Earnings Transcript for FPH.AX - Q2 Fiscal Year 2024

Operator: Please standby. Welcome to Fisher & Paykel Healthcare's Results Conference Call. My name is Cynthia, 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 will conduct a question-and-answer session. We ask for your assistance in keeping the call to a maximum of one hour. [Operator Instructions] Please note this conference call is being recorded. I would now like to turn the call over to Marcus Driller, VP Corporate. Please go ahead.

Marcus Driller: Thank you, Cynthia. Good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's first half results for the 2024 financial year. On the call today are Lewis Gradon, our Managing Director and Chief Executive Officer; Lyndal York, Chief Financial Officer; Paul Shearer, Senior VP of Sales and Marketing; and Andrew Somervell, our VP of Products and Technology. Lewis and Lyndal will first provide an overview of the results, and then we'll open up the call to questions. We'll be discussing our results for the half year ended 30 September 2023. Earlier today, we provided our 2024 interim 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/investor. With that, I'd now like to turn the call over to Lewis.

Lewis Gradon: Okay. Thanks, Marcus, and welcome to the call, everyone. I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX this morning, if you'd like to follow along. I'll start on page 3 with some of our recent highlights. . Our new Fisher & Paykel solo mask was released in New Zealand and Australia in the half. We think this is quite a significant step forward in mask innovation, and we'll be gradually rolling this out in more markets in the New Year. We've continued to invest in our sales team, particularly in the anesthesia space. Our Guangzhou facility in China is progressing well, and that's on track to be operational in the first six months of the next calendar year. We got 510(k) approval for the 950 from the United States Food and Drug Administration during the half. And we recently showed this at the AARC American Association of Respiratory Care Conference in Nashville, along with Airvo 3 so pretty strong reception last month. Airvo 3 is currently available in the United States and the 950 will be available in the New Year. We marked the formal opening of our third building in Tijuana, Mexico, and we welcome Graham McLean on to the Board. Graham brings a good depth of medical device experience having spent more than a decade in regional leadership roles in our industry with Stryker. So, now if we move on to financials on page 4. First half operating revenue was $803.7 million. This is a 16% increase from the first half of the 2023 financial year, and that's in both reported and constant currency, 16%. Net profit after tax for the first half was $107.3 million. That's up 12% on the first half of the 2023 financial year, and that is 22% in constant currency. I'll let our CFO, Lyndal York, provide more details on this -- on the figures shortly. But before that, we'll take a look at the quick look at the product group breakdowns. So first up, have a look at hospital on Page 6. Hospital operating revenue for the first half was $487.5 million. That's up 11% year-on-year and 11% in constant currency also. New applications consumables revenue was up 20% year-on-year, and that's 19% in constant currency. So against the backdrop of the first half last year, which included destocking coming from the Omicron surge at the end of 2022, we saw strong demand for hospital consumables across the product portfolio in this first half, and hardware demand was solid. So turn now to homecare on Page 8. Homecare operating revenue was $314.4 million. That's up 26% on the first half of 2023 or 25% in constant currency. I would say, mask and accessories revenue was up 29%. That's 28% in constant currency. Evora Full was introduced in the US during our first half last year, and our teams are continuing to receive very positive feedback on that masks performance and comfort from our customers. Now before I hand over to Lyndal, I want to turn to Page 9 and give you some context on the strides we've made over the last few years. Now here, we've tried to drill down into what has fundamentally changed in our business over the last four years. We've started with FY 2019. That's the last year we had no COVID impacts, and we've compared it to FY 2022, our last financial year. And I think this slide puts some context around a lot of what flows through the income statement and the balance sheet this year and maybe into a few more years into the future yet. In the interim report, when we talk about the factors converging favorably and our foundations for future growth, this is what we're thinking of. And to just summarize this slide, we think we're very well placed in sales to deliver growth over the short-term. We think we have a manufacturing infrastructure we can very efficiently grow into, and we think our accelerated R&D investment sets us up well for sustainable profitable growth over the long-term. So on that note, I'll hand over to you now, Lyndal.

