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Edited Transcript of FPH.NZ earnings conference call or presentation 25-Nov-18 9:00pm GMT

Half Year 2019 Fisher & Paykel Healthcare Corporation Ltd Earnings Call

Auckland Nov 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Fisher & Paykel Healthcare Corporation Ltd earnings conference call or presentation Sunday, November 25, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Blackie

Fisher & Paykel Healthcare Corporation Limited - Acting CFO

* Andrew Somervell

Fisher & Paykel Healthcare Corporation Limited - VP of Products & Technology

* Lewis G. Gradon

Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director

* Marcus Driller

Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate

* Paul N. Shearer

Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing

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Conference Call Participants

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* Andrew Goodsall

MST Marquee - Healthcare analyst

* Chelsea Arna Leadbetter

Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities

* Chris Cooper

Goldman Sachs Group Inc., Research Division - Research Analyst

* Elyse Miriam Shapiro

Wilsons Advisory and Stockbroking Limited, Research Division - Equity Analyst

* John Deakin-Bell

Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand

* Marcus Curley

UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research

* Stephen Ridgewell

Craigs Investment Partners Limited, Research Division - Deputy Head of Research

* Steven David Wheen

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* Tristan Joll

First NZ Capital Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Fisher & Paykel Healthcare's results conference call. My name is John Taylor, and I'll be the operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I would like to now turn the call over to Mr. Marcus Driller, General Manager, Corporate.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [2]

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Thank you, John. Good morning, everyone, and welcome to the Fisher & Paykel Healthcare First Half 2019 Results Conference Call. On the call today are Lewis Gradon, our Managing Director and Chief Executive Officer; Paul Shearer, Senior VP of Sales and Marketing; Andrea Blacking -- Blackie, Acting Chief Financial Officer; and Andrew Somervell, our VP of Products and Technology. Lewis will first provide an overview, followed by some specific comments from Andrea. And then we'll open up the call to questions for the team. We will be discussing our results for the 6 months ended 30 September 2018. We have earlier today provided our 2019 interim report, including financial statements and commentary on our results to the New Zealand and Australian stock exchanges. These documents can be accessed on our website at www.fphcare.com/investor.

With that, I'd now like to turn the call over to Lewis.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [3]

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Well, thank you, Marcus. And welcome, everyone. We had a good start to the 2019 financial year. The results are in line with our expectations for the start of the financial year, and they reflect consistent momentum across both of our product groups.

So turning to Slide 3. Overall operating revenue for the half grew 12% to a record NZD 511.3 million or 8% growth in constant currency terms. That's comprised of 11% constant currency growth in our Hospital product group and 6% constant currency growth in our Homecare product group. Core product group revenue grew 9% in constant currency terms, and that excludes the impact of the distributed and other segment. Revenue on this segment reduced, as expected, from NZD 4.6 million in the prior half to NZD 2.9 million this half. And that's as we took last-time orders for our range of infant warmers in September 2017.

Operating profit grew 21% to NZD 139 million, and reported net profit after tax was up 20% on the prior half at NZD 97.4 million. And this represented 14% growth in constant currency terms.

This first half earnings result is above the guidance of NZD 95 million that we provided at our Annual Shareholders' Meeting in August. Therefore, our Board of Directors have approved an 11% increase in the interim dividend to $0.0975 per share, carrying full imputation credit. We know that the results we've achieved this year to date are built on the hard work and dedication of our team of more than 4,000 people. And in accordance with our usual practice, this week, we will pay profit-sharing bonus totaling $2.7 million for the half to our employees around the world.

In the Hospital product group, our devices and systems are used in treating patients with respiratory complications and during surgery. Revenue from our hospital products for the half was NZD 297.3 million, representing growth of 11% in constant currency.

A highlight was the continued strong revenue growth of new applications consumables of 24% or 22% in constant currency terms. Revenue from new applications now accounts for 60% of our Hospital consumables revenue, and that's compared to 40% 5 years ago. This growth in new applications consumables revenue continues to be driven primarily by our Optiflow nasal high flow therapy. There's an extensive amount of clinical interest in the therapy, and we are seeing Optiflow being used on a broader range of patients throughout the hospital.

