Cochlear Plc Ord

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.

Let me just finish up with our guidance. You saw on February 8th, we've increased our guidance to 385 to 400 up on last year. That's up 26 to 31%. The primary driver behind that is the strong growth in the first half in cochlear implants and our expectation that that growth will continue in the second half. So we're now anticipating cochlear implant growth rate to be between 10% and 15% for the year versus our expectation of high single digits back in August. Services, we expect to continue strongly with upgrades in just a year, just over a year into nuclear safe. There's still more upgrades coming. We expect a good performance in the second half. And acoustics to be growing again this half as we have the Ossia 3 rolling out, so the OSI 300 implant rolling out and expanding the countries where Ossia is available. We'll keep investing in R&D and particularly in our market growth strategies to support the long-run strategy. While we've seen some improvements in awareness, you've got to keep that in context of the overall penetration. It's still around 5%, so still a significant opportunity in front of us that we've got to continue to invest in to drive growth. The exchange rates that we're using for guidance are there. not far different from the rates we put out in August, slightly more favour on the US dollar. CapEx you spoke to, and also the board expects to maintain a 70% payout on the dividend. Now, our guidance doesn't factor in the acquisition of Oticon Medical, their cochlear implant business. We expect that to close in this half, and we now expect our integration costs to be around 30 million previously, We had put 30 to 60 million as we get closer and get more clarity. We're able to narrow those costs down a bit further, which we have done. Okay, so with that, we will go on to questions.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Andrew Goodsall from MST. Please go ahead.

Thanks very much for taking my question. Just on China, and thanks for the colour and progress there, but could you comment around the direction of COGS and any sense of when it'll no longer be a drag on GMs?

Yeah, sure. Andrew, good to hear your voice. Look, we think it's at least another couple of years while that plant really gets up to full speed. Obviously, we've spent a better part of 90 to 100 mil putting it in place. And so the cost of that first unit is very high on a per unit basis and that starts to drop over time. So, yeah, we think another two to three years of headwind and then it eventually turns to a tailwind.

And how do your COGS compare to, say, Australian manufacturing? And directionally, can they go down further?

I think, Dan, you've got to remember that the components are identical, so there's no difference in components. And as Hugh was saying, it's the leverage of the overhead. Again, overhead's not very different, takes time. So to the extent there's a difference, it's really only going to be in labour cost differences, and there is a difference, but it's not a huge difference. So as Stu said, over time it becomes slightly favourable for us, but it's not significant. And as we've said before, putting the factory in China as a longer-run strategy there is all about the future potential of China and the potential of that market and the importance of being present in the market to be able to share in that growth.

This final one for me, just on Oticon. Could you give us a sense of any cost that you've incurred in this period, say around legals, that you've expensed, and then just the flow of integration costs once you get that settled and get underway? I know you've talked to the 30, but just how that might split.

Yeah, sure. We've had a pretty modest amount of transaction costs and sort of single digit millions, I guess, in terms of legals and other associated costs so far. We had guided for restructure costs of, we thought, between 30 to 60. We think we're going to be closer to the 30 end of that pool. And that's really a function of we're only, 30 to 60 was predicated on do we get the entire business? We're getting more certainty now, obviously, with the nature of the transaction that it is going to be a CI only. And that means less people coming across and a smaller impact. So we still think those restructure costs are going to be in that sort of 30 mil range.

And that might be split over a couple of years or?

Yeah, in terms of, Payments, yes. In terms of what we can see at the end of the year, we'll look to accrue for it at the end of the year.

Thank you.

Thanks, Andrew. Thank you. The next question is from Steve Ween from Jarden. Please go ahead.

Yeah, good morning, Degan. Just wanted to ask about the Cochlear Aircraft growth that you're seeing. You obviously reiterated guidance at your AGM And I guess we're aware of the technology exchange impact. Just wondering if there were particular areas to call out where you saw a late acceleration of those implant numbers to kind of help explain the strength that you've seen ultimately at the end of the half.

So, Steve, I mean, the grace was strong in developed markets. and across the range of developed markets. I think where we're heading with this is remember most of our developed markets are in the Northern Hemisphere. July and August is holiday time in the Northern Hemisphere, so it is hard to get a read on what's happening in the first few months of the year, given the bias of our sales to the Northern Hemisphere. So it's sort of normal in a half to see more sales in Q2 than in Q1.

