Fisher & Paykel Healthcare Corporation Limited

Heiko HealthCare's results conference call. My name is Melinda, and I'll be your operator for today's call. At this time, everyone except the guest speakers will be in a listen-only mode. Later, we'll conduct a question and answer session. 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 the zero on your phone, and wait for a coordinator. If you require further assistance, you should just dial into the call. Please note this conference call is being recorded. I would now like to turn the call over to Marcus Driller, VP Corporate.

Thank you, Melinda. Good morning, everyone, and welcome to the Fisher & Paykel Healthcare 2020 Financial Year Results Conference Call. On the call today are Lewis Graydon, our Managing Director and Chief Executive Officer, Lyndall York, Chief Financial Officer, Paul Shearer, our 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 will be discussing our results for the year ended 31 March 2020.

including financial statements and commentary on our results for the NZX and the ASX.

These documents can be accessed on our website at www.fbhtier.com forward slash investor. With that, I'd now like to turn the call over to Lewis. Well thank you Marcus and welcome everyone. Today I'm going to be referring to the investor presentation pack that was released to the NZX and ASX this morning. We'll start on page 3. business highlights. Our products have been used to treat around 16 million patients worldwide, and what a very different year it's been. The 2020 financial year was already on track to deliver growth, and that's before sales were impacted by COVID-19. We expanded the release of our 950 and Viterra products, and we launched our new Evora Compact nasal mask for OSA. We also opened two new sales offices during the year. So turning to page four, in February, as a result of COVID-19, the demand for our respiratory therapies began to accelerate in a way that is unprecedented. We've seen a change in clinical practice emerge over the last few months, with a shift from early intubation and mechanical ventilation for COVID patients to meeting with nasal high flow. And that has brought a lot of attention to our products. Throughout this pandemic, our priority has been ensuring the safety of our own people and protecting our ability to manufacture, supply and train end users on that essential respiratory equipment. To increase production, we've added ships and we've hired more than 500 additional direct manufacturing staff in each of New Zealand and Mexico since January. I'm really proud of what our people have achieved for the sake of patience. as we doubled or even tripled our output in some hospital hardware products over just a few months. As a consequence, we do have a very strong result for the 2020 financial year. Returning to our financial results on page five, overall operating revenue for the year grew 18% to $1.26 billion. That's 14% growth in constant currency. This is comprised of 21% constant currency growth in our hospital product group and 4% constant currency growth in our home care product group. Operating profit grew 30% to $379.3 million and reported net profit after tax was up 37% on last year at $287.3 million. Our consistent practice has been to pay a dividend to shareholders And given the positive result, our board of directors has approved an increased fully imputed final dividend of 15.5 cents per share. This brings the total dividends for the year to 27.5 cents per share, an increase of 18% of the previous year. We know that achieving these results would not have been possible without our people. And to recognise our 5,000 employees and their incredible efforts, we have provided additional annual leave. This week we'll pay our profit sharing bonus. To acknowledge the way our global team have gone above and beyond, our directors have added an additional discretionary bonus of $3.8 million over our normal practice. This effectively doubles our profit share for the second half. This year's bonus represents approximately 3.9% of annual base pay for each person for a total profit share of $12 million. We're turning now to page six. This is an overview of the hospital product group. These are the products and systems that are used in invasive ventilation, non-invasive ventilation, nasal high flow therapy and during surgery. These include the devices and the therapies like OptiFlow that are being used to treat COVID patients. On page seven, Growth and revenue for the second half of the year from our hospital products was strong at 24% in constant currency. Excluding the impact of COVID-19, we estimate that underlying hospital growth, revenue growth for the second half, was in the range of 14% to 15% constant currency. Hardware for us began to accelerate from January off an already strong year of growth. to finish at 53% growth in constant currency for the half. Revenue growth in the consumable products that are required for use alongside these devices was also strong at 23% for new apps in the second half in constant currency. As this pandemic has evolved, nasal high-flow therapy, and in particular our OptiFlow system, has steadily gained increasing acceptance as the preferred frontline therapy for COVID-19 patients. And this is now reflected in many of the clinical practice guidelines around the world. As a result, we've placed OptiFlow systems and AVA hardware in more hospitals, more parts of the hospital, and in more countries. Our therapy is becoming practically household name among intensivists and healthcare practitioners. And as the real world experience of more and more physicians combines with what is already a strong base of clinical evidence of over 2,000 publications, and that includes 65 controlled studies, the barrier to clinical change is reduced. Our future opportunity is to translate the visible and experienced benefits of OxyFlow therapy for COVID patients to respiratory patients in general, and then to demonstrate how those same benefits can be applied using MyEvo for patients in the home. And it's a similar story for invasive ventilation and non-invasive ventilation. COVID-19 is primarily a lung disease. The benefits of humidification become more easily apparent with high numbers of ventilated patients with lung disease. And during this pandemic, those benefits are visible to more and more clinicians than ever, which can only help reduce the hurdle to change. So move now to page eight. In our home care group, these are our products used in long-term care facilities and in 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. On page 9 now, we have reported home care growth of 9% in constant currency for the second half. Within the home care group, second half OSA mask revenue was also up 9% in constant currency, and that's driven by steady growth of Viterra, our new full face mask for OSA, which was released into the US in October, and a significant increase in volume above the pre-COVID levels across the range towards the end of our second half. We also saw continued growth of MyAvo, which is used to deliver OptiFlow nasal high flow therapy in the home for patients with chronic respiratory conditions. And as we mentioned last year, there are a number of studies in progress about the benefits of nasal high flow therapy in the home for patients with COPD. And these have timelines of about three to five years. We expect to see these publications, along with the experiences of treating COVID-19 patients with nasal high flow therapy in the hospital, support the ongoing strong growth of the home application. I'll now turn over to our CFO, Lyndall York, and she will give you some details.

