Cochlear Limited

by and welcome to the Cochlear Limited Half Year 25 Result 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 would like to ask a question you'll need to press the star key followed by the number 1 on your telephone keypad. I'd now like to hand the conference over to Mr. Dick Howitt, CEO and President. Please go ahead.

Good morning everyone and thanks for joining for our Half Year Results presentation. So here with me today have Stu Sayers and Sarah Tom. And Stu, who was our CFO until the end of December and is now President of Asia Pacific and Latin America, will talk about the result because it's the result for the last half. Sarah, as our new CFO, is here with me as well. Okay, so thanks for joining. Let's get underway. And we have our mission up front because... That does guide all that we do at Cochlear and it also sets out our longer run ambition and underpins our long-term strategy for growth. So looking back at the first half of this year, overall we were pretty happy with the outcome but clearly as you look into it, there's some mixed results in there. So strong cochlear implant revenue growth at 13%, acoustics revenue very strong at 22%, and services, which we'll obviously talk more about, declining by 12%, but all of that giving us a net sales increase of 6% in constant currency. Our underlying net profit moved pretty much in line with sales on a reported basis, with our profit up 7% to $206 million. Gross margin that Stu will talk more about in line with our targets and our operating expenses up 10%, so a bit faster than sales and that's not unusual for us early in the year as we continue to invest into R&D and very much into driving growth. Balance sheet remains strong with $383 million in cash. Now, that's come down a bit as we've been building up inventory ahead of new product launches, and Stu can talk a bit more to that. And the dividend up 8% to $215 and just short of our 70% payout ratio. And we're maintaining our guidance range, but do expect to come in at the lower end of that range. And two contributors, which we'll talk more to, the lower services revenue and outlook for the year, and we've increased our cloud spending in this year as we move into the final phase of our cloud transition. So let's go into these in a bit more detail. So cochlear implants first up. So sales revenue up 13% and unit growth of 6%. Now developer 5%. Development market's going 6%. And remember here we had a 15% growth in the first half of 24. We saw a good growth across the US and Asia Pacific in our developed markets, but a lower rate of growth in Western Europe. Importantly, adults and seniors grew at 10% for the half, whereas our children declined modestly. And we're actually pretty pleased with that outcome for children because if you remember back to the first half of 24, we had strong growth, actually had double-digit growth for children, which we said was a one-off. We thought some share gains, and in the US, with the FDA changing its indications from 12 months to nine months, we had a pull forward of younger children getting surgeries earlier. So we were pleased to see that actually, rather than settling to a lower level, actually that children have started hasn't grown it that way and stayed pretty strong. And I think it's a good indication of our competitive position in children in paediatrics. But we do continue to work on the core of this, obviously, our long-run strategy for growth in adults and seniors, which is by far the biggest opportunity that we have, and we continue to invest in our strategy for growth. We continue to see good adult referral rates And we do continue to see some of the bottlenecks in a few places, as we've talked about, particularly at the full year for 24, particularly around audiology. But equally, we're seeing increasing engagement and uplift of more efficient paths for audiology, fewer appointments in the first year. We still have a long way to go, but it is pleasing to see increasing adoption of fewer appointments based on the evidence showing that outcomes are equally as good. Now, in emerging markets, this was a bit behind where we had hoped to be in the first half, but recognising that emerging markets always has some volatility to it. We said at the full year that there were A number of markets, including India, where tenders hadn't come out at the rate that we had seen in the past or expected. We did expect those to come back through this year. We haven't seen as much of that in the first half. But the demand is clearly there and the governments have funded before, so we do expect that to come back. And we did see a lift, you know, that gap between the revenue and the unit growth rate. largely driven out of emerging markets and it's a reflection of lower tender volumes, a positive country mix, obviously countries have different prices and some stronger growth rates in private pay segments and the premium segments in China and in India. So certainly pleasing to see the the growth in those premium segments and that's supported stronger growth in cochlear implant revenue overall. Now if we move on to services and to our upgrade business, so clearly down 12%, that wasn't where we expected. We did expect it to come off given the 29% growth in the equivalent half last year. We saw that growth come off in the second half of 24. We didn't expect it to come off by as much as it did. Now, there's a few factors underneath that. One of the significant ones that we are seeing is this cost of living pressures, particularly in the US, that we are seeing a higher rate of cancellations or inquiries that don't follow through. when people see they're out of pocket. We were actually asked about this at the half, at the full year, and then we said we were monitoring it, but we hadn't seen an impact from inflation and higher cost of living in this half. We have seen, particularly in the US, an impact of inflation, higher cost of living, pressures of people deferring upgrades when they see the co-pay. Further on that, and part of the reason I'll do that is because Nucleus 7 is such a good product. Nucleus 8 is a better product than people who switch, recognising the benefit that we have these two pieces of Nucleus 7 being very strong in cost of living pressures, having people defer upgrades. In this area we do, and as part of our cloud transformation, putting a new CRM and implementing a new cloud-based marketing automation system, which will enable us to much better segment our customer base and be able to therefore better target people on upgrades. Because while there's barriers around co-pays, one of the biggest barriers to upgrades still is awareness of eligibility. And We have made good progress but there is more progress for us to make in actually being able to segment eligibility and where we are able to make people aware of their eligibility and the benefits of new products and we're building the platforms to enable us to do that. So let's move on now from services and going on to acoustics and a very strong half in acoustics. recognising that it was a little bit weaker in the first half of last year because we introduced the OSI 300 in that half and we saw some surgeries held in the US which led to a 50% increase in surgeries half on half for the OSI, for the Osseo system. Baha continues to perform well, but Ossia is absolutely the driver of growth, and as we have talked about for the last few years here, we see a huge opportunity, long-run opportunity for growth in acoustic implants. With Ossia, we clearly have the right product to do it, delivering great power output in high frequencies, simple to implant, very good MRI compatibility. and extremely good feedback from virtually all of our OSSEA recipients. So we've got the right product. We've got a huge opportunity. We continue to expand into new countries. So we are reflecting the quality of the product by asking for a higher price, which is appropriate, and that means it does take time for us to roll out country by country. Having added France and Italy recently and a number of emerging markets, we see good growth in those as we roll out. But lots more opportunity to come in acoustics and very confident of our product portfolio there in that competitive position that we hold and our activity to drive growth. So with that, I will now hand over to Stu to talk through the P&L and the balance sheet and I'll come back to talk about the outlook.

