Fisher & Paykel Healthcare Corporation Limited

Thank you, Justin. Good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's full year results for the 2026 financial year.

On the call today, with me and Dan are Lewis Gradon, our Managing Director and CEO; Lyndal York, our Chief Financial Officer; Andy Niccol, our Chief Operating Officer; Justin Callahan, our 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'll move on to questions.

We'll be discussing our results for the 12 months ended 31 March 2026. Earlier today, we provided our 2026 annual report, including financial statements and commentary on our results to the NZX and ASX.

These disclosures can be accessed on our website at fphcare.com/investor. With that, I'd now like to turn the call over to Lewis.

Okay, and thank you, Marcus. Good morning, everyone, and thanks for joining us on the call today.

I'm going to be referring to the investor presentation pack that was released to the NZX and ASX earlier this morning. So we'll start on Page 2 with some of the key features from FY '26, and I'd like to just call out a few of these items.

We'll start where it matters most, the efforts of our people, our clinical partners, customers and suppliers saw approximately 24 million patients treated by Fisher & Paykel products over the past year. So thank you to everyone who's contributed to improving care and outcomes for all these people over this period.

We achieved a strong result in hospital hardware sales. It's been strong across all the regions, but especially so in the United States, where both Airvo 3 flow generator and the 950 humidification system were released just 2 years ago.

And the body of clinical evidence for Optiflow nasal high flow therapy has continued to grow with some additional clinical practice guidelines released during this year. We now count 12 guidelines with those recent additions from the American College of Emergency Physicians, the National Institute for Health and Care Excellence in the U.K.

and the global initiative for chronic obstructive lung disease. So now let's turn to Page 3.

Operating revenue for the year was $2.3 billion, up 14% on the prior period or 12% in constant currency. Net profit after tax was $468.5 million, up 24% on the prior period or 28% in constant currency.

Lyndal is going to take you through our financial performance in more detail shortly. But before that, I have a few comments on Hospital and Homecare revenue drivers.

So start with Hospital on Page 5. Operating revenue was $1.5 billion, up 18% on the prior period, that's 15% in constant currency.

And once again, this is broad-based strength that's across the product portfolio and it's across the geographies. New applications consumables revenue grew 18% year-on-year, and that's 16% in constant currency.

And Hospital consumables as a whole grew 14% in constant currency, and that is becoming the more relevant number for us these days. That growth in consumables is during a period where we think we've had a reduced year-on-year hospital admissions for respiratory illnesses during the Northern Hemisphere winter, and that's in the United States and in the other major markets.

So it does suggest that changing clinical practice was once again a strong growth driver for us. Hardware revenue was up 27% in constant currency on last year and this exceptional result is probably another point to progress in changing clinical practice.

So let's turn now to Homecare on Page 7. Homecare operating revenue was $802.7 million.

That's up 8% on last year or 7% constant currency. And OSA mask growth was 7% or 5% constant currency with that growth generated by our latest Solo and Nova ranges of nasal and pillows masks.

Hardware growth is also a feature of our Homecare result for this year. I'm going to pause there for now and hand over to Lyndal.

Thanks, Lewis, and good morning, everyone. On Page 8, our gross margin was 63.7% for the year.

This is an increase of 122 basis points in constant currency over last year. The range of margin improvement efforts across our business, including manufacturing efficiency and other efficiency gains continued making a positive impact.

U.S. tariffs on products sourced from New Zealand impacted our gross margin by approximately 90 basis points this year.

We have no material impact to our gross margin in FY '26 related to the disruption in the Middle East. Lewis will outline the gross margin assumptions in our guidance for FY '27 later in the call.

Moving on to Page 9. Total operating expenses grew 8% in constant currency compared to last year.

This reflects the higher investment made over the last few years and modest increase in people numbers in the last financial year. Operating margin was 27.6% for the year, an increase of 277 basis points in constant currency over last year.

This reflects the improvement in gross margin as well as our operating expenses growing below revenue growth. R&D expenses grew 4% to $235.5 million and were 10% of revenue for the year.

This represents a 6-year compound annual growth rate from FY '20 of 12%. We continue to estimate that about 60% of our R&D spend is eligible for the 15% R&D tax credit.

SG&A expenses were $298 million this year, an increase of 9% in constant currency. Moving to Page 10.

Operating cash flow this year was $663 million, up 21% from last year, reflecting the strong increase in profit. Tax payments this year of $161 million were up from $90 million last year.

Capital expenditure, which includes purchases of intangible assets, was $195 million for the year, up from $103 million last year. This includes $132 million spent progressing the construction of the fifth building at our East Tamaki campus in New Zealand and the second payment for our Karaka land purchase.

