Cochlear Limited

Thank you for standing by and welcome to the Cochlear Limited FY24 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 Mr. Dig Howitt, CEO and President. Please go ahead.

Good morning, everyone. Thank you for joining for our 24 results update. Let's get started. As always, we like to start with our mission. Our mission is the inspiration for all employees at Cutlery, but also at a high level guides our strategy. And the core of our strategy is focused on the middle piece of our mission. We transform the way people understand business. and treat hearing loss. Hearing loss is one of the most prevalent medical conditions out there and one of the least treated. That's our opportunity and that's the core of our strategy. So let's get into having a look at F24. So clearly the highlight of the year for us was helping over 47,000 people here with one or two of our implants and in doing so we created over $8 billion of value for society. The way we think about how we create value is in terms of the overall banner and then the five pillars that we show here. So I'm going to talk about a lifetime of hearing solutions and a healthy and productive society in a little bit more depth in the presentation because they are the core elements of our strategy, our market leadership and our growth strategy. Very importantly, are our people and environmental responsibility and the value. So from a people perspective, we are a technology company, so our people are critical to our know-how, to our customer relationships and to our growth. So we remain very focused on having committed and engaged people. Employee engagement maintained at 80%. And we also are very conscious of providing opportunities for people in the organisation and bringing new people into the organisation as we grow. So we have 1,000 roles filled for people outside Cochlear in the year and 37%, so another 400 roles, are actually filled by people within Cochlear. And to do all that, we have over 43,000 applications. So there are clearly many, many people who want to work for Cochlear. You would have seen just recently an announcement on some executive changes. This is all part of providing broader experience across Cochlear with Richard Brooks stepping down, Anthony Bishop moving to the president of EMEA, and Stu is with us today, moving from CFO to the president of APAC and that being effective all from 1st to of January. And then on environmental responsibility, we are a very small emitter of greenhouse gases, but we've made significant steps, as you can see here, to reduce that small footprint. And we obviously, as others, prepare for the new reporting requirements coming, and part of that is doing the full scope 3 inventory. But significant reductions in scope 1 and 2. Okay, so let's move on to the financial summary. So a strong year for revenue, up to $2.258 billion, 15% growth, 12 in constant currency. I will talk through the elements of that in terms of the cochlear implant services and acoustics in just a few minutes. And a strong profit performance at 387, up 27%. Obviously, currency part of that was at 15% in constant currency. And then with the closure of the Oticon Medical acquisition and the restructuring costs that we've taken up, our statutory profit up 19% in constant currency to 357. But largely, that's the Oticon Medical restructuring that accounts for that gap. But importantly, our margin. So we say that, and we have said consistently, we target 10% revenue growth over the long term. We target a net profit margin of 18% pre-cloud with our investment in cloud over the last few years. In the next couple of years, that'll take about one percentage point off the margin from 18 down to 17. But our long-range outlook and goals there are unchanged. And overall, we remain in a very strong financial position, significant cash on the balance sheet, the opportunity to lift the dividend up 24% for the full year to 410, and I'll come to our guidance at the end of the presentation talking about our outlook more holistically. So if we now dive into each of the elements, so you've got green plants being 59% of revenue, critical driver of overall performance, a core piece, the core piece of our strategy here, particularly driving developed market growth and developed markets. In developed markets, as you know, it's the adults and seniors where the opportunity is. So, you see, we grew 9% across the year. Sales revenue was up 14% in constant currency. In developed markets, which is a significant part of our business, we had 11% volume growth. and a 2% increase in ASP. Stu will talk more to that. But we saw really strong performance across the US, across Western Europe, in part from share grains, but largely from our growth strategy continuing to look like it's working. We've said this over the last couple of results, that the actions we're taking to develop alternative care systems Increased referrals, increased awareness of hearing loss, increased the motivation for treatment. They do look to be working. We see that anecdotally when we talk to clinics and we talk to them about the people coming in, their awareness and the numbers of them. We see backlogs and we also see it through our results with 11% growth in developed markets, seniors growing at 15%. And we just put an example here from the US with our direct-to-consumer data activities contributing more than 30% of surgeries in the US and 70% of our lead generation there coming from digital engagement with seniors. And as part of that, we see increase in professional referrals and part of that more awareness of people coming in as they're moving through the funnel a bit faster than we have seen in the past, which is clearly a good thing. So overall developed markets worked as came out where we expected. We said at the half that we'd seen unusually high growth in children. That moderated in the second half again as we expected it to and we said at the half that we expected children growth to slow to normal. That has happened, but the seniors and adults continue. Our moving markets, we saw 5% growth with a really strong first half and a decline in the second half. In terms of where we finished up for the year, this is