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

Please stand by. Welcome to Fisher & Paykel Healthcare's results conference call. My name is Cynthia, 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. Please go ahead.

Thank you, Cynthia. Good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's first half results for the 2024 financial year. 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. We'll be discussing our results for the half year ended 30 September 2023. Earlier today, we provided our 2024 Interim 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 to the call, everyone. I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX this morning, if you'd like to follow along. I'll start on Page 3 with some of our recent highlights. Our new Fisher & Paykel Solo mask was released in New Zealand and Australia in the half. We think this is quite a significant step forward in mask innovation, and we'll be gradually rolling this out to more markets in the new year. We've continued to invest in our sales team, particularly in the anesthesia space. Our Guangzhou facility in China is progressing well, and that's on track to be operational in the first 6 months of the next calendar year. We got 510(k) approval for the 950 from the United States Food and Drug Administration during the half. And we recently showed this at the AARC, American Association of Respiratory Care Conference in Nashville, along with Airvo 3 to a pretty strong reception last month. Airvo 3 is currently available in the United States, and the 950 will be available in the new year. We marked the formal opening of our third building in Tijuana, Mexico. And we welcome Graham McLean on to the Board. Graham brings a good depth of medical device experience, having spent more than a decade in regional leadership roles in our industry with Stryker. So now if we move on to financials on Page 4. First half operating revenue was $803.7 million. This is a 16% increase from the first half of the 2023 financial year, and that's in both reported and constant currency, 16%. Net profit after tax for the first half was $107.3 million. That's up 12% on the first half of the 2023 financial year, and that is 22% in constant currency. I'll let our CFO, Lyndal York, provide more details on this -- on the figures shortly. But before that, we'll take a look at the -- a quick look at the product group breakdowns. So first up, have a look at Hospital on Page 6. Hospital operating revenue for the first half was $487.5 million. That's up 11% year-on-year and 11% in constant currency also. New applications consumables revenue was up 20% year-on-year, and that's 19% in constant currency. So against the backdrop of the first half last year, which included destocking coming from the Omicron surge at the end of 2022, we saw strong demand for hospital consumables across the product portfolio in this first half, and hardware demand was solid. So turn now to Homecare on Page 8. Homecare operating revenue was $314.4 million. That's up 26% on the first half of 2023 or 25% in constant currency. I would say, masks and accessories revenue was up 29%. That's 28% in constant currency. Evora Full was introduced in the U.S. during our first half last year, and our teams are continuing to receive very positive feedback on that mask's performance and comfort from our customers. Now before I hand over to Lyndal, I want to turn to Page 9 and give you some context on the strides we've made over the last few years. Now here, we've tried to drill down into what has fundamentally changed in our business over the last 4 years. We've started with FY '19. That's the last year we had no COVID impacts, and we've compared it to FY '23, our last financial year. And I think this slide puts some context around a lot of what flows through the income statement and the balance sheet this year and maybe into a few more years into the future yet. In the interim report, when we talk about the factors converging favorably and our foundations for future growth, this is what we're thinking of. And to just summarize this slide, we think we're very well-placed in sales to deliver growth over the short term. We think we have a manufacturing infrastructure we can very efficiently grow into, and we think our accelerated R&D investment sets us up well for sustainable profitable growth over the long term. So on that note, I'll hand over to you now, Lyndal.

