Resmed Inc (RMD) — Q4 2023 Earnings Call Transcript

Great. Thank you so much, Kevin. Hi everyone, and welcome to ResMed's fourth quarter fiscal year 2023 earnings 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 Lucile Blaise, President of our Sleep & Respiratory Care Business for the Q&A portion of the call. During today's call, we will discuss several non-GAAP measures. Please review the supporting schedules in today's earnings press release for a reconciliation of the non-GAAP measures to our GAAP reported numbers. Our discussion today will also 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 all our shareholders for joining us today as we review the results of our June quarter, the last quarter of our fiscal year 2023. Our results reflect incredible growth across our entire business with double-digit growth in our devices, masks, and software businesses. Unconstrained availability of our market-leading cloud connected flow generator platforms has enabled us to continue to offer access to 100% cloud-connectable AirSense 10 flow generated devices in all of our major global markets and beyond. In parallel, we are ramping up and improving the availability of our best-in-class AirSense 11 platform, which will gain further geographic regulatory approvals throughout the fiscal year and steadily increasing supply also throughout the fiscal year 2024 and beyond. Although challenges within the post-COVID supply chain haven't completely been mitigated yet, we expect ongoing steady improvement in component and end product supply in the quarters ahead using a combination of AirSense 10 and AirSense 11 platforms. While we remain focused on scaling production and global availability of the AirSense 11 platform, we remain on allocation for the Air 11 platform for the next few quarters. But I want to be clear on this point. With combined availability of the unconstrained Air 10 platform, we have enough devices to meet all of the customer needs that we see in major markets and globally. With the powerful combination of the Air 10 and the Air 11 platforms, we have the two best device platforms on the market. Our strong double-digit 23% year-over-year growth in the devices category demonstrates that customers are choosing ResMed, and we are delivering. Our masks and accessories business also performed at a very strong 18% growth in constant currency this quarter. Patient demand continues to drive increased adoption and utilization of our mask resupply programs, augmenting a steady cadence of new patient setups. We continue to see strong growth in both the U.S. business where provider resupply programs have augmented growth and in our markets outside the U.S. where our consumer outreach and subscription programs are also driving mass replenishment directly with those end-user patients. Our teams continue to work incredibly hard to achieve these strong growth results amid a challenging industry environment where component costs and freight costs are still working their way through our inventory post this supply chain crisis. I'm proud of the work that 10,000 ResMedians have put in every week, every month, every quarter to deliver these incredible results for the business, for our customers, for our shareholders, and ultimately for our most important customer, our patients. Let's now briefly review updates on the top three strategic priorities for our company. Number one, to grow and differentiate our core sleep apnea and respiratory care business; number two, to design, develop, and deliver market-leading medical devices as well as 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, a field that we call residential medicine. In terms of our patient-facing digital health platforms, adoption continues to go very well. The feedback we hear from patients and healthcare professionals remains very positive. We are seeing strong adoption of the myAir patient app by folks using AirSense 11. In fact, it is more than double the adoption rate that we saw with our AirSense 10 platform with many, many millions of patients signing up and engaging daily on their myAir app to view their own sleep data on their own phone and to review their own therapy data. This is important as engagement with a digital health platform like myAir is directly linked to higher adherence to therapy in patients. And higher adherence to therapy is directly related to better patient outcomes, to increased resupply and to better economics for the payer and the healthcare provider with lower overall healthcare costs. Last month, we announced and closed the acquisition of Somnoware. Somnoware is a U.S.-based leader in sleep and respiratory care diagnostics software and physician management software. As part of our ongoing efforts to improve and streamline the end-to-end pathway for patients and make it easier for sleep labs and physicians and their practices to diagnose and manage patients, we're excited about this acquisition that complements our current ecosystem of software solutions, including AirView for providers and physicians and Brightree for home care providers. These ecosystems together will drive greater efficiency and better patient care by accelerating the pathway to therapy and with a better overall customer experience. We're also excited about our progress across several digital health technology initiatives to further increase the value proposition for our connected healthcare ecosystem. Over the next several quarters, we plan to introduce several artificial intelligence-driven data products and capabilities on both the physician and provider-facing AirView platform, as well as the patient-facing myAir app. Early testing of these AI-driven data products is very positive in both of these customer groups, and we will refine to the optimal digital design and then we will launch and then we will scale these products around the world. These AI-driven data products provide personalized suggestions to increase therapy adherence and to ultimately improve patient outcomes as well as patient, physician, and provider experience. We will continue to invest in the world's largest digital healthcare ecosystem that we have with over 15.5 billion nights of medical data in the cloud as we continue to unlock value from those data to benefit physicians, providers, payers, and patients. We saw strong growth in our respiratory care business in the quarter through ongoing adoption of our non-invasive ventilators as well as our life support ventilator solutions. We're still in the early stages of market development with some of our newer to market technologies in this category, including home-based high-flow therapy that we call HFT for treating chronic obstructive pulmonary disease or COPD in the home. We continue to generate clinical