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Edited Transcript of SOM.AX earnings conference call or presentation 21-Aug-19 1:00am GMT

Full Year 2019 Somnomed Ltd Earnings Call

Sydney Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of SomnoMed Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hervé Fiévet

SomnoMed Limited - CFO

* Neil Verdal-Austin

SomnoMed Limited - CEO

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Conference Call Participants

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* Huiyi Wang;CTHD Investment;Analyst

* Iain Wilkie

Morgans Financial Limited, Research Division - Associate Analyst

* Mark Devcich

Pie Funds Management Ltd - Head Of Research and Portfolio Manager

* Peter Meichelboeck

Select Equities Pty Ltd., Research Division - Head of Research

* Shane A. Storey

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the SomnoMed 2019 Full Year Results Briefing. (Operator Instructions)

I would now like to hand the conference over to Mr. Neil Verdal-Austin, CEO. Please go ahead.

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Neil Verdal-Austin, SomnoMed Limited - CEO [2]

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Thank you. Good morning, everyone, and welcome to our fiscal '19 results presentation. Thank you again for attending this webcast.

As you can see on Slide 2, our disclaimer and regulatory disclosure of course, [duly tabled].

And on Slide 3, the new slogan and focus that we have at SomnoMed this year. As you will come to see throughout this presentation, SomnoMed will have a new theme, thread or visionary statement. You will hear this a few times that SomnoMed will now become treatment-focused and technology-driven. More on this throughout the presentation.

Slide 4 takes you through to the agenda for this presentation and this gets through the main topics that we'd like to cover during our time together. Starting with the vision and market opportunity and the core strength and positioning our product as the alternative to CPAP.

Also covering the summary of fiscal '19, the financial results and then talking about our future horizons more importantly and the outlook and guidance for fiscal '20.

So moving to Slide 5. The vision and mission of SomnoMed is clearly outlined on this slide. SomnoMed really will become a leader in the treatment of patients suffering from obstructive sleep apnea and all relevant adjacent conditions. We believe that this vision is a tremendous outlook and statement for our company in terms of investors, staff and shareholders. That will be achieved through our mission, which is really to advance the adoption and acceptance of the treatment therapy by all, in other words medical specialists, dentists, patients again and insurers.

Just a little bit on Slide 6 regarding obstructive sleep apnea. I think for those who are not aware of the treatment and the actual disease that it is, obstructive sleep apnea is a disorder that occurs when a person's breathing is interrupted during sleep because the airway becomes blocked for whatever reason. The issue of this is that most are unaware of this condition and it, of course, has multiple and severe consequences if not treated. The issues arise around hypertension, cardiovascular disease, diabetes, to name but a few.

Slide 7 starts to outline really what this global market opportunity is for this company and that is significant. The picture on the left outlines the global market for sleep apnea, which is approximately USD 7 billion to USD 8 billion and growing at around 6% to 8%, indicating a substantial market opportunity for this company.

The graph on the right indicates a study done showing the equivalence and effectiveness of oral appliance therapy versus CPAP, and certainly indicates a better tolerance or adherence levels when patients have a choice and presented with oral appliances.

The OSA market on Slide 8 starts to show in a recent study, in fact a Lancet Respir Med sponsored paper, indicating a larger section of global OSA sufferers to be mild. This speaks to the real opportunity that SomnoMed has. This is the graph showing on the left-hand side of that slide. On the right-hand side, it shows the countries that SomnoMed are currently trading in and their respective mild OSA population sufferers in millions, indicating the real and accessible, addressable market for SomnoMed.

Slide 9 indicates the real issue that we have in the marketplace with CPAP and the therapy dilemma that is CPAP. And the graph on the left-hand side showing that 50% of patients do not use CPAP up to 6 months.