Thanks, Lewis, and good morning, everyone. On Page 10, gross margin increased by 65 basis points to 60.5% for the half compared to the prior corresponding period, and that's up 192 basis points in constant currency. This continued our constant currency gross margin improvement, this half improving on the second half of last financial year by 72 basis points. Reduced freight costs account for the majority of this improvement over the prior corresponding period. We started negotiating reduced freight rates in the second half of last year. This half, we also had a much lower proportion of our shipments going air freight, reflecting our inventory levels globally and improving supply chain speed and reliability. The return to our usual practice of working on efficiency and margin improvements is starting to show an impact, but these improvements have been largely offset by the inflationary cost increases now flowing into our gross margin. Moving on to Page 11. Total operating expenses grew 16% in both reported and constant currency. This is as we expected given the lower-than-targeted spend we had last year and keeping in line with our long-term trajectory for growth. Operating margin was 19%, an increase of 64 basis points or 195 basis points in constant currency, reflecting the gross margin improvement. R&D expenses grew 15% to $97 million and were 12% of revenue for the half. We estimate that about 60% of our R&D spend will be eligible for the 15% R&D tax credit this year. SG&A expenses increased 17% to $237 million or 16% in constant currency. Moving to Page 12. Operating cash flow this half was $156.5 million, up from $2 million last year. Last year was unusually low as the growth in working capital in that half reduced our operating cash flow by $84 million. This half, our taxes paid is lower than usual as we prepaid tax during the 2023 financial year, requiring less tax to be paid this half. Our slightly higher working capital reflects receivables increasing partly offset by a slight reduction in inventory. Capital expenditure, which includes purchases of intangible assets, was $275.5 million for the half. The increase of $151 million from the prior year is primarily due to the $190 million we paid this year for the Karaka land acquisition. Capital expenditure for the full year is now expected to be approximately $350 million, reflecting timing of building design and cash flows. Looking at the balance sheet. Debtor days were largely in line with the prior year at 41 days. Net debt at the 30th of September was $173 million, and our gearing ratio was 9.1%. As expected, this has gone outside the top of our target gearing range as a result of the long-term strategic land acquisition. Interest-bearing debt was $243 million, all of it noncurrent. Turning to Page 13. We have declared a fully imputed interim dividend of $0.18 per share. This represents a 3% increase on the interim dividend declared last year and continues our recent track record of increasing our dividends to shareholders. It will be paid on the 18th of December. Our dividend reinvestment plan remains available for eligible shareholders with a 3% discount to the market price. Looking now at foreign currency on Page 14. Foreign currency movements negatively impacted our profit after tax by $5 million compared to the same period last year. At end of October spot rates, we would have a pretax loss from hedging of approximately $11 million for the full year. With that, it's back over to you, Lewis.

Okay. Thanks, Lyndal. So now we turn to Page 15. We're providing guidance for the full year for revenue of approximately $1.7 billion, and that's at 31st of October exchange rates. Now historically, sales of our hospital consumables are typically higher in the second half, and that reflects the seasonal patterns of hospital admissions. And this revenue guidance approximation includes that range of the pre-COVID historical seasonality in hospital consumables. And we've also guided to net profit after tax in the range of $250 million to $260 million for the full year, again at those October 31 exchange rates. So now with that, I think we've left plenty of time for questions.

Yes. Thanks, Lewis. Cynthia, if I could ask you to please open up the lines for questions. [Operator Instructions]

[Operator Instructions]

Thanks, Cynthia. Our first questions come from Gretel Janu at E&P.

Firstly, just in terms of utilization, I just want to understand how the new sales team has been. Have you started to see a return or any step-up in utilization since you launched the new sales team?

Okay. Gretel, yes, good question. As far as utilization goes, we kind of moved away from the concept of utilization on the hardware base. That gets complex when you look at the different usages and different patterns of usage of our hardware. And we're more focused really just on absolute number. And I think when you look at the consumables growth for the half, you have to say that's hardware being utilized.

I guess I just wanted to get a bit more color about the new sales team and whether there's been any kind of significant return that you're starting to see there.

Sure. So in terms of sales team growth, we've added people, and I think now we're up to 17 countries around the world over the last 2 to 3 years. And I would say that's definitely turning in a result in terms of both hardware sales and utilization. And then the other place where we've added salespeople is in our anesthesia sales force and also definitely making a very strong contribution.

Okay. And then just my second question is just on inventory levels. They're still very high, no real reduction since the kind of the second half of '23. So is this now the new norm? Like -- and just trying to think about relative to COVID, how much is this higher inventory level just due to volume versus higher price of high-cost inventory?

Thanks, Gretel. I'll take this one. We typically build inventory through our first half as we head into northern hemisphere winter as well as our typical shutdown through the Christmas break. So we would normally expect to see a reasonable increase in inventory in the first half. We actually have reduced finished goods slightly through the first half. So that really is reflecting in actual fact a reduction of inventory compared to where we would normally be. So look, we would still continue to look to reduce that over time. In terms of the split of sort of value versus volume, it's a little bit of both. The bulk of it is volume, but there's a bit of price in there and cost in there as well.

Thanks, Gretel. Next questions come from Chris Cooper at Goldman Sachs.

Just the revenue guidance of $1.7 billion, I know previously, you sort of indicated that the growth rates across the 2 divisions would be sort of comparable. You seem to have dropped that nuance today. So just after an update, do you expect the sort of contribution from Homecare versus Hospital to be slightly different than when you were speaking to us in August?

Yes, that's absolutely right, Chris. The difference there, you've got hospital hardware. We gave you a fairly arbitrary number of $115 million. First half has come in maybe closer to $50 million. So there's one change. And then the other change would be OSA masks kind of towards the top end of the range.

