Cochlear Limited

Thank you for standing by and welcome to the Cochlear Limited HY26 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 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.

Hi everyone, thanks for joining us today for our first half results announcement. So let me let me get started and as I said we'll do a presentation up front and then open for questions. We always do like to start with our mission and particularly this half where we've been very focused on the launch of Nexa, which is sort of the core of our mission of getting people here and be heard and sort of highlights of being able to talk to professionals about their excitement around the technology and Nexa and what that brings for the future. And to be able to meet a bunch of recipients who have been excited by the technology and be able to benefit from features like SmartSync. Let's get into the results. So as I said, this year, this half is really all about NEXA. And it's certainly a big undertaking to launch NEXA. And I'll explain a bit more about what's involved in just a few minutes. And overall, we saw a very successful launch that really does set us up for the second half and certainly sets us up for the future. And in doing that, and I'll go into some of the detail, we saw price increases and we did see some delays in those price increases, some delays in sales. And that's really what's brought us short of where we expected to be in the first half, which led to the sales revenue being down 2% in constant currency and the underlying net profit of $195 million. So what that means for the outlook, and I'll talk more about the outlook a little bit later, but at a high level, We now think we'll come in at the lower end of our original guidance range before we adjust for the recent rise in the Australian dollar. And the reason for that being at the lower end rather than just in the range more broadly is the shortfall in the first half. We don't see that we will catch up in the second half. And then on to FX, obviously, Australian dollar has been on quite a run just over the last few weeks. If it stays about where it is today, that's about a 30 million profit hit through the half. And you'll see later on, we've provided a bit more detail because it has been moving around so that if it does continue to move around, you can have a chance of estimating what that impact will be. Let's go on to talk through the segments. And I want to spend a bit of time on cochlear implants, obviously with the Nexa launch. Because the key with a launch like this is a significant exercise right across the company. It's a change to our manufacturing process, obviously change to the distribution. It also involves new software in all of the clinics around the world. that are using Nexus. So we think about just the logistics of that launch. It's a significant effort across the organisation and it does take time. And so we said at the start of the year that our performance, our revenue and our profit would be weighted to the second half and it still is. And so if you think a bit more about Nexus, first of all, as we know, we had approvals in Western Europe and parts of Asia Pacific at the start of the half. So we're able to start shipping into a number of countries in Western Europe and Australia from early in the half. We did then have to install software. Some of that went quickly, but for instance, in the NHS, our new software got stuck in a queue in the NHS. So it was actually some months before we were shipping Nexa into the UK and a half. In the US, we got FDA approval in June, Early July, we started shipping in September two hospitals that had recontracted with us for Nexa. So again, we've really, in the US, we've got four months of Nexa sales in that first half for the hospitals that contracted up front, and some of them took longer, which meant even less impact of Nexa in that half. We did, as we went into this, we said at the start of the year, we would seek price increases in countries where the reimbursement system enables a price increase for new technology. In most of the countries where that's the case, that does mean contracting hospital by hospital. So that's the case in Germany, it's the case in the US. And in going through that, we have been able to achieve the price increases that we set out to do. albeit take a bit longer in some instances. And obviously when we're negotiating prices, it's an opportunity for our competitors to compete with us quite quite aggressively and we did we expected that to happen we saw that happen we saw a number of instances where when we were pushing for price our competitors were offering discounts for bulk purchases in those hospitals and that enables them to get a bit of stock on the shelf so certainly a few cases where we lost a little bit of market share going through the contracting process That's a bit of a description of what happened. Where did we end up? And where did we end up is important for the confidence it gives us looking forward. And so the result of all that is by December, over 80% of our developed market sales were in NEXA. So that's obviously a very significant shift. We did see in November and December across key markets a 10% lift, those key developed markets, a 10% lift in our cochlear implant units compared to the prior year. And so that's a sort of a good indicator of the impact that Nexa had once it was installed. And we did get a low single digit price increase. So we got the price increases we sought in the markets that we went for, ended up with a low single digit impact. And obviously not much of an impact for that in the first half, given the timing. But as a result, we ended up with just a low growth in overall CI units. Now we do know, while we've been very focused on Nexa, that the key to our success is driving growth in the cochlear implant market. So we have continued to execute our growth strategies and we continue to launch new growth strategy. I'll talk a little bit more about that and push more resource into driving growth, particularly in the adults and seniors. But one example of that is we're launching right now some new messaging on cognition using the latest results from independent studies showing the links between cognition and hearing loss, the benefits to cognition from learning using cochlear implants and starting to use that to, again, to raise awareness of the need to treat. So move on then to look at emerging markets. Emerging markets, we