Fisher & Paykel Healthcare Corporation Limited

Welcome to Fisher and Pichol Healthcare Results Conference Call. My name is Justin 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 star followed by zero on your phone and wait for a coordinator. If you require further assistance, you should redial 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, Justin. Good morning, everyone, and welcome to Fisher & Paykel Healthcare's 2021 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, Senior VP of Sales and Marketing and Andrew Somerville, our VP of Products and Technology. Lewis and Lyndall will first provide an overview of the results and then we'll open up the call to questions for the team. We'll be discussing our results for the year ended 31 March 2021. We have earlier today provided our 2021 annual report including financial statements and commentary on our results to the NZX and ASX. These documents can be accessed on our website at fphcare.com forward slash investor. With that I'd now like to turn the call over to Lewis.

Okay, well thanks Marcus and welcome everyone. So today I'm going to be referring to the investor presentation pack that we released to the NZX and ASX this morning. But first, we would like to begin by thanking some people who are very important to us all. And that's the healthcare professionals around the world who have been caring for patients during a global pandemic. Our thoughts are with them and their families wherever they may be. I also want to personally acknowledge the people of Fisher & Paykel Healthcare for their commitment to delivering for our customers and to thank their partners and families. Because of your contribution our products were used to treat an estimated 20 million patients during the 2021 financial year. We also want to thank our suppliers for your commitment. They had to work under very challenging conditions to provide the raw materials, the components and the services that we needed to make our products. Operating during a pandemic has tested their resilience and we have been amazed at their ability to scale up and adapt. Thank you. So starting now on page three. Our key achievement for the 2021 financial year was increasing output for some of our hospital products by approximately six times and doubling output for some of our hospital consumable products. To do this we hired and trained around 1,800 people over the year and that's an achievement all in itself. It's an important part of our company culture to recognise the efforts of our people. and this year they've made an outstanding commitment and this would not have been possible without the help of our families and our partners. To recognise this the board have doubled our standard profit sharing bonus for our people and that's a total profit share of $29 million for the year. So turn now to page 4. We've also made progress against our long-term strategy in spite of the challenges of COVID-19. During this year, we've managed to release hospital and home care products into new markets, and we expanded our direct sales presence in five more countries. Developing long-term partnerships in our local communities has always been important to us, and today we announced a $20 million commitment to establish the Fisher and Paykel Healthcare Foundation. This independent charitable organisation will enable us to have a more sustainable model for funding of community and charitable activities. The foundation's purposes include supporting and funding health research and programs that improve access to healthcare, environmental protection initiatives and promoting awareness of opportunities in STEM subjects such as science, technology, engineering and mathematics. So turning now to page five, I think we can sum this up by saying it's a year like no other. Operating revenue for the 2021 financial year was $1.97 billion, 56% higher than the previous financial year. or 61% in constant currency. Net profit after tax was $524 million, 82% higher than the previous financial year or 94% in constant currency. This extraordinary full year result is driven by our hospital product group and that includes OptiFlow and Evo systems used to deliver nasal high flow therapy. For the full financial year revenue for the hospital product group was $1.5 billion and that's an increase of 87% over FY20 or 94% in constant currency. Revenue for the home care product group was $466 million, an increase of 2% over the previous year or 4% in constant currency. So now looking more closely at our product groups, starting with the hospital product group on page 6. These are the devices and systems used with invasive ventilation, non-invasive ventilation, nasal high flow and surgery. Hardware was 37% of revenue this year. versus 16% of revenue for FY20, so I just want to point that out. On page 7, hospital products made up 77% of operating revenue for the second half of the financial year. We saw extraordinary demand for a range of humidifiers and airvotes systems, and that's driven by experience in clinical trials of treating COVID-19 patients. In the second half of the year, our revenue in hardware and consumables continued to follow COVID hospitalisations around the world. The third quarter was a peak for the year in both hardware and consumable demand. And for the fourth quarter, consumables remained above our first half average and hardware sales remained elevated, but a little below the first half average. So now let's move on to the home care product group on page So this includes products used in the treatment of obstructive sleep apnoea or OSA and chronic obstructive pulmonary disease or COPD as well as other chronic respiratory conditions. On page 9, home care products made up 23% of operating revenue on the second half of the year. product grew strongly through the year and the home respiratory support part of that business now makes up over 15% of the home care business. Reported revenue for OSA masks was flat in the second half in constant currency terms, impacted by the reduction in new patient diagnoses due to COVID-19. Progress in markets where Arbiterra and Avora masks were released prior to COVID-19 restrictions applying is encouraging, although it's still impacted by ongoing restrictions and the periodic lockdowns. So now I'll turn over to our CFO, Lyndall York, to give you more details on the year. Lyndall.