evidence and economic outcomes to support broader adoption of these technology innovations for treating lung disease in the home. We're encouraged by the clinical results we've seen with our HFT trials so far, and we continue to remain very focused on addressing COPD as one of the top diseases globally for hospitalization and the number one cause of re-hospitalization in the U.S. geography. The prevalence of respiratory insufficiency due to COPD, as well as respiratory insufficiency due to neuromuscular disease continues to increase, and we are focused on having low-cost, high-quality solutions to address this health epidemic. Our SaaS business had another great quarter with year-over-year growth of 34%. Our SaaS business growth was supported by another full quarter contribution from our fast-growing MEDIFOX DAN business, as well as solid organic growth of 8% across our Brightree and MatrixCare portfolio of SaaS businesses. We're pleased to see sustained high-single-digit growth in our SaaS business on an organic basis, driven by the ongoing strength in the HME and infusion segment, and more stability in the facility segment as patient flows have now rebounded post-COVID. I'm very impressed by the leadership of our most recent SaaS portfolio addition MEDIFOX DAN, which is on track and meeting or beating our expectations. I'll be visiting personally with the team in Hildesheim, Germany, this quarter to discuss the growth face-to-face with the digital health innovators there in Hildesheim who are changing healthcare and taking care of people in the lowest cost, lowest acuity and highest quality of life setting, which is very often the home. We believe this is the future of healthcare and that's where we're investing and that's where we're winning. Our customers continue to see the value of adopting technologies to improve and optimize business efficiencies and personalized care, and we deliver the best software solutions to help customers do just that. There is pent-up demand for technology investments in residential medicine verticals, particularly as staffing shortages continue to impact the industry, particularly in nursing, but across the clinician and provider groups. This presents opportunities for ResMed's SaaS solutions to streamline operations and create workflow efficiencies so our customers' staff can focus on providing personal care. It's up to us to deliver for our customers and drive growth. I have confidence that our SaaS business can accelerate from these high-single-digits on an organic basis to double-digit growth on an organic basis in the mid to long term. Our SaaS business remains an integral part of ResMed's growth strategy. This business complements the market-leading software and device solutions that we have in our core sleep apnea and respiratory care businesses. As an important example, our Brightree ReSupply program continues to demonstrate strong synergies between SaaS and our core business, providing resupply for patients with sleep apnea, COPD, neuromuscular disease and beyond. The output of this work can be seen in our very healthy 19% growth in mass revenues in the U.S. geography this quarter. Ultimately, this work results in better outcomes for the patient, the physician, the provider, and the payer with lower overall healthcare costs. We are well-positioned as the leading global strategic provider of SaaS solutions for residential medicine globally. We have created differentiated value for our customers as well as long-term sustainable growth for our stakeholders. Here at ResMed, we are transforming respiratory medicine and residential medicine at scale, leading the market in digital health technology across our businesses. As we continue to scale and drive efficiencies in our operations in this post-COVID world, we continue to leverage appropriate pricing and cost reductions to drive accelerated growth in our bottom line. We are focused on driving top-line revenue and maintaining tight discipline and increasing efficiencies so that we can lower costs and ultimately so that we can accelerate our impact and our bottom line profitability, delivering even further value for all of our shareholders. As we move through fiscal year 2024, I see improvements in our business margins with geography mix, with product mix, and specifically with strong bi-level and non-invasive ventilator growth with strong mask growth and increased software solutions growth. All these business lines are margin accretive to our growth. I also see that the higher inventory costs and freight costs that we've seen through the supply chain crisis continue to work their way through our sold products and as we progress through the fiscal year, we will continue to drive the transition to AirSense 11 and we will gain regulatory approvals and we will scale production. All these factors above lead to tailwinds for the gross margin and the net margin of our business as we move through the fiscal year. I can tell you we are working furiously to drive all of the above elements with our global teams. We now have over 15.5 billion nights of medical data in the cloud, as I said earlier, and that data comes from over 21.5 million 100% cloud-connectable medical devices on bedside tables in 140 countries worldwide. We continue to lead the industry in digital health and we don't plan to stop anytime soon because there's so much opportunity ahead of us. 7% of our revenues go straight into R&D to power our hardware and our data innovation engines. ResMed's mission and key goal remains crystal clear. We will improve 250 million lives through better residential healthcare in 2025. This patient-centric mission drives and motivates ResMedians every day. We made excellent progress towards that inspiring goal over the last 90 days and during the trailing 12 months, we have improved over 160 million lives with the delivery of a complete device platform to a patient or a complete mask system to a patient or a digital health software solution that is helping each person to sleep better, to breathe better, and to live a high quality life with healthcare delivered right where they live. As we start fiscal year 2024 here, I'm very excited about the opportunities in front of us. We just had our SaaS ASM earlier this week, and I'll be attending the Country Market Group for our North America team in the coming weeks. Sales meetings are happening around the world. We're on a good trajectory. We have an exciting pipeline. In closing, I want to express my sincere gratitude to the more than 10,000 ResMedians for their perseverance, their hard work, and their dedication both today and every day. With that, I'll hand the call over to Brett in Sydney and then we'll move and open up for Q&A for the group. Brett, over to you.