We've continued to make good progress with recently released products, including our Optiflow Junior cannula, Nivairo non-invasive ventilation mask and our F&P 950 respiratory humidification system. Our F&P 950 system is continuing its global rollout. And we intend to release this product into Europe mid-2019, to be followed by Canada and then the U.S. upon regulatory clearance. Growth in Hospital consumables revenue was strong, driven by new applications consumables up, as we previously mentioned. Hospital hardware revenue growth in the first half was flat in constant currency terms, and we believe this is potentially some customers delaying purchases until the 950 system is available in their region. Given the low global penetration of nasal high flow therapy, we believe we can continue to grow the new application segment of our Hospital business strongly for years to come.

Turning now to Slide 5. In our Homecare group, our products are used in long-term care facilities and home settings, assisting in the treatment of obstructive sleep apnea or OSA and chronic obstructive pulmonary disease or COPD as well as other chronic respiratory conditions. We reported constant currency growth of 6% in our Homecare product group for the half with OSA mask constant currency revenue growth of 2% and robust growth of 43% in OSA flow generators.

We are pleased with the progress that we've made with our myAIRVO device, which is used for patients with COPD and other chronic respiratory conditions. And sales from this product now make up a larger and growing proportion of our Homecare revenue. 2 research papers were published this year that showed considerable benefits of using Optiflow nasal high flow therapy in the home in patients with COPD, and there are a number of other studies underway. We expect these studies will help us drive clinical change and assist with the adoption of our myAIRVO system. As we had previously signaled, the growth in OSA masks is lower than we had experienced over the last few years as competitors introduced new masks to the market. Our product pipeline is full. And we anticipate that resolving a manufacturing delay will allow us to introduce our next new OSA mask early in 2019, and that will be followed by more new masks during the year.

Demand for our premium SleepStyle CPAP device, which is used in the treatment of OSA, was robust. And that product will be released in the U.S. in the coming months. We've received great feedback about the device and the accompanying SleepStyle patient engagement app and website. These tools complement our InfoSmart web system, which offers health care providers exception-based patient management, comprehensive reporting and a simple user experience. InfoSmart also offers an extensive set of APIs enabling seamless integration of data into health care provider systems. Our CPAP and related informatics systems position us well to continue our emphasis on OSA masks and the COPD opportunity in the home in the future.

So moving on now to Slide 7. Gross margin increased by 77 basis points to 66.8%. In constant currency terms, gross margin for the half increased by 22 basis points primarily as a result of favorable product mix, offset by OSA price declines within the ranges that we have experienced in previous years. We expect to make similar gross margin improvements for the full year as those trends continue.

And moving on now to operating expenses. Research and development expenditure of NZD 45.7 million for the half was down 3% on the prior half. This is largely due to cycling a very strong 13% growth in the first half last year, and that included product development costs associated with new product introductions and some patent renewal expenses. Excluding those effects, R&D increased by 5% over the period. We anticipate that R&D expense growth in the second half will be slightly below constant currency revenue growth as we compensate for strong R&D growth over the last few years during a busy period of new product introductions. We have a strong new product pipeline, and that includes new humidification systems, flow generators, masks, consumables and information solutions all under development.

Selling, general and administrative expenses increased 11% to NZD 159 million for the half or approximately 8% growth in constant currency. And that's largely due to the continuing expansion of sales teams and promotional activities around the world and building out our logistics network.

We have included an update on the patent litigation proceedings, and that's on Pages 27 and 28 of our interim report. We incurred expenses of NZD 7.7 million in the first half in relation to a patent litigation. Assuming a continuation of current actions, we expect that patent litigation costs will be in the range of NZD 20 million to NZD 30 million for the full year, and that's as much of the discovery and deposition procedures are conducted during our second half in relation to the U.S. International Trade Commission proceedings and the Australian and New Zealand court cases. Our estimated patent litigation costs are included within our earnings guidance. Underlying growth in SG&A excluding litigation was 12% in constant currency terms. And we expect to maintain underlying expense growth, excluding litigation, slightly below revenue growth in the second half as we continue to make efficiency gains within our sales and administrative operations.

So now before making some comment on the outlook for the 2019 financial year, I'll pass the call over to Andrea to discuss balance sheet, cash flows and foreign exchange.

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Andrea Blackie, Fisher & Paykel Healthcare Corporation Limited - Acting CFO [4]

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Thank you, Lewis. And good morning, everyone. Looking first at cash flow on Slide 9. Operating cash flow was $93.4 million, which was 14% higher than last year. The increase in operating cash flow is largely a result of profit growth. We are expecting operating cash flow growth to continue to track closely with earnings for the second half of the year.

