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

Good afternoon. I'm Scott St John, Chair of the Fisher & Paykel Healthcare Board. Welcome to the 2021 Annual Shareholders Meeting of Fisher & Paykel Healthcare. Today, we are very pleased to welcome you on the virtual meeting platform provided by our share registrar, Link Market Services. Health and safety is a top priority at Fisher & Paykel Healthcare, and the company has a critical role to play as a manufacturer of health care products during the global pandemic. Because of the recent cases of COVID-19 in the community in Auckland and the government's announcement, we have changed this meeting to a virtual-only format. We appreciate your flexibility and understanding. You are still able to vote and ask questions online today. Please refer to the virtual annual meeting online portal guide for instructions. And if you need help, phone the Link Market Services helpline on 0 (800) 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 with me in-person and physically distanced is Managing Director and CEO, Lewis Gradon. Joining us online are Sir Michael Daniell, Pip Greenwood, Geraldine McBride, Neville Mitchell and Donal O'Dwyer. The minutes of the Annual Shareholders' Meeting have been approved by the Directors and are there 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, and you will hear from the Chair of each of the Board's subcommittees. Then I will ask our Managing Director and CEO, Lewis Gradon, to provide an update on the current financial year. After addressing any questions on the financial statements, we will move to the resolutions contained in the notice of meeting. After each resolution is proposed, you will have the opportunity to ask questions with respect to that resolution. Shareholders can submit questions online at any time prior to voting on the resolution by using the online question functionality. The slide presentation and speeches were released to the NZX and ASX today and are available on the Investors section of the company's website at fphcare.com. To open this year's address, I would like to thank health care professionals for their incredible efforts and sacrifices during such a challenging year. I would also like to acknowledge the people of Fisher & Paykel Healthcare who have been working so hard behind the scenes to put the right products into the hands of those helping patients. Our last Annual Shareholder Meeting was also virtual-only. In August 2020, it was still early days in the pandemic. Over the past year, I have been amazed at how the business has adapted to the rapid changes required to remain operational during a time of so much uncertainty. That kind of pivot could only happen in an environment of high trust where there is a highly competent executive team and a great company culture. Fisher & Paykel Healthcare's response to COVID-19 was anchored and strong business continuity processes that have been developed and advanced and were ready to put into action. Instead of telling you more about that, I'd rather show you. Back in May, the employees of Fisher & Paykel Healthcare all around the world watched a video of CEO, Lewis Gradon, reflecting on the 2021 financial year. We thought you, our shareholders, might also like to see a portion of that video. So we will play that for you now. [Presentation]

As Lewis said in the video, new teams were set up all across the business. Each had a leader in the control room and every important decision was funneled through that control room. As for the Board, our approach was to stay out of management's way. The executive team developed a regular communications process to the Board, and we were well informed. As you could see in the photos, Fisher & Paykel Healthcare products were shipped all over the globe, and the company's Optiflow nasal high flow therapy emerged as one of the leading therapies for treating patients with COVID-19. That brings us to our financial performance for the 2021 financial year. It was truly a year like no other, and the company achieved a record result. Operating revenue was $1.97 billion, up 56% over the previous financial year or 61% in constant currency. Net profit after tax was $524 million, up 82% over the previous year. The total dividend to shareholders for the financial year was $0.38 per share, up 38% over the previous financial year. The business is structured into 2 major groups: Hospital and Homecare. In the 2021 financial year, the Hospital product group made up a higher percentage of revenue than in previous years. Hospital products made up 76% of revenue while Homecare products made up 24%. Looking more closely at the Hospital product group, this includes products for invasive and noninvasive ventilation, Optiflow nasal high flow therapy and surgery. Last year, revenue for the Hospital product group was $1.5 billion, an increase of 87% or 94% in constant currency. This increase was largely driven by demand for products used to treat COVID-19 patients. Looking at the Homecare product group, this includes products for obstructive sleep apnea, or OSA, and other therapies used in the home. Last year was challenging as COVID-19 restrictions closed many sleep clinics and reduced OSA diagnosis rates. In spite of these setbacks, the Homecare product group delivered revenue of $466 million, which was an increase of 2% over the previous year or 4% in constant currency. Gross margin decreased by 295 basis points for the year to 63%. This was due to higher freight costs, including the increase use of air freight as well as additional COVID-19-related costs. However, operating margin was higher than in previous years as sales growth was significantly higher than cost growth during the year. Innovation is critical to the success of Fisher & Paykel Healthcare. And the therapies the world will use 10 years from now are in development today. We were unwavering in our commitment to research and development during the 2021 financial year and invested $137 million into R&D. We now have nearly 700 people working in R&D-related roles, developing the products of the future. The company could not have achieved so much without the 6,000-plus people of Fisher & Paykel Healthcare, and we believe it is important for them to share in the reward. Our common practice is to pay a profit-sharing bonus to our people around the world every 6 months. In the 2021 financial year, this totaled $29 million for the year, and the bonus was extended to eligible, temporary and contract workers. It was well deserved, and I would like to take this opportunity to personally thank everyone for their contributions. We know that it is important for a successful business to look after the needs of the wider community. In the 2021 financial year, the company committed $20 million to establish the Fisher & Paykel Healthcare Foundation. This independent charitable organization will enable a more sustainable model for funding the company's community initiatives in charitable giving. We look forward to discussing the Foundation's activities next year. Turning now to your Board. We are in the final stage of our search for a new Director to replace Tony Carter. And with that appointment, we will maintain 7 Non-Executive Directors. We are very close to an announcement, and we'll update you on that as soon as we can. 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 these committees, Neville, Pip and Donal will now provide an update on their areas of focus over the past year. These updates have been prerecorded in order to prevent any technical issues. First, we will hear from Neville Mitchell, who Chairs the Audit & Risk Committee.