CPAP, of course, is an incredible therapy and treatment that works 100% of the time, but with one significant issue and that is adherence. Adherence is generally low. And many studies over the last 20 years all confirm this to be at similar levels or a range between 40% to 60% of nonadherence. This, of course, indicates that although patients -- the effectiveness of the product is there but the adherence is low, the medical outcome, of course, could also be pretty low. This indicates that 50% of those patients that we see on that graph who do not use CPAP up to 6 months [can't really be confirmed] in the clinical insight table as a gold standard treatment anymore.

Slide 10 starts to indicate where this high ceiling of growth or COAT growth as we call it, Continuous Open Airway Therapy growth, can really go to. The graph indicates the percentage of positively diagnosed patients in a particular country that is treated by either CPAP or COAT oral appliances. As you can see, this has a potential for the future of SomnoMed and real growth. You can see on the far left-hand side those countries with a low percentage of COAT penetration in that market, Italy, Spain, Switzerland and Germany. And at the far right-hand those markets where we have high degrees of penetration, almost an equal to CPAP level of penetration in those markets, and those relate to Holland and Sweden.

The point really of this slide is to show where the journey can go to and the enormous potential for SomnoMed in the future. Two things to point out for this particular presentation, of course, is the Australian market where we see 15% of COAT penetration and 85% still CPAP, and the U.S. market, which shows great potential for the future showing only an 8% COAT market penetration versus 92% currently for CPAP.

Moving to Slide 11, starts to show where SomnoMed's core strengths really lie. As the leader in oral appliance treatment of obstructive sleep apnea, there are 4 key areas of core strength that SomnoMed has and has developed over the last 14 years. They stretch across all aspects of our regulated corporate and focused oral appliance company operating now in 28 countries globally. We start with the design and innovation and then we move to both the traditional and now digital manufacturing capability. Our sales and distribution and strong brand building is another core strength. And finally, all of our service and support that is necessary is best-in-class across the industry.

We move to Slide 12. And so far, we've stepped through the OSA markets with the CPAP nonadherence, global market penetrations and trends and have touched on SomnoMed's core strengths. This slide shows our -- probably our most fundamental core strength and that is our product and our product range. And especially the new digitally made Avant product pictured here. This is currently being launched worldwide as we speak, and having recently announced the fact that we treated 500,000 patients worldwide. We are very, very proud of the fact that this product, that now comes to market, is the result of extensive analysis, research in materials, design and innovation that now comes to market after 2 to 2.5 years of development.

The product, we believe, will bring more comfort to patients, enhance the greater compliance and actually, we're now seeing in the early clinical results, an improved effectiveness over the previous product that we've launched before.

Slide 13 starts to summarize for you the year of fiscal 2019. SomnoMed's core growth grew by 12% over the prior year and has reached $59 million. In North America, that represents 11% of revenue growth. In Europe, 13%. And in APAC, a very impressive 16% growth.

Just to highlight again as per previous releases, North America has really turned around, within quarter 4 direct dental revenue growth was achieved of 31% over the prior year. The underlying EBITDA is just under $5 million and a growth of 27% over the prior year, and we very proudly have now launched, as I said, the SomnoDent Avant on our digital manufacturing platform.

Cash at the end of the year was $8 million and ahead of forecast, and we've now treated over 500,000 patients worldwide. We've also just recently announced this morning in our release that we have signed the very first managed health care contract with a very large German insurer. This has again taken enormous amount of time and dedication and resources to bring to fruition what could become a future template for the future of treating patients in that market with an oral appliance.

We also need to, of course, mention the fact that RSS is now closed and officially closed within the promised cash range that we had mentioned to the 30th of June 2019. And I think I'm very proud to at least say, at this stage, we now have the right management team in place to achieve our strategic objectives, which we will talk about later in the presentation.

The next few slides will be covered by our new CFO, Mr. Hervé Fiévet, I'd like to hand over to Hervé for the next few slides. Thank you, Hervé.

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Hervé Fiévet, SomnoMed Limited - CFO [3]

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Thank you, Neil. So on Slide #14, we detail the group's revenue growth by half year. We are very pleased with a growth rate of 12% for the year and in spite of the softer second half due to several issues in Europe that we'll discuss later, we are happy that U.S. was back and positively contributed to the growth in the second half.

