Fisher & Paykel Healthcare Corporation Limited

Welcome to the Fisher & Paykel Healthcare Results Conference Call. My name is Eduardo, and I'll be your operator for today's call. At this time, everyone except the guest speakers will be in listen-only mode. Later, we'll conduct a question-and-answer session, and we ask for your assistance in keeping the call to a maximum of one hour. If assistance is required at any time, please press the star followed by zero on your touchtone phone and wait for the coordinator. If you require further assistance, you should redial into the call. Please note this conference is being recorded, and now I'd like to turn the call over to Marcus Driller, VP Corporate. Please go ahead, sir.

Thank you, Eduardo. Well, good morning, everyone, and welcome to the Fisher & Paykel Healthcare First Half 2020 Results Conference Call. On the call today are Lewis Graydon, our Managing Director and Chief Executive Officer, Lyndall York, Chief Financial Officer, Paul Shearer, Senior VP of Sales and Marketing, and Andrew Somerville, our VP of Products and Technology. Lewis will first provide an overview, followed by some specific comments from Lyndall, and then we'll open up the call to questions for the team. We'll be discussing our results for the six months ended 30 September 2019. We've earlier today provided our 2020 interim report, including financial statements and commentary on our results to the NZX and ASX. These documents can be accessed on our website at www.fphcare.com forward slash investor. With that I'd now like to turn the call over to Lewis.

Well thanks Marcus and welcome everyone. Today I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX this morning. But first also this morning our Chairman Tony Carter announced his intention to retire with effect from the close of the annual shareholders meeting next August and the current A current director, Scott St John, has been elected by the board to succeed Tony as part of a planned succession process. As the chairman of our audit and risk committee, Scott has been a strong leader with excellent corporate governance and commercial skills, and he has the unanimous support of his fellow directors. And we'll also have an opportunity to thank Tony at the annual shareholders meeting next year. So now I'll start on page two of the investor presentation pack. We've had a good start to the 2020 financial year with a number of notable business highlights there. We expanded the release of our new products in the new countries. And as always, we have an exciting product pipeline. So turning to page three, these results exceeded our earlier expectations for the start of the financial year. And that's largely driven by robust growth in our hospital product group. Overall operating revenue for the half grew 12% to a record $570.9 million, or 9% growth in constant currency terms. That's 17% constant currency revenue growth in our hospital product group, and a 1% decline in constant currency revenue for our hospital product group. Now Lyndal will talk through gross margin and operating expenses shortly, so then Coming down to reported net profit after tax, that was up 24% on the prior half at $121.2 million, and this represented 23% growth in constant currency turns. Given that positive result, our board of directors has approved a 23% increase in the interim dividend to 12 cents per share, carrying a full imputation credit. In accordance with our usual practice, this week we will pay a profit sharing bonus totaling $2.95 million for the half to our qualifying employees around the world. We certainly appreciate their hard work and their commitment to our success. So now for a closer look at each of the product groups. Let's turn to page four. The hospital product group includes our devices and systems used in invasive ventilation, non-invasive ventilation, nasal high flow therapy, and during surgery. 88% of hospital operating revenue was generated from consumables and accessories during the first half. Turning to page five, revenue from our hospital products for the half was $353.6 million, representing growth of 17% in constant currency. And we saw strong demand across our entire hospital product portfolio, but in particular for our OptiFlow and Evo systems, which continued to benefit from the growing body of clinical research in the use of nasal high flow therapy. This half year also included an extended flu season in the United States, and this likely assisted our growth. Constant currency revenue of 23% in new applications consumables revenue for the first half was driven by our OptiFlow nasal high flow therapy, and we also delivered strong growth in our non-invasive ventilation product portfolio. We had robust growth in hospital hardware for the first half at 18% in constant currency terms. And that's as we lapped the prior period of flat hospital hardware revenue. And this half also included some large one-off tenders. We are pleased with the underlying growth rates of our humidifiers and other hardware. And we do expect hospital hardware growth to return back to more normal levels for the full year. So moving now onto page six. That's our home care group. Our products are used in long-term care facilities and home settings, assisting in the treatment of obstructive sleep apnea, or OSA, and chronic obstructive pulmonary disease, or COPD, as well as other chronic respiratory conditions. Eighty-four percent of home care operating revenue is generated from consumables and accessories during the half. So now onto page seven. Revenue from our home care products for the half was $214.7 million, That represents growth of 2% or a decline of 1% in constant currency terms. We're encouraged by the early response from customers to our new Viterra full face mask in OSA. Revenue from Viterra in Australasia, Canada and Europe has offset declines in sales of legacy OSA masks, resulting in an overall mask revenue slightly above our expectations for the first half. Viterra was launched in the United States in October. And we expect this trend of Viterra offsetting legacy masks to continue for the second half. And we're also planning to launch another new OSA mask later this financial year. I would say flow-generated revenue declined 6% in the first half in constant currency terms. We expect that trend to continue for the full year. Our strategy remains to focus on OSA masks and on the home respiratory support opportunity. Our MyEvo system, which is used to deliver OptiFlow nasal high-flow therapy in the home for patients with chronic respiratory conditions, grew strongly. And we're encouraged by the recent publication of an observational study in a hospital in France by Daugan et al., published in the Advances in Therapeutics in Respiratory Disease Journal. This study concluded that the use of long-term nasal high-flow therapy allows very severe patients to be discharged to the home, and at a reasonable cost. We are aware of at least 10 studies currently underway investigating the benefits of nasal high flow therapy in the home for patients with chronic respiratory conditions. So now I'll turn over to our CFO, Lyndall York, and she'll discuss the rest of our P&L balance sheet cash flows and foreign exchange position. Over to you, Lyndall.

