Fisher & Paykel Healthcare Corporation Limited (FPH) has disclosed its financial results for the 2024 fiscal year, reporting a 10% increase in operating revenue to $1.74 billion. Despite this growth, the company's reported net profit after tax saw a significant decrease of 56% to $132.6 million. However, the underlying net profit after tax, which excludes certain items, rose by 6% to $264.4 million.
Looking ahead, Fisher & Paykel Healthcare anticipates operating revenue for the 2025 financial year to be between $1.9 billion and $2 billion, with net profit after tax projected to be in the range of $310 million to $360 million, signaling an expectation for further improvement in gross margin.
Key Takeaways
- Fisher & Paykel Healthcare's operating revenue increased to $1.74 billion, a 10% rise year-over-year.
- Reported net profit after tax fell 56% to $132.6 million, while underlying net profit after tax grew by 6% to $264.4 million.
- The company gained regulatory clearance in the United States for several products and introduced new products in the home care sector.
- Revenue for FY 2025 is projected to be between $1.9 billion and $2 billion, with net profit after tax expected to range from $310 million to $360 million.
- Gross margin is expected to improve, with a target of 65%, while operating margin is anticipated to reach 30% in the next two to three years.
Company Outlook
- Fisher & Paykel Healthcare forecasts operating revenue for FY 2025 to be between $1.9 billion and $2 billion.
- Net profit after tax is projected to be in the range of $310 million to $360 million for FY 2025.
- The company is aiming for a gross margin target of 65% and an operating margin target of 30%, which is expected to lag by a year or two.
Bearish Highlights
- There was a significant drop in reported net profit after tax by 56% compared to the previous year.
- Regulatory approval timelines for the Optiflow switch product in the US are unpredictable.
- The company increased its provision for a product recall, estimating the cost at around $20 million.
Bullish Highlights
- Fisher & Paykel Healthcare achieved regulatory clearance in the US for several products, enhancing its home care sector offerings.
- Positive feedback and performance have been reported for their Solo and Airvo 3 products since their launch in the US.
- The company anticipates mid-teens growth for new applications and expects new product introductions over the next five years.
Misses
- The company did not have hard data to provide an accurate answer regarding the growth rate of new patient starts.
Q&A Highlights
- Anesthesia sales are progressing well in each market and are in line with expectations, though still a small part of the overall business.
- The company discussed the potential impact of capitated arrangements on their OSA mask business in the US, noting it does not significantly affect mask volumes per patient.
- Executives expressed confidence in their product portfolio, customer relationships, and infrastructure.
In conclusion, Fisher & Paykel Healthcare's earnings call revealed a mixed financial performance with strong revenue growth but a decline in reported net profit. The company remains optimistic about its future, with projections of increased profit and continued product innovation. The focus on new product introductions and the expectation of improved gross margins suggest a strategic plan to bolster the company's market position in the coming years.
Full transcript - None (FSPKF) Q4 2024:
Operator: Welcome to Fisher & Paykel Healthcare's results conference call. My name is Cynthia, and I'll be your operator for today's call. At this time, everyone except the guests speakers will be in listen-only mode. Later, we will conduct a question-and-answer session. [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.
Marcus Driller: Thank you, Cynthia. Well, good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's Full Year Results for the 2024 Financial Year. On the call today are Lewis Gradon, Managing Director and Chief Executive Officer; Lyndal York, Chief Financial Officer; Justin Callahan, VP Sales and Marketing; Andrew Somervell, VP of Products and Technology; and Andy Niccol, our Chief Operating Officer. 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 year ended March 31, 2024. Earlier today, we provided our 2024 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 and with thunder and lightning here at our campus, I'd now like to turn the call over to Lewis.
