Resmed Inc (RMD) — Q3 2023 Earnings Call Transcript

Hey, thank you Kevin. Hello everyone and welcome to ResMed’s third quarter fiscal year 2023 earnings conference call. This call is being webcast live and a replay will be available on the investor relations section of our corporate website later today along with the copy of the earnings press release and the presentation, both of which are available now. On the call today are Chief Executive Officer, Mick Farrell and Chief Financial Officer, Brett Sandercock. Following our prepared remarks, Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer and David Pendarvis, Chief Administrative Officer and Global General Counsel for our Q&A session. During today’s call we will discuss several non-GAAP measures. For a reconciliation of the non-GAAP measures, please see the supporting schedules in today’s earnings release. Our discussion today will include forward-looking statements, including but not limited to expectations about our future financial and operating performance. We believe these statements are based on reasonable assumptions; however, our actual results could differ. Please review 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’d like to now turn the call over to Mick.

Thanks, Amy, and thank you to our shareholders for joining us today as we review results for the March quarter. Our third quarter fiscal year 2023 financial results reflect very strong performance across our entire business. Through the hard work of our ResMed team worldwide, we’ve been able to steadily improve supply and manufacturing output to deliver for customers, and most especially for patients, with now full market availability of our life-saving products and Therapy Solutions. During the quarter, we were able to offer unconstrained access to cloud-connected AirSense 10 flow generator devices in North America, as well as improved access to those cloud-connected devices across our global markets. We continue to work through some supply chain constraints with our latest AirSense 11 platform, and we expect to steadily improve the global availability of AirSense 11 over the next several quarters. We are thrilled to have the AirSense 10 platform off allocation and fully available to customers in the U.S. and other major markets in swift succession. I would like to send a huge personal thank you to our Six Sigma Black Belt supply chain and manufacturing teams. Partnering with our global supplier Alliance, we have been able to significantly increase production to the point that we are now able to deliver cloud-connected devices to meet the needs of all of our customers in the U.S. And we are working hard to make that the case in all 140 countries that we sell into worldwide as we move forward. Last quarter, we made a commitment to meet the global demand for connected CPAP and APAP devices with a combination of AirSense 10 and AirSense 11 by the end of calendar year 2023. As I just noted, we have already achieved that goal in our largest market, and we will be well ahead of that goal across all of our global markets. Supply chain challenges aren’t completely behind us, but we have passed the idea in supply and we see steady increases in supply ahead. Our amazing R&D teams and global supplier Alliance teams have designed and validated new components. They have added new suppliers and they have worked hand in hand with existing suppliers to secure the flow of parts that we need. We’re also focused on scaling our manufacturing capabilities with the world’s biggest and highest output manufacturing plant on the planet in the field of respiratory medicine. That high-tech facility is now fully up and running in Tuas, Singapore. We are working country by country to secure the necessary regulatory approvals as we ramp production and delivery of the AirSense 11 platform across global markets. Given this global ramp plan, we expect to remain on allocation for the AirSense 11 platform for the next few quarters with AirSense 10 covering all the difference in demand. With this combination of AirSense 10 and AirSense 11, we have the two best sleep apnea therapy platforms in the market, and we are now able to service all of our customers’ needs. Our incredible growth rates of 43% in global device revenue this quarter speak to that market leadership position of these two platforms; customers are voting with their wallets. Our mask and accessory business also continued its strong growth trajectory, with 15% global growth in constant currency this quarter across our masks businesses. Mask growth is supported by both new patient growth as well as enhanced resupply programs to existing patients catalyzed by ongoing core patient demand. We have now reached the point that new patient flow is well above the levels we saw pre-COVID. In fact, March 2023 was our highest quarter ever for new patients setups in our cloud-based patient management system called AirView. Our digital health ecosystem enables and drives long-term adherence, pushing towards 90% adherence for our highest-performing customers. Even as we’ve now passed three years since the start of COVID, there continues to be sustained heightened awareness by patients of the importance of respiratory hygiene and respiratory health. This has been a major step change that has held for now 12 quarters; we consider that a permanent change at this point. In the U.S. market, customers resupply programs including Brightree ReSupply have augmented growth. In our consumer-driven markets, outreach programs and subscription programs have also driven mask replenishment rates. Patients want fresh equipment because there is less leakage and more comfort for them, the person who was suffocating before this treatment. Physicians want fresh equipment because they have seen peer-reviewed published evidence that patient resupply is directly correlated to increased patient therapy adherence. Our teams continue to work incredibly hard to achieve these double-digit growth results amid a challenging industry environment. All 10,000 of us ResMedians are laser-focused on continuing to deliver both the devices and masks for our customers globally, every week, every month, and every quarter. Let’s now briefly review updates on the top three strategic priorities for our company. Number one, to grow, expand the reach of, and differentiate our core sleep apnea and respiratory care businesses. Number two, to design, develop, and deliver market-leading devices as well as market-leading digital health solutions that can be scaled globally. And number three, to create, innovate, and grow the world’s best software solutions for care delivered outside the hospital. The launch of and market reaction to our AirSense 11 device platform continues to go very well. Patient feedback remains very positive, and we continue to see strong adoption of our myAir patient app. In fact, AirSense 11 adoption rates of myAir are more than double the adoption rate of myAir with the AirSense 10 platform. It turns out that patients love getting their own data every day on their myAir app with a daily score, daily coaching, therapy engagement through advanced analytics and patient-focused algorithms. Patient utilization of a digital health platform like myAir is directly linked to adherence, which is then directly linked to better patient outcomes as seen by the physician, which ultimately drives