Resmed Inc (RMD) — Q4 2024 Earnings Call Transcript

Great. Thank you, Kevin. Hello everyone. Welcome to ResMed's fourth quarter fiscal year 2024 earnings call. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today's call, we will discuss several non-GAAP measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for the GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on our 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'll now turn the call over to our Chairman and CEO, Mick Farrell.

Thanks, Amy, and thank you to our shareholders for joining us as we announce results from our full fiscal year 2024 and review our fourth quarter results in more detail. Our global ResMed team executed incredibly well in our fourth quarter, producing another strong period of growth and execution across our business. With solid performance across all regions and all segments of our business and strong double-digit bottom-line growth. Ongoing new patient demand for our market-leading flow generators remained robust in the quarter, even against a very tough year-over-year comparable. Media interest in sleep apnea and all the various therapies seems to be helping patients find their way to screening, diagnosis, and therapy. Especially the lowest cost, most efficacious therapy with the best outcomes, which is positive airway pressure therapy. In terms of our masks and accessories business, physicians, respiratory therapists, and patients are choosing ResMed masks when they start therapy and as they continue through resupply, resulting in very strong double-digit growth in our masks and accessories business. Our residential care software business delivered double-digit growth in revenue and in net operating profit. Our laser focus on operating leverage has delivered another quarter of strong, profitable growth and we're well-positioned to continue on this trajectory as we launch into fiscal year 2025. Over 2.4 billion people worldwide suffer from sleep apnea, insomnia, or respiratory insufficiency due to chronic obstructive pulmonary disease or neuromuscular disease. As the market leader in respiratory medicine and residential care globally, here at ResMed, we're uniquely positioned to drive increased market penetration through demand generation to accelerate growth. These chronic conditions in sleep health and breathing health form a global health epidemic that ResMed is well positioned to address. We believe that healthcare should be delivered in the lowest cost, lowest acuity, and highest comfort location possible; in the optimal case, that's in a person's own home. ResMed is the clear leader in sleep apnea, a market of over 1 billion people globally. Our end markets remain significantly underpenetrated. We're leading the industry in digital health solutions, with approximately 19 billion nights of medical data in the cloud and 26 million 100% cloud connectable medical devices sold into over 140 countries worldwide. We've leveraged these de-identified data to show that our therapy solutions lower costs, improve outcomes, and bend the curve of chronic disease progression. Significant opportunities remain in digital health, and we plan to be right there at the cutting edge of innovation. The latest advances in wearables from the consumer technology industry and the latest medicines from big pharmaceutical companies will bring more and more new patients into the healthcare system. We have many opportunities to add value, expanding interoperability, lowering costs, and improving patient outcomes. Billions of people can benefit from our products and solutions, and we're focused on expanding our reach and growing the market to help people get on their pathway to better sleep, better breathing, and better care at home. Sales of our flow generator devices, including the category-leading AirSense 11 platform, grew 6% year-over-year globally. We're supporting the global market and every patient who needs a device has access to our market-leading 100% cloud connectable platforms, the AirSense 10 and the AirSense 11. We continue increasing the availability and production of our AirSense 11 and our AirCurve 11 platforms worldwide as we secure regulatory clearances and launch these market-leading technologies country by country. Our masks and accessories business grew 15% year-over-year, expanding in a competitive category globally. Our latest mask innovation, the AirFit F40, introduced last quarter, is doing extremely well in the markets that it has launched in. New patients are selecting the F40 for its comfort, fit, and ease of use. It is the smallest profile oronasal mask on the market from ResMed. Patients are voting with their wallets, and respiratory therapists are voting with their setup protocols, and physicians are voting with their prescriptions. We look forward to ongoing success in the US and across global markets as we increase availability and introduce the F40 into more and more countries throughout fiscal year 2025. ResMed's clinical and commercial teams continue to partner with physicians and providers to drive resupply programs directly with their patients. We're successfully establishing subscription programs in our cash pay countries to help consumers find their path to therapy with resupply directly. Masks and accessory resupply programs are a very important part of our offering as we serve the ongoing therapy needs of patients globally; research shows that resupply programs can both improve patient adherence and improve long-term clinical outcomes. In the US our resupply programs are powered by our digital health ecosystem, including AirView for physicians, myAir for patients, and Brightree for home medical equipment providers. We will continue to develop, launch, and scale these technologies and programs to help people take control of their own health, regularly refreshing their ongoing therapy needs. As the global leader in significantly underpenetrated markets, our most important opportunity is to expand and grow the market through awareness, diagnosis, and seamless pathways to treatment. We aspire to be the digital health concierge for each person as they pursue their personal journey to better sleep, better breathing, and better residential care. We are ramping up our demand generation initiatives to raise awareness and create pathways for patients to help them find access to care for their sleep health and their breathing health. We're serving traditional healthcare channels as well as investing in cost-effective, social media-driven demand generation campaigns to help consumers who are concerned about their sleep and breathing find their own personal ways into appropriate screening, diagnosis, treatment, and management pathways. Our physician and provider-based software ecosystem called AirView now contains over 28 million patient records. Adoption of our consumer patient engagement app, which is called myAir, where people choose to participate in their personalized sleep health journey, remains incredibly active and now includes over 8.3 million users. These digital health ecosystems are growing every quarter, showing the engagement of physicians as well as patients in accessing their own data to measure progress along their personal health journey. As we look to the future, I've discussed two global megatrends that I believe will further support ongoing growth for ResMed. Awareness of sleep health issues driven by consumer technology companies, specifically sleep tracking wearables like the Samsung Galaxy Watch, which has a De Novo FDA clearance to screen for moderate to severe sleep apnea. And we expect similar capabilities from other wearable players in consumer tech such as the Apple Watch, Google's Fitbit, the Oura Ring, WHOOP, and Garmin. In terms of the second megatrend behind future patient growth, we are seeing increased volumes of patients entering the healthcare system driven by the efforts of big pharmaceutical companies as they increase awareness of the treatments for diabetes and obesity medicines and they continue their research into the impacts of these medicines on sleep apnea. Together, we believe these two megatrends in consumer tech and big pharma will increase patient awareness and be a significant tailwind for long-term growth here at ResMed. Our goal is to educate people as they move from what we call sleep wellness tracking on a wearable to what we would call sleep health tracking, where they are seeking the help, advice, and care of a health professional in the field of sleep medicine. This connection pathway from consumer awareness of sleep health and breathing health issues into a true healthcare pathway is what