Fisher & Paykel Healthcare Corporation Limited (OTCPK:FSPKF) Q2 2023 Results Conference Call November 28, 2022 4:00 PM ET
Company Participants
Marcus Driller – Vice President, Corporate
Lewis Gradon – Managing Director & Chief Executive Officer
Lyndal York – Chief Financial Officer
Paul Shearer – Senior Vice President, Sales & Marketing
Andrew Somervell – VP, Products and Technology
Conference Call Participants
David Low – JPMorgan
Gretel Janu – Credit Suisse
Lyanne Harrison – Bank of America
Saul Hadassin – Barrenjoey Markets
Chris Cooper – Goldman Sachs
Matt Montgomerie – Forsyth Barr
Stephen Ridgewell – Craigs Investment Partners
Adrian Allbon – Jarden
Marcus Curley – UBS
Mathieu Chevrier – Citi
Dan Hurren – MST
Operator
Good day and welcome to the Fisher & Paykel Healthcare Half Year Results Call. At this time, I would like to turn the conference over to Marcus Driller, VP, Corporate. Please go ahead, sir.
Marcus Driller
Thanks, Jenny. Good morning, everyone, and welcome to Fisher & Paykel Healthcare’s results conference call for the first half of the 2023 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 can open it up to your questions for the team. We’ll be discussing our results for the six months ended 30 September, 2022. Earlier today we issued our 2023 interim report, including financial statements and commentary to the NZX and ASX. These documents can be accessed on our website at fphcare.com/investor.
With that I’ll pass over to Lewis.
Lewis Gradon
Okay. Thanks, Marcus and welcome to the call, everyone. Today, I’m going to be referring to the investor presentation pack that we released to the NZX and the ASX this morning. But before we look at our results, I would like to start by recognizing the ongoing efforts of people right across the healthcare sector. While it’s been great to see a normalization of sorts after the peak of the pandemic, we do want to acknowledge that conditions remain challenging for our customers.
And at this time, I’d also like to make a special mention for the people of Fisher & Paykel Healthcare, seasonal illness and COVID-19 that meant that we’ve had some periods of home isolation and continued disruption to our work environments and to our customers work environments during this first half and we’re grateful that our people have maintained their relentless commitment. So, thank you.
So turning now to page three, I’d like to call out some of the highlights during our first half, which included continued growth of our anesthesia sales force, the conditional purchase of land for a second New Zealand campus and the rollout of a number of new products to more markets around the world.
So moving on now to the financials on page four. First half operating revenue was $690.6 million, this is a 23% decline from the first half of the 2022 financial year and it’s a 27% decline in constant currency. As we said in our August update, this result does reflect how we are lapping a period of significant COVID-19 driven demand. It is however a solid performance compared to pre-pandemic levels with revenue up 21% compared to the first half of the 2020 financial year. Net profit after tax for the first half was $95.9 million, that’s down 57% on the first half of the 2022 financial year and 65% in constant currency.
Now, our CFO Lyndal York is here today to unpack some of these figures shortly. But before we do that, let’s have a look at our revenue from product groups, starting with Hospital on page six. Hospital operating revenue for the first half is $438.7 million, down 35% year-on-year and 37% in constant currency. New applications consumables revenue was down 20% year-on-year and 23% in constant currency.
Now customer inventory levels have played a role in this result. A number of our customers purchased a significant amount of product in the second half of 2022 financial year to prepare for Omicron wave that eventually required less intensive respiratory support than was expected at the time. And as this half has progressed, we saw signs that customers were working through their excess inventories, and sales of our hospital consumables have increased month-on-month since May. This trend has continued through the early stages of our second half.
Now, ultimately we see these stocking dynamics as short-term and the fundamentals of our sales strategy remain the same. Our teams are committed to helping improve clinical practice and ensuring our hardware is used to benefit a broader range of patients requiring respiratory support.
Now let’s move on to our Homecare product group on page eight. Homecare operating revenue was $249.9 million, up 10% on the first half of 2022 or 4% in constant currency. OSA masks and accessories revenue was up 16% or 10% in constant currency and a significant contributor to the was the strong reception of our Evora full face mask, we received 510(k) clearance in April, in the United States and the feedback from clinicians and end users has been very positive.
So, now I’ll hand over to our CFO, Lyndal York for a more detailed look at the financials. Lyndal?
Lyndal York
Thanks, Lewis, and good morning everyone. On page nine, gross margin decreased by 325 basis points to 59.8% for the half compared to the prior corresponding period, down 533 basis points in constant currency. The cost of freight continues to be elevated. The increased proportion of air freight and elevated rates compared to pre-COVID-19 rates impacted our constant currency gross margins by approximately 290 basis points for the half. This compares to a 190 basis point impact in the first half last year as the average road and inbound air freight rates were higher than the same period last year. We have recently been seeing an easing of air freight rates out of New Zealand, which is encouraging.
This half, we have also experienced manufacturing inefficiencies as we have been carefully balancing demand fluctuations with manufacturing throughput and higher sickness related rates of absenteeism. So sales softened in February, and in response, we progressively reduced our production volumes and manufacturing workforce. This resulted in under recovery of overhead costs, which are largely fixed and labor costs during the half.
