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Edited Transcript of FPH.NZ earnings conference call or presentation 26-Nov-19 9:00pm GMT

Half Year 2020 Fisher & Paykel Healthcare Corporation Ltd Earnings Call

Auckland Dec 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Fisher & Paykel Healthcare Corporation Ltd earnings conference call or presentation Tuesday, November 26, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Somervell

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

* Lewis G. Gradon

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

* Lyndal York

Fisher & Paykel Healthcare Corporation Limited - CFO

* Marcus Driller

Fisher & Paykel Healthcare Corporation Limited - VP 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

* David A. Low

JP Morgan Chase & Co, Research Division - Research Analyst

* Jack Crowley

Jarden Limited, Research Division - VP of Equity Research

* 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 Institutional Research

* Steven David Wheen

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

* Thomas Yeo

Goldman Sachs Group Inc., Research Division - Business Analyst

* Tom Deacon

Macquarie Research - 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 Eduardo, and I'll be your operator for today's call. (Operator Instructions) Please note this conference is being recorded. And now I'd like to turn the call over to Marcus Driller, VP Corporate. Please go ahead, sir.

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

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Thank you, Eduardo. Well, good morning, everyone, and welcome to the Fisher & Paykel Healthcare First Half 2020 Results Conference Call. 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 will first provide an overview, followed by some specific comments from Lyndal, and then we'll open up the call to questions for the team.

We'll be discussing our results for the 6 months ended 30 September 2019. We've earlier today provided our 2020 interim report, including financial statements and commentary on our results to the NZX and ASX. 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, thanks, Marcus, and welcome, everyone. Today, I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX this morning. But first, also this morning, our Chairman, Tony Carter, announced his intention to retire with effect from the close of the Annual Shareholders' Meeting next August. And the current -- a current director, Scott St John, has been elected by the board to succeed Tony as part of a planned succession process. As the Chairman of our Audit and Risk Committee, Scott has been a strong leader with excellent corporate governance and commercial skills, and he has the unanimous support of his fellow directors. And we'll also have an opportunity to thank Tony at the Annual Shareholders' Meeting next year.

So now I'll start on Page 2 of the investor presentation pack. We've had a good start to the 2020 financial year with a number of notable business highlights there. We expanded the release of our new products into new countries. And as always, we have an exciting product pipeline.

So turning to Page 3. These results exceeded our earlier expectations for the start of the financial year, and that's largely driven by robust growth in our Hospital product group. Overall, operating revenue for the half grew 12% to a record $570.9 million or 9% growth in constant currency terms. That's 17% constant currency revenue growth in our Hospital product group and a 1% decline in constant currency revenue for our Homecare product group. Now Lyndal will talk through gross margin and operating expenses shortly.

So then coming down to reported net profit after tax, that was up 24% on the prior half at $121.2 million, and this represented 23% growth in constant currency terms.

Given that positive result, our Board of Directors has approved a 23% increase in the interim dividend to $0.12 per share carrying a full imputation credit. In accordance with our usual practice, this week, we will pay a profit-sharing bonus totaling $2.95 million for the half to our qualifying employees around the world. We certainly appreciate their hard work and their commitment to our success.

So now for a closer look at each of the product groups, let's turn to Page 4. The Hospital product group includes our devices and systems used in invasive ventilation, noninvasive ventilation, nasal high flow therapy and during surgery. 88% of hospital operating revenue was generated from consumables and accessories during the first half.

Turning to Page 5. Revenue from our Hospital products for the half was $353.6 million, representing growth of 17% in constant currency, and we saw strong demand across our entire Hospital product portfolio. But in particular, for our Optiflow and AIRVO systems, which contribute -- continued to benefit from the growing body of clinical research in the use of myAIRVO high flow therapy. This half year also included an extended flu season in the United States and this likely assisted our growth.

Constant currency revenue of 23% in new applications consumables revenue for the first half was driven by our Optiflow nasal high flow therapy, and we also delivered strong growth in our noninvasive ventilation product portfolio. We had robust growth in Hospital hardware for the first half at 18% in constant currency terms and that's as we lap the prior period of flat hospital hardware revenue, and this half also included some large one-off tenders. We are pleased with the underlying growth rates of our humidifiers newer hardware, and we do expect hospital hardware growth to return back to more normal levels for the full year.

So moving now onto Page 6. It's 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. 84% of Homecare operating revenue is generated from consumables and accessories during the half.