Thanks, Lewis, and good morning, everyone. On page 10, growth margin decreased by 295 basis points to 63.2% for the year, down 165 basis points in constant currency. 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 our customers quickly. The cost of air freight all year and sea freight from the half year has been significant. The rates per cubic metre for air freight stabilised during the second half, down from the highs we saw early in the year. The cost per cubic metre of both air and sea freight during the second half was, and still is, about twice what it cost at the end of calendar year 2019. we have opted not to increase prices to our customers. And this increased freight cost has impacted our constant currency growth margin by 280 basis points. This is an impact of 230 basis points compared to last year, as we started to experience elevated costs at the end of FY20. The increased freight costs along with COVID-19 related costs have been partially offset by overhead leverage, with volume increases outpacing our cost growth this year. We anticipate freight costs will continue at current levels next year and that air freight will remain a higher proportion of total freight volume than it was before COVID-19. We also expect to retain our COVID-19 safety practices on our manufacturing sites during next year. Moving on to page 11, total operating expenses grew 17%. As this was significantly lower than revenue growth, the operating margin increased 612 basis points to 36%. There was a net saving of around $12 million in operating expenses related to COVID-19. Reduced travel and sales event costs were partly offset by higher costs such as personal protective equipment, wellbeing, cleaning and security. R&D expenses grew 15% to $137 million, reflecting our continued growth and timing of R&D projects. R&D expenses were 7% of revenue for the year. SG&A increased 17% to $397 million for the year. or a 20% increase in constant currency. We made $26 million of donations this year, including the $20 million commitment to establish the Fisher & Paykel Healthcare Foundation. Excluding donations and with similar ongoing COVID-19 costs and reduced travel and sales event costs as we experienced this year, we would expect to grow our constant currency operating expenses by around 8% in FY22. A normal year of travel and sales event costs would add a further 4 percentage points of growth to operating expenses. Moving to page 12, we have estimated around 65% of our R&D spend is eligible for the 15% R&D tax credit this year. Going forward we expect 65 to 70% of our R&D spend to be eligible for the credit. Our effective tax rate increased by 130 basis points to 28.8% if you exclude the R&D tax credit and the reintroduction of the building tax depreciation last year. We expect our effective tax rate to be around to 29% excluding the R&D tax credit. Moving to page 13, operating cash flow this year was $625 million. Our working capital increased primarily due to higher inventory. Capital expenditure which includes purchases of intangible assets was $185 million for the year with about two-thirds of this for plant and equipment. Our fourth New Zealand building, the Daniel Building, was completed in May 2020 and we commenced work on our third building in Mexico this year. We have been and will continue accelerating our investment in manufacturing capacity to ensure we have an increasing supply of our products. We anticipate spending up to $245 million in total capex next year with about 60% of this for plant and equipment. Our free cash flow, which is operating cash flow, less capital expenditure and lease payments was $430 million for the year. From this, we paid $181 million in dividend throughout the year. The balance sheet remains strong. Debtor days are within the normal range at 43 days and in line with the prior year. Inventory has increased as we rebuilt, including the sea freight pipeline. from lower levels at the end of last year. We plan to hold higher levels of inventory to ensure any surge demand can be met. Trade and other payables increased and includes the $20 million donation that will be paid to the foundation during FY22. Tax payable increased $114 million to $150 million. The final New Zealand tax instalment, which reflects our estimated FY21 taxable income, was paid earlier this month. Net property, plant and equipment increased by $147 million from last year, mainly as a result of the acceleration of manufacturing capacity and a $35 million revaluation of our land, primarily in New Zealand. Net derivative financial instruments changed from a liability of $80 million last year to an asset of $143 million this year, reflecting the appreciation of the New Zealand dollar. Net cash at the end of March 2021 was $303 million, up from $42 million last year, and their gearing ratio was minus 27%. This cash will be used to pay our final tax instalments related to FY21 and our continued acceleration of investment in manufacturing capacity. Interest bearing debt was $75 million with 84% of it being non-current. Turning to page 14. We will be paying an increased final dividend of 22 cents per share payable on the 7th of This represents a 42% 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 over the next year. This brings the total dividends declared for FY21 to 38 cents per share, an increase of 38%. Looking now at foreign currency on page 15. Foreign currency movements negatively impacted our profit after tax by $38 million compared to last year, primarily due to the New Zealand dollar being stronger than at 31 March 2020, and particularly its strengthening over the second half of this year. This includes the results of our hedging program, which contributed a gain of $15 million after tax for the year. At current rates we would have an after tax gain from hedging of approximately $42 million in FY22. The net impact on our profit from movements in foreign currency will depend on revenue for the year and the currency mix of that revenue. Now it's back over to you Lewis.

