Fisher & Paykel Healthcare Annual Shareholders' Meeting Speeches

27 AUGUST 2010

We achieved a significant milestone in the 2010 financial year, with our operating revenue exceeding 500 million NZ dollars for the first time.  Our growth was again a result of a strong contribution from both of our core product groups. We also achieved strong growth in earnings, with a 15% increase in profit after tax, to 71.6 million New Zealand dollars. Your directors approved a final dividend of seven cents per ordinary share, carrying full imputation credit, taking total dividends for the year to 12.4 cents per share.

As we announced in May, earlier in the year we reviewed the company’s capital structure and intend to progressively increase shareholders funds to ensure that we have the capacity to continue to implement our foreign currency hedging policy as the company grows.

We expect that, subject to earnings performance, the dividend will be maintained in real terms until the target capital structure is achieved.  Longer term, we expect that a dividend payout ratio of greater than 60% will be appropriate to maintain target gearing.

New and improved products and processes, along with the development of new applications for our technologies, are critical drivers of our annual revenue and earnings growth. We are committed to investing in R&D and increased our investment to 7 percent of revenue last year.

Over the year we continued to expand our global sales network, with our own people now located in 31 countries and our products sold in more than 120 countries. Almost 500 of our staff support customers around the world and work with clinicians and care providers.

As our business is international, we sell in a variety of currencies with a large proportion, approximately 80%, of our operating revenue generated in US dollars or Euros. Exchange rates between the New Zealand dollar and the other currencies we receive revenue in were again volatile, with the New Zealand
dollar appreciating substantially against the US dollar over the year.  Our hedging policy again served us well, with hedging gains contributing almost 29 million NZ dollars to operating profit.

Our total capital expenditure was 48 million NZ dollars. We invested almost 27 million dollars of capital expenditure in New Zealand.  This  included equipment for increased manufacturing capacity, new product tooling, replacement equipment and the initial site works for a new 31,000 square metre building, which will provide increased office, research and development, laboratory, manufacturing and warehouse space.

We also invested almost 20 million NZ dollars establishing a manufacturing facility in Tijuana, Mexico, which will primarily accommodate increased manufacturing capacity for our more established, high volume consumable devices.

Mike Daniell will soon provide a more in-depth commentary on our performance and will discuss our prospects for the current year.

We operate in specialised international markets, and as Chairman, I believe that shareholder interests are well represented by your Board.  We are fortunate in that we have a board whose experience and knowledge spans marketing, sales, finance, science, medicine, engineering, legal, quality, regulatory, and the many other demands of an international business.

The Board recognises that there needs to be regular refreshment of Board members. Adrienne Clarke retired in February 2008 and was replaced by Arthur Morris, continuing the experience and knowledge in science and medicine.  In February 2009, Roger France replaced Mike Smith, providing specialist financial knowledge, as well as all the other skills Roger brings to the table as an experienced corporate director.

As advised at the last year’s meeting Sir Colin Maiden will be retiring in February next year and the process to replace Sir Colin is well underway.  There will continue to be refreshment, in a planned manner, over future years.

Your Board is committed to ensuring that the company adheres to best practice corporate governance standards.  A summary of the company’s governance policies are set out each year in the annual report.

Excellence in quality, research, development, manufacturing, marketing, sales, distribution and administration are essential to our future growth. We operate a comprehensive quality management system, which complies with the requirements of international regulators, including the United States FDA.

The experience, capabilities and commitment of our more than 2,300 people worldwide ensures we are able to offer innovative medical devices, which can help to improve patient care and outcomes and enable us to deliver the long-term growth in value our shareholders expect.

The Board appreciates that our strong performance and our prospects for growth are due to the combined efforts of our staff and the support we receive from our customers, distributors, suppliers and clinical partners.  We thank them all.

I would also like to thank you, our shareholders, for your continued loyalty to the company. The Board and our management team value your support as we continue to focus on creating value for you.


27 AUGUST 2010

Slide 1
Thank you, Gary. Good afternoon, ladies and gentlemen.  I’m pleased to have the opportunity to review our results for the 2010 financial year, and to update you on progress so far this year.

Before doing so, I’d like to mention that we have a number of our staff here today who will be available later to discuss the products we have on display.  They are wearing name badges, so you should be able to identify them easily.

Our consistent long term growth strategy;  expand our range of innovative products, offer devices to treat a wider range of conditions, and increase our international  presence - continued to result in  an increasing number of hospitals, physicians, nurses, therapists and homecare providers choosing our devices to assist in the treatment of their patients.

As this graph of US dollar operating revenue over the past four years illustrates, our strategy has delivered consistently strong revenue growth.

Slide 2
Over the year, 57% of our operating revenue was generated in US dollars, with 99% of our sales resulting from exports from New Zealand.

Our operating revenue grew 14%, to 341 million US dollars and 10% to 503 million NZ dollars.

We achieved an operating margin in excess of 20%, and net profit after tax increased by 15% while we invested 7% of operating revenue in research and development.

Slide 3
We achieved strong increases in operating revenue across our two major product groups, with respiratory and acute care revenue up 11% in US dollars, ,and contributing 48% of our total revenue, and obstructive sleep apnea product group revenue up 22%, and 47% of the total.

The proportion of our revenue generated from recurring items, such as consumables and accessories, continued to increase and accounted for 75% of core operating revenue.

Slide 4
The geographic split of sales remained diverse, with good revenue growth in each major geographic region.  North America continues to be our biggest market, with a large proportion of our OSA sales made there.

We are very well represented in our international markets, as Gary mentioned. We began operating new distribution and clinical sales support centres in Japan, Canada and Taiwan and completed set-up of a new sales office in Turkey.

