Resmed Inc (RMD) — Q4 2022 Earnings Call Transcript

Great. Thank you, Kevin, and hi, everyone. Welcome to ResMed's Fourth Quarter 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 our earnings release and the presentation, both of which are available now. Joining me on the call today are our Chief Executive Officer, Mick Farrell; and Chief Financial Officer, Brett Sandercock. Following our prepared remarks, we will host a Q&A session, and Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer; and David Pendarvis, Chief Administrative Officer and Global General Counsel. During today's call, we will discuss several non-GAAP measures. For a reconciliation of the non-GAAP measures, please review the supporting schedules in today's earnings press release. And as a reminder, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future operating and financial performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. Please refer to our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'll now go ahead and turn the call over to Mick.

Thanks, Amy, and thank you all for joining us today as we review the results for the fourth quarter of our fiscal year 2022 ended June 30. On today's call, I will provide a brief high-level overview of our financial results. I'll then review progress towards our ResMed 2025 strategic goals, and then discuss our actions to navigate through ongoing industry and supply chain challenges. Brett will then join the call to review our financial results in more detail. Okay. Let's jump right in. Our fourth quarter results reflect strong performance across our business with high single-digit revenue growth in both our sleep and respiratory care business segment as well as in our Software-as-a-Service business segment. Our ongoing growth reflects our global team's relentless focus to solve very complex supply chain problems and find alternate design and engineering solutions to address the incredible industry challenges that we have faced over the past year and beyond. The global supply chain environment remains very much in flux across multiple industries. We are starting to see indications that the macro environment is improving, particularly semiconductor availability. However, we're mindful that even as macro trends start to improve, we still need our supplier partners to prioritize med tech component needs over other nonlife-sustaining industries. Demand in the market remains very strong. We've been able to mitigate some of the electronic component bottlenecks with the launch of our redesigned card to cloud AirSense 10 devices introduced to the market midway through our fourth quarter. As you can imagine, clearing one bottleneck simply brings the next rate-limiting step to the forefront. Our team is actively working to clear as many bottlenecks as they can as quickly as possible. On the positive news side, the redesign, reengineering and launch of the card to cloud device greatly improved our ability to meet the incredible demand that we see in the marketplace. During the last month of the quarter, during June, we were able to allocate more products to our customers than in recent months and in recent quarters. We're not out of the woods yet, but the compass is pointing to true north and we are on top of it. Throughout this crisis of demand and supply, our established ResMed guiding principles remain the same: that is that we will give priority to the production and delivery of devices to meet the needs of the highest-acuity patients first. As we discussed last quarter, we are still facing a challenging freight environment. The key challenges of sea freight and airfreight are due to reduced availability and elevated prices. These forces are impacting our ability to efficiently get components into our factories and then to get the finished goods out of those factories and ship to warehouses and ultimately to customers. We continue to do everything that we can to secure additional supply to ultimately further increase production of our devices. As highlighted on previous calls, this includes a combination of 5 concurrent work streams in supply chain. One, we are locking in the flow of our existing parts from existing suppliers. Two, we are establishing flow of existing parts from new suppliers. Three, we're validating and verifying new parts from existing suppliers. Four, we're validating and verifying new parts from new suppliers. And then finally, five, we're reengineering designs to mitigate the major supply bottlenecks. In summary, we're making good progress with these 5 lines of work, and we've been able to offset some of the impacts of the component shortages to best support patients, providers, physicians and beyond. In addition to the successful launch of our redesigned card to cloud device last quarter, we also continue to support our customers with our market-leading mask portfolio. Despite the challenges we faced with reduced new patient setups due to a competitor recall, we continue to see strong uptake of our mask solutions as our customers want the smallest, the quietest, the most comfortable, the easiest to fit and the most highly patient-rated masks in the market, and those come from ResMed. Peer-reviewed and published studies have clearly shown that patients that are on a ReSupply program are much more likely to remain on sleep apnea treatment adherent for the long term than those that aren't on a ReSupply program. Our home care provider customers not only want to put new patients on therapy, they want to keep those new patients and all of their existing patients on therapy over the long term. And the ultimate goal there is to improve patient outcomes to lower total health care system costs as well as to drive their own recurring revenue streams. We recognize that this demand outstripping supply situation remains a very difficult temporary state for all customers, including physicians, home medical equipment providers, payers, health care systems, as well as the most important customer of all, the patient. We continue to work across the industry to be the best partner and the best solutions provider for all customers. We expect demand to be greater than supply for at least 12 more months, driven by the recall of one of our competitors primarily. The net result is that every device that we here at ResMed make during these next 12 months, we will sell as it leaves the production line to a warehouse and is shipped to a customer. We are looking at every angle to maximize supply and address this incredible demand these next 12 months. As a company, we are learning every day. And as an industry, we will get through this challenge stronger than ever. Our goal is to ensure that every person gets the care that they need, where they need it, when they need it, and we won't stop until we achieve that goal. Let's now briefly review the COVID-related market impacts on our industry. Most of the 140 countries that we operate in are now above 100% of pre-COVID levels of patient flow. It is noted that in some regions and some countries, we see ongoing surges of new COVID variants with some select governments continuing to impose COVID restrictions. In these areas, patient flow remains below pre-COVID levels. But across the board, we are seeing ongoing adoption of digital health solutions for screening, for diagnosis and for remote patient setup and monitoring as well as well-established COVID cleaning protocols at sleep labs and physician offices. These trends continue to minimize the impact of new variants and diminish the absolute impact of COVID on our industry over time. Let's now