Hello, everyone. You may recall that last year, I took over from Scott St John as Chair of the Audit & Risk Committee. The Audit & Risk Committee as well as monitoring ongoing accounting and audit matters assists the Board by reviewing the company's risk management processes and strategies to mitigate the impact of major risks from climate-related events to cybersecurity incidences. The objective is to ensure that management have the right frameworks in place to enable high-quality decisions in complex and uncertain situations. Over the past several years, the company has continued to mature its business continuity plans, developing systems, processes and teams to help coordinate and manage a potential crisis. The pandemic tested and, in many ways, strengthened those plans. Although COVID-19 brought some unanticipated disruptions to supply chains, the crisis management framework in place served the business well and manufacturing sites in New Zealand and Mexico have managed to remain safe and operational throughout the pandemic. Furthermore, the experience of operating through the crisis strengthened key relationships with suppliers and customers as well as leaders in government, trade and foreign affairs. As we indicated last year, the Audit & Risk Committee is now responsible for the governance of climate-related risks. This involves monitoring the company's global carbon footprint and ensuring that climate-related risks are embedded into the broader risk management process. This is in line with the recommendations of the Task Force for Climate-related Financial Disclosure. Each year, the business continues to improve its reporting on climate and other sustainability matters. Thank you.

Thank you, Neville. Next, Pip Greenwood will provide an update on the People & Remuneration Committee.

Hello, everyone. On the People & Remuneration Committee, we continue to focus on enabling an environment where good people contribute the most they can over the long term. We recently held a people and culture long-term planning day, and we believe we have the right approach in place to nurture our unique culture and achieve sustainable profitable growth. Diversity of thought is the foundation of our culture, and it is important to ensure our culture is inclusive. One of the company's diversity and inclusion objectives for 2021 was to understand and improve female representation in the research and development function. Phase 1 of this project is complete, and we now have a better understanding of how gender impacts the experiences of the company's engineers and how this might contribute to low representation of females in R&D. Phase 2 of this project has commenced, and this year, the business will launch 2 initiatives to improve female representation in R&D. Also this year, the company will extend gender representation diagnostics to its global sales offices in its Mexico manufacturing plant. We continue to monitor pay equity between women and men in the same roles and 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. We have reviewed our executive team remuneration procedure and are continuing to progress our succession planning activities. As Scott mentioned, we are nearing the end of our search to identify a replacement for Tony Carter so that we maintain 7 Non-Executive Directors on our Board. It's important that our Board reflects diversity, including of thought and experience, and this process has taken some time. Our list of potential candidates has included people who are international and COVID-19 has made it challenging to interview those candidates. However, we have made progress recently, and we are looking to be able to be in a position to make an announcement very soon. Finally, I would like to acknowledge the extraordinary efforts of the people of Fisher & Paykel Healthcare. Over the last 18 months, our people are our strength as they have demonstrated on countless occasions. They have a strong connection to our purpose of improving care and outcomes, and this continues to enable the success of this extraordinary company. Thank you.