better outcomes for the payer and the provider. Given these trends, increasing production and global availability of the AirSense 11 platform clearly remains a top priority and an obligation, and we will continue to drive market penetration, leading the market and expanding the market as we scale production and achieve regulatory approvals country by country. Meanwhile, we continue to improve the software and digital health technology that drives a significant component of the value proposition for our connected devices. Over the next several quarters, we will introduce several artificial intelligence-driven coaching features into the AirView system, as well as on the patient-facing myAir app. These AI algorithms will provide personalized suggestions to improve the patient experience and ultimately to increase patient therapy adherence. Many of these AI-driven solutions will be available on both the AirSense 10 and AirSense 11 ecosystems. ResMed’s AirSense 11 device is the best positive airway pressure device on the planet, followed very closely by the second-best device, which is the AirSense 10 platform. And together they share the same digital health technology ecosystem. We will continue to invest in the ecosystem supporting these platforms as we innovate solutions for the benefit of physicians, providers, and especially patients. The bottom line is that our digital health technology investments have a multiplier effect across both AirSense 10 and AirSense 11 ecosystems, catalyzed and powered by AirView and myAir. Pivoting to our respiratory care business, we continue to drive growth and adoption of our bilevel and other non-invasive ventilator solutions around the world as well as investing in our newer-to-market technologies for patients including neuromuscular disease, COPD, asthma, and beyond. During the quarter, we announced a pilot collaboration between our digital therapeutics team under the Propellor Health brand and the University of California Davis Health System. This partnership allows eligible UC Davis Health patients to have access to Propellor’s digital therapeutics platform, including sensors for inhaled medications, a mobile app, a web portal, as well as ongoing patient support. Data from the Propeller sensors will be transmitted to the UC Davis Health Electronic Health Record system through an API to support patient enrollment and remote patient monitoring. It’s still early days for this technology. However, combined with our investments in clinical research for home-based high flow therapy for the treatment of COPD at home, we see these technology innovations as important clinical additions for treating respiratory disease and an integral part of our 2025 growth strategy as we now pivot to look beyond to ResMed 2030. Turning to our software as a service offerings for care delivered outside the hospital, our SaaS business grew strongly at 35% year-over-year in the quarter, including the contribution from our recently acquired MEDIFOX DAN team in Germany. On an organic basis, SaaS growth in the quarter achieved high single-digit growth of 9% across our SaaS portfolio. We’re excited about the strong sustainable growth of our core SaaS business, and we’re very pleased to see MEDIFOX DAN contributing to our growth in its first full quarter as part of the global ResMed Group. We continue to grow with customers that deliver care outside the hospital, as they increase utilization of our software and data solutions to improve and optimize business efficiencies and patient care. Here at ResMed, we believe the future of healthcare is in lower-cost, lower-acuity settings; we are investing in technology that our customers need to operate and scale as patient volumes grow in these facilities and out-of-hospital facilities. As opposed to COVID, patient census continues to improve in our facilities verticals; we are seeing pent-up demand for technology investments that continue to come to market across skilled nursing facilities, nursing homes, and beyond. Our Home Medical Equipment SaaS business under the Brightree brand continues to grow at a very rapid pace and deliver sustained profitable growth. We are seeing the ongoing impacts of staffing shortages across all of the outside hospital healthcare verticals that we serve. This pressure on our customers provides opportunities to drive conversations about the benefits of our software solutions to streamline and drive efficiencies across their businesses, so that they can free up staff to focus on their core purpose of serving patients and improving patient outcomes. Our SaaS business remains an important part of ResMed’s growth strategy, and it complements the market-leading software and device solutions that we have in our core sleep apnea and respiratory care businesses. Our Brightree ReSupply program continues to demonstrate the synergies we can generate between our SaaS business and our core SRC business. Brightree ReSupply automates the entire process from contacting the patient, interacting with the payer on coverage, communicating directly with the patient, collecting copays, and managing the logistics and distribution process of the product. The ultimate goal is to keep a CPAP, APAP, or bilevel therapy user replenished with the supplies that they need to enable a better and longer-lasting therapy experience. This results in better outcomes for the patient, the physician, the provider, and the payer. We are well positioned as the leading global strategic provider of SaaS solutions for outside hospital care globally, and we have created differentiated value for our customers and long-term sustainable growth for our stakeholders. We are transforming out-of-hospital healthcare at scale, leading the market in digital health technology across our business. We now have over 14.5 billion nights of medical data in the cloud, and we have over 20.5 million cloud-connectable medical devices on bedside tables in 140 countries worldwide. We are liberating data to the cloud every day and unlocking value for patients, for providers, for physicians, for payers, and entire healthcare systems. We are leading the industry and we won't stop innovating. We’re investing 7% of our revenue in R&D. It’s worth noting that the annualized revenue pool is now well north of $4 billion. There is so much opportunity ahead of us. It’s inspiring and it’s exciting. ResMed’s mission remains crystal clear. We have a goal to improve 250 million lives through better healthcare by 2025. This patient-centric mission drives and motivates ResMedians every day. We made excellent progress towards that inspiring goal with our growth over the last 90 days. And during the last 12 months, we have improved over 156 million lives with the delivery of the device platform to a patient, or a full mask system to a patient, or a digital health software solution that directly impacts the patient, helping each person to sleep better, breathe better, and live a high-quality life with healthcare delivered right where they live. Let me close my remarks with my sincere gratitude to the more than 10,000 ResMedians working across 140 countries for their perseverance, their hard work, and their dedication today, and every day. Thank you. With that, I’ll hand the call over to Brett in Sydney for his remarks and then get in the queue because we will open up for Q&A from the group. Brett, over to you.

