Q3 2023 Resmed Inc Earnings Call
Hello, and welcome to resume its third quarter fiscal year 2023 earnings call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.
And answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Amy Wake him Chief Communications and Investor Relations Officer. Please go ahead Amy.
Great. Thank you, Kevin Hello, everyone and welcome to <unk> third quarter fiscal year 2023 earnings Conference call.
This call is being webcast live and a replay will be available on the Investor Relations section of our corporate website later today, along with a copy of the earnings press release and the presentation both of which are available now.
On the call today are chief Executive Officer of mixed Farrell, and Chief Financial Officer, Brett Sandra Cock following our prepared remarks, making Brett will be joined by Rob Douglas President and Chief operating Officer, and David Pendarvis, Chief administrative officer, and Global General Counsel for Q&A session.
During today's call, we will discuss several non-GAAP measures for a reconciliation of the non-GAAP measures. Please see the supporting schedules in today's earnings release.
Our discussion today will 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 <unk>.
Adult to differ materially from any forward looking statements made today I'd like to now turn the call over to Nick.
Thanks, Amy and thank you to our stockholders for joining us today as we review the results for the March quarter.
Our third quarter fiscal year 2023 financial results reflect very strong performance across our entire business through the hard work of our resumes team worldwide, we've been able to steadily improve supply and manufacturing output to deliver for customers and most especially for patients with now full market availability.
Although our life saving products and therapy solutions.
During the quarter, we were able to offer unconstrained access to cloud connected essence 10 flow generator devices in North America as well as improved access to those cloud connected devices across our global markets.
We continue to work through some supply chain constraints with our latest and greatest essence 11 platform and we expect to steadily improve the global availability of essence 11 over the next several quarters we.
We are thrilled to have the essence 10 platform off allocation and fully available to customers in the U S and other major markets in Swift succession.
I would like to send a huge personal thank you to our six Sigma black belt supply chain and manufacturing teams.
<unk> with our global supplier lines, we have been able to significantly increase production to the point that we are now able to deliver cloud connected devices to meet the needs of all of our customers in the U S. And we are working hard to make that the case in all 140 countries that we sell into worldwide as we move forward.
Sure.
Last quarter, we made a commitment to meet the global demand for connected CPAP and iPad devices with a combination of assets 10 in essence 11 by the end of calendar year 2023 as I. Just noted we have already achieved that goal in our largest market and we will be well ahead of that go across all of our global <unk>.
Markets.
Supply chain challenges aren't completely behind us, but we have passed an idea in supply and we see steady increases in supply ahead.
Our amazing R&D teams and global supplier Alliance teams have designed and validated new components. They have added new suppliers and they have worked hand in hand with existing suppliers to secure the flow of parts the way need.
We're also focused on scaling our manufacturing capabilities with the world's biggest and highest output manufacturing plant on the planet in the field of respiratory medicine.
We are working country by country to secure the necessary regulatory approvals as we ramp production and delivery of the essence 11 platform across global markets. Given this global ramp plan, we expect to remain on allocation for the essence 11 platform for the next few quarters with essence Tien covering all the difference in demand.
With this combination of air Tien and are living we have the two best sleep apnea therapy platforms in the market and we are now able to service all of our customers' needs.
Our incredible growth rate of 43% and global device revenue this quarter speaks to that market leadership position of these two platforms customers are voting with their wallets.
Our mask and accessory business also continued its strong growth trajectory with 15% global growth in constant currency this quarter across our mosques businesses.
Mask growth is supported by both new patient growth as well as enhanced resupply programs to existing two existing patients catalyzed by ongoing core patient demand.
We have now reached the point that new patient flow is well above the levels. We saw pre COVID-19. In fact March is we just finished March 2023 was our highest quarter ever for new patient setups in our cloud based patient management system called <unk>.
Our digital health ecosystem enables and drives long term adherence pushing towards 90% adherence for our highest performing customers.
Even as we now passed three years since the start of Covid. There continues to be sustained heightened awareness by patients of the importance of respiratory hygiene and respiratory health. This has been a major step change that is held for now 12 quarters, we consider that a permanent change at this point.
In the U S market customers resupply programs, including <unk> resupply have augmented growth in our consumer driven markets outreach programs and subscription programs have also driven mask replenishment rights.
Patients want fresh equipment, because there is less lake and more comfort for them the person who is suffocating before this treatment.
Physicians want fresh equipment, because they have seen peer reviewed published evidence that patient re supply is directly correlated to increased patient therapy adherence.
Our teams continue to work incredibly hard to achieve the double digit growth results amid a challenging industry environment.
All 10000 of US raise millions are laser focused on continuing to deliver but the devices and masks for our customers globally every week every month and every quarter.
Let's now briefly review updates on the top three strategic priorities for our company number one to grow and expand the reach of and differentiate our core sleep apnea and respiratory care businesses number two to design develop and deliver market leading devices as well as market.
Leading 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.
The launch of and market reaction to our essence 11 device platform continues to go very well.
Patient feedback remains very positive and we continue to see strong adoption of our my patient App.
In fact 11 adoption rights of my year are more than double the adoption rate of <unk> with the <unk> 10 platform.
It turns out that patients love getting their own data every day on their <unk> app with a daily score daily coaching therapy engagement through advanced analytics and patient focused algorithms.
Utilization of a digital health platform like Maya is directly linked to adherence, which is then directly linked to better patient outcomes as seen by the physician, which ultimately drives better outcomes for the payer and the provider.
Given these trends increasing production and global availability of the essence 11 platform clearly remains a top priority and an obligation and we will continue to drive market penetration, leading the market expanding the market as we scale production and achieve regulatory approvals country by country.