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

Good afternoon, everyone. Two of the most important issues affecting the long-term value of Fisher & Paykel Healthcare are patient safety and product quality. The Quality, Safety & Regulatory Committee provides oversight in these areas. This year, the company has continued to maintain its compliance to regulatory requirements right around the world. In Europe, medical device regulations changed last year, and the company has done a significant amount of work to ensure compliance to the new regulations. In the U.S., the company has continued to build on its strong relationship with the U.S. Food and Drug Administration, engaging the FDA on new product introductions as well as supporting their strategic initiatives. Additionally, the health, safety and well-being of all of our employees continues to be a top priority. This year has been dominated, not surprisingly, by the pandemic. The business has taken a conservative and prudent approach to help in safety. Meeting or exceeding local government regulations and manufacturing operations have continued uninterrupted, both in New Zealand and Mexico. To support employee well-being, the company offers access to counseling services through the Employee Assistance Program and is focused on returning to sustainable workloads for all. In addition to its COVID-19-related safety and wellness initiatives, the business has continued to roll out proactive health and safety processes related to 9 critical risks. All of these risk factors have now been deployed globally to the highest risk locations, and the business has implemented controls to manage those risks. Thank you.

Thank you, Neville, Pip and Donal. As you will see from the notice of meeting, I will be seeking your support for reelection at this meeting. I thought it appropriate to make a few comments now in support of my reelection. I have been on the Board of Fisher & Paykel Healthcare for more than 5 years, and this marks my first full year as Board Chair. It is a privilege to be part of the company whose products have made such an impact on the lives of people around the world. I have more than 3 decades of experience in the financial services industry and have advised some great New Zealand companies that operate in global markets in a highly regulated industries. I believe my financial and commercial acumen, my governance experience and my knowledge of Fisher & Paykel Healthcare will continue to bring value to the Board. I am a shareholder myself, and I am committed to the success of the company and to delivering results for all shareholders, and I seek your endorsement for my reelection. To close, I would like to thank you, our shareholders, for your continued support and loyalty. Your investment in Fisher & Paykel Healthcare helped clinicians treat around 20 million patients in 120 countries during the last financial year. I will now invite Lewis, our Managing Director and CEO, to go into more detail on the company's performance and to give you an update on our current outlook for the 2022 financial year. Lewis?

Well, thank you, Scott. First off, I do want to echo Scott's words and thank the health care professionals worldwide who are caring for patients this year and last year as well. I also would like to acknowledge the people of Fisher & Paykel Healthcare who are working in our manufacturing facilities, our warehouses, our offices and many of us still working or many of them still working in their own homes in many parts of the world to meet the ongoing demand for respiratory products during the pandemic. Also today, I'd like to thank the team at Fisher & Paykel Healthcare and our long-term event partners, Edge Creative, for turning what we hoped would be an in-person meeting today into this virtual event. Both those teams worked pretty much all night to get this set up. So thanks, guys. Today, we updated the market on our progress for the first 4 months of the 2022 financial year. So that's through to the 31st of July. Revenue for the first 4 months was $583 million, with 74% of revenue from our Hospital product group and 26% from our Homecare product group. In constant currency, revenue for the 4 months was 2% below the prior comparable period. But remembering that was a period of high demand during the initial surges of COVID-19 in North America and Europe. In our Hospital product group, constant currency revenue for the 4 months of the '22 financial year was 3% below the prior comparable period. This consisted of a 13% decline in hardware sales partially offset by 2% growth in consumables. 66% of hospital revenue was from the sale of consumables and 34% was from the sale of hardware. Compared to pre-COVID levels, overall hardware volume remained elevated and that was largely driven by some regions experiencing COVID-19 hospitalization surges during the period. In North America and Europe, total hardware sales declined 62% and total consumable sales declined 14% from the same period last year in constant currency terms. That was influenced by reduced COVID-19 hospital admissions during the period and our customers' decisions on how much stock of consumables to hold after the big demand they'd seen in our fourth quarter across December and January. Compared with pre-COVID-19 levels, volumes in North America and Europe remained elevated. Outside North America and Europe, hardware grew 42% and consumables grew 31% over the prior comparable period, again, in constant currency terms. Now hospital consumable sales continue to reflect the clinical practice shift from invasive ventilation towards the use of Optiflow nasal high flow therapy. And that was evident in new applications consumables growth of 17% for the period in constant currency. In our Homecare product group, constant currency revenue for the 4 months ended 31st July '21 was 4% above the prior comparable period, and that includes 4% growth in obstructive sleep apnea, or OSA masks. Now given the continuing uncertainties associated with the vaccination rates, the efficacy of the various vaccines against the various variants of the coronavirus and the government responses and the public responses to COVID-19 case numbers, we're not providing quantitative revenue or earnings guidance for the remainder of the 2022 financial year. With the ongoing global vaccination activity in most countries, having now experienced a COVID-19 hospitalization surge and then a boosted hospital treatment capacity to some extent, we do not expect our hospital hardware revenue to continue at this elevated level for the remainder of this financial year. We are ready for it, though, just in case it does. In the short term, we do expect our hospital sales will continue to be impacted by COVID-19-related hospital admissions, and we're seeing this effect now in North America, where demand is currently increasing in conjunction with the local COVID-19 hospitalization surges. How much stock our individual customers choose to hold and then run down in response to rapid increases and then rapid decreases in COVID-19-related demand is also likely to influence our apparent consumables volume, in particular, over short-term periods. And that also contributes to an environment that is very difficult to predict and difficult to analyze. In our Homecare product group, growth in OSA mask is dependent on new patient diagnosis rates. We currently expect that they will continue to be at or above FY '21 rates for the remainder of the 2022 financial year. And on that basis, we would expect growth in OSA masks for the year. Freight costs have remained elevated, and we have continued growing our investment in R&D and in SG&A as we discussed in May. Now if we look through the short-term swings, the longer-term enduring impact from COVID-19 is that more of our devices have been placed in hospitals and many more hospital staff have been trained on how to use them. There is a broader awareness of our therapies and products amongst respiratory therapists and physicians. Nasal high flow therapy is being featured in the media all over the world. And what we have now for you is a clip of a new story that added recently in Southern California and it illustrates that point really well. [Presentation]