Moving to Slide #15. So on this slide we talk about the different core revenue growth strategy in the various markets. As you can see, whilst Europe has a very strong first half, the second half growth rate suffered due to external factors in Poland and Sweden, which we hope will be resolved soon and that they will come back to growth rates in the area of 15% [plus]. In the USA and Canada, we are pleased with the results, that includes all sales channels. We managed to grow even in spite of one of our major customers [Phase III] is in operation and the disruption caused by disclosure of RSS.

Multi (inaudible) economy on the next slide showing direct dental revenue in North America. And last but not least, we are very happy with the performance of the APAC region, largely driven by the [unmet] area. In this market, we have focused on the (inaudible) referral pathway channels resulting in a strong growth of 16%.

Now moving to Slide #16. This slide shows you more detail the North American direct dental revenue in constant currency. As we have previously mentioned, we are exceptionally pleased with the revenue results in Q4 there has been a real focus on lost customers and on high (inaudible) competitive accounts in this market. We are happy to see customers who are engaging with us following the closure of RSS and expect this trend to continue as demonstrated by our performance in July and August. This is another strong evidence of the fact that our customers really like our products no matter what.

Slide #17. As promised before, [with this slide we tell you] revenue growth in Europe in constant currencies. (inaudible) market is (inaudible). It’s important to understand that this market is made up of different segments that are at different stages of development. So the second half growth rate was subdued by 2 of our larger markets, The Netherlands and Sweden, as well affected by matters outside our control, which we have and continue to address. We are confident in the longer term these troubles will be overcome and growth will return to the usual percentage, expected to be around 7%. In spite of that, other markets in Europe are developing and moving towards reinvestment, which is known as a key factor of our platform.

We have shown strong growth during the year with growth rates with an average above 25% from [loss of revenue]. It all appears very well for the future of this region.

Now moving to Slide #18. Now we're going to talk about gross margin on this slide with a breakdown of our different business streams. The [MAS core] business generated a strong gross margin of 59%, in line with last year. It was made of our main product, MAS, revenues contributing to $31 million out of the $35 million at a healthy and stable 70% of sales.

Now going to Slide #19. So this slide talks about the EBITDA. So our positive EBITDA we [normally steer at $3.4 million] versus $3.9 million. However, there are 2 one-off factors. One is, of course (inaudible) on which recovery we actually are purchasing and the severance fees of the previous [CEO] which leaves us an underlying EBITDA of just under $5 million and a growth of 27%.

Now Slide #20. So just for completeness, we showed you a summary P&L of the period where you can see that revenues and margins are recovered leaving the expense (inaudible)

The drop in operating profit is due to further marketing investments to support growing market in Europe as we told before. And second, an increase in [revenue] expenses because of one-off costs. And once you take off the [S&G] impact, we take down the 19% to [6.5%]. (inaudible) growth that the operating profit actually grows at 15%. Also, once you adjust the corporate expenses for the one-off [year] costs, you realize that when [is paying] less than last year.

So in spite of quite an eventful year, it all comes from an underlying EBITDA showing a promising run rate shy of $5 million and a very pleasing growth of 27%.

And now I'm handing you over to Mr. Verdal-Austin.

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Neil Verdal-Austin, SomnoMed Limited - CEO [4]

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Thank you, Hervé. Thank you for that rundown of the results and a very good summary, I think, of revenues, margins and EBITDA for the year of fiscal '19.

From Slide 21 onwards, I'd really like to introduce how I see the future of this company and the key focus areas that we believe are important to build this company for the future. We are very excited about the future of this company and I'd like to convey that in the next few slides that build out if you like, the future horizons as we see them.

On Slide 20, there are really 3 focus core areas that we will start to look at to build this business in the future. One being advancing the treatment of oral appliance therapy and building out the core business that has always been successful in this company. Secondly, to position what we call the patient's alternative as a treatment to OSA. And thirdly, to talk about the technology piece that I believe is going to become more important in the future. And of course, if I could bring you back to the very first slide we started with that SomnoMed will become treatment focused and technology driven.

