Cochlear Limited

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 Mr Dick Howitt, CEO and President. Please go ahead.

Thank you all for joining and good morning and good to have you with us. We'll get underway. I will present and then stew and then open up for questions after that. So let's get started. And we always like to start with our mission. It not only reminds us of what we're doing and why we're doing, but it's actually at a higher level is a guide to our strategy, looking at the need to raise awareness and change how hearing loss is treated and ensuring that we continue to innovate and support our customers throughout their lifetimes. Okay, so let's jump into the results. Obviously, it was a good first half result, particularly driven by the strength of cochlear implant units. They were obviously higher than we expected with 14%. Growth and services grew strongly as we expected close to the launch of Nucleus 8. I think underlying the result is further indications that our long-term strategy of raising awareness And getting increasing referrals, particularly for older people, is having some impact. We continue to want to see this impact run for longer. But again, in this result, there are some indicators that that strategy is having an impact on overall industry growth. Essentially, it's a strong top line that carried through to our net profit, up 35% in reported terms to $192 million. obviously a little bit lower growth in constant currency. And importantly, our pre-cloud margin at 18%, which is in line with our long-term goal, and 17% once we include those cloud expenses. And importantly, with those investment in cloud computing and broader work that we're doing across the organisation on operating processes and our culture, These are all aimed at underpinning our future growth and building the foundations of the company for us to be a bigger company and to be able to support ongoing growth. So on that front, in the last half, we went live with two major systems, our human capital management system and our commercial system, so CRM and marketing. So important milestones there. in the progress of that investment in cloud computing and the underpinning of our long-run growth. And we continue to be in a very strong position financially with $485 million of cash, good operating cash flows, interim dividend up 29% to $2 and broadly maintaining our 70% payout ratio. And you would have seen on the 8th of February that we've upgraded our profit guidance for the year. And I'll come back to that at the end of the presentation. But now let's just step through each of the areas and starting with copper implants, which is 58, 59% of our business and clearly critical to our growth. And they're a strong half. So as I said, up 14% in volume terms, sales revenue up 18% in constant currency. So work through that to get about a 3% ASP increase in constant currency. Stu will talk more to what sits under that 3% and why the difference between that 3% constant currency and the headline ASP growth, which was higher than that. I will talk to the volume. So in developed markets, we saw growth of around 15%, which again was stronger than we had expected for the half. And we saw growth across all segments, children, adults, and seniors. And if we look at seniors, and that's obviously where seniors and adults is where we are most focused in developed markets. As we have talked about many times, there is huge clinical need for cochlear implants, that there are many, many people with severe to profound hearing loss who are using high-powered hearing aids or given up on hearing aids who would clearly benefit from a cochlear implant. And our long-run strategy is aimed at raising awareness. It's building the referral paths, ensuring the funding is there, and all of that working towards standard of care. What we've seen in the last half and over the last couple of years now with the growth in adults and seniors. We've certainly seen an increase in awareness. There is growing awareness and understanding of the links between cognition and hearing loss and the ACHIEVE study, which came out in July last year, which demonstrated for a cohort of people from across the population that those with, all the people having hearing loss, two arms in the study, One of the arms, when people got hearing aids, their cognition declined at a slower rate than the equivalent cohort whose hearing loss was untreated. That study continues. And obviously across the whole study, there was no difference, but across the cohort that was representative of the broader population, there was a significant difference. But studies like that are raising awareness of the medical importance of treating hearing loss as people age. And when we look specifically at our programs, at our DTC work, our work to get referrals from the hurling aid channels, we are seeing that the number of surgeries we're getting from those is growing faster than our overall growth rate in this segment, which is an indicator those programs are working and that they are contributing to lift overall industry growth rate. We want to see this continue for a longer time frame than we have done so far but certainly over the last few years we've seen increased benefit of those programs and obviously we will continue to invest in them. In the last half in developed markets we also