Capital expenditure, which includes the purchase of intangible assets, was $61.1 million for the half compared with $51.6 million for the prior half year. The majority of CapEx for the current year period was for increased manufacturing capacity and new product tooling, with $32 million spent on building projects. Capitalized costs associated with the SAP global projects are included within intangible expenditure. And the global effective rollout will continue over the next 2 to 3 years, with the U.S. office implementation expected in July next year.

Included within operating cash flow is $2.3 million of income from the Callaghan Innovation growth grant. And this growth grant was recently extended through to the 31st of March 2021, meaning we expect to receive a further $2.5 million grant in the second half of the 2019 financial year.

The New Zealand government has recently proposed change to the way that R&D in New Zealand is incentivized, and legislation is currently before parliament for consideration. The aim of the proposed legislation is to incentivize more business expenditure on R&D, which will be supported by 15% tax credit. This is expected to benefit our business, and we are currently working through the impact of this.

Our effective tax rate for the half was 28.3%, down from 28.7% for the last half year, which is largely due to nontaxable benefits on foreign currency conversions. We estimate that, ignoring currency movements, the effective tax rate for the group should be approximately 29% for FY '19, which is in line with FY '18.

Balance sheet details are also included on Slide 9. The balance sheet is in good shape, with working capital well managed. Debtor days are within the normal range, being 48 days and in line with the prior year. Our inventory value has increased, largely in line with business growth. And the proportion of manufacturing in Mexico remains steady at 35%. Net property, plant and equipment has increased by approximately $41 million from the end of last year, mainly as a result of building CapEx. Overall, we had a net cash balance of $15 million at the end of the period, and gearing was minus 2%.

Interest-bearing debt increased by approximately $14 million, including the impact of the revaluation of the New Zealand dollar and also the ongoing building program in Mexico. No New Zealand dollar was -- No New Zealand dollar debt was held at period end, with the majority of debt held in U.S. dollars and euros and the balance sheet hedged. We hold cash balances and short-term investments, mainly in New Zealand dollars, at approximately $110 million at the end of the period. This balance assumes the payment of the interim dividend and payments for our new building in Auckland. We are expecting net cash to increase slightly in the second half, notwithstanding the continued CapEx and payments of the interim dividend. We do also expect to remain within our target gearing range of minus 5% to plus 5%.

In regard to dividend, as Lewis mentioned previously and as set out on Slide 10, we will be paying an increased dividend, interim dividend, of $0.0975 per share payable on the 21st of December. The company will again be offering eligible shareholders the option to take all or a portion of the dividend in the form of a fully paid ordinary shares under the dividend reinvestment plan. No discount will be offered for this dividend. The dividend will be fully imputed, and a supplementary dividend of $0.01721 per share will be paid to non-resident shareholders.

Looking now at foreign currency on Slide 11. For the first half, earnings before tax were impacted by $4.8 million benefit from the New Zealand dollar being lower than last year, which has largely been due to favorable balance sheet translations. The lower New Zealand dollar has allowed us to add further hedging over the last 6 months, with average forward rates of kiwi-U. S. at or about $0.66 and kiwi-euro at around EUR 0.52. The lower spot rates have seen various filter test being met, which has allowed us to place hedges beyond 2 years forward, particularly in relation to the kiwi-euro. We have been able to do so also to a limited degree in relation to the U.S. dollar and Mexican peso. We've also been able to top up our hedging on other currencies in the 1- and 2-year buckets. Our policy remains unchanged and when -- there are opportunities to extend our hedging positioned. We are -- and we're able to do so up to 5 years forward and in some circumstances, up to 10 years forward.

The foreign exchange hedging has contributed a loss of $2.1 million for the period. And at current exchange rates, we are forecasting a further second half loss from hedging of approximately $1.5 million.

On the next slide, we have set out revenue, cost of sales and expenses in key currencies. We've included this to assist investors and analysts in understanding our currency exposures.

Now over to Lewis, who will provide some comments in relation to our guidance for the full year.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [5]

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Thanks, Andrea. So we're turning now to guidance on Slide 13. Our strategic direction remains consistent as we continue to develop new and innovative products, utilize our expertise to develop new therapies and change clinical practice and glow -- grow our international presence.