Okay. And that's a development you expect to continue in the second half by the time sort of as well Homecare significantly outperforming Hospital?

I wouldn't put it quite like that. I would say if you drill down to the fundamentals, we haven't really changed our expectations for the second half. It's more about that what's occurred in the first half.

Okay. I've got a couple of others. If I've got one other question, I'll probably focus on gross margin. Sort of, Lyndal, I mean you talked to freight costs that come down. You're using less air. I know previously you said of the gross margin pressure in '23, I think it was 230 basis points of that was still freight relative to pre-COVID. Of that 230, there was still a material headwind last year. How much of that is going to come back to us? And how quickly does that happen?

So of that freight, the improvement this half has -- pretty much the freight covers most of that, about 170 basis point improvement coming from freight compared to the first half of last year. So don't forget, we're only talking a first half year as opposed to the full year. In terms of what's sort of still sitting in our gross margin this year and where we think we've sort of landed in terms of pricing, we think we've done the bulk of the negotiation of prices, and we've been saying for the last couple of years we don't think that prices will get down to pre-COVID levels again. And we've sort of landed at about a 90 basis point higher than where we were pre-COVID roughly in freight.

Thanks, Chris. Next questions come from Dan Hurren at MST Markets.

I was wondering, could you talk to sort of journey of hospital consumable sales across the half as a run rate you saw at the exit of the half compared to the start of?

Look, I'm sorry, Dan, that was a really low-quality audio for us to try and understand. Can I just ask you to repeat the whole thing?

Yes. Sorry, Dan.

Yes. Sorry about that. Is that better? I was hoping you could talk about the journey of hospital consumable sales across the half and perhaps comparing the run rate you saw at the exit of the half to the beginning?

Oh, that's a real complex one, Dan. You got the complexities of what you're lapping, and then we've got quite a lot of regional variation, again, depending on what you're lapping. If you -- it's more about what we're lapping than the journey. The journey during the half, I'd say, looks like a stable pattern and a steady progression. And then if you compare it to what you're lapping, you're all over the place. Does that help you?

Not really, but okay.

Try again. I'll give you another 3 questions. Try again.

No, no, no. I understand it's complicated. But maybe just extend that. What do you -- what are you lapping in the second half? I remember you called out some late China COVID surge in the second half of '23. What does that look like going forward?

What are we lapping in our second half coming up? So you've got 2 things going on in the second half coming up. You've got China opening up towards the end, so you've got some surge demand in the second half that we're lapping. And you've got an RSV surge also largely in North America but some effects elsewhere. And then when we get to OSA, we're lapping a second half with CPAP supply freed up and people were supplying a backlog of customers. And we're lapping a second half that's a full half of Evora Full release in North America.

Right. So I guess the PCP gets tougher in the second half. Is that fair to say?

I would say big time, yes. Yes, you've got some surge demand that you're lapping in Hospital and you've got some supplying into backlog that you're lapping in OSA.

Thank you, Dan. Next question comes from David Low at JPMorgan.

Most of the questions I've had coming in this morning have just been around the FX rates. And given the FX rates have moved a lot since the update in August, what are the implications for the guidance that's been given? What should we be expecting on the hedging front, please?

Yes, sure, David. Yes, currency has been moving around a lot. In terms of impact to our profit before tax line, currency movements have a more muted impact because we've got a solid hedging program in place. We ideally have managed our net assets in currency to be minimal to try and make sure that at the profit before tax line, there's less impact coming from currency. But you will see it in individual line items coming through there. So -- and then there's some tax implications on things like the balance sheet translations depending on which entity or where those translations are coming through from. And that's what we saw particularly in the first half of last year, which causes some weird-looking comparables there. In terms of what currency movement's done compared to what we were looking at back in May when we were sort of talking to you then, again, at that bottom line, really not material. And I'd say, actually on individual line items, sort of revenue is the one that we've guided to, a bit of movement there, but nothing material. It's all within that approximation that we've been talking about.

So at face value, I mean the rates are better, and therefore, the profit ought to be improved as well. So the takeaway here is that that's largely offset by the hedging program. So if rates stay where they are, you'd see the benefit next year of that?

Slightly over time. The aim of our hedging program is to have a more smooth impact from average exchange rates rather than taking big hits and big gains as rates move. So yes, if rates stayed down at this level over time, we'd be sort of working towards slow improvements there that you're spot-on, the hedging program as well as the fact that we largely have -- we try to minimize the net asset exposure by currency, means that at the bottom line, we have less of an impact.