Thanks, Lewis, and good morning, everyone. If you turn to slide eight, I would first like to discuss one of the key changes that have impacted our accounts for the 2020 financial year. A new accounting standard for leases came into effect for us from 1st of April 2019. This requires all operating leases to be recorded on the balance sheet as a right of use or leased asset with a corresponding lease liability. This increased our property, plant and equipment assets by $29 million and added lease liabilities of $34 million. Rental payments will no longer be expensed. Instead, there will be a depreciation expense and interest expense. For the first half, $5.8 million was no longer included as lease expense. Instead, depreciation expense increased by $4.7 million, improving our net operating profit by $1.1 million. Interest expense then increased by $900,000. This half included an increase in net profit after tax of $100,000 from the implementation of the new standard. This also impacts the classification in the statement of cash flows. $4.3 million of lease liability payments in this half is now classified as a cash outflow from financing activities. there is a corresponding increase in cash flows from operating activities by the $4.3 million compared to how it would have been presented prior to the new standard. Moving on to gross margin on page 9. Gross margin increased by 26 basis points to 67.1% for the half, or 15 basis points in constant currency. Favourable product mix offset the startup costs of our new Mexico manufacturing facility. We expect the second half constant currency growth margin to be higher than the first half as product starts coming out of the new Mexico manufacturing facility. We still expect the full year constant currency margin to decline from last year within approximately 50 basis points, as we guided to in May. Moving on to page 10. Total operating expenses grew 6% or 3% in constant currency. Last year's expenses included $7.7 million of patent litigation costs with ResMed and approximately $1.1 million of lease expenses that are now effectively classified as interest expense. Excluding these items, operating expenses grew 8% in constant currency. To implement the recently introduced New Zealand R&D tax credit regime that I'll talk about soon, we improved our collection of R&D-related costs. This resulted in approximately $4 million of incremental costs classified as R&D rather than selling general and administrative expenses, or SG&A. This, combined with increased investment, led to R&D growing 18% to $54 million. which is 9% of revenue. Excluding the impact from the improved data collection process, R&D grew approximately 9% from last year. We have a strong new product pipeline, including new humidification systems, flow generators, masks, consumables, and information solutions all under development. SG&A increased 2% to $162.9 million for the half, or a 1% decline in constant currency, largely due to the patent litigation costs last year. It is also impacted by the incremental costs now classified as R&D and the reclassification of a portion of the lease expenses to interest expense this year. Excluding the impact of all of these items, SG&A grew approximately 8% in constant currency terms. We anticipate that our constant currency operating expense growth for the second half will be slightly lower than the first half, excluding last year's litigation costs and the lease expense reclassification. Slide 11 shows our financing and tax expenses. The increase in financing expense is primarily due to the lease interest expense reclassified from SG&A and the foreign exchange losses to our interest bearing liabilities, including the newly recognised lease liabilities. The other key change impacting our accounts this year is how the New Zealand Government incentivises R&D. For the last six years, up to and including FY19, we have received $5 million annually from the Callaghan Innovation Growth Grant. This has been included in other income in our income statement and has been taxable. The New Zealand government has implemented a new Research and Development Tax Credits Act, which became effective for us from the 1st of April 2019, thus for the full FY20 year. This provides a 15% tax credit on eligible R&D expenditure and replaces the Callaghan Innovation Growth Grant. We are including this tax credit as an offset to our tax expense line in the income statement. We