Now there was a very strong Northern Hemisphere flu season last year, which we estimate contributed between 1 or 2 percentage points to our Hospital revenue growth for the prior year. At this stage, it's too early to predict the severity of the upcoming Northern Hemisphere flu season, and so we've assumed a moderate flu season in our guidance for the 2019 financial year. And this impact is largely felt in the second half of our financial year. So on that basis, we expect full year constant currency revenue growth in our Hospital group to moderate by a few percentage points from the growth that we saw last year. In our Homecare product group, we expect strong home respiratory support and OSA flow generator growth to provide a small benefit to our full year constant currency growth rate compared to last year.

At current exchange rates, we expect full year operating revenue to be approximately NZD 1.07 billion and net profit after tax to be in the range of approximately NZD 205 million to NZD 210 million.

We continue to expect that capital expenditure for FY '19 will be higher than FY '18, as a substantial portion of the New Zealand building four expenditures will occur this financial year. Our expectation for FY '19 capital expenditure is now approximately NZD 160 million.

So with that, John, I think we can now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [2]

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All right, thanks, John. Our first question comes from Steve Wheen at Evans & Partners.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [3]

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Just a question on your guidance. Obviously, with the delay in the OSA masks, there's the fact that you've reiterated guidance and actually beat the guidance for the first half. Could you sort of tease out some of the areas where you perhaps performed better than expected within the rest of the business?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [4]

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So talking about first half. Probably flow generators would be the first one to call out, very robust growth of 43%. Masks, probably pretty much as expected first half. And the other comment to kind of your second half question is, given the predicted timing of the introduction of our next masks, we weren't really picking it to be material to second half in the first place.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [5]

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Got it. Secondly, I just wanted to ask about your SG&A, once you strip out that -- those legal costs. The -- you did sort of mention that there has been some investment in sales force, but is that the only reason why as a proportion of revenue it has stepped up again?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [6]

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No, not really. I mean, there's a couple of things going on there. There's no single big number. We do have our ERP project. And in this half last year, we were implementing SAP in Japan and Canada, so those expenses were largely being capitalized for this half that we just finished. We're preparing to implement in the United States mid-year so a lot of this capitalization of those expenses. And the other contributor is that we had moved patent renewal fees from R&D, where they were last half, into SG&A, which is where they more properly belong. So no real, single big thing, just a number of smaller things. For the full year, we are expecting operating expenses to be in line with revenue growth, SG&A maybe a little over, R&D a little under.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [7]

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Okay, got it. And then just lastly, on the masks and the issue around manufacturing, can you just provide some color as to what the problem is and what needs to be done, any costs involved in actually trying to rectify that production issue?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [8]

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Sure. Well, the real cost is in the delay. Look, it's kind of a normal business-as-usual manufacturing thing. We go through a validation process. Part of that is that we do live tests on the product. The live test this time around showed up an issue at around about the 6-month mark. So the team had to go back. And that's really minor changes to the manufacturing process, to parameters used on some of the molding machines and things like that, but it does mean we need to revalidate that process so hence the delay.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [9]

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Next question comes from Marcus Curley at UBS.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [10]

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First question. Could you maybe just talk a little bit about what you think the true underlying Hospital revenue growth is at the moment? Yes, first half, yes, I think you've talked about having some sort of inventory benefits in the first few months from restocking and obviously, the flu season benefits in the second half of last year. If you'd sort of drew a line through those, what do you think the true underlying growth rate is at the moment for that part of the business?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [11]

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So we'd say low double digits, Marcus, with flu, mostly second half, on top of that and various effects when you lack strong seasons. And you have strong seasons, flat; and weak seasons -- weak season, flat and strong, but underlying, if you cut all the flu out of it, we'd say low double digits.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [12]

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So like circa 11-odd percent...

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [13]

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Yes, yes. That will be low double digits.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [14]

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Yes. And secondly, just on that, if you ended up with a mild flu season. And I know it's too early to call, but obviously the -- you're -- in terms of those tests which are out so far in the U.S., it looks pretty modest at the moment. And we'll obviously know a lot more in the next months, but if it was a mild flu season, what would be the impact on the Hospital revenues in the second half?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [15]

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Yes. So it's all about what you're lapping as well as what you're currently experiencing. So the guidance we gave is that our best estimate is that a moderate season is worth 1 to 2 percentage points to growth to Hospital for the year, over a week. And a strong over moderate is worth 1 to 2 percentage points to Hospital for the year. Now we had a strong. So just -- we go from strong to moderate because the moderate is a bit lower growth, and you're lapping a period with higher growth, it kind of doubles the effect, that you'd be talking about an impact of 2 to 4 percentage points to Hospital growth to go from a strong to a mild, [talking about full results], full year. And double that, you go from a strong to a weak.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [16]