Meanwhile, we continue to improve the software and digital health technology that drives a significant component of the value proposition for our connected devices.
Over the next several quarters, we will introduce several artificial intelligence driven coaching features into the <unk> system as well as on the patient facing my App.
These AI algorithms will provide personalized suggestions to improve the patient experience and ultimately to increase patient therapy adherence.
Many of these AI driven solutions will be available on both the <unk> 10, and the essence 11 ecosystems.
<unk> essence 11 device is the best positive airway pressure devices on the planet.
Very closely by the second best device, which is the <unk> 10 platform and.
And together they share the same digital health technology ecosystem.
We will continue to invest in the ecosystem supporting these platforms as we innovate solutions for the benefit of physicians providers and especially patients.
The bottom line is that our digital health technology investments have a multiplier effect across both air <unk> and air 11 ecosystems catalyzed and powered by <unk> and Maya.
Pivoting to our respiratory care business, we continue to drive growth and adoption of our bi level and other noninvasive ventilator solutions around the world as well as investing in our newer to market technologies for patients, including euro muscular disease, COPD and asthma and beyond.
During the quarter, we announced the pilot collaboration between our digital therapeutics team under the propeller health brand and the University of California, Davis Health system.
This partnership allows eligible UC Davis health patients to have access to propellers digital therapeutics platform, including sensors for inhaled medications, a mobile app or web portal as well as ongoing patient support.
Data from the propeller senses will be transmitted to the UC Davis health electronic health record system through an IPR to support patient enroll enrollment and remote patient monitoring.
It's still early days for this technology, however, combined with our investments in clinical research for home based high flow therapy for the treatment of COPD in the home. We see these technology innovations as important clinical additions for trading respiratory disease, and an integral part of our 2020.
<unk> growth strategy as we now pivot to look beyond to resume 2030.
Turning to our software as a service offerings for care delivered outside the hospital, our SaaS business grew strongly at 35% year over year in the quarter, including the contribution from our recently acquired <unk> team in Germany.
On an organic basis SaaS growth in the quarter achieved high single digit growth of 9% across our SaaS portfolio.
We're excited about the strong sustainable growth of our core SaaS business and we are very pleased to see many folks Don contributing to our growth in its first full quarter as part of the global <unk> group.
We continued to grow with customers that deliver care outside the hospital as they increased utilization of our software and data solutions to improve and optimize business efficiencies and patient care.
Resume we believe the future of health care is a lower cost lower acuity settings, we are investing in technology that our customers need to operate and scale as patient volumes grow in these facilities and out of hospital facilities.
As the post Covid patient census continues to improve in our facilities verticals. We are seeing pent up demand for technology investments that continue to come to market across skilled nursing facilities nursing homes and beyond.
Our home medical equipment SaaS business under the <unk> brand continues to grow at a very rapid pace and deliver sustained profitable growth.
We are seeing the ongoing impacts of staffing shortages across all of the outside hospital health care verticals that we serve this pressure on our customers provides opportunities to drive conversations about the benefits of our software solutions to streamline and drive efficiencies across their businesses. So that they can free.
Staff to focus on the core purpose of serving patients and improving patient outcomes.
Our SaaS business remains an important part of resumes growth strategy and it complements the market leading software and device solutions that we have in our core sleep apnea and respiratory care businesses.
Our bright tree resupply program continues to demonstrate the synergies we can generate between our SaaS business and our core <unk> business brought tree resupply automates the entire process from contacting the patient interacting with the payer on coverage communicating directly with the patient collecting co pays and <unk>.
<unk>, the logistics and district distribution process of product.
The ultimate goal is to keep a CPAP ipass will buy level therapy used replenished with the supplies that they need to enable a better and longer lasting therapy experience.
This results in better outcomes for the patient the physician the provider and the Payor.
We are well positioned as the leading global strategic provider of SaaS solutions for outside hospital care globally, and we have created differentiated value for our customers and long term sustainable growth for our stakeholders we.
We are transforming out of hospital health care at scale, leading the market in digital health technology across our business.
We now have over $14 5 billion nights of medical data in the cloud and we have over 25, 100% cloud connected medical devices on bedside tables in 140 countries worldwide.
We are liberating data to the cloud every day and unlocking value for patients for providers for physicians for payers and entire healthcare systems, we are leading the industry and we won't stop innovating.
We're investing 7% of our revenue in R&D.
Noting that the annualized revenue pool is now well north of $4 billion.
There is so much opportunity ahead of us, it's inspiring and it's exciting.
<unk> mission remains Crystal clear, we have a goal to improve 250 million lives through better health care in 2025. This patient centric mission drives and motivates, whereas medians everyday we made excellent progress towards that inspire and golf without growth over the last 90 days and during the last 12 months, we have improved over 100.
Third 56 million lives with the delivery of the device platform to a patient or a full mask system to a patient or a digital health software solution that directly impacts of patients, helping each person to sleep better to breathe better and to leave a high quality life with healthcare delivered right where they are.
Let me close my remarks, with my sincere gratitude to the more than 10000, <unk> <unk> working across 140 countries for their perseverance their hard work and their dedication to die and everyday. Thank you with that I will hand, the call over to Brett in Sydney for his remarks, and then get in the queue, because we will open up for <unk>.
<unk> from the group Brett over to you.
Great. Thanks, Nick.
My remarks today I will provide an overview of our results for the third quarter of fiscal year 2023.
As noted all comparisons out of the prior year quarter.
We had strong financial performance in Q3.
