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

Welcome to Fisher & Paykel Healthcare Results Conference Call. My name is Justin, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference call is being recorded. I would now like to turn the call over to Marcus Driller, VP Corporate.

Thank you, Justin. Good morning, everyone, and welcome to Fisher & Paykel Healthcare's 2021 Financial Year 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 and Lyndal will first provide an overview of the results, and then we'll open up the call to questions for the team. We'll be discussing our results for the year ended March 31, 2021. We have earlier today provided our 2021 annual report, including financial statements and commentary on our results to the NZX and ASX. These documents can be accessed on our website at fphcare.com/investor. With that, I'd now like to turn the call over to Lewis.

Okay. Thanks, Marcus, and welcome, everyone. So today, I'm going to be referring to the investor presentation pack that we released to the NZX and ASX this morning. But first, we would like to begin by thanking some people who are very important to us all, and that's the healthcare professionals around the world who have been caring for patients during a global pandemic. Our thoughts are with them and their families wherever they may be. I also want to personally acknowledge the people of Fisher & Paykel Healthcare for their commitment to delivering for our customers and to thank their partners and families. Because of your contribution, our products were used to treat an estimated 20 million patients during the 2021 financial year. We also want to thank our suppliers for your commitment. They had to work under very challenging conditions to provide the raw materials, the components and the services that we needed to make our products. Operating during a pandemic has tested their resilience, and we have been amazed at their ability to scale up and adapt. Thank you. So starting now on Page 3. Our key achievement for the 2021 financial year was increasing output for some of our hospital products by approximately 6x and doubling output for some of our hospital consumable products. To do this, we hired and trained around 1,800 people over the year, and that's an achievement all in itself. It's an important part of our company culture to recognize the efforts of our people. And this year, they've made an outstanding commitment. And this would not have been possible without the help of our families and our partners. To recognize this, the Board have doubled our standard profit-sharing bonus for our people, and that's a total profit share of $29 million for the year. So turn now to Page 4. We've also made progress against our long-term strategy in spite of the challenges of COVID-19. During this year, we've managed to release Hospital and Homecare products into new markets. And we expanded our direct sales presence in 5 more countries. Developing long-term partnerships in our local communities has always been important to us. And today, we announced a $20 million commitment to establish the Fisher & Paykel Healthcare Foundation. This independent charitable organization will enable us to have a more sustainable model for funding of community and charitable activities. The foundation's purposes include supporting and funding health research and programs that improve access to health care, environmental protection initiatives and promoting awareness of opportunities in STEM subjects, that's science, technology, engineering and mathematics. So turning now to Page 5. I think we can sum this up by saying it's a year like no other. Operating revenue for the 2021 financial year was $1.97 billion, 56% higher than the previous financial year, or 61% in constant currency. Net profit after tax was $524 million, 82% higher than the previous financial year or 94% in constant currency. This extraordinary full year result is driven by our Hospital product group, and that includes Optiflow and AIRVO systems used to deliver nasal high-flow therapy. For the full financial year, revenue for the Hospital product group was $1.5 billion, and that's an increase of 87% over FY '20 or 94% in constant currency. Revenue for the Homecare product group was $466 million, an increase of 2% over the previous year or 4% in constant currency. So now looking more closely at our product groups, starting with the Hospital product group on Page 6. These are the devices and systems used with invasive inhalation, noninvasive inhalation, nasal high flow and surgery. Hardware was 37% of revenue this year versus 16% of revenue for FY '20. So I just want to point that out. On Page 7, Hospital products made up 77% of operating revenue for the second half of the financial year. We saw extraordinary demand for a range of humidifiers and AIRVO systems, and that's driven by experience in clinical trials of treating COVID-19 patients. In the second half of the year, our revenue in hardware and consumables continued to follow COVID hospitalizations around the world. The third quarter was a peak for the year in both hardware and consumable demand. And for the fourth quarter, consumables remained above our first half average and hardware sales remained elevated, but a little below the first half average. So now let's move on to the Homecare product group on Page 8. So this includes products used in the treatment of obstructive sleep apnea, or OSA. And chronic obstructive pulmonary disease, or COPD, as well as other chronic respiratory conditions. On Page 9, Homecare products made up 23% of operating revenue in the second half of the year. Sales of myAIRVO product grew strongly through the year, and the home respiratory support part of that business, now makes up over 15% of the Homecare business. Reported revenue for OSA masks was flat in the second half in constant currency terms, impacted by the reduction in new patient diagnosis due to COVID-19. Progress in markets where our Vitera and Evora masks were released prior to COVID-19 restrictions applying is encouraging. Although it's still impacted by ongoing restrictions and the periodic lockdowns. So now I'll turn over to our CFO, Lyndal York, to give you more details on the year. Lyndal?