saw growth in children which is unusual and remembering that children being a smaller part of the proportion of surgeries in developed markets it doesn't take too many things to lead to an uplifting growth but I'll just talk to the Things we saw there, which contributed to growth in children, which we haven't seen in a little while. The first of those is changing indications. A few years ago, we saw we got approval for the age of implantation in the US to shift from 12 months to nine months. We know when we change indications, it can take some time to flow through. Certainly one of the things we've seen in the last half is we think a pull forward or people moving to that lower age. So we've seen some surgeries happening at the sort of normal time, 12 months or just after, and we've seen more happening at nine months. So indicates a little bit of a pull forward and a double up there. We've seen some specific instances where there's just been audiology bottlenecks that have moved across a small number of clinics, but quite significant impact on surgeries of audiology bottlenecks going and left in surgeries. And the other thing is we believe we want some share in the paediatric segment, largely on the back of the reliability of our implants, which is clearly very, very high and proven over a very long period of time. And then in emerging markets, we continue to see good growth and good growth there across our major markets, certainly China and India. Central and Eastern Europe and the Middle East also grew well in the last half. And again, we see continuing long run growth there. On to upgrades, strong results, strong growth in services. We expected that because of the timing around the Nucleus 8 launch, which it launched late in the comparable half. So we expect strong growth and we saw strong growth across developed markets. And that growth in developed markets is largely a result of just the installed base growing. we still have more work to do to try to lift the penetration. That is the proportion of people who are eligible for an upgrade in developed markets actually getting an upgrade in the year in which they become eligible. It's the underlying growth in the store price, which is the driver. And an indicator of that is if you look at the Nucleus 8 launch and Nucleus 7 launch, and you look at the last two halves, we've seen significant services revenue growths both in dollars and obviously, sorry, in percentage and significant in absolute terms. If you go back to the second half of financial 18 and the first half of 19, they're the equivalent halves for Nucleus 7. Again, good growth, but in absolute terms, not at the same scale we're seeing in Nucleus 8. And that difference is the growth in the installed base rather than significant changes in penetration. Where we are seeing a lift in penetration is in emerging markets. So we've seen faster growth in emerging markets of upgrades more recently. And we think that there's, again, a growing wealth, which we said will be a driver in emerging markets, a larger population of people implanted for longer periods of time and therefore ready for upgrades or needing upgrades. And again, we expect that to continue again as those markets grow and as wealth grows in those markets over time. And then on to acoustics. So acoustics didn't grow in the half, down 9% in constant currency, 4% in reported. And as we talked about going into the year, there's two things, two factors at work here. There's the Baja business and the Ossia business. Now within Baja, we have new Baja sales and we have upgrades and they all go through this acoustics line. We anticipated that the growth in Baja 6 Max upgrades would slow this half because the product's been out there for a few years, penetration's got higher, there are fewer people in the queue, and that's certainly what we saw. So we saw lower upgrades for Baja 6 Max. With Ossia, we continue to see underlying growth. Now, Ossia didn't grow quite as fast as we anticipated in the last half. And the reason for that is the Ossia 3 launch in the US. So we got FDA approval. We then, it was a few months between when we got approval and when we were shipping the product. Part of that's us being ready. Part of that is with the new product, we often have to reset contracts with hospitals before we can supply. And with that awareness, a number of surgeons held patients that they had for Ossia until they had the Ossia 3 in their operating theatres. So what we saw was a very strong growth, a very strong month in December for Ossia as that contracting came in place. And we expect that to continue through the second half. And with Aussie, as we've talked about, this is a long-run growth plan. We continue to work country by country to both get regulatory approval and to get appropriate pricing, and the appropriate pricing has to be a premium to the Baja pricing because of the improved outcomes and functionality. It does take time to convince payers of that, so we continue to add countries, but we still have more work to do over time to increase the geographic expansion of ICO. But where we do have the product in market, we continue to see outstanding feedback from surgeons and from customers. We remain confident of the long-run growth opportunity. Okay, and with that, I'm going to hand over to Stuart or through the P&L in the ballot sheet.