So now on to Page 7. Revenue from our Homecare products for the half was $214.7 million. That represents growth of 2% or a decline of 1% in constant currency terms. We're encouraged by the early response from customers to our new Vitera full-face mask in OSA. Revenue from Vitera in Australasia, Canada and Europe has offset declines in sales of legacy OSA masks, resulting in an overall mask revenue slightly above our expectations for the first half. Vitera was launched in the United States in October, and we expect this trend of Vitera offsetting legacy masks to continue for the second half. And we're also planning to launch another new OSA mask later this financial year.

I would say flow generator revenue declined 6% in the first half in constant currency terms. We expect that trend to continue for the full year. Our strategy remains to focus on OSA masks and on the home respiratory support opportunity. Our myAIRVO system, which is used to deliver Optiflow nasal high flow therapy in the home for patients with chronic respiratory conditions, grew strongly. And we're encouraged by the recent publication of an observational study in a hospital in France by Dolidon et al published in the Advances in Therapeutics in Respiratory Disease Journal (sic) [Therapeutic Advances in Respiratory Disease] Journal. This study concludes that the use of long-term nasal high flow therapy allows very severe patients to be discharged to the home and at a reasonable cost. We are aware of at least 10 studies currently underway, investigating the benefits of nasal high flow therapy in the home for patients with chronic respiratory conditions.

So now I'll turn over to our CFO, Lyndal York, and she'll discuss the rest of our P&L, balance sheet, cash flows and foreign exchange position. Over to you, Lyndal.

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [4]

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Thanks, Lewis, and good morning, everyone. If you turn to Slide 8, I would first like to discuss one of the key changes that have impacted our accounts for the 2020 financial year. A new accounting standard for leases came into effect for us from 1st of April 2019. This requires all operating leases to be recorded on the balance sheet as a right-of-use or leased asset, with a corresponding lease liability. This increased our property, plant and equipment assets by $29 million and added lease liabilities of $34 million. Rental payments will no longer be expensed. Instead, there will be a depreciation expense and interest expense. For the first half, $5.8 million was no longer included as lease expense. Instead, depreciation expense increased by $4.7 million, improving our net operating profit by $1.1 million. Interest expense then increased by $900,000. This half included an increase in net profit after tax of $100,000 from the implementation of the new standard. This also impacts the classification in the statement of cash flows. $4.3 million of lease liability payments in this half is now classified as the cash outflow from financing activities. There is a corresponding increase in cash flows from operating activities by the $4.3 million compared to how it would have been presented prior to the new standard.

Moving on to gross margin on Page 9. Gross margin increased by 26 basis points to 67.1% for the half or 15 basis points in constant currency. Favorable product mix offset the start-up costs of our new Mexico manufacturing facility.

We expect the second half constant currency gross margin to be higher than the first half as product starts coming out of the new Mexico manufacturing facility. We still expect the full year constant currency margin to decline from last year within approximately 50 basis points, as we guided to in May.

Moving on to Page 10. Total operating expenses grew 6% or 3% in constant currency. Last year's expenses included $7.7 million of patent litigation costs with ResMed, and approximately $1.1 million of lease expenses that are now effectively classified as interest expense. Excluding these items, operating expenses grew 8% in constant currency. To implement the recently introduced New Zealand R&D tax credit rating that I'll talk about soon, we improved our collection of R&D-related costs. This resulted in approximately $4 million of incremental costs classified as R&D rather than selling, general and administrative expenses, or SG&A. This, combined with increased investment, led to R&D growing 18% to $54 million, which is 9% of revenue. Excluding the impact from the improved data collection process, R&D grew approximately 9% from last year.

We have a strong new product pipeline, including new humidification systems, flow generators, masks, consumables and information solutions all under development. SG&A increased 2% to $162.9 million for the half or a 1% decline in constant currency largely due to the patent litigation costs last year. It is also impacted by the incremental costs now classified as R&D and the reclassification of a portion of the lease expenses to interest expense this year.

Excluding the impact of all of these items, SG&A grew approximately 8% in constant currency terms. We anticipate that our constant currency operating expense growth for the second half will be slightly lower than the first half, excluding last year's litigation costs and the lease expense reclassification.

Slide 11 shows our financing and tax expenses. The increase in financing expense is primarily due to the lease interest expense reclassified from SG&A and the foreign exchange losses to our interest-bearing liabilities, including the newly recognized lease liabilities.