Lyndal York: Thanks, Lewis, and good morning, everyone. On Page 10, gross margin increased by 65 basis points to 60.5% for the half compared to the prior corresponding period and that's up 192 basis points in constant currency. This continued our constant currency gross margin improvement. This half improving on the second half of last financial year by 72 basis points. Reduced freight costs account for the majority of this improvement over the prior corresponding period. We started negotiating reduced freight rates in the second half of last year. This half, we also had a much lower proportion of our shipments going air freight reflecting our inventory levels globally and improving supply chain speed and reliability. The return to our usual practice of working on efficiency and margin improvements is starting to show an impact, but these improvements have been largely offset by the inflationary cost increases now flowing into our gross margin. Moving on to Page 11. Total operating expenses grew 16% in both reported and constant currency. This is as we expected, given the lower-than-targeted spend we had last year and keeping in line with our long-term trajectory for growth. Operating margin was 19%, an increase of 64 basis points or 195 basis points in constant currency, reflecting the gross margin improvement. R&D expenses grew 15% to $97 million and were 12% of revenue for the half. We estimate that about 60% of our R&D spend will be eligible for the 15% R&D tax credit this year. SG&A expenses increased 17% to $237 million or 16% in constant currency. Moving to Page 12. Operating cash flow this half was $156.5 million, up from $2 million last year. Last year was unusually low as the growth in working capital in that half reduced our operating cash flow by $84 million. This half, our taxes paid is lower than usual as we prepaid tax during the 2023 financial year, requiring less tax to be paid this half. Our slightly higher working capital reflects receivables increasing, partly offset by a slight reduction in inventory. Capital expenditure, which includes purchases of intangible assets, was $275.5 million for the half. The increase of $151 million from the prior year is primarily due to the $190 million we paid this year for the Karaka land acquisition. Capital expenditure for the full year is now expected to be approximately $350 million, reflecting timing of building design and cash flows. Looking at the balance sheet. Debtor days were largely in line with the prior year at 41 days. Net debt at the 30 of September was $173 million, and our gearing ratio was 9.1%. As expected, this has gone outside the top of our target gearing range as a result of the long-term strategic land acquisition. Interest-bearing debt was $243 million, all of it non-current. Turning to Page 13. We have declared a fully imputed interim dividend of $0.18 per share. This represents a 3% increase on the interim dividend declared last year and continues our recent track record of increasing our dividends to shareholders. It will be paid on the 18 of December. Our dividend reinvestment plan remains available for eligible shareholders with a 3% discount to the market price. Looking now at foreign currency on Page 14. Foreign currency movements negatively impacted our profit after tax by $5 million compared to the same period last year. At end of October spot rates, we would have a pre-tax loss from hedging of approximately $11 million for the full year. With that, it's back over to you, Lewis.

Lewis Gradon: Okay. Thanks, Lyndal. So now we turn to Page 15. We're providing guidance for the full year for revenue of approximately $1.7 billion, and that's at 31 of October exchange rates. Now historically, sales of our hospital consumables are typically higher in the second half, and that reflects the seasonal pans of hospital admissions, and this revenue guidance approximation includes that range of the pre-COVID historical seasonality in hospital consumables. And we've also guided to net profit after tax in the range of $250 million to $260 million for the full year, again, at those October 31 exchange rates. So now with that, I think we've left plenty of time for questions.

Marcus Driller: Yes. Thanks, Lewis. Cynthia, if I could ask you to please open up the lines for questions. Before we begin, can I please ask everybody to limit your questions to two. This is to ensure that everybody has an opportunity to participate.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you.

Marcus Driller: Thanks, Cynthia. Our first question comes from Gretel Janu at E&P. Please go ahead, Gretel.

Gretel Janu : Thanks. Good morning. Firstly, just in terms of utilization, I just want to understand how the new sales team has been? Have you started to see a return or any step-up in utilization since you launched the new sales team? Thanks.

Lewis Gradon : Okay, Gretel. Yes, good question. As far as utilization goes, we kind of moved away from the concept of utilization on the hardware base that gets complex when you look at the different usages and different patents of usage of our hardware, and we're more focused really just on the absolute number. And I think when you look at the consumables growth for the half, you have to say that's hardware being utilized.

Gretel Janu : I guess, I just want to get a bit more color about the new sales team and whether there's been any kind of significant return that you're starting to see there?

Lewis Gradon : Sure. So, in terms of sales team growth, we've added people and I think now we're up to 17 countries around the world over the last two to three years. And I would say that's definitely turning in a result in terms of both hardware sales and utilization. And then the other place where we've added sales people is in our anesthesia sales force and also definitely making a very strong contribution.

Gretel Janu : Okay. Thanks. And then just my second question is just on inventory levels. There's still very high, no real reduction since the kind of the second half 2023. So is this now the -- like -- and just kind of think about relative to COVID, how much is this higher inventory level distribution volume versus higher price of high-cost inventory? Thanks.

Lyndal York : Thanks, Gretel. I'll take this one. We typically build inventory through our first half, as we head into Northern Hemisphere winter as well as our typical shutdown through the Christmas break. So we would normally expect to see a reasonable increase in inventory in the first half. We actually have reduced finished goods slightly through the first half. So that really is reflecting in actual fact, a reduction of inventory compared to where we would normally be. So look, we would still continue to look to reduce that over time. In terms of the split of sort of value versus volume, it's a little bit of both. The bulk of it is volume, a bit of price in there and cost in there as well.

Gretel Janu: Right. Thanks very much.

Marcus Driller: Thanks, Gretel. Next questions come from Chris Cooper at Goldman Sachs.

Chris Cooper: Thanks. Good morning. Just the revenue guidance of $1.7 billion. I know previously, you indicated that the growth rates across the two divisions would be comparable. You seem to have dropped that nuance today. So just after an update, do you expect the contribution from home care versus a hospital to be slightly different than when you were speaking to us in August?

