Australia | Apr 28 2025
ResMed's largely in-line third quarter results showcased a rising gross margin, while management also moved to ease market concerns regarding tariffs.
-ResMed's third quarter results reveal a higher gross margin
-Company's products remain largely exempt from US import duties
-New facility set to double US manufacturing
By Mark Woodruff
Sleep apnoea equipment manufacturer ResMed ((RMD)) delivered third quarter results largely in line with consensus forecasts but a rising gross margin and removal of tariff uncertainty has since buoyed a flagging stock price.
While ResMed's devices and masks have been historically exempt from US tariffs, points out Jarden, shares fell by -8.3% following 'Liberation Day,' when the US introduced 10% tariffs on all trading partners, including Australia and Singapore, where the company's major manufacturing hubs are located.
Some brokers had already allowed for reciprocal tariff impacts in prior forecasts, but management recently received confirmation from US Customs and Border Protection its products would largely remain exempt from US import duties under the Nairobi Protocol.
This protocol is an international provision under the Harmonized Tariff Schedule of the United States which provides duty exemptions for medical devices used in the treatment of chronic conditions or for humanitarian purposes.
ResMed management revealed that US authorities have confirmed the company will continue to receive exemption from US import tariffs for its products that are used to treat chronic respiratory conditions under the Nairobi Protocol. There are some products (e.g. relating to treatment diagnosis) that will incur tariffs, however the financial impact should not be "material".
Additionally, in line with Goldman Sachs' expectation, management has announced the opening of a new manufacturing facility in Calabasas, California in June 2025, helping to strengthen the company's US-based supply chain.
This facility is expected to double ResMed's US manufacturing footprint and increase production for its core motor technology and silicon masks.
ResMed is involved in the development, manufacturing, distribution and marketing of medical devices and cloud-based software applications enabling diagnosis, treatment and management of respiratory disorders including sleep disordered breathing (SDB), chronic obstructive pulmonary disease (COPD), neuromuscular disease, and other chronic diseases.
Products include airflow generators, diagnostic products, mask systems, headgear, and other accessories.
Third quarter results
Wilsons believes ResMed's third quarter results suggest major market demand has reverted to long-term trends. While backlogs persist in diagnostic and referral channels, prescription fulfillment rates and sales growth have reverted to long-term norms, explains the broker.
Sales increased by 9% in constant currency to US$1,292m, in line with the consensus forecast, while operating income increased 14% to US$426m missing consensus by around -3%.
During the quarter, the gross margin percentage increased by 70bps over quarter two, coming in three months earlier-than-expected by Jarden and at the top end of guidance. Year-on-year, the gross margin expanded by 140bps.
Management believes the fourth quarter gross margin percentage will be similar to the third quarter, but conceded currency spot prices now represent a tailwind, which could take the margin above 60%.
The company is confident in ongoing expansion, notes Morgans, given a "solid long-term pipeline of opportunities" across manufacturing, procurement, and continuous improvement programs.
Ord Minnett attributes the improving margin to an improved product mix and manufacturing efficiencies.
US mask sales proved an around 2% beat against the consensus forecast, partially offset by weaker-than-expected US devices sales, observes Macquarie.
Better-than-expected growth for Masks/accessories revenue in the Americas was offset by slightly lower growth in rest-of-the-world (ROW) markets.
Reflecting management's focus on growing re-supply rates and market share gains, suggests Goldman Sachs, US masks sales have now grown across quarters one to three by 20%, 12% and 13%, respectively.
US mask growth remains ahead of industry growth, underpinned by re-supply initiatives and net patient setups, with "plenty of runway remaining", according to management.
Capital management
Given a net cash position as of March 31, management has increased the share buyback program to US$100m per quarter from the fourth quarter onwards, up from US$75m in the third quarter.
Goldman Sachs believes the increased buyback signals ResMed's confidence in the demand outlook for its core products and progress in executing its 2030 strategy.
Operating cash flow (OCF) jumped 17% to US$471m, supporting a 10% dividend increase to US$53 cents. Additionally, management noted a number of tuck-in M&A opportunities in the pipeline over the next six to twelve months.
Highlighting strong cash flow generation, high-single digit revenue growth, and expanding operating leverage, Morgans believes ResMed is well positioned competitively.
This view is supported by the company's new tariff-exempt status, expanding US manufacturing footprint, adoption driven by modern technologies, and favourable tailwinds from growth in wearables and weight loss drugs.
Macquarie also lists tariff exemption, new products, margin expansion, cash flow and capital deployment as factors which should reverse the recent valuation multiple compression weighing on the ResMed share price.
Gross margin
As management expects the fourth quarter gross margin to be in line with the third quarter, Macquarie assumes a FY25 gross margin of around 59.6%, in line with 59-60% guided range for the second half, with upside risk if the US dollar remains weak.
For the near-term, this broker forecasts sustained margin expansion and a positive demand catalyst via weight loss drugs and wearables over the medium-term.
In a changing product mix, the higher priced AirSense 11 continues to be rolled out with markets like the UK contributing from the fourth quarter of FY25, explains Goldman Sachs. Other key markets are expected to follow, with management guiding to a China roll out within the next 12-24 months.
Providing a further margin boost, note the analysts, total masks sales outgrew total devices sales due to improvements in re-supply and new patient setups.
Manufacturing and operating efficiencies also contributed with improvement in component costs and operational leverage, while management also noted freight costs have improved significantly with air freight/sea freight ratio returning to pre-covid levels.
Ord Minnett expects solid operating leverage will be maintained, or even slightly increased, driven by a further widening in gross margin, discipline on selling, general and administration expenses, and greater production efficiencies.
Morgan Stanley agrees internal initiatives should support incremental gross margin expansion over coming years, noting selling, general & administrative expenses (SG&A) leverage has driven EBIT margin improvement.
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