The other key change impacting our accounts this year is how the New Zealand government incentivizes R&D. For the last 6 years, up to and including FY '19, we have received $5 million annually from the Callaghan Innovation Growth Grant. This has been included in Other Income in our income statement and has been taxable. The New Zealand government has implemented a new Research and Development Tax Credits Act, which became effective for us from the 1st of April 2019; thus, for the full FY '20 year. This provides a 15% tax credit on eligible R&D expenditure and replaces the Callaghan Innovation Growth Grant. We are including this tax credit as an offset to our tax expense line in the income statement.

We have analyzed our first half R&D expenditure and estimate that approximately 80% of our reported R&D spend will be eligible for the credit. Based on this assumption, we have recognized an estimated tax credit of $6.6 million in the first half. Recognizing that the R&D tax credit replaces the Callaghan Innovation Growth Grant, the net impact to our net profit after tax was $4.8 million this half, which will support our ongoing R&D investments. Our effective tax rate for the half was 24.1%, down from 28.3% for the same period last year, largely due to the introduction of the R&D tax credit. Excluding the impact of this, the effective tax rate was 28.2%.

Moving to Slide 12. Operating cash flow was $113.5 million. Our working capital increased, primarily reflecting the growth in the business and our usual inventory build ahead of the northern hemisphere winter. Capital expenditure, which includes purchases of intangible assets, was $86.6 million for the half compared with $61.1 million last year. About half of that CapEx for the current year was for our fourth New Zealand building, which is on track to be complete early next year. We are now expecting to spend approximately $117 million in CapEx for the full year.

Capitalized costs associated with the SAP project are included within intangible expenditure. The U.S office implementation in June this year went very smoothly, and the global SAP rollout will continue over the next few years. Our free cash flow, which is operating cash flow less capital expenditure and lease payments, was $23 million for the half. From this free cash flow and our short-term deposits, we paid $77.5 million in dividends during the half. The balance sheet remains strong, debtor days are within the normal range at 47 days and in line with the prior year. Inventory has increased with business growth, and as previously mentioned, in preparation for the northern hemisphere winter.

Trade and other payables reflects a decrease in litigation and capital building projects accruals. Net property, plant and equipment increased by $89 million from the 31st of March mainly as a result of building CapEx and the recognition of lease assets. Net debt at 30th of September 2019 totaled $5.2 million compared to a net cash position of $54.4 million at 31st of March, predominantly as a result of higher CapEx and dividends.

We had cash balances and short-term investments, mainly in New Zealand dollars, of $93.6 million at the end of September. Interest-bearing debt was $98.8 million, with 76% of that being noncurrent. The majority of debt is held in U.S. dollars and euros as the balance sheet hedge.

Turning to Page 13. Our gearing ratio at 30th of September 2019 was 0.6%, which is within our target gearing range of minus 5% to plus 5%. We expect our net debt to remain largely unchanged at the end of FY '20 as we complete the New Zealand building project and pay the interim dividend over the next half. We expect to remain within our target gearing range at the end of FY '20.

As Lewis mentioned previously, we will be paying an increased interim dividend of $0.12 per share, payable on the 19th of December. This represents a 23% increase on the interim dividend declared last year. It will be fully imputed and a supplementary dividend $0.021176 per share will be paid to nonresident shareholders.

Looking now at foreign currency on Page 14. Profit before tax year-on-year was benefited by $2.7 million from the New Zealand dollar being weaker than last year. This includes the results of our hedging program, which contributed a loss of $2.8 million for the first half of this year. Over the last 6 months, we have added to our hedging levels in the 1 and 2-year buckets as well as into years 3 and 4 for some currencies, most notably the U.S. dollar.

Our policy remains unchanged and when there are opportunities to extend our hedging position, we are able to do so up to 5 years forward, and in some circumstances, 10. At current rates, for the second half this year, we are forecasting a similar loss from hedging at this half and a net currency benefit compared to last year of approximately $10 million after tax.

On the next page, we have set out revenue, cost of sales and expenses in key currencies. We include this to assist investors and analysts in understanding our currency exposure.

Now over to Lewis, who will outline our full year guidance. Lewis?

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

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Thanks, Lyndal. So turning now to guidance on Page 16. Our strategic direction remains consistent. We continue to develop new and innovative products and apply expertise to develop new therapies and help change clinical practice and to grow our international presence. In the second half of the 2020 financial year, we anticipate consistent underlying trends in our Hospital product group. So assuming a moderate flu season for FY '20 for the second half, we expect constant currency hospital revenue growth similar to the second half of FY '19.