Great. Thanks, Mick. In my remarks today, I'll provide an overview of our results for the fourth quarter of fiscal year 2023. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q4. Group revenue for the June quarter was $1.12 billion, an increase of 23% on a headline basis and in constant currency terms. Revenue growth reflected the ongoing combined availability of cloud connected AirSense 10 and AirSense 11 sleep devices to support strong underlying global demand, as well as solid growth across our broader product portfolio. Year-on-year movements in foreign currencies negatively impacted revenue by approximately $3 million in the June quarter. Looking at our geographic revenue distribution, excluding revenue from our Software-as-a-Service business, sales in U.S., Canada, and Latin America countries increased by 25%. In constant currency terms, sales in Europe, Asia and other markets increased by 14%. Globally in constant currency terms, device sales increased by 24% while masks and other sales increased by 18%. Breaking it down by regional areas, device sales in the U.S., Canada, and Latin America increased by 30% as we benefited from strong demand. And as previously mentioned, our continued ability to fully supply the market with combined availability of AS 10 and AS 11 cloud connected devices. Masks and other sales increased by 19%, reflecting growth in resupply and new patient setups. Europe, Asia, and other markets, device sales increased by 15% in constant currency terms, again reflecting strong demand and improving availability of cloud connected devices. Masks and other sales increased by 14% in constant currency terms, reflecting increased patient setups. Software-as-a-Service revenue increased by 34% in the June quarter, reflecting the contribution from our MEDIFOX DAN acquisition and continued strong performance from our HME vertical. Excluding our MEDIFOX DAN acquisition, SaaS revenue grew by 8% in the June quarter. MEDIFOX DAN contributed revenue of $27.3 million for the June quarter consistent with our expectations at the time of the acquisition. During the rest of my commentary today, I will refer 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 declined by 200 points to 55.8% in the June quarter. The decrease primarily reflects component cost increases; warranty and manufacturing related cost increases and product mix shifts due to the significant increase in sleep device sales partially offset by increases in average selling prices. On a sequential basis, unfavorable foreign currency movements accounted for the 30 basis points decline in our gross margin and we saw a lower than expected product mix benefit as we continue to see strong growth in sleep devices in the U.S. market. Moving on to operating expenses. SG&A expenses for the fourth quarter increased by 25%, or in constant currency terms increased by 26%. The increase was predominantly attributable to increases in employee-related costs, marketing and travel expenses, as well as the incremental SG&A expenses associated with MEDIFOX DAN that we acquired in November 2022. SG&A expenses as a percentage of revenue was 21.5% compared to 21.1% 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% during fiscal year 2024. R&D expenses for the quarter increased by 21% or in constant currency terms increased by 23%. R&D expenses as a percentage of revenue was 7%, consistent with 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% during fiscal year 2024. Operating profit for the quarter increased by 13% underpinned by strong revenue growth partially offset by lower gross margin. Following the acquisition of MEDIFOX DAN, our net interest expense for the quarter is $15 million and we expect interest expense to be a similar amount per quarter in the first half of fiscal year 2024. Our effective tax rate for the June quarter was 18.3% compared to the prior year quarter rate of 17.6%. Looking forward, we estimate our effective tax rate for the fiscal year 2024 will be in the range of 19% to 21%. Our net income for the June quarter increased by 7%, and non-GAAP diluted earnings per share also increased by 7%. During the quarter, we incurred $1.8 million in acquisition expenses associated with our Somnoware acquisition, and we recognized restructuring costs of $9.2 million associated with the closure of the Aria lymphedema business and workforce rationalization in our German and SaaS business verticals. We also recognized a gain of $20.2 million within our income in relation to a business interruption insurance claim. These have all been treated as non-GAAP items in our Q4 financial results. Cash flow from operations for the quarter was $237 million, reflecting solid underlying earnings, partially offset by a modest increase in working capital. Capital expenditure for the quarter was $34 million. Depreciation and amortization for the quarter totaled $47 million. We ended the fourth quarter with a cash balance of $228 million. At June 30, we had $1.4 billion in gross debt and $1.2 billion in net debt, which mainly reflects the funding of our MEDIFOX DAN acquisition. During the quarter, we reduced our debt by $145 million. At June 30, we had approximately $745 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 $0.48 per share, representing an increase of 9% over our previous quarterly dividend and reflecting the Board's confidence in our operating performance. Going forward, we plan to continue to reinvest in growth through R&D and expect to deploy further capital for tuck-in acquisitions such as our recently announced acquisition of Somnoware, a company that provides an upstream diagnostic management platform that is complementary to our current AirView and Brightree solutions. And with that, I'll hand the call back to Amy.

