Cochlear Limited

to the Cochlear Limited H523 Result Analyst and Media Briefing. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the bizarre key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Dick Allen, CEO and President. You can go ahead.

Thank you, and good morning, everyone. Thank you for joining us for our results update. So let's get straight into the presentation and as always we start with our mission. Our mission as always guides what we do. It guides our strategy and has been particularly important over the last three years as we've navigated the various challenges that the world has thrown up. But let's move into our results. I'm certainly quite pleased with the results that we've got in the last six months. that the sales revenue up 9%, up 7% in constant currency and a pretty strong performance across each of the revenue lines, and we'll talk about that in a minute. The underlying net profit is obviously down 10%, 6% in constant currencies, and there's really two factors driving that. One is the increase in cloud computing expenses, which we... talked about and the second one that was the higher than expected profit in the first half of last year on the back of sales growth and then us not increasing our investment at that rate through the first half. But overall, we're in a strong financial position in terms of the balance sheet, able to maintain that dividend the same as last year and Stu will talk more to those as we go in and I will also finish up with the outlook with us maintaining the guidance we set at the start of the year. But now let's look into each of the revenue lines, starting with cochlear implants. So we saw good growth across developed markets and emerging markets in the last half, with 14% unit growth in total, with just more than 10% in developed markets and approximately 20% in emerging markets. Now, in developed markets, we saw strong growth in the US and Australia particularly, and that's very pleasing given the constraints we've seen in those markets and the investments that we've been making to drive growth. It's good to certainly see that growth come through. And also Western Europe, some good momentum in Western Europe coming out of COVID. The nucleoside processor has been important in that, albeit coming out late in the half. We think that share has lifted slightly as a result of nucleoside, but clearly most of that growth in developed markets is actually the market growing. And then in emerging markets with 20%, we said going in COVID that one of the big impacts was that governments withdrew their funding for tenders in that market. The private pay markets continued reasonably well through COVID, but governments withdrew the lower-priced tender funding. We've seen that come back over the last 12 months and particularly the last six months, and that has driven the increase in emerging markets. I want to talk now to the obvious gap between the 14% growth in units and the 9% growth in revenue in constant currencies. There's three points I want to make there. They are, first of all, is that our developed market pricing has been flat. So there's no change there. So what has happened, it's in part a mixed issue. And that is the great extra growth in emerging markets relative to developed and that growth in emerging markets being the lower price tenders has had some impact. But actually the most significant impact was the technology exchange programs that we ran in a few countries on the back of the Nucleus 8 launch. What that means is that we ship an implant system and in certain countries we allow people that might have shipped with a Nucleus 7 to swap the Nucleus 7 for a Nucleus 8. Now, in that case, we don't recognise the revenue on the sound processor until people have had that opportunity to swap. So if you look into the balance sheet and see deferred revenue, you'll see the deferred revenue grew in the half at a much faster rate than it's growing, would typically grow half on half. That's a result of the technology exchange program, and obviously that revenue comes through. We expect that deferred revenue to come through in this half. So that's that. That's why that gap between the 14% and the 9%. Let's move on to services. So services were flat. We expected services not to grow in the half with the announcement of Nucleus 8 in August and then availability later in the half. Obviously, some people held back on an upgrade until that was available, so we did see a strong lift in upgrades late in the half. But I think they're still very pleased with that performance, particularly given the strength of first half 22. And you can see that in the chart. The first half of 22 was also a strong performance for upgrades, and particularly being late in the cycle for Nucleus 7. So to match that again this half, I think just shows that the thing we talk about most in services and upgrades is that this growing installed base is the most critical element to... to driving growth over time and certainly having Nucleus 8 now out there and very well received and the features and functionality of Nucleus 8 stand out and we're getting that feedback and we think that will continue to support both CI systems but also services over the cycle. And then onto acoustics. So acoustics, 70% growth in constant currency, another strong half. We really got some tailwinds in acoustics. One of those is that acoustics was more impacted by COVID. So part of this is the ongoing bounce back. The other two items which are very important here is OSSEA. The rollout of OSSEA continues. We continue to make sure that we do the work country by country to get appropriate and suitable reimbursement for OSSEA. As we do that and as we roll out into a country, we see pretty quickly a transition from passive acoustics as Baja through to active acoustic, which is Austria. And we expect that transition from passive to active to continue country by country around the world. But also supporting the acoustic sales is the Baha 6 Max. There is a significant base of people with a Baha implant and they are upgrading from a Baha 5 to a Baha 6. So we've really got the COVID rebound, the rollout of Ossia and Baha 6 Max to the existing recipient base. driving acoustics. So we do expect, as we've talked about, acoustics to continue to grow well over time, albeit it may not be linear growth, just given timing of country rollouts and launches, but do have confidence in acoustics over time. Okay, so now I'm going to hand over to Stu to talk through the P&L, the balance sheet.