Okay, thanks Lyndall. So now I'll go to page 17, observations. We have the ongoing uncertainties of vaccinations, we've got lockdowns, COVID-19 variants, localised surges, when a return to stable hospitalisation rates might occur and to what extent a return to normal includes COVID-19 endemic hospitalisations. So with all that we can't really provide guidance for the FY22 financial year. Now what we've done is provide some observations in today's media release and these are intended to help you understand or interpret the impacts of COVID-19 around the world on our business. So we do expect our hospital and home care revenue for FY22 to be impacted by the number of COVID-19 related hospitalisations around the world. An ongoing global vaccine rollout is likely to reduce the total number of COVID-19 related hospital admissions over the year when you compare it to FY21. And with fewer overall hospitalisations requiring respiratory support, achieving a similar consumable volume for FY22 relies on a change in clinical practice to use nasal high flow therapy for a broader range of respiratory patients. After achieving 337 cent growth in hospital hardware for FY21, ongoing hardware sales in FY22 would be driven by those local COVID hospitalisation surges, additional sales of ventilators or that ongoing change in clinical practice to providing nasal high-flow therapy. Now for the start of FY22, over the last few months, hospital revenue remains volatile on a weekly basis. Higher volumes of hardware and consumables to locations with hospitalisation surges and an ongoing shift towards OptiFlow are continuing trends. Currently, COVID hospitalisations passed their peak in North America Ongoing but localised surges in Europe and increases in other parts of the world are all reflected in our revenue trends. Our customer stocking and destocking choices in regions with declining COVID hospitalisations are not always visible to us and this is likely to contribute to apparent volatility over the short term. and home care shows signs of recovery after what looks like a slower fourth quarter. Freight costs overall remain elevated and we continue to utilise a high proportion of air freight to respond to these localised surges as Lyndall pointed out. But over the long term COVID-19 has not really affected our longer term strategies. The longer term impact for our hospital business has been an increased installed base of our hardware, increased physician awareness and experience with our therapies and products, and that's throughout hospitals and throughout the hospital, and generation of a significant volume of clinical data. This acceleration also potentially helps develop the market for home respiratory support. The other impact is that we're advancing our investment in our forward looking R&D programs. So with that I think we can now answer the call to questions.

Great, thanks Lewis and Operator Justin if I could ask you to please open the line for questions. Just before we move to the Q&A could 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 will now begin the question and answer session. If you wish to register a question, please press star followed by 1 on your phone. And if you wish to cancel your registration, you may remove yourself from the queue by pressing the pound or hash key.

Thanks, Justin. So I'm going to take questions in the order people have joined the queue. Our first question is from Leanne Harrison. Please go ahead Leanne.

Hi, good morning all. Thank you for taking my questions. The first one is around trying to better understand what you saw in the fourth quarter. Earlier this year you provided a nine month trading update that showed strong growth but if I look at those numbers and where you ended up on the year. It looks like growth decelerated in the fourth quarter despite the increase in hospitalisations globally. Can you provide some colour on that trend between third and fourth quarter?

Sure, Leanne. I think you've got a couple of things that we need to acknowledge here and that is that the revenue is very volatile on a monthly basis and a quarterly basis. We had a very big peak in that third quarter, which is quite visible. And then the other thing confounding our analysis, or any analysis really, is the stocking and destocking choices of our customers. So bearing all that in mind, and then the other impact on our fourth quarter is we're lapping. Gee, I think we're probably lapping 3%. We're lapping a half of 24% growth, which was mostly stacked into the fourth quarter. So we're lapping the beginning of COVID as well. So I think those are all the contributors. And then otherwise I would say the trend is the same. It really is our volumes really are tracking hospitalisations, which is what you'd expect, I think.

Okay, and if I thought about, I guess, where the hospitalizations are currently, obviously, you know, the United States is moderated. You know, the shift is probably moving away from, you know, Europe now into Asia. If I think about, you know, what you saw in forecourt and what you have currently to date for financial year 22, which geographies are you seeing the demand from?

Again, remembering all those caveats of month-to-month volatility and things like that, if you think of the hospitalisation rates, that's what it's following. So I would say currently Europe has still got some localised surges. Europe looks a little bit like the rest of FY21. The US is coming off a bit in terms of COVID-related hospitalisations. So that looks a little bit more like FY20. And then in the rest of the world, country by country, you've got our volume following the hospitalisation trend in that country. So increasing on the whole in the rest of the world.

Okay, so just to follow up on that, with the rest of the world, are we seeing, I guess, the demand coming from countries like India, Brazil, Mexico, Argentina, how does that compare with the rate of demand that we saw from the US and Europe?

Well, in terms of... You've got two things going on there. In terms of those countries' historical demand, it's a very large increase, but compared to... North America and Europe it's smaller but there's a heck of a lot more of those countries too.

Okay, thank you very much.

Thanks Leanne. Our next question comes from Gretel Janu at Credit Suisse.

Thanks very much for taking my question. Firstly, what do you see in terms of increased utilisation of your hardware devices outside the ICU? Have all the anecdotes been positive in this regard, that in general the hospitals are more willing to use the devices outside the ICU post-COVID?

I would say yes, all the anecdotals are positive. And when we've had those hospitalisation surges and hospitals are at or above their capacity, there's no choice. They're using them outside ICU.

But I guess going forward, I guess what level of confidence do you have that, you know, when all the surges die down, they will be utilised, you know, outside of COVID situations?

Well, I'd say we are fairly confident in that we have had COVID. We have had high increases in hospitalisation rates. Those regions, those countries, those states, those hospitals, they've used these therapies outside ICU. And just as importantly, the physicians, nursing staff, respiratory therapists outside ICU have used it. So I think we're fairly confident that the hurdle to using the outside ICU is significantly reduced.