Lewis Gradon: Yeah, that's absolutely right, Chris. The difference there, you've got hospital hardware. We gave you a fairly arbitrary number of $115 million. First half has come in maybe closer to $50 million. So there's one change. And then the other change would be OSA masks towards the top end of the range.

Chris Cooper: Okay. And that's a development you expect to continue in the second half by the time of as well. Homecare significantly outperforming hospital?

Lewis Gradon: I wouldn't put it quite like that. I'd say if you drill down to the fundamentals, we haven't really changed our expectations for the second half. It's more about that what's occurred in the first half.

Chris Cooper: Okay. I've got a couple of others. If I've got one other question, I'll probably focus on gross margin. Lyndal, I mean you talked to freight costs that come down, you're using less air. I know previously you said of the gross margin pressure in 2023, I think it was 230 basis points of that was still freight relative to pre-COVID. Of that 230, there was still a material headwind last year, how much of that is going to come back to us? And how quickly does that happen?

Lyndal York: So of that freight, the improvement this half has pretty much the freight covers most of that, about 170 basis point improvement coming from freight compared to the first half of last year. So I don't forget we're only talking a first half year as opposed to the full year. In terms of what's still sitting in our gross margin this year and where we think we've landed in terms of pricing. We think we've done the bulk of the negotiation of prices, and we've been saying for the last couple of years, we don't think that prices will get down to pre-COVID levels again. And we've landed at about a 90 basis point higher than where we were pre-COVID roughly in freight.

Chris Cooper: Okay. Thank you.

Marcus Driller: Thanks Chris. Next question comes from Dan Hurren at MST Marquee. Please go ahead, Dan.

Dan Hurren: Good morning. Thanks very much. I was wondering, could you talk to journey of this year sales across the half as a run rate you saw the exit the half compared to the start half?

Lewis Gradon: Look, I’m sorry, Dan, that was a really low quality audio for us to try and understand. Can I just ask you to repeat the whole thing?

Marcus Driller: Yeah. Sorry, Dan.

Dan Hurren: Yes. Sorry about that. Is that better? I was hoping you could talk about the journey of hospital consumable sales across the half, perhaps comparing the run rate you saw at the exit of the half to the beginning?

Lewis Gradon: All that's a real complex one, Dan. You got the complexities of what you're lapping and then we've got quite a lot of regional variation, again, depending on what you're lapping. If you -- it's more about what we're lapping than the journey. The journey during the half, I'd say, looks like a stable pattern and a steady progression. And then if you compare it to what you're lapping you're all over the place. Does that help you?

Dan Hurren: Really, but okay.

Lewis Gradon: Try again, I'll give you another three questions. Try again.

Dan Hurren: No, no, no. I understand. But maybe just extend that. What do you -- what are you lapping in the second half? I remember you called out some late China COVID surge in the second half of 2023? What does that look like going forward?

Lewis Gradon: What are we lapping in our second half coming up? So, you've got two things going on in the second half coming up. You've got China opening up towards the end. So, you've got some surge demand in the second half that we're lapping. And you've got an RSV surge also largely in largely in North America, but some effects elsewhere. And then when we get to OSA, we're lapping a second half with CPAP supply freed up, and people were supplying a backlog of customers. And we're lapping a second half -- that's a full half of full release in North America.

Dan Hurren: Right. So, I guess the PCP gets tougher in the second half. Is that fair to say?

Lewis Gradon: I would say big time, yes, you've got some surge demand that you're lapping in hospital and you've got some supplying into backlog that you're lapping in OSA.

Dan Hurren: That’s great. Thank you very much.

Marcus Driller: Thank you, Dan. Next question comes from David Low at JPMorgan.

David Low: Thanks very much. Most of the questions I've had coming in this morning have just been around the FX rates. And given the FX rates have moved a lot since the update in August, what are the implications for the guidance that's been given? What should we be expecting on the hedging front, please?

Lyndal York: Yes, sure, David. Yes, currency has been moving around a lot. In terms of impact to our profit before tax line, currency movements have a more muted impact because we've got a solid hedging program in place we ideally have managed our net assets in currency to be minimal to try and make sure that a profit before tax line, there's less impact coming from currency. But you will see it in individual line items coming through there. So, -- and then there's some tax implications on things like the balance sheet translations depending on which entity or where those translations are coming through from and that's what we saw, particularly in the first half of last year, which causes some weird looking comparable there. In terms of what currency movements done compared to what we were looking at back in May when we were sort of talking to you then. Again, at that bottom-line, really not material. And I'd say, actually, on individual line items, sort of revenues, the one that we've guided to, a bit of movement there, but nothing material. It's all within that approximation that we've been talking about.

David Low: So, at face value. I mean, the rates are better and therefore, the profit ought to be improved as well. So, the takeaway here is that that's largely offset by the hedging program. So, if rates stay where they are, you see the benefit next year that?

Lyndal York: Slightly over time, the aim of our hedging program is to have a more smooth impact from average rates, rather than taking big hits and big gains as rates move. So yes, if rates stay down at this level over time, we'd be sort of working towards slow improvements there that you've got on the hedging program as well as the fact that we largely have. We try to minimize the net asset exposure by currency means that at the bottom line, we have less of an impact.

