Fisher & Paykel Healthcare Corporation Limited

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

Thank you, Amal. Good morning, everyone, and welcome to Fisher & Paykel Healthcare's 2022 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, 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 will be discussing our results for the year ended 31 March 2022. We have earlier today provided our 2022 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 we're going to be referring to the investor presentation pack that was released to the NZX and ASX this morning. But we would like to begin by thanking our customers and our clinical partners who have been relentless in their efforts to respond to COVID-19 over the last few years. It's inspiring. We also want to thank the people of Fisher & Paykel Healthcare for their hard work this year. They had to manage through another disruptive year and deal with lockdowns, higher rates of absenteeism because of COVID-19 and the global supply chain issue. And through all of this, our people demonstrated that we could deliver to our customers. We also want to thank our suppliers who came through for us yet again. They too were operating in a difficult environment. They've had to adapt and change along with us. Our suppliers are critical to our success and we're very grateful for these relationships. So let's start now on page three. During the 2022 financial year, we continued to respond to waves of COVID-19 driven demand across the globe. And our products were used by clinicians to treat approximately 20 million patients around the world. At the same time, we've stayed focused on the long view. And today we announced the launch of two new applications that expand the market opportunity for OptiFlow into anesthesia. We also unveiled our new Evo III device and we'll tell you more about those opportunities shortly. We've continued investing in our sales force and to support all that hospital hardware placements globally and to deliver on the opportunity in anesthesia. And as always, we continued growing our manufacturing and supply chain capacity. So let's turn to page four. So just to put this into perspective, our full year operating revenue for FY19 before the pandemic was just over $1 billion. For FY20, it was over $1.2 billion. And revenue increased to nearly $2 billion for FY21 last year. Off the back of that extraordinary year, FY22 was another year of high demand and performance was once again strong. Operating revenue for FY22 was $1.68 billion, and this was a decline of 15% from that previous financial year, or 14% decline in constant currency. Net profit after tax for FY22 was $376.9 million, and that's a 28% decline from the previous financial year, or 30% decline in constant currency. Again, for context, this result was strong. Operating revenue for the 2022 financial year was 33% above the pre-COVID-19 2020 financial year. Turning now to page five, our hospital product group. This includes the devices and systems used with invasive and non-invasive ventilation, nasal high flow, and for surgery. And I'd like to spend a little more time on this slide this time. One of the strengths of our business is that we offer a continuum of care for respiratory patients and that's across an entire hospital and for nearly all modes of respiratory therapy. Hospital hardware includes our range of humidifiers and airvotes. Our humidifiers are used with invasive ventilators for intubated patients in ICU, intensive care units. Most modern invasive ventilators are also capable of delivering non-invasive ventilation and nasal high-flow therapy, and they do that in conjunction with our humidification systems. Our humidifiers are also used with non-invasive ventilators, and modern non-invasive ventilators are also capable of delivering nasal high-flow. Again, that's in conjunction with our humidification systems. And these humidifiers can also be used with flow sources such as blenders and flow meters to deliver nasal high flow therapy. Our airbow system is used exclusively for delivering nasal high flow therapy. So our consumables can be used with all of these hardware arrangements I just mentioned. This flexible range of applications and consumables means we don't have an installed base for a particular therapy, we have an installed base for respiratory care. And the therapies supported by our hardware, largely driven by nasal high flow, are increasingly utilized in more parts of the hospital. So application of our installed base is flexible, and usage patterns vary depending on the location in a hospital, the different clinical practices between and within hospitals, and how a hospital chooses to deploy their hardware. So this all impacts how we think of utilization and why it's beyond just a simple turns ratio for a particular or specific therapy. For us, the indicator of change in clinical practice is the number of patients treated with a therapy. The number of patients treated is best represented by concernable volume. And because patient census varies for all sorts of reasons, that needs to be over a period of time. So now that we've been through that, I hope it's been illuminating, let's look more closely at our result on page six. In the hospital product group, revenue was $1.21 billion for the full year, a decline of 19% from FY21, and that's 19% in constant currency. Of total hospital product group revenue, 27% was from the sale of hardware, That's the range of humidifiers and EMOs. And 73% was from the sale of consumables. Sales from new applications consumables increased 3% in constant currency over the prior financial year. And that growth was across the respiratory therapies in that category. Hospital hardware was very strong at $323 million for the year. That's more than triple a pre-COVID year. So move on now to our home care product group on page 7. This includes products used 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 8. Home care revenue was $469.5 million for the full year, which was a 1% increase over the previous financial year, or 2% in constant currency. Reported revenue for OSA masks is up 3%, or 4% in constant currency for the year, and that's 6% for second half. Growth in OSA masks is dependent on new patient diagnosis rates, and in FY22, Mask revenue continued to be impacted by reduced new patient diagnoses due to COVID-19, as well as the limited supply of the treatment hardware. Our Evora full mask for OSI has been one of the most positive new mask launches we've ever experienced. And that's based on customer feedback and initial sales performance to date in the regions where it's been available. And we've just launched it in the United States in May this year. So let's turn to page nine. So this is our aspiration slide. And before the pandemic, our long-term goal was to sustainably double our constant currency revenue every five or six years. And you can see that over the different timeframes, we're expecting a progression of different applications to contribute to the longer-term goals. So now if you turn to the next page, page 10, This is still a graphic, it's not a graph, but it's to illustrate how we're thinking about the potential impact of the pandemic on our long-term growth aspirations. Our aspiration doesn't change, but we have an opportunity to bring forward our progress. Now, as you know, we've had a steep increase in revenue over FY21 and FY22 with COVID-driven demand, and that's placed about 10 years' worth of hospital hardware in only two years. So we're representing that by the bump, which is not to scale and marked COVID-19 on that graphic. I think it's also fair to say that we can't be exactly sure where we are on that bump just yet. But as we change clinical practice, transitioning hospital hardware to a broader application for respiratory insufficiency, our course moves above where we were before COVID and that puts us ahead. of where we were before COVID. And the size of that step up depends on the time it takes to transition that hospital hardware. Because we've moved ahead, we need to bring forward the release of new products and applications, invest sooner in clinical research, accelerate the growth of sales teams, and continue growing our manufacturing and distribution facilities, all compared to before COVID. So this is something else that we started working on over the last two years. On that note, move on to page 11. Today we announced the launch of two new hospital products, OptiFlow Switch and OptiFlow Trace. These interfaces are designed to facilitate the use of nasal high flow in anaesthesia applications. In procedures with much heavier sedation, where the patient will need a machine to breathe for them, OptiFlow Switch lets the anesthesiologist make sure the patient is full of oxygen before they stop breathing, and then also while the artificial ventilation is being put in place. Compared to the current practice, OptiFlow Switch can give the anesthesiologist more time to intubate the patient, And it can help in preventing desaturations. It's not enough oxygen in the blood. Opti-Fo switch lets the anesthesiologist swap to their normal anesthesia mask at any time, quickly and efficiently, so they can check the airways or they can add pressure to assist breathing whenever they need to. Now, in procedures with lighter sedation, where the anesthesiologist expects that the patient will be able to make a breathing effort themselves throughout the procedure, OptiFloat Trace helps measure the exhaled CO2, carbon dioxide, so that they can check that the patient is breathing throughout the procedure. Now, if we move on to page 12, we also announced the launch of our new Evo 3, for nasal high-flow therapy today. EVO3 makes it easier for more patients to be treated in more parts of the hospital and by more healthcare practitioners. There's quite a bit of technology that comes together to enable all of that, which you can see here on page 12. So we're going to spend some time on that at our investor day tomorrow. So with that, I'll turn you over to our CFO, Linda York, to give you more details on the year.