Great. Thanks, Mick. In my remarks today, I’ll provide an overview of our results for the third quarter of fiscal year 2023. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q3. Group revenue for the March quarter was $1.12 billion, an increase of 29%. In constant currency terms, revenue increased by 31%. Revenue growth reflected improved availability of sleep devices to support the strong underlying demand for these products, as well as solid growth across our broader product portfolio. Year-on-year movements in foreign currencies, in particular, the weaker euro negatively impacted revenue by approximately $20 million in the March quarter. We recorded an incremental revenue of approximately $15 million from COVID-related demand in the March quarter. However, looking forward, we expect negligible revenue from COVID-related demand. Looking at geographic revenue distribution and excluding revenue from our software as a service business, sales in the U.S., Canada, and Latin America increased by 32%. Sales in Europe, Asia, and other markets increased by 28% in constant currency terms. Globally, in constant currency terms, device sales increased by 43%, while masks and other sales increased by 15%. Breaking it down by regional areas, device sales in the U.S., Canada, and Latin America increased by 48% as we benefited from strong demand and improving availability of our connected devices. Masks and other sales increased by 14%, reflecting solid resupply and growth in new patient setups. In Europe, Asia, and other markets device sales increased by 36% in constant currency terms, again reflecting strong demand and improving availability of connected devices. Masks and other sales increased by 15% in constant currency terms, reflecting increased patient setups. Software as a service revenue increased by 35% in the March quarter, reflecting the contribution from our MEDIFOX DAN acquisition and continued strong performance from our HMV vertical. Excluding our MEDIFOX DAN acquisition, SaaS revenue grew by 9% in the March quarter. The MEDIFOX DAN acquisition contributed revenue of $26.6 million for the March quarter consistent with our expectations at the time of the acquisition. 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 third quarter earnings press release. Gross margin declined by 200 basis points to 56.1% in the March quarter. The decrease primarily reflects product mix shifts with a significant increase in sleep device sales, as well as component cost increases and unfavorable foreign currency movements, partially offset by increases in average selling prices. Moving on to operating expenses, SG&A expenses for the third quarter increased by 25%, or in constant currency terms increased by 28%. The increase was predominantly attributable to increases in employee-related costs and travel expenses, as well as the incremental SG&A expense associated with our MEDIFOX DAN acquisition. SG&A expenses as a percentage of revenue improved to 20.5% compared to the 21.1% we recorded in the prior year period. Looking forward, and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the balance of fiscal year 2023. R&D expenses for the quarter increased by 14%, or in constant currency terms increased by 16%. R&D expenses as a percentage of revenue was 6.8% compared to 7.7% in the prior 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% for the balance of fiscal year 2023. Operating profits for the quarter increased by 27% underpinned by strong revenue growth, partially offset by a lower gross margin. Following the acquisition of MEDIFOX DAN our net interest expense for the quarter was $15 million, and we expect interest expense to be a similar amount for the balance of fiscal year 2023. Our effective tax rate for the March quarter was 20% compared to the prior year quarter effective tax rate of 21.1%. Looking forward, we estimate our effective tax rate for fiscal year 2023 will be in the range of 19% to 21%. Our net income for the March quarter increased by 28%, and non-GAAP diluted earnings per share increased by 27%. Cash flow from operations for the quarter was $283 million, reflecting solid underlying earnings partially offset by a modest increase in working capital. Capital expenditure for the quarter was $29 million. Depreciation and amortization for the quarter totaled $44 million. We ended the third quarter with a cash balance of $228 million. As of March 31, we had $1.6 billion in gross debt, and $1.4 billion in net debt reflecting the funding of our previously announced MEDIFOX DAN acquisition. During the quarter, we reduced our revolver debt by $215 million. As a result, at the end of the quarter, we have approximately $605 million available for drawdown under our revolver facility, and we continue to maintain a solid liquidity position. Our board of directors today declared a quarterly dividend of $0.44 per share. Going forward, we plan to continue to reinvest in growth through R&D, reduce our overall debt levels, and deploy further capital for tuck-in acquisitions. And with that, I’ll hand the call back to Amy.