step back a little and review ResMed's top 3 strategic priorities: number one, to grow and differentiate our core sleep apnea and respiratory care businesses; number two, to design, develop and deliver world-leading medical devices as well as digital health solutions that can be scaled globally; and number three, to innovate and grow the world's best software solutions for care that is delivered outside the hospital and especially in the home. The launch of our next-generation device platform called the AirSense 11 continues to go very well. It remains somewhat difficult to differentiate the success of the launch from previous generations with the incredibly high demand we're seeing around the world. Every Air 11 we make is sold immediately as it leaves the manufacturing floor. However, when we drill into patient feedback data, we see that patients are very excited about the platform, including the Air 11 device itself and the myAir software solutions surrounding it. During the fourth quarter, we introduced the AirSense 11 into several new countries outside the United States where we first launched the platform, including France, Switzerland and across the Nordic countries of Northern Europe. We look forward to further expansion into additional countries as we progress through our fiscal year 2023. One area that we are closely watching is patient adoption of digital health solutions. And to that point, adoption rates of the myAir app by new patients set up on therapy with the AirSense 11 continue to be more than double that of the AirSense 10. This is because the AirSense 11 platform is designed to enable and encourage patients to engage directly with their own health care. The bottom line is that people want personal care. They want their own data on their own app on their own phone. And they love the coaching and personal engagement of our ecosystem. They are voting with their digital presence, and repeat usage of the myAir app is stronger than ever. More patients on myAir means more patients are fully engaging with ResMed's software technology. This has led us to now passing over 12 billion nights of sleep apnea and respiratory care medical data in the cloud. Our software solutions, including myAir and AirView, are delivering a better patient experience, better efficiencies for home care providers and physicians, and most importantly, greater long-term adherence to therapy for the patient. 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 digital health. For our industry, this is specifically seen in the increased usage of home-based sleep apnea tests. Although new patient demand generation is clearly not a top priority in the immediate term given the current supply-demand imbalance, we are maintaining our focus in this area and our long-term investments so that we are ready when conditions improve and we can pivot and fire up our portfolio of demand-gen models and thereby ensure sustainable long-term pipelines of new patients for our industry. With over 1 billion people suffering from sleep apnea worldwide, we see this work as an opportunity but also an obligation as the market leader in the field. We are innovating with health care system partners and all of our customers to create an even more efficient and effective approach to sleep apnea patient identification, screening, diagnosis, treatment and management. We will continue to invest in technology that enables an end-to-end, seamless, digital experience for patients and their caregivers. As we consider opportunities to address the wider sleep market, we are investing in opportunities to address another major sleep disorder epidemic, that of insomnia. Insomnia has been shown in clinical research to occur in combination with sleep apnea, and that's a deadly combination. To this medical need and this medical opportunity, just last week, we announced the acquisition of a company called mementor. This is a German and Swiss digital health start-up that develops and sells digital medical products in the field of sleep medicine and beyond. mementor offers the first and so far the only permanently listed digital health application in the field of sleep medicine that is reimbursed by the statutory insurances in Germany. The acronym for these German digital health apps is DIGA, D-I-G-A. This acquisition furthers our efforts to diversify and accelerate growth of our ResMed business in Germany and the potential opportunity with DIGA to expand this offering into other markets around Europe and around the world. There's an unmet need in diagnosing and treating people with sleep problems, such as sleep apnea and insomnia, the 2 biggest sleep problems on the planet and especially when there's an overlap of these chronic conditions. This acquisition of mementor broadens our focus in this vertical from a sleep apnea therapy company to a true sleep therapy company. More to come as we pursue growth in this exciting space in Germany and beyond. Growth trends in the global sleep apnea market are in a state of flux in the short term given the market supply-demand dynamics that we talked about and the recall from one of our competitors. Long term, we estimate the underlying growth trends in the global sleep apnea market to be very strong; in the mid-single-digit range for devices and the high single-digit range for masks. As always, our goal is to drive market demand and to meet or beat market growth through generation of new patients and sales of our market-leading therapy solutions and the introduction of new innovations and alternative treatment pathways that enable us to address even more patients with undiagnosed sleep apnea. Current industry dynamics indicate that we have a multiyear opportunity to drive even greater ongoing acceptance and adoption of our solutions to further solidify our market leadership position. I've challenged our global ResMed team to strive for even stronger growth in the coming months and quarters and the fiscal year and beyond. I'm telling them to go get the share, to go lock in that share with digital health with value that speaks for itself with lower costs, better outcomes for patients and increased efficiencies for the health care system. Turning to a discussion of our respiratory care business. I want to focus on our strategy to better serve the 380 million people worldwide with chronic obstructive pulmonary disease, or COPD, with many others with neuromuscular diseases and respiratory insufficiency 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 as well as life support ventilation, as well as newer therapeutic areas, such as our cloud-connected pharmaceutical delivery solutions from our Propeller team, and high-flow therapy offerings that we are conducting clinical trials on right now, including our product platform called Lumis HFT. Demand for our core noninvasive ventilation and life support ventilation solutions for COPD and neuromuscular disease and beyond remains solid throughout the quarter. Ventilation solution demand was supported by the continued success, adoption and scaling of our AirView for ventilation software platform by customers as they experience the benefits of remote monitoring to better manage their ventilated patient populations through remote access to clinical data as well as customizable physician notifications. Let me now review our Software-as-a-Service business for outside hospital care. Our SaaS business achieved another quarter of high single-digit growth year-on-year across our portfolio of verticals, including home medical equipment as well as facilities-based and home-based care settings. Our SaaS