Fisher & Paykel Healthcare Corporation Limited (FPH) Earnings Call Transcript & Summary

[Presentation] Good afternoon, everyone. I'm Tony Carter, Chair of the Fisher & Paykel Healthcare Board. Welcome to the 2020 Annual Shareholders Meeting of Fisher & Paykel Healthcare. I am at the company's Auckland facility in one of the labs used for product development and testing. I'm joined by Managing Director and Chief Executive, Lewis Gradon, and we are maintaining the appropriate 2-meter distancing. The rest of your Board members are joining this meeting virtually due to the community transmission of COVID-19 in Auckland. A virtual-only meeting is a new experience for us of all, so we appreciate your attendance and understanding. You are still able to vote and ask questions in this online meeting. Please refer to the virtual annual meeting online portal guide for instructions. And if you need help, find the Link Market Services helpline on 0800-200-220. On the information conveyed to me, I declare that a quorum of shareholders is present and the meeting has been duly convened. I would like to introduce your directors to you. Here in person is our Chief Executive, Lewis; and joining us by Zoom are Mike Daniell, Scott St John, Pip Greenwood, Geraldine McBride, Donal O’Dwyer and Neville Mitchell. In addition, we have [ Karen Bakey ], who is our external auditor on behalf of PwC. The minutes of the last Annual Shareholders Meeting have been approved by the directors and are available for inspection. The Notice of Meeting, including the explanatory notes, has been circulated to all shareholders, and I intend to take it as read. The first item on the agenda is the Chair's address, where I will give an overview of the company's performance. Then I will ask our Managing Director and Chief Executive, Lewis, to provide a review of our activities over the past year, and he will also provide an update on our performance during the current financial year. After addressing any questions on the financial statements, we will move to the resolutions contained in the Notice of Meeting. We will address questions after each resolution is proposed. You can submit questions by asking Ask a Question function. I would encourage you to send your -- through your online questions as soon as you can. This will allow us to answer these questions at the appropriate time of the meeting. The slide presentation and speeches were released to the NZX and ASX today and are available in the Investors section of the company's website at fphcare.com. I opened last year's meeting by stating that Fisher & Paykel Healthcare is a global leader in medical devices and systems for use in respiratory care, surgery and the treatment of obstructive sleep apnea. Today, I think it's important to note that the company is also the world's largest manufacturer of products used for 2 of the primary respiratory therapies for patients admitted to hospital with COVID-19. This year has certainly presented some unexpected challenges, but we can all be proud of the company's world-leading role during this global pandemic. In the 2020 financial year, Fisher & Paykel Healthcare products touched the lives of an estimated 16 million patients. With that in mind, I'll take you through the highlights of the company's performance. Because of COVID-19, we announced our 2020 full year results a month later than usual at the end of June. After a particularly strong second half, the company delivered operating revenue of $1.26 billion, up 14% over last year in constant currency. Net profit after tax was $287 million, up 37% over the previous year. The total dividend to shareholders for the financial year was $0.275 per share, and this was up 18% over the previous year. In FY '20, the Hospital product group made up 63% of revenue, and the Homecare product group made up 36%. The Hospital product group includes products from invasive and noninvasive ventilation, Optiflow nasal high flow therapy and surgery. Last year's hospital revenue grew 21% in constant currency terms. This increase was largely driven by 3 factors: growth in the use of Optiflow, demand for products to treat COVID-19 patients and strong hardware sales throughout the course of the year. Looking at the Homecare product group now. This includes products for obstructive sleep apnea and other therapies used in the home. Homecare revenue increased by 4% in constant currency terms. The expansion of the Vitera full-face mask and the launch of the Evora compact nasal mask for OSA contributed to these results. In terms of margin, gross margin was down slightly at 66.1% compared with 66.9% in FY '19. This was due to start-up costs for our second Mexico manufacturing facility and increased air freight costs associated with COVID-19. However, it remains above our long-term target of 65%. Operating margin was 30%, which is right on our long-term target. The pandemic has created a lot of attention for existing products and therapies. However, at Fisher & Paykel Healthcare, innovation is seen as the key to long-term success. Last year, the company invested $118.5 million in research and development, which was 9% of our revenue. Safeguarding that investment by protecting the company's intellectual property remains a key priority. The company could not have achieved these financial results without the people of Fisher & Paykel Healthcare going above and beyond to get essential products into the hands of customers and patients. Every 6 months, a profit-sharing bonus is paid to the company's employees around the world, and in the 2020 financial year, this bonus totaled $12 million. It was well-deserved, and I'd like to take this opportunity to personally thank everyone for their contributions. Turning now to your Board. Last year, there were no changes to the Board. However, we did welcome Toni Moyes as part of our Future Directors Programme. Toni is the Chief Operating Officer at Montoux, a software-as-a-service company in the life insurance industry. Toni has brought a range of insights of experience in leadership, management, governance, legal and operational roles, and she has brought global insights and expertise that complement the other Board members. As we have previously announced, I will be retiring at the close of today's meeting, and Scott St John will take over as Board Chair. The Board has commenced a search for a replacement nonexecutive director, and with that appointment will maintain 7 nonexecutive directors. The Board operates with the support of 3 subcommittees, which are the Audit & Risk Committee, the People & Remuneration Committee and the Quality, Safety & Regulatory Committee. The Chairs of each of those committees, Scott, Pip and Donal, will now provide an update on their areas of focus over the past year. Please note, these updates have been prerecorded so that we minimize any technical issues in this virtual meeting. Pip is standing for reelection as a Director of the Board at this meeting and so she will also address that. First, I'll hand over to Scott St John, who currently chairs the Audit & Risk Committee and will be taking my place as Board Chair at the conclusion of this meeting. Scott?