Great. Thank you, Brett. And thank you, Mick. Kevin, I’d like to now turn the call over to you to provide instructions and then run the Q&A portion of the call.

Yes, good morning. Before I start, I want to say thank you to David Pendarvis. We’re certainly sad to see him retire, but we know that we’re in safe hands with Amy. In terms of my question, obviously some very good device revenue there, but I want to just to talk about the you mentioned the third quarter, you had a new patient high higher than what we’ve seen pre-COVID. Can you provide some comments of how much of that new patient backlog remains? And also, what sort of progress you’re making on the Repat backlog? And if you can discuss that, according to the Americas investor separately, that’d be very helpful.

Well, thanks for the question, Lyanne and a tribute to Dave for his 22 years in this role. To your question, look, yes, incredible growth, 43% growth in device revenue this quarter to an all-time high. Many factors have gone into that; primarily, we were able to deliver on our promise to get unconstrained on AirSense 10 connected devices. We’ve got those in the market. I think we were able to take care of all of the demand of customers in the U.S. market. We said we’d be there by the end of this calendar year, but we’re already here right now. In terms of the backlog of those new patients, I think we’re there in the U.S. But in terms of REPAPING, I think there’s a lot more to do, and we’re going to partner across the U.S. with our thousands of home medical equipment companies to start to work through that REPAP program. But I think that’s going to happen over time. We just got to the point where we’re completely unconstrained on AirSense 10 in this quarter. I think it’s fantastic. I want to get unconstrained on AirSense 11; that’s going to take several quarters. And then, of course, that’s just one country. We’re in 140 countries worldwide, we’re going to go get regulatory and all of them and then get those products to market. So it’s going to be an ongoing process over the coming quarters and years to continue there. I’m not going to say that we’re going to see this sort of exceptional 43% growth on an ongoing basis; the market growth is closer to the mid to high single digits in this space. But we’re seeing that market growth come back. We’re seeing the new patients come back. We are through that pandemic side and we’re getting new patient flow, we see it in our home sleep testing data, we’re looking at all the information coming through. We’re seeing it in the number of patients being set up in AirView, all-time high. We’re looking at that every week, every month, and every quarter, and it’s steadily improving. And it’s not just the U.S.; it’s in Western Europe, Northern Europe, and it’s certainly coming through Asia with very strong growth in China over the last number of quarters as we’ve come through the COVID crisis there as well. So that’s my summary there, Lyanne. Great question.

Sorry, can I just clarify when you said that you’re there on the backlog? Is that both for the United States and the rest of the world?

Yes. So we’re through the backlog in the U.S. and we’re going to be progressively working our way through the other 139 countries. It’s a complex system; when you get regulatory approvals for AirSense 11, you’ve got to go region by region, you can do the European Union, but then you have to go country by country for many of these approaches for Brazil, for China, for India, and it takes time to get them there to get unconstrained with the two platform approach that we’ve been able to take in the U.S. Canada and a number of other countries. But look, we’ll give you updates over the coming quarters, Lyanne, as we get unconstrained country by country, you will be informed. Our goal is to be unconstrained everywhere; it’s just not logistically possible to do that immediately. So we’re going slowly and steadily to that, but I’m just happy to be nine months ahead of when we were saying we’re going to deliver unconstrained in at least some of our top markets here, and we’ll keep you updated as we go forward.