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And so it's if you went -- in terms of your revenue growth in the Hospital division in the second half, if you ended up at a mild flu season, the impact on the revenue growth relative to last year, do you have that sort of number to hand?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [17]

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Yes. Well, you double that again. We go from strong to weak. So you'd be in the 4% to 8% range of impacts.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [18]

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And that's full year effects?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [19]

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Full year effects I'm talking, yes.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [20]

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And so you double that again for the second half impacts because one would assume it's all contained in the second half?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [21]

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Yes, if it's all contained in the second half.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [22]

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Okay. And then I mean, just one question on our side from me. Given what you did around the problems with the manufacturing, is it right to assume that this mask is different to the others that we've seen? So it's arguably more of a revolution in terms of mask style as opposed to an evolution, or is that reaching it?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [23]

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No. We're probably not going to provide any more color on what new product's coming out when, I was going to say in the OSA space, probably in any space, actually. Sorry.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [24]

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It's all right. And then I just wondered if you could provide what you're assuming on hedging gains for full year in the guidance.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [25]

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Andrea?

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Andrea Blackie, Fisher & Paykel Healthcare Corporation Limited - Acting CFO [26]

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Yes. So it's Andrea here. I referred to that. Obviously, first half, we have achieved a loss of $2.1 million of hedging gains in the first half. And so the second half, as I indicated, probably also indicating a further loss of another $1.5 million for the second half.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [27]

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The next question comes from the line of Chris Cooper at Goldman Sachs.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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So if I could just follow up, first, on the sensitivity, please, on especially the flu season. So let me just make sure I understand these numbers correctly. If we're going from strong to moderate and potentially, that's taking 1% to 2% of Hospital growth for the full year, a strong to mild is 2% to 4%. Strong to weak is 4% to 8%. Is that -- first of all, is that correct?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [29]

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It was really fast for me. I'm sorry...

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [30]

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So sorry. Just the numbers you just ran through.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [31]

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So look, if we go -- so talking full year only, to try and simplify it just a little bit. If we go from strong to moderate, you're talking 2% to 4% for the full year.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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Got it. And can you just give us some sort of guidance in terms of how you define moderate and mild and weak, I mean, just maybe in terms of a reference here perhaps? I mean, which of kind of the recent historical years would you assume to have been a sort of a weak season versus a moderate season perhaps?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [33]

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Yes, sure. Hey, look, I don't want to give the impression of too much precision around this number. There's a lot going on. We've had a little more insight when we went direct in the United States. So that's our FY '17, FY '18 years, where we've been able to see underlying movements rather than stocking movements. So I don't want to give -- this is our best estimate, kind of a 2 years of data. So I don't want to get too much precision going on that. And as you can see, when you start stacking up year-on-year and going into halves, you get quite a wide range, which I think is appropriate for the precision we've got on this estimate. Now having said that, when we looked back at the last 7 years, the best data I can give you, the last 7 years, we categorized 2 as strong, 3 as moderate and 2 as weak.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Okay, that's helpful. Just on the manufacturing challenges that you've highlighted in the Homecare business. Can you just confirm whether that's had any impact at all on the plans regarding phasing or order, perhaps, of launch? So is the plan still to come out with a full face mask early in 2019 and then perhaps the subsequent products will follow later in the year?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [35]

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So look, we haven't given any details or color over what type of mask is out when. So putting that aside, our -- typically, our launch plans are to launch whatever we've got as soon as we can. So no change.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [36]

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And just lastly -- fine. And lastly, apologies if I missed it, but can I just confirm what percentage of Optiflow applications were outside of the ICU in the half?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [37]

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So we haven't really talked about that. I mean, the last time we talked about it, and it's probably still current, we'd get -- about 20% of nasal high flow therapy for us is outside ICU.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [38]

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Got it. And is there one particular region which is disproportionately bringing up that average?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [39]

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Bringing up the average, no. This is pretty -- with the exception of New Zealand and Australia, which are a few years ahead of the rest of the world, it's pretty consistent around the world.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [40]

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Our next question comes from Andrew Goodsall at MST Marquee.

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Andrew Goodsall, MST Marquee - Healthcare analyst [41]

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Just looking for a bit more color on SleepStyle. And obviously, 43% growth here is a substantial number, so I'm just trying to get a sense. You haven't launched in the U.S. What sort of -- what markets are you sort of largely seeing that success? And are you seeing upgrades? Is that sort of what's driving it?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [42]

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Well, I can't comment on the last part, Andrew, but we launched SleepStyle. We got a full second half in there in New Zealand and Australia. Canada came onstream halfway through our second half, and Europe at the beginning of this first half.