Our second half constant currency gross margin will likely improve from the first half by approximately 200 basis points with improvements in the labor under recovery and freight assuming current slightly lower freight rates continue. We expect second half production levels to remain lower than last year as we aim to reduce finished goods inventory. At 31st of October exchange rates, reported gross margin in the second half would be approximately 61%.
Moving on to page 10. Total operating expenses grew 8% or 3% in constant currency. Operating margin was 18% as we continued our focused investment through the demand, fluctuations over the last few years. R&D expenses grew 11% to $84 million, as longer term projects accelerate. R&D expenses were 12% of revenue for the half. We are estimating that 60% of our R&D spend will be eligible for the 15% R&D tax credit this year.
SG&A expenses increased 7% to $202 million and were flat in constant currency. Our sales expenses grew 11% in constant currency as we continued our investment to support the strong hardware sales through COVID and deliver on our anesthesia opportunity. This was offset primarily by a reduction in our profit sharing schemes.
Travel and sale events have increased and we estimate that we’re about two-thirds of the normal expected level for the half, up from about a third of normal levels last year. We anticipate that that will continue to increase and approach approximately three quarters of normal levels for the full year. We are targeting operating expense constant currency growth of 8% for the full year, with R&D being about 15% and SG&A about 5%. At 31st of October exchange rates, reported operating expense growth would be around 14%.
Moving on to page 11. Operating cash flow this year was $2 million, reflecting the lower profit. Our working capital increased as inventory grew and payables reduced. We have increased our raw materials and finished goods as we saw sales softened in February. And in response, we progressively reduced our production volume and are managing our long lead time purchase commitments with suppliers.
Capital expenditure, which includes purchases of intangible assets was $125 million for the half. The increase from $81 million in the prior year is primarily due to land and buildings. We completed our third building in Mexico and earthworks continue to progress for our fifth building in New Zealand.
In September, we paid a deposit of $27.5 million for the acquisition of land for our second New Zealand campus at Karaka. The purchase is conditional on receiving Overseas Investment Office consent. The next payment for this acquisition of $190 million is anticipated to be in the first half of our 2024 financial year.
Capital expenditure for the second half of FY ’23 is expected to be approximately in line with the first half, excluding that deposit for the Karaka land. The balance sheet remained strong. Debtor days were in line with the prior year at 42 days. As the majority of our receivables are in foreign currency, revaluing them to New Zealand dollars resulted in an increase of approximately $15 million in the half.
Net debt at 30 September was $43 million and our gearing ratio was 2.7%. Interest-bearing debt was $112 million with $17 million of that being non-current. As of 30 September, 2022, we had available liquidity of $312 million between undrawn facilities and cash.
Turning to page 12, we have declared a fully imputed interim dividend of $0.175 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 21 December. We want to maintain the strength and flexibility of our balance sheet as we fund our significant infrastructure investments over the next few years, including the Karaka land acquisition, which is a long-term strategic investment.
To assist us in maintaining this flexibility and strength we have reactivated our dividend reinvestment plan. We are offering a 3% discount to the market price commencing with this dividend. Shareholders who are resident in New Zealand, Australia and the United Kingdom are eligible to participate and need to ensure they are opted in by 12 December to be able to participate for this dividend.
Looking now at foreign currency on page 13. Foreign currency movements positively impacted our profit after tax by $6 million compared to the same period last year, primarily due to the New Zealand dollar being weaker on average through the period. At end of October spot rates, we would have a pre-tax loss from hedging of approximately $14 million for the full year.
And with that it’s back to Lewis.
Lewis Gradon
Okay. Thanks, Lyndal. So turning now to page 15. Before we move on to our observations for the second half, I’d like to remind you of our long-term aspiration and provide a little more color on our manufacturing infrastructure plans to support our growth. Many of you will be familiar with this graphic. We aspire to sustainably double our constant currency revenue every five to six years, and you can see that over different timeframes, we expect a progression of different applications to contribute to this longer term goal.
In the short to medium-term, we see a very large opportunity for Optiflow nasal high flow with both, general respiratory patients and in anesthesia. In both of these applications, we have world leading technologies and the market remained significantly underpenetrated. In the medium-term, we see the opportunity to further develop Optiflow therapy in the home setting. And then for the long-term, we’re building out our surgical humidification set of products and the global sales channel. And our respiratory humidification and OSA businesses remain a core part of our overall strategy for growth with demographic and geographical drivers.
Now to support these overall growth aspirations, we continue to invest in R&D, manufacturing and supply chain infrastructure. With the completion of our fifth building in New Zealand in approximately 2025, this current site in New Zealand will be at full capacity. We continue to view New Zealand as an attractive combination of people skills and healthcare infrastructure to continue growing our R&D and pilot manufacturing and so we’ve entered into this conditional agreement during the half to purchase the land for our second site in New Zealand.
In prior announcements, we’ve also talked about options for additional manufacturing locations and we can now report that we’ve entered into a lease agreement for manufacturing facility in Guangzhou, China. We have a well-established sales footprint in China, which has been run out of Guangzhou for almost 20 years now, and this new facility is aligned with our distributed supply chain strategy. It will start with a sleek range of products to service those local markets and it provides us with optionality and flexibility to respond to demand over time.