Lewis Gradon: Yeah. Look, thanks, Marcus. And you can't plan these things, but we are sitting here in the middle of a major downpour in Auckland. I hope there's not too much background noise. And we might sound a little funny, too, that's because we're sheltering at the speaker to try and get over this background thunder, lightning and deluge, so my apologies. Now today, I'm going to be using the investor presentation pack that we released to the NZX and the ASX this morning. So let's start on Page 3 with the business highlights. Our people continue to work with clinicians around the world to promote the adoption of our therapy and that's supporting the treatment of approximately 20 million patients during this year. In the hospital business, we've reached some important product milestones. We've got regulatory clearance in the United States for a number of products, and that includes the F&P 950 System, our Optiflow+ Duet nasal cannula as well. We also introduced the Airvo 3 into the United States this year. And you can find more details on these and the timing, on Page 26 of the presentation pack. In home care, OSA masks had an outstanding year. Our Evora Full face mask continue to perform well, and we've recently launched our new solo mask into the United States. So now let's turn to Page 4. Operating revenue for the full year was $1.74 billion, up 10% on FY '23, and that's 8% in constant currency and this was driven by solid demand across the hospital consumables product portfolio and strong growth in OSA masks. Now as we explained in our market announcement, reported net profit after tax was impacted by three factors that were unusual: the voluntary product recall; the valuation of the Karaka land; and removal of depreciation deductibility for our New Zealand buildings. And these are all reflected in this table on Page 4, where we also look at the underlying results. Lyndal is going to touch on this shortly, but I would like to make one brief comment on the Karaka land. We're actually pretty pleased that we've got this now as we consider that owning this site mitigates the risk to our future growth in light of the current increase in uncertainty around potential development of site like this in Auckland. So including these adjustments, reported net profit after tax for the year was $132.6 million, that's down 56% on FY '23 in constant currency. Underlying net profit after tax, which excludes those items was $264.4 million, that's up 6% on FY '23 or 5% in constant currency, and we think it's a better representation of the ongoing operating characteristics of the business for the year. So now let's look at our product groups. We'll start on Page 6. Hospital operating revenue was $1.1 billion for the full year, that's up 6% or 5% in constant currency. New applications consumables revenue was up 15% on FY '23 or 13% in constant currency. Growth in the second half has come from reduced cumulative respiratory illness hospitalizations in the Northern Hemisphere compared to FY '23. I should really say, it's come after reduced cumulative respiratory illness hospitalizations because we're thinking of seasonal respiratory illness is including COVID, flu and RSV-related hospitalizations. FY '24 had a strong flu season compared to historical periods, but that's offset by a lower COVID hospitalization rates, and it results in a lower overall seasonal hospitalization compared to the second half of FY '23. So I think going forward, we'll be talking about seasonal hospitalizations to incorporate all those moving parts. Now against this backdrop, growth was broad-based across the portfolio, that's including a non-invasive inhalation, Optiflow for respiratory and anesthesia patients and invasive ventilation. And it all suggests that we are making headway with changing clinical practice. Hospital hardware of over $100 million was pleasing given the significant volume of hardware sold in recent years and the fact that we lapped the period with COVID-driven surges in some countries such as China, for example. So turning now to Page 8. Home care operating revenue was $652.3 million, that's up 18% on FY '23 or 16% in constant currency. Our Evora Full face mask continues to be a strong performer, and we're continuing to add new high performance masks to our portfolio, and that accommodates a wide range of patient needs and patient preferences. In April this year, we launched a new Solo mask into the United States. This mask offers automatic fitting and adjustment for patients who prefer something that just works without adjustments or any assistance. We also unveiled our smallest and lightest mask yet, the Nova Micro nasal pillows mask. This has been released in New Zealand and Canada and launches into Australia, Europe and the U.S. are to follow later this year. So I'm going to pause there and hand over to our CFO, Lyndal York, for more details on financial performance, and then I'll speak to guidance after that.
Lyndal York: Thanks, Lewis and good morning, everyone. On Page 9, as Lewis mentioned, we have three abnormal items impacting profit this year: the voluntary recall provision; the Karaka land revaluation; and the removal of depreciation deductibility for our New Zealand buildings. We believe a more meaningful representation of the performance of our business for the year and for the future is the underlying result excluding these three items. On Page 10, our underlying gross margin was 61.1% for the year, up 172 basis points from last year or 216 basis points in constant currency. Reduced freight costs account for the large part of the improvement over last year. We have had the benefit of negotiated reduced freight rates for most of this year. We also had a much lower proportion of our shipments going average this year, reflecting our inventory levels globally. The return to our usual practice of working on efficiency and margin improvements is making an impact. And along with our pricing have more than offset the inflationary cost increases now flowing into our gross margin. Including the product recall provision, reported gross margin was 59.9%, up on last year by 95 basis points in constant currency. We remain confident of being able to return to our target gross margin of 65%. As prior to COVID, we had delivered improvements in gross margin of 100 basis points to 150 basis points a year on average. Moving on to Page 11. Total operating expenses grew 14% or 13% in constant currency. This is as we expected, given the full year impact of the people that we added throughout FY '23. Underlying operating margin was 21.4%, an increase of 41 basis points or 36 basis points in constant currency, reflecting the improvement in gross margin. R&D expenses grew 14% to $198 million and were 11% of revenue for the year. We have estimated that about 60% of our R&D spend will be eligible for the 15% R&D tax credit this year. SG&A expenses were $493 million, an increase of 14% or 13% in constant currency. Moving to Page 12. Operating cash flow this year was $430 million, up $191 million from last year. This year, our taxes paid is lower than usual as we prepaid tax during the 2023 financial year, requiring less tax to be paid this year. The reduction of our inventory levels throughout FY '24 also assisted operating cash flow this year. Capital expenditure, which includes purchases of intangible assets was $339 million for the year. The increase of $128 million from last year is primarily due to the $190 million paid this year for the Karaka land acquisition. Capital expenditure for the next financial year is expected to be approximately $150 million. Looking at the balance sheet, debtor days were largely in line with the prior year at 45 days. Our net debt at the 31st of March, was $32 million, and our gearing ratio was 1.8%. Interest-bearing debt was $113 million, with $77 million of that being current. Turning to Page 13. We have declared a fully imputed final dividend of $0.235 per share. This represents a 2% increase on the final dividend declared last year and continues our recent track record of increasing our dividends to shareholders. It will be paid on the 10th of July. This brings the full year dividend to $0.415 per share, up 2% on last year. 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 positively impacted our profit after tax by $3 million compared to last year. At 1st of May rates, we would have an overall positive impact on net profit after tax of approximately $35 million in FY '25 compared to FY '24. Hedging would deliver a pretax gain of $19 million in FY '25. Now with that, it's back over to you, Lewis.