Thanks, Lewis, and good morning, everyone. On Page 10, gross margin decreased by 295 basis points to 63.2% for the year, down 165 basis points in constant currency. Because of challenges with global supply chains, we have been and continue to use air freight to bring in raw materials and deliver product to our customers quickly. The cost of air freight all year and sea freight from the half year has been significant. The rates per cubic meter for air freight stabilized during the second half, down from the highs we saw early in the year. The cost per cubic meter of both air and sea freight during the second half was, and still is, about twice what it cost at the end of calendar year 2019. We have opted not to increase prices to our customers. And this increased freight cost has impacted our constant currency gross margin by 280 basis points. This is an impact of 230 basis points compared to last year, as we have started to experience elevated costs at the end of FY '20. The increased freight costs, along with COVID-19-related costs have been partially offset by overhead leverage with volume increases outpacing our cost growth this year. We anticipate freight costs will continue at current levels next year. And that air freight will remain a higher proportion of total freight volume than it was before COVID-19. We also expect to retain our COVID-19 safety practices on our manufacturing sites during next year. Moving on to Page 11. Total operating expenses grew 17%. As this was significantly lower than revenue growth, the operating margin increased 612 basis points to 36%. There was a net saving of around $12 million in operating expenses related to COVID-19, reduced travel and sales event costs were partly offset by higher costs, such as personal protective equipment, well-being, cleaning and security. R&D expenses grew 15% to $137 million, reflecting our continued growth and timing of R&D projects. R&D expenses were 7% of revenue for the year. SG&A increased 17% to $397 million for the year or a 20% increase in constant currency. We made $26 million of donations this year, including the $20 million commitment to establish the Fisher & Paykel Healthcare Foundation. Excluding donations and with similar ongoing COVID-19 costs and reduced travel and sales event costs as we experienced this year, we would expect to grow our constant currency operating expenses by around 8% in FY '22. A normal year of travel and sales event costs would add a further 4 percentage points of growth to operating expenses. Moving to Page 12. We have estimated around 65% of our R&D spend is eligible for the 15% R&D tax credit this year. Going forward, we expect 65% to 70% of our R&D spend to be eligible for the credit. Our effective tax rate increased by 130 basis points to 28.8%, if you exclude the R&D tax credit and the reintroduction of the building tax depreciation last year. We expect our effective tax rate to be around 28% to 29%, excluding the R&D tax credit. Moving to Page 13. Operating cash flow this year was $625 million. Our working capital increased primarily due to higher inventory. Capital expenditure, which includes purchases of intangible assets, was $185 million for the year. With about 2/3 of this for plant and equipment. Our fourth New Zealand building, the Daniell Building, was completed in May 2020, and we commenced work on our third building in Mexico this year. We have been and will continue accelerating our investment in manufacturing capacity to ensure we have an increasing supply of our products. We anticipate spending up to $245 million in total CapEx next year, with about 60% of this for plant and equipment. Our free cash flow, which is operating cash flow, less capital expenditure and lease payments, was $430 million for the year. From this, we paid $181 million in dividend throughout the year. The balance sheet remains strong. Debtor days are within the normal range at 43 days and in line with the prior year. Inventory has increased as we rebuilt, including the sea freight pipeline, from lower levels at the end of last year. We plan to hold higher levels of inventory to ensure any surge demand can be met. Trade and other payables increased and includes the $20 million donation that will be paid to the foundation during FY '22. Tax payable increased $114 million to $150 million. The final New Zealand tax installment, which reflects our estimated FY '21 taxable income was paid earlier this month. Net property, plants and equipment increased by $147 million from last year, mainly as a result of the acceleration of manufacturing capacity and a $35 million revaluation of our land, primarily in New Zealand. Net derivative financial instruments changed from a liability of $80 million last year, to an asset of $143 million this year, reflecting the appreciation of the New Zealand dollar. Net cash at the end of March 2021 was $303 million, up from $42 million last year, and our gearing ratio was minus 27%. This cash will be used to pay our final tax installments related to FY '21 and our continued acceleration of investment in manufacturing capacity. Interest-bearing debt was $75 million with 84% of it being noncurrent. Turning to Page 14. We will be paying an increased final dividend of $0.22 per share payable on the 7th of July. This represents a 42% increase on the final dividend declared last year and enables us to make the accelerated investments in manufacturing capacity that we are currently doing and expect to continue over the next year. This brings the total dividends declared for FY '21 to $0.38 per share, an increase of 38%. Looking now at foreign currency on Page 15. Foreign currency movements negatively impacted our profit after tax by $38 million compared to last year, primarily due to the New Zealand dollar being stronger than at the 31st of March 2020, and particularly, its strengthening over the second half of this year. This includes the results of our hedging program, which contributed a gain of $15 million after tax for the year. At current rates, we would have an after-tax gain from hedging of approximately $42 million in FY '22. The net impact on our profit from movements in foreign currency will depend on revenue for the year and the currency mix of that revenue. Now back over to you, Lewis.