So let’s look now at page 16. There’s a number of uncertainties, which I think we’re all familiar with now leading into the coming half and that leaves us unable to provide quantitative guidance for revenue or earnings at this time. As we note in our earnings release, we see a number of factors impacting the period, including the severity and extent of COVID-19, RSV, influenza and there is an addition to the impact of ongoing hospital staffing pressures and potentially surgical backlogs.
So speaking on a more qualitative basis, we have a number of things that lead us to believe that second half revenue will be higher than the first half. Historically, sales of our hospital consumables are typically higher in the second half and that reflects seasonal patterns in hospitals. Specifically in the last two pre-COVID years, hospital consumable sales were 19% higher in the second half than in the first half in constant currency terms.
And in addition, the proportion of customers cycling through their Omicron driven consumable stock is likely to be lower in our second half than the first half. And in Homecare, the recent launch of our Evora full face mask in combination with an ongoing improving supply of CPAP hardware is likely to contribute to continued homecare growth for the remainder of the year.
Lyndal has already mentioned our expectations for gross margin and operating expenses for the rest of this financial year. So, I’ll leave it there. And with that, we’re now happy to take your questions.
Marcus Driller
Thanks. Lewis. We can now take your questions. But before we begin, can I please ask everybody to limit your questions to two. This is to ensure that everybody has an opportunity to participate. If you do have further questions, you’re welcome to rejoin the queue and we can do our best to cover everything off within the hour. So, Jenny, I think we can now open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question today is going to come from David Low from JPMorgan.
David Low
Thanks very much. If I could start with the commentary around flu and RSV, we’ve seen a lot of reports that the incidence of flu in the Northern Hemisphere, particularly the US is weighted towards children. Just wondering what the implications are for Fisher & Paykel’s consumable sales if we do see more children than adults and it’s perhaps normal?
Lewis Gradon
Well, I think most years includes adults and children. We have a neonatal range across everything we do across nasal high flow, across noninvasive ventilation and across invasive. So, we just view it as a flu impact historically. This year probably no different, but maybe a bigger impact in the neonatal part of the business.
David Low
Okay. So nothing to particularly read into that one way or the other if it’s a different weighting. The other question is just on hardware. I mean, I think my expectations was after selling so much hardware, we would see hardware sales really sort of pull back to below normal experience for quite some time. Just wondering if you could talk about your observations there. It seems to have held up better than I had — I might have thought. I’m just wondering what your expectations are going into the second half and beyond that, please?
Lewis Gradon
Yeah. You’re not alone with those thoughts. I can talk to what we’ve seen in the first half really. In the first month or two, we saw some COVID-driven demand in hardware. In certain countries that had a COVID hospitalizations surge, we saw the hardware pickup in those countries. But then in the latter part of the half, the last four months or so, we’ve kind of seen hardware at pretty similar levels to pre COVID, and for pretty similar reasons.
David Low
Okay. Can I get you to elaborate a little bit on pretty similar reasons? You meant that demand does seem pretty normal?
Lewis Gradon
Yeah. It looks like pretty similar volume and when you dig into why we buying this hardware. It’s kind of business as usual. You’ve got some end of life replacements, you’ve got some fleet upgrades, you’ve got some hospital expansion, you’ve got a little bit of change in clinical practice as well.
David Low
Great, thank you very much.
Operator
Thanks for your questions, David. Next questions come from Gretel Janu at Credit Suisse. Go ahead Gretel.
Gretel Janu
[Technical Difficulty] can you give some further. Hi. Can you hear me now?
Lewis Gradon
I can hear you now, Gretel.
Gretel Janu
Perfect, thanks. Just — first question is just around the level of stocking and destocking, just wondering if you can give us some further color around how it differs between regions. And are we seeing any normal buying patterns return particularly post the end of September and into October, November? Thanks.
Lewis Gradon
You know the complexity around trying to determine stocking and destocking. I would say, we feel like that there’s similar trends across all the regions, in the United States we have a distributor in the chain, so that adds another kind of step in the stocking destocking kind of phenomena compared to maybe Europe. Otherwise, I’d say, fairly similar trends and that similar trend is an increased during a COVID hospitalization surge, but steep sharp drop-off in February. Couple of months of low levels and then sequential increases, so that’s fairly universal.
Gretel Janu
If we’re comparing buying patterns currently to how it was pre-COVID, would you say it is back to normal or is there still significant irregularity from your customers?
Lewis Gradon
I think probably the best description we can give for that is sequential increases since May. On the whole that’s not so normal. Normal would be our Q2 would normally be less than our Q1. So, I’d say sequential increases is a little bit unusual and probably speaks to the destocking phenomena.
Gretel Janu
Great, thanks. And then just in terms of the operating margin, long-term target of 30% so trending well below that for reasons we all understand, but I guess just how long will it take to get back to that 30% level? And at some point in time will you look to scale back on the OpEx growth to get there? Thanks.
Lyndal York
Yes. Thanks, Gretel. Look, we do think that it will take us a few years to get back there. What we want to do is, make sure that we’re investing in focused areas in the business still and we’ll continue to do that, but we will be looking to grow our OpEx lower than our sales growth until we get back to those target levels, which we’re confident that we’ll get back to, but it certainly won’t be a next year thing.