Good afternoon, everyone. This year, the Audit & Risk Committee has been continuing to advance how we manage risk and uncertainty. We believe risk management is fundamentally about decision-making, so our objective is to enable high-quality decisions in complex and uncertain situations. In essence, we are trying to enhance the likelihood of meeting our strategic objectives regardless of what confronts us. This links into our approach to crisis management. Three years ago, we set out to improve our capabilities in this area, developing systems, processes, and teams to help coordinate and manage a potential crisis. The team tested its new systems in 2019 during an outbreak of measles in New Zealand and applied the lessons learned. This preparedness has empowered the business to respond effectively to the uncertainties of COVID-19. While we did not anticipate an event of this magnitude, the approach has been scalable. The team has worked well under pressure, creating robust processes to deal with business imperatives. Another area of risk that is getting increased attention from stakeholders is environmental risk. In May 2020, the Board transitioned environmental risk management from the Quality, Safety & Regulatory Committee to the Audit & Risk Committee. This will help us better align management and reporting of these risks within the broader risk management framework. You will also be aware that this is Tony's last meeting as Chair. Tony is a bit special. He is very committed and has aligned himself strongly with shareholders. He has built a great team around him, is always clear and transparent, and performance matters to him. This is indeed high praise, but he has had praise from a higher station because, of course, his talent and effort have been noted by the Queen when he was made a Companion of the New Zealand Order of Merit for services to business governance in the 2020 New Year's Honors List. Now under normal circumstances, at this point, I would ask you to stand and join me in acknowledging Tony's contribution to our company, but in a virtual environment, it's not quite the same. So Tony, on behalf of the Board, shareholders and all stakeholders, thank you. For my part, I note the great responsibility that goes with being Chair of our company, and I am energized by that responsibility. I will continue to attend Audit & Risk Committee meetings and all Board committee meetings. Neville has agreed to take on the Chair role of Audit & Risk, which is a great outcome for us. Neville is a former CFO of the Australian company, Cochlear. He is also Audit Chair of the Australian company, Sonic Healthcare, and has been attending our audit meetings for some time in preparation for this. Thank you very much.

Thank you, Scott. Now Pip Greenwood will provide an update on the People & Remuneration Committee. Pip?

Hello, everyone. On the People & Remuneration Committee, we continue to work on developing the team for the future and creating an environment where everyone can make a contribution. As part of our diversity and inclusion objectives, we monitored through the year the impact of the company's new policy on flexible working arrangements and introduced an updated parental leave policy in New Zealand. One of the company's objectives for 2020 was to establish a council on inclusion, diversity, equality and awareness. The program got off to a good start, hosting workshops to raise awareness of the rainbow community and highlight gender diversity, and research and development as we continue to work towards improving gender representation amongst our engineers. This year, the company will be using demographic data to examine areas of the company where there is least ethnic diversity and identify root causes. We continue to monitor pay equity between women and men in the same roles, and we are pleased to see no statistical difference between genders. One of the committee's responsibilities is advising on executive and Board succession, and recommending guidelines for executive and director remuneration. This year, the committee commissioned an independent review of directors' fees, and after a competitive RFP process, engaged EY to conduct this. A summary of the EY report was posted on the company's website. We are currently working with an external search firm to identify a replacement for Tony. So -- this is so that we can maintain 7 nonexecutive directors on our Board. Our list of potential candidates includes people who are international, and COVID-19 has made it challenging to interview them in person. However, we will continue to progress that search, and we'll update you in due course. As Tony mentioned, I am delighted to be standing for reelection as a Director of the Board. I would like to highlight 2 years of my expertise, which I consider relevant to my role as a Director of your company. The first is my broad commercial and legal experience. I have over 25 years' experience in commercial law in New Zealand. And during that time, I have provided advice to some of New Zealand's leading corporates, and I have led some of New Zealand's largest commercial transactions. The second is my governance experience. I am a Director of the A2 Milk Company, Spark and Westpac New Zealand. I'm also a trustee of the Auckland Writers Festival. I have over 10 years' experience on the Board of Russell McVeagh, and I served as the firm's Chair. Lastly, I'd like to echo Scott's comments and acknowledge the huge contribution that Tony has made to the company over the last 10 years. It's been an absolute privilege to work with Tony, one of New Zealand's leading nonexecutive directors, and I wish Tony very well for the future.

Thank you, Pip. Now Donal will provide an update on the Quality, Safety & Regulatory Committee. Donal?