Okay. Thanks, Lyndal. So now I'll go to Page 17, observations. We have the ongoing uncertainties of vaccinations. We've got lockdowns, COVID-19 variants, localized surges, when a return to stable hospitalization rates might occur and to what extent to return to normal includes COVID-19 pandemic hospitalizations. So with all that, we can't really provide guidance for the FY '22 financial year. Now what we've done is provide some observations in today's media release, and these are intended to help you understand or interpret the impacts of COVID-19 around the world on our business. So we do expect our Hospital and Homecare revenue for FY '22 to be impacted by the number of COVID-19-related hospitalizations around the world. An ongoing global vaccine rollout is likely to reduce the total number of COVID-19-related hospital admissions over the year when you compare it to FY '21. And with pure overall hospitalizations, requiring respiratory support, achieving a similar consumable volume for FY '22 relies on a changing clinical practice to use nasal high-flow therapy for a broader range of respiratory patients. And after achieving 337% growth in hospital hardware for FY '21, ongoing hardware sales in FY '22 would be driven by those local COVID hospitalization surges, additional sales of ventilators or the ongoing change in clinical practice to providing nasal high-flow therapy. Now for the start of FY '22, over the last few months, Hospital revenue remains volatile on a weekly basis. Higher volumes of hardware and consumables to locations with hospitalization surges in an ongoing shift towards Optiflow are continuing trends. Currently, COVID hospitalizations passed their peak in North America, ongoing but localized surges in Europe, and increases in other parts of the world are all reflected in our revenue trends. Our customers stocking and destocking choices in regions with declining COVID hospitalizations are not always visible to us. And this is likely to contribute to apparent volatility over the short term. And Homecare shows signs of recovery after what looks like a slower fourth quarter. Freight costs overall remain elevated, and we continue to utilize a high proportion of air freight to respond to these localized surges as Lyndal pointed out. But over the long term, COVID-19 has not really affected our longer-term strategies. The longer-term impact for our Hospital business has been an increased installed base of our hardware, increased physician awareness and experience with our therapies and products, and that's throughout hospitals and throughout the Hospital and generation of a significant volume of clinical data. And this acceleration also potentially helps develop the market for home respiratory support. The other impact is that we're advancing our investment in our forward-looking R&D programs. So with that, I think we can now answer the call to questions.

Great. Thanks, Lewis. And operator, Justin, if I could ask you to please open the line for questions. [Operator Instructions]

[Operator Instructions]

Our first question is from Lyanne Harrison at BOA. Please go ahead, Lyanne.

The first one is around trying to better understand what you saw in the fourth quarter. And earlier this year, you provided a 9-month trading update that showed strong growth. But if I look at those numbers and where you ended up on the year, it looks like growth decelerated in the fourth quarter despite the increase in hospitalizations globally. Can you provide some color on that trend between third and fourth quarter?

Sure, Lyanne. I think you've got a couple of things that we need to acknowledge here, and that is that the revenue is very volatile on a monthly basis, on a quarterly basis. We had a very big peak in that third quarter, which is quite visible. And then the other thing confounding our analysis or any analysis really is the stocking and destocking choices of our customers. So bearing all that in mind and then the other impact on our fourth quarter is we're lapping -- gee, I think we are probably lapping -- we're lapping on half of 24% growth, which was mostly stacked into the fourth quarter. So we're lapping the beginning of COVID as well. So I think those are all the contributors. And then otherwise, I would say the trend is the same. It really is -- our volumes really are tracking hospitalizations, which is what you'd expect, I think.

Okay. And if I thought about, I guess, where the hospitalizations are currently, obviously, the United States, it's moderated. The shift is probably moving away from Europe now into Asia. If I think about what you saw in fourth quarter and what you have current year-to-date for financial year '22, which geographies are you seeing the demand from?

Again, remembering all those caveats of month-to-month volatility and things like that, if you think of the hospitalization rates, that's what it's following. So I would say, currently, Europe has still got some localized surges. Europe looks a little bit like the rest of FY '21. The U.S. is coming off a bit in terms of COVID-related hospitalizations. So that looks a little bit more like FY '20. And then in the rest of the world, country by country, you've got our volume following the hospitalization trend in that country to increasing on the whole in the rest of the world.

Okay. So just to follow-up on that. With rest of the world, are you seeing, I guess, the demand coming from countries like India, Brazil, Mexico, Argentina, how does that compare with the rate of demand that we saw through from the U.S. and Europe?

Well, in terms of a -- you've got 2 things going on there. In terms of those countries' historical demand, it's a very large increase. But compared to North America and Europe, it's smaller, but there's a heck of a lot more of those countries, too.

Our next question comes from Gretel Janu at Credit Suisse.

Firstly, what are you seeing in terms of increased utilization of your hardware devices outside the ICU? Have you -- have all the anecdotes been positive in this regard that, in general, the hospitals are more willing to use the devices outside the ICU post-COVID?

I would say, yes, all the anecdotals are positive. And when we've had those hospitalization surges and hospitals are or above their capacity, there's no choice. They're using them outside ICU.

So I guess going forward, I guess, what level of confidence do you have that when all the surges die down, they will be utilized outside of COVID?

I'd say we are fairly confident in that -- we have had COVID, we've had high increases in hospitalization rates, those regions, those countries, those states, those hospitals, they've used these therapies outside ICU. And just as importantly, the physicians, nursing staff, respiratory therapists, outside ICU, have used it. So I think we're fairly confident that the hurdle to using that outside ICU has significantly reduced.

