ResMed Inc.

Hello and welcome to ResMed's fourth quarter fiscal year 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed in the question queue. We do ask you ask one question and one follow-up then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Amy Wakeham, Chief Communications and Investor Relations Officer. Please go ahead, Amy.

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 the replay will be available on the Investor Relations section of our corporate website later today, along with a 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, our President and Chief Operating Officer, and Lucille Blaze, President of our Sleep and 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 generator 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 AirSense 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 am 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 US-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 Brighttree 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 trial 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 US 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 SAS business had another great quarter with year-over-year growth of 34%. Our SAS 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 Bright Tree and MatrixCare portfolio of SAS businesses. We're pleased to see sustained high single-digit growth in our SAS 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 SAS portfolio addition, Medifox Dahn, 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 Bright Tree resupply program continues to demonstrate strong synergies between SAS 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 mask revenues in the US 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 SAS solutions for residential medicine globally, and 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 with increased software solutions growth. All these business lines are margin accretive to our group. 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 those data come 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 health care 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 SAS ASM earlier this week, and I'll be attending the country market group, CMG group, for our North America team in the coming weeks, and 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 will 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. 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 US, 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 US, 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 AS10 and AS11 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, SAS 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, unfavourable 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 US 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 were 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 24. 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 in subject currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% during fiscal year 24. Operating profit for the quarter increased by 13%, underpinned by strong revenue growth, partially offset by a lower gross margin. Following the acquisition of Medifox Dan, our net interest expense for the quarter is $15 million, and we expect interest expense to be a similar amount per quarter in the first half of fiscal year 24. 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 24 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 Somnaware acquisition, and we recognised restructuring costs of $9.2 million associated with the closure of the Aria-Lymphedema business and workforce rationalisation in our German and SAS business verticals. We also recognised 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 48 cents 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 Somnaware, a company that provides an upstream diagnostic management platform that is complementary to our current AirView and Bright Tree solutions. And with that, I will 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.

Certainly. We're now beginning our question and answer session. And as a reminder, we ask that you please ask one question and one follow-up. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. One moment, please, while we pull for questions. Our first question today is coming from Matthew Michon from KeyBank Capital Markets. Your line is now live.

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 kind of from here, Are we looking at just saying $600 million and then add on some percentage of what the underlying sleep market is kind of growing at?

Yeah, thanks for the question, Matthew, and it's a good one. It's hard to predict because there are so many factors involved that are going on in the market right now. But, yeah, as you said, a very solid number, $602 million there. in global devices in the quarter, and 30% growth in US, Canada, Latin America, 15% growth in Europe, Asia, and rest of the world. Look, we're seeing a strong sort of mid-single digits level of patient flow into the channel. We're seeing in addition to that, like in terms of new patients, we're seeing in addition to that resupply of patients at that five-year point for most US reimbursement and various points in the other 139 countries where people make their own decisions, or insurance has other criteria to drive that. So it's new patient setups, it's resupply setups, and there's, of course, the impact of a competitor recall, which was supposed to be over in June 30 and now has no definitive date. And so as we look to that with all those unknown factors, it's very hard for me to say, Matthew, that it's just stop and steady growth from here. It might be stronger growth from here. And that, you know, makes it hard to predict gross margins because as we grow those CPAP and APAP numbers so well in the US geography, it's incredible great revenue and cloud connected and links us with the patient for life, but it is lower gross margin than our group. And so it's great gross profit dollars, but has an impact on our gross margin as you saw that steady apart from FX moving it down 30 basis points. So a complex equation, but I'd say it's at minimum, you know, it stays where it is and grows with the markets. but it could potentially grow above that as we continue to take share and solidify that share through our digital ecosystem. Thanks for the question, Matthew.

Thank you. Our next question today is coming from Margaret Cusore from William Blair. Your line is now live.

Hey, good afternoon and good morning, everyone. I wanted to follow up first on the competitive dynamic to the extent that you'll you see anything maybe in the marketplace. So whether, you know, your key competitor is coming back, either approaching or, you know, maybe hiring processes, marketing campaigns, anything that maybe they're gearing up for that you're seeing or is demand relatively similar to what you've seen in the past, no real change. Thank you.