Expanding on the first one, on Slide 22, advancing the treatment of building the core, there are really 3 aspects to this that we will focus on in the future. One is always the relationship bridge that we have to build between the medical and the dental communities globally. Firstly, starting with restoring the relationship within the U.S. and to continually build on those medical relationships and referral pathways on a global basis.

Secondly, is to build out the digital strength chain that we have been concentrating on for the last 2.5 years. We have a unique digital manufacturing platform now built to drive the future growth of our business.

And on the back of that, [thirdly], to launch our very first digital product, the SomnoDent Avant, that I've spoken about before. This brings an unparalleled comfort-level and innovative design and again efficacy results that were looking very, very promising in the early studies of this product.

Slide 23. This speaks to the second horizon of our last slide and that is to really focus our business and all of our staff on repositioning the patient's alternative to treatment. The 3 key aspects to that start with redefining an effective medical outcome within the medical community. And what I mean by that is refocusing on the formula that compliance and efficacy really, really gives you an effective medical outcome. Having high compliance and high effectiveness in oral appliances and within the SomnoMed range of products leads us to a much higher medical outcome for patients. We're also going to concentrate on helping physicians, guiding physicians to find early true predictive responders. We're going to look at how we can predict that for physicians and starts to talk about personalized medicine for physicians so their oral appliance treatment can really become an alternative to those patients that physicians identify to be responders.

And thirdly, to always think about the patients, driving patient demand, education, refining that education, redirecting and targeting CPAP-fail patients and using our preferred dental networks around the globe to do that.

Slide 24 starts talking about the third horizon that I have outlined and this is the technology piece. Again, this is the technology-driven end for our future. And for us, we see 3 key things to achieving that. Firstly, a technology bridge and what I mean by that is a bridge that [swaps] medical and dental work more effectively together in a software platform that connects these specialists using a SomnoMed device. The second aspect is what's termed Connected Health and using our immense database and artificial intelligence to help add value to both our medical and dental partners, to look at our compliance measurements and further technology advancements that we're going to be bringing to the market over the next 2 to 3 years.

The third part of the technology is patients again, patient pathway management. Looking at an upfront patient pathway management tool and partnering with a company that have done it very effectively over the past 5 to 10 years and helping patients in that pathway management.

At last, we come to Slide 25 and really the outlook for fiscal '20 and the guidance that we'd like to propose to you. The focus for us and the outlook for us is to broaden the sales and marketing in all of our regions. We're coming back to the core of SomnoMed's business. We're refocusing sales, we're refocusing our marketing efforts, we're investing in both of those fields in all regions that we operate in.

We have very, very proudly launched the SomnoDent Avant as we do this month and that's a global launch in all regions.

We're also extremely excited about what we call digital done right. In other words, our digital manufacturing platform that will change the look and feel of how we deliver product in the future and the next steps to that, other products, other geographies as we bring these products closer to market. We will always focus on reimbursement and reimbursement policy. And our announcement this morning about the first contract signed with a very, very large German insurer is evidence of the focus that we have in this field and reimbursement in Europe and in other parts of our markets.

We will concentrate on the horizon development, and I'll keep you updated on these horizon developments as we go through the year. It's important that the advancing of the treatment, moving out of the core, positioning the patient's alternative and building the technology piece will help us to become treatment focused and technology driven.

And last but not least, we're very pleased to present our guidance as follows. For the year fiscal '20, we guide that our revenues will grow from $59 million to a range of between $67 million and $69 million for the year, a growth of between 14% and 17%; and also that our EBITDA will grow from a run rate of $5 million as Hervé has pointed out, to between $6.3 million and $6.7 million for the year at a growth of between 26% and 34%.

Just to conclude, I would like to thank you for your time this morning. I'd like to thank you for your interest in SomnoMed. And I would like to thank you for listening to what we have to say together this morning.