Lewis Gradon: Okay. Thanks, Lyndal. So let's turn to outlook on Page 15. At the 1st of May exchange rates, our guidance for the full 2025 financial year is for operating revenue to be in the range of approximately $1.9 billion to $2 billion and net profit after tax to be in the range of approximately $310 million to $360 million. And this guidance assumes no significant respiratory disease events within the 2025 financial year and it assumes further improvement in gross margin. So I think I'll end my results there, so that we can open the line to questions.
Marcus Driller: Thanks, Lewis. Cynthia, if I could ask you to please open the lines up for questions. Before we begin though, can I please ask everybody to limit your questions to two. This is to ensure that everybody has an opportunity to participate. And you can rejoin the queue for any additional questions, preferably one at a time.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]
Marcus Driller: Thanks. The first question comes from the line of Lyanne Harrison at BofA. Please go ahead, Lyanne.
Lyanne Harrison: Yeah. Good morning, Lewis. Good morning, Lyndal. Can you hear me okay?
Lyndal York: We can. Thanks, Lyanne.
Lewis Gradon: We can. We hope you can hear us, too.
Lyanne Harrison: I can hear you. Now that the rain stopped over there in New Zealand. We can certainly hear you much clearer. Sounded like you were on air field at the time. But let me start with the guidance and then my follow-up question will be on gross margin in relation to that guidance. But on guidance, it's quite a wide range on that NPAT guidance, $310 million to $360 million. I'm just trying to understand, what do you think the key variables are, which would result either falling in at the lower end of that range or at the top end of that range?
Lewis Gradon: Well, first of all, the biggest driver would be the revenue range flowing through. And then for the other moving components, I'll hand over to Lyndal.
Lyndal York: Yeah. So in terms of the revenue, it's pretty much as that drops down gives that NPAT range. Gross margin, we're looking at around about 100 basis points on an underlying basis. That sort of 200, if you include the recall provision in FY '24 and OpEx around about a 10% growth, and that's all sort of give and take at the lower and the top end of the range and then the revenue flowing down.
Lyanne Harrison: Okay. Thank you. And then, if I look at the gross margin drivers, so you're saying you're looking at about 100 basis points improvement. Where is that going to come from? Obviously, you talked about this year there was improvement being that freight in terms of renegotiating that, that largely being cycled through because if I understand, you negotiated that in 2023. So if we think about that GM improvement, can you give us some color on where do you think that might come from and if there could be further upside?
Lyndal York: Yeah. Absolutely, Lyanne. You're spot on that freight's largely done now in FY '24. So there's really no benefit further coming from freight into '25. So that 100 basis point of improvement is just that continued improvement and efficiency through the organization more than offsetting the cost increases coming through.
Lyanne Harrison: Okay. Thank you very much. I’ll go back in the queue.
Marcus Driller: Thanks, Lyanne. Next question comes from Dan Hurren at MST Marquee. Go ahead, Dan.
Dan Hurren: Good morning. Thanks very much. I guess my question just in regard to the home care, with the Evora slowing. Just wondering the experience of that in the exit rate of Evora and whether we should be thinking about stacking two new mask launches on top of that or is Evora slowing to sort of historical levels after successful launch?
Lewis Gradon: I probably wouldn't go Evora slowing. If you're looking at H2 versus H1, you've got -- in our second half, you've got, I would say, masks lapping -- a really big lapping the Evora introduction. So I suppose, in that regard, if you want to go slowing. But in absolute numbers, I probably wouldn't go slowing. It's just that we're lapping really successful introduction. I think that our thinking is that, if we can maintain that second half growth rate going through FY '25 would be done pretty well.
Dan Hurren: Okay. Thank you. And second question, just on the hospital consumables business. I mean, obviously, lots of movement. There's been so many sort of one-off headwinds and tailwinds over the last two years. Do you get a feel for where consumption is, or where utilization of new apps is perhaps versus the pre-COVID period or before all the volatility?
Lewis Gradon: Not really before all the volatility, but we think there's a good signal in there. We've kind of got this new language now. We need to talk about seasonal hospitalizations because we need to incorporate a seasonal COVID component and then your standard flu component. And for most of the data that's available, U.S. CDC and European country data that you can get, it's pretty clear that, that seasonal variation in FY '24 is lower than it was in '25 the seasonality -- sorry, '24 is lower than it was in '23. So against a backdrop of lower hospitalization rate in our second half, we think delivering growth of 9% in new apps points to changing clinical practice and it points to progress.