In our Homecare product group, we also expect a continuation of recent trends, with strong growth in home respiratory support and ongoing pressure in legacy OSA masks, and that results in a constant currency Homecare revenue for the FY -- for the 2020 financial year similar to the previous financial year in constant currency terms. At current exchange rates, we expect to continue to -- we expect -- sorry, at current exchange rates, we continue to expect full year operating revenue for the 2020 financial year to be approximately $1.19 billion, and net profit after tax to be in the range of approximately $255 million to $265 million.

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

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [6]

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Yes. Thanks, Lewis. And Eduardo, if I could ask you to please open the lines. Just before we move to the Q&A, could I -- can I please ask everybody to limit your questions to 2? That's just with a view to giving everybody an opportunity to ask their questions. And of course, if you do have further questions, you're welcome to join the queue again. Over to you, Eduardo.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I'll take a first question from David Low at JPMorgan.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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If -- Lewis, if we could just start with the new mask in the U.S. and just with competitive bidding around 2021 coming, just wondering whether the strategy for the launch differs in any meaningful way from what Fisher & Paykel's done in the past with mask launches.

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

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The real short answer to that, David, is no, not at all. I mean that's a great mask, we'll be doing what we normally do. And having said that, it was really only launched in the U.S. at the end of October actually. So not quite changed our strategies.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Okay. Just one of the other question I had. Just on the R&D reclassification, I presume the benefit from that comes through on the tax credit as well as if you've reclassified it so it becomes eligible deduction credit, I should say?

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [5]

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So yes and no. It certainly is part of what will be considered for the R&D tax credit. But the R&D tax credit is on eligible R&D spend regardless of where it's classified in the P&L. So this reclassification wasn't to make sure that we accessed more tax credit. It was -- as a result of the tax credit, we have to actually get a lot more granular with the information we're collecting on our R&D spend. And so that has enabled us to be more accurate and more precise about what is our R&D spend, and that's what's driven the reclassification.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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But I guess from our benefit, is it also gives a number that we can apply that 80% to with greater accuracy, given we can't see how other things are classified and what might be an R&D eligible for a credit somewhere else in the P&L?

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [7]

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Absolutely. Yes.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [8]

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Next question comes from Chelsea Leadbetter at Forsyth Barr.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [9]

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I guess if I can start first question with respect to gross margins, and appreciate you've given us an outlook for this year, and you also have a target that you -- or I guess, expectation on a longer-term basis. I'm just kind of interested in maybe thinking about gross margins generally and outlook. You've still got product mix benefits coming through. How long do you think that can continue? And then perhaps how to think about when the New Zealand facility comes on stream and the impact on -- of that and the impact this year with respect to the Mexico facility. I mean just kind of teasing out some of those drivers going on at the moment.

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [10]

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Sure, Chelsea. In terms of our target, we do have a target of 65%, is our long-term target for gross margin. Now obviously we are slightly over that at the moment, but we've got currency working in our favor. And the idea of that is to have 65% as a long-term average that we can achieve. So we always do want to be overshooting that to give us a bit of flexibility if currency, et cetera, moves against us and to cope with bringing new buildings online where you have more depreciation and cost upfront before you get volume out of it. We don't expect to see significant gains going forward out of margin. We will continually be having cost increases coming through our business. We've spent a lot of effort and time over the past few years really getting as efficient as we can through our supply chain and through all of our costs. So there's not a lot more capacity that we can do there. So costs are likely to continue increasing, and we see the benefit coming from more volume out of Mexico as helping to counterbalance those cost offsets. We also don't expect to see significantly more product mix benefit going forward. So we do expect margins to -- at the long term, be around that 65% rate. And our aim is to maintain the margin rather than expecting growth coming out of it.

In terms of the fourth building in New Zealand, not all of that's going to go into gross margin because, unlike Mexico, that whole building isn't dedicated to manufacturing. So a big portion of the cost there will actually go into operating expenses.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [11]

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Okay. And I guess the second question, in terms of kind of picking up on the competitive bidding dynamic, can you talk about, I guess, your expectations in terms of what that could mean? Or I guess how that potentially plays out in terms of the pricing landscape in the U.S. market? Is it still within that 2% to 4% decline range that we've kind of talked to in sleep apnea masks for the foreseeable future? Or did something change as a result of competitive bidding?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [12]

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We'll pass that question over to Paul, Chelsea.