Understood. And just finally, just in terms of the sales and marketing, how much further investment do you need to make in terms of sales and marketing to ensure that utilization of the installed base remains strong post-COVID?

Yes. Well, the simple strategy there is to increase the investment where we have customers that need more support. So we'll be doing that. We'll be increasing that investment as things play out over the year, and we have over the last year as well. But it's basically increasing the support where customers are going to need it.

Our next question comes from David Low at JPMorgan.

Just on similar topics. Can I just start with the clinical practice that Fisher & Paykel Healthcare observed? I mean we saw things change through the pandemic. Just wondering whether you think pretty much all countries are in the same position. And perhaps if I could get you to talk a little bit to how things changed over the period from invasive ventilation to noninvasive and nasal high flow?

Yes. There's a pretty clear trend there in our volume data, David, with -- you can see in the first half that invasive and nasal high flow actually grow at a pretty similar rate. And through the second half, you can see it just tilting more and more and more towards nasal high flow as the clinical evidence developed. So I think that one is pretty well established. That trend -- and that trend is just continuing, it's tilting more and more towards nasal high flow. And then in these countries, where surges are more recent, they start with a bit of a talk towards nasal high flow. But there's still an increased demand for invasive ventilation, whichever way you look at it. So that's still increasing demand. I'd just say that's just a continuing trend.

Yes. So it's consistent across the globe, though. I mean, what happened in the U.S. was pretty much what Europe, et cetera, is now the clinical practice in other regions as well.

Yes. It looks -- it's similar in almost every regard. The only difference being at the very beginning, nasal high flow and invasive were kind of growing at similar rates, which now that's just tilted. Yes.

Okay. My second question, if we could focus in on the U.S. a little bit, given that it's a bit ahead of the curve with vaccines, given you've got a competitor there who puts out some fairly clear data in terms of utilization rates. And I heard the comments about stocking and destocking, but any sort of insights you could offer because it would strike me that particularly in that market, destocking is probably something that has been a material issue in the months since the COVID peaks passed. So anything you could talk to there? And in the same vein, what you're doing with the sales and marketing front to try and ensure utilization transition in a post-COVID world?

Yes. So there's quite a bit in that question, David. And I think, yes, one of the issues when we're talking about utilization is it's almost impossible to quantify utilization with these kind of swings and with volatility in both consumables and hardware. So we're going to put utilization aside for now in terms of utilization of the hardware. It's one of those things you can look back over the last 2 years, and get a fairly good handle on it. But looking at month by month, it doesn't give you any insight at all. Same with stocking and destocking. When we look back over 2 years a day, you can see pretty clear patterns of stocking and destocking, and it's quite apparent. When you're looking at it monthly or quarterly, it's -- you just really can't tease out stocking and destocking. We think it's bound to occur. It's kind of how the world works. It's how inventory algorithms work, how much stock to carry. So it's bound to happen. And I think we're just -- we're going to have to see stable hospitalization and kind of stable volumes to be confident that stocking and destocking is washed out. I think the important point there is it's just a temporal thing. It's kind of a transitory thing. And it just confirms your analysis, your real-time analysis. That's the point of stocking and destocking. So maybe, Paul, do you want to comment on what are we doing specifically in the U.S.?

Absolutely, David. So the last 12 months, the sales team has been very busy, but largely in a virtual sense. So now that everything is starting to open up again and our salespeople can start getting out and call on customers, they can be very, very busy. We've got a lot larger installed base of users. We've always had great relationships and if all the RT departments, and that will continue. We are obviously calling on them. We're also calling other parts of the hospital, making sure that people are very familiar with how to use the devices that they've got and doing training and making sure they understand all the post-COVID utilization of devices. So over the next -- this year, we'll be very busy just getting in front of all our customers and making sure that they actually know to use devices and make sure they're using them effectively for a wider range of respiratory patients.

Next question comes from Chelsea Leadbetter at Forsyth Barr.

I guess looking at the hardware side of the business and $550 odd million of revenue this year, I'm just interested, Lewis, if you're prepared to provide any context in terms of the mix between traditional hardware and AIRVO and what that kind of looks like in terms of that hardware deployment in the year?

Yes, I'll try and do what I can. If you look at the -- we've got a mild complication here and that you've got 2 types of hardware, you've got humidifiers and you've got AIRVOs. The humidifiers can be used for nasal high flow also. That complicates any analysis, whatsoever, how many of those humidifiers are used with nasal high flow that can be used on an intensive care ventilator to deliver nasal high flow, noninvasive ventilator. They can be used on flow sources, [ max tics ], vendors and things like that to deliver nasal high flow. So I think if you look at the trend at the beginning of the year, it was probably weighted more towards humidifiers, and you'd expect that's because probably weighted more towards invasive ventilation. And then the trend over the year is weighted more towards the AIRVO's hardware.

Okay. So no broad split for what that looks like in total for the year?

No. I don't think it's really all that helpful because we're not sure what the application is of the humidifiers anyway.