Revenue for the March quarter was 112 billion, an increase of 29% in constant currency terms revenue increased by 31%.
Revenue growth reflected improved availability of sleep devices to support with strong underlying demand for these products as well as solid growth across our broader product portfolio.
Year on year movements in foreign currencies in particular, a weaker euro negatively impacted revenue by approximately $20 million in the March quarter.
We recorded incremental revenue of approximately 15 million from Covid related demand in the March quarter. However, looking forward, we expect negligible revenue from Covid related demand.
Looking at geographic revenue distribution and excluding revenue from our software as a service business.
In the U S, Canada, and Latin America increased by 32%.
Sales in Europe , Asia, and other markets increased by 28% in constant currency terms.
Globally in constant currency terms device sales increased by 43%, while masks and other sales increased by 15%.
Breaking it down by regional areas people ourselves in U S, Canada, and Latin America increased by 48% as we benefited from strong demand and improving availability of our connected devices.
Masks and other sales increased by 14%.
<unk> solid re supply and growth in new patient setups.
In Europe Asia, and other markets device sales increased by 36% in constant currency terms again, reflecting strong demand and improving availability of connected devices.
Masks and other sales increased by 15% in constant currency terms, reflecting increased patient setups.
Software as a service revenue increased by 35% in the March quarter, reflecting the contribution from our <unk> acquisition and continued strong performance from our high generally vertical.
Excluding that many folks Don acquisition SaaS revenue grew by 9% in the March quarter.
Many folks Don contributed revenue of $26 6 million for the March quarter, consistent with our expectations at the time of the acquisition.
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 third quarter earnings press release.
Gross margin declined by 200 basis points to 56, 1% in the March quarter.
<unk>, primarily reflects product mix shifts due to the significant increase in sleep device styles as well as component cost increases and unfavorable foreign currency movements, partially offset by increases in average selling prices.
Moving onto operating expenses SG&A expenses for the third quarter increased by 25% or in constant currency terms increased by 28%.
The increase was predominantly attributable to increases in employee related costs and travel expenses as well as the incremental SG&A expense associated with how many folks down acquisition.
SG&A expenses as a percentage of revenue improved to 25% compared to the 21, 1% we recorded 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% for the balance of fiscal year 'twenty three.
Okay.
<unk> expenses for the quarter increased by 14% while in.
Constant currency terms increased by 16%.
R&D expenses as a percentage of revenue was six 8% compared to seven 7% in the project quarter.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of fiscal year 2003.
Operating profit for the quarter increased by 27% underpinned by strong revenue growth, partially offset by a level of gross margin.
Following the acquisition of maybe folks down our net interest expense for the quarter was $15 million and we expect interest expense to be a similar amount for the balance of fiscal year 'twenty three.
Our effective tax rate for the March quarter was 20% compared to the prior year quarter effective tax rate of 21, 1%.
Looking forward, we estimate our effective tax rate for fiscal year 'twenty three will be in the range of 19% to 21%.
Net income for the March quarter increased by 28% and non-GAAP diluted earnings per share increased by 27%.
Cash flow from operations for the quarter was $283 million, reflecting solid underlying earnings partially offset by a modest increase in working capital.
Capital expenditures for the quarter was 29 million depreciation and amortization for the quarter totaled $44 million.
We ended the third quarter with a cash balance of $228 million as of March 31, We had $1 6 billion in gross debt and $1 4 billion and net debt, reflecting the funding of our previously announced maybe focused on acquisition.
During the quarter, we reduced our revolver debt by $215 million.
As a result at the end of the quarter, we had approximately $605 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 <unk> 44 per share.
Going forward, we plan to continue to reinvest in growth through R&D reduce our overall debt levels and deploy further capital for tuck in acquisitions.
And with that I'll hand, the call back to Amy.
Great. Thank you Brett and thank you Mick Kevin I'd like to now turn the call over to you to provide instructions and then run the Q&A portion of the call.
Certainly, we'll now be conducting a question and answer session. We ask you. Please ask one question the return to the queue, if you'd like to be placed into the question queue. Please press star one at this time a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to move your question from the queue. Once again Thats star one fee place.
In the question queue and we ask you. Please ask one question and return to the queue. Our first question is coming from Lyanne Harrison from Bank of America. Your line is now live.
Yes, good morning, before I start I want to say, thank you to David Pendarvis, certainly sad to see him retire, but we know that we are in safe hands with Amy.
In terms of my question, obviously, Sanjay good to device revenue there but.
Just to talk about that.
You mentioned the third quarter, you had a new patient high higher than what we've seen pre COVID-19.
Can you provide some comments of how much of that new pipe backlog remains.
And also what sort of progress you're making on the repack backlog and if you can discuss that.
According to the Americas and vegetable separately.
That would be very helpful.
Well, thanks for the question Lyanne and attribute to dive for 'twenty.
Plus he has 22 years of I think it was this is 83rd Investor call eight three so amazing tribute to Dave and we are in very safe hands with IV only investor relations from to your to your <unk>.
Two question.
Looking at our incredible growth, 43% growth in device revenue this quarter to an all time high.
There are many many factors that have gone into that primarily that we were able to deliver on our promise to get unconstrained on SMS tin, 100% connected devices and we've got those end markets and so I think.
We were able to take care of the demand of customers in the U S market period end of story, we said we'd be there by the end of this calendar year, but with are already here right now.
And as I said in the prep remarks, we're going to be scaling the essence 11.
Steadily and strongly is that new platform, the latest and greatest comes to market and we move forward.
In terms of backlog of those sort of new patients.