Fantastic. Thanks, Dick. Morning, everybody. Dick's already spoken about the strong sales lines. I won't add anything to that. If I jump down to the next line, gross margin, very happy to see that staying at 75%. That's a testament to the procurement and manufacturing guys continuing to do a great job, both buying well and manufacturing efficiently, and we expect to stay in that range for the full year. We do anticipate about a half a percent headwind in 24 as Chengdu starts to go online. You'll see a pretty significant jump, 19% lift in our selling, marketing and general expenses. A couple of comments on that. First off, that's all investments in growth. So that's things like standard of care, trying to drive people through the funnel, create a bigger pipeline in the future. It's also a function of coming off a very low base in 22. So in 22, we weren't confident that the market was really opening up and capacity was there, and so we held back on OPEX in half one, so we're cycling a very low number. If you look at it relative to half two of 22, we're only up about, I think, with 3% or 4%. And there's also some in-aid launch costs in there as well. On the R&D side, we always aim for about 12% of revenue. We're slightly under that for the first half. Again, on track to be at 12% for the full year. The growth and admin expenses ex-cloud, it's really two things. We expanded the STI program, the short-term incentive program, to lower-level employees in the company, and we're also starting to see some Oticon transaction costs flow through that line as well. And on the cloud investment, very much where we anticipated to be. As we've said numerous times, we're in a four to five year journey, 100 to 150 mil in total. We think that spending is going to peak this year and into next year. And we're very much where we'd expect to be, about 12 mil up on last year and 17 for that half. If we go on to the balance sheet, next slide. The biggest change here is the movement in working capital, and it's really on those first three lines. Receivables are up. We've sold a lot more and actually quite a lot of that back-ended in the half. N8 launched very late in the half, but again, receivables up for the right reason. We're selling more. Inventory up a small amount, the 15.5. That's really, again, a function of continuing to opportunistically take advantage of the the chance to buy more raw material and componentry to secure supply, and also holding slightly higher stocks ahead of N8 launch. And then payables, really just timing of major payments flying through at the end of the calendar year, really nothing to affect the underlying sort of structure of the P&L there at all. That's purely a timing impact. If we go on to cash flow, So the EBIT resolved down, but really a function of, as Diggis flagged, two things there. The increased cloud spend, so the 17 mil up 12 mil on last year, half on half. And also we had an abnormally high EBIT result and an impact result in half one last year where revenue came back faster than expenses. But very happy with the EBIT result and probably more of a normal, more balanced half one, half two picture relative to last year where it was very heavily skewed. And the only other thing to call out there is just that net change in the investments line, the 17.9 down. That's a combination of us putting in – I'm sorry, that's the investment going into Precisas. And then on to the dividend. So a couple of things here. First off, dividend, $1.55 flat on last year, with 72% of NPAT and on track for the long-term guidance of 70% payout for the full year. Again, when we think about the delta from last year, we had a much bigger half-one NPAT last year, and that's why that payout ratio is different. Of the $1.55, 35% is going to be franked. And again, we'd expect that amount to grow at the full year and into next year. And again, that's a function of those losses from air 20 flowing through and impacting our ability to pay the fully franked dividend. The other significant news is we will be doing an on-market share buyback. We've been looking at this for a couple of years now. We raised capital at the beginning of COVID to really secure the company in the face of significant uncertainty. We can see that uncertainty reducing. It's not zero. We don't want to reduce it all at once. And we also think doing that would not be in the best interests of long-term shareholders. So what we'll be doing is looking to aim at a set point of net cash of about plus $200,000. and to get to that point over time. And so certainly over a number of years, we will reaffirm that set point and the amount we intend to spend every year. And for the next 12 months, we'll be aiming to spend up to $75 million buying back shares with that long-term set point of, as I said, 200 net cash and maintain that 70% dividend payout ratio. So with that, I'll hand you back to Digg to talk through the outlook.