Understood. And just finally, just in terms of the sales and marketing, how much further investment do you need to make in terms of sales and marketing to ensure that utilisation of the installed base remains strong post-COVID?

Yeah, well the simple strategy there is to increase the investment where we have customers that need more support. So we'll be doing that. We'll be increasing that investment as things play out over the year and we have over the last year as well. But it's basically increasing the support where customers are going to need it.

Okay, thank you very much.

Thanks, Gretel. Our next question comes from David Lowe at JPMorgan. Go ahead, David.

Thanks very much. Just on similar topics, can I just start with the clinical practice that Fisher & Paykel observes? I mean, we saw things change through the pandemic. Just wondering whether you think pretty much all countries are in the same position and perhaps if I could get you to talk a little bit to how things changed over the period from invasive ventilation to non-invasive and nasal high flow.

Yeah, there's a pretty clear trend there in our volume data, David, where you can see in the first half that invasive and nasal high flow actually grow at a pretty similar rate. through the second half you can see it just tilting more and more and more towards nasal high flow as the clinical evidence developed. So I think that one's pretty well established and that trend is just continuing. It's tilting more and more towards nasal high flow and then in these countries where surges are more recent they start with a bit of a tilt towards nasal high flow. But there's still an increased demand for invasive ventilation, whichever way you look at it. So that's still increasing demand. I just think that's just a continuing trend.

Yeah, so it's consistent across the globe, though. What happened in the US was pretty much Europe, et cetera, has now the clinical practice in other regions as well.

Yeah, it's similar in almost every regard. The only difference being at the very beginning, nasal high-flow and invasive were kind of growing at similar rates, whereas now that's just tilted.

Yeah. Okay. My second question, if we could focus in on the US a little bit, given that it's a bit ahead of the curve with vaccines, given you've got a competitor there who puts out some fairly clear data in terms of utilisation rates. And I heard the comments about stocking and destocking, but any sort of... insights you could offer? Because it would strike me that particularly in that market, destocking is probably something that has been a material issue in the months since the COVID peaks passed. So anything you could talk to there and in the same vein, what you're doing with the sales and marketing front to try and ensure utilization transitions in a post-COVID world?

Yeah. So There's quite a bit in that question, David. And I think one of the issues when we're talking about utilisation is it's almost impossible to quantify utilisation with these kind of swings and with volatility in both consumables and hardware. So we're going to put utilisation aside for now in terms of utilisation of the hardware. It's one of those things you can look back over the last two years and you get a fairly good handle on it, but looking at it month by month It doesn't give you any insight at all. Same with stocking and destocking. When we look back over two years a day you can see pretty clear patterns of stocking and destocking and it's quite apparent. When you're looking at it monthly or quarterly you just really can't tease out stocking and destocking. We think it's bound to occur. It's kind of how the world works. inventory algorithms work, how much stock to carry, so it's bound to happen and I think we're going to have to see stable hospitalisation and kind of stable volumes to be confident that stocking and destocking is washed out. I think the important point there is it's just a temporal thing, it's kind of a transitory thing and it just confounds your analysis, your real time analysis. That's the point of stocking, destocking. So maybe Paul do you want to comment on what are we doing specifically in the US?

Absolutely. David? So the last 12 months the sales teams have been very busy but largely in a virtual sense. So now that everything is starting to open up again in our sales people can start getting out and calling on customers. They can be very, very busy. We've got a lot larger installed base of users. We've always had great relationships with all the RT departments and that will continue. We're obviously calling on them. We're also calling other parts of the hospital and making sure that people are very familiar with how to use the devices that they've got and doing training and making sure they understand all the post-COVID utilisation of devices. This year we'll be very busy just getting in front of all our customers and making sure they actually know how to use devices and make sure they're using them effectively for a wider range of respiratory patients.

Okay, thanks very much.

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

All right, morning, guys. I guess looking at the hardware side of the business and, you know, 550-odd mil of revenue this year, I'm just interested, Lewis, if you're prepared to provide any context in terms of the mix between traditional hardware and Evo and what that kind of looks like in terms of that hardware deployment in the year?

Yeah, I'll try and do what I can. If you look at the... We've got a mild complication here in that you've got two types of hardware. You've got humidifiers and you've got airvotes. The humidifiers can be used for nasal high flow also. That complicates any analysis whatsoever. How many of those humidifiers are used with nasal high flow? They can be used on an intensive care ventilator to deliver nasal high flow, non-invasive ventilator. They can be used on flow sources, Max-Tex, and things like that to deliver nasal high flow. So I think if you look at the trend at the beginning of the year it was probably weighted more towards humidifiers and you'd expect that's because it's probably weighted more towards invasive ventilation and then the trend over the year is weighted more towards the airvose hardware.

Okay so no broad splits for what that looks like in total for the year?

I don't think it's really all that helpful because you're not sure what the application is of the humidifiers anyway.