Capital expenditure for the 2027 financial year is expected to be approximately $230 million. Within this is around $125 million on land and buildings, including the final payment on our Karaka land purchase.

Looking at the balance sheet. Debtor days were slightly down on last year at 43 days.

Net cash at the 31st of March 2026 was $401 million, and our gearing ratio was minus 22.8%. Interest-bearing borrowings were $53 million, all of it being noncurrent.

Turning now to Page 11. We have declared a fully imputed final dividend of $0.33 per share.

This takes the total dividends declared this year to $0.52 per share, up 22% on last year, and this represents a 65% payout of our full year profit. The final dividend will be paid on the 3rd of July.

Looking now at foreign currency on Page 12. Foreign currency movements unfavorably impacted our net profit after tax growth by 4 percentage points.

or $15 million from the FY '25 reported result. This largely reflects the movement in hedging results, partly offset by the movement in spot rates when compared to last year.

During the 2026 financial year, we recorded hedging losses of $21 million and foreign exchange losses on balance sheet translations of $3 million, all on a pretax basis. At the end of April exchange rates, we would recognize hedging losses of $17 million and foreign exchange losses on balance sheet translations of $1 million in the 2027 financial year, both as pretax amounts.

At the end of April exchange rates, we would have an overall favorable impact to our net profit after tax growth of approximately 2 to 3 percentage points. or $10 million to $15 million in FY '27 from the FY '26 reported result.

If all currencies moved by 1%, our net profit after tax for FY '27 would move by approximately $2 million to $3 million based on the level of hedging in place. This excludes the impact of balance sheet translations, which would impact by approximately $1 million if all currencies moved by 1% between reporting dates.

Now it's back over to you, Lewis.

Okay. Thanks, Lyndal.

So let's turn now to outlook on Page 13. And there's a bit more there to digest this year.

We've provided an estimate for full year operating revenue at exchange rates on the 30th of April, of between $2.45 billion and $2.57 billion. And for full year net profit after tax, we've estimated a range of about $500 million to $550 million.

And for these interesting times, we've also provided insight into some of the assumptions that we've incorporated into those estimates. And in general, we assume a continuation of the current status.

And just for absolute clarity, these are assumptions that we have incorporated in our estimates and not necessarily a prediction of the future or future events. So first of all, tariffs.

There's a number of moving parts of potential U.S. tariffs during the year, and we fully expect some change at some time during the year.

In this net profit after tax estimate, we've assumed that a 10% tariff rate for certain respiratory products manufactured in New Zealand is applied for the whole year. And this results in an estimated adverse impact to gross margin of 70 basis points in constant currency terms, and that is actually an improvement of 20 basis points over last year.

So now for the impact of the Middle East conflict. We've assumed that something similar to the current freight and raw material surcharges will continue to exist for the whole year.

Now we have a very seasoned and experienced team of supply chain professionals, and we've got long-standing supportive working relationships with our suppliers, and they have all been working long and hard from the very beginning to mitigate the impact of this conflict on our supply of medical devices. And I want to call out all those people and thank them for those efforts, which, of course, are ongoing.

So thanks very much. And so based on our current status, our best estimate for the impact on raw materials is an additional 45 basis point cost to gross margin; and for freight, an additional impact of 25 basis points to gross margin.

Now we're also assuming that sea freight availability is not impacted to the extent that it pushes us to more air freight than normal. And in addition, for our business, we're not expecting any impact to revenue in the region from the conflict for the year.

Now we've also called out on the slide some of the other assumptions in our estimates for the year. They are more of an accounting nature.

I hope they're self-explanatory. So after all that, it's a net 50 basis point negative impact to gross margin for the year.

But for us, we still expect that our ongoing continuous improvement activities across the entire business will generate savings and efficiencies that more than offset that 50 basis points and result in an improvement to gross margin for the year. Now finally, before we go to Q&A, I do just want to point you back to a word that sits on the cover of the slide pack and it's on the cover of the annual report, and that's momentum.

We do believe that a business built on innovation with the patience to change clinical practice, the discipline of a robust quality management system and a mindset of continuous improvement builds momentum. And in the face of these disruptions and uncertainties, this momentum helps keep us on track towards the compelling market opportunities we have in front of us.

So Marcus, at present, I think that momentum is carrying us into time for questions.

Very good. Thanks, Lewis.

Justin, if I could ask you to please open the line up for questions. [Operator Instructions]

Our first question comes from Rob Morrison at Craigs Investment Partners.