Yeah, thanks, Margaret, and welcome back. I think it's difficult to predict exactly where they're at from those sort of early emerging signs, as you say. Look, we have regional competitors in Europe that we are fighting with every day there, and we have regional competitors in Asia that we're fighting with every day, and regional competitors in the Americas that we're fighting with every day. You know, when Philips comes back, they'll have to start at position number four, if you like, in new patient setups, They are back, and we are competing with them in some countries in Europe, like in Spain. They never went away because they never had a phone device there. So they've been there the whole time through this recall, and we've been beating them handsomely there. And there's other markets in Europe where they've started to come back. We're competing and winning and maintaining share and growing share. I think the reputation hit and the time to market is going to be a very slow progress for them country by country, whether or not they get a consent decree in the largest geography. And so... we look at it going forward and say, look, do we have enough supply to take care of all the market demands between us and the other regional players? And we finally got there, where I can say that this quarter, that we're there and we can take care of it. So it's almost irrelevant to us how and when in terms of what that looks like, because we're able to take care of all the market growth. So for us, it sort of takes away that uncertainty and allows us to push forward. But yeah, we're competing head to head with them in some many countries in Asia and some countries in Europe. And it's like it was in 2019, where our Smaller, quieter, more comfortable, more connected, and more digital solutions are taking share and holding share. And it's an ongoing competitive game. And as I said, we're launching some of these AI-driven products on top of this ecosystem. It's an exponential game when you think about digital. And we're well ahead. We've had two or three years here to sprint ahead. We were ahead before that. And I think it's a long-term game. We'll keep productively paranoid, but We are improving outcomes, we're lowering costs, and the physicians like the workflow efficiencies, and patients like the increased adherence, and payers like the fact that there's an ROI in lowering total healthcare costs.

Thank you, guys.

Thank you. Next question is coming from Anthony Patron from Mizzou Group. Your line is now live.

Great. Thank you. Congrats on a strong top line here, share gains. Maybe a 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, are 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.

Yeah, thanks, Anthony, and welcome back to you, too, to ResMed following us here. I'll take both your question and your follow-up in order. So firstly, on resupply, You know, as you know, you've been following us for a number of years. It's not a lock and key. You can use our mask on other devices and you can use other masks on our devices. The way that we've won mask share and nobody's been on a major, you know, in terms of not being able to sell recall out there on this. And so we've had head to head competition with all the top five players in masks, you know, these last three years. And we've gained really good share with that. So I think it's just the smallest, the quietest, the most comfortable, the minimalist size, you know, the ones that have full freedom and the ones that have the ability for prone sleepers and side sleepers to provide that capability. And so that's how we've gained share in the mask side and maintained that share. So, you know, there is a better together in that when you have an Essence 10 or an Essence 11, the mask leak data are more accurate. the interoperability of an AHI calculation or a leak calculation are more accurate. So we certainly push that angle, and we do get some extra share through the device, but it's not as material as the fact that the masks themselves are just excellent, which I think speaks to the sustainability there. So, you know, that strong resupply, as you said, you know, 19% growth in the U.S., 14% growth in Europe, Asia, and beyond, where, you know, we don't have that sort of automated resupply that we have with Bright Tree resupply solutions in the U.S., that's been from hard work from our teams in asia latin america and europe on patient outreach subscription programs and connecting directly to that end user so you know i think postcode people care about respiratory health respiratory hygiene and and taking care of themselves outside the hospital and we've been able to leverage that trend uh in the consumer side as well so i think it's sustainable and i don't think although may be catalyzed somewhat by our increased device share I think our mask share is on its own extraordinary due to the intrinsic products. The second question around GLPs, yeah, look, there's a lot of moving parts. I was just reading in the press today that many U.S. employers are banning coverage of GLP-1s due to cost. European governments have all said no from the government insurance side. These things are incredibly expensive, about $1,000, well, anywhere from $800 to $1,200 a $1,000 a month. So I think there are three factors that will mitigate GLPs in the space. One is cost. Two is adherence. And three is side effects. I'll take them really quickly in order. If you look at cost, take a 40-year-old person who's on therapy full-time for 40 years. 40 times 12 times $1,000 is $480,000 lifetime cost for that patient on a GLP-1 from 40 to 80 lifetime cost. If you take that same patient and say, well, let's treat them with CPAP, right? First year, maybe $1,000 and then 39 years of, let's take a really strong case where you get four masks a year and they're all full face masks. That's about $13,500. So it's 35 times more expensive to go with a GLP-1. It's just like, you know, what's the ROI here? So that's cost. On adherence, the data out there are about 33% adherence at one year through the clinical trials on GLP-1s. That's incredibly low. We get 87% adherence in 90 days and we hold it pretty strong there. So I think adherence is a big deal. And the third is side effects. Reading thyroid, pancreas, kidney, cancer, these major side effects and minor ones like nausea, constipation and pain. Our biggest side effect, President Biden had a little mark on his face and he was asked about it and it was from his CPAP. Look, I think it's a long road to play out here. I think it's, frankly, good marketing around the area of obesity, and it can drive patients into the funnel. But I don't think it's going to be a major impact on patients because we've got 936 million of them worldwide, and we need them to get into the funnel. If they come in the funnel because they tried a pill and it didn't work, that's good for us too.