Thanks, Dick. Morning, all. So you've heard Dick talk to the sales line, that 6% change year-on-year constant currency. I won't add further to that. If you look at gross margin, that's 75%. That's slightly better than we had expected, and that's really the tailwind of some higher ASPs in emerging markets, offsetting what we knew was coming in terms of a little bit of a headwind Whereas Chengdu is still very much in ramp-up stage, that Chengdu site, we are manufacturing and selling sound processors out of that site now. We've just got approval to manufacture and sell implants out of that site. They come through in December. So while that plant is in ramp-up, and that'll be for the next year or two, we'll still see a slight headwind there. We are expecting to be at about 74.5% at the full year. Good growth in the sales marketing general line, and that's really us continuing to invest in medium to long-term growth. So that's standard of care, that's direct-to-candidate activity, really all of the activity around expanding access and awareness, and we continue to see good progress and good wins in that space. R&D, as we often say, we aim to keep that at 12% of revenue, and it is there again for the half. It's up slightly more than that year on year, and that's really just a function of sort of timing more than anything, being slightly below that 12% mark and slightly fractionally above it at the end of the half. Again, 12% of revenue is the set point we're aiming for there. Dick mentioned the cloud investment. H1 at 11.7 was slightly lower. Again, that's a timing thing. We are... accelerating that program. We're going to be spending more in half, too. We still expect to be at around 40 mil for the full year, and I think we'll talk to more of that acceleration into FY26 as well. And lastly, underlying profit, both pre- and post-cloud, given the slightly smaller cloud spend, 18%, and again, that's that set point we're aiming for. So on to the balance sheet. A key change here is a pretty significant move in inventory. You can see that 69.5 mil increase in H1 in inventories, driving the 97 mil change in working capital. That's really a function of two things. The biggest one, a build-up of inventory ahead of some major new product launches coming later in the year. And then also, again, some deliberate choices to hold higher levels of safety stock on a And again, that just makes us more confident that there's no chance we ever run out of stock. That stock level, as I said, it's ahead of new product launches. We do expect it to stay at those elevated levels through the end of the financial year, and it should start to moderate towards the end of calendar 25. Property plan and equipment up 18.6%. That's continuing investment in the Lane Cove site capacity expansion and the same in Malaysia in our KL operations. And the net cash line coming down 130, really that's a function of the inventory build and the higher inventory line. Obviously, we're still doing the share buyback and remembering that H1 is always a bit heavier on cash use versus H2, because that's also where the STI payments for the prior year come out. And then lastly, on to cash flow. Operating cash flow is down 47. Again, that's a function of those inventory movements. We did get stronger cash coming in through the underlying business. CapEx, very much in line with last year and where we expected. And as previously mentioned, where the 19 mil on share buyback, that's the amount we've spent since June, and that program is set to continue. And with that, I'll hand you back to Dick.