In the U S. But in terms of <unk> I think there is a lot more to do and we're going to partner across the U S. With all of our thousands of home medical equipment companies to start to work through that re <unk> program.
I think thats going to happen over time, we just got to the point, where we're completely unconstrained on essence 10 in this quarter I think it's fantastic I want to get unconstrained, an essence, 11th that's going to take a number of unit numbers of quarters.
And then of course.
Just one country.
Third 40 countries worldwide, we Gotta go get regulatory and hold them and then get those products to market and so it's going to be an ongoing process over the coming quarters and years to continue there.
Im not going to say that we're going to see this sort of exceptional 43% growth.
On an ongoing basis.
Growth is closer to the mid to high single digits in this space, but we're seeing that market growth come back we're seeing the new patients come back we are through that that pandemic side, and we're getting new patient flow, we see it in our home sleep testing data, we're looking at all the stuff coming through at <unk>, We're seeing it in the number of patients being set up and have you all.
Hi, but we're looking at that every week every month and every quarter and its steadily improving and it's not just the U S.
In Western Europe , Northern Europe , and its certainly coming coming through Asia, very strong growth in China over the last number of quarters as we've come through the Covid crisis, there as well. So that's my summary daily and great question.
Sorry can I just clarify when you said that your data.
Dara on the backlog is that both for the United States and rest of the world.
Yes, so we're thrilled with through the backlog in the U S and we're going to be progressively working our way through the other 139 countries.
Not.
It's a complex system, where when you get regulatory approval side for the <unk> 11, you've got to go region by region. You can do the European Union, but then you have to go country by country for many of these approaches for Brazil for China for India, and it takes time to get them there to get unconstrained with the the two platform approach that we've been able to take in the U S, Canada and a number of.
All the countries, but look we'll give you updates over the coming quarters Leann is as we get unconstrained country by country. You will report it to you and our goal is to be unconstrained everywhere Tomorrow is just not logistically possible to be able to do that so we're going slowly and steadily to that but I'm just happy to be nine months ahead of when we decide we're going to deliver an unconstrained.
At least in some of our top markets here and we'll keep you updated as we go forward.
Okay. Thank you very much bank.
Thanks Leann.
Thank you next question is coming from Danaher from MST Marquee. Your line is now live.
Good morning, and thanks for the question.
What else ask the gross margin question, but I'd like to ask about yesterday.
The fact that it through by relatively constant as a percentage of <unk> revenue.
During the course of the recall, which continues to be counterintuitive. When you consider the fact that the products have been in shortage and et cetera, and suddenly selling themselves. So I was wondering if we could talk about the key elements of that SG&A.
And the mid to long term trajectory there as volumes continue to improve.
Yes, that's a great question, Dan and I'll hand over to Rob Douglas, Our President and Chief operating officer to cover.
Our SG&A yeah, Dan So you know us and you know how we operate no matter, what's going on with fiscally disciplined.
We're always keeping an eye on the future and where we're going and what's happening is we build we build and expenses.
Absolutely talked about the fact that we werent doing face to face marketing and.
A lot of travel and those types of things earlier in the pandemic.
That started to come back we've had to manage carefully how thats playing an extra load on our SG&A, but it's really.
Really effective careful management everyone's aware of the issue of <unk>.
<unk> cost and other things, which is which are moving in the time of inflation.
And we continue to manage that carefully and we're extremely prudent about what we add in on and how we go and so we really don't want to get ahead of ourselves and end up like.
Some of these other companies that have had the wire either provisioned in the.
Go to market operations and had to make corrections so.
We are in good shape, and we've got a solid plan.
We should be able to stick very.
Very carefully with that forecast on our SG&A.
Okay.
Okay.
Thank you. Our next question today is coming from Mathieu Chevrier from Citi. Your line is now live.
Good morning, Thanks, very much for taking my question and good afternoon to those in California.
You, obviously had a very strong devices growth in the quarter was just wondering whether you still believe that you can sequentially grow every quarter.
In fiscal year 'twenty three.
In devices.
And then how should we think about.
FY 'twenty four and the returns potential return of Philips to the market and whether there's been any update there.
Sure.
Yeah. Thanks for the question Matthew and yes.
Last quarter I, certainly said that we expect to see sequential growth of devices throughout the.
The calendar year actually here through 2023 and that was our forecast.
I'm going to tell you this $607 $9 million of device sales in the quarter.
<unk> was ahead of where I thought we were at that point and Thats, a big number to come up and as Brett said, there is about $15 million of ventilator sales to China in there as they went through another phase of Covid as they've reopened during the during the March quarter. So if you take that out.
Still a big number to shoot for here in Q4, but we have the best commercial teams on the planet in respiratory medicine sales and <unk>.
Q4 for us our fiscal year Q4 is a big time. This presence clubs in some geographies. This fiscal incentives everywhere for people to finish the fiscal year strong and so there's a lot of incentives. So yes, it's a tough number to get there on sequential growth.
Were taking out theres been a lot as I think we can do it I'm confident my team all back my team.
They got a little bit ahead of me here in March and I Love that I'd love them to be a little bit ahead of me in June and so I'm confident we can do that more important than that is that we have now taken care of every patients needs in our major markets and our goal is to be there in all 140 countries. So some of it is that revenue growth and it's amazing, but it's really about patient care.
And it's about leaving no patient behind and it was really disappointing I think for us as an industry. Some of these quarters over the last eight quarters.
As an industry, we werent able to take care of every patient that got a prescription we're now doing that in our major markets and we plan to absolutely fulfil that not only where we have already achieved it but to get ahead of it and all the other countries. As we go so sequential growth is good we're going to be pushing towards trying that but more important than that taken care of every patient and every geography and working as hard as we can.
