Hello and welcome to the ResMed Second Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's my pleasure to turn the call over to Amy Wakeham, Vice President-Investor Relations and Corporate Communications. Please go ahead, Amy.

Great. Thanks, Kevin, and hi, everyone. Welcome to ResMed’s second quarter of fiscal year 2022 earnings conference call. We thank you for joining us. This call is being webcast live, and the replay will be available on the Investor Relations section of our corporate website later today, along with a copy of the earnings press release and presentation, which are both available now. With me on the call today are Chief Executive Officer, Mick Farrell; and Chief Financial Officer, Brett Sandercock. During the Q&A portion of our call, Mick and Brett will be joined by Rob Douglas, our President and Chief Operating Officer; Jim Hollingshead, our President-Sleep and Respiratory Care; and David Pendarvis, our Chief Administrative Officer and Global General Counsel. As a reminder, on today's call, we will discuss some non-GAAP measures. For a reconciliation of the non-GAAP measures, please review the notes in today's earnings press release or the appendix of the earnings presentation. Our discussion today may also include forward-looking statements, including, but not limited to, expectations about ResMed’s future performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. You are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements that are made today. I'll now turn the call over to Mick.

Thanks, Amy, and thank you to all of our shareholders for joining us today as we review results for the December quarter, the second quarter of our fiscal year 2022. Our second quarter results continue to demonstrate strong performance across our business, benefiting from the ongoing extremely high demand for our sleep and respiratory care devices, as well as the steady recovery of markets from the peaks of COVID-19 impacts. We achieved double-digit growth in our business as we navigate three major externalities. Firstly, the recovery of patient flow post the COVID maximum peaks; secondly, global supply chain constraints, particularly in electronic components; and thirdly, the almost unlimited demand associated with a competitor recall that has actually extended further in terms of volumes of their devices that were impacted and the duration of their repair and replace process. The bottom line is we have at least 12 more months of this incredible demand for ResMed products. I'm very proud of 8,000 ResMedians serving patients in 140 countries worldwide. Our global teams are finding ways to deliver products and solutions to home care providers, physicians, and healthcare systems, and ultimately into the hands of patients who need them most. Clearly, the global supply chain environment remains very challenging across multiple industries and we are not immune to its impact. During the quarter, despite growing double-digits year-on-year, we were not able to meet all the demand available in the market. We are being allocated components from our suppliers, particularly electronic components and even more specifically, semiconductor chips. And we are thus being forced to allocate our outbound products to our customers. We have established an allocation process with clear guiding principles that give priority to the production and delivery of devices to meet the needs of the highest acuity patients first. In addition to component supply issues, the ongoing challenges of sea freight and air freight are impacting our ability to respond as rapidly as we would like to the demand for ResMed products. Freight costs are increasing across the board on inbound components from suppliers and on outbound products to our distribution centers and for ultimate delivery to our customers. As a result of these increased costs, we implemented a surcharge on our products starting in January to share some of the burden of these increased costs with customers. Given all the increase in prices from commodities to specialty products across multiple industries around the world, the necessity of this surcharge has been understood and accepted by our customers. We are working closely with our global supply chain partners, doing everything that we can to gain access to additional supply of the critical components that we need to further increase production of our medical devices. We are also re-engineering designs, validating new parts, pieces, suppliers, and accelerating new product launch and development to further catch up with the demand. We understand that this is a difficult situation for all of our customers, including physicians, home medical equipment providers, payers, health care systems, and most importantly, the patients. Our number one priority will always be patients, doing our best to help those who suffer from sleep apnea, COPD, asthma, and other respiratory chronic diseases, as well as those who benefit from our out-of-hospital health care software solutions. To grow and differentiate our sleep and respiratory care business, we will develop, design, and deliver world-leading therapy solutions that can be scaled globally. And we're going to deliver the world's leading out-of-hospital software solutions to empower each person's health care wherever they are. Our goal is to ensure that every person gets the care that they need, where they need it and when they need it. Let me step back to discuss the broad market conditions in our industry. We're seeing steady ongoing recovery of demand across the countries that we operate in. We are still seeing a divergence in the total patient flow from 85% to 100% of pre-COVID levels in most countries, and about 100% of pre-COVID levels in