FPH Posted Record High Earnings
Fisher & Paykel Healthcare (FPH) released its full year financial results for 2019 today, reported a 10% increase in net profit after tax to NZ$209 million. The company’s revenue surpassed the $1 billion milestones, up 9% compared to the previous fiscal year.
Operating revenue was $1070.4 million. The company’s gross margin improved by 56 basis points to 66.9%, compared to the long term target of 65%. Operating expenses accumulated to $428.2 million. The 11% increase in expense was driven by higher patent litigation expenses, continued investment in research and development (R&D) to support global sales growth and the global ERP implementation.
FPH offers medical devices in two business sectors; hospital and homecare. The products are for use in respiratory care, acute care, surgery and the treatment of obstructive sleep apnea (OSA). The record high gains were mainly attributed by strong sales in hospital equipment, followed by homecare products and others. Hospital contributed 60% to total operating revenue. The company reported a 12% increase in hospital sales to $642.3 million, driven by strong sales growth in Optiflow; accounted for 62% of its product sales. For homecare products, the operating revenue grew by 6%, reporting $421.4 million. Distributed and other products had $6.7 million in revenue.
In the financial year for 2020, the company is expecting to generate $1.15 billion of operating revenue and around $240 million of net profit after tax. NFP’s new production factory in Tijuana, Mexico was completed. The facility is expected to operate in the coming fiscal year. Further investment had occurred in Auckland, New Zealand. The construction work of a fourth building in the area is expected to be completed and operational in 2020. More than $150 million was exhausted in capital expenditure in the 2019 financial year. Over the long term, the company plans to keep R&D annual cost growth to be in line with revenue growth.
In the days leading up to the financial announcement, the strong gains were anticipated by ASX investors as FPH’s share price was trading at a record high at $15.81 last week. The company’s stock also traded at a record high on the NZX at $16.67. On the same day as the announcement, FPH also notified dividend distribution. The imputed final dividend is expected to be 13.5 NZ cents per share. The total annual dividend of 23.25 NZ cents a share is up 9% on the year. Given the strong performance over the last five years, the board has suspended the dividend reinvestment plan. However, since the announcements, the ASX listed share price has dropped more than 4% at $15.12 in the morning.
FPH’s operation in foreign countries
FPH is primarily an exporting company. The products are sold in over 120 countries worldwide, mainly in regions including North America, Europe, Asia-Pacific and others. In terms of total sales, almost 50% of total sales was comprised of revenue from North America. European sales contributed 29% of its total revenue and 20% coming from the Asia Pacific. North America generated $501.5 million in operating revenue. This was a 9% increase from the last fiscal year. Sales in Europe grew by nearly 6% to $314.6 million. For revenue in the Asia Pacific, $208.1 million were made, a growth of 15% from the previous year. The rest of the regions contributed $46.2 million in revenue.
With the majority of its sales from foreign countries, FPH is exposed to movements in foreign exchange rates. The operating revenue was generated in a wide range of currencies mainly in US dollars (50%), Euros (19%), Australian dollars (6%) and Japanese yen (5%). Only 1% of the sales were generated domestically. While the company implemented strategies to hedge against currency risk, currency headwinds contributed a loss of $1.9 million to operating profit. However, new hedging in USD and EUR is expected to realise benefits in future periods.
Resmed, one of the dominant players in the health care industry, has been in patent infringement disputes with FPH in a number of countries, costing each of the companies millions of dollars. The disputes dated all the way back to 2016 and the net intellectual property litigation expenses amounted to $23.4 million for FPH in the fiscal year 2019. In February 2019, Resmed and FPH reached an agreement to drop all outstanding disputes with no payment by either party. The settlement will significantly reduce patent litigation costs in the coming year.
The demand for quality healthcare continues to rise. Healthcare providers are constantly seeking solutions that provide a better patient experience. In terms of context, ageing population and technology advancement in the industry will be the key to secure market capitalisation. For FPH, its focus on innovative products will be crucial in the business’s growth. Furthermore, the company continues to identify opportunities to expand. As the population increases, the growing demand in China and India can offer significant potential for FPH.
By Jack Lee
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