Thank you. As a reminder, that's star one to be placed in the question queue. And in the interest of time, we ask you please ask one question, then return to the queue. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Hi, this is Seamus on for Suraj. So we saw gross margin step down a little bit. I know you said there were some reasonings for it, but I just, looking forward, you know, 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.

Yeah, thanks for the question. And look, it's a good one. Lots of factors going on gross margin. Actually, the major one, as you noticed, sequentially on the 30 basis points was foreign exchange. And that was on inventory as it flowed through our funnel as we sold those CPAPs, APAPs. We had FX that had impacted them six, nine months ago, but they're flowing through inventory that we sold during the June quarter. That was the headwind of 30 basis points from Q3 to Q4. You know, look, I think there's so many moving parts, but when you add it up and you look at geography mix and the upside opportunity for us to grow our business in Europe, Asia, particularly Japan, which has some chance for acceleration over the coming years, product mix, I mentioned in the prep remarks, particularly on buy level and our non-invasive ventilator growth, so think air curve ST, STA, air curve ASV, These are incredible. And our mask side, particularly the full face, but any of the masks, all of those are gross margin accretive to our group. And I see opportunities for strong growth in all those categories. And also our software solutions have gross margin accretive capabilities. And as we go on an organic basis from single digits to high single digits to low doubles there on the software, SaaS side of the business, I think that's margin accretive. So I feel good about that. I also know that we're working through the sort of higher inventory costs that we had in that supply chain crisis. We had to spend more on chips, parts and pieces in those contracts and get more expensive components for the cloud connective chip and beyond. And those freight costs that we invested in, and everyone's talking, oh, the news, the freight costs are down. You should take away your surcharge. Well, no, actually, the freight costs that we paid six, nine months ago are working their way through our gross margin, as you saw in the June quarter, and that'll go on for some time. But that's going to continue to go down over time. And as that does go through our sole products, there's going to be some tailwinds for gross margin. And the final one, a really important one, is we're going to drive Essence 11. It's the best in the world product. It's better than the second best product in the world, which is the Essence 10. And it gives us a chance, as we gain regulatory approvals and we scale that production, to improve our gross margins there as well. All those are tailwinds for the gross and net margin of the business as we move through the fiscal year. You know, hard to predict in that one of the main factors is, you know, how do we accelerate in the US and particularly in CPAP, APAP? I will never turn down a patient. If there's demand for a patient and they want a CPAP and APAP, I'm not going to reverse engineer. And we know how to do it. We could reverse engineer our gross margin up 30, 50 basis points by slowing down sales of product. We're not going to do that. When a patient needs care, we're going to take care of them even if it's a slightly lower gross margin. And by the way, it is very good gross profit dollars and we get to take that cash flow, as you saw, a really strong cash flow in the quarter and reinvest it in R&D. So we're working on all the above furiously and we're going to get success as we go over the next, you know, one, two, three and four quarters.