Good afternoon, everybody. Each year, we identify the issues that are most material to our business and our stakeholders, and these are listed in our annual report. Two of the most important topics that impact the long-term value of our business are patient safety and product quality. So the Quality, Safety & Regulatory Committee provide oversight in these critical areas. This year, the company has continued to maintain its compliance to key regulatory requirements right across the world as well as improving its working relationship with key regulators. In Europe, medical device regulations are in the process of changing. The company has done a significant amount of work to ensure compliance to the changing requirements. In the U.S., the company has continued to build on its strong working relationship with the U.S. Food and Drug Administration, actively discussing new product introductions and supporting FDA strategic initiatives such as its Case for Quality program. The health, safety and well-being of our employees also remains a top priority for Fisher & Paykel Healthcare. This year, the company has continued its deployment of proactive risk management processes across global operations aimed at improving the health, safety and well-being of employees. These initiatives are focused on managing critical risks that pose the most significant impact to our people. Initiatives addressing 4 critical risks have been deployed last year and 5 are due to be released soon. Due to the COVID-19 pandemic this year, the company put employee welfare first, implementing work-from-home protocols and introducing increased safety measures at our manufacturing facilities in New Zealand and Mexico. The lessons learned from the crisis response have resulted in a number of process improvements, and our executive management team are confident that the business is now more resilient than ever. Thank you.

Thank you, Scott, Pip and Donal. As Scott mentioned, he will be taking my place as Chair of the Board and leadership of the Audit & Risk Committee will transition to Neville Mitchell. Before I turn over to Lewis, I'd like to say it's been an absolute privilege to be involved with Fisher & Paykel Healthcare for the past 10 years, a business that has grown into New Zealand's largest listed company. I'd like to thank everyone I've worked with, particularly the management, Mike Daniell and Lewis Gradon and each of the directors. And of course, I'd like to thank the team of 6,000 people who design and deliver the products that is helping so many patients. I'm confident about the future of this company. I know that Fisher & Paykel Healthcare will continue to fill its purpose of improving care and outcomes whatever lies over the horizon. And finally, I'd like to thank you, the shareholders, for your continued support and loyalty. Your investment in this company has impacted many lives around the world. I will now invite Lewis, our Managing Director and Chief Executive, to go into more detail on the company's performance and to give you an update on 2021 financial year. Lewis?

Okay. Thank you very much, Tony. And thank you, everyone, for joining us in this virtual meeting format. As Tony mentioned, we are broadcasting this from one of our usability labs. And what you see behind both me and Tony is -- it's not a photoshopped background. We have in the room here some of -- some samples of the ventilators that you've been hearing about, and we have samples of all of our products here in the room as well. They're involved with treating respiratory patients. So this has been a very different year in many ways, and I'm going to begin in another way differently by reading a message from one of our shareholders. And this is what the message says: "My mother was diagnosed with coronavirus about 3 weeks ago. She was in hospital for 8 days, including 3 in ICU, and was treated with Fisher & Paykel Healthcare equipment. She has made a full recovery and is now back home. So from our family, I just wish to extend the utmost thanks for your life-saving technology. It is one thing to be a shareholder studying your company, quite another being someone relying on your equipment." And we think that letter, that message really sums up our purpose of improving care and outcomes through inspired and world-leading healthcare solutions. For us, it's about making a difference for each individual patient and for their loved ones. Now as we became aware of the coronavirus threat, we acted quickly and decisively to protect our people, products and patients. We canceled travel and international meetings. We limited the number of people on site. We transitioned quite a number of our office employees to working from home. In January, we activated our crisis management -- response team, and by March, we were managing 10 separate work streams under that format. Since then, we have continued to adapt our work environment as conditions change, and our people are living out our purpose with more drive and more clarity than I think I have ever seen. Since January, we have steadily increased output of our hospital hardware products, and we have added about 1,500 additional people in manufacturing areas across New Zealand and Mexico. There's been a massive effort behind the scenes to meet the global demand for our products, and that's all while our people continue to innovate and develop new ones. In June this year, we had TVNZ One News on our site. And I think their story sums up some of the work we've been doing this year, and we'd like to play that for you now. [Presentation]

Okay. Thank you. Now during a respite from COVID here in New Zealand, we opened our fourth building, the Daniell Building. It is a state-of-the-art facility, and it houses some of our research and development teams, and it greatly expands our manufacturing and distribution capabilities. Today, we also announced that we've commenced planning for our third manufacturing in Mexico. Now when we report our results on the 29th of June, we made some initial assumptions about the progression of COVID-19 around the world, and we provided a guide for the 2021 financial year at the time. But this is a rapidly changing situation. So this week, we provided a trading update on the first 4 months of this financial year, so that's up to the end of July. And you can read that update on our website. But to summarize that, Hospital hardware sales have continued to steadily increase with 390% constant currency revenue growth and that's compared to the prior comparable period. Hospital consumables revenue has grown 48%, and overall, Hospital product group revenue has grown 91%, all compared to the prior comparable period and all in constant currency terms. COVID-19 has also impacted revenue in our Homecare product group. We continue to see lower diagnosis rates of OSA globally. So Homecare revenue growth was 5% to the end of July in constant currency terms, also compared to the prior comparable period. So what does this all mean for the 2021 financial year? And it has been our historical practice to provide first half guidance at the Annual Shareholders' Meeting. This year, we feel we're not in a position to provide that explicit guidance. We can't predict the impact of COVID-19 on global demand, on hospitalization rates, on clinical practice guidelines or on how they're adopted. So for that reason, we think it's wiser to provide a guide for the full 2021 financial year. But before we get to that, let me recap on how we are arriving at that guide. We can't predict the impact of COVID-19, so we're making some assumptions, which we're going to talk about, and then our guide for the year is an estimate of how those assumptions would impact our business. I think it's important to understand these assumptions are predictions, and our guide is not a forecast. So let me recap our current assumptions for you. First, we assume that global hospitalizations requiring respiratory support steadily return to normal by the end of this calendar year. Second, we assume that countries around the world continue to build respiratory care infrastructure, that's including those established intensive care ventilators requiring our humidifiers, and that the trend towards nasal high flow as a preferred therapy continues for COVID and non-COVID patients. Third, we maintain the assumption that OSA diagnosis rates are reduced for the year. And finally, we continue to assume that some costs related to COVID-19, particularly freight, remain elevated for the year. So on this basis and at current exchange rates, full year operating revenue for the 2021 financial year would be approximately $1.61 billion, and net profit after tax would be approximately $365 million to $385 million. So these assumptions are not a forecast or a prediction. As I said, we can't predict the course of COVID-19 around the world and the impact on our business. Indeed, we are continuing to increase our manufacturing capacity for the rest of this year. What we can say is that our strategic direction remains the same, and we still think and plan for the long term. We are still developing new, innovative products and therapies, expanding our global reach and working with key opinion leaders to help change clinical practice. We expect the COVID-19 pandemic has accelerated our progress. In closing, I'd like to thank our suppliers, customers, clinical partners, and our own team of more than 6,000 people for their steadfast commitment. I also want to thank you, our shareholders, for continuing to support Fisher & Paykel Healthcare. Because of you, our products were used to treat around 16 million patients last year, and they will likely help even more this year. Tony, I really want to acknowledge and thank you for your outstanding leadership as Board Chair for the last 10 years, and we wish you all the best in your retirement from Fisher & Paykel Healthcare. This has been a challenging year for us. We've scaled up manufacturing faster than we thought possible, and we've placed hardware in hospitals all over the world that helps them cope with a global pandemic. But most importantly to us, we have played a role in helping patients get better faster, patients like the mother in the message that I shared with you. We are confident in our ability to respond to the COVID-19 pandemic, and we're optimistic about the future of the company beyond it. Thank you.