Slide 5
Our heated humidifier and respiratory care systems play an important role in improving patient care in a variety of applications.

Warming and moistening of the gases delivered through mechanical ventilation helps to reproduce the normal functioning of the nose and upper airways and reduces airway moisture loss and the occurrence of adverse side effects.

Our devices include humidifier controllers, chambers, breathing circuits which convey medical gases to and from the patient, filters, connectors and interfaces.

Slide 6
In the hospital setting, as well as heated humidification systems for use in intensive care ventilation, we are expanding our opportunities by also providing devices that can be used in non-invasive ventilation, oxygen therapy, humidity therapy and surgery.

Over the past year we achieved very encouraging progress, with revenue from those new applications accounting for 27% of our respiratory and acute care consumables operating revenue.

During the year, we began the international roll-out of our AIRVO humidity therapy product range for patients with Chronic Obstructive Pulmonary Disease or COPD. Earlier this year, the medical journal Respiratory Medicine published a significant study, which concluded that humidity therapy almost halved the number of exacerbation days for the COPD patients studied, as well as improving lung function and quality of life.

Slide 7
Most people with OSA do not realize that they have a condition which causes excessive daytime fatigue, is associated with cardiovascular disease and strokes, and is directly linked to hypertension.  In fact, tens of millions of people worldwide who have untreated OSA stop breathing for short periods many times each night while they are asleep.

Continuous positive airway pressure, or CPAP, therapy is the most common treatment for OSA. CPAP therapy prevents the collapse and blockage of the patient's airway during periods of deep sleep and is delivered using an airflow generator, humidifier, tubing and mask.

Slide 8
In the OSA product group, we again grew strongly, with our broad range of CPAP masks and flow generators generating 22% operating revenue growth, in US dollar terms.

Late last year we began Australasian introduction of our new ICON flow generator range.

The ICON range integrates our leading technologies into stylish, compact and intelligent devices to deliver a better night’s sleep for OSA patients.  The ICON also includes a digital clock, alarm and music playing capabilities to enhance patient adaptation to CPAP therapy.

ICON combines both exceptional style and technology to fit unobtrusively into the home setting, has a very small footprint and incorporates our innovative technologies including, SmartStick, ThermoSmart and SensAwake.

he product range spans three models; Auto, Premo and Novo.

The Auto detects interruptions to normal breathing and provides the appropriate positive airway pressure to meet the breath-by-breath needs of the patient with full efficacy and compliance reporting. The Premo model provides fixed pressure therapy with efficacy and compliance reporting, while the Novo provides basic compliance reporting.

The ICON™ range also includes our InfoSmart technologies, which provide a full range of communication and compliance reporting options.

Slide 9
Over the year, we increased our R&D spending by 25% to 35 million NZ dollars, which represented 7% of operating revenue.  The pending culmination of the ICON development project was obviously a significant contributor to our R&D growth last year.

We continue to have in development an extensive new product pipeline, with a number of new products scheduled for introduction over the next twelve to eighteen months.  These include new humidifier systems and consumables in our respiratory and acute care product group as well as new interfaces and compliance monitoring systems in OSA.

Slide 10
As Gary mentioned earlier, we have made significant investments in manufacturing capacity and expect to continue to do so to meet anticipated increasing demand.

In the current financial year, we plan to invest approximately 50 million dollars of capital expenditure in New Zealand, which will include the start of construction of the third building on our Auckland site, new product tooling, equipment for increased capacity and some replacement equipment.

We also expect to invest a further 7 million dollars of capital expenditure at our Mexico manufacturing facility.  We began manufacturing in Tijuana in April, and will be ramping up volumes as additional manufacturing equipment is installed and commissioned.

Slide 11
In November, we will be reporting our results for the first six months of the 2011 financial year.
In respiratory and acute care, growth for the first half, so far, has been strong as expected.
In OSA, our homecare dealer customers have been anticipating the introduction of ICON, and this has resulted in a reduction in demand for our SleepStyle range. We began earlier this month as planned, controlled market release of ICON into our largest markets, the United States and Europe, and expect volumes to ramp up rapidly during the second half.

We expect to achieve first half operating revenue of approximately 245 million NZ dollars, representing growth of approximately 7% in underlying constant currency terms for our core product groups, and 3% in total due to last year’s discontinued Australian Medela and North American warmer sales.

Exchange rates have moved unfavourably compared to last year and compared to rates prevailing when we provided guidance in May.  However the first half result so far has been supported by efficiency gains and a favourable product and pricing mix, consequently, we expect first half trading profit after tax to be approximately 27 million NZ  dollars.

We will need to deduct approximately 12 million NZ dollars from that trading result, due to the previously disclosed deferred tax charge relating to the NZ government’s removal of depreciation on buildings and the reduction in company tax rate.

In the second half, we expect a continuation of strong respiratory and acute care revenue growth.  Initial feedback for ICON has been very encouraging and we expect  OSA revenue growth to accelerate substantially, as we expand the ICON rollout.

We expect second half earnings to be approximately 15% above the second half last year. For the full year, allowing for those higher current exchange rates, we now expect to achieve operating revenue of approximately 530 million NZ dollars, and to achieve trading profit after tax of approximately 65 to 70 million NZ dollars. Again prior to that one-off deferred tax adjustment.  That would represent full year trading earnings growth of 10% in constant currency terms.

Slide 12
In conclusion, I would like to express our appreciation of the continued support of our Board and our shareholders, and also our customers, suppliers and clinical partners. Our teams around the world are working to reward that support.