a few locations. These metrics will continue to steadily increase towards pre-COVID levels and beyond as vaccines and boosters roll out globally. Each new COVID variant has an impact, but with the adoption of digital health solutions for screening, diagnosis, and remote patient setup, and remote patient monitoring, as well as established processes for COVID-cleaning protocols at sleep labs, we expect the impact of new variants to diminish in absolute impact each time. Our global ResMed team remains committed to working with national, state, and city governments, as well as local health care systems, hospitals, and health care providers to supply ventilators, masks, and training for acute care, and the important transition home as needed. Given the steadily decreasing severity of each impact on the hospitalizations and severe disease from COVID, the demand for ventilators is now consistent with pre-COVID levels. Let me now update you on our top three strategic priorities. Number one is to grow and differentiate our core sleep apnea, COPD, and asthma businesses. Number two is to design, develop, and deliver world-leading medical devices, as well as digital health solutions that can be scaled globally. And number three is to innovate and grow the world's best software solutions for care delivered outside the hospital, and especially in the home. The US launch of our next generation device platform called AirSense 11 continues to go very well. This new platform has provided much-needed additional product supply as we face all-time high demand for ResMed devices. We expect to introduce AirSense 11 platform into additional countries throughout calendar year 2022. In parallel, we will continue to sell our globally available market-leading platform the AirSense 10 to maximize the total volume of CPAP, APAP, and bilevel available for sale. In fact, the only product that the AirSense 10 is inferior to is the AirSense 11. As you saw in our results, with double-digit growth this quarter, the ongoing adoption of both the AirSense 10 and AirSense 11 platforms remains very, very strong. With the AirSense 11 platform and our digital health technology ecosystem, we are engaging patients in their therapy digitally like never before in the industry. We are also making it easier and more efficient for our customers to manage their patient populations using our full suite of software solutions, including myAir for patients, AirView for physicians, and Brightree for home medical equipment providers. When customers use these digital health technology solutions, they have increased efficiencies, lower costs, and we achieve improved outcomes for patients and their physicians. We have peer-reviewed published evidence showing that combining the AirSense platform with myAir software and AirView software, we see over 87% adherence to positive airway pressure therapy. This was in a study with over 85,000 patients. On our latest and greatest platform, AirSense 11, we are driving even higher adoption rates of myAir than ever before. In fact, we are seeing more than double the uptake of patients signing up to myAir and fully engaging with ResMed software technology. The net result is that this delivers a better patient experience, better efficiency for home care providers, and more importantly, greater long-term adherence to therapy. We saw this demonstrated in the Alaska study in partnership with the French healthcare systems where we showed in a study with over 176 patients that those patients who adhered to CPAP therapy had a 39% relative reduction in mortality rates versus control. Demonstrating these types of better patient outcomes and lower costs for the healthcare system at a scale not seen before in the industry are critical components of the ResMed 2025 strategy. Another key aspect of our long-term growth strategy is driving awareness and increasing the flow of patients through the top of the sleep apnea diagnosis funnel. COVID-19 has advanced awareness, adoption, and acceptance of respiratory health and respiratory hygiene, but also adoption acceptance of digital health and telehealth tools including home-based sleep apnea tests. Although increasing demand is not as important in the immediate short term, giving the ongoing competitor recall, we have a long-term focus and we're always focused on that long-term demand gen opportunity. We are innovating with partners and our customers to create an even more efficient and effective approach to sleep apnea patient identification, screening, diagnostics, treatment, and management. We will continue to invest in technology that enables an end-to-end seamless digital experience for patients. As we mentioned in our October call, during the second quarter, we acquired Ectosense, a leading provider of cloud-connected home sleep apnea testing technology worldwide. We believe Ectosense’s digital and easy-to-use solutions in the hands of physicians, sleep lab technicians, as well as consumers can help significantly increase both diagnostic and screening rates as well as general sleep apnea awareness. Let me now turn to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million patients with chronic obstructive pulmonary disease or COPD worldwide and the 330 million patients that suffer from asthma worldwide. Our goal is to reach hundreds of millions of patients with our respiratory care solutions, including noninvasive ventilation and life support ventilation, as well as newer therapeutic areas, such as cloud-connected pharmaceutical delivery solutions from our Propeller technology and high flow therapy offerings, such as our product platform called Lumis HFT. Demand for our core noninvasive ventilation and life support ventilation solutions was strong