Thank you, Lewis. We'll now move on to the formal business of the meeting. The third item on the agenda is to receive and consider the financial statements and auditor's report as contained in the company's annual report for the year ended 31st of March 2020. This is the opportunity for shareholders to ask any questions specifically on the financial statements, the auditor's report or the company's 2020 annual report. Please note, there will be an opportunity for general questions once all items on the agenda have been considered. Are there any questions?

Yes, there's a question here from [ David Cockroft ]. His question is around risk. Page 100 of the 2020 Annual Report identifies cybersecurity and data protection as a material business risk. Granted that F&P has hired independent auditors to review the security posture, have you proved to stakeholders and regulators that you are now demonstrably compliant? Are you seeking ISO 27101 for health ISO compliance, for example? Similarly, for GDPR/Privacy Act compliance, how can you demonstrate that you are compliant or even at industry best practice?

Thank you. Lewis, I'll perhaps hand it over to you.

Yes, it's a very detailed and in-depth question. I'll do my best. So yes, we are going for ISO 27001. It is audited in 2 parts, and we have been recently audited and passed the first phase. And we will be progressing the Stage 2 audit this year also. We're compliant with all sorts of acts all around the world, including the New Zealand privacy act. We also -- on a regular and frequent basis, we have external audits, independent audits that we do ourselves from external experts. I think we're taking it seriously. We've seen recent issues in New Zealand. It's very top of mind for us. And we do actually have a team at F&P. I think it's about half a dozen people now that are actually dedicated to the cybersecurity risk. And for GDPR, similarly, we have a dedicated team of -- how many people? We have 3 people that are -- that's what they do for a living, ensure we're compliant, ensure the best practices. I hope I've answered your question thoroughly enough.

Thank you, Lewis. Are there any other questions?

No other questions on the financial statements.

Okay. Thank you. The fourth item on the agenda is the consideration of the formal resolutions. There are 7 resolutions, and each resolution is an ordinary resolution. This means they are required to be passed by simple majority, more than 50% of the votes of shareholders who are entitled to vote on the resolutions and do so vote. Shareholders will be asked to vote on each resolution after the resolution has been proposed and discussed. Voting on the resolutions will proceed using the online meeting platform. To vote, you'll need to click Get a Voting Card at the top of your web page or below the video. You'll be asked to enter your shareholder number or proxy number to validate. You can then select how you wish to vote by clicking For, Against or Abstain in respect of each resolution. Remember to click Submit Vote on the bottom of the card once you have selected all your votes. Further information is available in the Link Market Services virtual annual meeting online portal guide, and you can call the helpline for assistance. Following voting on the resolutions, we will be happy to take any general questions you may have in regard to our company and its operations. Online participants can submit general questions any time during the meeting by using the online question function. The registrar, Link Market Services, will complete the counting of all votes and complete their duties of scrutineer for the purposes of the poll. We will make an announcement of the results of the voting to the NZX and ASX once this process has been completed. We will now move to consideration of the individual resolutions. The first 2 resolutions for the day relate to the reelection of Pip Greenwood and Geraldine McBride as directors. Please see Explanatory Note 1 of the Notice of Meeting for more information on Resolutions 1 and 2. Both Pip and Geraldine standing for reelection do so with the unanimous support of the Board. The Board maintains ongoing consideration of the tenure, experience, other commitments and positions, and performance generally of its members. The first resolution is on the reelection of Pip Greenwood as a director. Pip has already spoken in support of a reelection. It, therefore, pleases me to move as an ordinary resolution that Pip Greenwood be reelected as a director of the company. Are there any questions on the resolution?