we are calling the digital health concierge opportunity. Our plan is to be there for that person as they go through the process of screening, diagnosis, treatment, and ongoing management of their sleep health and their breathing health for life. Big Pharma is squarely focused on GLP-1 medications. For many people dealing with their obesity and diabetes issues, their healthcare goals are focused on losing weight while improving their diet, cardiovascular exercise, and their sleep routines, something that Bill Dement called the triumvirate of health. We believe that increased utilization of GLP-1s to treat obesity will bring many new people into the healthcare funnel, activating them to see their primary care physicians as they strive to achieve and maintain weight loss. We believe this will open them up to treating other chronic diseases they may suffer from, including increased awareness of sleep apnea, ultimately driving new patients into diagnosis and treatment pathways they may not have previously considered or been treated for. So, it's not just driving more patients into our channel, but we believe it's also driving more motivated patients. The emphasis on GLP-1 medications and increased focus by Big Pharma has put a spotlight on sleep apnea like never before. We believe that the growth in weight loss drugs will be a net positive for our business and the data supports that thesis. ResMed has added to the biggest study in the field and our data, which is using real-world evidence of the impact of GLP-1s through a de-identified patient analysis leveraging third-party claims data. We now have an expanded cohort of over 811,000 de-identified subjects in our analysis. This analysis demonstrates that GLP-1s are having a positive impact on patients both seeking and adhering to positive airway pressure therapy. The latest numbers are an improvement from what we have presented previously. For patients prescribed a GLP-1 medication, the latest data show a 10.7 absolute percentage points higher propensity to start PAP therapy over those without a GLP-1 prescription. These data show that patients with this drug prescription are more motivated to start their CPAP, APAP, or bilevel therapy. In terms of longer-term impacts on PAP therapy, we have seen that the resupply rate at T equals 12 months is 310 basis points, so 3.1 absolute percentage points higher for the patients who have a GLP-1 prescription, and further at T equals 24 months, the resupply rate is 530 basis points, or 5.3 absolute percentage points higher for PAP therapy resupply for patients who have a GLP-1 prescription. These data show that the new pharmaceutical class is a clear tailwind for our business, bringing more patients into the healthcare system. And more than that, we believe it is bringing highly motivated patients into the healthcare system. We've included this updated analysis in our quarterly earnings PowerPoint deck, and I encourage you to review the data there in further detail. ResMed is the clear world leader in sleep health, breathing health, and healthcare delivered at home. Frankly, it's our obligation and it's our brand promise. It's the ResMed brand promise to ensure that sleep-concerned consumers find their path to the highest efficacy, lowest cost, and most comfortable therapy that's out there and best for them. Our peer-reviewed and published evidence demonstrates that we can achieve over 87% adherence to PAP technology in the first 90 days by combining our market-leading device platforms with digital health solutions, myAir and AirView. Of course, that means that 13% of patients in that scenario still need alternatives and ResMed wants to be there to help those patients too. So, we are investing in alternative therapies to help patients who can't adhere to PAP therapy find their pathway to second-line therapies. And that includes dental devices where ResMed provides Narval, the market-leading 3D printed dental device for treatment of sleep apnea with dental treatment in Western and Northern Europe. In addition, we have investments in third-line therapies, including pharmaceutical options with our investment in ApneaMed and hypoglossal nerve stimulation technology with our investment in NIC SOA. So, let's step back and talk about broadly our digital health technology investments. Leveraging an extraordinary ecosystem of almost 19 billion nights of de-identified medical data, we are developing and continuing to expand our portfolio of artificial intelligence-driven capabilities, as well as customer-facing AI products that we're launching into the market from our ecosystem. We continue to roll out and expand the AI products in AirView such as compliance coach in the United States and our new smart coaching pilot, which is expanding into a few new countries as we go through our current quarter, which is Q1 of fiscal year 2025 and beyond. We are also progressing with our generative AI capabilities to help patients along their health journey. A project that was initially piloted within our Asia Pacific region, our generative AI sleep concierge that we call Dawn, and yes, that is a reference to the sun rising at dawn after a great night of sleep. Dawn was recently expanded from AsiaPac into our US market. We'll continue to share the progress on this front of GenAI and simple ML and generic AI as well, as this tech is further developed and scaled across our business. It's going to enhance the user experience and drive consumer awareness, and what we're focused on is outcomes, not the tech, but what it can do for a patient, a physician, a provider. In our residential care software-as-a-service business, we had another strong quarter with year-over-year growth of 10%, supported by strength in our home medical equipment provider business through our Brightree brand, as well as very strong growth in our home nursing and nursing home business with our MEDIFOX DAN brand. We've made very good progress in the business segment throughout fiscal 2024 and we plan to maintain high single-digit growth to low double-digit growth throughout each quarter in fiscal year 2025. But really importantly, we're driving operating leverage, and we're going to have very strong double-digit net operating profit growth from our residential care software business sector in 2025. Our residential care software business is integral to the broader ResMed growth portfolio with ongoing synergistic growth opportunities across our businesses. We are accelerating growth across our residential care software business intrinsically, but we're also helping support the core business through mask and accessory resupply growth. We continue to drive operating leverage by managing across our businesses with capabilities managed such as cloud compute, cybersecurity, interoperability, privacy and research and development velocity across our software platforms and with our core sleep, health and breathing health businesses. We are transforming respiratory medicine and residential care software at scale. We are leading the industry in developing, applying, and adopting digital health technology across the 140 plus countries that we serve. We continue to scale and drive efficiencies in our operations. We're focused on driving top-line revenue growth, but with strong cost discipline and increasing efficiencies to accelerate profitability at the bottom line. We made excellent progress on that this quarter. The global team delivered growth in non-GAAP operating income of 30%. The global team also delivered growth in non-GAAP net income of 30%. I'm incredibly proud of our global team and their performance. We provide differentiated products and solutions for customers worldwide, driving long-term sustainable value for our shareholders. We lead the industry in digital health technology with the smallest, quietest, most comfortable, most connected, and most intelligent technologies. During the last 12 months, we have improved over 178 million lives by delivering a medical device directly to a patient, or a complete mask directly to a patient, or a digital health software solution that provides personal care. We've helped each person sleep better, breathe better, and live higher quality lives with best-in-class healthcare delivered right where they live. In closing, I want to express my sincere gratitude to 10,000 plus ResMedians for their perseverance, hard work, and dedication today and every day across 140 countries. Thank you, team. With that, I'll hand the call over to our CFO Brett, who's in Sydney this morning for his remarks, and then we'll open up to Q&A with the global team here in San Diego and Sydney. Over to you, Brett.