Thanks, Lewis. And good morning, everyone. On page 13, gross margin decreased by 59 basis points to 62.6% for the year, down 147 basis points in constant currency, as our costs increased as expected to appropriately reflect the level of production volume growth we experienced last year. Because of the challenges with... global supply chains, we have been and continue to use air freight to bring in raw materials and to deliver product to our customers quickly. The cost of freight continued to be elevated during the year. The increased proportion of air freight and elevated rates compared to pre-COVID-19 rates impacted our constant currency growth margin by approximately 240 basis points for the year. Freight rates are likely to remain elevated for at least FY23. We also expect air freight in FY23 to remain a higher proportion of freight than it was pre-COVID-19. If freight impacts remain the same as they are now, we expect our constant currency gross margin for FY23 to be in line with FY22. Moving on to page 14. Total operating expenses grew 3%, or 4% in constant currency. Excluding the donations of $25.6 million last year, which includes the $20 million to the Fisher & Paykel Healthcare Foundation, operating expenses grew 9% in constant currency. Operating margin was 30.1%, in line with our long-term target, assisted by the strong hospital hardware sales this year. R&D expenses grew 13% to $154 million, reflecting continued growth and timing of R&D projects. R&D expenses were 9% of revenue for the year. We've estimated 65% of our R&D spent is eligible for the 15% R&D tax credit this year and believe that that's a reasonable estimate for the next year. SG&A decreased 1% to $393 million for the year, or a 1% increase in constant currency. Excluding the donation last year, we grew SG&A by 8% in constant currency. We will continue to grow our investment in R&D as longer-term projects accelerate. We will also continue growing our sales teams to support the increased hospital hardware that has been sold over the last two years and deliver on our anaesthesia opportunity. Activity in many of our locations is increasing and we anticipate travel and sales event costs for the next year to be approaching the normal expected level, up from less than half of the normal expected level that we experienced this year. Targeting an operating expense constant currency compound annual growth rate of 11% from FY20 would result in FY23 operating expenses growing around about 13% over FY22 in constant currency. Moving to page 15. Operating cash flow this year was $324 million. The final tax instalments for FY22's profit were paid this year, with total tax payments of $250 million this year compared to $131 million last year. Our working capital increased as inventory grew to ensure we can manage any surge demand from our customers and supply chain disruptions. Capital expenditure, which includes purchases of intangible assets, was $117 million for the year. Our third building in Mexico is nearing completion. and earthworks have commenced on our fifth building here in New Zealand. Once that building's complete, we'll be at maximum capacity on our Auckland campus. Work is progressing well on identifying and acquiring a second campus in New Zealand, as well as a new offshore manufacturing location outside of New Zealand and Mexico. We expect our investment in land and buildings to be approximately $700 million over about a five-year timeframe. The balance sheet remained strong. Debtor days were in line with the prior year at 41 days. Inventories increased in both raw materials and finished goods to manage the supply of products through potential surge demand and supply chain disruption. The $20 million donation to the foundation committed to last year was paid during this year. Tax payable decreased $120 million as the final tax instalments particularly in New Zealand, which reflects our FY21 taxable income, was paid in May 21. Net cash at the 31st of March 2022 was $222 million, and our gearing ratio was minus 16.3%. Interest-bearing debt was $68 million, with 92% of it being non-current. At the 31st of March 2022, we had a valuable liquidity of approximately $474 million between unborn facilities and cash and investments. Turning to page 16, we've declared a final dividend of 22.5 cents per share. This represents a 2% increase on the final dividend declared last year and is payable on the 6th of July. This brings the total dividends declared for FY22 to 39.5 cents per share, an increase of 4% over FY21, and continues our record over the last eight years of increasing our dividends to shareholders. Looking now at foreign currency on page 17. Foreign currency movements negatively impacted our profit after tax by $2 million compared to the same period last year. primarily due to the New Zealand dollar being stronger on average throughout the period. This includes the results of our hedging program, which contributed a gain of $30 million after tax for the period. At current rates, we would have an after tax gain from hedging of approximately $29 million during FY23. The net impact on profit from movements in foreign currency will depend on revenue for the period and the currency mix of that revenue. Now it's back over to you, Lewis.