Congratulations on another excellent result. I'd like to kick off by asking about the revenue guidance.

So you've guided to 6% to 11% revenue growth next year. Could you give me a bit of color on the assumptions that book-end, the top and the bottom of that range?

And ideally, some color on the assumptions for our Hospital and Homecare divisions?

Sure. Okay, and thanks, Rob.

So when we think about guidance, looking at the midpoint, you're looking at something like similar growth in Hospital consumables, you're looking at similar growth in OSA masks. And you're probably looking at flat hardware year-on-year.

At the top end, probably looking at improvement in everything, improvement in Hospital consumables, improvement and growth rates in OSA masks and some growth in Hospital hardware and Homecare hard care -- hardware. And at the bottom end, we'd be looking at probably a lower Hospital result in consumables, probably a significantly lower hardware result at the lower end and similar, slightly lower growth rate in Homecare and Homecare hardware also dropping off significantly.

And I might just talk to those hardware comments. And we've had a big year with 27%, 28% in Hospital hardware.

If that Hospital hardware rate was to drop for FY '27 or even go backwards, if it went backwards 20%, you'd still be looking at a cumulative placement of hardware over the 3 years, '25, '26, '27 that corresponded to a 10% compound annual growth rate. So I hope that gives you a bit of insight.

No, that's awesome. And just on that hardware front, it's very interesting, like that the Hospital hardware growth accelerated strongly in the second half.

So could you give me a bit of color on what was driving that, be it new products or whatever else? And then kind of speak to what you're seeing in terms of that growth on '27 to date?

Sure, I'll answer the first question there. Look, one of the bigger drivers is coming out of the United States.

We introduced Airvo 3 and the 950 humidification system into the U.S. first half FY '25.

We've seen pretty low Hospital hardware growth in the U.S. '23 and '24.

We saw really strong growth, '25. We've seen that strong growth has continued '26.

So at this point in time, we're thinking probably some pent-up demand was generated and that's still flowing through.

[indiscernible] just on what you're seeing in on that?

1 month, I wouldn't make any comment on what we're seeing for 1 month in any way whatsoever and even more so in hardware.

Thanks, Rob. Next questions come from Lyanne Harrison at Bank of America.

Can I start with gross profit? Obviously, we saw material expansion.

I think even in the second half, that expansion in gross margin accelerated. Can you talk through the key improvement there?

And then my follow-up question, I listened to your comments around assumptions for FY '27 gross margin being a 70 basis points impact from U.S. tariffs and then also the 25 and 45 from the Middle East conflict.

But I'm just trying to understand how that gets to the 50 basis points net margin impact that you spoke to earlier? And is there any pass-through of those costs to consumers?

Okay. Thanks, Lyanne.

I'll take the first part of all of that. In the second half, the strong revenue allowed us to produce more, so our production volume increasing, whereas we kept a lot of the overhead growth rate fairly controlled in the second half.

So we did see a step-up in our overhead efficiency and leverage that we got there in the second half compared to the first. But the improvement in gross margin is really everything.

So everything else really continuing to benefit. That's the continuous improvement projects throughout the entire organization, pricing and mix benefit that we always get as well as keeping really controlled on the overhead spend continuing to grow into that overhead structure.

So that really was the key as to why second half stepped up was supported by that revenue growth. Now in terms of FY '27, the 70 basis points are on a stand-alone basis from tariffs, and that's comparable to the 90 basis points that we saw in FY '26.

So tariffs actually helps us year-on-year '27 to -- from '26 by 20 basis points. So we get a positive impact there of 20 basis points.

And then offsetting that is the 25 and 45 from the Middle East disruption where we had nothing in FY '26, and we've got that 70 basis points in FY '27. So that 70 basis points from Middle East disruption in '27 netted off against the 20 basis point benefit year-on-year coming from tariffs gives us that negative 50 basis points that we were talking about.

Hopefully, that clarifies that for you.

I'll take the second part of the question. Look, we typically don't pass on cost increases to our customers.

I don't think we have any customers at all that we can just notify we're putting their prices up. It's not like we're the ASX or anything like that.

So we -- for us, it's contracted pricing, it's negotiated pricing, and it's a process we have to go through and it's time and effort we have to put into it because the customers don't like it. So we tend to put our time and effort into the growth opportunities rather than renegotiating pricing.

Next questions come from Saul Hadassin at Barrenjoey.

Just first one on operating costs. Just wondering if you could provide some color on what you're assuming growth looks like for R&D and SG&A into FY '27.

Yes. So between the sort of bottom end and top end of our range, you would be looking from sort of mid- to high single-digit growth in our OpEx, and that's fairly consistent across R&D and SG&A.