one we didn't expect. We did expect the emerging markets to keep going. The key driver of this was in India. So we saw really good growth in China and Brazil, Central and Eastern Europe. But in India, and we think it was related to the election, there was virtually no government tender activity from November through the rest of the year. So what we see in that part of the market is quite a lot of volume at a lower price. So the consequence of not having that volume come through, as you pull down our overall unit number a little bit below our expectations, not a huge impact on the revenue, but did mean our ASP in emerging markets was higher than our expectations. Stu will talk more to those impacts on the ASP that explain the gap between the 14% revenue growth and the 9% in-plant unit growth. On to services, so good growth in services. You can see in the chart there that services, apart from the time around COVID, have had long-run growth. We are, again, we've said at the hearth that we expected upgrade growth to slow. So we've had some very strong halves, and as we start to go a little bit further from the nuclear-safe launch, we see that growth slowing. So that's what we did in the second half, and we expect to see that services growth slow a little bit more, again, as we move later into the cycle. And then going on to acoustics. And acoustics also worked at Canyon where we thought it would for the year at the half. We'd actually gone backwards in the first half, and you can see that in the yellow bar on this slide. We said the reason for that was that we had announced and launched the OSI 300 implant, which is a three-Tesla compatible osteoimplant. With that product launch, with that product announcement, we saw surgeries being held. And in some countries, we also need to re-contract with hospitals when we have a new price and it takes some time to work through the administrative process. So when we have a new product, we need to re-contract and it takes some time to work through that process, and particularly if we're seeking a price rise, which we were in the markets with the OSI 300 because it is a better product. So we saw that dip in the first half, but then a very strong second half with 15% constant currency growth, volume growth in OSI over the year of 30%, and we continue to... Expand the opportunity for Ossia by adding countries, so France, Sweden, an example of a country where we now have reimbursement for Ossia. We didn't a year ago. The age of implantation in the US has moved just right late in the half from 12 to 5, again, which expands the market. We talked for a while about saying that acoustics implant opportunity is... Similar to the crowdfunding opportunity, very, very large. It's an underserved area of hearing loss. We do think that Osseo is the right product to close that gap between the uptake and the opportunity. What we've seen with the uptake of Osseo over the last few years is this increasing confidence of that opportunity and that we do have the right product to realise it. So that's a quick look through each of the three segments. Now I'm going to jump onto our strategy, and I'm going to jump over our strategy here because we talk about it consistently. It is unchanged. It has been unchanged for a number of years. And what we do do each year is continue to refine our learning and therefore our focus, particularly in these first two of the lifetime-affirming solutions about retaining our market leadership, and growing the hearing implant market. So under retaining market leadership, we continue to have more than 60% global market share. That's underpinned by our very strong technology portfolio and the quality of people and service that we offer around the world. We continue to make a significant investment in R&D, as you'd expect, 4% of sales, $270 million. And we made really good progress in the last year on meeting development milestones across a whole range of our development areas. And we remain excited by the opportunity we have for our products in the future as well as the strength of our portfolio now. Just one example of an area in which we've made progress in the last year is the development of a drug-eluting electrode. We did get some trial data where that has demonstrated a substantial impedance reduction from a drug-device combination. What that indicates is, what impedance indicates is reduced inflammation, lower fibrosis, and therefore less trauma and potentially healthier cochlear over people's lifetime, which possibly could be a path to hearing preservation in the future. Now, we don't know those things yet, the point of developing these products and getting the evidences to do that. And we certainly do have, from history, a small number of implants we did back 10 years ago with the drug-alerting electrodes that we've seen sustained reductions in impedances over that 10-year period. And that's a really important outcome for us. So very pleased with our position and progress on our product development. and a strong pipeline approach to come to build on the strength of the position that we have now. And then on to the growing hearing implant market, and here I want to talk particularly about the adults and seniors' work there. There, we're looking to build out standards of care, which is to make sure that adults within, adult and seniors with hearing indications for cochlear implants are being referred routinely. to implant clinics to be assessed. And given the market penetration is under 5%, clearly that is not happening routinely in any country in the world at the moment. And our goal is to make progress step by step towards that. And our results are giving us good confidence that the actions we are taking are having an impact. But the parts that are awareness, The living guidelines are part of getting evidence-based guidelines that can be adopted as clinical practice in countries around the world to get that more consistent referral. So that's getting the path clear. An important part of that is the motivation, is making it important to treat hearing loss. And the links between healthy hearing and healthy aging and the importance of healthy hearing to healthy aging are growing. in a whole