Yes, there's a question here from [ Alistair McFarlan ]. And the question is, Pip Greenwood's expertise are listed as capital markets, mergers and acquisitions, takeovers, leveraged buyouts and communications. How are these relevant to FPH? And how does she see herself adding value to FPH in the future?

I'll perhaps ask Pip to answer that question herself. Pip?

I'm sorry, Tony, but the interface cut out, so I didn't actually hear the question. Would Marcus mind repeating the question for me?

Sure. I'll repeat it, Pip. Pip Greenwood's expertise are listed as capital markets, mergers and acquisitions, takeovers, leveraged buyouts and communications. How are these relevant to FPH? And how does she see herself adding value to FPH in the future?

Thanks. I have spent my career in the capital markets, essentially advising the boards of listed companies such as Fisher & Paykel Healthcare, all of those issues that I've previously been involved in relevant to my role as a Director of Fisher & Paykel Healthcare. That's the first thing I'd say. And the second thing I'd say is those are just aspects of my legal expertise. And my broader legal expertise, I think, is beneficial to my role as a director. For example, one of the biggest assets of the company is our intellectual property, and we recently settled an intellectual property dispute with ResMed, in which I provided a secret support to Lewis and his team in relation to the settlement process.

Thank you, Pip. Can I also add as Chair that Pip has been a great contributor on the Board. She chairs our people in the remuneration committee, and I think she has been a great director and a great asset to the Board, and I certainly would support her reelection. Are there any other questions on this resolution?

Yes, there's another question here from Alistair McFarlan. It says, as well as FPH, Pip Greenwood is also a director of a2 Milk, Spark New Zealand and Westpac New Zealand, 3 very large companies. How many board and sub-board meetings is she required to attend to serve these companies? And can she commit sufficient time to FPH?

Pip?

That's a very good question. For each board, under normal circumstances, it's roughly 8 meetings a year with 4 board meetings and 4 subcommittee meetings. During COVID, all of my boards have been meeting on a more regular basis, and I can confirm absolutely that I have the capacity to do the role for, not only for Fisher & Paykel Healthcare, but for my other boards. I take it is an absolute privilege to be a director of companies I am on, and I take that role very seriously.

Thank you. I can confirm that Pip's availability for Fisher & Paykel Healthcare business is absolutely exemplary. [indiscernible]. Are there any other questions on this resolution?

There are no further questions, Tony.

Okay. Thank you. The second resolution is on the reelection of Geraldine McBride as a director. Before I put the motion, Geraldine will speak to you regarding her reelection as a director. Like previously, this has been prerecorded.

Good afternoon, everyone. I'm very pleased to be standing for the reelection to the Fisher & Paykel Healthcare Board at this year's Annual Shareholders meeting. Fisher & Paykel Healthcare continues to be an outstanding New Zealand company, delivering world-class products in a global marketplace. And it's always a pleasure working with my colleagues on the Fisher & Paykel Healthcare Board, Fisher & Paykel Healthcare executives, employees, shareholders and also customers over the past 6 years. Now COVID-19, as we all know, has created unprecedented challenges for all people and nations globally, and it has been a privilege to work with such a dedicated team of professionals who have risen to deliver more than -- more Fisher & Paykel Healthcare products to help save lives and improve patient outcomes than ever before. Fisher & Paykel Healthcare continues to be a great example of New Zealand innovation. It also is a great example of global market execution and also a major growing New Zealand employer. Now I understand this company very well after 6 years of serving on the Board, and I believe my experience in leading companies in international markets, understanding innovation, technology and commercializing that technology globally enables me to continue to make a positive contribution to the Fisher & Paykel Healthcare Board. I am committed to continuing to support the Board's highest standards of corporate governance, ensuring continuous innovation together with working with my Board colleagues to continue to deliver strong shareholder value, and with your support, I put myself forward for reelection at this year's Annual Shareholders Meeting. Thank you.

Thank you, Geraldine. I have pleasure of moving as an ordinary resolution that Geraldine McBride be reelected as a director of the company. Are there any questions on that resolution?

There are no questions.

Thank you. As there are no questions, could you please now record your vote on those 2 resolutions, the reelection of Pip and the reaction of Geraldine? Thank you. [Voting]

The third resolution is to authorize the directors to fix the fees and expenses of PwC as the company's auditor. Under the Companies Act, PwC is automatically reappointed as the auditor of the company. Therefore, I now move as an ordinary resolution that the directors be authorized to fix the fees and expenses of PwC as the company's auditor. Are there any questions on that resolution?

There are no questions.

As there are no questions, could you please record your vote on this resolution? Thank you. [Voting]