And maybe just one for Lewis. Lewis, Hospital hardware, you touched on that 27%, 28% growth.

Just wondering if you can distill whether growth is equivalent for both the Airvo 3 and also the 950? Or is there disproportionate growth in terms of the hardware within any of those categories?

I think it'd be pretty comparable, Saul. We don't really think of it like that, but I think pretty comparable, nothing to call out, nothing unusual.

Next questions come from Chris Cooper at JPMorgan.

So first one, actually just on tariffs, if you don't mind. So I actually thought you'd come in a little bit worse than that in '26 and -- sorry, a little bit better than that in '26, a little bit worse in '27.

You sort of exceeded my expectations there for the guidance for this year coming. How are you thinking about 1 -- sorry, 122 and just generally latest expectations for whether or not the 232 will impact the sector and how you may be able to respond to that?

Thanks, Chris. I'll touch on that.

What we're not doing is trying to predict what's going to happen with tariffs through the end of the year. The best we can do is, as we've done, lay out the assumptions saying, if the current situation holds for the full year, here's what the impact would be, which is 70 basis points on an absolute basis there.

Part of that reduction from '26 is in '26, we had some rates at 15%, so that's come down to 10%, which is what we're currently paying on products that are subject to tariff out of New Zealand and then just our continuing sort of growth that allows us to help manage where we put growth volume and capacity there. So we really don't want to speculate on what is going to happen going forward.

The best we can do is let you know and try to be as clear as possible with the assumptions that we base this guidance on.

Okay. And noting Lewis' prior answer there, I mean, if there was a situation where a tariff was imposed, would that be a situation where it might be appropriate to pass that on to customers in some way?

Probably not, Chris. I mean, it will depend on the magnitude, of course, but it wouldn't be our go-to, and we'd be balancing time and effort about passing on the cost because it doesn't come free, that time and effort versus time and effort on the growth opportunity.

Same with the manufacturing and supply chain footprint, actually same logic. We can adjust our footprint based on where we put our growth and our first preference.

Okay. And just a quick one on Homecare, if you don't mind.

I mean, 5% growth in OSA masks, it does look like you perhaps lost a couple of points of share. Anything you could put that down to, given you probably have had a couple of launches recently.

I know you've had a new nasal mask launch January or so this year. So is that going to drive an improvement?

Or is there anything else that's going on there in that revenue line?

Hard to say. I mean, I think what we're looking at is more a result of lapping 2 -- 3 years of double-digit growth than anything else.

Next questions come from Sacha Krien at Evans & Partners.

First question on hardware as well. Just wondering if you can give us any sort of guidance or whether you have any visibility on the extent to which that growth is being driven by replacements versus expansion units?

Yes. Yes.

Unfortunately, we can't. Typically, it is 80% to 90% replacement.

And typically, it's driven by growth. So this is a scenario where a customer has 50 850 heater bases.

They want to add 10 more. They have to decide whether they buy 10 more 850s.

They probably will not mix the 950 and the 850 models. So if they want to go to 950, they're probably going to do 60 950s.

Hence the comment, it is largely replacement driven by growth.

Yes. Okay.

That makes sense. And then I think in your CEO report, you do talk about the contribution from anesthesia.

I'm just wondering if you can provide a bit more color on that and what -- whether there's been any particular guideline change or anything that's making penetration into the U.S. faster?

Probably not. I mean, it's a strong uptake.

It's off a small base. We're still looking at better than 40% growth this year, currently heading towards over 10% of new apps, not really running into clinical evidence or guidelines as the hurdle, I would say, at this point.

One difference with this product is the anesthesiologist can trial the product on the first patient, and they can see the impact in the first 5 minutes.

Okay. Sorry, can you just explain that in the sense that they can trial the product?

They -- so they can trial the product. They can see that the patient is not breathing, and they can see that saturation levels are not changing.

And they can see that every single time on the first patient.

Next questions come from Davin Thillainathan at Goldman Sachs.

Lewis, maybe a question for you to start off. The revenue guidance for FY '27 would imply about 9% at the midpoint.

And I think you were talking about momentum in your opening remarks. I would say that 9% is perhaps a touch lighter than your 12% aspiration.

So perhaps if you can help us understand what's holding growth back on that 12-month view, please?

Sure. So you can get to the midpoint by maintaining Hospital consumables growth at 14%, maintain those masks, I would say, masks at 5% and then hardware going backwards.

