients into the funnel to keep device growth strong and steady. And as you said, there's upside as you add on to ResMed AirMini, which is brand-new category. It's cash pay. It's a second use, it's travel path, and it's sold direct in some markets. It's sold through our great home care provider customers in the U.S.

and many European countries, and we think that's good addition. As you said, there's portable oxygen concentrators, and there's also our growing COPD play in noninvasive ventilation and life-support ventilation, and we have now cloud connected both of those, the NIV. So our AirCurve 10 range and our Astral devices both now have cloud connectivity.

We're in the early days of driving our connected COPD strategy, but that's a very high-cost disease state. It’s The number three killer in the world, COPD. And it's the number two cause for rehospitalization.

So we think as we look forward to 2020 and beyond, there's a lot of opportunity to have steady and growing device growth as we look forward to the longer term.

Thanks..

Victor Windeyer from Citi is on line with a question..

Yes hi, it’s [indiscernible]. I just wanted to ask a bit more about the COPD and also as it relates to the device growth overall.

So just as we look forward, do you think RSA itself can continue to grow mid-single digits? And then the COPD part of them, if you like, is on top of device growth given we're relatively early in the journey there? Or how does that sort of play out long term? And then all also perhaps you could talk to where do you think we are in terms of capturing the value out of the noninvasive vent side, you talked about Europe side..

Yes. Thanks, Victor [ph]. The answer is yes. I mean, I think the sleep apnea market as we said earlier is growing in mid-to-high single digits with the devices more in that mid-single-digit range.

I think we can continue to hold and grow share in the device side that will allow us to grow the sleep apnea business and that mid-single digits in the device category. And in addition to the ResMed AirMini, which is on top of that as a cash pay and the POCs, which is on top of that, there are the noninvasive ventilator devices.

Where we're at on that is the early stages. There are 400 million, 500 million patients worldwide who suffer from chronic obstructive preliminary disease or lung disease. Many of them remain undiagnosed or undertreated. Many of them need to get first initial drug therapy, and they need oxygen therapy and then they need non-invasive ventilation therapy.

And then as their disease progresses towards more chronic care, they need life-support ventilation therapy. And so ResMed plans to be walking with those COPD patients along that channel. So this is a longer-term development. It's sort of part of our 2020 and even our 2020 strategies.

We're starting to put that together and developing our connected COPD strategy, and we'll be doing that with partners across med tech and pharma and beyond.

And so watch this space for longer-term growth there, but we're really excited about the growth in our core business of sleep apnea and our second Horizon of growth in COPD and our third Horizon of growth in out-of-hospital software. And if you put them all together, I think you've got a very strong and dynamic portfolio..

Okay, great.

And then just a follow-up on the cash pay at kind of CPAP side that it seems that’s going better in the market ofAustralia in stage? Is that cannibalizing mainly in cash pay market with us cannibalizing sales? Or how much is there [indiscernible]?.

Yes I’ll hand that to Rob..

So our view of the market whole new segment, and so it's contributing to growth. And when a person buys an AirMini to travel in addition to their home sleep app, that's really good for them and to sell that we otherwise wouldn’t have had. So we see a very strongly contributing to growth.

As Jim said earlier in some of the cash pay markets, there are some people will say actually I will not use that, it’s my premium one. We’re okay with that either way. But really on as a whole in most of the markets AirMini is really a strong contributor..

Okay, great. Thanks so much..

Anthony Petrone from Jefferies is online with a question..

Good afternoon good morning thank you for taking the question. Maybe make a little bit on rising tide carrying all boats here Philips put up a pretty good print as well high single digit growth.

So many a little bit more on is it a reimbursement thing that that benefiting everyone in the marketplace? Is it another dynamic that whether it's in a DME channel or again you also mentioned reimbursement coverage in France. Just trying to get maybe why this quarter's a little bit different from an underlying funnel/volume perspective..

Thanks for the question, Anthony. Yes, look, I think there is some rising tide there, and that's a global mid-single digits to high-single digits market growth. And so other players are going in that mid- to high single digit range as well. As I said earlier, I do think we're taking share with connected care. You mentioned France.

There is four levels of reimbursement for sleep apnea therapy that starts from January 1 in France. And the highest is telemonitored patients with adherence over 4 hours and telemonitored patients with two to four hours and then below that non-telemonitored patients, and so on. And ResMed's been leading in connected care not just in the U.S.

but globally, and we've been preparing for this type of a change, and we're really excited that the government of France has recognized that they get a return on investment by telemonitoring patients, increasing adherence and taking those patients out of hospital.

So we think this market is great and growing and good for all players, but we think it's particularly good for people who are looking at ways to take cost out of that channel and partner with their customers, which include the home care providers but also the patients like giving them their own data every day patients use their devices more.

I mean, adherence rates of 87% is unheard of in our industry, and we're publishing that and getting it in the peer-reviewed press in the Blue Journal, Jama, Lancet and you're going to see more from us on that.

We have one billion nights of sleep data in the identified aggregated data, and we're going to be putting clinical studies out there to show this therapy, sleep apnea therapy is very beneficial, and we'll be doing the same in COPD as we move forward..

Great and then just a follow-up would be just a bit on working capital once again, just on year-over-year basis. AARs ticked up quite a bit as inventory. I'm just wondering is there reason to hold more inventory? Is there an elongated sales cycle in the same on the credit sales? And is there an elongated cycle there as well? Thanks..

So I’ll handle the question to Brett..

Thanks Mick. Thanks Anthony Petrone. On the data side, [indiscernible] I think is still within kind of our range that we would expect and fairly typically historically, and it's probably still may be allow us maybe 12 months ago but still comfortable with where we are on that. On the inventory front, you're right.

We're up a little on the inventory, but it's been pretty well documented. We're a little bit supply constrained on masks and so on. So some of that is kind of a rebuild into getting that right. So you see that's kind of manifested in the inventory a little bit as well. That's all the way through the supply chain.

So we're now in much better shape, but I guess that's reflected in some inventory build. And then going forward, I'd expect not necessarily come down, but I'd expect sort of the growth with moderate as we kind of balance a bit better now..

Thanks..

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

Thanks, Mariama. In closing, I want to thank the more than 6,000-strong ResMed team for their execution on our new product launches. This quarter, that hard work has translated into market share gains, revenue growth and double-digit 12% net operating profit growth.

Our team remains focused on our future pipeline of products and software solutions that change patients' lives and benefit all of our customers, including patients, physicians, payers and providers. We will talk to you again in 90 days. Thank you..

This concludes today’s conference call. You may now disconnect. This concludes ResMed’s first quarter of fiscal year 2018 earnings live webcast. You may now disconnect..