Great. Thank you, Brett, and thank you, Mick. Kevin, I'd like to go ahead and turn the call back over to you to provide the instructions and run the Q&A portion of our call.

Hey, good afternoon, and thank you for taking the questions. Hey Mick, with the devices number sort of steady sequentially around this $600 million mark, is this where the number would kind of base out if you are supplying the majority of the market? And from here, are we looking at just saying $600 million and then add on some percentage of what the underlying fleet market is kind of growing at?

Thanks for the question, Matthew. It's a good one. It's difficult to predict because there are many factors influencing the market right now. However, as you mentioned, we achieved a solid $602 million in global devices this quarter, with 30% growth in the U.S., Canada, and Latin America, and 15% growth in Europe, Asia, and the rest of the world. We're seeing strong mid-single-digit growth in patient flow, and along with new patients, we're also seeing resupply of patients at the five-year mark for most U.S. reimbursements and varying criteria in other countries. In addition to new patient setups and resupply, there's also the impact of a competitor recall, which was supposed to end on June 30 but now lacks a definitive conclusion. Considering all these unknown factors, it’s challenging to assert that growth will simply be steady from here. It may actually experience stronger growth, which complicates predictions for gross margins. While the growth in CPAP and APAP numbers in the U.S. is impressive and significantly contributes to revenue and patient connectivity, it carries a lower gross margin than our overall group. This results in solid gross profit dollars but also affects our gross margin, which has decreased 30 basis points apart from foreign exchange influences. It’s a complex situation, but I would say at the very least, we expect it to maintain its current level and grow with the market, with potential for even more growth as we continue to gain market share and strengthen that position through our digital ecosystem. Thanks for the question, Matthew.

Good afternoon and good morning, everyone. I wanted to first follow up on the competitive landscape to see if you've noticed anything in the marketplace. Are your key competitors becoming more active, perhaps through hiring processes or marketing campaigns, or is demand consistent with what you've experienced in the past, without any significant changes? Thank you.

Thank you, Margaret, and welcome back. It's challenging to predict precisely where we stand based on the early signs you've mentioned. We face regional competitors in Europe, Asia, and the Americas daily. When Philips returns, they will start from a disadvantaged position in new patient setups. They are back, but in some European countries, like Spain, they never truly left because they did not have a phone device there, and we have been outperforming them there consistently. In other European markets where they have started to re-enter, we are continuing to compete successfully while maintaining and growing our market share. Their reputation and the speed of their market re-entry will be slow and vary country by country, especially depending on whether they secure a consent decree in their largest market. Moving forward, we assess whether we have enough supply to meet market demands alongside other regional competitors, and I can confidently say that this quarter we do. Thus, the specifics of how and when competitors re-enter the market are somewhat irrelevant to us because we can handle all market growth. This situation alleviates uncertainty, allowing us to move forward. We are competing directly with them in many Asian markets and some European countries. Unlike in 2019, our more compact, user-friendly, connected, and digital solutions are gaining and holding market share. It's an ongoing competitive landscape. We are also launching AI-driven products within this ecosystem, which is rapidly evolving, and we are well positioned. We've had the advantage of a few years to accelerate our progress. Beyond that, we are committed to maintaining a mindset of productive paranoia, and we continue to improve health outcomes, reduce costs, enhance workflow efficiencies for physicians, boost patient adherence, and provide payers with a return on investment by lowering overall healthcare costs.

Great. Thank you. Congrats on a strong top-line here, share gains. Maybe two-part question. Mick, one would be just on the amount of resupply that's now coming in as it relates to the share gains that you've seen over the past two years, is the resupply number we're seeing now where we actually starting to see consumables come off of the new sockets that you gained? So that would be question one. And then question two, there's obviously the debate out there on GLP-1s, maybe from the perspective of ResMed, how do you see the GLP-1 phenomenon playing out in the sleep space, specifically do you expect to gain more patients from GLP-1s versus maybe certain patients that would fall out of the funnel? Thanks again.