Dan Hurren: Got it. Thanks very much.
Marcus Driller: Thanks, Dan. Next question comes from Gretel Janu at E&P.
Gretel Janu: Thanks. Good morning. So I just want to follow up on the new apps growth rate. So that moderation in second half is just 9%. I think some in the market might be a bit disappointed that that's below the 10% mark. So I guess I just want a little bit more color in terms of your expectations going forward. Do you expect it to accelerate from here back into the double-digits or remain kind of high-single digits going forward? Thanks.
Lewis Gradon: Yeah. We've got to make some assumptions about the seasonal hospitalization period that you're following. But we're thinking -- all things being equal, we're thinking we should be at mid-teens for new apps.
Gretel Janu: So that's the FY '25 mid-teens?
Lewis Gradon: Yeah, sorry, yes, for FY '25 yes, absolutely.
Gretel Janu: Okay. Excellent. Thanks. Very clear. And then just in terms of hospital hardware, it did step up in second half relative to your first half numbers. Is that gaining more traction there or just further replacements or entering into new hospital contracts?
Lewis Gradon: Look, I think it's just actually lower than normal fluctuation actually. At the best of times, our hardware number is quite lumpy year-on-year and then delving into individual components or shorter time frame, so it's just so lumpy. So we really don't read anything into that kind of movement at all.
Gretel Janu: Okay. Great. Thanks so much.
Marcus Driller: Thanks, Gretel. Next question is come from the line of Adrian Allbon at Jarden.
Adrian Allbon: Good morning, team. Just wondering if I could sort of stay in hospital consumables. Are you able to give us a reference for what you -- where anesthesia sort of ended for the second half? I think at the first half, you referenced just short of 10% of new app sales.
Lewis Gradon: Yeah, Adrian. We're going to sit on still just a bit less than 10%. It's off a small base, and it's very strong growth.
Adrian Allbon: Right. Okay. And so on that basis, like is it fair to sort of because your IV consumables sort of, if I just think first half versus second half sort of -- first half was strong at 8%, second half feels more like 4%. And does that mean that the core sort of NIV high flow was gone more like 8% in the second half, like 7% to 8% off sort of in the first half, like just doing the maths of anesthesia?
Lewis Gradon: Yeah. I mean, sure, do that math. But Adrian, the caution there, that's all about what you're lapping. And first half, we're lapping a destocking period. Second half, we're lapping seasonal hospitalizations. We're letting a China COVID surge. So certainly, on this side of the table, there's not much we can figure out from the comparisons of '24 against '23 growth rates.
Adrian Allbon: Right. Okay. Well, maybe if I asked slightly differently, like I noticed that you sort of haven't necessarily you have -- like in terms of sales force investment in '24 as sort of less by number versus '23, are you anticipating sort of lifting that into '25 to sort of lift that growth rate that you sort of referred to in Gretel's question?
Lewis Gradon: So if I take you back to how we think about it, typically, we will add salespeople, roughly in line with revenue growth. And we're continuing to do that, and we're doing that now. The one thing that changed several years ago is we made a strategic decision that we would allocate a proportion of that sales rep growth to a specialized sales force just for anesthesia. But otherwise, I guess, what I want to make clear is the philosophy and the thinking has remained exactly the same. We're adding salespeople at a rate roughly proportional to revenue growth. We had a few years there where that was a hard one to figure out. But we're back to that mentality. The only difference is allocating some of them specifically to anesthesia.
Adrian Allbon: Okay. Maybe can I ask just a second question In terms of -- if we look over the COVID period from sort of, if you like, FY '23 to '24, like there has been strong reinvestment in R&D with the additional gross margin dollars that you've kind of extracted. And that we have seen it intensity as a proportion of sales Like for the next five years, like the products that we know about and you sort of described on '26, would they be what you expect to underpin the majority of the next five years of revenue growth or with the recent like reinvestment or lifting of R&D spend, we would be expecting to see new ones at the end of that period?
Lewis Gradon: I think the context there is you've got a little bit of a COVID get. But otherwise, we're on the same track we've always been on, and that is -- in the longer term, there will be new therapies, and that's driven by products and technologies, and we will be continuously updating the technologies that we have today. So I don't see any change going forward. And over the next five years, again, I think it's just a part of a continuum. We'd expect to be seeing constant new product introductions every year, year after year in different geographies as we roll them out across all parts of the business. So no different over the next 5 years to what you saw before COVID.
Adrian Allbon: So just to clarify that. So -- but I would have thought that like your 950 and your Airvo 3 would have been more platform introductions as opposed to just like on the mass side of the business, we would expect new ones every couple of years?