customers recognize the need for technology solutions to solve their challenges with efficiency and scale, and our software, services and solutions help them achieve both. The continued growth of home-based care is providing tailwinds for HME solutions as well as home health solutions. We continue to grow with our customers as they increase their utilization of our software and our data solutions to improve and optimize their business efficiencies and their patient care, including Brightree and Snap ReSupply offerings. As businesses continue to open up, we've been able to visit customers more and more in person as well as attend trade shows, host conferences, where the interest in our Brightree, MatrixCare, HEALTHCAREfirst and Citus offerings remain very strong. Earlier this week, I personally attended the Inspire 2022 Conference in Austin, Texas. This is MatrixCare's annual customer summit, and it was in person for the first time since 2019. I had the pleasure and the opportunity of presenting and engaging in person with over 600 customers and partners from home health, skilled nursing, senior living, private-duty home care, life plan community verticals and beyond. The passion for caring for each patient that was involved in every conversation I had this week, the openness, the sharing and the ability for us as a community to move patients to lower-cost, lower-acuity and higher-quality outcome cares, those settings was palpable at Inspire 2022. I came away from that conference even more energized and excited about the opportunities that we have to support customers across the care settings with our digital health and our software solutions. The ultimate goal is that customers of our Brightree- and MatrixCare-branded solutions can provide better care for the people that they serve. Given the passion of our customers and the service levels that we're providing and the product pipeline that was discussed at this conference, I expect we'll continue to not only take share from our competitors across the portfolio, but even drive growth with more tech solutions being adopted by customers across care settings. The COVID-19 pandemic has been and remains challenging for facility-based verticals in our SaaS business, particularly skilled nursing and, to a lesser extent, hospice, where patient census rates below remain below pre-pandemic levels. As COVID restrictions continue to ease and our customers improve their line of sight to better conditions and better cleaning, we are seeing pent-up demand for technology investments in these facility-based areas. This provides opportunities for us to sell more services and more tech solutions to existing customers as well as to increase our new customer pipeline. One MatrixCare customer at Inspire 2022 grabbed me at the conference, and he described what he called a rocket ship acceleration of demand at skilled nursing tech solutions for those skilled nursing customers. This is a really welcome sign for sustainable growth across our SaaS portfolio. So as we look at our portfolio of solutions across care settings, we expect our SaaS group revenue to maintain high single-digit growth throughout fiscal year 2023. As always, our goal is to meet or beat market growth rates, and we will continue to invest and innovate to grow the market and to take share. Our growth in SaaS will come through organic and inorganic growth. We've long talked about our desire to expand our SaaS offerings internationally if and when we found the right opportunity for ResMed. In early June, we announced the acquisition of MEDIFOX DAN, the leading provider of end-to-end software solutions for home health and for nursing home providers in Germany. We've been closely watching the evolution of the German digital health system and the associated outside hospital health care system for many years. And we've actually been closely watching MEDIFOX DAN for a number of years. This is our first investment in a pure-play SaaS business in Europe, and it's a great opportunity to expand our reach in this business globally. We're starting in Germany as it is not only a market where we're vertically integrated in our core business of sleep and respiratory care, it's also one of our largest markets globally and a country where the government is investing in digital health reimbursement. We're excited about the opportunity to accelerate innovation and recurring revenue business models through this acquisition in Germany. As we discussed on the acquisition call that we had in June, MEDIFOX DAN will be immediately accretive to ResMed at close. Progress towards closing this acquisition is moving ahead as expected. We remain on track to close by the end of December 2022 in our fiscal 2023 second quarter. We are the leading strategic provider of SaaS solutions for outside hospital care globally, and we provide mission-critical software across a broad set of very attractive markets. We are well positioned, and we have created a differentiated value for our customers and for ResMed with our SaaS business investments. I'm excited about the future of our SaaS business. And Bobby Ghoshal and the excitement that he had on Inspire 2022 with the crowd for both MatrixCare and Brightree was an inspiration for me as the CEO of the parent company but also for the whole team there. It's an important part of ResMed's future growth, and I see a lot of opportunities to invest in lower-cost, lower-acuity settings of care. We believe that this is the future of health care delivery, and that's where ResMed competes and it's where ResMed wins. To bring it all together, our strategic focus remains on personal care that is patient-centric, physician-centric and provider-centric. This triple-pronged approach, combined with our unique ResMed culture, means that we are very well positioned to continue winning in the vastly underserved medical markets of sleep apnea, COPD, neuromuscular disease, asthma, insomnia and beyond. We are transforming outside hospital care at scale. We're leading the market in digital health technology with over 12 billion nights of medical data in the cloud and nearly 18 million cloud-connectable medical devices on people's bedside tables in 140 countries worldwide. We are unlocking value by using de-identified data to help patients, providers, physicians, payers and entire health care systems. We have invested in the cybersecurity, the privacy, the cloud ops, the data analytics, the AI/ML capabilities to do this at scale, unmatched by any competitor. And we are increasing our investments and our lead each and every day. Our 2 key global customer-facing software products, AirView and myAir, are 100% in the cloud. Our devices are both cloud-connected and cloud-enabled, making ResMed itself a market-leading cloud-connected and cloud-enabled digital health company. Our mission and goal to improve 250 million lives through better health care in 2025 drives and motivates ResMedians every day. We made excellent progress towards that inspiring goal this last fiscal year 2022. We changed nearly 141 million lives these last 12 months with our devices, our mask systems, our software solutions, helping people sleep better, breathe better and live higher-quality lives with outside hospital care. Before I hand the call over to Brett for his remarks, I want to once again express my sincere gratitude and thanks to more than 8,000 ResMedians helping their customers in 140 countries. Your perseverance, hard work and dedication have been impeccable. Thank you. With that, I'll hand the call over to Brett in Sydney, and then we'll open up for Q&A.

Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the fourth quarter of fiscal year 2022. Unless noted, all comparisons are to the prior year quarter. We had solid financial performance in Q4 despite the headwinds we faced due to significant ongoing supply chain constraints in a challenging freight environment. Group revenue for the June quarter was $915 million, an increase of 4%. In constant currency terms, revenue increased by 8%. Revenue growth reflects increased demand for our sleep products across our portfolio and increased device demand generated by our competitor's ongoing product recall. We did not derive incremental revenue from COVID-19-related demand during the June quarter compared to $20 million in the prior year quarter. Looking forward, we expect negligible revenue from COVID-19-related demand. Excluding the impact of COVID-19-related demand in the prior year, revenue increased by 10% on a constant currency basis. In relation to the impact of our competitor's recall, we estimate that we generated incremental device revenue in the range of $60 million to $70 million in the June quarter. Note, this is consistent with the estimated $60 million to $70 million incremental device revenue in the prior year quarter. For fiscal year '22, this brings the total estimated incremental revenue in the range of $230 million to $250 million associated with our competitor's recall. While we continue to experience ongoing challenges in securing sufficient production components to meet market demand, we are now seeing a stable to improving supply chain environment. This has given us more confidence around our expectation of increasing device production in fiscal year '23 relative to fiscal year '22. Looking at our geographic revenue distribution and excluding revenue from our Software-as-a-Service business, sales in U.S., Canada and Latin America countries increased by 12%. Sales in Europe, Asia and other markets increased by 1% in constant currency terms. By product segment globally in constant currency terms, device sales increased by 6%, while masks and other sales increased by 11%. Breaking it down by regional areas, device sales in the U.S., Canada and Latin America increased by 11% as we benefited from incremental revenue due to our competitor's recall. Masks and other sales increased by 13%, reflecting solid resupply revenue achieved despite the challenging device supply environment, which continues to limit new patient setups. In Europe, Asia, and other markets, device sales decreased by 2% in constant currency terms, or increased by 7% in the current period when excluding the impact of COVID-19-related sales from the previous year. Sales of masks and other products in these regions increased by 7% in constant currency terms, or by 9% when excluding COVID-19-related sales from the prior year. Software-as-a-Service revenue increased by 8% in the June quarter. Our HME segment performed strongly, as customers continued to use our SaaS solutions to streamline their operations. We are also seeing stability in the skilled nursing care segment despite ongoing challenges related to COVID-19. 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 fourth quarter earnings press release. Gross margin increased by 50 basis points to 57.8% in the June quarter. The increase is predominantly attributable to improvement in average selling prices and a positive product mix, partially offset by higher freight component and manufacturing costs, negative geographic mix and unfavorable foreign currency movements. Moving on to operating expenses. We are seeing a more normalized expenditure profile as COVID-19 impacts subside compared to the low comparable growth rate we experienced in Q4 last year. SG&A expenses for the fourth quarter increased by 6%, or in constant currency terms, increased by 11%. The increase was predominantly attributable to increases in employee-related costs and T&E expenses. SG&A expenses as a percentage of revenue at 21.1% remained broadly consistent with the 20.7% we recorded in the prior year period. Looking forward and subject to currency movements, we expect SG&A expenses as a percentage of revenue to be in the range of 20% to 22% during fiscal year '23. R&D expenses for the quarter increased by 7%, or in constant currency terms increased by 11%. The R&D expenses as a percentage of revenue was 7% compared to 6.8% in the prior year quarter. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% in fiscal year '23. Operating profit for the quarter increased by 4%, underpinned by strong revenue growth, partially offset by higher operating expenses. Our effective tax rate for the June quarter was 17.6% compared to the prior year quarter rate of 21.5%. Looking forward, we estimate our effective tax rate for fiscal year '23 will be in the range of 19% to 21%. Our net income for the quarter increased by 10%, and our diluted earnings per share for the quarter also increased by 10%. Cash flow from operations for the quarter was $79 million, reflecting solid underlying earnings, offset by higher levels of working capital. Capital expenditure for the quarter was $29 million; depreciation and amortization for the quarter totaled $37 million. During the quarter, we paid dividends to shareholders totaling $61 million. We recorded equity losses of $2.5 million in our income statement in the June quarter associated with the Primasun joint venture with Verily. We expect to record equity losses of approximately $3 million per quarter in fiscal year '23 associated with the joint venture operation. We ended the fourth quarter with a cash balance of $274 million. At June 30, we had $780 million in gross debt and $500 million in net debt. Our debt levels remain modest. At June 30, we had approximately $1.4 billion available for drawdown under our revolver facility. In summary, our liquidity position remains strong. Our Board of Directors today declared a quarterly dividend of $0.44 per share, representing an increase of 5% over the previous quarterly dividend and reflecting the Board's confidence in our operating performance. Our solid cash flow and low leverage provide flexibility in how we allocate capital. We recently announced the MEDIFOX DAN acquisition and expect to close this transaction before the end of the calendar year pending regulatory clearances. Going forward, we plan to continue to reinvest in growth through R&D and also expect to continue to deploy capital for tuck-in acquisitions, such as the recently announced acquisition of mementor, a German pioneer and health tech start-up that develops and distributes digital medical products in the field of sleep medicine and related areas. And with that, I will hand the call back to Amy.