The focus of our business and the future of our business is extremely exciting. As I leave this entity and I leave this company with a great team of people, we will eventually become and focused on treatment and that will not change, but we will also add a technology piece to our business that will protect our business in the future.

Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Shane Storey with Wilsons.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [2]

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Neil, I might just begin with the U.S., if I can. Looking at the segment reporting, it looks like you may have concerns to margin there in the second half. And I was just wondering if you could describe that a bit more because the guidance sort of has implied that, that margin will come back pretty quickly in FY '20 and just if you could give us some details about what went on in the second half in terms of margins in the U.S. would be helpful.

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Neil Verdal-Austin, SomnoMed Limited - CEO [3]

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Yes. Thank you, Shane. So of course, as you're aware, in the second half, we had lost the business of both RSS and S3 and that wasn't insignificant in the second half. When we looked at the business though and we kept the infrastructure and the investment we had in what's needed to deliver a first-class product and get a better class service [charge] to our history, we felt that that investment had to stay.

So as we see the future of our business, as we guided the growth and the launch of the SomnoDent Avant, we're very excited about the turnaround that we're going to have in that business, as you've see in Q4, we've continued, as Hervé has pointed out, into July and August so far. And so we're confident that we will get that margin back despite the turbulent year we've had in fiscal '19.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [4]

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It's a [certain year] as, I mean, progress with the German health fund has been a long time coming as you all know. I just wondered whether there's sort of more to come there, just knowing the work that's been devoted to them.

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Neil Verdal-Austin, SomnoMed Limited - CEO [5]

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Yes. Look, I think that this is probably the starting point, Shane. And yes, we've spoken about this for some time and it has taken time to break through into this German market, which is fundamentally very different actually to a lot of markets we have in Europe.

I think that the access has always been very, very difficult, and so we've concentrated on this what we would call managed care or managed care services contracts that allow us access to millions and millions of patients or members, if you like, of this particular insurer. And hopefully, what we're able to do over the next couple of years is use this as a template for success and future contracts into those markets and others that are not yet reimbursed.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [6]

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Great. There's been a lot also in the press, I guess, around the strategic ideas that you mentioned just at the back of your presentation. The one in particular sort of catches my eyes is to do with the technology piece and sort of candidacy around selecting the right responders. But maybe if you could talk to like who specifically that technology piece is aimed at and how it might change what we're doing today.

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Neil Verdal-Austin, SomnoMed Limited - CEO [7]

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I think the information that we have today and the use of artificial intelligence, I mean, we've treated 500,000 patients and have a database that's going back 12 years. We can help physicians and/or dentists in what we've seen over the last 12 years of 500,000 patients. It's hard to treat -- better treat certain patient groups with an oral appliance. So we start to talk about effective prediction and how we can help prescribe and identify responders.

Now we can have responders in all 3 categories of severity, mild, moderate and severe. And a lot of our clinical results have proven that and have shown that over the years. However, what we try to focus this on in terms of personalized medicine, which is the new sort of medical term in the U.S. and Europe, is to try at least find a solution for a particular patient that we know will likely respond to that patient.

And so identifying those mild patients and as we can see from one of our slides, the significant portion of OSA -- or positively OSA diagnosed patients throughout the world, that gives us a great opportunity going forward.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [8]

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Do you see it as giving the physicians sort of some ammunition in being able to direct particularly a new patient towards this mode of therapy rather than CPAP?

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Neil Verdal-Austin, SomnoMed Limited - CEO [9]

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I think it should. I think it's much -- we'll be bringing together now a predictive tool and an identification of responding -- of responders. We're bringing together a tool that connects the -- or builds the bridge, if you like, between medical and dental where a very consistent candidate, shared diagnostic platform and system that'll help [seat] physicians from (inaudible) or a desk more effectively and more confidently refer a patient for oral appliance therapy knowing that they're going to get a validated and clinically validated product from SomnoMed in that process.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [10]

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Last question from me is just really around tax and what you expect the effective tax rate in this year's income statement.