Lewis Gradon: Well, there's different cycles across the product ranges. OSA masks are a quicker cycle time typically than the hospital products. Yeah, that's right. I mean OSA mask development time might be three to five years, whereas the platform might be 10 years -- up to 10 years.
Adrian Allbon: Okay.
Marcus Driller: Thanks, Adrian for your questions. Next questions come from Vanessa Thomson at Jefferies. Please go ahead, Vanessa.
Vanessa Thomson: Thanks very much. Thanks for taking my questions. I just wanted to ask about margin. We've spoken about gross margin this morning and the target of 65% is still on track. And I wondered if the 30% target for operating margin in the next two to three years is also still on track? Thank you.
Lewis Gradon: Operating margin target, we would imagine would lag achieving our gross margin target by a year or two or so.
Vanessa Thomson: All right. Thank you. And then my second question, just wanted to ask for expectations of R&D -- ratio of R&D to sales for FY '25. Thanks. Clearly we should be continuing near 11%.
Lewis Gradon: We couldn't catch that. Our...
Lyndal York: How much R&D [indiscernible] yes, that intensity, well, so we've given that revenue range, whereas we're probably locking in a lift wider range for R&D and OpEx spend. So depending on where we land within the revenue. But we're looking at growing our OpEx, which is R&D and SG&A, by about 10% next year.
Vanessa Thomson: Thanks very much.
Marcus Driller: Thanks, Vanessa. Next questions come from the line of Mathieu Chevrier at Citi. Please go ahead, Mathieu.
Mathieu Chevrier: Yeah. Good morning. Thanks for taking my questions. I just wanted your views on the potential impact that some capitated arrangements may have in the U.S. on your OSA mask business?
Lewis Gradon: We're not sure what you're referring to there, Mathieu. Can you help us out with the question.
Mathieu Chevrier: Yeah. You had like Humana (NYSE:HUM), for example, who use a capitation model to -- for its patient population that signed up to Medicare Advantage in some states, and they signed up some capitated arrangement with some DMEs to provide things like CPAP.
Justin Callahan: Yeah. Mathieu, it's Justin here. I think probably what you're referring to there really affects the DME provider, that's how they get paid. It doesn't really change too much how choose to replace the mask for the patients. So we don't see any real effect directly mass volumes per patient as an example.
Lewis Gradon: Thank you, Justin.
Mathieu Chevrier: Okay. Thank you, Justin. And then my other one was just on the 820, the new device. I was just curious to understand how important is this predecessor, the 810 and what are your aspirations for the 820?
Lewis Gradon: Well, the 820 is largely intended for use in our home care applications. So supporting home care patients, home care ventilated patients and so on. Sometimes these long-term facilities might use 820s. So it's important to keep the technology moving along. It's a relatively small part of the overall business.
Mathieu Chevrier: Got it. Thanks very much.
Marcus Driller: Thanks, Mathieu. Next questions come from Stephen Ridgewell at Craigs.
Stephen Ridgewell: Good morning. Just two questions. First of all, on OSA masks. Just interested in the earlier reception you've seen to the Solo since it's launched in the U.S. over the last couple of months, it sounds like? And also, any color you can provide on how Solo performed in Australia over the second half? And then just bring it all together, can you help us understand like the expectations for OSA mask in constant currency growth at the top and the low end of the guidance range, please?
Justin Callahan: All right. Stephen, Justin here. I think I'll perhaps take on the question about the mask performance. So obviously, it's early days in the U.S., but the feedback has been tremendous. I mean that we're promoting that product are well received by the customer and they viewed by the customer. So it's a good product out the gate. And in Australia, they've had continued to get good feedback since their full -- nearly a full year on the release. So we see it performing what we have with our other masks, and that will be to our thinking moving forward.
Lewis Gradon: Yeah. And then we're thinking of in a midpoint of guidance maintaining H2 and OSA mask growth around the 10% mark. I think total swing around that, you might be talking 1% or 2% top end, lower end, something like that.
Stephen Ridgewell: Yes. That's helpful. And just a second one on the Airvo 3. I guess can you comment on the take-up of that product since launch in the U.S. market? And then again, against the guidance, I mean it's a hard one for you to forecast and for the analyst too. What -- at the top end of the range, what are the assumptions for device sales and at the low end as well, please?
Lewis Gradon: Okay. It sounds like two questions, Steve. Do you want to take the Airvo 3.
Andrew Somervell: Yeah. I'll perhaps take the first question. So Airvo 3, we've had that in the U.S. now for a couple of months. Again, the performance has been good. The feedback from the customer and from the market has been really, really solid. But like all capital equipment, we mentioned already, it's sort of up and down. So at the timing of how much that drives will drive the impact this year. But the feedback is good, and it's doing the job. And so we're really pleased with it. The teams are really pleased with it.
Lewis Gradon: Yeah. And for the second part of your question, top end, bottom end range, I presume you're talking about hospital consumables. So...
Stephen Ridgewell: Hospital hardware hospital hardware.