Great, thanks, Mick. In my remarks today, I will provide an overview of our results for the fourth quarter of fiscal year 2024. Unless noted, all comparisons over the prior year quarter and in constant currency terms were applicable. We had strong financial performance in Q4; group revenue for the June quarter was $1.22 billion, a 9% headline increase and 10% in constant currency terms. Revenue growth reflects positive and consistent contributions across our product and resupply portfolio. Year-over-year movements in foreign currencies had a minimal impact on revenue during the June quarter. Looking at our geographic revenue distribution and excluding revenue from our software as a service business, sales in US, Canada, and Latin America increased by 10%. Sales in Europe, Asia, and other regions increased by 8%. Globally, device sales increased by 6%, while masks and other sales increased by 15%. Breaking it down by regional areas, device sales in the US, Canada, and Latin America increased by 5%, supported by solid ongoing new patient diagnosis. Masks and other sales increased by 17%, reflecting growth in both resupply and new patient setups. In Europe, Asia, and other regions, device sales increased by 8% on a constant currency basis and masks and other sales increased by 9% on a constant currency basis. Software as a service revenue increased by 10% in the June quarter, underpinned by growth from MEDIFOX DAN and continued strong performance from our HME vertical. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press release. Gross margin increased by 330 basis points to 59.1% in the June quarter. The year-over-year increase was driven by reductions in freight expense, manufacturing and component cost improvements, favorable product mix, and an increase in average selling prices. Sequential gross margin improved by 60 basis points. The increase was driven by favorable product mix and manufacturing cost improvements, partially offset by increased freight costs. We continue to monitor the freight cost headwinds arising from Middle East conflict and congestion in Asian ports. We expect increased freight cost rates will continue to impact our gross margin in fiscal year 2025. We have made good progress expanding gross margin over the last several quarters and we will continue to drive initiatives to improve gross margin. Looking forward, we estimate our gross margin will be in the range of 59% to 60% in fiscal year 2025. Moving on to operating expenses, SG&A expenses for the fourth quarter increased by 1%. SG&A expenses as a percentage of revenue improved to 19.8% compared to 21.5% in the prior year period and reflects savings and ongoing cost discipline following restructuring actions undertaken in the December quarter. Looking forward and subject to currency movements, we expect SG&A expenses as a percentage of revenue to be in the range of 18% to 20% for fiscal year 2025. Consistent with historical trends, we expect Q1 FY '25 will be at the higher end of this range. R&D expenses for the quarter increased by 4% on a constant currency basis. R&D expenses as a percentage of revenue were 6.6% compared to 7% in the prior year period. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year 2025. Operating profit for the quarter increased by 30%, underpinned by revenue growth, gross margin expansion, and modest growth in operating expenses. Our net interest expense for the quarter was $6 million. Given our lower debt levels, we expect interest expense in the range of $1 million to $3 million in Q1 FY '25. Additionally, we will likely generate net interest income in the second half of fiscal year 2025. During the quarter, we recognized unrealized losses of $15 million associated with our minority investment portfolio. This reduced our Q4 earnings per share by $0.10. Our effective tax rate for the June quarter was 18.7%. Broadly consistent with the prior year quarter, we estimate our effective tax rate for fiscal year 2025 will be in the range of 19% to 21%. Our net income for the June quarter increased by 30% and non-GAAP diluted earnings per share also increased by 30%. Cash flow from operations for the quarter was $440 million, reflecting strong underlying earnings and improvement in our working capital position. Capital expenditure for the quarter was $25 million. Depreciation and amortization for the quarter totaled $44 million. We ended the fourth quarter with a cash balance of $238 million. During the quarter, we reduced debt by $300 million. As of June 30, we had $707 million in gross debt and $469 million in net debt. And we have approximately $1.5 billion available for drawdown under our revolver facility. We continue to maintain a healthy liquidity position. Today, our board of directors declared a quarterly dividend of $0.53 per share, representing an increase of 10% over our previous quarterly dividend and reflecting the board's confidence in our operating performance. During the quarter, we purchased 232,000 shares under our previously authorized share buyback program for consideration of $50 million. We plan to continue to repurchase shares with a value of approximately $50 million per quarter in fiscal year 2025. This will more than offset any dilution from the vesting of equity to employees during the year. Going forward, we plan to continue to reinvest in growth through R&D, deploy further capital for tuck-in acquisitions, and continue with our share buyback program. And with that, I will hand the call back to Amy.