Gretel Janu
Great. That’s all I had. Thanks very much.
Operator
Thanks, Gretel. Next question comes from Lyanne Harrison at Bank of America.
Lyanne Harrison
Yeah. Good morning all. Thank you for taking my questions. I just wondering are you getting any insights on how the nasal high flow devices are used in the hospital now given the reduction in COVID volume?
Lewis Gradon
Yeah, we have to rely on anecdotal for that and I suppose the best I can give you is that, most salespeople would say they got a hospital that’s considering changing the clinical protocols, is developing new clinical protocols or in the last stages of developing clinical protocols. We see anecdotal evidence of that change for nasal high flow, but I think we all understand, we don’t see it coming through in our numbers just.
Lyanne Harrison
And what does Fisher & Paykel then doing to try and encourage, I guess, increased utilization and can Fisher & Paykel do anything to accelerate it? Obviously, there’s more devices in the market. Can that — can they do something to accelerate the usage?
Lewis Gradon
Yeah. That’s kind of what we do for a living. And it’s certainly the focus right now and it really is a process of visiting a customer that’s acquired a lot of hardware over COVID and pointing out what the clinical practice guidelines are and then offering to help them implement those clinical practice guidelines. [Multiple Speakers]
Paul Shearer
Hi, Lyanne. It’s Paul here. I mean, that’s what we do. So we’re just spending as much time as we possibly can in getting in front of customers, educating them and servicing them if they haven’t had lot of in service during COVID, educating them to the applications outside COVID. It could be used in different areas of the hospital. We’ve talk to them about that. Helping them — I go and talk to the patients in those different areas. So this is what we do all day, every day and have been doing for many years just a continuation of.
Lyanne Harrison
And would you say that the level of interaction with customers. Would that be — would you say that’s similar to the levels that you had pre-COVID or would you say that you are more elevated since then?
Paul Shearer
Well, starting to get there. I mean, we’re starting to get pretty good access and most hospitals around the world. So the problem has been access, it is really being the stumbling block. And I think generally speaking, we now getting pretty reasonable access to hospitals commissions. These people are still very busy. So that makes it harder. So, I don’t think we’re getting back to other than what it was in the past, but I think we’re starting to get towards getting more normalized access to the people we need to talk to.
Lyanne Harrison
Okay. Thank you very much.
Operator
Thanks, Lyanne. Next question comes from Saul Hadassin at Barrenjoey Capital. Go ahead, Saul.
Saul Hadassin
Good morning, guys, thanks for taking my questions. Just one in the media release talks to seasonal patterns as it relates to your hospitals, consumable sales 19% higher sales second half versus first in pre-COVID times 2018, 2019. I’m just trying to work out what relevance that has to this half that we’ve just finished. Lewis, maybe some comments as to — is that a trend we should read into this fiscal ‘23 year was that first half revenue figure for consumables still difficult to interpret based on what’s happening with destocking and stocking et cetera?
Lewis Gradon
Yeah. I think I would say yes to all the above, Saul. It’s difficult to read into the first half and all that. In the absence of data points, we think probably the best data point we can point to is FY ’18 and ’19. We are any — for all of our history just about second half is higher than the first half, and it’s generally related to more hospital admissions in the Northern Hemisphere over second half than our first half for all sorts of reasons. So in the absence of other data that’s probably the best point we can give you.
Saul Hadassin
No problem. Okay, thank you. And just a question on OpEx. I just noted that the — for the half itself the constant currency OpEx growth was below where you guided to, I think, going into the first half, and I think for the full year as well. The guidance in constant currency is now also below where we were thinking it might land back at the Investor Day, I think that guidance was given in terms of your ability to just flex that OpEx up and down. Now that we’re sort of into the second half, how much control do you have over that full year guidance of 8%? Do you think that’s sort of very realistic number or do you still have the leverage to pull that down if need be?
Lewis Gradon
Yeah. I’ll pass that question over to Lyndal, but just a little bit of background there is that, when we looked at this financial year, we thought we would try and aim for an OpEx growth, which would be a compound annual growth of FY ’20, our last normal year of about 11% and that’s what we were aiming at. And we did say at the time that’s what we’re going to try and do that seems to make sense, but we did say at the time that might be challenging and that’s kind of what’s played out.
Lyndal York
Yeah. And I guess just to expand on that, look, we knew that it was quite optimistic to set those targets at the beginning of the year, which is why they are coming down. As everybody is experiencing, just taking a little bit longer to hire the people that we wanting to do travel and sale events haven’t ramped up to normal entirely. So it’s just taking a little bit longer to get that back up to speed, nothing that we’re overly worried about. And again as I said to Gretel question, we’re making sure that we’re continuing to invest in focused areas in the business for the long-term growth and the sale of hardware that we’ve made through COVID and to make sure that we make the most of our anesthesia opportunity and that’s not really changing.
Lewis Gradon
And I just want to make really that we — sorry — just a moment. I just want to make really clear that we intentionally pulled back OpEx guide from our initial guidance?
Lyndal York
And sorry, just one other thing, the lower profit share schemes that playing into that a little bit as well this year on a year-on-year growth.