Thank you, Anthony, and welcome back to everyone at ResMed. I'll address both of your questions in order. First, regarding resupply, as you are aware from following us over the years, it's not a straightforward process. Our masks can be used with other devices, and other masks can be used with ours. Over the past three years, we've successfully gained market share through competition with all the leading mask brands. We've achieved this by offering the smallest, quietest, and most comfortable masks, ideal for both front and side sleepers. This strategy has helped us maintain our market share. Furthermore, when used with the AirSense 10 or AirSense 11, the mask leak data becomes more accurate, enhancing the reliability of calculations related to AHI and leaks. We certainly emphasize this aspect and have gained additional share through our devices, though the quality of our masks plays a crucial role in sustainability. The strong resupply numbers you mentioned, including 19% growth in the U.S. and 14% in Europe and Asia, stem from the dedicated efforts of our teams in those regions, focusing on patient outreach, subscription programs, and direct connections with users. Following the pandemic, there's increased awareness about respiratory health, which we have effectively capitalized on. Thus, I believe this growth is sustainable and not solely dependent on our device market share, but also on the excellence of our products. Regarding GLPs, there are many factors at play. I recently read that many U.S. employers are limiting coverage for GLP-1s due to their high costs, which European governments have similarly rejected for public insurance. The medications are very expensive, ranging from $800 to $1,200 per month. There are three main factors that will likely limit the uptake of GLPs: cost, adherence, and side effects. On cost, if you consider a 40-year-old individual on GLP-1 therapy for 40 years, the total lifetime cost could reach approximately $480,000. In contrast, the expense for CPAP therapy over the same period is about $13,500, making GLP-1 therapy 35 times more costly. Then there's adherence; clinical trials indicate only 33% adherence after one year with GLP-1s, while we maintain 87% adherence at 90 days. Lastly, side effects can be significant, including serious risks like thyroid issues and cancer, along with common minor side effects. Our most notable side effect from CPAP is a mark that President Biden had on his face, which he attributed to his device. I believe the situation will evolve over time, and while GLPs may attract patients' interest in weight management, they won't dramatically affect our patient base. We have a vast pool of 936 million potential patients globally, and if some try a pill and don’t find success, that could lead them to us as well.

Hi, this is Shaymus on for Suraj. So we saw gross margin set down a little bit. I know you said there was some reasonings for it, but I'm just looking forward kind of in the future, maybe you can walk us through the temporary and more structurally permanent changes we should think through as far as GM outlook is concerned.

Thank you for the question, it's a great one. There are several factors affecting our gross margin, with the most significant being foreign exchange, which impacted inventories as we sold our CPAPs and APAPs. This foreign exchange effect was a 30 basis point headwind from Q3 to Q4. There are many moving parts to consider, including regional mix and the potential growth opportunities in Europe and Asia, especially Japan, where we may see acceleration in the coming years. Product mix is also important; we've seen growth in bi-level devices and non-invasive ventilators, including AirCurve ST, FTI, and AirCurve ASV, as well as full face masks. All these categories contribute positively to our gross margin. Additionally, our software solutions are expected to improve margins as we see organic growth from single digits to high single digits and low double digits in our SaaS business. We're also managing higher inventory costs arising from the supply chain challenges, which led to increased expenses on chips and parts. Although freight costs are decreasing, the costs we paid months ago are still affecting our gross margin as they phase through our sold products. However, we anticipate these costs will continue to decrease over time, providing a tailwind for our gross margin. A key area for us is the launch of AirSense 11, which is a superior product compared to AirSense 10. As we receive regulatory approvals and increase production, we expect improvements in gross margins. All these factors are positive for our overall gross and net margins as we navigate the fiscal year. It's tough to predict, especially regarding our acceleration in the U.S. market for CPAP and APAP devices. We won't turn away patients needing care, and while we could improve our gross margin by slowing sales, we prioritize patient care even if it means slightly lower margins. Nevertheless, we are generating strong cash flow, which we reinvest in R&D. We're actively working on all these aspects and are confident in our success in the upcoming quarters.

Hello, thank you. I was just wondering if you could talk about how your position to increase your mask supply in the event that the consent decree over at the competition impacts their ability to provide those, for example, if they end up constrained at a facility level. Thanks.

Yes. Look, we have run all sorts of scenario analyses around that. I think one of the differences if you think in terms of ResMed's ability to work with suppliers in the core device side, where in terms of chip sets, the whole med-tech sector as a group, and I serve on the Board of AdvaMed and we were advocating for more semiconductor chips for the whole industry. When we were going to Intel, TI and all these companies and sort of begging for semiconductor chips 12, 18 months ago, all together we were less than 1% of the supply of chips. And it was very difficult. We did get some, and as you saw, we did have to pay a little more, but we were able to get those contracts with other players and get long-term contracts and get that supply. In the field of medical-grade silicon rubber, we are one of the top users in the world for this. As you know, we sell tens of millions of mask products per year. And we are an incredibly large part of that supply chain. So if a competitor was not able to sell masks, their demand for that LSR would go down, and those or similar suppliers would then want to keep their factories operating and be looking for other suppliers. And we would be running the game theory and the analysis of where we go and how we go to ramp that production up. So it would be a good problem to have for the business. I think it'd be a bad problem to have for patients, but I think the probability of that is relatively low, but if it does happen, we're ready. But Rob, do you have any thoughts on that? Rob Douglas, our President and COO.