throughout the quarter, especially in markets outside the US where providers shifted focus to support the most severe highest acuity patients. This demand aligns with the guiding principles of our allocation process, namely, to give the highest priority to manufacturing life support ventilation and noninvasive ventilation devices, including bilevels that meet the needs of these highest acuity patients first. Adoption of the AirView for ventilation software solution that we launched in Europe a little over a year ago remains solid, and we continue to expand this technology to regions around the world. AirView for ventilation has provided value by helping physicians and the healthcare systems they operate in to manage high-risk patients during the COVID-19 pandemic. But it is also increasingly being used on an ongoing basis to enhance quality of care through early and proactive intervention at the first sign of respiratory medical issues to help reduce the risk of hospitalization. We see a world where AirView ventilation is standard of care for COPD, the way that our core sleep apnea AirView platform is now standard of care for sleep apnea treatment. Let me now review our software as a service business for out-of-hospital care. During the quarter, our SaaS business showed improved sequential growth. We achieved high single-digit growth year-on-year across our portfolio of SaaS markets including home medical equipment as well as facilities-based and home-based care settings. The continued growth of home-based care is providing tailwinds for our home medical equipment as well as our home health and hospice products and we continue to grow with customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care, including Brightree and SNAP ReSupply. The COVID-19 pandemic has been and remains challenging for some of the verticals in our SaaS business, particularly skilled nursing facilities as the effects of the highly contagious Omicron variant remain a headwind for patient volumes in these settings. We will continue to watch this closely as COVID rates peak and then decline with this latest variant as has happened in many regions around the country and around the world. As COVID restrictions continue to ease and our customers improve their line of sight to better conditions, we expect to see pent-up demand for technology investments, which provides opportunities for us to sell more and more services and solutions to existing customers as well as to increase our new customer pipeline. As we look at our portfolio of solutions across care settings, we expect our SaaS group revenue growth to accelerate, achieving sustainable high single-digit growth as we exit this fiscal year. As always, our goal is to meet or beat that market growth rate as we continue to innovate and continue to take market share from competitors. We are the leading strategic provider of SaaS solutions for out-of-hospital care and we provide mission-critical software across a broad set of very attractive markets. Our latest and greatest SaaS solutions address the number one issue reported across our customer base, which is staffing challenges. Our SaaS customers expect this problem to persist and they recognize the need for technology solutions to help solve their challenges with efficiency and scale, and our software services and solutions help them achieve both of these outcomes. We are well-positioned, and we have created differentiated value for our customers and for ResMed within our SaaS business. Looking at the broader portfolio of ResMed's businesses across sleep and respiratory care, as well as our SaaS solutions, we remain confident in our long-term strategy and our pipeline of innovative solutions. Our sleep and respiratory care solutions treat the most prevalent and highest cost chronic conditions, and our SaaS solutions support the care settings where people face these and other chronic conditions. With this combination, we can fundamentally transform out of hospital healthcare at a scale that no other company can match. And we have set up for sustainable growth through ongoing investments in R&D to the tune of 7% of our revenues, commercial excellence in partnerships with CVS, Verily, and beyond, as well as future acceleration through strategic mergers and acquisitions as well as tuck-in M&A as we move forward. Our patient-centric, physician-centric, and provider-centric approach combined with our unique ResMed culture means that we are positioned to continue winning in the vastly underserved medical markets of sleep apnea, chronic obstructive pulmonary disease, asthma, and beyond. We are transforming out-of-hospital healthcare at scale, leading the market in digital health technology with over 10.5 billion nights of medical data in the cloud and over 16 million 100% cloud-connectable medical devices on bedside tables in 140 countries worldwide. We are unlocking value by using de-identified data to help patients, providers, physicians, payers, and entire healthcare systems. We have invested in privacy, cloud operations, and AI and ML-driven data analytics capabilities to do this at a scale that is unmatched by competitors, and we are increasing our lead every day. Our mission to improve 250 million lives through better healthcare in 2025 drives and motivates ResMedians every day. We again made excellent progress toward that inspiring goal during this last quarter. Before I hand the call over to Brett for his remarks, I want to once again express my sincere gratitude to more than 8,000 ResMedians for their perseverance, hard work, and dedication during these ongoing, unprecedented times. Thank you. With that, I'll hand the call over to Brett in Sydney, and then we will move to the group for Q&A.

Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2022, unless noted, all comparisons are to the prior year quarter. We're pleased with our financial performance in Q2, despite the headwinds we faced as a result of significant ongoing supply chain constraints and the challenging freight environment. Group revenue for the December quarter was $895 million, an increase of 12%. In constant currency terms, revenue increased by 13%. Revenue growth reflects increased demand for our sleep and respiratory care products across our portfolio, driven by recovering market conditions and by increased device demand in response to the ongoing product recall by one of our competitors. In the December quarter, we recorded immaterial incremental revenue from our COVID-19 related demand, consistent with the prior year quarter. Looking forward, we expect negligible revenue from COVID-19-related demand. However, we will continue to estimate it for you as appropriate. Regarding the impact of our competitor’s recall, we estimate that we generated incremental device revenue in the range of $45 million to $55 million in the December quarter. For the first half of our FY 2022, this reflects incremental revenue in the range of $125 million to $145 million. We continue to expect component supply constraints will limit the total incremental device revenue opportunity to somewhere between $300 million and $350 million for the full fiscal year 2022. As we shared last quarter, we expect our fiscal third quarter to remain supply constrained, similar to our fiscal second quarter, therefore limiting incremental revenue during the third quarter. We see supply challenges easing to some extent in our fiscal fourth quarter and into fiscal year 2023. Looking at geographic revenue distribution and excluding revenue from our software-as-a-service business, sales in the US, Canada and Latin America increased by 14%. Sales in Europe, Asia, and other markets increased by 12% in constant currency terms. By product segment, globally, in constant currency terms, device sales increased by 16%, while masks and other sales increased by 10%. Breaking it down by regional areas, device sales in the US, Canada, and Latin America increased by 19% as we benefited from incremental revenue due to a competitor's recall and favorable product mix as we sold an increased proportion of higher acuity devices. This is consistent with our guiding principles for product allocation, namely that we are giving priority to the production and delivery of our devices to meet the needs of the highest acuity patients first. Mask and other sales increased by 9%, reflecting solid resupply revenue and achieved despite the challenging device supply environment, which continues to limit new patient setups. In Europe, Asia, and other markets, device sales increased by 13% in constant currency terms, again reflecting the benefit from incremental revenue due to a competitive recall. Masks and other sales in Europe, Asia, and other markets benefited from improved patient flow relative to the prior year and increased by 11% in constant currency terms. Overall, our Asian operations in particular delivered a strong quarter. Software-as-a-service revenue increased by 8% in the December quarter. We saw strong performance in the HME segment as customers continue to utilize our SaaS solutions to streamline and more efficiently run their businesses. And we are seeing some stability in the skilled nursing care segment as it continues to emerge from the challenges of the COVID-19 pandemic. For the second half of fiscal year 2022, we expect to continue to benefit from our competitors’ inability to supply new patients and from the global fleet market's general recovery from COVID-19 impacts. However, as we have said in the last few quarters, while we are working hard to increase device output, we will not be able to meet all expected demand resulting from our competitors’ recall, primarily because of significant and ongoing supply constraints for electronic components. We are operating in a very dynamic supply chain environment. As I stated earlier, we continue to expect component supply constraints will limit the incremental device revenue resulting from our competitors recall to somewhere between $300 million and $350 million for fiscal year 2022. This includes the device revenue we were able to generate in the first half of fiscal year 2022. We expect Q3 to remain challenging but Q4 to be better. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release. Our non-GAAP gross margin declined by 230 basis points to 57.6% in the December quarter. The decrease is predominantly attributable to higher freight, component, and manufacturing costs and unfavorable currency movements, partially offset by a positive product mix, particularly in relation to strong growth of our higher acuity devices. Moving on to operating expenses, during Q2, we maintained a disciplined approach in our ongoing spend to support our operations. But we are seeing a more normalized expenditure profile as COVID-19 impacts subside. SG&A expenses for the second quarter increased by 9% or, in constant currency terms, increased by 10%. The increase was predominantly attributable to an increase in employee-related expenses. Importantly, SG&A expense as a percentage of revenue improved to 20.7% compared to 21.2% in the prior-year period. Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the second half of FY 2022. R&D expenses for the quarter increased by 14% on both a headline and a constant currency basis. R&D expenses as a percentage of revenue were 7% compared to 6.9% in the prior-year quarter. We continue to make significant investments in innovation because we believe our long-term commitment to technology, product, and solutions development will deliver sustained competitive advantage. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the second half of FY 2022. Our non-GAAP operating profit for the quarter increased by 5%, underpinned by strong revenue growth, partially offset by the contraction of our gross margin. On a GAAP basis, our effective tax rate for the December quarter was 15%, while on a non-GAAP basis, our effective tax rate for the quarter was 15.6% compared to the prior year quarter of 15.2%. The relatively low tax rate in Q2 in both the current quarter and prior year quarter reflects a favorable tax benefit associated with employee equity vesting that typically occurs in the second quarter. Looking forward, we estimate our non-GAAP effective tax rate for the full fiscal year 2022 will be in the range of 19% to 20%. Our non-GAAP net income for the quarter increased by 5% and our non-GAAP diluted earnings per share for the quarter increased by 4%. Now cash flow from operations for the quarter was $220 million, reflecting robust underlying earnings, partially offset by higher working capital. Capital expenditure for the quarter was $13 million, depreciation and amortization for the quarter totaled $41 million. During the quarter, we paid dividends to shareholders totaling $61 million. We recorded equity losses of $1.9 million in our income statement in the December quarter associated with the premise on joint venture with Verily. We expect to record equity losses of approximately $2 million per quarter through the balance of fiscal year 2022 associated with the joint venture operation. We ended the second quarter with a cash balance of $109.4 million. At December 31, we had $680 million gross debt and $496 million net debt. Our debt levels remain modest and at December 31, we had approximately $1.6 billion available for drawdown under our existing revolver facility. In summary, our liquidity position remains strong. Our board of directors today declared a quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance. As our cash flow and low leverage provide flexibility in how we allocate capital going forward, we plan to continue to reinvest for growth through R&D. We also expect to continue to deploy capital for tuck-in acquisitions such as Citus Health and Ectosense, an acquisition we completed on October 1. And with that, I'll hand the call back to Amy.