Saul Hadassin
Thank you.
Operator
Thanks for your questions, Saul. Next question’s come from Chris Cooper at Goldman Sachs. Go ahead, Chris.
Chris Cooper
Hi, good morning. Thank you. Just a follow-up on that OpEx question I had something similar at the Investor Day in May, I mean, the reason for the OpEx guidance that you gave was primarily focused on the need to build sales reps and prioritize that sort of effort in terms of proportionately where the incremental COVID demand had been placed. Clearly, you’ve got a role here to make sure these devices are going to continue to be used by not being able to effectively hit that OpEx target. Is there any sort of concern in your mind that you don’t have the necessary sales reps in place, which is going to sort of drive additional digitalization you were hoping for when you were speaking in May?
Lewis Gradon
Yeah, well, probably I’ll chip in on that one. A lot of the sales question. A lot of a sales person growth accrued last year, so not tight about that particular part of it. Do you want to?
Lyndal York
Yeah. And I guess I just would point out Chris that we’ve got 11% growth in our R&D and sales offices this half. So that is actually a good solid growth. Again that focused investments. So we’re not concerned about that, we’re continuing foot down in those focused areas.
Chris Cooper
And to your previous comments Lyndal as well, are we to interpret this as more of a deferral of some of the OpEx that you had expected to come into ’23, that’s not going to be deferred into ’24. Is that the right way of thinking about things?
Lyndal York
Yeah, that’s probably best way of think of it.
Chris Cooper
Yeah. Understand. And gross margin, so that’s now guided to 200 basis points in the second half from what was previously flat. You commented in your statement today that sort of New Zealand freight rates are sort of softening but still lagging the global easing. So I just want to clarify it, is the upgrade based on the view that New Zealand cross will continue to follow global cost stand or just based on spot today New Zealand you can upgrade 200, and then the [indiscernible] ship about further upside into fiscal ’24?
A – Lyndal York
Yeah. So there’s two components to that improvement in constant currency gross margin in the second half compared to the first, freight rate is part of it, it’s about a quarter of it and sort of 50 basis points based on rates that we’re seeing today, which is sort of, after the end of the first half but we have seen them come down and if they continue, we’ll see that. Now obviously if they, if the decrease accelerate the potential further improvement there, if other components spike up, it could go either way.
The other big factor there is, the labor under recoveries that we had in the first half will reduce significantly in the second half as we’ve reduced our manufacturing workforce. Through the first half being primarily the temporary employees in New Zealand that we hired during the COVID spike, as well as through natural attrition in Mexico. So coming into the second half, a lot of that labor under recovery would go away. Assuming that production volumes to remain fairly comparable half on half to aim to reduce those finished goods inventory as we’re hoping to do.
Chris Cooper
Understood. Thanks very much.
Operator
Thanks, Chris. Next question come from Matt Montgomerie at Forsyth Barr.
Matt Montgomerie
Hey guys, thanks for taking my question. Maybe just firstly back on the gross margin, just trying to get a feel for the track and then ’20 — or the second half in ’24. Would you be able to — without the impacts that you talked to in terms of the mix manufacturing inefficiencies and then the freight impact in terms of the 5 percentage point delta between your target?
Lyndal York
Sure. So, the one thing that I would point out is, when we’re talking reported gross margin, exchange rates are at a very favorable place for us at the moment. So with exchange rates where they are today, we’d actually be wanting to overshoot that target somewhere around 67%, 68% and that’s why you see the difference in the constant currency and the reported year-on-year impact of gross margin. But the key then shifts other than that sort of currency from our target of 65%. We’ve got about 290 basis points of freight. Now, we are hoping that a little bit of that start coming away next year that will be bit dependent on freight rates. We don’t think all of that will come away, some of that will stick with where that is we’re not 100% sure. The labor under recoveries, it’s sort of about a 150-odd basis points and they need the overhead under recoveries is sort of the balance of that. There’s no [Multiple Speakers]
Matt Montgomerie
Now, that makes sense. And then maybe secondly sort of going back to the broader insights through the hospital and they talking to a lack of bandwidth for clinical change. Would you be able to talk to that by geographies and particularly in your core North American and Europe markets relative to maybe the newer markets that you have sold into through the pandemic, just a trying to get a feel for a growth by region at a utilization level going forward?
Lewis Gradon
Yeah. That’s a tough one. Look when you talk to individual salespeople from different regions, you really don’t get much of a different story in terms of the dynamic in the day-to-day interactions, I’d say that part of its fairly consistent you think. [Multiple Speakers] that’s both growth by region. I’m just, I’m just thinking, sorry about that the growth by region part I guess there probably is a difference there that is when you go outside North America and Europe you’ve got countries that have come off a tiny, tiny installed base, they’ve had a massive growth in installed base, relatively speaking during COVID.
I think that’s a slightly different dynamic, there a big part of the drop this half, but they dropping to actually what’s a pretty high level compared to FY ‘20. So I think that would be a different dynamic. Other than North America and Europe, some of that with one exception, you’ve got a distributor chain in North America, which adds to the overstocking and then adds to the destocking timeframe a little bit, otherwise dynamic in the hospital I would say it’s similar. Is that helpful?