Thanks, Lewis, and good morning, everyone. Slide 10 outlines the full year impact of the new accounting standard for leases effective from 1st April 2019 that I discussed at the half year. On slide 11, gross margin decreased by 73 basis points to 66.1% for the year, down 150 basis points in constant currency. About a third of the margin decline was due to the start-up of our second Mexico manufacturing facility this year. Products have started coming out of this facility in the second half. Since the outbreak of COVID-19, there has been an unprecedented and urgent demand for our respiratory products. Because of challenges with global supply chains, we have been and continue to use air freight to bring in raw materials and deliver product to customers quickly. The cost of air freight and expediting the supply of raw materials has been significant, with the cost per cubic metre being up to eight times higher than normal. However, we have opted not to increase prices to our customers, and this has impacted our gross margin. At the current level of elevated COVID-19 related demand and travel restrictions, freight costs continue to be significantly higher than usual. In our guidance for FY21, we have factored in up to a 200 basis point decline in gross margin in constant currency for the year, which includes this rate impact. Moving on to slide 12. Total operating expenses grew 7% or 3% in constant currency. Last year's expenses included $23.4 million of patent litigation costs with ResMed, and approximately $2.1 million of lease expenses that are now classified as interest expense. Excluding these items, operating expenses grew 10% in constant currency. To implement the New Zealand R&D tax credit regime, we improved our collection of R&D related costs. This resulted in approximately $8 million of incremental costs classified as R&D rather than SG&A. This, combined with increased investment, led to R&D growing 18% to $118.5 million, which is 9% of revenue. Excluding the impact from the improved data collection process, R&D grew approximately 10% 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 3% to $338 million or a 1% decline in constant currency, largely due to the patent litigation cost last year. It is also impacted by the incremental costs now classified as R&D and the reclassification of a portion of lease expenses to interest expense this year. Excluding the impact of all of these items, SG&A grew approximately 10% in constant currency. We anticipate that our constant currency operating expense growth for next year will be comparable to this year, excluding the impact of patent litigation costs and the lease expense reclassification. Slide 13 shows our financing and tax expenses. The increase in financing expense is primarily due to the lease interest expense reclassified from SG&A and foreign exchange losses on our interest bearing liabilities, including the newly recognised lease liabilities. This year, the New Zealand Government changed how they incentivise R&D. For the six years to FY19, we received $5 million annually from the Callaghan Innovation Growth Grant. This was included in Other Income and has been taxable. The new Research and Development Tax Credit Act replaces this grant, effective from 1 April 2019, and provides a 15% tax credit on eligible R&D expenditure. We are including this tax credit as an offset to our tax expense line. We estimate that approximately 75% of our reported R&D spend in FY20 will be eligible for the credit. Based on this assumption, we have recognised the tax credit of $13.4 million this year, which will support our ongoing R&D investment. We estimate that 70% to 75% of our R&D expenditure going forward will be eligible for the tax credit. In March 2020, the New Zealand Government passed the COVID-19 response Taxation and Social Assistance Urgent Measures Act that reintroduced depreciation on our buildings for tax purposes, effective from 1 April 2020. As a result of the Act, the tax base of our buildings increased by $19 million at 31 March 2020. This resulted in a reduction in deferred tax liabilities and a reduction in tax expense of $5.3 million this year, which will not be repeated in future years. This Act provides us with a small annual cash benefit over the next 67 years. Our effective tax rate for the year was 22.5%, down from 28.2% last year, largely due to the introduction of the R&D tax credit and the reintroduction of the building tax depreciation. Excluding these impacts, the effective tax rate was 27.5%, slightly below the prior period. Going forward, we expect our effective tax rate, excluding R&D tax credit, to average around 28 to 29%. Moving to slide 14. Capital expenditure, which includes purchases of intangible assets, was $170.7 million this year. up from $133.3 million last year. Almost half of the property, plant and equipment capex for the current year was for our fourth New Zealand building, which was completed in May. We are expecting to spend approximately $160 million in total capex in FY21. Capitalised costs associated with the SAT project are included within intangible expenditure. The US office implementation in June last year went very smoothly. The global SAP rollout is on hold during the COVID-19 pandemic and we expect it will resume next year and be completed two to three years from then. Our free cash flow, which is operating cash flow, less capital expenditure and lease payments, was $141 million for the year. From this free cash flow and our short-term deposits, we paid $146.4 million in dividends during the year. The balance sheet remained strong. Higher trade receivables at the 31st of March 2020 reflected the increased sales in response to COVID-19. Getter days at 45 days are in line with the prior year of 46 days. Inventory and trade payables also increased, reflecting higher production levels and purchases of raw materials in line with the increased output. Net property plant and equipment increased by $134 million in the year, mainly as a result of CapEx and the recognition of lease assets. Net cash at 31st March 2020 totalled $42.2 million, down slightly from $54.4 million last year, predominantly as a result of higher CapEx and dividends. Interest-bearing debt was $102.6 million, with 21% of it being non-current. The majority of debt is held in US dollars as a balance sheet hedge. Our $30 million US dollar fully drawn facility is scheduled to mature in November and is classified as current at the 31st of March. We plan to extend or replace this over the next few months. Turning to slide 15, We have expanded our dividend policy into a broader capital management policy. Our policy is to manage our balance sheet and financial policies to support long-term financial sustainability. When considering how to apply our free cash flow, a priority is to appropriately invest in the business to support our long-term growth aspirations. This investment is in people, programs and capital expenditure. Our second priority is to ensure a conservative balance sheet by maintaining our target gearing ratio of plus 5 to minus 5% excluding hedging, taking into account expected business performance and future cash requirements. This will ensure we have sufficient available liquidity to continue with an appropriate level of investment in the business to put us in the best position to achieve our goal of sustainable, profitable growth. It will also assist us in withstanding a significant adverse event with minimal compromise to the business. Once we have appropriately invested in the business and have an appropriate hearing ratio, surplus cash will be returned to shareholders. We expect to increase dividends as earnings grow. For the five financial years prior to this one, that is FY15 to FY19, our average dividend payout ratio was 65%. Our gearing ratio at 31st of March 2020 was minus 4.3%, which is within our target gearing range. We expect to remain at the lower end of our target gearing range next year. As Lewis mentioned previously, we will be paying an increased final dividend of 15.5 cents per share, payable on the 17th of July. This represents the 15% increase on the final dividend declared last year and enables us to make the accelerated investments in manufacturing capacity that we are currently doing and expect to continue for the coming year. This brings the total dividends declared for FY20 to 27.5 cents per share, an increase of 18%. Looking now at foreign currency on page 16. Profit after tax year on year was benefited by $17.4 million from the New Zealand dollar, typically being weaker than last year. This includes the results of our hedging program, which contributed a loss of $7.7 million before tax this year. Over the last six months, we have taken advantage of the weakening New Zealand dollar and added to our hedging levels in all of years one to five, most notably the US dollar. At current rates we are forecasting a loss from hedging in FY21 of approximately $3.5 million before tax and a net currency benefit compared to FY20 of approximately $3 million before tax. Now back to Lewis who will outline our FY21 guidance.