Okay, thanks, Lyndall. Turn to page 19. So on page 19, our Evora full mask for OSA launched in the United States in May this year. It's performed very well in the countries where it's been available. But growth in OSA masks will be dependent on new patient diagnosis rates. and how the availability of treatment hardware plays out over the year. And on all those fronts, we're expecting some level of growth in the 2023 financial year. So now moving on to the hospital part. For our hospital product group, over the last two financial years, we've placed about $880 million of hospital hardware, both humidifiers and airvotes. That's the equivalent of more than 10 years of placements prior to COVID-19. It's been driven by healthcare systems and hospitals around the world gearing up to treat COVID patients. So we're not expecting FY23 hospital hardware sales to continue at that pace. To give you a context of the opportunity for consumables growth presented by that incremental hardware, we've estimated a range of scenarios in the table on the right-hand side there. First, we estimated that for FY22, average hardware utilization through the year across the therapy options was somewhere between 60 and 70% of a pre-COVID-19 midpoint. Then we modeled the revenue impact of different timeframes to convert 85% of that incremental FY21, FY22 hardware to a historical normal utilization, taking FY22 as the base. And the only rationale we have for that 85% number in this model is that it seems conservative. Then, on that basis, the implication is that if it took four years, that activity alone would represent an equivalent compound annual growth rate of about 13%. for our hospital consumers for the four-year period, again, from that FY22 starting point. If the transition was completed over three years, the compound annual growth rate would be equivalent to 18%. And if it was five years, 10%. That's over each complete period. Now, that's without selling any additional hardware during that period. When we model placing additional hardware over these timeframes at half, of our pre-COVID-19 levels, and we assume that that will be driven by a change in clinical practice, so it has historically normal utilization, then that adds another two to three percentage points to the hospital consumer's compound annual growth rate. So this is all for context. We can't forecast the pace of that clinical change, and even less so on an annual basis or even shorter basis. And this is an equivalent compound annual growth rate that we're talking about over a period of time. Over the journey, we expect to be impacted by surges and declines in hospitalized COVID-19 patients, as well as the resulting increases and reductions in our customers' demand and their stockholding choices. And these surges in COVID hospitalizations are also impacting our customers' bandwidth for adopting clinical change. Many of them are tied. Many of them are understaffed. The take-home points of all this commentary and estimates and modelling are that the installed base of hospital hardware driven by COVID-19 provides a strong underlying base of growth in hospital consumables for several years to come, as and when COVID-19 hospitalisations abate or stabilise. Secondly, there's a growing body of clinical evidence supporting the use of nasal high flow and other respiratory therapies to improve care and outcomes, and that's beyond COVID-19 patients. And then finally, we have a proven 50-year track record of changing clinical practice. And never before in our history have we changed clinical practice with the significant advantage that our customers already have the hardware, already have the clinical experience with it, and they already have access to such a huge amount of clinical evidence. So now, with that, I think we can open the call to questions.

