Operator: Thank you. Next question today is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Suraj Kalia: Mick, can you hear me all right?
Mick Farrell: Yes, I can, Suraj. Hopefully your phone and our phone are good throughout this question and answer.
Suraj Kalia: So forgive me if there is any background noise. Mick, first and foremost, congratulations on this quarter. Mick, specifically, and I — forgive me for belaboring this, gross margins, a nice uptick in the quarter. Mick, if I recall correctly, a couple of quarters ago, gross margins were soft and one of the reasons cited was a higher U.S. contribution, which intrinsically has lower margins than OUS. This quarter also, U.S. has ticked up nicely. Contribution has picked up. Maybe I’m missing a key aspect here. Can you help us reconcile those two? Thank you for taking my questions.
Mick Farrell: Yeah. Thanks for the question, Suraj. I’ll have a go first and I’ll hand over to Brett for detail. But as I look at it from my perspective, there are a number of factors that were positives to have such a great gross margin number this quarter. The first one was that we had excellent work by our global supply chain teams to work on getting our cost of goods sold down, not just direct COGS but OCOGS as well. And so we worked through some of that high inventory — high cost inventory stock moved through the system, and some of the reengineering work and revalidation and verification work we’ve done has been able to bring new product to market. We have a good flow between the AirSense 10 and AirSense 11 platforms.
But look, if you look at the growth from like 12 months ago and some of the issues, I mean, we had — as I said earlier, we had 49% growth in our U.S., Canada, Latin America flow generators a year ago. That has a very big impact on margin as it’s, lower margin than our masks business and other businesses, certainly in our ventilation and software around the world. This quarter, we’re sort of back to a steady state where ResMed’s growing well. We’re growing at mid-to-high single digits in parts of our business and double digits in the masks and accessory side. And I think we’re just back to our core execution, something that ResMed’s done in our 35-year history is have operating excellence and operational excellence as a core competency.
We were able to, after all those perturbations of COVID, supply chain, cost of inventory, we’re able to get back to what we do really well. So that’s what I’d say are the main factors for us achieving such great gross margin in the quarter. Brett, do you want to provide any further detail?
Brett Sandercock: Yeah. Thanks, Mick. I mean, the only thing I would add is the geographic mix impacts tend to be pretty modest. You do see that, but for example, product mixes usually has much more impact than geographic mix. So it’s less of an impact on our margin either way from geographic mix. It’s there, but it’s not substantial.
Operator: Thank you. Next question is coming from Margaret Kaczor-Andrew from William Blair. Your line is now live.
Margaret Kaczor-Andrew: Hey. Good afternoon. Good morning, guys. Thanks for taking the questions. I wanted to maybe touch on the market demand drivers and demand gen that you referenced earlier on the call. My recollection can tell me if I’m wrong, but I think you guys have sporadically maybe invested in understanding market growth drivers and the Verily partnership is the one that kind of comes to mind on that. But as you think of demand gen, can you give us any data from those programs that might help inform the demand gen that you’re trying to create? Over what time period can these efforts make that impact on market growth? And again, key sources, is it local level, podcasts, newsletters, global level, celebrity, partnerships? Again, any details would be helpful. Thanks, guys.
Mick Farrell: Well, yeah. Thanks, Margaret. It’s a great question on how we’re going to learn from our many years of experience of getting patients in the funnel and taking it to the next level and scaling globally. As you know, we’ve had sort of direct to consumer campaigns in our cash paid countries, Australia, New Zealand, Singapore and others around the world. One of the big changes we made in our 2030 operating model was to establish a Global Chief Product Officer, Global Chief Revenue Officer, but also a Global Chief Marketing Officer. And I think bringing that marketing function to be across the whole of the sleep health and breathing health business, and really across our whole ResMed business, is going to allow us to bring.
Yeah, as you said, we did experiments in that joint venture where, by the way, we own all the intellectual property and capability of that joint venture, the assets and capability that we learned over those last many years in that JV. We’ve now taken that on board and we’ve said, okay, let’s not just do that in one metropolitan statistical area in the United States or within one country like Australia or another country like Singapore or Korea. Let’s look at ways we can scale that globally. So without signaling directly and exactly how, where, and when we’re going to do it, I can tell you we’ve got a global team looking at this, Margaret, and as we go throughout fiscal year 2025, we’re going to talk about, as they go public, this is the campaign.