Great. Thank you, Brett, and thanks, everyone. Kevin, I'd like to turn the call back over to you to review the Q&A instructions and run that portion of the call.

Yeah, good morning, Mick, Brett, and Amy. Can I start with devices that came in a little bit lower than what I had expected? And can you give us some color? In terms of that 6% increase in device revenues? How much of that do you think is driven by November price increases? How much is the AX 11 mixed benefit? And how much of that is volume? And then on volume, are you seeing any change in that new start pipeline coming through?

Well, thanks for your question, Lyanne. That lets me talk through our really strong growth I believe in our devices business. Just to refresh in Q4 fiscal year '23 just 12 short months ago we were talking about US device growth of 30% and Europe, Asia, rest of the world growth of 15%. So incredible double-digit comps that we're building these numbers off, and we saw really good growth in the US of 5% growth in our US, Canada, Latin America and we saw 8% growth in Europe, Asia, rest of the world. We're in full competition with all the players out there and as you said, 6% constant currency globally. Look, you know, the market is growing in that mid-single digits and we are holding share or gaining share. But really now as the global market leader, our primary focus is on demand generation. Where are there capacities in the field for screening, diagnosis, treatment, and management? That we can drive appropriate demand generation not to overflow the channel, but to make sure that any spare capacity in screening, diagnosis, treatment, and management can come through. So, I was very impressed by those numbers. I think they're right in line with the market and slightly ahead in Europe, Asia, and rest of the world. I think the team did incredibly well. And we're doing it through patient flow, which is very strong. And yes, there are some ASP changes in there. They're kind of small. Our costs have gone up, and we did have some adjustments to pricing over the last 12 months. But the primary generator here is the flow of patients, which, as I said in the prep remarks, we're seeing really good flow of patients. And our job as the global market leader is to continue to have that grow and grow even faster as we go throughout the fiscal years ahead. Thanks for your question.

Yeah thanks. I just had a question regarding the gross margin. Are you going to quantify the freight-related expectations that you would have for the next quarter? And are you being able to introduce rate levies again given the spike in sea freight charges at the moment?

So, thanks for the question, Steve. I'll hand that over to Brett to cover some issues around GM and really good accretion of our gross margin year-on-year and sequentially, Brett, over to you.