Great. And just the other topic I wanted to touch on. We've heard a lot about the GLP-1 obesity drugs and potential implications for sleep apnea given the links between sleep apnea and obesity. Just wondering what your expectations or how Fisher & Paykel is thinking about that potential impacting sometime to the future?

Yes, there's been a lot of commentary on that. I won't repeat it, David. But look, our thinking is probably not much impact, and we get there -- just putting aside all the other intricacies of GLP-1s, we get there just by -- it's the large market, still quite underpenetrated, and we have a relatively low market share.

Thanks, David. Next questions come from Craig Wong-Pan at RBC.

Thanks for providing the NPAT guidance for the full year. I was just wondering, with your comments previously around gross margins improving by approaching 200 basis points and a constant currency OpEx growth of 12%, do those statements still stand? Or if not, could you provide any kind of color on those items?

Yes. Thanks, Craig. Obviously, with currency having moved a little bit, when we talk about in reported numbers, they've moved a bit, they're largely to sort of offset each other, as we were chatting about on the previous question. In terms of the 200 basis point improvement, that was constant currency. We were talking about in May that we were expecting around about 200 basis point improvement in constant currency. So that still does hold, and no real change to that. What -- with these currency rates when we've redone this guidance at October rates, because those rates have been a bit favorable, we would expect that the reported gross margin now is closer to -- getting closer to the 150 basis points rather than the 100 basis points that we spoke about in May at those exchange rates. The other -- it's the opposite effect for OpEx. So previously, in May, we were talking about constant currency growth. That constant currency growth has not changed in terms of this guidance, but what it means in reported, instead of being that 12%, we're probably now looking at closer to about 14%, 15% in reported for OpEx growth.

Okay. That's very helpful. And then my second question, just on the home care consumables, quite a good result there. I was just wondering, are you seeing any particular sales from particular customers? Like are you kind of gaining share as Philips has been kind of out of the market in new patient sales? Or are you seeing kind of any particular share changes there that are driving your very strong revenue numbers?

It's Paul here, Craig. I guess I think we view our growth pretty much across the board, most customers really. Evora Full has been an exceptional product for us. It's growing strongly. So I think it's not really sort of particular customers. That's really across the board.

Thanks, Craig. Next questions come from Vanessa Thomson at Jefferies.

Just following on from Craig's question about masks. You've had obviously great results from the full-face Evora. The F&P Solo mask, when do you expect to launch that in the U.S.?

Yes, we haven't put a hard date on that. We actually don't have a hard date. We're hoping it's early in the new year. For us, it's really as we get manufacturing up to speed and get manufacturing capacity stable, reliable and enough volume, we'll release it. I think early new year would be our hope.

Fiscal year.

Fiscal year, yes.

Fiscal year. Okay. And then just one other question. On the -- what should we expect for the tax rate for FY '24? Prepaid some tax in '23, which is a good outcome in the first half. I just wonder for the full year what we should be expecting.

Yes. So typically, we expect our tax rate, excluding the R&D tax credit, to be between 28% and 29% and then layering on top of that the R&D tax credit, which we're estimating about 60% of our R&D spend to be eligible for that 15% credit. The only complexity with that is, depending on where exchange rates end the year, if we've got big swings in our balance sheet translation gains or losses that go into that financing expense or income, that's taxable or nontaxable, and that can swing around that reported rate a little bit there. But as a general rule, 28% to 29% effective tax rate and then reduce that by R&D tax credit, and that's pretty much what we'll be expecting for the full year.

Thanks, Vanessa. Next questions come from Saul Hadassin at Barrenjoey.

Lewis, just going back to the new app consumables sales for the half, if we look at the rate of compound growth going back to the half, I guess, pre-COVID, it looks like the growth rate is about 13%. Just wondering if you think it's a reasonable reflection of the growth rates that you expect to see, say, for full year '24. And is that a little bit lower than sort of the rate you would have expected to be, sort of more towards the 20% range considering contribution from anesthesia? Just wondering if you think that growth rate will accelerate over the next couple of years as utilization picks up on all those devices that have gone into the market.

