Cochlear Limited

Thank you for standing by and welcome to the Cochlear Limited FY23 results, analyst and media briefing. All participants are in a 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 star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Dick Howard, Chief Executive Officer and President. Please go ahead.

Thank you. Thanks all for joining today. Great to have you with us to talk through our F23 results and outlooks. So let's get started. As always, we start with our mission that guides all that we do at Cochlear, both our strategy and our day-to-day work. And sitting under our mission is our strategy and they're thinking particularly of What's the impact that Cochlear has on society, on our customers, on our people, on the environment and financially? And we talk about our strategy in that context. I'm not going to go through all of the detail on this slide. You can read through it. But the one point I did want to make is that in helping over 44,000 people here in the last year, the net societal benefit of that is over $7 billion, which just shows how cost-effective it is. our products are that we can conservatively create that sort of value with what we do and that comes from health outcomes, educational cost savings and through productivity gains. I'll now step into the result in a bit more detail and I will run through the revenue and each of the revenue lines and then Stu will talk through the P&L and the cash flow and the balance sheet in a bit more detail. Clearly it was a really strong revenue result. We saw double digit growth in each of our revenue lines, cochlear implants, services and acoustics and we saw double digit growth in each of the regions. We often talk about having a portfolio of geographies and products. It's rare that we see all of those growing at this rate at the same time. There was hardly any countries last year where we didn't see good growth. And I'll talk through each of those revenue lines in a minute, but certainly Nucleus 8 is a highlight. In terms of net profit, the studio will talk more to that, $305 million. And we took the opportunity with the increase in sales to choose to increase our investment in R&D and in long-run growth. Something we'll also talk about is we have an incentive system that runs right through the business which is highly leveraged to above plan revenue growth. So employees get rewarded for the strong revenue growth in the year it happens and then we obviously lock that revenue in for the baseline for future growth. And we remain in a strong position from a balance sheet perspective and I'll talk to the dividend and I'll talk to the outlook at the end of the presentation. But now let's jump into each of the revenue lines in more detail. Starting with cochlear implants, so clearly very strong growth in cochlear implants, 17% in constant currency. And we saw good growth across developed markets and emerging markets. And we called out there about 15% in developed markets, about 20% in emerging markets. And we caught out the second half growth rate there in develop of 18%. And that's because if you just look at the raw numbers, you'll see a 30% revenue lift in cochlear implants in the second half. That's driven by currency, but by the deferred revenue moving from first half to second half. And so the underlying growth rate, which you can see across all implants and then in develop markets is very strong, but well under that 30%. So what drove that growth? So there were four factors. Market growth was there and clearly important. Improved clinical capacity, and that's both the audiology capacity for screening and the hospital surgical capacity. And as we've talked about, it's the audiology capacity that is more of a constraint for us now. We gained market share on the back of the strength of our product portfolio and particularly Nucleus 8.0. And there were COVID catch-up surgeries, which we didn't expect at the rate that we saw them. Now, we don't know exactly what each of those four elements contributed to growth. One of the ways we looked at this, we looked at the growth in children in the developed markets. Normally, we would expect children in the developed markets to grow about 1%, which is pretty much in line with the birth rate. We actually had surgery growth of 5% of children in developed markets. And there's two things that are driving that that we don't think will repeat next year. One is market share gains. We have gained share, but we don't expect that to continue into 24, just given the level that our share is at. And the second one, which we saw in children, but it flows through adults as well, is catch-up surgeries. And We can see that in the numbers and we hear that anecdotally from clinics that they are seeing some older babies come through that we're assuming got missed through the last couple of years of screening. And again, that surprised us to see that come through. We don't expect that to repeat. So as we look into next year, we think our growth will be just driven by market growth. I think one of the very pleasing things on Growth is that we are seeing an improvement in the adult surgery rates and in referral rates in key markets. And that gives us, is encouraging in terms of the investments we're making in standard of care, which, as we said, are long run investments. It's encouraging to see the growth there. We obviously want to see that growth continue for more than just a year to give us even more confidence. And emerging markets, strong growth there. We said we expected governments to come back with restart tender activity. We've seen that. So emerging markets now well above pre-COVID levels and we expect continued growth there. We had also strong performance in China. Onto services. So a very strong second half, which we said would happen on the back of Nucleus 8, up 14% in constant currency. And we saw growth there across the world. One of the pleasing parts of services, we are seeing increasing growth rates and increasing penetration of upgrades into emerging markets. Upgrades over time has been much more focused on developed markets. It continues to remain largely a developed market source of revenue, but we are seeing increases in emerging markets, and I think that's coming from we've been in emerging markets for longer now, largely children who get implants. As those children get older and as wealth grows, more of them either themselves or through governments, are looking to upgrade technology. So we're encouraged by the longer-run outlook and expect services to keep growing in 2024, given the full-year opportunity with Nucleus 8. And then on to acoustics. Again, a strong growth, again, 20% in reported currency, 15% in constant currency. It's really two factors here. The