Yes, thank you, Mick. Steve, we are experiencing pressure on freight costs, especially due to significant rate increases that everyone has noticed. This will continue to be a challenge for us, but we believe we can maintain a gross margin in the 59% to 60% range. There are many factors that influence this, but freight costs will be a hurdle. Whether these costs are permanent or temporary will affect how we navigate the market moving forward, and we are currently bearing these costs. What actions we take in the future will depend on how the year progresses.

Hey guys, how are you doing? Thank you so much for taking the questions. Wanted to ask a quick follow-up on the gross margin question just now. Just thinking about some of the year-over-year trend, it looks like 2024 is finishing at about 57.7%, and you're guiding to 59% to 60%. So maybe if you could just walk through some of the positive incremental drivers relative to how we're exiting the second half year? And you already touched on the freight as a partial offset? Thank you.

So Brett, back to you, gross margin.

Yes, sure. Could you clarify if you are referring to the future gross margins? Specifically, I’m asking about the commentary for fiscal year 2025 in relation to fiscal year 2024. Yes, moving forward, there are several factors influencing gross margin. While freight is expected to be a challenge, we are resuming our cost optimization initiatives now that we have met demand. This means we can focus on regular cost optimization programs again. We are developing initiatives aimed at manufacturing improvements and efficiencies, as well as procurement strategies. Additionally, with the current volumes, we will start to see benefits from economies of scale, which are crucial for cost optimization in the supply chain. The ongoing transition to the AS 11 platform will also support gross margin into fiscal year 2025. We anticipate that product mix will be favorable throughout fiscal year 2025, contributing positively as well. Lastly, the introduction of new products typically helps reduce discounting, enabling us to price them based on their features and value. These are the factors we expect to impact fiscal year 2025.

Yeah, thanks. So, I guess, first, I just want to ask about Philips. Have you seen them reentering any of the international markets in any meaningful way with devices specifically?

Yes, thanks for the question, Mike. Our fourth competitor has fallen to fourth in new patient share globally. They are re-entering many markets in Europe, Asia, and the Rest of the World, where we experienced an 8% growth in the quarter compared to a 15% comp. I believe the market is growing in mid-single digits, and ResMed is gaining share in these regions relative to our competitors. While this competitor is returning, they will need to work hard to regain their position. They will have to rebuild their brand and prove they offer a safe and effective product, competing against Tier 2 and Tier 3 players. They recently indicated growth from a low base, which is a positive development for them. I welcome competition. ResMed remains the market leader, offering the smallest, quietest, and most comfortable devices. Importantly, our products are the most connected and intelligent, relying on the AirView and myAir ecosystems to share data with doctors. This competitor is indeed back in several markets. As we mentioned in previous quarters, we consistently outperformed them from 2010 to 2019 before their recall, and we will continue to do so as they re-enter the market. We've demonstrated that capability this quarter, and we’ll maintain that momentum going forward.

Good morning. Thanks very much. I wanted to ask about that mask growth and the impact of the new products. And specifically, does that strong growth reflect an element of initial stocking? Or is that level of growth representative of what the new products can sustain?

Look, it's a good question because we talk about mask growth being high single digits. And then obviously, in this quarter. We performed right there in Europe, Asia, rest of the world at 9%, right there in that high single digits. Then in U.S., Canada, Latin America, we performed at 17% growth. On a pretty good comp actually of 19% from the year before. So double-digit on double-digit. Look, you're not going to grow double digits in masks forever when the market is growing at high single digits, and you are the clear market leader. But you can drive demand generation and you can drive better resupply programs. And I said in the prep remarks, we've done a lot of investment in Brightree, Snap Technologies and all of the digital health technology that we have to support home medical equipment providers here in the U.S. market. And then globally, we've really set up some great subscription programs where people, frankly, I think, have been underserved in Europe, Asia, and rest of world with the ability to get fresh equipment if they love their device and they love their mask, why isn't it super simple to just click on an app, see the price, and get a drop ship delivery of a device to your place in a cash-pay market where those same people are doing the same and have done with Amazon and all the other WeChat in China, Amazon in the U.S., et cetera, et cetera, globally. Everyone has seen this in the consumer field. And so I think healthcare needs to catch up and be more consumer-focused, and in those cash-pay markets, we've set up some great subscription programs. In the more regulated provider-based markets like the U.S. and Europe, we're really partnering with our providers like never before. So that's how we saw the outperformance. That's how we saw the extra demand generation. That's how we saw the extra resupply. Our goal is to meet or beat market growth every quarter that we go ahead. The team did it really well this quarter, and I have confidence that we'll be able to do it going forward. Thanks for the question about masks. It's a really important part of our business.

Good morning. Thank you, Mick and Brett. I'm considering the long-term growth of new patients. You mentioned that increased awareness could arise from some of the GLP-1 studies and data. Regarding diagnoses, do you see any limitations that could affect the influx of new patients? Essentially, when do you anticipate a shift from mid-single-digit growth to something more significant?