Just a second question. I appreciate the complexity here and obviously the number of variables that you've tried to articulate in terms of demand, etc. But I'm just interested, obviously the market has to think about forecast expectations. There's consensus out there in terms of earnings, expectations, etc. for FY22. I mean how do you as a team or a board kind of think about where market expectations are versus what may play through this year and ultimately how do you want the market to kind of judge the success or what FY22 kind of pathway looks like, if that makes sense. I don't really know how to articulate the question but just trying to understand. That is an excellent question.

I understand the question. I understand the question. It's an excellent question. I think there are a number of components to it. I think all we can do is try and give you as much clarity as possible on the history and we've tried to do that. In terms of going forward, all we can do is let you know what we know which is so far the trend is tracking hospitalisations and that's one thing we can share that you can work with. It's about preparing for the worst, making sure we can cope with whatever comes and hoping for the best. That's kind of the investment side of the business. Then the other thing we've tried to tell you to help you out here is that we've tried to give you really explicit guidance on what we're doing with operating expenses during the year. Essentially the way we're approaching operating expenses is we're saying we're going to do this. This is what we're going to do. We're going to add the sales people to support the product. We're going to add R&D people to advance our forward looking R&D programs. We're going to add operations people to get our manufacturing and a lot more manufacturing overheads really into a lot more sustainable shape. We said that all comes out to about 8% growth in OPEX so that's kind of locked in plus Lyndall's other comment was that's with no travel and no events whatsoever. A full year of travel and events would be about plus another 4%. We're not really expecting that, but we don't know when we're going to be travelling and when we're going to be having events. So we're trying to give you a guide there. You've got a base of plus 8 and then depending on when we start travelling, kind of pro rata that to plus 4% for the year. There's one guide we've tried to give you. The second guide we've tried to give you in gross margin and what that all summarises to is you've got freight. Our second half, freight, Lyndal gave you the numbers, 230 basis points or something.

230 for the full year on end. So the second half we're lapping some high freight starting last year. So for the second half alone that sort of margin, that level of Extra freight is what we would expect going forward. Likewise, the COVID site protection costs would be similar as we experienced in the second half, but we did have some overhead leverage in the second half as the volumes outpaced the cost growth. We would expect, depending on what volume does, for that to reverse, potentially go backwards as we right-size costs, but it all depends on what the volume is.

Yep. So there's the gross margin guidance, Chelsea. Freight trucking along probably the same as the second half. Some COVID costs trucking along at the second half. And what you can see in our second half is this overhead leverage. We're going to unwind that leverage because it's us off the leverage. It's people working 24... It's equipment working 24-7 and people working really long hours. So we are working hard to unwind that leverage so we don't see... gross margin improvements going forward for this year. In fact, maybe the opposite. That would be the other steer we can give you outside of the table. So there's an OPEX steer, a gross margin steer, and then revenue follows hospitalisation so far as the trend.

Okay. I appreciate it. Thank you.

Thanks, Josie.

Next question comes from Chris Cooper at Goldman Sachs.

Hi, morning. Thank you. Look, I think your views around the mid to long term are pretty clear, but we're really going to need a bit more help, I think, with fiscal 22. I mean, I know this is highly uncertain at this stage, to say the least, but you certainly have better information than we do, and perhaps you can use I guess, some of the experiences in those markets with better recent virus success to provide some insight. So the two things I'm really trying to get my head around is, firstly, the proportion of the units sold due to the pandemic, which are likely to be shelved or, I guess, even heavily underutilized going forward. And then secondly, just on the average turn rate of consumables across the portfolio. I mean, I know we've seen an uptick in utilization because of the COVID demand, but I'm particularly interested in the installed base not specific to COVID and just whether there's any reason to think there's going to be any material change in the utilisation on those units going forward. I mean, should we still be thinking about something in the sort of 20 to 30 times range or is there scope to be outside of that range for some reason?

Yeah, Chris, I'm trying to figure out. These are all unanswerable. I'll try and help you. So I just want to give you... You know, they really are, because you've got this volatile consumables, then you've got volatile hardware. They can be a little bit out of sync, the consumables and hardware. So getting to install base is pretty tough. Getting to utilisation is impossible. And then you add on stocking and destocking effects, where you really need to see, like, six months to let that wash out, to work out what that is. So internally, mate, we have just put utilisation, turns rates and installed base aside. It's just not constructive. And on a short-term basis, it's out of context. So, I mean, if you really want to model something going forward on a forecast, I mean, I think what you're looking at is something like when COVID hospitalisations are... reduced to zero or very, very low, you're probably looking at at least FY20 plus something, numbers. So that would be one way to think about it. And then volumes and then where you've got surges, your guess is as good as anybody's. So, I mean, that's how you're going to have to try and play it out.

Okay. Is it reasonable to assume that we hear conflicting messages here, but on the installed base that was sold due to COVID specifically, it was the utilisation rate on those machines in terms of consumables per machine per year. Was that materially different to what you saw in the rest of the portfolios?