Okay. And just second question. In terms of -- I mean, I appreciate the complexity here and obviously, the number of variables that you've tried to articulate in terms of demand, et cetera. But I'm just interested, obviously, the market has to think about forecast expectations. There's consensus out there in terms of earnings, expectations, et cetera, for FY '22. I mean, how do you, as a team or a Board kind of think about where market expectations are versus what may play through this year? And ultimately, how do you want the market to kind of judge the success or what FY '22 kind of pathway looks, if that makes sense? I don't really know how to articulate the question, but just trying to understand the scenario [indiscernible].

That is an excellent question. I understand the question. Yes. I understand the question. It's an excellent question. I think there are a number of components to it. I think all we can do is try and give you as much clarity as possible on the history, and we've tried to do that. In terms of going forward, all we can do is let you know what we know, which is so far the trend is tracking hospitalizations. And that's what we can -- it's one thing we can share that you can work with. In terms of our business, it's about preparing for the worst, making sure we can cut with whatever comes and hoping for the best. So that's kind of the investment side of the business. And then the other thing we've tried to tell you to help you out here is that we've tried to give you really explicit guidance on what we're doing with operating expenses during the year. And essentially, the way we're approaching operating expenses is we're saying we're going to do this. This is what we're going to do. We're going to add the salespeople to support product. We're going to add R&D people to advance our forward-looking R&D programs. We're going to add operations people to get our manufacturing, and a lot more manufacturing overheads, really into a lot more sustainable shape. And we said that all comes out to about 8% growth in OpEx. So that's kind of locked in. Plus, Lyndal's other comment was that's with no travel and no events whatsoever. A full year of travel and events would be about plus another 4%. We're not really expecting that, but we don't know when we're going to be traveling and when we're going to be having events. So we're trying to give you a guide there. You've got a base of plus 8%. And then depending on when we start traveling, kind of pro rata that to plus 4% for the year, is -- there's one guide we've tried to give you. The second guide we've tried to give you in gross margin and what that all summarizes to is you've got freight. Our second half freight, Lyndal gave you the number, was 230 basis points or something.

230 for the full year, year-on-year. So second half, we're lapping some high freight starting last year. So look, for the second half alone, that sort of margin, that level of extra freight is what we would expect going forward. Likewise, the COVID protection -- site protection costs would be similar as we experienced in the second half, but we did have some overhead leverage in the second half as the volumes outpaced the cost growth, we would expect depending on what volume does for that to reverse, potentially go backwards as we rightsize cost, but it all depends on what the volume is.

Yes. So there's the gross margin guidance, Chelsea. Freight tracking along probably the same as the second half, and COVID costs tracking along at the second half. And what you can see in our second half is this overhead leverage. We're going to unwind that leverage because it's a healthy leverage. It's people working 24 -- equipment working 24/7 and people working really long hours. So we are working hard to unwind that leverage. So we don't see gross margin improvements going forward for this year, in fact, maybe the opposite. That would be the other steer we can give you a side of the table. So there's an OpEx there, a gross margin steer in the revenue follows hospitalization so far as the trend.

Next question comes from Chris Cooper at Goldman Sachs.

Look, I think your views around the mid- to long term are pretty clear, but we're really going to need a bit more help, I think, with fiscal '22. I mean, I know this is -- highly uncertain this is, to say the least, but you certainly have better information than we do. And perhaps you can use, I guess, some of the experiences in those markets with better recent virus success to provide some insight. So the 2 things I'm really trying to get my head around is, firstly, the proportion of the units sold due to the pandemic, which are likely to be shelved or, I guess, even heavily underutilized going forward. And then secondly, just on the average turn rate of consumables across the portfolio. I mean, I know we've seen an uptick in utilization because of the COVID demand. But I'm particularly interested in the installed base, not specific to COVID and just whether there's any reason to think there's going to be any material change in the utilization of those units going forward? I mean should we still be thinking about something in the sort of 20 to 30 times range? Or is there scope to be outside of that range for some reason?

Yes. Chris, I'm trying to figure out. These are all unanswerable. I just want to give you a little bit -- but I'll try and help you. So I just want to give you -- they really are because you've got this volatile consumables, then you've got volatile hardware. They can be a little bit out of sync, the consumables and hardware. So getting to installed base is pretty tough. Getting to utilization is impossible. And then you add on stocking and destocking effects, where you really need to see like 6 months to let that wash out to work out what that is. So internally, mate, we have just put utilization turns rates on installed base aside. It's just not constructive. And on a short-term basis, it's out of context. So I mean, if you really want to model something going forward on a forecast, I mean I think what you're looking at is something like when COVID hospitalizations are reduced to 0 or very, very low, you're probably looking at, at least FY '20 plus something numbers. So that'd be one way to think about it. And then volumes. And then we've got surges, your guess is as good as anybody's. So I mean, that's how you're going to have to try and play it out.

Okay. Is it reasonable to assume that -- I mean we hear conflicting messages here. But on the installed base that was sold due to COVID specifically, it was the utilization rate on those machines in terms of consumables per machine per year? Was that materially different to what you saw in the rest of the portfolio?