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [13]

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Chelsea, well, obviously, competitive bidding is coming up. And obviously, we don't know what the impact of it is at the moment. But generally, we are used to working with competitive bidding and have -- obviously have some form of impact. But from our point of view, it's really about delivering customers good technology because technology is -- we can give them best result because we can make it more efficient and help them reduce costs. So our job is to make sure we bring out the very best technology as we're seeing with the release of Vitera.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [14]

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Our next question comes from Steven Ridgewell at Craigs.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [15]

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Just a first question on hospital growth rates. So it was obviously a good first half at 17% constant currency. But I just want to dig a little bit deeper into kind of new apps growth rate. So we saw 23% in this half versus 22% a year ago. I mean given the commentary around the extended flu season, I just wonder if we should have seen a little bit of a stronger pickup for the year in -- on our numbers. We did see a stronger pickup in the core consumables. Just interested if you could give us a bit of a flavor as to how you're thinking about the, if you like, the look through growth rate in new apps. Did that slow down a little bit over last year? Or were there some other factors in new apps that we should keep in mind?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [16]

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No. Stephen, when we look at the flu impact in our first half, there's probably -- there's 2 things going on there. There's an extended U.S. flu season. That's -- it ran through April, May and a bit of June. So that's a contributor. And we also had a strong flu season in Australia and that had a small impact as well. So across the board, new apps and base of ventilation as well, we estimate those are worth about 1% of growth. Otherwise, you're seeing what you see, just very strong growth.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [17]

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Okay. So a relatively small benefit from the flu season in the first half?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [18]

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Yes, yes. When you're looking at a couple of months, U.S. and Australia as a relative wallet was strong, a small proportion of our business. So we're just landing on roundabout the 1% mark for those.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [19]

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Okay. That's helpful. And then second question on Homecare. Good first half -- well, I guess, relative to the guide we had in May for OSA masks. Just wondering if you're able to give us a sense of how much market share you believe you're taking in the full-face category in the markets for Tera (sic) [Vitera] that's selling in or sold in over the first half?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [20]

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Yes. Almost an impossible question to answer because you're working with estimates of market size, estimates of new patient starts, estimates of growth. So we think in those markets that you're referring to, we probably are taking market share. (inaudible) project go.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [21]

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Can I rephrase that question then? Maybe from market share, just maybe to talk about constant currency growth rates, what we see in those markets where Vitera's been released.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [22]

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Yes, yes. So the model there really is, you've got legacy masks declining, and they're on that declining trend that you've seen over the last year or 2. And you've got Vitera offsetting that decline. So that's what's happening outside of U.S. in the first half. And then in the U.S., you don't have the Vitera offset sitting there.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [23]

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So I mean, I guess, going to the comment on the guide that you're expecting it kind of to continue. Does the guide imply that you're only expecting flat Homecare constant currency in the second half? Or should we expect a little bit better than that given you obviously got it's going through the U.S. market?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [24]

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Yes. So looking at the full year, you're in about the right zone there with that, Stephen. And it's that phenomena of legacy masks increasing to decline -- increasing decline, offset by Vitera, probably a little bit of pressure on CPAPs and then respiratory support growing well.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [25]

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Next question comes from Thomas Yeo at Goldman Sachs.

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Thomas Yeo, Goldman Sachs Group Inc., Research Division - Business Analyst [26]

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Just a question on new application consumables. Another good period of 23% growth. So could you just confirm what percentage of the additional volumes is actually coming from outside of the ICU?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [27]

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Yes, that's also a really difficult question for us to answer, Thomas. Look, our best estimate is that somewhere between 20% and 30% of our volumes globally are outside ICU.

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Thomas Yeo, Goldman Sachs Group Inc., Research Division - Business Analyst [28]

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Yes. And in the U.S., that's towards the lower end of the range, you reckon?

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

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Yes, absolutely right. With the U.S., at the lower end, yes.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [30]

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Next question comes from Andrew Goodsall at MST Marquee.

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Andrew Goodsall, MST Marquee - Healthcare analyst [31]

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Just the first one on U.S. consumables. Just trying to understand if during the period, you took any price increases? And whether you saw any increase in the turn rate of the consumables, I guess, against your -- any turn rate against the previous year.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [32]

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No, not really on turn rate. And that's just about all volume, Andrew. I wouldn't describe any of that growth to [turn rate of consumables].