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Neil Verdal-Austin, SomnoMed Limited - CEO [11]

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Yes, I think that should be somewhere around probably 10% to 15%, Shane, having looked at the new tax regime in the U.S., but we still have some losses we can absorb there. The same in Europe, but a much lower effective tax we're able to achieve with our mix of product sales between Amsterdam and Switzerland -- Holland and Switzerland. And also the fact that I think we have some losses still in Australia given the immense research and development costs that we've had at our head office or corporate level that will allow us to have an effective tax rate in the future probably 10% to 15% at this stage.

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Operator [12]

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(Operator Instructions) The next question comes from Stella Wang with CTHD Investment.

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Huiyi Wang;CTHD Investment;Analyst, [13]

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My first question comes from the presentation Slide #18 on the gross margins. This pretty big other revenue line of some $3.2 million. Could you give us some details about that?

And in the future, with the new German deal and exciting new products launching, how should we think of the gross margin going forward?

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Neil Verdal-Austin, SomnoMed Limited - CEO [14]

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Stella, nice to have you on the line, and thank you so much for the time in joining the call. Great question. So the other revenues are made up of ancillary product that we sell, things like measurement gauges to help us with bite registrations and effective movement of titration of the device into a comfortable position; sales of our cleaning tablets which are very, very successful in Europe and the U.S.; and then, of course, we have ancillary products, like brushing or teeth grinding products, et cetera. So those contribute mainly to the other revenue streams that we have, which isn't insignificant at $3.2 million and a really strong margin, even greater than our product margin of 70% posted here at 87%.

I think with the future of the German contracts and outlook that will give us access to greater selling opportunities, patient treatment of oral appliances, that will only raise the levels of revenues and penetration of that in the MAS or the product line and that will strengthen our margins as we grow again, that [proposal] loss we had (inaudible) are the key volumes. And I think with volumes of the SomnoDent Avant which we think come in, in the next 12 to 18 months will also start to add to our margin expansion again with our digital products, as I say, now being launched.

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Huiyi Wang;CTHD Investment;Analyst, [15]

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Great. The second one is with growth into FY '20 projected, are you okay to break it down a bit by region? For example, how should you -- can you tell us more about the problem they had in Sweden and Holland? Just what is going on in the hospital? Why is that reducing the growth this much?

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Neil Verdal-Austin, SomnoMed Limited - CEO [16]

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Yes, I understand your question. There's 2 things. The guidance that we've given in terms of the revenue breakdown and the EBITDA breakdown, we don't give a regional aspect to that at this stage; we only give a company total revenue guidance in EBITDA. But I think that the issues we see in Europe, which are external to us, but we're helping facilitate and overcome these with the authorities, are really quite unique actually.

The one in Sweden is probably good for the long term and that is a tender in Stockholm where the medical and dental community is already at loggerheads as to who should effectively treat patients properly with a validated and clinically validated oral appliance. We had 350 dentists registered on that Stockholm tender to be able to treat OSA patients with oral appliance. And the medical community is starting to question whether those dentists have been adequately trained and accredited basically.

And going through that process, that reduced the number of dentists that can treat on that tender from 350 to 150, based on what we have done over the last 8 to 10 years in Sweden and our accreditation and training program and they're all SomnoMed dentists. So it probably augurs well for the future, but it causes a bottleneck right now and a huge pipeline and funnel of patients waiting to be treated. And we're hoping that this will end soon and those patients can be treated soon.

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Huiyi Wang;CTHD Investment;Analyst, [17]

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Right. Okay, and quite unique. Thanks for the background for that. Really, so where this bottleneck -- when you guys get through this phase, there's actually quite a big backlog of patients and could we expect a bit of a bump once you get through this capacity constraint?

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Neil Verdal-Austin, SomnoMed Limited - CEO [18]

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It depends. I think it depends on whether those patients that are in that funnel have already had a sleep test or not, whether they still need to go through a sleep test because that may drag out the funnel a little bit longer, but at least spread those patients over the next probably 2 quarters.