Yep. Okay. I guess part of this question is predicated on the change to access that you're flagging for adults. Is that a reference to the eligibility of reimbursement in the U.S.? ? Or is there other sort of aspects to that improving access that you're talking to?

I think there's multiple factors. So in the US specifically, what we've seen over the last few years, the approval funding for single-sided deafness. So that's been part of the growth, the change in the word score from 40% to 60%. That was more recent and these things take some time to come through, but there's probably a partial contributor there. So indications are definitely an important part, both for raising awareness and for funding. And then our work in either DTC or in the US on the CPNs, we can measure is driving faster growth and overall sales. So it can indicate us that we are learning. Part of this is time and scale. Part of it is us learning the best messages, the best way to sell, the profile of the people who we can convince to refer. And we are learning as we go. And we're seeing that certainly in the US, but we're also seeing that across the other larger developed markets. And we're seeing this all good growth in that last half in seniors pretty much right across all of the developed markets.

Okay, last one for me, just to try and understand your strategy again on your net profit margin. It looks like in this half you've allowed a little bit more operating leverage to come through, particularly as your revenue growth outstrips the growth in your SG&A. So is this sort of something that as you get sort of above market growth that we can expect to see some of that operating leverage contribute, or is it just the nuance of a six-monthly number allowing us to see a little bit more of that operating leverage?

I wouldn't read too much into a half. We had this a couple of years ago. When we get stronger growth than we expected, we want to make sure that We spend extra, but we want to make sure it's in areas that add value. So it does take us a bit of time to do our spending. And there are constraints on how much we can spend, obviously, and we want to make sure we spend effectively. So I wouldn't read anything much into a half. And certainly, as we've said before, our long-run target of 18% net profit margin stays intact.

Okay, but are you fair to assume that if you get above market growth, there is that difficulty of finding where it can invest and therefore we should be able to see some benefit from growing?

Yeah, look, at some level, over a sustained period of time, that's probably true, but we haven't thought too much about that. Okay, thanks a lot.

Thank you. The next question is from David Lowe from JP Morgan. Please go ahead.

Thanks very much. Just on unit sales, so we've seen very strong growth in this period. I presume that the medium term outlook, you're still thinking high single digit or is something changed for the more positive?

Yeah, I think our medium term outlook is still in that low single digit. It's certainly very encouraging to see the growth we've seen over the last few years, but we're not changing our outlook. You've just said low single digits, is that what you meant? Oh sorry, high single digits, yes.

Okay, good, good. There's a strong growth that we've just seen, I mean you can attribute it to various factors but you're not seeing something there with the increased awareness in seniors etc that could give you or give us hope that perhaps stronger growth is something that could be maintained?

We're certainly seeing an increase in awareness and a lift in referrals. But I think we'd want to see that continue for longer. It's been happening for the last couple of years, but that's also coming out of COVID. So if this continued for longer, and I won't put a number on it, but for more years into the future, then you get more confidence that could be sustained, but we haven't seen that yet. We certainly haven't.

We look at the metrics of 5% penetration and the opportunity set is enormous. It just seems to me that growth rates above a single digit should be achievable. I'll leave it there because we could go back and forth.

And David, just the thing to remember on that is the proportion that are children, which did grow in the last half. But we know the incident, you know, children are pretty high penetration. The incidence is not changing. So there was some support for the higher growth rate in the last half from children, which is unusual.

I'm going to leave the children question to someone else because I'm sure it's coming. The other question I had was on gross margins. If we add that inventory right down back, the gross margins look very strong. I heard the comments about the headwinds from the China plant, but what's the sustainable gross margin do you think is allowing for that from China?

David, we're still targeting 75 longer term and we think that's achievable. I think it's worth noting just the size of the ASP tailwind there. And we don't anticipate getting that every half or every year.

Presumably it's now in the base as well.

Yep. Yep. But yeah, 75 remains where we think we can land.

All right.

Thanks very much. I'll stop there.

Thank you. The next question is from Saul Hadasson from Baron Joey. Please go ahead.

Thank you. Good morning, Digg, and good morning, Stu. Just a quick question, Digg, on the services revenue line and particularly the upgrades within that. He commented on expectations for second half to see continued growth. I was just wondering, within the guidance, what are you expecting in terms of those sales relative to, say, first half of 24? Are you expecting to see those dollars step up again as you increase penetration even further, or do you think the run rate now from first half is fairly reflective of sales you'd expect to achieve in second half for those upgrades?