Yes, David, it's a really good question, and it's sort of the 3.5-decade question for ResMed, right, which is how do you get people screened, diagnosed, and treated for a disease, whether they're unconscious when they suffer from it in sleep apnea, being asleep while you have the suffocation. So education, awareness and better protocols to get patients into the funnel screening diagnosis treatment and management has been our decades-long mission. And look, we did very well, I think, going through COVID and on the other side to apply increases in home sleep apnea testing increases in remote patient monitoring and technology that we've used to help. And so, I do think the big-pharma GLP-1 trend is bringing more and more patients in, and they're very motivated patients. You saw our latest update on our real-world evidence, 811,000 patients seeing 10.7 absolute percentage points, high propensity to start CPAP. These are very motivated patients over the average patient. And I think that's a big trend. You didn't mention in your question, but I will, David, consumer tech, the wearables. I mean, Samsung dropping the mic there on the other consumer tech companies to say we've got a De Novo clearance to screen for moderate to severe sleep apnea from a watch, from the Samsung Galaxy Watch. And I know the Apple Watch has an oximeter on it, and they can do the same. We know Google's Fitbit team have been doing sleep architecture for years. And they will start to recognize many patients with this. So the real question is not will there be a flow of patients from consumer tech and big pharma. That's going to happen. The real question is, can ResMed really pick up and fight and be the world leader in a digital sleep health concierge to take that sleep-concerned consumer and help them find a path to a healthcare specialist to a protocol to a system that gets them screened, diagnosed, and treated? We're making good progress on it. We've got a number of experiments globally. We're partnering with an ecosystem of other smaller players out there as well as our own technology in all 140 countries. I can tell you the experiments are happening, and we're seeing some success. The question of the inflection point, look, I do think we can take market growth rate and move it up by 50, 75, 100, maybe even 125 basis points. We're not going to double it. It's a huge, huge global franchise now. Look at our trailing 12 months revenue north of $4.5 billion, but I do think we can move it up 50, 75, 125 basis points by bringing these new technologies that help with that digital sleep pathway. Yes, I'm aware I've got a disease; my watch has told me I'm at risk. What do I do about it? ResMed needs to be there to help that person find their pathway through the convoluted frankly, global health care systems to therapy. For those who are coming in the big pharma one, they're already in the healthcare system. They're going to a primary care physician or a specialist doctor. So that's an even easier route where it's more about education and driving the traditional channels. So we're working both, social media, digital, and traditional channels. And together, I do think there's opportunities to accelerate market growth and watch this space. We've done well over the years, and we've learned a lot in these last five years. And now as the global leader, it's our obligation to do this, and we're all over it. Thanks for the question, David.

Thanks. Good morning. Just back on the gross margin and the guidance of 59% to 60% for FY '25, how should we think about the cadence of that throughout the first half and second half? Weaker first half, stronger second half given freight, or relatively consistent throughout each quarter? Thanks.

Yes. Good question, Gretel. Over to you, Brett.

Great. Thanks, Mick. Thanks, Gretel. Yes, I mean, we're at 59.1%, I guess, exit there. I think we've got a 59% to 60% and I think it's probably likely kind of be that gradual improvement as we work through FY '25, I think it's kind of our best estimate at this stage.

Mick, can you hear me all right?

Can hear you loud and clear, Suraj.

Perfect. Congrats on a nice quarter. So, Mick, if I could, I'd love to push you on one of the earlier questions about pricing impact in the quarter. If you could strip out at least give us directionally a little bit additional color, that would be great. Mick, and also if I’ll throw my follow-up question also together in terms of inventory levels, how should we think about inventory levels on masks, accessories across the pond? Is there anything out of the normal? Or how would you characterize it? Thank you for taking my questions.

Sure. I'll address the first question regarding pricing impact, and then Brett will follow up on inventory levels, especially concerning masking accessories. We've seen total inventory decrease, but let's focus specifically on masks and accessories. Regarding pricing impact, you've done your research and spoken to our U.S. customers about pricing. As you've observed over the past few fiscal years, we've faced rising costs for components due to inflation and increased shipping expenses, which has affected our cost of goods sold. We've shared some of these costs with our customers through price increases, typically linked to innovations. For instance, the AirSense 11 is priced higher than the AirSense 10 due to its advanced features, such as being smaller, quieter, more comfortable, and having better connectivity. Similarly, the F40 mask is significantly improved, and we don't need to offer discounts on such a superior product. This mask is the smallest full-face and oral nasal mask in our 35-year history, which justifies a premium price. While I can't provide exact pricing details for devices or masks, I can confirm that the majority of our growth comes from volume. We're focused on reaching over a billion patients with sleep apnea, half a billion with insomnia, and half a billion with COPD to help improve their breathing. Our main goal is to enhance screening, diagnosis, and treatment so that more patients can be served, while average selling price is just one aspect of this. I genuinely hope that inflation decreases and costs drop, allowing us to pass on savings to our customers, especially since they often face challenges with reimbursement. While U.S. Medicare raised rates this year to align with inflation, not all insurance providers globally do the same. Our mission is to bring in more patients, ensuring that our operations remain profitable so we can invest in raising awareness for those in need of our assistance. That concludes my comments on the first half, and now I’ll turn it over to Brett to address inventory and masks and accessories.