David Low: Great. Thanks. And just the other topic I wanted to touch on. We've heard a lot about the GLP-1, obesity drugs and potential implications for sleep apnea given the length between sleep apnea and obesity. Is just wondering, what your expectations or how future in thinking about that potential acting sometime to the future?

Lewis Gradon: Yes, there's been a lot of commentary on that. I won't repeat it, David. But look, our thinking is probably not much impact and we get there just putting aside all the other intricacies of GLP-1s, we get there just by -- it's the large market, still quite underpenetrated, and we have a relatively low market share.

David Low: Perfect. Thank you, very much.

Marcus Driller: Thanks, David. Next questions come from Craig Wong-Pan at RBC.

Craig Wong-Pan: Thanks, and good morning. Thanks for providing NPAT guidance for the full year. I was just wondering, with your comments previously around gross margins improved by approaching 200 basis points and our constant currency OpEx growth of 12%. Do those statements still stand? Or if could you provide any kind of color on those items?

Lyndal York: Yes. Thanks, Craig. Obviously, with currency having moved a little bit when we talk about reported numbers, they've moved a bit. They largely to sort of offset each other as we were chatting about on the previous question. In terms of the 200-basis point improvement, that was constant currency, we were talking about in May that we were expecting around about 200 basis point improvement in constant currency. So that still does hold, and no real change to that. What would these currency rates when we've redone this guidance at October rates because those rates have been a bit favorable, we would expect that the reported gross margin now is closer to -- getting closer to the 150 basis points rather than the 100 basis points that we spoke about in May at those exchange rates. The other -- it's the opposite effect for OpEx. So previously, in May, we were talking about constant currency growth constant currency growth has not changed in terms of this guidance, but what it means in reported instead of being that 12%, we're probably now looking at closer to about 14%, 15% in reported for OpEx growth.

Craig Wong-Pan: Okay. Thanks. That's very helpful. And then my second question, just on the home care consumables, quite a good result there. I was just wondering, are you seeing any particular sales from particular customers? Like are you kind of gaining share as Philips has been kind of out of the market in new patent sales? Or are you seeing kind of any particular share changes there that are driving your very strong revenue numbers?

Paul Shearer: It's Paul here, Craig. I guess, I think we view our growth pretty much across the board. Most customers really Airvo flow has been an exceptional product for us. It's growing strongly. So I think it's not really a sort of particular customers that's really across the board.

Craig Wong-Pan: Okay. Thank you.

Marcus Driller: Thanks, Craig. Next questions come from Vanessa Thomson at Jefferies. Please go ahead, Vanessa.

Vanessa Thomson: Good morning and thank you for taking my question. Just following on from Craig's question about masks. You've had obviously great results from the full face Airvo or F&P solo mask, when do you expect to launch that in the US?

Lewis Gradon: Yeah, we haven't put a hard date on that. We actually don't have a hard date. We're hoping it's early in the New Year. It's -- for us, it's really as we get manufacturing up to speed and get manufacturing capacity stable, reliable and enough volume, we'll release it. I think early New Year would be our hope. Fiscal year, yeah.

Vanessa Thomson: Fiscal year, yeah. Okay. Thank you. And then just one other question. On the -- what should we expect for the tax rate for FY 2024 prepaid on tax in 2023, which got out on in the first half. I just wonder for the full year what we should be expecting? Thank you.

Lyndal York: Yeah. So typically, we expect our tax rate, excluding the R&D tax credit to be between 28% and 29% and then layering on top of that, the R&D tax credit, which we're estimating about 60% of our R&D spend to be eligible for that 15% credit. The only complexity with that is, depending on where exchange rates end the year, if we've got big swings in our balance sheet translation gains or losses that go into that financing expense or income. That's taxable or non-taxable and that can swing around that reported rate a little bit there. But as a general rule, 28% to 29% effective tax rate and then reduce that buy R&D tax credit, and that's pretty much what we'll be expecting for the full year.

Vanessa Thomson: Thank you.

Marcus Driller: Thanks, Vanessa. Next question comes from Saul Hadassin at Barrenjoey. Please go ahead, Saul.

Saul Hadassin: Good morning. Thanks for taking my question. Lewis, just going back to the new app consumables sales for the half. If we look at the rate of compound growth going back to the half, I guess, pre-COVID. It looks like the growth rate is about 13%. Just wondering, if you think it's a reasonable reflection of the growth rates do you expect to see, say, for full year 2024? And is that a little bit lower than sort of the rate you would have expected to be sort of more towards the 20% range considering contribution from anesthesia? Just wondering, if you think that growth rate will accelerate over the next couple of years as utilization picks up on all those devices that have gone into the market? Thanks.