Yeah, look, I think a sort of hold from here, I think we see that big step in the first 12 months, and then I expect it sort of to continue to run around the levels we are now.

And do you historically... I think Cochley has said that there's been an attempt to sort of smooth the services revenue line so you don't get big peaks and troughs, and that was evident with the Kanso launch a few years ago. Is there something that we should think about as it relates to what might happen mid-cycle for the N8 processor, or was that sort of a one-off in terms of that Kanso introduction?

I think a few things. So firstly, the smoothing's not so much our doing as just the size of the installed base and people's awareness of upgrade and upgrade eligibility. The second thing is with having an off-the-air processor like Kanso and a behind-the-air like the Nucleus range. People are very clear that they want the choice and we will continue to provide both. So how we stage the launches of the next generation is important both from, you know, we're thinking about our R&D capacity, our capacity to market and sort of the market's capacity to absorb. And so, you know, what we certainly saw with Kanso 1 and Kanso 2 is they didn't occur at the same time as an equivalent nucleus launch. And that staging just helps us manage capacity, but also does, I think, to sort of smooth the upgrades a little bit.

Thanks, Deegan. One last one for Stu. Stu, just looking at the cloud-based costs incurred over the last three years, including fiscal 24, I think there's about $45 million left to expense. And I'm just wondering, for fiscal 25, do you get a small net tailwind as that dollar figure steps down? Or how do we allocate the remaining portion of that cloud-based competing costs over the next two years, i.e. fiscal 25, 26?

yeah so a couple of things there so we as i said we were aiming for 100 150 i think we'll be towards the top end of that and we're about 80 through that so we've got about 70 to go um we do think we're last year and this year is probably the peak of that so that those those costs will drop down uh modestly until we get to the end of that sort of one you know north end of 100 to 150 range um and that's when we expect Yeah, we won't be then quoting pre- and post-cloud MPAT margin numbers. We'll be back to hopefully normal transmissions resumed at 18%.

Great. Thanks, that's all, Anne. Thanks, all.

Thank you. The next question is from Sean Lamar from Morgan Stanley. Please go ahead.

Thank you. Good morning, Dick. Good morning, Stu. Hope you both well. Yeah, just to circle back on the paediatric question, would you be able to remind us sort of where you sit in terms of percentages of implants going into PEDS and, you know, what sort of growth might you have seen in that market and how sustainable do you think it is?

Yeah, no worries, Sean. So first of all, in developed markets, it's children are now less than a third of the total and that varies by market. So in Australia and the US, Children are 25% or even a little bit less. Across Germany, it's the same. Across the rest of Western Europe, it's still more 50% children, 50% adults and seniors. But as a proportion, children will continue to decline in the developed markets in terms of their contribution to the developed market surgeries. So we saw stronger growth than we had for quite a while in children in that last half. And that happened across a few countries. The US was certainly one, and given the size of the US, that has an impact on the total growth rate. But the reasons I've said earlier were... In the US, the indications issue, both with the 12 to 9 months, possibly a little bit of the single side of deafness is supporting children there as well. And obviously, we think those things will wash through. Certainly, the pull forward on 12 to 9 months is a little bit of a one-off. In terms of backlogs, that's the interesting thing, because when we obviously saw the level of growth, we go and try and understand. And we saw some clinics with very, very significant growth. And that was all about just, they didn't have audiologists in the corresponding half and they did, or they were, you know, the audiologist was off and now they were here. So again, with smaller numbers, it's easier to have an impact. But there's probably some underlying, just unblocking of capacity, again, coming out of COVID that's a partial contributor there too. And the third one is, We're pretty sure we've won some market share in children, and as I said earlier, on the back of our reliability, which should be critical for everyone, but is most critical for children. We think we've picked up some share there too.

Great. Thank you, Dick. And I think there's a little bit of a change in your view or what you're observing at least with uptake of children. upgrades in the emerging markets. I mean, is that material? Is it something different to what you've seen in the past? And how far behind developed markets do you think upgrade penetration generally is in emerging markets versus developed markets?