First of all, Hospital hardware, which I've kind of spoken to, we think we've got some pent-up demand driving the last 2 years, and it's a matter of whether that rolls off or not, that would be fair enough. And even if you -- even if Hospital hardware was to go backwards 20% over the 3 years, that's still pretty high cumulative placements.

And then also, we've got a phenomenon in Homecare as well, where we've had in FY '26, we've had growth in CPAPs. So we've had growth in OSA hardware.

That's pretty unusual for us. It's usually going the opposite direction.

That's been driven by a turn off of 3G and swap over to 4G. So a bit of a bolus of hardware replacement in a particular market through FY '26.

We're not expecting that to repeat into FY '27. So to get to your midpoint, you've also got OSA hardware going backwards.

That's pretty reasonable assumptions, I think, and neither of them are something to panic about.

Yes. No, that's clear.

And I guess the next question is on your assumption as well that you've incorporated into '27, specifically on the gross margin and the comments about the surcharges going into the Middle East conflict. I mean, I guess the comments about the surcharge, I would read that as a temporary increase, and therefore, there should be an unwind once things change.

So I guess what are the leading indicators we should be looking at given you have given us the building blocks for your guidance range? So what should we be looking at to think about that change in the surcharge assumption, please?

Yes, Davin, I'll sort of take that. I think it's, one, the end of the disruption in the Middle East and things normalizing.

That even when the war stops, it will still take quite a bit of time for supply chains and everything to work their way through. So whilst, yes, we think this probably is a temporary surcharge cost.

How long that temporary goes for is uncertain at this point in time. And I would say that we would anticipate that it still remains for a reasonable period after the war stops.

Next questions come from Dan Hurren at MST Marquee.

Look, I guess first question to Lyndal. Clearly, tariff mitigation is getting better than expected.

So is there any change to your original comment that this will all cost you an extra year in achieving your long-term gross margin guidance?

Thanks, Dan. So look, I think if everything sort of holds as it is at the moment, we have historically been able to do that 100, 150 basis points of just BAU improvement.

If tariffs and Middle East disruptions sort of stay as it is, we think we could get back to that 65% in, say, 2 to 3 years. Now that's with the caveat that we're at very favorable exchange rates at the moment.

So we'd actually be targeting for higher than that at this stage.

Okay. And the next point, I can't remember if you said this or we've all assumed it, but there's probably some ability to shift geographic manufacturing footprint to minimize that tariff impact.

Is that something you're doing? And I mean -- and if so, how are you progressing with that?

Yes. The important thing for us, as I said, is to spend our time and effort on growth rather than moving things around.

But within the plants, we can move some capacity from plant to plant. We've done that during FY '26, maybe helped to the tune of a couple of million dollars in the year.

And then also if we're adding manufacturing lines, we can maybe pull forward where we add them to help with that. And we've done that during the year as well, probably a couple of million dollars total in terms of moving things around.

But when I say moving things around, I don't mean picking stuff up and moving it from one plant to another. I mean [indiscernible] from one plant to the other.

Next questions come from Adrian Allbon at Jarden.

Perhaps the first question for Lewis. Just on Slide 5.

Just wondering, just picking up on a comment you made around Hospital consumables in total becoming a more relevant focus, I guess, rather than the new apps, which has traditionally been a strong focus. I'm not saying you're losing focus on it.

But are you able to just give us a bit more color what's sort of driving each of those kind of lines? Like I think NIV consumables is again pretty strong at 9% growth.

You've called out anesthesia at 40% plus, around about 10% of new apps. Can you just give us a bit more between sort of nasal high flow and NIV?

Yes. Look, they're all pretty strong across the board, Adrian.

But the comment I kind of wanted to make is a lot of ventilators replaced during COVID, and there was quite a big turnover of the world's ventilator fleet. The modern ventilators can deliver invasive ventilation, noninvasive ventilation and nasal high flow.

So what we see these days is we do see noninvasive ventilation use and nasal high flow use on a ventilator can look like an invasive consumable to us. So when you now look at our new apps versus our invasive consumables or traditional consumables, traditional has got new apps in it.

And that's just a fact of the matter. So personally, I don't tend to look at new apps to the same extent I used, so I'm looking at Hospital consumables.

And so I'm very appreciative you asked the question because I think that's the one we need to look at. That's one we'll look at going forward, but we don't want people to feel like we're taking something off them.

Sure. Okay.

That's helpful. And just before we leave the first question, are you able to kind of just give us a sense of, I guess, the Optiflow versus -- the traditional Optiflow versus NIV within the new app?

I appreciate there's a little bit of flow into the NIV stuff.

They're not all that different, in terms of growth rates.

Okay. All right.