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Andrew Goodsall, MST Marquee - Healthcare analyst [33]

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Okay. So pretty stable on those 2 measures?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [34]

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Yes.

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Andrew Goodsall, MST Marquee - Healthcare analyst [35]

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And second question, just thinking -- looking into competitive bidding and the risk of a bit of a price impact there. With your Mexican plant coming on, is it feasible that -- or is that likely to phase in a way that would allow you to have a COGS savings roundabout the same time? Just trying to understand the phasing of the benefits there.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [36]

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Yes, I hear the question. We don't really think of it like that. We've kind of got the other effect going on due to the mask growth, which is largely in Mexico. Mexico's been a smaller proportion of our output, last year and this year, than previous years. So that could increase in FY '21, and we just think of it as a kind of a general gross margin -- contributor to gross margin improvement.

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [37]

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And helping to offset the cost increases that will continue to go forward.

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Andrew Goodsall, MST Marquee - Healthcare analyst [38]

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Okay. But that's a FY '21 effect?

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

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Well, Lyndal kind of pointed out the key thing. We just kind of, going forward, we see cost efficiencies out of Mexico just offsetting the inevitable cost earnings.

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

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Next question comes from Steve Wheen at Evans & Partners.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [41]

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I just wanted to ask a question of Lyndal, just on the guidance. The currency that it's struck on now has gone back to sort of $0.64. I wonder if you might be able to help us see the FX impact on the second half of the year if you were to keep it at what the previous guidance was struck at.

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [42]

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Good question, Steve. Now as you can see, we actually have a lot of hedging in place for the rest of the year. So currency has less and less of an impact as we go throughout the year. So a rough sort of back of the envelope sensitivity is about $0.01 move in the U.S. equate to maybe $1 million or $2 million at the NPAT level.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [43]

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Okay. And that -- sorry, that includes the hedge book effect in there as well?

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [44]

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Yes. It's all in there, yes.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [45]

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Yes, right. Second question is just trying to get some -- you called out the strong growth in both myAIRVO in the Homecare segment, but also strong growth in the noninvasive ventilators on the -- in the consumables side. Could you kind of give us any color around the growth and what's driving that?

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

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So we think in the myAIRVO space, it really hasn't been a massive change in clinical data. So it is really just our people getting around to hospitals and getting around to physicians and that sort of slow, but rather lumpy climb up in usage. Probably wouldn't read much more into it than that. In the noninvasive ventilation consumables in the hospital, that's really just getting a bit of traction with a noninvasive mask that we introduced 18, 24 months ago. And it really is a much better-performing product, and we're just starting to get traction there.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [47]

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So can you quote a growth rate for either of those segments?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [48]

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Well, we've got them both in new apps. Noninvasive, you'd probably put in the mid-teens, in that kind of region.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [49]

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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 [50]

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First, could you just give a little bit of color around what I think is the guidance for a slowdown in the hospital constant currency revenue growth from 17% in the first half to, I think, you're saying 11% in the second, as a starting point?

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

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Sure. Well, second half last year was more like 12%. But what we think is going on there is you'll see there's really strong hardware growth in our first half. I think that's like 18% constant currency. That's capital equipment. It's lumpy by nature. And you might remember, we're lapling a first half last year where it was flat, so it's an indication of the lumpiness. So essentially, what we're doing there is we're smoothing that lumpy hardware growth in that exceptionally high first half this year. We're smoothing it over FY '19 and FY '20. So that plays into our second half number. I guess the short answer is we're not expecting a lot of hardware growth in our second half.

And then the second thing we're thinking is that when we look at the FY '19 flu season, we classify that as moderate. Off our model, it does look at the more impactful end of moderate. And we're thinking that's unlikely to happen twice. So in our guidance, we brought it down to the less impactful end of that moderate range that we give. (inaudible)

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [52]

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Sure. Okay. And just on the hardware sales in the first half, could you give a little bit of color on what type of equipment was sold and what wards, just to give a little bit of perspective in terms of the incremental demand?

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

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Yes. Well, we don't really know what wards it's going to go into with humidifiers. All we really know is that AIRVOs are going to be used with nasal high flow. So we can't go much past that.

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Unidentified Company Representative, [54]

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(inaudible)

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [55]

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So more AIRVOs than MR850s, 950s?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [56]

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Yes, we're not going to drill that deep to individual products.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [57]

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Okay. And then just secondly, on OSA, looking into next year, maybe this is a question for Paul. With 2 new masks operating, is it reasonable to assume, let's just forget about competitive bidding impact at the moment, yes, that the business could get back to a market growth outcome? Or is that too optimistic for FY '21?