Thank you Lyndall. So we're on page 18. Our strategic direction remains the same. We're continuing to develop new and innovative products and therapies, work with key opinion leaders to help change clinical practice and expand our global reach. We expect the COVID-19 pandemic has accelerated that progress. For the first three months of FY21, our hospital business has continued to accelerate, with hardware growth of over 300% and hospital consumables tracking at over a one-third increase. In home care we're seeing both a lower OSA diagnosis rate and OSA mask resupply levels in the beginning of FY21, returning closer to expected levels compared to the elevated levels at the end of FY20. Home care growth for the first three months of FY21 has therefore been closer to the FY20 full year rate. Now this year we're going to provide guidance on a different basis. We can't predict the course of COVID-19 around the world. We can't predict the effectiveness of preventative measures, future hospitalisation rates, clinical practice guidelines evolving or their adoption. So we're going to provide guidance based on an assumption that respiratory hospitalisations peak for our first quarter due to COVID-19 and then they steadily return to normal activity by the beginning of our second half. Correspondingly, in OSA, diagnosis rates are reduced during the year due to COVID-19 and our assumptions. Some costs, most significantly freight, also remain elevated during the first three months of our FY21 due to COVID-19 and we've assumed freight costs remain at elevated levels throughout the end of the calendar year. We value a long-term relationship with our customers and so we have not increased their prices as Lyndall mentioned. These are assumptions for guidance and not a forecast or prediction of the course of COVID-19 around the world. Instead, we are continuing to grow our manufacturing capacity of hospital respiratory products during our 2021 year. And as Lyndall indicated, we're bringing forward our capital expenditure spend for product tooling and manufacturing capacity to ensure a further increase in supply of our respiratory products is available. So on this basis and with these assumptions and at current exchange rates, full year operating revenue would be approximately $1.48 billion and net profit after tax would be approximately $325 to $340 million. So with that I think we can now open the call to questions. Yeah, well, thanks, Lewis. And Melinda, if you could please open the line up for questions. Just before we move to the Q&A, can I ask everybody to limit your questions to two? This is 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.