That's good. I don't know if this is a question for Marcus maybe, but just coming back to the tariff situation, are you able to kind of just give us a bit of an update of what you've been doing on the Nairobi protection and how -- and what sort of guidance you've received as to how that might apply in a forward-looking construct, including potentially like a Section 232.

Thanks for the question, Adrian. I think what we would say is that nobody knows the answer to how these different exceptions will be treated under any future changes.

So that's -- nobody can give you an opinion on that, that will be foolproof. So we're still carrying on business as usual.

We've included that 10% sort of assumption for the year. We know that will not necessarily be how things play out, but we have various free trade agreements and then exceptions that currently apply, whether they apply in the event of a Section 301 tariff or Section 232, that's still to be played out.

Okay. But -- okay, I understand that part.

But can you just give us a bit of an update on what you've been doing on the Nairobi? I understand that's kind of been expanded to the Airvo 3 in particular, I think?

Yes, we do have some exclusions that are on the U.S. Customs and Border Protection website, and that's for Airvo range of products and consumables and our 950 and some various consumables associated with the 950.

Next questions come from Ben Crozier at Forsyth Barr.

Just first one for me, just on that Hospital hardware. Is there anything anecdotal you can sort of call out of how these 950 and Airvo 3 have, maybe opened up that opportunity outside of the ICU a lot more than prior device version did?

Yes, I'm going to ask Justin to -- maybe some color on that.

Yes. Thanks, Ben.

Justin here. I think from the 950, that's typically used on the ventilator.

So typically, where the ventilators are is where they're used. So I wouldn't sort of suggest too much is happening outside of the ICU there.

The Airvo 3 does provide -- it's a lot more mobile than our previous generation products, so people can use that in other areas of the hospital. That's primarily to transfer patients from one department to another.

And that's one of the big features of that product, and that's definitely being valued.

And then maybe just on the mask side of things. I think previously, you called out maybe full face masks has been a bit of a headwind because it's been a few years since you've launched a new mask.

Is that still what you're seeing? And the new masks that you've launched in recent years are still growing quite well, but it's more offset by some of those mask categories where you haven't launched the mask lately?

Actually, I don't think I'd called that out, Ben, but that's all a fair assumption, right? Quite accurate.

I think ask and answer in the same.

Next questions come from Marcus Curley at UBS.

I just wondered if we could start with a little bit of color in terms of how you're thinking about R&D these days. It's -- obviously, it was a year of much slower growth.

And so just keen on getting an understanding of your thinking behind that and in particular, how you think about it going forward? Is there a greater discipline being put over the top of the R&D in terms of its incremental return?

Or am I just sort of overplaying more of a moderation in the growth rate?

Yes, Marcus, I think it's sort of -- you're overplaying it probably a little bit there. It's more a reflection of we purposely going through COVID and coming out of COVID accelerated our investment in R&D, and we said we were very willfully and purposely doing that.

And so then this last year was more a reflection of that, which is where sort of over the 6 years, a 12% CAGR on growth of R&D sort of feels about right-ish to us. There is some lumpy expenses in the R&D number like biocompatibility expenses, clinical trials.

So that can throw just that R&D growth rate around a little bit, not material to the overall result. But just looking at that R&D growth rate can make that look a bit higher and a bit lower.

And we had a little bit of that higher in some of those costs in '25, a bit lower in '26, which was reflected in the '25 being a bit higher, '26 looking a bit lower from a growth rate. So I wouldn't read anything into that.

Sure. Okay.

And then secondly, I suppose an extension of that, maybe for Lewis. We haven't seen a full face mask in OSA in a while.

I was sort of expecting to see one. Could you talk a little bit about the challenges in full face relative to the other categories where clearly you've had a much greater cadence of mask release?

Look, I think it comes back down to the fundamental philosophy for us in this business, and that is to have a product where our customers, dealers, patients can see a difference. So when we are running our R&D programs, we're aiming at a perceivable difference.

And whether we like it or not, that takes as long as it takes and no matter the planning and the strategies and the schedules that go in, we don't know we've hit that metric until we hit it. I think it's as simple as that.

Does that suggest that you have more false starts or you have -- or the process has a number of false starts in terms of ideas that don't necessarily meet that criteria and hence don't get launched?

Yes, it's a fair assessment. When it takes longer, that's probably have more iterations in it.

Yes, absolutely right, mate.

Next questions come from Andrew Paine at CLSA.

Congrats on the result. Just coming back to gross margin.

I'm just wondering if there's -- if that guidance has any second half weighting. And also, you touched on it before, but if these headwinds ease, how long would it take for gross margin to normalize, just thinking about the inventory build and how long it would take to work through that?