So early on, when you've only got COVID increasing, we were able to make estimates of utilisation and at the time we thought utilisation during surge, utilisation was increasing and that was fairly clear. But we're now talking about 18 months and we're talking about multiple surges and so you've got increases and decreases and hospitalisation rates, so now you've got stocking, destocking playing into it. We've also got a disconnect between, when you get multiple surges, a disconnect between the hardware and the consumables. The consumables tend to track hospitalisations pretty closely and in real time. When you look back, they tend to overshoot. Hardware also tracks it but with a bit of a lag. With that scenario, trying to get to utilisation is just not possible and installed base is also not possible. I've forgotten the question. The only thing I can say about utilisation is that early on... Sorry mate, what was that?

Sorry, I was just commenting that we'll try our best to work with what we've got then in that case. It does sound like it's particularly uncertain, but sorry, I interrupted you.

Oh, I interrupted you, I think. The only real thing I can say about utilisation is that early on, we were pretty confident that utilisation of the installed base was increasing. Certainly over the last six months, we think that we can't realistically model that at all.

And just very lastly, clearly no position at all to provide quantitative guidance today. Are you at any point through the year likely to be able to provide a 22 guidance or do you think that's unlikely at this stage?

Chris, we don't like saying no guidance and we don't like leaving you out there with not much to go on. It's not something we want to do. I'd say right now we have no choice. When we feel that we can give some guidance, we're going to give the guidance. We're going to give you whatever we can. We're not super happy with this situation of guidance and non-guidance but I think right now when you look at it all, you can generate all sorts of models to try and predict revenue. We've tried to give you a really, as accurate as we can, steer on operating expenses and gross margin. It's the revenue line that's the issue obviously. We're going to leave you to your own devices on that one.

Thanks very much.

Thanks Chris.

Next question comes from Steven Ridgewell at Craigs Investment Partners.

Good morning. Look I understand that the company is not able to give guidance for the full year given for the reasons you articulated but are you able to give us a broad indication of whether based on the trends you're seeing today you'd expect the June quarter revenue for the whole business to be up down sideways compared to last June quarter and specifically for the hospital consumables segment as well?

I think it will be up, down or sideways. It'll be one of those three. I think I need to somehow communicate the nature of the lumpiness. You can have a whole country order stuff in a week and we can get it to them sometimes in a week. If I look back over the last year compared to our internal forecast, we can be miles out with a week to go in a month.

Could you maybe shorten the period then and just say for what you've seen so far, the actual numbers that you're seeing coming in the last seven weeks or so, just some flavour would be helpful. I think you're sort of seeing a trend in the questions from people in the call that this is like a little bit of an indication of how things are actually going.

Sure, sure. I'll try. So the first thing I want to do, mate, is I don't want to compare it to last year because now that's even worse. You've got this year's volatility lapping last year's volatility. So we're kind of not placing a lot of importance on the comparables because you've got volatility lapping volatility. That's even worse. So if we look at sequential, I don't see any difference. Probably Q4FY21 is not a bad indicator for Q4FY22. Let me try again. Q4FY21 is not a bad indicator for Q1FY22 but probably with a different make-up. you know, Q1 FY22 being more outside North America and Europe, probably. And I reserve the right... Yeah, no, that makes sense, yeah.

For sure, for sure. And I guess just broadly, I mean, you sort of indicated, like, unless you go away and look at the hospitalisation data, and it is difficult, as you know, because in many parts of the world where you sell, there's not great data available. Maybe if we looked at COVID mortality data as a proxy, that's kind of tracking up to excellent PCP. Is that a reasonable proxy for how you might be seeing COVID-specific demand come through or is the company not kind of fully capturing that demand in emerging markets perhaps where it's not as well established?

I can tell you what we're doing. to try and help. So if you've got the hospitalisation data, that obviously is the best indicator. When we don't, it's also pretty close to cases. Same trends as cases that you see in countries, actually. Yeah. I'd use cases as my proxy.

Go on. If I could sneak... Yeah. If I could sneak one more in. Just on my Evo loss, you did mention that demand for... that product was kind of tracking possible admissions, is it fair to assume most of that demand for myEVO has been in the US in particular and so with that coming off you'd perhaps expect demand for myEVO to be a bit softer this year?

I'll probably head more towards Europe and the US but probably a bit more Europe actually for myEVO. Yes, it has. You know, there was a lag. We didn't see much in the first part of the year and then it kind of picked up in the second half. We have anecdotals of myEvo being used to keep people at home rather than go to the hospital and we have anecdotals of myEvo being used to get people out of a hospital sooner. All anecdotal. So I think all we can say so far is it's growing pretty strongly. It seems to have followed along behind hospital admissions with a bit of a lag. It's US and Europe so far, and I think that's about it as far as kind of actual information.

Okay, thank you.

Thanks Steven. Next question comes from Adrian Orbon at Jarden. Looks like Adrian has left the queue. Sorry about that. So we have Marcus Curley from UBS.

Good morning. I suppose, could we just talk Lewis to equipment sales? With your observation here, I'm a little confused, but is the start of this observation assuming that equipment sales is in line with pre-COVID levels?