said going into the year that we expect to see volume growth, but at lower price, but in the lower tiers. And that was particularly because of the China volume-based pricing. which came in in March last year. So we had the full six months. And we also had that against a comparable half where we had noted higher than normal premium tier sales in emerging markets. So we saw very good volume growth in the emerging markets, but it did lead to lower overall revenue. And that's directly as a result of the volume-based pricing in China. That said, we did execute very well in China. We're holding a strong market share. We're seeing strong growth, and the team there have managed that transition very well. So overall in cochlear implants for the half, so the sales down 2% in constant currency, a little bit up in developed, a bit down in emerging. Certainly from my perspective, very pleased with how we executed on the NEXA launch, pleased with the execution through emerging markets. And both of those things set us up well for a strong second half in cochlear implant units. Okay, let's move on to services. Our services was in line with our expectations. In place with cochlear implants, we were a little bit behind where we expected to be. Services was in line. We did see growth in developed markets of 4% in constant currency. And this follows on what we've been talking about and executing on is we've strengthened our digital marketing, a new platform, better able to segment and target people eligible for upgrades, stronger messaging around Nucleus 8 based on direct feedback. from people who had gone, particularly from Nucleus 7 to Nucleus 8 and the benefits of that, emphasising the waterproofing in Nucleus 8 and the launch of Kanso 3, all of that led to that 4% growth in developed markets. And what we see looking forward is stronger, even much stronger growth in the second half, particularly with the retirement of Nucleus 7 in the US, we've seen a significant uplift in people inquiring about upgrades just over the last few weeks, which is in line with our expectation, but gives us confidence of our outlook for services into the second half. And then onto acoustics. So acoustics down 3% in constant currency. And if we look at that by market, we actually continue to see good, very good growth in the underlying markets for acoustics and particularly osseous. And we saw it particularly through Western Europe and Australia. One of our competitors launched a new product just over 12 months ago into the acoustic segment. And we know that it's sort of the second six months after launch where you start to see the impact of that launch. We saw that we lost a bit of share in the US and the UK. And that's better with a new product. People are going to try it. We remain very confident of our product features. and product benefits, particularly in terms of hearing outcomes with Ossia over the competition. And we have significantly better MRI indications. And so while we've lost a little bit of share, we still hold a very significant share in that acoustic implant market. And we expect to regain some of that share plus the market growth as we look into the future. But did see an impact from a competitive launch a bit over 12 months ago. And it is that sort of six months later, we start to see the that impact. Okay. Before I hand over to Sarah, I do want to make a few points on our strategy. As we talked in the release about some restructuring that we have been doing across the company, which is really something we've been working on over the last few years. It's all about making sure that we are making the company fit to drive growth and fit to get scale as we grow. So there's three things that I wanted to call out in areas where we've been doing quite a bit of work to drive the drive growth or set ourselves up for the future. The first of those is the transition to the cloud, which has been a program that has been very visible for the last four or five years. And this is just about switching our platforms over the cloud. It's also about getting consistent and aligned processes across the company. and re-engineering our data to get consistent data architecture and data structures. Those two things combined with the systems enable us to get scale as we grow, and they also become platforms for the use of AI, which is going to be part of us getting efficiency, part of us getting scale, but also getting insights into how we drive growth. So those programs continue to progress well. The second area that we've worked hard on over the last six months and certainly since the next launch, is to restructure our R&D. And it's the right time to do it after a big launch, but our products are now much more complex than they used to be. Our R&D organisation is larger than it used to be, quite naturally. And in doing that, what we're doing is restructuring to make our R&D more modular, which is improves accountability, but also enables us to target the capabilities we need and make sure we get concentrations of the right capabilities we need for future technology development. So important piece of work there that's well underway and appropriate to do after the next launch to make sure that our R&D organisation stays future fit and able to continue to develop an outstanding range of products. And then the third area is around driving growth. And We know that's the key to our longer term success. We continue to work hard to lift the growth rate, particularly in that adults and seniors segments. We've got a number of programs we've talked about over time, but we continue to add some new programs and new experiments, particularly focused on referrals and referrals out of the medical channel rather than perhaps the hearing aid channel. And we're diverting more of our sales and marketing resource towards growth. and towards building these referrals. And that's both requires some organisational change to do that and some reskilling of some of our commercial teams to have that, because there's different conversations that they have in the referral channel than they might have either in hearing aid or in the cochlear implant clinics. So we've done some restructuring across our commercial organisations to set ourselves up there. But just three important areas of strategy that we were making changes that don't have any benefit now, but are setting ourselves up to have a benefit into the future. Okay, and with that, I will hand over to Sarah.