Yes. Look, not really giving much color on second half.

The second half seasonality is sort of where we see the biggest uncertainty, I guess, in terms of what our revenue is likely to be. And so that can move that around a little bit.

So nothing really to call out one way or another for that. In terms of working through inventory, I don't see that as being a major impact there.

It just sort of depends on how long these costs go up for. I guess one thing that I do want to call out as a risk to that margin in FY '27 is the amount of volume going air freight.

We're assuming, as Lewis said, sort of stable supply chains, and that's sort of almost at our record low of the percentage going air freight and air freight is where we've seen the biggest fuel surcharge impact. So I just really want to call that out as a bit of a risk to these numbers as well.

Okay. So just to clarify, so the 45 basis points raw material, you're assuming that is for the entire FY '27?

Correct.

Yes. Okay.

And then just staying on gross margin. So obviously, you've got the 65 basis points target.

You did 63.7% this year with a 90 basis point headwind. So if we look at like an underlying gross margin, you're at 64.6%.

You're still targeting 100 to 150 basis points year-over-year, but you're saying for 3 years to 65%, noting kind of the exchange rates. I'm just thinking like how far does this have to go?

Are you still targeting 65% as a baseline, but -- or do you think you'll get above that over the next few years on an underlying basis?

Yes. Look, if -- so we want it to be on a -- as we're dealing it basis rather than an underlying basis.

So we're going for that 65% based on the costs that we're seeing today because we're just doing our usual efforts to mitigate them and just treating them effectively as normal costs in. At these exchange rates, we wouldn't stop at 65% because as you highlight, we're pretty close to that if you stripped out the tariff impact.

So at these exchange rates, we'd probably be aiming for about 67%, 68%.

The 65% gross margin target is over the long term. So we think of it as over the whole range of foreign exchange over that whole range.

That means when it's favorable, you need to be a bit above, which is now.

Next questions come from Vanessa Thomson at Jefferies.

Just wanted to continue on, on that FX theme. I think it says in the pack sensitivity of $2 million to $3 million for every 1% change in the New Zealand dollar.

Is that typical? Or is that a little higher than we would have seen in the past?

Thanks, Vanessa. Look, it's possibly a little bit on the lower side where we're coming into the year with quite good amount of hedging.

So that can go up and down depending on the level of hedging we enter the year in. And we do show you in the pack what our level of coverage is on Slide 16.

So you can see we're really in quite a well-hedged position for most of our currencies.

And then I also wanted to ask about the clinical guidelines. Obviously, you've seen some really good progress in the primary medical support category.

I wonder if you could give us a bit more color on guideline progress for the other categories of clinical practice.

Maybe a generic comment. I mean, certainly for respiratory Optiflow, it's research and clinical practice guidelines has been well out of our control, I think, for quite a few years now.

That's being run by the research community in general. I think for the current set of clinical practice guidelines that we have, if every hospital that we visited just implemented current clinical practice guidelines, I didn't want to think about what volume would look like.

So I think the content and the -- what the current guidelines cover is not a hindrance to us at all. We do expect them to continue improving and continue building up over time, but it's not something we have any control over.

Next questions come from David Bailey at Morgan Stanley.

Just got a question on anesthesia. Wondering if we can get that as a percentage of new apps revenue, that would be useful.

And then thinking about the uptake or the penetration of addressable markets, how would you characterize that compared to high flow? Do you think it's been faster?

Is it easier? So the question is, yes, the percentage of new apps relevant to anesthesia and then how the path of penetration is compared to high flow, if you could, please?

Sure, but over 10% of new apps would be anesthesia. In terms of penetration, I think it's on a fairly similar trajectory going back to what respiratory was at the time.

So maybe a little quicker. Yes.

Yes, maybe a little quicker. Part of that is we've accelerated the sales force, of course.

Yes, maybe a little quicker actually is where I think I'll lean on that one.

Okay. No, that's helpful.

And then just pulling the pieces of gross margin together, it looks like the previous estimates from tariffs was 130 annualized basis point impact. That's changed a little bit now, but now you've got some tariffs and -- sorry, some freight and other bits and pieces.

So 130 previously, 90 this year, plus 50 next year. Is -- we're thinking of the cumulative headwinds being 140 bps over '26 and '27 now compared to the 130 previously, which didn't have the freight and other bits and pieces in there?

Yes. Look, I think that's a reasonable assumption there.

Just the one little timing nuance I'd say, is that material cost increases. So the -- we've said 70 basis points for the surcharges across freight and materials.