range of areas, but particularly cognition. And there were a few points on cognition just from the last year. One is just recently the Lancet updated their analysis of the research into the modifiable causes of dementia. Hearing loss remained the number one modifiable cause of dementia from their analysis of the literature. We know about the ACHIEVE study from Frank Lynn, which showed that people at higher risk of dementia that were in hearing aids over three years reduced their cognitive decline by 48% compared to an equivalent group of people with hearing loss that didn't have their hearing treated. And then a study that will be published later this year in Australia analysing the cognition of people with cochlear implants showing that after four and a half years of wearing cochlear implants for older people, executive function and working memory had improved in that group compared to another cohort. That, again, strengthens the more direct evidence of the benefits of cochlear implants. So there's a link between cognition, hearing loss, and treating hearing loss through cochlear Slow cognitive decline, or even in this case, improved cognition are critical around, as are the broader links for healthy aging, providing that motivation, and that motivation not only for the individual, but also about healthcare systems funding cochlear implants. So core pieces of our strategy that we continue to execute well on, but still clearly a long way to go. Okay, I'm going to skip over these next couple of slides because I've already talked about people. There's a lot more information on our annual report on this as well and again on environmental responsibility and our actions there. I've talked about them up front and our sustainability report forms part of our annual report so you can read more there as well. And then on the value, excuse me, in a minute we'll just talk about this in... But just two points I wanted to make from this slide. One is we make good progress on our cloud system transformation. And this isn't just replacing our core systems. It's actually about standardizing our processes, our data architecture across the world so that we're able to be more agile, we're able to move faster, we have better and more insightful data on the business. And we are setting ourselves up to scale as we grow to become a much larger business as we make progress on executing our growth strategy. So in the year, we deployed a new human capital management system, a new customer relationship system. Both of those have been successfully implemented. rolled out, and now we have the opportunity to start getting benefits from them, and that program continues as we go on to replace core manufacturing and finance systems with more modern and more flexible systems and getting that process and data standardization as well. And we closed the Anticon Medical CI acquisition. There's a picture here of the team in Valerius in France. Some great... popular implant knowledge that we've picked up with this team, many long-standing CI engineers involved in product development, which is a great boost for us, as well as the 20,000 medical customers that we will provide support throughout their lifetime. With that, I'll hand over to Hugh to talk in more detail on the financial outcomes. Thanks, Dig. Morning, everybody. Good to be with you. Dig's already spoken. On the P&L, Dig's already spoken to the 12% constant currency revenue growth. I won't add anything to that. I'll take you through gross margin. So it's 75%. It's slightly better than we're expecting, and it's where we want it to be long-term. That's certainly where we're targeting long-term. It's really a combination of some ASPs and pricing increases offsetting the impact of some stock write-offs and some headwinds and ramp-up in Chengdu. If we start with the ASP increases, it was actually up 5% in constant currency. That's abnormally high for us. Two of that five was driven by real price increases in developed markets, places like the US and others, and that's off the back of N8 and taking price increases where we can. Obviously, there's a number of markets where we're a price taker, so we don't actually have an influence price. And then the balance of that 5% constant currency impact was significant next shift from lower-priced tender volume in emerging markets to higher-priced private pay volume. That was on ASP. On stock, we took a write-down of about $22 million for the full year. But again, that's abnormally high for us. The bulk of that was in half-one, $16 million half-one. And that was off the back of obsoleting the Freedom Series implant and sound processor. That product launched in 2005. It's surfaced very, very well. As you probably know, we talk about a lot on these calls, we tend to prefer to hold slightly more stock and components to make sure that we, A, don't miss a sale, and B, we're buffered from any sort of demand, volatility, and we've always got... pieces ready to go to keep people on the air. The downside of that, the upside is we don't miss sales because of supply. The downside is when we do obsolete a generation, we need to write some stuff off. So that was what went through this year. And Chengdu has remained, as expected, about a half a percent headwind for us as we ramp up production there. Pleasingly, we are now selling sound processors that are manufactured in Chengdu. And we remain confident that we'll get approval to start selling implants that we are currently manufacturing there today. We'll get approval to sell them come December this year as well. On to selling marketing in general. Sorry, yeah, same slide, thanks. That's up 10%. That's up continuing to invest. to really underpin future growth. And so that's things like investing in standard of care, the coach child, the achieved child, Frank Linsworth, those kind of things to try and establish that, try and make that genuine standard of care for treating severe to profound hearing loss. R&D, 12% up and very much where we want to be, also 12% of revenue for the year. Again, similar for the 75% gross margin and top line revenue. Long-term, we want R&D to see about 12% of revenue. You'll note the cloud expense was slightly lower