I'm not following the question. Sorry, mate. Can you have another try?

Look, so the observation on hardware equipment sales is maintaining pre-COVID level in FY22 But in some of the other comments you made, you talked about growth, and I'm a little confused in terms of the starting point. Do you think the starting point for this year coming is equipment sales at pre-COVID levels, or is the starting point for equipment sales what you just did in FY21?

Oh, I think none of the above. I think all we're trying to say for equipment sales, we've just done four years' worth in 12 months. Going forward, what would drive equipment sales? That's what we're thinking. Going forward for this year, what's going to drive hardware sales? Localised hospital surges. People are probably going to buy hardware. We've seen in countries with two, three, four waves we do get hardware purchases in waves two, three and four. They get more sort of muted with every wave but they buy more hardware through the waves. So that would drive hardware. The other thing that might drive hardware sales would be ventilators are still being placed. There was a big surge of intensive care and non-invasive ventilator orders placed at the beginning of last year. We think that some of those orders are still being filled. So that would drive some hardware sales. And then the other thing that would drive hardware sales is that phenomena where, gee, this nasal high flow is pretty good. I'm going to keep using it on more and more patients. That could be a driver of hardware sales. And Marcus, that's the sum total of the message.

Okay. So the message isn't trying to say to us, the starting point for this year would be broadly a pre-COVID number. It actually could be anything.

Yes, that would be true. It could be anything. You've just had North America and Europe. North America so far has passed its peak. Europe probably passed its peak. So you've got a large chunk of the world's healthcare systems past their peaks. So I don't think we'd be expecting to do a similar number in FY22 to FY21 in hardware.

Okay. Okay. And then secondly, you obviously have talked to, let's say, consumables following... But clearly that's not the case in terms of total hospitalizations because if the fourth quarter of the previous financial year was significantly down and this quarter's in line with that quarter, obviously cases are at record levels. So clearly within this there's a situation where different countries have different penetrations of cases FPH equipment. One would imagine that India in particular doesn't use a lot of Fisher and Parker equipment, particularly high flow, so cases in India don't see the same drop through as what you have in Europe and the US. Is that the right interpretation or is there an alternative one?

I might have confused you with some language there. I think the root confusion there is you've got different hospitals per capita in different countries, whereas cases, if you've got a lot more cases but fewer hospitals, it's still following the trend, I would say, relative to the number of hospitals you have per capita. If you take India, Our volume follows, we can't get hospitalisations, but it follows, it has the same shape as cases over time, just like it did for the US, but that translates to a different volume.

It's more the shape that follows as opposed to absolute numbers that we're talking about here, Marcus.

Yeah. Yeah, no, I understand. So it... Yes, it's a reflection of, I suppose, the starting point. So penetration in India for you, whether it's the number of hospitals, the number of hospitals you're in is a lot smaller relative to the number of people getting COVID. And so that determines the starting point, but the growth is obviously high.

Yes, you're onto it. Yes, that's exactly right. I wish I'd said that.

Okay, thank you.

Okay, thanks, Marcus. We're at the hour mark, but we still have four more questions, so we'll keep going to address these questions. Next question comes from John Deacon-Bell at Citi. Go ahead, John.

Thank you. I have two questions. One, just back on the gross margin, I'm just trying to understand, If I use FY19 as a reference point, so we're pre-COVID, 66.9%. You said you've added on a lot of capacity. I'm just trying to understand if the revenue falls, like ConsenSys has got revenue falling $250 million in FY22, are there fixed costs that have been added that will mean the gross margin will be lower than it used to be or... Are all of those costs a variable and we should still think the gross – I'm talking about ex-freight – that the gross margin should broadly be similar to what it was historically?

No, so not all of those costs are variable, John. There are a number of fixed costs so when we've added manufacturing capacity there's equipment there, there's depreciation, there's a level of overhead to support the business And that's what we've seen during FY21, that that cost growth has been lower than the volume growth. So we've managed to get some operating leverage there to help offset the freight hire costs as well as the COVID support costs. Now, we've always set our long-term target for gross margins about 65%. And we think that that's sort of where we would be aiming as freight returns to pre-COVID rates. and we don't need COVID site support costs. So again, nothing's really changed in terms of our long-term target that 65% is where we would be aiming to be. But if volumes did drop off as you said, not that we're giving any forecast or prediction on what's going to happen with that, That obviously does impact what the margin will be but if that plays out and we reverse that leveraging that we got this year, we would see it drop down below sort of back towards our long term targets of 65% in a more normalised world.

Thank you. That's very clear. Just an easy question, can you just give us a sense of the sleep apnea business? since the end of March, so the last nearly two months, what the trends are in that business? Are we seeing more new patients come in or is it kind of as it was previously?

So most recently, John, we would say it looks like returning towards normal.

Okay. That's all. Thank you.

Thanks. Next question comes from Andrew Goodsell at MST Marquee. Go ahead Andrew.