Thank you, Mick. Regarding inventory, we have reduced our levels over the past year to more appropriate amounts for our current situation. Moving forward, we expect inventory to grow in line with revenue. We believe we are in good shape with our inventory. As for masks and related accessories, we don't differentiate them much from our other products. We manage those inventory levels similarly to how we handle devices and components. Overall, we are more comfortable with our current inventory levels compared to a year ago, and we feel we are in a solid position regarding inventory.

Good afternoon or good morning, everyone. Thank you for taking my questions. I apologize in advance because I have three questions, but feel free to answer whichever you prefer. They are all connected. Mike, you mentioned wanting to be a sleep concierge service in one of your previous answers. My first question is whether this sleep concierge service will be offered for free or will it have some potential for monetization. Secondly, regarding the digital technologies you mentioned, how many patients do you think they could attract to the market, and over what time frame? Are we talking millions already? What is your success rate in connecting these patients to your services and ensuring they are on CPAP today as opposed to getting lost in the process? Lastly, I apologize for the multiple questions, but this ties into the overall concept of your growth funnel. You reported double-digit growth this quarter; can you share how you plan to sustain this trend over the long term, whether numerically or otherwise? Thank you.

Yes, Margaret, those are great questions. Essentially, they all center around demand generation and how we can best take advantage of a unique moment in the pharmaceutical cycle, as well as the consumer tech landscape regarding a surge of patients over the next one, three, five, and ten years. We aspire to be a digital health concierge focused specifically on sleep and breathing. When we offer technology or services in healthcare, we will charge for them. However, we also aim to facilitate access to information. ResMed possesses the world's most extensive database, containing 19 billion nights of medical data in the cloud, giving us unparalleled knowledge in the sleep and breathing fields, including insights into how patients sleep, breathe, and experience issues like mask leaks or apneas. Our goal is to share this valuable information. For instance, myAir is free for patients, as we feel they have already paid for it through their insurance or out-of-pocket. Currently, 8.3 million patients use myAir without charge. Similarly, we want to provide a pathway for patients on a freemium basis. While advanced analytics may have associated costs due to the engineering and energy involved, we may charge for some of those services, much like we do with AirView for our providers and physicians. Our sleep health concierge will follow a freemium model, with some premium offerings. The primary objective is to assist the billion people in finding their treatment path. Regarding your questions about quantifying patient flow from consumer tech and big pharma compared to standard referrals, we have internal analytics that aren't public. However, I assure you we are diligently analyzing our patient channels and tracking their origins while assessing the ROI of our advertising efforts across multiple platforms. We are committed to investing in this area as it's part of our brand promise to improve sleep, breathing, and home care globally. We have seen double-digit growth across the board this quarter, with more than 6% in devices, over 15% in masks, and a 10% increase in our residential care services and software. I'm proud of our team's efforts, and we aim to maintain this momentum in the future. Thank you for your questions, Margaret.

Thanks, Mike. Congrats on the quarter here, let me just stay on the theme high level. If you think about the debate on GLP-1, on the one hand, we still have a low diagnostic rate just for sleep apnea overall. I think it stands at 20% or so based on the last Wisconsin sleep study. So when you think about Lilly coming in here, potentially doing DTC. Where do you think the diagnostic rate can go? So that would be a huge tailwind. And then on the flip side, you think about the continuum. We have dental devices, CPAP therapy, auto CPAP, of course, in their sleep metrics on AirView, et cetera. And then we also have hypoglossal nerve stimulation. When we add in the GLP-1, how do you think the decision-making process will shake out over time? Thanks again.