Thank you. We now begin the question and answer session. If you wish to register a question, please press the star followed by 1 on your phone. If you wish to cancel your registration, you may remove yourself from the queue by pressing star followed by 2. Again, that is star 1 to ask a question.

All right. Thanks, Melinda. First question comes from Leanne Harrison at Bank of America.

Please go ahead, Leanne.

Good morning, all. Thank you for taking my questions. I guess this question is for Lewis, following what you're saying about the 2021 guidance. Given that we're, I guess, at the end of the first quarter and cases continue to rise globally, Would it be safe to assume that there's further upside in your guidance if we assume that the peak would be obviously second quarter or third quarter of this financial year?

Yeah, I think that would be a safe assumption, Leanne. We've kind of gone with a different concept here in that what we're trying to say is we can't predict what this is going to do. So we've given you guidance and we've given you the assumptions we made to get to that guidance. And in that guidance, we said peaks for our first quarter and then declines to normal. So if you want to think that COVID-19 hospitalisations increase or even remain the same, yeah, certainly upside to that assumption that we made.

OK. And just for a follow-up question, Obviously, when coronavirus first hit in the United States and Europe, I assume that there's a flood of orders at that time to secure devices. Can you add some color as to where the current hardware demand is coming from in terms of are you seeing more demand coming through the US in other states as cases rise? Also, can you comment on the emerging markets, particularly Brazil, Russia, and the like, where cases are also on the increase.

Yeah, well, you're pretty much onto it, Leanne. I mean, our demand for hardware pretty much has followed COVID around the world. I mean, it did start in China, moved to Europe, moved to the US, and now we're seeing more and more from those other countries like Brazil and Russia, as you mentioned. Plus the continuing flow of hardware demand for those other regions Lewis referred to too.

Okay, thank you.

Thanks, Leanne. Thanks, Leanne. Our next question comes from Steve Wing at Evans & Partners. Go ahead, Steve.

Yeah, good morning, guys. Just a question at the outset. I noticed in your slide that you've upgraded your target market. from $10 billion last half to $20 billion today. I just wanted to get an understanding as to what the major drivers of that significant increase in your target market is.