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Huiyi Wang;CTHD Investment;Analyst, [19]

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Okay. Great. Just last one, if I may. It's a tremendous asset for you guys to finish closing down RSS within the budget. Could you give us some feedback on whether you guys have touched base with all the key customers you might have lost because you hedged the period of heavy RSS, what's the feedback? Are they ready to come back on board?

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Neil Verdal-Austin, SomnoMed Limited - CEO [20]

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That's a great question. It's something we should be talking about. We have reached probably 95% at this stage of all what we would term lost RSS or SomnoMed customers. And I would say that of those 95% we reached, spoken to and I have personally done that myself, I have flown to the U.S. and connected with the most unpopular of the customers regarding the RSS issues. And I think we've managed to probably get around 75% to 80% of them at least ordering devices again, so that they can see and touch and experience the SomnoMed's quality and service excellence that we offer. And I think those things have all turned around and improved and slowly, hopefully, those customers, as they get more confident, will start to order greater volumes with us.

You can see the turnaround in Q4. We see that continued so far in July and in August, despite the summer months. And so hopefully, this and the launch of the SomnoDent device product in the U.S. right as we speak, starts to strengthen our position in both the U.S. and European markets again with both dentists and physicians.

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Huiyi Wang;CTHD Investment;Analyst, [21]

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Right. Hopefully, I will see a really bright future here onwards.

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Operator [22]

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The next question comes from Mark Devcich with Pie Funds.

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Mark Devcich, Pie Funds Management Ltd - Head Of Research and Portfolio Manager [23]

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Neil, just a couple of questions. So firstly, what's the currency assumptions built into the guidance?

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Neil Verdal-Austin, SomnoMed Limited - CEO [24]

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So the currency assumptions were, I think, they -- the currency for the U.S. dollar, I think it was about $0.70 or $0.71...

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Hervé Fiévet, SomnoMed Limited - CFO [25]

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No, $0.69.

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Neil Verdal-Austin, SomnoMed Limited - CEO [26]

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$0.69 in the U.S. As to the euro?

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Hervé Fiévet, SomnoMed Limited - CFO [27]

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$0.62.

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Neil Verdal-Austin, SomnoMed Limited - CEO [28]

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$0.62.

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Mark Devcich, Pie Funds Management Ltd - Head Of Research and Portfolio Manager [29]

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Okay. Great. All right. And then a second question, just on the German insurer deal that you have signed, how much should we expect that to contribute to financial year '20? And then following on, should we (inaudible) we should expect other deals to be signed in Germany? How do they compare to the relative size of the first one you've signed?

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Neil Verdal-Austin, SomnoMed Limited - CEO [30]

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Yes. So let's put some firm expectations on Australia. It was signed literally last week, and we're in negotiations and try to now make sure that we execute and implement this effectively for all of their members across all states in Germany. Again, we always take a cautious view as to the number of patients or members in a particular insurance contract but we really can see the results we have in Holland, the propensity for OSA, the positively diagnosed patients and then, of course, the influence, of course, always is the same. Going to see physicians and making sure that those prescribers identify first-line medicine predictors and how we can treat mild and moderate patients with an OSA which they then would use for SomnoDent.

So look, the long-winded answer is that we're not sure on the volume that it will contribute. We know that it will contribute something. And I think after 6 months of being in operation, we'll probably be able to come back to you and the market with further numbers on expectations of contribution for that.

I think the second part of your question was future contracts. We are hoping that this will start to open up doors to future contracts with other large German insurance companies in the future.

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Mark Devcich, Pie Funds Management Ltd - Head Of Research and Portfolio Manager [31]

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Right. And how large is this if I compare it to the other potential contracts out there?

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Neil Verdal-Austin, SomnoMed Limited - CEO [32]

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Yes. As far as I'm aware, it's probably around the third largest there is in the German insured market.

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Operator [33]

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The next question comes from Iain Wilkie with Morgans Financial.