Lewis Gradon: Yeah. Yeah, complex question. You're on the money with 13%, and we do use our rates against FY 2019 as one of our inputs for how we're going and our expectation how to think of it is a different thing, but 13% that you quoted is it's pretty much on the long-term track, maybe a bit above. Then I think the other thing in terms of future expectation is there's some maths going on there. And if you have the investor pack, I'd take you to page, the new app growth rate page, which is not popping up for me. Yes, growth rate history. If you take a look at that page, you'll find, got it Page 39. So if you look at the history of new apps growth, up until COVID, it looks like kind of a steady decline. And the mess that you've got going on there is you've got part of the business with a higher growth rate. So that naturally becomes more of the business as the higher growth rate component becomes more of the business, the growth rate can decline whilst maintaining or even improving the growth rate of the whole business, right? If that makes sense. So we've got that phenomena happening across our business. You've got it in hospital consumables as new apps becomes a bigger component, the growth rate can decline but maintain consumables growth. We've got it in hospital as consumables becomes a bigger part of the business compared to hardware. You have the same phenomenon occurring. And then maybe not this half, but over the longer term, as hospital becomes a bigger component, you've got the faster-growing part of the business becoming a bigger component. So our expectation, well, when you say expectation, that's a forecast of the future. But let's just say that new app growth rate are steadily coming back still meets your overall aspiration because it's a bigger and bigger part of the business and then I left one out within new apps, you've got anesthesia doing the same thing, a very small part of new apps, but growing at a higher rate. So if I try and summarize all that up. I hope it made sense. As you've got faster-growing parts of the business becoming a bigger part of the business, it's okay if that growth rate declines because you maintain your overall aspiration.

Saul Hadassin: Yeah. That makes sense. I think this just goes back to the math of law of large numbers as it relates to consumables dollars sold and the ability to sustain that -- those dollars at a 20% growth rate rather than as you say you've seen that modest contraction in that growth rate over time, which is what we'd expect. I think there was some expectation though that with the release of new indications, for example, like anesthesia, and potentially moving to other areas as well that you could sustain that percentage growth for new apps at 20% for the next decade. And I guess my question is, is that feasible based on the dollars you're selling to new apps today?

Lewis Gradon: Yeah. Okay. No, our expectation would be maintain your overall growth rate, which implies new apps coming back a bit. Yeah.

Saul Hadassin: Sorry. So just to be clear, maintain the growth rate at 20% or allow for a moderation in that growth over the next 5 to 10 years?

Lewis Gradon: Well, for moderation. Yeah, maintain the overall growth rate for the business. So where we are on that curve right now, you'd be looking for hospital consumables in total to be kind of low-teens. And so you'd be looking for new apps to maintain that working its way towards mid- to high teens to maintain for the overall business, yes, you don't need new apps running at 20% to do that. And you run into the law of large numbers anyway.

Saul Hadassin: Thanks.

Marcus Driller: Thanks, Saul. Next questions come from Adrian Allbon at Jarden.

Adrian Allbon: Good morning. Just coming back to I guess, the new app consumables across the first half. Was there any price increases to sort of call out? Or are they sort of more to be implemented in the second half?

Lewis Gradon: So look, Adrian, with the exception of two or three years during COVID, price increases are relatively normal for us and it's the ongoing phenomenon. We might have given the wrong impression. We put that on hold in the eye of the storm. Nobody had time for that. But we've reverted to our normal pattern of pricing increases probably for the last two years -- probably about the last two years, been as normal. And typically, for us, in the hospital business, that might kind of net out at maybe 1% a year, something like that. On average, over the last year or two, given high inflation of high price increases and the like, it's been a bit higher than that in terms of price increases. But for our numbers, the growth rates are still pretty much dominated by volume rather than price.

Adrian Allbon: Okay. That's helpful. And in terms of like on the invasive consumables, look, I think I sort of -- I think my math is right, the growth deal looks like about 8%. is that -- that seems quite strong to me. Is that like a reasonable portion coming from these new geographies?

Lewis Gradon: A little bit of everything. I think that I think we agree that does look quite strong. Probably two points there. It's probably pointing to lapping a destocking period. That's another strong indicator that destocking is occurring. And in some anecdotals, where part of this market uses an alternative technology called HME, heat and moisture exchanges. Some anecdotals around during COVID, customers didn't have the time for the extra patient maintenance that an HME requires, so they switched to humidifiers and some anecdotal evidence that a fair proportion of those aren't switching back. Now they've seen the light.

Adrian Allbon: Okay. So -- okay. So on that one, destocking potentially on the base that you're lapping and then some share gain of HME?

Lewis Gradon: Yes, maybe. Yes.

Adrian Allbon: Okay. And then just in terms of the gross margin, like I guess it was a bit of a highlight, certainly, the commentary was a bit of a highlight at the Investor Day. Like is there any update you can kind of provide on sort of traction on some of the cycle time improvements that you've been trying to implement or trying to generate and implement?