Great. Thanks, Brett, and thanks, Mick. Kevin, I'll now turn the call over to you to provide instructions and manage the Q&A portion of the call.

Mick, you mentioned at the start that you were seeing some improvement in the global supply chain. I just wanted to understand the details around what you meant by that improvement, and when that could start to see improvements to your manufacturing volumes.

Thank you for the question, Craig. Over the past several quarters, we faced a significant decline in the supply situation, experiencing decommitments, a term I hadn't encountered before in the supply chain, even during my time at BHP and other companies. This was particularly surprising given the context of commodity and specialty industries. However, I can say that this noise is starting to lessen. We're observing a supply environment for components that is stable to improving. Rob, would you like to add any more details about the supply chain and how we're seeing this stability and improvement in components?

Sure. Yes, Mick. Craig, one of the sort of fundamental things of supply chain management is ongoing risk management and having sort of the ability to foresee problems and to react through all of that. And then you also manage your risk through inventories and that type of thing. We've over recent months put in place a lot of forward orders, working a lot on relationships with key suppliers. We suspect that sort of global demand on these suppliers is moderating a little bit. And then as Mick says, that means that they're sticking with their commitments at a higher level than what we have seen recently. There are always problems to overcome. And as Mick said earlier, there are other bottlenecks. Once we close one bottleneck, we have to go and work on the next. But overall, I'd say we're feeling better about the forward outlook that we have, and we've got a little more clarity. It's not perfect. There will still be challenges and undoubtedly unexpected things that we'll have to manage through, but the net of it all is that we should see our volumes continue to increase from here.

So I noticed, Mick and Brett, no specific guidance on the recall tailwind in fiscal '23. Obviously, I understand the prudence. But I guess just given the importance of the debate, perhaps you can just share your latest thoughts on how you see that dynamic playing out this year.

Yes. Thanks for the question, Chris, and it's a really good one. But as you know, we've annualized the impact of that competitor recall. And for us now, as I said in my prepared remarks, for the next 12 months, I do not believe there'll be really in the new patient market given the consent decree work they've got to do, the remediation work they've got to do in responding to that and the observations. And so what that means for us is basically demand that is incredible for these next 12 months, and that every device we make will be sold as it comes through the manufacturing line. And so the rate-limiting step on that, as Rob said, will be a bunch of bottlenecks that we'll work our way through. And it's like a game of Whac-A-Mole. We just keep finding a problem, solving it; finding the next problem, solving it. And ResMed is exceptional at that continuous improvement process. Our supply chain teams, our manufacturing teams, our distribution teams have been heroic in the ventilator crisis in 2020 and then the supply chain crisis of '21-'22. And so that gives us confidence to say sequentially every quarter through fiscal '23, we're going to see those volumes improve. And we've got line of sight to that, and we've got interactions with suppliers on that, and we think it's going to go up every quarter. I don't look at this as incremental or temporal share taking now. This is permanent share taking. We're going to go in, we're going to get the share, we're going to lock it in with digital health solutions. And when somebody uses something that lowers their labor costs by 50%, that improves the adherence rate of the end customer, the patient, to 87%, 9 out of 10 patients getting adherent at day 9 and beyond, that's where we can lock it in. So that's sort of some extra color for you, Chris, but great question.