Matt Montgomerie
Yeah, that’s great. Thank you very much.
Operator
Thanks for your questions, Matt. Next question comes from Stephen Ridgewell at Craigs Investment Partners.
Stephen Ridgewell
Good morning. Good morning. Just first question for Lewis. Switching gears a little bit to product. At the Investor Day, you showed us some really interesting new products. Can you talk a little bit to the rollout of Airvo 3 and the market response so far. And in particular, is the market accepting, the higher price point for the different and what you’re seeing so far and I understand it’s early days.
Lewis Gradon
Yeah, good point. Early days. So Airvo 3 at present is available in New Zealand and Australia. We have some, I’d call them controlled release sites in Europe, probably not widely available in Europe until early next year and certainly hitting the price point.
Stephen Ridgewell
Yeah. Right. Just when you think medium-term, Lewis, I mean, what proportion of hardware or hospital device sales would you hope Airvo 3 might be able to achieve? Are you expecting sort of different peers if you like and systems release Europe and North America with perhaps more funding for this kind of device?
Lewis Gradon
See, going forward, I don’t know, we’re fairly agnostic to the hardware. So I think that maybe be the only difference would be markets that have been penetrated or ahead usage of Airvo for a period of time would be coming around to some upgrade cycles, so that’s North America, Europe, Australia and I can’t really think of any color to add. Can you?
Paul Shearer
Well, I think that that’s a very good product. Stephen it’s we wish customers conditions in Australasia and outside Australasia people really appreciate mobility that battery, there’s lots of good features on that an additional Airvo 2 which is going to fall in the — there’s going to be growing demand for the product as we have time to get from the customers and they get a view it, appreciate it and get coming for.
Lewis Gradon
I suppose, we can add one other but color on that as you one of the common hurdles to using nasal high flow throughout our hospital everywhere in the hospital is portability moving patients around and that’s something Airvo 3 facilitates and so far that [indiscernible].
Stephen Ridgewell
Great. Okay, thanks for that. And then just maybe one for Lyndal on the tax rate, which was 16% in the first half, certainly lower than I was expecting. I mean can you just tell us a little bit, what’s driving the tax rate that low? And are you able to provide some guidance with tax rate in the second half and perhaps beyond a bit of a one-off that’s why tax rate was expecting low tax — effective tax rates going forward. Thank you.
Lyndal York
Yeah, look, the biggest sort of impact in the first half. There is the currency translation as you’re very well aware different currencies have been very volatile through the half and so sudden certain of our currency translations are taxable or tax deductible and certain of them are not. And so when you add up the combination of that, you can get a bit of a weird looking tax rates at times.
Nothing has changed in the long-term in terms of we expect an effective tax rate of around 28% to 29% excluding the R&D tax credit. And as we’ve guided to today, about 60% of our R&D spend, we’d expect to be eligible for that R&D tax credits. So in the absence of ongoing currency, big different currency volatility in the second half, we’d expect the second half tax rate to be more in line with that and the go forward in line with that.
Stephen Ridgewell
That’s very clear. Thanks Lyndal. That’s all from me.
Operator
Thanks, Stephen. Next question is come from Adrian Allbon at Jarden. Go ahead Adrian.
Adrian Allbon
Hi. Good morning team. Can you hear me?
Lewis Gradon
Loud and clear.
Adrian Allbon
Perfect. Just wondering, just coming back to the first half. New apps consumables revenue, which I think it was around $260 million. Are you able to kind of give us a call out of how much is anesthesia and maybe also just comment on what sort of — what you’re sort of saying in noninvasive, just so we can sort of make our own assessment of what’s going on Optiflow?
Lewis Gradon
Sure. So anesthesia, bit over 5%. And then noninvasive ventilation, I think the way to think of it is nasal high flow is most sensitive to the COVID movements, the overstocking and the destocking. Noninvasive as a little bit less sensitive to the COVID movements and noninvasive is less sensitive again to the COVID movements.
Adrian Allbon
Okay. So sort of on that are they relatively stable like on a PCP basis?
Lewis Gradon
I wouldn’t go that far or would just less variation.
Adrian Allbon
Okay. And then just like on the same them, like just noting that, I guess, inventories was circa-$400 million like on your second half observations here. Would you be expecting to sort of bring that down by about $100 million as a target as we sort of round out the year or to circa [Multiple Speakers]
Lyndal York
Yeah. Adrian, that will all depend on what our revenue is doing, so we’re estimating that our production volume will be lower than sales. That will be our aim for the second half to try and reduce at least our finished goods inventory. Where that lands will absolutely depend on where revenue lands in the second half, which we were not binding to at the moment, we don’t — we don’t have enough information to be able to guide to that.
Adrian Allbon
But just — aren’t you guiding to like the second half revenue being higher than the first half?
Lyndal York
We’re not guiding to that we’re saying that’s our historic trend, seasonal trend and we would anticipate second half would be higher, but we’re not saying what sort of quantum that would be.
Adrian Allbon
Okay. But if that was to be achieved like how much reduction and sort of — I guess the other question like [indiscernible] take inventory, like if you hedge your observations, what you’re saying the second half being ahead of the first half. Like, can you give us any sort of sense of how far the inventories would come there?
