RMD’s innovation with the AirSense10 card to cloud product coupled with global supply chain improvements delivered strong device volume growth above market expectations. RMD also hit US$1b in quarterly sales for first time ever.
Volume growth. The improved global supply chain helped devices sales in the US rise 41%. This evzidences the continuing demand for RMD’s products post the Philips recall. RMD are also confident that they can “fulfill all customer demand before the end of CY23.”
Upside on exit-run rate. The new products from the re-engineering and sourcing initiatives over the last 18 months (including securing a new chip supplier) are expected to be realised in the 3Q/4Q results. Further, the launch of the 5G compatible AirSense11 will likely be an additional boost to top line growth, albeit there are no specific details on exactly when this will be launched. The acquisition of MEDIFOX DAN also saw only 6 weeks contribution of $10.7m, an annualised run rate of $93m.
Increased production impacting margins. Strained manufacturing to meet demand saw inefficiencies impact the gross margin to a low of 56.8%. The sales mix also impacted margins with the devices being a lower margin than the rest of the product suite and the remainder of the impact being from FX. We expect the margins to remain subdued in the short-term as the company prioritises volume growth over efficiency and as the sales mix continues to skew towards the lower-margin devices, although expect it to partially correct over time as RMD reverts to sea instead of air freight.
Investment View
The result all but confirms that RMD has progressed past the worst of the supply constraint concerns through clever re-engineering and sourcing initiatives, highlighting a capable management team. The outlook for top-line growth is at its most positive since the Philips recall, and there is scope for gross margin improvements.
The opportunity remains significant, and we expect a marked improvement for the 2H results, driven by continued volume growth, irrespective of a return to market from Philips. New product initiatives and innovative designs will continue to cement RMD as a market leader, increasing adoption of its products and we expect continued momentum into the next result.
Risks to Investment View
The key risks to RMD earnings are from a change in demand, pricing, and costs. There is clinical risk, competition, technical innovation and change of practice factors to be considered.
Recommendation
We have retained our Buy recommendation.