The fourth resolution relates to nonexecutive director fees. Each year, the Board reviews nonexecutive director fees to ensure they are appropriate. In December 2019, the Board sought an independent consultant to undertake a benchmarking exercise to assess the directors' fees, and after a competitive tender process, EY was conducted to conduct this assessment. EY looked at the NZX and ASX-listed companies of a similar size and scale. Their report concluded that Fisher & Paykel Healthcare current Board Chair fees and nonexecutive directors' fees were at least 25th percentile amongst comparable companies. EY recommended an increase that will place the company's nonexecutive directors' fees between the median and the 75th percentile of some of the companies. In June, the Board reengaged EY to assess whether the economic impact of COVID-19 had audited their recommendations, and it had not. The Board has considered EY's recommendations carefully, focusing on the long-term trajectory of the company rather than the immediate context of COVID-19. As a result of the benchmarking process conducted by EY and the Board's consultation with a number of shareholders and shareholder representative bodies, the Board determined to propose an increase in the total annual pool available for remunerating the nonexecutive directors as set out previously. Therefore, the fourth resolution of this meeting is to increase the maximum aggregate annual remuneration payable to nonexecutive directors by $405,000 from $1,050,000 per annum to $1,455,000 per annum. If shareholders approve this resolution, the nonexecutive directors' fees would be set at the midpoint of EY's recommendation. Details are included in Explanatory Note 3 of the Notice of Meeting with the proposed fee structure set out on Pages 12 and 13. The reason for the size of the unallocated fee pool is to provide flexibility for additional fees to be paid to nonexecutive directors, where there are significant projects or transactions requiring considerable additional hours over and above the scope of typical Board requirement. It is not the intention of the Board to use the fee pool to award significant additional fee increases without first seeking shareholder approval. At the close of this meeting, I will no longer be Board Chair. I will not personally benefit from this resolution, but I strongly support it. Attracting and retaining the most talented directors is essential for the successful management of this company. I now move as an ordinary resolution that the maximum aggregate annual remuneration payable to nonexecutive directors be increased by $405,000 from $1,050,000 to $1,455,000. Are there any questions on the resolution?

Yes, there's a question from Alistair McFarlan. And the question is, given the economic and health crisis currently facing the nation and many companies and employees, how much restraint did the Board consider before submitting a request to increase directors' fees by 39%?

Thank you, Alistair. The Board considered this very carefully. I think a few points to make. Firstly, this process was commenced in December last year, so prior to COVID happening. Secondly, the Board felt that given the performance of the company and the need to retain competitive directors' fees, particularly since we are recruiting for a further director that the increase was appropriate. While the increase in the pool is very substantial at 39%, the actual proposed increase for individual director's fees as outlined in the Notice of Meeting is 14%.

The next question comes from [ Tony Mitchell ]. And the question is this. NZSA, I presume that's New Zealand Shareholders' Association, thank the Board for providing an independent report to shareholders. Whilst the current wider economic environment does not lend itself well to a director fee pool increase, it is important to take into consideration the specific circumstances for Fisher & Paykel Healthcare. The last increase was approved in 2017. NZSA's policy is that Board should review fees regularly and 3 years as an appropriate period. We have read the documents and believe the increase sought is appropriate given the size, scale and performance of Fisher & Paykel Healthcare.

Thank you, Tony. And certainly, we appreciate the open way in which we were able to engage with the New Zealand Shareholders' Association. As a comment, I think the New Zealand Shareholders' Association do an outstanding job in representing the interests of retail shareholders in this country. So thank you. Are there any further questions?

There are no further questions.

Okay. There appears to be no further questions. So if you could now please record your vote on this resolution. Thank you. [Voting]

The fifth resolution is to approve the issue of performance share rights, or PSRs, to Lewis Gradon, the Managing Director and Chief Executive Officer of the company. Approval is being sought to issue up to 60,000 PSRs to Lewis. The PSRs are issued in accordance with the 2019 Performance Share Rights Plan, and the key terms of that plan are summarized in Explanatory Note 4 of the Notice of Meeting. This plan is unchanged from when it was introduced last year. The Board believes that the consistent issue of PSRs will create strong incentives for management to grow the value of the business at a rate greater than a peer group of multinational medical device companies, but effectively excluding the effects of movements in the New Zealand dollar. Therefore, I now move as an ordinary resolution that approval be given for the issue of up to 60,000 performance share rights under the Fisher & Paykel Healthcare 2019 Performance Share Rights Plan to Lewis Gradon, Managing Director and Chief Executive Officer of the company. Are there any questions on this resolution?

There are no questions.

Thank you. Could you please record your vote on this resolution? [Voting]

The sixth resolution is the issue -- is to approve the issue of options to Lewis, Managing Director and Chief Executive Officer of the company. The Option Plan operates alongside the company's Performance Share Rights Plan. The key terms are also summarized in Explanatory Note 4, and again, the plan is unchanged from when it was introduced last year. This year, approval is being sought to issue up to 190,000 options to Lewis. The option plan is part of the overall long-term variable remuneration structure recommended by PwC in 2019. PwC has been of the view that performance share rights and option plans will provide strong alignment between the interests of employees and those of shareholders. I, therefore, now move as an ordinary resolution that approval be given for the issue of up to 190,000 options under the Fisher & Paykel Healthcare 2019 share option plan to Lewis Gradon, Managing Director and Chief Executive Officer of the company. Are there any questions on this resolution?

No, there are no questions, Tony.

Okay. We now come to the final resolution on today's agenda, which is largely a procedural one. This is an ordinary resolution to approve the 2019 Performance Share Rights Plan Rules and the 2019 Share Option Plan Rules for North America. The updated plans for the North American-based employees were introduced in 2019. Under relevant U.S. law, each plan requires shareholder approval within 12 months of the date of first issue of such rights. Aside from the application of the U.S. Securities Act, the key terms of these plans are materially similar to the 2019 Performance Share Rights Plan in the 2019 Share Option Plan. Explanatory Note 5 of the Notice of Meeting sets out where you can find the key terms of those plans. I now move as an ordinary resolution that the 2019 Share Rights Plan Rules North American plan and the 2019 Share Option Plan Rules North American plan be approved. Are there any questions on this resolution?