Lyndal York
We would hope that it peaked at the moment for finished goods. We are aiming to reduce our finished goods going forward. I guess, the one thing that I would say is the most important thing to us is to make sure that if a patient needs our product they have it, so we’re not focused on really driving down inventory to a very minimal level. We want to make sure that there’s always product when it’s needed. We feel like we’ve got room to move that inventory down at the moment and still be able to satisfy that. And that’s what we’re aiming to do.
Lewis Gradon
There’s no real [indiscernible]
Adrian Allbon
Okay. I understood. And then perhaps just a couple of other comments like that would be helpful. Can you — is there any sort of update on the FDA approvals that you’re sort of waiting for [indiscernible] Airvo 3 into the site?
Andrew Somervell
It’s Andrew here. I’ll answer that question. We have a number of products like the 950 that are going through 510(k) process at the moment, but it’s very difficult to predict the timeline for those. So I can’t really give you any more information, except that they are underway right now.
Adrian Allbon
And Airvo 3?
Andrew Somervell
Yes. So that’s one of the products that’s going through 510(k) process at the moment, but it’s the same story. We can’t really predict the timelines for that right now.
Lewis Gradon
Adrian, if you think predicting revenue is tough. If you think predicting revenue is tough, predicting when we get clearance is even tougher my friend.
Adrian Allbon
Okay. And then maybe just on Homecare then like just in terms of like the response you have had for Evora, like how much do you think sort of Philips situation has sort of aiding that to the extent you can sort of [indiscernible].
Lewis Gradon
No, we’ve got a lot of drivers going on there. We’ve got a new product that’s had a fabulous reception. We’ve got CPAP supply improving over time and you’ve had — Phillips have had some difficulties. So it’s impossible for us to call out what the drivers are. I think it’s fair to say we don’t think Phillips problems have been a major driver. We think it’s more about the reception to Evora Full?
Paul Shearer
Adrian Evora Full is a very, very good mask — excellent reception format. And we think that’s driving growth, but don’t know how much, but it’s had a very good reception in the marketplace.
Operator
Thanks for your questions Adrian. Our next questions come from Marcus Curley at UBS. Go ahead Marcus.
Marcus Curley
Good morning. I just wondered if you could provide any observations around the equipment sales within the hospital business. Obviously, Lewis, you spoke about that remaining at a relatively surprising level. Are you able to see which hospitals they are going to and does it tell you about what’s happening to the existing stock of flow generators within the hospital?
Lewis Gradon
If it goes specific hospital, hospital-by-hospital and at a point in time, the answer to the questions is, yes, when we’ve explored, why that hardware is being purchased. We can definitely nail down what it for [indiscernible].
Marcus Curley
And does that suggest that, let’s say, that the surplus equipment here still hasn’t been relocated or isn’t necessarily being easily used on other applications at the moment?
Lewis Gradon
I think, I suggest, if they’re buying hardware, it’s all those reasons, I’ve got some old product. I think that’s all it tells us. I’ve got some old product that’s end of life, I’ve added some beds to my hospital I want some more equipment. We do also see fleet upgrades if it’s upgraded all of the ventilators they might like to upgrade all of their humidifiers. So all these things are still occurring, all these kind of normal. These are all normal reasons why we might sell hardware.
Marcus Curley
Okay. But, yeah, just to be clear. Yeah, you’ve got hospitals that bought lots of equipment during COVID, who are now buying more equipment today?
Lewis Gradon
Yes. Yes. For all those reasons.
Marcus Curley
Got it. And then secondly, this is probably a little longer term, but yeah I suppose, when you look at your experience with new application consumable revenues as Adrian mentioned around 260, it’s about 26% above pre-COVID levels three years on. Traditionally this I suppose part of the business used to grow at 20%. When you think about the next couple of years, do you think you’re sort of over-do some higher-than-expected growth or is it still a situation where you sort of going to bid down a new level and sort of look to re-accelerate it towards where it used to be?
Lewis Gradon
If you go back to pre-COVID, we were thinking that that 20% number you mentioned, it does — that growth rate steadily decreases. But, over time [indiscernible] because of becomes a bigger proportion of the business. The end result looks good. So where we sit relative to the pre-COVID one. I mean that’s considered question isn’t. That’s what we’re still trying to gauge, we feel like we should be ahead. But I mean I’d probably think of it more as maybe maintaining that growth rate rather than accelerating it up would be how I’d be thinking of that.
Marcus Curley
So just to be clear, maintaining the growth rate that you’ve seen over the last three years relative to pre-COVID or the growth rate that you saw before pre-COVID?
Lewis Gradon
Yeah. I was thinking about maintaining the pre-COVID rather than — we were thinking it would steadily drop as a growth rate. So yeah, maybe not such a steady drop going forward.
Marcus Curley
Okay. But not necessarily jumping up above the growth rate on the basis that you sort of overdue sort of a couple of years of uptake. If you’d like to call it that?
Lewis Gradon
A hard one to call, over a couple of years we think we’ll be ahead — we will be ahead of where we would have been and there could be some jumps in our future, but if you want to smooth things yeah over four years or five years, we’re thinking we’re ahead, we’re probably ahead of where we were pre-COVID. And pre-COVID we were thinking that growth rate steadily declines. So we’re thinking — if you want to go ahead and smooth over five years, maybe we can maintain closer to that pre-COVID growth rate.