Thanks, Lewis. Amal, if I could ask you to please open the lines up for questions. Before we begin, though, can I please ask everybody to limit your questions to two? This is to ensure that everybody has an opportunity to participate. If you do have further questions, you're welcome to rejoin the queue and we can do our best to cover everything off within the hour.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

Thank you, Amal. The first question comes from the line of Chris Cooper at Goldman Sachs. Please go ahead, Chris. Chris, just checking if you can hear us. We will go on to the next question. The next question comes from the line of John. Oh, we can hear you now.

Sorry, I think the operator just took a little while to unmute my line there. Sorry about that. So, look, good morning. Thanks for taking my questions. Just if I could start on slide 19, if you don't mind. So the scenario analysis you provided there is helpful. I note you've given some different sensitivities based on how many years it will take to convert the incremental installed base, but you haven't done so for the amount of additional installed base that will be used, that 85% number that you referenced there. So I'm just curious. I mean, you commented there, Lewis, as well, that the 85% number was conservative. Can I ask what's given you that degree of confidence at this stage in the cycle and In our sense, speaking to people on this matter quite regularly, there's still quite a few expectations out there which are below that 85% level.

Yeah, Chris, so those numbers in the years are based on converting 85% of the volume, hardware volume sold during FY21-22. So it's in all those numbers. I was having a bit of trouble hearing the all of your questions, you know, due to the quality of the call there. I mean, as far as the 85% goes, I mean, look, there's no science in that, mate. You know, we've just said, you know, 100% seems optimistic. 15%, maybe, or 85% seems conservative, and there's no more science in it than that. The whole point of that table there is really just to give a sense of what the opportunity is and a sense of the impact of the time frame that it might take to convert it.

I understood. It's just interesting to me that you can say with some confidence today that 85% is conservative because Yeah, like I say, the expectations, I think, generally are, on average, probably a touch below that. But just interested to hear why you think 85 is the number and not higher or lower than that at this stage.

Well, really, look, we think that, you know, if only 80% was utilized, that's one in five. You know, 20% of the hardware we've sold is not utilized. The job's not finished, as far as we're concerned, if that's the case. So... Yeah, it's going to be better than that. Okay.

Sorry. Yeah, okay. Understood. Thank you. And on the commentary on consumables growth, obviously we understand that you peaked in December, you troughed in February. You're now seeing a slower recovery from there, but presumably we're still closer to the sort of trough level than the peak I would imagine. First of all, is that true? And secondly, if that rate of recovery continues that you've seen since February, would hospital consumables revenues still decline year over year in fiscal 23? Or is there a scenario where you could grow that number?

Look, I think the point here is that in the short term, in six-month periods and in 12-month periods, we've got other influences. You've got COVID surges and... One of the influences of COVID surges is that great big overstocking phenomena and that destocking phenomena. So, you know, you picked up on that. We think we're seeing that. We're entering into FY23, probably with a destocking phenomena going on with our customers. I think the short version is, you know, we're a lot more confident saying over several years, yeah, it increases. Trying to pick six months and 12 months, I think, is a bit more challenging because of all the COVID hospitalizations and then the stocking, destocking, playing into, you know, year end and year beginning and that kind of thing.

Okay, thanks very much.

Thanks for your questions, Chris. The next questions come from John Deacon Bell at Citi. Please go ahead, John.

Thanks. Thanks very much. I mean, the first question, I guess, is, Lewis, you just sold 10 years of hardware in a two-year period. What was the strategy in launching the Evo III right now? Surely you're not going to get the full impact because there's so much hardware out there.