To get to those patients and get them, a well quality mask and get them on a resupply program because that's what leads to long term adherence not just at <unk>, but getting an adherent patient that 80 790 plus percent adherence rights on a not just a 90 day basis, but an ongoing basis. That's our challenge Matthew Great question. Thank you.
Thank you.
The next question is coming from Gretel <unk> from Credit Suisse. Your line is now live.
Thanks, Good morning all.
I'll answer the gross margin question.
The mix really the key driver of the waste to gross margin.
Do you have the high price offsetting component.
And just as we look forward, if you're going to continue to gain strong device sales.
Should we expect gross margin to continue to be weaker Inc levels.
In the short term.
Yes, Thanks for the question, Greg and as you said and as Brent said in his remarks.
We had some we had some headwinds on gross margin, which would geography mix, where it was more in.
Low margin countries U S.
Canada, and then product mix, we saw most CPAP and iPad growth than we did buy level or Luxembourg, or even though the noninvasive ventilators and so those headwinds are going to start to subside.
I am actually I think griddle that as I look forward I see gross margin expansion in.
In double digit basis points ahead for the coming quarters and throughout the fiscal year in the calendar year on bullish on gross margin expansion, because I see geography mix and product mix headwinds subsiding on bullish on gross margin as I see ventilator growth opportunities start to come back and IC mask growth and replenishment growth.
New patient growth start to come on masks.
And I'm bullish on gross margin as we go forward because I see inventory costs, starting to we're going to start to cut into that and bring them down versus the run up we had with our competitor being out of market.
And also I'm bullish on gross margin, because I see us being able to get better freight costs as we go forward.
And as you said, we have been offsetting some of that.
Gross margin headwinds with ISP holding steady in our coal business, increasing Isps and SaaS businesses.
And we've had some freight surcharges and others with customers as we start to see our cost come down will take away some of those surcharges and so on and so we will balance that out, but net net I see us being able to expand our gross margin and grow as we look forward throughout not just the fiscal year here 23, but the calendar year here in 'twenty three.
Thank you. Your next question is coming from Matt Taylor from Jefferies. Your line is now live.
Alright. Thanks.
I just wanted to ask about.
How much we should expect your math could trend to start following the device trends as you become more.
Incumbent I thought maybe there would be a little bit more mass growth this quarter not not taking away from a good result, but maybe you could talk about that as a derivative.
Yeah.
Yeah. Thanks, Matt for your question and you know that.
As you look at our masks and accessories business, it's sort of 70% to 80% of our mosques growth is replenishment, it's existing patients out there who are coming back for.
Our fresh mask a fresh.
Humidifier fresh set of tubing tubing, and so on and filters. So it's the mask and accessories as 70, 80% replenishment business and so it's not as directly impact so new patient growth is incredible we're back to.
Better than pre Covid, and we're growing from there and thats, great to see that sort of strong growth of new patients coming in but it doesn't sort of directly correlate to your point.
Lesser derivative and more a sort of a compounding effect over time as you like compound interest as you build up that installed base of those patients are ordering if they are ordering on three months or six month basis that becomes a compounding effect on the device growth today, leading to a future investment and growth in mosques under the coming fiscal quarters and fiscal years.
Build that install base. So there's not a direct correlation 43% device growth doesn't immediately car like Tomas growth, but to your point, 15% global mask growth on a constant currency basis is incredible pre COVID-19, we would have been very proud of a number like that.
<unk> pandemic coming through this growth.
Credibly proud of the team and what they're able to do not just in new patient setups, but in the replenishment programs and as I said in the prepared remarks, it's not just in the reimbursed markets, where we've got formalized systems.
France, the U S. Japan, we have formalized systems to go with our customers to patients to ensure they if they wanted that the patient gets them off when they need. It. We're also working in a consumer driven markets, where we're driving adherence programs subscription programs that are fast growing in many of our geographies, where it's cash pie or direct to.
Human interaction and they are saying.
<unk>, a fresh mask and so it's true to the core demand. It's not just the system driven one this is a patient driven one and thats. The part about mask growth, though I think is most exciting final thing I'll say on mask growth is that I think there was some skeptics two or three years ago people like all of this step up in respiratory health and hygiene step up in mask replenishment.
Short term trend Judah due to Covid pandemic with three years since the start of this.
The pandemic and that has been 12 quarters of strong mask growth. So I think that strong mask growth is sustainable for the future we've been able to execute for 12 quarters. We plan to continue to do that as we go forward.
Thank you Mike very helpful.
Thanks, Matt.
Thank you next question is coming from Michael Pollard from Wolfe Research. Your line is now live.
Thank you for taking the question.
I'll ask another twist on the mask question, you know as <unk>.
Butterfield on the device side, especially in the U S are you.
Is there a halo impact in terms of winning share incrementally on the consumable side is that a dynamic that's played out recently or could play out over the next year or so.
As the device.
Kind of the urgency to step into the device void Abates and you refocus on other priorities.
Yes, it looked like this.
Certainly a relationship and you know in.
Our commercial teams the working with the best platform the <unk> and the best second Best platform Esn's 10, both of which are better than our competitors. They're also obviously offering the best masks the best mask portfolio out there and we have a leading share in that 140 countries as well so there's definitely a synergy effect.
It's the same people talk to has the same physicians the same providers the same health care systems and so they're in addition, there is some sort of clinical technical needs I mean, we design our products to work better together.
Our marks on our devices have far more accurate masked leak detection they have far more accurate detection of pressure and controls on iPad device or by level device and particularly if it's used on overlap patient site, who as obstructive sleep apnea and COPD you need that iPad app in the APAC the pressure.