Thank you. Next question is coming from Laura Sutliff from UBS. Your line is now live.

Hello, thank you. I was just wondering if you could talk about how you're positioned 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 facility level. Thanks.

Yeah, look, we have run all sorts of scenario analyses around that. You know, 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 chipsets, the whole medtech sector is a group. And, you know, I serve on the board of AdvoMed, and we were advocating for more semiconductor chips for the whole industry. You know, when we were going to Intel and TI and all these companies and sort of begging for semiconductor chips, $12. 18 months ago, altogether, 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 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 would 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 present COO. Yeah, 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 burst capacity, if you like, and so our ability to rapidly increase volumes as needed is really strong. Thanks for the question.

I think your next question is coming from Sean Laman from Morgan Stanley. Your line is now live.

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

Yeah, thanks for the question, Sean. Yeah, simple question, very complex answer, you know, 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 in the US market where there was an inflation adjustment up of around 5% 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, you know, 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, you know, 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's 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, 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're 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.

Thank you. Next question is coming from Leanne Harrison from Bank of America. Your line is now live.

Good morning, Nick. Can I ask a question about outlook? So, you know, through the earlier quarters, you mentioned that, you know, we were going to see sequential revenue growth through 2023, and we have seen that, and that's been fabulous. But with your key competitor out of the market, do you still expect to grow revenue sequentially into first quarter, second quarter, 24, or for however long as they remain out of the market?

Yeah, so great question, Leanne. And yeah, you know, 12 months ago when, you know, it was pretty clear that we had a strong, you know, runway there on the devices side, and it was really we were constrained by our own productions. I was able to very strongly say, look, I am confident that our supply chain team has got access to this re-engineering, redesign, and redeployment of key components, particularly electronic components, particularly semiconductors. And we did that. And we grew device revenue every quarter throughout fiscal year 2023, as you noted. I was really excited with the team on that. As we look forward to fiscal year 24, we don't give guidance really on the top line. Brett's given some really solid guidance on our SG&A, our R&D, our effective tax rate, and how we're looking in those parts of the business that are very controllable. As I said in some of the earlier questions, there's so many moving factors in overall demand in the market. But look, I'm confident because new patients continue to come into the funnel. That's happening across the world. And it's not happening randomly. We're driving demand gen programs. We're driving them in Australia and New Zealand with our Awaken Your Best campaign. We're driving them through our German teams, our India teams, social media programs. In our China teams, really strong social media demand gen. And so we're getting new patients in the funnel. And there was a glut of patients who couldn't get a replenishment device when their device hit three years or five years or whatever time their insurance allows or they as a consumer decide that they want to get to the next gen product. And I think the Essence 11 and all its features, its engagement with the patient with compliance coach and its ability to engage with them directly on the touchscreen has driven some demand as well. So all that together make me confident that over the fiscal year we're going to have strong demand. But as you go from Q4 to Q1, you know, there's a seasonal impact. Northern European and U.S. markets take summer vacations, and these have impacts seasonally on the business. And so traditionally Q4 to Q1 isn't one up. I'm not giving guidance for it, but traditionally that's the way it happens. We're no longer supply constrained. We are back to a demand environment. And then there's the factor of, you know, that number four competitor probably not coming back during the next 60 days, so the end of this 90-day period. But I'm not going to jump in and predict on that. All I'm going to say is we're out there all day, every day, driving demand gen of new patients in. We're out there farming for patients who need to get a replacement device. And every day, we're engaging with patients on MyAir and reminding them of the importance of a clean hygiene and a new mask and engagement with their digital apps. So all of the above gives me very strong confidence for high growth of ResMed throughout the year. But I'm not going to call it on an every 90-day basis here. We just don't do that on the top line.

Thank you. Next question is coming from Chris Cooper from Goldman Sachs. Your line is now live.

Good morning. Afternoon. Thank you. So, Mick, on AirSense 11, you sort of emphasized its importance for gross margin. You also said at the start of the call you sort of expect this to remain on allocation for a few more quarters yet. I know this time frame was probably a bit longer than you'd hoped. I just wanted to confirm whether that's entirely a function of supply chain at this point or I guess whether there's any sort of strategic consideration to manage volumes during such an unusual competitive dynamic.