Yes. Yes, complex question. You're on the money with 13%, and we do use our rates against FY '19 as one of our inputs for how we're going and our expectation. How to think of it is a different thing, but 13% that you quoted is -- it's pretty much on the long-term track, maybe a bit above. Then I think the other thing in terms of future expectation is there's some maths going on there. And if you have the investor pack, I'd take you to page -- the new app growth rate page, which is not popping up for me. Yes, growth rate history. If you take a look at that page, you'll find -- got it, Page 39. So if you look at the history of new apps growth up until October, it looks like kind of a steady decline. And the mess that you've got going on there is you've got part of the business with a higher growth rate, so that naturally becomes more of the business. As the higher growth rate component becomes more of the business, the growth rate can decline whilst maintaining or even improving the growth rate of the whole business, right, if that makes sense. So we've got that phenomenon happening across our business. You've got it in hospital consumables. As new apps becomes a bigger component, the growth rate can decline but maintain consumables growth. We've got it in Hospital. As consumables becomes a bigger part of the business compared to hardware, you have the same phenomenon occurring. And then maybe not this half but over the longer term, as Hospital becomes a bigger component, you've got the faster-growing part of the business becoming a bigger component. So our expectation -- well, when you say expectation, that's a forecast of the future. But let's just say that new app growth rate are steadily coming back, still meets your overall aspiration because it's a bigger and bigger part of the business. Oh, and I left one out. Within new apps, you've got anesthesia doing the same thing, a very small part of new apps but growing at a higher rate. So if I try and summarize all that up, I hope it made sense. As you've got faster-growing parts of the business becoming a bigger part of the business, it's okay if that growth rate declines because you maintain your overall aspiration.

Yes, that makes sense. I think this just goes back to the maths of law of large numbers as it relates to new app consumables dollars sold and the ability to sustain that -- those dollars at a 20% growth rate rather than, as you say, you've seen that modest contraction in that growth rate over time, which is what we'd expect. I think there was some expectation, though, that with the release of new indications, for example, like anesthesia and potentially moving to other areas as well that you could sustain that percentage growth for new apps at 20% for the next decade. And I guess my question is, is that feasible based on the dollars you saw in new apps today?

Yes. Okay. No, our expectation would be maintain your overall growth rate, which implies new apps coming back a bit, yes.

Sorry. So just to be clear, maintain the growth rate at 20% or allow for a moderation in that growth over the next 5 to 10 years?

Well, for moderation. Yes, maintain the overall growth rate for the business. So where we are on that curve right now, you'd be looking for hospital consumables in total to be kind of low teens. And so you'd be looking for new apps to maintain that working its way towards mid- to high teens. So maintain for the overall business. Yes, you don't need new apps running at 20% to do that. And you run into the law of large numbers anyway.

Thanks, Saul. Next questions come from Adrian Allbon at Jarden.

Just coming back to, I guess, the new app consumables across the first half, was there any price increases to sort of call out? Or are they sort of more to be implemented in the second half?

So look, Adrian, with the exception of 2 or 3 years in COVID, during COVID, price increases are relatively normal for us, and it's the ongoing phenomenon. We might have given the wrong impression. We put that on hold during the -- in the eye of the storm. Nobody had time for that. But we've reverted to our normal pattern of pricing increases probably for the last 2 years -- yes, probably about the last 2 years as normal. And typically, for us, in the Hospital business, that might kind of net out at maybe 1% a year, something like that. On average, over the last year or 2, given high inflation of -- high price increases and the like, it's been a bit higher than that in terms of price increases. But for our numbers, the growth rates are still pretty much dominated by volume rather than price.

Yes.

Okay. That's helpful. And in terms of like on the invasive consumables, look, I think I sort of -- I think my math is right, like the growth there looks like about 8%. That seems quite strong to me. Is it like a reasonable portion coming from these new geographies?

A little bit of everything. I think that in that new -- I think yes, we agree that does look quite strong. Probably 2 points there. It's probably pointing to lapping a destocking period. That's another strong indicator that destocking is occurring. And in some anecdotals where part of this market uses an alternative technology called HME, so heat and moisture exchangers. Some anecdotals around during COVID, customers didn't have the time for the extra patient maintenance that an HME requires, so they switched to humidifiers. And some anecdotal evidence that a fair proportion of those aren't switching back now they've seen the light.

Okay. So on that one, destocking potentially on the base that you're lapping and then some share gain of HME?

Yes, maybe, yes.

Okay. And then just in terms of the gross margin, like I guess it was a bit of a highlight or certainly the commentary was a bit of a highlight at the Investor Day. Like is there any update you can kind of provide on sort of traction on some of these cycle time improvements that you've been trying to implement or trying to generate and implement?