<unk> to be right on when you use our bi level without mosque, that's going to be far more accurate and that physicians know that and they will script towards that for those patients and then for the respiratory therapist doing a setup. They know our products are designed better together our teams have shown in the clinical and technical data of how they design and so there is a strong positive synergy effects. So.
Yes, I do think there is a correlation between ammonia you can think that sort of simple commercial I mean, they're selling it. But then you look at it from a physician's perspective on clinical and then the therapist perspective on fit and comfort in Lake. So I think all that goes together to show that some good synergy between our device growth and masked growth overtime.
Thank you next question is coming from David low from Jpmorgan. Your line is now live.
Thanks, very much can I go back to gross margins.
As you correctly, you said you expect gross margins to expand at double digits in future can eke out a little bit on what.
Sort of timeframe are we talking.
Gross margin percentage, we're talking quite powerful it's just I'm trying to understand what you're expecting on that front. Please.
Yes, David Thanks, I'm going to hand, the Brett to go through more detail, but what I was saying is I expect double digit basis points improvement from from where we're at in the quarter 56, 1% I see as an idea and I want to grow from there. So I see us being able to move that up I don't know 10, 2030, 50, or 100 basis points over the coming quarters.
And beyond but Brett you want to provide a little more detail for David to the headwinds and <unk> and all the fun that goes into gross margin.
Yes sure David.
I mean, we wouldn't we're not going to try and quantify.
Quantified, but when we look at it we do expect margin expansion over the coming quarters.
Some of the key ones that have hurt us year on year.
Its around its product mix, obviously with the match.
Matching increasing slightly losses, we had to deal with component cost increases coming through year on year, but that looks to be stabilizing base. That's there is two big headwinds that we expect will moderate.
And then we're working on manufacturing logistics flight cost looking at efficiencies. So we're focused back on that now and that again, they should improve over the coming quarters as well.
And then on top of that with the ICD 11 platform that does contribute positively to gross margin as well now that one will take time as we roll that out, but if you kind of putting the.
I guess you can look at it this way that the headwinds.
Moderating should get a few title wins.
In manufacturing and logistics and that kind of gives us the confidence we think we can get that expansion from here on in.
Thank you very much.
Yes.
Thank you. Your next question today is coming from Margaret <unk> from William Blair. Your line is now live.
Hey, everyone. Thanks for taking the question.
I wanted to maybe follow up on some of the patient demand metrics that you guys gave earlier on the call I think I heard maybe high single digit market growth.
In the U S or Americas.
And then should we add re perhaps that so that that ultimately leads us to the double digit growth rate at and then how do you think about that I guess, one Philips does potentially re entered the marketplace.
For you guys.
Uh huh.
On a long term growth and I guess continue at that double digit topline growth rate. Thanks.
Yes, thanks for the question Margaret.
So much that goes into it but yes.
We're on the other side of this pandemic not only just the pandemic has become an endemic in the way that the worlds opening up and we're driving forward, but in our industry. We're now seeing that strong growth of patients that were really starting to pick up and yes. It's mid to high single digits growth on the patient starting to come through the funnel now and that's that's really strong how long that is.
Stable and how we can drive it that's going to be up to us as the market leader, we have the market lead here and we're going to drive awareness programs. We are going to drive demand generation programs, we're going to partner with I just got an update from a from a same here in the U S market looking at a project to bring patients into the funnel and to drive patients into the funnel and as the market leader that's.
Really our job so not just accept market growth, but to drive market growth. So this is going to be active thing that we're going to be looking at as we move forward and it's very exciting for us to do that I'm not going to quantify it out I mean, given where we're at I know you have your models of everyone on the sell side buy side has their models.
But I would say to that whatever your models.
Think about an active leader engaging in digital awareness.
Marketing awareness and driving and <unk> patients through the channel and we've learned a lot through the Covid crisis about digital health about engaging with patients in.
Testing in remote setup and virtual pathways that are really.
The necessary at the peak of the pandemic and now become a catalyst for future demand generation. So I don't know Rob or Lucille if you have any extra thoughts on that just one other minor point Nick.
That that new patient growth really solid in this time of the untreated patients we could see a long term future in that but also as we build a long term adherence programs and start driving long term adherence that'll keep the mask growth ahead of that new patient growth and we see a long term outlook for that too.
Thank you next question is coming from Andrew Paine from CLSA. Your line is now a lot.
Yes.
Good morning.
Everyone, just thinking about your ability to ability to retain market share.
So it comes back to the market.
Good afternoon.
You mean from the start of FY 'twenty four.
Do you think you can pull here to ensure that you do retain market market share.
We're looking at things like pricing.
Sector or do you think there are some other things that will help you retain that sure.
Yes, thanks for the question Andrew and.
Yes, certainly look we look at all competition, we've got competitors based in Western Europe and in Asia that we've been competing with very strongly for the last few decades and certainly the last two years and one competitor who has been out of the market for new patient setups to use and who knows how much longer that.
I'll have to come in that third competitor that will have to come in and stop fighting to become the number two share player from a zero percent new patient set up share and we look forward to that we were beating that particular competitor in 2019 before they had the recalls so I know, we'll be able to beat them.
When they come back in and so our goal is to see zero share. Our goal is to actually maintain and grow share as the market leader that gets more and more difficult to take more and more share, but that's our goal we have the smallest quietest most comfortable and most cloud connected devices, but more important than that we've created a digital ecosystem that engages patients with my doctors.