Lewis Gradon: Hospital hardware. For hospital hardware, well, I go back to the lumpy comment. And I think in guidance, bottom end may be flat. Top end, plus 20% would be within our range.
Stephen Ridgewell: That’s helpful. Thanks.
Marcus Driller: Thanks, Stephen. Next questions come from David Low at JPMorgan (NYSE:JPM).
David Low: Thanks very much. Just on the gross margin expectations trajectory. Could you just talk about when do you expect to get back to that 65% level? And Lyndal, I just wasn't quite clear what you said about freight. I mean it seems to be done, but I thought you made a comment that airfreight was still significant, maybe I misunderstood.
Lewis Gradon: So I think I can help on that. So I just want to give you the science. We can make an estimate of what we think gross margin is going to be over the next 12 months. There are thousands of moving parts in that, David. So we do think of that as sort of plus or minus 50 basis points. And then with regard to the -- and so trying to forecast FY '26 and '27, we can't do that with any precision whatsoever. What we're relying on is our track record prior to COVID of improving gross margin, and it's all these moving parts. We're back to that behavior. We're doing the same things we did then. And the track record was that over, I forget now five, six, seven years or something like that, we were able to generate 100 basis points to 150 basis points of gross margin improvement a year. So that's kind of where that guidance is coming from.
Lyndal York: And then also price -- and I guess, David, the freight part of it, what I was saying is that we've got a big benefit into gross margin in FY '24. We're not expecting any big benefit or cost really in '25, assuming that we've got reasonable amounts of inventory around the world and we've renegotiated our rates that will apply through '25. So we're not seeing a major impact of freight for next year.
Lewis Gradon: Barring any unforeseen
David Low: Yeah. No, I understood that. I just thought your comment about air freight was a bit unclear. But look at [indiscernible] Thanks.
Lyndal York: Okay. I will clarify that. So in FY '24, we did send a lower portion of our volume airfreight than we used to pre-COVID. But that could be a bit of a headwind. But as you will see in our pack that we've relocated our international export distribution, so that reduces some of that freight rate and help -- will help counterbalance a potential increase in the percentage of air freight.
David Low: Great. That’s enough clear. Thanks very much.
Marcus Driller: Thanks, David. Next question comes from Matt Montgomerie at Forsyth Barr.
Matt Montgomerie: Thanks, guys. Good morning. Just on anesthesia, I'd be keen for you to talk to, I guess, feedback from the larger developed markets as you've begun to increase the sales force there? And then also just in terms of Optiflow switch regulatory approval status, I know a couple of years ago that the product was yet to be approved in most large developed markets. I'd just be keen for an update there on where it's at potential timing?
Lewis Gradon: Justin, do you want to take the first part?
Justin Callahan: All right. Yeah, absolutely. Matt, Justin here. Yes, so regarding anesthesia, the performance of sales growth there. So we're sort of being progressively putting teams into the markets as each market sort of set right to go after that space. And so that's been progressing quite well. It's still a small part of the business, though. But what we're seeing in each of those markets is in line with what we would expect to see, so in line with our expectations. And so we're quite pleased by it. But it is market by market, and that's what we're now progressively doing. But as mentioned, it is still continue a good growth, but on a small base at the moment, but very pleasing, and we're excited about it.
Lewis Gradon: I mean, on the regulatory approval, Matt, we don't have clearance for a switch in the U.S. yet. And these are notoriously dangerous things to predict.
Matt Montgomerie: Maybe just a follow-up there. Like what's the delays or headwinds to approvals?
Lewis Gradon: It's just an unpredictable process. There's no fundamental issue, no fundamental questions. It's how long the regulator takes to respond can be completely dependent on the regulators' workload at the time. There's no fundamental issue, but it's just not a thing you can predict.
Matt Montgomerie: Yeah. That's fine, understandable. And Lyndal, just one on gross margin. So your comment for 100 basis point expansion for FY '24 implies sort of only 50 bps on the second half. Could you just maybe talk to the drivers here in a bit more detail? It just feels slightly conservative when you put together your comment around 100 to 150 bps, I guess, pre-COVID in terms of that track record?
Lyndal York: Sorry, Matt, I'm bit confused. Are you talking '24 or '25?
Matt Montgomerie: Yeah. I'm talking your '25 guidance. But you did 61.5% -- you hit 61.5% in the second half and when your guidance is essentially for 62% for the full year.
Lyndal York: Yeah. So don't forget, we've had a lot of the improvement in '24 was the freight, which we don't get again. We still have cost increases coming in, in '25. So we still have headwinds of that facing us. So we actually think that's a really good result for '25, if we can get that 100 that we've sort of put into the guidance there, give and take, that's all of those improvements more than offsetting the cost increases that are still to come into '25.
Lewis Gradon: And no freight benefit.
Lyndal York: And no freight benefit, yes.
Marcus Driller: Thanks for your questions, Matt. Next questions come from the line of Saul Hadassin at Barrenjoey. Please go ahead, Saul.