Mick, my question is around the card to cloud devices. And is there anything that you note with respect to either compliance rates or resupply potential with card to cloud versus direct cloud connectivity? And is there a view that maybe you get patients that are on card to cloud devices back to the fully charged AirSense 11 at some point?

Thanks, Sean. I have two questions. The AirSense 10 with card to cloud is quite new, as we really launched it in June during the quarter. It's still early for that product, but we have significant experience with card to cloud, especially when considering the S8 and S9, the latter having a small SD chip in the back. I launched the S9 while overseeing the sleep business back in 2009 and 2010, so we have a solid background in this area. Most of the card to cloud volume has been in the U.S., where we've established a strong digital health system and have engaged well with our HME partners. We don't have exact numbers comparing adherence between the AirSense 10 and AirSense 11, but I believe the adherence will be better with AirSense 11 since we are seeing double the uptake rate of myAir, and that digital health engagement leads to higher adherence. Once we receive clearance for the communication chips and their supply, we will transition everyone to AirSense 11 as quickly as possible. However, we likely won't retrofit existing groups because patients are generally satisfied with their therapy. The data will still be sent to the cloud, but not daily; it will be uploaded during follow-ups at 30, 60, or 90 days when they see their home care provider and physician. They are not lost patients or data; they remain part of the ecosystem, though it's not as efficient as we'd like. We're committed to ramping up the AirSense 11 as quickly as we can. Despite the supply demand issues we've faced, I was impressed that our team managed to pivot in June, and we plan to maintain that momentum through the September and December quarters and beyond. Thank you for your question, Sean.

This is Maggie Boeye on for Margaret today. I wanted to ask one on ReSupply, just the trends you're seeing this quarter and if you're continuing to see incremental and permanent share gains within that market as well.

Yes. Thanks, Maggie. Great question, allows us to talk about masks. Despite that competitor not being there for new patient setups where we had a lot of adoption of ResMed masks on their platform as well as ours and then it's not in the market. We saw mask growth rates at 11% constant currency globally. We saw 13% constant currency growth in the quarter on masks in the U.S. And we saw a pretty strong 7% constant currency growth on masks in Europe, Middle East and other markets. And so I actually think that the team and all the work we've done with Brightree and Snap ReSupply in the U.S. and all the work our European and Middle Eastern teams and our Asia teams have done around engaging patients digitally through either myAir or other marketing and adherence programs have performed really well. And despite the headwind of lower new patient setups, we're achieving at or above market growth rates. And to the second part of your question, yes, I do think we're taking share across categories. And I think we're creating new categories by some of our innovations in the different types of comfort and design of the masks, the minimalist masks, the fun comfort masks, the over-the-head masks and so creating new segments, taking share in those and being able to lock in that share. Because when a patient gets happy on their mask, like I am with my AirFit P10, they tend to stick with it for life. And it's a great thing for us to be able to do on that. So really excited about it, and I look forward to more mask innovation coming out and more share taking and locking it in over time.

I guess I wanted to ask a question on the gross margins. Do you have a sense of kind of what the supply issues, FX, retrofitting, all of this is having on your productivity and kind of gross margins in FY '22?

That's a great question, Matthew. I'm going to hand that to Brett. Any color on GM there for Matthew?

Yes, Matthew. I mean it is because we're just trying to maximize the devices out the door with the components that we have. So as you think through that, in terms of manufacturing optimization, we've really struggled with that. So I do think as we get further through this and some of the supply issues abate, then I think we do have some opportunities there on manufacturing recoveries to significantly improve from where we are. So I do think that's an opportunity for us. It's not immediate, but if you look through the medium term, there is definitely opportunity for us to optimize there.

You can hear me here, yes?

Yes. Got you loud and clear, Steve.

Yes. Great. Also, just on the gross margin for Brett. We're seeing in freight costs spot prices for shipping and for airfreight coming down by about 30% at the moment from its peak in March. I just wonder when we might start to see that appearing in the gross margin and if there's any changes with regards to semiconductor chip pricing that is worth calling out in more recently.

Yes, Steve, it's Brett. You're noticing some moderation in freight costs, leading to reductions, but this isn't reflected in our numbers right now. I believe we will begin to see some benefits in the second half of the year. However, for now, it’s not impacting our margin. We anticipate some potential improvements in freight costs in the second half, both in rates and by increasing our sea freight usage as the year progresses, which will help lower our overall freight expenses. Overall, we are seeing some stabilization in the environment. As we move through fiscal year '23, there may also be opportunities in manufacturing and on the freight side, but we haven't observed these changes in our numbers yet.

Maybe just continuing on the cost around gross margins. Can I get, perhaps you, Brett, to talk about the impact of inflation, what you're seeing on costs, and what you expect or what we should be looking out for in terms of margins and the impact there for?