Lyndal York: Yes. Look, Adrian, hopefully, the key message at the Investor Day was we've got thousands of these continuous improvement projects going on all the time. And we actually see the benefit hitting the gross margin if it's a cycle time improvement. The benefit might not come this year. It might not come even next year. It might be another year before sort of two years before we see it. It comes when the volume gets to a point where we would then have to add another line or add another shift and add cost in there to keep making more volume, you then get the benefit of improved cycle time by not needing to do that. So it's sort of reducing the cost increase that you need to do. So it's -- some of these have a long lead time in terms of starting to see an impact onto the bottom line. But the fact that we do thousands of them, they lay out and they'll layer age as we go. Now we've had a couple of years where we weren't really doing many at all. So we've got a bit of a gap. So that sort of layering effect that's normally in a pretty reasonable trend line. It's going to take a while to get some momentum back to a normal trend line for that. But we're definitely seeing improvements coming out of all the projects we're doing.

Adrian Allbon: Okay. And maybe if I can just -- sorry.

Lyndal York : No, go, Adrian.

Adrian Allbon: I was just wondering if you can comment on like in terms of sales force investment into the second half, like maybe excluding anesthesia, how are you thinking about that just as a sort of a way of us thinking about the resource like you're looking to apply against the revenue opportunity?

Paul Shearer : Yes, thanks for question. Adrian, I think that in terms of second half, I think most of the sales force that we've put on is generally been put on during the first half. Is that the question you're asking?

Adrian Allbon : Well, I just want to get on whether you're still trying to ramp, I guess, the non-anesthesia kind of hospital sales force, as you see the opportunity, as you sort of see like a gap in protocolizing outside the ICU all that kind of stuff on Optiflow?

Paul Shearer : Yes. I mean, over time, obviously, we continue to invest in the sales force and some of it in that area there. But I think in terms of second half impact, there's very little.

Lewis Gradon : I'll try and give you some clarity on that. Be a business as usual for us is adding salespeople kind of as the revenue growth and where the revenue grows. That's business as usual and we're back to business as usual.

Adrian Allbon : Okay. Sure. Thank you.

Marcus Driller: Thanks for your question, Adrian. Next question comes from Matt Montgomerie at Forsyth Barr.

Matt Montgomerie : Yes. Thank you. Good morning. I just want to go back to Saul's question, if that's okay. So if I look at full year guidance, it appears to be implying sort of high single-digit hospital consumables revenue growth if you take your seasonality comments. Firstly, is this correct? And then secondly, I just want to get an idea of sustainability of them, if you think that's an appropriate growth rate we should be thinking about in the consumables business as a whole. It's just that, I mean, slightly lower than what has been delivered historically?

Lewis Gradon : Yes. So I think 99% of the answer to that question is that it's about what you're lapping. And we're still in -- the unusual times are still reaching out and ankle tapping us. So this is all about what you're lapping when you're looking at growth rates, and you're lapping a half with a COVID surge in China and an RSV surge. So what to make -- and you know just as well as we do the complexities of trying to estimate what that impact is. So trying to interpret at the moment, trying to interpret growth on prior periods, especially when you get to our second half, I think, is quite challenging. So probably we're certainly looking more at sequential growth half-on-half rather than on PCP growth. And that would be what I'd point you to.

Matt Montgomerie: Yeah. But I suppose another way of asking is, do you think FY 2023 was a fair base when you net out 1H and 2H from the destocking in FIRST HALF, and then the benefits you got in 2H more now I'm asking?

Lewis Gradon: Look, I'll give you our best guess on that for the year, but I just want to -- just to make sure we're on the same page, the complexities of doing this. When we see an event like a COVID surge, we see our volume jump up during that surge time. For us, that's against possible seasonality that would have been occurring anyway. That's a gain future -- that's against growth due to clinical change that would have been occurring anyway. If it was last year, it's probably lapping a period that had either a surge or a lull of it. So first of all, you need to estimate how much of that jump in volume do you think is due to the event. Next thing you need to do is go how much of that volume do I think was used. And then the next thing you need to consider is how are my customers going to behave with their destocking period over what time frames are they going to want to be conservative. So the sum all gets really too hard. And the other thing I'd like to highlight is when you make that estimation, it kind of has a double whammy. It's quite a sensitive number to estimate because if you think of customers overstocked in FY 2023, that's volume you don't get in FY 2024, and then you lap it as well. So it's quite a sensitive number. So I wanted to give you the whole big context to say, well, look, we think when you net all those out, FY 2023 for the year in hospital consumables is probably like by somewhere around $10 million and I want to put the context somewhere around $10 million. I mean, I don't really like giving that number. But as long as it is understood by that is best guess. We're confident that 2023 is light. But the exact magnitude is getting speculative.

Matt Montgomerie: Yeah. No, that's clear. I appreciate the color. Just on anesthesia, I'd just be interested if you could provide any comments on the mix within the new apps number that was reported in the half. And then just any qualitative comments more broadly with respect to the early rollout in the US, et cetera?

Lewis Gradon: Sure. Proportionately, it's a bit under 10%, growing really strongly. In terms of rollout in North America, I mean, it's looking pretty familiar to us compared to other rollouts.

Paul Shearer: Yeah, we're just onboarded a sales force. That's gone well. Obviously, we're getting to put the speed. We're seeing good results at an early stage coming from there. So we're very pleased with the role that actually met.