have analysed our first half R&D expenditure and estimate that approximately 80% of our reported R&D spend will be eligible for the credit. Based on this assumption, we have recognised an estimated tax credit of $6.6 million in the first half. Recognising that the R&D tax credit replaces the Callaghan Innovation Growth Grant, the net impact to our net profit after tax was $4.8 million this half, which will support our ongoing R&D investment. Our effective tax rate for the half was 24.1%, down from 28.3% for the same period last year, largely due to the introduction of the R&D tax credit. Excluding the impact of this, the effective tax rate was 28.2%. Moving to slide 12, operating cash flow was $113.5 million. Our working capital increased, primarily reflecting the growth in the business and our usual inventory build ahead of the Northern Hemisphere winter. Capital expenditure, which includes purchases of intangible assets, was $86.6 million for the half, compared with $61.1 million last year. About half of that capex for the current year was for our fourth New Zealand building, which is on track to be complete early next year. We are now expecting to spend approximately $170 million in capex for the full year. Capitalised costs associated with the SAP project are included within intangible expenditure. The US office implementation in June this year went very smoothly, and the global SAP rollout will continue over the next few years. Our free cash flow, which is operating cash flow, less capital expenditure and lease payments, was $23 million for the half. From this free cash flow and our short-term deposits, we paid $77.5 million in dividends during the half. The balance sheet remains strong. Debtor days are within the normal range at 47 days and in line with the prior year. Inventory has increased with business growth and, as previously mentioned, in preparation for the Northern Hemisphere winter. Trade and other payables reflects a decrease in litigation and capital building projects accruals. Net property, plant and equipment increased by $89 million from the 31st of March. mainly as a result of building CapEx and the recognition of lease assets. Net debt at 30th of September 2019 totaled $5.2 million compared to a net cash position of $54.4 million at 31st of March, predominantly as a result of higher CapEx and dividends. We had cash balances and short-term investments mainly in New Zealand dollars, of $93.6 million at the end of September. Interest-bearing debt was $98.8 million, with 76% of that being non-current. The majority of debt is held in US dollars and euros as a balance sheet hedge. Turning to page 13, our gearing ratio at 30th of September 2019 was 0.6%. which is within our target gearing range of minus five to plus five percent. We expect our net debt to remain largely unchanged at the end of FY20 as we complete the New Zealand building project and pay the interim dividend over the next half. We expect to remain within our target gearing range at the end of FY20. As Lewis mentioned previously, we will be paying an increased interim dividend of 12 cents per share payable on the 19th of December. This represents a 23% increase on the interim dividend declared last year. It will be fully imputed and a supplementary dividend of 2.1176 cents per share will be paid to non-resident shareholders. Looking now at foreign currency on page 14. Profit before tax, year on year, was benefited by $2.7 million from the New Zealand dollar being weaker than last year. This includes the results of our hedging program, which contributed a loss of $2.8 million for the first half of this year. Over the last six months, we have added to our hedging levels in the one and two year buckets, as well as into years three and four for some currencies, most notably the US dollar. Our policy remains unchanged, and when there are opportunities to extend our hedging position, we are able to do so, up to five years forward, and in some circumstances, 10. At current rates for the second half this year, we are forecasting a similar loss from hedging as this half, and a net currency benefit compared to last year of approximately $10 million after tax. On the next page, we have set out revenue, cost of sales and expenses in key currencies. We include this to assist investors and analysts in understanding our currency exposure. Now, over to Lewis, who will outline our full year guidance. Lewis?