Thank you, Dave. We've noticed increases in component costs, particularly in electronic components, as well as in freight expenses. These increases are already reflected in our current cost structure. Looking ahead, I anticipate that some of these costs will continue to rise, though I believe we can manage them. As part of our strategy, we've implemented some pricing adjustments for our customers, such as a surcharge on devices, and we plan to introduce modest price increases starting July 1. These measures should help mitigate some of the cost pressures. While we are still observing cost increases, they are not accelerating, which is encouraging. Overall, there are some offsets to consider regarding gross margins; we may face headwinds from component costs, but the rise in average selling prices should positively impact margins moving forward.

So just moving back to revenue. How much revenue did the card to cloud contribute in the fourth quarter? And then I guess going forward, do you expect it to be meaningful in FY '23?

Yes. Thanks for the question, Gretel, and it's a really good one. For competitive reasons, I don't want to go into too much detail around it, other than to say that the pivot of the team during the quarter was incredible. To redesign, reengineer and requalify, validate and verify a device with a new model of card to cloud and get it to market and get it in customers' hands in June was fantastic. So all credit to the team. It was material to our growth in the quarter, and it will be material to our growth up to and when we get those comms chip supply back to the levels that we need it to meet the incredible demand of the marketplace. So it was material. It was strong; I'm not going to quantify it down to the nth level of detail here. But it provided great additional growth for us in that last quarter and will for the coming quarters. I look forward to the point where I can say we are no longer selling AirSense 10 card to cloud because that means that we've got AirSense 11 connectivity and AirSense 10 connectivity back up to where we need it with that component no longer being a bottleneck for us. But that may be 3, 6, 9, 12 months out there with this incredible demand we're seeing in the market.

Mick, following up on your comments about the card to cloud, could you clarify what will happen to those machines once the chip shortage is resolved and we have better access to communication chips? Is the plan to bring those devices back to install the chips, or will customers keep the card to cloud devices for around five years before upgrading later?

Yes, that's a great question. I believe the answer relates to the latter part of your inquiry. When someone receives a device, it becomes a very personal and intimate item, often placed on their bedside table. It enhances their comfort and quality of life. The requirement to take an SD card to their doctor or provider won't diminish that personal connection. Some tech-savvy patients may want to upgrade their devices before the typical 3- to 5-year insurance replacement period, but I think most will keep their devices long-term. Our responsibility is to offer excellent services via AirView and engaged communication with our patients through various channels like email and text, significantly beyond just the cloud connectivity from the device that we've maintained in our Air Solutions ecosystem for some time. I am confident we will see high adherence among users of the AirSense 10 card to cloud system with our current ecosystem, and it will improve with Air 11. Once we have the necessary components again, we will move forward. However, there will be a small group who seeks to upgrade their devices faster in certain socioeconomic segments and countries. To clarify, our main focus is on the card to cloud system in the U.S., where we have a strong network of home care providers experienced in using card readers and transmitting data to the cloud, allowing it to be accessed in AirView and helping to engage patients for Resupply through various methods within our Air Solutions ecosystem. Thank you for your insightful questions, Saul.

Mick, you've been quite specific in the past about these streams of engineering efforts to overcome supply chain shortages, and I guess, including the AirSense 11 range with parts alternate suppliers. So the card to cloud device clearly had a big impact. But do you have any update on the timing of these other initiatives? And will that be a calendar year '22 feature?

Yes, Dan, that's a great question. Our Chief Operating Officer is on the line and is more familiar with the other four work streams. The fifth involves reengineering for C2C and beyond. Rob, can you provide any details for Dan on the work we are doing in the supply chain and our engineering efforts aimed at increasing supply over the fiscal year?

Yes, Dan. I mean one of the key areas, obviously, is in the columns is around getting access to some of the 5G protocols that are being rolled out. And we're seeing them get rolled out pretty nicely in some markets. And some of our validation, some of those streams are getting access to those types of chips, including we're getting access to earlier-gen protocols as well. And we'll be deploying both of those. I don't think we can give you granularity over it. And it's not without risk in some of the timing. But what we will be doing is as soon as we can deploy and validate and have access to those chip volumes, we'll switch to that as quickly as possible. So it won't actually be a single overnight switch of now, all of a sudden, everything has gone to some new protocol or something; they'll be targeted to markets in specific volumes, and we'll keep doing work on that. As I said earlier, the outlook in terms of the overall demand for these chips from other parts of industries, obviously, cars and phones, may be looking a little better for us. And certainly, people are less likely to allocate away from us. So we're expecting to be able to plan a little more certainty, but we won't be able to sort of publicly give out the exact dates and things like that on those deployments.

My question is just around consumables and masks and accessories. Are we expecting increased device output over fiscal '23? Just interested in your thoughts on the impact of that on masks and accessories volumes and what that might mean to masks and accessories revenues. And then also, do you think the attachment rates on market share, that those incremental revenues would be higher than you may have seen in the past?