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Andrew Goodsall, MST Marquee - Healthcare analyst [43]

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All right, terrific. So -- and presumably, just with the U.S. launch early in the new year, just sort of, I guess, any sort of hints as to how you -- whether your launch strategy will differ from previous approaches or anything you can bring into the market that you think is sort of innovative or new there?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [44]

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Well, it's going to be a consistent launch strategy in the sense that our SleepStyle is a premium product, and we'll be positioning it as a premium product.

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Andrew Goodsall, MST Marquee - Healthcare analyst [45]

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Perfect. And just in terms of, I guess, penetration rates. We always look at trying to understand sort of whether there's a bit of an inflection point with the high flow. Just trying to see if there's anything that you're seeing in the marketplace that would lead you to think that growth, obviously, continues to grow, that whether there's sort of, I guess, an acceleration of acceptance or the sort of things that you normally talk to, I guess, whether that the cadence is increasing in terms of that growth.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [46]

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Well, probably not, but when you're looking at this kind of percentage growth year-after-year, I mean, I'd make the case that, that's inflecting every year off a bigger and bigger base, with percentage growths in the 20s. For us, it's more about maintaining that kind of rate, I think, off the bigger and bigger base. And it's probably all about just increasing clinical data, covering more and more patients and a higher and higher-quality clinical data.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [47]

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Our next question comes from Elyse Shapiro at Wilsons.

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Elyse Miriam Shapiro, Wilsons Advisory and Stockbroking Limited, Research Division - Equity Analyst [48]

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Just a quick question on myAIRVO growth. So you have mask growth at 2% constant currency. Can you split out the rest of the Homecare growth and specifically, the impact that myAIRVO had on Homecare?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [49]

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Yes, that's not a place we've gone, Elyse, and we're not there yet. The best we can give you there is that our home respiratory support part of Homecare grows at the kind of rates that we see in new apps in Hospital. And as a proportion of the total Homecare business, that would now be around about 10%.

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Elyse Miriam Shapiro, Wilsons Advisory and Stockbroking Limited, Research Division - Equity Analyst [50]

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And is that primarily in Australia and New Zealand? Or which geographies are you seeing that in?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [51]

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Actually, that one, do you want comment on that, Paul?

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [52]

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It's -- Elyse, that growth is around various parts of the world, obviously Australasia, Europe, North America. So it's pretty spread across the world.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [53]

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It's pretty spread off a small number.

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [54]

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Yes.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [55]

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Next question comes from John Deakin-Bell at Citi.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [56]

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I'm just interested in trying to understand a little bit more on the Hospital legacy business, which was quite weak and just geographically where -- there some regions where that's weaker than others. Or just give us a little more color around that weakness and the likely trajectory going forward.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [57]

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Probably wouldn't have said it was weak. Low single-digit growth in invasive this first half. And in terms of geographical spread, I would say, nothing stands out in geography whatsoever. The key phenomenon there in the first half is hardware growth was flat.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [58]

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All right. And just secondly, on the litigation. I look at your notes from the account, obviously, litigation across multiple jurisdictions. And then just perhaps summarize the likely news flow in the next half that we should be focusing on.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [59]

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Well, there could be some news flow in Germany. Germany is a little bit complicated to try and summarize because they run infringement hearings, validity hearings and European Patent Office hearings kind of all independently. So I'll tell you, in the next 6 months, there might be a little bit of news flow there. Otherwise, probably the next material or next significant event would be Australia, as that happen -- April.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [60]

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Next question comes from Tristan Joll at FNZC.

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Tristan Joll, First NZ Capital Limited, Research Division - Research Analyst [61]

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Just on Homecare, though, and in particular that flow gen result, which is great. Can you -- could you characterize it as a sort of a price-v-volume concept? I'm just conscious the selling prices may be different. And then secondly, in terms of your 2% mask growth, can you give us a sense of resupply v new setups? Like what would this year be of new setups by category, in your own reckoning?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [62]

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First question, in CPAPs, that is price and volume both contributing to that growth. Second question, masks 2%, what's resupply and what's -- look, we really don't have a good handle on that. Do you want to -- there's not much we can add to it. I mean, we only see a tiny sliver of that business or only a visibility of a tiny sliver, so it's just too hard for us to comment.