Yes. So this increased attention on nasal high flow therapy, like you've seen in that video, has really accelerated the adoption of Optiflow in a way we could not have imagined only a few years ago. Importantly, over the longer term, nasal high flow is not only for treating COVID-19 patients. It has applications across a broad range of patients requiring respiratory support. Our sales over the next few years will probably be affected by how long it takes to return to normal hospital admissions and the speed of change to utilizing Optiflow nasal high flow therapy for those general respiratory patients as was discussed in the video. We're expecting that helping clinicians realize the benefits for patients and hospitals and homes will be a key area of focus for us over the next few years. Now following on from the increased sales in the 2021 financial year, we are accelerating some of our research and development projects, and we're expanding our global sales teams to support the growing installed base of nasal high flow systems. We're also bringing forward some of our longer-term building projects and production capacity projects to ensure that we have supply if and when it's needed. Now lately, I'm often asked what's next for our business after COVID-19. As Scott said, the 2021 financial year was an unusual year, and it was always going to be interesting following a year like that. If you've followed us for a while, then you know that we have always taken a long-term view. Our business was on a growth trajectory before the pandemic, and our strategy has not changed. We are still aiming to deliver sustainable profitable growth over the long term through better products, changing clinical practice and expanding our global reach. That work to research, develop and improve the benefits of our products and therapies started more than 50 years ago. It continues today so that we will be ready to help clinicians treat more patients far into the future. In closing, I want to thank our customers, clinical partners, suppliers and employees for their continued support of the company. As always, I'm grateful to you, our shareholders, for supporting our purpose, our values, our strategy and our team. Thank you.

Thank you, Lewis. 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 31 March 2021. This is the opportunity for shareholders to ask any questions specifically on the financial statements, the auditor's report or the company's 2021 annual report. Please note that there will be an opportunity for general questions once all items on the agenda have been considered. Are there any questions?

There are no specific questions on the financial statements, auditor's report or company's 2021 annual report.

As there are no questions, I will move on to the next item on the agenda. The fourth item on the agenda is the consideration of the formal resolutions. There are 5 resolutions and each resolution is an ordinary resolution. This means they are required to be passed by a simple majority, more than 50% of the votes of shareholders who are entitled to vote on the resolution and do 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 will need to click, Get a Voting Card, at the top of your web page or below the video. You will 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 of your votes. Further information is available on the Link Market Services Virtual Annual Meeting online portal guide, and you can call the helpline for assistance. Following the voting of the resolutions, we will be happy to take any general questions you may have in regard to our company and operations. Online participants can submit general questions at 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 as 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 now move to consideration of the individual resolutions. Explanatory note 1 of the notice of meeting explains the requirement that 1/3 of the company's Directors must retire by rotation at the Annual Shareholders' Meeting in accordance with the company's constitution. The first motion relates to the reappointment of myself as a Director. Earlier, I spoke in support of my reelection. It is appropriate that I call upon Pip Greenwood, who is the Chair of our People & Remuneration Committee, to chair the meeting for this resolution.

Thank you, Scott. I have the pleasure in moving that Scott St John be reelected as a Director of the company. Is there any discussion on the motion?

There are no questions on this particular resolution, Pip.

Thanks, Marcus. There appears to be no further discussions. So could you please now record your vote on this resolution? Thank you. I now invite the Chair to continue with the further motions.