Yeah, I might ask Marcus if he can address that question, Steve. Yeah, Steve, one of the things there is previously we had US $10 plus billion. We've moved to NZ 20 plus billion, so you've got currency there. I guess we report all of our numbers in New Zealand dollars and so we thought for consistency we should do that. The increase in that total addressable market largely relates to the 50 million estimate we have come up with around hospital respiratory support.

that is patients using, who could benefit from our OptiFlow nasal high flow therapy.

So we had done some reasonably detailed analysis looking at USH data and ICD-10 codes to work out potential, that potential number. So that's gone from 30 million to a 50 million estimate. So that's probably the main move, Steve.

Okay, great.

Second question is just to try and get a better understanding of what the clinical experience is like with OptiFlow. We saw during COVID a big shift away from perhaps in the first instance ventilators being used and now, you know, OptiFlow is... Sorry, high flow therapy has been used to stabilise oxygenation levels. I'm just wondering if you can... talk to, now that we've got such a big base, what are you seeing, what's the experience like on the pull-through of your OptiFlow cannula?

Well, look, I'll just echo those comments, Steve. We did see that shift from intubate early through to more and more leading with OptiFlow. With regard to the pull-through, so far on everything we can see, it looks like those devices are being used. if anything, maybe even at a mildly elevated rate. Thanks, Steve. Sorry, I'll let you go, Steve. You've got a follow-up there.

No, I was just curious about the mildly elevated. That surprises me, given the popularity of the therapy.

I'm thinking of a turns rate, Steve, so replace the hardware and so far as we can tell by turns rate it's all being used and maybe a little bit more turns than normal.

Okay, thank you.

Thanks, Steve. Our next question comes from David Lowe at JP Morgan.

Thanks very much. Could I just talk a little bit about the ordering backlog that you've got at the moment? So you've obviously set some assumptions there. With those assumptions, are you expecting that if it plays out that way, we see a peak in the point quarter and then it normalises by the end of the half, that your order book would have caught on?

That's a hard one to answer, Steve. We think we've satisfied... Sorry, Dave? David? We think we've satisfied all the demand and the reason it's hard to answer is you've got orders flying in daily and you've got manufacturing rates ramping up daily. I think the bottom line is we think over that first quarter we've satisfied the demand. Clearly if demand goes down during our second quarter we'll satisfy that but we're also planning to satisfy that demand if it goes up during our second quarter as well. We're still building manufacturing capacity.

So if I understand that correctly, you're keeping up with demand at the moment. It's not that if I ordered a new device today, I'd have to wait three, six, nine months for it?

Well, nothing like that kind of timeframe. What we're doing is we're ensuring that we supply to meet the treatment needs first and that's been our first priority. Otherwise, we may have been phasing our customer deliveries. Delayed now, you're probably talking, if we think it's not immediate need to treat patients, you might be talking a couple of weeks. Paul here, Dave. Of course, we do... It's Paul here, Dave. I'd just like to add, of course, we do have forward orders too in line with... ventilators being delivered at future periods.

Right, thanks. I'll just pick topics as I could to the OSA or the home care side. You talked about diagnosis channel being down, also talked about resupply being down. We've heard reports in the US that resupply has held up pretty well. Just wondering if you could talk to what you've seen and your assumptions with that diagnostics channel in particular, please.

Yeah, okay. So at the end of our fourth quarter, we did see what we interpreted as a big pickup in resupply rates. We're still seeing what we think are probably elevated resupply rates, but they've come back a bit from that fourth quarter. And then for our assumptions going forward, we've assumed that resupply returns to normal levels. Maybe stays a little bit elevated through the first half, returns to normal levels by the second half. And then we just made kind of a blanket assumption for new patient starts. And we said for the full year, new patient starts, well the assumption is, would be 80% of last year. And probably the thing for me to emphasise there is that's just a blanket assumption. That's what we've baked into the numbers we've given you. And we're just trying to wrap up all the various impacts that COVID might have on that diagnosis rate in that one kind of assumption.

Great, thanks very much.

Thanks, David. All right, next question comes from Andrew Goodsell at MST Marquis. Go ahead, Andrew.