Well, you know, the general strategy with product launches is to try and launch everything as quick and soon as possible. That's kind of what we do with everything. So, you know, really no impact there. I mean, I think the point of Evo 3 is it sits alongside Evo 2 and it provides some features that we think our customers are going to be really keen on.

OK, but if they've just bought But an Avvo 2 in the last two years, is it likely that they'll buy an Avvo 3 in the next one or two years?

I could jump in there, John. It's Paul here. Who knows? But I mean, Avvo 3s are great. We think we can upgrade users from Evo 2s to Evo 3s. We can sell it in different parts to hospitals, to people who have previously used high flow. So we think that over time it's a great opportunity for Evo 3.

I think that this is also against the backdrop of, you know, we don't really have any customers that are fully penetrated with hardware. There's still plenty of headroom. And if we've got someone where the hurdle is, you know, I need to move patients around the hospital and the way we work, I need to move them with the hardware, they want Evo 3 when they grow their hardware fleet. And if we've got customers that are saying, well, I want to use it in my general ward, but that's too much training for my general staff and my travelling nurses, Well, we've got Evo 3, that'll help with that. So I don't know. I think it's going to help with some of the hurdles to increasing penetration.

Okay, thank you. And just maybe, just for context, anecdotally, if you pick a big hospital system in the US or in Europe, wherever, if the COVID patients continues to decline dramatically and you've already been in the intensive care whip, What are the one or two areas in the hospital that you expect will pick up that slack and be the real driver of growth, you know, if not the next six or 12 months, but beyond that, to take the place of the COVID patients?

Well, it's kind of already there in these places because of COVID, but you're talking pulmonology wards, emergency departments, and in many cases, general wards.

Okay. Thank you.

Thanks, John. Next question comes from Gretel Janou at Credit Suisse. Go ahead, Gretel.

Thanks. Good morning. So just going back to that hospital hardware utilization of 60% to 70% on average through FY22, what was your exit run rate? Can you be able to give us an estimate of where you were tracking as you exited FY22 on that?

Well, we haven't really done that. To arrive at this number, we've looked at the entire year. You know, we think year by year there's enough variation. So it's probably not, it's not something we've done. It's not something we really can do. And I don't think if you tried to, I don't think it would make a lot of sense or be helpful.

Sure. Okay. Then how about via each of the regions? are we seeing any significant trends between Europe, US and APAC?

So far as we can tell, no. We think it's fairly, in a pretty tight range through FY22.

Okay. And then just in terms of inventories, like large jump in inventories, I know you stated that's partly because you're trying to manage your supply chain and respond to any potential surges, I guess when do you expect your inventory levels to normalise and how much of that jump in inventories is also because you're seeing at the customer level some significant destocking happening here and not normalised buying patterns?

Hi Gretel, it's Lyndal here, I'll take that. Whilst we're still seeing supply chain disruptions and particularly lead time of sea freight continuing to get longer and longer and once it gets to a port you then have to say how long is it going to take to clear and get into a warehouse, as well as potential likely surge demand from customers and raw material constraints and supplies We won't be looking to reduce inventory materially from where we are now until we see all of those things stabilize or settle down. But we would anticipate when they do settle down, we would look to probably reduce that inventory a bit. By far the most important thing for us is making sure that if a patient needs treatment, they get the product. as opposed to keeping very low levels of inventory. We're very conscious of that and the capital tied up in inventory, but the priority is ensuring patient treatment.

And then as far as our customers' inventory goes, we've seen this effect all through COVID, where when they see their COVID hospitalisations rapidly increasing, they practically fill their warehouses with stock of consumables. And then the phenomenon with COVID is they drop just about as quickly. So then when the COVID hospitalizations drop, our customers got a warehouse full of consumables and we just have to ride that out for a few months.

Great. That's all I had. Thanks very much.

Thanks, Gretel. Next question comes from Dan Hurren at MST Marquee. Go ahead, Dan.

Good morning. Thanks, everyone. I just want to ask, of the $880 million in hardware sales that you're talking about there, what has been the split between humidifiers and new applications? By the way, splitting out the high flow.

Well, we don't really break that out. I mean, I suppose the commentary is that EVOs, which are only used for nasal high flow, have been the higher growing component, but off the smaller base.

Right. Okay. Why... What's the hesitation to actually explain what the installed base is? I mean, clearly you don't want to talk about that, and you're talking about patient numbers rather than terms, but why the hesitation to let us know what the installed base of the equipment is? What is the complication?

Well, there's two, really. We do think it's commercially sensitive, and what I'm trying to get at is giving more colour to how the hardware is used and how it's flexible. It doesn't really help us with modeling and predictions and how we manage our business and the strategies that we generate.