Thanks, Lyndall. So, turning now to guidance on page 16. Our strategic direction remains consistent. We continue to develop new and innovative products and apply our expertise to develop new therapies and help change clinical practice and to grow our international presence. In the second half of the 2020 financial year, we anticipate consistent underlying trends in our hospital product group. So assuming a moderate flu season for FY20 for the second half, we expect constant currency hospital rents similar to the second half of FY19. In our home care product group, we also expect a continuation of recent trends with strong growth in home respiratory support and ongoing pressure in legacy OSA masks. And that results in a constant currency home care revenue for the FY, for the 2020 financial year, similar to the previous financial year in constant currency terms. At current exchange rates, we expect full year operating revenue for the 2020 financial year to be approximately $1.19 billion, and net profit after tax to be in the range of approximately $255 to $265 million. So, Marcus, with that, I think we can open the call to questions.

Thanks, Lewis. And Eduardo, if I could ask you to please open the lines. Just before we move to the Q&A, could I please ask everybody to limit your questions to two? That's just with a view to giving everybody an opportunity to ask their questions. And of course, if you do have further questions, you're welcome to join the queue again. Over to you, Eduardo.

Next, of course, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star 1 to pose a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. I'll take a first question from David Lowe at JPMorgan. Please go ahead, sir.

Thanks very much. Lewis, if we could just start with the new mask in the US, just with competitive bidding around 2021 coming, just wondering whether the strategy for the launch differs in any meaningful way from what Fisher & Paykel's done in the past with mask launches.

The real short answer to that, David, is no, not at all. I mean, it's a great mask. We'll be doing what we normally do. And having said that, it was really only launched in the US at the end of October, actually. But no, no change to our strategies.

Okay. Just one of the other questions I had, just on the R&D reclassification, I presume the benefit from that comes through on the tax credit as well, as in you've reclassified it so it becomes eligible deduction credit, I should say?

Yes and no. It certainly is part of what will be considered for the R&D tax credits. But the R&D tax credit is on eligible R&D spend regardless of where it's classified in the P&L. So this reclassification wasn't to make sure that we accessed more tax credit. It was as a result of the tax credit we have to actually get a lot more granular with the information we're collecting on our R&D spend. And so that has enabled us to be more accurate and more precise about what is our R&D spend and that's what's driven the reclassification.

But I guess from our benefit is it also gives a number that we can apply that 80% to with greater accuracy given we can't see how other things are classified and what might be an R&D eligible for a credit somewhere else in the P&L.

Absolutely, yes.

All right, I'll leave it at that. Thank you very much.

Thank you. Thanks, David. Next question comes from Chelsea Ledbetter at Forsyth Bar. Go ahead, Chelsea.

Thanks, Marcus, and morning, Lewis and team. I guess if I can start first question with respect to gross margins and appreciate you've given us an outlook for this year and you also have a target that you, or I guess expectation on a longer-term basis, I'm just kind of interested in maybe thinking about gross margins generally and outlook, you know, you've still got product mix benefits coming through. How long do you think that can continue? And then perhaps how to think about when the New Zealand facility comes on stream and, you know, the impact of that and the impact this year with respect to the Mexico facility. I mean, just kind of teasing out some of those drivers going on at the moment. Sure, Chelsea.

In terms of our target, we do have a target of 65%. It's our long-term target for gross margin.

Now, obviously, we are slightly over that at the moment, but we've got current and to cope with bringing new buildings online where you have more depreciation and costs up front before you get volume out of it. We don't expect to see significant gains going forward out of margin. We will continually be having cost increases coming through our business. We've spent a lot of effort and time over the past few years really getting as efficient as we can through our supply chain and through all of our costs. So there's not a lot more capacity that we can do there, so costs are likely to continue increasing. And we see the benefit coming from more volume out of Mexico as helping to counterbalance those cost offsets. We also don't expect to see significantly more product mix benefit going forward. So we do expect margins to, at the long term, be around that 65%. rate and our aim is to maintain the margin rather than expecting growth coming out of it. In terms of the fourth building in New Zealand, not all of that's going to go into gross margin because unlike Mexico, that whole building isn't dedicated to manufacturing, so a big portion of the cost there will actually go into operating expenses.