No, there are no questions.

Thank you. As there are no questions, could you please now record your vote on this resolution? Thank you. [Voting]

That concludes the voting on today's resolutions. Please remember to ensure you have submitted your electronic voting card. We will be shortly discussing questions on general company matters, so please take this opportunity to submit any questions you may have. Thank you for participation and voting on resolutions today. The votes will be counted by Link Market Services automatically via the online platform, and the results of the voting will be announced to the NZX and ASX as soon as they are available. I would now like to give shareholders an opportunity to ask any questions concerning any matters relating to the company.

The first question, Tony, comes from [ Jet Ming Tam ]. His question is -- or the question is, what are the company's outstanding orders for respirators?

Lewis?

Okay. Thanks. Look, that is a really, really good question for us to start with, actually, because we've seen this a lot, we've seen it in the press, we've seen it in various articles, Fisher & Paykel respirators, Fisher & Paykel ventilators. So what I want to do is, I want to make it very, very clear that we don't actually make ventilators and respirators. And I think I will take this opportunity -- is it okay with you, Tony? I would like to take 5 minutes to show the difference.

Yes. Okay. Right.

I will take the opportunity. Maybe this is an advantage of a virtual meeting, I can show you all sorts of things. So what I'll show you here, just here, this machine here, this is an intensive care ventilator. This is a fairly common one. This is made by a Swiss company. Now an intensive care ventilator is designed to connect to a patient who has this tube. It's called an ET tube or an endotracheal tube. It goes right down in through the mouth orally, right down to the lungs, right to where the trachea branches into 2, right to the carina. And this tube sits in there like that. And the ventilator can control the patient's lungs through this tube. What our equipment does is, we connect the ventilator to this tube, and we condition that gas to body temperature of 37 degrees Celsius, 100% relative humidity. And if the camera can come down a little bit here, this is our humidifier. This is the hardware. There's technology in that hardware. And then you can see this tubing coming from the ventilator, it goes through our humidifier, goes to this patient model -- goes to the patient model, it comes back, and we have technology -- because that gas is at 37 degrees C, 100% relative humidity, we have technology in that tube as well. So when we're talking to you and talking to our results, talking -- we'll call this invasive ventilation. We would like to call it mechanical ventilation. That's because it's got -- the patient has the tube down into the lungs. That's us. The ventilator is not us. I'll show you the other thing we [ hear from you guys ]. This is a noninvasive ventilator, where I am now. Here we go. It was really testing the technology there. So this is a noninvasive ventilator, and we call it noninvasive because this will ventilate a patient through a mask -- this mask, and so it's ventilating through nose and mouth. And again, the clinical data is that you get better results with noninvasive ventilation if you can afford the gas. And so this is the ventilator or the respirator, if you like. Down here, the camera can get down there. Same thing. This is [ our new resuscitation ] system. Now this one is our 950 humidifier. That's our latest model. The previous one I was showing you was our 850 system. So it's a noninvasive ventilator, and it maybe just -- while I'm here, I'll show you something else. While I'm here, I'll show you something else. This is our -- okay -- I'm beaten by the technology just a little. This is our -- is it better if I come up? No, no, I'll stay back. This is our AIRVO system. Here we go. So this is our AIRVO system. So this is self-contained. It has a flow source, and it has a built-in humidifier. And this system delivers the nasal high flow therapy to the patient through a nasal cannula, which is here, and that nasal cannula goes in the nares around the back of the hip. That's a self-contained system. We call it nasal high flow. Our brand is Optiflow. Same thing. We have some hardware, which is [ AIRVO ], and we have the consumables here, which is all the bits that connect from the equipment to the patient. That's how consumables do. So technically, I hope you can see we don't sell respirators or ventilators. That was a very long-winded way of answering the question. The rest of the question -- what was the rest of the question?

The question was what are the company's outstanding orders?

Outstanding orders? So typically, normal business for us is we ship within 48 hours of receiving the order. We ship from stock. We're not quite there, but outstanding orders, it's not something we track or manage or maintain. And right now it's almost an impossible number due to the rapid increase in manufacturing output and orders coming in on a daily basis. So it's almost an impossible question for us to answer.

We have a supplementary question?

We have a second question from [ Jet Ming Tam ], and the question is, has the company been getting higher prices for respirators?

Yes. Yes. Great question. I'm very happy to talk to that because we made a philosophical decision right at the beginning of this crisis that we would not be putting our prices up as long as we could withstand all the additional costs. So we have intentionally and willfully -- because we think it's the right thing to do. We have not increased our prices at all. You will see -- in the financial statements, you'll see our gross margin is going backwards. It's going down a little bit and that's because we're incurring additional costs related to COVID-19. There's all sorts of additional costs, and we're absorbing those, you as shareholders are absorbing those because we think it's the right thing to do. Primarily, it's freight, getting our product to the customers, getting raw materials into New Zealand would be our biggest one, biggest single additional cost that we're absorbing.

Okay. Thank you, Lewis. Next question?

Next question comes from [ John Cahill ]. The question is, Pacific Edge has had recent recognition and acceptance in the U.S.A. in particular. Is this area of medical practice that might fit well with F&P one way or another? Thank you, John.