Health care systems by Ipi that link into ethical sooner in the U S and health care systems around the world in UK and NHS, Northern Europe into government in Western Europe into government run health care systems, and we're engaging with patients in a consumer driven markets incredibly well. So our goal is to maintain and grow that share, but more important than that to grow the market.
As the market leader.
Our obligation there.
Now with the lightest epidemiology.
Rising up by around 1 billion people with obstructive sleep apnea that needs to be traded worldwide and if you add in COPD asthma, and insomnia Youre talking $2 5 billion people in our total addressable market. So.
But you can think about share, but it's really not coke and Pepsi was out and Pepsi is coming back. This is not a low growth carbonated beverages market. This is a high growth digital health technology market in Med Tech and that's how that's how we're driving it forward, but yes, well I look forward to just getting the uncertainty out of this number three.
I want them back in let's say in let's let's compete and we will keep our share and grow it and and game on and look forward to it.
And actually one last thing I'll say on that people are talking about when the number three competitor comes back how will they come back the CFO last week said, although we won't be coming in and lowering prices, we'll look to take 2019 prices and add to that with inflation. So.
Game on I look forward to it we've always competed on value. We've always competed on driving that and it's never been a competition on price for us we've always been a price premium to to the other players, but we save them more money. So that the smart customers are using our products because it's more profitable.
Thank you next question is coming from Matthew <unk> from Keybanc capital markets. Your line is now live.
Yeah, Hi, Nick.
You mentioned at one point that Youre getting 90% adherence.
On some of your customers I'm, just curious like where that is versus <unk>.
Versus kind of baseline.
And how you can move that forward with like the rest of your customer base.
Yes, Matt it's a really good question and so the peer reviewed published evidence out there as an 87% adherence number that's that's been out there for a couple of years.
If you look at the average of the market where people maybe aren't using as much of the digital capabilities the patients aren't using Maya the doctors aren't using <unk>.
General industry adherence might be on average, 60% to 70% right with a competitive device, it's not connected or.
Maybe someone who is not fully engaged with the digital ecosystem, we have as they start to getting Guy age Theres actually peer reviewed published evidence on is just adding just adding the doctor using <unk> moves up adherence by 10%. So you go from let's say an average of 65% to 75% for that customer just having the doctor used if the pie.
<unk> uses Maya you move up almost another 10%. So for that example, you might go from 75% to 85% adherence with the doctors using <unk> and the patients using <unk> to get to those non <unk> you need a really special customer that's really engaged and really investing in tech that takes out tech in sort of adds algorithms that adds capabilities to it.
And we have a number of those sophisticated customers in Europe , and the U S and we partner with them and we do joint development with them and we love that training, we learn from each other because together is how we deliver the care. We are manufacturer on when a provider of digital health solutions, we've worked with providers in our biggest countries to get them, where we done in smaller consume.
Driven markets, we have to pick up the bowl and engage directly ourselves, but that 90% is achieved in very rare cases, but it's that peer reviewed published evidence shows that it can be done with the tech at 87% and yes to your point, how do we get everyone up to that 7% that 90% that is a process of engagement.
Training and that's why I say, our share is not only going to stay where it is but have the chance to grow from that because we are the market later in this no one's investing like we are in cloud compute no one's investing like we are in analytics, and AI and ml and engagement with patients and physicians and providers and we're not doing it alone we're doing it with the ecosystem with the patients we're listening.
To them with the physicians and with the providers. Thanks for the question Matt.
Thank you next question is coming from solid often put their enjoy capital. Your line is now live.
Thanks for taking my question, maybe just a question on premise.
This quarter the investment was very low suddenly less than what the guidance that vein. So I'm wondering did something change this quarter and any update on how that project is going thanks.
Yes, it's a great question, because it lets us talk too.
Our whole sort of demand generation and engagement approach I mean, as you know <unk> a joint venture with barely in the U S market looking to digitally engage with.
Digitally identify engage and enroll patients in a sort of digital health pathway from sleep concerned consumer override through to diagnose patients on treatment and management, we have activities through our core U S and North America marketing attainment, obviously and the other 139 countries, we operate in where look.
King at other digital ways to engage.
The 1 billion people, who need our help so look we're looking at investments where a pilot phase of some trials and we're getting ready to to scale. Some approach with with <unk> with our U S programs and many of the others were operating in all parts of the world and so as we start to roll those out now that now that we're at the point, where we've got.
Full capability to supply as we said in the prep remarks and throughout the call with essence 10 in essence 11 as a combination we can really turn to to start to turn the dial up on these demand generation initiatives with undiagnosed sleep apnea patients and I'm excited to start doing that so those investments might tick up a little over the coming quarters, but that will.
A huge return and bringing patients into the funnel. So watch this space.
Okay.
Thank you next question is coming from Suraj Kalia from Oppenheimer <unk> Company. Your line is now live.
Good afternoon can you hear me all right.
Got you loud and clear Suraj.
Perfect.
First let me.
Just express my.
Thanks to David David, which you have a great retirement, it's been a pleasure dealing with you all these years.
Lot of questions have been asked.
Your comment about AI caught my attention.
So think about it this way Suraj comes in he has gone through the CPAP titration, a sleep lab.
Certain parameters have been set by the by level.
Variable whatever.
What parameters, specifically would your AI ml obese oligos.
Hello patient and the reason I ask is specifically trying to understand how will you use this to improve compliance. Thank you.
Well Suraj, it's a really good question and.
We only have five minutes left in the call I could spend a.
<unk> 50 minutes a lot of those things are actually quite proprietary as we put together these AI and ml models on how we'd culture patient, particularly you talked about a high acuity patient like that on bi level or ventilation noninvasive ventilation therapy.