Saul Hadassin: Yeah. Thanks. Good morning. Lyndal, just a clarification to start with. You mentioned an FX impact in '25 figure of $35 million. Can I just clarify, if we look at the FX impact in '24, are you saying that, that $35 million is effectively sort of $4 million less than what the impact was in '24? Is that what you were referencing? Is that $35 million?
Lyndal York: So the $35 million is at the total NPAT line of all currency impacts, '25 over '24. So the reported results for '25 at the 1st of May rates, if that applied for the full year, we'd have a benefit to NPAT in '25 reported by $35 million. The number I spoke to in '24, so '24 over '23 was that $3 million -- $2 million or $3 million. But that's year-on-year compare -- the year-on-year comparison. So there's significant tailwinds of currency into '25 if these rates hold.
Saul Hadassin: Yeah, understood. And then my second question was just on CapEx. So just noting the step down to $150 million in FY '25, which kind of gets you back to CapEx spend roughly in FY '19. So is there a metric that we should think about in terms of your CapEx, let's say, over the next three years as a percentage of sales or is it just going to remain lumpy over the next years based on developments that you've got going on?
Lyndal York: Yeah. There will be some lumpiness there as we develop and do the fifth building here in New Zealand. So certainly, we're expecting a bit of spend there for '25, but the bulk of that spend probably '26, '27.
Saul Hadassin: Okay. Thanks. That’s all I had.
Marcus Driller: Thank you, Saul. Next questions come from Andrew Paine at CLSA.
Andrew Paine: Hi. Good morning. Thanks for taking my question. Just on the recall, you've noted that you stepped up vision to $20 million. Can I just kind of be a view on what the reason was for that and how confident you are that will cover it and also how you're progressing with the recall?
Lewis Gradon: Yeah. Sure. These are units that are seven to 12 years old. And the challenging part and the moving number is how many of them you think are still out there and in use. And we had an original estimate of that. And essentially, what we've done here is we've revised it up based on the early responses from customers and what they have. The $20 million reflects what we've seen so far with over half the responses in. So I think that was -- that gives us confidence that probably getting a bit closer. In terms of progression, we're probably a bit over. In terms of volume, I think a bit over. In terms of responses, road the halfway through it.
Andrew Paine: Okay. So there could be a bit of increase there. Is that right?
Lewis Gradon: Well, based on the data we've got now, that's over half of the responses -- over half the customers have responded. So we think that's a fairly reliable data point, and we're confident the $20 million covers it. There's a theory out there that early responders are people that have some and late responders are people that don't have any. So I put that out there is a potential theory.
Andrew Paine: Okay. That's great. And yes, sir, just coming back to gross margin. Look, you're talking about your views on pre-COVID 150 basis points improvement each year, and everyone is focused on obviously getting back to that 65%. But from there, do you think you can keep growing above that 65% or do you think it out there?
Lewis Gradon: Well, the goal always was to get to the 65% gross margin and the 30% operating margin, keep working on efficiencies and continuous improvements, but reinvest it back into the business to try and lift growth. And we're back to having that as a goal.
Lyndal York: Well, we think that those targets are what's sustainable over the long term. So once we get to that point, we feel like that's sort of world-class margins. And if we can sustain that, we're quite happy in the continual reinvestment to continue the strong growth of our business.
Andrew Paine: Yeah. Got it. Makes sense. Great. Thanks.
Marcus Driller: Thanks, Andrew. Next questions come from Craig Wong-Pan at RBC.
Craig Wong-Pan: Hi. Good morning. Just wanted to ask about the mask market in home care. Just trying to understand the competitive dynamics there. Could you make any comments about what you're seeing there with competition, if any particular competitors are doing anything different recently?
Lewis Gradon: Well, the market is kind of these days dominated by ResMed. In our fundamental strategy for all competitors is to have a product offering where the customer can see a difference between the performance of what we have and what the competitor has. I don't think much has really changed in the last few years. We have the same strategy, and we're pursuing the same outcome really. In terms of market dynamics, the only thing that's really happened there over the last four or five years is the competitive landscape if anything is reduced.
Craig Wong-Pan: And with the kind of Philips -- I guess just as a follow-up, with sort of Philips, have you seen much change from them?
Lewis Gradon: Justin is shaking his head.
Justin Callahan: Craig, Justin hear. Not really on we think as far as in the major markets, globally, the landscape's clines consistent. As Lewis has pointed out, it's all based around having the right technology for the customer, for the patient, and that's -- and we're still in that same trajectory we've always been on. So -- but I don't say we're seeing any material difference from a competitive landscape.
Craig Wong-Pan: Okay. And then just my second question. On CapEx guidance, so to Saul's question about the sort of, I guess, lumpiness of that coming through, that seems to be sort of different to commentary that you provided previously. Just wanted to understand, has there been a delay or rephasing of those building projects?