Great. Thanks, Brett, and thanks, Mick. Kevin, let's go ahead and now turn the call over to you to provide instructions and then run the Q&A portion of the call.

We’ll now be conducting a question-and-answer session. Our first question today is coming from Chris Cooper from Goldman Sachs. Your line is now live.

Afternoon. Good morning, thanks for taking my question. Mick, can you just remind us, please, of the specific measures you're employing to mitigate the component supplier challenges? And I guess where you're seeing more and less success.

Yeah. Chris, thanks. It's a very pertinent question, obviously, and we're pursuing multiple paths, as I outlined in the prep remarks we're focusing on. The first thing we're doing is going to our existing suppliers and existing supply chains and really imploring them to prioritize medical devices over the other aspects. They have choices to give to electric cars, cellular phones, consumer devices, and medical devices. And we are working with them directly on that. We're seeing some benefits from that, certainly at the level of maintaining the sort of double-digit growth that you saw during this quarter. In addition to that, we are redesigning parts and components within our existing platforms and we're bringing new platforms to market faster. So we're working on our Air 10 designs and Air 11 designs. We're also re-engineering our supply chains to validate and verify new suppliers to be able to get there. So that whole combination gives us a lot more confidence that as we look to the March quarter, we will get better than December, and then in the June quarter, we expect significant improvements. As we go through September and December of this calendar year, we really start to free up a lot of those projects come into play and we're seeing a lot of confidence with them. But you know, over that portfolio, Rob, do you have any more information to provide Chris, around what we're doing with supply chain and parts?

Maybe only also, Chris, this has sort of been going on for a year now and we knew these shortages were going to be coming. So our teams have been working on all those activities that Mick's been talking about throughout the year, and we're starting to see some of the benefits. It does take time and that's why we're talking about things continuing to be challenging for this coming quarter and starting to see improvement further out. That said, you know, it's a very dynamic situation and things do change on a weekly basis and so our teams have to be extremely agile. We've got a really strong team of engineers and commercial relationship people working with the suppliers and our product teams are all really focused on this as we work through these challenging times.

So can, I mean, relative to the update you were providing in the last quarter results in October. Are you now more or less confident that the deficits that you're currently seeing in components can be addressed by the fourth quarter?

Yeah, it's a good question, Chris. I'm actually precisely where I was in October that, you know, I think we said in October it's going to be tough in December, it's going to be tough in March, and really start to open up in June, and then as we go out throughout the calendar year. So, I stand by that. As Brett said earlier, looking at fiscal 2022 the $300 million to $350 million of incremental product. Look at the December quarter, 16% growth year-on-year in devices among a global supply chain crisis, COVID-19 recovery, all the challenges that are here. That’s really strong. But we’re going to get stronger than that as we go throughout the fiscal and as we go throughout the calendar year. This seemingly infinite demand is going to be with us for the whole of this calendar year and potentially beyond that. All the projects that Rob talked about will come to fruition in December and significantly better in June and then really start to free up as we hit September and December. With almost infinite demand, you never quite catch up to that. But we're going to get faster and faster and grow more year-on-year as we go throughout the calendar year.

Thanks very much.

Thank you. Our next question is coming from Dan Hurren from MST Marquee. Your line is now live.

Good morning, everyone. Thanks very much. Mick, you mentioned that ventilation demand is back at pre-COVID levels, but I presume you're talking about the hospital events or hospital patients. So, I was hoping you can give us some color detail on ventilation into the home healthcare market and specifically how the Astral product has performed whilst the explosion of gains over the last couple of quarters.

Yeah. Thanks for the question, Dan. I'll have a first stab at it and then hand to Jim Hollingshead, who's our President of Sleep and Respiratory Care. What I’ve said in the prep remarks is that what we're seeing is that the demand for ventilators is really around that COPD neuromuscular disease, respiratory insufficiency markets are where they were pre-COVID-19 pandemic. So that we're seeing that flow of sick patients through digital health solutions, telehealth monitoring, digital work with their pulmonary and/or COVID cleaning particles in labs for their pulmonary physicians. We’re getting the prescription for those products. The vast majority of our revenues, 90-plus percent globally on respiratory care are out-of-hospital respiratory care. So even Astral and Astellas and WSTs, FTAs, FTs and AFEs, they’re used for ventilation outside the hospital. So those seem to be back in terms of patient flow. Jim, any further color to provide Dan on that?

Yeah. The only thing I would add to what Mick said is that our Astral product is performing really well in the market. It's got very sophisticated algorithms that can treat a wide range of patients, and demand for it has been really strong. So in general, the Astral has been very well accepted and some of the algorithms we've added over the last several months have driven demand upward. It's also benefiting from the tailwind from the Philips recall. So, there's a bit of incremental demand for Astral in that context as well.

Thanks a lot. Thank you.

Your next question is coming from Sean Gorman from Morgan Stanley. Your line is now live.