Yes. Hi, just one other minor comment on that. And we've said this before, because of the relatively low CapEx of our supply chain and the equipment that we need, we generally run with quite a lot of those capacity supply. And so our ability to rapidly increase volumes as needed is really strong.

Thanks for the question.

Good afternoon. Mick, hope you're well. Mick, I'm wondering if you could characterize for us some of the price dynamics that might have been present during the quarter.

Yes, thanks for the question, Sean. Yes, a simple question, very complex answer across the 140 countries and all the dynamics. I think one thing that I'm comfortable to say though on this is that if you look over the last four quarters, our commercial teams have done an incredible job of partnering up with our customers to say, look, inflation is up, costs are up. How do we share some of the pain, if you like, of these increased costs? And we were able to increase some prices on some mask systems and components and some devices where we could, it's tough because customers often don't get much relief from the payers. They did in the Medicare side of the U.S. market where there was an inflation adjustment up of around 5% on January 1. And so that was a benefit for our providers, and so we could share some of the pain there in terms of increased pricing. But we've also had some surcharges on our products in terms of freight. And although, as I said in the prep remarks, we've seen all the news media that freight costs are all down. Well, yes, okay, they are on a spot price, but 12 months ago or nine months ago, as that works through our inventory, that freight charge is still there and is still impacting our costs. And inflation, although coming down, is still high. But I think our commercial teams have done a really good job of partnering up with our customers, walking them through the situation, the reality that costs are up, inflation's up, freight's up, inventory costs are up. We need to work on appropriate pricing to make that happen. And we've had some appreciation in average selling price over these last 12 months. And we'll look to do over the next 12 months to do an appropriate pricing with customers on a per-customer-per-contract basis to sort of share some of the pain of the increased cost that our industry is having. But at the same time, we're laser-focused on driving that growth. And so it's a really strong sort of price elasticity, it's a question of how do we make sure we get that balance right? But it's a competitive game. Some of our competitors are out there saying the same thing publicly, that costs are up. And so we need to move prices appropriately. And we are out there working with customers to make sure that we as an industry take care of patients in a sustainable economic way, and that involves both quantity, price, and supply over the long-term.

Good morning, Mick. Can I ask a question about the outlook? Earlier, you mentioned that we would see sequential revenue growth throughout 2023, and that has indeed happened, which is fantastic. With your key competitor out of the market, do you still anticipate revenue growth sequentially into the first and second quarters of 2024 or for as long as they remain absent?

Thank you for your question, Lyanne. A year ago, we recognized a strong potential in our devices segment, although we faced some production limitations at the time. I expressed confidence that our supply chain team could effectively re-engineer and secure the necessary components, especially semiconductors. As a result, we consistently increased our device revenue each quarter throughout fiscal year 2023. Looking ahead to fiscal year 2024, while we don't provide specific top-line guidance, Brett has shared solid projections concerning our SG&A, R&D, and effective tax rate in the controllable segments of our business. As I've mentioned in previous responses, overall demand in the market is influenced by many variables. However, I'm optimistic as we continue to attract new patients worldwide through our demand generation initiatives, such as the Awaken Your Best campaign in Australia and New Zealand, efforts in Germany and India, and strong social media outreach in China. Many patients have been unable to obtain replacement devices within the timeframe allowed by their insurance, or they want to upgrade to the next-generation product. The AirSense 11, with its new features and patient engagement capabilities, has also contributed to this demand. I believe all these factors combined will support strong demand throughout the fiscal year. That said, there's a seasonal effect as we transition from Q4 to Q1, particularly with vacations in Northern Europe and the U.S., which typically leads to a decline in business during that period. While I won’t provide specific guidance for that transition, it is historically a challenging time. We are no longer constrained by supply and have shifted back to a demand-driven environment. Additionally, we may not see our number four competitor returning to the market in the next 60 days, but I'm not going to predict that. What I can say is that we are continuously working on attracting new patients and assisting those in need of replacement devices. We are actively engaging with patients through programs like myAir, emphasizing the importance of hygiene and proper equipment. All these elements give me strong confidence in ResMed's growth throughout the year, but I won't commit to quarterly projections on top-line performance.