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Paul N. Shearer, Fisher & Paykel Healthcare Corporation Limited - SVP of Sales & Marketing [58]

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If -- Marcus, I think that if we -- we got a second mask coming out with Vitera still going in next year. I think if we get a good reception of the new mask, which we expect to get, I think there will be a reasonable expectation it would start to be moving up to market growth rates.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [59]

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Next question comes from Jack Crowley at Jarden.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [60]

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Just one question from me. Just hoping to tease out Homecare guidance a little bit better in thinking, I guess, about that 1% constant currency decline in the first half versus full year kind of flat assumption, which implies, I guess, a relatively immaterial pick up in the second half. I guess you have mentioned that trend of Vitera continuing to offset the legacy pressures. But given that we've got the launch of that in the U.S., it takes place in the second half, do we need to think about guidance as, I guess, escalating pressures on the legacy mask that the U.S. introduction of Vitera offsets? Or is it kind of more the case of, I guess, Vitera not having a meaningful uplift into FY '21? Or how should we kind of piece those things together?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [61]

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Well, in that guidance, we have got Vitera going pretty well. But what we're doing is we -- in the guidance, we're increasing the decline of the legacy masks. So that's your offset.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [62]

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Okay. So that makes sense. And then just as a follow-up to that, is there any kind of, I guess, quantification that you guys could give us about, I guess, what you think the constant currency decline is from the legacy mask putting Vitera to one side?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [63]

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Well, look, all I can just point at the data you can see. If you look at last year in the first half, that was 2% in masks, the second half was minus 2%. And then in our first half, you've seen minus 1%, and that's got Vitera in it in -- outside the U.S. for a bit less than the first half. So that should imply that, that decline's increasing. And we just carried forward that increasing decline that you can see there into our second half.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [64]

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Next question comes from John Deakin-Bell at Citigroup.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [65]

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Just sort of a kind of a macro question on the OSA business. When we look at the competitive landscape, do you think the market's growing at a higher rate than it has been historically? Because notwithstanding, obviously, you haven't had a mask that competitors are growing at quite rapid levels.

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

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Look, I think the answer to that, John, is we don't know, we can't be sure, especially of our volumes and our trajectory. And the other comment I would make is that we give you a pure-play OSA mask number. I'm not totally sure what the other numbers you're looking at represent.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [67]

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Yes, yes. Fair enough. And just on Optiflow, can you just give us a bit of a feel for how you think it's penetrated through ICU, both in the U.S. and maybe in Europe at this point? It's obviously growing rapidly and a fantastic product. It's just a bit hard from the outside to get a feel for how penetrated you are.

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

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Yes, there's 2 levels to the penetration question. Across U.S. and Europe, we would say we've got something in about 70% of ICUs, U.S. a little under -- sorry, U.S. a little over, Europe a little under. And then the second level of penetration is how much do they use it to the extent they could. And we would say about 5% to 10% of those ICUs use Optiflow fully on all patients that they could.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [69]

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Right. There's a long road ahead. That's great.

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

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Yes, just good news.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [71]

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Next question comes from Stephen Ridgewell at Craigs.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [72]

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I just wanted to talk a little bit about myAIRVO. So I just think the disclosure is, devices were about 16% of Homecare division sales. Could you call out perhaps what percentage of Homecare sales was myAIRVO during the period? And then characterize the growth rate for myAIRVO? Was it still sort of still somewhat to the new apps growth rate? Or would you characterize it a little bit faster, a little bit slower than that?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [73]

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Stephen, we really don't like calling out growth rates for individual products. So sorry about that. We'll leave that one there. But we can say that myAIRVO is growing at the new app rate, yes.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [74]

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Okay. So okay. That's helpful. And then given device sales were kind of -- well, it looks like they're pretty flat year-over-year in Homecare, and myAIRVO's growing at a decent clip, should we take from it that SleepStyle is going backwards at a pretty decent clip as well?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [75]

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Yes, fair assumption. That's your offset.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [76]

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Yes. And then just one for Lyndal. If my numbers are right, I think CapEx guide's increased by $20 million. Apologies if this has been covered off. But since the May guide, so from $150 million to $170 million, was there any -- I guess, what were the drivers for that increase?