Yes. Look, Adrian, hopefully, the key message at the Investor Day was we've got thousands of these continuous improvement projects going on all the time, and we actually see the benefit hitting the gross margin. So if it's a cycle time improvement, the benefit might not come this year. It might not come even next year. It might be another year before -- or sort of 2 years before we see it. It comes when the volume gets to a point where we would then have to add another line or add another shift and add cost in there to keep making more volume. You then get the benefit of improved cycle time by not needing to do that. So it's sort of reducing the cost increase that you need to do. Some of these have a long lead time in terms of starting to see an impact onto the bottom line. But the fact that we do thousands of them, they layer and they'll layer each -- as we go. Now we've had a couple of years where we weren't really doing many at all, so we've got a bit of a gap. So that sort of layering effect that's normally in a pretty reasonable trend line, it's going to take a while to get some momentum back to a normal trend line for that. But we're definitely seeing improvements coming out of all the projects we're doing.

Okay. Maybe if can just sneak in one -- sorry?

Go ahead, Adrian.

I was just wondering if you can comment on like in terms of sales force investment into the second half, like maybe excluding anesthesia, how are you thinking about that just as a sort of a way of us thinking about the resource like you're looking to apply against the revenue opportunity?

Yes, thanks for that question. Adrian, I think that in terms of second half, I think most of the sales force that we've put on has generally been put on during the first half. Is that the question you're asking?

Well, I just want to get a sense of whether you're still trying to ramp, I guess, the non-anesthesia kind of hospital sales force as you see the opportunity, as you sort of see like a gap in protocolizing outside the ICU, all that kind of stuff on Optiflow.

Yes. I mean over time, obviously, yes, we continue to invest in the sales force and some of it in that area there. But I think in terms of second half impact, there's very little.

I'll try and give you some clarity on that. Business as usual for us is adding salespeople kind of as the revenue grows and where the revenue grows. That's business as usual, and we're back to business as usual.

Thanks for your questions, Adrian. Next questions come from Matt Montgomerie at Forsyth Barr.

I just want to go back to Saul's question, if that's okay. So if I look at full year guidance, it appears to be implying sort of high single-digit hospital consumables revenue growth if you take your seasonality comments. Firstly, if this is correct. And then secondly, I just want to get an idea of sustainability of them, if you think that's an appropriate growth rate we should be thinking about in the consumables business as a whole. It's just that it's, I mean, slightly lower than what has been delivered historically.

Yes. So I think 99% of the answer to that question is that it's about what you're lapping. And we're still in -- the unusual times are still reaching out and ankle-tapping us. So this is all about what you're lapping when you're looking at growth rates. And you're lapping a half with a COVID surge in China and an RSV surge. So what to make -- and you know just as well as we do the complexities of trying to estimate what that impact is. So trying to interpret -- at the moment, trying to interpret growth on prior periods especially when you get to our second half, I think, is quite challenging. So probably we're certainly looking more at sequential growth half-on-half rather than on PCP growth. And that would be what I'd point you to.

Yes. But I suppose another way of asking is, do you think FY '23 was a fair base when you sort of net out 1H and 2H from the destocking in 1H and then the benefits you got in 2H? Might be another way of asking.

Look, I'll give you our best guess on that for the year. But I just want to -- just to make sure we're on the same page, the complexities of doing this, when we see an event like a COVID surge, we see our volume jump up during that surge time. For us, that's against possible seasonality that would have been occurring anyway. That's against future. That's against growth due to clinical change that would have been occurring anyway. If it was last year, it's probably lapping a period that had either a surge or a lull of it. So first of all, you need to estimate, how much of that jump in volume do you think is due to the event? Next thing you need to do is go, how much of that volume do I think was used? And then the next thing you need to consider is, how are my customers going to behave with their destocking period? Over what time frames are they going to want to be conservative? So the sum all gets really too hard. And the other thing I'd like to highlight is when you make that estimation, it kind of has a double whammy. It's quite a sensitive number to estimate because if you think of customers overstocked in FY '23, that's volume you don't get in FY '24 and then you lap it as well. So it's quite a sensitive number. So I wanted to give you the whole big context to say, well, look, we think when you net all those out, FY '23 for the year in hospital consumables is probably light by somewhere around $10 million. And I want to put the context around the somewhere around $10 million. I mean I don't really like giving that number. But as long as it's understood, boy, that is best guess. We're confident that '23 is light. But the exact magnitude is getting speculative.

Yes. No, that's clear. I appreciate the color. Just on anesthesia, I'd just be interested if you could provide any comments on sort of the mix within the new apps number that was reported in the half, and then just any qualitative comments more broadly with respect to the early rollout in the U.S., et cetera.