Yes. Thanks, John. So we would view that as a different area of business. It's about cancer diagnostics. And what we have been trying to communicate is that we could see a pathway -- before COVID, we could see a pathway to doubling the size of our business every 5 or 6 years for a very long time, sustainably and profitably. That's what we're working on. That's what we're going to keep focused on. COVID probably has accelerated that a little bit, but not to the point where we think we need to look into other areas or different areas.

Thank you. Perhaps if I can just add a comment to that. I think one of the reasons that Fisher & Paykel Healthcare has been so successful is its singular focus, and that's something ever since I've been on the Board. So I think the success is as much due to what they don't do as what they do. Next question?

The next question comes from [ Chirag Negandhi ], and this was submitted in regards to the financial statements, but just too late, so we're asking it now. The question is how will an adoption of a successful vaccine impact the net profit after tax in the 2021 financial year?

Yes. So maybe, again, I'll give you a very long answer to the short question. I'm sorry about that. So what we're doing is we're in a respiratory pandemic crisis. We're going to continue to increase our manufacturing capacity as much as we possibly can until things settle down. We don't know how it's going to pan out. We don't know when we're going to get a vaccine. We don't know how that's going to play out at all. We're just giving you a financial guide based on some assumptions which I spelt out. Now if we get a vaccine, if COVID-19 goes away, if it all disappears, we think we're still in pretty good shape because what we're doing through this pandemic is we're placing a lot of hardware. We're placing those AIRVOs all around the world in very large numbers, and we're placing those humidification systems onto the ventilators, invasive ventilation, noninvasive ventilation. We're putting a lot of hardware out there, and it will be our job going forward after COVID, whether because of a vaccine or any other reason, to ensure that our hospital customers can see the benefit of that better therapy and continue to use it on their patients long after COVID is gone.

Okay. Next question?

Next question comes from [ Samuel Firth ]. And the question is, what is F&P doing to ensure COVID-19 doesn't enter into its manufacturing operations and staff?

Yes, really good question. That's been top of mind for us since about February. We've got different operations around the world, and we've got different things in place around the world. Maybe to start with, I'll talk to New Zealand. So we defined different states for Fisher & Paykel, which take into account the New Zealand, now the Auckland operating state. So it's well-defined for us what we'll do, and we've got also well-defined for us when we move up state of operation on our site and when we move down. So maybe I'll talk to what we're currently in with Auckland Level 3, we're running our site in what we call our precaution state. For this manufacturing site in Auckland, precaution state for us, it's one down from our top state, which is crisis state. We are in our office, distribution, cafeteria, nonfactory areas. We are working to 2-meter spacing, full stop, across the board. We are wearing masks also in those areas. And we have frequent -- I don't know about the frequency as all high contact surfaces in those office and distribution areas are sanitized. I think it's on a daily basis, high contact areas. And then in our manufacturing areas, they're in a clean room. They're in a controlled clean room environment with 20 air changes an hour, anyway. So we have all the same requirements. And if there are circumstances where we can't meet the 2-meter social distancing, we go with masks and alternative PPE measures in that environment. So I think the point is -- top of mind for us is we want to maintain the integrity of these sites. And our general thinking is, wherever we are in the world, we're probably going one step beyond what the local environment is. And we apply that logic also to our Mexican site. We use the same rules for the Mexican site and the New Zealand site. And we apply this logic to our offices and distribution centers around the world. Of course, every country has slightly different requirements and regulations. Generally, you're going to find Fisher & Paykel is kind of taking precautions one step above whatever the local requirement is.

Thank you, Lewis. Next question?

The next question comes from [ Jeffrey Lewis ]. And the question is, how does F&P health care decide how much to invest in R&D with a view to developing improved and new products for the long-term success of the company?

Lewis?

Yes. So take a few steps back. So we've said our business model is sustainable, profitable growth. So overall, if you're going to be sustainable and profitable for a very long time, the model is that we grow our R&D expenditure over the long term at about the same rate as our revenue grows. So that's the first decision we make. There may be variations from year to year. And then the other thing to remember is a lot of our R&D is in New Zealand dollars, not all our sales. So basically, let's grow R&D at the same rate at which your business grows. That's sustainable. We could do that just about forever. And then within the various product portfolios, how do we decide what to spend? We've almost always got some part of our business that's kind of starting up, and we'll spend a little bit more in R&D in that part of the business than the revenue it generates. But with that exception, we're generally growing R&D within our business at about the same rate as that part of the business is growing. With -- over the long term, the way -- you need to think that over the long term from a year-to-year basis or every few years, there's some variations kind of around that, let's say, long-term average approach.

Thank you, Lewis. Next question?

That is the final question, Tony. So no more questions for you.

Thank you for all the great questions. I really appreciate it. I think they're good. I think they're high quality. And as you can see, a lot of those questions are right on the money for understanding our business. Thank you.

Thank you. Ladies and gentlemen, that concludes the online meeting. Thank you for your attendance and your patience. The virtual meeting experience is new for us all, and we're certainly adapting to new ways of working this year in all sorts of way. Thank you for your continued support of Fisher & Paykel Healthcare. I speak on behalf of the Board when I say that we truly value their support. As you know, this is my last [indiscernible] I retire in approximately 10 seconds' time, and so I appreciate all the support that you as shareholders have given me and the company over the years. And I wish Scott, the rest of the team, Lewis and the management team and all the people involved with Fisher & Paykel Healthcare all the very, very best for the future. It's a great company. It's a great New Zealand success story. It's been a privilege to be involved. Thank you.