Certainly in terms of the gap, and I won't go to quantify it, but there's a significant gap. And that's largely driven by funding, that across most developed markets, not all, There is upgrades are reimbursed sort of five or six years. There's still a few countries like Japan, Korea, and actually part of a segment in Australia that don't have that reimbursement for upgrades, and we're working to close those. Whereas that's just not present at all in emerging markets. We are seeing some governments in emerging markets fund upgrades as a one-off. often at a state or provincial level. So that's encouraging because it's a bit like when we talk about implants in emerging markets, we say often we'll start with a few private pay, then governments will come in with tenders and over time it sort of turns into reimbursement. I think what we're seeing on upgrades there is probably similar. It starts with private pay. It's not quite a government tender, but a bulk purchase by a government. And then hopefully that moves towards reimbursement over time. And just with ongoing wealth increases, we are seeing most of our upgrades in emerging markets are still private pay, but we are seeing an uplift there in the private pay component of emerging market upgrades.

Great, thank you. And one last one, just to be really clear, just the deferred revenue benefit to ASPs this period. So we're looking at a headwind going to FY25.

No, no. So it was an impact in December 22 that makes the financial year 23 baseline abnormal. We're back to normal transmission. So you shouldn't see then a corresponding delta in FY25.

Got it. Perfect. Thank you. That's all I have. Thanks, Sean.

Thank you. Thank you. The next question is from Gretel Janu from E&P. Please go ahead. My apologies. The next question is from Leanne Harrison from Bank of America. Please go ahead. Good morning, Dave.

Good morning, Stu. If we can come back to, you mentioned that you've got some growth, a significant growth in some clinics from audiologists' availability. You know, what are you seeing there on audiologist capacity overall? Is that availability improving in general? And then also, can you provide us an update on remote check and thoughts there on providing audiologist capacity improvement?

Yeah, Leanne, great question. As we've talked about, audiology capacity is one of the constraints on growth and it comes from... audiologists spending, as the recipient base grows, audiologists spend a proportion of their time with that recipient base. To the extent that that time can be reduced, they then have more time for seeing and counselling new patients. And as the recipient base grows, we're seeing more and more audiologist time drawn into the recipient base and that detracts from new patients. And so there's a few things going on. So you mentioned remote check and remote check being able to provide care from home and with remote check, the recipient be able to do some testing that the audiologist would do and then have the audiologist look at the results, reduces the load on audiologists. So the rollout of remote check is important. It continues to expand. but it will take time because it's quite a significant change in clinical practice. You know, appointment times have to change. We've got to make sure that we've got all the data infrastructure right. There is clinic and hospital concerns on cybersecurity. We've got to one by one convince them that we've done the work to manage those things. So it will take time to roll out remote check, but it's definitely part of streamlining. One of the things we're seeing around the world, and particularly in the US, is some clinics re-looking at how many appointments do they really need to do, particularly in the first year. How many of those appointments, what happens if they reduce the numbers of appointments? And there we're seeing some of the big, well-established clinics cutting the post-surgery appointments significantly. And by tracking performance showing there's no impact on outcomes for adults and seniors from reducing those appointments and thereby freeing up significant audiology time. So some clinics in places are still doing 12 appointments with someone in the first year, others based on data are down to three appointments across the first year and some use of, and potentially supported by remote check, but some just saying three appointments and the patient calling back is sufficient. So that change is happening. It will take time again. I think one of the things we're learning out of this is changing clinical practice takes quite some time for it to happen, but it is happening and I think will continue to happen. And obviously by producing those patients surgery appointments without detriment outcomes, it's a potentially significant saving for healthcare systems as well. So perhaps in payers' interests to see this change in practice too.

Thank you. And one more on services growth. So this half you mentioned, a lot of that growth or most of that growth is driven by the greater installed base rather than penetration. So if we think about, you know, the next 12 months, is that, you know, what we should expect also in terms of drivers for services revenue growth? Or how should we also think about the penetration rate getting up over the next, you know, six to 12 months?

Yeah, certainly in that timeframe, just think about the installed recipient or the recipient base and that growth. And over the long run, that is absolutely the biggest driver. of services. We're working hard to try to lift penetration over time so we can add to that. But even if we do lift penetration, the big driver is the size of the recipient base.

Okay, thank you. I'll leave it there.

Thanks, Leanne.

Thank you. The next question is from Gretel Janu from E&P. Please go ahead.

Thank you, good morning. I just want to touch further on the NH upgrade cycle. So how far penetrated are you currently and why aren't you expecting increased penetration in the short to medium term at this point?