Okay, thank you very much, Mick.

Good morning. Thanks for the question. Someone else asked about the gross margin, but I’d like to ask about the SG&A and just the fact that it’s remained relatively constant as a percentage of revenue during the course of the record, which, to say a bit counterintuitive, when you consider the fact that the product had been shortages, etc., and suddenly was selling themselves. So I just wonder if we could talk about the key elements of that SG&A and the mid-to-long term trajectory there as volumes continue to improve?

Yes, that’s a great question. Daniel, I’ll hand over to Rob Douglas, our President and Chief Operating Officer to cover our SG&A.

Yes, Dan. So you know how we operate: no matter what’s going on, we’re fiscally disciplined. We’re always keeping an eye on the future and where we’re going and what’s happening as we build expenses carefully. We absolutely talked about the fact that we weren’t doing face-to-face marketing and a lot of travel and those types of things earlier in the pandemic. As that started to come back, we’ve had to manage carefully how that’s becoming an extra load on our SG&A. But it’s really, really a factor of careful management. Everyone’s aware of the issue of employee costs, which are moving in a time of inflation. We continue to manage that carefully, and we’re extremely prudent about what we add and how we go. We really don’t want to get ahead of ourselves and end up like some of these other companies that have found themselves way over-provisioned in their go-to-market operations and had to make corrections. So we’re in good shape, and we’ve got a solid plan. We should be able to stick very carefully with our SG&A forecasting.

Good morning. Thanks very much for taking my question. Good afternoon to those in California. You obviously had a very strong devices growth in the quarter. I was just wondering whether you still believe that you can sequentially grow every quarter in fiscal year 2023 in devices? And then how should we think about FY 2024 and the potential return of Philips to the market and whether there’s been any update there?

Yes, thanks for the question, Matthew. And yes, last quarter, I certainly said that we expect to see sequential growth of devices throughout the calendar year, actually here through 2023. Those are forecasts. I got to tell you, this $607.9 million of device sales in the quarter was ahead of where I thought we were at that point. That’s a big number to come up. As Brett said, there’s about $15 million of ventilator sales to China in there as they went through another phase of COVID during the March quarter. So, if you take that out, it’s still a big number to shoot for here in Q4. But we have the best commercial teams on the planet in respiratory medicine sales. Our fiscal year Q4 is a big time; there are incentives everywhere for people to finish their fiscal year strong. There’s a lot of incentives. It’s a tough number to accomplish. Taking out those ventilators, I think we can do it; I’m confident in my team, I’ll back my team. They got a little bit ahead of me here in March, and I’d love for them to be ahead of me in June. I’m confident we can do that. More important than that is that we are now taking care of every patient’s needs in our major markets. Our goal is to be there in all 140 countries. Some of it is that revenue growth is amazing, but it’s really about patient care. It was disappointing for us as an industry that, as an industry, we weren’t able to care for every patient that got a prescription. We’re now doing that in our major markets and we plan to fulfill it not only where we’ve already achieved it but to get ahead of it in all the other countries as we go. So, sequential growth is good; we’re going to be pushing towards trying that. But more important than that, taking care of every patient in every geography, and working as hard as we can to get to those patients and get them the quality mask they need, and get them on a resupply program—that’s what leads to long-term adherence, not just that one-time device sale but getting an adherent patient at an 87% or 90% adherence rate on an ongoing basis. That’s our challenge. Matthew, great question. Thank you.

Thanks, good morning all. I’ll ask the gross margin questions. Is the mix really the key driver of the way to gross margins here? Do you have— is the higher price offsetting component costs? And just as we look forward, if you’re going to continue to assume strong device sales growth, should we expect gross margins to continue to be weaker at these levels in the short term? Thanks.

Yes, thanks for the for the question, Gretel. And as you said, and as Brett said in his remarks, we had some headwinds on gross margin, which were geography mix. We saw more growth in low-margin countries, U.S., Canada, and in product mix, we saw more CPAP and APAP growth than we did by-level or life support or even other non-invasive ventilators. Those headwinds are going to start to subside, but I actually think, Gretel, as I look forward, I see gross margin expansion in double-digit basis points ahead for the coming quarters and throughout fiscal year and calendar year. I’m bullish on gross margin expansion because I see geography mix and product mix headwinds subsiding. I’m bullish on gross margin because I see ventilator growth opportunities start to come back and I see mask growth and replenishment growth, new patient growth starting to come on masks. I’m also bullish on gross margin as we go forward because I see inventory costs starting to drop and we’re going to start to cut into that, and bring them down versus the run-up we had with our competitor being out of the market. As you said, we have been offsetting some of those gross margin headwinds with ASP holding steady in our core business and increasing ASPs in our SaaS businesses. We’ve had some freight surcharges and others with customers; as we start to see our costs come down, we’ll take away some of those surcharges. So net-net, I see us being able to expand our gross margin and grow as we look forward throughout, not just the fiscal year 2023 but the calendar year here in 2023.