But I mean, clearly your sensitivity analysis has that installed back in there. So it would be helpful to us, surely.

Sorry, you're fading in and out on that question.

Yeah, okay. Perhaps I'll leave it for tomorrow. No, perhaps I'll leave that for tomorrow. Just, Lyndal, could we just, cash flows look a little unusual. Can you just talk to, break out the elements there?

We can't hear what you're saying.

We can't hear what you're saying.

Sorry, repeat that.

Yeah, sorry, Lyndal, just the cash flows look a little unusual. Could you break out the elements there, please?

Yeah, the big item in the cash flow was the payment of the third or the final instalment of tax related to the FY21 year. Here in New Zealand, which the bulk of our profit comes to because this is where we've got all of our manufacturing assets, et cetera, at risk, the first two instalments for a tax year are paid within that tax year, and that's using a prior year's taxable income with an uplift of 5%. So for FY21, where we had that big jump up in profitability, the two tax payments within FY21 were at only a 5% uplift from FY20. The final catch-up of that happened in FY22. So we had a payment of about $140 million in May 2021, so this financial year, related to last year's profit. And then last year's tax payments were really just at that 5% uplift compared to the profit and the cash flow generated out of the business that year. So it's just really a timing difference between the two years.

Thanks very much.

Thanks, Dan. Next question comes from Tom Deacon at Macquarie. Go ahead, Tom.

Good morning, guys. Thank you very much for taking the question. Just in terms of GP margin outlook, just wondering, you know, given that freight prices and other, you know, COGS price increases, you know, potentially looking more structural now or sticking around for longer, does that mean that you'll look to take some price increase across the product range in FY23?

Yeah, we're back in kind of a normal pricing cycle now where we're increasing pricing where we're able to and kind of in line with local CPIs and where it's sensible.

Yeah. That's great. Thanks very much, Lewis. And then just maybe a second one from me. Just in terms of the device utilization estimate you provided for FY22, can you just provide a little bit more color on how the team came to that range, given the challenges we've discussed previously around coming to an accurate device utilization estimate?

Yeah, absolutely. So we took the five years before COVID and we looked at the relationship between incremental hardware and incremental consumables over those five years and then we averaged it and we called that normal. So that was our starting point. And then we applied that ratio to FY22.

Got it. That's helpful, guys. Thank you very much. And I'll jump back in the queue.

Thanks, Tom. Next question comes from Stephen Ridgewell at Craves Investment Partners.

Good morning. I just wanted to touch on what you're seeing in emerging markets in a bit more depth. You've previously called out a large portion of the 880 million of devices sold over the past couple of years have been placed in emerging markets such as India, Brazil, Russia, etc. Are you seeing consumables demand come off in those emerging markets consistent with the decrease in COVID hospitalisations in recent months, or is there some evidence that hospitals in emerging markets like India are starting to transition to using that installed base to treat non-COVID patients, or is it just too early?

I think we've landed on it. It's too early. For FY22, it doesn't look much different to anywhere else, but you've got the COVID searches going on, so I think it's too early to say. I think also fair to say we think that emerging markets are probably going to be more challenging for us to convert that usage than US and Europe.

And just following up on that, Lewis, could you just elaborate on that last comment as to why your emerging markets would be more challenging?

I'll ask Paul to have a go at that.

Steve? Hey, Stephen. So, you know, in 22, a lot of those emerging markets, you know, we would sell consumables with the hardware. They went out together. So they were largely being used for treating COVID patients. So they were able to do that because they had the hardware and they had the consumable sets. Clearly, a lot of these markets, they've probably bought these products to treat COVID patients. So the opportunity for us now is to go and educate them into non-COVID applications. So I think that'll be more time-consuming. They'll put people into some of those markets. Sometimes you're working with distributors. Sometimes funding may not be available for the consumable set. So it will be more challenging to do that in the emerging markets. In the more developed markets, HIFO, EVO, Optiflow is understood. People are using it already. So it'll be an easier transition. We think.

We think. Cool. Cool. Thanks. Maybe a second question for me. We haven't talked too much about MyEvo on the call so far. You saw that big spike early in the pandemic and then the growth rate kind of eased. Can you just call out or give us some flavour on the trends you've seen in MyEvo during the year? Some suggestions that some MyEvo units, I think you might have made on a previous call, Lewis, that some of those units have been kind of rented to hospitals during the peaks of the pandemic. Just interested in what you're seeing in that part of the business, please.

Yeah, you're totally on the money there. We think what's happened with Miami is FY21, some of that was making its way to COVID patients either in hospitals or at home. So FY22 looks a bit backwards compared to 21. But if we look at 22 versus 20, we're kind of just on a similar trend if we skip that 21 kind of COVID-related jump out of it.