But yes, certainly I look at our compliance predictors and compliance analysis tools that can help empower and HMA in the U S and just some of the ways in which we're able to use.
AI and ml to drive prioritization of the most at risk <unk> patients and those who are so close enough to get there and thus would definitely there and just need some sort of digital coaching that sort of triage. If you like which has previously been done manually is now going to an automated way.
We've always had some levels of that automation, but to have an algorithm that learns as it goes in to get better and better at it just serves the doctor. It serves the respiratory therapist and both of them.
Super pleased to see that level of efficiency reduction of if you feel like the administrative management and focus on the toughest patients, but also making sure that the best patients.
The digital coaching and help the diners. So it's really we're triaging compliance adherence and beyond but what's the space, we're going to launch a bunch of new products that we'll be able to talk to very specifically, what they are and what they do over the coming quarters.
Thank you next question is coming from Craig Wong Pan from RBC. Your line is now live.
Thanks for taking my question.
The inventory balances continued to increase so I was wondering when you might start to see that come down and also is there much content cloud inventory of parts in that number.
Yeah, Craig Thanks for the question. It did move up just a little bit in the quarter I actually got a very strong target for Andrew <unk> President of our operations and the whole manufacturing team to get that number down because we're through the peak of this and we've got full supply, let's get that number down, but Brett you want to speak to some of the details of how we're going to turn that inventory.
<unk> number down significantly over the coming quarters in fiscal year.
Sure sure.
Yes.
We stabilized that inventory this quarter and really that drives it really strong operating cash flow that you saw but.
I think there is more that we can do in the <unk> to reduce those inventory levels overall.
I mean, a number of things we can do but some of them some of them I would point out we say we are seeing improvement in lead times, which will help you caught.
Getting from Port to Port improved a bit so we can lower inventories.
Continuing to increase safe ride for US right. So some of that manifest in inventory, but eventually that kind of stabilizes at a ratio.
We're tuning safety stock levels now because we've got more predictability.
What we need and when we can get supply.
And then inventory obviously its future looking so we're looking to support styles. So we just got to balance all of that but it will let say too I think we're looking for inventory levels at trajectory too.
Congratulate go down over the course of FY 'twenty four.
Thank you. Our final question today is coming from Chris Cooper from Goldman Sachs. Your line is now live.
Thanks Mick.
Thanks for taking the question I'm, just asking I'd like to start on the diabetes and obesity drugs. Please.
I guess, we had another positive update last night that there do seem to be coming thick and fast at the moment.
I guess could you just share how risk way to thinking about these and to what extent the success may have any impact on your business. Please.
Yes, Thanks, Chris.
It's a huge market and.
Actually quite exciting we've always wanted to have interactions we actually when I first joined the company 23 years ago, we were working with bariatric surgeons and looking at patients that would go through bariatric surgery, and maybe from 450 pounds down to 200 pounds and our challenge in those days when it was mostly a CPAP market was how do we make sure they get on iPad because there.
Their needs their IHI might go from 50, when there are 450 pounds to 30, when there were 250 pounds, but thats 30 is still severe sleep apnea. So we had to have an iPad algorithm could adjust with them. These days the market is 80% <unk>. So you don't need to make sure that a patient on a let's say a weight loss drug or.
So on that sees a white loss in their IHI needs go down from very very seriously back near to just the VA or moderate to severe we have the algorithms and the capabilities within the devices with our orders that algorithm to adjust automatically and we'll also have all the digital health data so that the pulmonary doctor can partner up with the.
Primary care or bariatric type Doctor that's working.
Presumably be PCP is working on the basically drugs and they can monitor the patient to see how much better they are getting maybe more adhere its more participation in their fitness and exercise for the overall health.
For us actually we're invested in one of the sleep apnea drugs thats not a weight loss drug that actually goes to the core of trying to treat sleep apnea, which is called <unk>, we're going to partner with pharma in this space.
The substitute of those sort of tiny sort of whatever it is <unk>, 5% of patient flow into these implanted devices and there's a company out there doing I think what's very expensive advertising, but it's driving lots of patients into the funnel it's demand Gen for us because.
They marketed as a button to treat sleep apnea, but it's actually an implanted medical device the size of a pacemaker that goes into the chest when the patient funds that they say well what are the alternatives all of as a noninvasive alternative like CPAP the right type of vital when the patient goes on line with that I think some of the pharmaceutical advertising in this space will drive us to the 80% of undiagnosed patients in the space to say.
Hey, Luke I'll take the pill first and maybe then.
Sleep apnea therapy, or vice versa, but we think theres a lot of opportunity to partner with pharma, we're already partnering with our propeller division with some of the COPD and asthma drug delivery I look forward to not just with <unk>, but these other basically drugs to understand how they drive patients into the funnel and how we work with them to treat those patients.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to Mick for any further or closing comments.
Well, thanks, Kevin and thank you again to all of our stakeholders for joining us on the call I would once again like to take the opportunity to thank the 10000 <unk> <unk>. Many of you are also shareholders. So thank you for what you do and for investing in our company as well. Thank you for your dedication hard work, helping people sleep better breathe better and live better lives and 140 countries.
<unk> delivered these numbers that we just reported thank you for OLED <unk> I'll hand, the call back to Amy and then we'll close out.
Great. Thank you Mick Thanks, Kevin and thanks, everyone. We appreciate your interest and your time, if you do have any questions. Additional questions. Please don't hesitate to reach out directly. This does conclude our third quarter 2023 conference call. Kevin you can now close this out.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.