So early on, when you've only got COVID increasing, we were able to make estimates of utilization. And at the time, we thought utilization during surge -- utilization was increasing, and that was fairly clear. But we're now going -- we're now talking about 18 months, and we're talking about multiple surges. And so you've got increases and decreases in hospitalization rates. So now you've got stocking, destocking playing into it. And you've -- we've also got a disconnect between when you get multiple surges of disconnect between the hardware and the consumables, the consumables tend to track -- tend to track hospitalizations pretty closely and in real time. When you look back, they tend to overshoot. Hardware also tracks it, but with a bit of a lag. So with those -- with that scenario, trying to get to utilization, just -- it's just not possible and installed base is also not possible. Forgot the question. So look, the only thing I would say about utilization is that early on -- sorry mate, what was that?

Sorry, I was just commenting that we'll try our best to work with what we've got then in that case. So it goes sound like it's particularly uncertain, but sorry, I interrupted you.

I interrupted you, I think. The only real thing I can say about utilization is that early on, we were pretty confident that utilization of the installed base was increasing. Certainly over the last 6 months, which we think that we can't realistically model it at all.

Okay. And just very lastly, I mean, clearly, no position at all to provide quantitative guidance today, are you at any point through the year likely to be able to provide a '22 guidance? Or do you think that's unlikely at this stage?

Chris, we don't like saying no guidance, and we don't like leaving you out there with not much to go on. So it's not something we want to do. I'd say we're just -- right now, we have no choice. When we feel that we can give some guidance, we're going to give the guidance. We're going to give you whatever we can. We're not super happy with this situation of guidance and no guidance. But I think right now, when you look at it all, as you can generate all sorts of models to try and predict revenue, we've tried to give you a really, as accurate as we can, steer on operating expenses and gross margin. And then it's the revenue line that's the issue, obviously. We're going to leave you to your own devices on that one.

Next question comes from Stephen Ridgewell at Craigs Investment Partners.

Look, I understand that the company is not able to give guidance for the full year, given -- for the reasons you articulated. But are you able to give us a broad indication of whether, based on the trends you're seeing today, you'd expect the June quarter revenue for the whole business to be up, down, sideways compared to last June quarter and specifically for the hospital consumables segment as well?

I think it will be up, down or sideways. It will be one of those 3. I think I need to somehow communicate the nature of the lumpiness. You're going to have a whole country order stuff in a week. And we can get it to them sometimes in a week. So -- and if I look back over the last year, compared to our internal forecast, we can be miles out with a week to go in a month. There is an instance where we...

Could we shorten the period -- well, could you maybe shorten the period then and just say, for what you've seen so far, the actual numbers that you're seeing coming in the last 7 weeks or so? Just some flavor would be helpful. I think you're sort of seeing a trend in the questions from people on the call that there's a lack of a little bit of indication how things are actually going.

Sure. Sure. I'll try. So the first thing I want to do, mate, is I don't want to compare it to last year because now that's even worse. You've got this year's volatility lapping last year's volatility. So I don't want to -- we're kind of not placing a lot of importance on the comparables because you've got volatility, lapping volatility, that's even worse. So if we look at sequential, I don't see any -- probably Q4 FY '20 is not a bad indicator for Q1. Q4 FY '21 is not a bad indicator for Q4 FY '22. Let me try again, mate. Let me try again. Q4 FY '21 is not a bad indicator for Q1 FY '22. But probably with a different makeup, more out -- Q1 FY '22 being more outside North America and Europe, probably. And I'll reserve the right to be [ wrong ] on them.

For sure, for sure. And I guess, just broadly, I mean you sort of indicated, look -- unless you go and look at hospitalization data. And it is difficult, as you know, because in many parts of the world, where you sell, there's not great data available. Maybe if we looked at COVID mortality data as a proxy, that's kind of tracking up 2x on PCP. Is that a reasonable proxy for how you might be seeing COVID-specific demand come through? Or is the company not kind of fully capturing the demand in emerging markets, perhaps it's not as well established?

I can tell you what we're doing to try and help. So if you've got the hospitalization data, that obviously is the best indicator. When we don't, it's also pretty close to cases, the same trends as cases that you see in countries actually. Yes. I'd use cases as my proxy, when I can't get hospitalization data.

Yes. If I could sneak one more. Just on myAIRVO, last year, you did mention that demand for that product was kind of tracking hospital admissions. I mean is it fair to assume most of that demand from myAIRVO has been in the U.S. in particular? And so with that coming off, you'd perhaps expect demand for myAIRVO to be a bit softer this year?

We're probably hit more towards -- well, Europe and the U.S., but probably a bit more Europe actually from myAIRVO. Yes, it has -- there was a lag. We didn't see much in the first part of the year and then it kind of picked up in the second half. We have anecdotals of myAIRVO being used to keep people at home rather than go to the hospital, and we have anecdotals at myAIRVO being used to get people out of the hospital sooner, all anecdotal. So I think all we can say so far is it's growing pretty strongly. It seems to have followed along behind hospital admissions with a bit of a lag. It's U.S. and Europe so far. And I think that's about as far as kind of actual information.

Our next question comes from Adrian Allbon at Jarden. It looks like Adrian has left the queue. Sorry about that. So we have Marcus Curley from UBS.