Marcus Driller: Thanks for the questions Matt. Next questions come from Sean Laaman at Morgan Stanley. Please go ahead, Sean.

Sean Laaman: Good morning, everyone. Hi Paul and Lewis. A couple of questions. So on slide 9, the 48% growth in people associated with manufacturing in ops. I don't know if, Lewis, you could characterize where you see that going forward? And what's been the unit cost? How has that changed for labor?

Lewis Gradon: Well, generally, labor around the world, we're at a fairly high inflation environment. We put that in the back to business as usual category. We have increase in labor costs. We do have it every year, and that needs to be offset by gains in efficiency. So, I put that into the back to business as usual, but with maybe a bit more on the labor increase than you would normally see. And then the other part of the question, per unit cost for labor, in terms of.

Marcus Driller: You've answered that first half the cost part in terms of number of people going forward in manufacturing.

Lewis Gradon: We would see a number of people going manufacturing sort of similar to what in line with revenue growth. So, typically, the history is the number of people is proportional to the revenue. And then you're offsetting labor--

Sean Laaman: Sure. Thank you. And just monitoring quite carefully what's going on with China with the spike in respiratory disorders, no new or novel strains discovered yet. But wondering if you're starting to see inbound or with respect to potential surge in orders or anything to comment on the current situation in China?

Lewis Gradon: Yes. With the current years over the last few weeks, we haven't seen any reaction or response and our volumes to that.

Sean Laaman: Perfect. Thank you. That’s all I have.

Marcus Driller: Thanks Sean. Next question comes from Marcus Curley at UBS. Please go ahead Marcus.

Marcus Curley: Good morning. I just -- could we just start with the flu season assumption for the second half, Lewis, is it fair enough to assume it's similar to last year?

Lewis Gradon: Yes. Well, incorporated in guidance is within the range of normal seasonality. So, kind of implicit in that assumption is flu season within the normal range also.

Marcus Curley: Which is what you got last year?

Lyndal York: It's within the -- like last year was one year. So, we're talking about the historic range of seasonality that we were looking at.

Lewis Gradon: Yes, within the historic range.

Marcus Curley: Yes. Like you haven't given a range on revenue guidance, you've gotten a point estimate. So, I suppose you should --

Lewis Gradon: Yes, we're approximately. I'm going to rely on the word approximately quite heavily, Marcus.

Marcus Curley: Okay. Okay, let's move on. Obviously, there's been a bit of noise around changes in working practices at Oaklands in terms of over time over the weekends. Can you talk a little bit about what's the -- I suppose, the background to that? We haven't necessarily seen sort of potential strike action at Fisher & Paykel for decades? So, it just sort of seems so unusual.

Lewis Gradon: Yes, that's -- I agree with that. And we're currently in mediation process with the Union. So, we're on a sensitive topic. Probably might be best to leave that one there, Marcus, actually.

Marcus Curley: Okay. Does that mean I get another question?

Lewis Gradon: Yes, you can have one. I don't think I can count that answer, no.

Marcus Curley: Okay. Great. Could you talk a little bit about how much home respiratory support that was growing in the half or a contribution to the Home Care results, please?

Lewis Gradon: Sure. I mean I'd call it solid growth. You're still talking somewhere a bit under around 10% of the home care business small. And when we talk about home respiratory support, we're including. We're talking about the hardware. So, it has that lumpy characteristic. But I'd say the overall summary of H1 is we feel that we're making good progress. Comment? Yes, I'm looking at Paul Shearer I say that.

Paul Shearer: That's correct.

Marcus Curley: Okay. Thank you.

Marcus Driller: Thanks, Marcus. Our next question comes from Christian Bell at Jarden. Please go ahead with your question.

Christian Bell: My first question is in relation to new as growth in particular, high flow growth. Just wondering where does that come from in terms of hospital setting? Like has it been predominantly from ICU or you -- or was it sort of more increasing utilization outside the ICU perhaps in the world of AD [ph]?

Paul Shearer: It's a spread, Christian. It's obviously some ICE, some emergency room that we work in different parts of the hospital. So, we've seen penetration growth in a lot of those areas, awards you need to see an ICU.

Christian Bell: So can we assume in the half, it was pretty even across all of those three settings or...

Paul Shearer: I'd say it's off a smaller base will be growing faster in the non-ICU areas.

Christian Bell: Okay. Cool. And then so my second question is, so you lift on operating margin was basically like-for-like with the gross margin uplift to get to -- back to your target operating margin of 30% is going to require some bit of sales rep efficiency. So just wondering, when you're expecting to start seeing that efficiency come through from, I guess, following on from the first question, the wider adoption across the hospital and ultimately, more productization?