Okay, and I think for that, and I guess just second question, in terms of kind of picking up on the competitive bidding dynamic, can you talk about, I guess, your expectations in terms of what that could mean or I guess how that potentially plays out in terms of the pricing landscape in the U.S. market? Is it still within that 2% to 4% decline range that we've kind of talked to in sleep apnea masks for the foreseeable future? Or does something change as a result of competitive bidding?

We'll pass that question over to Paul, Chelsea.

Hey Chelsea. Well obviously competitive bidding is coming up and obviously we don't know what the impact is at the moment but generally we're used to working with competitive bidding and it'll obviously have some form of impact but from our point of view it's really about delivering customers good technology because technology can give them the best result because we can make them more efficient and help them reduce costs. So our job is to make sure we're bringing out the very best technology. That's what you're seeing with the release of Viterra.

Okay, thanks, Paul. Appreciate the colour. I'll come back to you later.

Thanks, Chelsea. Our next question comes from Stephen Ridgewell at Craig.

Yeah, good morning. Just first question on hospital growth rates. So obviously a good first half at 17% constant currency, but I did just want to dig a little deeper into kind of new apps' growth rates. So we saw 23% in this half versus 22% a year ago. I mean, given the comments around the extended flu season... I just wonder if we should have seen a little bit of a stronger pickup there, and on our numbers we did see a stronger pickup in the core consumables. Just interested if you could give us a bit of a flavour as to how you're thinking about the, if you like, the look through growth rate in new apps. Did that slow down a little bit over last year? Or were there some other factors in new apps that we should keep in mind?

No, Stephen, when we look at the flu impact in our first half, there's probably two things going on there. There's an extended US flu season. That ran through April, May and a bit of June. So that's a contributor. And we also had a strong flu season in Australia and that had a small impact as well. So across the board, new apps and invasive ventilation as well, we estimate those are worth about 1% of growth. Otherwise, you're seeing what you see.

Okay, so relatively small benefit. Relatively small benefit from the flu season.

Yeah, when you're looking at a couple of months in the US and Australia as a relative, while it was strong, a small proportion of our business. So we're just landing on around about the 1% mark for those.

Okay, that's helpful. And then second question on home care, you know, Good first half, I guess, relative to the guide we had in May for OSM masks. Just wondering if you're able to give us a sense of how much market share you believe you're taking in the full face category in the markets for Terra that's selling in or sold in over the first half.

Yeah, almost an impossible question to answer because, you know, you're working with estimates of market size, estimates of new patient starts, estimates of growth. So we think in those markets that you're referring to, we probably are taking market share. Can I rephrase that question then?

Can I rephrase that, Ben? Maybe from market share just maybe to talk about constant currency growth rates, I would say, in those markets. We have a tier that's been released.

Yeah, yeah, so... The model there really is you've got legacy masks declining, and they're on that declining trend that you've seen over the last year or two, and you've got Viterra offsetting that decline. So that's what's happening outside of US in the first half, and in the US you don't have the Viterra offset sitting there.

So I guess going to the comment on the guide that you're expecting that kind of to continue, Does the guide imply that you're only expecting flat home care and constant care in the second half or should we expect a little bit better than that given it's going to the US market?

So looking at the full year, you're in about the right zone there with that, Stephen, and it's that phenomena of legacy masks increasing to decline, increasing decline, offset by Viterra. probably a little bit of pressure on CPAPs and then respiratory support growing well.

Thanks, I'll get back in the queue.

Thanks, Steve. Thanks, Stephen. Next question comes from Thomas Yeo at Goldman Sachs. Go ahead, Thomas.

Hi, good morning, guys. Just a question on new application consumables. So another good pretty enough 23% growth. So could you just, confirm what percentage of the additional volumes is actually coming from outside of the ICU?

Yeah, that's also a really difficult question for us to answer, Thomas. Look, our best estimate is that somewhere between 20% and 30% of our volumes globally are outside ICU.

Yep, and in the US, that's towards the lower end of the range, you reckon?

Yeah, absolutely right, with the US at the lower end, yeah.

Perfect, thank you.

Thanks, Thomas. Next question comes from Andrew Goodsell at MST Marquis. Over to you, Andrew.