Thanks very much for taking my question. I'm just trying to understand the post-COVID-19 profile and what that market looks like. So just going to ask, you're very early on the ground in Wuhan. I'm just trying to understand what you sort of see that is now, sorry, what's happening there now, sort of that I guess things are stable and potentially they'd acquired all the equipment they need. Just trying to get a better sense of that.

I don't know if I can drill down to Wuhan specifically. I think on the whole in China we saw, well China's always grown very, very strongly for us. We did see a pick up in January and I'd say it's probably back to normal kind of growth rates now would be the best summary I could give.

Okay and perhaps just interested in this DNA, obviously you got some leverage out of this this half year gone, just trying to understand where promotional activity and things like that is taking place. You know, we know with a lot of the closures that just hasn't happened. I guess just trying to understand the impact on your launch of your new masks plus just ongoing costs and whether to still get leverage out of that this next six months. Probably a question for Linda.

I'll take it. Yeah, I'll take the first part of it there and maybe pass over to Paul in terms of rollout of new masks and plans for that. What we have said is we see some ups and downs in terms of our expenses as a result of COVID. So we've got a bit of less travel, a bit of less... people moving out and about. We're still undertaking a lot of activities. We're just being able to do them remotely in a number of cases. And so we're assuming and guiding that our operating expenses will grow around that 10%, which is the growth that we had this year, next year. And we don't see there being material impacts to that, depending on what happens with COVID, because, as I said, there's ups and downs. We're still undertaking the activities by and large of what we had planned to do. Some things possibly delayed with a bit of a pickup as teams are able to move around a bit more. In terms of new product releases and launches of new masks, again, I think that will be dependent on as people get access into the markets. But I'll just pass over to Paul if there's any other comments on that.

Not really. Andrew Lindell is saying it's quite spotty around the world but I mean we've clearly got to call in sleep labs, pulmonologists, home care dealers and we're quite restricted in being able to do that in many parts of the world. That's just affecting the way we can launch new products but we'll do it where we can and where we can't physically do it we do it virtually so the teams out there just doing the very best they can in an environment that's not conducive to face to face. Maybe the final comment to that Andrew is that in our assumptions we assumed that that activity returns closer to normal for our second half in our assumptions for expense growth.

Terrific, thank you very much.

Thanks Andrew. Our next question comes from Chelsea Leadbetter at Forsyth Bar. Over to you Chelsea.

Thanks Marcus and morning team. trying to expand on the post-COVID discussion that we had started getting into. What I'm interested in kind of understanding, Lois, maybe, is the hardware boost that we're seeing at the moment, clearly as a result of the COVID orders, etc., I mean, firstly, I guess, how are you guys thinking about that going forward? I mean, are you thinking that some of this is a pull forward or are you thinking about a sustained sort of change in behaviour here? I mean, just thinking more on a medium-term basis, how do we think about the hardware line in particular?

Yeah, so for Airhost Chelsea, we're thinking that that's just accelerated our progress with the installed base. We're thinking it's probably reduced the hurdle to clinical change you have maybe the most physicians in the world having some experience with nasal high flow over the last few months and probably the next few. That clinical experience probably speaks louder than the clinical evidence. We're thinking of it as really just pulling everything, pulling our penetration, pulling our progress forward a couple of years. On the whole, our heater bases have probably been going on to the established intensive care ventilators. So we're also expecting that they'll be the preferred ventilation tools before, during and after the pandemic. So we're expecting that, again, we'll just increase our penetration there as well.

Okay, thank you. And I guess just a second question, just trying to understand, well, can you give us a bit of an update on patient numbers for high flow and where that's sitting now in terms of your treatment numbers and also just in terms of your penetration throughout various areas of the hospital? You know, where's been the most, the biggest change and I guess what you're seeing in that particular area versus, say, six, 12 months ago?

Yeah, well, for FY20, we said about four million patients treated with nasal high flow, with OptiFlow. In terms of penetration throughout the hospital, I think that's another place where the COVID pandemic has accelerated our progress and that we think a lot of the usage of OptiFlow is outside ICU. You're seeing a lot of hospitals generate assessment hubs where they start the patients on OptiFlow and then they'll move patients to different parts of the hospital. We're seeing a lot more usage in an emergency department where, again, they'll start patients on OptiFlow and then decide where they're going to move them. And I think probably the other thing we see more and more of, I don't think you'd find many customers that would not accept that they can use nasal high flow outside ICU. They would all accept that these days, I think. And I think there's been a big shift that's occurred over three or four months. All anecdotal, of course.