I suppose, could we just talk a little to equipment sales. Like with your observation here, I'm a little confused, but is the start of this observation you're assuming that equipment sales was in line with pre-COVID levels?

I'm not following the question. Sorry, mate. Can you have another try?

Look, so the observation on hardware equipment sales is maintaining pre-COVID level in FY '22. But in some of the other comments you made, you talked about growth. And I'm a little confused in terms of the starting point. Do you think the starting point for this year coming is equipment sales at pre-COVID levels? Or is the starting point for equipment sales what you just did in FY '21?

I think none of the above. I think all we're trying to say for equipment sales. We've just done 4 years' worth in 12 months. So going forward, what would drive equipment sales. That's what we're thinking. So going forward, for this year, what's going to drive hardware sales. Localized hospital surges, people are probably going to buy hardware. And we've seen in countries with 2, 3, 4 waves, we do get hardware purchases in wave 2, 3 and 4. They get more sort of muted with every wave, but they buy more hardware through the waves. So that would drive hardware. The other thing that might drive hardware sales would be ventilators are still being placed. There was a big surge of intensive care and noninvasive ventilator orders placed at the beginning of last year. We think that's -- some of those orders are still being filled. So that would drive some hardware sales. And then the other thing that would drive hardware sales is that phenomena where [indiscernible] this nasal high flow is pretty good. I'm going to keep using it on more and more patients. That could be a driver of hardware sales. And Marcus, that's the sum total of the -- kind of the message.

Okay. So the message isn't trying to say to us, yes, the starting point for this year would be broadly a pre-COVID number. It actually could be anything.

Yes. That would be true. It could be anything. You've just had North America and Europe. North America, so far, is past its peak. Europe, probably past its week -- it's peak. So you've got a large chunk of the world's healthcare systems past their peaks. So I don't think we'd be expecting to do a similar number in FY '22 to FY '21 in hardware.

Okay. Okay. And then secondly, you obviously have talked to, let's say, consumables following hospitalizations. But clearly, that's not the case in terms of total hospitalizations because with the fourth quarter of the previous financial year, was significantly down, and this quarter is in line with that quarter, obviously, cases are at record levels. So clearly, within this, there's a situation where different countries have different penetrations of FPH equipment. One would imagine that India, in particular, doesn't use a lot of Fisher & Paykel equipment, particularly high flow. So cases in India don't see the same drop-through as what you have in Europe and the U.S., is that the right interpretation or is there an alternative one?

So I might have confused you with some language there. The -- I think the root confusion there is you've got different hospitals per capita in different countries. And you've -- whereas cases, if you've got a lot more cases, but fewer hospitals, it's still following the trend, I would say, relative to the number of hospitals you have per capita. So if you take India, our volume follows. We can't get hospitalization, but it follows it has the same shape as cases over time, just like it did for the U.S., but that translates to a different volume.

It's more the shape that follows as opposed to absolute numbers that we're talking about here, Marcus.

Yes. But we're not...

No, I understand. Yes...

Yes.

So it's a reflection of, I suppose, starting point, yes. So penetration in India for you, whether it's the number of hospitals and the number of hospitals you're in, is a lot smaller relative to the number of people getting COVID. And so that's determines the starting point, but the growth is obviously high.

Yes, you're on to it. Yes, that's exactly right. I wish I'd said that.

As we're at the hour mark, but we still have formal questions. So we'll keep going to address these questions. Next question comes from John Deakin-Bell at Citi.

I have 2 questions. One, just back on the gross margin. I'm just trying to understand, if I use FY '19 as a reference point, so we're pre-COVID, 66.9%. Have you -- that you said you've added on another -- you've added a lot of capacity. I'm just trying to understand if the revenue falls, like consensus has got revenue falling $250 million in FY '22, is -- are there fixed costs that have been added that will mean the gross margin will be lower than it used to be? Or are all of those costs variable and we should still think the gross -- I'm talking about ex freight that the gross margin should broadly be similar to what it was historically?

No. So not all of those costs are variable, John. There are a number of fixed costs. So when we've added manufacturing capacity, there's equipment there. There's depreciation, there's a level of overhead to support the business. And that's what we've seen during FY '21 that, that cost growth has been lower than the volume growth. So we've managed to get some operating leverage there to help offset the freight higher cost as well as the COVID support costs. Now we've always said our long-term target for gross margin is about 65%. And we think that, that's sort of where we would be aiming as freight returns to pre-COVID rates, and we don't need COVID site support costs. So again, nothing's really changed in terms of our long-term target. That 65% is where we would be aiming to be. But we -- if volumes did drop off, as you said, not that we're giving any forecast or prediction on what's going to happen with that. That obviously does impact what the margin will be. But if that plays out and we reverse that leveraging that we got this year, we would see it drop down below sort of back towards our long-term targets of 65% in a more normalized world.

That's very clear. And just an easy question. Can you just give us a sense of the sleep apnea business since the end of March, so the last nearly 2 months, what the trends are in that business? Is -- are you seeing more new patients come in? Or is it kind of as it was previously?

So most recently, John, we would say it looks like returning towards normal.