Sure. Proportionally, it's a bit under 10%, growing really strongly. In terms of rollout in North America, I mean it's looking pretty familiar to us compared to other rollouts.

Yes, we've just onboarded a sales force. That's gone well. Obviously, we're getting those people up to speed. We're seeing good results at an early stage coming from there. So we're very pleased with the rollout actually, Matt.

Thanks for the questions, Matt. Next questions come from Sean Laaman at Morgan Stanley.

A couple of questions. So on Slide 9, the 48% growth in people associated with manufacturing in ops, I don't know if, Lewis, you could characterize where you see that going forward. And what's been the unit cost? How has that changed for labor?

Well, generally, labor around the world, we're in a fairly high inflation environment. We put that in the business-as-usual category. We have increase in labor costs. We do have it every year, and that needs to be offset by gains in efficiency. So I put that into the factor business as usual but with maybe a bit more on the labor increase than you would normally see. And then the other part of the question, per unit cost for labor, in terms of...

You've answered that in the first half, the cost part in terms of number of people going forward in manufacturing. We would see number of people going in manufacturing sort of similar to what -- in line with revenue growth. So...

Yes.

Typically, the history is the number of people is proportional to the revenue, and then you're offsetting labor increases by...

Sure. And just monitoring quite carefully what's going on with China with the spike in respiratory disorders, no new or novel strains discovered yet. But wondering if you're starting to see inbound or -- with respect to potential surge in orders. Or anything to comment on the current situation in China?

Yes. With the current news over the last few weeks, we haven't seen any reaction or response in our volumes to that.

Thanks, Sean. Our next questions come from Marcus Curley at UBS.

I just -- could we just start with the flu season assumption for the second half, Lewis? Is it fair enough to assume it's similar to last year?

Yes. Well, incorporated in guidance is within the range of normal seasonality. So kind of implicit in that assumption is flu season within the normal range also.

Which is what you got last year?

It's within the -- like last year was 1 year. So we're talking about the range, historic range of seasonality that we were looking at.

Yes, within the historic range.

Yes. Like you haven't given a range on revenue guidance. You've given a point estimate. So I suppose...

Oh, I think you should separate the range, yes, with approximately. I'm going to rely on the word approximately quite heavily, Marcus.

Okay, okay. Let's move on. Obviously, there's been a bit of noise around changes in working practice at Auckland in terms of overtime over the weekends. Can you talk a little bit about what's, I suppose, the background to that? We haven't necessarily seen sort of potential strike action at Fisher & Paykel for decades, so it just sort of seems a little unusual.

Yes, that's -- I agree with that. And we're currently in mediation process with the union. So we're on a sensitive topic. Probably might be best to leave that one there, Marcus, actually.

Okay. Does that mean I get another question?

Yes, you can have one more. I don't think I can count that answer, no.

Okay. Great. Could you talk a little bit about how much home respiratory support, yes, was growing in the half or a contribution to the Homecare results, please?

Sure. I mean I'd call it solid growth. You're still talking somewhere a bit under around 10% of the Homecare business, so small. And when we talk about home respiratory support, we're including myAIRVO. We're talking about the hardware. So it has that lumpy characteristic. But I'd say the overall summary of H1 is we feel like we're making good progress. Fair comment?

Yes.

I'm looking at Paul Shearer when I say that.

That's correct.

Thanks, Marcus. Our next questions come from Christian Bell at Jarden.

My first question is in relation to new apps growth in particular, high flow growth. Just wondering where does that come from in terms of hospital setting? Like has it been predominantly from ICU or you -- or was it sort of more increasing utilization outside the ICU, perhaps in the ward or the ED?

It's a spread, Christian. It's obviously some in the ICU, some in the emergency room that we work in, different parts of the hospital. So we've seen penetration growth in a lot of those areas, the wards, emergency room and ICU.

So can we assume in the half, it was pretty even all of those 3 settings? Or...

I'd say it's off a smaller base. We'll be growing faster in the non-ICU areas.

Okay. Cool. And then so my second question is, so your lift on operating margin was basically like-for-like with the gross margin uplift. To get to -- back to your target operating margin of 30% is going to require some bit of sales rep efficiency. So just wondering, when you're expecting to start seeing that efficiency come through from, I guess, following on from the first question, the wider adoption across the hospital and ultimately more product utilization?