Thank you for your question, Anthony. It covers a lot of ground, which allows me to discuss diagnostic rates and the various therapies available for obstructive sleep apnea. The Wisconsin Cohort study, specifically the Sleep Heart Health Study, is an impressive long-term research effort. Terry Young and her team have conducted invaluable work within the field. They report diagnostic rates in the U.S. range from 15% to 20%. However, it is important to note that this is a U.S. study and does not reflect Europe, where the diagnostic rate is below 10%. In the Asia Pacific, Middle East, Africa, and Latin America, the rates drop to under 5%. Considering our position, we highlight that we have 28 million patients within our ecosystem, which represents 2.8% of the global patient population of one billion. We lead the world in digital health, not only in respiratory care but across all areas, with 19 billion nights of accumulated data, indicating this is a market still in the single digits regarding penetration. We recognize the urgent need for treatment among patients and are committed to exploring all alternative therapies. Our investments span CPAP, APAP, and bilevel technologies, where we hold a leading position. We've also made strong investments in dental therapy, being the top provider of 3D printed devices in Western and Northern Europe, along with pharmaceuticals and hypoglycemia treatments. Our objective is to ensure comprehensive care for every patient. Healthcare providers, payers, and physicians look for the most cost-effective, efficient, least invasive, yet most impactful therapies. Our studies indicate that the use of PAP can lead to a 29% reduction in mortality rates. Our strategy aims to guide patients through the sleep health channel to find the best possible therapy, beginning with CPAP. If those options aren't successful for approximately 10% of patients, we consider dental therapy, followed by pharmaceutical solutions that might outperform hypoglossal nerve stimulation. According to our data, pharma solutions show around 60% reduction in apnea-hypopnea index compared to over 50% for certain surgical options. Therefore, third-line therapies are likely to include GLP-1 or similar products. All these treatments are valuable, and we are investing in each one. If someone cannot tolerate dental devices or medication, an implant may become necessary, as some form of treatment is crucial. Effective treatment reduces the risk of heart attacks and strokes, lowers overall mortality, and is more economical for the healthcare system. Our data shows a clear correlation where each hour of positive airway pressure therapy translates to a 7% to 8% decrease in emergency room costs. We aim to remain integrated into this ecosystem and assist patients in accessing their preferred therapies. We are witnessing more patients seeking help, and I hope this will lead to an uptick in diagnostic rates, as it's our duty as an industry to facilitate that improvement. Thank you for your question, Anthony.

Yeah, good morning, Mick, Brett, and Amy. Mick, can I just get you to give some commentary around the SURMOUNT-OSA write-up in the New England Journal and particularly some of those secondary endpoints as it relates to the reduction in AHI in that no disease effectively of mild disease. You mentioned the data as it relates to resupply. I was wondering if you have any data that looks at or tracks people who are given a script for GLP-1 and CPAPs as to how many people have actually been able to come off CPAP at the end of either 12 months or 24 months? Thanks.

Yes, Saul, thanks for the question. And look, we're looking at the real-world evidence every single way that we can. And yes, certainly, the SURMOUNT-OSA data had a pretty extraordinary trial, right, where they had the patients with the sleep coach, a nutrition coach, an exercise coach, they were calling them and interacting with them every day. So even people in the placebo arm had incredible reductions in weight and some really big reductions in HI in the placebo one where they got no pharmaceutical medication whatsoever, either saline or nothing. And so, look, I think that under that circumstance, there's roughly 600 patients, plus or minus. They have some extraordinary results. But even in all those circumstances, they still weren't as good as dental devices and certainly nowhere near the 95% reduction in HI that any doctor would want with positive airway pressure therapy. But look, it certainly was larger than many people thought in the HR reduction. So, I think it's great. I think it means that those two companies that are investing in this are going to go through, getting the indication for use, and then they're going to be out there doing DTC advertising, which in the U.S, you can do on late-night television, and they'll be out there. They'll find some catchy tune, and it will be out there driving patients into the funnel, and I think it will be good for all of us in the therapeutic side. We're definitely looking at the churn rates and CPAP quitters, APAP quitters, bilevel quitters, and really looking in detail at it. I can tell you, in aggregate, we've seen no change on the data. And as you know, the latest generation GLP-1s, some of them have been out there one year, three years, and four years plus these latest gen, and we're not seeing any increase in that. We're looking at it real-world data, and we're analyzing left, right, and center, but we're not seeing an increase in quitters rates. If anything, we're seeing more motivated patients come in and holding on more. The combination therapy, which is what the primary investigators in this talk about, which is CPAP plus drug therapy as in I'm managing my weight and my suffocation is really there. And the vast majority of patients have incredible residual apnea at levels that would be treated by any primary care physician in the planet even under the very controlled circumstances of this trial, let alone what's going to actually happen in the real world. So we're watching it. We have a really strong focus on it. We've got 811,000 patients in our study or analysis, and we'll continue to publish data on it. And as we get more and more, we'll go even more to publish in the American Thoracic Society, European Respiratory Society and get in the Blue Journal and all the big journals to have this down there in the clinical literature as well as the subjects that we're looking at in our analysis. Thanks for the question, Saul.

Yes. Thanks, Kevin, and thank you to all of our stakeholders for joining us on this call. The opportunities in front of us, as you heard from all these questions, huge and largely untapped. It's an incredible runway. We see more and more people coming into the health system, and this will benefit us as we help them sleep better, breathe better, and live better lives in 140 countries. Thank you to all the ResMedians, who listen to this call around the world. Many of you are also shareholders, so thank you for what you do today and every day. With that, I'll hand the call back to you, Amy.

Great. Thank you, Mick. Thanks, everyone, for listening and your questions. We do appreciate your interest and your time. If you have any additional questions, please don't hesitate to reach out directly. This concludes ResMed's Fourth Quarter 2024 Conference Call. Kevin, you may now close out the call.