Thank you, David. That's a great question. In the last quarter, we saw an 11% growth globally and 13% in the U.S. as we begin to ramp up the AirSense 10 card to cloud to address increased demand. Throughout fiscal '23, we expect to see steady growth in our volume deliveries across the AirSense 10 and AirSense 11 product lines. As Rob mentioned, this will lead to rising volumes consistently each quarter. Regarding your specific question, new patients will drive additional sales of masks and consumables. A significant portion of revenue from these items comes from re-supply and recurring sales to our established patient base, which remains strong. The focus on respiratory health and hygiene has increased post-COVID, prompting more attention to clean equipment. This change in demand among existing patients has become a lasting trend over the past couple of years. Additionally, the number of new patients is also rising as supply improves. I know you have models in place, and you'll likely notice an uptick in the consumption of masks and accessories. While this won't result in an abrupt increase, there will be a gradual rise in the growth rate of these products as we align device supply with the existing demand over the next year. Ultimately, every device we produce is sold.

I was wondering if the card to cloud units are contributing to your gross margin by eliminating other chipsets. Are they resulting in savings that significantly impact your margins, or is that not the case?

Brett, you want to answer Mike's question?

Sure, Mick. Yes, Mike. The card to cloud does not include the communications module, which results in some savings. This is beneficial for our margin, but it is not significant.

Mick, I have a two-part question for you. Regarding the card to cloud transition, could you clarify how much of this is tactical versus strategic? You've mentioned market growth consistently at 5% to 8%. It would be helpful to understand how this shift might contribute to ResMed's long-term device growth. Additionally, Brett, if I look at SG&A for FY '22, which was around 8% to 9% year-over-year and roughly 20% to 22% of revenues, my calculations suggest it could amount to about $3.6 billion to $4 billion for FY '23. Is that an accurate way to approach it? Apologies for adding a second question.

Yes. A bit cheeky, Suraj, but let’s dive in. I’ll address the first part briefly and then pass it over to Brett for the second part of your two-part question. Regarding the card to cloud, it’s a tactical decision. It is crucial because we have patients who are struggling. They navigate the health care system, get screened, diagnosed, and receive a prescription, but then they wait for a device. We’ve decided that our strategy, which focuses on 100% connectivity in every device through communication chips, will not hinder the needs of these patients. Therefore, we are making a tactical shift to the AirSense 10 C2C, due to the communication chips causing a supply bottleneck. As soon as that supply improves, we will return to the 100% connectivity of the AirSense 10 and AirSense 11 devices. This is a temporary adjustment, and we are committed to doing our best for these patients; they will have great adherence, although they won’t have all the technology features like daily feedback that come with the AirSense 11 and the increased myAir usage associated with it. I want everyone to get an AirSense 11 as soon as we receive the components. Our supply chain team is aware of this, and our customers are too. We are prepared to ramp up production throughout the fiscal year. Regarding the second part of your question, our competitor released figures regarding the current market and projections for 2025 that I believe are significantly underestimated—by 25% to 35%. They mentioned a $2.1 billion device market for 2025, but I project it will exceed $2.5 billion, potentially reaching $2.6 billion or $2.7 billion, provided we drive demand effectively. We expect to capture the majority of that market. Brett, do you have any thoughts?

Sure. Yes. Suraj, I mean given some broad guidance, I guess, on the SG&A as a percentage of revenue, I wouldn't get drawn into strict revenue guidance. I'd just reiterate what we said before. We're expecting an increase in production volumes, and that should definitely support sequential revenue growth through FY '23.

I was hoping you could help us understand the decline in device sales in the rest of the world a little better. While I acknowledge you're focusing on the cloud initiative in the United States, could you provide insight into the market in the rest of the world and what you are observing from competitors outside of Philips in that area?

Yes, thank you, Lyanne. Your question is a good one, and the answer is quite straightforward. In the fourth quarter of our fiscal year 2021, we reported $20 million in COVID-related ventilator sales in India. As many of us recall, there was a significant surge of the COVID variant in India about a year ago, leading to $20 million worth of ventilator sales across cities like Delhi and Bangalore to help save lives. Our response was remarkable, and Justin Leon and his team did an excellent job facilitating those sales in India. If we exclude that $20 million in COVID sales, we actually observe positive growth in device sales in Europe, Asia, and the rest of the world. To address the broader part of your question, in countries where there are no unreasonable COVID lockdowns, like China and a few others that continue with such measures, we are seeing significantly more than 100% patient flow. There is tremendous demand for our products, both in ventilation and devices, returning to the mid-single-digit growth for devices and high single-digit growth for masks and accessories. We are even exceeding those numbers, as shown in our results, due to increased market share and demand as we help patients. To summarize, the trends in Europe, Asia, and the rest of the world were mainly impacted by those ventilator sales.

Thanks, Kevin, and thanks again to all our shareholders for joining us on the call today. I'd like to once again take the opportunity to thank all 8,000 ResMedians, many of whom are also shareholders. And thank you for your hard work, your dedication, helping over 141 million people sleep better, breathe better and live better lives outside the country in over 140 countries worldwide. Thanks for what you do today and every day. I look forward to talking with all of our stakeholders here on our earnings call in about 90 days, plus or minus. And with that, I'll hand over to Amy.

Great. Thanks, Mick, and thanks, everybody. We do appreciate your time and your interest. And if you have any additional questions, please don't hesitate to reach out directly to Investor Relations. This does conclude our fourth quarter fiscal year 2022 conference call. Kevin, I'll turn it back to you to close things out.