Alright, thanks. Sorry, I was on mute. I just wanted to ask about how much we should expect the mask trend to start following the device trends, as you become more encumbered. I thought maybe there would be a little bit more mass growth this quarter, not taking away from a good result. But maybe you can talk about that as a derivative.

Yes, thanks, Matt, for your for your question. And you know that as you look at our masks and accessories business, about 70% to 80% of our masks growth is replenishment; it’s existing patients out there who are coming back for a fresh mask, a fresh humidifier, a fresh set of tubing, heated tubing, and so on and filters. So, it’s the mask and accessories being 70% to 80% replenishment business. So, it’s not directly impacted. New patient growth is incredible, we’re back to better than pre-COVID, and we’re growing from there; and that’s great to see that sort of strong rise. But it doesn’t directly correlate. It’s less a derivative and more a sort of compounding effect over time, as you know, like compound interest. As you build up that install base, those patients are ordering on a three-month or six-month basis, that becomes a compounding effect on the device growth today leading to a future investment in growth in masks over the coming fiscal quarters and fiscal years as you build that installed base. So, 43% device growth doesn’t immediately correlate to mass growth; but I mean, to your point, 15% global mass growth on a constant currency basis is incredible; pre-COVID, we would have been very proud of a number like that. Post-pandemic, coming through this growth, I’m incredibly proud of the team and what they’re able to do not just in new patient setups but also in the replenishment programs. It’s not just in reimbursed markets where we’ve got formalized systems. In France, the U.S., Japan, we have formalized systems to ensure that the patient gets a mask when they need it. We’re also working in our consumer-driven markets, where we’re driving adherence programs, subscription programs that are fast-growing in many of our geographies where it’s cash pay, or direct-to-consumer interaction, and they’re saying; I want a fresh mask. It’s true to the core demand. It’s not just a system-driven one; this is a patient-driven one. And that’s the part about mass growth that I think is most exciting. I’ll say one last thing: I think there were some skeptics, two or three years ago, who said this step-up in respiratory health and hygiene, this step-up in mask replenishment—that’s a short-term trend due to the COVID pandemic. We’ve now seen 12 quarters of strong mass growth. So I think that strong mass growth is sustainable for the future, and we’ve been able to execute that for 12 quarters; we plan to continue to do that as we go forward.

Thank you for taking the question. I’ll ask another twist on the mask question. As you’ve better filled on the device side, especially in the U.S., is there a halo impact in terms of winning share incrementally on the consumables side? Is that a dynamic that’s played out recently or could play out over the next year or so as the device urgency to step into the device void abates and you refocus on other priorities?

Yes, look, Mike, there’s certainly a relationship. When our commercial teams are working with the best platform, the AirSense 11 and the best second-best platform, the AirSense 10—both of which are better than our competitors—they’re also obviously offering the best masks, the best mask portfolio out there, and we have a leading share in that across all 140 countries as well. So there’s definitely a synergy effect in that it’s the same people talking to the same physicians, the same providers, the same healthcare systems. There are some clinical technical needs. We design our products to work better together: our masks and our devices have far more accurate mask leak detection; they have far more accurate detection of pressure and control of an APAP device or a bilevel device, particularly for overlap patients who have obstructive sleep apnea and COPD. You need that IPAP and APAP pressure control to be right on. When you use our bilevel with our mask, that’s going to be far more accurate. The physicians know that and they will script towards that for those patients. So, there is a strong positive synergy effect. Yes, I do think there’s a correlation with terminal, but it’s less a competition; it’s more the same commercial teams talking to the same therapy centers, with the best technology, and the best outcomes.

Thanks very much. Mick, can I go back to gross margins? I mean if I heard you correctly, you said you expect gross margins to expand in double digits in the future. Can you do a little bit on what sort of timeframe? And are we talking gross margin percentage? Are we talking gross profits? Just trying to understand what you’re expecting on that front, please?

Yes, David, thanks. I’m going to hand to Brett to go through more detail. But what I was saying is I expect double-digit basis points improvement from where we were at in the quarter. 56.1% is the idea, and I want to grow from there. I see us being able to move that up, I don’t know, 10, 20, 30, 50, or 100 basis points over the coming quarters and beyond. But Brett, do you want to provide a little more detail for David on the headwinds, the tailwinds, and all the fun that goes into gross margin?