Good morning, Mick and team. Hope you're all right. Well, Mick, I'm hoping we could get an update on the new RTM cuts from CMS and how that might be influencing our Propeller.

Thanks, Sean. It's a great question, and as you know, Propeller technology is, for those who may not know, a cloud-connected pharmaceutical delivery product for both COPD and asthma, and a lot of those are in pilot stages and partnerships with governments in Europe and private payers in the United States. So we do have some commercial models going. They're not material to the global business, but, Dave Pendarvis, do you have any data about RTM codes that we've got through reimbursement and any impacts on those for Propeller and across the business?

Yeah. Well, generally, we're happy to see coding and reimbursement flow towards more remote monitoring type activity. That's a positive. At the same time, Propeller is working both to have physician adoption of those codes, and we're working to see the funding come through with that. Nothing changes quickly in terms of medical practice, and Propeller is also working with health care systems and other system-wide bases to adopt the Propeller system. So, I'd say we're encouraging, but it's still a little early in the day for us to say we're seeing material uptake for Propeller as a result. But certainly, it improves the operating conditions. We think this is a long-term trend that will benefit Propeller as well as the rest of the business in remote patient monitoring in the long run.

Yeah.

Thanks, Dave. Thanks, Mick.

Thank you. Our next question today is coming from Matthew Mishan from KeyBanc. Your line is now live.

Hey. Good afternoon, guys. You saw a sequential improvement quarter-over-quarter in US masks. Can you give us a sense of what the drivers of that are and whether or not you expect continued sequential improvement moving forward?

Thanks for the question, Matt. And it's great to see US, Canada, Latin America, or the strong 9% constant currency growth on masks and Europe, Asia, rest of world at 11% year-on-year with strong double-digit 10% growth. As you said, that is up from last year. Look, I think I'll start by handing to Jim for some more color. But at the broad level, COVID-19 has shown the importance of respiratory health and respiratory hygiene. We said this in 2020 when we saw that sort of uptick of the growth of our masks and accessories business. We just launched Snap and we have rightly resupplied, and a lot of people thought, well, this is the second was step up. While people like, there were people with stockholdings and some commodity products. This is a stockholding issue. We said, no, this is sustainable. We’re talking to patients, analyzing data, and consumers want to and always wanted to more health care. They've now seen the reason for respiratory health and respiratory hygiene. We’re now two years into this and we are seeing sustained growth at the patient level demand for respiratory health and respiratory hygiene.

I think the mix just listed a couple of tailwinds that are related to. I do think patients have changed their behavior in the context of COVID and are much more keen to get clean, refreshed consumables and their experience. I think our customers worldwide have gotten better at providing that and the US market in particular, there's a very strong push on resupply and has been for months. And so there's that's a tailwind. There's always a Q2 cyclicality tailwind because of deductibles. So that's a normal cyclical thing, but the other thing I think is really important to point out is that our mask portfolio is performing really, really well. We have the widest range of masks available to fit almost any patient experience. We continue to take share, which is a really important dynamic for us. So not massive shocking movement but incrementally, we continue to take a bit of share over the last two or three quarters, and that's been really good. The only headwind on the mask is the filter recall, because the filter recall is dampening new patient starts. So that's a tiny headwind against four or five tailwinds that we've just listed, and we feel really confident about our mask portfolio going forward.

Thank you. Our next question today is coming from Craig Wong-Pan from Royal Bank of Canada. Your line is now live.

Thanks. Just a question on US device sales. I was wondering if you could provide any comments on the split there between AirSense 11 and AirSense 10 and how that kind of proportion of sales between the two might compare to the first quarter.

Craig, it's a pertinent question, but one we don't feel comfortable going into the details of. What I can tell you as an equal one personal user of this AirSense 11 platform is that the delivery is smaller, quieter, more comfortable, and more connected. My wife actually asked me if it was on when I turned it on, it is that much smaller, quieter, and better than our last generation already the leading platform. So, I can tell you it is taking off every single AirSense 11 we can make is sold that day. They are moving fast. Increasing as a portion of our US sales. For competitive reasons we're not going to split out how quickly that S curve is coming up, but the points I made in the prep remarks are really strong. The AirSense 10 on its own is the second-best product in the market after only the AirSense 11. I can tell you it’s growing extraordinarily fast. The S-curve uptake is great, and patients are loving it. Yes, we will introduce it to other countries around the world, and we expect the same level of uptake.

Thank you. Next question is coming from Andrew Paine from CLSA. Your line is now live.

Yeah. Thanks for taking my question. Just wanting to get a bit more clarity on your ability to re-engineer parts and redesign elements in your devices. How is that going to be achieved, and does this mean you won't be as exposed to chip shortages from Q4 and onwards? When do you think these changes will allow you to be running at full capacity and, in essence, meeting current demand?