Thanks very much for taking my questions. Just the first one on new apps, consumables, just trying to understand if during the period you took any price increases, and whether you saw any increase in the turn rate of the consumables, I guess, against your... any turn rate against the previous year?

No, not really on turn rate, and that's just about all volume, Andrew.

I wouldn't ascribe any of that growth to... OK, so pretty stable on those two measures? Yeah. And second question, just thinking, you know, looking into competitive bidding and, you know, the risk of a bit of a price impact there. With your Mexican plant coming on, is it feasible or is that likely to phase in a way that would allow you to have a savings, you know, around about the same time? Just trying to understand the phasing of the benefits there.

Yeah, I had a question. We don't really think of it like that. We've kind of got the other effect going on, you know, due to the mass growth, which is largely in Mexico. Mexico's been a smaller proportion of our output last year and this year than previous years. So that could increase in FY21, and we just think of it as a kind of a general gross margin, contributed a gross margin improvement.

And helping to offset the cost increases that will continue to go forward.

But that's a FY21 effect? And that's an FY21 effect?

Well, Cain, you know, Lyndall kind of pointed out the key thing. We just kind of, going forward, we see cost efficiencies out of Mexico just offsetting the inevitable cost ins.

Yep. That's terrific. Thank you very much.

Thanks, Andrew. Next question comes from Steve Ween at Evans & Partners.

Good morning. I just wanted to ask a question of Lyndall just on the guidance. The currency that it's struck on now has gone back to sort of 64 cents. I wonder if you might be able to help us see the FX impact on the second half of the year if you were to keep it at what the previous guidance was struck at.

Good question, Steve. Now, as you can see, we actually have a lot of hedging in place for the rest of the year, so currency has less and less of an impact as we go throughout the year. A rough sort of back-of-the-envelope sensitivity is about one cent move in the US equates to maybe one or two million at the NPAT level.

Okay, and that, sorry, that includes the hedge book effect in there as well yes it's all it's all net yeah yeah yeah right uh second question is um just trying to get some you've you called out the the strong growth in both my evo in the home care segment but also strong growth in the non-invasive ventilators um on the in the consumable side um could you uh kind of give us any color around the growth and what's driving that

So we think in the MyEvo space, it really hasn't been a massive change in clinical data. So it is really just our people getting around to hospitals and getting around to physicians and that sort of slow but rather lumpy climb up in usage. Probably wouldn't read much more into it than that. In the non-invasive ventilation consumables in the hospital, That's really just getting a bit of traction with a non-invasive mask that we introduced 18, 24 months ago, and it really is a much better performing product, and we're just starting to get traction there.

So can you quote a growth rate for either of those segments?

Well, you've got them both in new apps. Non-invasive, you'd probably put in the mid-teens in that kind of region.

Great, thank you.

Thanks, Steve. Next question comes from Marcus Curley at UBS. Go ahead, Marcus.

First, could you just give a little bit of colour around what I think is the guidance for a slowdown in the hospital, constant currency revenue growth from 17% in the first half to, I think you're saying, 11% in the second? as a starting point?

Sure. Well, second half last year was more like 12%. What we think's going on there is you'll see there's really strong hardware growth in our first half. I think that's like 18% constant currency. It's capital equipment. It's lumpy by nature. And you might remember we're lapping a first half last year where it was flat. It's an indication of the lumpiness So essentially what we're doing there is we're smoothing that lumpy hardware growth in that exceptionally high first half this year. We're smoothing it over FY19 and FY20. So that plays into our second half number. I guess the short answer is we're not expecting a lot of hardware growth in our second half. And then the second thing we're thinking is that When we look at the FY19 flu season, we classified that as moderate. Off our model, it does look at the more impactful end of moderate, and we're thinking that's unlikely to happen twice. So in our guidance, we've brought it down to the less impactful end of that moderate range that we give.

And just on the hardware side, Sure, okay. And just on the hardware sales in the first half, could you give a little bit of colour on what type of equipment was sold and what wards, just to give a little bit of perspective in terms of the incremental demand?

Yeah, well, we don't really know what wards it's going to go into with humidifiers. All we really know is that airvodes are going to be used with nasal high flow. So we can't go much past that.

It's more than MR850s, 950s.

Yeah, we're not going to drill that deep to individual products.

Okay.