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Tristan Joll, First NZ Capital Limited, Research Division - Research Analyst [63]

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Okay. Or I mean, I suppose your perception of how you're going with the new patient now who wants to take or is going to take a full face mask, your perception from a sales point of view is, is that's improving? Or is it -- I'm trying to get a sense of how important this new mask, given it's a full face mask, actually is in the eyes of the customer.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [64]

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Well, as far as -- what you can say is that at 2% growth, we're growing under market rates. And we would expect new mask to be helpful to that. And I don't know what else to add, Tristan, unless you want to lead me somewhere else?

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Tristan Joll, First NZ Capital Limited, Research Division - Research Analyst [65]

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No, it's all right. I'll lead you to Hospital, I guess, just with new apps and that 22% growth. I think -- from memory, I could be wrong, but I think this is the first half wherein Nivairo was in the U.S. for the whole half, so I just wondered if you could talk about the relative contribution that, that has made, the Optiflow, to that result and also as -- the sort of level about what we would expect for the full year.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [66]

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Sure. I'm not totally sure if this is the first full half. Last full half might have had Nivairo in the U.S. I'm not sure. Nivairo is growing well. It's making a good contribution to new apps growth. It would be under the average, with nasal high flow over the average.

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Tristan Joll, First NZ Capital Limited, Research Division - Research Analyst [67]

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So I suppose, for inference, Optiflow is still mid-20s and beyond.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [68]

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That is the inference, yes.

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [69]

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And just adding a little bit more color there too, Tristan. I mean, you've got to remember we've got 2 NIV masks. So we've got this (inaudible) traditional range, and we've obviously got Nivairo. And Nivairo's growing very well and very strongly, but we still selling a lot of the old products -- older products, too.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [70]

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Yes. And in terms of second half, I mean, we are expecting a similar underlying trend, but you've got the flu season overlay over it for the second half.

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [71]

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Yes.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [72]

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Next question comes from Stephen Ridgewell at Craigs Investment Partners.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Research [73]

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Just going back to SleepStyle and the good number in that business where you're focusing growth. I'm just wondering if you can give us a little bit more color on the performance in those markets where it's launched, as you're delivering 43% growth across the globe if you like. Given you're running sort of a handful of markets today, it does imply extremely strong growth in those markets where it has been launched. Give us a little more color there.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [74]

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Sure. Well, if you look at our first half, it's basically launched everywhere in the first half, except the U.S. And it's not really lapping any launches in that first half either, a little bit of Australia and New Zealand at the end of our first half.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Research [75]

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Right. So -- but would you -- would that sort of -- okay, that's fine, I think. Well, just in terms of the reorder rates you're seeing post initial launch, are you seeing good reorder rates for that product in those markets?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [76]

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Reorders for CPAP, it's -- well, [pointed it out].

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [77]

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I think the question -- the answer to that question might be, Stephen, that we have got providers that are supporting it, putting on new patients. Like what they see, it's a very good product, and they continue to put it on new patients as they come in. That's what you mean by reorder rate, right?

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Research [78]

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Yes, broadly. And I suppose as well there'd been some concern maybe 6 months ago, some thoughts that success of SleepStyle might come at the cost of mask sales. Are you comfortable now that success of SleepStyle is not coming at the cost of mask sales?

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [79]

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Very comfortable, Stephen, yes. We're taking great care to make sure that we have the right places and the right products and doing, yes, the right activities and promotions.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Research [80]

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Great. And just going to, again strong point in the result, myAIRVO growth. And it is helpful, you've given us a little bit color. It's around about 10% of Homecare and growing at similar rates to -- perhaps it'll be there to new apps in Hospital. Are you able to give us a rough steer as to the split between devices and consumables impact of myAIRVO, just given that the devices are relatively high average selling price, and it's perhaps more of a device-led revenue mix for that business? Just some color there would be helpful.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [81]

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Yes, that's a fair comment. So in the business model where you're placing hardware, and it drives some consumables, home respiratory support is in the early days of that. So without the accumulated installed base using consumables, that business also is a little more hardware dominated than you might expect.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Research [82]

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Okay. And apologies if I missed this earlier in the call, but just in terms of the guidance that you're providing. So it's helpful that you've split out litigation cost, NZD 20 million to NZD 30 million, expectations for the full year, but Andrea, would you let us -- provide us the expected hedge profits in that range?