Awesome. Thanks, Doug. And morning, everybody. You've heard a lot about the drivers of that 20% constant currency revenue growth year on year. The one area there where I will just double click is on ASP. Elsewhere in the materials, you'll see that headline ASP growth was 11%. That's abnormally high for us. A good amount of that is currency. So in constant currency terms, it's 7% growth. That's still abnormally high. But of that, you need to back out. the deferred revenue impact from December 22. So if you've cast your mind back to that time, we had announced innate launch, but we hadn't actually launched the product in America yet. And when we're in that window, a typical mode is when a person's implanted, they get the system and we book the system as revenue at that time. When we're in that funny window of announced but not launched, particularly in the U.S., the person would get surgery, we'd record the revenue for the implant, but we then defer the revenue for the processor until they come back and swap out. They get an N7 on when they get switched on and they'll come back and switch that out for an N8 and we record the revenue then. So that led us to having about a 20 mil larger than normal deferred revenue balance at the end of December 22. When you back that out for this year for the ASP calc, the actual ASP growth was only 3%. The bulk of that is country mix where we're selling more in places where the price is slightly higher. And we were able to get modest price increases in a couple of countries off the back of N8 as well. If we look at gross margin, we're at 74, down 1% from this time last year. Obviously the ASP tailwind is helping there. The couple of headwinds of note, we'd signaled about a half a percent gross margin impact from Chengdu. We are seeing that and we expect to for the rest of the year. And that effect will be there for a couple more years to come. And the other thing is we took a reasonably significant write-down of inventory. The bulk of that, so 15.6 million, the bulk of that was to do with freedom implants and accessories and components and spares. That's a product that we first sold in 2005. And as many of you will know, the way we tend to operate is because we're low volume, high value, we'd rather have more stock on hand than we need and never risk running out. And I guess a natural function of that is when the product gets towards end of life, we are likely to finish with slightly more than we need. And that's what drove that. Selling marketing in general, we're up 16%. That's absolutely us continuing to put money into activities that we are most confident are going to drive market growth. So that's about raising awareness, improving access and creating that standard of care for severe to profound hearing loss. R&D, we continue to target 12% of revenue as the set point there. We got to 11 in the first half and really the delta there was more to do with the speed of the revenue growth than anything. Not much to see on admin expenses. I will just touch briefly on cloud. We spent just shy of 17 million in the first half. That's pretty much exactly half of what we intend to spend for the full year. And as a reminder, we're about three years in now to that sort of four to five year journey of 100 to 150 mil. of rethinking the systems and processes that underlie the business. And we're confident with how we're tracking in the year and confident tracking overall. We do expect we'll be towards the top end of that 100 to 150 range. Lastly, on the P&L, it's on the underlying impact margin. It's pretty much where we wanted it to be, 18% excluding cloud, 17% pre-cloud. That's in reported. When you do the constant currency, it's pretty much flat on last year. So if we move to the balance sheet, not much to see in working capital. We're up 24 mil. That's almost entirely timing related due to payments and receivables timings. The 32.9 reduction in investments and other financial assets. That's worth a brief comment. The bulk of that is market to market with Niksoa, whose share price dropped quite a lot towards the back end of calendar 23. It's increased a lot since then, but we obviously do that as a December 31 price and a decrease in a company called SIA. That's an epilepsy monitoring company we have an investment in. The biggest move within the balance sheet is the net liability improvement of 94 million. The biggest driver of that was about $40 million of benefits incentive payments that were earned in 23 driven by the strong performance in 23 and paid in the first half of 24. We also saw some increases in prepayments and some nice increases in net receivables to drive that overall increase. And then lastly, the movement in net cash we're remembering we paid a bigger dividend and we paid 43 million out in the first half on the shared buyback. And I'll talk a bit more about that later, which takes us to cashflow. Operating cashflow, 157 up 68 million, very much reflecting the underlying operating performance in the business, which is great to see. CapEx, we're flat. That's a representation of Spending less in Chengdu as we've pretty much finished the build there and that site's up and running. And pleasingly, we've started selling product out of Chengdu now. We're selling sound processors that are manufactured there. We anticipate getting approval to sell implants out of manufacturing in Chengdu by December. As that CapEx is ramped down, we have ramped up investment to expand capacity at Lane Cove. And that's why that spend is flat year on year. And then lastly, I just want to touch on the buyback. As I mentioned, we spent $43.5 million. If you remember this time last year, we talked about initiating a multi-year share buyback, which we felt was the best way to return excess cash to shareholders and to do that in a way that most rewards long-term buy and hold shareholders. And we targeted $75 million for the 12 months as year one of that program. We spent 73 and of that 43 in the first half of 24. We still believe that's the right thing to do and the best way to return excess cash to long-term bondholders, shareholders. However, the big delta today versus this time a year ago is just how much interest we're earning on our cash holdings. We're earning 5% now on those balances. And with interest rates that high, we think it's prudent to pause that buyback for now. We'll continue to monitor it and we'll look to reinstate it if and when those rates drop. And with that, I'll hand you back to Dick. Thanks, Hugh.