Good morning or afternoon. Thank you. Mick, regarding AirSense 11, you highlighted its significance for gross margin. You also mentioned earlier in the call that you anticipate it will remain on allocation for a few more quarters, which I understand is a longer timeframe than you initially expected. I wanted to clarify if this situation is entirely due to supply chain issues, or if there are any strategic reasons for managing volumes amidst the current competitive landscape.

Yes, Chris, thanks for the question. We've really been focused on that patient and making sure no one's left behind. As I said in an earlier question, and although the AirSense 11 is better margin for us, and it's better innovation and it has a higher engagement on the myAir app, which drives engagement, adherence, mass resupply and everything. Our view is that if there's a patient available and we have the parts and pieces and the ability to make an AirSense 10 to take care of that demand now while we ramp AirSense 11, we're going to do it, and we're going to take care of that patient. By the way, there's some really strong upside for that patient in that the alternative is a competitor device, which would not be as small, quiet, comfortable, and connected. And so they'd have a much worse experience than the AirSense 10 with a competitive one. So it's better for the patient. It is slightly low margin for us, but we get that patient on therapy, and there is the better together with ResMed that it's more likely, hopefully, that they get a ResMed mask and that they use that mask for the rest of their life. And so I think there's an overlap there, if you like of altruism and the profit motive to do the right thing on a gross profit, cash flow-driven environment. And we're not going to manage just to a GM line and say, well, let's not do that and make those products. And so it's less I mean, it's strategic in this way that our brand is about patient care. Our brand is about taking care of someone who's suffocating and getting them out of hospital and doing that. And if we have to do it with an AirSense 10, which is an amazing seven-year-old platform, then we're going to do it. If we can do it with the brand-new AirSense 11 platform, we're going to do it. And look, nothing's slowing us down. Our quality and regulatory teams are going geography by geography to get the AirSense 11 approved in each of the regulatory environments. So as soon as that is, we can start selling the products. But the ramp-up on AirSense 11 is probably not as fast as it would be in a market where you had all five major competitors competing there because of that excess demand we're covering a lot of that with the AirSense 10. So that's sort of how we're thinking about it. Patient-centric, patient demand, take care of that patient now, get them on our ecosystem, and then ramp as fast as we can AirSense 11, and we're doing that. Nothing's slowing down. The accelerator is firmly pedal to the floor on AirSense 11. And so everyone we make, we sell but it will be on allocation just given the huge demand that we see in the market right now, Chris. Thanks for the question.

Hi, good morning, and thanks very much. Mick, at the third quarter result, you seem to be very confident about gross margin. In fact, I think at the time we know that it was probably the most positive gross margin commentary we'd heard out of ResMed in recent memory. So I know you've spoken to component cost and why you don't manage the gross margin, but what else changed since the time you gave that commentary to the result?

Thank you for the question. Looking back at the factors I discussed three months ago, we're still addressing them today, but we've also incorporated the ongoing ramp-up of AirSense 11. Over the past 90 days, we experienced unexpected demand, particularly for CPAPs and APAPs, which we hadn't anticipated. While we could have adjusted the production of our AirSense 10 to improve our gross margin, our priority was to meet the needs of patients. The demand for CPAPs and APAPs in the U.S. was notably strong, and this positively impacted our gross profit and cash flow during the quarter. We wrestled with the decision to focus on improving gross margin versus patient care, and ultimately chose to prioritize the latter. I remain optimistic about this fiscal year. Although we cannot predict future demand precisely, we are committed to prioritizing patient care, and as we navigate through elevated inventory costs, there are opportunities for gross margin improvement. Additionally, when comparing this year's SG&A to last year's June quarter, we see that many aspects related to COVID have shifted. We've resumed activities like customer travel and strategic meetings, which are now reflected in our SG&A and affect our net margin. We will continue to manage our expenses carefully, especially in SG&A, while maintaining our investment in R&D to drive innovation, particularly in AI and digital health. I believe we can achieve both patient care and gross margin improvement over the next several months, and I'm confident in our ability to succeed in these areas.

Thanks very much. Mick, could I get to comment a little on what you saw in the ex-U.S. market? Obviously, last quarter we saw the big event sale ventilator sales into China. Just wondering if there's any countries you'd call out or any items we should be aware of, please.

Yes, David, that's a good point. We didn't really see anything of material context in this quarter in terms of exacerbation of COVID that that led to hospital-based or life-support ventilator sales. And so we're back to I would say some steady growth that we see in our neuromuscular disease, our COPD and other sort of respiratory insufficiency parts of our business for life support vents. On the non-invasive vents and adaptive server vents and bi-levels, we're back to steady market growth and actually we saw strong double-digit growth as those post-COVID, we're starting to see the clinics open up and patient flows start to come back. Rob, any thoughts on ventilators?

No. Not on ventilators, because I'm just going to comment on masks.

Yes.