this year, down from 38 down to 30. We're about 90 million through our 100 to 150 program. And so our plan at the moment is to have somewhere between 30 to 38 for the next couple of years. So it's in the range you would expect. Two more things on this page. The net margin you'll see pre-cloud, that's the one that they've mentioned we try and sort of manage to, and we want to hold that at 18%. It's actually 18.1 for the year. It looks like it's improving about a percent from last year, but really the bulk of that impact is currency. When you wash out currency, previous year would have been 18 if we re-baselined on the same currency as well. And lastly, that one-off item 29.8, The vast bulk of that, 28 mil of that, is the integration costs to do with acquiring out-of-con medical business. The extra 1.8 is just very small changes in valuations in some of the innovation fund investments that we have. So if I take you to the balance sheet, so working capital up 84%. As you'd expect, as we're selling more and very good trading volume, receivables and payables are growing nicely, nothing concerning there. Inventories, again, we are taking a deliberate choice to hold more component stock and also increase our finished goods stock so we're buffered from demand spikes. In property planning equipment, you see $28 million going in there. The bulk of that went into Lane Cove in F24. We're about two-thirds of the way through a significant site refurbishment. The total footprint of the building is not getting any bigger, but the footprint of the clean room there, the real manufacturing engine of that building is getting materially bigger and will continue to do that across multiple sites over the next couple of years. And you'll note the net cash, the decreasing net cash of 41.9 mil, 43 mil, but a reminder that we did spend 43 mil on the share buyback in at 24. If you go to cash, it's a very similar story from the balance sheet there. Again, great operating cash flow off the back of strong trading. Camping broadly in line with last year and where we expected it to be. And again, 28 mil of that going into 2021. We do think that number's going to tick up a bit in the next couple of years as we look at making more capacity enhancements and expansions across our network. And again, just a reminder, the 43 mil going out in the share buyback. And with that, I'm going to hand you back to Dick. Thank you, Hugh. And onto the outlook before we then move over to questions. To give context for our outlook is that we are targeting, continue to tell you over the long run, 10% sales revenue growth, 18% margin pre-cloud, as Stu said, and for the next couple of years we've got that cloud investments which will bring our margin down to nearer 17% when we include that. We're targeting to get over 50,000 people hearing this year up from the 47. Again, there's the one or two implant piece to that. And that gives us a net profit guidance range of 410 to 430, which is a 6% to 11% increase. And a little bit of context for that, if we look back over the last few years, our growth rates have exceeded, our revenue growth rates have exceeded 10%. And what that's meant is that we have had the opportunity to reinvest in The extra in either more R&D, if we kept the R&D at 12%, or particularly opportunity to drive growth. And given the opportunity, and we've said over a long period of time, it makes sense for us to continue to invest while we can sensibly see how to do that and have the capacity to do it because of a huge opportunity. And what this guidance range gives us with the context of those targets at the top is the opportunity to to continue to invest and make sure that we don't starve our future growth in a year so that we keep investing. And then a little bit more detail on the pregnancy cut for implants is the key part of our webinar. We've seen very good growth over the last few years in developed countries based on higher awareness and increasing referrals. We expect that to continue. We do see some evidence of growing waiting lists for audiological evaluation or sometimes for surgery. We talked about capacity constraints in audiology for some time and we continue to work hard both on the technology side with Connect Care but also on clinical practice with a number of clinics around the world to make sure that we streamline the do what we can and what the whole therapy area does to streamline those post-surgical appointments so that there is capacity up front for further assessment and enabling more people to get access to a significant lifting in hearing outcomes that they get from a cochlear or an acoustic implant. We do expect services growth to slow. We said that at the half, and we saw it through at half. We expect services to slow as we get a little bit further away from that Nucleus 8 launch. And Ossia, we have high expectations for growth of Ossia with the OSI 300 out there with the expanded market access that we have, and we continue to work across a range of countries where we don't yet have Ossia, and particularly across the Asia-Pacific region, where there is significant opportunity. And as we've said, taking a long-term approach in terms of our pricing and our market access work to get the right conditions for long-term work in acoustics. We expect the gross margin to come up by half a percent in the year, and that's with Chengdu ramping up through the year. R&D as normal at 12%. Stu talked about the cloud computing. The currency has been bouncing around a bit recently, but this guidance has given it 66 and 61. Obviously, even with our hedging, that currency does move our revenue and our net profit around. And that we are restarting the share buyback that we started about 18 months ago. Again, it's the same conditions, long-run share buyback. to bring our cash down slowly and we see this as a really good way to increase value to our long-term shareholders by doing a gradual and long-term share buyback. Okay, so with that, we will turn over to questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you're using a speakerphone, please pick up the handset to ask your question. The first question today comes from Andrew Goodsell from MST. Please go ahead.