Okay, just to be clear, Lewis, that was kind of in that 15-20% range from memory, that kind of organic growth rate in Evo kind of pre-COVID?

It's not the small number, so it's pretty bouncy, but, you know, it is somewhere, yeah.

Great, thank you.

Thanks, Stephen. Next question comes from Saul Hadasson at Baron Joey Capital. Go ahead, Saul.

Good morning, guys. Hopefully you can hear me. A couple of questions just on hospital hardware. Just looking at the second half revenues, it looks like the run rate's still running at about double the sort of the pre-COVID levels of sales. I'm just wondering, as you move into FY23, the decline in hardware sales this fiscal year, I mean, do you expect to be able to still maintain hospital hardware sales above a pre-COVID level, or do you think we're heading back to that more circa $45, $50 million per half, or is it too early to say?

Well, yeah, we really don't know how to predict that one. I think that's all I can say. Do you want to add anything, Paul? I think it's hard to predict, isn't it? But I think it's starting to settle down to more normalised levels. Yeah, well, you can see the trend over the last, let's say, four halves.

And I guess, again, are you still seeing pull-through sales for hardware in some regions where COVID is still a bit of an issue?

Yes, we are. And I think the reason we're saying it's probably heading back to more normalized levels over time, it's really hard to pick it, is a lot of customers now have bought hardware to cope with surges. So as and when there are additional surges, probably many of those customers have already purchased hardware they need. But of course, there's still going to be people around the planet that are going to need hardware if there's more COVID surges.

Sure, and just one other one for me. Just looking at the guidance you've given around the number of years to convert for that hardware and the growth of hospital consumables, Lewis, how much influence do you guys have on reaching those targets based on those years? In other words, if you were to accelerate your SG&A expense, could that get you to an earlier timeframe and hence the higher rate of growth? In other words, is there a drop through to EBIT if you achieve that or is there an offset through having to expense a lot more SG&A to get you to three years versus, say, five years. I'm just trying to work out what assumptions you've made as to what would get you to those three years, four years or five years of conversion.

Yeah. So I just need to make one comment for the record. That's not guidance, technically, that we've provided there. That's a range of scenarios that were modelled. So, and then to your question... Sure. Well, you know, the numbers are derived. They're a model. They're not guidance. They're an if. And the strategy of what we are doing is we're putting the people in where there's been increases in hardware. It's just kind of that simple. Whether it's three years, four years, or five years kind of isn't part of it. It's a mathematical model. We think we've made a balanced investment in our systems. Yeah. Essentially, we're putting the people in proportionate to where the hardware's gone and we expect over time that we'll give a result proportionate to where the hardware's gone.

Okay.

Thank you. How long it takes is a whole different question.

Thanks, Saul. Next question comes from Marcus Curley at UBS.

Good morning. I just wonder if we could start with cost of goods sold. You're obviously flagging flat gross margin, but within cost of goods sold, the largest component is labour. So are you managing your labour costs down this year? And if so, how are you planning on doing that?

Well, the largest component is materials. But to your labour question, With the occasional exception I'll touch on, you know, we match labour to the output rate. You know, it is kind of that simple. And the exception has been during COVID, when we're trying to accommodate absenteeism due to COVID up to 20% or 30% at times, we run a bit heavy on the labour force that's on board for manufacturing. But we're probably through that now, we think.

So in other words, as your inventory build requirement lessens, you'll just drop down your labour force numbers in Auckland?

Yeah, if that's the case, yeah, absolutely. And we coped with that demand and those rapid increases in demand with temporary staff.

And over time as well. So it's not just... The number of people is how hard and how long they're working, so we can ratchet that back with keeping headcount the same.

And, you know, within... Second question, within your commentary, obviously, within hospital consumables, you know, obviously the third quarter was much stronger than the fourth quarter. Can you give us any colour on what the fourth quarter was, you know, as a reflection of... I suppose the ex-COVID sort of outcomes?

What we've really got going on there is a great big COVID surge that picks up in November, peaks in December. January is still pretty big and then February falls off the cliff and March is still somewhere around the bottom of that cliff. that's what you've got going on in the quarters.

Okay, in other words, have it another way, if we looked at the second half on a complete basis, would you describe there being a COVID tailwind collectively still in that second half hospital consumable number?

Look, I don't know. It still kind of tracks COVID hospitalisations. If you overlay a hospitalisation curve on our consumers, they've got a pretty similar shape. So I'd have to go back to, to answer that question, Marcus, you know, go back to the beginning of the half and what happened prior to that. My recollection is we entered it, we entered with a bit of destocking, I think. I can't remember that actually, Marcus. You've got the stocking playing into weeks. Does it average out for the half or not?

