This Post Market Wrap is presented by KOSEC – Kodari Securities

• Lower COVID hospitalisation cases impacting revenue and operating margin
• Higher freight costs also creating margin pressure 
• Future revenue growth dependent on success of new products 
• No earnings guidance given prevailing uncertainty around COVID-19 variants. 

Fisher & Paykel Healthcare (FPH or the Company) is a New Zealand based medical device manufacturer of products and systems for use in chronic respiratory care, surgery and the treatment of obstructive sleep apnea. The Company comprises 2 key business units, Homecare and Hospital. FPH designs, manufactures and sells its products in 120 countries worldwide.

FY22 revenue guidance

FPH expects full year operating revenue for the March 2022 financial year to be in the range of $1.675 billion to $1.7 billion. This compares to operating revenue of $1.97 billion generated for the full year ended 31 March 2021, a decline of 14 percent. 

The Company attributes the decline to lower respiratory intervention requirements of the current Omicron variant, as compared with the more severe Delta variant. The comparatively mild flu season in the Northern Hemisphere has also contributed to lower demand for hospital consumables. This follows a period of unprecedented demand for humidification products used in respiratory, acute and surgical care during FY21, when hospitalisations in response to COVID-19 case numbers were extraordinary. Hospitalisation numbers are critical to revenue growth because the Hospital product group accounts for approximately 75 percent of total operating revenue. 

The 63.1 percent operating margin earned in FY21 represented a decline of close to 3 percent compared to the previous financial year. Higher air freight utilisation and elevated freight rates were cited as reasons for this margin decline. This adverse trend has continued into the FY22 financial year with the operating margin expected to come in at about 62.5 percent. This compares to Fisher & Paykel’s long term gross margin target of 65 percent.

Looking Ahead

The flattening of the curve following the global surge in COVID-19 has tempered revenue growth while higher freight costs have compressed operating margins, in the current reporting period. The Hospital product group, which was the primary beneficiary of the COVID-19 hospitalisation surge, saw revenue in the FY21 financial year, ramp up by 87 percent to $1.5 billion. This revenue spike was sustained up to the period when the Delta variance was rampant around the world, especially in North America. 

Given subsequent lower hospitalisation rates, the Hospital product group is now focused on testing and trialing new products. The success of such products, including the Visairo mask for non-invasive ventilation in the US and the Evora full mask on NZ and Australia, will have a bearing on medium term revenue growth. R&D research is also a key factor in future revenue growth, with $75 million expended in the first half of the current financial year.     

Significantly, the FPH board has not committed to firm earnings guidance for the FY22 year. The prevailing uncertainty around COVID-19 variants, including the effectiveness of vaccinations, is impacting the number of COVID-19 related hospitalisations around the world. The lack of clear and definitive qualitative evidence is grounds for FPH in leaving earnings details to the release of full financial year results on Wednesday May 25. 

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.