Yes. Look, we sort of tried to flag in May that we were expecting quite high growth rate in OpEx this year because we had lower growth last year. We definitely will be looking to get leverage out of our OpEx spend over the coming years to help assist us getting to that operating margin target, but we assess sort of coming into each year, what we need to do as a business in terms of investment in saving anesthesia sales force where we do actually need to keep investing heavily in that. And we're getting then efficiencies through the rest of the team as they get onboarded and up to speed and getting traction in the hospitals that way. So we definitely are focused on that and would anticipate to start seeing in the next sort of year or 2 some leverage coming out of the OpEx spend.

Yes. Christian, I would say, in our history, our normal mode of operating is that we take leverage from our sales expenses. And we've just had a couple of years of not doing that, and we're back to business as usual from here on out.

Thanks, Christian. Next questions come from Mathieu Chevrier at Citi.

My first one was in the prepared remarks, you flagged your raw material and manufacturing costs were headwinds to gross margin. I was just wondering what portion of the manufacturing costs you were talking about. And have these gotten worse or better? Or is it just that you're focusing on them now that you're largely done with freight costs?

Yes. Thanks, Mathieu. Materials are about half of our COGS, just to give a bit of size of that. And we have seen the inflation impact of our materials not have the same speed, I guess, you would say, in this financial year. What we are seeing and what I'm sort of trying to explain a bit over the past 6 to 12 months is whilst we're paying for these raw materials and over the past 12 months have been buying them in at higher cost, they sit in inventory and raw materials. They then have to get converted into a finished good, shipped to our offices around the world and then sold to our customers only at that in sale that we -- that you see it, and we all see it, in our gross margin. And that's where we're starting to see that flowing into the gross margin this half. But this is sort of product that we have purchased almost 12 months ago that's finally been converted and ended up sold. So this cost inflation of materials will go on until all of that has sort of fleshed through and that we're on -- that we've got the cost of our product for everything fully incorporating that. But we definitely aren't seeing as big an increase as now as we were, say, 6, 12 months ago.

Thanks for those questions -- that question, Matthew. Seem to have lost you, but we'll go to our next question, which comes from David Bailey at Macquarie.

Yes. Just I think I'm a bit new to Fisher & Paykel. When you're talking about traditional seasonality in consumables, if I look at fiscal '18 and '19, it's about 46% in the first half. If I go back over a longer period, it's closer to 48%, 49%. Just want to understand exactly what you're referring to as sort of a traditional seasonal pattern in terms of consumable sales into the first half, second half.

Yes, that's exactly the sum we'd be doing, David. I mean you're right on the money, and it is that in terms of the process, I tend to think of it as second half over first half. So trying to backfill your numbers. But you're following the exact process that we're referring to. I mean that's the history. And right now, that's probably the most reliable data point we've got, second half over first half. Wouldn't look at FY '20 because you got COVID kicking in H2. '19, '18, '17 from memory are fairly normal. I think '16 is the year we went direct in the U.S., so probably I wouldn't count the anomalies in that data. '15 or '16 was we went direct in the U.S. So there's some timing on that one. Yes.

Okay. So just to be clear, I mean 46% is probably a better number than 48% because it can move around quite...

Yes, I think so. Yes.

That's helpful. Okay. That's good, 46, [ 46.50 ], whatever is. And in terms of that OSA, very strong OSA mask growth. Assuming resupply is relatively flat, you've got new patient growth, a bit of price and market share. Just wondering if you could give us a bit of a sense as to the various contributions of those to mask growth, so new patient growth versus market share and maybe a bit of price, just trying to break down that revenue growth number a little bit.

Well, boy, we don't really have that visibility, David. A mask is a mask. And then trying to work out where it's come from is one step too far, I think, unless, Paul -- if you want to give some color to that.

I think that the -- I think it was more CPAP supply freeing up obviously means more patients. So it's probably been some increases in new patients. And I think we've benefited from that, David. And I think that we've got no idea about market share gains and stuff really. But the growth rates we've got with the products, [ CPAP ] going forward probably getting some gain there, too. So that might be the drivers of first growth.

Maybe try and help you, when we model it and when we think about it, we do think about growth coming from new patient starts. And we think that the installed base is sticky when we're modeling it.

Thanks, David. Look, that brings us up to time, everyone. Just a reminder that if you have any follow-up questions, please feel free to reach out to me or Hayden Brown. And I'll now turn over to Lewis for the final word.

Okay. Well, look, thanks, Marcus. And thanks to everyone for joining us on the call. Thanks for your questions as always. A special thanks also as always go to the people at Fisher & Paykel as well as our customers and our suppliers. Thanks for the work you do that makes our business successful so that patients around the world can benefit. And as always, I would like to thank any shareholders on the call for your continued support of the company. Thank you.

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