Yes, sure, Mick. Yes, David, it’s—I mean we wouldn’t—we’re not going to try and quantify, but when we look at it, we do expect margin expansion over the coming quarters. So if you look at some of the key ones that have hurt us year-on-year, it’s around product mix. We had to deal with significant increases in sleep devices. We’re dealing with component cost increases coming through year-on-year, but that looks to be stabilizing there. So there’s 2 big headwinds that we expect will moderate. We’re working on manufacturing and logistics, freight costs, and we’re looking at efficiencies. We’re focused back on that now, and these should improve over the coming quarters. On top of that, with the AirSense 11 platform, that does contribute positively to gross margin as well. Now that one will take time as we roll that out. Putting things together; I guess, you look at the sort of headwinds that are moderating, we should get a few tailwinds in manufacturing and logistics. That kind of gives us the confidence we think we can get that expansion from here on in.

Hey everyone, thanks for taking the question. I wanted to maybe follow up on some of the patient demand metrics that you guys gave early on the call. I think I heard maybe high single-digit market growth in the U.S. or Americas. Should we add repat to that so that ultimately leads us to a double-digit growth rate? How do you think about that, I guess, once Philips potentially reenters the marketplace for you guys on a long-term growth? Can you continue at that double-digit top-line growth rate? Thanks.

Yes. Thanks for the question, Malgorzata. I think there’s so much that goes into it. But yes, look, we’re on the other side of this pandemic, right? Not only just the pandemic becoming endemic in the way that the world is opening up, but in our industry, we’re now seeing that strong growth of patients that we’re really starting to pick up. And yes, it’s mid to high single digits growth on the patients starting to come through the funnel now, and that’s really strong. How long that’s sustainable and how we can drive it? That’s going to be up to us as the market leader. We have the market lead here, and we’re going to drive awareness programs. We’re going to drive demand generation programs. I just got an update from a team here in the U.S. market looking at a project to bring patients into the funnel and drive patients into the funnel. As the market leader, that’s really our job—not just accept market growth but drive market growth. That’s going to be an active thing we’re going to be looking at as we move forward. I’m not going to quantify it out. I know you have your models; everyone on the sell-side and buy-side has their models. I would say, whatever your models are, think about an active leader engaging in digital awareness, marketing awareness and driving and curating patients through the channel. We’ve learned a lot through the COVID crisis about digital health, home testing, remote setup, and virtual pathways that have become a catalyst for future demand generation. So I don’t know, Rob or Lucie, if you have any extra thoughts on that?

Just one other minor point, Mick. That new patient growth is really solid and there are so many untreated patients. We can see a long-term future in that. But also as we build our long-term adherence programs, that will keep the mask growth ahead of that new patient growth, and we see a long-term outlook for that, too.

Yes, Hi morning and evening everyone. Just thinking about your ability to retain market share when Philips comes back to the market. What levers do you think you can pull to ensure that you retain market share? Are we looking at kind of things like pricing as a factor? Or do you think there are other things that will help you retain that share?

Yes, thanks for the question, Andrew. We’ve got competitors based in Western Europe and Asia, and we’ve been competing with them very strongly for the last few decades, and certainly the last 2 years. We have one competitor who’s been out of the market for new patient setups for 2 years; who knows how much longer they’ll have to come in? They’ll have to fight to become the number two share player from a 0% new patient setup share. We look forward to that. We were beating that particular competitor in 2019 before they had their recalls. I know we’ll be able to beat them when they come back in. Our goal is to maintain and grow share as the market leader. There are now with the latest epidemiology, rising up to around 1 billion people with obstructive sleep apnea that needs to be treated worldwide. If you add in COPD, asthma, and insomnia, you’re talking about 2.5 billion people in our total addressable market. You can think about share, but it’s really not Coke and Pepsi; this is not a low-growth carbonated beverage market. This is a high-growth digital health technology market in med tech, and that’s how we’re driving it forward. Watch this space.

Yes, hi Mick, you mentioned at one point that you’re getting 90% adherence on some of your best customers. I’m just curious like where that is versus kind of baseline? And how you can move that forward with the rest of your customer base?

Yes, Matt, it’s a really good question. The peer-reviewed published evidence is out there around an 87% adherence number that’s been out there for a couple of years. The average market adherence might be around 60% to 70%. The general industry adherence might be on average 65% to 75% for patients who aren’t engaged with myAir or AirView. Just having the doctor use AirView can add nearly 10% to adherence; where the doctors are using AirView, you might go from 65% to 75% adherence. With patients using myAir, it can go up another 10%. For that example, you might go from 75% to 85% adherence. Getting to the 90s is a challenge, as that involves partnerships between us and healthcare providers, which can involve joint developments and sophisticated customers in Europe and the U.S. But regarding engagement—that’s how we deliver care. We’ve been enriching our collaboration with many partners, and we’ve worked specifically to continue growing adherence rates. We focus on engagement and training. That’s why I’m confident our share will not only stay where it is but grow as we innovate and push forward with technology.