All right, thanks, Dick. So I will take us starting with the profit and loss. And you see the sales revenue has declined by 2% in constant currency, but Dick's taken us through those details, so I won't go into it further right now. We go to gross margins. you see a two-point decline to 73%. Now, this was largely expected, and there's three things that I'd call out in here. First is the mixed shift to lower-margin emerging markets in the first half, including the impact of the China volume-based pricing coming through. Second is Nexa. At launch, Nexa has higher COGS. We expect that, but we also expect that as we come up the experience curve, as the commercial volumes grow, we do expect that to decrease over time. Finally, Chengdu is a facility that is continuing to ramp up. We're really happy with the production we're getting there, but there's still room to go in that facility. So we'll continue to see Chengdu be a small headwind to gross margin for another year or so. Our operating expenses declined 2%. That's a net effect. As Diggs talked about, we've continued to invest to drive the long-term sustainable growth and to invest in R&D. So that's strengthening our sales capabilities, getting more scalable in how we support our go-to-market, investing to strengthen the referrals pathways in the way that Dave talked about, and then also putting investment into R&D so that we support that project and services pipeline that we have coming. However, at the same time, we've been very deliberate in this half about phasing our costs into the second half. That's to balance out the second half weighting of the revenue profile that we expected to have. Finally, we're cycling a few once-off projects that finished up in the first half of last year and are finished at this point. That brings us to the underlying net profit margin of 17%. What you see below that are some items I'd call out, in particular, the $24 million of cloud computing-related expenses, which we expected to invest there and will be reported as a significant item below the line. You'll see the fair value losses on investments of $9.6 million. That's related to Saluda, which is a small long-term financial investment that we've had that was revalued on their listing back in December. Let's go on to the balance sheet on the next page. Right, the main feature of the balance sheet is the $48 million increase in working capital. Now, that's a factor mainly driven by having fairly conservative safety stock coming into this half and holding that as we launched Nexa, Kanso 3, and Baja 7 progressively rolling out around the world. We continue also to build that stock ahead of what we expect will be a big second half. We also continue to expect that that inventory will moderate over the second half. The other thing I'd note on here is you do see that $36 million change in trade receivables. That variability is pretty normal and largely due to our emerging markets. If you remember back to the end of FY25, we had seen receivables increase due to larger emerging market orders, and this is just the unwinding of that as the receipts come through. I note the other net liabilities increase of 33 million. That's an increase in net tax assets, and it's very much a timing effect that will unwind by June. Let's talk about cash on the next page, if we can, please. All right. The main feature in the cash flow you see is the $103 million decrease in net cash. There's a few factors behind that. We have a number of quite lumpy payments in that first half. The $48 million increase in working capital that we just spoke to. There's a $34 million cloud investment that we mentioned. There's those taxes paid, noting that that's $30 million higher than what's expensed in the P&L due to the timing effects. And there's also the discretionary bonus that gets paid in the first half. Now, this was $16 million, which is much smaller than our STI normally is. That reflects that in FY25, there was no STI paid to senior levels of management. Final call-out on here is our capital expenditure of $40 million. That is continued expansion in our Leyton Cove and Malaysia facilities. All right, Dave, back to you for the outlook.