F&P Healthcare rallies despite 57pc first half earnings drop

F&P Healthcare chief executive and managing director Lewis Gradon. Photo / NZ Herald

Shares in Fisher and Paykel Healthcare rallied sharply despite the company reporting a 57 per cent fall in first half net profit to $95.9 million.

The fall in earnings reflected sales returning to more normal levels after a Covid-driven rush.

The bottom line figure was slightly above the top end of company guidance, issued in August, of $95m.

The respiratory products maker said its revenue for the six months to September fell by 23 per cent to $690.6m but was above the $670m figure guided by the company.

F&P Healthcare - New Zealand’s biggest company by market capitalisation - raised its interim dividend by half a cent to 17.5 cents a share.

The sharemarket’s response to the result was positive, with the company’s share price gaining $2.51 or 12 per cent to $23.22 by mid-afternoon.

The company did not give a full-year forecast for revenue or earnings because of the high number of uncertainties.

“However, we expect second half revenue for the 2023 financial year will be higher than in the first half,” it said.

Managing director and CEO Lewis Gradon said the result was consistent with what the company signalled in August.

“Compared to pre-pandemic levels, this represents solid growth,” Gradon said.

Adrian Allbon, director, equity research at Jarden, said the first half’s earnings and revenue were ahead of expectations.

The strong result and encouraging commentary for the second half should help remove fears that F&P Healthcare is still in a “material downgrade cycle” for 2023, he said.

“We would expect this result to be well received and the focus to revert to longer-term growth opportunities and duration,” he said.

One of the key downside risks included hospital inventory levels, Allbon said.

Forsyth Barr analyst Matt Montgomerie said the result had given the market confidence that there was now a base for F&P Healthcare’s earnings and that there was a growth path ahead.

“There are a couple of aspects that show that there is light at the end of the tunnel and we should see a return to robust growth from here,” he said.

Over the last two financial years F&P Healthcare has supplied $880 million worth of hospital hardware, the equivalent of about 10 years of hardware sales prior to the pandemic.

The March 2021 year was the peak, with revenue hitting a record $1.97 billion, up 56 per cent on the previous year’s, and net profit coming in at $524m, up 82 per cent.

Looking ahead, the company said its second half would be impacted by several factors.

One was the rate of Covid-19 hospitalisations and the related intensity of respiratory support required.

Another was the severity and duration of a Northern Hemisphere flu season.

A third was the magnitude of RSV (respiratory syncytial virus) hospitalisation surges currently experienced in some regions.

And a fourth factor was the impact of ongoing hospital staffing challenges on the surgical procedure backlogs in many countries.

In the hospital product group, which includes humidification products used in respiratory, acute and surgical care, revenue for the first half was $438.7m.

This marked a decline of 35 per cent on the prior comparable period, or 37 per cent in constant currency.

This represents an increase of 24 per cent on the first half of the 2020 financial year.

Omicron impact on hospitals

Of total hospital product group revenue, 87 per cent was from the sale of consumables and 13 per cent was from the sale of hardware.

“Customer stock levels of hospital consumables continued to reflect purchases of considerable amounts during our prior half, in preparation for an Omicron hospitalisation wave which proved less severe than originally anticipated,” Gradon said.

“Through the first half, there are positive signs that our hospital customers are working through their excess inventory holdings, and total group sales of our hospital consumables have increased sequentially on a month-by-month basis since May,” he said.

This trend continued in the second half to date.

“While we believe the number of hospitals which continue to be overstocked is declining, ultimately, these stocking dynamics are short term, and the fundamentals of our sales strategy remain the same.”

In the homecare product group, which includes products used in the treatment of obstructive sleep apnea (OSA) and respiratory support in the home, revenue was $249.9m, a 10 per cent increase over the prior comparable period, or 4 per cent in constant currency terms.

OSA masks and accessories revenue increased 16 per cent on the prior comparable period, or 10 per cent in constant currency.

Gross margin was 59.8 per cent, down from 63.1 per cent in the prior period and below the company’s long-term target of 65 per cent.

“Although global freight rates are seeing prices soften, legs in and out of New Zealand lag this trend, which continues to weigh on margin,” Gradon said.

The company has also been impacted by manufacturing inefficiencies, as it balances demand fluctuations while managing manufacturing throughput and higher rates of sickness-related absenteeism in the manufacturing workforce.