No, I appreciate that. Thank you very much, Lois, and great effort for the team.

Thank you. Thanks, Chelsea. Our next question comes from Chris Cooper at Goldman Sachs.

Hi. Morning. Thanks, guys. So I'm just trying to triangulate a few comments you made on supply and demand. So you commented to a previous question, supplies met demand, and also you assumed that global hospitalisations have peaked. but also you still continue to increase manufacturing capacity. Can you just confirm which lines you're still seeing that tightness in and continuing to build out?

Well, we're really only talking about two product ranges, right? We're talking about humidifiers for use with mechanical ventilators, and we're talking about airvotes for use with OptiFlow, and probably not much difference in terms of Again it's a model and it's an assumption we use to give you some kind of guidance and we haven't really made any distinction between the two. We've said peaking in our first quarter, declining to normal growth by the end of our second quarter and we've treated them both the same in that assumption. Does that answer your question?

It does, it does. And the second question, please, you commented about a mild elevation in the pull-through rate. I just want to clarify, you were talking there about, you know, OptiFlare consumables coming through from hardware. You know, fiscal 21 started very strongly, obviously, and consumables growth over a third, but still that's, you know, somewhere below the growth you've seen in hardware of up over 300%. So, Again, just trying to triangulate your comments there in terms of the elevation and pull-through. I think normally we'd see a higher correlation between hardware and consumables growth there.

Yep. Okay, Chris. So the thing there is for us to... Let's say if we double our hardware growth in 12 months, we've doubled last year's sales. If we want to... or if we were to double our consumables consumption in 12 months, then we've doubled everything that we ever sold. The hardware installed base has only gone up by a certain percentage. Okay, look, I think I made a mess of that. To double hardware sales, we only have to double last year's sales. But if we were, for example, to double consumables sales, we're doubling usage on the entire base. So they're quite disconnected numbers. It's because you have a great big installed base of hardware that's using consumables.

Okay. Should we be assuming... Yeah, no, sorry. I'm just trying to get my head around the comments. So should we be assuming that consumables growth should strengthen from here? And in terms of that percentage there, I mean, you know, historically I think we've seen, you know, often the harder challenge is getting the hardware... into the customer and we've had this very unusual set of circumstances which has helped to drive that forward. Whatever the normal ratio is of X number of consumables per piece of hardware, does that ratio still hold or has that in some way changed?

It still holds. It's gone up a little bit. Let me try another sum. Let's just say I sell 100 pieces of hardware every year. I do that for 10 years. I've got a thousand bits of hardware out there. This year I sell 200. This year I sell 200. So I've doubled my hardware sales this year, but my installed base has gone from 1,000 to 1,200. So I'd expect my consumables to go up 20%. If the turns rate stays the same, does that help you?

Okay, understood. It does. Thank you very much.

Thank you. Thanks, Chris. Next question comes from Steven Ridgewell at Craig's Investment Partners.

Good morning. The first question on production capacity capex. So the $160 million you've got for FY21, which is an elevated number. Could you please clarify to what extent approximately this relates to new buildings? and approximately how much to expanding production lines and then roughly what the planned increase in production line capex is year over year.

Yeah, look, I'll do the first part of it, Steve. And in terms of new buildings, there's still probably about $20 million or so to finish off the new Daniel building. And then within that $160 million includes intangibles, which we spent about $25 million last year. You can say that that's fairly comparable, a bit of growth in that next year. Everything else is pretty much production lines.

Yeah, Steve, that just lines up with, you know, the comment, continuing to grow our manufacturing capacity throughout the year.

Yes, and just one follow-up on that. Once that capex is spent, roughly where would the company's capacity be for hospital consumable production compared to the 33% growth that we've seen in the first quarter?

As I said, we're continuing to build that manufacturing capacity. We'll continue to build it throughout the year. The peg in the sand I can give you is that we'd expect to be about doubled for the humidification consumables by November capacity and about double the capacity for the Evo consumables by September. But then the plan is to carry on building capacity. Obviously we'd reassess that from time to time.