Maybe another way of answering the question, when do you think you'd be in a position to provide some sort of commentary or guidance in terms of where you think hospital consumable sales are going for the year? Do you think it's going to be all the way through to possibly the first half result, or do you think it could be earlier than that?

Yeah, that is a good question. I think we're going to want to see a bit of stability that we can forecast off of, awful grammar. We're going to want to see stability that we can say there's a base that we can project from. And so stability, that's going to need to be two things, the COVID hospitalisations, and then because of stocking, destocking, a bit of stability in our volumes as well.

Okay, thank you.

Thanks, Marcus. Next question comes from Adrian Orbon at Jarden. Go ahead, Adrian.

Good morning, Sam. Just the first question, and maybe this is for Paul, and it's related, I guess, to the consumables. Can you just give us a sense, maybe, in the US and Europe, just what sort of access your sales force has actually now got to the hospitals and what sort of activity is going on?

Sure, Adrian. You know, I think we might have had some commentary earlier on. You know, it's been relatively spotty access to hospitals over this whole period. And again, you know, the last surge, you know, especially, say, the UEs with Omicron in the third quarter, you know, that really affected our ability to get into hospitals. So getting to hospitals, about now, we're getting, you know, reasonably... unrestricted access to hospitals, both in Europe and the US. So, you know, it's game on really for us now that we can generally get into most of the people, most of the institutions we want to see. And that's only been in the last, you know, month or two. Okay, and just... You go, Adrian.

Oh, sorry, no, I missed the last part of your question, sorry. Oh, sorry, answer.

I was just wanting to make sure I was answering the question. Actually, I think the answer is yes.

So just to play that back, you're now getting unrestricted access in the hospital in the US and across Europe. And is there any development just related to this question on the clinical practice evidence? Is it still that couple of key papers that you've mentioned over the last period, or is there new stuff which you're able to use as well?

Well, there's clinical papers coming out all the time, and obviously now our whole emphasis is making sure that our customers actually understand the value of their investment. They can use it for wider applications than just COVID, so for all kinds of respiratory insufficiency. So we use whatever clinical data is available at the time and depending on who we're talking to and what kind of application that they're seeing as an opportunity. We're using a lot of clinical data and all the latest clinical data, but, you know, if it supports the clinical practice guidelines, probably the most compelling. Yep, and the clinical practice guidelines are definitely the most compelling, well, very compelling too, yep.

Okay, that's helpful. And then, second question, just, like, if I just come back to, I think, in the presentation, you've got, you've, I guess, expanded your total addressable market from sort of NZ$20 billion plus to $25 billion. Is it right to assume that the anaesthesia is kind of like the key component within the hospital, like at sort of 5 billion, within that?

Yep, that's, yep, good assumption.

And then related to that is, I think somewhere else in your slides you also sort of make the point that the nasal high flow, the general respiratory sort of use is about the same size. Is that also kind of fair? And I presume that's where Evo 3 is targeting as well?

Yeah, so we think it's a similar opportunity, absolutely. Evo3 is kind of a different story. Evo3 is more respiratory-oriented than anaesthesia.

Oh, yes, no, sorry, I understand that. I think in one of the slides you make the point that nasal high flow in a general respiratory setting is kind of around the same size as anaesthesia.

Yeah, that's right.

From a patient perspective?

Yeah, probably that. Number of patients that would benefit, yes.

Okay. That's good. Thank you.

Thanks for your questions, Adrian. Given time, we will just take one last one. I realise there are others in the queue. You can feel free to call Hayden or me following the call. But last question is from David Lowe from JP Morgan. Go ahead, David.

David, are you there?

We haven't had good luck with technology today. What we might do is we might conclude the time now for questions. As a reminder, we're holding an investor day tomorrow, so if you're registered for that event, you'll have the opportunity to hear from more of our team and to learn more about our new products. But I'll hand it over to Lewis to conclude. Okay, thanks Marcus.

In summary, FY22 has been another remarkable year for our company and above all, we've showed our customers that they can rely on Fisher & Paykel Healthcare and that we're doing all we can to create the best possible outcomes for patients, whatever may come. Going forward, we haven't wavered from our long-term sustainable profitable growth aspiration We've got an exciting opportunity to apply our 50 years of experience in changing clinical practice to what is now a customer base that already has the hardware and already has the clinical experience. That enables us to bring forward new products and applications and global sales, manufacturing and distribution investment. We want to thank everyone who has supported us and we're all looking forward to the years ahead. Thank you to all the participants for joining us on the call today as well.