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [77]

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It's really just bringing forward starting a few extra CapEx projects on production lines towards the end of this year that we sort of had in the long-term plan for next year, such as bringing forward a little bit of production lines, making sure that we always have capacity well ahead of when we need it.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [78]

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It's a good news increase.

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Lyndal York, Fisher & Paykel Healthcare Corporation Limited - CFO [79]

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Yes.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [80]

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Next question comes from Tom Deacon at Macquarie.

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Tom Deacon, Macquarie Research - Research Analyst [81]

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Just wondering if you guys might be able to give us a little bit of detail on how much of the OSA mask growth historically has been attributable, you think, to resupply just noting the OIG's investigation into resupply ongoing in the state at the moment.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [82]

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Attributable to resupply. Again, that's a number we just don't have visibility when we make a sale or whether that's a new patient or whether it's resupply. So it's -- we just can't comment on it.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [83]

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We don't currently have any further questions in the queue. So we will give you 10 seconds or so if anyone else would like to ask a question. Or else we will -- so I'll just give one further call for questions. I've got one from Steve Wheen at Evans & Partners.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [84]

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Yes, I thought I might just take the opportunity to see if you have noticed the flu data for the current northern hemisphere that started off very strongly. It's sort of tracking similar sort of levels to one of the more recent strongest flu seasons we've seen for some time. So just wondering if you've seen that and that's part of your inventory build that you're preparing for?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [85]

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It's not related to the inventory build. And yes, we do monitor it closely. And if you look back over the last 10 years, you'll see all sorts of shapes to that curve, Steve. We're not going to read too much into it. We won't be absolutely sure what it is probably until the end of March.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [86]

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Yes. Suffice is to say, though, but it's still at that moderate level in terms of your guidance?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [87]

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Yes, yes, yes. That wouldn't move our guidance at all, no.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [88]

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A 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 [89]

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I just wondered, you obviously highlighted some of the recent studies underway for myAIRVO in the home. I just -- yes, could you provide a little bit of perspective in terms of what you think the time frames there are for the development of those markets and to material revenue sources? Probably, obviously, at a loose level, maybe framed with when you expect some of the key study results to be released.

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [90]

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Look, I can only be loose on that. Look, what you've seen over the last couple of years is you've seen steady growth in that COPD in the home with the clinical evidence. It was a little bit of a milestone in March -- last year or the year before when the Danish study came out, that was a bit of a milestone. And it's kind of just contributes. There's no sort of step functions on this clinical data. And it's -- as we talked to early adopters with a bit more clinical data, we can get a bit further up the early adopter curve. It's kind of that simple, and it might make the process a bit easier. So to get to material to us, revenue from that, you do need kind of a body of clinical evidence, and we expect that's going to occur over the next decade or so, Marcus. But we think, in the meantime, we'll stay on this kind of trajectory. And we sort of -- our history has been -- we don't really see milestone studies that turn into a step function. That's just something else for our people to use and it makes the conversation maybe a bit easier or it means that more people who are prepared to discuss it.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [91]

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And also trials underway in the U.S., what would be the time frames for their results?

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Lewis G. Gradon, Fisher & Paykel Healthcare Corporation Limited - MD, CEO & Executive Director [92]

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Yes. So look, I probably can't run through all of them for you. There's one I'm thinking of, and it's going through a fairly typical track of doing a pilot study so that we can size and fund a big study. So we're likely to see the pilot study results. Andrew, can you give me a helping hand?

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Andrew Somervell, Fisher & Paykel Healthcare Corporation Limited - VP of Products & Technology [93]

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Yes. The results of the pilot study should be out within the next 6 months or something like that. But we need to bear in mind that this is just a pilot and will lead to a much bigger study, and that bigger study will take a considerable amount of time.

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

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And funding and study design for the big study will be based on the pilot data.

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Marcus Driller, Fisher & Paykel Healthcare Corporation Limited - VP of Corporate [95]

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Thanks, Marcus. We don't have any further questions in the queue. So Lewis, I'll hand over to you to conclude.

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

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Okay. Thanks, Marcus.

Look, in summary, we have an exciting future beyond 50 as we continue to innovate, to improve care and develop new applications for our technologies. And we really do appreciate the support of our customers, employees, shareholders, suppliers and clinical partners who are on this journey with us. Thanks to you, we are estimating that Fisher & Paykel Healthcare products will be used by more than 15 million patients in 120 countries during this financial year. So thank you also very much for joining us today. Thanks.

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Operator [97]

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