Thanks for taking my question. Mick, just a question on Primasun. I just noticed this quarter the investment was very low, certainly less than what the guidance had been. So I’m wondering, did something change this quarter? And any update on how that project is going?

Yes, it’s a great question. Primasun is our joint venture with Verily in the U.S. market. We’re looking to digitally engage, identify, enroll patients from sleep concerns to diagnosed patients in treatment. We have activities through our core U.S. and North American marketing teams, and obviously, in the other 139 countries we operate in. We’re at a pilot phase in trials and we’re gearing up for scaling approaches with Primasun, U.S. programs, and many others worldwide. As we start to roll those out, we can’t wait; we’ve got full capability to supply with AirSense 10 and AirSense 11. We can really turn the dial up on demand generation initiatives. Watch this space.

Good afternoon, Mick, can you hear me all right?

Got you loud and clear, Suraj.

Perfect. So first, let me just express my thanks to David. David, wish you the best in your retirement; it’s been a pleasure dealing with you all these years. Mick, a lot of questions have been asked. You commented about AI, that caught my attention. So Mick, think about it this way: Suraj comes in, he’s gone through the CPAP titration, the sleep lab. Certain parameters have been set at a bi-level variable, whatever. How would—what parameters specifically would your AI/ML-based algorithms deploy with patients? The reason I ask is to understand how you’ll use this to improve compliance?

Well, Suraj, it’s a really good question. A lot of those things are proprietary. However, we look at our compliance predictors—our compliance analysis tools, which can help empower HME in the U.S. and many more ways. We’ll have algorithms that learn over time, serving the doctors, respiratory therapists, as they see improvements in adherence. That triage process that was done manually is now automated, allowing us to deliver the best outcomes for the toughest patients, as well as ensuring those who need coaching are identified and helped. There’s a lot to come on this in the upcoming quarters, so watch this space.

Thanks for taking my question. I just noted the inventory balances continued to increase. When might we start to see that come down? Also, is there much cloud inventory concerning parts in that number still?

Yes, Craig, thanks for the question. It did move up just a little bit in the quarter. I want to target that down because we’re through the peak, and we’ve got full supply. Let’s get that number down. But Brett, do you want to speak to some of the details of how we’re going to significantly reduce that inventory number over the coming quarters and fiscal year?

Sure, sure, Mick. Yes, I’d characterize it, Craig, in that we’ve stabilized that inventory this quarter, and really that drove the strong operating cash flow that you saw. I think there’s more that we can do, and the aim is to reduce those inventory levels overall. We can do it; we’re seeing improvement in lead times, which will help. Getting from port to port has improved a bit, so we can lower inventories. We’re continuing to increase sea freight versus air freight, so some of that manifests in inventory. Eventually, we tune safety stock levels because we’ve got more predictability on what we need and when we can get supplies. And then inventory—as you see has been future-looking, so we’re balancing that, but the trajectory is we expect to gradually lower inventory levels throughout FY 2024.

Thanks, Mick. I’m just after your latest thoughts on the diabetes and obesity drugs. We had another positive update last night and they seem to be coming fast. Could you just share how ResMed is thinking about these, and to what extent their success may impact your business?

Yes, thanks, Chris. Yes, it’s a huge market and quite exciting. We’ve wanted to have interactions; when I first joined the company 23 years ago, we were working with bariatric surgeons looking at patients that go from 450 pounds to 200 pounds and, thus, various ways to manage minor alterations because sleep apnea therapy still remained vital. We want to make sure they get on APAP due to their needs. These days, the market is 80% APAP so you don’t need a new algorithm to treat varying weight loss. We’re aligned with those milestones—the digital health use cases allow for partnerships between variable technologies and primary care. The innovations in AI drive further enhancement—this will help in increasing the patient funnel for the 1.2 billion people needing treatment worldwide. This is something we can align with as we work with pharmaceutical companies Thank you to all of our stakeholders for joining us on this call. I want to take the opportunity to thank the 10,000 ResMedians who are also shareholders. Thank you for what you do and your dedication helping people sleep better, breathe better, and live better lives in 140 countries. You delivered these numbers we just reported. Thank you for all that you do. I’ll hand the call back to Amy, and then we’ll close out.

Great. Thank you, Mick. Thanks, Kevin, and thanks, everyone. We appreciate your interest and your time. If you do have any additional questions, please don’t hesitate to reach out directly. This does conclude our third quarter 2023 conference call. Kevin, you can now close this out.