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Andrea Blackie, Fisher & Paykel Healthcare Corporation Limited - Acting CFO [83]

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Yes. So I think this is -- as I referred to before, the first half hedging loss has been $2.1 million. Second half hedging loss is forecast at around about $1.5 million, being total loss from hedges of $3.6 million for the year.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [84]

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We've got no more questions in the queue, so we'll give you a very quick opportunity if anyone else wants to come in. We do have one more that's just come in, Chelsea Leadbetter at Forsyth Barr.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [85]

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I guess, just briefly on the, I guess, CapEx and new facilities that you've kind of obviously talked a bit about, Mexico and Auckland. Can you just give us a bit of an update on exactly when those come onstream? And then I guess, when do we start thinking about the third location in terms of the next, I guess, round or phase of CapEx spend?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [86]

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Okay, so when we look at Mexico, that -- the building itself should be complete by the end of this calendar year, probably not any product out of that until the new financial year so no real impact until then. Now New Zealand, the building itself should be complete end of 2020 so no impact until then. Another site, a fourth site, for manufacturing -- gee whiz. So the plan always was we would look at other sites. We're probably several years away from beginning to look again and then several years after that.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [87]

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Okay. And I guess just thinking about when Mexico does come onstream. And I guess, beginning of FY '21, product comes out. How do we think about the, I guess, gross margin profile maybe in the short term and a little bit of a drag? And then as it still start to see some benefits again. Is that kind of a correct way of thinking about it?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [88]

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Well, depreciation will kick in at the beginning of next year. That's for sure. There is a question around where that depreciation fits, whether it fits in cost of goods or whether it fits in SG&A. I don't know if you want to talk to that. No, she doesn't, but fundamentally, depreciation will kick in at the beginning of the financial year. And gross margin improvement will need some volume before they start getting material.

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Andrew Somervell, Fisher & Paykel Healthcare Corporation Limited - VP of Products & Technology [89]

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Yes, that's right, Chelsea. So I think the big thing for us next year with Mexico is really about when we're going to get new product being manufactured there. At this point, we're not able to estimate that, so it's very hard to actually put up an estimate on the impact of Mexico for the next financial year at the moment.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [90]

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Okay, no problem. And I guess, just lastly, coming back to the Hospital, which was obviously covered quite a bit in detail so far but just your sort of thoughts. Or I guess, can you give us any commentary on patient numbers across the key sort of hospital areas and maybe if you've seen any change in your thought process around market size or opportunity at all?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [91]

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No change to anything there, Chelsea. We haven't updated the patient numbers since end of year, so you can probably just extrapolate pretty safely off those. And nothing over the last 6 months have caused us to rethink our -- either our penetration or potential market size.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [92]

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We have another question from Marcus Curley at UBS.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [93]

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Could you just talk a little bit about your market share in masks by category? [You're] obviously below market. Would you call out any of the categories in particular where you think you've been lagging market growth rate?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [94]

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Probably the only little bit of color I could give you there, Marcus, is flow's going pretty well. Otherwise, everything's consistent with the overall number.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [95]

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Okay. And I suppose 2 of your competitors recently launched sort of low-touch full face masks. Do you have a view on whether that's the future of that category? Or is it a fad?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [96]

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I guess we don't have a view we're prepared to share right now, best I could give you.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [97]

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Okay. And then finally, with the litigation costs second half, and the middle of your range is around $17 million, if you double that for an annualized rate of, let's call it, mid 30s, is that an indication of where things could go for next year given the activity levels?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [98]

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Look, I don't think so. And trying to amortize litigation is a bit of a nightmare because it is such a lumpy thing. And we do have these 2 USITCs. And we do have New Zealand, and we do have Australia, all kind of hitting big spending towards the end of our second half, so I probably wouldn't try and amortize that particular number out over the long term.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - General Manager of Corporate [99]

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So we're at the end of our questions. If there are any follow-up questions, by all means, please give me a call, but I hand back over to Lewis to close.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [100]

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Well, thanks, Marcus.

We have a team of more than 4,000 people all around the world. They're all committed to delivering innovative medical devices to help improve care and outcomes for patients, and I'd like to take this opportunity to thank them all for their care and dedication with which they approach their work, and that's evident in the strong work today -- strong results today.

Thank you also to our shareholders for your continued support and to all the other participants for joining us today.

Thank you.

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Operator [101]

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Ladies and gentlemen, this does conclude our call today. We do appreciate your participation. Please have a great day. At this time, you may disconnect.