One thing that is different from what we did before is that I believe in what gets measured gets done and every single campaign we’re going to do is going to have hardcore metrics of sponsorship here, driven here and influence it there, this social media impact there. We’ll look at the ROI, and before it scales, we’re going to analyze that portfolio of primarily social media but other media-driven demand gen, and yes, it will be local, but it’ll also be national, and there’ll be global. The platforms will be global, the cultural impacts will be national, and then the impact will be local, and we’ll be measuring that direct ROI of that marketing spend. As you saw in the quarter, we were very efficient on SG&A this quarter. We will go back to our steady state on that, not growing at revenue, well below, but getting up to better growth and those investments will go in areas like this, in demand gen on SG&A, and of course, our core R&D growth will go back into AI and generative AI.
I can tell you some of our work on generative AI in Asia-Pacific, helping a patient in that digital health concierge through the channel will be a big part of our demand gen as well, so a combination between R&D and SG&A there, but great question, Margaret, and we’ll update you as we move through fiscal year 2025 and beyond on our demand gen initiatives.
Operator: Thank you. Our next question is coming from Gretel Janu from E&P. Your line is now live.
Gretel Janu: Thanks. Good morning. I just want to go back to the gross margin and more just thinking about the gross margin trajectory into FY 2025, so how should we think about the quantum of improvement likely to be achieved into FY 2025, and where’s that additional step up going to come from now that you’ve kind of normalized a lot of the headwinds that we’ve seen in the last 12 months? Thanks.
Mick Farrell: Yeah. Thanks for the question, Gretel. Brett, with this great performance from your finance and our global supply chain team, you’re getting all the questions this quarter, so over to you on projections for gross margin for FY 2025 to answer Gretel’s question.
Brett Sandercock: Yeah. Thanks, Mick. Yeah. Gretel, I mean, there is — yeah, there’s been quite a good increase year-on-year and freight and some manufacturing efficiencies, cost improvements there, obviously played a big part. We’re also not so much facing the headwinds of these component cost increases that we saw sort of six months to 12 months ago as well. But if you look forward, and it’s always hard to predict, as I mentioned earlier, there’s a lot that plays out on the gross margin, product mix, the timing of the cost improvements or the continuous improvement programs that we’re now running, and we’ve had an opportunity to do that. We’re really, really focused on supply and getting devices into the market.
So now as that stabilizes, then that gives us an opportunity to work on cost improvement programs. So we’re focusing on that. So the goal, without being specific on targets, but certainly our goal is to improve gross margin over the course of FY 2025. And we’ve got, probably need to do that on a number of fronts, which is more around a continuous improvement or gradual improvement program now, I think, as we work through FY 2025.
Operator: Thank you. Next question is coming from Brett Fishbin from KeyBanc. Your line is now live.
Brett Fishbin: Hey, guys. Thanks so much for taking the questions. Really appreciate some of the updates that you guys have provided on the data front. And I think what stood out to me a lot with the last couple of updates was the 10% plus type of increase that you’re seeing in PAP initiation rates for the GLP users. And then especially considering this isn’t really even reflecting some of the likely marketing activity from pharma. So curious, some of the factors that you think might be driving this correlation and then maybe looking ahead where this number could potentially go once we’re actually seeing patients that are prescribed with under an OSA indication and diagnosed with OSA?
Mick Farrell: Yeah. Brett, it’s a really good question. It’s quite a complex one and I think it’ll play out over time. We’ve obviously got very strong quantitative data with the 660,000 subjects that we’re following in that analysis. But we get a lot of anecdotal information from folks, all the way from folks who are involved in the clinical research to frontline physicians through our network and we position this across 140 countries. These new medications are primarily focused on the U.S. and Western Europe right now. But as we watch, our hypothesis is that this new therapy is bringing people into the healthcare system who weren’t previously there. They weren’t choosing to go as frequently to their GP or their primary care physician.
They are now seeing that PCP, that GP, and now they are getting treated for not only their obesity, but now other chronic diseases and we’ve seen this in other disease states from some of our peers here in medtech. But yeah, it’s quite extraordinary to have 10.5% higher propensity to start positive airway pressure therapy. There are not many other factors recently in terms of innovations from biotech and pharma that we’ve seen that could drive this level. And so it is early days as those drugs are penetrated in the U.S., Western Europe, and beyond. But we’re watching it very closely. I do think that these trillions of dollars worth of capital will bring lots of advertising and will bring lots of patients into the funnel. And then our job will be to help those patients to find the best path to the best therapy and the best therapy is positive airway pressure therapy and we’re seeing that in these early days.