Thanks very much for taking my call. Thanks very much for taking my question. Just trying to get a quick sense just proportionally when you're selling to some of these emerging countries that have the surges at the moment, just sort of how you see proportional use for consumables per device and I'm just sort of thinking around limitations around walled oxygen and other limitations that might occur. So just any flavor you can give us, just how you'd see it, just as a ratio, say, of the US or... Yeah, probably can't.

I'm also looking at Paul. We think, you know, it's going in under surge, so we think it's getting absolutely flogged. We think it's being used pretty much full-time and that would be the status at present.

Yeah, bearing in mind... Well, maybe the ratio, this is probably a hard one, probably just the ratio relative to obviously the access to hospitals is a lot lower, just maybe that was probably more the ratio that might make sense if there's any way to sort of give us that sense.

Yeah, ratio of what to what?

Well, just relative to the US, just I guess the... sort of per capita or just some sort of broad ratio, just trying to get a sense of how we should sort of respond to these surges we see in those emerging countries here.

Okay, yeah, good question. Look, I think the best data I can give you is that over the last year just about half of our hardware placements have gone outside North America and Europe.

Yep. Okay, okay, that's really good.

So there's your ratio, and then when they go, they tend to have very high utilisation, higher utilisation.

So it's sort of a, yeah, okay, that's quite useful actually because you kind of get a sense relative to populations. Okay. Apologies for interrupting you there. I'm not sure if I cut you off. And I guess there's been a bit of talk around potentially use in the home, and Just sort of any thoughts you've got there and I'm just wondering how it's sort of overcome the access to oxygen type issues with that.

So I think there's a really important point there. It's nasal high flow therapy and it has three things, three ways of acting. It can provide positive end expiratory pressure. It humidifies 100% of the expiratory breath and it can clear dead space. And if you need to, you can add oxygen. So I wouldn't think of it as oxygen therapy and I wouldn't think of that as the primary use. I'd think of it as nasal high flow therapy. It just so happens with COVID patients, you almost always add oxygen.

Yes, got it.

Oxygen use with nasal high flow is more related to COVID than to anything else.

So COVID really uses those higher end pressures than perhaps other use?

Oxygen.

And one quick one just on the home care business, just sort of understanding whether you're seeing a bit of a market recovery in current conditions and whether you've had any benefits from the Philips recall, particularly say with your devices in Europe?

Well the Philips recall of CPAPs, so that's not We don't really see that as any kind of opportunity.

Yep. And just how you're sort of seeing just quickly the market conditions in terms of just recovery of diagnosis and others, particularly in Europe?

Well, over the last few months, we'd say signs of recovery.

Okay. Thanks. Appreciate it. I know we're all strapped for time. Appreciate it. Thank you.

Next question comes from Tom Deacon at Macquarie.

Hi guys, just a quick one for me. Just to understand what the difference was in the R&D tax rebates that you guys put through mentioning that 65% to 70% of previous expectations were that number to be about 80%.

Yes, thanks Tom. Look, we only introduced this tax credit or the new legislation only came into place in the FY20 year. So what we had done is an estimate in FY20 as we've worked through analysing exactly the projects that we've worked on and the time that our people have spent on those projects, we fine tuned that estimate down to about that 65 to 70% and it varies depending on The work being done on existing products which still is R&D for us but doesn't meet the eligibility criteria. So depending on the type of work that we're doing and that will move up and down from year to year, that's why we think about 65% to 70% is about a reasonable range.

No problem, Lyndall. That's very helpful. And just sort of teasing out. Just a question prior on gross margin. Were there any other sort of one-off costs within COGS that you guys would call out this year just from start-up costs from new manufacturing facilities? I'm just trying to get an understanding of what the sort of BAU gross margin would be. Thank you.

Yeah, no other sort of one-off costs that we'd call out around start-ups. there other than just our COVID costs which in the second half about 10 to 15 basis points of ongoing costs and we would expect that to continue into FY22. But as I said, if we return to a level of more normal pre-COVID world, so we don't have those COVID support costs, freight rates return to more normalised levels based on the overhead structure that we've got in place we're comfortable that we'd be back at our target margin of around that 65%.

At the end of the day, nothing's changed. Thanks, Wendell. Some sort of transitory effects.

Thanks, Wendell. Thanks, Lewis. Really appreciate that. That's it for me.

Thanks. Thanks. That's the last question, so Lewis, I'll hand back over to you to wrap up.

Okay, thanks, Michael. Look before closing I would like to remind everyone that we're holding some virtual investor days called our investor series that's going to be New Zealand time Tuesday, Wednesday and Thursday next week. The link to register for those is available on the investor relations section of our website and if you do that you'll get an opportunity to hear from more of the team about how we plan to continue delivering sustainable profitable growth into the future. Now in summary I would really like to reiterate our heartfelt and grateful thanks to all of those people who have supported us and our business during this extraordinary year. We really appreciate it. We are going to continue to focus on the long term just as we always have and we're going to keep on doing everything we can to improve care outcomes for patients all around the world. So thanks very much to all the participants for joining us here on the call today. Thank you.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.