Next question comes from Andrew Goodsall at MST marquee.

I was just trying to get a quick sense, just proportionately, when you're selling into some of these emerging countries that have the surges at the moment, just sort of how you sort of see proportional use for consumables per device? And I'm just sort of thinking around limitations around [ bought ] oxygen and other limitations that might occur. So just any flavor you can give us just how you'd see -- or just as a ratio, say, for U.S. or...

Yes, probably can't. I'm also looking at Paul. We think it's going in under surge. So we think it's getting absolutely flogged. We think it's being used pretty much full time, and that would be the status at present. Yes. Bearing in mind...

Maybe the ratio, this is probably a hard one. Probably just the ratio relative to, obviously, the access to hospitals is a lot lower. Just maybe if that was probably more the ratio, it might make sense, if there's any way to sort of give us that sense?

Yes. Ratio of what to what?

Well, just relative to the U.S., just, I guess, the sort of per capita or just some sort of broad ratio. Just trying to get a sense of how we should sort of respond to these surges we see in those emerging countries here.

Okay. Yes, good question. Look, I think the best data I can give you is over the last year, just about half of our hardware placements have gone outside North America and Europe. So there's your ratio, this ratio and then when they go, they tend to have very high utilization, higher utilization.

So it's sort of a -- yes, okay. That's quite useful actually because trying to get a sense of relative to populations that are -- okay. Apologies for interrupting you there. I'm not sure if I cut you off. And I guess there's been a bit of talk around potentially using home and just sort of any thoughts you've got there? And I'm just wondering how you sort of overcome the home -- the access to oxygen type issues with that....

So I think there's a really important point there. It's nasal high-flow therapy, and it has 3 things, 3 ways of acting. It can provide positive end respiratory pressure, humidifies 100% of the [indiscernible] by breath and it can clear dead space. And if you need to, you can add oxygen. So I wouldn't think of it as oxygen therapy. And I wouldn't think of that as the primary use. I think of it as nasal high-flow therapy. It just so happens with COVID patients, you almost always add oxygen. The oxygen used with nasal high flow is more related to COVID than to anything else.

So COVID really uses those higher-end pressures than perhaps the other use?

Oxygen -- requires the more [indiscernible].

Oxygen flows through the [indiscernible].

Yes.

And one quick one just on the Homecare business, just sort of understanding whether you're seeing a bit of a market recovery in current conditions and whether you've had any benefits from the Philips recall, particularly, say, with your devices in Europe?

Well, the fullest recall with CPAPs. So that's not -- we don't really see that as any kind of opportunity.

Yes. And just whether you -- you sort of seeing -- just quickly, the market conditions in terms of just recovery of diagnosis and others, particularly in Europe?

Well, over the last few months, we'd say signs of recovery.

Next question comes from Tom Deacon at Macquarie.

Just a quick one for me. Just trying to understand what the difference was in the R&D sort of tax rebates that you guys sort of put through mentioning that it was sort of 65% to 70%. I thought our previous expectations with that number to be about 80%.

Yes. Thanks, Tom. Look, it's -- we only introduced this tax credit or the new legislation only came in to place in the FY '20 year. So what we had done is an estimate in FY '20, as we've worked through analyzing exactly the projects that we've worked on and the time that our people have spent on those projects, we fine-tuned that estimate down to about that 65% to 70%. And it varies depending on the work being done on existing products, which still is R&D for us. That doesn't meet the eligibility criteria. So depending on the type of work that we're doing, and that will move up and down from year to year. That's why we think about 65% to 70% is about a reasonable range.

That's really helpful. And maybe just sort of teasing out just the question prior on gross margin. Were there any other sort of one-off costs within COGS that you guys would call out this year just from start-up costs from your manufacturing facilities? I'm just trying to get an understanding of what the sort of BAU gross margin would be.

Yes. No other sort of one-off costs that we'd call out around start-ups. There other than just our COVID costs, which in the second half, about sort of 10 to 15 basis points of ongoing costs, and we would expect that to continue into FY '22. But as I said, if you -- if we return to a level of more normal pre-COVID world, so we don't have those COVID support costs, freight rates return to more normalized levels. Based on the overhead structure that we've got in place, we're comfortable that we'd be back at our target margin of around that 65%.

At the end of the day, nothing has changed. Sort of transitory effects.

That's the last question. So Lewis, I'll hand back over to you to wrap up.

Okay. Thanks, Marcus. Look, before closing, I would like to remind everyone that we are holding some virtual Investor Days, called our Investor series, that's going to be New Zealand Time, Tuesday, Wednesday and Thursday next week. The link to register for those is available on the Investor Relations section of our website. And if you do that, you'll get an opportunity to hear from more of the team about how we plan to continue delivering sustainable profitable growth into the future. Now in summary, I would really like to reiterate our heartfelt and grateful thanks to all of those people who have supported us and our business during this extraordinary year. We really appreciate it. We are going to continue to focus on the long term, just as we always have. And we're going to keep on doing everything we can to improve cared outcomes for patients all around the world. So thanks very much to all the participants for joining us here on the call today. Thank you.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.