Sorry, go ahead.

And then just secondly, on OSA, looking into next year, maybe this is a question for Paul, with two new masks operating Is it reasonable to assume, let's just forget about competitive bidding impacts at the moment, that the business could get back to a market growth outcome, or is that too optimistic for FY21?

Yes, Marcus, I think that if we've got a second master coming out, with Viterra still going in next year, I think if we get a good reception with the new mask, which we expect to get, I think there'll be a reasonable expectation we'd start to be moving up to market growth rates.

Okay, thank you.

Thanks, Marcus. Next question comes from Jack Crowley at Jarden.

Yeah, morning, team. Just one question from me. Just hoping to tease out home care guidance a little bit better and thinking, I guess, about that 1% constant currency decline in the first half versus full year kind of flat assumption, which implies, I guess, a relatively immaterial pickup in the second half. I guess you have mentioned that trend of Viterra continuing to offset the the legacy pressures, but given that we've got the launch of that in the US, it takes place in the second half. Do we need to think about guidances, I guess, escalating pressures on the legacy mass that the US introduction of the terror offsets, or is it kind of more the case of... I guess, Viterra not having a meaningful uplift into FY21, or how should we kind of piece those things together?

Well, in that guidance, we have got Viterra going pretty well. But what we're doing is we're, in the guidance, we're increasing the decline of the legacy masks. So that's your offset.

Great. Okay, so that makes sense. And then just as a follow-up to that, is there any kind of, I guess, quantification that you guys could give us about, I guess, what you think the constant currency decline is from the legacy mass spring Viterra to one side?

Well, look, all I can do is point at the data you can see. If you look at last year in the first half, that was 2% in masks. The second half was minus 2%. Then in our first half, you've seen minus 1%, and that's got Viterra in it outside the US for a bit less than the first half. So that should imply that that decline's increasing, and we've just carried forward that increasing decline that you can see there into our second half.

Got it. Okay, perfect. That's all from me. Appreciate the time. Thank you.

Thank you. Thanks, Jack. Next question comes from John Deacon Bell at Citigroup.

Hi there. Just sort of a macro question on the OSA business. When we look at the competitive landscape, do you think the market's growing at a higher rate than it has been historically, because notwithstanding, obviously, you haven't had a mask. The competitors are growing at quite rapid levels.

Look, I think the answer to that, John, is we don't know. We can't be sure, especially of our volumes and our trajectory. And the other comment I would make is that we give you a pure play OSA mask number. I'm not totally sure what the other numbers you're looking at represent.

Yeah, fair enough. And just on OptiFlow, can you just give us a bit of a feel for how you think it's penetrated through ICU, both in the US and maybe in Europe at this point? You know, it's obviously growing rapidly and a fantastic product. It's just a bit hard from the outside to get a feel for how penetrated you are.

Yes, there's two levels to the penetration question across US and Europe. We would say we've got something in about 70% of ICUs, US a little under. Sorry, US a little over, Europe a little under. And then the second level of penetration is, you know, how much do they use it, you know, to the extent they could. And we would say about 5% to 10% of those ICUs use OptiFlow fully on all patients that they could.

All right, so there's a long, long road ahead. That's great, Lewis. Thank you.

Yeah, which is good news.

Thanks, John. Next question comes from Stephen Ridgwell at Craig's. Thanks for getting back in the queue, Stephen.

Thanks, Marcus. I just wanted to talk a little bit about my Evo. So just think the disclosure is devices were about 16% of home key division sales. Could you call out perhaps what percentage of home care sales was MyEVO during the period and then characterize the growth rate for MyEVO? Is it sort of still similar to that new app's growth rate or would you characterize it a little bit faster, a little bit slower than that?

We really don't like calling out growth rates for individual products. Sorry about that. We'll leave that one there. But we can say that MyEVO is growing at the new app rate, yeah.

Okay, so, okay, that's helpful. And then given device sales were kind of, looks like they were pretty flat year over year in home care, and my Evo's growing, you know, at a decent clip, should we take from that that sleep style is going backwards at a pretty decent clip as well?

Yep, fair assumption. That's your offset.

Yep. Thanks. And then just one for Lyndall. If my numbers are right, I think CapEx guide's increased by, Apologies if this has been covered off but since the May guide, so from 150 to 170, I guess what were the drivers for that increase?