Marcus Curley
Okay, thank you.
Operator
Thanks, Marcus. Next questions come from Mathieu Chevrier at Citi. Go ahead, Mathieu.
Mathieu Chevrier
Yeah. Good morning, all. Thank you for taking my question. The first one is, just around the challenges that you’re facing when you’re trying to get your new Optiflow customers to actually use the device on a more regular basis?
Lewis Gradon
Well, I think probably the best scripter that we did a survey of Canadian hospitals of few months ago, I forget the exact number, but it was something 20-something-percent of our customers were aware of the clinical practice guidelines. So I think really that’s the challenge, it’s an age old challenge what we normally do there’s actually nothing unusual in that and it’s about getting those clinical practice guidelines in front of our customers and working through it with them.
And then once there is a second step pointing up once they’ve signed off on agreed and I think the clinical practice guidelines make good sense. They can put protocols in place, and that’s a good step, but they have to follow the protocols as the next step.
Mathieu Chevrier
Yeah. Understood. And then six months ago, you’ve given us some scenarios around the potential hospital consumable sales growth and over time, assuming that 85% of the devices that’s sold during the pandemic would actually get used? How has your thinking around those scenarios evolved since then?
Lewis Gradon
Maybe I should put that into context, so what we were doing at the time is, we were trying to provide a context for the opportunity. So, we said that if 85% of those hardware is used — if it returns to very long-term historical average consumable usage and if it takes three or four or five years. This is the kind of growth rates you can see. And the point was that installed base of hardware drives pretty decent growth rates and whether you assume 15% isn’t used or 20% or 10% or whether you assumed five years or three years or eight years. The only point of that model was to say, hey, that installed base however you look at it drives pretty decent growth in consumables. So I don’t want you to stick on the 15% as a number or an expectation. It’s kind of just the model. [indiscernible] do you want to add to that?
Paul Shearer
Mathieu for that over the last six months impact of stocking destocking hasn’t really given us any further also I tend to.
Lewis Gradon
That’s a really, really good point. And that if you look at the last six months, we’ve sold hardware and consumables volume was down, so kind of tells you pretty clearly that’s not a predictive model or our go-forward model that we provided.
Mathieu Chevrier
Yeah, understood. And just finally on your choice making Guangzhou your next manufacturing hub. What are the factors that made you decide on that location versus others?
Lewis Gradon
So the overall strategy is geographical diversification in local manufacturing. So, we’ve had sales team based out of Guangzhou in China for over 20 years now. So that’s the logical place. It is a manufacturing hub in China. So that makes it a logical place and China is a large and growing market for us. So that also makes it a logical place.
Mathieu Chevrier
Understood. Thank you.
Operator
Thanks for your questions. Mathieu. Last questions last person in the queue is Dan Hurren from MST. So, please go ahead, Dan.
Dan Hurren
Hi, good morning everyone. Thanks very much. We’ve had a discussion on the call that the 950. Now we can talk about expect when it will be launched two questions around that. What’s been experience in the 950 in the market that has been operating? And two is the market, right. For new product is, there is one of those sort of cyclical times where there’s large fleets ready to be upgraded or do we still will that also be impacted by the big hardware that we saw during COVID?
Marcus Driller
Yeah. Look historically for us when we introduce new models of hardware that’s like a 10-year kind of change over timeframe and 950 is no different. Typically customers don’t want to have 30 850s and 5 950s, when I get five more ventilators so they can go with 850s for quite a long time until it gets into life and then they might look at upgrading to 950’s, do you want to add color to that, Paul?
Paul Shearer
Yeah. I do. Yeah, I mean, sort of like a 20-year cycle actually. But the reality is the 950 is a very good product. I think in neonatal, it’s extremely well received and that was an area, of course, we [indiscernible] COVID wasn’t so suddenly COVID hardware purchases and we’re just making very good progress. It’s a very good product and we’ll just to sell more products as we go.
Dan Hurren
Right. I guess what I’m asking. Put simply, did we sell a whole bunch of A950s is there is a whole bunch about 50 during the COVID period which is made the age, average age of the installed fleet younger than it normally would be. I guess I’m just trying to understand how we should model the launch of the new 150 and what that will be a software, hardware, which is, I’m trying to get to?
Paul Shearer
Yeah, I mean clearly, that’s great. You’ve got a younger average age of the fleet. But when we model going forward given Paul’s 20 year kind of a lifecycle upgrade cycles and never really that material. It’s not something we actually model going forward or claim on it, it’s kind of a continuous process. If you think of a 20 year upgrade cycle and introduce a new product, every 10 years. It’s kind of, it’s continuous. It’s not a cycle of — all got a new product rush out and upgrade everything.
Dan Hurren
Got it. That’s very helpful, thank you very much.
Marcus Driller
Thank you, Dan. That’s the end of our question, so I’ll pass it back over to Lewis to conclude.
Lewis Gradon
Okay. Thanks, Marcus. Thanks everyone for joining the call and thanks a lot for your questions, I would like to end on relative thanks for to all of our shareholders for their continued support. So thank you very much and 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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