So the masks in all these other markets were really strong and really it's showing underlying strength of the market not affected by recall dynamics or anything like that. So really the whole patient diagnostic systems are working in order and everything's going strongly.

I wanted to ask Brett about the working capital position. Last quarter, you indicated that you would be able to make progress on reducing the inventory balances, which might lead to more cash release. However, inventory has increased again along with receivables. Is this just a reaction to the demand you are seeing? Could you provide some context on why it didn't turn out as expected?

Yes, hi, Steve. It's Brett. The inventory actually decreased slightly from the previous quarter, aligning with our expectations. We anticipate that the inventory balance will continue to decrease throughout fiscal year 2024 as well. You are correct that receivables did increase a bit, but that is primarily due to revenue growth. Overall, we are in a fairly solid position concerning working capital. It did rise slightly this quarter, largely due to the timing of tax payments; we paid higher taxes this quarter than we typically would. This has resulted in a minor negative impact on working capital, but it's simply a timing issue. We expect to generate strong cash flow throughout each quarter of fiscal year 2024, and we will continue to focus on reducing working capital. A significant factor in that will be the gradual reduction of inventory over the fiscal year.

Hi guys, this is Joseph on for Mike. Could you maybe talk about the new patient and REPAP backlog internationally? I guess the way that I understand it is it's fully worked through in the U.S. but there's still work to do internationally. I don't know if that's the case and if you could size that at all.

Yes. Look, I don't think we've fully worked through the backlog of patients in the U.S. in terms of patients who want to get whose insurance has got to the five-year point if their Medicare or three, four, five depending on which private payer they're under. And so I do think our competitors' actions slowed down that, particularly if they're on a competitive device and the demand limitation and the physician saying, look, I've got to take care of new patients. They weren't as prone to write prescriptions or to allocate REPAP, if you like, for patients. So I actually think there's some runways still left on REPAP within the U.S. geography, and I think that's even more so in other markets. As Rob just noted and as we talked about the engagement with consumers and patients in different geographies is driving mass growth and any quarter that has 14% revenue growth in masks in Europe, Asia, rest of the world would be incredible. And that's not driven by any recall dynamics whatsoever from a competitor. Everybody's been competing in masks globally. And so I think that speaks to our ability to hopefully have a sustainable approach to REPAP not only in the U.S. where we have incredibly strong relationships with Brightree and myAir directly to patients, directly to providers but the ecosystems that we are generating in some of our other sort of omni-channel markets around the world. So I think the opportunity for REPAP in the U.S. is still there over this fiscal year and beyond, and to make it a rhythm, right? So it becomes a steady part of the growth of the devices and to drive it. I think there's even more opportunity in the other parts of the world leveraging the work we've done on the mask side to then remind patients and track them when they're at that three, four, five-year time period to pull forward. Now I want to be there with the appropriate supply, so I'm not jumping ahead of ourselves, but we do have the programs and capabilities to do that, but I think the demand is there inherently.

Good morning, Mick, and good day, Brett and Rob. I wanted to ask about masks, as it's been a while since ResMed has introduced new products. How has the recall impacted your ability to focus on new product development and launches? Also, should we expect any updates to the mask portfolio in the near term? Thanks.

Our R&D team has been intensely focused on re-engineering, resupplying, and redesigning our core device platforms. We've successfully restored the supply of Air 10s and Air 11s. Recently, our board visited Sydney to review our pipeline of devices and masks, and I find it truly exciting. While I don't want to steal the spotlight from my commercial teams, I can share that we have new innovations and masks from ResMed coming this fiscal year. Personally, I test every new mask, including a recent one with a project name related to a beautiful island accessible by boat. It’s an amazing product, and I’m eager for it to hit the market. We also have more masks in production that are currently navigating through regulatory requirements and gearing up for commercial launch to ensure they meet ResMed's high standards of quality, first-time fit, and adherence. You can expect to see these products launch in our major markets and globally throughout the fiscal year. On the digital front, we've introduced an AI product, and I'm excited about its potential. We'll discuss how our digital and mask products will contribute to maintaining our strong double-digit growth as the year progresses.

Yes. Thanks, Kevin. And thanks to all of our stakeholders for joining us this last hour as we talked through our results. And we'll talk to you again in 90 days. In closing, I want to thank the 10,000 ResMedians. Many of you are shareholders and listen to these calls as well, thanks for your dedication and hard work, helping people sleep better, breathe better, live better lives in 140 countries. These results are yours, incredible double-digit growth. Thanks for all that you do. I'll hand the call back to you, Amy to close this out.

Awesome. Thank you, Mick, and thanks, everyone. We do appreciate your interest and your time. If you have any additional questions, please don't hesitate to reach out directly. This does conclude our ResMed's fourth quarter 2023 conference call. Kevin, I'll turn it back to you to close the call.