So we're only just over 12 months in. We're still at a very early stage of that cycle and many, many people out there who are eligible and haven't upgraded yet. And obviously every day more people become eligible as they pass five years from their initial implant or five years from their last upgrade. So that's a big one. On penetration, we are working at it and it is hard work to lift it. As I said, where we've seen the biggest change is in emerging markets. And so it is lifting there and developed markets continue to have a range across countries. So some countries higher than others. That tells us we can do better, albeit some of that difference is driven by funding more so than awareness. But we've still got work to lift penetration and lift awareness of upgrades.

So within the five-year upgrade cycle, typically, what would be the penetration at year five?

So what we've said in the past and continue to see that over five years in developed markets, we typically get to around 50% of people who were eligible for an upgrade upgrading. So that still leaves a scope to go further and to get more.

Very clear, thanks. And then just on Ossia, so how many markets are you in currently? And did you launch in new countries in the last six months? And what's the target for the next six to 12 months as well?

Thanks. Let's start with Ossia. So yeah, on Ossia, we are just launching now in France. That's the most significant country which is now added in. And we continue to work across a number of countries to... expand access. So Japan is one that we are working on. We haven't got us here into China yet, but we're working on that front too, plus a range of others.

Great, thanks very much.

Thanks, Gretel.

Thank you. The next question comes from David Bailey from Macquarie Bank. Please go ahead.

Yeah, thanks. Morning, Stephen and Stu. Just that high single digit growth rate, you're sort of expecting over the meetings longer term. kids about 25%, adults about 75%. Just can you give us a bit of a sense as to what you're expecting in terms of growth for these adults and paediatric segments over the next three to five years?

So paediatrics, we've talked about, said that best grows with the population, with the birth rate, so maybe a couple of percent, and therefore all of the rest of the growth comes from adults and seniors. And so obviously that's in the into double digits with the adults and seniors growth, which gets that weighted average, the high single digits.

Yeah, got it. You sort of called out maybe some benefits from backlog and the innate for the pediatric markets. Anything to call out there for the adults? Do you think that was a bit of a contributor to growth for the adult segment and a half?

No, I think in the last half, nothing we saw. sure they're like, like we saw some, as I said, some factors for children, didn't see equivalent ones for adalps. Now that said, I'm sure there were clinics that had audiology bottlenecks that removed adalps just with the bigger volume. It's just not obvious in the numbers.

That's great. Just a final question from me, sort of touched on cochlear or CPM, cochlear part networks. Just wondering if you're seeing more referrals per centre there or are you sort of adding Have you added more centres to that network over the past six to 12 months?

Yeah, more per centre. So we've focused now in a number of countries on the centres we've got, educating them and getting them to refer more. And so that's been a bigger driver. Now, we continue to add some CPMs across countries, but it's more about working more closely with ones and getting more from that at this stage.

Thanks, Dick. Thanks, David.

Thank you. The next question is from David Stanton from Jefferies. Please go ahead.

Morning, team, and thanks very much for taking my one question. Would it be fair to assume for revenue in constant currency in Baja that, you know, basically you're hoping for flat in F24? Um...

Yeah, we'd hope to get a little bit of growth, but we'll see. But obviously, whether it's a bit of growth or whether it's flat is not going to be significant overall. So we do, you know, by the full year. So we're down in the half. We expect to at least get back to flat by the full year and then be able to grow again in 25. Maybe we can do a bit better than that, but we'll see.

Thanks, Jane. That's all I had. Thank you. Thanks, David.

Thank you. The next question is from Matei Shavria from Citi. Please go ahead.

Yeah, thank you. Good morning, Diggins. Just one on ASP going forward. I think you previously expected ASP to be kind of flat. Has that changed?

No, no. I think what we typically have seen is a blend of some reductions in some countries, some modest price rises and others, and they tend to be, you know, very close to netting off on a longer term basis. But what we saw in this half was somewhat abnormal on that front.

Got it. And then just looking at R&D and looking a bit wider, how do you see potential CMV vaccines and and gene therapy potentially impacting the demand for cochlear implants in children?

Yeah, from what we can see at the moment, not significant impacts. We look at gene therapy first, so the trials, the Otoferrin trials that a couple of companies are running are a really, really small segment, about one in a thousand of the children with hearing loss have done are potentially eligible for this therapy. And there'll be quite some time until, if it does work, you know, and you certainly hope it does, right? If there's a genetic solution for hearing loss or any solution for hearing loss, you want it to work. But it'll still take some time to get through the hurdles. With CMV, and it's a, it's more, certainly more prevalent than 1 in 1,000. The numbers are hard to get of how many of our recipients or children who are eligible for cochlear implants, their deficits caused by CMV. But the numbers are hard to get. What we can see is probably less than 10%. And again, there's some time to go through here and that's across the developed world and obviously some time to roll out. But again, if there is a vaccine that controls or stops CMV, then I think we'd all want that to be successful.