Yeah, Chris, thanks for the question. You know, we've really been focused on that patient and making sure no one's left behind, you know, as I said in an earlier question. And, you know, although the Essence 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, you know, 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 Essence 10 and take care of that demand now while we ramp Essence 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 Essence 10 with a competitive one. So it's better for the patient. It is slightly lower 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, you know, 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 the hospital and doing that. And if we have to do it with an Essence 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 Essence 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 peddled to the floor on AirSense 11. And so every one 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.

Thank you. Next question is coming from Dan Hearn from MST. Your line is now live.

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

Yeah, thanks for the question. And, you know, I think actually if you go back and look, all the factors that I talked about 90 days ago, you know, we're talking about today, but in addition, the Essence 11 ramp that we're putting together there, you know, what happened in these 90 days that was unpredicted was there was more demand. We thought a competitor may be back, and there was more demand for CPAPs and APAPs, and we didn't, you know... I know the exact number of how we could have slowed down our Essence 10 generation to get gross margin to be plus 30 basis points from queue to queue. But we didn't engineer it and reverse engineer it that way. We said, there's demand out there. Let's go take care of those patients. That was the unexpected factor. It was US CPAP and APAP demand. And, I mean, you look through the numbers, you'll see that it was incredibly strong in gross profit generation, cash flow generation, incredibly strong during the quarter. And, you know, we did think about it. Oh, gosh, do we follow through in saying, oh, we want to get a creative GM, you know, 90-day to 90-day point? Or do we say take care of that patient? And we said, no, we're going to do the right thing. We're going to take care of the patient. So we're thinking about the long term here. But, no, I'm still bullish over this fiscal year for sure. You know, I – You never can know what demand is going to look like and where it's at. And, you know, we are not going to not take care of a patient. But as those, you know, higher inventory costs work their way through our system, there's opportunity for gross margin improvement as we go forward. You know, there's also the impact of, if you looked at the SG&A, you know, this time a year ago in the June quarter of 2022 versus 2023, there was still a lot of people on that sort of COVID. I'm not traveling. I'm not going to see customers. I'm not going to do the strategic meetings and the planning meetings. We've opened some of that up, as you saw in our SG&A, and so that's impacting our net margin as well. We're going to manage those tightly and carefully, and we'll probably have some further vigilance, if you like, on our SG&A. We won't be pulling back, really, on R&D. I think that the innovation engine has to continue to grow, and we're doubling down on AI, and I think our leadership in digital health, we have to make that happen. I'm still bullish throughout the fiscal year of FY24, but we're not going to not take care of a patient if there's excess demand with a CPAP and APAP to manage one component of the P&L versus taking care of the patients and thinking about the you know, one, three, five-year strategic engagement with the patient, with the physician, with the provider, and doing the right thing for the industry. So that's the sort of factors that have changed in the next 90 days. And I hope actually all this comes together and we continue to do both, right? Drive the needs of the patient and be able to get accretion in our GM. And I'm very confident we'll do that over the coming, you know, three, six, nine, 12 months.

Thank you. Next question is coming from David Lowe from J.P. Morgan. Your line is now live.

Thanks very much. Nick, could I just comment a little on what you saw in the ex-US markets? Obviously, last quarter we saw the big ventilator sales into China. Just wondering if there's any countries you'd call out or any items we should be aware of, please.

Yeah, 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 led to hospital-based or life support ventilator sales. And so We're back to, I would say, the sort of 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 servo vents and bi-levels, we're back to steady market growth and actually we saw strong double-digit growth as those, you know, post-COVID, we're starting to see the clinics open up and patient flows start to come back. Robin, any thoughts on ventilators?

No, not on ventilators because I'm just going to comment on masks. So the masks in all these other markets were really strong and really 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.

Thank you. Next question is coming from Steven Ween from Jordan. Your line is now live.