Lyndal York: Yes. Look, we sort of tried to flag in May that we were expecting quite high growth rate in OpEx this year because we had lower growth last year. We definitely will be looking to get leverage out of our OpEx spend over the coming years to help assist us getting to that operating margin target, but we assess sort of coming into each year, what we need to do as a business in terms of investment in saving anesthesia sales force where we do actually need to keep investing heavily in that, and we're getting the efficiencies through the rest of the team as they get onboarded and up to speed and getting traction in the hospitals that way. So, we definitely are focused on that and would anticipate to start seeing in the next sort of year or two, some leverage coming out of the OpEx spend.

Lewis Gradon: Yeah, Christian, I would say, in our history, in our normal mode of operating is that we take leverage from our sales expenses. And we've just had a couple of years of not doing that, and we're back to business as usual from here on now.

Christian Bell: Great. Thank you, very much.

Marcus Driller: Thanks, Christian. Next question come from Mathieu Chevrier at Citi.

Mathieu Chevrier: Yeah. Good morning. Thanks for taking my question. My first one was in the prepared remarks, you flagged that you on material and manufacturing costs. We're headwinds to gross margin. I was just wondering, what portion of the manufacturing costs you were talking about? And have these gotten worse or better or is it just that you're focusing on them now that you're largely done with freight costs?

Lyndal York: Yeah. Thanks, Mathieu. Materials are about half of our COGS to give a bit of size of that. And we have seen the inflation impact of our materials not have the same speed, I guess, you would say, in this financial year. What we are seeing and what I'm sort of trying to explain a bit over the past 6 months to 12 months is whilst we're paying for these raw materials and over the past 12 months have been buying them in at higher cost. They sit in inventory and raw materials. They then have to get converted into a finished good. Ship to our offices around the world and then sold to our customers only at that in sale that we -- that you see it, and we all see it, in our gross margin. And that's where we're starting to see that flowing into the gross margin this half. But this is sort of product that we have purchased almost 12 months ago that's finally been converted and ended up salt. This cost inflation of materials will go on until all of that has sort of fleshed through and that we're on -- that we've got the cost of our product for everything -- fully incorporating that. But we definitely aren't seeing as big an increase as now as we were, say, 6, 12 months ago.

Marcus Driller: Thanks for those questions, that question, Mathieu. Seems to have lost you, but we'll go to our next question, which comes from David Bailey at Macquarie.

David Bailey: Yeah. Thanks. Good morning. Just I think I'm a bit new to Fisher & Paykel when you're talking about traditional seasonality in consumables, if I look at fiscal 2018 and 2019, it's about 46% in the first half. If I go back over a longer period, it's closer to 48%, 49%. I just want to understand exactly what you're referring to as to a traditional seasonal pattern in terms of consumable sales into the first half, second half?

Lewis Gradon: Yeah, that's exactly the time we'd be doing, David. I mean, you're right on the money in terms of the process, I tend to think of it as second half over first half. So, trying to backfill your numbers. But you're following the exact process that we're referring to. I mean, that's the history. And right now, that's probably the most reliable data point we've got. Second half over wouldn't look at FY 2020 because you got COVID kicking in H2, 2019, 2018, 2017 from memory are fairly normal. I think 2016 is the year we went direct in the US probably I wouldn't count the anomalies of that data. 2015 or 2016 was we went direct in the US. So there's some timing on that one.

David Bailey: Okay. So just to be clear, I mean 46% is probably a better number than 48%, because it around quite.

Lewis Gradon: Yes, I think so. Yes.

David Bailey: Yes, that's helpful. Okay. That's good, 46%, 46%whatever is -- and in terms of that OSA, very strong OSA mask growth. Assuming resupply is relatively flat. You've got new patient growth, a bit of price and market share. Just wondering if you could give us a bit of a sense as to the various contributions of those to mask growth. So new patient growth versus market share and maybe a bit of price just trying to break down that revenue growth number a little bit.

Lewis Gradon: Well, boy, we don't really have that visibility, David, a mask is a mask and then trying to look out where it's come from one step too far, I think, less Paul, if you want to give a color to that.

Paul Shearer: I think that the -- I think it was more CPAP supply freeing up obviously, need more patients. So it's probably been some new increase in new patients. And I think we've benefited from that, David. And I think that we've got no idea about market share gains and stuff really. But the growth rates we've got in [indiscernible] products CPAP got the board forward probably getting some gain there too. So that might be the drivers of first half growth.

Lewis Gradon: Maybe try and help you, when we model it, when we think about it, we do think about growth coming from new patient starts and we think that the installed base is sticky when we're modeling it.

David Bailey: That’s helpful. I was just trying to consistently – thinking about new process app as well. Thanks.

Marcus Driller: Yes. Thanks, David. Look, that brings us up to time, everyone. Just a reminder that if you have any follow-up questions, please feel free to reach out to me or Hayden Brown. And I'll now turn over to Lewis for the final word.

Lewis Gradon: Okay. Well, look, thanks, Marcus, and thanks to everyone for joining us on the call. Thanks for your questions, as always. A special thanks also, as always, go to the people at Fisher & Paykel as well as our customers and our suppliers. Thanks for the work you do that makes our business successful, and so that patients around the world can benefit -- and as always, I would like to thank any shareholders on the call for your continued support of the company. Thank you.

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