Lyndal York: No. Look, we continually assess looking out over the next five to 10 years what we think our requirements might need to be. And our priorities and our strategy is to always have buildings ahead of when we think that we're actually going to need them. And so when we put out some guidance a few years ago, we were in the eye of the COVID volatile storm. And so we were flat down going, just build, build, build, we're going to need more buildings. Now that, that demand has sort of stabilized and we've normalized out of it, we've assessed and we don't need to go as hard or as fast with those buildings, but still making sure that we've got empty buildings, and we've got a new empty building in Mexico that we've still got room to grow into some here.
Lewis Gradon: Yeah. I think to be fair, Craig, we did say a time with the COVID strategy, we're keeping the pedal to the metal. We're going to keep building capacity until things stabilize. That's what we had at the time. That's what we are thinking at the time, which kind of implies an overshoot.
Craig Wong-Pan: Okay. Fair enough. Thank you.
Marcus Driller: Thanks, Craig. Next questions comes from David Bailey at Macquarie.
David Bailey: Thank you. I just had a follow-up question just all actually. Just to make sure the numbers are right for currency. So am I right that $264 million is the '24 number, midpoint of guidance is $335 million NPAT. Are you saying $35 million of that $71 million delta is coming from currency?
Lyndal York: Yes.
David Bailey: Okay. So we're looking at more like a 300 midpoint, excluding currency, sort of 13.5% NPAT growth at the midpoint?
Lyndal York: Yeah.
David Bailey: Yeah. And just as a follow-up to Craig's question, there's been no real material change in the market dynamics around OSA masks. Does that imply that the new patients start to stepped up materially or recovered post some COVID lull or do you think there's incremental market share gains coming through there from Philips as well?
Lewis Gradon: Do you want to talk to that, Justin?
Justin Callahan: Yeah. I think probably at this stage, David, I think the new patient start volume, and we still model it out to be fairly percent-wise, fairly similar to previous. Obviously, that step-up in the CPAP supply kind of sort of probably washed through the previous year. So we're growing above market growth rates at the moment, which implies market share gains. And so that's probably what we should be expecting to see with some of these new parts bringing to the market.
David Bailey: Just a follow up there, what do you think the new patient starts are growth rate?
Justin Callahan: Well, that's always a tricky one. Isn't it, typically, it's a been around that sort of high mid-single digit.
Lewis Gradon: Yeah. The reason we've been cagey, David, and Justin used a careful word, we model it. We don't actually have any hard data that would help you out that question.
David Bailey: That’s helpful. Thank you.
Marcus Driller: Thanks, David. Next questions come from Christian Bell at Jarden.
Christian Bell: Yeah. Good morning. So just on your sort of OpEx comments, you're looking to pull back on growth from 14% to 10% into '25. just wondering, where is the main pool be coming from? Is it in R&D or SG&A or is it sort of even across the two of those?
Lewis Gradon: Look, it's driven -- for us, OpEx growth, it's largely driven by the people we added the prior year. So FY '24 was driven by adding, I think, 9% or 10% people in the prior year, and we get them for a whole year. FY '25 will be largely driven by adding about 5% to our total OpEx head count, if you like, going into FY '25, so that's the basis of the numbers. In terms of the ratio, I’d say, it’s pretty similar. And we do tend to think of it as OpEx and the spread across R&D and sales and the rest of it for us is not really the driver.
Christian Bell: Okay. Great. Thank you. And then just secondly, when you mentioned mid-teens growth for the new apps, are you able to sort of give a sense of the growth mix across in anesthesia? Like is it mostly coming from And then is that sort of driven by more salespeople on the ground or more leverage on the current sales force?
Lewis Gradon: All of the above are always happening. Adding salespeople always contribute. We're always looking to get leverage on what our people do per person. I think the short answer is all of the above.
Christian Bell: So just a follow-on from that. Is there sort of -- are you sort of expecting anesthesia at a sort of similar growth rate to what you have been saying? And perhaps there is a bit of a slight pickup in HF in '25 compared to '24?
Lewis Gradon: Yeah, I think that's on the money.
Christian Bell: Okay. Thank you for clarifying. Thanks for the questions.
Marcus Driller: Thanks, Christian. That's the end of questioners in the queue. So in bright sunshine here now in the it's changed in the course of 50 minutes. I'll turn over to Lewis for some concluding comments.
Lewis Gradon: Okay. Look, thanks, Marcus and thanks to everyone on the call for your questions. We do appreciate it. Now looking ahead, we've got all the right foundations in place for future success. We've got fabulous portfolio of products. We've got strong relationships with customers and clinical partners, and we've certainly invested in the infrastructure to meet our future needs. I'd like to acknowledge the people of Fisher & Paykel for your efforts in delivering the innovative products to market. Thank you. And my thanks also go to our customers, suppliers, clinical partners and of course, our shareholders for your continued support. So thank you very much, everybody, and please enjoy the rest of your day.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
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