Ossia 2 system continues to go well. We've always said with Ossia, this is a long-run program. It's effectively a new therapy. We need to get regulatory approval. We need to get appropriate reimbursement in countries before we will launch. In the countries where we do have that, achieve those two things, we are seeing a strong uptake and strong growth in Ossia surgeries. We've now sold over 12,000 systems since that launch and continue to be very excited by the long run opportunity. Baha 6 was a strong contributor to growth in the last few years and a lot of that comes from people with the Baha implant upgrading from an earlier generation to Baha 6. We expect that the upgrades for Baha 6 will slow in 24 and therefore while Osseo will grow strongly we expect slower growth in acoustics overall uh in 24 but uh remain very positive on the long run opportunity here in acoustics okay let me just then run quickly through our strategies a lot of information on these slides i think it's actually very important to articulate our strategy clearly and our strategy is unchanged uh over the last few years and we continue to execute carefully and clearly on it and invest as we can afford to to drive this strategy. So I'm going to jump through a few slides. I do want to just pause on this one, the Healthier, More Productive Society, because this is about standard of care. It's about getting particularly the developed markets adults and seniors. And we've made good progress in the last year, not only helping over 44,000 people here, and that's across all of the world and all of our products, But the development of the living guidelines, which was 50 cochlear implant professionals from around the world collaborating based on evidence, building out practice guidelines, which are now available and able to be tailored to countries to get more consistent referral, more consistent clinical practice and post-surgery care. That's an important part of building standard of care. The ACHIEVE study, which is Frank Lynn at Johns Hopkins, has been running for three years, reported just in July. For a long time, it's been very clear evidence of a strong correlation between cognitive decline and hearing loss and between dementia and hearing loss. This study was looking for, is there a causal link? Does treating hearing loss change the rate of cognitive decline? in people with that hearing loss. What the study saw, that in the overall cohort, there wasn't a change in three years, but for people with higher risk of cognitive decline, the study showed that the rate of decline slowed 48% across the three years for those people who had hearing loss and had it treated versus the arm that didn't have it treated. And that's a very significant difference result in terms of building the evidence base that shows that hearing loss is a serious and significant medical condition. It can be treated, it should be treated, and treating it has the potential to improve overall health. So we expect more evidence to continue to come out over the next few years from this study and others, but all of this helps build that evidence background towards standard of care. And finally, reimbursement, very important that reimbursement expands with the effectiveness of the product and to support broader adoption. A good example of that is the CMS expansion of indications in the U.S. from a 40% word score to a 60% word score. Clearly that expands, that matches then in the U.S. insurance reimbursement, CMS matching insurance. and expands the opportunity, as did single-sided deafness a few years ago, and we're seeing that come through now in our sales. And Aussie funding and more countries adopting newborn hearing screening and comprehensive programs for newborns. Okay, I'll jump more quickly through the rest. So lifetime hearing solutions, we have a very strong product forward pipeline based on our investment. In R&D, as we said with Nucleus 8, great reception, over 48,000 people upgrading their processor in the last year, up 19% on previous years. As a technology business, we are a knowledge-based business and our people are critical to our continued success. We have strong engagement throughout the world. we continue to make progress on shaping our culture and our organisational processes to really underpin and support growth. We are planning on continuing to grow and to be a bigger company and we need to make sure that we build out the infrastructure, the capability and the processes to support much larger number of customers and underpin our growth. Our culture is central to doing that as it is to executing our strategy and driving growth. And we continue to make good progress on building out a diverse and inclusive workplace. Our environmental impacts, we're a very small carbon emitter, but it is important that we take action and we are. so we have converted our manufacturing sites to renewable energy. Now, 96% of energy used in our manufacturing sites is renewable, and the constraint there is actually availability as to why it's not 100. As a result of that, a significant reduction in our scope one and two emissions from our F19 baseline, down 68%, and we've also committed to reducing emissions air travel both in terms of the number of flights per employee and then buying offsets to reduce the overall flight related emissions and you can see the impact there and we continue to work with regulators to reduce the amount of paper that we need to distribute with our products and as we make progress there not only as an environmental impact but pretty significant cost impact as well And then finally on to state value. We talked about sales. Hugh's going to talk about the P&L and the balance sheet. We have started manufacturing a sound processor at our factory in China. So that's an important milestone. We expect the implant approval to come through within the next 18 months. We're making very good progress on our business process and IT platform upgrade with $100 million to $150 million spending over... Four to five years and we're a little bit below halfway through that program. Connected care products remain important and the cybersecurity certification helps us with implementation in hospitals. We talked a lot and reported a lot on the Oticon medical acquisition that we're now focused on the cochlear implant business. Happy to take questions on that, but there's really no new news from our previous updates, but happy to go into that further in Q&A. With that, I'm going to hand over to Stu to talk about the P&L.

Fantastic. Thanks, Steve. Good morning, everybody. You've heard a lot already about the strength of the top-line sales result. I'm not going to add anything more to that. I think that the next-line gross margin, we came in at 75%.