Yeah, Andrew, great three-part question. I'll start with it, and then maybe Rob, you can cover anything I missed on Andrew's components there. But, look, the starting gun went on this project in April when they said there was a quality issue, June when they said there was a recall. We were already ready for the supply chain shortages that COVID-19 would drive, and if this recall from our competitor hadn't happened, we would be able to meet all the existing demand. As you saw, we grew 16% year-on-year in this quarter, and that would have been great growth, taking some good share in the core competitive market. We started reengineering components and parts, and we also started reengineering Six Sigma Black Belts, looking at our supply chain and analyzing different suppliers and revalidating and assuring that we could get them there. There are a bunch of projects going on. When looking at that portfolio, the confidence is driving, but some will come to fruition in December, some more in March. In the June quarter, we expect a bunch of these projects will free up supply and then you hit September and December, and the portfolio projects will get to market. That gives us confidence in that recovery and share we're going to take through 2022. Rob, what did I miss there?

Yeah, Andrew, these products have hundreds of components in them. If you're missing one, you can't build any of the products. You'll see as we build buffers, we will see our inventory levels of materials go up as we build buffers with alternatives. Some components are easy to have as alternatives. You've got to revalidate them. And in the medical device world, you've got to have rigorous revalidation of alternate components. Some components like microcontrollers are complex. They interact with embedded software on the systems. The design and validation processes are more complex and take more time. We have projects across all those areas going on, and as we make these alternatives, then you're scheduling the longer-term commitments, building the inventories and making sure we have options.

Thank you. Our next question is coming from John Deakin-Bell from Citigroup. Your line is now live.

Thank you. I'm just trying to get a bit more color around the underlying new patients, maybe between the US and the rest of the world. And just give us a sense of where you think we’re at in different markets and perhaps when you think it might get back to the patient growth during 2019?

Yeah, John, it's a very complex question because as you know, we operate in 140 countries. All the different Greek letter variants of COVID flow through those 140 countries at different rates. One great thing because we have strong visibility and awareness into this is we talk to the pulmonary physicians and watch hospitalization rates and usage rates as each variant seems to be more communicable but less severe. As we enter 2022, we feel very comfortable across countries. I gave you in prep remarks a wide band, right? 85% to 100% of pre-COVID patient flow, depending on the country and location. Some locations are exceeding pre-COVID levels. The protocols for testing and monitoring have improved significantly, driving strong adoption. We have strong confidence. We’re seeing one step forward as we look across that portfolio every 90 days, allowing us to maintain strong device growth in the region. It won’t be just a one-off impact when our competitor comes back. There’s a backlog to address, and even when they return, we’ll continue to take share, and deal with this flow of patients. We’re pushing strongly around our long-term demand generation.

Thank you. Our next question today is coming from Gretel Janu from Credit Suisse. Your line is now live.

Thanks. Good morning, all. More of a medium-term question, Mick. So as the industry isn't able to meet the demands of new patients at the moment, what are you doing to ensure that patients don't fall off the waiting list? And I guess do you see any risk here that the industry will see slower growth in the medium term from all the disruption over this 12, 24-month period? Thanks.

Thanks, Gretel. I'll have a first go at it and hand to Jim. I mean, the short answer to your question is absolutely not. I do not see any growth slowing down. In fact, the backlog, certainly for ResMed, I see incredible growth coming for our industry. The demand generation stuff I talked about – everything from brick-and-mortar partnerships. As we opened up new channels, we are not turning the dollars on that requirement. We're focusing on 2023. The backlog of patients will eventually come to fruition, and we will see increased secular growth. The long-term demand generation will lead us into a faster growth rate of our industry; new solutions and protocols will undoubtedly crystallize better patient interactions. Jim, any additional information around industry growth there?

Yeah, Gretel, I would add that we’re actively working with our partners to understand patient wait lists and work to reduce them. We’re prioritizing higher-acuity conditions and working closely with our channel partners to manage expectations and enhance communication around product availability. Additionally, we’re developing programs to capture patients facing long waitlists, which will help minimize the impact of backlog as supply increases. We’re also working on new channels to reach patients more effectively. We believe that these initiatives will position us well for growth as production scales up.

Thank you. Our next question today is coming from Saul Hadassin from Barrenjoey Capital. Your line is now live.

Good morning and good afternoon. Thanks for taking my question. Just maybe one for Rob. Rob, just on the discussion around semiconductors and the shortages, can you talk to us about the line of sight you get as it relates to the inflow of those chips and then the manufacturability? In other words, is it still taking approximately three months to process devices? Are you now positioned to provide a forecast on volume on flow generators into the fourth quarter due to these chips either sitting with you now or due to come in over the next few weeks?

