ResMed Inc. (NYSE:RMD) Q4 2023 Earnings Call Transcript

Page 4 of 11

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

Mick Farrell: Yes. Thanks for the question and you look and it’s a good one. Lots of factors going on gross margin, actually, the major one that 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. We — 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 bi-level and our non-invasive ventilator growth.

So think AirCurve ST, FTI, AirCurve ASV, these are in — and our masks 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 are 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 and 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 all 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 there with through — 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 and really important one is we’re going to drive AirSense 11. It’s the best in the world product. It’s better than the second best product in the world, which is the AirSense 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.

So all those are tailwinds for the gross and net margin of the business as we move through the fiscal year. Hard to predict in that one of the main factors is, how do we accelerate in the U.S. and particularly in CPAP, APAP. I will never turn down a patient if there’s demand for a patient and they want an 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 one, two, three, and four quarters.

Page 4 of 11