The second resolution is on the reelection of Sir Michael Daniell as a Director. Before I put the motion, Mike will speak to you regarding his reelection as a Director. His speech was also prerecorded.

Good afternoon. Thank you for the opportunity to address you today. It is a privilege to be part of a business which has achieved so much, created opportunities for so many people and which has a clear strategy for further success. Particularly so over the past 1.5 years, as the team has responded so well to the pandemic, providing devices to help in the care of an extraordinary number of COVID patients while also ensuring supply of essential devices to the many other caregivers and millions of patients that we serve. I began my now 42 years with the company in research and development, and then with involvement in regulatory, quality, manufacturing, international sales, marketing, governance and all the facets of the rapidly growing business. I have a deep understanding of the clinical applications and markets that we serve and a broad knowledge of the wider medical devices industry as well as the rapidly evolving international regulatory environment. I have extended that knowledge as a Board member of the Australia-based Medical Research Commercialisation Fund and leading hearing implant company, Cochlear Ltd. And here in New Zealand, I've chaired the Medical Technologies Centre of Research Excellence for the past 6 years. Our culture, integrity and relentless innovation to improve care and sustainably taking those innovations to the world are essential to our continuing development and success. I look forward with your support to contributing to our ongoing strategy, growth and achievements. Thank you.

Thank you, Mike. I have pleasure in moving as an ordinary resolution that Sir Michael Daniell be reelected as a Director of the company. Are there any questions on the resolution?

There is a question from [ Grant Dugel ], who is the proxy holder for the New Zealand Shareholders' Association. The question is, given Sir Michael's long tenure on the Board, can we have some indication of his intentions if he is reelected?

So I'm going to pass that question to you, Mike. I certainly hope that you intend to be here for a while, but over to you.

All right. Thank you, Scott, and thank you, [ Grant ], for the question. As I mentioned in that short video a moment ago, our business is very much based on innovation and long-term thinking in a very specialized medical device field. I intend to continue to contribute using my deep experience to our governance, our ongoing strategy and sustainable growth for as long as the F&P team, the Board and our shareholders see that as being beneficial. Thank you.

There are no further questions on this resolution.

There appears to be no further discussion. So could you please now record your vote on this resolution? 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 the resolution?

There are no questions on this resolution, Scott.

There appears to be no discussion. So could you please now record your vote on this resolution? [Voting]

The fourth resolution is to approve the issue of performance share rights, or PSRs, to Lewis Gradon, Managing Director and Chief Executive Officer of the company. Approval is being sought to issue up to 60,000 PSRs to Lewis Gradon. The PSRs are issued in accordance with the 2019 performance share rights plan and the key terms of that plan are summarized in the explanatory note 3 of the notice of meeting. The plan is unchanged from when it was introduced in 2019. 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 to the issue -- 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 the resolution?

There are no questions on this resolution.

There appears to be no discussion. So could you please now record your vote on this resolution? [Voting]

The fifth resolution is to approve the issue of options to Lewis Gradon, 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 3, and again, the plan is unchanged from when it was introduced in 2019. This year, approval is being sought to issue up to 190,000 options to Lewis Gradon. I, therefore, now move as an ordinary resolution that approval is 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 the resolution?

No, Scott. There are no questions on this resolution either.

There appears to be no discussion. So could you please now record your vote on this resolution? [Voting]

That concludes the voting on resolutions today. Please ensure that you have now submitted your electronic voting card. The votes will now be counted by Link Market Services. The results of the voting will be announced on 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 comes from [ Peter Gent ]. The question is, what risks does the Board see in regards to cybersecurity, both in terms of the business directly and your supply chain? Related, what steps are you at the Board level are undertaking to prepare the business to survive a cybersecurity incidents because eventually one will happen and we have seen both domestically and internationally the results of these?

Thank you very, very much for your question. And it won't surprise you to hear us say that we take cybersecurity extremely seriously. We spend a lot of time on cybersecurity at both the Board. But more specifically, within the audit and risk function or subcommittee of the Board. We test on a regular basis and continue to expand the type and style of testing that we are implementing. It is a very, very active part of our responsibility and one that we would characterize as having no finish line in terms of the way we approach it. Lewis, do you have anything to add to that?

Yes. Sure. We've got a full-time team within our business that work on cybersecurity. We engage the best experts that we can find from around the planet, and we run simulations frequently. We're running one yesterday actually on how we response and -- on how we respond. And we have business continuity plans that we regularly practice and update.

So the next question also comes from [ Peter Gent ]. And the question is, what risks does the Board see in regards to climate change, both in terms of the business directly and your supply chain? Related, what steps are you at the Board level undertaking to prepare the business to be resilient to climate change?