Great. Thanks very much.

Thank you. The next question is from Craig Wongpan from Royal Bank of Canada. Please go ahead.

Thanks and good morning. I just wanted to touch on ASP again. In the period, there was a benefit from country mix. I was wondering, does that sort of shift and then in the second half or beyond that, does that become a headwind then?

I think it depends on relative growth rates. So I think what would need to change if the countries with the higher ASP are growing faster, which happened in the last half, then that continues. If the countries with the lower ASP grow faster, then it does become a headwind. Look, we saw stronger growth in developed markets than we did in emerging in the last half, so that's a partial contributor to it. If that turns around, then go the other way, but it's just a mass.

Okay. And then just my last question on the price increases. You saw some price increases in some countries. Are there other sort of countries that you're potentially targeting to lift prices in the second half or beyond, or are those kind of price increases mostly done now?

I think the way we get price increases is to have better technology that delivers better benefits for patients and then being able to convince payers that a premium is justified based on the outcome. A big focus of our R&D, as we've said in the past, is on improving hearing outcomes. So as we do that, we will be looking to, and can prove it, we'll be looking to get price increases across, you know, in all the countries where there's that opportunity.

Okay, thank you.

Thanks, Greg.

Thank you. The next question is from Shane Story from Wilson's Advisory. Please go ahead.

Morning. I can see that we're through the hour, so just one from me. I wanted to go back to some of your comments on single-sided deafness, please. I'm aware that the formal indication is only a couple of years old, but any comments on what that opportunity looks like longer term? And I guess we're asking it because we're seeing some really terrific reported outcomes from the USA and Italy, and we're sort of aware that it was a pretty good market for Baha over the years. Thanks.

Yeah, so in the US where single-sided deafness has been now funded for the last few years. In other markets it's been funded for a little while. We think in the US there's about 60,000 people a year who become, suffer single-sided deafness or lose hearing in one ear or are born without. I think what clinics are learning over time is some of those people are better candidates than others and there's a whole range of factors that go go into that. And so I think people are learning over time who are the best candidates and I think the outcomes you say for them are very good. So that will certainly continue. So it's certainly an important segment for us and binaural hearing is important for a whole range of reasons on directionality of sound on reducing the cognitive load and being able to hear. So the sort of the medical benefits are clear. It's then just an assessment of which are the better candidates. Thanks. An interesting sign.

That's interesting to me. Thank you. Thanks, sir.

Thank you. The next question is from Andrew Payne from CLSA. Please go ahead.

Yeah, hi, just one from me. So just back on cochlear implants, and you've covered off quite a lot here, but just wondering if a few of the tailwinds in the first half could potentially be one-off type benefits, like you talked about audiologists coming back, so that may be supporting some pent-up demand, stronger growth in paediatrics. Just trying to think if there's a risk, FY24, makes FR25 growth difficult after these high comps or are you comfortable with FR24 being a rebased year?

We talked about children and some of those things are more likely one-offs than not. We've also got higher comparable in the second half than the first half. If you look at last year, growth was more weighted to the second half. So that sort of weighs into the outlook. But, you know, the outlook for 25, we still expect to have good growth. And at this stage, sort of the high single digits in the CI. But we'll get to that when we put together our outlook for 25.

So you're not seeing any clear areas that could be a bit of an unwind year on year?

I'll go back to what we talked about earlier. Back to our strategy, there's huge potential, there's huge clinical need. We have a long run strategy aimed at making cochlear implants the standard of care for people with severe to profound hearing loss. At 5% penetration, we've got a long way to go, but there are good signs that the strategies we're implementing are working. Turning that into an exact growth rate going forward is, by definition, it's inexact. But our goal is over the long term to expand access and awareness and increase that penetration and keep the business growing over the very long term.

Okay, that's great. Thanks. And just one quick one, just on expected FX impact in the second half between reported and constant currency underlying impact. Do you have any details there?

Well, we'll need to see what the rates are to know the impact. Rule of thumb, if it moves a cent, it's about two to three mil.

Okay, great. Thanks.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Howitt for closing remarks.

Okay, just to finish up, thank you all for joining again and look forward to the full year result in about six months' time.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.