Yeah. As I was saying earlier, we've actually had to greatly extend our forecast lead times to get the supply commitments that we want. So at that level, we have a long view. Our cycle times are pretty short. The longest part is freight. The challenges of forecasting sales is what's happening to freight that's stuck off Los Angeles or something like that. We can mitigate that at a cost with air freight but we certainly can't do 100%. The hardest thing for predicting what's going to happen in the next couple of weeks is those freight deliveries. Our internal systems around delivering them out of our warehouses are very slick and run well. The key issue is the suppliers and the short-term variability of freight.

Thank you. Our next question today is coming from Lyanne Harrison from Bank of America. Your line is now live.

Yeah. Good morning, everyone. I guess you’ve spoken about volume in detail, but can we talk about price and provide some color on the trends you're seeing in average device prices this quarter and perhaps with some reference to mix and discounting, if you can.

Yeah. Thanks, Lyanne. It's a good question. Traditionally, we don't talk much about price. One thing I will say is that we announced in my prep remarks here today that we have a surcharge now on all ResMed devices. It's a $12 surcharge in the US and a €12 surcharge in Europe. It applies to all devices but not on the masks. We haven't implemented a price increase, but the surcharge is necessary to address the increased costs that we face. Customers have accepted this surcharge as they see increased prices in other areas. Overall, I foresee no significant price pressure from the semiconductor suppliers to us now, but the mix on the higher acuity products may create a natural increase in ASP.

Thanks, Steve. Now, let me try to unpack gross margin a little bit here. There's been a decline year-on-year due to freight and logistics costs, among other factors. Looking forward, we expect freight and logistics costs to remain a headwind through the rest of this calendar year. FX may be neutral, but ASP declines won't likely be a factor moving forward. We have the surcharge to help us cover the costs, albeit it won't fully recover them. We expect higher output while the product mix may not be as favorable as we move forward, but that provides a more balanced view of gross margin.

Thank you. Our next question today is coming from David Bailey from Macquarie. Your line is now live.

Yeah. Thanks. Good morning, Mick and Brett. You sort of touched on this in part of your earlier remarks. But I just wanted to confirm that you're confident that some of the changes in relation to digital initiatives over the past couple of years will allow the system to deal with the backlog of new patients over the medium term.

Yes, David. It’s a really pertinent question. I feel very confident. We’ve seen significant adoption of digital solutions from doctors getting involved in telehealth to adopting identification and enrollment systems on a digital basis. As we enter 2022, we believe the adoption will improve efficiency significantly. We believe that the initiatives we've put in place over the last two years will lead us into a faster growth rate for our industry, particularly as we work on transforming patient experiences through partnerships and technology.

Thank you. Next question today is from Margaret Kaczor from William Blair. Your line is now live.

Hey. Good afternoon, and good morning to you, sir. I wanted to follow up a little bit on some of the math that you guys had implied from the benefit of the competitive recall. If we keep the fiscal Q3 benefits similar to what we saw in fiscal Q2, maybe pick it up a little, the fiscal Q4 benefit sounds like it's going to be $130 million, $140 million or so at the midpoint of your range. With Philips extending the timing of the impact of the recall, should we be using that $140 million as a base benefit as we go into the second half of the calendar year, especially given that it sounds like demand may not be fully satisfied?

Yeah, Margaret, it's a great question. Not going to get into the detailed breakdown of the $350 million through the fiscal year. But as you said, look at it, it is back-ended, so Q4 will be significant because of the projects Rob talked about will come to fruition in June and September. We're comfortable with that $350 million for fiscal 2022. Looking forward, I think the share we're taking this year will be long-term sustainable. We believe we can get solid growth as we work to expand effective digital partnerships and solutions that many of our competitors won’t have as easily available.

Thank you. Our final question today is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Good afternoon, everyone. Mick, one question from my side. In a hypothetical scenario, obviously, demand is not being met. How do you ration between an organic ResMed patient that will be sticky long-term versus a Philips patient who potentially could generate a higher ESP in the short term? Do you also see mixing and matching going out to the field, i.e., tubes and accessories with blowers being mixed to meet demand?

It's a good question, Suraj. We prioritize the highest acuity patients. We're focused on existing relationships with partners, patients, and providers because that ensures the best outcomes and efficiencies. The decision isn’t solely around what’s immediately profitable but is based on our long-term vision. As for mixing and matching, care providers typically use products interchangeably, relying on their experience and knowledge of what delivers the best patient care. But ultimately, our offerings are designed to satisfy as many patient needs as possible. Thank you. As we wrap up today, I want to highlight my sincere appreciation for the continuous dedication of our ResMedians and our supply chain teams who face these challenges head-on. Thank you for your hard work, and thank you to all those who are on the front lines delivering care and making a difference in patients’ lives. I look forward to connecting again in 90 days. Thank you.

Great. Thanks, Mick. Thank you everyone for sticking with us. If you have any follow-up questions, please reach out to us directly. This concludes our second quarter 2022 call. Kevin, I’ll turn it back to you to close things out.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.