That's helpful. And then the second one from me. earlier in the channel you mentioned that you've seen increased demand from the likes of Brazil, Russia, etc. as COVID hotspots are spread around the world. Is that increasing demand in the likes of Brazil and Russia as examples primarily for your core invasive ventilation set of consumables or are you also now seeing interest in Optiflow given Hyflow is now recommended as frontline treatment in the context of historically a lot of the growth in high flow is coming out of the US and Europe and Australia.

Stephen, Paul here. Just to answer your question, simply it's both. We're seeing increased demand for our thermification products, consumables, also for our high flow, air flow, optifloating products.

I guess geographically if you were to split that, trying to get into detail, are you seeing high flow demand to go up in those sort of emerging markets where you perhaps haven't been as strong historically, where I guess historically the US and Europe have been the focus for the sales teams?

I know definitely Stephen, there's no question that we're seeing strong demand in those I guess you could say emerging markets for high flow and I think what I've seen what's been happening around the rest of the world during the earlier waves, the guidelines coming out, so we're clearly seeing increased demand for Hiklo, for Evo.

That's helpful. Thank you.

Thanks Stephen. Our next question comes from Marcus Curley at UBS. Go ahead Marcus.

Good morning. I just wondered if you could provide what your overall revenue assumptions, constant currency is for the hospital and home care division for the current year?

In the guidance that we gave, based on the assumptions that we have given you, Marcus, you get most of that growth is in hospitals. You get home care fairly flat to low digits.

Within that obviously you've talked to the peak being assumed in the first quarter. Does the order profile align with that at this stage?

It's a difficult question to answer. I'd say pretty close, yeah.

And then just following on from the last questions asked, historically, the emerging markets have been very reluctant to buy the single-use consumables, generally using the reusables. Is that changing or is it too early to tell?

Look, at this stage, there seems to be a bit of a drift towards consumables.

single use. How about China, for example? Has the experience with COVID changed their practice in the last few months?

I think we would say a drift towards single use. Single use is a proportion of China's picking up.

Okay, thank you.

Thanks, Marcus. Next. question comes from John Deacon Bell at Citigroup. Go ahead John.

Thank you. I just wanted to follow on from Chris's question to understand that you eloquently made the point there Lewis about the 1,000 and 1,200 so we understand the consumables growth but just in terms of a normal year where there was a normal number of respiratory patients, what we're trying to understand is Is the installed base now really too big for the number of patients in a normal year or do you think you can go in and through the education of the physicians backfill to the point that you can get more and more normal patients if you like using your therapies?

Yes, that's exactly it. When you're talking about OptiFlow, a lot of that usage right now, a lot of it will be COVID, not all of it. And the future opportunity for us is to make sure that our customers translate the benefits that they see for COVID patients, translate that benefit to all of their respiratory patients. And we think, you know, it's probably pretty evident to them, but it's certainly something we'll be working on. And also remembering, you know, we probably, well, we're still less than 10% penetrated. We don't think we're anywhere near getting an installed base that's too big for the number of patients.

I understand. Thank you. And just to go back on another comment you made about the OSA business in terms of getting access to patients, obviously the world's a bit disrupted. Have you seen any normalisation of that? Any more people going to sleep labs or anything to suggest it would get back to normal in the next quarter?

Paul here, John. Again, it's spotty around the world, you know, things are happening in different places. So our people are calling on, all the people who like to call on where we can.

A lot of sleep labs have opened or opening, but in terms of patients going to those sleep labs, I think there's a lot of patients staying away because they're worried about

just going into those kind of environments. So I think that's why we've made the assumptions that we have. Thanks very much. Thanks John. We have no more questions in the queue, so we'll give one last opportunity for one more question. Just a reminder, press star followed by one, and if we have no further questions then we will back that up. Okay, Lewis, it looks like we've got no further questions. If there are any follow-up questions, by all means, please give me or Hayden a call. But over to you, Lewis, to conclude. Thanks, Marcus. I'd like to conclude by recognising our suppliers, our customers, our shareholders, and especially our now more than 5,000 people for your support. And it's our strong long-term relationships that have really come to the forefront during this pandemic and our response to this pandemic. We're confident in our ability to respond to the continuing COVID-19 pandemic and we're optimistic about our future beyond it. So thank you very much to everyone and thanks for your time on the call today.

And that does include today's conference call. We thank you all for joining us.