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Iain Wilkie, Morgans Financial Limited, Research Division - Associate Analyst [34]

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So just a quick one, just a bit of housekeeping from me. Just really wanted to confirm that the -- all the RSS costs have now been pulled through. And basically, is FY '20 a clean sheet from here on out in that regard?

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Neil Verdal-Austin, SomnoMed Limited - CEO [35]

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Yes. Iain, great question. So as far as we're able to provide and as far as we are legally and within the bounds of what the auditors would let us do, we have provided, as we see it, at the 30th of June, all future costs we could possibly experience within the rules of what we're able to accrue for. So our intention is certainly to have no costs going through the P&L related to RSS in the future.

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Iain Wilkie, Morgans Financial Limited, Research Division - Associate Analyst [36]

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Yes. Okay. Yes, that's great. Oh yes, because I saw a couple of provisions on your balance sheet. But I mean, they're sort of smaller in sort of scale. So that's good.

And also, just lastly from me, can you sort of give us an indication for seasonality of the business going forward? I note that I think Q2 and Q4 are historically the stronger quarters for sales. Is that still the same? Or has there been any changes?

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Neil Verdal-Austin, SomnoMed Limited - CEO [37]

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No, that's exactly right. Back to the SomnoMed core business, yes. So (inaudible) one of the biggest quarters, really be effectively, only because of seasonality, right, so holiday periods in both the U.S. and Europe, whether it's July, August and, of course, a softer sort of January period normally into Q3.

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Operator [38]

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The next question comes from Peter Meichelboeck with Select Equities.

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [39]

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Look, just actually following on from Iain's question there. Just in terms of RSS, is there still some cash outflow we should expect in FY '20 as opposed to P&L?

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Neil Verdal-Austin, SomnoMed Limited - CEO [40]

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Yes, that's possible, right. So we have some cash commitments that SomnoMed have stood behind for RSS and that may still flow into FY '20. Correct.

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [41]

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Can you give us any indication of sort of how big that could be?

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Neil Verdal-Austin, SomnoMed Limited - CEO [42]

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That's unknown at this stage as we conclude the last of the leases and as we collect the last of the AR. So hopefully, in 3 to 6 months' time, I'll know what that is, Peter.

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [43]

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Right. Okay. And just sort of following on from that, just in terms of the sites that you had signed up, are they now all subleased or have you got out of all of those leases?

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Neil Verdal-Austin, SomnoMed Limited - CEO [44]

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No, there are 2 that are outstanding that are the most difficult, of course, and that's the reason they're at the end of the line and so we're still in negotiations to try and complete those.

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Peter Meichelboeck, Select Equities Pty Ltd., Research Division - Head of Research [45]

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Right. Okay. And look, the other question I had was just in terms of the Avant product. I mean, are you able to give us a bit of a feel for sort of the metrics around that in terms of sort of pricing and given the cost -- the manufacturing -- change in manufacturing, I guess, with that? Can you give us some sort of metrics how that would compare to say your existing products?

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Neil Verdal-Austin, SomnoMed Limited - CEO [46]

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Look, generally, because this is a launch of a digital product in a new digital segment, if you like, within the industry, it does cover the premium price generally in most markets. Now, we have to be careful about that in some markets. But generally, this is a signature product line, not a standard product line and this is [at the end] of our signature product line, Peter.

So we aim to make sure that we get the value that we should, given the investment in the technology, the type, the design the material and the digital platform that it offers. And hopefully, with increasing volumes, that will bring down the cost of manufacture below what we currently see on our other range of products.

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Operator [47]

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There are no further questions at this time. I'll hand back to Mr. Verdal-Austin for any closing remarks.

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Neil Verdal-Austin, SomnoMed Limited - CEO [48]

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Again, thank you all for your time during this very, very busy week and also day. I really welcome your involvement and your interest in SomnoMed. So thank you very much. And I hope to continue the discussion of our future and how SomnoMed will become treatment focused and technology driven with you over the next 6 to 12 months.

Thank you for your time.