Some of the materials we won't be buying for the full year this year. So there's probably another 20-odd basis points to come to sort of 20, 25 basis points to come in '28 if everything stayed as it was now.

Next questions come from Craig Wong-Pan at RBC.

Great. Look, related to that last point, I just wanted to understand how much worth of raw materials and finished goods did you have at the start of '27 to mitigate those impacts of higher input costs?

Yes. Look, we probably hold, and you can see in our inventory fairly good levels of raw materials, several months' worth of raw materials.

And whilst we've been advised that some of these prices, some of them haven't kicked in yet in terms of our purchasing. So that's why we don't get the full impact this year.

Okay. And then second question is just with the Middle East conflict, that's impacted pricing, but has there been any constraints on or difficulty in obtaining raw materials?

I'm going to pass that question over to Andy.

Craig, Andy here. Yes, we haven't seen that yet.

Obviously, our supply chain team got on to this very early, as Lewis said in his opening remarks, and they've been working really, really hard to sort of mitigate that sort of being a sort of medical device manufacturer, we're all over this sort of thing. So they responded really, really quickly to mitigate that and keep on top of it, definitely.

Yes. And when you look at the experience our supply chain team have had over the last 5 years, Craig, I'm thinking of COVID, we're pretty seasoned.

The great thing about supply chain at the moment is you get 10 years' experience every 12 months.

Next questions come from Sacha Krien at Evans & Partners.

I just had one follow-up. We haven't -- I don't think we've discussed seasonal hospitalizations, which were, I think, the swing factor in last year's guidance.

I'm just wondering if you could provide a few comments on how that sort of played out for you over the course of '26, whether or not you think you did see the impact from the weaker flu season or whether or not maybe those -- the expected impact wasn't quite as much as you were initially flagging at the start of the year?

Super question, Sacha, a pretty complex topic. So I just want to put a context on the discussion, and that is that most years, generally, the seasonal variation is less than 5% of our Hospital business.

So that's what we're talking about. And then the other thing to consider is when we're talking about it, you've got virulence, that's one thing.

You've got hospital admissions, that's one thing. And then respiratory intensity, that's a whole completely different thing.

And it's really admissions versus intensity that we're potentially exposed to and can move us around. And if you look at the year we just completed, we've delivered 14% growth in Hospital consumables constant currency with what looks like considerably lower respiratory seasonality.

So all you can really make of that today is that changing clinical practice has overridden whatever impact seasonality had. And that's actually what we've seen over the last few years as well.

So then when we look at seasonality going forward, how are we going to treat it? What are we going to do?

And I think going forward, the only real implication that you can use seasonality for is that if you see a big change year-on-year in seasonality and that lines up with a big change in our consumables growth, we probably need to think through what the implications of that are. So for example, if we saw a very large increase in seasonal hospitalizations and that lined up with a pretty large increase in our Hospital consumables growth rate, we probably need to think about what information does that give us for the growth rate in the future.

And then you've got the opposite effect if we see a big decrease in seasonal respiratory admissions, and we've got a decrease in our growth rate, that might not be the right growth rate that we should be taking forward into the future. So I think that's the sum total extent of it.

I don't want to overplay it. I don't want to overthink it.

I think it's mostly about if you see a big swing year-on-year and it lines up with a big swing in our numbers, we need to think through. We need to be careful how we interpret that.

I think we've got time for one more question in the queue. That's from Christine Trinh at Macquarie Bank.

Congratulations on another solid result. You mentioned before that the potential revenue impact from the Middle East conflict haven't really been considered in the guidance.

I was just wondering if you could give us some color on what that might look like if the war does continue. Just any comments around magnitude and percentage of sales that may impact?

Yes, Christine, we have totally considered that in our guidance. And what we're considering is that it won't have any impact -- so hospital products used to treat patients is what our business in that part of the world is.

So we don't expect any impact from the conflict. Maybe in terms of delivery times and shipping, that might not be smooth during the year.

But in terms of total impact over the financial year to revenue, we don't expect anything.

Thanks very much, Christine. That concludes the time we have for questions.

Please feel free to follow up with Dan or I. I'm now going to pass back to Lewis for his final remarks.

Okay. Thanks, Marcus.

Thanks to everyone for dialing in. Thanks for asking all the questions today.

They were great, and we do appreciate it. And thank you, as always, to the entire team at Fisher & Paykel Healthcare for your contribution towards our results and for building the momentum.

And we continue to be grateful for the support of our customers, our suppliers, our clinical partners and our shareholders. Thank you, everyone, and enjoy the rest of your day.