It's really just bringing forward starting a few extra capex projects on production lines towards the end of this year that we sort of had in the long term plan for next year. So just bringing forward a little bit of production lines, making sure that we always have capacity well ahead of when we need it.

It's a good news increase. Yeah.

Okay, thanks. That's all from me. Thank you.

Thanks, Stephen. Next question comes from Tom Deacon at Macquarie.

Hey, good morning, guys. Just wondering if you guys might be able to give us a little bit of detail on how much of the OSA mass growth historically has been attributable, you think, to resupply, just noting the OIG's investigation into resupply ongoing in the States at the moment?

Attributable to resupply? Again, that's a number. We just don't have visibility when we make a sale of whether that's a new patient or whether it's resupply, so we just can't comment on it.

Okay, that's not a problem. Thanks.

Thanks Tom. We don't currently have any further questions in the queue so we will give you 10 seconds or so if anyone else would like to ask a question or else we will just give one further call for questions. I've got one from Steve Ween at Evans and Partners. Steve, go ahead.

Yeah, I thought I might just take the opportunity to see if you have noticed the flu data for the current northern hemisphere. That started off very strongly. It's sort of tracking similar sort of levels to one of the more recent strongest flu seasons we've seen for some time. So just wondering if you've seen that and that's part of your inventory build that you're preparing for.

It's not related to the inventory build and yes, we do monitor it closely and You know, if you look back over the last 10 years, you see all sorts of shapes to that curve, Steve. We're not going to read too much into it. We won't be absolutely sure what it is, probably till the end of March.

Yeah. Suffice it to say, though, but it's still at that moderate level in terms of your guidance.

Yeah, yeah, yeah, yeah. That wouldn't move our guidance at all, no.

Yeah. OK, thank you.

Thanks, Steve. Thanks, Steve. Another question from Marcus Curley at UBS.

I just wondered, you obviously highlighted some of the recent studies underway for Maievo in the home. Could you provide a little bit of perspective in terms of what you think the timeframes there are for the development of those markets into material revenue sources? Probably obviously at a loose level, maybe framed with when you expect some of the key study results to be released.

Look, I can only be loose on that. What you've seen over the last couple of years is you've seen steady growth in that COPD in the home with the clinical evidence. It was a little bit of a milestone in March last year or the year before when the Danish study came out. That was a bit of a milestone and it kind of just contributes You know, there's no sort of step functions on this clinical data, and it's, as we talk to early adopters with a bit more clinical data, we can get a bit further up the early adopter curve. You know, it's kind of that simple, and it might make the process a bit easier. So to get to material, you know, material to us, revenue from that, you do need kind of a body of clinical evidence, And we expect that's going to occur over the next decade or so, Marcus. But we think in the meantime we'll stay on this kind of trajectory. And we sort of, our history has been, we don't really see milestone studies that turn into a step function. That's just something else for our people to use and it makes the conversation maybe a bit easier or it means that more people are prepared to discuss it.

And of the trials underway in the US, what would be the timeframes for their results?

Yeah, so look, I probably can't run through all of them for you. There's one I'm thinking of, and it's going through a fairly typical track of doing a pilot study so that we can size and fund a big study. So we're likely to see the pilot study results. Andrew, can you give me a helping hand?

Yes, the results of the pilot study should be out within the next six months or something like that, but we need to bear in mind that it is just a pilot and will lead to a much bigger study, and that bigger study will take a considerable amount of time.

Funding and study design for the big study will be based on the pilot data.

Okay, thank you.

Okay, thanks Marcus.

Thanks Marcus. We don't have any further questions in the queue, so Lewis, I'll hand over to you to conclude.

Okay, thanks Marcus. Look, in summary, we have an exciting future beyond 50 as we continue to innovate to improve care and develop new applications for our technologies. And we really do appreciate the support of our customers, employees, shareholders, suppliers, and clinical partners who are on this journey with us. Thanks to you, we are estimating that Fisher & Paykel healthcare products will be used by more than 15,000 patients in 120 countries during this financial year. So thank you also very much for joining us today. Thanks.

This now concludes today's call. Thank you for participation. You may now disconnect.