Yeah, thanks very much. I just wanted to ask Brett about the working capital position. Again, last quarter you were thinking that you'd be able to make some inroads into the inventory balances that you had such that we might see a bit of more of a release of cash. But obviously, inventory stepped up again as has the receivables. Is that just building more to the demand that you see, or could you just help put that into a bit more context as why it didn't quite play out the way you thought?

Yeah, hi Steve, it's Brett. The inventory actually came down a little bit sequentially, so that's sort of tracking down how we're expecting. We expect that the inventory balance should decline over the course of FY24 as well. The receivables arrivals up a little bit, but that's really driven by the revenues. I think Overall in the working capital, we're in pretty good shape. It was up a little bit this quarter. But when you look at that, it's really the timing around tax payments this quarter. So we paid higher tax this quarter than we would typically do each quarter. So that drove, if you like, a little bit of negative working capital. But again, that's just a timing element. So we're expecting pretty robust cash flow generation through each of the quarters in FY24. And we'll continue to work hard on the working capital and bringing that down. A big driver of that will obviously be the inventory and working that down progressively over the fiscal year.

Thank you. Next question is coming from Mike Madsen from Neiman Company. Your line is now live.

Hi, guys. This is Joseph on for Mike. Could you maybe talk about the new patient and and repat backlog internationally? I guess the way that I understand it is it's fully worked through in the US, 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.

Yeah, look, I don't think we're fully worked through the backlog of patients in the US in terms of patients whose insurance has got to the five-year point if they're Medicare or 3, 4, 5, depending on which private payer they're under. And so I do think our competitors' actions slowed down that, particularly if they were on a competitive device. And the demand limitation and the physicians 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 runway still left on repap within the US geography. And I think that's even more so in other markets. You know, as Rob just noted, and, you know, as we talked about, the engagement with consumers and patients in different geographies is driving mask growth. And, you know, any quarter to have 14% revenue growth in masks in Europe, Asia, rest of the world would be incredible. And that's not driven by by any recall dynamics whatsoever from competitors. 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 US where we have incredibly strong relationships with Bright Tree and MyAir directly to patients, directly to providers, but the ecosystems that we're generating in some of our other sort of omnichannel markets around the world. So I think the opportunity for REPAP in the US 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 supplies. 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.

Thank you. Our final question today is coming from Saul Hadassin from Baron Jolie Capital. Your line is now live.

Morning, Mick, and good day, Brett and Rob. Mick, just wondering on masks, it's been a while since we've seen some new product coming out from ResMed. Just wondering how much has the recall, competitor recall, impacted on your ability to continue to focus on new product development and new product launch? And I guess on the mask side, should we expect anything near term in terms of a refresh of the mask portfolio? Thanks.

Yeah, so it's a great question. And yeah, our R&D team have obviously been incredibly focused on the reengineering, the resupply, and the redesign on our core device platforms. And we're able to do that, right? So we're able to get the supply back of Air 10s, as you saw, and Air 11s. But yet, look, we had the whole board down in Sydney last quarter, and we were looking through the pipeline of devices and masks. And it's incredible. It's really exciting. I don't like to get ahead of my commercial teams, and one of them is at the table with me now telling me to keep quiet. But I can tell you I'm very excited about the pipeline. There will be new innovation, new masks from ResMed as we go through this fiscal year. And as a personal user of these products, I try every new mask that comes out. And this new one, which has a great project name that I'm not able to say, but it's a beautiful island that you can travel to by boat. I have tried that mask and it's incredible and I can't wait for that to come to the market. But yeah, look, we do have masks that are coming in the pipeline that are working their way through regulatory and then of course commercial ramp up to make sure that when we deliver it, it's ResMed quality, ResMed capability, first time fit, incredible adherence and to drive through the channel. And so you'll see those come to our major markets and then globally throughout the fiscal year. So I'm excited about that pipeline. The one that I can talk about is the digital side where we've launched an AI product, and I'm really excited. As those get more traction, we'll talk about how the digital products and the mask products throughout the year are going to impact and keep our incredibly strong double-digit growth that we saw this quarter.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Mick for any further closing comments.

Yeah, 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, and 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 us 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.

Thank you. You may now disconnect. We do thank you for your participation today.